DEVELOPMENT BANK OF THE PHILIPPINES, PETITIONER, VS. NLRC AND NATIONAL MINES AND ALLIED WORKERS UNION, RESPONDENTS.

Before us is a petition to set aside the NLRC Decision dated November
28, 1990 (Annex “C”, p. 41, Rollo), disposing as follows:

WHEREFORE, PREMISES CONSIDERED, the appealed decision is hereby set
aside and a new judgment is entered, holding the Development Bank of the
Philippines liable to the complainants for their separation pay to the extent
of the proceed of the foreclosure sale, subject to the liquidation
or bankruptcy proceeding that may be instituted
against Midland Cement Corporation. (pp. 47-48, Rollo)

Herein private respondent labor union filed on January 10, 1986,
a complaint, the allegations of which were paraphrased by the NLRC in this
wise:

. . . that the individual complainants were all employees of
respondent Midland Cement Corporation who were terminated from employment on or
about July 30, 1981 by reason of the termination of the business operations of
the Construction and Development Corporation of the Philippines (CDCP) now
PNCC, which was brought about by the expiration of the lease contract between
Midland Cement Corporation and CDCP; that
at the time of the separation from the service [of] the individual
complainants, the complainant union was the certified sole and exclusive
bargaining agent; that as a consequence of said termination, the complainant
union filed with the then Ministry of Labor and Employment an opposition to the
application for clearance to terminate their services filed by CDCP, the lessee
of the cement plant owned by Midland Cement Corporation; that on April 27,
1983, the Ministry of Labor and Employment thru then Deputy Minister Vicente
Leogardo, Jr., ordered applicant CDCP to
pay the 175 affected employees separation pay equivalent to one-half (1/2)
month salary for every year of service; that the employees were paid only based
on their length of service with CDCP from August 1, 1975 up to July 30, 1981;
the said employees were not paid (with) their separation pay when they were
employees of respondent Midland Cement Corporation; that later, respondent DBP
foreclosed and assumed ownership over the cement plant, including land, buildings,
machineries, etc., of Midland Cement Corporation; that the individual
complainants are claiming separation benefits covering the period from date of
hiring up to July 31, 1975 when CDCP took
over the operations of Midland Cement Corporation by virtue of lease
contract. (pp. 43-44, Rollo)

After hearing, the Labor Arbiter rendered a decision on January
5, 1990 (Annex “A”, p. 26, Rollo), finding DBP jointly and severally
liable with Midland Cement for the payment of the separation pay, as follows:

WHEREFORE, judgment is hereby rendered giving due course to the
complaint thereby ordering the respondents DBP and Midland Cement Corporation
jointly and severally liable for the separation pay of the affected members of
the complainant union.

It appearing that as published in the morning dailies lately that
the assets of Midland Cement Corporation are now being offered for sale through
public bidding by the Asset Privatization Trust, (APT) let copies of this
decision be served upon said APT to protect the interest of the herein
complainants. (pp. 30-31, Rollo)

DBP appealed, contending that its acquisition of the mortgaged
assets of Midland through foreclosure sale did not make it the owner of the
defunct Midland Cement, and that the doctrine of successor-employer is not
applicable in this case, since DBP did not continue the business operations of
Midland. The NLRC, while finding merit
in DBP’s contention, nonetheless held DBP liable since respondent’s claim
“constitutes a first preference with respect to the proceeds of the
foreclosure sale” as provided in Article 110 of the Labor Code:

Art. 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 their
wages and other monetary claims, any provisions of law to the contrary
notwithstanding. Such unpaid wages and
monetary claims shall be paid in full before claims of the government and other
creditors may be paid. (p. 46, Rollo)

Following the denial of  its
motion for reconsideration, DBP filed the instant petition.

DBP correctly points out that its mortgage lien should not be
classified as a preferred credit. The
issue raised was settled in Republic vs. Peralta (150 SCRA
37 [1987]) and reinforced in DBP vs. NLRC (183 SCRA 328 [1990]) wherein we held
that because of its impact on the entire system of credit, Article 110 of the
Labor Code cannot be viewed in isolation but must be read in relation to the
Civil Code scheme on classification and preference of credits. Thus,

4.       A distinction should
be made between a preference of credit and a 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.

In the words of Republic vs. Peralta, supra:

“Article 110 of the Labor Code does not purport to create a
lien in favor of workers or employees for unpaid wages either upon all of the
properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall
at all within the category of specially preferred claims established under
Articles 2241 and 2242 of the Civil Code, except to the extent
that such claims for unpaid wages are
already covered by Article 2241, number
6: claims for laborers wages, on
the goods manufactured or the work done,’ or by Article 2242,
number 3: ‘claims of
laborers and other workers engaged in the construction, reconstruction or
repair of buildings, canals and other works, upon said buildings, canals and
other works, upon said buildings, canals and other works.’ To the extent that
claims for unpaid wages fall outside the scope of Article 2241, number 6 and
2242, number 3, they would come within the ambit of the category of ordinary
preferred credits under Article 2244.

6.       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.)

x          x          x

x          x          x

x          x          x

In fine, 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. … (DBP vs. NLRC,
supra; pp. 337-­339.)

The NLRC, therefore, erred in holding DBP liable “to the
extent of the proceeds of the foreclosure sale.” And making such liability
dependent on a bankruptcy or liquidation proceedings is really beside the
point, for these proceedings are relevant only to preferred credits, which is
not the situation in the case at bar. To equate DBP’s mortgage lien with a preferred credit would be to render
inutile the protective mantle of the mortgage in DBP’s favor and thus in the
process wreak havoc to commercial transactions.

WHEREFORE, the petition is GRANTED. The decision of the NLRC dated November 28,
1990 and the Resolution of February 1, 1991 are hereby SET ASIDE, and a new
judgment is entered absolving Development Bank of the Philippines of any and all liabilities to private
respondent and its members.

No special pronouncement is made as to costs.

SO ORDERED.

Feliciano, (Chairman), Bidin, Davide, Jr., and Romero, JJ., concur.