G.R. No. 28205 , December 24, 1927
VOLUNTARY INSOLVENCY OF THE “CENTRAL CAPIZ.” TIMOTEO UNSON, ET AL., claimants-appellees, vs. URQUIJO, ZULOAGA & ESCUBI, claimants-appellants.

FACTS

This case involves the distribution of assets in the voluntary insolvency of “Central Capiz.” The appellants, Urquijo, Zuloaga & Escubi, sold machinery to the insolvent company for a total price of P30,000, of which a portion (P19,285.71 5/7) remained unpaid. The machinery was later sold by the assignee in insolvency. In a prior decision ( G.R. No. 26293 ), the Supreme Court ruled that the appellants had a preferential right under Article 1922(1) of the Civil Code, but only to the extent of the value of the unpaid machinery, not to exceed their claimed amount of P30,000. The case was remanded to the trial court to determine the specific value subject to the preference.

On remand, the trial court found the unpaid balance to be P19,285.71 5/7 and held that the appellants’ preferential right was limited to that amount, ordering payment accordingly. The appellants appealed, contending that their preferential right should extend to the *full* proceeds from the sale of the machinery (up to P30,000), not just a portion proportional to the unpaid balance.

ISSUE

Does the vendor’s preferential right under Article 1922(1) of the Civil Code for the unpaid purchase price of personal property extend to the entire property sold, or is it limited only to a portion proportional to the unpaid balance of the price?

RULING

The Supreme Court REVERSED the trial court’s decision. The vendor’s preferential right extends to the entirety of the property sold, not merely a proportional part.

The Court explained that the legal preference is based on equity and justice. The purchaser’s estate is enriched by the property at the vendor’s expense. Without this preference, the vendor would become an involuntary surety for the purchaser’s other creditors. The property sold becomes part of the purchaser’s assets, which other creditors might seize, and it is only fair that the vendor who supplied the property be paid first from its value.

The law (Article 1922[1]) makes no distinction between partially paid and fully unpaid prices. To limit the preference to a proportional part when partial payment has been made would undermine the very purpose of the preference. Therefore, the preference covers the *whole* property while it remains in the debtor’s possession, up to the full amount of the credit or the value of the property, whichever is lower.

Consequently, the appellants are entitled to collect their full credit of P30,000 from the total proceeds of the sale of the machinery, in preference to other creditors. The assignee in insolvency was ordered to make this payment.