Sundowner Development Corporation vs. Drilon

A bona fide purchaser of the assets of an on-going concern is not obliged to absorb in its employ the employees of the seller, labor contracts being in personam and binding only between the parties unless expressly assumed; liability to the employees attaches only where the transaction between the parties is colored or clothed with bad faith.

Sundowner Development Corporation is a corporation engaged in the hotel business, while Hotel Mabuhay, Inc. was the operator of a hotel on premises at 1430 A. Mabini Street, Ermita, Manila, leased from Santiago Syjuco, Inc. Respondent National Union of Workers in Hotel, Restaurant and Allied Industries (NUWHRAIN), Hotel Mabuhay Chapter, is the labor union of Mabuhay's rank-and-file employees, and respondent Mariano Penano is Mabuhay's president. The dispute arose against the backdrop of Article 263(g) of the Labor Code, as amended, which authorizes the Secretary of Labor and Employment to assume jurisdiction over labor disputes in industries indispensable to the national interest and to issue orders for the maintenance of the status quo pending resolution.

Hotel Mabuhay, Inc. operated a hotel on premises at 1430 A. Mabini Street, Ermita, Manila, which it leased from Santiago Syjuco, Inc. Because Mabuhay failed to pay rentals, Syjuco filed an ejectment case against it in the Metropolitan Trial Court of Manila. Mabuhay offered to settle the case amicably by surrendering the premises to Syjuco and selling its assets and personal property to any interested party. Syjuco then offered the premises for lease to Sundowner Development Corporation, and the negotiation culminated in a lease agreement executed on April 16, 1987, to commence on May 1, 1987 and to expire on April 30, 1992.

Mabuhay thereafter offered to sell its assets and personal properties in the premises to Sundowner, which agreed. A deed of assignment of said assets and personal properties was executed by Mabuhay in Sundowner's favor on April 29, 1987 for a consideration of P2,500,000.00, and it was specifically provided therein that the same was "purely for and in consideration of the sale/transfer and assignment of the personal properties and assets of Hotel Mabuhay, Inc. listed . . ." and "in no way involves any assumption or undertaking on the part of Second Party (petitioner) of any debts or liabilities whatsoever of Hotel Mabuhay, Inc." On the same date, Syjuco formally turned over possession of the leased premises to Sundowner, which actually took possession and occupied the same on May 1, 1987.

On May 4, 1987, NUWHRAIN picketed the leased premises, barricaded the entrance, and denied Sundowner's officers, employees and guests free access to and egress from the premises. Sundowner wrote a letter-complaint to Syjuco. On May 7, 1987, Sundowner filed a complaint for damages with preliminary injunction and/or temporary restraining order with the Regional Trial Court of Manila, docketed as Civil Case No. 87-40436. On the same day, the Executive Judge of said court issued a restraining order against NUWHRAIN and its officers and members as prayed for. NUWHRAIN nevertheless maintained its strike on the subject premises but filed an answer to the complaint.

On May 14, 1987, the Secretary of Labor issued an order assuming jurisdiction over the labor dispute pursuant to Article 263(g) of the Labor Code as amended and, in the interim, requiring all striking employees to return to work and Mabuhay to accept all returning employees pending final determination of the issue of the absorption of Mabuhay's former employees; the parties were directed to submit their respective position papers within ten days from receipt of the order. On May 25, 1987, Mabuhay submitted its position paper alleging, among others, that it had sold all its assets and personal properties to Sundowner, that there was no sale or transfer of its shares whatsoever, and that it had completely ceased operation effective April 28, 1987 and surrendered the premises, so that there existed a legal and physical impossibility on its part to comply with the return-to-work order specifically as to absorption. On June 26, 1987, in order to commence its operation, Sundowner signed a tri-partite agreement with NUWHRAIN and Mabuhay so that the workers might lift their strike, whereby Mabuhay paid NUWHRAIN the sum of P638,000.00 in addition to the first payment of P386,447.11, for which reason NUWHRAIN agreed to lift the picket. The agreement stipulated that immediately after its execution the union would give a list of its members whom it desired to recommend for employment so that Sundowner could consider them for employment, "with no commitment whatsoever" on Sundowner's part to hire them in the business it would operate in the premises formerly occupied by Hotel Mabuhay.

