DBP vs. NLRC

A formal declaration of bankruptcy or judicial liquidation of the employer's business is required before the worker's preference under Article 110 of the Labor Code may be invoked, even after the amendment introduced by R.A. 6715, because a preference of credit is meaningful only within distribution proceedings where all creditors are convened, their claims ascertained and inventoried, and preferences thereafter determined — a process that presupposes proceedings in rem such as insolvency, bankruptcy, or liquidation.

Private respondent Leonor A. Ang was employed by Tropical Philippines Wood Industries, Inc. (TPWII), a corporation engaged in the manufacture and sale of veneer, plywood, and sawdust panel boards. Petitioner Development Bank of the Philippines (DBP) was TPWII's mortgagee, having extended credit secured by the latter's plant facilities and equipment. The dispute centers on whether DBP, as mortgagee that foreclosed and took possession of the employer's assets, may be held subsidiarily liable for the unpaid monetary claims of TPWII's employees under Article 110 of the Labor Code, which governs worker preference in case of bankruptcy or liquidation.

On 21 March 1977, private respondent Leonor A. Ang began employment as Executive Secretary with Tropical Philippines Wood Industries, Inc. (TPWII), a corporation engaged in the manufacture and sale of veneer, plywood, and sawdust panel boards. In 1982 she was promoted to the position of Personnel Officer.

In September 1983, petitioner Development Bank of the Philippines, as mortgagee of TPWII, foreclosed its plant facilities and equipment. TPWII nevertheless continued its business operations, interrupted only by brief shutdowns for the purpose of servicing its plant facilities and equipment. In January 1986, petitioner took possession of the foreclosed properties, and from then on the company ceased its operations. As a consequence, private respondent was on 15 April 1986 verbally terminated from the service.

On 14 December 1987, aggrieved by the termination of her employment, private respondent filed with the Labor Arbiter a complaint for separation pay, 13th month pay, vacation and sick leave pay, salaries and allowances against TPWII, its General Manager, and petitioner. After hearing, the Labor Arbiter found TPWII primarily liable to private respondent but only for her separation pay and vacation and sick leave pay, because her claims for unpaid wages and 13th month pay were later paid after the complaint was filed. The General Manager was absolved of any liability. With respect to petitioner, the Labor Arbiter held it subsidiarily liable in the event the company failed to satisfy the judgment, rationalizing that the right of an employee to be paid benefits due from the properties of the employer is superior to the right of the latter's mortgagee, citing the Court's resolution in PNB vs. Delta Motor Workers Union.

On 16 November 1992, public respondent National Labor Relations Commission affirmed the ruling of the Labor Arbiter. Petitioner then elevated the matter to the Supreme Court via a petition for certiorari, questioning whether the NLRC committed grave abuse of discretion in holding Article 110 of the Labor Code applicable notwithstanding the absence of any formal declaration of bankruptcy or judicial liquidation of TPWII.

• Requirement of Bankruptcy or Liquidation Proceedings: Petitioner argued that the decision of public respondent runs counter to the consistent rulings of the Supreme Court in a long line of cases emphasizing that the application of Article 110 of the Labor Code is contingent upon the institution of bankruptcy or judicial liquidation proceedings against the employer.

• Applicability of Article 110: Whether public respondent NLRC committed grave abuse of discretion in holding that Article 110 of the Labor Code, as amended, which refers to worker preference in case of bankruptcy or liquidation of an employer's business, is applicable notwithstanding the absence of any formal declaration of bankruptcy or judicial liquidation of TPWII.

• Applicability of Article 110: Yes. The NLRC gravely abused its discretion. Article 110 of the Labor Code, even as amended by R.A. 6715, requires a formal declaration of bankruptcy or judicial liquidation before the worker's preference may be enforced, and no such declaration or liquidation order existed with respect to TPWII.

