G.R. No. L-8769; February 5, 1916
SMITH, BELL & CO., plaintiff-appellant, vs. THE ESTATE OF MARIANO MARONILLA, deceased, VICENTE VELASCO, administrator, and VENANCIO CAVADA DIAZ, a creditor of said estate, defendants-appellees.

FACTS:
Smith, Bell & Co. (appellant) and Venancio Cavada Diaz (appellee) are both creditors of the insolvent estate of the deceased Mariano Maronilla. The appellant’s claim of P36,475.55 is a general unsecured credit. The appellee’s claim of P8,985.48 is evidenced by a public document dated August 29, 1904. The lower court, applying Articles 1921, 1924, and 1925 of the Civil Code, ordered the administrator to give preference to the appellee’s claim over the appellant’s in the distribution of the estate’s funds. The appellant contends that Articles 735 and 736 of the Code of Civil Procedure have repealed the relevant Civil Code provisions on preference, thereby placing all creditors not included in the first five classes of Section 735 on an equal footing to be paid pro rata.

ISSUE:
Whether or not the preference granted to credits evidenced by a public document under Article 1924(3) of the Civil Code has been repealed by Sections 735 and 736 of the Code of Civil Procedure, thereby requiring all debts in the sixth class to be paid pro rata without distinction.

RULING:
No. The Supreme Court affirmed the lower court’s decision. The preference granted by Article 1924(3) of the Civil Code to credits appearing in a public instrument was not repealed by the Code of Civil Procedure.

The Court held that while Sections 735 and 736 of the Code of Civil Procedure established a new order of payment for insolvent estates, repealing by implication the classifications in Articles 1924(1) and (2) of the Civil Code, there is no necessary conflict between the later statute and Article 1924(3). Repeals by implication are not favored. The legislative intent was not to destroy all existing statutory liens or preferences upon a debtor’s death.

The Court construed Section 735 as dealing only with the distribution of assets of the estate that “can be appropriated for the payment of debts,” meaning unencumbered assets available for general creditors. Credits secured by a statutory preference, such as one evidenced by a public document, are not part of the general mass of assets for pro rata distribution among the sixth class. Instead, such preferred credits under the Civil Code retain their priority, albeit subordinated to the payment of the five preferred classes enumerated in Section 735 of the Code of Civil Procedure (e.g., funeral expenses, expenses of last sickness, debts due to the US, taxes, and provincial debts).

Therefore, the appellee’s credit, evidenced by a public document, retains its preferential status under Article 1924(3) of the Civil Code over the appellant’s general unsecured credit.