DEVELOPMENT BANK OF THE PHILIPPINES, PETITIONER, VS. HON. LABOR ARBITER ARIEL C. SANTOS, PHILIPPINE ASSOCIATION OF FREE LABOR UNIONS (PAFLU-RMC CHAPTER) AND ITS MEMBERS, MICHAEL…

This petition calls for the interpretation of Article 110 of the
Labor Code which gives the workers preferences as regards wages in case of
liquidation or bankruptcy of an employer’s business.  Petitioner Development Bank of the Philippines
(DBP) maintains that Article 110 does not apply where there has been an
extra-judicial foreclosure proceeding while the respondents claim
otherwise.  Labor Arbiter Ariel C. Santos
sustained the private respondents’ position. 
Petitioner DBP has now elevated the case to us by way of this
petition for certiorari.

On November 29, 1984, in NLRC-NCR Case No. 2517-84 entitled
“Philippine Association of Free Labor Unions (PAFLU-RMC Chapter) and its
Members v. Riverside Mills Corporation, et al.”, Labor Arbiter Manuel Caday awarded separation pay, wage and/or living allowance
increases and 13th month pay to the individual complainants who comprise some
of the respondents in this case.

On March 18, 1985, Labor Arbiter Teodorico
Dogelio likewise awarded separation pay, vacation pay and sick
leave pay and unpaid increases in the basic wage and allowances to the other
private respondents herein in NLRC Case No. NCR – 7-2577-84 entitled
“Michael Penalosa, Jose Garcia and Apolinar Ray, et al. v. Riverside Mills Corporation, et
al., and Samahang Diwang Manggagawa sa
RMC-FFW Chapter, et al., v. Riverside Mills Corporation (RMC).” On March 29, 1985,
after the judgment had become final and executory, Dogelio issued a writ of execution directing NLRC Deputy
Sheriff Juanito Atienza to
collect the total sum of Eighty Five
Million Nine Hundred Sixty One Thousand Fifty-Eight & 70/100 Pesos (P85,961,058.70).  The
Deputy Sheriff, however, failed to collect the amount so he levied upon 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 are situated.

Meanwhile
in the other development which led to this case, petitioner DBP obtained a writ of possession on June 7, 1985 from the Regional
Trial Court (RTC) of Pasig of 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
which were levied upon by the private respondents.  As a result, on June 19, 1985, the latter filed an incidental petition with the NLRC to declare their preference
over the levied properties.  The petition entitled
“PAFLU-RMC Chapter and its members, Michael Penalosa,
et al., and the Samahang Diwang
Manggagawa sa
RMC-FFW Chapter and its members v. RMC and DBP, et al.”, was docketed as
NLRC Case No. NCR-7-2577-84.  Petitioner DBP filed its position paper and
memorandum in answer to the petition.

On
October 31, 1985, 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 aforesaid properties/assets of said
company, particularly those being asserted by respondent Development Bank of the Philippines.” (p. 84, Rollo)

The
petitioner appealed the order of
Dogelio to the
NLRC.  The latter in turn, set aside the
order and remanded the case to public respondent Labor Arbiter Santos for
further proceedings.

Meanwhile, another set of
complainants (who are also named as
respondents herein) filed, on April 7,
1986, a complaint
for separation pay, underpayment, damages, etc., entitled “Jaime Arada, et al. v.
RMC, DBP, Egret-Trading and
Manufacturing Corp., docketed as NLRC Case NO. NCR-4-1278-86.”
This case was subsequently consolidated
with the case pending before respondent Santos. 
Accordingly, the latter conducted
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 of the
case.  Even­tually, all the parties
agreed that the case shall be submitted for decision after their filing of posi­tion
papers and/or memorandums.

On March
31, 1987, public
respondent Santos rendered the questioned decision, the dispositive portion of which reads:

“WHEREFORE, it is hereby declared that all the complainants in the above-entitled cases, as former
employees of respondent Riverside Mills
Corpora­tion, enjoy first preference as regards separation pay, unpaid
wages and other benefits due them over and above all earlier encumbrances on
all of the assets/properties of RMC specifically those being asserted by
respondent DBP.

“As a consequence of the above declaration, the decision dated March 18, 1983 of the then Hon.
Arbiter Teodorico Dogelio should be
immediately enforced against DBP who is hereby directed to pay all the
monetary claims of complainants who were former employees of respondent RMC.

“Anent the Arada case, DBP is hereby
directed to pay all the amounts as indicated opposite the names of complainants
listed from page 1 to page 5 of
Annex “A” of complainants’ complaint provided that their names are
not among those listed in the Penalosa case.

“It is hereby also declared that former employees whose names
are not listed in the complainants’ position
papers but can prove that they were former employees of RMC prior to its bankruptcy, should also be paid
the same monetary benefits being granted to herein complainants.

“Finally, DBP is hereby ordered to deposit
with the National Labor Relations Commission the proceeds of the sale of the
assets of RMC bet­ween DBP on one hand and General Tex­tile Mills, Inc. and/or Rosario Textile Mills, Inc.,
on the other hand and that future payment being made by the latter to the
former should also be deposited with the National Labor Relations Commission
for proper disposition.” (pp. 174-175, Rollo)

Hence, this petition.

