DIONISIA VALENCIA, ET AL vs.

HONORIO ACALA, ET AL

This is an action for the redemption of certain land, which is described in the complaint.

At the trial, the parties submitted to the court the following agreed statement of facts:

The parties agree that the land in question is the same lot that is the subject of litigation in civil cause No. 966
of this court; and that in the year 1891, the plaintiff herein, Dionisia Valencia, and her deceased husband,
Daniel Adepueng, conveyed to one Severino Agbagala and his wife Francisca Cadapan the land in question,
as evidence by the document marked Exhibit A of the plaintiffs, which is found on folio 24 of civil cause No.
966 of this court.

Later on in the year 1899 Francisca Cadapan, wife of Severino Agbagala, conveyed this same property to
Juan Cagayat and Josefa Galendis, as shown by the memorandum appearing at the bottom of the document
marked Exhibit A of the plaintiffs, attached to the record of the cause No. 966, folio 24.

That the possession of the land passed to Pedro Acala, who is one of the Acalas, the defendants in the present
action. In the year 1912, the herein defendants Acala sold the land unconditionally to the herein defendant
Bagayanan for the sum of P70.

The pertinent part of the contract Exhibit A reads thus:

We, Daniel Adepueng and Dionisia Valencia, acknowledge being indebted to Severino Agbagala in the sum
of P6.75, which we will pay with the fruits of the land the possession of which we now turn over to him. We
have mortgaged it for P6.75, it being covenanted that we may redeem it by paying the same price, without
taking into account the fruits of the land and the interest on the money.

The memorandum mentioned in the agreement is as follows:

I, the undersigned, declare that the lot mentioned in the foregoing document (Exhibit A) was mortgaged by
me to the spouses Juan Cagayat and Josefa Galendis for the same amount above-mentioned and with the
same condition. Paete, December 6, 1899. — Francisca Cadapan —

The judge a quo held that the contract in question was one of sale with the right of repurchase, and decided: (a) That
the defendants must be absolved from the complaint; (b) that the contract (Exhibit A) and those that were successively
executed involving the lot in question are contracts of sale and not of mortgage or of loan with security; (c) that the
action for the redemption and annulment of the sale of the lot in question has prescribed; (d) that the defendant
Apolinario Bagayanan is at present the lawful owner of the said lot; and (e) that the costs of the suit should be paid
by the plaintiffs jointly and severally to the defendants.

Upon examining the record before us, and bearing in mind the fact that, when the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal meaning of its clauses should prevail, we are
of the opinion that the contract herein above copied is a contract of antichresis and not of sale with the right of
repurchase.

In the case of De la Vega vs. Ballilos (34 Phil., 683), this court said:

When money is loaned and the debtor places the creditor in possession of a piece of real property as security
for the sum loaned in order that he may hold it in usufruct, in consideration for the said loan, the contract is
not one of mortgage, notwithstanding the terms thereof, inasmuch as it is not of the nature of a public
instrument, and even though it were, it does not appear to have been recorded in the property registry. Neither
can such a contract be classified as one of sale under pacto de retro, notwithstanding that it is set forth therein
that the debtor cedes and conveys to the creditor the ownership and possession of the said real property.
Therefore, such a contract should be classified as one of antichresis, by means of which the creditor acquires
the right to collect the fruits of the real property turned over to him by his debtor, but with the obligation to
apply them to the payment of whatever interest is due and the contracting parties may stipulate that the interest
of the debt be paid by the fruits of the property given in antichresis.

The legal nature of the contract in question having thus been determined, it is evident that the antichretic creditor and
his successors in interest cannot acquire ownership by prescription of the realty given in antichresis.

That the defendants Acala could not sell unconditionally the same land to their codefendant Bagayanan, is proved by
the agreed statement of facts according to which the possession of the predecessor in interest of the Acala people
was the same precarious possession of his assignor Juan Cagayat.

The judgment appealed from is reversed, and it is ordered that the defendants return the land in question to the
plaintiffs upon payment by the latter of the sum of P6,75, the redemption price of the land, without prejudice to
whatever right his codefendants Acala the price he might have paid them for the land, without special finding as to
costs. So ordered.
 LICERIO LEGASPI and JULIAN SALCEDO vs. DAMASO CELESTIAL

The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the judgment rendered by the Court of First
Instance of Cavite in civil cases Nos. 3025 and 3037 of said court, the dispositive part of which reads as follows:

Wherefore, judgment is rendered by this court holding that both the so-called instrument of mortgage Exhibit A and
the instrument Exhibit C-1 are really contracts of antichresis and, consequently, the plaintiffs should render to the
defendant an account of the 65 salt beds, which are the subject matter of the two cases, as soon this decision
becomes final, taking into consideration the sums already paid by the defendant to the plaintiffs.

The writ of preliminary attachment issued in civil case No. 3037 is set aside, without costs in both cases. It is so
ordered.

In support of their appeal, the appellants assign the following alleged errors as committed by the court a quo in its judgment
in question, to wit:

1. The court erred in holding that both the instrument of mortgage Exhibit A and the instrument Exhibit C-1 are really
contracts of antichresis.
2. The court likewise erred in ordering the plaintiffs to render to the defendant an account of the fruits produced by the
65 salt beds, which are the subject matter of both cases.
3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and cross-complaint filed by the defendant,
with the costs to the latter.

On January 17, 1935, the plaintiffs brought an action against the defendant Damaso Celestial in the justice of the peace
court of Kawit, Cavite, praying that judgment be rendered, ordering said defendant to pay to the abovenamed plaintiffs the
sum of P556.160, plus the corresponding legal interest thereon from the date of the filing of the complaint, until fully paid,
and the costs.

The defendant, answering the complaint, admitted the essential facts alleged therein, stating that he was disposed to pay
what he should appear still to be indebted and, by way of counterclaim and cross-complaint, claimed that, the contract
entered into between him and the plaintiffs being an antichresis, the latter were bound to render an account of the products
of the five salt beds, the total production of which was from 300 to 350 cavans of salt at P1 a cavan.

After due trial of the case, the justice of the peace court of Kawit, Cavite, on February 5, 1935, rendered judgment in said
case, the dispositive part of which reads as follows:

Premises considered, judgment hereby rendered ordering the defendant to pay the herein plaintiffs the sum of
P556.60 with interest at the legal rate from January 17, 1935, and to pay the costs of suit. It is so ordered.

From the foregoing judgment, the defendant appealed to the Court of First Instance of Cavite.

