The Yek Tong Fire and Marine Insurance Co., Ltd. vs. Pelagio Yusingco, et al.

A credit for repairs made on a vessel, assigned to the guarantor who paid the repair obligation, enjoys special preference in the proceeds of the vessel's judicial sale under article 1922 and article 1926, rule 4, of the Civil Code, superior to a mortgage credit; a vessel is personal property, and the mortgagee that purchases the vessel at the execution sale with knowledge of its own mortgage extinguishes its credit by merger.

Pelagio Yusingco owned the steamship Yusingco, and Yu Seguioc held a power of attorney to administer, lease, mortgage, and sell Yusingco's properties, including vessels. The plaintiff, Yek Tong Fire and Marine Insurance Co., Ltd., was an insurance company that became a mortgage creditor of the vessel; Vicente Madrigal was a guarantor of repair costs later assigned the repair credit. The dispute concerns the order of preference among credits satisfied from the proceeds of a judicial sale of a vessel, governed by the Code of Commerce and the Civil Code.

Pelagio Yusingco owned the steamship Yusingco. On November 19, 1927, he executed a power of attorney in favor of Yu Seguioc to administer, lease, mortgage, and sell his properties, including his vessels or steamships (Exhibit N). Acting as Yusingco's attorney in fact, Yu Seguioc mortgaged the steamship Yusingco to the plaintiff, Yek Tong Fire and Marine Insurance Co., Ltd., with the approval of the Bureau of Customs, to answer for any amount the plaintiff might pay in Yusingco's name on account of a promissory note for P45,000 executed by it upon receipt of that sum as a loan from the China Banking Corporation on September 25, 1928, and on account of a guaranty in the sum of P20,000 subscribed by it in favor of the same bank on the 17th of that month and year. The deed, Exhibit A, was executed in absolute conformity with the Chattel Mortgage Law.

In February, 1930, and April, 1931, the steamship Yusingco needed repairs, which were made by the Earnshaw Docks & Honolulu Iron Works upon petition of A. Yusingco Hermanos, which according to documentary evidence was co-owner of Pelagio Yusingco. The repairs were made upon the guaranty of Vicente Madrigal at a cost of P8,244.66. When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay that sum, Madrigal paid it with stipulated interest at 9 per cent per annum on March 9, 1932, because he was bound by the bond he had filed; his payment amounted to P8,777.60. On that date, after the credit of Earnshaw Docks & Honolulu Iron Works for the repairs had already been paid, that company assigned its credit against A. Yusingco Hermanos to Madrigal by instrument Exhibit 5, duly registered in the Bureau of Customs.

Some days later, upon discovering that he would not be reimbursed for the repairs, Madrigal brought an action against Pelagio Yusingco and A. Yusingco Hermanos to compel reimbursement, giving rise to civil case No. 41654 of the Court of First Instance of Manila (Exhibit 6). Judgment was rendered in his favor, ordering the Yusingcos to pay him P3,269.66 plus interest at 9 per cent per annum from May 6, 1931, with costs. The judgment provided that upon their failure to pay, a writ of execution would issue to have the steamship Yusingco sold at public auction to satisfy the amounts from the proceeds.

Because neither Pelagio Yusingco nor A. Yusingco Hermanos paid the judgment in civil case No. 41654, Madrigal obtained the corresponding writ of execution (Exhibit 8). Before the sale of the steamship Yusingco under that writ could be carried out, the plaintiff filed with the defendant sheriff a third-party claim demanding the ship for itself, alleging that it had been mortgaged to it long before the issuance of the writ and that it was therefore entitled to possession. The sheriff informed Madrigal that if he wished the execution to proceed, he should file the indemnity bond required by section 451 of Act No. 190. Madrigal did so, but to prevent him and the sheriff from proceeding with the execution, the plaintiff instituted this case in the court of origin and asked for a writ of preliminary injunction addressed to those two defendants to restrain them from selling the steamship Yusingco at public auction. The writ was issued on August 19, 1932, and was later dissolved upon Madrigal's filing of a P5,000 bond; the ship was then sold at public auction on September 19, 1932.

The plaintiff itself purchased the steamship Yusingco at the public auction as the highest bidder, having made the highest bid of P12,000 (Exhibit 8). Of that amount, the defendant sheriff turned over P10,195 to Vicente Madrigal in payment of his judgment credit, distributing the balance in the manner stated in Exhibit 9. When Madrigal instituted civil case No. 41654 in March, 1932, the steamship Yusingco was already in the possession of Pelagio Yusingco in the port of Surigao (Stipulation of Facts, paragraph VI). The payments made by the plaintiff on account of the credit of the China Banking Corporation against Pelagio Yusingco, by virtue of the mortgage deed executed in its favor through an attorney in fact, amounted to only P16,190.83 plus P700 as insurance premium.

