Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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.

not the annotation in that registry of the sale of the mortgaged

property, had any effect whatever so far as the building was concerned.

Article 1473 of the Civil Code is as follows:

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.

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,

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:

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.

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.)

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.

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

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.

EN BANC
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.

Republic of the Philippines

SUPREME COURT
Manila

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.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point.

According to the Code, real property consists of

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.

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.

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.

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.

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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-58469 May 16, 1983
MAKATI LEASING and FINANCE CORPORATION, petitioner,
vs.

WEAREVER TEXTILE MILLS, INC., and HONORABLE

COURT OF APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for
petitioner.
Jose V. Mancella for respondent.

DE CASTRO, J.:
Petition for review on certiorari of the decision of the Court of
Appeals (now Intermediate Appellate Court) promulgated on
August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain
Orders later specified herein, of Judge Ricardo J. Francisco, as
Presiding Judge of the Court of First instance of Rizal Branch
VI, issued in Civil Case No. 36040, as wen as the resolution
dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from
herein petitioner Makati Leasing and Finance Corporation, the
private respondent Wearever Textile Mills, Inc., discounted and
assigned several receivables with the former under a
Receivable Purchase Agreement. To secure the collection of the
receivables assigned, private respondent executed a Chattel
Mortgage over certain raw materials inventory as well as a
machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for
extrajudicial foreclosure of the properties mortgage to it.
However, the Deputy Sheriff assigned to implement the

foreclosure failed to gain entry into private respondent's

premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint
for judicial foreclosure with the Court of First Instance of Rizal,
Branch VI, docketed as Civil Case No. 36040, the case before
the lower court.
Acting on petitioner's application for replevin, the lower court
issued a writ of seizure, the enforcement of which was however
subsequently restrained upon private respondent's filing of a
motion for reconsideration. After several incidents, the lower
court finally issued on February 11, 1981, an order lifting the
restraining order for the enforcement of the writ of seizure and
an order to break open the premises of private respondent to
enforce said writ. The lower court reaffirmed its stand upon
private respondent's filing of a further motion for
reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order,
repaired to the premises of private respondent and removed the
main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings
subsequently filed by herein private respondent, set aside the
Orders of the lower court and ordered the return of the drive
motor seized by the sheriff pursuant to said Orders, after ruling
that the machinery in suit cannot be the subject of replevin,
much less of a chattel mortgage, because it is a real property
pursuant to Article 415 of the new Civil Code, the same being
attached to the ground by means of bolts and the only way to
remove it from respondent's plant would be to drill out or destroy
the concrete floor, the reason why all that the sheriff could do to
enfore the writ was to take the main drive motor of said
machinery. The appellate court rejected petitioner's argument

that private respondent is estopped from claiming that the

machine is real property by constituting a chattel mortgage
thereon.
A motion for reconsideration of this decision of the Court of
Appeals having been denied, petitioner has brought the case to
this Court for review by writ of certiorari. It is contended by
private respondent, however, that the instant petition was
rendered moot and academic by petitioner's act of returning the
subject motor drive of respondent's machinery after the Court of
Appeals' decision was promulgated.
The contention of private respondent is without merit. When
petitioner returned the subject motor drive, it made itself
unequivocably clear that said action was without prejudice to a
motion for reconsideration of the Court of Appeals decision, as
shown by the receipt duly signed by respondent's
representative. 1 Considering that petitioner has reserved its right to
question the propriety of the Court of Appeals' decision, the contention of
private respondent that this petition has been mooted by such return may not
be sustained.
The next and the more crucial question to be resolved in this Petition is
whether the machinery in suit is real or personal property from the point of
view of the parties, with petitioner arguing that it is a personality, while the
respondent claiming the contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage constituted thereon is null
and void, as contended by said respondent.
A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA
143 where this Court, speaking through Justice J.B.L. Reyes, ruled:
Although there is no specific statement referring to the
subject house as personal property, yet by ceding, selling or
transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the
house as chattel, or at least, intended to treat the same as

