G.R. No. 86932. June 27, 1990.*SECOND DIVISION.

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION
and DOROTHY S. ANCHETA, MA. MAGDALENA Y. ARMARILLE, CONSTANTE A. ANCHETA, CONSTANTE B.
BANAYOS, EVELYN BARRIENTOS, JOSE BENAVIDEZ, LEO-NARDO BUENAAGUA, BENJAMIN BAROT,
ERNESTO S. CANTILLER, EDUARDO CANDA, ARMANDO CANDA, AIDA DE LUNA, PACIFICO M. DE JESUS,
ALFREDO ESTRERA, AURELIO A. FARIÑAS, FRANCISCO GREGORIO, DOMELINA GONZALES, JUANA
JALANDONI, MANUEL MALUBAY, FELICIANO OCAMPO, MABEL PADO, GEMINIANO PLETA, ERNESTO S.
SALAMAT, JULIAN TRAQUENA, JUSFIEL SILVERIO, JAMES CRISTALES, FRANCISCO BAMBIO, JOSE T.
MARCELO, JR., SUSAN M. OLIVAR, ERNESTO JULIO, CONSTANTE ANCHETA, JR., ENRIQUE NABUA and
JAVIER P. MATARO, respondents.

Labor Law; Corporation Law; Ownership of majority of capital stock and fact that majority of directors of
a corporation are the directors of another corporation creates no employer-employee relationship with
latter’s employees.—It is to be noted that in their comment, private respondents tried to prove the
existence of employeremployee relationship based on the fact that DBP is the majority stockholder of
PSC and that the majority of the members of the board of directors of PSC are from DBP. We do not
believe that these circumstances are sufficient indicia of the existence of an employeremployee
relationship as would confer jurisdiction over the case on the labor arbiter, especially in the light of the
express declaration of said labor arbiter and the NLRC that DBP is being held liable as a foreclosing
creditor. At any rate, this jurisdictional defect was cured when DBP appealed the labor arbiter’s decision
to the NLRC and thereby submitted to its jurisdiction.

Labor Law; Preference of Credits; Mortgages; Insolvency Law; A foreclosing bank creditor cannot be held
liable for unpaid wages and the like of employees of mortgagor. They should file their claims, in a
proceeding in bankruptcy on their employer.—In fine, the right to
________________

* SECOND DIVISION.

842

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SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. NLRC

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 preference determined in the
course of judicial proceedings which have for their object the subjection of the property of the debtor to
the payment of his debts or 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
proceedings 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.”

Same; Same; Same; Same; Same.—On the foregoing considerations and it appearing that an involuntary
insolvency proceeding has been instituted against PSC, private respondents should properly assert their
respective claims in said proceeding.

SARMIENTO, J., dissenting:

Labor Law; The majority misread the clear intent of R.A. 6715, which gave absolute preference to unpaid
wages.—As I held in DBP v. NLRC and more recently, in Bolinao v. Padolina, that on account of the
amendment introduced by Republic Act No. 6715, workers now enjoy “absolute preference” in the
payment of labor claims, above and beyond taxes due from the Government, and credits belonging to
private persons. As I said therein, Republic Act No. 6715 was enacted, precisely, to work more favorable
terms to labor—Zbecause prior to the amendment, labor enjoyed no preference. I am afraid that the
majority has misread the clear intent of the legislature.

PETITION for certiorari to review the decision of the National Labor Relations Commission.

The facts are stated in the opinion of the Court.

The Legal Counsel for petitioner.

C.A. Ancheta & C.B. Banayos for private respondents.

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Development Bank of the Philippines vs. NLRC

REGALADO, J.:

The present petition for certiorari seeks the reversal of the decision of the National Labor Relations
Commission (NLRC) in NLRC-NCR Case No. 00-07-02500-87, dated January 16, 1986,1Petition, Annex A;
Rollo, 26. which dismissed the appeal of the Development Bank of the Philippines (DBP) from the
decision of the labor arbiter ordering it to pay the unpaid wages, 13th month pay, incentive pay and
separation pay of herein private respondents.

Philippine Smelters Corporation (PSC), a corporation registered under Philippine law, obtained a loan in
1983 from the Development Bank of the Philippines, a government-owned financial institution created
and operated in accordance with Executive Order No. 81, to finance its iron smelting and steel
manufacturing business. To secure said loan, PSC mortgaged to DBP real properties with all the buildings
and improvements thereon and chattels, with its President, Jose T. Marcelo, Jr., as co-obligor.
By virtue of the said loan agreement, DBP became the majority stockholder of PSC, with stockholdings in
the amount of P31,000,000.00 of the total P60,226,000.00 subscribed and paid-up capital stock.
Subsequently, it took over the management of PSC.

