G.R. No.

79351 November 28, 1989

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
THE HON. SECRETARY OF LABOR, CRESENCIA DIFONTORUM, ET AL., respondents.

The Chief Legal Counsel for petitioner.

Dante P. Sindac for private respondents.

CORTES, J.:

Petitioner Development Bank of the Philippines seeks the nullification of an order dated July 29, 1987 and
issued by the Undersecretary of Labor and Employment, affirming that of National Capital Region Officer-
in-Charge Romeo A. Young, directing the petitioner to deliver the properties of Riverside Mills Corporation
(RMC) which it had in its possession to the Ministry (now Department) of Labor and Employment (MOLE)
for proper disposition in Case No. NCR-LSED-7-334-84 pursuant to Article 110 of the Labor Code.

Labor Case No. NCR-LSED-7-334-84 involves a complaint for illegal dismissal, unfair labor practice,
illegal deductions from salaries and violation of the minimum wage law filed by private respondents herein
against RMC. On July 3, 1985, a decision was rendered by Director Severo M. Pucan of the National
Capital Region, MOLE, ordering RMC to pay private respondents backwages and separation benefits. A
corresponding writ of execution was issued on October 22, 1985 directing the sheriff to collect the amount
of ONE MILLION TWO HUNDRED FIFTY-SIX THOUSAND SIX HUNDRED SEVENTY-EIGHT PESOS
AND SEVENTY SIX CENTAVOS (P1,256,678.76) from RMC and, in case of failure to collect, to execute
the writ by selling the goods and chattel of RMC not exempt from execution or, in case of insufficiency
thereof, the real or immovable properties of RMC.

However, on May 23, 1986, the writ of execution was returned unserved and unsatisfied, with the
information that the company premises of RMC had been padlocked and foreclosed by petitioner. It
appears that petitioner had instituted extra-judicial foreclosure proceedings as early as 1983 on the
properties and other assets of RMC as a result of the latter's failure to meet its obligations on the loans it
secured from petitioner.

Consequently, private respondents filed with the MOLE a "Motion for Delivery of Properties of the [RMC]
in the Possession of the [DBP] to the [MOLE] for Proper Disposition," stating that pursuant to Article 110
of the Labor Code, they enjoy first preference over the mortgaged properties of RMC for the satisfaction
of the judgment rendered in their favor notwithstanding the foreclosure of the same by petitioner as
mortgage creditor [Rollo, pp. 16-17]. Petitioner filed its opposition.

In an order signed by Officer-in-Charge Romeo A. Young and dated December 11, 1986, private
respondents' motion was granted based on the finding that Article 110 of the Labor Code and the ruling
laid down in Philippine Commercial and Industrial Bank v. Natural Mines and Allied Workers' (NAMAWU-
MIF) [G.R. No. 50402, August 19, 1982, 115 SCRA 873] support the conclusion that private respondents
still enjoyed a preferential lien for the payment of their backwages and separation benefits over the
properties of RMC which were foreclosed by petitioner [Rollo, pp. 21-22].

Petitioner then filed its motion for reconsideration on December 24,1986 contending that Article 110 of the
Labor Code finds no application in the case at bar for the following reasons: (1) The properties sought to
be delivered have ceased to belong to RMC in view of the fact that petitioner had foreclosed on the
mortgage, and the properties have been sold and delivered to third parties; (2) The requisite condition for
the application of Article 110 of the Labor Code is not present since no bankruptcy or insolvency
proceedings over RMC properties and assets have been undertaken [Rollo, pp. 24-28]. In an order dated
July 29, 1987, petitioner's motion for reconsideration was denied for lack of merit by Undersecretary
Dionisio C. dela Serna.

Hence, petitioner filed this special civil action for certiorari with prayer for the issuance of a writ of
preliminary injunction. On August 27, 1987, this Court issued a temporary restraining order enjoining
public respondent from enforcing or carrying out its order dated July 29, 1987. After considering the
allegations made and issues raised in the petition, comments thereto and reply, the Court, on March 14,
1988, resolved to give due course to the petition and to require the parties to submit their respective
memoranda. Petitioner and private respondent submitted their memoranda, while public respondent
adopted as its memorandum the comment it had previously submitted.

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After a careful study of the various arguments adduced, as well as the legal provisions and jurisprudence
on the matter, the Court finds the petition impressed with merit. Indeed, the assailed Order suffers from
infirmities which must be rectified by the grant of a writ of certiorari in favor of petitioner.

Firstly, public respondent acted with grave abuse of discretion amounting to lack or excess of jurisdiction
in enforcing private respondents' right of first preference under Article 110 of the Labor Code
notwithstanding the absence of bankruptcy, liquidation or insolvency proceedings against RMC.

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

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 [Emphasis supplied].

Section 10. PAYMENT OF WAGES IN CASE OF BANKRUPTCY.— Unpaid wages

earned by the employees before the declaration of bankruptcy or judicial liquidation of the
employer's business shall be given first preference and shall be paid in full before other
creditors may establish any claim to a share in the assets of the employer.

It is clear from the wording of the law that the preferential right accorded to employees and workers under
Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the
employer. The law is unequivocal and admits of no other construction.

