GR 32704; (November, 1930) (Digest)

G.R. No. 32704, November 29, 1930
INVOLUNTARY INSOLVENCY OF MARIANO VELASCO & CO., ET AL. S. W. O’BRIEN, claimant-appellee, vs. CHINA BANKING CORPORATION, oppositor-appellant. VICENTE NEPOMUCENO, assignee-appellant.

FACTS

Mariano Velasco & Co. received deposits from the late C.W. O’Brien and later from his estate’s administrator, S.W. O’Brien. After the estate’s partition, the outstanding balances were consolidated into two promissory notes executed by the insolvent firm in favor of S.W. O’Brien (in his capacities as guardian and trustee). These notes were secured by a chattel mortgage evidenced by a notarial deed (Exhibit C) and duly recorded. Upon the insolvency of Mariano Velasco & Co., S.W. O’Brien filed a claim for the unpaid balance of the mortgage credit after the mortgaged property was sold. The trial court allowed the claim as a preferred credit under Article 1924(3)(A) of the Civil Code. The China Banking Corporation and the assignee appealed, arguing that the claim is not preferred and that O’Brien waived any preference.

ISSUE

1. Whether the unpaid balance of a mortgage credit, evidenced by a recorded public instrument (the chattel mortgage deed), constitutes a preferred credit under Article 1924(3)(A) of the Civil Code in insolvency proceedings.
2. Whether the claimant-appellee waived his right to preference by recommending the appointment of the assignee.

RULING

1. YES. The Supreme Court AFFIRMED the trial court’s judgment. The unpaid balance of the mortgage credit retains its character as a credit evidenced by a public instrument. Article 1924(3)(A) of the Civil Code grants ordinary preference to credits evidenced by a public instrument. The fact that the credit was originally secured by a mortgage does not strip the remaining unpaid balance of this preference. Citing Manresa, the Court held that a mortgagee, with respect to the debtor’s unencumbered property, enjoys the same preference as a creditor whose claim is evidenced by a public instrument, since a mortgage must itself be constituted in a public instrument to be binding against third persons.

2. NO. The claimant’s act of recommending the appointment of the assignee did NOT constitute a waiver of his preferred credit. A waiver is the intentional relinquishment of a known right. The mere recommendation was not equivalent to the vote for an assignee prohibited by the Insolvency Law and did not demonstrate an intent to abandon the legal preference attached to his credit.

DISSENTING OPINION (Justice Malcolm, concurred in by Justices Ostrand and Johns):
The dissent argued that Article 1924 of the Civil Code had been impliedly repealed by the Insolvency Law (Act No. 1956). Since the Insolvency Law specifically enumerates preferred claims and provides that “all other creditors shall be paid pro rata,” any claim not falling within the specified categories in the Insolvency Law is not preferred. Therefore, O’Brien’s claim, not being among those listed, should be treated as an ordinary, non-preferred claim.