DEVELOPMENT BANK OF THE PHILIPPINES, PETITIONER, VS. THE HON. SECRETARY OF LABOR, CRESENCIA DIFONTORUM, ET AL., RESPONDENTS.

Petitioner Development Bank of the Philippines seeks the
nullification of an order dated July 29, 1987 and issued by the Undersecretary
of Labor and Employment, affirming that of National Capital Region
Officer-in-Charge Romeo A. Young, directing the petitioner to deliver the
properties of Riverside Mills Corporation (RMC) which it had in its possession
to the Ministry (now Department) of Labor and Employment (MOLE) for proper
disposition in Case No. NCR-LSED-7-334-84 pursuant to Article
110 of the Labor Code.

Labor Case No. NCR-LSED-7-334-84 involves a complaint for illegal
dismissal, unfair labor practice, illegal deductions from salaries and
violation of the minimum wage law filed by private respondents herein against
RMC.  On July 3, 1985, a decision was rendered by Director Severo M. Pucaan of the National
Capital Region, MOLE, ordering RMC to pay private respondents backwages and separation benefits.  A corresponding writ of execution was issued
on October 22, 1985 directing the sheriff to collect the amount of ONE MILLION
TWO HUNDRED FIFTY-SIX THOUSAND SIX HUNDRED SEVENTY-EIGHT PESOS AND SEVENTY SIX
CENTAVOS (P1,256,678.76) from RMC and, in case of
failure to collect, to execute the writ by selling the goods and chattel of RMC
not exempt from execution or, in case of insufficiency thereof, the real or
immovable properties of RMC.

However, on May 23, 1986,
the writ of execution was returned unserved and
unsatisfied, with the information that the company premises of RMC had been
padlocked and foreclosed by petitioner. 
It appears that petitioner had instituted extra-judicial foreclosure
proceedings as early as 1983 on
the properties and other assets of RMC as a result of the latter’s failure to
meet its obligations on the loans it secured from petitioner.

Consequently, private respondents filed with the MOLE a
“Motion for Delivery of Properties of the [RMC] in the Possession of the
[DBP] to the [MOLE] for Proper Disposition,” stating that pursuant to
Article 110 of the Labor Code, they enjoy first preference over the mortgaged
properties of RMC for the satisfaction of the judgment rendered in their favor
notwithstanding the foreclosure of the same by petitioner as mortgage creditor
[Rollo, pp.16-17.]
Petitioner filed its opposition.

In an order signed by
Officer-in-Charge Romeo A. Young
and dated December 11, 1986, private respondents’ motion was granted based on
the finding that Article 110 of the Labor Code and the ruling laid down in Philippine
Commercial and Industrial Bank v. Natural Mines and Allied
Workers’ (NAMAWU-MIF) [G.R. No.
50402, August 19, 1982, 115 SCRA 873] support the conclusion that
private respondents still enjoyed a preferential lien for the payment of their backwages and separation benefits over the properties of
RMC which were foreclosed by petitioner [Rollo, pp.
21-22.]

Petitioner then filed its
motion for reconsideration on December 24, 1986 contending that Article 110 of
the Labor Code finds no application in the case at bar for the following
reasons:  (1) The properties sought to be
delivered have ceased to belong to RMC in view of the fact that petitioner had
foreclosed on the mortgage, and the properties have been sold and delivered to
third parties; (2) The requisite condition for the application of Article
110 of the Labor Code is not present since no bankruptcy or insolvency
proceedings over RMC properties and
assets have been undertaken [Rollo, pp. 24-28.] In an
order dated July 29, 1987, petitioner’s motion for reconsideration was
denied for lack of merit by Undersecretary Dionisio
C. dela Serna.

Hence, petitioner filed
this special civil action for certiorari with prayer for the issuance of
a writ of preliminary injunction.  On August
27, 1987, this Court
issued a temporary restraining order enjoining public respondent from enforcing
or carrying out its order dated July 29, 1987. 
After considering the allegations made and issues raised in the
petition, comments thereto and reply, the Court, on March 14, 1988, resolved to
give due course to the petition and to require the parties to submit their
respective memoranda.  Petitioner and
private respondent submitted their memoranda, while public respondent adopted
as its memorandum the comment it had previously submitted.

After a careful study of
the various arguments adduced, as well as the legal provisions and
jurisprudence on the matter, the Court finds the petition impressed with
merit.  Indeed, the assailed Order
suffers from infirmities which must be rectified by the grant of a writ of certiorari
in favor of petitioner.

Firstly, public
respondent acted with grave abuse of discretion amounting to lack or excess of
jurisdiction in enforcing private respondents’ right of first preference under
Article 110 of the Labor Code notwithstanding the absence of bankruptcy,
liquidation or insolvency proceedings against RMC.

Article 110 of the Labor Code and Section 10, Rule VIII, Book III
of the Omnibus Rules Implementing the Labor Code provide the following:

 Article
110.  WORKER
PREFERENCE IN CASE OF BANKRUPTCY. – In the
event of bankruptcy or
liquidation 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 other creditors may establish any claim to a share in the
assets of the employer [Underscoring supplied.]

Section 10.  PAYMENT OF WAGES IN CASE OF
BANKRUPTCY. – Unpaid wages earned by the employees 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 a share in the assets of the employer.

It is clear from the wording of the law that the preferential
right accorded to employees and workers under Article 110 may be invoked only
during bankruptcy or judicial liquidation proceedings against the
employer.  The law is unequivocal and
admits of no other construction.

