CENTRAL AZUCARERA DEL DANAO, PETITIONER, VS. HON. COURT OF APPEALS, NONELON BANA-AY, AND DANAO DEVELOPMENT CORPORATION, RESPONDENTS.

Central Azucarera del Danao versus Court of Appeals

The Case

This is a petition for review brought by Central Azucarera del Danao, the owner and operator of a sugar mill in Toboso, Negros Occidental, against the Court of Appeals and three of its former employees, Nonelon Bana-ay, Jose Cosculluela, and Gorgonio Palma, together with the purchasing corporation, Danao Development Corporation. The employees sued to recover termination pay under the Termination Pay Law, Republic Act Number 1052, as amended by Republic Act Number 1787, after Central Danao sold all its sugar mill properties and assets to Danao Development Corporation and the workers were thereafter taken in, or not taken in, by the new owner. The case matters because it fixes the rule on who answers for termination pay when a business is sold: the selling employer cannot hide behind the sale, and a change of ownership or management is not the same as the closing or cessation of operations that the law treats as a just cause for termination.

Procedural History

The three employees, originally with other complainants, filed separate complaints for recovery of termination pay with damages against Danao Development Corporation and Central Danao as common defendants before the then Court of First Instance of Negros Occidental, Branch Two, sitting in Bacolod City. After pre-trial, the parties entered into a stipulation of facts in each case and limited the trial to two questions: whether the employees were entitled to termination pay under the law, and who should pay it. The trial court rendered three separate decisions in favor of the employees, ordering Central Danao to pay, and dismissing the complaints against Danao Development Corporation. Central Danao appealed to the then Court of Appeals, which affirmed the trial court but modified the award to Jose Cosculluela so as to cover only his years of service from 1935 up to the date of sale. Central Danao's motion for reconsideration was denied, and it then filed this petition for review, seeking a consolidated review of the joint decision in the three cases.

Facts

Nonelon Bana-ay began working with Central Danao in October 1939 as a railroad repair man and was promoted to locomotive conductor in 1946. Jose Cosculluela was hired in October 1935 as superintendent of the transportation department. Gorgonio Palma was employed as a machinist in August 1931. All three were regular and permanent employees of Central Danao.

On July 7, 1961, Central Danao sold its sugar mill properties and other assets to Danao Development Corporation, a corporation organized by the sugar planters of the milling district. The next day, July 8, 1961, the buyer took over the management and operation of the mill under the deed of sale. The deed said nothing express about the continued employment of the old employees. The buyer did hire Central Danao's regular and permanent employees, but under its own hiring and selection policies. Jose Cosculluela was hired on July 8, 1961, the day after the sale. Nonelon Bana-ay and Gorgonio Palma were hired only on August 1, 1961, twenty-three days after the sale.

During their new employment, Nonelon Bana-ay was terminated in December 1961, Gorgonio Palma in July 1966, and Jose Cosculluela in February 1967. The employees then sued both corporations. The records showed that the negotiations for the sale were held behind the employees' backs; they were taken by surprise when the sale was consummated, were not formally notified of the impending sell-out or of what would happen to their employment, and were given no notice of termination at all.

Issues

• Whether or not Central Danao is liable to pay termination pay to the employees for their years of service from 1935 up to the date of sale.
• Whether or not the employment of the employees was terminated when Danao Development Corporation purchased and assumed operation of the mill properties.
• Whether or not the claims for termination pay were barred by laches.

Applicable Provisions

Section 1 of Republic Act Number 1052, as amended by Republic Act Number 1787, the Termination Pay Law, provides in its relevant part:

In cases of employment, without a definite period, in a commercial, industrial, or agricultural establishment or enterprise, the employer or his legal representative or the employee must, at least one month in advance, serve a written notice on the other of the intention to terminate the same, and in default thereof, the employer shall pay to the employee the equivalent of at least one month's salary or of one-half month's salary for every year of service, whichever is greater.

This is the provision under which the employees claim termination pay, and it is the measure of the selling employer's obligation when no notice of termination is served.

The same Section 1 enumerates the just causes for terminating employment without a definite period, among them the closing or cessation of operation of the establishment or enterprise, which the employer invoked:

The following are just causes for terminating an employment without a definite period: (a) The closing or cessation of operation of the establishment or enterprise, unless the same is to defeat the purpose of this Act.