On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025 of said Court of First Instance, praying that
the same defendant Damaso Celestial be ordered to pay them the sum of P7,637, with the legal interest thereon from the
date of the filing of the complaint, until fully paid, and the costs of the suit, and that, upon his failure to do so, the mortgage
constituted by said defendant in their favor to secure the payment of the loan in question be ordered foreclosed.lâwphi1.nêt

The defendant, answering the complaint, admitted the material facts alleged therein as well as the conditions set forth in
the documents Exhibit "A" attached thereto, stating that he had never refused to pay any balance of the debt resulting after
a rendition of accounts by the plaintiffs and a liquidation; and by way of counterclaim and cross-complaint, alleged that the
sixty-five salt beds administered by the plaintiffs, by virtue of the above-stated documents, yielded a net produced of a about
6,500 cavans of salt every six months at P1 a cavan; that the plaintiffs should render to the defendant an account of said
products so that they may be applied to the payment of his loan or debt; that the approximate total value of half of the
number of cavans of salt reaped and availed of by the plaintiffs from the sixty-five salt beds administered by them during
three years and eleven months, that is, from February 23, 1931, to February 8, 1935, the date of the filing of the answer,
was P13,000; that after deducting from said P13,000 the total amount of the defendant's debt to the plaintiffs under the
above-stated contracts, that is, P8,193.60, there would still remain a balance in favor of the defendant in the sum of
P4,806.40, which he is entitled to collect from the plaintiffs. He prayed that judgment be rendered, ordering the plaintiffs to
render an account of their administration and to pay jointly and severally the sum of P4,806.40, with the legal interest
thereon, plus the damages that would result if the contract of mortgage already perfected with Melchor de Lara should be
frustrated and should he fail to find another to execute said contract of mortgage in the sum of P25,000.

The plaintiffs, replying to the special defense and cross-complaint, denied each and every one of the facts alleged therein,
stating that the salt gathered from the 60 salt beds mentioned in the complaint was for the exclusive use, benefit and
enjoyment of the plaintiffs who, under the provisions of Exhibit A and the intention of the parties, were not obliged to submit
to the defendant a liquidation of the salt produced and gathered, in order that the same may be deducted from the principal.

On February 25, 1935, the parties to civil case No. 3025 submitted the following stipulation to the court, to wit:

Come now the parties to this case, assisted by their respective attorney, and respectfully submit the following stipulation:
 1. That, aside from this case, the same plaintiffs had instituted against the same defendant in the justice of the peace
court of Kawit, Cavite, civil case No. 165, for the recovery of the sum of P556.60 representing a loan made by the
plaintiffs on a portion of the same parcel of land which is the subject matter of the mortgage in this case before this
Honorable Court of First Instance, as evidenced by another notarial document dated August 13, 1932. And in this
stipulation, said case shall be understood to be consolidated with the present one.

2. That the defendants agrees and is disposed to make immediate delivery to the plaintiffs of the total amount of
P8,193.60, without prejudice to his right to prosecute the case in connection with his contention of their administration.
In must render to him an account of their administration. In consideration hereof, the plaintiffs, in turn, agree and bind
themselves now to secure the amount in question, or the receipt thereof, for the due compliance with the judgment to
be rendered by the court on said rendition of accounts, with sufficient property of their own worth not less than the 14th
instant,; and likewise forthwith to respect, turn over and restore now, as they hereby do so, to the defendant or his
assignees, the conclusive possession, administration, benefit and use of the mortgaged property in question, particularly
the sixty-five salt beds administered by said plaintiffs to date.

Wherefore, both parties sign this stipulation and pray this honorable court to render its decision in accordance
herewith, upon acting on the motion of the defendant, dated February 7, 1935.

In view of the foregoing stipulation, the court a quo rendered contracts entered into between the plaintiffs Licerio Legaspi
and Julian Salcedo, on the one hand, and Damaso Celestial, on the other hand, appearing in the instruments Exhibits A
and C-1 are of mortgage or antichresis.

The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the following stipulation:

That during the existence of this Contract, the Party of the SECOND PART (Licerio Legaspi and Julian Salcedo) or
their representative shall administer and enjoy the benefits and fruits gathered and harvested thereon; and that the
Party of the FIRST PART (Damaso Celestial) shall give and turn over to the Party of the SECOND PART the
administration and to possession of the said 5 salt beds during the term of this contract.

In the contract Exhibit A, the parties stipulated the following:

(a) The term of this mortgage is three (3) years to be counted from February 23, 1931, and should the party of the first
part, after the expiration of this term, fail to pay to the party of the second part the amount of this mortgage, this contract
shall subsist in full force and effect and continue the debt or amount of the mortgage is fully paid.

(b) During the term of the mortgage, the party of the second part of the mortgagees shall administer or take charge of
the work and harvest of the 60 salt beds and pay for the maintenance of the croppers and defray the expenses for the
improvement thereof; and the party of the first part shall turn over to the party of the second part the administration of
the sixty salt beds mortgaged for the duration of the stipulation contract.

(c) The crop from the sixty salt beds shall be shared equally by the croppers and the party of the second part, after
deducting the expenses paid by the party of the second part during each harvest period and throughout the existence
of this mortgage.

It should be noted that the contract Exhibit C-1 is entitled "Contract of Antichresis" while the contract Exhibit A is entitled
"Contract of Mortgage". Both in the contract Exhibit C-1 and in the contract Exhibit A, the defendant Damaso Calestial, as
debtor, agrees to turn over to the plaintiffs, as creditors, the possession of the salt beds so that the latter, after paying the
expenses for the production, administration and harvest of the salt with one-half of the produce, may keep the other half of
the use, benefit and enjoyment. It is not stipulated that the net produce of the salt beds shall first be applied to the payment
of the interest, if any, and afterwards to that of the principal of their credit. Both contracts merely provide that the creditors
shall keep one-half of the products. Therefore, they are not contracts of antichresis, as defined by article 1881 of the Civil
Code. In a contract of mortgage, the mortgagor, as a general rule, retains the possession of the property mortgaged as
security for the payment of the sum of money borrowed from the mortgagee, and pays the latter a certain per cent thereof
as interest on his principal by way of compensation for his sacrifice in depriving himself of the use of said money and the
enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is not an essential requisite of the contract of
mortgage that the property mortgaged remain in the possession of the mortgagor (article 1857 of the Civil Code), the latter
may deliver said property to the mortgagee, without thereby altering the nature of the contract. It not being an essential
requisite of said contract of mortgage that the principal of the mortgage credit bear interest, or that the interest, as
compensation for the use of the principal and enjoyment of its fruits, be in the form of a certain per cent thereof, such interest
may be in the form of fruits of the property mortgage, without the contract's longing thereby its character of a mortgage
contract. It is stipulated in the contracts under consideration that, during the term thereof and while the total amount of the
loan remains unpaid by the debtor, the salt beds constituted as security for the payment of said loan, shall be administered
by the creditors who shall destine one-half of the products thereof for the maintenance and support of the croppers and the
improvements of the property, keeping the other half for themselves. It appears, therefore, that the debtor, instead of paying
a certain per cent of the principal of the loan as compensation for the sacrifice made by the creditors in depriving themselves
of the use of their principal and the enjoyment of its fruits, so as to give them to the debtor, has delivered to them the
property constituted as a security for the payment of the loan, so that they may administer and use it, enjoying its fruits, by
way of compensation for their said sacrifice in lending said debtor their money. Therefore, the contracts, which are the
subject matter of this action, have all the essential requsites of a mortgage, enumerated in article 1857 of the Civil Code
and, consequently, are mortgage contracts.
With respects to the second assignment of alleged error, this court, having arrived at the conclusion that the contracts
entered into between the plaintiffs and the defendant are contracts of mortgage and not of antichresis, finds the same to be
well founded.

