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.

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-30173 September 30, 1971

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,

vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:

Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only
questions of law are involved.

This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil
Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the court a quo
(Civil Case No. 30993) which also rendered a decision against them, the dispositive portion of which
follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the
defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00
on the house, subject-matter of this action, from March 27, 1956, to January 14, 1967, with
interest at the legal rate from April 18, 1956, the filing of the complaint, until fully paid, plus
attorney's fees in the sum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed a chattel

mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int. 3,
Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being
rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila
on 2 September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received
from plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment was
P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable
on or before August, 1956. It was also agreed that default in the payment of any of the amortizations,
would cause the remaining unpaid balance to becomeimmediately due and Payable and —

the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No.
3135, and for this purpose, the Sheriff of the City of Manila or any of his deputies is hereby
empowered and authorized to sell all the Mortgagor's property after the necessary publication
in order to settle the financial debts of P4,800.00, plus 12% yearly interest, and attorney's
fees...2

When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on
27 March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder,
plaintiffs-appellees were issued the corresponding certificate of sale. Thereafter, on 18 April 1956,
3
plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among
other things, that the house be vacated and its possession surrendered to them, and for defendants-
appellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is
surrendered. On 21 September 1956, the municipal court rendered its decision —
4

... ordering the defendants to vacate the premises described in the complaint; ordering further
to pay monthly the amount of P200.00 from March 27, 1956, until such (time that) the premises
is (sic) completely vacated; plus attorney's fees of P100.00 and the costs of the suit. 5

Defendants-appellants, in their answers in both the municipal court and court a quo impugned the
legality of the chattel mortgage, claiming that they are still the owners of the house; but they waived
the right to introduce evidence, oral or documentary. Instead, they relied on their memoranda in
support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did
not have jurisdiction to try and decide the case because (1) the issue involved, is ownership, and (2)
there was no allegation of prior possession; and (b) failure to prove prior demand pursuant to Section
2, Rule 72, of the Rules of Court. 6

During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to
deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in the
decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for execution,
and it was actually issued on 24 January 1957. However, the judgment regarding the surrender of
possession to plaintiffs-appellees could not be executed because the subject house had been already
demolished on 14 January 1957 pursuant to the order of the court in a separate civil case (No. 25816)
for ejectment against the present defendants for non-payment of rentals on the land on which the
house was constructed.

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and withdrawal
of deposited rentals was denied for the reason that the liability therefor was disclaimed and was still
being litigated, and under Section 8, Rule 72, rentals deposited had to be held until final disposition of
the appeal. 7

On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion
of which is quoted earlier. The said decision was appealed by defendants to the Court of Appeals
which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief and this appeal
was submitted for decision without it.

Defendants-appellants submitted numerous assignments of error which can be condensed into two
questions, namely: .
(a) Whether the municipal court from which the case originated had jurisdiction to adjudicate
the same;

(b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs during the
period of one (1) year provided by law for the redemption of the extrajudicially foreclosed house.

We will consider these questions seriatim.

(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the
case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on
the theory that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial
foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the
house still remained with defendants-appellants who are entitled to possession and not plaintiffs-
appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be
adjudicated first in order to determine possession. lt is contended further that ownership being in issue,
it is the Court of First Instance which has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which
are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or trickery;
and (b) that the subject matter of the mortgage is a house of strong materials, and, being an
immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants'
contentions as not supported by evidence and accordingly dismissed the charge, confirming the
8

earlier finding of the municipal court that "the defense of ownership as well as the allegations of fraud
and deceit ... are mere allegations." 9

It has been held in Supia and Batiaco vs. Quintero and Ayala that "the answer is a mere statement
10

of the facts which the party filing it expects to prove, but it is not evidence; and further, that when the
11

question to be determined is one of title, the Court is given the authority to proceed with the hearing
of the cause until this fact is clearly established. In the case of Sy vs. Dalman, wherein the defendant
12

was also a successful bidder in an auction sale, it was likewise held by this Court that in detainer cases
the aim of ownership "is a matter of defense and raises an issue of fact which should be determined
from the evidence at the trial." What determines jurisdiction are the allegations or averments in the
complaint and the relief asked for. 13

Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab
initio, and can only be a ground for rendering the 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
14

mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence,
defendants-appellants' claim of ownership on the basis of a voidable contract which has not been
voided fails.

It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or
trickery, the chattel mortgage was still null and void ab initio because only personal properties can be
subject of a chattel mortgage. The rule about the status of buildings as immovable property is stated
in Lopez vs. Orosa, Jr. and Plaza Theatre Inc., cited in Associated Insurance Surety Co., Inc. vs. Iya,
15

et al. to the effect that —

16

... 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 irrespective of whether or not
said structure and the land on which it is adhered to belong to the same owner.

Certain deviations, however, have been allowed for various reasons. In the case of Manarang and
Manarang vs. Ofilada, this Court stated that "it is undeniable that the parties to a contract may by
17

agreement treat as personal property that which by nature would be real property", citing Standard Oil
Company of New York vs. Jaramillo. In the latter case, the mortgagor conveyed and transferred to
18

the mortgagee by way of mortgage "the following described personal property." The "personal
19

property" consisted of leasehold rights and a building. Again, in the case of Luna vs. Encarnacion, 20

the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and this
Court hold therein that it was a valid Chattel mortgage because it was so expressly designated and
specifically that the property given as security "is a house of mixed materials, which by its very nature
is considered personal property." In the later case of Navarro vs. Pineda, this Court stated that —
21
 The view that parties to a deed of chattel mortgage may agree to consider a house as personal
property for the purposes of said contract, "is good only insofar as the contracting parties are
concerned. It is based, partly, upon the principle of estoppel" (Evangelista vs. Alto Surety, No.
L-11139, 23 April 1958). In a case, a mortgaged house built on a rented land was held to be a
personal property, not only because the deed of mortgage considered it as such, but also
because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is
now settled that an object placed on land by one who had only a temporary right to the same,
such as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs.
Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil.
709). Hence, if a house belonging to a person stands on a rented land belonging to another
person, it may be mortgaged as a personal property as so stipulated in the document of
mortgage. (Evangelista vs. Abad, Supra.) It should be noted, however that the principle is
predicated on statements by the owner declaring his house to be a chattel, a conduct that may
conceivably estop him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA]
48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expressly designated as Chattel
Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS
by way of Chattel Mortgage the property together with its leasehold rights over the lot on which it is
23

constructed and participation ..." Although there is no specific statement referring to the subject
24