such, so that they should not now be allowed to make an

inconsistent stand by claiming otherwise. Moreover, the
subject house stood on a rented lot to which defendantsappellants merely had a temporary right as lessee, and
although this can not in itself alone determine the status of
the property, it does so when combined with other factors to
sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as personality.
Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza
Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the
chattel mortgage, it is the defendants-appellants themselves,
as debtors-mortgagors, who are attacking the validity of the
chattel mortgage in this case. The doctrine of estoppel
therefore applies to the herein defendants-appellants, having
treated the subject house as personality.
Examining the records of the instant case, We find no logical justification to
exclude the rule out, as the appellate court did, the present case from the
application of the abovequoted pronouncement. If a house of strong
materials, like what was involved in the above Tumalad case, may be
considered as personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract so agree and no
innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized
only by destination or purpose, may not be likewise treated as such. This is
really because one who has so agreed is estopped from denying the
existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine,
the Court of Appeals lays stress on the fact that the house involved therein
was built on a land that did not belong to the owner of such house. But the
law makes no distinction with respect to the ownership of the land on which
the house is built and We should not lay down distinctions not contemplated
by law.
It must be pointed out that the characterization of the subject machinery as
chattel by the private respondent is indicative of intention and impresses
upon the property the character determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that

the parties to a contract may by agreement treat as personal property that

which by nature would be real property, as long as no interest of third parties
would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it
had never represented nor agreed that the machinery in suit be considered
as personal property but was merely required and dictated on by herein
petitioner to sign a printed form of chattel mortgage which was in a blank
form at the time of signing. This contention lacks persuasiveness. As aptly
pointed out by petitioner and not denied by the respondent, the status of the
subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover,
even granting that the charge is true, such fact alone does not render a
contract void ab initio, but can only be a ground for rendering said contract
voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage
has been annulled. Neither is it disclosed that steps were taken to nullify the
same. On the other hand, as pointed out by petitioner and again not refuted
by respondent, the latter has indubitably benefited from said contract. Equity
dictates that one should not benefit at the expense of another. Private
respondent could not now therefore, be allowed to impugn the efficacy of the
chattel mortgage after it has benefited therefrom,
From what has been said above, the error of the appellate court in ruling that
the questioned machinery is real, not personal property, becomes very
apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v.
CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the case
at bar, the nature of the machinery and equipment involved therein as real
properties never having been disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more
nearly perfect parity with the instant case to be the more controlling
jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of
Appeals are hereby reversed and set aside, and the Orders of the lower
court are hereby reinstated, with costs against the private respondent.
SO ORDERED.

Jovita L. de Dios for defendant Isabel Iya.

M. Perez Cardenas and Apolonio Abola for defendant Associated
Insurance and Surety Co., Inc.
FELIX, J.:

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-10837-38

May 30, 1958

ASSOCIATED INSURANCE and SURETY COMPANY, INC.,

plaintiff,
vs.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO,
defendants.
ISABEL IYA, plaintiff,
vs.
ADRIANO VALINO, LUCIA VALINO and ASSOCIATED
INSURANCE and SURETY COMPANY. INC., defendants.

Adriano Valino and Lucia A. Valino, husband and wife, were the
owners and possessors of a house of strong materials constructed on
Lot No. 3, Block No. 80 of the Grace Park Subdivision in Caloocan,
Rizal, which they purchased on installment basis from the Philippine
Realty Corporation. On November 6, 1951, to enable her to purchase
on credit rice from the NARIC, Lucia A. Valino filed a bond in the
sum of P11,000.00 (AISCO Bond No. G-971) subscribed by the
Associated Insurance and Surety Co., Inc., and as counter-guaranty
therefor, the spouses Valino executed an alleged chattel mortgage on
the aforementioned house in favor of the surety company, which
encumbrance was duly registered with the Chattel Mortgage Register
of Rizal on December 6, 1951. It is admitted that at the time said
undertaking took place, the parcel of land on which the house is
erected was still registered in the name of the Philippine Realty
Corporation. Having completed payment on the purchase price of the
lot, the Valinos were able to secure on October 18, 1958, a certificate
of title in their name (T.C.T. No. 27884). Subsequently, however, or on
October 24, 1952, the Valinos, to secure payment of an indebtedness in
the amount of P12,000.00, executed a real estate mortgage over the lot
and the house in favor of Isabel Iya, which was duly registered and
annotated at the back of the certificate of title.
On the other hand, as Lucia A. Valino, failed to satisfy her obligation
to the NARIC, the surety company was compelled to pay the same
pursuant to the undertaking of the bond. In turn, the surety company
demanded reimbursement from the spouses Valino, and as the latter
likewise failed to do so, the company foreclosed the chattel mortgage
over the house. As a result thereof, a public sale was conducted by the

