G.R. No.

L-11658 February 15, 1918

LEUNG YEE, plaintiff-appellant,

vs.
FRANK L. STRONG MACHINERY COMPANY and J. G. WILLIAMSON, defendants-appellees.

Booram and Mahoney for appellant.

Williams, Ferrier and SyCip for appellees.

CARSON, J.:

The "Compañia Agricola Filipina" bought a considerable quantity of rice-cleaning machinery

company from the defendant machinery company, and executed a chattel mortgage thereon to
secure payment of the purchase price. It included in the mortgage deed the building of strong
materials in which the machinery was installed, without any reference to the land on which it stood.
The indebtedness secured by this instrument not having been paid when it fell due, the mortgaged
property was sold by the sheriff, in pursuance of the terms of the mortgage instrument, and was
bought in by the machinery company. The mortgage was registered in the chattel mortgage registry,
and the sale of the property to the machinery company in satisfaction of the mortgage was
annotated in the same registry on December 29, 1913.

A few weeks thereafter, on or about the 14th of January, 1914, the "Compañia Agricola Filipina"
executed a deed of sale of the land upon which the building stood to the machinery company, but
this deed of sale, although executed in a public document, was not registered. This deed makes no
reference to the building erected on the land and would appear to have been executed for the
purpose of curing any defects which might be found to exist in the machinery company's title to the
building under the sheriff's certificate of sale. The machinery company went into possession of the
building at or about the time when this sale took place, that is to say, the month of December, 1913,
and it has continued in possession ever since.

At or about the time when the chattel mortgage was executed in favor of the machinery company,
the mortgagor, the "Compañia Agricola Filipina" executed another mortgage to the plaintiff upon the
building, separate and apart from the land on which it stood, to secure payment of the balance of its
indebtedness to the plaintiff under a contract for the construction of the building. Upon the failure of
the mortgagor to pay the amount of the indebtedness secured by the mortgage, the plaintiff secured
judgment for that amount, levied execution upon the building, bought it in at the sheriff's sale on or
about the 18th of December, 1914, and had the sheriff's certificate of the sale duly registered in the
land registry of the Province of Cavite.

At the time when the execution was levied upon the building, the defendant machinery company,
which was in possession, filed with the sheriff a sworn statement setting up its claim of title and
demanding the release of the property from the levy. Thereafter, upon demand of the sheriff, the
plaintiff executed an indemnity bond in favor of the sheriff in the sum of P12,000, in reliance upon
which the sheriff sold the property at public auction to the plaintiff, who was the highest bidder at the
sheriff's sale.

This action was instituted by the plaintiff to recover possession of the building from the machinery
company.

The trial judge, relying upon the terms of article 1473 of the Civil Code, gave judgment in favor of the
machinery company, on the ground that the company had its title to the building registered prior to
the date of registry of the plaintiff's certificate.
Article 1473 of the Civil Code is as follows:

If the same thing should have been sold to different vendees, the ownership shall be transfer
to the person who may have the first taken possession thereof in good faith, if it should be
personal property.

Should it be real property, it shall belong to the person acquiring it who first recorded it in the
registry.

Should there be no entry, the property shall belong to the person who first took possession of
it in good faith, and, in the absence thereof, to the person who presents the oldest title,
provided there is good faith.

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. By its express terms, the
Chattel Mortgage Law contemplates and makes provision for mortgages of personal property; and
the sole purpose and object of the chattel mortgage registry is to provide for the registry of "Chattel
mortgages," that is to say, mortgages of personal property executed in the manner and form
prescribed in the statute. The building of strong materials in which the rice-cleaning machinery was
installed by the "Compañia Agricola Filipina" was real property, and the mere fact that the parties
seem to have dealt with it separate and apart from the land on which it stood in no wise changed its
character as real property. It follows that neither the original registry in the chattel mortgage of the
building and the machinery installed therein, not the annotation in that registry of the sale of the
mortgaged property, had any effect whatever so far as the building was concerned.

We conclude that the ruling in favor of the machinery company cannot be sustained on the ground
assigned by the trial judge. We are of opinion, however, that the judgment must be sustained on the
ground that the agreed statement of facts in the court below discloses that neither the purchase of
the building by the plaintiff nor his inscription of the sheriff's certificate of sale in his favor was made
in good faith, and that the machinery company must be held to be the owner of the property under
the third paragraph of the above cited article of the code, it appearing that the company first took
possession of the property; and further, that the building and the land were sold to the machinery
company long prior to the date of the sheriff's sale to the plaintiff.

