THE YEK TONG LIN FIRE & MARINE INSURANCE CO., LTD., PLAINTIFF AND APPELLANT, VS. PELAGIO YUSINGCO ET AL., DEFENDANTS. VICENTE MADRIGAL, APPELLANT.

The plaintiff, Yek Tong Lin Fire & Marine
Insurance Co., Ltd. and the defendant Vicente Madrigal appealed from
the judgment of the Court of First Instance of Manila, ordering (a) the defendant Pelagio Yusingco
to pay to the plaintiff the sum of P17,590.85 with interest thereon at
12 per cent per annum from August 10, 1932, until fully paid, plus the
sum of P4,500 as attorney’s fees and the costs of the suit; (b)
the defendant Vicente Madrigal to turn over to the plaintiff the amount
of money received by him in October, 1932, from his co-defendant
provincial sheriff of Surigao, and (c) absolving said sheriff from the complaint.

The appeal of the defendant Vicente Madrigal according to him, is based
on the ground that the lower court committed the following alleged
errors:

“I. In holding that the claim of the plaintiff, as
mortgagee, is superior to his, as assignee of the preferred credit of
Earnshaw Docks & Honolulu Iron Works, which had made some repairs
on the steamship Yusingco;

“II. In ordering him to
turn over to the plaintiff the amount of money received by him from the
defendant provincial sheriff of Surigao, named Protolico P. Egay, which
formed a part of the proceeds of the auction sale of the steamship
Yusingco, and

“III. In denying his motion for a new trial
based upon his allegation that the decision is contrary to law and the
evidence taken.”

The plaintiff’s appeal, in turn, is due to the fact that, according
to it, the lower court erred in absolving the defendant provincial
sheriff of Surigao, and in denying its motion for a new trial based on
the ground that the decision, in so far as it absolves said sheriff
from the complaint, is not supported by the evidence and is contrary to
law.

The facts pertinent to the case, as inferred from the stipulation
submitted to the lower court by the parties and from the same evidence
taken during the trial, may be summarized as follows:

The defendant Pelagio Yusingco was the owner of the steamship Yusingco
and, as such, he executed, on November 19, 1927, a power of attorney in
favor of Yu Seguioc to administer, lease, mortgage and sell his
properties, including his vessels or steamships (Exhibit N). Yu
Seguioc, acting as such attorney in fact of Pelagio Yusingco,
mortgaged to the plaintiff Yek Tong Lin Fire & Marine Insurance
Co., Ltd., with the approval of the Bureau of Customs, the steamship Yusingco
belonging to the defendant, to answer for any amount that said
plaintiff might pay in the name of the defendant on account of a
promissory note for P45,000 executed by it, upon receipt of said sum as
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 said bank on the 17th of said month and year, the deed, Exhibit A,
having been executed to that effect, in absolute conformity with the
Chattel Mortgage Law.

One year and some months later, or in February, 1930, and in April, 1931, the steamship Yusingco needed some repairs which were made by the Earnshaw Docks & Honolulu Iron Works upon petition of A. Yusingco Hermanos which, according to documentary evidence of record, was co-owner of Pelagio Yusingco. The repairs were made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of P8,244.66.

When neither A. Yusingco Hermanos nor Pelagio Yusingco
could pay said sum to the Earnshaw Docks & Honolulu Iron Works, the
defendant and appellant Vicente Madrigal had to make payment thereof
with the stipulated interest thereon, which was at the rate of 9 per
cent per annum, on March 9, 1932, because he was bound thereto by
reason of the bond filed by him, the payment then made by him having
amounted to P8,777.60. On said date, but after the credit of the
Earnshaw Docks & Honolulu Iron Works, for the repairs made by it on
the steamship Yusingco had already been paid, said company assigned its credit against A. Yusingco
Hermanos to the defendant and appellant Vicente Madrigal, by executing
to that end the instrument Exhibit 5, which was duly registered in the
Bureau of Customs. Some days later, when said defendant discovered that
he was not to be reimbursed for the repairs made on the steamship
Yusingco, he brought an action against his codefendant Pelagio Yusingco and A. Yusingco
Hermanos to compel them to reimburse him, thereby giving rise to civil
case No. 41654 of the Court of First Instance of Manila, entitled
“Vicente Madrigal, plaintiff, vs. Pelagio Yusingco and A. Yusingco Hermanos, defendants” (Exhibit 6), which resulted in a judgment favorable to him and adverse to the Yusingcos,
as the latter were ordered to pay him the sum of P3,269.66 plus
interest thereon at 9 per cent per annum from February 27, 1930, and
also to pay him the sum of P4,97,5 plus interest thereon at said rate
of 9 per cent per annum from May 6, 1931, with the costs of the suit.
It was provided in the judgment that upon failure of the Yusingcos to pay the above-stated amounts to Vicente Madrigal, a writ of execution would be issued in order to have the steamship Yusingco sold at public auction for the purpose of satisfying said amounts with the proceeds thereof.

Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco
Hermanos paid the amount of the judgment rendered in civil case No.
41654, in favor of the defendant and appellant Vicente Madrigal, the
latter sought and obtained from the Court of First Instance, which
tried the case, the issuance of the corresponding writ of execution
(Exhibit 8). However, before the sale of the steamship Yusingco,
by virtue of the writ of execution so issued, was carried out, the
plaintiff and appellant filed with the defendant sheriff a third party
claim demanding said ship for himself, alleging that it had been
mortgaged to him long before the issuance of said writ and, therefore,
he was entitled to the possession thereof. The defendant sheriff then
informed the defendant and appellant Vicente Madrigal that if he wished
to have the execution sought by him carried out, he should file the
indemnity bond required by section 451 of Act No. 190. This was done by
Vicente Madrigal, but in order to prevent him and the sheriff from
proceeding with the execution, the plaintiff and appellant instituted
this case in the court of origin and asked for the issuance of a writ
of preliminary injunction addressed to said two defendants to restrain
them from selling the steamship Yusingco at public auction.
The writ of preliminary injunction, which was issued on August 19,
1932, was later dissolved, the defendant and appellant Vicente Madrigal
having filed a bond of P5,000. This left the preliminary injunction
unimpaired and valid for the sale of the steamship Yusingco
at public auction. For this reason, said ship was sold at public
auction on September 19, 1932, and was purchased, under the
circumstances, by the plaintiff and appellant itself, which was the
highest bidder, having made the highest bid of P12,000 (Exhibit 8). Of
said 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. It is said sum of P10,195 which the
lower court ordered Vicente Madrigal to turn over to the plaintiff.

In addition to the foregoing facts, it should be stated that when
the defendant and appellant Vicente Madrigal instituted said civil case
No. 41654 against Pelagio Yusingco and A. Yusingco Hermanos in March, 1932, the steamship Yusingco was already in the possession of Pelagio Yusingco in the port of Surigao (Stipulation of Facts, paragraph VI).

It should be added further that the payments made by the plaintiff
on account of the credit of the China Banking Corporation against
Pelagio Yusingco, by virtue of the deed of mortgage executed
by the latter in favor of said plaintiff, through an attorney in fact,
encumbering the steamship Yusingco, amounted to only
P16,190.83 plus P700 as insurance premium, which are still less than
that adjudicated to the plaintiff by the lower court.

The parties seem to believe that the important if not the only
question to be decided is whether or not the credit of the plaintiff,
as mortgage creditor of Pelagio Yusingco, is superior to that of Vicente Madrigal, as judgment creditor of said Pelagio Yusingco and A. Yusingco Hermanos. If the plaintiff is to be believed, it seems clear that as they (the plaintiff, Pelagio Yusingco, Vicente Madrigal, and A. Yusingco
Hermanos) are merchants, the provisions of the Code of Commerce should
govern their acts (article 2, Code of Commerce). The plaintiff contends
that if Vicente Madrigal enjoyed any preferred right at all, it could
have been no other than that based upon article 580 of said Code. The
pertinent part of said article reads:

“In all judicial sales of vessels for the payment of creditors, the said creditors shall have preference in the order stated:

“8. The part of the price which has not been paid the last vendor, the
credits pending for the payment of material and work in the
construction of the vessel, when it has not navigated, and those
arising from the repair and equipment of the vessel and its
provisioning with victuals and fuel during its last voyage.

