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G.R. No. 78261-62 March 8, 1989

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,vs.HON. LABOR ARBITER ARIEL C. SANTOS, PHILIPPINE ASSOCIATION OF FREE LABOR UNIONS (PAFLU-RMC CHAPTER) and its members, MICHAEL PENALOSA, ET AL., SAMAHANG DIWANG MANGGAGAWASA RMC-FFW CHAPTER, and its members, JAIME ARADA, ET AL., respondents.

The Chief Legal Counsel for petitioner DBP.

Pablo B. Castillon for private respondents.

Reynaldo B. Aralar & Associates for the Arada respondents.

Sisenando R. Villaluz, Jr. for individual respondents.

GUTIERREZ, JR., J.:

This petition calls for the interpretation of Article 110 of the Labor Code which gives the workerspreferences as regards wages in case of liquidation or bankruptcy of an employer's business. PetitionerDevelopment Bank of the Philippines (DBP) maintains the Article 110 does not apply where there hasbeen an extra-judicial foreclosure proceeding while the respondents claim otherwise. Labor Arbiter ArielC. Santos sustained the private respondent's position. Petitioner DBP has now elevated the case to us byway of this petition for certiorari.

On November 29,1984, in NLRC-NCR Case No. 2517-84 entitled "Philippine Association of Free LaborUnions (PAFLU-RMC Chapter) and its Members v. Riverside Mills Corporation, et al.", Labor ArbiterManuel Caday awarded separation pay, wage and/or living allowance increases and 13th month pay to

the individual complainants who comprise some of the respondents in this case.

On March 18, 1985, Labor Arbiter Teodorico Dogelio likewise awarded separation pay, vacation and sickleave pay and unpaid increases in the basic wage and allowances to the other private respondentsherein in NLRC Case No. NCR-7-2577-84 entitled "Michael Penalosa, Jose Garcia and Apolinar Ray, et al.,v. Riverside Mills Corporation, et al., and Samahang Diwang Manggagawa sa RMC-FFW Chapter, et al., v.Riverside Mills Corporation (RMC)." On March 29, 1985, after the judgment had become final andexecutory, Dogelio issued a writ of execution directing NLRC Deputy Sheriff Juanita Atienza to collect thetotal sum of Eighty Five Million Nine Hundred Sixty One thousand Fifty-Eight & 70/100 Pesos(P85,961,058.70). The Deputy Sheriff, however, failed to collect the amount so he levied upon personaland real properties of RMC.

On April 25, 1985, a notice of levy on execution of certain real properties was annotated on thecertificate of title filed with the Register of Deeds of Pasig, Metro Manila, where all the said propertiesare situated.

Meanwhile in the other development which led to this case, petitioner DBP obtained a writ ofpossession on June 7, 1985 from the Regional Trial Court (RTC) of Pasig of all the properties of RMC afterhaving extra-judicially foreclosed the same at public auction earlier in 1983. DBP subsequently leasedthe said properties to Egret Trading and Manufacturing Corporation, Rosario Textile Mills and GeneralTextile Mills.

The writ of possession prevented the scheduled auction sale of the RMC properties which were leviedupon by the private respondents. As a result, on June 19, 1985, the latter filed an incidental petitionwith the NLRC to declare their preference over the levied properties. The petition entitled "PAFLU-RMCChapter and its members, Michael Penalosa, et al., and the Samahang Diwang Manggagawa sa RMC-FFW Chapter and its members v. RMC and DBP, et al." was docketed as NLRC Case No. NCR-7-2577-84.Petitioner DBP filed its position paper and memorandum in answer to the petition.

On October 31, 1985, Dogelio issued an order recognizing and declaring the respondents' firstpreference as regards wages and other benefits due them over and above all earlier encumbrances onthe aforesaid properties/assets of said company, particulary those being asserted by respondentDevelopment Bank of the Philippines.' (p. 84, Rollo)



The petitioner appealed the order of Dogelio to the NLRC. The latter in turn, set aside the order andremanded the case to public respondent Labor Arbiter Santos for further proceedings.

