Development Bank of the Philippines vs.

NLRC

Motion for Execution and Garnishment filed by LAND on 7

January 1985, and the Order granting the Motion was issued only
after hearing. DBP had also addressed an appeal to the NLRC. It
had submitted, therefore, to the jurisdiction of the NLRC.
328 SUPREME COURT REPORTS ANNOTATED Civil Law; Labor Law; Bankruptcy; Wages; Article 110 of the
Development Bank of the Philippines vs. NLRC Labor Code and Section 10 Rule VIII, Book III of the Revised
Rules and Regulations Implementing the Labor Code, interpreted;
*
Declaration of bankruptcy or a judicial liquidation must be
G.R. Nos. 82763-64. March 19, 1990.
present before the worker’s preference may be enforced.—In
interpreting the foregoing provisions, the Court, in Development
DEVELOPMENT BANK OF THE PHILIPPINES,
Bank of the Philippines vs. Santos (G.R. Nos. 78261-62, 8 March
petitioner, vs. NATIONAL LABOR RELATIONS
1989), categorically stated: “It is quite clear from the provisions
COMMISSION, LABOR ARBITER ISABEL P.
that a declaration of bankcruptcy or a judicial liquidation must be
ORTIGUERRA, and LABOR ALLIANCE FOR NATIONAL
present before the worker’s preference may be enforced. Thus,
DEVELOPMENT, respondents.
Article 110 of the Labor Code and its implementing rule cannot be
invoked by the respondents in this case absent a formal
Civil Procedure; Jurisdiction; Being an incident in the declaration of bankruptcy or a liquidation order.”
execution of the final judgment award, NLRC retained jurisdiction Same; Same; Same; Same; Amendment of Article 110 by
and control over the case and could issue such orders as were Republic Act No. 6715 expand worker preference to cover not only
necessary for the implementation of that award.—It is true that unpaid wages but also other monetary claims.—The amendment
DBP was not an original party and that it was ordered impleaded expands worker preference to cover not only unpaid wages but
only after the Writs of Execution were not satisfied because the also other monetary claims to which even claims of the
properties levied upon on execution had been foreclosed Government must be deemed subordinate.
extrajudicially by it. DBP had to be impleaded, however, for the
proper satisfaction of a final judgment. Being an incident in the Same; Same; Same; Preference of credit; To effect an equitable
execution of the final judgment award, NLRC retained distribution of the insolvent’s property among his creditors, a
jurisdiction and control over the case and could issue such orders principal objective in the event of insolvency.—In the event of
as were necessary for the implementation of that award. Its insolvency, a principal objective should be to effect an equitable
inclusion as a party could not have been accomplished at the distribution of the insolvent’s property among his creditors. To
earlier stages of the proceedings because at the time of the filing accomplish this there must first be some proceeding where notice
of the Complaint, private respondents’ cause of action was only to all of the insolvents’s creditors may be given and where the
against LIRAG. claims of preferred creditors may be bindingly adjudicated.

Same; Due Process; DBP was given the opportunity to be Same; Same; Same; Same; Rationale of preference of credit
heard and to present its evidence.—DBP cannot rightfully contend expressed in the recent case of DBP vs. Secretary of Labor.—The
that it was deprived of due process. It was given the opportunity rationale therefore has been expressed in the recent case of DBP
to be heard and to present its evidence. It had actually filed its vs. Secretary of Labor (G.R. No. 79351, 28 November 1989), which
Opposition to the we quote: “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 debtors are insufficient to pay his debts in full; for if
* EN BANC.
the debtor is amply able to pay his various creditors in full, how
can the necessity exist to determine which of his

329
330

VOL. 183, MARCH 19, 1990 329

330 SUPREME COURT REPORTS ANNOTATED
 Development Bank of the Philippines vs. NLRC
Development Bank of the Philippines vs. NLRC