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 defendats-appellants
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 personalty. Finally unlike in the Iya
cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. and Leung Yee vs. F. L. Strong Machinery and
25

Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-
26 27

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 personalty.

(b) Turning to the question of possession and rentals of the premises in question. The Court of First
Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged house had
been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land
on which the house stood. For this reason, the said court limited itself to sentencing the erstwhile
mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage
was foreclosed and the house sold) until 14 January 1957 (when it was torn down by the Sheriff), plus
P300.00 attorney's fees.

Appellants mortgagors question this award, claiming that they were entitled to remain in possession
without any obligation to pay rent during the one year redemption period after the foreclosure sale,
i.e., until 27 March 1957. On this issue, We must rule for the appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508. Section 28

14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a
public officer in almost the same manner as that allowed by Act No. 3135, as amended by Act No.
4118, provided that the requirements of the law relative to notice and registration are complied with. 29

In the instant case, the parties specifically stipulated that "the chattel mortgage will be enforceable in
accordance with the provisions of Special Act No. 3135 ... ." (Emphasis supplied).
30
Section 6 of the Act referred to provides that the debtor-mortgagor (defendants-appellants herein)
31

may, at any time within one year from and after the date of the auction sale, redeem the property sold
at the extra judicial foreclosure sale. Section 7 of the same Act allows the purchaser of the property
32

to obtain from the court the possession during the period of redemption: but the same provision
expressly requires the filing of a petition with the proper Court of First Instance and the furnishing of a
bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the
order for a writ of possession issues as a matter of course. No discretion is left to the court. In the
33

absence of such a compliance, as in the instant case, the purchaser can not claim possession during
the period of redemption as a matter of right. In such a case, the governing provision is Section 34,
Rule 39, of the Revised Rules of Court which also applies to properties purchased in extrajudicial
34

foreclosure proceedings. Construing the said section, this Court stated in the aforestated case of
35

Reyes vs. Hamada.

In other words, before the expiration of the 1-year period within which the judgment-debtor or
mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right,
to possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to
receive the rentals if the purchased property is occupied by tenants, he is, nevertheless,
accountable to the judgment-debtor or mortgagor as the case may be, for the amount so
received and the same will be duly credited against the redemption price when the said debtor
or mortgagor effects the redemption. Differently stated, the rentals receivable from tenants,
although they may be collected by the purchaser during the redemption period, do not belong
to the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems, is
to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount
and the consequent return to him of his properties sold at public auction. (Emphasis supplied)

The Hamada case reiterates the previous ruling in Chan vs. Espe. 36

Since the defendants-appellants were occupying the house at the time of the auction sale, they are
entitled to remain in possession during the period of redemption or within one year from and after 27
March 1956, the date of the auction sale, and to collect the rents or profits during the said period.

It will be noted further that in the case at bar the period of redemption had not yet expired when action
was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession
under Section 7, Act No. 3135, as amended, which is the law selected by the parties to govern the
extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since
plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there could be no
violation or breach thereof. Wherefore, the original complaint stated no cause of action and was
prematurely filed. For this reason, the same should be ordered dismissed, even if there was no
assignment of error to that effect. The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just
decision of the cases. 37

It follows that the court below erred in requiring the mortgagors to pay rents for the year following the
foreclosure sale, as well as attorney's fees.

FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one entered,
dismissing the complaint. With costs against plaintiffs-appellees.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.
SIBAL V VALDEZ

FACTS:

(this case has a lot of confusing facts, just read the original if this digest fails to compress
everything) The Deputy Sheriff of the Province of Tarlac, by virtue of a writ of execution issued
by the Court of First Instance of Pampanga, attached and sold to the defendant Emiliano J.
Valdez the sugar cane planted by the plaintiff and his tenants on seven parcels of land. Included
also in those attached were real properties wherein 8mout of the 11 parcels of land, house and
camarin which was first acquired by Macondray & Co and then later on bought by Valdez in an
auction. First Cause for petitioner: That Within one year from the date of the attachment and
sale the plaintiff offered to redeem said sugar cane and tendered to the defendant Valdez the
amount sufficient to cover the price paid by the latter, the interest thereon and any
assessments or taxes which he may have paid thereon after the purchase, and the interest
corresponding thereto and that Valdez refused to accept the money and to return the sugar
cane to the plaintiff. Second Cause for petitioner: That Valdez was trying to harvest palay from
four out of seven parcels of land. Petitioner filed for preliminary injunction to stop defendant
from 1) distributing the lands 2) harvesting and selling the sugar canes, and 3) harvesting and
selling the palay. The writ was issued which prevented defendant from planting and harvesting
the lands. Defendant later appealed claiming that he was the owner of many of the alleged land
thus he also owns the crops of it. The court awarded the defendant 9,439.08 because the
petitioner unduly denied the defendant to plant in his land thus preventing him to profit
thereto.

