A.N. BOLINAO, JR., JUAN A. AGSALON, JR., ZOSIMO L. CARREON AND REYNOLD P. DANNUG, PETITIONERS, VS. HON. MANUEL S. PADOLINA, PHELPS DODGE (PHILS.) INC., BANK OF AMERICA, AND DEPU…

Bolinao versus Padolina

The Case

This is a petition for certiorari with preliminary injunction brought by four former employees of Sabena Mining Corporation against the presiding judge of the Regional Trial Court of Pasig, against Phelps Dodge (Phils.) Inc., against Bank of America, and against a deputy sheriff. The petitioners ask the Supreme Court to reverse the trial court's refusal to let them intervene and its dismissal of their third party claim over a garnished bank deposit. The case matters because it fixes the precise reach of the worker's preference under the Labor Code: that preference is real, but it is not self-executing, and it cannot be asserted outside a bankruptcy, insolvency, or judicial liquidation proceeding.

Procedural History

The petitioners first filed a complaint for collection of unpaid salaries, leave benefits, thirteenth month pay, and separation pay before the National Labor Relations Commission against Sabena Mining Corporation and the Development Bank of the Philippines. A compromise agreement was reached, and when the company ceased operations the Labor Arbiter issued a writ of execution for the unpaid balance. A deputy sheriff then garnished the company's remaining savings deposit at the Development Bank of the Philippines.

That same deposit had earlier been garnished by two creditors of the company, Bank of America and Phelps Dodge (Phils.) Inc., in separate civil cases before different branches of the Regional Trial Court of Pasig. The respondent court, in an order dated September 30, 1987, directed the bank to release the amount to its deputy sheriff in favor of Phelps Dodge, holding that the earlier attachment of Bank of America could not prevail for failure to prosecute its lien. The petitioners then moved to intervene and to lift that order, and filed a third party claim with the deputy sheriff. The respondent court denied the motion and dismissed the third party claim, declaring the Phelps Dodge garnishment superior to the petitioners' rights. The petitioners came to the Supreme Court on certiorari, and the Second Division gave due course to the petition.

Facts

The petitioners 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 and never recalled. In September 1983 they filed a formal complaint before the National Labor Relations Commission for unpaid salaries, unused accrued vacation and sick leave benefits, thirteenth month pay, and separation pay.

In May 1984 the parties entered into a compromise agreement under which the petitioners were to be paid, on a staggered basis, the collective amount of 385,583 pesos and 95 centavos. The company complied only up to March 1985, because it ceased operations effective April 1, 1985. The petitioners moved for execution, and the Labor Arbiter issued a writ of execution to collect the balance of 311,580 pesos and 14 centavos. In June 1985 a deputy sheriff garnished the remaining 150,279 pesos and 64 centavos in the company's savings account at the Development Bank of the Philippines.

But that same amount had already been garnished by two creditors: Bank of America in April 1982, and Phelps Dodge (Phils.) Inc. in June 1984, in separate cases before different branches of the Pasig court. The respondent court ordered the bank to release the fund to its deputy sheriff in favor of Phelps Dodge. The petitioners moved to intervene and filed a third party claim, to which the bank interposed no objection, but Phelps Dodge opposed, arguing that the workers' preference and first lien operate only in insolvency and bankruptcy proceedings. The respondent court agreed and dismissed the third party claim.

Issues

• Whether or not the petitioners, as former employees, enjoy a preferential right over the garnished funds of Sabena Mining Corporation under Article 110 of the Labor Code and its implementing rules.
• Whether or not that worker preference may be enforced absent a formal declaration of bankruptcy, insolvency, or judicial liquidation of the employer.

Applicable Provisions

Article 110 of the Labor Code, as it stood prior to its amendment, provides:

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.

This is the provision the petitioners invoke, and its opening words, "in the event of bankruptcy or liquidation," are the very hinge on which the Court's ruling turns.

Ruling

On the first issue, the Court held that the petition is without merit. The worker's preference does exist, but it is not a preference that can be asserted in any proceeding at any time.

On the second issue, the Court held that a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. It is quite clear, the Court said, from Article 110 and from Section 10, Rule VIII, Book III of the Implementing Rules, that such a declaration is a condition. Article 110 and its implementing rule cannot be invoked absent a formal declaration of bankruptcy or a liquidation order. In this case there was no showing of any insolvency proceeding, declaration of bankruptcy, or judicial liquidation filed by Sabena Mining Corporation; there was only an extra-judicial foreclosure of its assets by the Development Bank of the Philippines.

The Court added that to hold Article 110 applicable in extra-judicial proceedings would put the worker in a better position than the State, which can assert its own prior preference only in a judicial proceeding. Article 110 must not be viewed in isolation, but must always be reckoned with the provisions of the Civil Code on the classification, concurrence, and preference of credits. Quoting its earlier ruling, the Court said:

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 reason for requiring a judicial proceeding, or a proceeding in rem, is to bind all interested persons, known or unknown, to bring into the picture all claims whether preferred or not, to identify the preferred ones, and to consider the totality of the employer's assets, so that there may be an authoritative, fair, and binding adjudication instead of the piecemeal settlement that the questioned decision would produce.

Doctrine

The worker's preference under Article 110 of the Labor Code is enforceable only upon a declaration of bankruptcy or a judicial liquidation of the employer. Absent such a proceeding, the preference cannot be invoked against a creditor who has validly garnished the employer's funds. Article 110 is not to be read alone; it must be read together with the Civil Code provisions on concurrence and preference of credits, which operate in insolvency proceedings where all claims may be adjudicated in a binding manner. The preference is a rule of concurrence, not a lien that attaches by itself to any particular fund.

Disposition

The petition was dismissed for lack of merit, and the order of January 5, 1988 denying the motion to intervene and dismissing the third party claim was affirmed. Justices Padilla and Sarmiento dissented.

Remember This

Memorize the line: the worker's first preference under Article 110 requires a declaration of bankruptcy or judicial liquidation, and cannot be invoked in an extra-judicial proceeding. Examiners use this case to test whether you will confuse a preference with a lien, and to ask you to reconcile Article 110 with the Civil Code rules on concurrence and preference of credits.