Meanwhile, another set of complainants (who are also named as respondents herein) filed, on April 7,1986, a complaint for separation pay, underpayment, damages, etc., entitled 'Jaime Arada, et al. v. RMC,DBP, Egret Trading and Manufacturing Corp., docketed as NLRC Case No. NCR-4-1278-86." This case wassubsequently consolidated with the case pending before respondent Santos. Accordingly, the latterconducted several hearings where the parties, particulary DBP, General Textile Mills, Inc., and RosarioTextile Mills, Inc., were given the opportunity to argue their respective theories of the case. Eventually,all the parties agreed that the case shall be submitted for decision after their filing of positions papersand/or memorandums.

On March 31, 1987, public respondent Santos rendered the questioned decision, the dispositive portionof which reads:

WHEREFORE, it is hereby declared that all the complainants in the above- entitled cases,as former employees of respondent Riverside Mills Corporation, enjoy first preferenceas regards separation pay, unpaid wages and other benefits due them over and aboveall earlier encumbrances on all of the assets/properties of RMC specifically those beingasserted by respondent DBP.

As a consequence of the above declaration, the decision dated March 18, 1983 of thethen Hon. Arbiter Teodorico Dogelio should be immediately enforced against DBP whois hereby directed to pay all the monetary claims of complainants who were formeremployees of respondent RMC.

Anent the Arada case, DBP is hereby directed to pay all the amounts as indicatedopposite the names of complainants listed from page I to page 5 of Annex "A" of

complainants' complaint provided that their names are not among those listed in thePenalosa case.

It is hereby also declared that former employees whose names are not listed in thecomplainants' position papers but can prove that they were former employees of RMCprior to its bankruptcy, should also be paid the same monetary benefits being grantedto herein complainants.

Finally, DBP is hereby ordered to deposit with the National Labor Relations Commissionthe proceeds of the sale of the assets of RMC between DBP on one hand and GeneralTextile Mills, Inc. and/ or Rosario Textile Mills, Inc., on the other hand and that future

payment being made by the latter to the former should be deposited with the NationalLabor Relations Commission for proper disposition. (pp. 174-175, Rollo)

Hence, this petition.

Petitioner DBP maintains that the public respondent misinterpreted Article 110 of the Labor Code andSection 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code in thatthe said respondent upheld the existence of the worker's preference over and above earlierencumbrances on the properties of RMC despite the absence of any bankruptcy or liquidationproceeding instituted against the latter. The petitioner argues that there must be a judicial declaration,or at the very least, a cognizance by an appropriate court or administrative agency of bankruptcy orinability of the employer to meet its obligations.

On the other hand, the respondents contend that under both Article 110 and its implementing rule, theclaims of the laborers for unpaid wages and other monetary benefits due them for services renderedprior to bankruptcy enjoy first preference in the satisfaction of credits against a bankrupt company; thatthe word "bankruptcy" in the Labor Code is used in its generic sense, meaning that condition of inabilityto pay one's debt; and that Article 110 of the Labor Code is not confined to the situation contemplatedin Articles 2236-2245 of the Civil Code where all the preferred creditors must necessarily be convenedand the import of their claims ascertained.

We apply the rule expressed in Republic v. Peralta (150 SCRA 37 [1988] ), where we stated:





The proceedings in the court below do not partake of the nature of the insolvencyproceedings or settlement of a decedent's estate. The action filed by Ramos was only tocollect the unpaid cost of the construction of the duplex apartment. It is far from being ageneral liquidation of the estate of the Tabligan spouses.

Insolvency proceedings and settlement of a decedent's estate are both proceedings inrem which are binding against the whole world. All persons having interest in thesubject matter involved, whether they were notified or not, are equally bound.Consequently, a liquidation of similar import or 'other equivalent general liquidationmust also necessarily be a proceeding in rem so that all interested persons whetherknown to the parties or not may be bound by such proceeding.

In the case at bar, although the lower court found that 'there were no known creditorsother than the plaintiff and the defendant herein', this can not be conclusive. It will notbar other creditors in the event they show up and present their claim against thepetitioner bank, claiming that they also have preferred liens against the propertyinvolved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of thebank which is supposed to be indefeasible would remain constantly unstable andquestionable. Such could not have been the intention of Article 2243 of the Civil Codealthough it considers claims and credits under Article 2242 as statutory liens. Neitherdoes the De Barreto case ... .