creditors shall be paid first or whether they shall be paid out of PADILLA, J., Dissenting opinion
the proceeds of the sale of the debtor’s specific property?
Indubitably, the preferential right of credit attains significance
Preference is established with the amendment of Article 110 of
only after the properties of the debtor have been inventoried and
the Labor Code by Republic Act 6715 wherein unpaid wage and
liquidated, and the claims held by his various creditors have been
other monetary claims of workers enjoy absolute preference over all
established.
other claims.—With the amendment of Article 110 of the Labor
Same; Same; Same; Same; Lien; Preference of credit and a Code by Republic Act 6715, a three-tier order of preference is
lien distinguished.—A distinction should be made between a established wherein unpaid wages and other monetary claims of
preference of credit and a lien. A preference applies only to claims workers enjoy absolute preference over all other claims, including
which do not attach to specific properties. A lien creates a charge those of the Government, in cases where a debtor-employer is
on a particular property. The right of first preference as regards unable to pay in full all his obligations. The absolute preference
unpaid wages recognized by Article 110 does not constitute a lien given to monetary claims of workers, to which claims of the
on the property of the insolvent debtor in favor of workers. It is Government, i.e., taxes, are now subordinated, manifests the clear
but a preference of credit in their favor, a preference in and deliberate intent of our law-maker to put flesh and blood into
application. It is a method adopted to determine and specify the the expressed Constitutional policy of protecting the rights of
order in which credits should be paid in the final distribution of workers and promoting their welfare.
the proceeds of the insolvent’s assets. It is a right to a first
Prior formal declaration of insolvency or bankruptcy or a
preference in the discharge of the funds of the judgment debtor.
judicial liquidation of the employer’s business is not a condition
Same; Mortgage; Nature of Mortgage.—A mortgage directly sine qua non to the operation of the preference accorded to workers
and immediately subjects the property upon which it is imposed, under article 110 of the Labor Code.—I thus take exception to the
whoever the possessor may be, to the fulfillment of the obligation proposition that a prior formal declaration of insolvency or
for whose security it was constituted (Article 2176, Civil Code). It bankruptcy or a judicial liquidation of the employer’s business is a
creates a real right which is enforceable against the whole world. condition sine qua non to the operation of the preference accorded
It is a lien on an identified immovable property, which a to workers under Article 110 of the Labor Code.
preference is not. A recorded mortgage credit is a special
The fact remains that Congress intends that the assets of the
preferred credit under Article 2242 (5) of the Civil Code on
insolvent debtor be held first and above all else to satisfy in full the
classification of credits. The preference given by Article 110, when
unpaid wages and monetary claims of its workers.—In sum, it is
not falling within Article 2241 (6) and Article 2242 (3) of the Civil
to me clear that, whether or not there be a judicial proceeding in
Code and not attached to any specific property, is an ordinary
rem, i.e., insolvency, bankruptcy or liquidation proceedings, the
preferred credit although its impact is to move it from second
fact remains that Congress intends that the assets of the
priority to first priority in the order of preference established by
insolvent debtor be held, first and above all else, to satisfy in full
Article 2244 of the Civil Code.
the unpaid wages and monetary claims of its workers. Translated
into the case at bar, a formal declaration of insolvency or
CRUZ, J., Dissenting
bankruptcy or judicial liquidation of the employer’s business
should not be a price imposed upon the workers to enable them to
It was the intention of the legislature to give absolute
get their much needed and already adjudi-cated unpaid wages.
preference to the workers’ claims pursuant to the social justice
This position, I believe, is only in keeping with a fundamental
policy.—The amendment of Article 110 of the Labor code only
state policy enshrined in the Constitutional mandate to accord
strengthens that conviction and, I like to think, vindicates my
protection to labor. The legislative intent being clear and
original position. I reiterate it now and repeat that: Social justice
manifest, it is the duty of this Court, I submit, not to decimate but
is not a mere catchphrase to be mouthed with sham fervor in
to give it breath and life.
Labor Day celebrations for the delectation and seduction of the
working class. It is a mandate we should pursue with energy an Dissenting opinion of Justice Sarmiento—Under Republic Act
sincerity if we are to truly insure the dignity and well being of the No. 6715, the payment of unpaid wages and other benefits to
laborer. labor enjoys

331 332

VOL. 183, MARCH 19, 1990 331

332 SUPREME COURT REPORTS ANNOTATED VOL. 183, MARCH 19, 1990 333
Development Bank of the Philippines vs. NLRC
Development Bank of the Philippines vs. NLRC

