Barayoga vs. Asset Privatization Trust

A mortgagee-creditor who acquires foreclosed assets at an auction sale does not automatically assume the liabilities of the mortgagor-employer to its employees, absent an express and categorical assumption of such liabilities or a showing that the sale or transfer was made in bad faith. Labor contracts are in personam and binding only between the parties; no succession of employment rights and obligations arises between the employees and the transferee without privity of contract.

The Asset Privatization Trust (APT) is a public trust created under Proclamation No. 50, as amended, mandated to take title to and possession of, conserve, provisionally manage, and dispose of non-performing assets of the Philippine government identified for privatization or disposition. Pursuant to Section 23 of Proclamation No. 50, former President Corazon Aquino issued Administrative Order No. 14, Series of 1987, identifying certain assets of government institutions to be transferred to the National Government, including the financial claim of the Philippine National Bank (PNB) against BISUDECO in the form of a secured loan. A Trust Agreement was executed between the National Government and APT on February 27, 1987, constituting APT as trustee over BISUDECO's account with PNB.

Bisudeco-Philsucor Corfarm Workers Union is composed of workers of Bicolandia Sugar Development Corporation (BISUDECO), a sugar plantation mill located in Himaao, Pili, Camarines Sur. On December 8, 1986, the Asset Privatization Trust (APT), a public trust created under Proclamation No. 50, as amended, was mandated to take title to and possession of, conserve, provisionally manage, and dispose of non-performing assets of the Philippine government identified for privatization or disposition. Pursuant to Section 23 of Proclamation No. 50, former President Corazon Aquino issued Administrative Order No. 14 identifying certain assets of government institutions to be transferred to the National Government, including the financial claim of the Philippine National Bank (PNB) against BISUDECO in the form of a secured loan. By virtue of a Trust Agreement executed between the National Government and APT on February 27, 1987, APT was constituted as trustee over BISUDECO's account with the PNB.

On August 28, 1988, BISUDECO contracted the services of Philippine Sugar Corporation (Philsucor) to take over the management of the sugar plantation and milling operations until August 31, 1992. Because of BISUDECO's continued failure to pay its outstanding loan with PNB, its mortgaged properties were foreclosed and subsequently sold in a public auction to APT as the sole bidder. On April 2, 1991, APT was issued a Sheriff's Certificate of Sale. When Philsucor initially took over the operations of the company, it retained BISUDECO's existing personnel under the same terms and conditions of employment. However, at the start of the season sometime in May 1991, Philsucor started recalling workers back to work, to the exception of the union members. Management told them that they would be re-hired only if they resigned from the union, and the company thereafter started employing outsiders under the "pakyaw" system.

On July 15, 1992, APT's Board of Trustees issued a resolution accepting the offer of Bicol-Agro-Industrial Cooperative (BAPCI) to buy the sugar plantation and mill. On September 23, 1992, the board passed another resolution authorizing the payment of separation benefits to BISUDECO's employees in the event of the company's privatization, but the resolution did not include the union members who had not been recalled to work in May 1991. On October 30, 1992, BAPCI purchased the foreclosed assets of BISUDECO from APT and took over its sugar milling operations under the trade name Peñafrancia Sugar Mill (Pensumil). BISUDECO, Pensumil, and APT all interposed the defense of lack of employer-employee relationship.

• Liability of APT: Petitioners argued that the Court of Appeals erred in ruling that APT should not be held liable for the union's claim for unfair labor practice, illegal dismissal, illegal deduction, and underpayment of wages and other labor standard benefits plus damages.
• Enforcement Against Mortgagee: Petitioners contended that their claims can be enforced against APT/PNB as mortgagee of the foreclosed properties of BISUDECO.
• Entitlement Under Law: Petitioners argued that their entitlement to claims against APT is recognized under law, citing Central Azucarera del Danao vs. Court of Appeals for the proposition that the "sale of a business of a going concern does not ipso facto terminate the employer-employee relations insofar as the successor-employer is concerned, and that change of ownership or management of an establishment or company is not one of the just causes provided by law for termination of employment."

• Lack of Employer-Employee Relationship: Respondent APT interposed the defense of lack of employer-employee relationship with the petitioners.
• No Assumption of Liability: APT maintained that it was merely a secured creditor of BISUDECO and later the highest bidder in the foreclosure sale, and that it did not assume the liabilities of BISUDECO to its employees.

• Liability of APT: Whether the Court of Appeals erred in ruling that Respondent Asset Privatization Trust (APT) should not be held liable for the petitioner union's claim for unfair labor practice, illegal dismissal, illegal deduction, and underpayment of wages and other labor standard benefits plus damages.
• Enforcement Against Mortgagee: Whether the claims of petitioners can be enforced against APT/PNB as mortgagee of the foreclosed properties of BISUDECO.
• Entitlement Under Law: Whether the entitlement of petitioners upon their claims against Respondent APT is recognized under the law.