This court likewise finds the third assignment of alleged error to be well founded.

From the foregoing considerations, this court is of the opinion and so holds, that when a contracts of loan with security does
not stipulate the payment of interest but provides for the delivery to the creditor by the debtor of the real property constituted
as security for the payment thereof, in order that the creditor may administer the same and avail himself of its fruits, without
stating that said fruits are to be applied to the payment of interest, if any, and afterwards to that of the principal of the credit,
the contract shall be considered to be one of mortgage and not of antichresis.

Wherefore, the appealed judgment is reversed, and the defendant's debt to the plaintiffs is declared paid and the deeds of
security executed by both parties cancelled, dismissing the counterclaim and cross-complained filed by said defendant and
appellee Damaso Celestial, with costs to the latter. So ordered.
 MANUEL D. YNGSON, JR. vs. PHILIPPINE NATIONAL BANK

On appeal are the Resolutions dated April 14, 20051 and January 24, 20062 of the Court of Appeals (CA) in CA-G.R.
SP No. 88735. The CA dismissed petitioner's petition for review of the January 4, 2005 Resolution 3 and February 9,
2000 Order4 of the Securities and Exchange Commission (SEC) for failure of petitioner to attach to the petition copies
of material portions of the records and other relevant or pertinent documents.

The facts follow:

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in Pampanga. 5 Between 1991 and
1993, ARCAM applied for and was granted a loan by respondent Philippine National Bank (PNB).6 To secure the loan,
ARCAM executed a Real Estate Mortgage over a 350,004-square meter parcel of land covered by TCT No. 340592-
R and a Chattel Mortgage over various personal properties consisting of machinery, generators, field transportation
and heavy equipment.

ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to the provisions of
the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings in the Office of
the Clerk of Court/Ex Officio Sheriff of the Regional Trial

Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for the mortgaged
real properties and December 8, 1993 for the mortgaged personal properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments, Appointment of a
Management or Rehabilitation Committee, and Approval of Rehabilitation Plan, with application for issuance of a
temporary restraining order (TRO) and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ
of preliminary injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga from proceeding with the
foreclosure sale of the mortgaged properties.8 An interim management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the petition for
suspension of payment was filed in December 1993 and six years had passed but the potential white knight" investor
had not infused the much needed capital to bail out ARCAM from its financial difficulties.9 Thus, the SEC decreed that
ARCAM be dissolved and placed under liquidation.10 The SEC Hearing Panel also granted PNB’s motion to dissolve
the preliminary injunction and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for

ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of Court to re-
schedule the sale at public auction of the mortgaged properties.

Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion for the Issuance
of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the foreclosure sale of ARCAM’s
assets. The SEC en banc issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without any writ of
preliminary injunction being issued by the SEC. Consequently, on July 28, 2000, PNB resumed the proceedings for
the extrajudicial foreclosure sale of the mortgaged properties.12 PNB emerged as the highest winning bidder in the
auction sale, and certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale.13 Petitioner posited that all
actions against companies which are under liquidation, like ARCAM, are suspended because liquidation is a
continuation of the petition for suspension proceedings. Petitioner argued that the prohibition against foreclosure
subsisted during liquidation because payment of all of ARCAM’s obligations was proscribed except those authorized
by the Commission. Moreover, petitioner asserted that the mortgaged assets should be included in the liquidation and
the proceeds shared with the unsecured creditors.

In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules prohibits secured
creditors from foreclosing on their mortgages to satisfy the mortgagor’s debt after the termination of the rehabilitation
proceedings and during liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution15 denying petitioner’s motion to nullify the auction sale. It held that
PNB was not legally barred from foreclosing on the mortgages. Aggrieved, petitioner filed on February 28, 2005, a
petition for review in the CA questioning the January 4, 2005 Resolution of the SEC.16

By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner failed to attach material
portions of the record and other documents relevant to the petition as required in Rule 46, Section 3 of the 1997 Rules
of Civil Procedure, as amended. The CA likewise denied ARCAM’s motion for reconsideration in its Resolution dated
January 24, 2006.

Hence this petition under Rule 45 arguing that:

4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND PREFERENCE OF CREDITS
UNDER THE CIVIL CODE AND JURISPRUDENCE WHEN PD 902-A PROVIDES THAT THE SAME BE APPLIED
IN INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND PLACED UNDER LIQUIDATION ON
ACCOUNT OF FAILURE TO REHABILITATE DUE TO INSOLVENCY.17

4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO FORECLOSE THE
MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM LIQUIDATOR TO

MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES, SINCE THE LIQUIDATOR
HAD INITIALLY DETERMINED THAT ASIDE FROM PNB, SOME ARCAM WORKERS MAY ALSO HAVE A LEGAL
LIEN OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID WAGES. THESE LIENS OVER
THE SAME MOVABLE OR REAL PROPERTY ARE TO BE SATISFIED PRO-RATA WITH THE CONTRACTUAL
LIENS PURSUANT TO 2247 AND 2249 OF THE CIVIL CODE, IN RELATION TO 2241 TO 2242 RESPECTIVELY.
ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT THE LIQUIDATOR DOES NOT KNOW ABOUT, AND
IF THERE WERE, THESE COULD COMPRISE TAX LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL CODE
ARE CLEARLY GIVEN PRIORITY OVER OTHER PREFERRED CLAIMS SINCE SUCH ARE TO BE SATISFIED
FIRST, OVER OTHER LIENS PROVIDED UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS
MORTGAGE LIENS.18

4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN ENTITY IS DISSOLVED AND
PLACED UNDER LIQUIDATION DUE TO INSOLVENCY, SECURED CREDITORS ARE AUTOMATICALLY
ALLOWED TO FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR CREDITS AGAINST THE
DEBTOR.19

4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SEC’S HOLDING THAT THE FORECLOSURE BY
PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT PNB IS THE SOLE AND ONLY LIEN
HOLDER, IT STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR AGREES TO SUCH OR THAT THE SEC
GAVE PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE FORECLOSURE PROCEEDINGS.20

4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON THAT THE FORECLOSURE
PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21

The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to attach material
documents referred to in the petition; and (2) whether PNB, as a secured creditor, can foreclose on the mortgaged
properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC.

On the procedural issue, the Court finds that the CA erred in dismissing the petition for review before it on the ground
of failure to attach material portions of the record and other documents relevant to the petition. A perusal of the petition
for review filed with the CA, and as admitted by PNB,22 reveals that certified true copies of the assailed January 4,
2005 SEC Resolution and the February 9, 2000 SEC Order appointing petitioner Atty. Manuel D. Yngson, Jr. as
liquidator were annexed therein.