On July 13, 1987, NUWHRAIN filed its position paper alleging connivance between Mabuhay and Sundowner in selling the assets and closing the hotel to escape Mabuhay's obligations to its employees, and praying that Sundowner accept the workforce of Mabuhay and pay backwages from April 15, 1986 to April 28, 1987, the day Mabuhay stopped operation. Sundowner, for its part, filed a "Partial Motion for Reconsideration and Position Paper," alleging that it was denied due process, that there were serious errors in the findings of fact which would cause grave and irreparable damage to its interest, as well as on questions of law. On January 20, 1988, the public respondent issued an order requiring Sundowner to absorb the members of the union and to pay backwages from the time it started operations up to the date of the order.

Sundowner moved for reconsideration on January 27, 1988, arguing that the theory of implied acceptance and assumption of statutory wrong did not apply, that the prevailing doctrine that there is no law requiring bona fide purchasers of the assets of an on-going concern to absorb in their employ the employees of the latter should be applied, and that the order for absorption and payment of backwages was contrary to law; NUWHRAIN also filed a motion for clarification. On March 8, 1988, the public respondent denied both motions for lack of merit. The public respondent had found that the transaction between Sundowner and Mabuhay was attended with bad faith, that Sundowner should have informed NUWHRAIN of its lease of the premises and its purchase of Mabuhay's assets so that the employees could have taken steps to protect their interest, and that Sundowner and Mabuhay were joint tortfeasors.

• Bona Fide Purchaser Not Bound to Absorb: Sundowner maintained that the prevailing doctrine is that there is no law requiring bona fide purchasers of the assets of an on-going concern to absorb in their employ the employees of the latter, and that the order for absorption of Mabuhay's employees as well as the payment of their backwages is contrary to law.
• No Implied Acceptance or Assumption of Statutory Wrong: Sundowner argued that the theory of implied acceptance and assumption of statutory wrong does not apply in the instant case.
• Denial of Due Process: Sundowner alleged in its Partial Motion for Reconsideration and Position Paper that it was denied due process.
• Errors in Findings of Fact and Questions of Law: Sundowner asserted that there were serious errors in the findings of fact which would cause grave and irreparable damage to its interest, as well as questions of law.

• Connivance and Bad Faith: NUWHRAIN alleged connivance between Mabuhay and Sundowner in selling the assets and closing the hotel in order to escape Mabuhay's obligations to its employees.
• Absorption and Backwages: NUWHRAIN prayed that Sundowner accept the workforce of Mabuhay and pay backwages from April 15, 1986 to April 28, 1987, the day Mabuhay stopped operation.
• Duty to Notify and Joint Tortfeasorship: The public respondent Secretary of Labor held that Sundowner should have informed NUWHRAIN of its lease of the premises and its purchase of Mabuhay's assets so that the employees could have taken steps to protect their interest, and found that Sundowner and Mabuhay were joint tortfeasors.

• Absorption of Employees: Whether, under the circumstances of the case, Sundowner, as purchaser of the assets of Hotel Mabuhay, Inc., may be compelled to absorb the latter's employees.
• Bad Faith: Whether the transaction between Sundowner and Mabuhay was attended with bad faith so as to render Sundowner liable to Mabuhay's employees.
• Implied Acceptance and Assumption of Statutory Wrong: Whether Sundowner impliedly accepted Mabuhay's employees or assumed Mabuhay's statutory obligations.
• Duty to Notify: Whether Sundowner's failure to inform NUWHRAIN of its lease of the premises and its purchase of Mabuhay's assets constitutes an indicium of bad faith.
• Successor Employer and Continuity of Business: Whether Sundowner became a successor employer of Mabuhay's employees by reason of continuity of business operations.
• Joint Tortfeasors: Whether Sundowner and Mabuhay are joint tortfeasors.

• Absorption of Employees: No. Unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam and binding only between the parties.
• Bad Faith: No. There is no cogent basis for the finding that the transaction between Sundowner and Mabuhay was attended with bad faith; the deed of assignment and the tri-partite agreement expressly negated any assumption of Mabuhay's liabilities or any commitment to absorb its employees.
• Implied Acceptance and Assumption of Statutory Wrong: No. There can be no implied acceptance of Mabuhay's employees or acceptance of statutory wrong, the agreements expressly providing that Sundowner had no commitment or duty to absorb them.
• Duty to Notify: No. No duty rested on Sundowner to notify NUWHRAIN of its lease and purchase, and its failure to do so cannot be an indicium of bad faith.
• Successor Employer and Continuity of Business: No. There can be no continuity of the business operations of the predecessor employer by the successor employer where the predecessor had not retained control of the business; Sundowner is a corporation entirely different from Mabuhay, with no controlling interest in it and no privity with it.
• Joint Tortfeasors: No. There is no evidence that Sundowner and Mabuhay are joint tortfeasors.

