Primary Holding

A house constructed on rented land can be validly constituted as personal property and subject to a chattel mortgage if the parties to the contract agree to treat it as such. Furthermore, the mortgagor is not obligated to pay rent to the purchaser during the one-year redemption period following an extrajudicial foreclosure sale, unless the purchaser legally obtains possession through proper court procedures and posting of a bond.

Background

Defendants-Appellants executed a chattel mortgage over their house, built on rented land, to Plaintiffs-Appellees to secure a loan. Upon default, Plaintiffs-Appellees extrajudicially foreclosed the mortgage and purchased the house at auction. Plaintiffs-Appellees then filed an ejectment case against Defendants-Appellants in the municipal court to recover possession and collect rent.

Facts

• 1. Defendants-Appellants obtained a loan of P4,800.00 from Plaintiffs-Appellees.
• 2. To secure the loan, Defendants-Appellants executed a chattel mortgage over their house of strong materials located on rented land in Quiapo, Manila.
• 3. The chattel mortgage was duly registered.
• 4. Defendants-Appellants defaulted on the loan payments.
• 5. Plaintiffs-Appellees extrajudicially foreclosed the mortgage and purchased the house at a public auction on March 27, 1956.
• 6. Plaintiffs-Appellees filed an ejectment case against Defendants-Appellants to recover possession and rent from March 27, 1956.
• 7. Defendants-Appellants argued the chattel mortgage was void ab initio because a house is immovable property and contested the municipal court’s jurisdiction.
• 8. The house was demolished on January 14-15, 1957, due to a separate ejectment case filed by the landowner against Defendants-Appellants for non-payment of land rentals.

Arguments of the Petitioners

• 1. The municipal court had jurisdiction over the ejectment case.
• 2. The chattel mortgage was valid, and the extrajudicial foreclosure was proper.
• 3. Defendants-Appellants should be ordered to vacate the premises and pay rent from the date of foreclosure sale until possession is surrendered.
• 4. Defendants-Appellants are liable for rents during the redemption period.

Arguments of the Respondents

• 1. The municipal court lacked jurisdiction as the issue involved ownership of an immovable property (the house).
• 2. The chattel mortgage was void ab initio because a house is inherently immovable and cannot be subject to a chattel mortgage.
• 3. They are not obligated to pay rent during the one-year redemption period after the extrajudicial foreclosure sale.

Issues

• 1. Did the municipal court have jurisdiction over the ejectment case given the claim of ownership?
• 2. Was the chattel mortgage on the house valid, considering the house is a structure of strong materials?
• 3. Are the Defendants-Appellants legally bound to pay rentals to the Plaintiffs-Appellees during the one-year redemption period after the extrajudicial foreclosure?

Ruling

• 1. The municipal court had jurisdiction as the case was for ejectment, and the allegations in the complaint determine jurisdiction. The defense of ownership does not automatically divest the municipal court of jurisdiction in a detainer case.
• 2. The chattel mortgage was valid. Parties to a contract can treat as personal property that which by nature would be real property, especially when explicitly designated as such in the mortgage contract. The house was on rented land, and the parties intended to treat it as chattel. Furthermore, estoppel applies as Defendants-Appellants treated the house as personalty by executing a chattel mortgage.
• 3. Defendants-Appellants are not obligated to pay rent during the redemption period. Under the Chattel Mortgage Law and Section 34, Rule 39 of the Rules of Court, the purchaser in an extrajudicial foreclosure is not entitled to possession or rent as a matter of right during the redemption period unless they petition the court and post a bond to obtain possession. Since Plaintiffs-Appellees did not take these steps, they are not entitled to rent. The lower court erred in awarding rent for the redemption period.

Doctrines

• 1. Doctrine of Estoppel: Prevents a party from contradicting their previous actions or statements, especially if another party relied on them. In this case, Defendants-Appellants were estopped from claiming the house was immovable after treating it as chattel in the mortgage contract.
• 2. Agreement of Parties can Determine Nature of Property: Parties to a contract may agree to treat real property as personal property, specifically for chattel mortgage purposes, especially when dealing with structures on rented land.
• 3. Rules on Redemption in Extrajudicial Foreclosure: The purchaser in an extrajudicial foreclosure is not automatically entitled to possession or rentals during the redemption period. They must follow specific legal procedures to obtain possession.

