Leung Yee vs Strong Machinery Co

Leung Yee vs Strong Machinery Co.
37 PHIL 644
GR No. L-11658
February 15, 1918

FACTS
The Compania Agricola Filipina (CAF) purchased from Strong Machinery Co. rice–cleaning machines which CAF installed in one of its buildings.
As security for the purchase price, CAF executed a chattel mortgage on the machines and the building on which they had been installed.
When CEF failed to pay, the registered mortgage was foreclosed and Strong Machinery Co. purchased the building. This sale was annotated in the Chattel Mortgage Registry.
Later, Strong Machinery Co. also purchased from Agricola the lot on which the building was constructed. The sale wasn't registered in the Registry of Property BUT Strong Machinery Co. took possession of the building and the lot.
However, the same building had been previously purchased by Leung Yee, a creditor of Agricola, at a sheriff's sale despite his knowledge of the prior sale in favor of Strong Machinery Co.. The sale to Leung Yee was registered in the Registry of Property.

ISSUES
1. Was the property's nature changed by its registration in the Chattel Mortgage Registry?
2. Who has a better right to the property?

HELD
1. Where the interest conveyed is of the nature of real property, the placing of the document on record in the Chattel Mortgage Registry is a futile act.

Chattel Mortgage refers to the mortgage of Personal Property executed in the manner and form prescribed in the statute.

Since the building is REAL PROPERTY, its sale as annotated in the Chattel Mortgage Registry cannot be given the legal effect of registration in the Registry of Real Property.

The mere fact that the parties decided to deal with the building as personal property does not change its character as real property.

Neither the original registry in the chattel mortgage registry, nor the annotation in said registry of the sale of the mortgaged property had any effect on the building.

  1. Art. 1473 of the New Civil Code provides the following rules on determining ownership of property which has been sold to different vendees:
    • If Personal Property – grant ownership to person who 1st possessed it in good faith

    • If Real Property – grant ownership to person who 1st recorded it in the Registry

    • If no entry – grant to person who 1st possessed in good faith

      If no proof of possession – grant to person who presents oldest title

Since Leung Yee purchased the property despite knowledge of the previous purchase of the same by Strong Machinery Co., it follows that Leung Yee 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. 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.”

Good Faith, or the want of it, is a “state or condition of mind which can only be judged of by actual or fancied tokens or signs.” (Wilder vs. Gilman, 55Vt., 504, 505; Cf. Cardenas Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros. Co. vs. Bromley, 119Mich., 8, 10, 17.)

Honesty Of Intention is the honest lawful intent constituting good faith. It implies a freedom from knowledge and circumstances which ought to put a person on inquiry.

As such, proof of such knowledge overcomes the presumption of good faith.

Following the rule on possessory rights provided in Art. 1473, Strong Machinery Co. has a better right to the property since it first purchased the same ahead of Leung Yee, the latter not being a purchaser in good faith.

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