ISSUE:
Whether the sugar cane is personal o real property? (The relevance of the issue is with regards
to the sugar cane of the Petitioner which came from the land that now belongs to the
defendant)
RULING:

It is contended that sugar cane comes under the classification of real property as "ungathered
products" in paragraph 2 of article 334 of the Civil Code. Said paragraph 2 of article 334
enumerates as real property the following: Trees, plants, and ungathered products, while they
are annexed to the land or form an integral part of any immovable property." That article,
however, has received in recent years an interpretation by the Tribunal Supremo de España,
which holds that, under certain conditions, growing crops may be considered as personal
property.

In some cases "standing crops" may be considered and dealt with as personal property. In the
case of Lumber Co. vs. Sheriff and Tax Collector (106 La., 418) the Supreme Court said: "True,
by article 465 of the Civil Code it is provided that 'standing crops and the fruits of trees not
gathered and trees before they are cut down . . . are considered as part of the land to which
they are attached, but the immovability provided for is only one in abstracto and without
reference to rights on or to the crop acquired by others than the owners of the property to
which the crop is attached. . . . The existence of a right on the growing crop is a mobilization by
anticipation, a gathering as it were in advance, rendering the crop movable quoad the right
acquired therein. Our jurisprudence recognizes the possible mobilization of the growing crop."

For the purpose of attachment and execution, and for the purposes of the Chattel Mortgage
Law, "ungathered products" have the nature of personal property. SC lowered the award for
damages to the defendant to 8,900.80 by acknowledging the fact that some of the sugar canes
were owned by the petitioner and by reducing the calculated expected yield or profit that
defendant would have made if petitioner did not judicially prevent him from planting and
harvesting his lands.
THE STANDARD OIL COMPANY OF NEW YORK, petitioner,
vs.
JOAQUIN JARAMILLO, as register of deeds of the City of Manila, respondent.

Ross, Lawrence and Selph for petitioner.

City Fiscal Revilla and Assistant City Fiscal Rodas for respondent.

STREET, J.:

This cause is before us upon demurrer interposed by the respondent, Joaquin Jaramillo, register of
deeds of the City of Manila, to an original petition of the Standard Oil Company of New York, seeking
a peremptory mandamus to compel the respondent to record in the proper register a document
purporting to be a chattel mortgage executed in the City of Manila by Gervasia de la Rosa, Vda. de
Vera, in favor of the Standard Oil Company of New York.

It appears from the petition that on November 27, 1922, Gervasia de la Rosa, Vda. de Vera, was the
lessee of a parcel of land situated in the City of Manila and owner of the house of strong materials
built thereon, upon which date she executed a document in the form of a chattel mortgage, purporting
to convey to the petitioner by way of mortgage both the leasehold interest in said lot and the building
which stands thereon.

The clauses in said document describing the property intended to be thus mortgage are expressed in
the following words:

Now, therefore, the mortgagor hereby conveys and transfer to the mortgage, by way of mortgage, the
following described personal property, situated in the City of Manila, and now in possession of the
mortgagor, to wit:

(1) All of the right, title, and interest of the mortgagor in and to the contract of lease hereinabove
referred to, and in and to the premises the subject of the said lease;

(2) The building, property of the mortgagor, situated on the aforesaid leased premises.

After said document had been duly acknowledge and delivered, the petitioner caused the same to be
presented to the respondent, Joaquin Jaramillo, as register of deeds of the City of Manila, for the
purpose of having the same recorded in the book of record of chattel mortgages. Upon examination
of the instrument, the respondent was of the opinion that it was not a chattel mortgage, for the reason
that the interest therein mortgaged did not appear to be personal property, within the meaning of the
Chattel Mortgage Law, and registration was refused on this ground only.

We are of the opinion that the position taken by the respondent is untenable; and it is his duty to accept
the proper fee and place the instrument on record. The duties of a register of deeds in respect to the
registration of chattel mortgage are of a purely ministerial character; and no provision of law can be
cited which confers upon him any judicial or quasi-judicial power to determine the nature of any
document of which registration is sought as a chattel mortgage.

The original provisions touching this matter are contained in section 15 of the Chattel Mortgage Law
(Act No. 1508), as amended by Act No. 2496; but these have been transferred to section 198 of the
Administrative Code, where they are now found. There is nothing in any of these provisions conferring
upon the register of deeds any authority whatever in respect to the "qualification," as the term is used
in Spanish law, of chattel mortgage. His duties in respect to such instruments are ministerial only. The
efficacy of the act of recording a chattel mortgage consists in the fact that it operates as constructive
notice of the existence of the contract, and the legal effects of the contract must be discovered in the
instrument itself in relation with the fact of notice. Registration adds nothing to the instrument,
considered as a source of title, and affects nobody's rights except as a specifies of notice.

Articles 334 and 335 of the Civil Code supply no absolute criterion for discriminating between real
property and personal property for purpose of the application of the Chattel Mortgage Law. Those
articles state rules which, considered as a general doctrine, are law in this jurisdiction; but it must not
be forgotten that under given conditions property may have character different from that imputed to it
in said articles. It is undeniable that the parties to a contract may by agreement treat as personal
property that which by nature would be real property; and it is a familiar phenomenon to see things
classed as real property for purposes of taxation which on general principle might be considered
personal property. Other situations are constantly arising, and from time to time are presented to this
court, in which the proper classification of one thing or another as real or personal property may be
said to be doubtful.

The point submitted to us in this case was determined on September 8, 1914, in an administrative
ruling promulgated by the Honorable James A. Ostrand, now a Justice of this Court, but acting at that
time in the capacity of Judge of the fourth branch of the Court of First Instance of the Ninth Judicial
District, in the City of Manila; and little of value can be here added to the observations contained in
said ruling. We accordingly quote therefrom as follows:

It is unnecessary here to determine whether or not the property described in the document in question
is real or personal; the discussion may be confined to the point as to whether a register of deeds has
authority to deny the registration of a document purporting to be a chattel mortgage and executed in
the manner and form prescribed by the Chattel Mortgage Law.