on behalf of 180 dismissed members, also filed a Complaint

preference over all other indebtedness including taxes, of
against LIRAG seeking separation pay, 13th month pay,
management, with or without a declaration of insolvency.—I join
gratuity pay, sick leave and vacation leave pay and
Mr. Justice Teodoro Padilla in his dissent. It is also my considered
emergency allowance (Case No. 3-2581-82). These two
opinion that under Republic Act No. 6715, the payment of unpaid
cases were consolidated and jointly heard by the NLRC.
wages and other benefits to labor enjoys preference over all other
Said complainants have since been joined by supervisors
indebtedness, including taxes, of management, with or without a
and managers.
declaration of insolvency.
In a Decision, dated 30 July 1982, Labor Arbiter
PETITION for certiorari to review the order of the National Apolinar L. Sevilla ordered LIRAG to pay the individual
Labor Relations Commission. complainants. The NLRC (Third Division) affirmed the
same on 28 March 1982. That judgment became final and
The facts are stated in the opinion of the Court. executory.
     The Legal Counsel for petitioner. On 15 April 1983, a Writ of Execution was issued. On
     Piorello E. Azura, Errol Ismael, B. Palaci and Maria the same day, DBP extrajudicially foreclosed the
Lourdes C. Legaspi for APT. mortgaged properties for failure of LIRAG to pay its
     Pablo B. Castillon for respondent LAND. mortgage obligation. As the only bidder at the foreclosure
sale, DBP acquired said mortgaged properties for
MELENCIO-HERRERA, J.: P31,346,462.90. Since DBP was the sole mortgagee, no
actual payment was made, the amount of the bid having
This Petition for Certiorari addresses itself to the 12 been merely credited in partial satisfaction of LIRAG’s
February 1986 Order of the National Labor Relations indebtedness.
Commission directing petitioner Development Bank of the By reason of said foreclosure, the Writ of Execution
Philippines (DBP) to remit the sum of P6,292,380.00 “out of issued in favor of the complainants remained unsatisfied. A
proceeds of the foreclosed properties of Lirag Textile Mills, Notice of Levy on Execution on the properties of LIRAG
Inc., sold at public auction in order to satisfy the judgment” was then entered.
in NLRC Cases Nos. NCR-3-2581-82 and 2-2090-82. On 7 December 1984, LAND filed a “Motion for Writ of
The background facts of these two cases may be Execution and Garnishment” of the proceeds of the
summarized as follows: foreclosure sale.
The complainants in the two cases filed below were On 30 May 1985, upon motion of LAND, Labor Arbiter
former employees of Lirag Textile Mills, Inc. (LIRAG, for Apolinar L. Sevilla ordered the DBP impleaded “in the
short). LIRAG was a mortgage debtor of DBP. Private interest of justice and due process,” and required it to
respondent Labor Alliance for National Development intervene.
(LAND, for brevity) was the bargaining representative of On 12 February 1986, and over the opposition of DBP,
the more or less 800 former rank and file employees of Labor Arbiter Sevilla granted the Writ of Garnishment and
LIRAG. Around September 1981, LIRAG started directed DBP to remit to the NLRC the sum of
terminating the services of its employees on the ground of P6,292,380.00 out of the proceeds of the foreclosed
retrenchment. By December of the said year there were properties of LIRAG sold at public auction in order to
already 180 regular employees separated from the service. satisfy the judgment previously rendered.
LIRAG has since ceased operations presumably due to DBP sought reconsideration of the above Order on the
financial reverses. grounds of NLRC’s lack of jurisdiction over it since it was
In February 1982, Joselito Albay, one of the employees not a party to the case, and that it was deprived of its
dismissed in September 1981, filed a complaint before the property without due process of law. Public respondent,
National Labor Relations Commission (NLRC) against Labor Arbiter Isabel P. Ortiguerra, denied reconsideration
LIRAG for illegal dismissal (Case No. 2-2090-82). On 1 on 25 May 1987. DBP appealed that denial to the NLRC.
March 1982, LAND, In the meantime, on 3 February 1987, by virtue of
333
Proclamation Nos. 50 and 50-A, the Asset Privatization
Trust (APT)

