G.R. Nos.

L-10817-18 February 28, 1958

ENRIQUE LOPEZ, petitioner,

vs.
VICENTE OROSA, JR., and PLAZA THEATRE, INC., respondents.

Nicolas Belmonte and Benjamin T. de Peralta for petitioner.

Tolentino & Garcia and D. R. Cruz for respondent Luzon Surety Co., Inc. Jose B. Macatangay for
respondent Plaza Theatre, Inc.

FELIX, J.:

Enrique Lopez is a resident of Balayan, Batangas, doing business under the trade name of Lopez-Castelo
Sawmill. Sometime in May, 1946, Vicente Orosa, Jr., also a resident of the same province, dropped at
Lopez' house and invited him to make an investment in the theatre business. It was intimated that
Orosa, his family and close friends were organizing a corporation to be known as Plaza Theatre, Inc., that
would engage in such venture. Although Lopez expressed his unwillingness to invest of the same, he
agreed to supply the lumber necessary for the construction of the proposed theatre, and at Orosa's
behest and assurance that the latter would be personally liable for any account that the said
construction might incur, Lopez further agreed that payment therefor would be on demand and not
cash on delivery basis. Pursuant to said verbal agreement, Lopez delivered the lumber which was used
for the construction of the Plaza Theatre on May 17, 1946, up to December 4 of the same year. But of
the total cost of the materials amounting to P62,255.85, Lopez was paid only P20,848.50, thus leaving a
balance of P41,771.35.

We may state at this juncture that the Plaza Theatre was erected on a piece of land with an area of
679.17 square meters formerly owned by Vicente Orosa, Jr., and was acquired by the corporation on
September 25, 1946, for P6,000. As Lopez was pressing Orosa for payment of the remaining unpaid
obligation, the latter and Belarmino Rustia, the president of the corporation, promised to obtain a bank
loan by mortgaging the properties of the Plaza Theatre., out of which said amount of P41,771.35 would
be satisfied, to which assurance Lopez had to accede. Unknown to him, however, as early as November,
1946, the corporation already got a loan for P30,000 from the Philippine National Bank with the Luzon
Surety Company as surety, and the corporation in turn executed a mortgage on the land and building in
favor of said company as counter-security. As the land at that time was not yet brought under the
operation of the Torrens System, the mortgage on the same was registered on November 16, 1946,
under Act No. 3344. Subsequently, when the corporation applied for the registration of the land under
Act 496, such mortgage was not revealed and thus Original Certificate of Title No. O-391 was
correspondingly issued on October 25, 1947, without any encumbrance appearing thereon.

Persistent demand from Lopez for the payment of the amount due him caused Vicente Orosa, Jr. to
execute on March 17, 1947, an alleged "deed of assignment" of his 420 shares of stock of the Plaza
Theater, Inc., at P100 per share or with a total value of P42,000 in favor of the creditor, and as the
obligation still remained unsettled, Lopez filed on November 12, 1947, a complaint with the Court of
First Instance of Batangas (Civil Case No. 4501 which later became R-57) against Vicente Orosa, Jr. and
Plaza Theater, Inc., praying that defendants be sentenced to pay him jointly and severally the sum of
P41,771.35, with legal interest from the firing of the action; that in case defendants fail to pay the same,
that the building and the land covered by OCT No. O-391 owned by the corporation be sold at public
auction and the proceeds thereof be applied to said indebtedness; or that the 420 shares of the capital
stock of the Plaza Theatre, Inc., assigned by Vicente Orosa, Jr., to said plaintiff be sold at public auction
for the same purpose; and for such other remedies as may be warranted by the circumstances. Plaintiff
also caused the annotation of a notice of lis pendens on said properties with the Register of Deeds.