Provincial Sheriff of Rizal on December 26, 1952, wherein the

property was awarded to the surety company for P8,000.00, the
highest bid received therefor. The surety company then caused the said
house to be declared in its name for tax purposes (Tax Declaration No.
25128).
Sometime in July, 1953, the surety company learned of the existence
of the real estate mortgage over the lot covered by T.C.T. No. 26884
together with the improvements thereon; thus, said surety company
instituted Civil Case No. 2162 of the Court of First Instance of Manila
naming Adriano and Lucia Valino and Isabel Iya, the mortgagee, as
defendants. The complaint prayed for the exclusion of the residential
house from the real estate mortgage in favor of defendant Iya and the
declaration and recognition of plaintiff's right to ownership over the
same in virtue of the award given by the Provincial Sheriff of Rizal
during the public auction held on December 26, 1952. Plaintiff
likewise asked the Court to sentence the spouses Valino to pay said
surety moral and exemplary damages, attorney's fees and costs.
Defendant Isabel Iya filed her answer to the complaint alleging among
other things, that in virtue of the real estate mortgage executed by her
co-defendants, she acquired a real right over the lot and the house
constructed thereon; that the auction sale allegedly conducted by the
Provincial Sheriff of Rizal as a result of the foreclosure of the chattel
mortgage on the house was null and void for non-compliance with the
form required by law. She, therefore, prayed for the dismissal of the
complaint and anullment of the sale made by the Provincial Sheriff.
She also demanded the amount of P5,000.00 from plaintiff as
counterclaim, the sum of P5,000.00 from her co-defendants as
crossclaim, for attorney's fees and costs.
Defendants spouses in their answer admitted some of the averments of
the complaint and denied the others. They, however, prayed for the
dismissal of the action for lack of cause of action, it being alleged that
plaintiff was already the owner of the house in question, and as said

defendants admitted this fact, the claim of the former was already
satisfied.
On October 29, 1953, Isabel Iya filed another civil action against the
Valinos and the surety company (Civil Case No. 2504 of the Court of
First Instance of Manila) stating that pursuant to the contract of
mortgage executed by the spouses Valino on October 24, 1952, the
latter undertook to pay a loan of P12,000.00 with interest at 12% per
annum or P120.00 a month, which indebtedness was payable in 4
years, extendible for only one year; that to secure payment thereof,
said defendants mortgaged the house and lot covered by T.C.T. No.
27884 located at No. 67 Baltazar St., Grace Park Subdivision,
Caloocan, Rizal; that the Associated Insurance and Surety Co., Inc.,
was included as a party defendant because it claimed to have an
interest on the residential house also covered by said mortgage; that it
was stipulated in the aforesaid real estate mortgage that default in the
payment of the interest agreed upon would entitle the mortgagee to
foreclose the same even before the lapse of the 4-year period; and as
defendant spouses had allegedly failed to pay the interest for more
than 6 months, plaintiff prayed the Court to order said defendants to
pay the sum of P12,000.00 with interest thereon at 12% per annum
from March 25, 1953, until fully paid; for an additional sum equivalent
to 20% of the total obligation as damages, and for costs. As an
alternative in case such demand may not be met and satisfied plaintiff
prayed for a decree of foreclosure of the land, building and other
improvements thereon to be sold at public auction and the proceeds
thereof applied to satisfy the demands of plaintiff; that the Valinos, the
surety company and any other person claiming interest on the
mortgaged properties be barred and foreclosed of all rights, claims or
equity of redemption in said properties; and for deficiency judgment in
case the proceeds of the sale of the mortgaged property would be
insufficient to satisfy the claim of plaintiff.