Then, after quoting section 5 of the Chattel Mortgage Law (Act No. 1508), his Honor continued:

Based principally upon the provisions of section quoted the Attorney-General of the Philippine Islands,
in an opinion dated August 11, 1909, held that a register of deeds has no authority to pass upon the
capacity of the parties to a chattel mortgage which is presented to him for record. A fortiori a register
of deeds can have no authority to pass upon the character of the property sought to be encumbered
by a chattel mortgage. Of course, if the mortgaged property is real instead of personal the chattel
mortgage would no doubt be held ineffective as against third parties, but this is a question to be
determined by the courts of justice and not by the register of deeds.

In Leung Yee vs. Frank L. Strong Machinery Co. and Williamson (37 Phil., 644), this court held that
where the interest conveyed is of the nature of real, property, the placing of the document on record
in the chattel mortgage register is a futile act; but that decision is not decisive of the question now
before us, which has reference to the function of the register of deeds in placing the document on
record.

In the light of what has been said it becomes unnecessary for us to pass upon the point whether the
interests conveyed in the instrument now in question are real or personal; and we declare it to be the
duty of the register of deeds to accept the estimate placed upon the document by the petitioner and
to register it, upon payment of the proper fee.

The demurrer is overruled; and unless within the period of five days from the date of the notification
hereof, the respondent shall interpose a sufficient answer to the petition, the writ of mandamus will be
issued, as prayed, but without costs. So ordered.
Araullo, C.J., Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ., concur.
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 "Compañia 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 "Compañia 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 "Compañia 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
"Compañia 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 "Compañia 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, Avanceña and Fisher, JJ., took no part.
PRUDENTIAL BANK, petitioner,
vs.
HONORABLE DOMINGO D. PANIS, Presiding Judge of Branch III, Court of First Instance of
Zambales and Olongapo City; FERNANDO MAGCALE & TEODULA BALUYUT-MAGCALE,
respondents.

PARAS, J.:

This is a petition for review on certiorari of the November 13, 1978 Decision * of the then Court of First
Instance of Zambales and Olongapo City in Civil Case No. 2443-0 entitled "Spouses Fernando A.
Magcale and Teodula Baluyut-Magcale vs. Hon. Ramon Y. Pardo and Prudential Bank" declaring that
the deeds of real estate mortgage executed by respondent spouses in favor of petitioner bank are null
and void.

The undisputed facts of this case by stipulation of the parties are as follows:

... on November 19, 1971, plaintiffs-spouses Fernando A. Magcale and Teodula Baluyut
Magcale secured a loan in the sum of P70,000.00 from the defendant Prudential Bank. To
secure payment of this loan, plaintiffs executed in favor of defendant on the aforesaid date a
deed of Real Estate Mortgage over the following described properties:

l. A 2-STOREY, SEMI-CONCRETE, residential building with warehouse spaces containing a total floor
area of 263 sq. meters, more or less, generally constructed of mixed hard wood and concrete
materials, under a roofing of cor. g. i. sheets; declared and assessed in the name of FERNANDO
MAGCALE under Tax Declaration No. 21109, issued by the Assessor of Olongapo City with an
assessed value of P35,290.00. This building is the only improvement of the lot.

2. THE PROPERTY hereby conveyed by way of MORTGAGE includes the right of occupancy on the
lot where the above property is erected, and more particularly described and bounded, as follows:
A first class residential land Identffied as Lot No. 720, (Ts-308, Olongapo Townsite
Subdivision) Ardoin Street, East Bajac-Bajac, Olongapo City, containing an area of
465 sq. m. more or less, declared and assessed in the name of FERNANDO
MAGCALE under Tax Duration No. 19595 issued by the Assessor of Olongapo City
with an assessed value of P1,860.00; bounded on the

NORTH: By No. 6, Ardoin Street

SOUTH: By No. 2, Ardoin Street

EAST: By 37 Canda Street, and

WEST: By Ardoin Street.

All corners of the lot marked by conc. cylindrical monuments of the Bureau of Lands as visible limits.
( Exhibit "A, " also Exhibit "1" for defendant).

Apart from the stipulations in the printed portion of the aforestated deed of mortgage, there appears a
rider typed at the bottom of the reverse side of the document under the lists of the properties
mortgaged which reads, as follows:

AND IT IS FURTHER AGREED that in the event the Sales Patent on the lot applied
for by the Mortgagors as herein stated is released or issued by the Bureau of Lands,
the Mortgagors hereby authorize the Register of Deeds to hold the Registration of
same until this Mortgage is cancelled, or to annotate this encumbrance on the Title
upon authority from the Secretary of Agriculture and Natural Resources, which title
with annotation, shall be released in favor of the herein Mortgage.

From the aforequoted stipulation, it is obvious that the mortgagee (defendant Prudential Bank) was at
the outset aware of the fact that the mortgagors (plaintiffs) have already filed a Miscellaneous Sales
Application over the lot, possessory rights over which, were mortgaged to it.
Exhibit "A" (Real Estate Mortgage) was registered under the Provisions of Act 3344 with the Registry
of Deeds of Zambales on November 23, 1971.

On May 2, 1973, plaintiffs secured an additional loan from defendant Prudential Bank in the sum of
P20,000.00. To secure payment of this additional loan, plaintiffs executed in favor of the said
defendant another deed of Real Estate Mortgage over the same properties previously mortgaged in
Exhibit "A." (Exhibit "B;" also Exhibit "2" for defendant). This second deed of Real Estate Mortgage
was likewise registered with the Registry of Deeds, this time in Olongapo City, on May 2,1973.

