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Leung Yee v. Strong Machinery Co.

a. Preliminary Provisions (Art. 414) — Real property; effect of registration in the wrong registry
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Title

Leung Yee v. Strong Machinery Co.

Case Decision Date

G.R. No. L-11658 February 15, 1918

The case involves a conflict of ownership over a building constructed of strong materials, where one party (Respondent) purchased it through a chattel mortgage foreclosure and took possession, while the other party (Petitioner) subsequently purchased it at a sheriff's sale under an execution for debt and registered the certificate of sale in the land registry. The Supreme Court affirmed the judgment in favor of the Respondent, holding that the building is real property and that the Petitioner’s registration was ineffective due to bad faith.

Core Doctrine

The central doctrine is that a building is immovable property regardless of the parties' attempts to treat it as a chattel, and in a double sale under Article 1473 of the Civil Code, registration must be coupled with good faith; knowledge of a prior sale or adverse possession by another party precludes a finding of good faith.

Case Digest (G.R. No. L-11658)

Case DigestChapter I — Classification of Property

Leung Yee v. Strong Machinery Co.

G.R. No. L-11658 · February 15, 1918 · Supreme Court

a. Preliminary Provisions (Art. 414) — Real property; effect of registration in the wrong registry

Gist

The case involves a conflict of ownership over a building constructed of strong materials, where one party (Respondent) purchased it through a chattel mortgage foreclosure and took possession, while the other party (Petitioner) subsequently purchased it at a sheriff's sale under an execution for debt and registered the certificate of sale in the land registry. The Supreme Court affirmed the judgment in favor of the Respondent, holding that the building is real property and that the Petitioner’s registration was ineffective due to bad faith.

Core Doctrine

The central doctrine is that a building is immovable property regardless of the parties' attempts to treat it as a chattel, and in a double sale under Article 1473 of the Civil Code, registration must be coupled with good faith; knowledge of a prior sale or adverse possession by another party precludes a finding of good faith.

Facts

  • "Compañia Agricola Filipina" purchased rice-cleaning machinery from Frank L. Strong Machinery Company ("Machinery Co."). To secure the purchase price, "Compañia Agricola Filipina" executed a chattel mortgage on the machinery and included the building of strong materials in which the machinery was installed. Mortgaging a building of strong materials as though it were a chattel is the mistake the whole case grows out of — dealing with it "separate and apart from the land on which it stood in no wise changed its character as real property."
  • Simultaneously, "Compañia Agricola Filipina" executed another mortgage on the same building in favor of Petitioner Leung Yee to secure an indebtedness for the building’s construction. The mortgage in favor of Machinery Co. was registered in the chattel mortgage registry. Registering an immovable in the chattel registry is a "futile act" — that registry exists for personal property — so neither buyer could win on the register, and the case falls to be decided on possession and good faith instead.
  • Upon default by the mortgagor, the building was sold by the sheriff to Machinery Co. on December 29, 1913, in satisfaction of the mortgage, and the sale was annotated in the chattel mortgage registry. In December 1913, Machinery Co. took actual possession of the building. On January 14, 1914, "Compañia Agricola Filipina" executed a deed of sale of the land upon which the building stood to Machinery Co. 3.
  • Subsequently, Petitioner Leung Yee secured a judgment for his debt, levied execution upon the building, and bought it at a sheriff's sale on December 18, 1914. At the time of the levy, Machinery Co. filed a sworn claim of ownership with the sheriff, but Petitioner Leung Yee executed an indemnity bond to proceed with the sale. Petitioner then registered the sheriff’s certificate of sale in the land registry of Cavite. (This is the fact that decided the case. Pushing the sale through on an indemnity bond, after a sworn claim of ownership and with Machinery Co. already in possession since December 1913, is what fixed Leung Yee with notice — and registration in the land registry counts for nothing unless made in good faith.)
  • Petitioner Leung Yee filed the present action to recover possession of the building from Machinery Co. 5.

Issue

Whether the registration of a building in the chattel mortgage registry§ has any legal effect in a case of double sale under Article 1473 of the Civil Code.
Secondary issues. Whether Petitioner Leung Yee is a purchaser in good faith entitled to the protection of registration under the rules of double sale.

Ruling

Main issue. NO — the chattel-registry entry has no legal effect whatever. The building of strong materials housing the rice-cleaning machinery "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." The chattel mortgage registry exists for personal property alone, so recording a building there is a "futile act" that confers nothing and cannot count as the registration contemplated by Article 1473.
Secondary issues. NO — Leung Yee was not a purchaser in good faith, so his prior inscription does not win the double sale. Registration decides the contest only when made in good faith, and when he bought at the sheriff's sale and inscribed his title "he 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."
"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."

Ratio

  • The Court ruled that the building is real property by nature.
  • It held that "the building of strong materials in which the rice-cleaning machinery was installed... 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."
  • Consequently, its registration in the chattel mortgage registry is a "futile act" because that registry is intended solely for personal property.
  • Regarding the conflict of ownership, the Court applied Article 1473§ of the Civil Code (Old), which governs double sales.
  • While the Petitioner registered the property in the land registry, the Court held that registration is only decisive if made in good faith.
  • The Court found the Petitioner acted in bad faith because "when he bought the building at the sheriff’s sale and inscribed his title in the land registry, he 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."