Petitioner DBP maintains 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 that
the said respondent upheld the existence of the worker’s preference over and
above earlier encumbrances on the properties of RMC despite the absence of any
bankruptcy or liquidation proceeding instituted against the latter.  The petitioner argues 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.

On the other hand, the respondents contend that under both
Article 110 and its implementing rule, the claims of the 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
work “bankruptcy” in the
Labor Code is used in its generic sense, meaning that condition of inability to
pay one’s debt; and that Article 110 of the Labor Code is not confined to the
situation contemplated in Articles 2236-2245 of the Civil Code where all the
preferred creditors must necessarily be convened and the import of their claims
ascertained.

We
apply the rule expressed in Republic v. Peralta (150 SCRA
37 [1988]), where we stated:

“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.  (Barreto v. Villanueva, 1 SCRA 288 [1961]).” (pp.
44-45)

In the above
quoted case, there was a voluntary insolvency proceeding instituted by the
employer.  The respondents, however,
contend that since in the case at bar there is only an extra-judicial
proceeding, Article 110 is still the only law applicable without regard to the provisions of the Civil Code.

We do not agree with this contention.

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

“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.

“Article 10.  Payment of wages
in case of bankruptcy.  — 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 is full before other creditors may
establish any claim to the
assets of the employer.”

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.  Following the rule in
Republic v. Peralta, supra, to hold that Article 110 is also applicable in extra-judicial proceedings would be
putting the worker in a better position then the State
which could only assert its own prior preference in case of a judicial proceeding.  There­fore, as stated earlier, Article 110
must not be viewed in isolation and must always be reckoned with
the provisions of the Civil Code.

There was no issue of
judicial vis-a-vis extra-judicial proceedings in the Republic
v. Peralta interpretation Article 110
but the necessity of a judicial adjudication was pointed out when we explained the impact of Article
110 on the concurrence and preference of
credits provided in the Civil
Code.

We stated:

“We come to the question of what impact Article 110 of the
Labor Code has had upon the complete scheme of classification, concurrence and preference of credits in insolvency set out in
the Civil Code.  We believe and so hold
that Article 110 of the Labor Code did not sweep away the overriding preference
accorded under the scheme of the Civil Code
to tax claims of the government or any subdivision thereof which constitute a
lien upon properties of the Insolvent.  x x x.  It cannot be assumed simpliciter
that the legislative authority, by using Article 110 of the words ‘first
preference’ and any provisions of law to the contrary notwithstanding’ intended
to disrupt the elaborate and symmetrical structure set up in the Civil
Code.  Neither can it be assumed casually
that Article 110 intended to subsume the sovereign itself within the term
‘other creditors’, in stating that ‘unpaid wages shall be paid in full before
other creditors may establish any claim to a share in the assets of employer.’
Insistent considerations of public policy prevent us from giving to ‘other
creditors a linguistically unlimited scope that would embrace the universe of
creditors save only unpaid employees.”

Moreover, the reason behind the necessity for a judicial
proceeding or a proceeding in rem before the
concurrence and preference of credits may be applied was explained by this
Court in the case of Philippine
Savings Bank v. Lantin
(124 SCRA 476 [1983]).  We said:

“The proceedings in the court below do not partake of the
nature of the insolvency proceedings or settlement of a decedent’s estate.  The action filed by Ramos was only to collect
the unpaid cost of the construction of the duplex apartment.  It is far from being a general liquidation of
the estate of the Tabligan spouses.

“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.

“In the case at
bar, although the lower court
found that ‘there were no known creditors
other than the plaintiff and the
defendant herein’, this can not be conclusive.  It will not bar other creditors in the
event they show up and present their claim against the petitioner bank, claiming that they also have preferred
liens against the property
involved.  Consequently, transfer Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain constantly
unstable and questionable.  Such could not have been the intention of Article 2243 of the Civil Code although
it considers claims and credits under Article 2242 ate statutory liens.  Neither does the De Barreto case x x x.”

The claims of all creditors
whether preferred or non-preferred, the identification of the
preferred ones and the totality of the employer’s asset should
be brought into the picture.  There can
then be an authoritative, fair, and binding adjudication instead of the piece meal settlement which would result from the questioned
decision in this case.

We, therefore, hold that Labor Arbiter Ariel
C. Santos 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 the
petitioner in the absence of a declaration
of bankruptcy or judicial liquidation of RMC. 
There is, of course, nothing in this decision which prevents the
respondents from instituting involuntary insolvency or any other appropriate proceeding against their employer RMC where respondents’ claims can be
asserted with respect to their
employer’s assets.

WHEREFORE, the petition is hereby GRANTED.  The questioned
decision of the public respondent is ANNULLED and SET ASIDE.  The Temporary Restraining Order we
issued on May 20, 1987
enjoining the enforcement of the questioned decision is made PERMANENT.  No costs.

SO ORDERED.

Fernan, (Chairman), C.J., Feliciano, Bidin, and Cortes, JJ., concur.