The claims of all creditors whether preferred or non-preferred, the identification of the preferred onesand the totality of the employer's asset should be brought into the picture, There can then be anauthoritative, fair, and binding adjudication instead of the piece meal settlement which would resultfrom the questioned decision in this case.

We, therefore, hold that Labor Arbiter Ariel C. Santos committed grave abuse of discretion in ruling that

the private respondents may enforce their first preference in the satisfaction of their claims over thoseof the petitioner in the absence of a declaration of bankruptcy or judicial liquidation of RMC. There is, ofcourse, nothing in this decision which prevents the respondents from instituting involuntary insolvencyor any other appropriate proceeding against their employer RMC where respondents' claims can beasserted with respect to their employer's assets.

WHEREFORE, the petition is hereby GRANTED. The questioned decision of the public respondent isANNULLED and SET ASIDE. The Temporary Restraining Order we issued on May 20, 1987 enjoining theenforcement of the questioned decision is made PERMANENT. No costs.

SO ORDERED.



G.R. No. 79351 November 28, 1989

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,vs.THE HON. SECRETARY OF LABOR, CRESENCIA DIFONTORUM, ET AL.,respondents.

The Chief Legal Counsel for petitioner.

Dante P. Sindac for private respondents.

CORTES, J.:

Petitioner Development Bank of the Philippines seeks the nullification of an order dated July 29, 1987and issued by the Undersecretary of Labor and Employment, affirming that of National Capital RegionOfficer-in-Charge Romeo A. Young, directing the petitioner to deliver the properties of Riverside MillsCorporation (RMC) which it had in its possession to the Ministry (now Department) of Labor andEmployment (MOLE) for proper disposition in Case No. NCR-LSED-7-334-84 pursuant to Article 110 ofthe Labor Code.

Labor Case No. NCR-LSED-7-334-84 involves a complaint for illegal dismissal, unfair labor practice, illegaldeductions from salaries and violation of the minimum wage law filed by private respondents hereinagainst RMC. On July 3, 1985, a decision was rendered by Director Severo M. Pucan of the NationalCapital Region, MOLE, ordering RMC to pay private respondents backwages and separation benefits. Acorresponding writ of execution was issued on October 22, 1985 directing the sheriff to collect theamount of ONE MILLION TWO HUNDRED FIFTY-SIX THOUSAND SIX HUNDRED SEVENTY-EIGHT PESOSAND SEVENTY SIX CENTAVOS (P1,256,678.76) from RMC and, in case of failure to collect, to execute the

writ by selling the goods and chattel of RMC not exempt from execution or, in case of insufficiencythereof, the real or immovable properties of RMC.

However, on May 23, 1986, the writ of execution was returned unserved and unsatisfied, with theinformation that the company premises of RMC had been padlocked and foreclosed by petitioner. Itappears that petitioner had instituted extra-judicial foreclosure proceedings as early as 1983 on theproperties and other assets of RMC as a result of the latter's failure to meet its obligations on the loansit secured from petitioner.

Consequently, private respondents filed with the MOLE a "Motion for Delivery of Properties of the[RMC] in the Possession of the [DBP] to the [MOLE] for Proper Disposition," stating that pursuant to

Article 110 of the Labor Code, they enjoy first preference over the mortgaged properties of RMC for thesatisfaction of the judgment rendered in their favor notwithstanding the foreclosure of the same bypetitioner as mortgage creditor [Rollo, pp. 16-17]. Petitioner filed its opposition.

In an order signed by Officer-in-Charge Romeo A. Young and dated December 11, 1986, privaterespondents' motion was granted based on the finding that Article 110 of the Labor Code and the rulinglaid down in Philippine Commercial and Industrial Bank v. Natural Mines and Allied Workers ' (NAMAWU-MIF ) [G.R. No. 50402, August 19, 1982, 115 SCRA 873] support the conclusion that private respondentsstill enjoyed a preferential lien for the payment of their backwages and separation benefits over theproperties of RMC which were foreclosed by petitioner [Rollo, pp. 21-22].