• Vicente Madrigal (defendant-appellant) — Preference of Credit: Madrigal argued that the lower court erred in holding that the plaintiff's claim as mortgagee was superior to his as assignee of the preferred credit of Earnshaw Docks & Honolulu Iron Works, which had made repairs on the steamship Yusingco.
• Vicente Madrigal — Turnover of Proceeds: He argued that the lower court erred in ordering him to turn over to the plaintiff the amount of money he received from the provincial sheriff of Surigao, which formed part of the proceeds of the auction sale of the steamship Yusingco.
• Vicente Madrigal — New Trial: He argued that the lower court erred in denying his motion for a new trial based upon his allegation that the decision was contrary to law and the evidence taken.
• Plaintiff-appellant — Code of Commerce Article 580: The plaintiff contended that, as the parties were merchants, the Code of Commerce governed their acts under article 2, and that if Madrigal enjoyed any preferred right, it could only be based on article 580, which requires repair credits to appear by contracts recorded in the registry of vessels or, if contracted while the vessel is on a voyage and has not returned to its port of registry, to be made under the required authority and entered in the certificate of registry; because the repairs were not for averages suffered during the last voyage, Madrigal could not invoke a preferential right as guarantor.
• Plaintiff-appellant — Absolution of Sheriff: The plaintiff argued that the lower court erred in absolving the provincial sheriff of Surigao and in denying its motion for a new trial on the ground that the absolution was not supported by the evidence and was contrary to law.

• Preference of Credits: Whether the plaintiff's claim as mortgagee is superior to Vicente Madrigal's claim as assignee of the preferred credit of Earnshaw Docks & Honolulu Iron Works for repairs made on the steamship Yusingco.
• Turnover of Auction Proceeds: Whether Vicente Madrigal should be ordered to turn over to the plaintiff the amount he received from the provincial sheriff of Surigao as part of the proceeds of the auction sale of the steamship Yusingco.
• Absolution of the Sheriff: Whether the lower court erred in absolving the provincial sheriff of Surigao from the complaint.
• Other Assigned Errors: Whether the lower court erred in denying the parties' motions for a new trial based on the ground that the decision was contrary to law and the evidence.

• Preference of Credits: Yes. Vicente Madrigal's credit as assignee of Earnshaw's repair credit enjoyed preference over the plaintiff's mortgage credit under Civil Code articles 1922 and 1926, rule 4; the plaintiff's mortgage credit was extinguished by merger when it purchased the vessel at the execution sale.
• Turnover of Auction Proceeds: No. The order requiring Madrigal to turn over the P10,195 to the plaintiff was reversed because Madrigal was entitled to that amount as the preferred credit.
• Absolution of the Sheriff: Yes. The lower court correctly absolved the provincial sheriff from the complaint, and that portion of the judgment was affirmed.
• Other Assigned Errors: Not passed upon. The Court found it unnecessary to pass upon the other errors assigned by the parties after resolving the preference issue.