Defendant surety company, in answer to this complaint insisted on its

right over the building, arguing that as the lot on which the house was
constructed did not belong to the spouses at the time the chattel
mortgage was executed, the house might be considered only as a
personal property and that the encumbrance thereof and the subsequent
foreclosure proceedings made pursuant to the provisions of the Chattel
Mortgage Law were proper and legal. Defendant therefore prayed that
said building be excluded from the real estate mortgage and its right
over the same be declared superior to that of plaintiff, for damages,
attorney's fees and costs.
Taking side with the surety company, defendant spouses admitted the
due execution of the mortgage upon the land but assailed the allegation
that the building was included thereon, it being contended that it was
already encumbered in favor of the surety company before the real
estate mortgage was executed, a fact made known to plaintiff during
the preparation of said contract and to which the latter offered no
objection. As a special defense, it was asserted that the action was
premature because the contract was for a period of 4 years, which had
not yet elapsed.
The two cases were jointly heard upon agreement of the parties, who
submitted the same on a stipulation of facts, after which the Court
rendered judgment dated March 8, 1956, holding that the chattel
mortgage in favor of the Associated Insurance and Surety Co., Inc.,
was preferred and superior over the real estate mortgage subsequently
executed in favor of Isabel Iya. It was ruled that as the Valinos were
not yet the registered owner of the land on which the building in
question was constructed at the time the first encumbrance was made,
the building then was still a personality and a chattel mortgage over
the same was proper. However, as the mortgagors were already the
owner of the land at the time the contract with Isabel Iya was entered
into, the building was transformed into a real property and the real
estate mortgage created thereon was likewise adjudged as proper. It is

to be noted in this connection that there is no evidence on record to

sustain the allegation of the spouses Valino that at the time they
mortgaged their house and lot to Isabel Iya, the latter was told or knew
that part of the mortgaged property, i.e., the house, had previously
been mortgaged to the surety company.
The residential building was, therefore, ordered excluded from the
foreclosure prayed for by Isabel Iya, although the latter could exercise
the right of a junior encumbrance. So the spouses Valino were ordered
to pay the amount demanded by said mortgagee or in their default to
have the parcel of land subject of the mortgage sold at public auction
for the satisfaction of Iya's claim.
There is no question as to appellant's right over the land covered by the
real estate mortgage; however, as the building constructed thereon has
been the subject of 2 mortgages; controversy arise as to which of these
encumbrances should receive preference over the other. The decisive
factor in resolving the issue presented by this appeal is the
determination of the nature of the structure litigated upon, for where it
be considered a personality, the foreclosure of the chattel mortgage
and the subsequent sale thereof at public auction, made in accordance
with the Chattel Mortgage Law would be valid and the right acquired
by the surety company therefrom would certainly deserve prior
recognition; otherwise, appellant's claim for preference must be
granted. The lower Court, deciding in favor of the surety company,
based its ruling on the premise that as the mortgagors were not the
owners of the land on which the building is erected at the time the first
encumbrance was made, said structure partook of the nature of a
personal property and could properly be the subject of a chattel
mortgage. We find reason to hold otherwise, for as this Court, defining
the nature or character of a building, has said:
. . . while it is true that generally, real estate connotes the land
and the building constructed thereon, it is obvious that the

inclusion of the building, separate and distinct from the land, in

the enumeration of what may constitute real properties (Art.
415, new Civil Code) could only mean one thing that a
building is by itself an immovable property . . . Moreover, and
in view of the absence of any specific provision to the contrary,
a building is an immovable property irrespective of whether or
not said structure and the land on which it is adhered to belong
to the same owner. (Lopez vs. Orosa, G.R. Nos. supra, p. 98).
A building certainly cannot be divested of its character of a realty by
the fact that the land on which it is constructed belongs to another. To
hold it the other way, the possibility is not remote that it would result
in confusion, for to cloak the building with an uncertain status made
dependent on the ownership of the land, would create a situation where
a permanent fixture changes its nature or character as the ownership of
the land changes hands. In the case at bar, as personal properties could
only be the subject of a chattel mortgage (Section 1, Act 3952) and as
obviously the structure in question is not one, the execution of the
chattel mortgage covering said building is clearly invalid and a nullity.
While it is true that said document was correspondingly registered in
the Chattel Mortgage Register of Rizal, this act produced no effect
whatsoever for where the interest conveyed is in the nature of a real
property, the registration of the document in the registry of chattels is
merely a futile act. Thus, the registration of the chattel mortgage of a
building of strong materials produce no effect as far as the building is
concerned (Leung Yee vs. Strong Machinery Co., 37 Phil., 644). Nor
can we give any consideration to the contention of the surety that it has
acquired ownership over the property in question by reason of the sale
conducted by the Provincial Sheriff of Rizal, for as this Court has aptly
pronounced:
A mortgage creditor who purchases real properties at an
extrajudicial foreclosure sale thereof by virtue of a chattel
mortgage constituted in his favor, which mortgage has been

