PHILIPPINE TRUST COMPANY, PLAINTIFF AND APPELLEE, VS. SMITH NAVIGATION COMPANY, DEFENDANT AND APPELLEE. RAMON L. VERZOSA ET AL., INTERVENORS. EL VARADERO DE MANILA, INTERVENOR A…

This
is a new hearing of the appeal taken by the intervenor El Varadero de
Manila from the judgment of the Court of First Instance of Manila, the
dispositive part of which reads as follows:

“For
the foregoing considerations, judgment is rendered dismissing the
complaint in intervention of the Varadero de Manila. The defendant
Smith Navigation Company is ordered to pay to the plaintiff Philippine
Trust Company, as ‘trustee of an express trust,’ the sum of P64,000
Philippine currency, with interest thereon at 12 per cent per annum
from January 3, 1934, until fully paid, plus an additional sum
equivalent to 10 per cent of the above-stated amount for costs,
attorney’s fees, expenses and liquidated damages. As soon as this
judgment becomes final and executory and upon failure of the defendant
to make such payment, the sheriff of the City of Manila is authorized
to proceed in accordance with law to sell the two mortgaged vessels Ethel Conklin and Ethel Edwards
separately at public auction, applying the proceeds thereof to the
amount of this judgment, it being understood that the schooner Ethel Conklin,
is subject to the preferred claim of the crew, intervenors herein, in
the sum of P1,688.50, which claim should be paid with preference to
that of the plaintiff. It is so ordered.”

As ground for its appeal, the appellant assigns four alleged errors claimed by it to have been committed by the court a quo in its judgment in question, which will be discussed in the course of this decision.

When the case was called for hearing, the parties agreed upon the
existence of the following pertinent facts: That the defendant Smith
Navigation Company, on January 3, 1933, executed a document by virtue
of which it constituted a mortgage on the schooner Ethel Conklin and the motorship Ethel Edwards,
both of Manila registry, to secure the payment to the plaintiff
Philippine Trust Company of said defendant’s indebtedness in the sum of
P66,000, with interest thereon at 12 per cent per annum from January 3,
1934, payable monthly on or before the 15th of every month from said
date; that the mortgage in question has been registered in the Bureau
of Customs; that it has been stipulated that in case of violation of
any of the terms and conditions of said mortgage the entire amount
unpaid would become due and payable and the mortgage could be
foreclosed; that it has been agreed that in case of foreclosure of the
mortgage the defendant would pay a sum equivalent to 10 per cent of all
the sums due and unpaid for costs, attorney’s fees, expenses and
liquidated damages; that of the debt claimed by the Philippine Trust
Company, there remains only the sum of P64,000, plus interest thereon
at 12 per cent per annum due and unpaid from April 16, 1934; that the
defendant Smith Navigation Company has failed to pay interest from
April 16,1934, to date; that the claim of the intervenor El Varadero de
Manila for repairs made on the vessels amounts to P11,486.78; that such
claim has not been registered either in the Bureau of Customs or in any
other place; that before causing such repairs to be made the defendant
Smith Navigation Company did not inform the plaintiff Philippine Trust
Company thereof; that said repairs were made on the vessels Ethel Conklin and Ethel Edwards from the month of June, 1933, to June, 1934 (Exhibits 1-V to 30-V of the El Varadero de Manila).

In addition to the above-stated facts, on the existence of which the
parties have stipulated, the following have been established at the
trial, some by a preponderance of evidence and others without
discussion, to wit:

The intervenors Ramon L. Verzosa et al., who were the officer and crew of the motorship Ethel Conklin,
rendered services as such from March 29, 1934, up to 2 o’clock In the
afternoon of May 13th of said year when said motorship was tied up. The
vessel in question thereafter made no other voyage because the
intervenor-appellant El Varadero de Manila was made to repair it by
order of the Bureau of Customs (Exhibit 3). From the month of May,
1934, the two vessels did not navigate again. The repairs for which El
Varadero de Manila claims payment were made and finished in the month
of June, 1933.

Wilson G. Smith, general manager of the
defendant-appellee Smith Navigation Company, testifying as a witness,
stated, among other things, that the mortgage creditor Philippine Trust
Company had not been notified in writing of the repairs in question, as
required by Exhibit A, because the current practice is that when the
repairs are made by order of the Bureau of Customs said notice is not
served, and because the witness had had a verbal agreement with Nolting
and Ford, then president and vice-president, respectively, of the
Philippine Trust Company, relative to said repairs.

