Minority view on Article 110 (Labor Code)


FACTS: Lirag Textile (LIRAG) ceased operations by early 1982. Pursuant to a final and executory judgment of the NLRC, dated 20 March 1983, LIRAG was adjudged liable to its workers for unpaid wages and salaries which, as of 12 February 1986, amounted to P6,292,380.00.

LIRAG's only remaining asset was mortgaged to Development Bank of the Philippines (DBP) which on 15 April 1983 foreclosed the mortgage and acquired said property at public auction for P31,346.462.90, in partial satisfaction of LIRAG's indebtedness to DBP. LIRAG's workers through their union (LAND) thereupon sought to garnish on DBP the proceeds of the foreclosure sale, to the extent of their adjudged unpaid wages (P6,292,380.00). The NLRC ruled for LAND over DBP's objection. The issue therefore, in practical terms, is whether P6,292,380.00 should be deducted from the P31,346,462.90 realized by DBP from the foreclosure sale of LIRAG's property, to fully satisfy LAND's claim for LIRAG workers' unpaid wages, thereby leaving a balance of P25,054,082.90 only in partial satisfaction of LIRAG's debt to DBP.

MAJORITY VIEW: The majority holds that LAND may not enforce its first preference in the satisfaction of unpaid monetary claims of its members, viz. LIRAG's workers, over that of DBP, in the absence of a formal declaration of bankruptcy or judicial liquidation of LIRAG's business.

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 words of Republic vs. Peralta:

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 complaints 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 and other works, upon said buildings, canals and 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.

MINORITY VIEW AS ADVANCED BY JUSTICE PADILLA: I regret that I cannot join the majority ruling in the light of the amendment to Article 110 of the Labor Code by Republic Act 6715, approved on 2 March 1989, and the resultant amendment of Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code.

Before its amendment by Republic Act 6715, Article 110 of the Labor Code provided —

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.

After Republic Act 6715, Art. 110 now provides:

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 wages and other monetary claims, any provisions of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full before claims of the government and other creditors may be paid.

Section 10 of the Implementing Rules, before Republic Act 6715 provided:

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.
After Republic Act 6715, Section 10 of the Rules now provides:

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.

The majority, in my considered opinion, has failed to fully take into account the radical change introduced by Republic Act 6715 into the system of priorities or preferences among credits or creditors ordained by the Civil Code.

Under the provisions of the Civil Code, specifically, Articles 2241 and 2242, jointly with Articles 2246 to 2249, a two-tier order of preference of credits is established. The first tier includes only taxes, duties and fees on specific movable or immovable property. All other special preferred credits stand on a second tier.

Under the system of preferences in the Civil Code, only taxes enjoy absolute preference i.e., they exclude the credits of the lower order until such taxes are fully satisfied out of the proceeds of the sale of the property subject of the preference, and taxes can even exhaust such proceeds. All other special preferred credits enjoy no priority among themselves but must be paid or satisfied pro rata. To make the prorating fully effective, the preferred creditors enumerated in Nos. 2 to 13 of Article 2241 and Nos. 2 to 10 of Article 2242 must be convened and the import of their claims ascertained in some proceeding where the claims of all may be bindingly adjudicated.

With the amendment of Article 110 of the Labor Code by Republic Act 6715, a three-tier order of preference is established wherein unpaid wages and other monetary claims of workers enjoy absolute preference over all other claims, including those of the Government, in cases where a debtor-employer is unable to pay in full all his obligations. The absolute preference given to monetary claims of workers, to which claims of the Government, i.e., taxes, are now subordinated, manifests the clear and deliberate intent of our lawmaker to put flesh and blood into the expressed Constitutional policy of protecting the rights of workers and promoting their welfare.

I thus take exception to the proposition that a prior formal declaration of insolvency or bankruptcy or a judicial liquidation of the employer's business is a condition sine qua non to the operation of the preference accorded to workers under Article 110 of the Labor Code, for the following specific reasons:

First, the majority reads into the aforesaid law and implementing rule a qualification that is not there. Nowhere is it stated in the present law and its new implementing rule that a prior declaration of bankruptcy or judicial liquidation is a condition sine qua non to the operation of Article 110. In fact, it will be noted that the phrase declaration of bankruptcy or judicial liquidation of the employer's business, which formerly appeared in Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code has been deleted in the new implementing rule. What is to me even more obvious and, therefore, significant in the present law and implementing new rule is the unconditional and unqualified grant of priority to workers' monetary claims over and above all other claims as against all the assets of an employer incapable of fully paying his obligations.

Second, a proceeding in rem, by its nature, seeks to bar any other person who claims any interest in the property or right subject of the suit. To my mind, such a proceeding is not essential or necessary to enforce the workers' preferential right over the assets of the insolvent debtor as against other creditors of the lower tier, as Article 110 of the Labor Code itself bars the satisfaction of claims of other creditors, including the Government, until unpaid wages and monetary claims of the workers are first satisfied in full. Further, it appears that such a proceeding is essential only where the credits are concurring and enjoy no preference over one another, but not when the law accords to one of the credits absolute priority and undisputed supremacy. This submission finds support, by analogy, in the case of De Barreto vs. Villanueva, where the Court stated:

Thus it becomes evident that one preferred creditor's third party claim to the proceeds of the foreclosure (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preference under Article 2242, unless the claimant were enforcing credit for taxes that enjoy absolute priority. If none of the claim is for taxes, a dispute between two creditors will not enable the court to ascertain the prorata dividend corresponding to each, because the rights of other creditors likewise enjoying preference under Article 2242 cannot be ascertained.

In sum, it is to me clear that, whether or not there be a judicial proceeding in rem, i.e., insolvency, bankruptcy or liquidation proceedings, the fact remains that Congress intends that the assets of the insolvent debtor be held, first and above all else, to satisfy in full the unpaid wages and monetary claims of its workers. Translated into the case at bar, a formal declaration of insolvency or bankruptcy or judicial liquidation of the employer's business should not be a price imposed upon the workers to enable them to get their much needed and already adjudicated unpaid wages. This position, I believe, is only in keeping with a fundamental state policy enshrined in the Constitutional mandate to accord protection to labor. The legislative intent being clear and manifest, it is the duty of this Court, I submit, not to decimate but to give it breath and life.

ACCORDINGLY, I vote to DISMISS the DBP petition and to AFFIRM the resolution of the NLRC in favor of LAND. (DBP vs. NLRC. G.R. Nos. 82763-64)

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