• Absorption of Employees: The rule is that unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam and thus binding only between the parties. A labor contract merely creates an action in personam and does not create any real right which should be respected by third parties. This conclusion draws its force from the right of an employer to select his employees and to decide when to engage them as protected under the Constitution, a right that can only be restricted by law through the exercise of the police power. As a general rule, there is no law requiring a bona fide purchaser of the assets of an on-going concern to absorb in its employ the employees of the latter. Although the purchaser of the assets or enterprise is not legally bound to absorb the seller's employees, the parties are liable to the employees if the transaction between them is colored or clothed with bad faith.

• Bad Faith: Contrary to the claim of the public respondent that the transaction between Sundowner and Mabuhay was attended with bad faith, the Court found no cogent basis for such a contention, so that the absorption of Mabuhay's employees could not be imposed on Sundowner. It was undisputed that when Mabuhay surrendered the leased premises to Syjuco and asked Syjuco to offer the same to other lessees, it was Syjuco who found Sundowner and persuaded it to lease the premises; Mabuhay had nothing to do with the negotiation and consummation of the lease contract between Sundowner and Syjuco. It was only when Mabuhay offered to sell its assets and personal properties in the premises that the two came to deal with each other, and Sundowner agreed to purchase said assets to enable Mabuhay to pay its obligations to its striking employees and to Syjuco. The deed of assignment expressly stated that the transfer was purely for and in consideration of the sale, transfer and assignment of the listed personal properties and assets of Hotel Mabuhay, Inc., and that it "in no way involves any assumption or undertaking on the part of Second Party (petitioner) of any debts or liabilities whatsoever of Hotel Mabuhay, Inc." The liabilities alluded to in the agreement should be interpreted to mean not only any monetary liability of Mabuhay but any other liability or obligation arising from the operation of its business, including its liability to its employees.

• Implied Acceptance and Assumption of Statutory Wrong: In the tri-partite agreement entered into by Sundowner with NUWHRAIN and Mabuhay, it was clearly stipulated that immediately after the execution of the agreement the union would give a list of its members whom it desired to recommend for employment so that Sundowner could consider them for employment, "with no commitment whatsoever" on Sundowner's part to hire them in the business it would operate in the premises formerly occupied by Hotel Mabuhay. From the foregoing, it is clear that Sundowner had no liability whatsoever to the employees of Mabuhay, and its responsibility, if at all, was only to consider them for re-employment in the operation of the business in the same premises. There can be no implied acceptance of Mabuhay's employees by Sundowner and acceptance of statutory wrong, as it is expressly provided in the agreement that Sundowner has no commitment or duty to absorb them.

• Duty to Notify: The Court did not subscribe to the theory of the public respondent that Sundowner should have informed NUWHRAIN of its lease of the premises and its purchase of the assets and personal properties of Mabuhay therein so that said employees could have taken steps to protect their interest. No such duty exists on the part of Sundowner, and its failure to notify said employees cannot be an indicium of bad faith.

• Successor Employer and Continuity of Business: There is no evidence that Sundowner and Mabuhay are joint tortfeasors as found by the public respondent. While it is true that Sundowner is using the leased property for the same type of business as that of Mabuhay, there can be no continuity of the business operations of the predecessor employer by the successor employer, as Mabuhay had not retained control of the business. Sundowner is a corporation entirely different from Mabuhay; it has no controlling interest whatever in Mabuhay, and the two have no privity and are strangers to each other.

• Joint Tortfeasors: What is obvious is that Sundowner, by purchasing the assets of Mabuhay in the hotel premises, enabled Mabuhay to pay its obligations to its employees. There being no employer-employee relationship between Sundowner and the Mabuhay employees, Sundowner cannot be compelled to absorb the employees of Mabuhay and to pay them backwages.