On April 24, 1973, the Secretary of Agriculture issued Miscellaneous Sales Patent No. 4776 over the
parcel of land, possessory rights over which were mortgaged to defendant Prudential Bank, in favor
of plaintiffs. On the basis of the aforesaid Patent, and upon its transcription in the Registration Book
of the Province of Zambales, Original Certificate of Title No. P-2554 was issued in the name of Plaintiff
Fernando Magcale, by the Ex-Oficio Register of Deeds of Zambales, on May 15, 1972.

For failure of plaintiffs to pay their obligation to defendant Bank after it became due, and upon
application of said defendant, the deeds of Real Estate Mortgage (Exhibits "A" and "B") were
extrajudicially foreclosed. Consequent to the foreclosure was the sale of the properties therein
mortgaged to defendant as the highest bidder in a public auction sale conducted by the defendant City
Sheriff on April 12, 1978 (Exhibit "E"). The auction sale aforesaid was held despite written request
from plaintiffs through counsel dated March 29, 1978, for the defendant City Sheriff to desist from
going with the scheduled public auction sale (Exhibit "D")." (Decision, Civil Case No. 2443-0, Rollo,
pp. 29-31).

Respondent Court, in a Decision dated November 3, 1978 declared the deeds of Real Estate Mortgage
as null and void (Ibid., p. 35).

On December 14, 1978, petitioner filed a Motion for Reconsideration (Ibid., pp. 41-53), opposed by
private respondents on January 5, 1979 (Ibid., pp. 54-62), and in an Order dated January 10, 1979
(Ibid., p. 63), the Motion for Reconsideration was denied for lack of merit. Hence, the instant petition
(Ibid., pp. 5-28).

The first Division of this Court, in a Resolution dated March 9, 1979, resolved to require the
respondents to comment (Ibid., p. 65), which order was complied with the Resolution dated May
18,1979, (Ibid., p. 100), petitioner filed its Reply on June 2,1979 (Ibid., pp. 101-112).
Thereafter, in the Resolution dated June 13, 1979, the petition was given due course and the parties
were required to submit simultaneously their respective memoranda. (Ibid., p. 114).

On July 18, 1979, petitioner filed its Memorandum (Ibid., pp. 116-144), while private respondents filed
their Memorandum on August 1, 1979 (Ibid., pp. 146-155).

In a Resolution dated August 10, 1979, this case was considered submitted for decision (Ibid., P. 158).

In its Memorandum, petitioner raised the following issues:

1. WHETHER OR NOT THE DEEDS OF REAL ESTATE MORTGAGE ARE VALID; AND

2. WHETHER OR NOT THE SUPERVENING ISSUANCE IN FAVOR OF PRIVATE RESPONDENTS

OF MISCELLANEOUS SALES PATENT NO. 4776 ON APRIL 24, 1972 UNDER ACT NO. 730 AND
THE COVERING ORIGINAL CERTIFICATE OF TITLE NO. P-2554 ON MAY 15,1972 HAVE THE
EFFECT OF INVALIDATING THE DEEDS OF REAL ESTATE MORTGAGE. (Memorandum for
Petitioner, Rollo, p. 122).

This petition is impressed with merit.

The pivotal issue in this case is whether or not a valid real estate mortgage can be constituted on the
building erected on the land belonging to another.

The answer is in the affirmative.

In the enumeration of properties under Article 415 of the Civil Code of the Philippines, this Court ruled
that, "it is obvious that the inclusion of "building" separate and distinct from the land, in said provision
of law can only mean that a building is by itself an immovable property." (Lopez vs. Orosa, Jr., et al.,
L-10817-18, Feb. 28, 1958; Associated Inc. and Surety Co., Inc. vs. Iya, et al., L-10837-38, May
30,1958).

Thus, while it is true that a mortgage of land necessarily includes, in the absence of stipulation of the
improvements thereon, buildings, still a building by itself may be mortgaged apart from the land on
which it has been built. Such a mortgage would be still a real estate mortgage for the building would
still be considered immovable property even if dealt with separately and apart from the land (Leung
Yee vs. Strong Machinery Co., 37 Phil. 644). In the same manner, this Court has also established that
possessory rights over said properties before title is vested on the grantee, may be validly transferred
or conveyed as in a deed of mortgage (Vda. de Bautista vs. Marcos, 3 SCRA 438 [1961]).

Coming back to the case at bar, the records show, as aforestated that the original mortgage deed on
the 2-storey semi-concrete residential building with warehouse and on the right of occupancy on the
lot where the building was erected, was executed on November 19, 1971 and registered under the
provisions of Act 3344 with the Register of Deeds of Zambales on November 23, 1971. Miscellaneous
Sales Patent No. 4776 on the land was issued on April 24, 1972, on the basis of which OCT No. 2554
was issued in the name of private respondent Fernando Magcale on May 15, 1972. It is therefore
without question that the original mortgage was executed before the issuance of the final patent and
before the government was divested of its title to the land, an event which takes effect only on the
issuance of the sales patent and its subsequent registration in the Office of the Register of Deeds
(Visayan Realty Inc. vs. Meer, 96 Phil. 515; Director of Lands vs. De Leon, 110 Phil. 28; Director of
Lands vs. Jurado, L-14702, May 23, 1961; Pena "Law on Natural Resources", p. 49). Under the
foregoing considerations, it is evident that the mortgage executed by private respondent on his own
building which was erected on the land belonging to the government is to all intents and purposes a
valid mortgage.
As to restrictions expressly mentioned on the face of respondents' OCT No. P-2554, it will be noted
that Sections 121, 122 and 124 of the Public Land Act, refer to land already acquired under the Public
Land Act, or any improvement thereon and therefore have no application to the assailed mortgage in
the case at bar which was executed before such eventuality. Likewise, Section 2 of Republic Act No.
730, also a restriction appearing on the face of private respondent's title has likewise no application in
the instant case, despite its reference to encumbrance or alienation before the patent is issued
because it refers specifically to encumbrance or alienation on the land itself and does not mention
anything regarding the improvements existing thereon.

