Bolinao, Jr. vs. Padolina

The worker preference under Article 110 of the Labor Code, as amended, and Section 10, Rule VIII, Book III of its Implementing Rules may be enforced only upon a formal declaration of bankruptcy or judicial liquidation; absent such proceeding, workers cannot invoke a first preference over their employer's assets, and an extrajudicial foreclosure does not trigger Article 110.

Petitioners were former employees of Sabena Mining Corporation, which operated a copper and gold project in New Bataan, Davao del Norte. Sabena had dealings with creditors including Phelps Dodge (Phils.) Inc., Bank of America, and the Development Bank of the Philippines. The case turns on Article 110 of the Labor Code, as amended, and its implementing rules on workers' preference in case of bankruptcy, read with the Civil Code provisions on concurrence and preference of credits.

Petitioners A.N. Bolinao, Jr., Reynold P. Dannug, Juan A. Agsalon, Jr., and Zosimo L. Carreon were former employees of Sabena Mining Corporation, which operated a copper and gold project in New Bataan, Davao del Norte. In 1982 and 1983, they were laid off without being recalled.

In September 1983, petitioners filed a formal complaint for collection of unpaid salaries, unused accrued vacation and sick leave benefits, 13th month pay, and separation pay before the National Labor Relations Commission against Sabena Mining Corporation and the Development Bank of the Philippines, docketed as NCR Case No. 9-4178-83. On May 29, 1984, the parties entered into a compromise agreement under which petitioners were to be paid on a staggered basis the collective amount of P385,583.95. The company faithfully complied with the scheduled payments only up to March 1985 because it ceased operations effective April 1, 1985. With this development, petitioners moved for the issuance of a writ of execution in June 1985.

In an order dated June 21, 1985, the Labor Arbiter issued a writ of execution against the company to collect the balance of P311,580.14. On June 27, 1985, Deputy Sheriff Antonio P. Soriano garnished the remaining amount of P150,279.64 in the savings account of the company at the Development Bank of the Philippines. However, the same amount had previously been garnished by two creditors of the company: Bank of America garnished the amount in April 1982 in Civil Case No. 45452, while Phelps Dodge (Phils.) Inc. garnished the amount in June 1984 in Civil Case No. 50936. Both cases were filed in different branches of the Regional Trial Court in Pasig.

In an order dated September 30, 1987, the respondent court directed DBP to release to its Deputy Sheriff, Carlos G. Maog, the amount of P150,279.64, declaring that the writ of preliminary attachment made by Bank of America through Deputy Sheriff Norberto Doblado in Civil Case No. 45452 could not prevail over the garnishment pursuant to a writ of execution issued in Civil Case No. 50936 in favor of Phelps Dodge, for failure of Bank of America to prosecute its lien. The order came to the attention of petitioners, who then filed a Motion to Intervene and to Lift Order of September 30, 1987 on October 13, 1987 and a third-party claim with the deputy sheriff on October 19, 1987. DBP did not interpose any objection, but Phelps Dodge opposed the motion and third-party claim, arguing that petitioners' rights of preference and first lien under Article 110 of the Labor Code and Article 2244 of the Civil Code were operative only in insolvency court and in a bankruptcy case. Petitioners filed their reply and a motion to resolve the third-party claim.

On January 5, 1988, the respondent court issued an order denying the motion to intervene and dismissing the third-party claim, declaring that the garnishment made by its Deputy Sheriff in favor of Phelps Dodge was superior to the rights of petitioners. The record showed no insolvency proceeding, declaration of bankruptcy, or judicial liquidation involving Sabena; what was undertaken was DBP's extrajudicial foreclosure of Sabena's assets.

• Worker Preference Under Article 110: Petitioners contended that under Article 110 of the Labor Code and its implementing rules and regulations, the claims of laborers for unpaid wages and other monetary benefits due them for services rendered prior to bankruptcy enjoy first preference in the satisfaction of credits against a bankrupt company.
• Preferential Claim Over Sabena Funds: Petitioners asserted a preferential right or claim over the funds of Sabena Mining Corporation held by DBP, and sought to intervene and lift the order awarding the funds to Phelps Dodge.