We find the foregoing attached documents sufficient for the appellate court to decide the case at bar considering that
the SEC resolution contains statements of the factual antecedents material to the case. The Resolution also contains
the SEC’s findings on the legality of PNB’s foreclosure of the mortgages. The SEC held that when the rehabilitation
proceeding was terminated and the suspensive effect of the order staying the enforcement of claims was lifted, PNB
could already assert its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors.23 Before the CA, petitioner raised only the same
legal questions as there was no controversy involving factual matters. Petitioner claimed that the SEC erred in not
applying the rules on concurrence and preference of credits, and in denying its motion to nullify the auction sale of the
secured properties.24 Therefore, the assailed SEC Resolution is the only material portion of the record that should be
annexed with the petition for the CA to decide on the correctness of the SEC’s interpretation of the law and
jurisprudence on the matter before it.

Having so ruled, this Court would normally order the remand of the case to the CA for resolution of the substantive
issues. However, we find it more appropriate to decide the merits of the case in the interest of speedy justice
considering that the parties have adequately argued all points and issues raised. It is the policy of the Court to strive
to settle an entire controversy in a single proceeding, and to leave no root or branch to bear the seeds of future
litigation.25 The ends of speedy justice would not be served by a remand of this case to the CA especially since any
ruling of the CA on the matter could end up being appealed to this Court.

Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We answer in the negative.

In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual antecedents similar
to the present case, the court has already settled the above question and upheld the right of the secured creditor to
foreclose the mortgages in its favor during the liquidation of a debtor corporation. In that case, Consuelo Metal
Corporation (CMC) filed with the SEC a petition to be declared in a state of suspension of payment, for rehabilitation,
and for the appointment of a rehabilitation receiver or management committee under Section 5(d) of P.D. No. 902-A.
On April 2, 1996, the SEC, finding the petition sufficient in form and substance, declared that "all actions for claims
against CMC pending before any court, tribunal, office, board, body and/or commission are deemed suspended
immediately until further orders" from the SEC. Then on November 29, 2000, upon the management committee’s
recommendation, the SEC issued an Omnibus Order directing the dissolution and liquidation of CMC. Thereafter,
respondent Planters Development Bank (Planters Bank), one of CMC’s creditors, commenced the extrajudicial
foreclosure of CMC’s real estate mortgage. Planters Bank extrajudicially foreclosed on the real estate mortgage as
CMC failed to secure a TRO. CMC questioned the validity of the foreclosure because it was done without the
knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as follows:

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no longer
feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over
unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits.
Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the
preference and prove their credits as ordinary claims.

Moreover, Section 2248 of the Civil Code provides:

"Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent
of the value of the immovable or real right to which the preference refers."

In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a
right to foreclose the mortgage under Section 2248 of the Civil Code. The creditor-mortgagee has the right to foreclose
the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management
committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-
mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon the lifting of the stay order.27 (Emphasis supplied)

It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial Rehabilitation and
Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien during liquidation proceedings is
retained. Section 114 of said law thus provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a secured creditor to
enforce his lien in accordance with the applicable contract or law. A secured creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution
of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value
1âw phi 1

of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the
latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim secured,
the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the
excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws. (Emphasis
supplied)

In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged
properties should be respected, in line with our pronouncement in Consuelo Metal Corporation.

As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has elucidated in the
case of Development Bank of the Philippines v. NLRC28 that a distinction should be made between a preference of
credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge
on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 of the Labor
Code, does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which
credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference
in the discharge of the funds of the judgment debtor. Consequently, the right of first preference for unpaid wages may
not be invoked in this case to nullify the foreclosure sales conducted pursuant to PNB 's right as a secured creditor to
enforce its lien on specific properties of its debtor, ARCAM.

WHEREFORE, the petition for review on certiorari is DENIED.

G.R. No. L-19482 March 31, 1965

ZOSIMO D. UY vs. JOSE R. ZAMORA – THE ALLIED FINANCE, INC., intervenor-appellee.

This is an appeal from the Court of First Instance of Manila. It originated from a complaint filed in the Municipal Court
of Manila by Zosimo D. Uy against Jose R. Zamora for the recovery of a sum of money.

It appears that, at the instance of plaintiff Uy, the Municipal Court ordered the attachment of a motor vehicle belonging
to defendant Zamora. The writ of attachment was levied on the vehicle on August 11, 1960. Subsequently, the
Municipal Court rendered judgment for the plaintiff Uy and ordered defendant Zamora to pay the sum of P1,740, plus
interest at the rate of 12 per cent per annum, attorney's fees in the amount of P435 and the costs of the suit. From
this judgment, the defendant Zamora appealed to the Court of First Instance of Manila.

While the case was thus pending appeal, the Allied Finance, Inc. sought and was allowed to intervene. According to
the intervenor, the motor vehicle, which was attached by the Sheriff, had previously been mortgaged to it by defendant
Zamora to secure the payment of a loan of P3,060 and that at the time of the filing of the complaint in intervention on
December 19, 1960 there remained a balance of P2,451.93 in its favor. Intervenor, therefore, prayed that defendant
Zamora be ordered to pay P2,451.93 as principal, P250 as attorney's fees and the cost.

Meanwhile, on January 12, 1961, plaintiff Uy and defendant Zamora, who had earlier been declared in default,
submitted to the court a compromise agreement wherein Zamora admitted being indebted to Uy in the sum of P1,740
plus P760, representing sheriff, guard and attorney's fees, bond premiums and expenses of litigation or in the total
sum of P2,500. Since the motor vehicle had already been sold on order of the Court for P2,500 to prevent depreciation,
defendant Zamora agreed to have plaintiff Uy's credit paid out of the proceeds of the sale.

The court found defendant Zamora to be liable to plaintiff Uy in the amount of P2,500, and to the intervenor in the
amount of P2,451.93, plus interest at 12 per cent per annum and attorney's fees for P200. But since there was not
enough money with which to pay both claims, the question was: Which of the two credits is preferred?

Plaintiff Uy claims preference on the basis of a lien arising from the attachment of the motor vehicle on August 11,
1960. On the other hand, the intervenor bases its claim to preference on a Deed of Chattel Mortgage covering the
same motor vehicle. This deed was executed on January 14, 1960 and acknowledged before a notary public on June
20, 1960. As the lower court noted, it is not shown whether the mortgage was recorded in the Chattel Mortgage
Register and noted in the records of the Motor Vehicles Office, although both plaintiff Uy and the intervenor affirm in
their briefs that the mortgage was registered on August 24, 1960.

In resolving the issue, the lower court held that intervenor's claim could not be considered specially preferred credit
under Article 2241(4) of the Civil Code because an unregistered chattel mortgage is void. However, the court held
that the same could be considered a credit appearing in a public instrument under Article 2244 (14) so that it could be
considered preferred over plaintiff's attachment lien because of priority of its date.1äw phï1.ñët

Plaintiff moved for a reconsideration but the same was denied. Hence this appeal, plaintiff contending that —

1. The intervenor's chattel mortgage is void for lack of registration, citing Article 2140 of the Civil Code;

2. Since it was void, it could not affect plaintiff's attachment lien;

3. The intervenor's credit could not be considered a credit appearing in a public instrument under Article 2244
(14) because the credit was not yet due at the time of the levy of attachment;

4. Even if it is considered a credit in a public instrument, still plaintiff's lien by attachment is superior to the
intervenor's credit because plaintiff's lien is specially preferred.