• Liability of APT: No. APT is not liable for petitioners' monetary claims. The duties and liabilities of BISUDECO, including its monetary liabilities to its employees, were not automatically assumed by APT as purchaser of the foreclosed properties at the auction sale; any assumption of liability must be specifically and categorically agreed upon.
• Enforcement Against Mortgagee: No. Petitioners' claims cannot be enforced against APT as mortgagee. Under Articles 2241 and 2242 of the Civil Code, a mortgage credit is a special preferred credit that enjoys preference with respect to a specific/determinate property of the debtor, while the worker's preference under Article 110 of the Labor Code is an ordinary preferred credit that has no preference over special preferred credits.
• Entitlement Under Law: No. Petitioners' entitlement to claims against APT is not recognized under the law. Labor contracts are in personam and binding only between the parties; no succession of employment rights and obligations can be said to have taken place between BISUDECO's employees and APT, there being no privity of contract between them.

• Liability of APT: The Court ruled that the duties and liabilities of BISUDECO, including its monetary liabilities to its employees, were not all automatically assumed by APT as purchaser of the foreclosed properties at the auction sale. Citing Sundowner Development Corp. vs. Drilon, the Court held that unless expressly assumed, labor contracts like collective bargaining agreements are not enforceable against the transferee of an enterprise. Labor contracts are in personam and thus binding only between the parties. No succession of employment rights and obligations can be said to have taken place between the two. Between the employees of BISUDECO and APT, there is no privity of contract that would make the latter a substitute employer burdened with the obligations of the corporation. To rule otherwise would result in unduly imposing upon APT an unwarranted assumption of accounts not contemplated in Proclamation No. 50 or in the Deed of Transfer between the national government and PNB. Under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is not obliged to absorb the latter's employees. The most that the purchasing company may do, for reasons of public policy and social justice, is to give preference of reemployment to the selling company's qualified separated employees. The national government, in whose trust APT previously held the mortgage credits of BISUDECO, is not the employer of petitioner-union's members, who had been dismissed sometime in May 1991, even before APT took over the assets of the corporation. Even the NLRC found that no employer-employee relationship existed between APT and petitioners; thus, the Commission gravely abused its discretion in nevertheless holding APT liable.
• Enforcement Against Mortgagee: The Court addressed the misquotation of Central Azucarera del Danao vs. Court of Appeals by petitioners' counsel, admonishing counsel for misquoting or misrepresenting the text of Court decisions. The Court clarified that in that case, the rule was laid down that the sale or disposition must be motivated by good faith as an element of exemption from liability. An innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them, nor is the transferee liable for past unfair labor practices of the previous owner, except when the liability is assumed by the new employer under the contract of sale, or when liability arises because of the new owner's participation in thwarting or defeating the rights of the employees. Thus, the liabilities of the previous owner to its employees are not enforceable against the buyer or transferee, unless (1) the latter unequivocally assumes them; or (2) the sale or transfer was made in bad faith. APT cannot be held responsible for the monetary claims of petitioners who had been dismissed even before it actually took over BISUDECO's assets.
• Entitlement Under Law: The Court applied Article 110 of the Labor Code, as amended by Republic Act No. 6715, which provides for worker's preference in case of bankruptcy. The Court ruled that under Articles 2241 and 2242 of the Civil Code, a mortgage credit is a special preferred credit that enjoys preference with respect to a specific/determinate property of the debtor. On the other hand, the worker's preference under Article 110 of the Labor Code is an ordinary preferred credit. While this provision raises the worker's money claim to first priority in the order of preference established under Article 2244 of the Civil Code, the claim has no preference over special preferred credits. Citing Development Bank of the Philippines vs. NLRC, the Court explained that a preference applies only to claims which do not attach to specific properties, while a lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers; it is but a preference of credit in their favor, a preference in application. Furthermore, workers' claims for unpaid wages and monetary benefits cannot be paid outside of a bankruptcy or judicial liquidation proceedings against the employer. The application of Article 110 of the Labor Code is contingent upon the institution of those proceedings, during which all creditors are convened, their claims ascertained and inventoried, and their preferences determined.