Respondents contend that the terms “bankruptcy” or
“liquidation” are broad enough to cover a situation where there is a cessation of the operation of the
employer’s business as in the case at bar. 
However, this very same contention was struck down as unmeritorious in
the case of Development Bank of the Philippines v. Hon. Labor Arbiter Ariel C.
Santos [G.R. Nos. 78261-62, March 8, 1989]
involving a group of RMC employees which sought to enforce its preference of
credit under Article 110 against DBP over certain RMC real properties.  In that case, the Court laid down the ruling
that Article 110 of the Labor Code, which cannot be viewed in isolation of, and
must always be reckoned with the provisions of the Civil Code on concurrence
and preference of credits, may not be
invoked by employees or workers of RMC, like private respondents herein, in the
absence of a formal declaration of bankruptcy or a judicial liquidation order
of RMC.

The rationale for making
the application of Article 110 of the Labor Code contingent upon the institution
of bankruptcy or judicial liquidation proceedings against the employer is
premised upon the very nature of a preferential right of credit.  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 assets of the debtor are insufficient to pay his debts in full;
for if the debtor is amply able to pay his various creditors in full, how can
the necessity exist to determine which of his creditors shall be paid first or whether they shall be
paid out of the proceeds of the sale of the debtor’s specific property?  Indubitably, the preferential right of credit
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 [Kuenzle & Streiff
(Ltd.) v. Villanueva, 41 Phil. 611 (1916); Barretto
v. Villanueva, G.R. No. L-14938, December
29, 1962, 6 SCRA 928; Philippine Savings Bank v. Lantin, G.R. No. L-33929, September 2, 1983, 124 SCRA 476.]

In this jurisdiction,
bankruptcy, insolvency and general judicial liquidation proceedings provide the
only proper venue for the enforcement of a creditor’s preferential right such
as that established in Article 110 of the Labor Code, for these are in rem proceedings binding against the whole world where all
persons having any interest in the assets of the debtor are given the opportunity
to establish their respective credits [Philippine
Savings Bank v. Lantin, supra.; Development
Bank of the Philippines v. Santos, supra.]

 Secondly, public
respondent’s Order directing petitioner to deliver to the MOLE the properties
it had foreclosed from RMC for the purpose of executing the judgment rendered
against RMC in Case No. NCR-LSED 7-334-84 violates the basic rule that the
power of a court or tribunal in the execution of its judgment extends only over
properties unquestionably belonging to the judgment debtor [Special Services
Corporation v. Centro La Paz, G.R. No. L-44100, April 28, 1983, 121 SCRA 748; National Mines and Allied Workers’ Union v. Vera, G.R. No.
L-44230, November 19, 1984, 133 SCRA
295.]

It appears on record, and remains undisputed by respondents, that
petitioner had extra-judicially foreclosed the subject properties from RMC as
early as 1983 and purchased the same at public auction, and that RMC had failed
to exercise its right to redeem.  Thus,
when Officer-in-Charge Young issued on December 11, 1986 the order which
directed the delivery of these properties to the MOLE, RMC had ceased to be the
absolute owner thereof [See Dizon v. Gaborra, G.R. No. L-36821, June 22, 1978, 83 SCRA 688.] Consequently, the order was directed against
properties which no longer belonged to the judgment debtor RMC.

However, respondents, in citing the case of PCIB v.
NAMAWU-MIF [supra],
argue that by virtue of Article 110 of the Labor Code, an
“automatic first lien” was created in favor of private respondents on RMC properties
— a “lien” which pre-dated the foreclosure of the subject properties
by petitioner, and remained vested on these properties even after its sale to
petitioner and other parties.

There is no merit to this contention.  It proceeds from a misconception which must
be corrected.

What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor of employees [See
Republic v. Peralta, G.R. No. 56568, May 20, 1987, 150 SCRA 37.] This simply
means that during bankruptcy, insolvency or liquidation proceedings involving
the existing properties of the employer, the employees have the advantage of
having their unpaid wages satisfied ahead of certain claims which may be proved
therein.

It bears repeating that a
preference of credit points out solely the order in which creditors would be
paid from the properties of a debtor inventoried and appraised during
bankruptcy, insolvency or liquidation proceedings.  Moreover, a preference does not exist in any
effective way prior to, and apart from, the institution of these proceedings,
for it is only then that the legal provisions on concurrence and preference of
credits begin to apply.  Unlike a lien, a
preference of credit does not create in favor of the preferred creditor a
charge or proprietary interest upon any particular property of the debtor.  Neither does it vest as a matter of course
upon the mere accrual of a money claim against the debtor.  Certainly, the debtor could very well sell,
mortgage or pledge his property, and convey good title thereon, to third
parties free from such preference [Kuenzle & Streiff v. Villanuena, supra.]

Incidentally, the Court is not unmindful of the 1989 amendments
to the article introduced by Section 1, R.A. No. 6715 [March 21, 1989]. 
Article 110 of the Labor Code as amended reads:

WORKER PREFERENCE IN CASE OF BANKRUPTCY. –
In the event of bankruptcy or liquidation 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 Government and other creditors may be paid.  [Amendments indicated.]

However, these amendments only relate to the scheme of
concurrence and preference of credits; they do not affect the issues heretofore
discussed regarding the applicability of Article 110 to the attendant facts.

WHEREFORE, considering
the foregoing, the present petition is hereby GRANTED.  The assailed order dated July 29, 1987 is SET ASIDE and the temporary
restraining order issued by the Court on August 27, 1987 is made PERMANENT.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr.,
Feliciano, and Bidin,
JJ., concur.