The Court holds that a sale of all the properties and assets of the business, followed by continued operation by the buyer, is not this just cause, so the exemption does not apply.

On the period for filing the action, Article 1144 of the New Civil Code provides:

The following actions must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law; (3) Upon a judgment.

Because the obligation to pay termination pay is created by law, the employees had ten years from the accrual of their right of action, and their claims were filed well within that period.

Ruling

On the first issue, the Court holds Central Danao liable. The Court reasons that while the closing or cessation of operation of an establishment may be a just cause for termination, what happened here was not a cessation of operation but a sale or disposition of all or substantially all of the properties and assets of Central Danao to the buyer. The Court acknowledges that the Termination Pay Law recognizes the employer's right to sell, dispose of, or lease his business enterprise, provided the disposition is not intended to desecrate the law or adversely affect public interest. But the sale here transferred ownership and management to Danao Development Corporation, which continued the integral business operation of its predecessor in an essentially unchanged manner, that is, the milling of sugar cane and the manufacture of centrifugal sugar. A change of ownership or management is not one of the just causes enumerated by the Termination Pay Law, and it cannot be construed as synonymous with, or analogous to, closing or cessation of operation. The Court stresses that the law is strictly interpreted and construed against the employer.

On the second issue, the Court holds that the employees were in fact terminated on the date of the sale. The deed of sale contained no express stipulation on their continued employment, and no law requires a purchaser to absorb the employees of the selling company. The most the buyer may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees. Since some were hired the day after the sale and others only twenty-three days after, there was an interruption of employment, and they were in reality rehired anew by the new employer. The negotiations were held behind the employees' backs, they were not notified of the sale or of its consequences for their employment, and they were given no notice of termination. The Court quotes with approval the rule that it is not the cause for the dismissal but the employer's failure to serve notice upon the employee that renders the employer answerable for termination pay. Justice and equity therefore entitle the employees to termination pay for their years of service with Central Danao until the date of sale.

On the third issue, the Court holds that laches does not bar the claims. Laches is a creation of equity applied only to bring about equitable results, never to defeat justice, and it is addressed to the sound discretion of the court. Central Danao cannot take refuge in it to shield itself from an obligation created by law, which is a social legislation intended to protect the workingman. Since the obligation is created by law, Article 1144 of the New Civil Code applies, and the action may be instituted within ten years from the time the right of action accrues. The claims, filed within about six years of the termination, were timely.

Finally, since the employees other than Nonelon Bana-ay had already been paid their termination or separation pay or its equivalent covering their entire period of service with Danao Development Corporation, that corporation owes nothing further. Jose Cosculluela is entitled to termination pay only for his employment with Central Danao, from October 1935 up to July 7, 1961.

Doctrine

A change of ownership or management of a business establishment, brought about by the sale or disposition of all or substantially all of its properties and assets, is not a just cause for terminating employment under the Termination Pay Law. It is neither synonymous with nor analogous to the closing or cessation of operation of the establishment or enterprise, and the selling employer remains liable for termination pay. The sale or disposition must be motivated by good faith to be an element of exemption from liability, and the law is strictly construed against the employer. An innocent transferee of a business establishment has no liability to continue employing the transferor's employees, and is not liable for the previous owner's obligations, except when it assumes that liability under the contract of sale or participates in thwarting or defeating the rights of the employees. Because the obligation to pay termination pay is created by law, the action to enforce it prescribes in ten years under Article 1144 of the New Civil Code, and the equitable doctrine of laches cannot be used to defeat it.

Disposition

The Court denied the petition and affirmed the decision of the Court of Appeals, with the modification that Jose Cosculluela's termination pay covers only his service with Central Danao from October 1935 up to July 7, 1961, with costs against Central Danao.

Remember This

The one line to memorize: a sale of all the assets of a business, followed by continued operation by the buyer, is a change of ownership, not a closing or cessation of operation, so the selling employer still owes termination pay. Examiners use this case to test the strict construction of the Termination Pay Law against the employer, the good-faith requirement in the sale or disposition of a business, and the ten-year prescriptive period for obligations created by law, which laches cannot override.