Development Bank of the Philippines vs. Santos

A formal declaration of bankruptcy or a judicial liquidation order is required before workers may enforce their first preference under Article 110 of the Labor Code. The worker preference cannot be invoked in extra-judicial proceedings, such as an extra-judicial foreclosure, because Article 110 must be read in relation to the Civil Code provisions on classification, concurrence, and preference of credits, which require a proceeding in rem where all creditors' claims may be adjudicated in a binding manner.

The petitioner, Development Bank of the Philippines (DBP), is a government financial institution that held mortgage rights over the properties of Riverside Mills Corporation (RMC), an employer. The private respondents are labor unions and individual former employees of RMC who obtained money judgments for separation pay, wage increases, and other benefits. The dispute centers on the interpretation of Article 110 of the Labor Code, which grants workers first preference for unpaid wages in case of bankruptcy or liquidation of an employer's business, and whether this preference applies where the employer's properties were extra-judicially foreclosed rather than subjected to formal bankruptcy or liquidation proceedings.

The Development Bank of the Philippines (DBP) held mortgage rights over the properties of Riverside Mills Corporation (RMC), a textile company. On November 29, 1984, in NLRC-NCR Case No. 2517-84, Labor Arbiter Manuel Caday awarded separation pay, wage and/or living allowance increases, and 13th month pay to individual complainants who were members of the Philippine Association of Free Labor Unions (PAFLU-RMC Chapter). On March 18, 1985, Labor Arbiter Teodorico Dogelio likewise awarded separation pay, vacation and sick leave pay, and unpaid increases in basic wage and allowances to other private respondents in NLRC Case No. NCR-7-2577-84, which involved Michael Penalosa, Jose Garcia, Apolinar Ray, and others, as well as the Samahang Diwang Manggagawa sa RMC-FFW Chapter.

On March 29, 1985, after the judgment had become final and executory, Labor Arbiter Dogelio issued a writ of execution directing NLRC Deputy Sheriff Juanita Atienza to collect the total sum of P85,961,058.70. The Deputy Sheriff failed to collect the amount and instead levied upon the personal and real properties of RMC. On April 25, 1985, a notice of levy on execution of certain real properties was annotated on the certificate of title filed with the Register of Deeds of Pasig, Metro Manila, where all the said properties were situated.

Meanwhile, in a separate development, DBP obtained a writ of possession on June 7, 1985 from the Regional Trial Court of Pasig over all the properties of RMC, after having extra-judicially foreclosed the same at public auction earlier in 1983. DBP subsequently leased the said properties to Egret Trading and Manufacturing Corporation, Rosario Textile Mills, and General Textile Mills. The writ of possession prevented the scheduled auction sale of the RMC properties that had been levied upon by the private respondents.

As a result, on June 19, 1985, the private respondents filed an incidental petition with the NLRC to declare their preference over the levied properties. The petition was docketed as NLRC Case No. NCR-7-2577-84, and DBP filed its position paper and memorandum in answer. On October 31, 1985, Labor Arbiter Dogelio issued an order recognizing and declaring the respondents' first preference as regards wages and other benefits due them over and above all earlier encumbrances on the properties of RMC, particularly those being asserted by DBP. DBP appealed to the NLRC, which set aside the order and remanded the case to Labor Arbiter Ariel C. Santos for further proceedings.

Another set of complainants, also named as respondents, filed on April 7, 1986 a complaint for separation pay, underpayment, and damages, entitled "Jaime Arada, et al. vs. RMC, DBP, Egret Trading and Manufacturing Corp.," docketed as NLRC Case No. NCR-4-1278-86. This case was consolidated with the case pending before respondent Santos. After several hearings where the parties, particularly DBP, General Textile Mills, Inc., and Rosario Textile Mills, Inc., were given the opportunity to argue their respective theories, all parties agreed to submit the case for decision after filing position papers and memoranda.

On March 31, 1987, Labor Arbiter Santos rendered the questioned decision, declaring that all complainants, as former employees of RMC, enjoy first preference as regards separation pay, unpaid wages, and other benefits over all earlier encumbrances on all of RMC's assets, specifically those asserted by DBP. The decision directed DBP to pay all monetary claims of the complainants, including those in the Arada case, and ordered DBP to deposit with the NLRC the proceeds of the sale of RMC's assets between DBP and General Textile Mills, Inc. and/or Rosario Textile Mills, Inc., with future payments to be deposited with the NLRC for proper disposition.

• Misinterpretation of Article 110: Petitioner DBP maintained that the public respondent misinterpreted Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code in upholding the existence of the workers' preference over and above earlier encumbrances on RMC's properties despite the absence of any bankruptcy or liquidation proceeding instituted against RMC.
• Requirement of Judicial Declaration: Petitioner argued that there must be a judicial declaration, or at the very least, a cognizance by an appropriate court or administrative agency, of bankruptcy or inability of the employer to meet its obligations before the worker preference may be enforced.