• Labor contracts are in personam — Employment contracts and collective bargaining agreements bind only the parties thereto and are not enforceable against a transferee of an enterprise unless expressly assumed. A labor contract merely creates an action in personam and does not create any real right that third parties must respect. The Court applied this rule to hold that Mabuhay's employment contracts and its obligations to its employees could not be enforced against Sundowner as purchaser of Mabuhay's assets.
• No absorption of employees by a bona fide purchaser of assets (general rule) — As a general rule, there is no law requiring a bona fide purchaser of the assets of an on-going concern to absorb in its employ the employees of the latter. The Court applied this general rule in favor of Sundowner, which had purchased Mabuhay's assets for value and without any undertaking to assume Mabuhay's liabilities.
• Bad faith exception — Although a purchaser of the assets or enterprise is not legally bound to absorb the seller's employees, the parties are liable to the employees if the transaction between them is colored or clothed with bad faith. The Court found no cogent basis for the public respondent's finding of bad faith, and thus held the exception inapplicable.
• No implied acceptance of employees or assumption of statutory wrong — Where the agreements between the purchaser and the seller, and among the purchaser, the seller and the union, expressly provide that the purchaser has no commitment or duty to absorb the seller's employees, there can be no implied acceptance of those employees or assumption of the seller's statutory obligations. The Court relied on the deed of assignment's disclaimer of any assumption of Mabuhay's liabilities and on the tri-partite agreement's "no commitment whatsoever" clause.
• No duty to notify the seller's employees — A purchaser of the assets of an on-going concern has no duty to inform the seller's employees or their union of its lease of the premises and its purchase of the assets so that they may protect their interest; failure to notify is not an indicium of bad faith. The Court rejected the public respondent's contrary theory.
• Successor employer requires retention of control by the predecessor — There can be no continuity of the business operations of the predecessor employer by the successor employer where the predecessor had not retained control of the business. The Court found that Sundowner was a corporation entirely different from Mabuhay, held no controlling interest in it, and had no privity with it, so no successor-employer relationship arose.
• Employer's right to select employees — The right of an employer to select his employees and to decide when to engage them is protected under the Constitution and can only be restricted by law through the exercise of the police power. This constitutional protection underlies the in personam character of labor contracts and the general rule against compelled absorption.

• "The rule is that unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only between the parties." — This is the ratio decidendi of the decision, stating the controlling rule on the non-enforceability of labor contracts against a transferee of an enterprise and supplying the doctrinal basis for denying compelled absorption.
• "As a general rule, there is no law requiring a bona fide purchaser of assets of an on-going concern to absorb in its employ the employees of the latter." — This is the canonical formulation of the general rule most frequently invoked in subsequent jurisprudence on the non-absorption of employees by a purchaser of corporate assets.
• "However, although the purchaser of the assets or enterprise is not legally bound to absorb in its employ the employers of the seller of such assets or enterprise, the parties are liable to the employees if the transaction between the parties is colored or clothed with bad faith." — This passage states the bad-faith exception to the general rule, which the Court then found inapplicable to Sundowner's purchase of Mabuhay's assets.
• "There can be no implied acceptance of the employees of Mabuhay by petitioner and acceptance of statutory wrong as it is expressly provided in the agreement that petitioner has no commitment or duty to absorb them." — This passage disposes of the theory of implied acceptance and assumption of statutory wrong, grounding the conclusion on the express contractual disclaimer of any duty to absorb.

• Fernando vs. Angat Labor Union, 5 SCRA 248, 251 (1962) — Cited as authority for the rule that labor contracts are in personam and bind only the parties thereto, the doctrinal foundation of the ruling that Mabuhay's employment contracts were unenforceable against Sundowner.
• Visayan Transportation Co., Inc. vs. Java, 93 Phil. 962, 967-968 (1953) — Cited for the proposition that the employer's right to select his employees and to decide when to engage them is protected under the Constitution and may be restricted only by law through the exercise of the police power.
• MDII Supervisors & Confidential Employees Association vs. Presidential Assistant on Legal Affairs, 79 SCRA 40 (1977) — Cited as authority for the general rule that no law requires a bona fide purchaser of the assets of an on-going concern to absorb in its employ the employees of the latter.
• Majestic and Republic Theaters Employees' Association vs. CIR, 4 SCRA 457, 460 (1962) — Cited, together with Cruz vs. PAFLU, for the exception that the parties are liable to the employees if the transaction between them is colored or clothed with bad faith.
• Cruz vs. PAFLU, 42 SCRA 68, 77-78 (1971) — Cited, together with the Majestic case, as authority for the bad-faith exception to the general rule against compelled absorption of employees by a purchaser of assets.

• Article 263(g), Labor Code, as amended — Authorizes the Secretary of Labor and Employment to assume jurisdiction over labor disputes in industries indispensable to the national interest and to issue orders for the maintenance of the status quo. The public respondent invoked this provision in assuming jurisdiction over the dispute on May 14, 1987 and in issuing the interim return-to-work order and the subsequent orders requiring Sundowner to absorb Mabuhay's employees and pay backwages; those orders were reversed and set aside for having been issued contrary to law.
• Constitution (employer's right to select employees) — The Court cited the right of an employer to select his employees and to decide when to engage them as protected under the Constitution, a right that can only be restricted by law through the exercise of the police power. This constitutional protection was invoked to reinforce the in personam character of labor contracts and the rule that a transferee of an enterprise is not bound to absorb the transferor's employees absent express assumption or bad faith.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.