[ G.R. No.

L-7667, November 28, 1955 ]

CHERIE PALILEO, PLAINTIFF AND APPELLEE, VS. BEATRIZ COSIO, DEFENDANT AND APPELLANT.

DECISION

BAUTISTA ANGELO, J.:

Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the transaction
entered into between them on December 18, 1951 be declared as one of loan, and the document executed covering the
transaction as one of equitable mortgage to secure the payment of said loan; (2) the defendant be ordered to credit to
the plaintiff with the necessary amount from the sum received by the defendant from the Associated Insurance & Surety
Co., Inc. and to apply the same to the payment of plaintiff's obligation thus considering it as fully paid; and (3) the
defendant be ordered to pay to plaintiff the difference between the alleged indebtedness of plaintiff and the sum
received by defendant from the aforementioned insurance company, plus the sum allegedly paid to defendant as
interest on the alleged indebtedness.

On December 19,1952, defendant filed her answer setting up as special defense that the transaction entered into between
the plaintiff and defendant is one of sale with option to repurchase but that the period for repurchase had expired without
plaintiff having returned the price agreed upon as a result of which the ownership of the property had become
consolidated in the defendant. Defendant also set up certain counterclaims which involve a total amount of P4,900.

On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the parties, the
same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor her counsel appeared, even if
the latter had been notified of the postponement almost a month earlier, and so the court received the evidence of the
plaintiff. On January 18, 1954, the court, having in view the evidence presented, rendered judgment granting the relief
prayed for in the complaint.

On February 2, 1954, the original counsel for the defendant was substituted and the new counsel immediately moved that
the judgment be set aside on the ground that, due to mistake or excusable negligence, defendant was unable to present her
evidence and the decision was contrary to law, and this motion having been denied, defendant took the present appeal.

The important issue to be determined in this appeal is whether the lower court committed a grave abuse of discretion in
not reopening the case to give defendant an opportunity to present her evidence considering that the failure of her original
counsel to appear was due to mistake or excusable negligence which ordinary prudence could not have guarded against.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel showed
interest in the early disposal of this case by moving the court to have it set for trial. The first date set was April 7, 1953,
but no hearing was had on that date because plaintiff had moved to postpone it. The case was next set for hearing on April
28, 1953, but on motion again of plaintiff, the hearing was transferred to November 6, 1953. Then, upon petition of
defendant, the trial had to be moved to December 15, 1953, and because Atty. Guerrero could not appear on said date
because of a case he had in Cebu City, the hearing was postponed to January 18, 1954.

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed
Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected that Atty.
Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at all. It is averred that
"The days that followed his appointment were very busy days for defendant's former counsel. There was an immediate
need for clearing the backlog of official business, including the reorganization of the Department of Foreign Affairs and
our Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national
importance like the Japanese reparations, and the revision of the trade agreement with the United States, that, Atty.
Guerrero had to work as much as fourteen hours daily. * * * Because of all these unavoidable confusion that followed in
the wake of Atty. Guerrero's sudden and unexpected appointment, the trial of this case scheduled for January 18, 1954
escaped his memory, and consequently, Atty. Guerrero and the defendant were unable to appear when the case was called
for trial." These reasons,—it is intimated,— constitute excusable negligence which ordinary prudence could not have
guarded against and should have been considered by the trial court as sufficient justification to grant the petition of
defendant for a rehearing.

It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of mistake or excusable
negligence is addressed to the sound discretion of the court (See Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25
Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to be disturbed unless it is shown that
the court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De
Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821; Salva vs. Palacio and Leuterio, 90 Phil., 731.) In denying
the motion for reopening the trial court said: "After going over the same arguments, this Court is of the opinion, and so
holds that the decision of this Court of January 18, 1954 should not be disturbed." Considering the stature, ability and
experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before the date set for
trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision.

Coming now to the merits of the case, we note that the lower court made the following findings: On December 18, 1951,
plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following conditions: (a) that plaintiff shall
pay to defendant an interest in the amount of P250 a month; (b) that defendant shall deduct from the loan certain
obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as interest for the first month; and (c)
that after making the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.

Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00 corresponding to nine
months from December 18, 1951, on the basis of P250.00 a month, which is more than the maximum interest authorized
by law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign a document known as
"Conditional Sale of Residential Building", purporting to convey to defendant, with right to repurchase, a two- story
building of strong materials belonging to plaintiff. This document did not express the true intention of the parties which
was merely to place said property as security for the payment of the loan.

After the execution of the aforesaid document, defendant insured the building against fire with the Associated Insurance
& Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in the name of defendant. The building
was partly destroyed by fire and, after proper demand, defendant collected from the insurance company an indemnity of
P13,107.00 Plaintiff demanded from defendant that she be credited with the necessary amount to pay her obligation out of
the insurance proceeds but defendant refused to do so. And on the strength of these facts, the court rendered decision the
dispositive part of which reads as follows:

"Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as shown in
Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the defendant to plaintiff;
ordering the defendant to credit the sum of P13,107 received by the defendant from the Associated Insurance & Surety
Co., Inc. to the payment of plaintiff's obligation in the sum of P12,000.00 as stated in the complaint, thus considering the
agreement of December 18, 1951 between the herein plaintiff and defendant completely paid and leaving still a balance in
the sum of P1,107 from the insurance collected by defendant; that as plaintiff had paid to the defendant the sum of
P2,250.00 for nine months as interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in
this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and
overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to refund to herein
plaintiflF, plus the balance of P1,107 representing the difference of the sum loan of P12,000 and the collected insurance of
P13,107 from the insurance company above mentioned to which the herein plaintiflF is entitled to receive, and to pay the
costs."

The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully compensated by
the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107 representing the difference of the
loan of P12,000 and the sum of P13,107 collected by said defendant from the insurance company notwithstanding the fact
that it was not proven that the insurance was taken for the benefit of the mortgagor?

It is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an insurance taken
by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee, independently of the mortgagor,
insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of
loss, but in such case, he is not allowed to retain his claim against the mortgagor, but is passed by subrogation to the
insurer to the extent of the money paid." (Vance on Insurance, 2d ed., p. 654) Or, stated in another way, "the mortgagee
may insure his interest in the property independently of the mortgagor. Iii that event, upon the destruction of the property
the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the
mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but
it passes by subrogation to the insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed., pp. 772-
773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the case mentioned, an insurance
contract was taken out by the mortgagee upon his own interest, it being stipulated that the proceeds would be paid to him
only and when the case came up for decision, this Court held that the mortgagee, in case of loss, may only recover upon
the policy to the extent of his credit at the time of the loss. It was declared that the mortgaged had no right of action
against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)

It is true that there are authorities which hold that "if a mortgagee procures insurance on his separate interest at his own
expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no
interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage debt" (19 R.
C. L., p. 405), and that, furthermore, the mortgagee "has still a right to recover his whole debt of the mortgagor." (King vs.
State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden, 9 Allen, 123; See also Loomis vs. Eagle Life & Health
Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs.
Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority view (See case note, 3
Lawyers' Report Annotated, new series, p. 79). "The general rule and the weight of authority is, that the insurer is
thereupon subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation of
the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)

Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of the insurance
taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in ordering said defendant
to deliver to the plaintiff the difference between her indebtedness and the amount of insurance received by the defendant,
for, in the light of the majority rule we have above enunciated, the correct solution should be that the proceeds of the
insurance should be delivered to the defendant but that her claim against the plaintiff should be considered assigned to the
insurance company who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity.

Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as follows: (1) the
transaction had between the plaintiff and defendant as shown in Exhibit A is merely an equitable mortgage intended to
secure the payment of the loan of P12,000; (2) that the proceeds of the insurance amounting to P13,107.00 was properly
collected by defendant who is not required to account for it to the plaintiff; (3) that the collection of said insurance
proceeds shall not be deemed to have compensated the obligation of the plaintiff to the defendant, but bars the latter from
claiming its payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the
overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs.

Bengzon, Montemayor, Reyes, A., Jugo, Labrador, Concepcion, and Reyes, J. B. L., JJ., concur.