Title
Development Bank of the Philippines vs. National Labor Relations Commission
Case
G.R. No. 108031
Decision Date
Mar 1, 1995
Leonor Ang, terminated after TPWII's foreclosure, sought separation pay. SC ruled worker preference under Labor Code requires formal bankruptcy/liquidation, absolving DBP of liability.

Case Summary (G.R. No. 108031)

Petitioner, Respondent, and Roles

Petitioner (DBP) asserted mortgage rights over TPWII properties and resisted secondary liability for employee claims. Private respondent Leonor A. Ang asserted monetary claims arising from employment termination. The NLRC acted as the labor tribunal that reviewed and affirmed the Labor Arbiter’s decision.

Key Dates and Procedural History

Employment commenced for Leonor A. Ang on 21 March 1977; promoted in 1982. DBP foreclosed in September 1983; DBP took possession in January 1986. Ang was verbally terminated on 15 April 1986. Ang filed a complaint on 14 December 1987 for separation pay and other monetary claims. The Labor Arbiter rendered a decision finding TPWII primarily liable and DBP subsidiarily liable; NLRC affirmed on 16 November 1992. The Supreme Court decision resolving the petition was rendered in 1995 (majority opinion by Justice Bellosillo; dissent by Justice Padilla).

Applicable Law and Constitutional Basis

The 1987 Philippine Constitution (specifically the constitutional policy of protecting labor) is the constitutional backdrop for statutory interpretation in this post-1990 decision. Statutes and rules at issue: Article 110 of the Labor Code (worker preference in case of bankruptcy), as originally worded and as amended by R.A. 6715; Section 10, Rule VIII, Book III of the implementing Rules and Regulations (pre-amendment and post-amendment versions); pertinent Civil Code provisions on liens, mortgages and classification of credits; and the Insolvency Law principles governing distribution in proceedings in rem.

Issue Presented

Whether a declaration of bankruptcy or judicial liquidation is a prerequisite before the worker’s preference under Article 110 of the Labor Code may be invoked against a mortgagee or other creditors — i.e., whether Article 110 can be enforced in the absence of formal judicial insolvency or liquidation proceedings.

Facts Relevant to the Issue

Ang was an employee of TPWII from 1977 and was promoted in 1982. DBP, as mortgagee, foreclosed in 1983 and took possession in January 1986, after which TPWII ceased operations. Ang was verbally terminated in April 1986. She later sought separation pay and other monetary claims; some wage claims and 13th month pay were paid after filing, leaving separation pay and vacation and sick leave pay in dispute. The Labor Arbiter and the NLRC found DBP subsidiarily liable, reasoning that worker preference placed employee claims ahead of mortgagee rights.

Labor Arbiter and NLRC Decisions

The Labor Arbiter held TPWII primarily liable (only for separation pay and vacation/sick leave pay), absolved the General Manager, and declared DBP subsidiarily liable if the company failed to satisfy the judgment. The Labor Arbiter relied on the principle that employees’ rights to be paid from employer properties are superior to those of a mortgagee, citing earlier precedents. The NLRC affirmed the Labor Arbiter’s ruling.

Statutory Texts and Amendments at Issue

Original Article 110 provided worker preference “in the event of bankruptcy or liquidation” and implementing rules also referenced unpaid wages “before the declaration of bankruptcy or judicial liquidation.” R.A. 6715 amended Article 110 to expand worker preference to “unpaid wages and other monetary claims” and to state that such claims “shall be paid in full before the claims of the Government and other creditors may be paid.” The implementing Rules and Regulations were likewise amended; notably, some language expressly referencing “declaration of bankruptcy or judicial liquidation” was removed from the implementing rule text.

Majority Reasoning — Requirement of Formal Proceedings

The Supreme Court majority held that the NLRC gravely abused its discretion. It reaffirmed settled precedent that Article 110’s worker preference is a preference of credit, not a lien on specific property, and that its effective operation presupposes bankruptcy, insolvency or judicial liquidation proceedings in which all creditors may be convened, claims ascertained and inventoried, and preferences determined in an orderly proceeding in rem. The Court relied on prior decisions (including Development Bank of the Philippines v. Santos and Republic v. Peralta) to conclude that Article 110 must be applied in conjunction with Civil Code and Insolvency Law provisions to avoid piecemeal distribution of assets and to preserve the legal scheme of classification, concurrence and preference of credits. The Court emphasized that a mortgage is a real right enforceable against the world and is a special preferred credit under the Civil Code; Article 110’s preference (outside specific Civil Code exceptions) is an ordinary preferred credit that must be adjudicated in distribution proceedings.

Majority’s Interpretation of the Amendment (R.A. 6715)

Although R.A. 6715 broadened the scope of worker preference to include “other monetary claims” and made them prior even to government claims, the majority held that the amendment did not change the established rule that the worker’s preference is enforceable in the context of distribution proceedings (i.e., after presentation in insolvency or liquidation). The majority noted that eliminating the explicit words “declaration” or “judicial” from the implementing rule did not negate the necessity for proceedings in rem for orderly distribution and binding adjudication of competing claims.

Holding and Relief Granted

The Supreme Court granted DBP’s petition: it set aside the NLRC’s affirmation insofar as it held DBP liable for Ang’s monetary claims. The temporary restraining order previously issued enjoining execution of the NLRC decision against DBP was made permanent. The ponencia was concurred in by Justices Davide, Jr., Quiason, and Kapunan; Justice Padilla (Chairma

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