Property Law Case Digests

POSSESSION IN GOOD FAITH V. POSSESSION IN BAD FAITH (NCC 526)

Leung Yee v. Frank L. Strong Machinery Co.
G.R. No. 11658|J. Carson|February 15, 1918

DOCTRINE: Although article 1473 [now NCC 1544], 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. (Revista de los Tribunales, 13th ed.)

FACTS: Compañía Agricola Filipina (Agricola) bought a considerable quantity of rice-cleaning

machinery company from the machinery company and executed a chattel mortgage on the same to
secure payment of the purchase price. It included in the mortgage deed the building of strong materials
in which the machinery was installed. No reference to the land on which it stood. Agricola failed to
pay. Mortgaged property was sold by the sheriff. Mortgage was registered in the Chattel Mortgage
Registry. Sale of the property to Strong Machinery to satisfy the mortgage was annotated in the
registry (29 Dec 1913).
A few weeks later (≈14 Jan 1914), Agricola executed a deed of sale of the land upon which the
building stood to the machinery company. Deed in a public document, but not registered. 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 Strong Machinery’s title to the
building under the sheriff's certificate of sale. Strong Machinery went into possession of the building
around the time of sale (≈December 1913) and has been in possession ever since.
Around the time the chattel mortgage to Strong Machinery was made, Agricola executed another
mortgage to Leung Yee upon the building, separate from the land on which it stood, to secure payment
of the balance of debt to Leung under a contract for the construction of the building. Agricola failed to
pay debt. Leung secured judgment for the amount. Building executed upon. Leung Bought the building
on sheriff sale (≈18 Dec ’14). Certificate of sale registered with Land Registry-Cavite.
At the time of execution upon the building, Strong Machinery 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. Upon sheriff’s demand, Leung executed indemnity bond of ₱12K. In reliance
of such, sheriff sold the building at public auction. Leung was highest bidder.
Leung filed action to recover possession of bulding from Strong Materials.
TC ruled in favor of Strong Machinery on the ground that the Strong Machinery had its title to
the building registered prior to the date of registry of the Leung's certificate. TC relied on OCC 1473.1

ISSUE: W/N Good faith is a requirement in registration of property. YES.

HELD:
- It has been suggested that since the provisions of OCC 1473 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.

1 NCC 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in
the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and,
in the absence thereof, to the person who presents the oldest title, provided there is good faith. (OCC 1473)

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Property Law Case Digests

o SC disagrees. It could not have been the intention of the legislator to base the
preferential right secured under OCC 1473 upon an inscription of title in bad faith.
Such construction would lead to fraud and collusion.
o The public records cannot be converted into instruments of fraud and oppression by
one who secures an inscription therein in bad faith.
o The force and effect given by law to an inscription in a public record presupposes the
good faith of him who enters such inscription;
o Rights created by statute, 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
makes the inscription.
- SC cited the sentencia of the Spanish Supreme Court: “…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.”
- The agreed statement of facts clearly discloses––
o That the Leung, when he bought and registered the building, was duly notified that
the Strong Machinery had bought the building from Agricola;
o That Strong Machinery was in possession long prior to the sheriff's sale;
o That Strong Machinery was in possession when the sheriff executed Leung’s levy.
o The execution of an indemnity bond by Leung in favor of the sheriff, after the Strong
Machinery 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 Strong Machinery by the judgment-debtor
Agricola, the Leung cannot be said to have been a purchaser in good faith; thus, the subsequent
inscription of the sheriff's certificate of title must be held to have been tainted bad 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;
o 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.
o 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.
o 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.
o Good faith, or lack of it, is in its analysis a question of intention;
o Intent is ascertained through acts. “[H]onesty of intention," which constitutes good
faith implies a "freedom from knowledge and circumstances which ought to put a
person on inquiry." Proof of knowledge overcomes the presumption of good faith.
o 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."
- SC affirms decision of the TC, but disagrees with its ratiocination that prior registration of
Strong Machinery in the Chattel Registry was controlling. The Chattel Registry pertains to
personalty executed in the manner and form prescribed in the statute and the Land Registry
to realty.

JUDGMENT: Affirmed.

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