It has been suggested that since the provisions of article 1473 of the Civil Code require "good faith,"
in express terms, in relation to "possession" and "title," but contain no express requirement as to
"good faith" in relation to the "inscription" of the property on the registry, it must be presumed that
good faith is not an essential requisite of registration in order that it may have the effect
contemplated in this article. We cannot agree with this contention. 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. The public records cannot be converted into instruments
of fraud and oppression by one who secures an inscription therein in bad faith. The force and effect
given by law to an inscription in a public record presupposes the good faith of him who enters such
inscription; and rights created by statute, which are predicated upon an inscription in a public
registry, do not and cannot accrue under an inscription "in bad faith," to the benefit of the person who
thus makes the inscription.

Construing the second paragraph of this article of the code, the supreme court of Spain held in its
sentencia of the 13th of May, 1908, that:
 This rule is always to be understood on the basis of the good faith mentioned in the first
paragraph; therefore, it having been found that the second purchasers who record their
purchase had knowledge of the previous sale, the question is to be decided in accordance
with the following paragraph. (Note 2, art. 1473, Civ. Code, Medina and Maranon [1911]
edition.)

Although article 1473, in its second paragraph, provides that the title of conveyance of
ownership of the real property that is first recorded in the registry shall have preference, this
provision must always be understood on the basis of the good faith mentioned in the first
paragraph; the legislator could not have wished to strike it out and to sanction bad faith, just
to comply with a mere formality which, in given cases, does not obtain even in real disputes
between third persons. (Note 2, art. 1473, Civ. Code, issued by the publishers of the La
Revista de los Tribunales, 13th edition.)

The agreed statement of facts clearly discloses that the plaintiff, when he bought the building at the
sheriff's sale and inscribed his title in the land registry, was duly notified that the machinery company
had bought the building from plaintiff's judgment debtor; that it had gone into possession long prior to
the sheriff's sale; and that it was in possession at the time when the sheriff executed his levy. The
execution of an indemnity bond by the plaintiff in favor of the sheriff, after the machinery company
had filed its sworn claim of ownership, leaves no room for doubt in this regard. Having bought in the
building at the sheriff's sale with full knowledge that at the time of the levy and sale the building had
already been sold to the machinery company by the judgment debtor, the plaintiff cannot be said to
have been a purchaser in good faith; and of course, the subsequent inscription of the sheriff's
certificate of title must be held to have been tainted with the same defect.

Perhaps we should make it clear that in holding that the inscription of the sheriff's certificate of sale
to the plaintiff was not made in good faith, we should not be understood as questioning, in any way,
the good faith and genuineness of the plaintiff's claim against the "Compañia Agricola Filipina." The
truth is that both the plaintiff and the defendant company appear to have had just and righteous
claims against their common debtor. No criticism can properly be made of the exercise of the utmost
diligence by the plaintiff in asserting and exercising his right to recover the amount of his claim from
the estate of the common debtor. We are strongly inclined to believe that in procuring the levy of
execution upon the factory building and in buying it at the sheriff's sale, he considered that he was
doing no more than he had a right to do under all the circumstances, and it is highly possible and
even probable that he thought at that time that he would be able to maintain his position in a contest
with the machinery company. There was no collusion on his part with the common debtor, and no
thought of the perpetration of a fraud upon the rights of another, in the ordinary sense of the word.
He may have hoped, and doubtless he did hope, that the title of the machinery company would not
stand the test of an action in a court of law; and if later developments had confirmed his unfounded
hopes, no one could question the legality of the propriety of the course he adopted.

But it appearing that he had full knowledge of the machinery company's claim of ownership when he
executed the indemnity bond and bought in the property at the sheriff's sale, and it appearing further
that the machinery company's claim of ownership was well founded, he cannot be said to have been
an innocent purchaser for value. He took the risk and must stand by the consequences; and it is in
this sense that we find that he was not a purchaser in good faith.

