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[J. W v. WILLIAM THEIN ET AL.](http://lawyerly.ph/juris/view/ce08?user=fbGU2WFpmaitMVEVGZ2lBVW5xZ2RVdz09)
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[ GR No. 5577, Feb 21, 1910 ]

J. W v. WILLIAM THEIN ET AL. +

DECISION

15 Phil. 303

[ G. R. No. 5577, February 21, 1910 ]

J. W, MEYERS, PLAINTIFF AND APPELLANT, VS. WILLIAM THEIN ET AL., DEFENDANTS AND APPELLEES.

D E C I S I O N

ARELLANO, C.J.:

William Thein is indebted to J. W. Meyers for a loan in the sum of P1,000.  As security for payment of the loan, William Thein mortgaged to J. W. Meyers certain furniture owned by him which constitutes the fittings of  a saloon situated in Calle Real, No, 124, in the  district of Intramuros,  Manila, to  which effect a public instrument was executed on the 20th of June,  1908.

The premises at No. 124 Calle Real, district of Intramuros, are owned by Flora Broto, who leased the place to William Thein.   The latter opened a saloon therein, of which the said furniture formed a part.

William Thein, as lessee, was indebted to the lessor, Flora Broto, in the sum of P215, for rent due for the months of June and July, 1908.

In the months of June  and  July, 1908, the furniture in question was in the place  leased by William Thein, and, at the request of J. W. Meyers, was removed therefrom by the sheriff,  notwithstanding  the protest of  Flora  Broto,  the lessor.

The said furniture was sold by the sheriff, and the proceeds of the sale amounted to P972.30.

Preference with respect to payments to be made from the above sum is claimed on the one hand by J. W. Mayers, as mortgage creditor, or rather as pledgee under contract, and on the other by Flora Broto, as mortgage creditor by operation of the law.

The contract of  mortgage, or rather of pledge, invoked by J. W. Meyers, appears in the record.

The  mortgage or legal  pledge invoked by Flora Broto arises under article  1922 of the Civil Code, which provides:
"With regard to specified personal property of the debtor, the following are preferred:

"1.   *      *       *       *       *       *       *

*      *       *       *       *       *       *

"7. Credits for rents and leases for one year with regard to the personal property of the lessee existing on the estate leased and on the fruits thereof."*      *       *       *       *       *       *

Paragraph  2 of said article also contains the following:

"Credits secured by a pledge which may be in the possession of the creditor, with regard to the thing pledged and to the extent  of its value."
Were this  contest as to preference to be based only on the provisions of article 1922, paragraph 7, in favor of the lessor who is a defendant herein, and on paragraph. 2 in favor of the  creditor-pledgee  who is  the plaintiff, it would have  to be decided in favor  of  the lessor, for the reason that, in order-that the creditor-pledgee may enjoy the preference over the thing pledged to  him, it is a necessary condition that the same shall be in his possession.  As in this case, however, the furniture in question was not in the possession  of the creditor Meyers, but in that of the debtor, William Thein, it follows that the creditor Meyers can not claim the preference  prescribed  by paragraph 2 of article 1922 of the Civil Code; while the lessor Broto,  on the other hand, should have the preference specified in paragraph 7 over such personal property existing on the premises leased and in possession of the debtor Thein.

But the present contention as to preference does not rest upon  the  above-mentioned paragraphs 2  and  7 of article 1922 of the Civil Code; on the part of the  lessor it is based upon  said  paragraph 7 of article 1922 of the Civil Code, and, on the part of the creditor-pledgee, upon Act No. 1508 of the Philippine Commission, enacted July 2, 1906, under the provisions of which a chattel  mortgage was executed by Thein in favor of Meyers.

Between the said Act and  paragraph 2 of  article 1922 already cited, as well as article 1863 of the Civil Code, there is now a radical difference.

While according to the Civil Code it is an essential requisite,  in constituting a contract of pledge, that  the creditor, or a third person named by common accord, be placed in possession of the pledge, under Act No. 1508 of the Philippine  Commission  this is  not necessary in order to make the  pledge  valid and  efficient as against the  debtor; it is only necessary, to constitute a valid pledge  as against third persons;  notwithstanding this  exception, the registration of the contract of pledge or mortgage of the personal property so given as security,  in the registry  of  titles  of the province, is equivalent to the actual delivery of possession to the creditor-pledgee.

The  instrument of  pledge or chattel mortgage executed by Thein in favor of Meyers is recorded in the registry of mortgages of its proper class (B. of E., 7).