Defendants Vicente Orosa, Jr. and Plaza Theatre, Inc., filed separate answers, the first denying that the
materials were delivered to him as a promoter and later treasurer of the corporation, because he had
purchased and received the same on his personal account; that the land on which the movie house was
constructed was not charged with a lien to secure the payment of the aforementioned unpaid
obligation; and that the 420 shares of stock of the Plaza Theatre, Inc., was not assigned to plaintiff as
collaterals but as direct security for the payment of his indebtedness. As special defense, this defendant
contended that as the 420 shares of stock assigned and conveyed by the assignor and accepted by Lopez
as direct security for the payment of the amount of P41,771.35 were personal properties, plaintiff was
barred from recovering any deficiency if the proceeds of the sale thereof at public auction would not be
sufficient to cover and satisfy the obligation. It was thus prayed that he be declared exempted from the
payment of any deficiency in case the proceeds from the sale of said personal properties would not be
enough to cover the amount sought to be collected.

Defendant Plaza Theatre, Inc., on the other hand, practically set up the same line of defense by alleging
that the building materials delivered to Orosa were on the latter's personal account; and that there was
no understanding that said materials would be paid jointly and severally by Orosa and the corporation,
nor was a lien charged on the properties of the latter to secure payment of the same obligation. As
special defense, defendant corporation averred that while it was true that the materials purchased by
Orosa were sold by the latter to the corporation, such transactions were in good faith and for valuable
consideration thus when plaintiff failed to claim said materials within 30 days from the time of removal
thereof from Orosa, lumber became a different and distinct specie and plaintiff lost whatever rights he
might have in the same and consequently had no recourse against the Plaza Theatre, Inc., that the claim
could not have been refectionary credit, for such kind of obligation referred to an indebtedness incurred
in the repair or reconstruction of something already existing and this concept did not include an entirely
new work; and that the Plaza Theatre, Inc., having been incorporated on October 14, 1946, it could not
have contracted any obligation prior to said date. It was, therefore, prayed that the complaint be
dismissed; that said defendant be awarded the sum P 5,000 for damages, and such other relief as may
be just and proper in the premises.

The surety company, in the meantime, upon discovery that the land was already registered under the
Torrens System and that there was a notice of lis pendens thereon, filed on August 17, 1948, or within
the 1-year period after the issuance of the certificate of title, a petition for review of the decree of the
land registration court dated October 18, 1947, which was made the basis of OCT No. O-319, in order to
annotate the rights and interests of the surety company over said properties (Land Registration Case No.
17 GLRO Rec. No. 296). Opposition thereto was offered by Enrique Lopez, asserting that the amount
demanded by him constituted a preferred lien over the properties of the obligors; that the surety
company was guilty of negligence when it failed to present an opposition to the application for
registration of the property; and that if any violation of the rights and interest of said surety would ever
be made, same must be subject to the lien in his favor.

The two cases were heard jointly and in a decision dated October 30, 1952, the lower Court, after
making an exhaustive and detailed analysis of the respective stands of the parties and the evidence
adduced at the trial, held that defendants Vicente Orosa, Jr., and the Plaza Theatre, Inc., were jointly
liable for the unpaid balance of the cost of lumber used in the construction of the building and the
plaintiff thus acquired the materialman's lien over the same. In making the pronouncement that the lien
was merely confined to the building and did not extend to the land on which the construction was
made, the trial judge took into consideration the fact that when plaintiff started the delivery of lumber
in May, 1946, the land was not yet owned by the corporation; that the mortgage in favor of Luzon
Surety Company was previously registered under Act No. 3344; that the codal provision (Art. 1923 of the
old Spanish Civil Code) specifying that refection credits are preferred could refer only to buildings which
are also classified as real properties, upon which said refection was made. It was, however, declared
that plaintiff's lien on the building was superior to the right of the surety company. And finding that the
Plaza Theatre, Inc., had no objection to the review of the decree issued in its favor by the land
registration court and the inclusion in the title of the encumbrance in favor of the surety company, the
court a quo granted the petition filed by the latter company. Defendants Orosa and the Plaza Theatre,
Inc., were thus required to pay jointly the amount of P41,771.35 with legal interest and costs within 90
days from notice of said decision; that in case of default, the 420 shares of stock assigned by Orosa to
plaintiff be sold at public auction and the proceeds thereof be applied to the payment of the amount
due the plaintiff, plus interest and costs; and that the encumbrance in favor of the surety company be
endorsed at the back of OCT No. O-391, with notation I that with respect to the building, said mortgage
was subject to the materialman's lien in favor of Enrique Lopez.