Edward
V. Ford, testifying in rebuttal, denied that Nolting and he had had
such a verbal agreement, stating that he came to know of said repairs
only when they had already been carried out, that is, some time prior
to the filing of the action in the present case.

The parties
recognize the preferred right of Ramon L. Verzosa et al., to collect
their salaries earned during the last voyage of the schooner Ethel Conklin, for services rendered by them as officer and crew thereof.

The question to be decided in this new hearing is whether or not the
credit of the intervenor and appellant, El Varadero de Manila, for
repairs made on the two vessels, enjoy preference over that of the
plaintiff and appellee, Philippine Trust Company, secured by a mortgage
constituted on said vessels.

The pertinent parts of article 580 of the Code of Commerce read as follows:

“Art.
580. 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 front 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.”

The above-quoted legal provision enumerates the credits that may
compete for payment from the proceeds of the judicial sale of a vessel,
prescribes the conditions that must be present therein and establishes
the order of payment in case of concurrence of two or more credits
enumerated as having the requisites prescribed by the above-quoted
article. So that if any of the credits enumerated lack the conditions
required, it would be barred from the competition for payment and,
therefore, would not enjoy the preference it would have if said
conditions were present, thus making the pertinent provision of article
580 of the Code of Commerce inapplicable to it.

Although the
credit under consideration of the intervenor El Varadero de Manila, for
repairs made on the vessels sold at public auction, is among those
enumerated in subsection 8 of said article 580 of the Code of Commerce,
it cannot enter into the competition inasmuch as it does not appear by
contract recorded in the registry of vessels prescribed by the second
paragraph of the subsection in question. Consequently, the legal
provision under discussion is not applicable thereto.

Now,
then, are the povisions of said article 580 of the Code of Commerce
applicable to the claim of the plaintiff Philippine Trust Company? The
claim of said Philippine Trust Company is based on a pecuniary
obligation contracted by Smith Navigation Company and secured by the
mortgage constituted on the vessels Ethel Conklin and Ethel Edwards
belonging to the latter. Credits secured by chattel mortgage are not
among those enumerated in the above-cited article 680 of the Code of
Commerce. Therefore, the provisions of said article are not applicable
thereto and the benefits of preference afforded thereby do not extend
to them, for which reason they can not enter in the competition for
payment.

Inasmuch as the provisions of the above-quoted
article 580 of the Code of Commerce are not applicable either to the
claim for repairs of the intervenor El Varadero de Manila or to that of
the plaintiff Philippine Trust Company, for payment of credit secured
by chattel mortgage, which of the two credits enjoys preference over
the other?

Every juridical relation, whether civil or commercial, is governed by
some positive or common law, and article 6 of the Civil Code compels
the courts to render judgment by applying the custom of the place when
there is no statute applicable to the point in controversy, and in the
absence of such custom, the general principles of law. Fortunately,
however, there is no need of resorting to other sources of law and
obligations outside the Civil Code and the Code of Commerce because
article 2 of the latter Code provides that “commercial transactions, be
they performed by merchants or not, whether they are specified in this
Code or not, shall be governed by the provisions contained in the same;
in the absence of such provisions, by the commercial customs generally
observed in each place; and in the absence of both, by those of the
common law. Commercial transactions shall be considered those
enumerated in this Code and any others of similar character.” Both the
contract of loan entered into between the defendant-appellee Smith
Navigation Company and the plaintiff-appellee Philippine Trust Company
and secured by mortgage constituted on the vessels in question, and the
contract of repair of said vessels entered into between the
defendant-appellee Smith Navigation Company and the
intervenor-appellant El Varadero de Manila, are commercial transactions
and, as such, should be governed, first, by the provisions contained in
the Code of Commerce; in the absence of such provisions, by the
commercial customs generally observed in this place; and in the absence
of both rules, by those of the common law, according to the
above-quoted legal provision. As to which of the two credits resulting
from the contracts in question should enjoy preference for payment from
the proceeds of the judicial sale of said merchant vessels, we have not
found any provision in the Code of Commerce or any commercial custom
generally observed in the place, establishing preference between a
credit secured by mortgage constituted on merchant vessels and a
contract for the repair of said vessels not recorded in the registry of
vessels. Therefore, we should resort to the common law, which in our
case is the Civil Code (Decisions of the Supreme Court of Spain of
April 28, 1899; December 29, 1898, and February 16, 1897; G. Urrutia
& Co. vs. Baco River Plantation Co., 26 Phil., 632; Compañia General de Tabacos vs. Molina, 5 Phil., 142, 146; Vivante, Derecho Mercantil,
volume I, page 92, paragraph 7), as supplementary to the Code of
Commerce, in accordance with the above-cited article 2, to find some
provision establishing preference between one and the other.

