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G.R.No.86932

TodayisTuesday,January17,2017

RepublicofthePhilippines
SUPREMECOURT
Manila
SECONDDIVISION
G.R.No.86932June27,1990
DEVELOPMENTBANKOFTHEPHILIPPINES,petitioner,
vs.
NATIONALLABORRELATIONSCOMMISSIONandDOROTHYS.ANCHETA,MA.MAGDALENAY.
ARMARILLE,CONSTANTEA.ANCHETA,CONSTANTEB.BANAYOS,EVELYNBARRIENTOS,JOSE
BENAVIDEZ,LEONARDOBUENAAGUA,BENJAMINBAROT,ERNESTOS.CANTILLER,EDUARDOCANDA,
ARMANDOCANDA,AIDADELUNA,PACIFICOM.DEJESUS,ALFREDOESTRERA,AURELIOA.FARINAS,
FRANCISCOGREGORIO,DOMELINAGONZALES,JUANAJALANDONI,MANUELMALUBAY,FELICIANO
OCAMPO,MABELPADO,GEMINIANOPLETA,ERNESTOS.SALAMAT,JULIANTRAQUENA,JUSFIEL
SILVERIO,JAMESCRISTALES,FRANCISCOBAMBIO,JOSET.MARCELO,JR.,SUSANM.OLIVAR,
ERNESTOJULIO,CONSTANTEANCHETA,JR.,ENRIQUENABUAandJAVIERP.MATARO,respondents.
TheLegalCounselforpetitioner.
CA.Ancheta&C.B.Banayosforprivaterespondents.

REGALADO,J.:
The present petition for certiorari seeks the reversal of the decision of the National Labor Relations
Commission (NLRC) in, NLRCNCR Case No. 00070250087, dated January 16, 1986, 1 which dismissed
theappealoftheDevelopmentBankofthePhilippines(DBP)fromthedecisionofthelaborarbiterorderingittopay
theunpaidwages,13thmonthpay,incentivepayandseparationpayofhereinprivaterespondents.

PhilippineSmeltersCorporation(PSC),acorporationregisteredunderPhilippinelaw,obtainedaloanin
1983 from the Development Bank of the Philippines, a governmentowned financial institution created
and operated in accordance with Executive Order No. 81, to finance its iron smelting and steel
manufacturing business. To secure said loan, PSC mortgaged to DBP real properties with all the
buildingsandimprovementsthereonandchattels,withitsPresident,JoseT.Marcelo,Jr.,ascoobligor.
Byvirtueofthesaidloanagreement,DBPbecamethemajoritystockholderofPSC,withstockholdingsin
the amount of P31,000,000.00 of the total P60,226,000.00 subscribed and paid up capital stock.
Subsequently,ittookoverthemanagementofPSC.
WhenPSCfailedtopayitsobligationwithDBP,whichamountedtoP75,752,445.83asofMarch31,1986,
DBPforeclosedandacquiredthemortgagedrealestateandchattelsofPSCintheauctionsalesheldon
February25,1987andMarch4,1987.
On February 10, 1987, forty (40) petitioners filed a Petition for Involuntary Insolvency in the Regional
Trial Court, Branch 61 at Makati, Metropolitan Manila, docketed therein as Special Proceeding No. M
1359, 2 against PSC and DBP, impleading as corespondents therein Olecram Mining Corporation, Jose
Panganiban Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners representing themselves as
unpaidemployeesofsaidprivaterespondents,exceptPISOBank.

OnFebruary13,1987,hereinprivaterespondentsfiledacomplaintwiththeDepartmentofLaboragainst
PSC for nonpayment of salaries, 13th month pay, incentive leave pay and separation pay. On February
20, 1987, the complaint was amended to include DBP as party respondent. The case was thereafter
indorsed to the Arbitration Branch of the National Labor Relations Commission (NLRC). DBP filed its
positionpaperonSeptember7,1987,invokingtheabsenceofemployeremployeerelationshipbetween
privaterespondentsandDBPandsubmittingthatwhenDBPforeclosedtheassetsofPSC,itdidsoasa
foreclosingcreditor.
OnJanuary30,1988,thelaborarbiterrenderedadecision,thedispositiveportionofwhichdirectedthat
"DBPasforeclosingcreditorisherebyorderedtopayalltheunpaidwagesandbenefitsoftheworkers
whichremainunpaidduetoPSC'sforeclosure."3
On appeal by DBP, the NLRC sustained the ruling of the labor arbiter, holding DBP liable for unpaid
wagesofprivaterespondents"notasamajoritystockholderofrespondentPSC,butastheforeclosing
creditorwhopossessestheassetsofsaidPSCbyvirtueoftheauctionsaleitheldin1987."Inaddition,
theNLRCheldthatthelaborarbiteriscorrectinassumingjurisdictionbecause"theworker'spreference
totheamountsecuredbyDBPbyvirtueofsaidforeclosuresalesofPSCpropertiesaroseoutoforare
connected or interwoven with the labor dispute brought forth by appellees against PSC and DBP. 4
Hence,thepresentpetitionbyDBP.