declared null and void with respect to said real properties,

acquires no right thereto by virtue of said sale (De la Riva vs.
Ah Keo, 60 Phil., 899).
Wherefore the portion of the decision of the lower Court in these two
cases appealed from holding the rights of the surety company, over the
building superior to that of Isabel Iya and excluding the building from
the foreclosure prayed for by the latter is reversed and appellant Isabel
Iya's right to foreclose not only the land but also the building erected
thereon is hereby recognized, and the proceeds of the sale thereof at
public auction (if the land has not yet been sold), shall be applied to
the unsatisfied judgment in favor of Isabel Iya. This decision however
is without prejudice to any right that the Associated Insurance and
Surety Co., Inc., may have against the spouses Adriano and Lucia
Valino on account of the mortgage of said building they executed in
favor of said surety company. Without pronouncement as to costs. It is
so ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17870

September 29, 1962

MINDANAO BUS COMPANY, petitioner,

vs.
THE CITY ASSESSOR & TREASURER and the BOARD OF
TAX APPEALS of Cagayan de Oro City, respondents.
Binamira, Barria and Irabagon for petitioner.
Vicente E. Sabellina for respondents.

LABRADOR, J.:
This is a petition for the review of the decision of the Court of Tax
Appeals in C.T.A. Case No. 710 holding that the petitioner Mindanao
Bus Company is liable to the payment of the realty tax on its
maintenance and repair equipment hereunder referred to.
Respondent City Assessor of Cagayan de Oro City assessed at P4,400
petitioner's above-mentioned equipment. Petitioner appealed the

assessment to the respondent Board of Tax Appeals on the ground that

the same are not realty. The Board of Tax Appeals of the City sustained
the city assessor, so petitioner herein filed with the Court of Tax
Appeals a petition for the review of the assessment.
In the Court of Tax Appeals the parties submitted the following
stipulation of facts:
Petitioner and respondents, thru their respective counsels
agreed to the following stipulation of facts:
1. That petitioner is a public utility solely engaged in
transporting passengers and cargoes by motor trucks, over its
authorized lines in the Island of Mindanao, collecting rates
approved by the Public Service Commission;
2. That petitioner has its main office and shop at Cagayan de
Oro City. It maintains Branch Offices and/or stations at Iligan
City, Lanao; Pagadian, Zamboanga del Sur; Davao City and
Kibawe, Bukidnon Province;
3. That the machineries sought to be assessed by the respondent
as real properties are the following:
(a) Hobart Electric Welder Machine, appearing in the
attached photograph, marked Annex "A";
(b) Storm Boring Machine, appearing in the attached
photograph, marked Annex "B";
(c) Lathe machine with motor, appearing in the attached
photograph, marked Annex "C";
(d) Black and Decker Grinder, appearing in the attached
photograph, marked Annex "D";
(e) PEMCO Hydraulic Press, appearing in the attached
photograph, marked Annex "E";

(f) Battery charger (Tungar charge machine) appearing

in the attached photograph, marked Annex "F"; and
(g) D-Engine Waukesha-M-Fuel, appearing in the
attached photograph, marked Annex "G".
4. That these machineries are sitting on cement or wooden
platforms as may be seen in the attached photographs which
form part of this agreed stipulation of facts;
5. That petitioner is the owner of the land where it maintains
and operates a garage for its TPU motor trucks; a repair shop;
blacksmith and carpentry shops, and with these machineries
which are placed therein, its TPU trucks are made; body
constructed; and same are repaired in a condition to be
serviceable in the TPU land transportation business it operates;
6. That these machineries have never been or were never used
as industrial equipments to produce finished products for sale,
nor to repair machineries, parts and the like offered to the
general public indiscriminately for business or commercial
purposes for which petitioner has never engaged in, to
date.1awphl.nt
The Court of Tax Appeals having sustained the respondent city
assessor's ruling, and having denied a motion for reconsideration,
petitioner brought the case to this Court assigning the following errors:
1. The Honorable Court of Tax Appeals erred in upholding
respondents' contention that the questioned assessments are
valid; and that said tools, equipments or machineries are
immovable taxable real properties.
2. The Tax Court erred in its interpretation of paragraph 5 of
Article 415 of the New Civil Code, and holding that pursuant
thereto the movable equipments are taxable realties, by reason
of their being intended or destined for use in an industry.