Articles 1921 and 1922 of the Civil Code provide as follows:

“Art. 1921. Credits shall be classified for their graduation and payment in the order and manner specified in this chapter.

“Art. 1922. With respect to determinate personal property of the debtor, the following are preferred:

“1.
Credits for the construction, repair, preservation, or purchase price
of personal property in the possession of the debtor, to the extent of
the value of the same;

“2. Credits secured by a pledge in
the possession of the creditor, with respect to the thing pledged and
to the extent of its value.”

It should
be noted that article 1922 of the Civil Code gives preferential
character to credits for the repair of personal property, while in the
possession of the debtor, to the extent of the value of the same, but
not to credits secured by mortgage on personal property, vessels being
considered as such (article 585, Code of Commerce; Philippine Refining
Co. vs.
Jarque, 61 Phil., 229). The chattel mortgage is an institution created
by a special act of the Philippine Commission (Act No. 1508). Its
constitution is in the form of a conditional sale, similar to a sale
with pacto de retro, inasmuch as both convey dominion, the
only essential difference being that in the chattel mortgage failure on
the part of the mortgagor to comply with his obligation to pay his debt
gives rise to the execution of the thing mortgaged, while in the sale
with pacto de retro failure on the part of tne vendor to
exercise his right to repurchase the thing sold consolidates the
ownership thereof in the purchaser (Rosales vs. Reyes and Ordoveza, 25 Phil., 495; Meyers vs. Thein, 15 Phil., 303; Bank of the Philippine Islands vs. Trinidad, 42 Phil., 220; Bachrach Motor Co. vs.
Summers, 42 Phil., 3). A chattel mortgage, in its legal effects, is but
a mere security (section 3, Act No. 1508; In re Du Tec Chuan, 34 Phil.,
488), and, as such, is inferior to the preferred liens established by
the Civil Code (Unson vs. Urquijo, Zuloaga & Escubi, 50 Phil., 160; Kabankalan Sugar Co. vs.
Kubm, 54. Phil., 645). Inasmuch as the credit secured by a chattel
mortgage is not among those enumerated in the above-cited article 1922
of the Civil Code, as already stated, it can not compete with a credit
for repairs so enumerated.

The question now arises whether
or not after the sheriff had attached the vessels in question and sold
them at public auction by virtue of a writ of execution of judgment,
the credit of El Varadero de Manila for said repairs retains its
character of a preferred lien for purposes of payment.

In the case of International Banking Corporation vs.
Corrales (10 Phil., 435), this court has laid down the doctrine that
“the possession of a receiver does not adversely affect prior existing
liens and is not such a transfer of property as will deprive an
intervenor, in a proper case, of the preferential right secured to him
by article 1922 of the Civil Code.”

Under the foregoing
doctrine, the fact that the sheriff had attached the vessels in
question by order of the court has not produced the effect of
transferring possession of the same or the proceeds of the sale
thereof, they being only in custodia legis for the benefit of
the parties. Therefore, the credit of the intervenor-appellant El
Varadero de Manila retains its character of a preferred lien for
purposes of payment thereof from the proceeds of the sale.

It is contended by the plaintiff-appellee Philippine Trust Company that
the chattel mortgage being a lien upon the personal property mortgaged,
the credit secured thereby enjoys preference over a credit for repairs
made on said personal property because the preferential right granted
by law to the latter credit is not upon the property repaired and is
not secured by the same.

This question has already been decided by this court in the cases of Unson vs. Urquijo, Zuloaga & Escubi, supra and Kabankalan Sugar Co. vs. Rubin, supra,
wherein it laid down the doctrine that “By article 1922, paragraph No.
1, of the Civil Code and the decisions of this court, interpreting it,
as well as by the Revised Civil Code of Louisiana and the decisions of
the Supreme Court and the Circuit Court of Appeals of said State, the
preference granted the vendor to the personal property sold and in
possession of the purchaser for the price thereof, is superior to any
other real right or lien, such as mortgage and attachment.” The same
doctrine is applicable to the case of a credit for repairs on the
ground that the work and material employed in the personal property
repaired are incorporated into it, thereby increasing or, at least,
conserving its value. What the repair man seeks, therefore. is, more
than a security, a part of the thing itself, which part belongs to him.