334
 Development Bank of the Philippines vs. NLRC
334 SUPREME COURT REPORTS ANNOTATED
Development Bank of the Philippines vs. NLRC hearing. DBP had also addressed an appeal to the NLRC.
It had submitted, therefore, to the jurisdiction of the
NLRC.
became the transferee of the DBP foreclosed assets of
Now, for the core issue—whether or not the NLRC
LIRAG. On 12 July 1989, by virtue of that transfer, we
gravely abused its discretion in affirming the Order of the
deemed APT impleaded as a party-petitioner and gave it
Labor Arbiter granting the Writ of Garnishment out of the
time within which to file its pleading. It submitted a
proceeds of LIRAG’s properties foreclosed by DBP to satisfy
Memorandum on 22 November 1989.
the judgment in these cases.
It appears that on 21 December 1987, a partial
We are constrained to rule in the affirmative.
Compromise Agreement was entered into between APT and
Article 110 of the Labor Code provides:
LAND (Litex Chapter) whereby APT paid the
complainants-employees, ex gratia, the sum of P750,000.00 “Article 110. Worker preference in case of bankruptcy.—In the
“in full settlement of their claims, past and present, with event of bankruptcy or liquidation of an employer’s business, his
respect to all assets of LITEX transferred by DBP to APT.” workers shall enjoy first preference as regards wages due them
That amount was received by LAND’s local President. for services rendered during the period prior to the bankruptcy or
Apparently, however, on 25 January 1988, LAND, through liquidation, any provision to the contrary notwithstanding.
its national President, filed its opposition to the Unpaid wages shall be paid in full before other creditors may
Compromise Agreement for being contrary to law, morals establish any claim to a share in the assets of the employer.”
and public policy.
On 25 March 1988, the NLRC (First Division) affirmed In implementation of the foregoing, Section 10, Rule VIII,
the appealed Order and dismissed the DBP appeal. Book III of the Revised Rules and Regulations
DBP is now before us seeking a review and reversal. On Implementing the Labor Code, as amended, provides:
30 January 1989, the Court resolved to give due course to
“Section 10. Payment of wages in case of bankruptcy.—Unpaid
the petition and to require the parties to submit
wages earned by the employees before the declaration of
simultaneous memoranda. On 1 February 1990, the Court’s
bankruptcy or judicial liquidation of the employer’s business shall
Second Division referred the case to the Court en banc,
be given first preference and shall be paid in full before other
which the latter accepted on the same date.
creditors may establish any claim to a share in the assets of the
It is true that DBP was not an original party and that it
employer.” (Italics supplied).
was ordered impleaded only after the Writs of Execution
were not satisfied because the properties levied upon on In interpreting the foregoing provisions, the Court, in
execution had been foreclosed extrajudicially by it. DBP Development Bank of the Philippines vs. Santos (G.R. Nos.
had to be impleaded, however, for the proper satisfaction of 78261-62, 8 March 1989), categorically stated:
a final judgment. Being an incident in the execution of the
final judgment award, NLRC retained jurisdiction and “It is quite clear from the provisions that a declaration of
control over the case and could issue such orders as were bankruptcy or a judicial liquidation must be present before the
necessary for the implementation of that award. Its worker’s preference may be enforced. Thus, Article 110 of the
inclusion as a party could not have been accomplished at Labor Code and its implementing rule cannot be invoked by the
the earlier stages of the proceedings because at the time of respondents in this case absent a formal declaration of
the filing of the Complaint, private respondents’ cause of bankruptcy or a liquidation order. x x x”
action was only against LIRAG.
DBP cannot rightfully contend that it was deprived of Since then, however, Article 110 has been amended by
due process. It was given the opportunity to be heard and Republic Act No. 6715 and now reads as follows:
to present its evidence. It had actually filed its Opposition 336
to the Motion for Execution and Garnishment filed by
LAND on 7 January 1985, and the Order granting the
Motion was issued only after 336 SUPREME COURT REPORTS ANNOTATED

335
Development Bank of the Philippines vs. NLRC

VOL. 183, MARCH 19, 1990 335

“SECTION 1. Article 110 of Presidential Decree No. 442, as May 20, 1987, 150 SCRA 37).
amended, otherwise known as the Labor Code of the Philippines,
is hereby further amended to read as follows: 2. In the same way that the Civil Code provisions on
“Article 110. Worker preference in case of bankruptcy.—In the classification of credits and the Insolvency Law
event of bankruptcy or liquidation of an employer’s business, his have been brought into harmony, so also must the
workers shall enjoy first preference as regards their unpaid wages kindred provisions of the Labor Law be made to
and other monetary claims, any provision of law to the contrary harmonize with those laws.
notwithstanding. Such unpaid wages and monetary claims shall 3. In the event of insolvency, a principal objective
be paid in full before the claims of the Government and other should be to effect an equitable distribution of the
creditors may be paid.” (Amendments italicized). insolvent’s property among his creditors. To
accomplish this there must first be some proceeding
The amendment expands worker preference to cover not where notice to all of the insolvents’s creditors may
only unpaid wages but also other monetary claims to which be given and where the claims of preferred creditors
even may be bindingly adjudicated (De Barretto vs.
claims of the Government must be deemed subordinate. Villanueva, No. L-14938, December 29, 1962, 6
Section 10, Rule III, Book III of the Omnibus Rules SCRA 928). The rationale therefore has been
Implementing the Labor Code has also been amended by expressed in the recent case of DBP vs. Secretary of
Section 1 of the Rules and Regulations Implementing RA Labor (G.R. No. 79351, 28 November 1989), which
6715 as approved by the then Secretary of Labor and we quote:
Employment on 24 May 1989, and now provides:
“A preference of credit bestows upon the preferred creditor an
“Section 10. Payment of wages and other monetary claims in case
advantage of having his credit satisfied first ahead of other claims
of bankruptcy.—In case of bankruptcy or liquidation of the
which may be established against the debtor. Logically, it
employer’s business, the unpaid wages and other monetary claims
becomes material only when the properties and assets of the
of the employees shall be given first preference and shall be paid
debtors are insufficient to pay his debts in full; for if the debtor is
in full before the claims of government and other creditors may be
amply able to pay his various creditors in full, how can the
paid.”
necessity exist to determine which of his creditors shall be paid
Notably, the terms “declaration” of bankruptcy or “judicial” first or whether they shall be paid out of the proceeds of the sale
liquidation have been eliminated. Does this mean then that the debtor’s specific property? Indubitably, the preferential right
liquidation proceedings have been done away with? of credit attains significance only after the properties of the debtor
We opine in the negative, upon the following have been inventoried and liquidated, and the claims held by his
considerations: various creditors have been established (Kuenzle & Streiff (Ltd.)
1. Because of its impact on the entire system of credit, vs Villanueva, 41 Phil 611 (1916); Barretto vs. Villanueva, G.R.
Article 110 of the Labor Code cannot be viewed in isolation No. 14938, 29 December 1962, 6 SCRA 928; Philippine Savings
but must be read in relation to the Civil Code scheme on Bank vs. Lantin, G.R. 33929, 2 September 1983, 124 SCRA 476).
classification and preference of credits.
4. A distinction should be made between a preference of
“Article 110 of the Labor Code, in determining the reach of its credit and a lien. A preference applies only to claims which
terms, cannot be viewed in isolation. Rather, Article 110 must be do not attach to specific properties. A lien creates a charge
read in relation to the provisions of the Civil Code concerning the on a particular property. The right of first preference as
classification, concurrence and preference of credits, which regards unpaid wages recognized by Article 110 does not
provisions find particular application in insolvency proceedings constitute a lien on the property of the insolvent debtor in
where the claims of favor of workers. It is but a preference of credit in their
favor, a preference in
337
338

