G.R. No. L-17836; May 29, 1922
Involuntary Insolvency of Dy Poco. Te Pate, claimant-appellee, vs. Frank B. Ingersoll, assignee-appellant.

FACTS

On April 28, 1919, Dy Poco executed a private document in favor of Te Pate, acknowledging receipt of P15,000 and securing payment with “six hundred piculs of hemp.” The document stated that if Dy Poco could not pay, Te Pate had the right to sell the hemp and return any remainder. On June 7, 1919, an involuntary insolvency petition was filed against Dy Poco, and he was adjudged insolvent on June 23, 1919. Three or four weeks before Dy Poco’s death on July 10, 1919 (which was after the insolvency petition was filed), Te Pate took possession of the hemp. Te Pate then petitioned the court for preferential rights over the hemp, which the trial court granted. The assignee in the insolvency proceedings, Frank B. Ingersoll, appealed.

ISSUE

Whether the contract of pledge, evidenced only by a private document and with possession delivered after the commencement of insolvency proceedings, is enforceable against the assignee, entitling Te Pate to a preferential right over the hemp in the distribution of the insolvent’s assets.

RULING

No. The judgment of the trial court is reversed. For a pledge to be valid against third persons, it must be evidenced by a public instrument as required by Article 1865 of the Civil Code. An assignee in insolvency proceedings is a “third person” within the meaning of this article, as the assignee represents all the creditors of the insolvent estate. Since the pledge was constituted only by a private document, it was not valid against the assignee. Furthermore, the actual delivery of the pledged property occurred after the insolvency proceedings had begun, which distinguishes this case from prior rulings where delivery occurred before insolvency. Therefore, the contract of pledge was not enforceable against the assignee, and Te Pate was not entitled to a preference in the distribution of the insolvent’s assets.