• Generic Meaning of Bankruptcy: Respondents contended that under both Article 110 and its implementing rule, 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; that the word "bankruptcy" in the Labor Code is used in its generic sense, meaning that condition of inability to pay one's debts.
• Article 110 Not Confined to Civil Code Situations: Respondents argued that Article 110 of the Labor Code is not confined to the situation contemplated in Articles 2236-2245 of the Civil Code where all preferred creditors must necessarily be convened and the import of their claims ascertained.

• Applicability of Article 110 in Extra-Judicial Foreclosure: Whether Article 110 of the Labor Code, granting workers first preference for unpaid wages in case of bankruptcy or liquidation, applies where there has been an extra-judicial foreclosure proceeding rather than a formal declaration of bankruptcy or judicial liquidation.

• Applicability of Article 110 in Extra-Judicial Foreclosure: No. Article 110 of the Labor Code and its implementing rule cannot be invoked by the respondents absent a formal declaration of bankruptcy or a liquidation order. The Labor Arbiter committed grave abuse of discretion in ruling that the private respondents may enforce their first preference in the satisfaction of their claims over those of DBP in the absence of a declaration of bankruptcy or judicial liquidation of RMC.

• Applicability of Article 110 in Extra-Judicial Foreclosure: The Court applied the rule expressed in Republic vs. Peralta (150 SCRA 37 [1988]), which stated that 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. The Court rejected the respondents' contention that since the case involved only an extra-judicial proceeding, Article 110 is the only law applicable without regard to the provisions of the Civil Code. The Court found it clear from the provisions of Article 110 and Section 10, Rule VIII, Book III 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. To hold that Article 110 is also applicable in extra-judicial 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. The Court further explained, citing Philippine Savings Bank vs. Lantin (124 SCRA 476 [1983]), that insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are binding against the whole world, and a liquidation of similar import must also necessarily be a proceeding in rem so that all interested persons may be bound. 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 to allow an authoritative, fair, and binding adjudication instead of the piecemeal settlement that would result from the questioned decision. The Court noted that nothing in the decision prevents the respondents from instituting involuntary insolvency or any other appropriate proceeding against RMC where their claims can be asserted with respect to the employer's assets.

• Worker Preference in Bankruptcy Requires Judicial Declaration — Article 110 of the Labor Code, granting workers first preference for unpaid wages in case of bankruptcy or liquidation of an employer's business, requires a formal declaration of bankruptcy or a judicial liquidation order before the preference may be enforced. The Court applied this doctrine to hold that the worker preference cannot be invoked in extra-judicial foreclosure proceedings.
• Article 110 Must Be Read with the Civil Code — Article 110 of the Labor Code cannot be viewed in isolation but must 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 may be adjudicated in a binding manner. The Court applied this doctrine to reject the respondents' argument that Article 110 applies without regard to the Civil Code provisions.
• Preference of Credits Requires Proceeding in Rem — Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are binding against the whole world, and a liquidation of similar import must also necessarily be a proceeding in rem so that all interested persons may be bound. The Court applied this doctrine to explain why a judicial proceeding is necessary before the concurrence and preference of credits may be applied.

• "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 from Republic vs. Peralta, quoted by the Court, establishes the controlling interpretive principle that Article 110 must be read together with the Civil Code's scheme of credit preference.
• "It is quite clear from the provisions that 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 states the ratio decidendi of the case, holding that the worker preference under Article 110 requires a formal bankruptcy declaration or judicial liquidation order.
• "Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are binding against the whole world. All persons having interest in the subject matter involved, whether they were notified or not, are equally bound. Consequently, a liquidation of similar import or 'other equivalent general liquidation must also necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be bound by such proceeding." — This passage from Philippine Savings Bank vs. Lantin, quoted by the Court, explains the necessity of a judicial proceeding before the concurrence and preference of credits may be applied.

• Republic vs. Peralta, 150 SCRA 37 (1988) — Controlling precedent. The Court applied the rule in this case that Article 110 of the Labor Code must be read in relation to the Civil Code provisions on classification, concurrence, and preference of credits, which find particular application in insolvency proceedings.
• Philippine Savings Bank vs. Lantin, 124 SCRA 476 (1983) — Followed. The Court quoted this case to explain the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be applied.
• Barreto vs. Villanueva, 1 SCRA 288 (1961) — Cited within the quoted passage from Republic vs. Peralta to support the proposition that Article 110 must be read in relation to the Civil Code provisions on classification, concurrence, and preference of credits.

• Article 110, Labor Code — Provides 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 during the period 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 held that this provision requires a formal declaration of bankruptcy or judicial liquidation before the preference may be enforced.
• Section 10, Rule VIII, Book III, Revised Rules and Regulations Implementing the Labor Code — Provides that unpaid wages earned by the employee 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 the assets of the employer. The Court held that this implementing rule likewise requires a declaration of bankruptcy or judicial liquidation.
• Articles 2236-2245, Civil Code — The Court noted the respondents' argument that Article 110 of the Labor Code is not confined to the situation contemplated in these provisions where all preferred creditors must necessarily be convened and the import of their claims ascertained. The Court held that Article 110 must be read in relation to these Civil Code provisions on classification, concurrence, and preference of credits.

Fernan, C.J., Feliciano, Bidin, and Cortes, JJ., concurred.