COMPARATIVE CASE ANALYSIS ON PREFERENCE OF CREDIT CASES

PNB VS. CRUZ GR NO. 80593

DBP VS. NLRC GR NO. 82763-64

The Basic Issue : Whether Article 110 of the Civil code creates a lien in favor of
workers or employees for unpaid wages upon all the properties and upon any particular
property owned by the Employer.
PNB Vs. CRUZ and DBP Vs. NLRC differ in terms of the Courts interpretation of Article
110, the latter jurisprudence being the later one effectively repeals the former.

Distinction PNB VS. CRUZ DBP VS. NLRC

As to the Parties PNB Mortgagee DBP Mortgagee
Creditor of AMEX Creditor of of Lirag
Mining Textiles
Cruz et al Former LAND the labor
Employees of AMEX Union representing
suing for Lirags separated
Backwages and workers.LAND is
Separation benefits seeking separation
AMEX Mining pay, 13th month
ceased operations pay, gratuity pay,
due to alleged sick leave and
serious financial vacation leave pay
losses Leased its and emergency
equipment and allowance
machineries to TM Lirag Textiles
San Andres Ceased Operations
Development Corp. due to alleged
Did not formally financial reverses,
declare bankruptcy no declaration of
or any insolvency insolvency of
proceedings. Bankruptcy.
TM-San Andres Asset Privatization
Development Corp Trust (APT) became
Lessee of AMEX the transferee of the
Equipment DBP foreclosed assets
mortgaged to PNB. of LIRAG by virtue of
Proclamation 50 and
50-A
As to the type of Machineries and Not indicated except that
Property Mortgaged Equipment (Although not it was sold in a
indicated as to whether foreclosure sale to DBP
they are immovable or the mortgagee-creditor for
movable property P31,346,462.90
presumably mining related
equipment)

As to the award of the Separation pay and back Separation pay and back
NLRC wages amounting wages and other
219,452.03. To properly employment benefits
effectuate the payment of amounting to
the same, the necessary P6,292,380.00 which is to
arrangement should be be paid "out of proceeds
made between of the foreclosed
respondents Amex and properties of Lirag Textile
T.M. San Andres Mills Inc., sold at public
Development Corp. and auction in satisfaction of
Philippine National Bank Lirags indebtedness
(PNB) on their respective
role and participation
herein. For should the
principal respondent be
unable to satisfy these
Awards, the same can be
satisfied from the proceeds
or fruits of its machineries
and equipment being
operated by respondent
T.M. San Andres Dev.
Corp. either by operating
agreement with respondent
Amex or thru lease of the
same from PNB(Creditor-
Mortgagee of the
equipment)
As to the Courts PNB v. Cruz held that Art.
Decision relating to Art 110 accords workers of a
110 bankrupt employer
absolute preference in the
payment of their wages
which shall be paid in full
before claims of
Government and other
creditors may be satisfied.
The Court said the worker
preference established by
Art. 110 may be invoked
with or without a in relation to the Civil
declaration of bankruptcy
or a judicial proceeding for
insolvency.
The Court upheld the
preference accorded to the
private respondents in view
of the provisions of Art. 110
of the Labor Code which
are clear and which admit
of no other interpretation.
The phrase .any provision
of law to the
contrary notwithstanding.
indicates that such
preference
shall prevail despite the
order set forth in Articles
2241 to
2245 of the Civil Code. No
exceptions were provided
under
the said article, henceforth,
none shall be considered.
Furthermore, the Labor
Code was signed into law
decades
after the Civil Code took
effect.
. and the Insolvency Law
In Effect: Article 110 of the
labor code is controlling
over provisions on
In stark contrast DBP v.
NLRC declared that a
preference is not a lien
which attaches to specific
property to DBP.
It further declares:
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
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 proceedings
where the claims of all
creditors, preferred or
non-preferred, may be
adjudicated in a binding
manner. . . . Republic vs.
Peralta (G.R. No. L-
56568, May 20, 1987, 150
SCRA 37).
In the same way that the
Civil Code provisions on
classification of credits
have been brought into
harmony, so also must the
kindred provisions of the
concurrence and Labor Law be made to
preference of credit harmonize with those
provisions of the Civil Code laws.
(Art 2241-2245).
In Effect:
Bearing this in mind, the
Court Article 110 of the Labor
must reiterate the dictum Code does not purport to
laid down in AC Ransom create a lien in favor of
that the workers or employees for
conflict between Art. 110 of unpaid wages either upon
the Labor Code and all of the properties or
Articles 2241 to upon any particular
2245 of the Civil Code property owned by their
must be resolved in favor employer. Claims for
of the former. unpaid wages do not
therefore fall at all within
A contrary ruling would the category of specially
defeat the purpose for preferred claims
which Art. 110 established under Articles
was intended; that is, for 2241 and 2242 of the Civil
the protection of the Code, except to the extent
working class that such complaints for
pursuant to the never- unpaid wages are already
ending quest for social covered by Article 2241,
justice
Hence, PNBs Claim
which based on a
mortgage anchored to
Civil law has preference
because Art. 2241-2245
gives it higher priority over
an ordinarily preferred
credit (labor wage claims)

Moreover,. 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.

The Supreme Court upheld

As to payment of unpaid the decisions of both the The right to preference
wages as per decision of Labor Arbiter and NLRC given to workers under
Supreme Court with regards to the Article 110 of the Labor
laborers claims of unpaid Code cannot exist in any
wages. It must be noted effective way prior to the
the amount claimed by time of its presentation in
petitioner PNB for the distribution proceedings.
satisfaction of the
obligations of AMEX is The institution of
relatively insubstantial and insolvency proceedings
is insignificant. before the proper court
By contrast, that same will effect proper inventory
amount could mean of all the assets of LIRAG
starvation or subsistence of TEXTILE MILLS and
the working men. proper determination of its
creditors preferences and
There was no requirement such claims shall be
of institution of insolvency discharged in a binding
proceedings before the and conclusive manner.
awarding of the unpaid
wages.

Miscellaneous Distinctions:
In PNB Vs. Cruz, procedural matters gave the Court much more leeway in deciding in
favor of the employees:

At the outset, petitioner PNB did not question the validity of the workers' claim for
unpaid wages with respect to the mortgaged properties of AMEX, provided that the
same be limited to the unpaid wages, and to the exclusion of termination pay. In the
instant petition however, PNB starts off with the question of whether or not the workers'
lien take precedence over any other claim considering that this Court has ruled
otherwise in Republic vs. Peralta. 5

This Court cannot allow the petitioner to alter its stance at this stage inasmuch as it is
deemed to have acquiesced in the decision of the labor arbiter concerning payment of
unpaid wages. The records reveal that the petitioner failed to question the same on
appeal. Hence, it is now barred from claiming that the workers' lien applies only to the
products of their labor and not to other properties of the employer which are
encumbered by mortgage contracts or otherwise.

Subsequent Jurisprudence have consistently affirmed DBP Vs. NLRC. (DBP Vs. NLRC
and Leonora Ang GR 108031, 1995; DBP Vs. NLRC and National Mines and Allied
Workers Union G.R. No. 97175 May 18, 1993)

Prepared By:

Jim Louis V Ibanez

Rondell Q. Feliciano, Jr.