Plaintiff tried to secure a modification of the decision in so far as it declared that the obligation of
therein defendants was joint instead of solidary, and that the lien did not extend to the land, but same
was denied by order the court of December 23, 1952. The matter was thus appealed to the Court of
appeals, which affirmed the lower court's ruling, and then to this Tribunal. In this instance, plaintiff-
appellant raises 2 issues: (1) whether a materialman's lien for the value of the materials used in the
construction of a building attaches to said structure alone and does not extend to the land on which the
building is adhered to; and (2) whether the lower court and the Court of Appeals erred in not providing
that the material mans liens is superior to the mortgage executed in favor surety company not only on
the building but also on the land.

It is to be noted in this appeal that Enrique Lopez has not raised any question against the part of the
decision sentencing defendants Orosa and Plaza Theatre, Inc., to pay jointly the sum of P41,771.35, so
We will not take up or consider anything on that point. Appellant, however, contends that the lien
created in favor of the furnisher of the materials used for the construction, repair or refection of a
building, is also extended to the land which the construction was made, and in support thereof he relies
on Article 1923 of the Spanish Civil Code, pertinent law on the matter, which reads as follows:

ART. 1923. With respect to determinate real property and real rights of the debtor, the following are
preferred:

xxx xxx xxx

5. Credits for refection, not entered or recorded, with respect to the estate upon which the refection
was made, and only with respect to other credits different from those mentioned in four preceding
paragraphs.

It is argued that in view of the employment of the phrase real estate, or immovable property, and
inasmuch as said provision does not contain any specification delimiting the lien to the building, said
article must be construed as to embrace both the land and the building or structure adhering thereto.
We cannot subscribe to this view, for 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 properties1 could mean only one thing
that a building is by itself an immovable property, a doctrine already pronounced by this Court in the
case of Leung Yee vs. Strong Machinery Co., 37 Phil., 644. Moreover, and in view of the absence of any
specific provision of law 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.

A close examination of the provision of the Civil Code invoked by appellant reveals that the law gives
preference to unregistered refectionary credits only with respect to the real estate upon which the
refection or work was made. This being so, the inevitable conclusion must be that the lien so created
attaches merely to the immovable property for the construction or repair of which the obligation was
incurred. Evidently, therefore, the lien in favor of appellant for the unpaid value of the lumber used in
the construction of the building attaches only to said structure and to no other property of the obligors.

Considering the conclusion thus arrived at, i.e., that the materialman's lien could be charged only to the
building for which the credit was made or which received the benefit of refection, the lower court was
right in, holding at the interest of the mortgagee over the land is superior and cannot be made subject
to the said materialman's lien.

Wherefore, and on the strength of the foregoing considerations, the decision appealed from is hereby
affirmed, with costs against appellant. It is so ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L. and Endencia, JJ., concur.

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.

Jovita L. de Dios for defendant Isabel Iya.

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

FELIX, J.:
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.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and
Endencia, JJ., concur.

G.R. No. L-11139 April 23, 1958

SANTOS EVANGELISTA, petitioner,

vs.
ALTO SURETY & INSURANCE CO., INC., respondent.

Gonzalo D. David for petitioner.

Raul A. Aristorenas and Benjamin Relova for respondent.

CONCEPCION, J.:

This is an appeal by certiorari from a decision of the Court of Appeals.

Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista, instituted Civil Case No.
8235 of the Court of First, Instance of Manila entitled " Santos Evangelista vs. Ricardo Rivera," for a sum
of money. On the same date, he obtained a writ of attachment, which levied upon a house, built by
Rivera on a land situated in Manila and leased to him, by filing copy of said writ and the corresponding
notice of attachment with the Office of the Register of Deeds of Manila, on June 8, 1949. In due course,
judgment was rendered in favor of Evangelista, who, on October 8, 1951, bought the house at public
auction held in compliance with the writ of execution issued in said case. The corresponding definite
deed of sale was issued to him on October 22, 1952, upon expiration of the period of redemption. When
Evangelista sought to take possession of the house, Rivera refused to surrender it, upon the ground that
he had leased the property from the Alto Surety & Insurance Co., Inc. respondent herein and that
the latter is now the true owner of said property. It appears that on May 10, 1952, a definite deed of
sale of the same house had been issued to respondent, as the highest bidder at an auction sale held, on
September 29, 1950, in compliance with a writ of execution issued in Civil Case No. 6268 of the same
court, entitled "Alto Surety & Insurance Co., Inc. vs. Maximo Quiambao, Rosario Guevara and Ricardo
Rivera," in which judgment, for the sum of money, had been rendered in favor respondent herein, as
plaintiff therein. Hence, on June 13, 1953, Evangelista instituted the present action against respondent
and Ricardo Rivera, for the purpose of establishing his (Evangelista) title over said house, securing
possession thereof, apart from recovering damages.

In its answer, respondent alleged, in substance, that it has a better right to the house, because the sale
made, and the definite deed of sale executed, in its favor, on September 29, 1950 and May 10, 1952,
respectively, precede the sale to Evangelista (October 8, 1951) and the definite deed of sale in his favor
(October 22, 1952). It, also, made some special defenses which are discussed hereafter. Rivera, in effect,
joined forces with respondent. After due trial, the Court of First Instance of Manila rendered judgment
for Evangelista, sentencing Rivera and respondent to deliver the house in question to petitioner herein
and to pay him, jointly and severally, forty pesos (P40.00) a month from October, 1952, until said
delivery, plus costs.

On appeal taken by respondent, this decision was reversed by the Court of Appeals, which absolved said
respondent from the complaint, upon the ground that, although the writ of attachment in favor of
Evangelista had been filed with the Register of Deeds of Manila prior to the sale in favor of respondent,
Evangelista did not acquire thereby a preferential lien, the attachment having been levied as if the
house in question were immovable property, although in the opinion of the Court of Appeals, it is
"ostensibly a personal property." As such, the Court of Appeals held, "the order of attachment . . .
should have been served in the manner provided in subsection (e) of section 7 of Rule 59," of the Rules
of Court, reading:

The property of the defendant shall be attached by the officer executing the order in the following
manner:

(e) Debts and credits, and other personal property not capable of manual delivery, by leaving with the
person owing such debts, or having in his possession or under his control, such credits or other personal
property, or with, his agent, a copy of the order, and a notice that the debts owing by him to the
defendant, and the credits and other personal property in his possession, or under his control, belonging
to the defendant, are attached in pursuance of such order. (Emphasis ours.)

However, the Court of Appeals seems to have been of the opinion, also, that the house of Rivera should
have been attached in accordance with subsection (c) of said section 7, as "personal property capable of
manual delivery, by taking and safely keeping in his custody", for it declared that "Evangelists could not
have . . . validly purchased Ricardo Rivera's house from the sheriff as the latter was not in possession
thereof at the time he sold it at a public auction."

Evangelista now seeks a review, by certiorari, of this decision of the Court of Appeals. In this connection,
it is not disputed that although the sale to the respondent preceded that made to Evangelists, the latter
would have a better right if the writ of attachment, issued in his favor before the sale to the respondent,
had been properly executed or enforced. This question, in turn, depends upon whether the house of
Ricardo Rivera is real property or not. In the affirmative case, the applicable provision would be
subsection (a) of section 7, Rule 59 of the Rules of Court, pursuant to which the attachment should be
made "by filing with the registrar of deeds a copy of the order, together with a description of the
property attached, and a notice that it is attached, and by leaving a copy of such order, description, and
notice with the occupant of the property, if any there be."

Respondent maintains, however, and the Court of Appeals held, that Rivera's house is personal
property, the levy upon which must be made in conformity with subsections (c) and (e) of said section 7
of Rule 59. Hence, the main issue before us is whether a house, constructed the lessee of the land on
which it is built, should be dealt with, for purpose, of attachment, as immovable property, or as personal
property.

