Poliand v.

NDC FACTS: Asian Hardwood Limited (Asian Hardwood), a Hong Kong corporation, extended credit accommodations in favor of Galleon Shipping Corporation (GALLEON), a domestic corporation engaged in the maritime transport of goods, a sum totaling S!" million, which were utili#ed to augment GALL$%&'s wor(ing capital depleted as a result of the purchase of five new vessels and two second)hand vessels and competitiveness of the shipping industr*+ ,o finance the ac-uisition of the vessels, GALL$%& o.tained loans from /apanese lenders, secured .* a Deed of Undertaking executed .* 012 to guarantee the prompt and punctual pa*ment of GALL$%& to /apanese lenders+ ,o secure 012's guarantee under the Deed of Undertaking, GALL$%& executed a mortgage contract over five of its vessels in favor of 012+ 2ursuant to Letter of 3nstruction (L%3) &o+ 1155 issued .* 2resident 4erdinand 5arcos, GALL$%& and &0C forged a Memorandum of Agreement, where.* &0C assumed the management and operations of GALL$%& .* virtue of a share purchase agreement for the transfer of GALL$%&'s shareholdings+ sing its own funds, &0C paid Asian Hardwood the amount of S!6,777,777+77 as partial settlement of GALL$%&'s o.ligations+ L%3 &o+ 1195 was issued directing the foreclosure of the mortgage on the five vessels+ 4or failure of GALL$%& to pa* its de.t despite repeated demands from 012, pursuant to L%3 &o+ 6689, extra:udiciall* foreclosed the vessels on various dates and was ac-uired .* 012 for the total amount of 29"8 million+ 012 su.se-uentl* sold the vessels to &0C for the same amount+ Asian Hardwood assigned its credit rights over to ;orld niversal ,rading and 3nvestment Compan*, S+A+ (;orld niversal) and later, assigned the credit to petitioner 2%L3A&0+ 2%L3A&0 made written demands on GALL$%&, &0C, and 012 for the satisfaction of the outstanding .alance in the amount of S!" million+ 4or failure to heed the demand, 2%L3A&0, instituted a collection suit against &0C, 012 and GALL$%& filed with the <egional ,rial Court, claimed among other things, that it had a pre erred !ari"i!e lien over the proceeds of the extra:udicial foreclosure sale of GALL$%&'s vessels mortgaged .* &0C to 012+ ,he complaint pra*ed for :udgment ordering &0C, 012, and GALL$%& to pa* 2%L3A&0 :ointl* and severall* the .alance of the credit advances=loan accommodations+ 1* wa* of an alternative cause of action, 2%L3A&0 sought reim.ursement from &0C and 012 for the preferred maritime lien of S!6,68",>8?+9@+ 3n its Answer with Compulsory Counterclaim and Cross-claim, 012 denied .eing a part* to an* of the alleged loan transactions+ 1* wa* of its Affirmative Allegations and Defenses, 012 countered that it was unaware of the maritime lien on the five vessels mortgaged in its favor and that as far as GALL$%&'s foreign .orrowings are concerned, 012 agreed to act as guarantor thereof onl* under the conditions laid down under the Deed of Undertaking+

