[ G.R. No. 26320. December 03, 1926 ] 49 Phil. 658
[ G.R. No. 26320. December 03, 1926 ]
S. W. O’BRIEN, A. S. CROSSFIELD, L. R. SWEET, FINDLAY MILLAR TIMBER CO., AND ASIATIC PETROLEUM CO. (P. I.), LTD., PETITIONERS, VS. HONORABLE SIMPLICIO DEL ROSARIO, JUDGE OF FIRST INSTANCE OF MANILA, AND THE BANK OF THE PHILIPPINE ISLANDS, RESPONDENTS. D E C I S I O N
JOHNS, J.:
The question presented involves the construction of Act No. 1956 known as the Insolvency Law, which is entitled as “An Act providing for the suspension of payments, the relief of insolvent debtors, the protection of creditors, and the punishment of fraudulent debtors.” Section 1 provides:
“This Act shall be known and may be cited as the Insolvency Law, and in accordance with its provisions every insolvent debtor may be permitted to suspend payments or be discharged from his debts and liabilities.”
Under the head of “Voluntary Insolvency,” among other things, section 18 of the Act provides:
“Upon the granting of said order all civil proceedings pending against the said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be, all the property, assets, and belongings of the insolvent which have come into his possession.”
Under the head of “Involuntary Insolvency,” section 21 of the Act provides:
“Upon the filing of such creditors’ petition, the court or a judge thereof shall issue an order requiring such debtor to show cause, at a time and place to be fixed by said court or judge, why he should not be adjudged an insolvent debtor; and at the same time, or thereafter, upon good cause shown therefor, said court or judge may make an order forbidding the payment of any debts, and the delivery of any property belonging to such debtor to him or to any other person for his use or benefit or the transfer of any property by him.”
Section 24 provides:
“* * * Provided, That in the affidavit of the insolvent, touching his property and its disposition, he shall not be required to swear that he has not made any fraudulent preference or committed any other act in conflict with the provisions of this Act; but he may do so if he desires. Said order shall further direct the sheriff of the province or city where the insolvency petition is filed, or the receiver, if one has been theretofore appointed, to take possession of and safely keep, until the appointment of an assignee, all the deeds, vouchers, books of account, papers, notes, bills, bonds and securities of the debtor, and all his real and personal property, estate and effects, except such as may be by law exempt from execution. Said order shall further forbid the payment to the debtor of any debts due to him, and the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate * * *.” And that “upon the granting of said order, all civil proceedings pending against the said insolvent shall be stayed.”
Section 32 of the Act provides:
“As soon as an assignee is elected or appointed and qualified, the clerk of the court shall, by an instrument under his hand and seal of the court, assign and convey to the assignee all the real and personal property, estate, and effects of the debtor with all his deeds, books, and papers relating thereto, and such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. Such assignment shall operate to vest in the assignee all of the estate of the insolvent debtor not exempt by law from execution. It shall also dissolve any attachment levied within one month next preceding the commencement of the insolvency proceedings and vacate and set aside any judgment entered in any action commenced within thirty days immediately prior to the commencement of insolvency proceedings and shall vacate and set aside any execution issued thereon and shall vacate and set aside any judgment entered by default or consent of the debtor within thirty days immediately prior to the commencement of the insolvency proceedings.”
Section 33 provides:
“The assignee shall have the right to recover all the estate, debts, and effects of said insolvent. If, at the time of the commencement of proceedings in insolvency, an action is pending in the name of the debtor, for the recovery of a debt or other thing which might or ought to pass to the assignee by the assignment, the assignee shall be allowed and admitted to prosecute the action, in like manner and with like effect as if it had been originally commenced by him. If there are any rights of action in favor of the insolvent for damages, on any account, for which an action is not pending, the assignee shall have the right to prosecute the same with the same effect as the insolvent might have done himself if no proceedings in insolvency had been instituted. If any action or proceeding in which the insolvent is defendant is pending at the time of the adjudication, the assignee may defend the same in the same manner and with like effect as it might have been defended by the insolvent. Any suit prosecuted or defended by the assignee, a certified copy of the assignment made to him shall be conclusive evidence of his authority to sue or defend.”
