Leung Yee v. Strong Machinery Company
REITERATIONFacts
The Antecedents: The Compañia Agricola Filipina purchased rice-cleaning machinery from Frank L. Strong Machinery Company (defendant) and executed a chattel mortgage on the machinery, including the building where it was installed, without reference to the land. The mortgage was registered in the chattel mortgage registry. Upon default, the machinery company foreclosed and purchased the property at a sheriff's sale, with the sale annotated in the chattel mortgage registry. Subsequently, the Compañia Agricola Filipina executed an unregistered deed of sale for the land to the machinery company. The machinery company took possession of the building. Concurrently, the Compañia Agricola Filipina executed a separate mortgage on the building to Leung Yee (plaintiff) to secure construction costs. Upon default, Leung Yee obtained a judgment, levied execution on the building, and purchased it at a sheriff's sale, registering the certificate of sale in the land registry. The machinery company, in possession, filed a sworn claim of title with the sheriff, prompting Leung Yee to post an indemnity bond, after which the sheriff sold the building to Leung Yee. Procedural History: The trial court ruled in favor of the defendant machinery company, citing Article 1473 of the Civil Code, on the ground that the company's title to the building was registered prior to the plaintiff's registration. The Petition: The plaintiff instituted an action to recover possession of the building from the defendant machinery company.
Issue(s)
Whether a building of strong materials is real or personal property. Whether registration in the Chattel Mortgage Registry is sufficient for the 'inscription' of real property under Article 1473 of the Civil Code. Whether Leung Yee's registration in the Land Registry was made in good faith, granting him ownership under the rules of double sale.
Ruling
The Supreme Court affirmed the judgment of the lower court in favor of the defendant machinery company, but on different grounds. The Court held that the machinery company is the owner of the property because it first took possession in good faith and the building and land were sold to it prior to the sheriff's sale to the plaintiff. The Court found that the plaintiff was not a purchaser in good faith.
Ratio Decidendi
On Issue 1: The Court ruled that the building of strong materials is real property under the Civil Code. The mere fact that the parties dealt with the building separate and apart from the land on which it stood did not change its inherent character as an immovable. In Philippine jurisprudence, buildings are considered immovables by nature, and contractual stipulations to treat them as personalty are only binding between the parties and cannot prejudice third persons or the application of statutory rules on registration. Consequently, the rules governing real property, including those on double sales and registration, must be applied. On Issue 2: The Court clarified that the 'registry' referred to in Article 1473 of the Civil Code is specifically the Registry of Real Property. The Chattel Mortgage Law contemplates only mortgages of personal property, and the Chattel Mortgage Registry exists solely for that purpose. Therefore, the annotation or inscription of a sale of a building in the Chattel Mortgage Registry has no legal effect whatsoever regarding the building's status as real property. The trial court's reasoning that Strong's registry in the Chattel Mortgage Registry was 'prior' was technically incorrect because such a registry is not the venue for immovables. On Issue 3: Although Leung Yee was the only party who registered the sale in the proper Land Registry, he failed the requirement of good faith. The evidence showed that at the time of the levy and sale, Leung Yee was fully aware that Strong had already purchased the building and was in physical possession. His act of filing an indemnity bond to compel the sheriff to sell the property despite Strong's third-party claim proved he had full knowledge of the defect in CAF's title. Under Article 1473, if the first to register does so in bad faith, the property belongs to the person who first took possession in good faith. Since Strong took possession of the building and land long before Leung Yee's purchase and did so in good faith, Strong holds the superior title.
Main Doctrine
A building constructed on land is considered real property, and its registration in the chattel mortgage registry does not grant it the legal effect of registration in the real property registry. A subsequent purchaser with knowledge of a prior sale and possession by another cannot claim good faith.