• Applicability of Article 110: Article 110 should not be treated apart from other laws but applied in conjunction with the pertinent provisions of the Civil Code and the Insolvency Law to the extent that piecemeal distribution of the assets of the debtor is avoided. The original Article 110 and its implementing rule (Section 10, Rule VIII, Book III) were interpreted in Development Bank of the Philippines vs. Santos to mean that a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. The rationale is that to hold Article 110 applicable also to extrajudicial proceedings would put the worker in a better position than the State, which could only assert its own prior preference in case of a judicial proceeding. Although R.A. 6715 (effective 21 March 1989) amended Article 110 to expand the concept of worker preference to cover not only unpaid wages but also other monetary claims, subordinating even claims of the Government, and although the amended implementing rule notably eliminated the terms "declaration" (of bankruptcy) and "judicial" (liquidation), the Court in Development Bank of the Philippines vs. NLRC did not alter its original position that the right to preference given to workers under Article 110 cannot exist in any effective way prior to the time of its presentation in distribution proceedings. The preference finds application when, in proceedings such as insolvency, unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors may be paid. For an orderly settlement of a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the preferences determined. Such proceedings are proceedings in rem, ensuring an orderly determination of preference of creditors' claims binding on all parties-in-interest and preserving in harmony the legal scheme of classification, concurrence, and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code. A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead of other claims; it becomes material only when the properties and assets of the debtor are insufficient to pay his debts in full, and attains significance only after the properties of the debtor have been inventoried and liquidated and the claims held by his various creditors have been established. In the present case, there was as yet no declaration of bankruptcy nor judicial liquidation of TPWII, making it premature to enforce the worker's preference. The NLRC's additional ratiocination that the complainant enjoys a preference of credit over the properties of TPWII held in possession by DBP was a misconception of the nature of preference of credit. A preference applies only to claims which do not attach to specific properties, whereas a lien creates a charge on a particular property. The right of first preference under Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers; it is but a preference of credit — a method adopted to determine the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. DBP's claim, by contrast, is anchored on a mortgage credit, which directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted, creating a real right enforceable against the whole world. A recorded mortgage credit is a special preferred credit under Article 2242(5) of the Civil Code. The preference given by Article 110, when not falling within Article 2241(6) and Article 2242(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 preference established by Article 2244 of the Civil Code. Finally, the Court emphasized stare decisis: having spoken in a string of cases against the NLRC's position, the NLRC's duty was simply to obey judicial precedents, and any further disregard would be considered a ground to hold public respondent in contempt.

• Worker Preference Under Article 110 Requires Bankruptcy or Liquidation Proceedings — The worker's preference under Article 110 of the Labor Code, whether under the original or the R.A. 6715-amended version, cannot be enforced absent a formal declaration of bankruptcy or judicial liquidation of the employer's business. The preference of credit attains significance only when the debtor's properties have been inventoried and liquidated and the claims of various creditors have been established in proceedings in rem, such as insolvency, bankruptcy, or liquidation. This ensures an orderly determination of the preference of creditors' claims, binding on all parties-in-interest, and preserves in harmony the legal scheme of classification, concurrence, and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code.

• Preference of Credit Distinguished from Lien — A preference of credit applies only to claims which do not attach to specific properties; it is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. A lien, by contrast, creates a charge on a particular property. The right of first preference under Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. A mortgage credit, on the other hand, directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted, creating a real right enforceable against the whole world — it is a lien on an identified immovable property and a special preferred credit under Article 2242(5) of the Civil Code.

• Stare Decisis in Administrative Adjudication — Once a case is decided by the Supreme Court as the final arbiter of any justifiable controversy, another case involving exactly the same point at issue should be decided in the same manner. Lower courts and administrative agencies such as the NLRC have no choice but to obey judicial precedents; any further disregard or defiance of Supreme Court rulings may be considered a ground for contempt.

• "a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked by the respondents in this case absent a formal declaration of bankruptcy or a liquidation order . . . ." — This passage, quoting from Development Bank of the Philippines vs. Santos, states the controlling rule that bankruptcy or liquidation proceedings are a prerequisite to the enforcement of worker preference under Article 110.

• "A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application." — This passage defines the distinction between a preference of credit and a lien, explaining why Article 110 does not create a lien on specific properties and cannot override a mortgage credit enforceable against the whole world.

• "The rationale is that to hold Art. 110 to be applicable also to extrajudicial proceedings would be putting the worker in a better position than the State which could only assert its own prior preference in case of a judicial proceeding." — This passage articulates the equity-based rationale for requiring judicial proceedings before worker preference may be enforced, ensuring the worker is not given a more advantageous position than the State itself.

• Development Bank of the Philippines vs. Santos, G.R. Nos. 78261-62, 8 March 1989, 171 SCRA 138 — Controlling precedent. The Court interpreted Article 110 and its implementing rule to require a declaration of bankruptcy or judicial liquidation before the worker's preference may be enforced. This interpretation was reaffirmed in the present case.

• Development Bank of the Philippines vs. NLRC, G.R. Nos. 82763-64, 19 March 1990, 183 SCRA 328 — Followed. The Court did not alter its original position that the right to preference under Article 110 cannot exist in any effective way prior to its presentation in distribution proceedings, even after the R.A. 6715 amendment. This case also established the distinction between a preference of credit and a lien.

• Republic vs. Peralta, G.R. No. 56568, 20 May 1987, 150 SCRA 37 — Cited for the proposition that holding Article 110 applicable to extrajudicial proceedings would put the worker in a better position than the State, and for the principle that Article 110 does not create a lien in favor of workers.