Considering the fact that the intervenor Allied Finance, Inc. registered its mortgage only on August 24, 1960, or
subsequent to the date of the writ of attachment obtained by plaintiff Uy on August 11, 1960, the credit of the intervenor
cannot prevail over that of the plaintiff.

The lower court upheld intervenor's credit on the ground that, being embodied in a public instrument of an earlier date
(June 20, 1960), it should take precedence over plaintiff's lien by attachment (August 11, 1960), pursuant to Article
2244 of the Civil Code. This is untenable, for the reason that, as already stated, the credit of the intervenor cannot be
considered as preferred until the same has been recorded in the Motor Vehicles Office. Thus, inBorlough v. Fortune
Enterprises, Inc., 53 O.G. 4070, it was held that a mortgage of motor vehicles, in order to affect third persons, should
not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles
Office (now the Land Transportation Commission), as required in Section 5 (e) of the then Revised Motor Vehicles
Law. There is no doubt that with respect to defendant Zamora and the intervenor Allied Finance, Inc., plaintiff Uy is a
third person. We, therefore, hold that plaintiff's credit should first be paid.

WHEREFORE, the decision of the lower court is reversed, without pronouncement as to costs.
 CENTRAL BANK OF THE PHILIPPINES vs. MORFE

This case involves the question of whether a final judgment for the payment of a time deposit in a savings bank which
judgment was obtained after the bank was declared insolvent, is a preferred claim against the bank. The question
arises under the following facts:

On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the
Superintendent of Banks to take charge of its assets, forbade it to do business and instructed the Central Bank Legal
Counsel to take legal actions (Resolution No. 350).

On December 9, 1969 the Board involved to seek the court's assistant and supervision in the liquidation of the ban
The resolution implemented only on January 25, 1972, when his Central Bank of the Philippines filed the
corresponding petition for assistance and supervision in the Court of First Instance of Manila.

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically, sometime
in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila
against the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the balance of their time deposits (Civil
Case No. 82520 assigned to Branch I).

In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered to pay the Elizes
spouses the sum of P50,584 plus accumulated interest.

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A. Padilla and
Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as
the balance of their time deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's
fees (Civil Case No. 84200 where the action was filed on September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having cognizance of the
liquidation proceeding), upon motions of the Elizes and Padilla spouses and over the opposition of the Central Bank,
directed the latter as liquidator, to pay their time deposits as preferred judgments, evidenced by final judgments, within
the meaning of article 2244(14)(b) of the Civil Code, if there are enough funds in the liquidator's custody in excess of
the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.

From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final judgments secured
by the Elizes and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity
Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law, no
final judgment can be validly obtained against an insolvent bank.

Republic Act No. 265 provides: têñ.£îhqw â£

SEC. 29. Proceeding upon insolvency.—Whenever upon examination by the Superintendent or his examiners
or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is
one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors,
it shall be the duty of the Superintendent forthwith, in writing to inform the Monetary Board of the facts, and
the Board, upon finding the statements of the Superintendent to be true, shall forthwith forbid the institution to
do business in the Philippines and shall take charge of its assets and proceeds according to law.

The Monetary Board shall thereupon determine within thirty days whether the institution may be reorganized
or otherwise placed in such a condition so that it may be permitted to resume business with safety to its
creditors and shall prescribe the conditions under which such resumption of business shall take place. In such
case the expenses and fees in the administration of the institution shall be determined by the Board and shall
be paid to the Central Bank out of the assets of such banking institution.

At any time within ten days after the Monetary Board has taken charge of the assets of any banking institution,
such institution may apply to the Court of First Instance for an order requiring the Monetary Board to show
cause why it should not be enjoined from continuing such charge of its assets, and the court may direct the
Board to refrain from further proceedings and to surrender charge of its assets.

If the Monetary Board shall determine that the banking institution cannot resume business with safety to its
creditors, it shall, by the Office of the Solicitor General, file a petition in the Court of First Instance reciting the
proceedings which have been taken and praying the assistance and supervision of the court in the liquidation
of the affairs of the same. The Superintendent shall thereafter, upon order of the Monetary Board and under
the supervision of the court and with all convenient speed, convert the assets of the banking institution to
money.

SEC. 30. Distribution of assets.—In case of liquidation of a banking institution, after payment of the costs of the
proceedings, including reasonable expenses and fees of the Central Bank to be allowed by the court, the Central
Bank shall pay the debts of such institution, under the order of the court, in accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides: têñ.£îhqwâ£

SEC. 85. Any director or officer of any banking institution who receives or permits or causes to be received in
said bank any deposit, or who pays out or permits or causes to be paid out any funds of said bank, or who
transfers or permits or causes to be transferred any securities or property of said bank, after said bank
becomes insolvent, shall be punished by fine of not less than one thousand nor more than ten thousand pesos
and by imprisonment for not less than two nor more than ten years.

The Civil Code provides: têñ.£îhqw â£

ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code.

ART. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits
shall be preferred in the order named:

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they
have been the subject of litigation. These credits shall have preference among themselves in the order of
priority of the dates of the instruments and of the judgments, respectively. (1924a)

ART. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

(1) In the order established in article 2244;

(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates. (1929a)

The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of the Central Bank
in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which suspends or abates civil actions
against an insolvent bank pending in courts other than the liquidation court. It reasoned out that, because such actions
are not suspended, judgments against insolvent banks could be considered as preferred credits under article 2244(14)
(b) of the Civil Code. It further noted that, in contrast with the Central Act, section 18 of the Insolvency Law provides
that upon the issuance by the court of an order declaring a person insolvent "all civil proceedings against the said
insolvent shall be stayed."

The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I and XXX for the
enforcement of the judgments obtained by the Elizes and Padilla spouses. It suggested that, after satisfaction of the
judgment the Central Bank, as liquidator, should include said judgments in the list of preferred credits contained in the
"Project of Distribution" "with the notation "already paid" "

On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and
has ordered it to cease operations, the Board becomes the trustee of its assets "for the equal benefit of all the creditors,
including the depositors". The Central Bank cites the ruling that "the assets of an insolvent banking institution are held
in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference
over another by an attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245
Pac. 947).

The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file their actions with
the liquidation court. In support of that view it cites the provision that the Insolvency Law does not apply to banks (last
sentence, sec. 52 of Act No. 1956).

It also invokes the provision penalizing a director officer of a bank who disburses, or allows disbursement, of the funds
of the bank after it becomes insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the ruling that "a
creditor of an insolvent state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a
preference for (by) the mere fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N.
Carolina 10, 175 S. E. 838, Braver Liquidation of Financial Institutions, p. 922).