• Preference of Credits: The plaintiff contended that Code of Commerce article 580 governed and that Madrigal could not claim preference because the repairs were not for averages suffered during the last voyage and the credit did not meet the recording requirements. The Court assumed this to be true but held it did not follow that the plaintiff could recover from Madrigal what he received from the sheriff, nor that Madrigal had no other right of action against the Yusingcos for reimbursement, especially since Earnshaw assigned its credit to him. Under Civil Code article 1922, paragraph 1, Earnshaw was entitled to recover the cost of repairs, as supported by International Banking Corporation vs. Corrales and Bank of the Philippine Islands vs. Walter A. Smith & Co., because the steamship Yusingco was in the possession of its owners, Pelagio Yusingco and A. Yusingco Hermanos, before and at the time of the judicial sale. Madrigal, having paid the obligation as guarantor and received the assignment, succeeded to Earnshaw's right to the same extent. As assignee, he was entitled to exercise the right and prosecute all actions belonging to the assignor under Civil Code articles 1212 and 1528 and section 114 of Act No. 190. When the plaintiff attempted to foreclose its mortgage by filing a third-party claim, its only right was to sell the vessel judicially or extrajudicially upon default and apply the proceeds to its mortgage credit, or to collect any deficiency from other property of the debtors; because the vessel was in custodia legis, it could neither take possession nor sell it under the mortgage contract. After the judicial sale in civil case No. 41654, the plaintiff's only remaining right was to collect its mortgage credit from the purchaser at public auction, since a mortgage subjects the property to the obligation whoever possesses it under Civil Code article 1876. But the plaintiff itself was the purchaser, with full knowledge of its mortgage credit, so its credit was extinguished by merger of the rights of creditor and debtor under Civil Code articles 1156 and 1192. The Court concluded that Madrigal enjoyed preference in payment of his judgment credit from the proceeds by virtue of the assignment of Earnshaw's credit, as provided by Civil Code article 1922 and article 1926, rule 4, notwithstanding the preference referred to in rule 1. Rule 4 provides that in all other cases the value of the personal property shall be applied pro rata to the payment of credits which enjoy special preference with respect to such property; a vessel is personal property under Philippine Refining Co. vs. Jarque, and rule 4 refers to the credits stated in article 1922.
• Turnover of Auction Proceeds: Because Madrigal's assigned repair credit was preferred, the lower court erred in ordering him to turn over to the plaintiff the P10,195 he received from the provincial sheriff out of the proceeds of the sale. The appealed judgment was reversed on that point.
• Absolution of the Sheriff: The lower court's absolution of the provincial sheriff of Surigao was affirmed. The Court also noted that the plaintiff had to date taken no action against the sheriff for damages upon the indemnity bond filed by Madrigal under section 451 of Act No. 190, as amended by Act No. 4108, and that under section 2 of Act No. 4108 all rights of action against indemnity bonds must be filed within the inextensible period of 120 days effective December 6, 1933.
• Other Assigned Errors: The Court found it unnecessary to pass upon the other errors assigned by the parties after resolving the preference issue.

• Preference of repair credits over mortgage credit — Under article 1922, paragraph 1, of the Civil Code, a person who repairs a vessel in the possession of its owners is entitled to recover the cost of repairs; that credit is specially preferred as to the vessel under article 1926, rule 4, which applies to personal property. A vessel is personal property. The Court applied this to hold that Vicente Madrigal, as assignee of Earnshaw Docks & Honolulu Iron Works' repair credit, enjoyed preference in the proceeds of the judicial sale over the plaintiff's mortgage credit.
• Rights of an assignee — An assignee is entitled to exercise the right and prosecute all actions belonging to the assignor under articles 1212 and 1528 of the Civil Code and section 114 of Act No. 190. Because Earnshaw assigned its repair credit to Madrigal after he paid as guarantor, Madrigal acquired Earnshaw's right to recover the cost of repairs and its preference.
• Mortgagee's remedies when vessel is in custodia legis — A mortgagee's right upon default is to sell the mortgaged vessel judicially or extrajudicially and apply the proceeds to the mortgage credit, or to collect any deficiency from other property of the debtor. Where the vessel is in custodia legis, the mortgagee cannot take possession or sell it under the mortgage contract. After a judicial sale, the mortgagee's only right is to collect from the purchaser, since a mortgage follows the property into whosever possession it may be.
• Merger extinguishing mortgage credit — Obligations are extinguished by merger of the rights of creditor and debtor under articles 1156 and 1192 of the Civil Code. The plaintiff's mortgage credit was extinguished when it purchased the steamship Yusingco at the execution sale with full knowledge of its own mortgage.
• Code of Commerce article 580 requirements — For repair credits to enjoy preference under article 580 of the Code of Commerce, they must appear by contracts recorded in the registry of vessels, or if contracted while the vessel is on a voyage and has not returned to its port of registry, they must be made under the authority required and entered in the certificate of registry. The Court assumed the plaintiff's contention that Madrigal could not invoke this preference, but held it did not preclude Madrigal's Civil Code preference as assignee.
• Indemnity bond period — Under section 2 of Act No. 4108, all rights of action against indemnity bonds must be filed within the inextensible period of 120 days effective December 6, 1933. The Court noted the plaintiff had taken no action against the sheriff on the indemnity bond filed under section 451 of Act No. 190.

