Leung Yee v. Frank L. Strong Machinery Company and J.G.

Williamson
G. R. No. L-11658 February 15, 1918
Concepts:

 Chattel mortgage is a loan extended to an individual or company on a movable personal

property. Legal ownership of the chattel is transferred to the purchaser at the time of purchase, and
the mortgage is removed once the loan has been repaid.
 Personal v. real property
Facts:
This is a case where a real property has two rightful owners.
In 1913, Compania Agricola Filipina (CAF) bought rice-cleaning machines from Strong Machinery
Company (SMC). In order to secure payment, CAF executed a chattel mortgage on the said machines to
secure payment, which included the building where these rice-cleaning machines were installed. CAF failed
to pay for the loan which prompted Strong Machinery Company to foreclose the mortgage. This foreclosure
included the land where the building was standing. Strong Machinery then took possession of the said
chattel mortgage and registered it in the chattel registry.
Leung Yee is the contractor for the construction of the building where the rice-cleaning machines were
installed. For CAF to pay Yee, CAF also executed a chattel mortgage distinct and separate from the land,
in favor of Leung Yee EVEN when it is already executed in favor of SMC and even when SMC already
took possession of the building. When CAF failed to fulfill its debt to Yee, the sheriff foreclosed the
building and Yee bought the foreclosed building as he is also the highest bidder. The sheriff then levied the
said building after foreclosure and Yee registered the sale in the land registry.
SMC filed a sworn statement setting up its claim of title and to release the property from levy. SMC filed
a case demanding it be declared as the rightful owner.
The lower court ruled in favor of SMC on the ground that it has its title to the building registered prior to
date of registry. It is anchored on Article 1473(1) 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.
Yee appealed the decision of the lower court.

Issue:
Who is the owner of the property?
Ruling:
Strong Machinery should be upheld in this case. However, the reasoning of the trial court cannot be
sustained. Under the Chattel Mortgage Law, only personal movable properties are subject to this law.
The attachment and different treatment of the building to the land does not change its nature: the building
is a real property. Even if the parties dealt with it as a chattel; the manner on how it is dealt with the parties
does not change its nature. Not being under the Chattel Mortgage Law due to its very nature, the building
should be registered to the registry of lands, not to the chattel registry. It follows that neither the original
registry in the chattel mortgage registry of the instrument purporting to be a chattel mortgage of the
building and the machinery installed therein, nor the annotation in the registry of the sale of the
mortgaged property, had any effect whatever so far as the building is concerned.
The court ruled that the reasoning should not be anchored on 1473(1) of the Civil Code which pertains to
personal property but on its 3rd paragraph which contemplates a scenario that no one registered the property.
The Supreme Court ruled that SMC had better rights over Yee. This is due to Yee’s conduct. It is apparent
that Yee acted in bad faith—he already knew that SMC took possession of the building through the
constructive notice by the registry as well as the registered building itself and the possession of SMC. Still,
Yee proceeded with the foreclosure and sale to acquire the building.
Despite the defect that SMC’s title was registered to chattel registry, Supreme Court treated this as no-entry
to the land registry, not recognizing Yee’s registration despite having it first registered in land registry.
Therefore, the court applied 1473(3) which states that: 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.
In this case, SMC took first possession in good faith and should therefore be the owners.