Doctrine

  1. Immovable Character of Buildings: A building is real property, and its character is not altered by the parties' agreement to treat it as a chattel or by its separate ownership from the land.
  2. Registration Efficacy: Registration of real property in the Chattel Mortgage Registry does not satisfy the requirements of Article 1473 of the Civil Code and produces no legal effect against third persons.
  3. Good Faith in Double Sale: To prevail in a double sale of real property, the registrant must be in good faith. "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." Proof of knowledge of a prior sale or facts that should put a person on inquiry overcomes the presumption of good faith.
The Court clarified that it did not question the "righteousness" of the Petitioner's claim against the debtor, but only his "good faith" in the context of the purchase and registration under the double sale rules.

Full Digest — Recitation Format

I. Gist and Central Doctrine

Relationship to requested topic: DIRECT. The case involves a conflict of ownership over a building constructed of strong materials, where one party (Respondent) purchased it through a chattel mortgage foreclosure and took possession, while the other party (Petitioner) subsequently purchased it at a sheriff's sale under an execution for debt and registered the certificate of sale in the land registry. The Supreme Court affirmed the judgment in favor of the Respondent, holding that the building is real property and that the Petitioner’s registration was ineffective due to bad faith. The central doctrine is that a building is immovable property regardless of the parties' attempts to treat it as a chattel, and in a double sale under Article 1473 of the Civil Code, registration must be coupled with good faith; knowledge of a prior sale or adverse possession by another party precludes a finding of good faith.

II. Chronological Narration of Material Facts

  • "Compañia Agricola Filipina" purchased rice-cleaning machinery from Frank L. Strong Machinery Company ("Machinery Co.").
  • To secure the purchase price, "Compañia Agricola Filipina" executed a chattel mortgage on the machinery and included the building of strong materials in which the machinery was installed.
  • Simultaneously, "Compañia Agricola Filipina" executed another mortgage on the same building in favor of Petitioner Leung Yee to secure an indebtedness for the building’s construction.
  • The mortgage in favor of Machinery Co. was registered in the chattel mortgage registry.
  • Upon default by the mortgagor, the building was sold by the sheriff to Machinery Co. on December 29, 1913, in satisfaction of the mortgage, and the sale was annotated in the chattel mortgage registry.
  • In December 1913, Machinery Co. took actual possession of the building.
  • On January 14, 1914, "Compañia Agricola Filipina" executed a deed of sale of the land upon which the building stood to Machinery Co. 3.
  • Subsequently, Petitioner Leung Yee secured a judgment for his debt, levied execution upon the building, and bought it at a sheriff's sale on December 18, 1914.
  • At the time of the levy, Machinery Co. filed a sworn claim of ownership with the sheriff, but Petitioner Leung Yee executed an indemnity bond to proceed with the sale.
  • Petitioner then registered the sheriff’s certificate of sale in the land registry of Cavite.
  • Petitioner Leung Yee filed the present action to recover possession of the building from Machinery Co. 5.

III. Arguments of the Parties

A. Petitioner

Petitioner argued that he has a better right to the property under Article 1473 of the Civil Code because he was the first to record his title in the Registry of Real Property, whereas the Respondent’s prior purchase was only annotated in the Chattel Mortgage Registry.

B. Respondent/Defense

Machinery Co. contended that it was the lawful owner by virtue of a prior purchase and that it had been in continuous possession of the building long before the Petitioner’s levy and sale.

C. Common Ground

Both parties were creditors of the same debtor and both sought to satisfy their claims through the same building.

IV. Issues

A. MAIN ISSUE

Whether the registration of a building in the chattel mortgage registry has any legal effect in a case of double sale under Article 1473 of the Civil Code.

B. SECONDARY ISSUES

Whether Petitioner Leung Yee is a purchaser in good faith entitled to the protection of registration under the rules of double sale.

V. Ruling / Disposition

A. MAIN ISSUE

NO — the chattel-registry entry has no legal effect whatever. The building of strong materials housing the rice-cleaning machinery "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." The chattel mortgage registry exists for personal property alone, so recording a building there is a "futile act" that confers nothing and cannot count as the registration contemplated by Article 1473.

B. SECONDARY ISSUES

NO — Leung Yee was not a purchaser in good faith, so his prior inscription does not win the double sale. Registration decides the contest only when made in good faith, and when he bought at the sheriff's sale and inscribed his title "he 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."
"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."

VI. Ratio Decidendi and Doctrines

A. Ratio Decidendi

  • The Court ruled that the building is real property by nature.
  • It held that "the building of strong materials in which the rice-cleaning machinery was installed... 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."
  • Consequently, its registration in the chattel mortgage registry is a "futile act" because that registry is intended solely for personal property.
  • Regarding the conflict of ownership, the Court applied Article 1473 of the Civil Code (Old), which governs double sales.
  • While the Petitioner registered the property in the land registry, the Court held that registration is only decisive if made in good faith.
  • The Court found the Petitioner acted in bad faith because "when he bought the building at the sheriff’s sale and inscribed his title in the land registry, he 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."