• Non-transfer of labor liabilities to transferee of enterprise — Unless expressly assumed, labor contracts like collective bargaining agreements are not enforceable against the transferee of an enterprise. Labor contracts are in personam and thus binding only between the parties. The Court applied this doctrine to hold that APT, as purchaser of foreclosed assets, did not automatically assume BISUDECO's liabilities to its employees.
• Principle of absorption — A bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is not obliged to absorb the latter's employees. The most that the purchasing company may do, for reasons of public policy and social justice, is to give preference of reemployment to the selling company's qualified separated employees who are necessary to the continued operation of the business establishment.
• Preference of credits: special preferred vs. ordinary preferred — Under Articles 2241 and 2242 of the Civil Code, a mortgage credit is a special preferred credit that enjoys preference with respect to a specific/determinate property of the debtor. The worker's preference under Article 110 of the Labor Code is an ordinary preferred credit that, while raised to first priority in the order of preference under Article 2244 of the Civil Code, has no preference over special preferred credits. A preference applies only to claims which do not attach to specific properties; a lien creates a charge on a particular property.
• Conditions for transferee liability — The liabilities of the previous owner to its employees are not enforceable against the buyer or transferee, unless (1) the latter unequivocally assumes them; or (2) the sale or transfer was made in bad faith.

• "The duties and liabilities of BISUDECO, including its monetary liabilities to its employees, were not all automatically assumed by APT as purchaser of the foreclosed properties at the auction sale. Any assumption of liability must be specifically and categorically agreed upon." — This passage states the core ratio decidendi: a transferee of foreclosed assets does not automatically assume the transferor's labor liabilities absent express agreement.
• "Labor contracts are in personam and thus binding only between the parties. No succession of employment rights and obligations can be said to have taken place between the two. Between the employees of BISUDECO and APT, there is no privity of contract that would make the latter a substitute employer that should be burdened with the obligations of the corporation." — This passage articulates the doctrinal basis for rejecting the claim of successor liability against APT.
• "A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application." — This passage, quoted from Development Bank of the Philippines v. NLRC, explains the distinction between a special preferred credit (mortgage) and an ordinary preferred credit (workers' claims).

• Sundowner Development Corp. vs. Drilon, 180 SCRA 14, December 6, 1989 — Controlling precedent for the rule that unless expressly assumed, labor contracts are not enforceable against the transferee of an enterprise.
• Central Azucarera del Danao vs. Court of Appeals, 137 SCRA 295, June 29, 1985 — Cited by petitioners but clarified by the Court; establishes that an innocent transferee of a business establishment has no liability to the employees of the transferor, except when liability is assumed or when the new owner participates in thwarting employees' rights.
• Development Bank of the Philippines vs. NLRC, 312 Phil. 70, March 1, 1995 — Followed for the rule that a mortgage credit is a special preferred credit that must be satisfied before workers' ordinary preferred claims.
• Batong Buhay Gold Mines vs. Dela Serna, 312 SCRA 22, August 6, 1999 — Cited by the CA for the conclusion that petitioners' claims could not be enforced against APT as mortgagee of the foreclosed properties.
• Manlimos vs. NLRC, 312 Phil. 178, March 2, 1995 — Followed for the principle of absorption, holding that a bona fide buyer is not obliged to absorb the seller's employees.
• North Davao Mining Corp. vs. NLRC, 325 Phil. 202, March 13, 1996 — Cited for the proposition that there is no reason to expect a bailout by the national government for employees of a private corporation.

• Article 110, Labor Code (as amended by Republic Act No. 6715) — Provides for worker's preference in case of bankruptcy or liquidation of the employer's business, entitling workers to first preference as regards their unpaid wages and other monetary claims before the claims of the Government and other creditors. The Court applied this provision but held that the worker's preference is an ordinary preferred credit that does not override special preferred credits like a mortgage.
• Articles 2241 and 2242, Civil Code — Provide that a mortgage credit is a special preferred credit that enjoys preference with respect to a specific/determinate property of the debtor. The Court applied these provisions to hold that APT's lien on BISUDECO's mortgaged assets must be satisfied first before the claims of the workers.
• Article 2244, Civil Code — Establishes the order of preference for ordinary preferred credits. The Court noted that while Article 110 of the Labor Code raises the worker's money claim to first priority in this order, the claim has no preference over special preferred credits.
• Section 23, Proclamation No. 50 — Authorized the identification and transfer of certain assets of government institutions to the National Government. The Court noted that APT's assumption of accounts was limited to what was contemplated in this proclamation and the Deed of Transfer.
• Administrative Order No. 14, Series of 1987 — Approved the identification and transfer to the National Government of certain assets and liabilities of the Philippine National Bank, including PNB's financial claim against BISUDECO. The Court noted that what was transferred to APT was PNB's financial claim against BISUDECO, not the latter's assets and chattel.

Sandoval-Gutierrez, J.; Corona, J.; Carpio Morales, J.; Garcia, J.