DBPcontendsthatthelaborarbiterandtheNLRCcommittedagraveabuseofdiscretion(1)inassuming
jurisdictionoverDBP(2)inapplyingtheprovisionsofArticle110oftheLaborCode,asamendedand
(3)innotenforcingandapplyingSection14ofExecutiveOrderNo.81.
Wefindmeritinthepetition.

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It is to be noted that in their comment, private respondents tried to prove the existence of employer
employee relationship based on the fact that DBP is the majority stockholder of PSC and that the
majority of the members of the board of directors of PSC are from DBP. 5 We do not believe that these
circumstances are sufficient indicia of the existence of an employeremployee relationship as would confer
jurisdictionoverthecaseonthelaborarbiter,especiallyinthelightoftheexpressdeclarationofsaidlaborarbiter
andtheNLRCthatDBPisbeingheldliableasaforeclosingcreditor.Atanyrate,thisjurisdictionaldefectwascured
whenDBPappealedthelaborarbiter'sdecisiontotheNLRCandtherebysubmittedtoitsjurisdiction.

The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the
unpaidwages,13thmonthpay,incentiveleavepayandseparationpayoftheemployeesofPSC.
Weruleinthenegative.
Duringthedatesmaterialtotheforegoingproceedings,Article110oftheLaborCoderead:
Art.110.Workerpreferenceincaseofbankruptcy.Intheeventofbankruptcyorliquidation
of an employer's business, his workers shall enjoy first preference as regards wages due
them for services rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Unpaid wages shall be paid in full before
othercreditorsmayestablishanyclaimtoashareintheassetsoftheemployer.
Inconjunctiontherewith,Section10,RuleVIII,BookIIIoftheImplementingRulesandRegulationsofthe
LaborCodeprovided:
Sec. 10. Payment of wages in mm of bankruptcy.Unpaid wages earned by the employees
beforethedeclarationofbankruptcyorjudicialliquidationoftheemployer'sbusinessshall
be given first preference and shall be paid in full before other creditors may establish any
claimtoashareintheassetsoftheemployer.
Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor
ArbiterArielC.Santos,etal.,6explicatedasfollows:
Itisquiteclearfromtheprovisionsthatadeclarationofbankruptcyorajudicialliquidation
mustbepresentbeforetheworker'spreferencemaybeenforced.....
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Moreover,thereasonbehindthenecessityforajudicialproceedingoraproceedinginrem
beforetheconcurrenceandpreferenceofcreditsmaybeappliedwasexplainedbythisCourt
inthecaseofPhilippineSavingsBankv.Lantin(124SCRA476[1983]).Wesaid:
The proceedings in the court below do not partake of the nature of the
insolvencyproceedingsorsettlementofadecedent'sestate.Theactionfiledby
Ramos was only to collect the unpaid cost of the construction of the duplex
apartment.ItisfarfrombeingageneralliquidationoftheestateoftheTabligan
spouses.
Insolvency proceedings and settlement of a decedent's estate are both
proceedings in rem which are binding against the whole world. All persons
havinginterestinthesubjectmatterinvolved,whethertheywerenotifiedornot,
are equally bound. Consequently, a liquidation of similar import or 'other
equivalent general liquidation must also necessarily be a proceeding in rem so
thatallinterestedpersonswhetherknowntothepartiesornotmaybeboundby
suchproceeding.
In the case at bar, although the lower court found that 'there were no known
creditors other than the plaintiff and the defendant herein,' this can not be
conclusive.Itwillnotbarothercreditorsintheeventtheyshowupandpresent
their claim against the petitioner bank, claiming that they also have preferred
liensagainstthepropertyinvolved.Consequently,TransferCertificateofTitleNo.
101864 issued in favor of the bank which is supposed to be indefeasible would
remain constantly unstable and questionable. Such could not have been the
intention of Article 2243 of the Civil Code although it considers claims and
creditsunderArticle2242asstatutoryfines.NeitherdoestheDeBarretocase...
The claims of all creditors whether preferred or non preferred, the Identification of the
preferred ones and the totality of the employer's asset should be brought into the picture.
Therecanthenbeanauthoritative,fair,andbindingadjudicationinsteadofthepiecemeal
settlementwhichwouldresultfromthequestioneddecisioninthiscase.
RepublicActNo.6715,whichtookeffectonMarch21,1989,amendedArticle110oftheLaborCodeto
readasfollows:
Art.110.Workerpreferenceincaseofbankruptcy.Intheeventofbankruptcyorliquidation
of an employer's business, his workers shall enjoy first preference as regards their unpaid
wages and other monetary claims, any provision of law to the contrary notwithstanding.
Such unpaid wages and monetary claims shall be paid in full before the claims of the
Governmentandothercreditorsmaybepaid.
As a consequence, Section 1 0, Rule VIII, Book III of the Implementing Rules and Regulations of the
LaborCodewaslikewiseamended,towit:
Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. In case of
bankruptcyorliquidationoftheemployer'sbusiness,theunpaidwagesandothermonetary
claims of the employees shall be given first preference and shall be paid in full before the
claimsofgovernmentandothercreditorsmaybepaid.
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Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid
case of Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was
adopted by this Court in the recent case of Development Bank of the Philippines vs. National Labor
Relations Commission, et. al., 7 For facility of reference, especially the rationalization for the conclusions
reachedtherein,wereproducethesalientportionsofthedecisioninthislatercase.