4or its part, &0C specificall* denied having agreed to the assumption of GALL$%&'s lia.ilities .ecause no purchase and sale agreement was executed and the deliver* of the re-uired shares of stoc( of GALL$%& did not ta(e place+ ,he trial court also ruled that 2%L3A&0 had preference to the maritime lien over the proceeds of the extra:udicial foreclosure sale of GALL$%&'s vessels since the loan advances=credit accommodations utili#ed for the pa*ment of expenses on the vessels were o.tained prior to the constitution of the mortgage in favor of 012+ %n appeal, the appellate court rendered a modified :udgment, a.solving 012 of an* lia.ilit* in view of 2%L3A&0's failure to clearl* prove its action against 012+ However, &0C was held lia.le to 2%L3A&0 for the pa*ment of the preferred maritime lien .ased on L%3 &o+ 6689 which directed &0C to Adischarge such maritime liens as ma* .e necessar* to allow the foreclosed vessels to engage on the international shipping .usiness,B as well as attorne*'s fees and costs of suit+ Hence, the two petitions for <eview on Certiorari were filed to this Court+ #SS$E: ;hether 2%L3A&0 has a preferred maritime lien enforcea.le against &0C or 012 or .oth+ HELD: 1efore 2%L3A&0's claim ma* .e classified as superior to the mortgage constituted on the vessel, it must .e shown to .e one of the enumerated claims which Section 6C, 2+0+ &o+ 69>6 declares as having preferential status in the event of the sale of the vessel+ %ne of such claims enumerated under Section 6C, 2+0+ &o+ 69>6 which is considered to .e superior to the preferred mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage+ Such maritime lien is descri.ed under Section >6, 2+0+ &o+ 69>6, the expense must .e incurred upon the order of the owner of the vessel or its authori#ed person and prior to the recording of the ship mortgage+ ,he trial court found that GALL$%&'s advances o.tained from Asian Hardwood were used to cover, among other things, s%ip !odi i&a"ion &os" and the crew's salar* and wages+ As stated in Section >6, 2+0+ &o+ 69>6, a maritime lien ma* consist in Aother necessaries spent for the vessel+B ,he ship modification cost ma* properl* .e classified under this .road categor* .ecause it was a necessar* expenses for the vessel's navigation+ As long as an expense on the vessel is indispensa.le to the maintenance and navigation of the vessel, it ma* properl* .e treated as a maritime lien for necessaries under Section >6, 2+0+ &o+ 69>6+ ;ith respect to the claim for salar* and wages of the crew, there is no dou.t that it is also one of the enumerated claims under Section 6C, 2+0+ &o+ 69>6, second onl* to :udicial costs and taxes due the government in preference and, thus, having a status superior to 012's mortgage lien+ Only NDC is liable on the maritime lien All things considered, however, the Court finds that onl* &0C is lia.le for the pa*ment of the maritime lien+ A maritime lien is a(in to a mortgage lien in that in spite of the transfer of ownership, the lien is not extinguished+ ,he maritime lien is insepara.le from the vessel and until discharged, it follows the vessel+ Hence, the enforcement of a maritime lien is in the nature and character of a proceeding quasi in rem+ ,he expression Aaction in remB is, in its narrow

application, used onl* with reference to certain proceedings in courts of admiralt* wherein the propert* alone is treated as responsi.le for the claim or o.ligation upon which the proceedings are .ased+ Considering that 012 su.se-uentl* transferred ownership of the vessels to &0C, the Court holds the latter lia.le on the maritime lien+ &otwithstanding the su.se-uent transfer of the vessels to &0C, the maritime lien su.sists+ ,his is a uni-ue situation where the extra:udicial foreclosure of the GALL$%& vessels too( place without the intervention of GALL$%&'s other creditors including 2%L3A&0's predecessors)in)interest who were apparentl* left in the dar( a.out the foreclosure proceedings+ At that time, GALL$%& was alread* a failing corporation having .orrowed large sums of mone* from .an(s and financial institutions+ ;hen GALL$%& defaulted in the pa*ment of its o.ligations to 012, the latter foreclosed on its mortgage over the GALL$%& ships+ ,he other creditors, including 2%L3A&0's predecessors)in)interest who apparentl* had earlier or superior rights over the foreclosed vessels, could not have participated as the* were unaware and were not made parties to the case+ %n this note, the Court .elieves and so holds that the institution of the extra:udicial foreclosure proceedings was tainted with .ad faith+ 3t too( place when &0C had alread* assumed the management and operations of GALL$%&, .* virtue of L%3 6689, which directed &0C to Adischarge such maritime liens as ma* .e necessar* to allow the foreclosed vessels to engage on the international shipping .usiness+B Hence, it could not have pleaded ignorance over the existence of a prior or preferential lien on the vessels su.:ect of foreclosure+