DBP vs NLRC (186 SCRA 8413)

Development Bank of the Philippines vs National Labor Relations Commission
186 SCRA 8413 [GR No. 86932 June 27, 1990]

Facts: Philippine Smelters Corporation (PSC), a corporation registered under Philippine law, obtained a loan in 1983 from the Development Bank of the Philippines (DBP), 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 stock holdings in the amount of Php31,000,000 of the total Php80,226,000 subscribed and paid up capital stock.Subsequently, it took over the management of PSC. When PSC failed to pay its obligations with DBP, which amounted to Php75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired the mortgaged real properties and chattels of PSC in the auction sale held on February 25, 1987 and March 4, 1987. PSC’s employees filed a petition against herein petitioner for the unpaid wages and other benefits to which the labor arbiter ordered DBP to pay.

Issue: Whether or not DBP, as foreclosing creditor can be held liable for the unpaid wages, 13th moth pay, incentive leave pay, and separation pay of the employees of PSC.

Held: No. 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, if 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.

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 preference in the discharge of funds of the judgement debtor.

Article 110 of the labor code does not purport to create a lien in favor of workers or on employees for unpaid wages either upon all of the properties or upon any particular property owned b their employer. Claims for unpaid wages do not therefore fall 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 laborer’s 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.


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