G.R. No. 79351 November 28, 1989
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. THE HON. SECRETARY OF LABOR, CRESENCIA DIFONTORUM, ET AL., respondents.

FACTS

Private respondents, employees of Riverside Mills Corporation (RMC), secured a favorable decision from the Ministry of Labor for illegal dismissal, backwages, and separation benefits. A writ of execution was issued but returned unsatisfied, as RMC’s premises had been padlocked and its properties foreclosed by petitioner DBP. DBP had instituted extra-judicial foreclosure proceedings in 1983 due to RMC’s loan defaults. Consequently, the private respondents filed a motion with the Department of Labor, invoking Article 110 of the Labor Code, seeking an order to compel DBP to deliver the foreclosed RMC properties to satisfy their monetary claims, asserting a worker’s preference over DBP’s mortgage credit.
The Labor Undersecretary granted the motion, ordering DBP to deliver the properties. The order relied on Article 110 and the precedent in Philippine Commercial and Industrial Bank v. NAMAWU-MIF. DBP moved for reconsideration, arguing that Article 110 was inapplicable as the foreclosed properties no longer belonged to RMC and, crucially, there were no pending bankruptcy or insolvency proceedings against RMC. The motion was denied, prompting DBP to file this petition for certiorari.

ISSUE

Whether the Secretary of Labor committed grave abuse of discretion in enforcing the workers’ preferential right under Article 110 of the Labor Code against properties foreclosed by DBP, absent any bankruptcy or judicial liquidation proceedings against the employer.

RULING

The Supreme Court granted the petition, ruling that the Secretary of Labor acted with grave abuse of discretion. The legal logic is clear and twofold. First, Article 110 of the Labor Code explicitly states that the worker preference applies “In the event of bankruptcy or liquidation.” The provision’s wording is unequivocal; it creates a preference of credit that can only be invoked during formal bankruptcy, insolvency, or judicial liquidation proceedings where the employer’s assets are officially inventoried for distribution. No such proceedings were instituted against RMC. The mere cessation of operations or foreclosure does not constitute the “bankruptcy or liquidation” contemplated by the law.
Second, the Court clarified the nature of the right under Article 110. It establishes a mere preference of credit, not an automatic lien on specific properties. A preference of credit only determines the order of payment from the debtor’s assets during the specified proceedings. It does not create a charge on any particular property, nor does it vest prior to such proceedings. Therefore, it cannot attach to properties that have already been validly alienated, such as through DBP’s foreclosure and subsequent sale. DBP, as a mortgage creditor, acquired valid title to the properties free from any such inchoate preference. The amendments introduced by R.A. No. 6715 , which expanded the scope of claims covered, did not alter this fundamental requirement for the application of Article 110. The assailed orders were set aside.