G.R. No. 19026; April 3, 1923
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. UMBERTO DE POLI and WISE & CO., defendants-appellants.

FACTS

Umberto de Poli mortgaged properties to the Philippine National Bank (PNB) as security for a loan. A subsequent agreement released some original properties and substituted others. De Poli violated the mortgage conditions, prompting PNB to file an action to recover the mortgaged properties. The next day, De Poli was adjudged insolvent. During the proceedings, PNB sold some mortgaged property under a power in the mortgage contract and its charter. The trial court upheld PNB’s right to the goods and the validity of the sale. The assignee in insolvency and an intervening creditor appealed, challenging the court’s jurisdiction (claiming it was absorbed by insolvency proceedings), arguing the second mortgage was a fraudulent preference, and contesting the validity of PNB’s sale of the property.

ISSUE

1. Whether the Court of First Instance retained jurisdiction over PNB’s action despite the subsequent insolvency proceedings.
2. Whether the second mortgage constituted a fraudulent preference under the insolvency law.
3. Whether the sale of the mortgaged property by PNB under its charter and the contract was valid.

RULING

1. Yes. The Supreme Court held that the Court of First Instance retained jurisdiction. This issue was already resolved in a prior certiorari decision in the same case, which declared that jurisdiction was not lost due to the insolvency proceeding, and the Court considered that decision as the law of the case.
2. No. The second mortgage was a mere partial substitution of securities of substantially equal value. An exchange of securities of equal value, even within thirty days prior to insolvency adjudication, does not constitute an unlawful preference as it does not diminish the estate available to other creditors. The Court found the values were substantially equal, and a minor discrepancy relative to the total value did not render the substitution fraudulent.
3. Yes, the sale was valid. The majority upheld the sale made pursuant to the power in the mortgage contract and Section 33 of Act No. 2938 (PNB’s charter), which allowed sale without demand, advertisement, or notice. The dissenting opinion argued that such provisions granting arbitrary power to sell without notice, especially when the debtor is known to be insolvent, were unconstitutional and void as against other creditors. However, the majority did not adopt this view and sustained the trial court’s ruling on the sale’s validity.