31.DBP vs. NLRC, March 19, 1990

#31 DBP v. NLRC | G.R. Nos.
82763-64
PETITIONER/S: Development Bank of the Phils.

RESPONDENT/S: NLRC
DOCTRINE: The right to preference given to workers under Article 110 of the Labor Code cannot exist in any effective way
prior to the time of its presentation in distribution proceedings. It will find application when, in proceedings such as insolvency,
such unpaid wages shall be paid in full before the "claims of the Government and other creditors" may be paid. But, for an orderly
settlement of a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the
preferences determined in the course of judicial proceedings which have for their object the subjection of the property of the
debtor to the payment of his debts or other lawful obligations. Thereby, an orderly determination of preference of creditors' claims
is assured; the adjudication made will be binding on all parties-in-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, and the Labor Code is
preserved in harmony.
FACTS: Lirag Textile Mills, Inc. was a mortgage debtor of DBP. Private respondent Labor Alliance for National Development
(LAND) was the bargaining representative of the more or less 800 former rank and file employees of LIRAG. LIRAG started
terminating the services of its employees on the ground of retrenchment and it has ceased operations presumably due to financial
reverses.
The employees dismissed filed a complaint with the Labor Arbiter for illegal dismissal and claims form their monetary benefits.
The Labor Arbiter ordered LIRAG to pay the individual complainants. The NLRC affirmed. A Writ of Execution was issued. On
the same day, DBP extrajudicially foreclosed the mortgaged properties for failure of LIRAG to pay its mortgage obligation. By
reason of said foreclosure, the Writ of Execution issued in favor of the complainants remained unsatisfied.
On 7 December 1984, LAND filed a "Motion for Writ of Execution and Garnishment" of the proceeds of the foreclosure sale.
The Labor Arbiter granted the Writ of Garnishment 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 previously rendered.
DBP now seeks reconsideration of the decision.
ISSUE/S: Whether the NLRC gravely abused its discretion in affirming the Order of the Labor Arbiter granting the Writ of
Garnishment out of the proceeds of LIRAG's properties foreclosed by DBP to satisfy the judgment in these cases.
HELD: Yes.
Preference vs. Lien
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. 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. It is a right to a first preference in the discharge of the funds of the judgment debtor.
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 fulfillment of the obligation for whose security it was constituted (Article 2176,
Civil Code). It creates a real right which is enforceable 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 the Civil Code
on classification of credits. 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 (Republic vs.
Peralta, supra).
In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind as security is not permitted to
vote in the election of the assignee in insolvency proceedings unless the value of his security is first fixed or he surrenders all
such property to the receiver of the insolvent's estate.
Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean "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 the 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, RA No. 6715. To give Article 110 retroactive effect would be to wipe out the mortgage in
DBP's favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form of real property.
Petition granted.
DISSENTING OPINIONS:
The intention of the legislature to give absolute preference to the workers' claims is pursuant to the social justice policy.
Under the provisions of the Civil Code, specifically, Articles 2241 and 2242, jointly with Articles 2246 to 2249, a two-tier order
of preference of credits is established. The first tier includes only taxes, duties and fees on specific movable or immovable
property. All other special preferred credits stand on a second tier. 1
Under the system of preferences in the Civil Code, only taxes enjoy absolute preference i.e., they exclude the credits of the lower
order until such taxes are fully satisfied out of the proceeds of the sale of the property subject of the preference, and taxes can
even exhaust such proceeds. All other special preferred credits enjoy no priority among themselves but must be paid or
satisfied pro rata. To make the prorating fully effective, the preferred creditors enumerated in Nos. 2 to 13 of Article 2241 and
Nos. 2 to 10 of Article 2242 must be convened and the import of their claims ascertained in some proceeding where the claims of
all may be bindingly adjudicated.
With the amendment of Article 110 of the Labor Code by Republic Act 6715, a three-tier order of preference is established
wherein unpaid wages and other monetary claims of workers enjoy absolute preference over all other claims, including those of
the Government, in cases where a debtor-employer is unable to pay in full all his obligations. The absolute preference given to
monetary claims of workers, to which claims of the Government, i.e., taxes, are now subordinated, manifests the clear and
deliberate intent of our lawmaker to put flesh and blood into the expressed Constitutional policy of protecting the rights of
workers and promoting their welfare.
Thus, it was taken to the exception that a prior formal declaration of insolvency or bankruptcy or a judicial liquidation of the
employer's business is a condition sine qua non to the operation of the preference accorded to workers under Article 110 of the
Labor Code, for the following specific reasons:
First, the majority reads into the aforesaid law and implementing rule a qualification that is not there. Nowhere is it stated in
the present law and its new implementing rule that a prior declaration of bankruptcy or judicial liquidation is a condition sine qua
non to the operation of Article 110. In fact, it will be noted that the phrase declaration of bankruptcy or judicial liquidation of
the employer's business, which formerly appeared in Section 10, Rule VIII, Book III of the Revised Rules and Regulations
Implementing the Labor Code has been deleted in the new implementing rule. What is to me even more obvious and, therefore,
significant in the present law and implementing new rule is the unconditional and unqualified grant of priority to workers'
monetary claims over and above all other claims as against all the assets of an employer incapable of fully paying his
obligations.
Second, a proceeding in rem, by its nature, seeks to bar any other person who claims any interest in the property or right subject
of the suit. To my mind, such a proceeding is not essential or necessary to enforce the workers' preferential right over the assets
of the insolvent debtor as against other creditors of the lower tier, as Article 110 of the Labor Code itself bars the satisfaction of
claims of other creditors, including the Government, until unpaid wages and monetary claims of the workers are first satisfied in
full. Further, it appears that such a proceeding is essential only where the credits are concurring and enjoy no preference over one
another, but not when the law accords to one of the credits absolute priority and undisputed supremacy. This submission finds
support, by analogy, in the case of De Barreto vs. Villanueva, where the Court stated:
Thus it becomes evident that one preferred creditor's third party claim to the proceeds of the foreclosure (as in
the case now before us) is not the proceeding contemplated by law for the enforcement of preference under
Article 2242, unless the claimant were enforcing credit for taxes that enjoy absolute priority. If none of the
claim is for taxes, a dispute between two creditors will not enable the court to ascertain the prorata dividend
corresponding to each, because the rights of other creditors likewise enjoying preference under Article 2242
cannot be ascertained.
In sum, it is clear that whether or not there be a judicial proceeding in rem, i.e., insolvency, bankruptcy or liquidation
proceedings, the fact remains that Congress intends that the assets of the insolvent debtor be held, first and above all else, to
satisfy in full the unpaid wages and monetary claims of its workers. Translated into the case at bar, a formal declaration of
insolvency or bankruptcy or judicial liquidation of the employer's business should not be a price imposed upon the workers to
enable them to get their much needed and already adjudicated unpaid wages.

31.DBP vs. NLRC, March 19, 1990

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#31 DBP v. NLRC | G.R. Nos.

PETITIONER/S: Development Bank of the Phils.

DBP now seeks reconsideration of the decision.

Preference vs. Lien

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