One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim
that he has acquired title thereto in good faith as against the true owner of the land or of an interest
therein; and the same rule must be applied to one who has knowledge of facts which should have
put him upon such inquiry and investigation as might be necessary to acquaint him with the defects
in the title of his vendor. 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. His mere refusal to believe that such defect exists, or his willful
closing of his eyes to the possibility of the existence of a defect in his vendor's title, will not make him
an innocent purchaser for value, if afterwards develops that the title was in fact defective, and it
appears that he had such notice of the defects as would have led to its discovery had he acted with
that measure of precaution which may reasonably be acquired of a prudent man in a like situation.
Good faith, or lack of it, is in its analysis a question of intention; but in ascertaining the intention by
which one is actuated on a given occasion, we are necessarily controlled by the evidence as to the
conduct and outward acts by which alone the inward motive may, with safety, be determined. So it is
that "the honesty of intention," "the honest lawful intent," which constitutes good faith implies a
"freedom from knowledge and circumstances which ought to put a person on inquiry," and so it is
that proof of such knowledge overcomes the presumption of good faith in which the courts always
indulge in the absence of proof to the contrary. "Good faith, or the want of it, is not a visible, tangible
fact that can be seen or touched, but rather a state or condition of mind which can only be judged of
by actual or fancied tokens or signs." (Wilder vs. Gilman, 55 Vt., 504, 505; Cf. Cardenas Lumber
Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros. Co. vs. Bromley, 119 Mich., 8, 10, 17.)

We conclude that upon the grounds herein set forth the disposing part of the decision and judgment
entered in the court below should be affirmed with costs of this instance against the appellant. So
ordered.

G.R. No. L-40411 August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,

vs.
APRONIANO G. CASTILLO and DAVAO LIGHT & POWER CO., INC., defendants-appellees.

Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo and Delfin Joven for appellant.
J.W. Ferrier for appellees.

MALCOLM, J.:

The issue in this case, as announced in the opening sentence of the decision in the trial court and as
set forth by counsel for the parties on appeal, involves the determination of the nature of the
properties described in the complaint. The trial judge found that those properties were personal in
nature, and as a consequence absolved the defendants from the complaint, with costs against the
plaintiff.

The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the Government of the
Philippine Islands. It has operated a sawmill in the sitio of Maa, barrio of Tigatu, municipality of
Davao, Province of Davao. However, the land upon which the business was conducted belonged to
another person. On the land the sawmill company erected a building which housed the machinery
used by it. Some of the implements thus used were clearly personal property, the conflict concerning
machines which were placed and mounted on foundations of cement. In the contract of lease
between the sawmill company and the owner of the land there appeared the following provision:

That on the expiration of the period agreed upon, all the improvements and buildings
introduced and erected by the party of the second part shall pass to the exclusive ownership
of the party of the first part without any obligation on its part to pay any amount for said
improvements and buildings; also, in the event the party of the second part should leave or
abandon the land leased before the time herein stipulated, the improvements and buildings
shall likewise pass to the ownership of the party of the first part as though the time agreed
 upon had expired: Provided, however, That the machineries and accessories are not
included in the improvements which will pass to the party of the first part on the expiration or
abandonment of the land leased.

In another action, wherein the Davao Light & Power Co., Inc., was the plaintiff and the Davao, Saw,
Mill Co., Inc., was the defendant, a judgment was rendered in favor of the plaintiff in that action
against the defendant in that action; a writ of execution issued thereon, and the properties now in
question were levied upon as personalty by the sheriff. No third party claim was filed for such
properties at the time of the sales thereof as is borne out by the record made by the plaintiff herein.
Indeed the bidder, which was the plaintiff in that action, and the defendant herein having
consummated the sale, proceeded to take possession of the machinery and other properties
described in the corresponding certificates of sale executed in its favor by the sheriff of Davao.

As connecting up with the facts, it should further be explained that the Davao Saw Mill Co., Inc., has
on a number of occasions treated the machinery as personal property by executing chattel
mortgages in favor of third persons. One of such persons is the appellee by assignment from the
original mortgages.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code, real property
consists of —

1. Land, buildings, roads and constructions of all kinds adhering to the soil;

xxx xxx xxx

5. Machinery, liquid containers, instruments or implements intended by the owner of any

building or land for use in connection with any industry or trade being carried on therein and
which are expressly adapted to meet the requirements of such trade of industry.

Appellant emphasizes the first paragraph, and appellees the last mentioned paragraph. We entertain
no doubt that the trial judge and appellees are right in their appreciation of the legal doctrines flowing
from the facts.