Petitioner then filed its motion for reconsideration on December 24,1986 contending that Article 110 ofthe Labor Code finds no application in the case at bar for the following reasons: (1) The propertiessought to be delivered have ceased to belong to RMC in view of the fact that petitioner had foreclosedon the mortgage, and the properties have been sold and delivered to third parties; (2) The requisitecondition for the application of Article 110 of the Labor Code is not present since no bankruptcy orinsolvency proceedings over RMC properties and assets have been undertaken [Rollo, pp. 24-28]. In anorder dated July 29, 1987, petitioner's motion for reconsideration was denied for lack of merit byUndersecretary Dionisio C. dela Serna.

Hence, petitioner filed this special civil action for certiorari with prayer for the issuance of a writ ofpreliminary injunction. On August 27, 1987, this Court issued a temporary restraining order enjoiningpublic respondent from enforcing or carrying out its order dated July 29, 1987. After considering the

allegations made and issues raised in the petition, comments thereto and reply, the Court, on March 14,



1988, resolved to give due course to the petition and to require the parties to submit their respectivememoranda. Petitioner and private respondent submitted their memoranda, while public respondentadopted as its memorandum the comment it had previously submitted.

After a careful study of the various arguments adduced, as well as the legal provisions and jurisprudenceon the matter, the Court finds the petition impressed with merit. Indeed, the assailed Order suffers frominfirmities which must be rectified by the grant of a writ of certiorari in favor of petitioner.

Firstly, public respondent acted with grave abuse of discretion amounting to lack or excess of jurisdiction in enforcing private respondents' right of first preference under Article 110 of the LaborCode notwithstanding the absence of bankruptcy, liquidation or insolvency proceedings against RMC.

Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Omnibus Rules Implementing theLabor Code provide the following:

Article 110. WORKER PREFERENCE IN CASE OF BANKRUPTCY.—In the event ofbankruptcy or liquidation of an employer's business , his workers shall enjoy firstpreference as regards wages due them for services rendered during the period prior tothe bankruptcy or liquidation, any provision of law to the contrary notwithstanding.Unpaid wages shall be paid in full before other creditors may establish any claim to ashare in the assets of the employer [Emphasis supplied].

Section 10. PAYMENT OF WAGES IN CASE OF BANKRUPTCY.— Unpaid wages earned bythe employees before the declaration of bankruptcy or judicial liquidation of theemployer's business shall be given first preference and shall be paid in full before othercreditors may establish any claim to a share in the assets of the employer.

It is clear from the wording of the law that the preferential right accorded to employees and workers

under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against theemployer. The law is unequivocal and admits of no other construction.

Respondents contend that the terms "bankruptcy" or "liquidation" are broad enough to cover asituation where there is a cessation of the operation of the employer's business as in the case at bar.However, this very same contention was struck down as unmeritorious in the case of Development Bankof the Philippines vs. Hon. Labor Arbiter Ariel C. Santos [G.R. Nos. 78261-62, March 8, 1989] involving agroup of RMC employees which sought to enforce its preference of credit Article 110 against DBP overcertain RMC real properties. In that case, the Court laid down the ruling that Article 110 of the LaborCode, which cannot be viewed in isolation of, and must always be reckoned with the provisions of theCivil Code on concurrence and preference of credits, may not be invoked by employees or workers of

RMC like private respondents herein, in the absence of a formal declaration of bankruptcy or a judicialliquidation order of RMC.

The rationale for making the application of Article 110 of the Labor Code contingent upon the institutionof bankruptcy or judicial liquidation proceedings against the employer is premised upon the very natureof a preferential right of credit. A preference of credit bestows upon the preferred creditor anadvantage of having his credit satisfied first ahead of other claims which may be established against thedebtor. Logically, it becomes material only when the properties and assets of the debtor are insufficientto pay his debts in full; for if the debtor is amply able to pay his various creditors in full, how can thenecessity exist to determine which of his creditors shall be paid first or whether they shall be paid out ofthe proceeds of the sale of the debtor's specific property? Indubitably, the preferential right of creditattains significance only after the properties of the debtor have been inventoried and liquidated, andthe claims held by his various creditors have been established [Kuenzle & Streiff (Ltd.) v. Villanueva, 41Phil. 611 (1916); Barrette v. Villanueva, G.R. No. L-14938, December 29, 1962, 6 SCRA 928; PhilippineSavings Bank v. Lantin, G.R. No. L-33929, September 2, 1983, 124 SCRA 476].