Notably,theterms"declaration"ofbankruptcyor"judicial"liquidationhavebeeneliminated.
Doesthismeansthenthatliquidationproceedingshavebeendoneawaywith?
Weopinemthenegative,uponthefollowingconsiderations:
1.Becauseofitsimpactontheentiresystemofcredit,Article110oftheLaborCodecannot
beviewedinisolationbutmustbereadinrelationtotheCivilCodeschemeonclassification
andpreferenceofcredits.
Article 110 of the Labor Code, in determining the reach of its terms, cannot be
viewedinisolation.Rather,Article110mustbereadinrelationtotheprovisions
of the Civil Code concerning the classification, concurrence and preference of
credits which provisions find particular application in insolvency proceedings
wheretheclaimsofallcreditors,preferredornonpreferred,maybeadjudicated
inabindingmanner...(Republicvs.Peralta(G.R.No.L56568,May20,1987,150
SCRA37).
2. In the same way that the Civil Code provisions on classification of credits and the
InsolvencyLawhavebeenbroughtintoharmony,soalsomustthekindredprovisionsofthe
LaborLawbemadetoharmonizewiththoselaws.
3. In the event of insolvency, a principal objective should be to effect an equitable
distribution of the insolvent's property among his creditors. To accomplish this there must
first be some proceeding where notice to all of the insolvent's creditors may be given and
where the claims of preferred creditors may be bindingly adjudicated (De Barretto vs.
Villanueva, No. L14938, December 29, 1962, 6 SCRA 928). The rationale therefor has been
expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November
1989),whichwequote:
A preference of credit bestows upon the preferred creditor an advantage of
having his credit satisfied first ahead of other claims which may be established
against the debtor. Logically, it becomes material only when the properties and
assetsofthedebtorsareinsufficienttopayhisdebtsinfullforifthedebtoris
amply able to pay his various creditors, in full, how can the necessity exist to
determinewhichofhiscreditorsshallbepaidfirstorwhethertheyshallbepaid
outoftheproceedsofthesaleofthedebtor'sspecificproperty?Indubitably,the
preferential right of credit attains significance only after the properties of the
debtorhavebeeninventoriedandliquidated,andtheclaimsheldbyhisvarious
creditors have been established (Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil.
611 [1916] Barretto vs. Villanueva, G.R. No. 14038, 29 December 1962, 6 SCRA
928PhilippineSavingsBankvs.Lantin,G.R.33929,2September1983,124SCRA
476).
4. A distinction should be made between a preference of credit and a lien. A preference
appliesonlytoclaimswhichdonotattachtospecificproperties.Ahencreatesachargeona
particularproperty.TherightoffirstpreferenceasregardsunpaidwagesrecognizebyArticle
110doesnotconstituteahenonthepropertyoftheinsolventdebtorinfavorofworkers.It
isbutapreferenceofcreditintheirfavor,apreferenceinapplication.Itisamethodadopted
todetermineandspecifytheorderinwhichcreditsshouldbepaidinthefinaldistributionof
the proceeds of the insolvent's assets It is a right to a first preference in the discharge of
thefundsofthejudgmentdebtor.inthewordsofRepublicvs.Peralta,supra:
Article110oftheLaborCodedoesnotpurporttocreatealieninfavorofworkers
or employees for unpaid wages either upon all of the properties or upon any
particular property owned by their employer. Claims for unpaid wages do not
therefore fall at all within the category of specially preferred claims established
under Articles 2241 and 2242 of the Civil Code, except to the extent that such
claims 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 and other workers engaged in the
construction,reconstructionorrepairofbuildings,canalsandotherworks,upon
saidbuildings,canalsorotherworks.'Totheextentthatclaimsforunpaidwages
falloutsidethescopeofArticle2241,number6andArticle2242,number3,they
wouldcomewithintheambitofthecategoryofordinarypreferredcreditsunder
Article2244.'
5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately
subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillmentoftheobligationforwhosesecurityitwasconstituted(Article2176,CivilCode).It
createsarealrightwhichisenforceableagainstthewholeworld.ItisalienonanIdentified
immovable property, which a preference is not. A recorded mortgage credit is a special
preferred credit under Article 2242 (5) of the Civil Code on classification of credits. The
preferencegivenbyArticle110,whennotfallingwithinArticle2241(6)andArticle2242(3)of
the Civil Code and not attached to any specific property, is an ordinary preferred credit
although its impact is to move it from second priority to first priority in the order of
preferenceestablishedbyArticle2244oftheCivilCode(Republicvs.Peralta,supra).
In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or hen of any
kind as security is not permitted to vote in the election of the assignee in insolvency