In the first place, it must again be pointed out that the appellant should have registered its protest
before or at the time of the sale of this property. It must further be pointed out that while not
conclusive, the characterization of the property as chattels by the appellant is indicative of intention
and impresses upon the property the character determined by the parties. In this connection the
decision of this court in the case of Standard Oil Co. of New York vs. Jaramillo ( [1923], 44 Phil.,
630), whether obiter dicta or not, furnishes the key to such a situation.

It is, however not necessary to spend overly must time in the resolution of this appeal on side issues.
It is machinery which is involved; moreover, machinery not intended by the owner of any building or
land for use in connection therewith, but intended by a lessee for use in a building erected on the
land by the latter to be returned to the lessee on the expiration or abandonment of the lease.

A similar question arose in Puerto Rico, and on appeal being taken to the United States Supreme
Court, it was held that machinery which is movable in its nature only becomes immobilized when
placed in a plant by the owner of the property or plant, but not when so placed by a tenant, a
usufructuary, or any person having only a temporary right, unless such person acted as the agent of
the owner. In the opinion written by Chief Justice White, whose knowledge of the Civil Law is well
known, it was in part said:
 To determine this question involves fixing the nature and character of the property from the
point of view of the rights of Valdes and its nature and character from the point of view of
Nevers & Callaghan as a judgment creditor of the Altagracia Company and the rights derived
by them from the execution levied on the machinery placed by the corporation in the plant.
Following the Code Napoleon, the Porto Rican Code treats as immovable (real) property, not
only land and buildings, but also attributes immovability in some cases to property of a
movable nature, that is, personal property, because of the destination to which it is applied.
"Things," says section 334 of the Porto Rican Code, "may be immovable either by their own
nature or by their destination or the object to which they are applicable." Numerous
illustrations are given in the fifth subdivision of section 335, which is as follows: "Machinery,
vessels, instruments or implements intended by the owner of the tenements for the industrial
or works that they may carry on in any building or upon any land and which tend directly to
meet the needs of the said industry or works." (See also Code Nap., articles 516, 518 et seq.
to and inclusive of article 534, recapitulating the things which, though in themselves
movable, may be immobilized.) So far as the subject-matter with which we are dealing —
machinery placed in the plant — it is plain, both under the provisions of the Porto Rican Law
and of the Code Napoleon, that machinery which is movable in its nature only becomes
immobilized when placed in a plant by the owner of the property or plant. Such result would
not be accomplished, therefore, by the placing of machinery in a plant by a tenant or a
usufructuary or any person having only a temporary right. (Demolombe, Tit. 9, No. 203;
Aubry et Rau, Tit. 2, p. 12, Section 164; Laurent, Tit. 5, No. 447; and decisions quoted in
Fuzier-Herman ed. Code Napoleon under articles 522 et seq.) The distinction rests, as
pointed out by Demolombe, upon the fact that one only having a temporary right to the
possession or enjoyment of property is not presumed by the law to have applied movable
property belonging to him so as to deprive him of it by causing it by an act of immobilization
to become the property of another. It follows that abstractly speaking the machinery put by
the Altagracia Company in the plant belonging to Sanchez did not lose its character of
movable property and become immovable by destination. But in the concrete immobilization
took place because of the express provisions of the lease under which the Altagracia held,
since the lease in substance required the putting in of improved machinery, deprived the
tenant of any right to charge against the lessor the cost such machinery, and it was
expressly stipulated that the machinery so put in should become a part of the plant belonging
to the owner without compensation to the lessee. Under such conditions the tenant in putting
in the machinery was acting but as the agent of the owner in compliance with the obligations
resting upon him, and the immobilization of the machinery which resulted arose in legal
effect from the act of the owner in giving by contract a permanent destination to the
machinery.

xxx xxx xxx

The machinery levied upon by Nevers & Callaghan, that is, that which was placed in the
plant by the Altagracia Company, being, as regards Nevers & Callaghan, movable property,
it follows that they had the right to levy on it under the execution upon the judgment in their
favor, and the exercise of that right did not in a legal sense conflict with the claim of Valdes,
since as to him the property was a part of the realty which, as the result of his obligations
under the lease, he could not, for the purpose of collecting his debt, proceed separately
against. (Valdes vs. Central Altagracia [192], 225 U.S., 58.)

Finding no reversible error in the record, the judgment appealed from will be affirmed, the costs of
this instance to be paid by the appellant.