CALTEX (PHILIPPINES), INC., PETITIONER, VS. PNOC SHIPPING AND TRANSPORT CORPORATION, RESPONDENT.

Caltex versus PNOC Shipping and Transport

The Case

This is a petition for review brought by Caltex (Philippines), Incorporated against PNOC Shipping and Transport Corporation, which we shall call PSTC. Caltex sued PSTC for a sum of money, seeking to collect from PSTC a final judgment debt that originally belonged to Luzon Stevedoring Corporation, which we shall call LUSTEVECO. Caltex's theory is that PSTC had expressly assumed all of LUSTEVECO's obligations, including the judgment in Caltex's favor, when PSTC took over LUSTEVECO's tanker and bulk business. The case matters because it fixes the rule that an assignee who takes over all or substantially all of the assets of a corporation, in exchange for a promise to assume its obligations, cannot keep the assets and repudiate the promise. It also teaches when a stranger to a contract may nonetheless sue upon it as a real party in interest.

Procedural History

The original collection suit was filed by Caltex against LUSTEVECO before the then Court of First Instance of Manila, which ordered LUSTEVECO to pay Caltex. LUSTEVECO appealed to the then Intermediate Appellate Court, which affirmed the award with modification and increased the amounts due. That judgment became final and executory. A writ of execution was issued by the Regional Trial Court of Manila, Branch 12, but the judgment was never satisfied because LUSTEVECO's properties had already been foreclosed and the garnishee banks did not respond to the notices of garnishment.

Caltex then turned to PSTC, sending successive demands. PSTC refused, saying it was not a party to the original case and that Caltex should collect from LUSTEVECO directly. Caltex filed a complaint for sum of money against PSTC before the Regional Trial Court of Manila, Branch 51. On the first of June 1994, the trial court ruled in favor of Caltex and ordered PSTC to pay the sums due under the appellate judgment. PSTC appealed to the Court of Appeals, which on the thirty-first of May 2001 reversed the trial court and dismissed the complaint for want of cause of action, holding that Caltex had no personality to sue and was not a beneficiary of any stipulation in its favor. The Court of Appeals denied Caltex's motion for reconsideration on the ninth of November 2001. Caltex then came to the Supreme Court by petition for review under Rule 45.

Facts

On the sixth of July 1979, LUSTEVECO and PSTC entered into an Agreement of Assumption of Obligations. Under it, PSTC assumed all of LUSTEVECO's obligations with respect to the claims enumerated in two annexes, took complete control of the litigation over those claims, and received all the related papers and records. LUSTEVECO in turn appointed PSTC as its attorney in fact to demand and receive any claim arising from countersuits and counterclaims. This was part of a larger arrangement: an earlier Agreement of Transfer had conveyed to PSTC all of LUSTEVECO's business, properties and assets pertaining to its tanker and bulk departments, together with all the obligations relating to that business.

Among the claims listed in the annexes was the case of Caltex against LUSTEVECO, then pending on appeal before the Intermediate Appellate Court. That case ended in a judgment ordering LUSTEVECO to pay Caltex specific sums under two causes of action, with legal interest, plus ten percent of the sums due as attorney's fees, and the costs of suit. The judgment became final, but execution failed because LUSTEVECO's remaining properties had been foreclosed by lienholders.

When Caltex learned of the agreement between LUSTEVECO and PSTC, it sent successive demands to PSTC. PSTC asked for the records of the case, then refused to pay, insisting it was never a party to that litigation and that Caltex should look to LUSTEVECO. Caltex kept demanding, and when PSTC still refused, Caltex sued PSTC for the judgment debt.

Issues

• Whether or not PSTC is bound by the Agreement of Assumption of Obligations when it assumed all the obligations of LUSTEVECO.
• Whether or not Caltex is a real party in interest to file an action to recover from PSTC the judgment debt against LUSTEVECO.

Applicable Provisions

Section 40 of Batas Pambansa Blg. 68, the Corporation Code of the Philippines, provides:

Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

This provision allows the transfer of all or substantially all of a corporation's assets, but the Court reads it against the background rule that such a transfer must not prejudice the creditors of the assignor.

Article 1381 of the Civil Code provides:

Article 1381. The following contracts are rescissible: Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; All other contracts specially declared by law to be subject to rescission.