• Preference Only in Insolvency or Bankruptcy: Respondent Phelps Dodge maintained that the rights of preference and first lien of petitioners, as former employees of Sabena Mining Corporation, under Article 110 of the Labor Code and Article 2244 of the Civil Code, are operative only in an insolvency court and in a bankruptcy case.
• Opposition to Intervention and Third-Party Claim: Respondent Phelps Dodge opposed the Motion to Intervene and Third-Party Claim on the ground that petitioners' statutory preference did not apply to the funds already garnished in its favor.

• Preferential Right Over Sabena Funds: Whether petitioners enjoy a preferential right or claim over the funds of Sabena Mining Corporation under Article 110 of the New Labor Code, as amended, and Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code.
• Requirement of Bankruptcy or Judicial Liquidation: Whether a formal declaration of bankruptcy or judicial liquidation is required before the worker preference under Article 110 may be enforced.

• Preferential Right Over Sabena Funds: No. The petition is without merit because the worker preference under Article 110 of the Labor Code and Section 10, Rule VIII, Book III of its Implementing Rules cannot be enforced absent a formal declaration of bankruptcy or judicial liquidation.
• Requirement of Bankruptcy or Judicial Liquidation: Yes. A formal declaration of bankruptcy or judicial liquidation is required before Article 110 may be invoked; the extrajudicial foreclosure of Sabena's assets by DBP did not satisfy this requirement.

• Preferential Right Over Sabena Funds: Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code require that a declaration of bankruptcy or a judicial liquidation be present before the worker's preference may be enforced. The Court relied on Development Bank of the Philippines vs. Labor Arbiter, G.R. Nos. 78261-62, March 8, 1989, which held that Article 110 and its implementing rule cannot be invoked absent a formal declaration of bankruptcy or a liquidation order. In the case at bar, there was no showing of any insolvency proceeding, declaration of bankruptcy, or judicial liquidation filed by Sabena Mining Corporation; only an extrajudicial foreclosure by DBP was undertaken. To hold that Article 110 applies in extrajudicial proceedings would place the worker in a better position than the State, which could only assert its own prior preference in a judicial proceeding. Article 110 must not be viewed in isolation and must be reckoned with the Civil Code provisions on classification, concurrence, and preference of credits.
• Requirement of Bankruptcy or Judicial Liquidation: The rule in Republic vs. Peralta, 150 SCRA 37 [1987], requires Article 110 to be read in relation to the Civil Code provisions on classification, concurrence, and preference of credits, which find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner. The reason for requiring a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be adjudicated is to bind all interested persons, whether known to the parties or not. The claims of all creditors, the identification of the preferred ones, and the totality of the employer's assets should be brought into the picture, so that there can be an authoritative, fair, and binding adjudication instead of the piecemeal settlement that would result from the questioned decision. Because no such proceeding existed, the trial court correctly denied the motion to intervene and dismissed the third-party claim, and correctly declared Phelps Dodge's garnishment superior to petitioners' claimed preference.

• Worker Preference in Case of Bankruptcy Requires Judicial Proceeding — Under Article 110 of the Labor Code and Section 10, Rule VIII, Book III of its Implementing Rules, workers' first preference for unpaid wages and monetary claims may be enforced only in the event of bankruptcy or liquidation of an employer's business, and requires a formal declaration of bankruptcy or judicial liquidation. The Court applied this doctrine because no insolvency, bankruptcy, or judicial liquidation proceeding was shown; only extrajudicial foreclosure by DBP occurred.
• Article 110 Read with Civil Code on Concurrence and Preference of Credits — Article 110 cannot be viewed in isolation; it must be read with the Civil Code provisions on classification, concurrence, and preference of credits, which apply in insolvency proceedings where the claims of all creditors may be bindingly adjudicated. The Court used this principle to reject the application of Article 110 to an extrajudicial foreclosure.
• Proceeding in Rem for Binding Adjudication of Preferred Credits — The reason for requiring a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be adjudicated is to bind all interested persons, known or unknown, and to bring into the picture all claims and the employer's totality of assets, avoiding piecemeal settlement. This doctrine supported the denial of petitioners' intervention and third-party claim.