Respondents contend that the terms "bankruptcy" or "liquidation" are broad enough to cover a situation
where there is a cessation of the operation of the employer's business as in the case at bar. However,
this very same contention was struck down as unmeritorious in the case of Development Bank of the
Philippines vs. Hon. Labor Arbiter Ariel C. Santos [G.R. Nos. 78261-62, March 8, 1989] involving a group
of RMC employees which sought to enforce its preference of credit Article 110 against DBP over certain
RMC real properties. In that case, the Court laid down the ruling that Article 110 of the Labor Code, which
cannot be viewed in isolation of, and must always be reckoned with the provisions of the Civil Code on
concurrence and preference of credits, may not be invoked by employees or workers of RMC like private
respondents herein, in the absence of a formal declaration of bankruptcy or a judicial liquidation order of
RMC.

The rationale for making the application of Article 110 of the Labor Code contingent upon the institution of
bankruptcy or judicial liquidation proceedings against the employer is premised upon the very nature of a
preferential right of credit. 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 debtor are insufficient to pay his
debts in full; for if the debtor is amply able to pay his various creditors in full, how can the necessity exist
to determine which of his creditors shall be paid first or whether they shall be paid out of the proceeds of
the sale of the debtor's specific property? Indubitably, the preferential right of credit attains significance
only after the properties of the debtor have been inventoried and liquidated, and the claims held by his
various creditors have been established [Kuenzle & Streiff (Ltd.) v. Villanueva, 41 Phil. 611 (1916);
Barrette v. Villanueva, G.R. No. L-14938, December 29, 1962, 6 SCRA 928; Philippine Savings Bank v.
Lantin, G.R. No. L-33929, September 2, 1983, 124 SCRA 476].

In this jurisdiction, bankruptcy, insolvency and general judicial liquidation proceedings provide the only
proper venue for the enforcement of a creditor's preferential right such as that established in Article 110 of
the Labor Code, for these are in rem proceedings binding against the whole world where all persons
having any interest in the assets of the debtor are given the opportunity to establish their respective
credits [Philippine Savings Bank v. Lantin, supra; Development Bank of the Philippines v. Santos supra].

Secondly, public respondent's Order directing petitioner to deliver to the MOLE the properties it had
foreclosed from RMC for the purpose of executing the judgment rendered against RMC in Case No. NCR-
LSED 7-334-84 violates the basic rule that the power of a court or tribunal in the execution of its judgment
extends only over properties unquestionably belonging to the judgment debtor [Special Services
Corporation v. Centro La Paz, G.R. No. L- 44100, April 28, 1983, 121 SCRA 748; National Mines and
Allied Workers' Union v. Vera, G.R. No. L-44230, November 19, 1984, 133 SCRA 295].

It appears on record, and remains undisputed by respondents, that petitioner had extra-judicially
foreclosed the subject properties from RMC as early as 1983 and purchased the same at public auction,

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and that RMC had failed to exercise its right to redeem. Thus, when Officer-in-Charge Young issued on
December 11, 1986 the order which directed the delivery of these properties to the MOLE, RMC had
ceased to be the absolute owner thereof [See Dizon v. Gaborra, G.R. No. L-36821, June 22, 1978, 83
SCRA 688]. Consequently, the order was directed against properties which no longer belonged to the
judgment debtor RMC.

However, respondents, in citing the case of PCIB v. NAMAWU-MIF [supra], argue that by virtue of Article
110 of the Labor Code, an "automatic first lien" was created in favor of private respondents on RMC
properties—a "lien" which predated the foreclosure of the subject properties by petitioner, and remained
vested on these properties even after its sale to petitioner and other parties.

There is no merit to this contention. It proceeds from a misconception which must be corrected.

What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor of
employees [See Republic v. Peralta, G.R. No. 56568, May 20, 1987, 150 SCRA 37]. This simply means
that during bankruptcy, insolvency or liquidation proceedings involving the existing properties of the
employer, the employees have the advantage of having their unpaid wages satisfied ahead of certain
claims which may be proved therein.

It bears repeating that a preference of credit points out solely the order in which creditors would be paid
from the properties of a debtor inventoried and appraised during bankruptcy, insolvency or liquidation
proceedings. Moreover, a preference does not exist in any effective way prior to, and apart from, the
institution of these proceedings, for it is only then that the legal provisions on concurrence and preference
of credits begin to apply. Unlike a lien, a preference of credit does not create in favor of the preferred
creditor a charge or proprietary interest upon any particular property of the debtor. Neither does it vest as
a matter of course upon the mere accrual of a money claim against the debtor. Certainly, the debtor could
very well sell, mortgage or pledge his property, and convey good title thereon, to third parties free from
such preference [Kuenzle & Streiff v. Villanueva, supra].

Incidentally, the Court is not unmindful of the 1989 amendments to the article introduced by Section 1,
R.A. No. 6715 [March 21, 1989]. Article 110 of the Labor Code as amended reads:

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
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. [Amendments indicated.]

However, these amendments only relate to the scheme of concurrence and preference of credits; they do
not affect the issues heretofore discussed regarding the applicability of Article 110 to the attendant facts.

WHEREFORE, considering the foregoing, the present petition is hereby GRANTED. The assailed order
dated July 29, 1987 is SET ASIDE and the temporary restraining order issued by the Court on August 27,
1987 is made PERMANENT.

SO ORDERED.