In its motion for reconsideration and new hearing, the plaintiff and
appellee Philippine Trust Company likewise raises the question whether
or not, as some of the repairs were made in 1933, after which the
repaired vessels made other voyages, having again been repaired in
1934, without putting to sea thereafter, the credits for repairs made
in 1933 enjoy the same preference as the credits for repairs made in
1934.

The condition that the repairs be made on a vessel on
its last voyage, so that the credit created thereby may have a
preferential character, is imposed by article 580, subsection 8, of the
Code of Commerce. It has been stated by this court that this legal
provision is not applicable to the credit of El Varadero de Manila,
having failed to comply with the condition that it appear by contract
recorded in the registry of vessels, and that the provisions of the
Civil Code, as a supplementary law, are applicable in accordance with
the provision of article 2 of said Code of Commerce. Subsection 1 of
said article 1922 of the Civil Code speaks of the credit for repair of
personal property in general, neither making any distinction nor
establishing any condition with respect to vessels. It is, therefore,
sufficient that the repair has been made on a personal property, as a
vessel, and that the same be in the possession of the debtor, the owner
thereof, so that the credit created by such repair may enjoy
preference, it being unimportant whether said vessel has navigated or
not after the work thereon had been performed.

As to the
question whether or not by reason of the failure of the defendant Smith
Navigation Company to notify the plaintiff Philippine Trust Company of
the necessity of making the repairs and of the order given by it to the
intervenor El Varadero de Manila to make such repairs on the vessels in
question, El Varadero de Manila is not entitled to collect the value of
said repairs with, preference to the credit secured by the mortgage
constituted on said vessels, the agreement entered into between the
defendant Smith Navigation Company and the plaintiff Philippine Trust
Company, whereby said defendant binds itself to notify said plaintiff
of the necessity of making any repair on said vessels, is not binding
on said intervenor El Varadero de Manila on the ground that it was not
a party to said contract, notwithstanding the fact that the chattel
mortgage, wherein said obligation was made to appear, is recorded in
the register of transfers and liens of vessels of the Bureau of
Customs. In the case of Pacific Commercial Co. vs. Webb and
Falcon (51 Phil., 745), this court has laid down the doctrine that “the
repair man is not a party to the terms and provisions in a chattel
mortgage to the effect that the mortgagor cannot encumber the auto for
subsequent repairs without the written consent of the mortgagee, and in
the absence of personal knowledge of their existence, he is not legally
bound by such provisions in the chattel mortgage.”

In the
case under consideration, it does not appear that the intervenor El
Varadero de Manila had personal knowledge of the existence of such
stipulation in the instrument of mortgage of the vessels Ethel Conklin and Ethel Edwards before the defendant and mortgagor Smith Navigation Company ordered their repair and said intervenor accepted said order.

Although the above-cited case involves an automobile, the mortgage of
which is governed by Act No. 1508, otherwise known as the Chattel
Mortgage Law, and not a vessel, the mortgage of which is governed by
section 1171 of the Revised Administrative Code (Arroyo vs. Yu de Sane, 54 Phil., 511), the question at issue is the same and, therefore, the same principle is applicable.

Under the above-cited provisions of law and doctrine of this court, the
intervenor El Varadero de Manila is not barred from collecting the
amount of the repairs made by it with preference to the mortgage credit
of the plaintiff Philippine Trust Company (article 1922, subsection 1,
Civil Code).

For the foregoing considerations, this court is
of the opinion and so holds: (1) That the repairs made on merchant
vessels by contract not recorded in the registry of vessels enjoy
preference, not in accordance with article 580, subsection 8, of the
Code of Commerce, but in accordance with article 1922, subsection 1, in
connection with article 1921, of the Civil Code; (2) that the fact that
a sheriff attaches said vessels and sells them at public auction by
virtue of an execution, does not affect the preference of the repair
man with respect to them or the proceeds thereof at the judicial sale,
whether said repairs have been made during the last voyage or during a
former one; and (3) that as the credit secured by a mortgage of vessels
is not among those enumerated in article 1922 of the Civil Code, it
cannot compete for payment with a credit for repairs thereon with
respect to the proceeds of the sale thereof.