But it is a different matter, as regards the second mortgage executed over the same properties on May
2, 1973 for an additional loan of P20,000.00 which was registered with the Registry of Deeds of
Olongapo City on the same date. Relative thereto, it is evident that such mortgage executed after the
issuance of the sales patent and of the Original Certificate of Title, falls squarely under the prohibitions
stated in Sections 121, 122 and 124 of the Public Land Act and Section 2 of Republic Act 730, and is
therefore null and void.

Petitioner points out that private respondents, after physically possessing the title for five years,
voluntarily surrendered the same to the bank in 1977 in order that the mortgaged may be annotated,
without requiring the bank to get the prior approval of the Ministry of Natural Resources beforehand,
thereby implicitly authorizing Prudential Bank to cause the annotation of said mortgage on their title.

However, the Court, in recently ruling on violations of Section 124 which refers to Sections 118, 120,
122 and 123 of Commonwealth Act 141, has held:

... Nonetheless, we apply our earlier rulings because we believe that as in pari delicto may not
be invoked to defeat the policy of the State neither may the doctrine of estoppel give a
validating effect to a void contract. Indeed, it is generally considered that as between parties
to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against
public policy (19 Am. Jur. 802). It is not within the competence of any citizen to barter away
what public policy by law was to preserve (Gonzalo Puyat & Sons, Inc. vs. De los Amas and
Alino supra). ... (Arsenal vs. IAC, 143 SCRA 54 [1986]).

This pronouncement covers only the previous transaction already alluded to and does not pass upon
any new contract between the parties (Ibid), as in the case at bar. It should not preclude new contracts
that may be entered into between petitioner bank and private respondents that are in accordance with
the requirements of the law. After all, private respondents themselves declare that they are not denying
the legitimacy of their debts and appear to be open to new negotiations under the law (Comment;
Rollo, pp. 95-96). Any new transaction, however, would be subject to whatever steps the Government
may take for the reversion of the land in its favor.

PREMISES CONSIDERED, the decision of the Court of First Instance of Zambales & Olongapo City
is hereby MODIFIED, declaring that the Deed of Real Estate Mortgage for P70,000.00 is valid but
ruling that the Deed of Real Estate Mortgage for an additional loan of P20,000.00 is null and void,
without prejudice to any appropriate action the Government may take against private respondents.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Gancayco, JJ., concur.

RUBY L. TSAI, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R VILLALUZ,
respondents.

x---------------------------------------------------------x

[G.R. No. 120109. October 2, 2001.]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents.

QUISUMBING, J.:

These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. 32986,
affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in Civil Case No. 89-48265.
Also assailed is respondent court's resolution denying petitioners' motion for reconsideration.

On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso
(P3,000,000.00) loan from petitioner Philippine Bank of Communications (PBCom). As security for the
loan, EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot under
TCT No. 372097, where its factory stands, and the chattels located therein as enumerated in a
schedule attached to the mortgage contract. The pertinent portions of the Real and Chattel Mortgage
are quoted below:

MORTGAGE

(REAL AND CHATTEL)

xxx xxx xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the
MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and improvements now
existing or which may hereafter exist thereon, situated in . . .

"Annex A"

(Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications —
continued)

LIST OF MACHINERIES & EQUIPMENT

A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:

Serial Numbers Size of Machines

xxx xxx xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

 xxx xxx xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx xxx xxx

D. Four (4) Winding Machines.

xxx xxx xxx

SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx xxx xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the above-mentioned
lot.

III. MACHINERIES & EQUIPMENT situated, located and/or installed on the above-mentioned lot
located at . . .

(a) Forty eight sets (48) Vayrow Knitting Machines . . .

(b) Sixteen sets (16) Vayrow Knitting Machines . . .

(c) Two (2) Circular Knitting Machines . . .

(d) Two (2) Winding Machines . . .

(e) Two (2) Winding Machines . . .

IV. Any and all replacements, substitutions, additions, increases and accretions to above properties.

xxx xxx xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was
secured by a Chattel Mortgage over personal properties enumerated in a list attached thereto. These
listed properties were similar to those listed in Annex A of the first mortgage deed.

After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX
purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed
as SP Proc. No. LP-3091-P before the defunct Court of First Instance of Pasay City, Branch XXVIII.
The CFI issued an order on November 24, 1982 declaring the corporation insolvent. All its assets were
taken into the custody of the Insolvency Court, including the collateral, real and personal, securing the
two mortgages as abovementioned.

In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced
extrajudicial foreclosure proceedings against EVERTEX under Act 3135, otherwise known as "An Act
to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages" and Act 1506 or "The Chattel Mortgage Law". A Notice of Sheriff's Sale was issued on
December 1, 1982.

On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the
highest bidder and a Certificate of Sale was issued in its favor on the same date. On December 23,
1982, another public auction was held and again, PBCom was the highest bidder. The sheriff issued
a Certificate of Sale on the same day.

On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In
November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai for P50,000.00 a
month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00,
including the contested machineries.

On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages
with the Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of
subject mortgage was in violation of the Insolvency Law. EVERTEX claimed that no rights having been
transmitted to PBCom over the assets of insolvent EVERTEX, therefore Tsai acquired no rights over
such assets sold to her, and should reconvey the assets.

Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested
properties, which were not included in the Real and Chattel Mortgage of November 26, 1975 nor in
the Chattel Mortgage of April 23, 1979, and neither were those properties included in the Notice of
Sheriff's Sale dated December 1, 1982 and Certificate of Sale . . . dated December 15, 1982.