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true
deposits. They are considered simple loans and, as such, are not preferred credits (Art. 1980, Civil Code; In re
Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific Coast
Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank vs. Ang Cheng Lian, 65
Phil. 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast
Biscuit Co., 65 Phil. 443).

The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent,
the Monetary Board shall forbid it to do business and shall take charge of its assets. The Board in its Resolution No.
350 dated February 18,1969 banned the Fidelity Savings Bank from doing business. It took charge of the bank's
assets. Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent some depositors
from having an undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could
be maintained and judgments would be rendered for the payment of their deposits and then such judgments would
be considered preferred credits under article 2244 (14) (b) of the Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply
to judgments for the payment of the deposits in an insolvent savings bank which were obtained after the declaration
of insolvency.

A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as
entitled to priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by
the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary
Board from doing business, would rush to the courts to secure judgments for the payment of their deposits.

In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be
default judgments. Depositors armed with such judgments would pester the liquidation court with claims for preference
on the basis of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not
have been contemplated by the framers of section 29.

The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in that case that
the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July 9, 1923. On November 7,1924
the bank (then already under liquidation) issued to William Rohr a certificate stating that he was entitled to claim from
the bank $1,191.72 and that he was entitled to dividends thereon. Later, Rohr sued the bank for the payment of his
claim. The bank demurred to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the
order sustaining the demurrer, the Supreme Court of Montana said: têñ.£îhqw â£

The general principle of equity that the assets of an insolvent are to he distributed ratably among general
creditors applies with full force to the distribution of the assets of a bank. A general depositor of a bank is merely
a general creditor, and, as such, is not entitled to any preference or priority over other general creditors.

The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors, and one
cannot be permitted to obtain an advantage or preference over another by an attachment, execution or
otherwise. A disputed claim of a creditor may be adjudicated, but those whose claims are recognized and
admitted may not successfully maintain action thereon. So to permit would defeat the very purpose of the
liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver.

The available assets of such a bank are held in trust, and so conserved that each depositor or other creditor
shall receive payment or dividend according to the amount of his debt, and that none of equal class shall
receive any advantage or preference over another.

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of
such a bank "become a trust fund, to be administered for the benefit of all creditors pro rata and, while the bank retains
its corporate existence, and may be sued, the effect of a judgment obtained against it by a creditor is only to fix the
amount of debt. He can acquire no lien which will give him any preference or advantage over other general creditors.

Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and
just that they should be raised to the category of preferred credits simply because the depositors, taking advantage
of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and
supervision, were able to secure judgments for the payment of their time deposits.

The judicial declaration that the said deposits were payable to the depositors, as indisputably they were due, could
not have given the Elizes and Padilla spouses a priority over the other depositors whose deposits were likewise
indisputably due and owing from the insolvent bank but who did not want to incur litigation expenses in securing a
judgment for the payment of the deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden
to do business (and that ban would include the payment of time deposits) implies that suits for the payment of such
deposits were prohibited. What was directly prohibited should not be encompassed indirectly. (See Maurello vs.
Broadway Bank & Trust Co. of Paterson 176 Atl. 391, 114 N.J.L. 167).

It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank Liquidation Rules and
Regulations, it indicated in step III the procedure for processing the claims against the insolvent bank. In Step IV, the
court directed the Central Bank, as liquidator, to submit a Project of Distribution which should include "a list of the
preferred credits to be paid in full in the order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of
the Civil Code (note that article 2244 was not mentioned). There is no cogent reason why the Elizes and Padilla
spouses should not adhere to the procedure outlined in the said rules and regulations.

WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and set aside. No
costs.
 DBP vs. NLRC

This "petition for review on certiorari" ( in reality a petition for certiorari), filed by the Development Bank of the
Philippines ("DBP"), seeks the reversal of the decision of the National Labor Relations Commission ("NLRC"),
affirming that of the Labor Arbiter, which holds the petitioner, along with Atlas Textile Development Corporation
("ATLAS"), liable to the private respondents for wage differentials, "illegal" salary deductions, separation pay, and
similar money claims.

The private respondents were employees of ATLAS, a textile firm, which hypothecated its certain assets to DBP. After
ATLAS defaulted in its obligations, DBP foreclosed on the mortgage in March 1985. The latter acquired the mortgaged
assets by virtue of the foreclosure sale.

The private respondents filed their aforementioned claim, on 30 October 1985, against both ATLAS and DBP. The
Labor Arbiter ruled for the private respondents. On appeal by DBP, the decision was sustained by the NLRC.

Hence, the instant petition.

The petitioner contends that it is error on the part of the public respondent to consider the workers' preference under
Article 110 of the Labor Code over that of DBP's mortgage lien.

The issue has been put to fore in a number of cases brought to and decided by this Court.

In Republic vs. Peralta, 150 SCRA 37, the Court, through Mr. Justice Feliciano, ruled:

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their employer.
Claims for unpaid wages does not therefore fall at all within the category of specially preferred claims
established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for
unpaid wages are already covered by Article 2241, number 6: "claims for laborers' wages, on the
goods manufactured or the work done;" or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings, canals and other works
upon said buildings, canals or other works." To the extent that claims for unpaid wages fall outside the
scope of Article 2241, number 6 and 2242, number 3, they would come within the ambit of the category
of ordinary preferred credits under Article 2244. Applying Article 2241, number 6 to the instant case,
the claims of the Unions for separation pay of their members constitute liens attaching to the processed
leaf tobacco, cigars and cigarettes and other products produced or manufactured by Insolvent, but not
to other assets owned by the Insolvent. And even in respect of such tobacco and tobacco products
produced by Insolvent, the claims of the Unions may be given effect only after the Bureau of Internal
Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out of the products so
manufactured by the Insolvent.

Article 110 of the Labor Code was later amended by Republic Act
No. 6715 which became effective on 21 march 1989. And so modified, the provision thenceforth provided:

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 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.

The effects of the amendatory law were put to issue and passed upon in subsequent cases. In Development Bank of
the Philippines vs. National Labor Relations Commission, 183 SCRA 328, the Court, through, Mme. Justice Melencio-
Herrera, elucidated:

The amendment expands worker preference to cover not only unpaid wages but also other monetary
claims to which even claims of the Government must be deemed subordinate.

xxx xxx xxx

Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does this
mean then that liquidation proceedings have been done away with?

We opine in the negative upon the following considerations:

1. Because of its impact on the entire system of credit,

Article 110 of the labor Code cannot be viewed in isolation but must be read in relation to the Civil
Code scheme on classification and preference of credits.
 xxx xxx xxx

2. In the same way that the Civil Code provisions on classification of credits and the Insolvency Law
have been brought into harmony, so also must the kindered provisions of the Labor Law be made to
harmonize with those laws.