It is, our considered opinion that said house is not personal property, much less a debt, credit or other
personal property not capable of manual delivery, but immovable property. As explicitly held, in Laddera
vs. Hodges (48 Off. Gaz., 5374), "a true building (not merely superimposed on the soil) is immovable or
real property, whether it is erected by the owner of the land or by usufructuary or lessee. This is the
doctrine of our Supreme Court in Leung Yee vs. Strong Machinery Company, 37 Phil., 644. And it is
amply supported by the rulings of the French Court. . . ."

It is true that the parties to a deed of chattel mortgage may agree to consider a house as personal
property for purposes of said contract (Luna vs. Encarnacion, * 48 Off. Gaz., 2664; Standard Oil Co. of
New York vs. Jaramillo, 44 Phil., 630; De Jesus vs. Juan Dee Co., Inc., 72 Phil., 464). However, this view is
good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of
estoppel. Neither this principle, nor said view, is applicable to strangers to said contract. Much less is it
in point where there has been no contract whatsoever, with respect to the status of the house involved,
as in the case at bar. Apart from this, in Manarang vs. Ofilada (99 Phil., 108; 52 Off. Gaz., 3954), we held:

The question now before us, however, is: Does the fact that the parties entering into a contract
regarding a house gave said property the consideration of personal property in their contract, bind the
sheriff in advertising the property's sale at public auction as personal property? It is to be remembered
that in the case at bar the action was to collect a loan secured by a chattel mortgage on the house. It is
also to be remembered that in practice it is the judgment creditor who points out to the sheriff the
properties that the sheriff is to levy upon in execution, and the judgment creditor in the case at bar is
the party in whose favor the owner of the house had conveyed it by way of chattel mortgage and,
therefore, knew its consideration as personal property.

These considerations notwithstanding, we hold that the rules on execution do not allow, and, we should
not interpret them in such a way as to allow, the special consideration that parties to a contract may
have desired to impart to real estate, for example, as personal property, when they are, not ordinarily
so. Sales on execution affect the public and third persons. The regulation governing sales on execution
are for public officials to follow. The form of proceedings prescribed for each kind of property is suited
to its character, not to the character, which the parties have given to it or desire to give it. When the
rules speak of personal property, property which is ordinarily so considered is meant; and when real
property is spoken of, it means property which is generally known as real property. The regulations were
never intended to suit the consideration that parties may have privately given to the property levied
upon. Enforcement of regulations would be difficult were the convenience or agreement of private
parties to determine or govern the nature of the proceedings. We therefore hold that the mere fact that
a house was the subject of the chattel mortgage and was considered as personal property by the parties
does not make said house personal property for purposes of the notice to be given for its sale of public
auction. This ruling is demanded by the need for a definite, orderly and well defined regulation for
official and public guidance and would prevent confusion and misunderstanding.

We, therefore, declare that the house of mixed materials levied upon on execution, although subject of
a contract of chattel mortgage between the owner and a third person, is real property within the
purview of Rule 39, section 16, of the Rules of Court as it has become a permanent fixture of the land,
which, is real property. (42 Am. Jur. 199-200; Leung Yee vs. Strong Machinery Co., 37 Phil., 644; Republic
vs. Ceniza, et al., 90 Phil., 544; Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.)

The foregoing considerations apply, with equal force, to the conditions for the levy of attachment, for it
similarly affects the public and third persons.

It is argued, however, that, even if the house in question were immovable property, its attachment by
Evangelista was void or ineffective, because, in the language of the Court of Appeals, "after presenting a
Copy of the order of attachment in the Office of the Register of Deeds, the person who might then be in
possession of the house, the sheriff took no pains to serve Ricardo Rivera, or other copies thereof." This
finding of the Court of Appeals is neither conclusive upon us, nor accurate.

The Record on Appeal, annexed to the petition for Certiorari, shows that petitioner alleged, in paragraph
3 of the complaint, that he acquired the house in question "as a consequence of the levy of an
attachment and execution of the judgment in Civil Case No. 8235" of the Court of First Instance of
Manila. In his answer (paragraph 2), Ricardo Rivera admitted said attachment execution of judgment. He
alleged, however, by way a of special defense, that the title of respondent "is superior to that of plaintiff
because it is based on a public instrument," whereas Evangelista relied upon a "promissory note" which
"is only a private instrument"; that said Public instrument in favor of respondent "is superior also to the
judgment in Civil Case No. 8235"; and that plaintiff's claim against Rivera amounted only to P866, "which
is much below the real value" of said house, for which reason it would be "grossly unjust to acquire the
property for such an inadequate consideration." Thus, Rivera impliedly admitted that his house had
been attached, that the house had been sold to Evangelista in accordance with the requisite formalities,
and that said attachment was valid, although allegedly inferior to the rights of respondent, and the
consideration for the sale to Evangelista was claimed to be inadequate.