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proceedingsunlessthevalueofhissecurityisfirstfixedorhesurrendersallsuchproperty
tothereceiveroftheinsolvent'sestate.
6.EvenifArticle110anditsImplementingRule,asamended,shouldbeinterpretedtomean
'absolute preference,' the same should be given only prospective effect in line with the
cardinal rule that laws shall have no retroactive effect, unless the contrary is provided
(Article 4, Civil Code). Thereby, any infringement on the constitutional guarantee on non
impairment of obligation of contracts (Section 10, Article III, 1987 Constitution) is also
avoided. In point of fact, DBP's mortgage credit antedated by several years the amendatory
law,RANo.6715.TogiveArticle110retroactiveeffectwouldbetowipeoutthemortgagein
DBPs favor and expose it to a risk which it sought to protect itself against by requiring a
collateralintheformofrealproperty.
Infine,therighttopreferencegiventoworkersunderArticle110oftheLaborCodecannot
existinanyeffectivewaypriortothetimeofitspresentationindistributionproceedings.It
will find application when, in proceedings such as insolvency, such unpaid wages shall be
paidinfullbeforethe'claimsoftheGovernmentandothercreditors'maybepaid.But,foran
orderly settlement of a debtor's assets, all creditors must be convened, their claims
ascertained and inventoried, and thereafter the preference determined in the course of
judicialproceedingswhichhavefortheirobjectthesubjectionofthepropertyofthedebtor
tothepaymentofhisdebtsorotherlawfulobligations.Thereby,anorderlydeterminationof
preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L33929,
September 2, 1983, 124 SCRA 476) the adjudication made will be binding on all partiesin
interest, since those proceedings are proceedings in rem and the legal scheme of
classification, concurrence and preference of credits in the Civil Code, the Insolvency Law,
andtheLaborCodeispreservedinharmony.
On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been
instituted against PSC, private respondents should properly assert their respective claims in said
proceeding..
WHEREFORE,thepetitionisGRANTED.ThedecisionofpublicrespondentisherebyANNULLEDandSET
ASIDE.
SOORDERED.
MelencioHerrera(Chairperson)andParas,JJ.,concur.

SeparateOpinions

SARMIENTO,J.,dissenting:
As I held in DBP v. NLRC 1 and more recently, in Bolinao v. Padolina, 2 that on account of the amendment
introduced by Republic Act No. 6715, workers now enjoy "absolute preference" in the payment of labor claims,
above and beyond taxes due from the Government, and credits belonging to private persons. As I said therein,
Republic Act No. 6715 was enacted, precisely, to work more favorable terms to laborbecause prior to the
amendment, labor enjoyed no preference. I am afraid that the majority has misread the clear intent of the
legislature.

PADILLA,J.,dissenting:
IdissentforthesamereasonsstatedinmydissentingopinioninDBPvs.NLRC,etal.,G.R.Nos.82763
64,19March1990.

SeparateOpinions
SARMIENTO,J.,dissenting:
AsIheldinDBPv.NLRC1andmorerecently,inBolinaov.Padolina,2thatonaccountoftheamendment
introducedbyRepublicActNo.6715,workersnowenjoy"absolutepreference"inthepaymentoflaborclaims,
aboveandbeyondtaxesduefromtheGovernment,andcreditsbelongingtoprivatepersons.AsIsaidtherein,
RepublicActNo.6715wasenacted,precisely,toworkmorefavorabletermstolaborbecausepriortothe
amendment,laborenjoyednopreference.Iamafraidthatthemajorityhasmisreadtheclearintentofthe
legislature.

PADILLA,J.,dissenting:
IdissentforthesamereasonsstatedinmydissentingopinioninDBPvs.NLRC,etal.,G.R.Nos.82763
64,19March1990.

Footnotes
1Petition,AnnexARollo,26.
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2Rollo,84.
3Petition,AnnexBRollo,30.
4Rollo,66.
5Ibid.,7477.
6171SCRA138(1989).
7G.R.Nos.8276364,Mar.19,1990enbanc.
SARMIENTO,J.dissenting:
1G.R.Nos.8276364,March19,1990.
2G.R.No.81415
TheLawphilProjectArellanoLawFoundation

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