Palileo vs. Cosio

A mortgagee who independently insures the mortgaged property in her own name and for her own interest is entitled to the insurance proceeds in case of loss, but the proceeds do not inure to the mortgagor’s benefit and the mortgagee’s claim against the mortgagor passes by subrogation to the insurer to the extent of the insurance money paid.

On December 18, 1951, Cherie Palileo obtained a ₱12,000 loan from Beatriz Cosio. Their agreement provided that Palileo would pay monthly interest of ₱250; that Cosio would deduct from the loan proceeds certain obligations of Palileo to third persons amounting to ₱4,550, plus ₱250 as first month’s interest; and that, after those deductions, Cosio would deliver only the remaining balance. To secure the loan, Cosio required Palileo to sign a document denominated “Conditional Sale of Residential Building,” which purported to convey to Cosio, with right to repurchase, a two-story building of strong materials belonging to Palileo. The document did not express the true intention of the parties, which was merely to place the property as security for payment of the loan.

Thereafter, Palileo paid interest totaling ₱2,250, corresponding to nine months from December 18, 1951 at ₱250 a month, an amount the trial court found exceeded the maximum interest allowed by law. After execution of the document, Cosio insured the building against fire with Associated Insurance & Surety Co., Inc. for ₱15,000, with the policy issued in Cosio’s name. The building was partly destroyed by fire, and after demand Cosio collected an indemnity of ₱13,107 from the insurer. Palileo demanded that the insurance proceeds be credited to her obligation, but Cosio refused.

Palileo then sued in the Court of First Instance of Manila, praying that the transaction be declared a loan, that the document be declared an equitable mortgage securing payment, that Cosio be ordered to apply the insurance proceeds to the debt, and that Cosio pay the difference between the debt and the insurance received plus the interest already paid. Cosio answered that the transaction was a sale with option to repurchase, that Palileo failed to return the price within the period, and that ownership had consolidated in Cosio.

The trial court found that the transaction shown in the document was a loan secured by an equitable mortgage; that Palileo had paid ₱2,250 as nine months’ interest at ₱250 a month; that Cosio had insured the building in her own name, collected ₱13,107 after the fire, and refused to credit those proceeds to Palileo’s obligation. Those findings framed the Supreme Court’s review of the trial court’s application of the law.

• Excusable Negligence: Defendant-appellant Beatriz Cosio argued that the lower court should have set aside the judgment and reopened the case because her original counsel, Atty. Leon Ma. Guerrero, failed to appear at trial due to mistake or excusable negligence. His appointment as Undersecretary of Foreign Affairs on January 4, 1954 was sudden and unexpected, leaving him unable to wind up private cases, and his heavy official duties, including work of as much as fourteen hours daily, caused the trial date to escape his memory.

• Reopening of Trial: Whether the lower court committed grave abuse of discretion in not reopening the case to allow defendant to present evidence, considering that her counsel’s failure to appear was allegedly due to mistake or excusable negligence.

• Application of Insurance Proceeds: Whether the trial court erred in treating the ₱13,107 insurance proceeds collected by Cosio as fully compensating Palileo’s ₱12,000 obligation and in ordering Cosio to refund the ₱1,107 difference, absent proof that the insurance was taken for the mortgagor’s benefit.

• Reopening of Trial: No. The denial was within the trial court’s sound discretion, and no grave abuse was shown because counsel had almost one month’s notice and was a lawyer of stature, ability, and experience.

• Application of Insurance Proceeds: No. The lower court was not justified in crediting the proceeds to Palileo because a mortgagee who independently insures her own interest retains the proceeds, but her claim against the mortgagor passes to the insurer by subrogation.

• Reopening of Trial: A motion to set aside a judgment on the ground of mistake or excusable negligence is addressed to the sound discretion of the court, and an order issued in the exercise of that discretion is not disturbed unless grave abuse is shown. Atty. Guerrero’s appointment as Undersecretary of Foreign Affairs was sudden, and his official duties were heavy, but he had almost one month’s notice of the trial date. Considering his stature, ability, and experience, the Supreme Court concluded that the trial court did not abuse its discretion in refusing to reconsider its decision.

• Application of Insurance Proceeds: The trial court’s ruling ran counter to the rule governing insurance taken by a mortgagee independently of the mortgagor. Where a mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of loss, but his claim against the mortgagor passes by subrogation to the insurer to the extent of the money paid. The proceeds do not inure to the mortgagor’s benefit, and the mortgage debt remains unchanged. This majority rule, based on the analogy of the insurer to a surety, was adopted over the minority view allowing the mortgagee to retain the proceeds and still recover the whole debt. The local authority of San Miguel Brewery vs. Law Union was followed: the mortgagee may recover on the policy only to the extent of his credit at the time of loss, and the mortgagor has no right of action against the mortgagee on the policy. Accordingly, Cosio properly collected the ₱13,107 insurance proceeds, was not required to account for them to Palileo, and was barred from claiming payment of the loan from Palileo because the insurer was subrogated to her rights to that extent.

• Mortgagee’s independent insurance and subrogation — Where a mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, the mortgagee is entitled to the insurance proceeds in case of loss. The proceeds do not inure to the mortgagor’s benefit, and the amount due under the mortgage debt remains unchanged; however, the mortgagee may not retain both the proceeds and the claim against the mortgagor, because the claim passes by subrogation to the insurer to the extent of the insurance money paid. The Court applied this majority rule to allow Cosio to retain ₱13,107, while barring her from claiming payment of the ₱12,000 loan from Palileo.

• Discretion to set aside judgment — A motion to set aside a judgment or order on the ground of mistake or excusable negligence is addressed to the sound discretion of the court, and an order issued in the exercise of that discretion is not disturbed on review unless grave abuse is shown. The Court found no grave abuse in refusing to reopen, given counsel’s stature, ability, experience, and almost one month’s notice of trial.

• Equitable mortgage — A document styled as a conditional sale with right to repurchase may be declared an equitable mortgage where it did not express the true intention of the parties, which was merely to place the property as security for payment of a loan. The Court sustained the trial court’s characterization of Exhibit A as an equitable mortgage securing ₱12,000.

• "The rule is that 'where a mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim against the mortgagor, but is passed by subrogation to the insurer to the extent of the money paid.' (Vance on Insurance, 2d ed., p. 654)" — This is the controlling statement of the majority rule applied to the insurance proceeds.

• "Or, stated in another way, 'the mortgagee may insure his interest in the property independently of the mortgagor. In that event, upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid.' (Vance on Insurance, 3rd ed., pp. 772-773)" — This formulation clarifies that the mortgagor has no right to the proceeds and that the mortgage debt is not reduced, although the mortgagee’s claim passes to the insurer.

• "Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before the date set for trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision." — This passage states the ratio for sustaining the denial of the motion to reopen.

• "The general rule and the weight of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation of the insurer to that of a surety." — This explains the theoretical basis for the majority rule the Court adopted.

• Coombs vs. Santos, 24 Phil. 446; Daipan vs. Sigabu, 25 Phil. 184 — Cited for the rule that the granting of a motion to set aside a judgment on the ground of mistake or excusable negligence is addressed to the sound discretion of the court.

• San Miguel Brewery vs. Law Union, 40 Phil. 674 — Followed as Philippine authority that a mortgagee who insures his own interest in the mortgaged property may recover only to the extent of his credit at the time of loss, and the mortgagor has no right of action against the mortgagee on the policy.

Bengzon, Montemayor, Reyes, A., Jugo, Labrador, Concepcion, and Reyes, J.B.L., JJ., concurred.