• "Vicente Madrigal enjoys preference in the payment of his judgment credit with the proceeds of the sale of the steamship Yusingco, by virtue of the assignment to him of the credit of the Earnshaw Docks & Honolulu Iron Works..." — States the ratio decidendi on the preference of Madrigal's assigned repair credit over the plaintiff's mortgage credit.
• "Rule 4 of the above-cited article 1926 reads: "In all other cases the value of the personal property shall be applied pro rata to the payment of the credits which enjoy special preference with respect to such property," and a vessel is personal property, as stated in the case of Philippine Refining Co. vs. Jarque (61 Phil., 229)." — Defines the controlling rule and confirms that a vessel is personal property for purposes of the preferred-credit provision.
• "When the plaintiff attempted to foreclose the mortgage constituted in its favor, first by filing its third party claim in civil case No. 41654 wherein the writ of execution, by virtue of which the steamship Yusingco was sold at public auction, was issued, its only right with respect to said vessel was to sell it judicially or extrajudicially in accordance with law, upon default in the performance of the conditions of the mortgage contract entered into between it and the owners thereof, in order to apply the proceeds of the sale to its mortgage credit against said owners, or at least against Pelagio Yusingco, if such proceeds are sufficient..." — Explains the mortgagee's remedies and the effect of the vessel being in custodia legis.
• "After the steamship Yusingco had been sold by virtue of the judicial writ issued in civil case No. 41654 for the execution of the judgment rendered in favor of Vicente Madrigal, the only right left to the plaintiff was to collect its mortgage credit from the purchaser thereof at public auction, inasmuch as the rule is that a mortgage directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created (article 1876, Civil Code); but it so happens that it can not take such steps now because it was the purchaser of the steamship Yusingco at public auction, and it was so with full knowledge that it had a mortgage credit on said vessel. Obligations are extinguished by the merger of the rights of the creditor and debtor (articles 1156 and 1192, Civil Code)." — States the merger rationale that extinguished the plaintiff's mortgage credit.

• International Banking Corporation vs. Corrales, 10 Phil., 435 — Cited to support that Earnshaw Docks & Honolulu Iron Works was entitled to recover the cost of repairs under article 1922, paragraph 1, of the Civil Code.
• Bank of the Philippine Islands vs. Walter A. Smith & Co., 55 Phil., 533 — Cited for the same proposition on the repairer's right to recover the cost of repairs.
• Bachrach Motor Co. vs. Summers, 42 Phil., 3 — Cited for the mortgagee's right, upon default, to sell the mortgaged vessel judicially or extrajudicially and apply the proceeds to its mortgage credit.
• Philippine Refining Co. vs. Jarque, 61 Phil., 229 — Cited for the rule that a vessel is personal property, which made article 1926, rule 4, of the Civil Code applicable.

• Article 2, Code of Commerce — The plaintiff invoked this provision to argue that the parties, as merchants, were governed by the Code of Commerce.
• Article 580, Code of Commerce — The plaintiff contended that any preference of Madrigal could only be based on this article, which governs preference of creditors in judicial sales of vessels and requires repair credits to appear by contracts recorded in the registry of vessels or, if contracted while the vessel is on a voyage and has not returned to its port of registry, to be made under the required authority and entered in the certificate of registry. The Court assumed this contention but held it did not preclude Madrigal's Civil Code preference.
• Article 1922, paragraph 1, Civil Code — The Court relied on this provision to hold that Earnshaw Docks & Honolulu Iron Works was entitled to recover the cost of repairs made on the steamship Yusingco, and that Madrigal, as assignee, succeeded to that right.
• Article 1926, rule 4, Civil Code — Provides that in all other cases the value of personal property shall be applied pro rata to the payment of credits which enjoy special preference with respect to such property. The Court applied it to the vessel as personal property and to the repair credit under article 1922.
• Article 1926, rule 1, Civil Code — The Court referred to the preference for credits secured by a pledge and held that it did not defeat Madrigal's preference under article 1922 and article 1926, rule 4.
• Articles 1212 and 1528, Civil Code; Section 114, Act No. 190 — Cited to establish that an assignee is entitled to exercise the right and prosecute all actions belonging to the assignor; Madrigal thus acquired Earnshaw's repair credit and preference.
• Article 1876, Civil Code — Provides that a mortgage directly and immediately subjects the property to the fulfillment of the obligation secured, whoever its possessor may be. The Court used it to explain that after the judicial sale, the plaintiff's only right was to collect from the purchaser.
• Articles 1156 and 1192, Civil Code — Provide that obligations are extinguished by merger of the rights of creditor and debtor. The Court applied them to extinguish the plaintiff's mortgage credit when it purchased the vessel at the execution sale with knowledge of its mortgage.
• Section 451, Act No. 190 — Required the indemnity bond that Madrigal filed to allow the execution sale to proceed after the plaintiff's third-party claim.
• Act No. 4108, section 2 — Provides that all rights of action against indemnity bonds must be filed within the inextensible period of 120 days effective December 6, 1933. The Court noted the plaintiff had taken no action against the sheriff on the bond.

Avanceña, C.J., Villa-Real, Abad Santos, Laurel and Concepcion, JJ., concur.