VOL. 183, MARCH 19, 1990 337

338 SUPREME COURT REPORTS ANNOTATED
Development Bank of the Philippines vs. NLRC
Development Bank of the Philippines vs. NLRC
all creditors, preferred or non-preferred, may be adjudicated in a
binding manner. x x x” (Republic vs Peralta (G.R. No. L-56568,
application. It is a method adopted to determine and 6. Even if Article 110 and its Implementing Rule, as
specify the order in which credits should be paid in the amended, should be interpreted to mean “absolute
final distribution of the proceeds of the insolvent’s assets. It preference,” the same should be given only prospective
is a right to a first preference in the discharge of the funds effect in line with the cardinal rule that laws shall have no
of the judgment debtor. retroactive effect, unless the contrary is provided (Article 4,
In the words of Republic vs. Peralta, supra: Civil Code). Thereby, any infringement on the
constitutional guarantee on non-impairment of the
“Article 110 of the Labor Code does not purport to create a lien in obligation of contracts (Section 10, Article III, 1987
favor of workers or employees for unpaid wages either upon all of Constitution) is also avoided. In point of fact, DBP’s
the properties or upon any particular property owned by their mortgage credit antedated by several years the amendatory
employer. Claims for unpaid wages do not therefore fall at all law, RA No. 6715. To give Article 110 retroactive effect
within the category of specially preferred claims established would be to wipe out the mortgage in DBP’s favor and
under Articles 2241 and 2242 of the Civil Code, except to the expose it to a risk which it sought to protect itself against
extent that such claims for unpaid wages are already covered by by requiring a collateral in the form of real property.
Article 2241, number 6: ‘claims for laborers’ wages, on the goods In fine, the right to preference given to workers under
manufactured or the work done;’ or by Article 2242, number 3: Article 110 of the Labor Code cannot exist in any effective
‘claims of laborers and other workers engaged in the construction, way prior to the time of its presentation in distribution
reconstruction or repair of buildings, canals and other works, proceedings. It will find application when, in proceedings
upon said buildings, canals and other works, upon said buildings, such as insolvency, such unpaid wages shall be paid in full
canals and other works.’ To the extent that claims for unpaid before the “claims of the Government and other creditors”
wages fall outside the scope of Article 2241, number 6 and 2242, may be paid. But, for an orderly settlement of a debtor’s
number 3, they would come within the ambit of the category of assets, all creditors must be convened, their claims
ordinary preferred credits under Article 2244.” ascertained and inventoried, and thereafter the preferences
determined in the course of judicial proceedings which have
5. The DBP anchors its claim on a mortgage credit. A
for their object the subjection of the property of the debtor
mortgage directly and immediately subjects the property
to the payment of his debts or other lawful obligations.
upon which it is imposed, whoever the possessor may be, to
Thereby, an orderly determination of preference of
the fulfillment of the obligation for whose security it was
creditors’ claims is assured (Philippine Savings Bank vs.
constituted (Article 2176, Civil Code). It creates a real right
Lantin, No. L-33929, September 2, 1983, 124 SCRA 476);
which is enforceable against the whole world. It is a lien on
the adjudication made will be binding on all parties-in-
an identified immovable property, which a preference is
interest, since those proceedings are proceedings in rem;
not. A recorded mortgage credit is a special preferred credit
and the legal scheme of classification, concurrence and
under Article 2242 (5) of the Civil Code on classification of
preference of credits in the Civil Code, the Insolvency Law,
credits. The preference given by Article 110, when not
and the Labor Code is preserved in harmony.
falling within Article 2241 (6) and Article 2242 (3) of the
WHEREFORE, Certiorari is GRANTED, and the
Civil Code and not attached to any specific property, is an
assailed Decision of public respondent, the National Labor
ordinary preferred credit although its impact is to move it
Relations Commission (NLRC), dated 25 March 1988, is
from second priority to first priority in the order of
hereby SET ASIDE.
preference established by Article 2244 of the Civil Code
The Development Bank of the Philippines, the Asset
(Republic vs. Peralta, supra ).
Privatization Trust, the Labor Alliance for National
In fact, under the Insolvency Law (Section 29) a creditor
Development (LAND), and other creditors who may be so
holding a mortgage or lien of any kind as security is not
minded, are hereby directed, within sixty (60) days from
permitted to vote in the election of the assignee in
notice, to institute involun-
insolvency proceedings unless the value of his security is
first fixed or he surrenders all 340

