G.R. No. 78261-62 - Development Bank of the Philippines vs. Santos

The petition involves petitioner Development Bank of the Philippines (DBP) seeking interpretation of Article 110 of the Labor Code, which gives workers preference over wages in the event of a bankruptcy or liquidation of an employer’s business.
DBP contends that Article 110 does not apply where there has been an extra-judicial foreclosure proceeding, while the respondents argue otherwise.

On November 29, 1984, in NLRC-NCR Case No. 2517-84, Labor Arbiter Manuel Caday awarded separation pay, wage and/or living allowance increases, and 13th month pay to certain individual complainants.
On March 18, 1985, Labor Arbiter Teodorico Dogelio awarded separation pay, vacation pay, sick leave pay, and unpaid increases in basic wage and allowances to other complainants in NLRC Case No. NCR-7-2577-84.
After the judgment became final and executory, Dogelio issued a writ of execution directing collection of a large monetary sum against Riverside Mills Corporation (RMC), which was later enforced by levying both personal and real properties of RMC.

On June 7, 1985, DBP obtained a writ of possession from the RTC of Pasig, based on extra-judicial foreclosure of the RMC properties at a public auction held in 1983.
DBP subsequently leased these properties to affiliated corporations, leading to a conflict as the writ of possession prevented the scheduled auction sale of the properties that had been levied upon by the private respondents.
On June 19, 1985, the respondents filed an incidental petition with the NLRC seeking declaration of their advantageous position (first preference) over the levied properties.

Labor Arbiter Ariel C. Santos rendered a decision on March 31, 1987, declaring that the complainants (former RMC employees) shall enjoy first preference with respect to separation pay and other monetary benefits over any prior encumbrances, including DBP’s claims.
DBP appealed the decision of Labor Arbiter Santos; consequently, the NLRC set aside the decision and remanded the case for further proceedings.
Amid consolidated proceedings involving additional complainants (filed under NLRC Case No. NCR-4-1278-86), position papers and memoranda were submitted by all parties, resulting in the joint submission of their respective arguments for decision.

DBP argued that the public respondent misinterpreted Article 110 by enforcing worker preference in the absence of a judicial declaration of bankruptcy or liquidation of RMC.
The respondents maintained that under Article 110 and the implementing rules, worker claims for unpaid wages and benefits inherently enjoy first preference, asserting that the term “bankruptcy” is used generically to denote a state of inability to pay debts.
The dispute centered on whether Article 110 could be invoked in cases stemming from extra-judicial proceedings, or if it strictly required judicial insolvency or liquidation for its enforcement.

Whether Article 110, which guarantees worker preference for unpaid wages in the event of bankruptcy or liquidation, applies in cases where there has been an extra-judicial foreclosure proceeding without a formal judicial declaration of insolvency.

Whether the application of Article 110 should be viewed in isolation or in conjunction with provisions of the Civil Code concerning classification, concurrence, and preference of credits in insolvency proceedings.
How the absence of a judicial liquidation or bankruptcy proceeding affects the recognition of worker preference over previously existing encumbrances on the debtor’s assets.

The potential imbalance created if worker claims are given precedence in extra-judicial scenarios, possibly disadvantaging the State and other creditors who would normally have their claims addressed in a formal insolvency proceeding.