“In order that the credits provided for in this subdivision may enjoy
the preference they must appear by contracts recorded in the registry
of vessels, or if they were contracted for the vessel while on a voyage
and said vessel has not returned to the port of her registry, they must
be made under the authority required for such cases and entered in the
certificate of registry of the said vessel.”

Basing its opinion upon the foregoing provision of law, the plaintiff contends that as the repairs made on the steamship Yusingco
were not for averages suffered during its last voyage, the defendant
Vicente Madrigal cannot invoke preferential right for having paid for
them as guarantor. Granting this to be true, it does not follow that
the plaintiff is entitled to recover from said Vicente Madrigal what
the latter received from the defendant provincial sheriff of Surigao,
by virtue of the execution of the judgment rendered in his favor.
Neither does it follow that said defendant (Vicente Madrigal) has no
other right of action against Pelagio Yusingco and A. Yusingco
Hermanos for the recovery of what he had paid for them, particularly
when the Earnshaw Docks & Honolulu Iron Works, which had performed
the repairs in question, assigned to him the credit it had against
them. There is no doubt that under the provisions of article 1922,
paragraph 1, of the Civil Code, the Earnshaw Docks & Honolulu Iron
Works was entitled to recover the cost of said repairs (International
Banking Corporation vs. Corrales, 10 Phil., 435; Bank of the Philippine Islands vs. Walter A. Smith & Co., 55 Phil., 533), inasmuch as the steamship Yusingco,
before as well as at the time of its sale at public auction by virtue
of a judicial writ, was in the possession of the owners thereof,
Pelagio Yusingco and A. Yusingco Hermanos, debtors
of the plaintiff. If the Earnshaw Docks & Honolulu Iron Works had
such right, naturally the defendant and appellant Vicente Madrigal
later xhad such right, to the same extent as the former, by virtue of
the assignment made to him after he, as guarantor, paid the obligation
contracted by the Yusingcos with the Earnshaw Docks &
Honolulu Iron Works for the repair of said vessel. This is necessarily
so because the assignee is entitled to exercise the right and prosecute
all actions belonging to the assignor (articles 1212 and 1528, Civil
Code; section 114, Act No. 190).

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 (Bachrach Motor Co. vs.
Summers, 42 Phil., 3), and if insufficient, to collect the balance
thereof on other property belonging to said defendants (Exhibit C, page
3). The steamship Yusingco was then in custodia legis
and, under the circumstances, it could neither take possession thereof
nor sell it pursuant to the conditions of its mortgage contract.

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).

The conclusion arrived at by this court is that the defendant and
appellant 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, because it is so provided not only in
article 1922 of the Civil Code but also in article 1926, rule 4,
thereof, notwithstanding the preference referred to in rule 1 of the
latter article, which provides that credits secured by a pledge exclude
all others to the extent of the value of the thing pledged, inasmuch as
the plaintiff’s credit is not secured by pledge but by mortgage, so
much so that the mortgage deed executed in its favor contains a clause
to the effect that if the proceeds of the sale of the steamship Yusingco,
in case it is sold by reason of default in the performance of the
conditions thereof, should be insufficient, the plaintiff could collect
its credit on other property of the debtors (Exhibit C, page 3).

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). Said rule refers to the credits stated in said article 1922 (12 Manresa, Civil Code, 706).

Having arrived at this conclusion, it becomes unnecessary to pass
upon the other errors assigned by the parties, particularly if it is
taken into consideration that the plaintiff-appellant has to date taken
no action against the defendant sheriff for the recovery of the damages
it claims to have suffered, upon the indemnity bond filed by the
defendant and appellant Vicente Madrigal, in accordance with section
451 of Act No. 190, as amended by Act No. 4108 on December 6, 1933.
Under said Act No. 4108 (section 2), all rights of action against
indemnity bonds must be filed within the inextensible period of 120
days effective said date, December 6, 1933.

Wherefore, the appealed judgment is modified, reversing it in so
far as it orders the defendant and appellant Vicente Madrigal to turn
over to the plaintiff the amount of money paid him by the provincial
sheriff of Surigao from the proceeds of the sale of the steamship Yusingco,
and affirming it in so far as it absolves said sheriff from the
complaint, with the costs to the plaintiff-appellant. So ordered.

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