339
340 SUPREME COURT REPORTS ANNOTATED
VOL. 183, MARCH 19, 1990 339 Development Bank of the Philippines vs. NLRC
Development Bank of the Philippines vs. NLRC
tary insolvency proceedings before the proper Court where
all the assets of Lirag Textile Mills, Inc., may be
such property to the receiver of the insolvent’s estate.
inventoried, the preferences of all its creditors determined, garnish on DBP the proceeds of the foreclosure sale, to the
and their claims discharged in a binding and conclusive extent of their adjudged unpaid wages (P6,292,380.00). The
manner. No costs. NLRC ruled for LAND over DBP’s objection. The issue
SO ORDERED. therefore, in practical terms, is whether P6,292,380.00
          Fernan (C.J.), Narvasa, Gutierrez, Jr., Feliciano, should be deducted from the P31,346,462.90 realized by
Gancayco, Bidin, Cortés, Griño-Aquino, Medialdea and DBP from the foreclosure sale of LIRAG’s property, to fully
Regalado, JJ., concur. satisfy LAND’s claim for LIRAG workers’ unpaid wages,
     Cruz, Padilla and Sarmiento JJ., see dissent. thereby leaving a balance of P25,054,082.90 only in partial
     Paras, J., I concur with J. Padilla’s dissent. satisfaction of LIRAG’s debt to DBP.
The majority holds that LAND may not enforce its first
CRUZ, J., Dissenting: preference in the satisfaction of unpaid monetary claims of
its members, viz. LIRAG’s workers, over that of DBP, in
I was the lone dissenter in Republic v. Peralta, 150 SCRA the absence of a formal declaration of bankruptcy or
37, which is the mainstay of the present majority ponencia. judicial liquidation of LIRAG’s business.
Even then, I was convinced that it was the intention of the I regret that I cannot join the majority ruling in the light
legislature to give absolute preference to the workers’ of the amendment to Article 110 of the Labor Code by
claims pursuant to the social justice policy. The Republic Act 6715, approved on 2 March 1989, and the
amendment of Article 110 of the Labor Code only resultant amendment of Section 10, Rule VIII, Book III of
strengthens that conviction and, I like to think, vindicates the Revised Rules and Regulations Implementing the
my original position. I reiterate it now and repeat that: Labor Code.
Social Justice is not a mere catchphrase to be mouthed with sham Before its amendment by Republic Act 6715, Article 110
fervor in Labor Day celebrations for the delectation and seduction of the Labor Code provided—
of the working class. It is a mandate we should pursue with
“Worker preference in case of bankruptcy.—In the event of
energy and sincerity if we are to truly insure the dignity and well-
bankruptcy or liquidation of an employer’s business, his workers
being of the laborer.
shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation,
I am proud to dissent once again on the side of labor.
any provision of law to the contrary notwithstanding. Unpaid
wages shall be paid in full before other creditors may establish
DISSENTING OPINION any claim to a share in the assets of the employer.”

After Republic Act 6715, Art. 110 now provides:

PADILLA, J.:
“Worker preference in case of bankruptcy.—In the event of
The material facts are not disputed. Lirag Textile (LIRAG) bankruptcy or liquidation of an employer’s business, his workers
ceased operations by early 1982. Pursuant to a final and shall enjoy first preference as regards their wages and other
executory judgment of the NLRC, dated 20 March 1983, monetary claims, any provisions of law to the contrary
LIRAG was adjudged liable to its workers for unpaid wages notwithstanding. Such
and salaries which, as of 12 February 1986, amounted to
P6,292,380.00. 342