Key Excerpts

• 1. "it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property."
• 2. "the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise."
• 3. "In other words, before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same."

Precedents Cited

• 1. Supia and Batiaco vs. Quintero and Ayala: Established that an answer is merely a statement of facts a party expects to prove and not evidence itself, and that courts can proceed to hear cases involving title until the issue is clearly established. Used to address the jurisdictional issue.
• 2. Sy vs. Dalman: Held that in detainer cases, a claim of ownership is a defense, and jurisdiction is determined by the allegations in the complaint and the relief sought. Used to address the jurisdictional issue.
• 3. Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. & Associated Insurance Surety Co., Inc. vs. Iya, et al.: Established the general rule that buildings are immovable property. Distinguished to show that exceptions exist where parties agree to treat buildings as personalty.
• 4. Manarang and Manarang vs. Ofilada & Standard Oil Company of New York vs. Jaramillo: Supported the principle that parties can agree to treat real property as personal property.
• 5. Luna vs. Encarnacion: Similar case involving a chattel mortgage on a house of mixed materials, validating such mortgages when expressly agreed upon. Used as a precedent.
• 6. Navarro vs. Pineda: Reiterated the principle of estoppel in chattel mortgages on houses treated as personal property by contracting parties. Used as a precedent.
• 7. Evangelista vs. Alto Surety & Evangelista vs. Abad: Held that a mortgaged house on rented land can be considered personal property. Used as a precedent.
• 8. Valdez vs. Central Altagracia & Davao Sawmill Co., Inc. vs. Castillo, et al.: Supported the view that objects placed on land by someone with temporary rights do not become immobilized. Used to contextualize houses on rented land as potentially personal property.
• 9. Reyes vs. Hamada & Chan vs. Espe: Established that a purchaser in extrajudicial foreclosure is not automatically entitled to possession or rentals during the redemption period. Used to resolve the issue of rent during redemption.
• 10. De Gracia vs. San Jose: Referenced regarding the requirement for a purchaser to petition for possession during the redemption period.

Statutory and Constitutional Provisions

• 1. Act No. 1508 (Chattel Mortgage Law): Governs chattel mortgages in the Philippines. Cited as the basis for the rules on chattel mortgages.
• 2. Act No. 3135 (as amended by Act No. 4118): Governs extrajudicial foreclosure of mortgages. Cited as the law parties agreed to be governed by.
• 3. Section 6 & 7, Act No. 3135: Provisions on redemption period and purchaser's right to possess during redemption, respectively. Crucial for the ruling on rent during redemption.
• 4. Section 14, Act No. 1508: Provision on the mortgagee's right to sell mortgaged property at public auction. Mentioned in relation to the foreclosure process.
• 5. Article 1390, New Civil Code: Relating to voidable contracts and fraud. Cited to distinguish between void and voidable contracts in response to the fraud argument, although ultimately fraud was not proven.
• 6. Article 415, New Civil Code: Enumeration of immovable property. Referenced by Defendants-Appellants’ argument that the house is immovable.
• 7. Section 34, Rule 39, Revised Rules of Court: Governs rents and profits pending redemption in execution sales, applied to extrajudicial foreclosures to determine rights during the redemption period.
• 8. Section 2, Rule 70, Revised Rules of Court (formerly Rule 72): Requirement for demand in ejectment cases. Mentioned in the background as a point raised by Defendants-Appellants in lower courts, though not a central issue in the Supreme Court decision.
• 9. Sections 464-466, Code of Civil Procedure: Referred to by Act No. 3135 regarding redemption procedures, though not directly discussed in detail in this decision excerpt.
• 10. Section 7, Rule 51, Revised Rules of Court: Regarding the Supreme Court’s authority to review unassigned errors if necessary for justice. Mentioned in passing as justification for addressing the issue of premature filing.