• "It is quite clear from the provisions of Article 110 of the Labor Code and Section 10, Rule VIII, Book H of the Revised Rules and Regulations Implementing the Labor Code, that a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. Thus, it was held that Article 110 of the Labor Code and its implementing rule cannot be invoked absent a formal declaration of bankruptcy or a liquidation order (Development Bank of the Philippines v. Labor Arbiter, G.R. Nos. 78261-62, March 8, 1989)." — This passage states the ratio decidendi: the worker preference is conditioned on a formal bankruptcy or liquidation declaration.
• "In the case at bar, there was no showing of any insolvency proceeding or declaration of bankruptcy or judicial liquidation that was being filed by Sabena Mining Corporation. It is only an extra-judicial foreclosure that was being enunciated as when DBP extra-judicially foreclosed the assets of Sabena Mining Corporation." — This passage applies the rule to the facts and explains why petitioners' claim failed.
• "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 the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner." — This passage defines the interpretive framework for Article 110 and is a commonly cited formulation.
• "The reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be appealed is to bind all interested persons whether known to the parties or not." — This passage explains the rationale for requiring a judicial proceeding before preferred credits may be adjudicated.

• Development Bank of the Philippines vs. Labor Arbiter, G.R. Nos. 78261-62, March 8, 1989 — Controlling precedent cited for the rule that Article 110 of the Labor Code and its implementing rule cannot be invoked absent a formal declaration of bankruptcy or a liquidation order.
• Republic vs. Peralta, 150 SCRA 37 [1987] — Cited for the rule that Article 110 must be read in relation to the Civil Code provisions on classification, concurrence, and preference of credits, which apply in insolvency proceedings where all creditors' claims may be bindingly adjudicated.
• Development Bank of the Philippines vs. National Labor Relations Commission, G.R. Nos. 82763-64, March 19, 1990 — Cited in a footnote as reiterating the same doctrine on the necessity of a judicial proceeding or liquidation before worker preference may be enforced.

• Article 110, Labor Code (Presidential Decree No. 442, as amended) — Grants workers first preference in case of bankruptcy or liquidation of an employer's business. The Court construed it to require a formal declaration of bankruptcy or judicial liquidation before the preference may be enforced, and held that an extrajudicial foreclosure does not trigger its application.
• Section 10, Rule VIII, Book III, Implementing Rules and Regulations of the Labor Code — The implementing rule was read together with Article 110 to require a declaration of bankruptcy or judicial liquidation before the worker's preference may be enforced.
• Civil Code provisions on classification, concurrence and preference of credits — The Court held that Article 110 cannot be viewed in isolation and must be read with these provisions, which find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner.

Melencio-Herrera (Chairperson) and Regalado, JJ., concurred. No separate concurring opinions are set out in the provided text.

• Justice Sarmiento — Dissented. He reiterated his dissent in Development Bank of the Philippines vs. National Labor Relations Commission and adopted Justice Teodoro Padilla's dissent therein, holding that under Article 110 of the Labor Code, as amended by Republic Act No. 6715, workers enjoy "absolute preference" for unpaid wages and other monetary claims over and above taxes due to the government and claims of creditors, and subject to no prior declaration of bankruptcy or judicial order of liquidation. He argued that the amendment of Article 110 by Republic Act No. 6715 settled the debate in favor of absolute worker preference, that the prior Article 110 required a declaration of insolvency, and that the Constitution's policy of full protection to labor means labor above capital. The provided text also references Justice Teodoro Padilla's dissent in Development Bank of the Philippines vs. National Labor Relations Commission, which Sarmiento adopted; no separate Padilla opinion is set out in the source.