341
342 SUPREME COURT REPORTS ANNOTATED
Development Bank of the Philippines vs. NLRC
VOL. 183, MARCH 19, 1990 341
Development Bank of the Philippines vs. NLRC unpaid wages and monetary claims shall be paid in full before
claims of the government and other creditors may be paid.”
LIRAG’s only remaining asset was mortgaged to
Section 10 of the Implementing Rules, before Republic Act
Development Bank of the Philippines (DBP) which on 15
6715 provided:
April 1983 foreclosed the mortgage and acquired said
property at public auction for P31,346.462.90, in partial “Payment of wages in case of bankruptcy.—Unpaid wages earned
satisfaction of LIRAG’s indebtedness to DBP. LIRAG’s by the employees before the declaration of bankruptcy or judicial
workers through their union (LAND) thereupon sought to liquidation of the employer’s business shall be given first
preference and shall be paid in full before other creditors may obligations. The absolute preference given to monetary
establish any claim to a share in the assets of the employer.” claims of workers, to which claims of the Government, i.e.,
taxes, are now subordinated, manifests the clear and
After Republic Act 6715, Section 10 of the Rules now deliberate intent of our lawmaker to put flesh and blood
provides: into the expressed Constitutional policy of protecting the
2

“Payment of wages and other monetary claims in case of

rights of workers and promoting their welfare.
bankruptcy.—In case of bankruptcy or liquidation of the
I thus take exception to the proposition that a prior
employer’s business, the unpaid wages and other monetary claims
formal declaration of insolvency or bankruptcy or a judicial
of the employees shall be given first preference and shall be paid
liquidation of the employer’s business is a condition sine
in full before the claims of government and other creditors may be
qua non to the operation of the preference accorded to
paid.”
workers under Article 110 of the Labor Code, for the
following specific reasons:
The majority, in my considered opinion, has failed to fully First, the majority reads into the aforesaid law and
take into account the radical change introduced by implementing rule a qualification that is not there.
Republic Act 6715 into the system of priorities or Nowhere is it stated in the present law and its new
preferences among credits or creditors ordained by the implementing rule that a prior declaration of bankruptcy or
Civil Code. judicial liquidation is a condition sine qua non to the
Under the provisions of the Civil Code, specifically, operation of Article 110. In fact, it will be noted that the
Articles 2241 and 2242, jointly with Articles 2246 to 2249, phrase declaration of bankruptcy or judicial liquidation of
a two-tier order of preference of credits is established. The the employer’s business, which formerly appeared in
first tier includes only taxes, duties and fees on specific Section 10, Rule VIII, Book III of the Revised Rules and
movable or immovable property. All other special preferred Regulations Implementing the Labor Code has been
1
credits stand on a second tier. deleted in the new implementing rule. What is to me even
Under the system of preferences in the Civil Code, only more obvious and, therefore, significant in the present law
taxes enjoy absolute preference i.e., they exclude the and implementing new rule is the unconditional and
credits of the lower order until such taxes are fully satisfied unqualified grant of priority to workers’ monetary claims
out of the proceeds of the sale of the property subject of the over and above all other claims as against all the assets of
preference, and taxes can even exhaust such proceeds. All an employer incapable of fully paying his obligations.
other special preferred credits enjoy no priority among Second, a proceeding in rem, by its nature, seeks to bar
themselves but must be paid or satisfied pro rata. To make any other person who claims any interest in the property or
the prorating fully effective, the preferred creditors right subject of the suit. To my mind, such a proceeding is
enumerated in Nos. 2 to 13 of Article 2241 and Nos. 2 to 10 not
of Article 2242 must be convened and the
________________
________________
2 Art. II, Section 18 of the 1987 Constitution provides: The State
1 Republic v. Peralta, 150 SCRA 37. affirms labor as a primary social economic force. It shall protect the rights
of workers and promote their welfare.
343
344