3. In the event of insolvency, a principal objective should be to effect an equitable distribution of the
insolvent's property among his creditors. To accomplish this there must first be some proceeding
where notice to all of the insolvent's creditors may be given and where the claims of preferred creditors
may be bindingly adjudicated (De Baretto vs. Villanueva, No. L-14938, December 29, 1962, 6 SCRA
928). The rationale therefore has been expressed in the recent case of DBP vs. Secretary of
Labor (G.R. No. 79351, 28 November 1989), . . .

4. A distinction should be made between a preference of credit and a lien. A preference applies only
to claims which do not attach to specific properties. A lien creates a charge on a particular property.
The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a
lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their
favor, a preference in application. It is a method adopted to determine and specify the order in which
credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a
first preference in the discharge of the funds of the judgment debtor.

xxx xxx xxx

6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean "absolute
preference," the same should be given only prospective effect in line with the cardinal rule that laws
have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, any
infringement on the constitutional guarantee on non-impairment of the obligation of contracts (Section
10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated by
several years the amendatory law, RA No. 6715. To give Article 110 retroactive effect would be to
wipe out the mortgage in DBP's favor and expose it to a risk which is sought to protect itself against
by requiring a collateral in the form of real property.

In fine, the right of preference given to workers under Article 110 of the Labor Code cannot exist in
any effective way prior to the time of its presentation in distribution proceedings. It will find application
when, in proceedings such as insolvency, such unpaid wages shall be paid in full before the "claims
of the Government and other creditors" may be paid. But, for an orderly settlement of a debtor's assets,
all creditors must be convened, their claims ascertained and inventoried, and thereafter the
preferences determined in the course of judicial proceedings which have for their object the subjection
of the property of the debtor of the payment of his debts and other lawful obligations. Thereby, an
orderly determination of preference of creditors' claims is assured (Philippine Savings bank vs. Lantin,
No. L-33929, September 2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-
in-interest, since those proceedings are proceeding in rem; and the legal scheme of classification,
concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code is
preserved in harmony.

The ruling was reiterated in Development Bank of the Philippines vs. National Labor Relations Commission, 186
SCRA 841, as well as cases thereafter, and just recently in Development Bank of the Philippines vs. NLRC, 218 SCRA
183.

The case at bench concerns monetary claims of workers that are not involved in judicial proceedings in rem in
adjudication of claims of creditors vis-a-vis the assets of the debtor, nor have such claims accrued after the effectivity
of Republic Act 6715. The petition thus raises issues heretofore squarely resolved in our aforequoted decisions. To
recapitulate.

(1) Article 110 of the Labor Code, as amended, must be viewed and read in conjunction with the provisions of the Civil
Code on concurrence and preferences of credits;

(2) The aforesaid provisions of the Civil Code, including Article 110 of the Labor Code, require judicial proceedings in
rem in adjudication of creditors' claims against the debtor's assets to become operative;

(3) Republic Act No. 6715 has the effect of expanding the "worker preference" to cover not only unpaid wages but
also other monetary claims of laborers, to which even claims of the Government must be deemed subordinate; and

(4) The amendatory provisions of Republic Act 6715, which took effect on 21 march 1989, should only be given
prospective application.

WHEREFORE, the petition is GRANTED. The assailed decision of public respondent, National Labor Relations
Commission and that of the Labor Arbiter, insofar as the latter holds the petitioner liable for monetary claims of private
respondents, are hereby REVERSED and SET ASIDE.
 DEVELOPMENT BANK OF THE PHILIPPINES
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..

This petition calls for the interpretation of Article 110 of the Labor Code which gives the workers preferences as
regards wages in case of liquidation or bankruptcy of an employer's business. Petitioner Development Bank of the
Philippines (DBP) maintains the Article 110 does not apply where there has been an extra-judicial foreclosure
proceeding while the respondents claim otherwise. Labor Arbiter Ariel C. Santos sustained the private respondent's
position. Petitioner DBP has now elevated the case to us by way of this petition for certiorari.

On November 29,1984, in NLRC-NCR Case No. 2517-84 entitled "Philippine Association of Free Labor Unions
(PAFLU-RMC Chapter) and its Members v. Riverside Mills Corporation, et al.", Labor Arbiter Manuel Caday awarded
separation pay, wage and/or living allowance increases and 13th month pay to the individual complainants who
comprise some of the respondents in this case.

On March 18, 1985, Labor Arbiter Teodorico Dogelio likewise awarded separation pay, vacation and sick leave pay
and unpaid increases in the basic wage and allowances to the other private respondents herein in NLRC Case No.
NCR-7-2577-84 entitled "Michael Penalosa, Jose Garcia and Apolinar Ray, et al., v. Riverside Mills Corporation, et
al., and Samahang Diwang Manggagawa sa RMC-FFW Chapter, et al., v. Riverside Mills Corporation (RMC)." On
March 29, 1985, after the judgment had become final and executory, Dogelio issued a writ of execution directing
NLRC Deputy Sheriff Juanita Atienza to collect the total sum of Eighty Five Million Nine Hundred Sixty One thousand
Fifty-Eight & 70/100 Pesos (P85,961,058.70). The Deputy Sheriff, however, failed to collect the amount so he levied
upon personal and real properties of RMC.

On April 25, 1985, a notice of levy on execution of certain real properties was annotated on the certificate of title filed
with the Register of Deeds of Pasig, Metro Manila, where all the said properties are situated.

Meanwhile in the other development which led to this case, petitioner DBP obtained a writ of possession on June 7,
1985 from the Regional Trial Court (RTC) of Pasig of all the properties of RMC after having extra-judicially foreclosed
the same at public auction earlier in 1983. DBP subsequently leased the said properties to Egret Trading and
Manufacturing Corporation, Rosario Textile Mills and General Textile Mills.

The writ of possession prevented the scheduled auction sale of the RMC properties which were levied upon by the
private respondents. As a result, on June 19, 1985, the latter filed an incidental petition with the NLRC to declare their
preference over the levied properties. The petition entitled "PAFLU-RMC Chapter and its members, Michael Penalosa,
et al., and the Samahang Diwang Manggagawa sa RMC-FFW Chapter and its members v. RMC and DBP, et al." was
docketed as NLRC Case No. NCR-7-2577-84. Petitioner DBP filed its position paper and memorandum in answer to
the petition.

On October 31, 1985, Dogelio issued an order recognizing and declaring the respondents' first preference as regards
wages and other benefits due them over and above all earlier encumbrances on the aforesaid properties/assets of
said company, particulary those being asserted by respondent Development Bank of the Philippines.' (p. 84, Rollo)

The petitioner appealed the order of Dogelio to the NLRC. The latter in turn, set aside the order and remanded the
case to public respondent Labor Arbiter Santos for further proceedings.

Meanwhile, another set of complainants (who are also named as respondents herein) filed, on April 7, 1986, a
complaint for separation pay, underpayment, damages, etc., entitled 'Jaime Arada, et al. v. RMC, DBP, Egret Trading
and Manufacturing Corp., docketed as NLRC Case No. NCR-4-1278-86." This case was subsequently consolidated
with the case pending before respondent Santos. Accordingly, the latter conducted several hearings where the parties,
particulary DBP, General Textile Mills, Inc., and Rosario Textile Mills, Inc., were given the opportunity to argue their
respective theories of the case. Eventually, all the parties agreed that the case shall be submitted for decision after
their filing of positions papers and/or memorandums.

