G.R. No. 86932, June 27, 1990
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S. ANCHETA, et al., respondents.

FACTS

Philippine Smelters Corporation (PSC) obtained a loan from the Development Bank of the Philippines (DBP), secured by a mortgage on its properties. DBP became PSC’s majority stockholder and took over its management. Upon PSC’s default, DBP foreclosed and acquired the mortgaged assets at auction sales in February and March 1987. Prior to the foreclosure, on February 10, 1987, forty petitioners filed a Petition for Involuntary Insolvency against PSC and DBP in the Regional Trial Court. Subsequently, the private respondents, employees of PSC, filed a labor complaint for unpaid wages and benefits against PSC, later amending it to include DBP as a party-respondent.
The labor arbiter ruled against DBP, ordering it, as the foreclosing creditor, to pay the workers’ unpaid claims. The National Labor Relations Commission (NLRC) affirmed this decision, holding DBP liable not as a stockholder but as the foreclosing creditor in possession of PSC’s assets. The NLRC also upheld its jurisdiction, reasoning that the workers’ preference over the foreclosed assets was interwoven with the labor dispute.

ISSUE

Whether DBP, as a foreclosing creditor, can be held liable for the unpaid wages and benefits of PSC’s employees before the labor arbiter and the NLRC.

RULING

The Supreme Court GRANTED the petition, annulling the NLRC decision. The Court ruled that DBP, as a foreclosing creditor, cannot be held directly liable for the unpaid labor claims of PSC’s employees. The legal logic centers on the proper application of Article 110 of the Labor Code on workers’ preference in bankruptcy or liquidation.
The Court clarified that for the workers’ preference under Article 110 to be enforceable, a formal declaration of bankruptcy or judicial liquidation must first be present. This requirement ensures an orderly settlement where all creditors are convened, claims are inventoried, and preferences are determined within binding judicial proceedings. Since an involuntary insolvency proceeding (Special Proceeding No. M-1359) had already been instituted against PSC in the Regional Trial Court, the private respondents’ proper recourse was to assert their claims in that insolvency proceeding, not through a separate labor case against the foreclosing creditor.
The labor arbiter and NLRC thus committed grave abuse of discretion by assuming jurisdiction to directly enforce the workers’ monetary claims against DBP. The foreclosure by DBP did not, by itself, create employer-employee liability or provide a proper venue for adjudicating the preference of credits. The existence of the pending insolvency case mandated that the claims be litigated therein to preserve the legal scheme of classification and preference of credits under the Civil Code, the Insolvency Law, and the Labor Code.