Section 59 provides:
“When a creditor has a mortgage, or pledge of real or personal property of the debtor, or a lien thereon, for securing the payment of a debt owing to him from the debtor, or an attachment or execution on property of the debtor duly recorded and not dissolved under this Act, he shall be admitted as a creditor for the balance of the debt only, after deducting the value of such property, such value to be ascertained by agreement between him and the receiver, if any, and if no receiver, then upon such sum as the court or a judge thereof may decide to be fair and reasonable, before the election of an assigned, or by a sale thereof, to be made in such manner as the court or judge thereof shall direct; or the creditor may release or convey his claim to the receiver, if any, or if no receiver then to the sheriff, before the election of an assignee, or to the assignee if an assignee has been elected, upon such property, and be admitted to prove his whole debt. If the value of the property exceeds the sum for which it is so held as security, the assignee may release to the creditor the debtor’s right of redemption thereon on receiving such excess; or he may sell the property, subject to the claim of the creditor thereon, and in either case the assignee and creditor, respectively, shall execute all deeds and writings necessary or proper to consummate the transaction * * *.”
Among other things, section 60, upon which the defendants rely, provides:
“* * * That no valid lien existing in good faith thereunder shall be thereby affected. * * *”
Upon the question presented, it must be conceded that Act No. 1956 is very awkwardly worded and loosely written, and that there is an apparent conflict between the provisions of the Act as to “Voluntary insolvency” and “Involuntary insolvency”. The question presented arises out of an “Involuntary insolvency.” It is elementary that in the construction of any statute, force and effect should be given to the intent of the law, and the purpose for which it was enacted. Act No. 1956 is entitled “An Act providing for the suspension of payments, the relief of insolvent debtors, the protection of creditors. * * *” That was its purpose and intent, and in the case of an involuntary insolvency, section 32 of the Act provides that as soon as the assignee is elected, the clerk of the court shall convey to him all of the property, real, personal and mixed, of the insolvent, and that such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. In the instant case, it appears that the mortgage to the bank covers all of the property of the insolvent debtors, who have made and are now in default in the foreclosure suit. In the very nature of things, the insolvents have no further interest in the foreclosure proceeding. It also appears that at the time the complaint in the foreclosure suit was filed, a receiver was appointed, and that he qualified and took actual possession of the property. Assuming that the bank has a valid mortgage for the amount of its claim, it follows that its lien would not be impaired or its interest in any way jeopardized by a reasonable delay for the appointment of an assignee by the creditors. If such delay is not granted," the bank can obtain a decree for the full amount of its claim and sell all of the property of the insolvents, and the unsecured creditors would be helpless, and would not receive a centavo on the whole amount of their claim. Upon such a state of facts, if a foreclosure suit is not suspended pending the election of an assignee, the mortgagee and the insolvent, through fraud and collusion, as to the amount due on the mortgage, could wipe out all of the assets of an insolvent estate. For example: Suppose A executed a mortgage on all of his property to B, to secure a debt of Pl00,000, upon which A has paid P90,000 of the debt, and later B filed a suit to foreclose his mortgage in which he ignored the payments, and claims that there was P100,000 due and owing upon the mortgage. Pending the foreclosure suit, the creditors of A file a petition to have him declared an involuntary insolvent, A then, realizing that he has no further interest in the property covered by the mortgage, does not appear or make any defense in the foreclosure suit, and permits B to recover judgment against him for P100,000, and B has the mortgaged property sold to satisfy the judgment. By such a proceeding, all the assets of A would be wiped out, and the unsecured creditors would be left helpless. That was never the purpose and intent of the Insolvency Law, which, among other things, was enacted “for the suspension of payments and the protection of creditors.” In the event of collusion between the mortgagee and the insolvent, such a proceeding would defeat the very purpose and intent of the Insolvency Law, and consummate a fraud upon the creditors whose interests the law was designed to protect. Again, section 60 specifically provides “That no valid lien existing in good faith thereunder shall be thereby affected. * * ” Assuming that the bank has a valid lien, and that a receiver was appointed in the foreclosure suit at the time the complaint was filed, that lien would not in any manner be “affected,” or its interest jeopardized in those proceedings, through a reasonable delay for the appointment of an assignee by the creditors. If the bank does not have a valid lien for the full amount of its claim, and is permitted to obtain a decree by default for the full amount, and to sell the property