The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting
Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1 Heatset Equipment.

The RTC found that the lease and sale of said personal properties were irregular and illegal because
they were not duly foreclosed nor sold at the December 15, 1982 auction sale since these were not
included in the schedules attached to the mortgage contracts. The trial court decreed:

WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the
defendants:

1. Ordering the annulment of the sale executed by defendant Philippine Bank of Communications in
favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects the personal properties listed in
par. 9 of the complaint, and their return to the plaintiff corporation through its assignee, plaintiff
Mamerto R. Villaluz, for disposition by the Insolvency Court, to be done within ten (10) days from
finality of this decision;

2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of
P5,200,000.00 as compensation for the use and possession of the properties in question from
November 1986 to February 1991 and P100,000.00 every month thereafter, with interest thereon at
the legal rate per annum until full payment;

3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P50,000.00
as and for attorney's fees and expenses of litigation;

4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P200,000.00
by way of exemplary damages;

5. Ordering the dismissal of the counterclaim of the defendants; and

6. Ordering the defendants to proportionately pay the costs of suit.

SO ORDERED.4

Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated
August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and reduction
of the actual damages, from P100,000.00 to P20,000.00 per month, from November 1986 until subject
personal properties are restored to appellees, the judgment appealed from is hereby AFFIRMED, in
all other respects. No pronouncement as to costs.5

Motion for reconsideration of the above decision having been denied in the resolution of April 28, 1995,
PBCom and Tsai filed their separate petitions for review with this Court.

In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT MAKING A

CONTRACT FOR THE PARTIES BY TREATING THE 1981 ACQUIRED MACHINERIES AS
CHATTELS INSTEAD OF REAL PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND
CHATTEL MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE.

II

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING THAT THE
DISPUTED 1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED PART OF THE
MORTGAGE — DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS
OF THE SUPREME COURT.

III

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING PETITIONER

A PURCHASER IN BAD FAITH.

IV

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING

PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION — FOR
WANT OF VALID FACTUAL AND LEGAL BASIS.

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING AGAINST

PETITIONER'S ARGUMENTS ON PRESCRIPTION AND LACHES. 6
In G.R. No. 120098, PBCom raised the following issues:

I.

DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER
PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE 1975
DEED OF REAL ESTATE MORTGAGE AND EXCLUDED THEM FROM THE REAL PROPERTY
EXTRAJUDICIALLY FORECLOSED BY PBCOM DESPITE THE PROVISION IN THE 1975 DEED
THAT ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THE MORTGAGE
SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED FACT THAT SAID
MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY
MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE
TAX PURPOSES?

II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD FAITH,
EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982 TOTALLED
P9,547,095.28, WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE DISPUTED
MACHINERIES AND HAD TO PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY
COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU THEREOF BE
ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A CASE OF UNJUST
ENRICHMENT?7

The principal issue, in our view, is whether or not the inclusion of the questioned properties in the
foreclosed properties is proper. The secondary issue is whether or not the sale of these properties to
petitioner Ruby Tsai is valid.

For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating
the 1981 acquired units of machinery as chattels instead of real properties within their earlier 1975
deed of Real and Chattel Mortgage or 1979 deed of Chattel Mortgage. 8 Additionally, Tsai argues that
respondent court erred in holding that the disputed 1981 machineries are not real properties.9 Finally,
she contends that the Court of Appeals erred in holding against petitioner's arguments on prescription
and laches10 and in assessing petitioner actual damages, attorney's fees and expenses of litigation,
for want of valid factual and legal basis.11

Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment
decreeing that the pieces of machinery in dispute were not duly foreclosed and could not be legally
leased nor sold to Ruby Tsai. It further argued that the Court of Appeals' pronouncement that the
pieces of machinery in question were personal properties have no factual and legal basis. Finally, it
asserts that the Court of Appeals erred in assessing damages and attorney's fees against PBCom.

In opposition, private respondents argue that the controverted units of machinery are not "real
properties" but chattels, and, therefore, they were not part of the foreclosed real properties, rendering
the lease and the subsequent sale thereof to Tsai a nullity. 12

Considering the assigned errors and the arguments of the parties, we find the petitions devoid of merit
and ought to be denied.

Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari
under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law, not of fact,
unless the factual findings complained of are devoid of support by the evidence on record or the
assailed judgment is based on misapprehension of facts. 13 This rule is applied more stringently when
the findings of fact of the RTC is affirmed by the Court of Appeals. 14
The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive
of the issues: (1) the "controverted machineries" are not covered by, or included in, either of the two
mortgages, the Real Estate and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said
machineries were not included in the list of properties appended to the Notice of Sale, and neither
were they included in the Sheriff's Notice of Sale of the foreclosed properties.15

Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or
cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable
under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issue.
Mere nuts and bolts do not foreclose the controversy. We have to look at the parties' intent.

While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real
and Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case at bar,
both the trial and the appellate courts reached the same finding that the true intention of PBCOM and
the owner, EVERTEX, is to treat machinery and equipment as chattels. The pertinent portion of
respondent appellate court's ruling is quoted below:

As stressed upon by appellees, appellant bank treated the machineries as chattels; never as real
properties. Indeed, the 1975 mortgage contract, which was actually real and chattel mortgage,
militates against appellants' posture. It should be noted that the printed form used by appellant bank
was mainly for real estate mortgages. But reflective of the true intention of appellant PBCOM and
appellee EVERTEX was the typing in capital letters, immediately following the printed caption of
mortgage, of the phrase "real and chattel." So also, the "machineries and equipment" in the printed
form of the bank had to be inserted in the blank space of the printed contract and connected with the
word "building" by typewritten slash marks. Now, then, if the machineries in question were
contemplated to be included in the real estate mortgage, there would have been no necessity to ink a
chattel mortgage specifically mentioning as part III of Schedule A a listing of the machineries covered
thereby. It would have sufficed to list them as immovables in the Deed of Real Estate Mortgage of the
land and building involved.