VOL. 183, MARCH 19, 1990 343

344 SUPREME COURT REPORTS ANNOTATED
Development Bank of the Philippines vs. NLRC
Development Bank of the Philippines vs. NLRC
import of their claims ascertained in some proceeding
where the claims of all may be bidingly adjudicated. essential or necessary to enforce the workers’ preferential
With the amendment of Article 110 of the Labor Code by right over the assets of the insolvent debtor as against
Republic Act 6715, a three-tier order of preference is other creditors of the lower tier, as Article 110 of the Labor
established wherein unpaid wages and other monetary Code itself bars the satisfaction of claims of other creditors,
claims of workers enjoy absolute preference over all other including the Government, until unpaid wages and
claims, including those of the Government, in cases where monetary claims of the workers are first satisfied in full.
a debtor-employer is unable to pay in full all his Further, it appears that such a proceeding is essential only
where the credits are concurring and enjoy no preference taxes, of management, with or without a declaration of
over one another, but not when the law accords to one of insolvency.
the credits absolute priority and undisputed supremacy. It is likewise so, because labor enjoys protection not only
This submission finds support, by analogy, in the case of from statute but from the very Constitution. Thus:
De Barreto vs. Villanueva, where the Court stated:
Sec. 18. The State affirms labor as a primary social economic
“Thus it becomes evident that one preferred creditor’s third party force. It shall protect the rights of workers and promote their
claim to the proceeds of the foreclosure (as in the case now before welfare. (Article II)
us) is not the proceeding contemplated by law for the enforcement xxx      xxx      xxx
of preference under Article 2242, unless the claimant were Sec. 3. The State shall afford full protection to labor, local and
enforcing credit for taxes that enjoy absolute priority. If none of overseas, organized and unorganized, and promote full
the claim is for taxes, a dispute between two creditors will not employment and equality or employment opportunities for all.
enable the court to ascertain the prorata dividend corresponding It shall guarantee the rights of all workers to self-organization,
to each, because the rights of other creditors likewise 3enjoying collective bargaining and negotiations, and peaceful concerted
preference under Article 2242 cannot be ascertained. ” (Italics activities, including the right to strike in accordance with law.
ours) They shall be entitled to security of tenure, humane conditions of
work, and a living wage. They shall also participate in policy and
In sum, it is to me clear that, whether or not there be a decision-making processes affecting their rights and benefits as
judicial proceeding in rem, i.e., insolvency, bankruptcy or may be provided by law.
liquidation proceedings, the fact remains that Congress The State shall promote the principle of shared responsibility
intends that the assets of the insolvent debtor be held, first between workers and employers and the preferential use of
and above all else, to satisfy in full the unpaid wages and voluntary modes in settling disputes, including conciliation, and
monetary claims of its workers. Translated into the case at shall enforce their mutual compliance therewith to foster
bar, a formal declaration of insolvency or bankruptcy or industrial peace.
judicial liquidation of the employer’s business should not be The State shall regulate the relations between workers and
a price imposed upon the workers to enable them to get employers recognizing the right of labor to its just share in the
their much needed and already adjudicated unpaid wages. fruits of production and the right of enterprises to reasonable
This position, I believe, is only in keeping with a returns on investments, and to expansion and growth. (Article
fundamental state policy enshrined in the Constitutional XIII)
mandate to accord protection to labor. The legislative
intent being clear and manifest, it is the duty of this Court, On the other hand, under the Labor Code:
I submit, not to decimate but to give it breath and life.
ACCORDINGLY, I vote to DISMISS the DBP petition ART. 3. Declaration of basic policy—The State shall afford
and to AFFIRM the resolution of the NLRC in favor of protection to labor, promote full employment, ensure equal work
LAND. opportunities regardless of sex, race or creed and regulate the
relations between workers and employers. The State shall assure
the rights of workers to self-organization, collective bargaining
________________
security of tenure, and just and humane conditions of work.
3 De Barreto v. Villanueva, 6 SCRA 928. ART. 4. Construction in favor of labor—All doubts in the
implementation and interpretation of the provisions of this code,
345 including its implementing rules and regulations, shall be
resolved in favor of labor.
VOL. 183, MARCH 19, 1990 345 346
Development Bank of the Philippines vs. NLRC
346 SUPREME COURT REPORTS ANNOTATED
SARMIENTO, J., Dissenting
Development Bank of the Philippines vs. NLRC
I join Mr. Justice Teodoro Padilla in his dissent. It is also
my considered opinion that under Republic Act No. 6715, Under the Civil Code:
the payment of unpaid wages and other benefits to labor
enjoys preference over all other indebtedness, including ART. 1700. The relations between capital and labor are not
merely contractual. They are so impressed with public interest
 that labor contracts must yield to the common good. Therefore,
such contracts are subject to the special laws on labor unions,
collective bargaining, strikes and lockouts, closed shop, wages,
working conditions, hours of labor and similar subjects.
xxx      xxx      xxx
ART. 1702. In case of doubt, all labor legislation and all labor
contracts shall be construed in favor of the safety and decent
living for the laborer.

It is true that under the Charter, “[n]o person shall be

deprived,” among other things, “of property without due
process of law,” however, the basic document also states,
that:

Sec. 6. The use of property bears a social function, and all

economic agents shall contribute to the common good. Individuals
and private groups, including corporations, cooperatives, and
similar collective organizations, shall have the right to own,
establish, and operate economic enterprises, subject to the duty of
the State to promote distributive justice and to intervene when
the common good so demands. (Article XII)

Pascual says that in any productive economy, the first

factor is labor. [PASCUAL, LABOR AND TENANCY
RELATIONS LAW 2 (1975 ed.)]. I agree with him. For in
any enterprise, it is labor on which management depends
to run its business, to till its land, and to make its money.
Yet, labor has been the doormat of the economy when it
should be its hub. And now, we will make them fall in line
along with creditors of management in collecting what it
(labor) already owns—its just wages. I do not think that
this is in accord with established State policies.
Certiorari granted. Decision set aside.

Note.—In case of corporate bankruptcy, wages of

laborers must first be paid before other creditors (A.C.
Ransom Labor Union-CCLU vs. National Labor Relations
Commission, 150 SCRA 498).

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347

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