3. The Court of Tax Appeals erred in denying petitioner's

contention that the respondent City Assessor's power to assess
and levy real estate taxes on machineries is further restricted by
section 31, paragraph (c) of Republic Act No. 521; and
4. The Tax Court erred in denying petitioner's motion for
reconsideration.
Respondents contend that said equipments, tho movable, are
immobilized by destination, in accordance with paragraph 5 of Article
415 of the New Civil Code which provides:
Art. 415. The following are immovable properties:
xxx

xxx

xxx

(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. (Emphasis ours.)
Note that the stipulation expressly states that the equipment are placed
on wooden or cement platforms. They can be moved around and about
in petitioner's repair shop. In the case of B. H. Berkenkotter vs. Cu
Unjieng, 61 Phil. 663, the Supreme Court said:
Article 344 (Now Art. 415), paragraph (5) of the Civil Code,
gives the character of real property to "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 or industry."
If the installation of the machinery and equipment in question
in the central of the Mabalacat Sugar Co., Inc., in lieu of the
other of less capacity existing therein, for its sugar and
industry, converted them into real property by reason of their
purpose, it cannot be said that their incorporation therewith was

not permanent in character because, as essential and principle

elements of a sugar central, without them the sugar central
would be unable to function or carry on the industrial purpose
for which it was established. Inasmuch as the central is
permanent in character, the necessary machinery and
equipment installed for carrying on the sugar industry for
which it has been established must necessarily be permanent.
(Emphasis ours.)
So that movable equipments to be immobilized in contemplation of the
law must first be "essential and principal elements" of an industry or
works without which such industry or works would be "unable to
function or carry on the industrial purpose for which it was
established." We may here distinguish, therefore, those movable which
become immobilized by destination because they are essential and
principal elements in the industry for those which may not be so
considered immobilized because they are merely incidental, not
essential and principal. Thus, cash registers, typewriters, etc., usually
found and used in hotels, restaurants, theaters, etc. are merely
incidentals and are not and should not be considered immobilized by
destination, for these businesses can continue or carry on their
functions without these equity comments. Airline companies use
forklifts, jeep-wagons, pressure pumps, IBM machines, etc. which are
incidentals, not essentials, and thus retain their movable nature. On the
other hand, machineries of breweries used in the manufacture of liquor
and soft drinks, though movable in nature, are immobilized because
they are essential to said industries; but the delivery trucks and adding
machines which they usually own and use and are found within their
industrial compounds are merely incidental and retain their movable
nature.
Similarly, the tools and equipments in question in this instant case are,
by their nature, not essential and principle municipal elements of
petitioner's business of transporting passengers and cargoes by motor
trucks. They are merely incidentals acquired as movables and used
only for expediency to facilitate and/or improve its service. Even
without such tools and equipments, its business may be carried on, as
petitioner has carried on, without such equipments, before the war. The
transportation business could be carried on without the repair or

service shop if its rolling equipment is repaired or serviced in another

shop belonging to another.

installed in a building on land more or less permanently, and the

sawing is conducted in the land or building.

The law that governs the determination of the question at issue is as

follows:

But in the case at bar the equipments in question are destined only to
repair or service the transportation business, which is not carried on in
a building or permanently on a piece of land, as demanded by the law.
Said equipments may not, therefore, be deemed real property.

Art. 415. The following are immovable property:

xxx

xxx

xxx

(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; (Civil Code of the Phil.)
Aside from the element of essentiality the above-quoted provision also
requires that the industry or works be carried on in a building or on a
piece of land. Thus in the case of Berkenkotter vs. Cu Unjieng, supra,
the "machinery, liquid containers, and instruments or implements" are
found in a building constructed on the land. A sawmill would also be

Resuming what we have set forth above, we hold that the equipments
in question are not absolutely essential to the petitioner's transportation
business, and petitioner's business is not carried on in a building,
tenement or on a specified land, so said equipment may not be
considered real estate within the meaning of Article 415 (c) of the
Civil Code.
WHEREFORE, the decision subject of the petition for review is
hereby set aside and the equipment in question declared not subject to
assessment as real estate for the purposes of the real estate tax.
Without costs.
So ordered.