Respondent, in turn, denied the allegation in said paragraph 3 of the complaint, but only " for the
reasons stated in its special defenses" namely: (1) that by virtue of the sale at public auction, and the
final deed executed by the sheriff in favor of respondent, the same became the "legitimate owner of the
house" in question; (2) that respondent "is a buyer in good faith and for value"; (3) that respondent
"took possession and control of said house"; (4) that "there was no valid attachment by the plaintiff
and/or the Sheriff of Manila of the property in question as neither took actual or constructive
possession or control of the property at any time"; and (5) "that the alleged registration of plaintiff's
attachment, certificate of sale and final deed in the Office of Register of Deeds, Manila, if there was any,
is likewise, not valid as there is no registry of transactions covering houses erected on land belonging to
or leased from another." In this manner, respondent claimed a better right, merely under the theory
that, in case of double sale of immovable property, the purchaser who first obtains possession in good
faith, acquires title, if the sale has not been "recorded . . . in the Registry of Property" (Art. 1544, Civil
Code of the Philippines), and that the writ of attachment and the notice of attachment in favor of
Evangelista should be considered unregistered, "as there is no registry of transactions covering houses
erected on land belonging to or leased from another." In fact, said article 1544 of the Civil Code of the
Philippines, governing double sales, was quoted on page 15 of the brief for respondent in the Court of
Appeals, in support of its fourth assignment of error therein, to the effect that it "has preference or
priority over the sale of the same property" to Evangelista.

In other words, there was no issue on whether copy of the writ and notice of attachment had been
served on Rivera. No evidence whatsoever, to the effect that Rivera had not been served with copies of
said writ and notice, was introduced in the Court of First Instance. In its brief in the Court of Appeals,
respondent did not aver, or even, intimate, that no such copies were served by the sheriff upon Rivera.
Service thereof on Rivera had been impliedly admitted by the defendants, in their respective answers,
and by their behaviour throughout the proceedings in the Court of First Instance, and, as regards
respondent, in the Court of Appeals. In fact, petitioner asserts in his brief herein (p. 26) that copies of
said writ and notice were delivered to Rivera, simultaneously with copies of the complaint, upon service
of summons, prior to the filing of copies of said writ and notice with the register deeds, and the truth of
this assertion has not been directly and positively challenged or denied in the brief filed before us by
respondent herein. The latter did not dare therein to go beyond making a statement for the first time
in the course of these proceedings, begun almost five (5) years ago (June 18, 1953) reproducing
substantially the aforementioned finding of the Court of Appeals and then quoting the same.

Considering, therefore, that neither the pleadings, nor the briefs in the Court of Appeals, raised an issue
on whether or not copies of the writ of attachment and notice of attachment had been served upon
Rivera; that the defendants had impliedly admitted-in said pleadings and briefs, as well as by their
conduct during the entire proceedings, prior to the rendition of the decision of the Court of Appeals
that Rivera had received copies of said documents; and that, for this reason, evidently, no proof was
introduced thereon, we, are of the opinion, and so hold that the finding of the Court of Appeals to the
effect that said copies had not been served upon Rivera is based upon a misapprehension of the specific
issues involved therein and goes beyond the range of such issues, apart from being contrary to the
aforementioned admission by the parties, and that, accordingly, a grave abuse of discretion was
committed in making said finding, which is, furthermore, inaccurate.

Wherefore, the decision of the Court of Appeals is hereby reversed, and another one shall be entered
affirming that of the Court of First Instance of Manila, with the costs of this instance against respondent,
the Alto Surety and Insurance Co., Inc. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Reyes, J.B.L., Endencia and
Felix, JJ., concur.

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.