G.R. No. 78261-62 March 8, 1989
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HON. LABOR ARBITER ARIEL C. SANTOS, PHILIPPINE ASSOCIATION OF FREE LABOR UNIONS (PAFLU-RMC CHAPTER) and its members, MICHAEL PENALOSA, ET AL., SAMAHANG DIWANG MANGGAGAWA SA RMC-FFW CHAPTER, and its members, JAIME ARADA, ET AL., respondents.

FACTS

Riverside Mills Corporation (RMC) was adjudged liable to its employees for separation pay and other monetary claims in separate labor cases. After the judgments became final, a writ of execution was issued, and the sheriff levied upon RMC’s real properties. Meanwhile, petitioner Development Bank of the Philippines (DBP) had extra-judicially foreclosed on the same RMC properties in 1983, having been a mortgage creditor, and obtained a writ of possession in June 1985. This writ prevented the sheriff’s auction sale. The employees then filed an incidental petition with the NLRC to declare their preference over the levied properties pursuant to Article 110 of the Labor Code. Labor Arbiter Ariel C. Santos ruled in favor of the employees, declaring their claims for wages and benefits enjoyed first preference over all earlier encumbrances, including DBP’s mortgage, and ordered DBP to pay the claims.

ISSUE

Whether the workers’ preference of credits under Article 110 of the Labor Code can be enforced in the absence of a bankruptcy or judicial liquidation proceeding against the employer.

RULING

No. The Supreme Court granted DBP’s petition and annulled the Labor Arbiter’s decision. The legal logic is that the preference granted to workers by Article 110 of the Labor Code, which states that in the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy first preference as regards wages, requires a proceeding in rem for its proper application. Citing Philippine Savings Bank v. Lantin, the Court held that such a preference can only be invoked and enforced within the context of a formal insolvency proceeding, judicial liquidation, or any equivalent general liquidation. These are proceedings in rem that bind the whole world, allowing for the identification of all creditors, the totality of the employer’s assets, and an authoritative, fair, and binding adjudication of all claims according to the order of preference. In this case, there was no such collective proceeding against RMC. The mere extra-judicial foreclosure by DBP and the subsequent execution efforts by the workers constituted only piecemeal settlements. To allow the workers’ preference to prevail in this scenario would unjustly prejudice earlier encumbrancers like DBP without a conclusive determination of all claims against the insolvent estate. The Labor Arbiter thus committed grave abuse of discretion in enforcing the preference absent the requisite bankruptcy or liquidation declaration. The Court clarified that the workers are not without remedy, as they may institute involuntary insolvency proceedings against RMC where their preferred status can be properly asserted.