XV.

Workers Preference in case of Bankruptcy

2. DEVELOPMENT BANK OF THE PHILIPPINES V. NATIONAL LABOR RELATIONS

COMMISSION, G.R. NOS. 100264-81, [JANUARY 29, 1993]

FACTS:

On November 14, 1986, the private respondents filed with the Provincial Extension
Office of the Department of Labor and Employment (DOLE) in Daet, Camarines Norte
seventeen individual complaints against RHI for unpaid wages and separation pay. These
complaints were thereafter endorsed to the Regional Arbitration Branch (Branch V of Legaspi
City) of the National Labor Relations Commission (NLRC) since the petitioners had already
been terminated from employment. RHI alleged that it had ceased to operate in 1983 due to the
government ban against tree-cutting. It further alleged that in May 24, 1981, its sawmill was
totally burned resulting in enormous losses and that due to its financial setbacks, RHI failed to
pay its loan with the DBP. RHI contended that since DBP foreclosed its mortgaged assets on
September 24,1985, then any adjudication of monetary claims in favor of its former employees
must be satisfied against DBP.

The private respondents filed a motion to implead DBP. DBP filed its opposition to said
motion. Executive Labor Arbiter Gelacio Rivera hereby rendered a joint decision on the
complaints in favor of petitioners and adversely against respondent Republic Hardwood, Inc.
and Development Bank of the Philippines, ordering the latter to jointly and severally pay
petitioners separation pay. The Labor Arbiters decision provides that:

"To say that workers of bankrupt or insolvent employers must first file an
insolvency or bankruptcy proceeding against the latter before their unpaid
workers may be satisfied will cause additional burden, unnecessary expenses,
unwanted hardship which are conditions not so intended under the Social Justice
policy of the State. . . . .
". . . To require petitioners to file insolvency proceedings against RHI and later
file against DBP their claims is to prolong the agony of petitioners. To give a
technical and legal meaning to the words of Art. 110 is to subvert the rights of the
petitioners. We hold therefore that as against the contention of respondent DBP,
Art. 4 of the Labor Code is the answer. The social justice clause of the
Constitution is our guide."

DBP appealed to the NLRC which rendered a decision affirming the labor arbiters
judgment. DBP filed a motion for reconsideration which was likewise dismissed by the NLRC.
Hence, this petition for certiorari.

ISSUE:
 1. Whether the complainant-private respondents are entitled to separation pay; and

2. Whether or not Executive Labor Arbiter Gelacio L. Rivers and the NLRC correctly
applied Article 110 of the Labor Code in this case

RULING:

1. YES. There is no merit to DBPs contention that the workers are not entitled to
separation pay. Despite the enormous losses incurred by RHI due to the fire that gutted
the sawmill in 1981 and despite the logging ban in 1953, the uncontroverted claims for
separation pay show that most of the private respondents still worked up to the end of
1985 (See Hello, p. 39). RHI would still have continued its business had not the
petitioner foreclosed all of its assets and properties on September 24, 1985. Thus, the
closure of RHIs business was not primarily brought about by serious business losses.
Such closure was a consequence of DBPs foreclosure of RHIs assets. We therefore
apply Article 283 which provides:

". . . in cases of closures or cessation of operations of establishment or

undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or at least one-half(1/2)
month pay for every year of service, whichever is higher. . . .

NO. The Court repeatedly stressed that before the workers preference provided by Article 110
may be invoked, there must first be a declaration of bankruptcy or a judicial liquidation of the
employers business. In DBP v. Santos, supra, the Court discussed the import of Article 110 and
Section 10 of Rule VIII, Book III and stated:

"It is quite clear from the provisions that a declaration of bankruptcy or a judicial
liquidation must be present before the workers 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.

The NLRC committed grave abuse of discretion when it affirmed the labor arbiters ruling that the
workers preference espoused in Article 110 may be applied even in the absence of a
declaration of bankruptcy or a liquidation order. Also, the court emphasize that DBPs lien on
RHIs mortgaged assets, being a mortgage credit, is a special preferred credit under Article
2242 of the Civil Code while the workers preference is an ordinary preferred credit under Article
2244.

Thus, in DBP v. NLRC, (supra) it was held:

"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 insolvents assets. It is a right to a first preference in the
discharge of the funds of the judgment debtor.
"In the words of Republic v. 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. 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."

"5. 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 ((3) 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 v. Peralta, supra)."

Clearly, even if DBP and the private respondents assert their preferred credits in a judicial
proceeding, the formers claim must first be satisfied.

Article 110 of the Labor Code has been amended by R.A. No. 6715 and now reads:

"Article 110. Worker preference in case of bankruptcy. In the event of

bankruptcy or liquidation of an employers 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."

We ruled in DBP v. NLRC, supra, that the amendment "expands worker preference to cover not
only unpaid wages but also other monetary claims to which even claims of the Government
must be deemed subordinate." Hence, under the new law, even mortgage credits are
subordinate to workers claims.

In this connection, respondent NLRC ruled:

"Lastly, while we are cognizant of the pronouncement of the Supreme Court with
respect to Art. 110 and while we hold in respect said pronouncements, we are of
the earnest view that considering that Art. 110 has been amended by RA 6715,
complainants preference over government claims and other creditors be
adhered to."
R.A. No. 6715, however, took effect only on March 21, 1989. The amendment cannot therefore
be retroactively applied to, nor can it affect, the mortgage credit which was secured by the
petitioner several years prior to its effectivity.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of public

respondent National Labor Relations Commission are SET ASIDE. The temporary restraining
order issued by the Court is made PERMANENT.