Leung Yee vs. Strong Machinery Company

In a conflict involving immovable property, Article 1473 of the Civil Code applies. Good faith is an essential requisite for a subsequent registration to confer a preferential right. A purchaser with knowledge of a prior sale or defect in title is not a purchaser in good faith, and his registration does not give him priority over a prior possessor in good faith.

The Compañia Agricola Filipina purchased rice-cleaning machinery from the Frank L. Strong Machinery Company and executed a chattel mortgage over the machinery and the building of strong materials in which it was installed to secure the debt. The building was not attached to the land in the mortgage deed. After default, the sheriff sold the mortgaged property to the Machinery Company. This mortgage and sale were annotated in the Chattel Mortgage Registry. Later, the Compañia Agricola sold the land itself to the Machinery Company via an unregistered deed. Concurrently, the Compañia had given Leung Yee a separate mortgage on the same building to secure a construction debt. After default, Leung Yee obtained a judgment, levied execution on the building, and bought it at a sheriff's sale, registering the certificate in the land registry.

• Filed in the Court of First Instance (now RTC).
• The trial court ruled in favor of the defendant Machinery Company, applying Article 1473 of the Civil Code based on the prior registration in the Chattel Mortgage Registry.
• The plaintiff Leung Yee appealed directly to the Supreme Court.

• The Compañia Agricola Filipina bought machinery from the Machinery Company and gave a chattel mortgage covering both the machinery and the building of strong materials housing it.
• The mortgage and a subsequent sheriff's sale to the Machinery Company were registered in the Chattel Mortgage Registry in December 1913.
• In January 1914, the Compañia sold the underlying land to the Machinery Company via an unregistered deed.
• Around the same time, the Compañia had given Leung Yee a mortgage on the same building.
• Leung Yee obtained a judgment against the Compañia, levied execution on the building in December 1914, bought it at the sheriff's sale, and registered the sheriff's certificate in the land registry.
• At the time of the levy, the Machinery Company was in possession and filed a sworn claim of ownership. Leung Yee then provided an indemnity bond to the sheriff before proceeding with the sale.

• The building was personal property for purposes of the chattel mortgage, so its registration in the Chattel Mortgage Registry was valid.
• His subsequent registration of the sheriff's certificate in the land registry gave him priority under Article 1473 of the Civil Code.

• The building was immovable property by nature, so the chattel mortgage and its registration were void.
• It had taken possession of the building first and in good faith.
• Leung Yee was not a purchaser in good faith, as he had full knowledge of the Machinery Company's prior claim and possession when he bought the property.

• Procedural Issues: N/A
• Substantive Issues:
  1. Whether a building of strong materials can be the subject of a chattel mortgage.
  2. In a double sale of immovable property, which buyer has a better right: the one who first registered in bad faith, or the one who first took possession in good faith?

• Procedural: N/A
• Substantive:
  1. No. A building of strong materials is immovable property by incorporation. The parties' agreement to treat it as personal property in a chattel mortgage does not change its inherent nature. Therefore, the chattel mortgage on the building and its registration in the Chattel Mortgage Registry were void and had no legal effect.
  2. The buyer who first took possession in good faith (the Machinery Company) has the better right. While Article 1473 states that for real property, the first registrant has priority, this provision must be read in conjunction with the good faith requirement found in the first paragraph. Good faith is an essential requisite for registration to confer a preferential right. Leung Yee, having had full knowledge of the Machinery Company's prior purchase and possession when he bought the property at the sheriff's sale and registered his title, was not a purchaser in good faith. Therefore, his registration did not give him priority. The Machinery Company, which first took possession in good faith, prevails under the third paragraph of Article 1473.

• Immovability by Incorporation (Article 415, Civil Code) — Things attached to an immovable in a fixed manner, such as buildings of strong materials, are considered immovable property. The SC applied this to hold that the building could not be validly mortgaged as a chattel, regardless of the parties' intent.
• Good Faith in Registration under Article 1473 — The SC established that the preferential right given to the "first registrant" under the second paragraph of Article 1473 is not absolute. It is qualified by the good faith requirement inherent in the article. Registration in bad faith confers no priority. The SC reasoned that to hold otherwise would allow public records to be used as instruments of fraud.
• Double Sale (Article 1473, Civil Code) — The SC applied the article's hierarchy: (1) ownership goes to the first possessor in good faith for personal property; (2) for real property, to the first registrant in good faith; (3) if no registration, to the first possessor in good faith; (4) if none, to the holder of the oldest title in good faith. The SC placed the case under the third rule, as the first registration was void.

• "The registry her referred to is of course the registry of real property, and it must be apparent that the annotation or inscription of a deed of sale of real property in a chattel mortgage registry cannot be given the legal effect of an inscription in the registry of real property."
• "It could not have been the intention of the legislator to base the preferential right secured under this article of the code upon an inscription of title in bad faith. Such an interpretation placed upon the language of this section would open wide the door to fraud and collusion."
• "A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor."

• Wilder vs. Gilman (55 Vt., 504) — Cited for the definition of good faith as a state of mind judged by external conduct and tokens.
• Sentencia of the Supreme Court of Spain (May 13, 1908) — Cited as persuasive authority that the registration rule in Article 1473 is always understood to be based on the good faith mentioned in the first paragraph.

• Article 1473 of the Civil Code (Spanish Civil Code of 1889) — The core provision governing double sales, establishing the hierarchy of rights based on possession, registration, and title, all conditioned on good faith.
• Chattel Mortgage Law (Act No. 1508) — The SC interpreted its scope, holding it applies only to personal property, and registration thereunder cannot affect the legal status of immovable property.