G.R. No. 97175 May 18, 1993
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. NLRC and NATIONAL MINES AND ALLIED WORKERS UNION, respondents.

FACTS

The National Mines and Allied Workers Union filed a complaint on behalf of its members, former employees of Midland Cement Corporation. The employees were terminated on July 30, 1981, due to the expiration of the lease contract between Midland Cement Corporation and the Construction and Development Corporation of the Philippines (CDCP, now PNCC). The Ministry of Labor and Employment had previously ordered CDCP to pay separation pay equivalent to one-half month salary for every year of service, which was paid only for the period of service with CDCP from August 1, 1975, to July 30, 1981. The employees claimed additional separation benefits for their service with Midland Cement Corporation prior to the CDCP takeover. Subsequently, the Development Bank of the Philippines (DBP) foreclosed and assumed ownership over the cement plant and assets of Midland Cement Corporation. The Labor Arbiter rendered a decision holding DBP and Midland Cement Corporation jointly and severally liable for the separation pay. DBP appealed, contending that its acquisition of mortgaged assets through foreclosure did not make it the owner of Midland Cement Corporation and that the doctrine of successor-employer was inapplicable as it did not continue the business operations. The NLRC set aside the Labor Arbiter’s decision but held DBP liable to the extent of the proceeds of the foreclosure sale, subject to any liquidation or bankruptcy proceeding against Midland Cement Corporation, based on Article 110 of the Labor Code regarding worker preference in case of bankruptcy. DBP filed the instant petition after the denial of its motion for reconsideration.

ISSUE

Whether the NLRC correctly held DBP liable for the separation pay claims of the employees to the extent of the proceeds of the foreclosure sale, based on Article 110 of the Labor Code on worker preference in bankruptcy.

RULING

No. The Supreme Court granted the petition, set aside the NLRC decision and resolution, and absolved DBP of all liabilities. The Court held that Article 110 of the Labor Code does not create a lien on specific properties for unpaid wages but establishes a preference of credit in distribution proceedings. A mortgage credit, such as that held by DBP, is a lien on specific property and constitutes a special preferred credit under Article 2242(5) of the Civil Code. In contrast, the worker preference under Article 110, when not attached to specific property under the Civil Code provisions, is an ordinary preferred credit. The NLRC erred in equating DBP’s mortgage lien with a preferred credit subject to worker claims. The right to preference under Article 110 applies only in distribution proceedings like insolvency, where unpaid wages are paid in full before claims of the government and other creditors, but it does not affect a mortgage lien on specific foreclosed property. Making DBP liable would undermine the security of mortgage transactions.