In this jurisdiction, bankruptcy, insolvency and general judicial liquidation proceedings provide the onlyproper venue for the enforcement of a creditor's preferential right such as that established in Article110 of the Labor Code, for these are in rem proceedings binding against the whole world where allpersons having any interest in the assets of the debtor are given the opportunity to establish theirrespective credits [Philippine Savings Bank v. Lantin, supra ; Development Bank of the Philippines v.Santos supra ].



Secondly, public respondent's Order directing petitioner to deliver to the MOLE the properties it hadforeclosed from RMC for the purpose of executing the judgment rendered against RMC in Case No. NCR-LSED 7-334-84 violates the basic rule that the power of a court or tribunal in the execution of its judgment extends only over properties unquestionably belonging to the judgment debtor [SpecialServices Corporation v. Centro La Paz, G.R. No. L- 44100, April 28, 1983, 121 SCRA 748; National Minesand Allied Workers' Union v. Vera, G.R. No. L-44230, November 19, 1984, 133 SCRA 295].

It appears on record, and remains undisputed by respondents, that petitioner had extra-judiciallyforeclosed the subject properties from RMC as early as 1983 and purchased the same at public auction,and that RMC had failed to exercise its right to redeem. Thus, when Officer-in-Charge Young issued onDecember 11, 1986 the order which directed the delivery of these properties to the MOLE, RMC hadceased to be the absolute owner thereof [See Dizon v. Gaborra, G.R. No. L-36821, June 22, 1978, 83SCRA 688]. Consequently, the order was directed against properties which no longer belonged to the judgment debtor RMC.

However, respondents, in citing the case of PCIB v. NAMAWU-MIF [supra ], argue that by virtue of Article110 of the Labor Code, an "automatic first lien" was created in favor of private respondents on RMCproperties —a "lien" which predated the foreclosure of the subject properties by petitioner, andremained vested on these properties even after its sale to petitioner and other parties.

There is no merit to this contention. It proceeds from a misconception which must be corrected.

What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor ofemployees [See Republic v. Peralta, G.R. No. 56568, May 20, 1987, 150 SCRA 37]. This simply means thatduring bankruptcy, insolvency or liquidation proceedings involving the existing properties of theemployer, the employees have the advantage of having their unpaid wages satisfied ahead of certainclaims which may be proved therein.

It bears repeating that a preference of credit points out solely the order in which creditors would bepaid from the properties of a debtor inventoried and appraised during bankruptcy, insolvency orliquidation proceedings. Moreover, a preference does not exist in any effective way prior to, and apartfrom, the institution of these proceedings, for it is only then that the legal provisions on concurrenceand preference of credits begin to apply. Unlike a lien, a preference of credit does not create in favor ofthe preferred creditor a charge or proprietary interest upon any particular property of the debtor.Neither does it vest as a matter of course upon the mere accrual of a money claim against the debtor.Certainly, the debtor could very well sell, mortgage or pledge his property, and convey good titlethereon, to third parties free from such preference [Kuenzle & Streiff v. Villanueva, supra ].

Incidentally, the Court is not unmindful of the 1989 amendments to the article introduced by Section 1,

R.A. No. 6715 [March 21, 1989]. Article 110 of the Labor Code as amended reads:

WORKER PREFERENCE IN CASE OF BANKRUPTCY.— In the event of bankruptcy orliquidation of an employer's business, his workers shall enjoy first preference as regardstheir unpaid wages and other monetary claims, any provision of law to the contrarynotwithstanding. Such unpaid wages and monetary claims shall be paid in full before theclaims of the Government and other creditors may be paid. [Amendments indicated.]

However, these amendments only relate to the scheme of concurrence and preference of credits; theydo not affect the issues heretofore discussed regarding the applicability of Article 110 to the attendantfacts.

WHEREFORE, considering the foregoing, the present petition is hereby GRANTED. The assailed orderdated July 29, 1987 is SET ASIDE and the temporary restraining order issued by the Court on August 27,1987 is made PERMANENT.

SO ORDERED.