Taking into consideration the different legal grounds on which each party bases his claim for  preference over the other with respect to the personal property of the common debtor, it becomes necessary to  determine  in  whose favor the contention should be decided,  inasmuch as  the proceeds of the sale  of the said personal furniture  is not sufficient to pay both claims.

The Court of First Instance of the city of Manila decided the question in favor of the lessor, granting to the defendant,  Flora Broto, preference in the  payment of her claim; the judgment "sentences William Thein, the other defendant,  to  pay  the  said Flora  Broto the  sum  of P200,  which sum must, as far as possible, be paid to the said defendant out of the proceeds of the sale of the furniture  ma.de by the sheriff on the petition of the plaintiff, Meyers, to which end the latter is ordered to deliver to the said defendant out of the proceeds of said  sale the above-mentioned sum of P200, being the amount of the aforesaid rent.  And  the plaintiff is further ordered to pay the costs of the action."

Against the foregoing judgment the plaintiff, Meyers, has appealed and, among other assignments of error, alleges the fact that preference was granted in favor of the claim for rent by the defendant, Flora Broto, over a credit secured by pledge executed and registered in accordance with the provisions of  Act No. 1508 of the  Philippine  Commission. This  is the only question to be resolved in  this instance, for the reason that it was the only one decided by the court below.  The grounds upon which the trial court has  based its opinion  are the following:
  1. That Act No.  1508  does not repeal the provisions of the Civil  Code with respect  to this  matter, because it does not mention such repeal.

  2.  That although the registration of a mortgage or pledge of personal property prejudices a third  party, a privileged creditor, such  as a  lessor claiming  the rent for his leased property, who, in law, has a mortgage upon the furniture of the lessee existing upon the premises, can not be considered as such third party, but any other third party by any other title different from that derived from the lease, recognizing no superior claim except one of  pledge  of personal property, and this only when the property is in the possession of the creditor-pledgee.

  3. That said privilege or  right of retention on the part of the lessor would be vain and illusory  if preference were given to a credit secured by a pledge for the mere reason that it was  registered, and.such registration would  be contrary to the "right  of possession," arising by operation of law and in favor of the  lessor, over the furniture existing upon the premises leased.

  4. That it being unnecessary that a legal mortgage, such as that of  the lessor, be entered in the registry for  the reason that it is created by the law itself, a  contractual mortgage can  not take  preference  over it  for the  mere reason that it  is registered.

  5. That as the debt of the lessee  Thein in favor of  the lessor Broto bears a date prior to that of the debtor Thein in favor of  the creditor-pledgee Meyers, the  mortgage created by law in favor of the former became effective before the contractual mortgage; so that, when the latter was registered, the former  was already a lien upon the furniture pledged in favor of  another.
It becomes necessary to pass upon the nature of the contract of mortgage or pledge of personal property, in accordance  with the  provisions of section 3 of the said Act No. 1508  which prescribes that  "a chattel mortgage is a conditional sale of personal property as security for the payment of  a  debt,  or  the performance  of  some other  obligation specified therein, the condition being that the sale shall  be void  upon the  seller  paying to the purchaser  a  sum  of money or doing some other  act named.   If the condition is performed according to its terms the  mortgage and sale immediately become void, and  the  mortgagee is thereby divested of his title."

From the language of the law  it now appears: (1) That by  the  operation  of Act No. 1508 the  actual contract  of pledge of the Civil  Code degenerates into one of  sale by mutual  consent; (2) that,  under Act No. 1508, a chattel mortgage is a  sale with pacto de retro, almost equivalent to that  under the same name in the Civil Code; (3) that as in  a contract of sale with pacto de retro where the juridical dominion and possession of the thing sold pass to the purchaser as soon as the sale is consummated,  so also in a chattel mortgage the dominion and possession of the mortgaged personal  property pass to the creditor-pledgee, because, as the law provides, it is nothing more than a conditional sale; (4) that,  in the same manner that a contract of  sale  is  consummated by the  delivery, either actual  or symbolic,  of the thing sold, which symbol of the delivery may be the inscription of the instrument in the registry, so  also  a chattel  mortgage is consummated by a similar delivery, actual  or symbolic, by means of an analogous inscription in the  registry.

