Yellow is attacking Blue.
Yellow scores two hits on Blue.
Blue decides to put both hits on his two Dreadnoughts, because he would prefer not to loose troops.
Yellow plays the card Direct Hit which states "Destroy one damaged Dreadnought or War Sun. Play immediately after the ship has been damaged."
In response (and before anything else happens), Blue plays the card Emergency Repairs which states "Choose a system, immediately repair all of your Dreadnoughts and War Suns in the chosen system. Play at any time."
Yellow argues that since the ship has "already been destroyed" it thus cannot be repaired. Goodbye Dreadnought.
Blue, being someone that plays too much M:tG, says that his card "goes on the stack" and thus repairs both ships.
Who is right, Yellow or Blue?