• PNB vs. Delta Motor Workers Union, G.R. Nos. 75161-62, 3 April 1987 — Cited by the Labor Arbiter as basis for holding that the right of an employee to be paid benefits due from the properties of the employer is superior to the right of the latter's mortgagee; the Supreme Court effectively rejected this application in the present case.

• Philippine Savings Bank vs. Lantin, G.R. No. L-33929, 2 September 1983, 124 SCRA 476 — Cited as authority for the principle that judicial proceedings ensure an orderly determination of preference of creditors' claims binding on all parties-in-interest, since such proceedings are in rem.

• De Barreto vs. Villanueva, G.R. No. L-14938, 29 December 1962, 6 SCRA 928 — Cited for the principle that in the event of insolvency, a principal objective should be equitable distribution of the insolvent's property among creditors, which requires a proceeding where notice to all creditors may be given and claims of preferred creditors may be bindingly adjudicated.

• Kuenzle & Sheriff (Ltd.) vs. Villanueva, 41 Phil. 611 (1916) — Cited for the principle that a preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated and the claims of various creditors have been established.

• DBP vs. Secretary of Labor, G.R. No. 79351, 28 November 1989 — Cited for the rationale that a preference of credit bestows an advantage of having one's credit satisfied first, and becomes material only when the debtor's properties are insufficient to pay debts in full.

• Pines City Educational Center vs. NLRC, G.R. No. 96779, 10 November 1993, 227 SCRA 655 — Cited in support of the stare decisis principle that the NLRC must obey judicial precedents established by the Supreme Court.

• Article 110, Labor Code (original version) — Provided that in the event of bankruptcy or liquidation of an employer's business, workers shall enjoy first preference as regards wages due them for services rendered prior to the bankruptcy or liquidation, and unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer. The Court interpreted this to require a formal declaration of bankruptcy or judicial liquidation before the preference may be enforced.

• Article 110, Labor Code (as amended by R.A. 6715, effective 21 March 1989) — Expanded the concept of worker preference to cover not only unpaid wages but also other monetary claims, subordinating even claims of the Government. Despite the elimination of the terms "declaration" and "judicial" from the amended implementing rule, the Court held that the requirement of bankruptcy or liquidation proceedings subsists.

• Section 10, Rule VIII, Book III, Revised Rules and Regulations Implementing the Labor Code (original and amended versions) — The original implementing rule required unpaid wages earned before the "declaration of bankruptcy or judicial liquidation" to be given first preference. The amended rule (approved 24 May 1989) eliminated the terms "declaration" and "judicial" but the Court held this did not alter the requirement of distribution proceedings.

• Articles 2241(6), 2242(3) and (5), and 2244, Civil Code — Article 2241(6) covers claims for laborers' wages on goods manufactured or work done; Article 2242(3) covers claims of laborers engaged in construction, reconstruction, or repair of buildings; Article 2242(5) classifies recorded mortgage credits as special preferred credits. Claims for unpaid wages falling outside Articles 2241(6) and 2242(3) come within the ambit of ordinary preferred credits under Article 2244. The Court used these provisions to distinguish DBP's mortgage credit (a special preferred credit and a lien on specific property) from the worker's preference under Article 110 (an ordinary preferred credit not attached to any specific property).

Davide, Jr., Quiason, and Kapunan, JJ., concurred. (The text's concur line also lists Padilla, J., but he filed a separate dissenting opinion, summarized below.)

• Padilla, J. — Justice Padilla dissented, reiterating his views from prior cases (DBP vs. NLRC, G.R. Nos. 82763-64; Hautea vs. NLRC, G.R. No. 96149) that R.A. 6715 introduced a radical change into the system of preferences by establishing a three-tier order wherein unpaid wages and other monetary claims of workers enjoy absolute preference over all other claims, including those of the Government. He argued that nowhere in the amended law or its new implementing rule is a prior declaration of bankruptcy or judicial liquidation stated as a condition sine qua non, noting that the phrases "declaration of bankruptcy" and "judicial liquidation" were deliberately deleted from the amended implementing rule. He contended that a proceeding in rem is not essential to enforce the workers' preferential right because Article 110 itself bars the satisfaction of other creditors' claims until workers' claims are first satisfied in full, and that such a proceeding is necessary only where credits are concurring and enjoy no preference over one another — not when the law accords absolute priority. He further argued that the distinction between a preference of credit and a lien does not negate the clear legislative intent to give absolute preference to workers' claims, and that the express and unqualified statement that workers' claims are given first preference "any provision of law to the contrary notwithstanding" should prevail over the classification of mortgage credits as special preferred credits under Article 2242(5) of the Civil Code. He voted to dismiss the DBP petition and to affirm the NLRC resolution in favor of Ang, grounding his position on the constitutional mandate to protect the rights of workers and promote their welfare.