G.R. Nos. 82763-64 March 19, 1990

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,vs.NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER ISABEL P. ORTIGUERRA, and LABOR

ALLIANCE FOR NATIONAL DEVELOPMENT,respondents.

The Legal Counsel for petitioner.

Piorello E. Azura, Errol Ismael, B. Palaci and Maria Lourdes C. Legaspi for APT.

Pablo B. Castillon for respondent LAND.

MELENCIO-HERRERA, J.:

This Petition for Certiorari addresses itself to the 12 February 1986 Order of the National Labor RelationsCommission directing petitioner Development Bank of the Philippines (DBP) to remit the sum ofP6,292,380.00 "out of proceeds of the foreclosed properties of Lirag Textile Mills Inc., sold at publicauction in order to satisfy the judgment" in NLRC Cases Nos. NCR-3-2581-82 and 2-2090-82.

The background facts of these two cases may be summarized as follows:

The complainants in the two cases filed below were former employees of Lirag Textile Mills, Inc. (LIRAG,for short). LIRAG was a mortgage debtor of DBP. Private respondent Labor Alliance for NationalDevelopment (LAND, for brevity) was the bargaining representative of the more or less 800 former rankand file employees of LIRAG. Around September 1981, LIRAG started terminating the services of its

employees on the ground of retrenchment. By December of the said year there were already 180regular employees separated from the service. LIRAG has since ceased operations presumably due tofinancial reverses.

In February 1982, Joselito Albay, one of the employees dismissed in September 1981, filed a complaintbefore the National Labor Relations Commission (NLRC) against LIRAG for illegal dismissal (Case No. 2-2090-82). On 1 March 1982, LAND, on behalf of 180 dismissed members, also filed a Complaint againstLIRAG seeking separation pay, 13th month pay, gratuity pay, sick leave and vacation leave pay andemergency allowance (Case No. 3-2581-82). These two cases were consolidated and jointly heard by theNLRC. Said complainants have since been joined by supervisors and managers.

In a Decision, dated 30 July 1982, Labor Arbiter Apolinar L. Sevilla ordered LIRAG to pay the individualcomplainants. The NLRC (Third Division) affirmed the same on 28 March 1982. That judgment becamefinal and executory.

On 15 April 1983, a Writ of Execution was issued. On the same day, DBP extrajudicially foreclosed themortgaged properties for failure of LIRAG to pay its mortgage obligation. As the only bidder at theforeclosure sale, DBP acquired said mortgaged properties for P31,346,462.90. Since DBP was the solemortgagee, no actual payment was made, the amount of the bid having been merely credited in partialsatisfaction of LIRAG's indebtedness.

By reason of said foreclosure, the Writ of Execution issued in favor of the complainants remainedunsatisfied. A Notice of Levy on Execution on the properties of LIRAG was then entered.

On 7 December 1984, LAND filed a "Motion for Writ of Execution and Garnishment" of the proceeds ofthe foreclosure sale.

On 30 May 1985, upon motion of LAND, Labor Arbiter Apolinar L. Sevilla ordered the DBP impleaded "inthe interest of justice and due process," and required it to intervene.

On 12 February 1986, and over the opposition of DBP, Labor Arbiter Sevilla granted the Writ ofGarnishment and directed DBP to remit to the NLRC the sum of P6,292,380.00 out of the proceeds of



the foreclosed properties of LIRAG sold at public auction in order to satisfy the judgment previouslyrendered.

DBP sought reconsideration of the above Order on the grounds of NLRC's lack of jurisdiction over it sinceit was not a party to the case, and that it was deprived of its property without due process of law. Public

respondent, Labor Arbiter Isabel P. Ortiguerra denied reconsideration on 25 May 1987. DBP appealedthat denial to the NLRC.

In the meantime, on 3 February 1987, by virtue of Proclamation Nos. 50 and 50-A, the AssetPrivatization Trust (APT) became the transferee of the DBP foreclosed assets of LIRAG. On 12 July 1989,by virtue of that transfer, we deemed APT impleaded as a party-petitioner and gave it time within whichto file its pleading. It submitted a Memorandum on 22 November 1989.