On March 31, 1987, public respondent Santos rendered the questioned decision, the dispositive portion of which
reads:

WHEREFORE, it is hereby declared that all the complainants in the above- entitled cases, as former
employees of respondent Riverside Mills Corporation, enjoy first preference as regards separation
pay, unpaid wages and other benefits due them over and above all earlier encumbrances on all of the
assets/properties of RMC specifically those being asserted by respondent DBP.

As a consequence of the above declaration, the decision dated March 18, 1983 of the then Hon.
Arbiter Teodorico Dogelio should be immediately enforced against DBP who is hereby directed to pay
all the monetary claims of complainants who were former employees of respondent RMC.
 Anent the Arada case, DBP is hereby directed to pay all the amounts as indicated opposite the names
of complainants listed from page I to page 5 of Annex "A" of complainants' complaint provided that
their names are not among those listed in the Penalosa case.

It is hereby also declared that former employees whose names are not listed in the complainants'
position papers but can prove that they were former employees of RMC prior to its bankruptcy, should
also be paid the same monetary benefits being granted to herein complainants.

Finally, DBP is hereby ordered to deposit with the National Labor Relations Commission the proceeds
of the sale of the assets of RMC between DBP on one hand and General Textile Mills, Inc. and/ or
Rosario Textile Mills, Inc., on the other hand and that future payment being made by the latter to the
former should be deposited with the National Labor Relations Commission for proper disposition. (pp.
174-175, Rollo)

Hence, this petition.

Petitioner DBP maintains that the public respondent misinterpreted Article 110 of the Labor Code and Section 10,
Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code in that the said respondent
upheld the existence of the worker's preference over and above earlier encumbrances on the properties of RMC
despite the absence of any bankruptcy or liquidation proceeding instituted against the latter. The petitioner argues
that there must be a judicial declaration, or at the very least, a cognizance by an appropriate court or administrative
agency of bankruptcy or inability of the employer to meet its obligations.

On the other hand, the respondents contend that under both Article 110 and its implementing rule, the claims of the
laborers for unpaid wages and other monetary benefits due them for services rendered prior to bankruptcy enjoy first
preference in the satisfaction of credits against a bankrupt company; that the word "bankruptcy" in the Labor Code is
used in its generic sense, meaning that condition of inability to pay one's debt; and that Article 110 of the Labor Code
is not confined to the situation contemplated in Articles 2236-2245 of the Civil Code where all the preferred creditors
must necessarily be convened and the import of their claims ascertained.

We apply the rule expressed in Republic v. Peralta (150 SCRA 37 [1988] ), where we stated:

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.
Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits, which provisions find particular application in
insolvency proceedings where the claims of all creditors, prefer red or non-preferred, may be
adjudicated in a binding manner. (Barreto v. Villanueva, 1 SCRA 288 [ 1961] ). (pp. 44-45)

In the above quoted case, there was a voluntary insolvency proceeding instituted by the employer. The respondents,
however, contend that since in the case at bar there is only an extra-judicial proceeding, Article 110 is still the only
law applicable without regard to the provisions of the Civil Code.

We do not agree with this contention.

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

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.

Article 10. Payment of wages in case of bankruptcy. Unpaid wages earned by the employee 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 the assets of the
employer.

It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be present before the
worker's preference may be enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked
by the respondents in this case absent a formal declaration of bankruptcy or a liquidation order. Following the rule in
Republic v. Peralta, supra, to hold that Article 110 is also applicable in extra-judicial proceedings would be putting the
worker in a better position than the State which could only assert its own prior preference in case of a judicial
proceeding. Therefore, as stated earlier, Article 110 must not be viewed in isolation and must always be reckoned
with the provisions of the Civil Code.

There was no issue of judicial vis-a-vis extra-judicial proceedings in the Republic v. Peralta interpretation of Article
110 but the necessity of a judicial adjudication was pointed out when we explained the impact of Article 110 on the
concurrence and preference of credits provided in the Civil Code.
We stated:

We come to the question of what impact Article 110 of the Labor Code has had upon the complete
scheme of classification, concurrence and preference of credits in insolvency set out in the Civil Code.
We believe and so hold that Article 110 of the Labor Code did not sweep away the overriding
preference accorded under the scheme of the Civil Code to tax claims of the government or any
subdivision thereof which constitute a lien upon properties of the Insolvent. ... It cannot be assumed
simpliciter that the legislative authority, by using Article 110 of the words 'first preference' and any
provisions of law to the contrary notwithstanding intended to disrupt the elaborate and symmetrical
structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to
subsume the sovereign itself within the term 'other creditors', in stating that 'unpaid wages shall be
paid in full before other creditors may establish any claim to a share in the assets of employer.' Insistent
considerations of public policy prevent us from giving to 'other creditors a linguistically unlimited scope
that would embrace the universe of creditors save only unpaid employees.

Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence
and preference of credits may be applied was explained by this Court in the case of Philippine Savings Bank v. Lantin
(124 SCRA 476 [1983] ). We said:

The proceedings in the court below do not partake of the nature of the insolvency proceedings or
settlement of a decedent's estate. The action filed by Ramos was only to collect the unpaid cost of the
construction of the duplex apartment. It is far from being a general liquidation of the estate of the
Tabligan spouses.

Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are
binding against the whole world. All persons having interest in the subject matter involved, whether
they were notified or not, are equally bound. Consequently, a liquidation of similar import or 'other
equivalent general liquidation must also necessarily be a proceeding in rem so that all interested
persons whether known to the parties or not may be bound by such proceeding.

In the case at bar, although the lower court found that 'there were no known creditors other than the
plaintiff and the defendant herein', this can not be conclusive. It will not bar other creditors in the event
they show up and present their claim against the petitioner bank, claiming that they also have preferred
liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in
favor of the bank which is supposed to be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory liens. Neither does the De Barreto case
... .

The claims of all creditors whether preferred or non-preferred, the identification of the preferred ones and the totality
of the employer's asset should be brought into the picture, There can then be an authoritative, fair, and binding
adjudication instead of the piece meal settlement which would result from the questioned decision in this case.

We, therefore, hold that Labor Arbiter Ariel C. Santos committed grave abuse of discretion in ruling that the private
respondents may enforce their first preference in the satisfaction of their claims over those of the petitioner in the
absence of a declaration of bankruptcy or judicial liquidation of RMC. There is, of course, nothing in this decision
which prevents the respondents from instituting involuntary insolvency or any other appropriate proceeding against
their employer RMC where respondents' claims can be asserted with respect to their employer's assets.

WHEREFORE, the petition is hereby GRANTED. The questioned decision of the public respondent is ANNULLED
and SET ASIDE. The Temporary Restraining Order we issued on May 20, 1987 enjoining the enforcement of the
questioned decision is made PERMANENT. No costs.