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 "Compaia 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 "Compaia 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
"Compaia 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 "Compaia 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 "Compaia 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.

Arellano, C.J., Johnson, Araullo, Street and Malcolm, JJ., concur.

Torres, Avancea and Fisher, JJ., took no part.
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. ricecleaning 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 ofAgricola, 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 afreedom
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.