to satisfy the decree, that would operate as a fraud upon the unsecured creditors. Through a reasonable delay in the foreclosure suit for the election of an assignee by the creditors, an assignee could then appear in the foreclosure suit and make any legal defence which he might have. During all of such proceedings, any valid lien which the bank might have would be recognized and respected under the provisions of section 60. As the title of the Act says, the Insolvency Law was designed to provide “for the suspension of payments,” and the “protection of creditors,” and under the law, the assignee appears for and represents the creditors, and he cannot make such appearance until after he is elected and qualified. Section 32 provides that from the date of his appointment, “ * * such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. * * *” Of what legal force and effect is that section, if pending the election of an assignee, all of the assets of the insolvent estate are wiped out by a decree in the foreclosure suit, as would be done in the instant case? If, as that section says, “such assignment shall relate back to the commencement of the proceedings in insolvency,” and “by operation of law shall vest the title to all such property, estate and effects in the assignee,” why should not his legal right to appear and defend in the foreclosure suit also relate back “to the commencement of the proceedings in insolvency,” if for no other’ purpose, to prevent fraud and collusion between the insolvent debtor and the mortgagee in a foreclosure suit, and the wiping out of all the assets of the insolvent estate? If the assignee does not have that legal right, section 32 of the Act is a nullity. This opinion is founded upon our construction of the Insolvency Law in which we do not wish to be understood as casting any reflections upon the justness of the amount of the bank’s claim, but we do say that, upon the facts in this record, the assignee, when elected, ought to have the legal right to appear and defend in the foreclosure suit as of the date when the insolvency proceedings were filed, and as of the date when the title is vested in him as assignee. Otherwise, any title which is vested in him as assignee would be wiped out in the foreclosure suit before he had an opportunity to appear and defend. It will also be noted that the provisions of section 32 apply alike to a voluntary and an involuntary insolvent. The prayer of the petitions is that a writ of prohibition be issued restraining the defendant Simplicio del Rosario from proceeding with the trial and decision in the foreclosure suit until authority is obtained from the insolvency court and an assignee in insolvency can be appointed and made a party defendant in the suit. In other words, that the lower court does not have jurisdiction to proceed in the foreclosure suit and render a decree until such time as an assignee is elected. Legally speaking, upon the filing of the insolvency petition, Velasco & Company ceased to exist and was judicially dead, and it did not have or claim any further interest in the foreclosure suit. If in fact Velasco & Company had been an individual and had died pending the suit, it would be conceded that the lower court would not have jurisdiction to proceed with the trial and render a decree until such time as an administrator or an executor was appointed and substituted as a defendant. Upon legal principle, what is the difference? In the one case, you have a death through natural causes, and in the other, a legal death, as to the estate of the insolvent, through the filing of the insolvency petition. That is the true meaning and legal force and effect of section 32 when it says that upon the election of an assignee, his title to the estate relates back to the filing of the insolvency petition. That is to say, when a petition is filed by creditors to have a person declared an involuntary insolvent where, in the regular course of business, he is declared insolvent, and an assignee is elected, the title of the assignee to all of the estate and assets of the insolvent relates back and becomes vested in the assignee as of the date of the filing of the original petition by the creditors. In other words, as to his estate, the insolvent is then declared judicially dead as of the date of the filing of the petition. During that time the court might have jurisdiction to render a personal judgment against such an insolvent in an action which was brought and pending when the insolvency petition was filed, but it would not have jurisdiction to render a decree for the sale of the assets of the insolvent to satisfy the judgment. It must be admitted that when an administrator is appointed of the estate of a deceased person, the title of the administrator to the assets of the estate relates back to the date of the death of the deceased. That is the true meaning of section 32. If, in a foreclosure suit, where the defendant dies before the rendition of the decree, all proceedings must be stayed until an administrator of his estate is appointed and a substitution made, why does not the same legal principle apply to an insolvent estate where the title to the estate of the insolvent relates back and becomes vested in the assignee when elected as of the date of the filing of the insolvency petition? Upon the undisputed facts, and in the interest of justice, the writ is granted as prayed for by the petitioners, with costs. So ordered. Ostrand, Romualdez, and VillaReal, JJ., concur.