When PSC failed to pay its obligation with DBP, which amounted to P75,752,445.83 as of March 31,
1986, DBP foreclosed and acquired the mortgaged real estate and chattels of PSC in the auction sales
held on February 25, 1987 and March 4, 1987.

On February 10, 1987, forty (40) petitioners filed a Petition for Involuntary Insolvency in the Regional
Trial Court, Branch 61 at Makati, Metropolitan Manila, docketed therein as Special Proceeding No. M-
1359,2Rollo, 84. against PSC and DBP, impleading as co-respondents therein Olecram Mining
Corporation, Jose Panganiban Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners
representing themselves as unpaid employees of said private respondents, except PISO Bank.

On February 13, 1987, herein private respondents filed a

________________

1 Petition, Annex A; Rollo, 26.

2 Rollo, 84.

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Development Bank of the Philippines vs. NLRC

complaint with the Department of Labor against PSC for non-payment of salaries, 13th month pay,
incentive leave pay and separation pay. On February 20, 1987, the complaint was amended to include
DBP as party respondent. The case was thereafter indorsed to the Arbitration Branch of the National
Labor Relations Commission (NLRC). DBP filed its position paper on September 7, 1987, invoking the
absence of employer-employee relationship between private respondents and DBP and submitting that
when DBP foreclosed the assets of PSC, it did so as a foreclosing creditor.

On January 30, 1988, the labor arbiter rendered a decision, the dispositive portion of which directed
that “DBP as foreclosing creditor is hereby ordered to pay all the unpaid wages and benefits of the
workers which remain unpaid due to PSC’s foreclosure.”3Petition, Annex B; Rollo, 30.

On appeal by DBP, the NLRC sustained the ruling of the labor arbiter, holding DBP liable for unpaid
wages of private respondents “not as a majority stockholder of respondent PSC, but as the foreclosing
creditor who possesses the assets of said PSC by virtue of the auction sale it held in 1987.” In addition,
the NLRC held that the labor arbiter is correct in assuming jurisdiction because “the worker’s preference
to the amount secured by DBP by virtue of said foreclosure sales of PSC properties arose out of or are
connected or interwoven with the labor dispute brought forth by appellees against PSC and DBP.”4Rollo,
66. Hence, the present petition by DBP.

DBP contends that the labor arbiter and the NLRC committed a grave abuse of discretion (1) in assuming
jurisdiction over DBP; (2) in applying the provisions of Article 110 of the Labor Code, as amended; and
(3) in not enforcing and applying Section 14 of Executive Order No. 81.

We find merit in the petition.

It is to be noted that in their comment, private respondents tried to prove the existence of employer-
employee relationship based on the fact that DBP is the majority stockholder of PSC and that the
majority of the members of the board of directors of

________________

3 Petition, Annex B; Rollo, 30.

4 Rollo, 66.

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Development Bank of the Philippines vs. NLRC

PSC are from DBP.5Ibid., 74-77. We do not believe that these circumstances are sufficient indicia of the
existence of an employer-employee relationship as would confer jurisdiction over the case on the labor
arbiter, especially in the light of the express declaration of said labor arbiter and the NLRC that DBP is
being held liable as a foreclosing creditor. At any rate, this jurisdictional defect was cured when DBP
appealed the labor arbiter’s decision to the NLRC and thereby submitted to its jurisdiction.

The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the
unpaid wages, 13th month pay, incentive leave pay and separation pay of the employees of PSC.

We rule in the negative.

During the dates material to the foregoing proceedings, Article 110 of the Labor Code read:

“Art. 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.”

In conjunction therewith, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the
Labor Code provided:

“Sec. 10. Payment of wages in case of bankruptcy.—Unpaid wages earned by the employees 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 a share in the
assets of the employer.”

Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor
Arbiter Ariel C. Santos, et al.,6171 SCRA 138 (1989). explicated as follows:
_______________

5 Ibid., 74-77.

6 171 SCRA 138 (1989).

846

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SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. NLRC

“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. x x x.

x x x
“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 lines. Neither does the De Barreto case x x x.’

“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.”

Republic Act No. 6715, which took effect on March 21, 1989, amended Article 110 of the Labor Code to
read as follows:

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Development Bank of the Philippines vs. NLRC

“Art. 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.”

