The Supreme Court has definitively ruled that a company acquiring assets through a foreclosure sale is not automatically responsible for the former owner’s labor liabilities. This means that workers cannot directly claim unpaid wages or benefits from the new asset owner unless explicitly assumed or the asset transfer was done in bad faith. This decision protects purchasers of foreclosed properties from unforeseen labor debts, while underscoring the need for employees to pursue claims against their original employer during bankruptcy or liquidation proceedings. The ruling offers clarity for businesses and workers alike in the context of asset privatization and transfer.

From Sugar Fields to Courtrooms: Who Pays When a Company’s Assets Are Sold?

This case revolves around the Bicolandia Sugar Development Corporation (BISUDECO), a sugar plantation, and its workers’ union, Bisudeco-Philsucor Corfarm Workers Union. Due to BISUDECO’s financial difficulties, the Philippine National Bank (PNB) foreclosed on its assets. The Asset Privatization Trust (APT) acquired these assets as the highest bidder in a public auction. The union then filed a complaint, seeking to hold APT liable for BISUDECO’s alleged unfair labor practices, illegal dismissals, and unpaid wages. The central legal question is whether APT, as the purchaser of foreclosed assets, is responsible for the labor liabilities of the previous owner, BISUDECO.

The Supreme Court addressed the issue of whether the Asset Privatization Trust (APT) should be held liable for the monetary claims of the employees of Bicolandia Sugar Development Corporation (BISUDECO) after APT acquired BISUDECO’s assets through foreclosure. The Court emphasized that the transfer of assets from PNB to APT, as trustee, involved PNB’s financial claim against BISUDECO, not BISUDECO’s assets and chattel. BISUDECO remained the owner of the mortgaged properties until APT foreclosed on them due to BISUDECO’s failure to pay its loan obligations. The court needed to determine whether APT should be held responsible for the unpaid monetary claims and alleged illegal dismissal of these workers.

The Supreme Court relied on the principle that the duties and liabilities of BISUDECO, including its monetary obligations to its employees, were not automatically assumed by APT as the purchaser of the foreclosed properties. Citing Sundowner Development Corp. v. Drilon, the Court reiterated that labor contracts, such as collective bargaining agreements, are not enforceable against the transferee of an enterprise unless expressly assumed. Labor contracts are considered in personam, binding only between the parties involved. The Court found that there was no succession of employment rights and obligations between BISUDECO’s employees and APT, and no privity of contract existed that would make APT a substitute employer burdened with BISUDECO’s obligations.

Moreover, the Court invoked the principle of absorption, noting that a bona fide buyer or transferee of all or substantially all of the properties of the seller or transferor is not obligated to absorb the latter’s employees. The Court clarified that at most, the purchasing company may give preference to re-employment to the selling company’s qualified separated employees. The national government, in whose trust APT previously held the mortgage credits of BISUDECO, was not the employer of the union members who were dismissed before APT took over the assets. There was no legal basis for expecting a bailout by the national government in this scenario.

The petitioners argued that in Central Azucarera del Danao v. Court of Appeals, the Supreme Court had ruled that the sale of a business does not automatically terminate employer-employee relations insofar as the successor-employer is concerned. However, the Court clarified that the cited case did not contain those exact words and admonished the petitioners’ counsel for misquoting its decisions. The Court held that 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. As APT acquired BISUDECO’s assets for conservation purposes due to its lien and later as the highest bidder, it could not be held responsible for the employees’ monetary claims arising from dismissals that occurred even before APT took over BISUDECO’s assets.

Furthermore, the Court considered the relevance of Article 110 of the Labor Code, which provides workers with first preference in the event of bankruptcy or liquidation of the employer’s business. This preference applies to unpaid wages and other monetary claims, which are to be paid in full before the claims of the government and other creditors. However, the Court clarified 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 property of the debtor. The worker’s preference under Article 110 of the Labor Code is an ordinary preferred credit.

The Court, citing Development Bank of the Philippines v. NLRC, explained that a preference applies only to claims that do not attach to specific properties, whereas a lien creates a charge on a particular property. The right of first preference regarding unpaid wages does not constitute a lien on the property of the insolvent debtor but is a preference of credit in application. Workers’ claims for unpaid wages and monetary benefits cannot be paid outside of bankruptcy or judicial liquidation proceedings against the employer. The application of Article 110 is contingent upon the institution of such proceedings, during which all creditors are convened, their claims ascertained and inventoried, and their preferences determined. Because the petition was brought against APT alone, the Court held that APT, which had never been an employer of the petitioners, was not liable for their claims. The Court clarified that it was not ruling on the petitioners’ entitlement to back wages and other unpaid benefits from their previous employer, BISUDECO.

FAQs

What was the key issue in this case?	The key issue was whether the Asset Privatization Trust (APT), as the purchaser of foreclosed assets of Bicolandia Sugar Development Corporation (BISUDECO), was liable for BISUDECO’s labor liabilities, including unpaid wages and illegal dismissal claims.
Did the Supreme Court rule in favor of the workers?	No, the Supreme Court ruled against the workers. It held that APT was not liable for the labor liabilities of BISUDECO, as APT was merely a transferee of assets and had no direct employer-employee relationship with the workers.
What legal principle did the Court rely on?	The Court relied on the principle that a purchaser of foreclosed assets does not automatically assume the labor liabilities of the previous owner unless there is an express agreement or bad faith involved in the transfer.
What is the significance of Article 110 of the Labor Code in this case?	Article 110 of the Labor Code provides workers with a preference in the event of bankruptcy or liquidation of the employer’s business. However, the Court clarified that this preference does not override the special preferred credit of a mortgage lien held by APT.
What does in personam mean in the context of labor contracts?	In personam means that labor contracts are binding only between the parties involved, which in this case were BISUDECO and its employees, and not automatically transferable to a new owner like APT.
Is a buyer of assets obligated to absorb the seller’s employees?	No, the Court clarified that a bona fide buyer or transferee is not obligated to absorb the employees of the seller, although they may give preference to re-employment based on public policy and social justice.
What should the workers do to pursue their claims?	The workers should pursue their claims against their former employer, BISUDECO, in bankruptcy or liquidation proceedings, where all creditors’ claims can be properly ascertained and preferences determined.
Why was the counsel for the petitioners admonished?	The counsel for the petitioners was admonished for misquoting a Supreme Court decision, which is a violation of the duty to refrain from misrepresenting the text of court decisions.

In conclusion, this case serves as a crucial reminder that the acquisition of assets through foreclosure does not automatically transfer labor liabilities to the new owner. Workers seeking to recover unpaid wages and benefits must pursue their claims against their original employer through proper legal channels, such as bankruptcy or liquidation proceedings. This decision protects the interests of asset purchasers while clarifying the responsibilities of employers facing financial distress.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Abundio Barayoga vs. Asset Privatization Trust, G.R No. 160073, October 24, 2005