It appears that on 21 December 1987, a partial Compromise Agreement was entered into between APTand LAND (Litex Chapter) whereby APT paid the complainants-employees, ex gratia, the sum ofP750,000.00 "in full settlement of their claims, past and present, with respect to all assets of LITEXtransferred by DBP to APT." That amount was received by LAND's local President. Apparently, however,on 25 January 1988, LAND, through its national President, filed its opposition to the CompromiseAgreement for being contrary to law, morals and public policy.

On 25 March 1988, the NLRC (First Division) affirmed the appealed Order and dismissed the DBP appeal.

DBP is now before us seeking a review and reversal. On 30 January 1989, the Court resolved to give duecourse to the petition and to require the parties to submit simultaneous memoranda. On 1 February1990, the Court's Second Division referred the case to the Court en banc , which the latter accepted onthe same date.

It is true that DBP was not an original party and that it was ordered impleaded only after the Writs ofExecution were not satisfied because the properties levied upon on execution had been foreclosedextrajudicially by it. DBP had to be impleaded, however, for the proper satisfaction of a final judgment.Being an incident in the execution of the final judgment award, NLRC retained jurisdiction and controlover the case and could issue such orders as were necessary for the implementation of that award. Itsinclusion as a party could not have been accomplished at the earlier stages of the proceedings becauseat the time of the filing of the Complaint, private respondents' cause of action was only against LIRAG.

DBP cannot rightfully contend that it was deprived of due process. It was given the opportunity to beheard and to present its evidence. It had actually filed its Opposition to the Motion for Execution and

Garnishment filed by LAND on 7 January 1985, and the Order granting the Motion was issued only afterhearing. DBP had also addressed an appeal to the NLRC. It had submitted, therefore, to the jurisdictionof the NLRC.

Now, for the core issue — whether or not the NLRC gravely abused its discretion in affirming the Orderof the Labor Arbiter granting the Writ of Garnishment out of the proceeds of LIRAG's propertiesforeclosed by DBP to satisfy the judgment in these cases.

We are constrained to rule in the affirmative.

Article 110 of the Labor Code provides:

Art. 110. Worker preference in case of bankruptcy . — In the event of bankruptcy or liquidation of anemployer's business, his workers shall enjoy first preference as regards wages due them for servicesrendered during the period prior to the bankruptcy or liquidation, any provision to the contrarynotwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to ashare in the assets of the employer.

In implementation of the foregoing, Section 10, Rule VIII, Book III of the Revised Rules and RegulationsImplementing the Labor Code, as amended, provides:

Sec. 10. Payment of wages in case of bankruptcy . — Unpaid wages earned by the employees before the

declaration of bankruptcy or judicial liquidation of the employer's business shall be given first preference



and shall be paid in full before other creditors may establish any claim to a share in the assets of theemployer. (Emphasis supplied).

In interpreting the foregoing provisions, the Court, in Development Bank of the Philippines vs . Santos (G.R. Nos. 78261-62, 8 March 1989), categorically stated:

It is quite clear from the provision that a declaration of bankruptcy or a judicial liquidation must bepresent before the workers preference may be enforced. Thus, Article 110 of the Labor Code and itsimplementing rule cannot be invoked by the respondents in this case absent a formal declaration ofbankruptcy or a liquidation order. . . .

Since then, however, Article 110 has been amended by Republic Act No. 6715 and now reads as follows:

Sec. 1. Article 110 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code ofthe Philippines, is hereby further amended to read as follows:

Art. 110. Worker preference in case of bankruptcy . — In the event of bankruptcy or liquidation of anemployer's business, his workers shall enjoy first preference as regards their unpaid wages and othermonetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages andmonetary claims shall be paid in full before the claims of the Government and other creditors may be

paid . (Amendments emphasized).

The amendment expands worker preference to cover not only unpaid wages but also other monetaryclaims to which even claims of the Government must be deemed subordinate.

Section 10, Rule III, Book III of the Omnibus Rules Implementing the Labor Code has also been amendedby Section 1 of the Rules and Regulations Implementing RA 6715 as approved by the then Secretary of

Labor and Employment on 24 May 1989, and now provides:

Sec. 10. Payment of wages and other monetary claims in case of bankruptcy . — In case of bankruptcy orliquidation of the employer's business, the unpaid wages and other monetary claims of the employeesshall be given first preference and shall be paid in full before the claims of government and othercreditors may be paid.

Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does thismean then that liquidation proceedings have been done away with?

We opine in the negative, upon the following considerations:

1. Because of its impact on the entire system of credit, Article 110 of the Labor Code cannot be viewedin isolation but must be read in relation to the Civil Code scheme on classification and preference ofcredits.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning theclassification, concurrence and preference of credits, which provisions find particular application ininsolvency proceedings where the claims of all creditors, preferred or non-preferred, may beadjudicated in a binding manner. . . . Republic vs . Peralta (G.R. No. L-56568, May 20, 1987, 150 SCRA 37).

2. In the same way that the Civil Code provisions on classification of credits and the Insolvency Law havebeen brought into harmony, so also must the kindred provisions of the Labor Law be made to harmonizewith those laws.

3. In the event of insolvency, a principal objective should be to effect an equitable distribution of theinsolvent's property among his creditors. To accomplish this there must first be some proceeding wherenotice to all of the insolvents's creditors may be given and where the claims of preferred creditors maybe bindingly adjudicated (De Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928). Therationale therefore has been expressed in the recent case of DBP vs . Secretary of Labor (G.R. No. 79351,28 November 1989), which we quote:



A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfiedfirst ahead of other claims which may be established against the debtor. Logically, it becomes materialonly when the properties and assets of the debtors are insufficient to pay his debts in full; for if thedebtor is amply able to pay his various creditors in full, how can the necessity exist to determine whichof his creditors shall be paid first or whether they shall be paid out of the proceeds of the sale the

debtor's specific property? Indubitably, the preferential right of credit attains significance only after theproperties of the debtor have been inventoried and liquidated, and the claims held by his variouscreditors have been established (Kuenzle & Streiff (Ltd.) vs. Villanueva, 41 Phil 611 (1916); Barretto vs.Villanueva, G.R. No. 14938, 29 December 1962, 6 SCRA 928; Philippine Savings Bank vs. Lantin, G.R.33929, 2 September 1983, 124 SCRA 476).

4. A distinction should be made between a preference of credit and a lien. A preference applies only toclaims which do not attach to specific properties. A lien creates a charge on a particular property. Theright of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien onthe property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a

preference in application. It is a method adopted to determine and specify the order in which creditsshould be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a firstpreference in the discharge of the funds of the judgment debtor.

In the words of Republic vs . Peralta, supra :

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees forunpaid wages either upon all of the properties or upon any particular property owned by theiremployer. Claims for unpaid wages do not therefore fall at all within the category of specially preferredclaims established under Articles 2241 and 2242 of the Civil Code, except to the extent that suchcomplaints for unpaid wages are already covered by Article 2241, number 6: "claims for laborers wages,on the goods manufactured or the work done;" or by Article 2242, number 3 : "claims of laborers andother workers engaged in the construction, reconstruction or repair of buildings, canals and otherworks, upon said buildings, canals and other works, upon said buildings, canals and other works." To theextent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number3, they would come within the ambit of the category of ordinary preferred credits under Article 2244.

5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects theproperty upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligationfor whose security it was constituted (Article 2176, Civil Code). It creates a real right which isenforceable against the whole world. It is a lien on an identified immovable property, which a

preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of theCivil Code on classification of credits. The preference given by Article 110, when not falling within Article2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinarypreferred credit although its impact is to move it from second priority to first priority in the order ofpreference established by Article 2244 of the Civil Code (Republic vs. Peralta, supra ).

In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind assecurity is not permitted to vote in the election of the assignee in insolvency proceedings unless thevalue of his security is first fixed or he surrenders all such property to the receiver of the insolvent'sestate.

6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean "absolutepreference," the same should be given only prospective effect in line with the cardinal rule that lawsshall have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, anyinfringement on the constitutional guarantee on non-impairment of the obligation of contracts (Section10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated byseveral years the amendatory law, RA No. 6715. To give Article 110 retroactive effect would be to wipeout the mortgage in DBP's favor and expose it to a risk which it sought to protect itself against byrequiring a collateral in the form of real property.

In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in anyeffective way prior to the time of its presentation in distribution proceedings. It will find application



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LABOR CASES 1.pdf