Wherefore, the
appealed judgment is reversed in so far as it dismisses the complaint
in intervention of El Varadero de Manila, and it is ordered that from
the proceeds of the sale at public auction of the two vessels Ethel Conklin and Ethel Edwards
the sheriff of the City of Manila, after having satisfied the claim of
the other intervenors Ramon L. Verzosa et al., who constitute the
officer and crew of the schooner Ethel Conklin, pay first to
said intervenor El Varadero de Manila the sum of P11,486.78, with legal
interest thereon from the date of the filing of the complaint in
intervention, until fully paid, and lastly pay the plaintiff Philippine
Trust Company in the manner provided1 for in the appealed judgment,
with costs to the plaintiff-appellee. So ordered.

Avanceña, C. J., Abad Santos, Imperial, and Diaz, JJ., concur.

---

 

DISSENTING

CONCEPCION, J.:

I
regret to have to insist on my former dissenting opinion, with due
respect to the majority opinion. There are before this court two
credits disputing preference: The credit of the intervenor El Varadero
de Manila for repairs made on the vessels Ethel Conklin and Ethel Edwards,
and the credit of the plaintiff Philippine Trust Company secured by
mortgage constituted on said vessels. Everything related to merchant
vessels is governed by the provisions of Book III of the Code of
Commerce, entitled “Maritime Commerce.”

The part of article 580 of said Code, pertinent to this matter, reads as follows:

“Art.
580. 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 * * *.

“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, * * *.” (Underscoring mine.)

Now then: inasmuch as the credit of El Varadero de Manila does not
appear by contract and is not recorded in the registry of vessels, this
creditor can not claim right of preference. The majority, however,
maintain that although the credit of El Varadero de Manila is among
those included in subsection 8 of said article 580 of the Code of
Commerce it cannot compete with the other credits enumerated in said
article because it does not appear by contract recorded in the registry
of vessels. Therefore, the legal provision under consideration,
according to them, is not applicable thereto. I dissent. I am of the
opinion that it is applicable to the credit in question, not only when
the latter enjoys preference for having complied with the conditions
prescribed in said legal provision but also when the preference of said
credit is not recognized precisely for noncompliance with the
conditions prescribed therein.

With respect to the mortgage
credit of the plaintiff Philippine Trust Company, the majority allege
that neither is said credit included among those enumerated in said
article 580 of the Code of Commerce and, upon the ground that none of
the two credits in question falls under the provisions of said Code of
Commerce, they have gone to seek solution of the litigation in the very
vast field of the Civil Law. I cannot follow the majority in their
quest.

I am of the opinion that, if the credit of El
Varadero de Manila is merely an ordinary credit and enjoys no right of
preference under the provisions of the Code of Commerce, which are the
ones that govern this matter, no other law or Code can give it such
right, because to hold otherwise would be to arrive at the absurdity of
affirming that, with or without a written contract and with or without
notation thereof in the registry, at any rate the credit of El Varadero
de Manila is and shall be preferred in all cases. This would make a
laughing stock of the provisions of the Code of Commerce. The registry
of vessels would be a myth. The Code of Commerce, in requiring the
credit to appear by contract and to be registered in the registry,
attempts to protect all persons desiring to lend money upon a vessel,
or attempting to purchase it. Had El Varadero de Manila recorded1 its
contract in the registry of vessels before commencing the repair works
on the two vessels in question in June, 1933 (Exhibit 1), or
immediately thereafter, the plaintiff Philippine Trust Company would
have had knowledge of the lien existing on said vessels and,
undoubtedly, it would not have granted the loan of P66,000 by accepting
the mortgage constituted on said vessels on January 3, 1933. Under
these circumstances, I do not see how the right of preference of the
intervenor El Varadero de Manila, which has not sought the protection
afforded by the Code, can be recognized, to the prejudice of the
plaintiff Philippine Trust Company, which has complied with all the
legal requisites for the purpose of safeguarding the efficacy of its
security.

The plaintiff Philippine Trust Company has
recorded its mortgage right on the vessels in the registry of vessels
and under the law said mortgage is a security for the payment of its
credit (section 3, Chattel Mortgage Law; Bachrach Motor Co. vs. Summers, 42 Phil., 3; In re Du. Tec Chuan, 34 Phil., 488, 490).

Wherefore, the vessels in question being specially assigned to the
payment of the credit of the plaintiff, and on the other hand, as El
Varadero de Manila has no lien on said vessels for not having complied
with the provisions of the Code of Commerce, I vote for the preferred
payment of the mortgage credit of the plaintiff.