B. Doctrines/Rules

  1. Immovable Character of Buildings: A building is real property, and its character is not altered by the parties' agreement to treat it as a chattel or by its separate ownership from the land.
  2. Registration Efficacy: Registration of real property in the Chattel Mortgage Registry does not satisfy the requirements of Article 1473 of the Civil Code and produces no legal effect against third persons.
  3. Good Faith in Double Sale: To prevail in a double sale of real property, the registrant must be in good faith. "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." Proof of knowledge of a prior sale or facts that should put a person on inquiry overcomes the presumption of good faith.

C. Limitations/Exceptions

  • The Court clarified that it did not question the "righteousness" of the Petitioner's claim against the debtor, but only his "good faith" in the context of the purchase and registration under the double sale rules.

D. Topic Integration

  • The relationship is DIRECT.
  • This case is a foundational authority in Philippine Property Law regarding the classification of buildings as immovables (Article 415§, New Civil Code) and the strict requirement of good faith in the registration of titles (Article 1544§, New Civil Code, formerly Article 1473).

VII. Separate Opinions

NOT IN RECORD (Unanimous decision).

Cited Laws & Provisions

Every statute, rule, and issuance the decision turns on — the text as written, and the work it does in this case.

Civil Code

Article 415, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book II (Property, Ownership, and Its Modifications), Title I (Classification of Property), Chapter 1 (Immovable Property)

The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

(2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable;

(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object;

(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements;

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included;

(7) Fertilizer actually used on a piece of land;

(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant;

(9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast;

(10) Contracts for public works, and servitudes and other real rights over immovable property. (334a)

Why it is cited here

Paragraph (1) names "[l]and, buildings, roads and constructions of all kinds adhered to the soil," and the case applies it against the parties' own arrangements.

A building is immovable regardless of the parties' attempts to treat it as a chattel. So a chattel mortgage executed over one, and registered in the chattel mortgage registry, registers nothing so far as the immovable is concerned — a person searching the property records would never see it.

That is why the first branch of the case matters to the second. The chattel registration could not give constructive notice, so the priority contest had to be decided on other grounds.

Civil Code

Article 1544, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title VI (Sales), Chapter 4 (Obligations of the Vendor), Section 2 (Delivery of the Thing Sold)

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

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

Why it is cited here

The double-sale rule the priority contest is decided under (Article 1473 of the old Code, as the decision numbers it).

For immovable property, ownership belongs "to the person acquiring it who in good faith first recorded it in the Registry of Property"; failing registration, to the person who in good faith was first in possession; and failing that, to the person presenting the oldest title, provided there is good faith.

Notice that good faith qualifies every branch, and that is the holding: registration must be coupled with good faith. Being first to the register is not enough.

Hence the rule the case is famous for — knowledge of a prior sale, or of another's adverse possession, precludes good faith. A buyer who registers knowing someone else bought first has not won the race; he has disqualified himself from it. The article rewards diligence, not speed, and a purchaser who sees someone else in possession is on notice to inquire.

Study digest — refer to the full text of the decision for accuracy. https://lawphil.net/judjuris/juri1918/feb1918/gr_l-11658_1918.html

Cited laws & provisions

Article 415, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book II (Property, Ownership, and Its Modifications), Title I (Classification of Property), Chapter 1 (Immovable Property)

The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

(2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable;

(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object;

(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements;

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included;

(7) Fertilizer actually used on a piece of land;

(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant;

(9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast;

(10) Contracts for public works, and servitudes and other real rights over immovable property. (334a)

Why it is cited here

Paragraph (1) names "[l]and, buildings, roads and constructions of all kinds adhered to the soil," and the case applies it against the parties' own arrangements.

A building is immovable regardless of the parties' attempts to treat it as a chattel. So a chattel mortgage executed over one, and registered in the chattel mortgage registry, registers nothing so far as the immovable is concerned — a person searching the property records would never see it.

That is why the first branch of the case matters to the second. The chattel registration could not give constructive notice, so the priority contest had to be decided on other grounds.

Full entry below ↓

Article 1544, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title VI (Sales), Chapter 4 (Obligations of the Vendor), Section 2 (Delivery of the Thing Sold)

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

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

Why it is cited here

The double-sale rule the priority contest is decided under (Article 1473 of the old Code, as the decision numbers it).

For immovable property, ownership belongs "to the person acquiring it who in good faith first recorded it in the Registry of Property"; failing registration, to the person who in good faith was first in possession; and failing that, to the person presenting the oldest title, provided there is good faith.

Notice that good faith qualifies every branch, and that is the holding: registration must be coupled with good faith. Being first to the register is not enough.

Hence the rule the case is famous for — knowledge of a prior sale, or of another's adverse possession, precludes good faith. A buyer who registers knowing someone else bought first has not won the race; he has disqualified himself from it. The article rewards diligence, not speed, and a purchaser who sees someone else in possession is on notice to inquire.

Full entry below ↓