This is the remedy of a creditor against a contract entered into in fraud of creditors, and it bears on Caltex's standing to complain of the transfer.

Article 1291 of the Civil Code provides:

Article 1291. Obligations may be modified by: Changing their object or principal conditions; Substituting the person of the debtor; Subrogating a third person in the rights of the creditor.

This identifies substitution of the debtor as a mode of modifying an obligation, which is how the Court characterizes the agreement.

Article 1293 of the Civil Code provides:

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment made by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

This is decisive because the substitution of PSTC for LUSTEVECO was made without Caltex's knowledge and consent, so it cannot prejudice Caltex.

Section 2 of Rule 3 of the 1997 Rules of Civil Procedure provides:

Section 2. Parties in interest. A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

This is the test the Court applies in deciding whether Caltex may sue PSTC despite not being a party to the agreement.

Ruling

On the first issue, the Court ruled that PSTC is bound by the agreement. Caltex may recover not because of any stipulation in its favor, but because PSTC expressly assumed all of LUSTEVECO's obligations. The agreement recites that LUSTEVECO transferred, conveyed and assigned to PSTC all of its business, properties and assets pertaining to its tanker and bulk business, together with all the obligations relating to that business, and it specifically lists the Caltex case among the claims covered. The Court held that PSTC cannot accept the benefits without assuming the obligations, and that to repudiate its commitment after taking the assets would amount to defrauding LUSTEVECO's creditors and would result in a failure of consideration.

Even without the agreement, the Court held, PSTC is still liable. The disposition of all or substantially all of a corporation's assets is allowed under Section 40 of the Corporation Code, but the transfer must not prejudice the assignor's creditors. The only way to proceed without prejudice is to hold the assignee liable for the assignor's obligations. The acquisition of all or substantially all of the assets necessarily includes the assumption of the liabilities, unless creditors who did not consent choose to rescind the transfer on the ground of fraud. The Court also invoked the badges of fraud from Oria versus McMicking, among them the transfer of all or nearly all of a debtor's property while he is insolvent or greatly embarrassed financially. Finally, the Court characterized the agreement as a novation by substitution of the debtor, which under Article 1293 cannot be made without the creditor's consent. Since the substitution was made without Caltex's knowledge and consent, it cannot prejudice Caltex, and the assets transferred, or their value, remain subject to execution in PSTC's hands.

On the second issue, the Court ruled that Caltex is a real party in interest. Ordinarily one who is not a privy to a contract may not sue to enforce it, but this case falls under the exception recognized in Oco versus Limbaring, where parties who took no part in a contract may show that they have a real interest affected by its performance or annulment. Caltex has such an interest because non-performance by PSTC will defraud it. Even if PSTC had not expressly assumed to pay LUSTEVECO's creditors, it would still be liable to Caltex up to the value of the assets transferred.

Doctrine

First, an assignee that acquires all or substantially all of the assets of a corporation in exchange for a promise to assume the assignor's obligations is bound by that promise and cannot accept the benefits while repudiating the burden. Second, even absent an express assumption, the transfer of all or substantially all of the corporate assets cannot be used to defraud creditors; the assignee is liable for the assignor's obligations up to the value of the assets received, unless the creditors who did not consent choose to rescind the transfer for fraud under Article 1381 of the Civil Code. Third, a substitution of the debtor is a novation that cannot be made without the creditor's consent under Article 1293, so an agreement made without that consent cannot prejudice the creditor. Fourth, under Section 2 of Rule 3, a stranger to a contract may sue upon it when he has a real interest affected by its performance or annulment, as where non-performance would defraud him.

Disposition

The Supreme Court reversed and set aside the decision and resolution of the Court of Appeals, affirmed the decision of the trial court ordering PSTC to pay Caltex the judgment debt, and taxed the costs against PSTC.

Remember This

The single line to memorize is that an assignee who takes over all the assets of a corporation on the strength of a promise to assume its obligations cannot keep the assets and repudiate the promise, for that is a fraud on creditors. Examiners use this case on the liability of a transferee of all corporate assets for the assignor's debts, on the real party in interest exception for strangers to a contract, and on novation by substitution of the debtor without the creditor's consent.