As a consequence, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor
Code was likewise amended, to wit:

“Sec. 10. Payment of wages and other monetary claims in case of bankruptcy.—In case of bankruptcy or
liquidation of the employer’s business, the unpaid wages and other monetary claims of the employees
shall be given first preference and shall be paid in full before the claims of government and other
creditors may be paid.”
Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid
case of Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was
adopted by this Court in the recent case of Development Bank of the Philippines vs. National Labor
Relations Commission, et. al.,7G.R. Nos. 82763-64, Mar. 19, 1990; en banc. For facility of reference,
especially the rationalization for the conclusions reached therein, we reproduce the salient portions of
the decision in this later case.

“Notably, the terms ‘declaration’ of bankruptcy or ‘judicial’ liquidation have been eliminated. Does this
means 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.

‘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

________________

7 G.R. Nos. 82763-64, Mar. 19, 1990; en banc.

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SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. NLRC

proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a
binding manner. x x x’ (Republic vs. Peralta (G.R. No. L-56568, May 20, 1987, 150 SCRA 37).

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 kindred 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 Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928). The
rationale therefor has been expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351,
28 November 1989), which we quote:

‘A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied
first ahead of other claims which may be established against the debtor. Logically, it becomes material
only when the properties and assets of the debtors are insufficient to pay his debts in full; for if the
debtor is amply able to pay his various creditors, in full, how can the necessity exist to determine which
of his creditors shall be paid first or whether they shall be paid out of the proceeds of the sale of the
debtor’s specific property? Indubitably, the preferential right of credit attains significance only after the
properties of the debtor have been inventoried and liquidated, and the claims held by his various
creditors have been established (Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil. 611 [1916]; Barretto vs.
Villanueva, G.R. No. 14938, 29 December 1962, 6 SCRA 928; Philippine Savings Bank vs. Lantin, G.R.
33929, 2 September 1983, 124 SCRA 476).’

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. In the

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Development Bank of the Philippines vs. NLRC

words of Republic vs. Peralta, supra:

‘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 do 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 Article 2242, number 3, they would come within the ambit of the
category of ordinary preferred credits under Article 2244.’

5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted (Article 2176, Civil Code). It creates a real right which is
enforceable against the whole world. It is a lien on an identified immovable property, which a
preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of the
Civil Code on classification of credits. The preference given by Article 110, when not falling within Article
2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinary
preferred credit although its impact is to move it from second priority to first priority in the order of
preference established by Article 2244 of the Civil Code (Republic vs. Peralta, supra).

In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind as
security is not permitted to vote in the election of the assignee in insolvency proceedings unless the
value of his security is first fixed or he surrenders all such property to the receiver of the insolvent’s
estate.

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
shall have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, any
infringement on the constitutional guarantee on non-impairment of 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
850

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SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. NLRC

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 it sought to protect itself against by requiring a collateral in the form of real
property.

“In fine, the right to 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 preference
determined in the course of judicial proceedings which have for their object the subjection of the
property of the debtor to the payment of his debts or 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 proceedings 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.”
On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been
instituted against PSC, private respondents should properly assert their respective claims in said
proceeding.

WHEREFORE, the petition is GRANTED. The decision of public respondent is hereby ANNULLED and SET
ASIDE.

SO ORDERED.

Melencio-Herrera (Chairman) and Paras, JJ., concur.

Padilla, J., I dissent for the same reasons stated in my dissenting opinion in DBP vs. NLRC, et al., G.R.
Nos. 82763-64, 19 March 1990.

Sarmiento, J., Dissents in a separate opinion.

SARMIENTO, J., Dissenting Opinion

As I held in DBP v. NLRC1G.R. Nos. 82763-64, March 19, 1990. and more recently, in Bolinao v.

_______________

1 G.R. Nos. 82763-64, March 19, 1990.

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People vs. Aquino

Padolina,2G.R. No. 81415. that on account of the amendment introduced by Republic Act No. 6715,
workers now enjoy “absolute preference” in the payment of labor claims, above and beyond taxes due
from the Government, and credits belonging to private persons. As I said therein, Republic Act No. 6715
was enacted, precisely, to work more favorable terms to labor—because prior to the amendment, labor
enjoyed no preference. I am afraid that the majority has misread the clear intent of the legislature.

Petition granted. Decision annulled and set aside.

Notes.—An obligation arising from non-payment of stock subscription to a corporation cannot be offset
against a money claim of an employee against an employer. (Apodaca vs. National Labor Relations
Commission, 172 SCRA 442.)
Mere fact that an administrative manager signed the compromise agreement is not a conclusive proof.
He must first be authorized by the Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210.)

——o0o—— Development Bank of the Philippines vs. NLRC, 186 SCRA 841, G.R. No. 86932 June 27,
1990