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DBP v. NLRC, et. al. | G.R. No. 86932 | June 27, 1990| Regalado, J.

SUMMARY
PSC obtained a loan from DBP, and mortgaged property as security for the loan . As a result DBP became its major
stockholder and subsequently took over the management of PSC. PSC failed to pay the loan so DBP forclosed and
acquired the mortgaged property. The Labor Arbiter and NLRC held that DBP, as the foreclosing creditor, was liable to
pay the wages and benefits of workers which were unpaid due to PSC's foreclosure. The SC held otherwise. A foreclosing
bank creditor cannot be held liable for unpaid wages and the like of employees of mortgagor. The unpaid workers
should file their claims, in a proceeding in bankruptcy on their employer.

FACTS
 1983: Philippine Smelters Corporation (PSC) obtained a loan from the Development Bank of the Philippines (DBP), a
government-owned financial institution created and operated in accordance with Executive Order No. 81. As
security for the loan, PSC mortgaged to DBP real properties.
o Purpose of loan: to finance PSC's smelting and steel manufacturing business
 By virtue of the said loan agreement, DBP became the majority stockholder of PSC and subsequently took over the
management of PSC.
 PSC failed to pay its obligation with DBP amounting to 75M, so DBP foreclosed and acquired the mortgaged property
of PSC in auction sales.
 1987: 40 petitioners who claimed to be unpaid employees filed a Petition for Involuntary Insolvency in the RTC
against PSC and DBP, Olecram Mining Corporation, Jose Panganiban Ice Plant and Cold Storage, Inc. and PISO Bank.
 1987: Herein private respondents filed a complaint with the DOL against PSC and DBP for nonpayment of salaries,
13th month pay, incentive leave pay and separation pay.
o DBP's defense: It invoked the absence of employer-employee relationship between private respondents
and DBP and submitted that when DBP foreclosed the assets of PSC, it did so as a foreclosing creditor.
 The Labor Arbiter decided against DBP and ordered it, as the foreclosing creditor who possessed the assets of PSC,
to pay all the unpaid wages and benefits of the workers which remain unpaid due to PSC's foreclosure.
 The NLRC sustained the ruling of the Labor Arbiter. 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 arose from the labor dispute
brought forth by appellees against PSC and DBP.

ISSUE
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: NO

Discussion of employer-employee relationship/jurisdiction


 Private respondents: There exists an employer-employee relationship based on the fact that DBP is the majority
stockholder of PSC and that majority of the members of the board of directors of PSC are from DBP.
 Court: These do not prove the existence of an employer-employee relationship and therefore do not confer
jurisdiction over the case on the labor arbiter, especially given the express declaration of the labor arbiter and the
NLRC that DBP is being held liable as a foreclosing creditor. However, the jurisdictional defect was cured when DBP
submitted to NLRC's jurisdiction (by appealing NLRC decision).

Main issue
 In Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., the Court held that a declaration
of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced.
o based on Art. 110 LC1 & Sec 10, Rule VIII, Book III of its IRR2

 1
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.
 The reason behind the necessity for a judicial proceeding before the concurrence and preference of credits may be
applied was explained in Philippines Savings Bank v. Lantin:
o Insolvency proceedings are proceedings in rem which are binding against the whole world. All persons
having interest in the subject matter involved, whether notified or not, are equally bound. Consequently, a
liquidation of similar import 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.
o The claims of all creditors whether preferred or non- preferred should be brought into the picture so there
can then be an authoritative, fair, and binding adjudication.
 In 1989, RA. 6715 amended Article 110 of the Labor Code. Its IRR was also amended and the terms "declaration" of
bankruptcy or "judicial" liquidation were eliminated.
o 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, the SC, in DBP v NLRC (March 1990 decision), still interpreted the provisions in the same
way. Reasons:
 Article 110 must be read in relation to the provisions of the Civil Code concerning credits, which provisions find
particular application in insolvency proceedings.
o In case of insolvency, a principal objective should be to effect an equitable distribution of the insolvent's
property among his creditors. To do 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.
o 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 creditors have been established.
 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 Article 4, Civil Code + non-impairment of obligation of
contracts under Section 10, Article III, 1987 Constitution).
o DBP's mortgage credit came before the amendatory law, RA No. 6715. To give Article 110 retroactive effect
would be to wipe out the mortgage in DBPs favor.
 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. All creditors must first be convened, their claims
ascertained and inventoried, and thereafter the preference determined.
 It appears that an involuntary insolvency proceeding has been instituted against PSC. Private respondents should
properly assert their respective claims in said proceeding.

DISPOSITION
Petition GRANTED. NLRC decision ANNULLED.

SArmiento, J. dissenting:

The majority misread the clear intent of RA 6715 which gave absolute preference to unpaid wages.

 2
Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code: 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.

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