Therefore, so long as the  mortgage exists, the  dominion, with respect to the mortgaged personal property, rests with the creditor-pledgee from the time of the inscription of the mortgage in the registry, and the furniture ceases to be the property of the debtor for  the reason that  it  has become the property of the creditor, in like manner as the dominion of a thing sold is transferred to the purchaser and ceases to belong to the  vendor from the moment  of  the delivery thereof,  as  a result of  the sale.   According to the Civil Code, a thing given  in pledge never  becomes the property of  the creditor-pledgee;  the  debtor continues to be  the owner thereof (art. 1869); the creditor does not become the owner; he is  nothing more than a creditor with a real right over the thing in  his possession  as a pledge, which he can dispose of through a notary at a public sale according to the Civil Code, the same as the creditor-pledgee may now, under the provisions of Act No. 1508, sell the pledge through the sheriff.   (Civil Code,  1872; Act No. 1508, sec. 14.).

In view of the above  it must be  concluded:  (1) That from June 20,1908, the furniture belonging to Thein, which existed in the house leased by Flora Broto, ceased to be the property of the first named and passed to the dominion and juridical possession of J. W.  Meyers, the material possession alone continuing in the hands  of Thein, and the property actually remaining in the leased  building;  (2)  that when" the lessor tried to collect the rent due for the months of June  and July, 1908, the furniture  that existed in the building  was no  longer the property of the lessee but belonged to a third person who had  acquired it as a pledge which, under the law,  is a sale, and as  such the ownership is transferable, although conditionally and depending upon whether  the debtor (the conditional seller)  fulfills the condition subsequent, and is  similar  to a  sale with pacto  de retro;  (3) the preference in the payment of rents due for one year, granted by  paragraph 7 of article  1922, refers to "personal property of the  lessee;" hence, as the furniture existing in the house leased no longer belongs to Thein but to J. W. Meyers,  according to the public instrument recorded in the public  registry, the said right of preference has not existed since the 20th of June, 1908; (4)  the registration of a chattel mortgage, executed in accordance with Act No. 1508, is not in violation of the  right of possession, supposed to have been acquired ex lege by the lessor over the  furniture existing upon the leased premises, because no such right  of possession is granted by the law to the lessor over the personal property of the lessee  upon the estate leased; it is subject only to the payment of rent for one  year, a condition which may become vain and illusory by a transaction  like the one now in question, to wit, when the lessee executes a mortgage  upon such personal property in favor of a third person, in the same manner as he could have previously performed these or other acts of disposal in respect thereto, inasmuch as his right to dispose of the same was not  then, and  is not now limited  by reason of their being in  a  leased building; against this contingency the lessor should  take proper precautions in order to ensure the payment of rent by means of an express lien thereon, since the personalty is merely affected by a tacit lien under the circumstances presumed by the law, to wit, that it belongs to the lessor and continues upon the premises and is liable only for the rent for one year.

The mortgage executed by Thein in favor of Meyers being a valid one, and considering the latter merely as a mortgage creditor (passing over the juridical effects of a sale with which the law has  compared  a  chattel mortgage), he is entitled to have the property  sold, as he did,  through  the sheriff, and to pay  himself from the proceeds thereof in preference  to subsequent mortgages,  in accordance with said  section 14 of Act No. 1508.  Against this preference, that  claimed in this case under paragraph 7 of article 1922 of the Civil Code can not prevail from the moment that it is admitted that,  over and above the  claim for rerit, that described in paragraph 2  of the same article has the superior  preference, whenever, in  accordance with /its  provisions, the pledge  is in the possession of the creditor.  The case  at bar falls  within the circumstances prescribed by section 4 of Act No. 1508 which reads as follows:
"A chattel mortgage shall not be valid against any person except the mortgagor, his  executors  or administrators, unless  the  possession  of the property  is delivered to and retained  by the mortgagee  or  unless the mortgage is recorded in the office of  the register of deeds of the province *   *  * ."
The above provision does not, in this respect, repeal paragraph 2 of the said article 1922, but extends the provisions thereof  by providing  that the property  pledged is to be considered  as being delivered to the mortgage creditor and to be in his possession, if the mortgage is recorded in the office of the register of deeds of the province.  The code only refers to the actual delivery of the pledge; Act No. 1508 provides both for the actual and for the symbolic delivery thereof by means of the registration of the title.

The judgment appealed from  is  reversed, without  any special ruling as. to the costs of both instances.

It is hereby decided and decreed that, from the proceeds of the sale,  preferential payment shall be made to the plaintiff J.  W. Meyers; provided, however, that the debtor William Thein  alone is adjudged to pay the claim of the latter as prayed for in the complaint.  So ordered.

Torres, Mapa, Johnson, Carson, and Moreland, JJ., concur.

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