As regards the 1979 contract, the intention of the parties is clear and beyond question. It refers solely
to chattels. The inventory list of the mortgaged properties is an itemization of sixty-three (63)
individually described machineries while the schedule listed only machines and 2,996,880.50 worth of
finished cotton fabrics and natural cotton fabrics.16

In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the
evidence on record, we find no compelling reason to depart therefrom.

Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the
parties from treating it as chattels to secure an obligation under the principle of estoppel. As far back
as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal property if
there is a stipulation as when it is used as security in the payment of an obligation where a chattel
mortgage is executed over it, as in the case at bar.

In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and
Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to treat all
properties included therein as immovable, and (2) attached to the said contract a separate "LIST OF
MACHINERIES & EQUIPMENT". These facts, taken together, evince the conclusion that the parties'
intention is to treat these units of machinery as chattels. A fortiori, the contested after-acquired
properties, which are of the same description as the units enumerated under the title "LIST OF
MACHINERIES & EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as the
subject mortgages were intended by the parties to involve chattels, insofar as equipment and
machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof
that: "a chattel mortgage shall be deemed to cover only the property described therein and not like or
substituted property thereafter acquired by the mortgagor and placed in the same depository as the
property originally mortgaged, anything in the mortgage to the contrary notwithstanding."

And, since the disputed machineries were acquired in 1981 and could not have been involved in the
1975 or 1979 chattel mortgages, it was consequently an error on the part of the Sheriff to include
subject machineries with the properties enumerated in said chattel mortgages.

As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor.
Consequently, the sale thereof to Tsai is also a nullity under the elementary principle of nemo dat quod
non habet, one cannot give what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a nullity,
she is nevertheless a purchaser in good faith and for value who now has a better right than EVERTEX.

To the contrary, however, are the factual findings and conclusions of the trial court that she is not a
purchaser in good faith. Well-settled is the rule that the person who asserts the status of a purchaser
in good faith and for value has the burden of proving such assertion. 18 Petitioner Tsai failed to
discharge this burden persuasively.

Moreover, a purchaser in good faith and for value is one who buys the property of another without
notice that some other person has a right to or interest in such property and pays a full and fair price
for the same, at the time of purchase, or before he has notice of the claims or interest of some other
person in the property.19 Records reveal, however, that when Tsai purchased the controverted
properties, she knew of respondent's claim thereon. As borne out by the records, she received the
letter of respondent's counsel, apprising her of respondent's claim, dated February 27, 1987. 20 She
replied thereto on March 9, 1987.21 Despite her knowledge of respondent's claim, she proceeded to
buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in finding that she
was not a purchaser in good faith.

Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are
located is equally unavailing. This defense refers to sale of lands and not to sale of properties situated
therein. Likewise, the mere fact that the lot where the factory and the disputed properties stand is in
PBCom's name does not automatically make PBCom the owner of everything found therein, especially
in view of EVERTEX's letter to Tsai enunciating its claim.

Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent
reason to disturb the consistent findings of both courts below that the case for the reconveyance of
the disputed properties was filed within the reglementary period. Here, in our view, the doctrine of
laches does not apply. Note that upon petitioners' adamant refusal to heed EVERTEX's claim,
respondent company immediately filed an action to recover possession and ownership of the disputed
properties. There is no evidence showing any failure or neglect on its part, for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence, could or should have been
done earlier. The doctrine of stale demands would apply only where by reason of the lapse of time, it
would be inequitable to allow a party to enforce his legal rights. Moreover, except for very strong
reasons, this Court is not disposed to apply the doctrine of laches to prejudice or defeat the rights of
an owner.22

As to the award of damages, the contested damages are the actual compensation, representing
rentals for the contested units of machinery, the exemplary damages, and attorney's fees.

As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid
rentals of the contested properties based on the testimony of John Chua, who testified that the
P100,000.00 was based on the accepted practice in banking and finance, business and investments
that the rental price must take into account the cost of money used to buy them. The Court of Appeals
did not give full credence to Chua's projection and reduced the award to P20,000.00.

Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof
but must actually be proven with reasonable degree of certainty, premised upon competent proof or
best evidence obtainable of the actual amount thereof.23 However, the allegations of respondent
company as to the amount of unrealized rentals due them as actual damages remain mere assertions
unsupported by documents and other competent evidence. In determining actual damages, the court
cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on
competent proof and on the best evidence obtainable regarding the actual amount of loss. 24 However,
we are not prepared to disregard the following dispositions of the respondent appellate court:

. . . In the award of actual damages under scrutiny, there is nothing on record warranting the said
award of P5,200,000.00, representing monthly rental income of P100,000.00 from November 1986 to
February 1991, and the additional award of P100,000.00 per month thereafter.

As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh (sic) Chua
and Mamerto Villaluz, is shy of what is necessary to substantiate the actual damages allegedly
sustained by appellees, by way of unrealized rental income of subject machineries and equipments.

The testimony of John Cua (sic) is nothing but an opinion or projection based on what is claimed to be
a practice in business and industry. But such a testimony cannot serve as the sole basis for assessing
the actual damages complained of. What is more, there is no showing that had appellant Tsai not
taken possession of the machineries and equipments in question, somebody was willing and ready to
rent the same for P100,000.00 a month.

xxx xxx xxx

Then, too, even assuming arguendo that the said machineries and equipments could have generated
a rental income of P30,000.00 a month, as projected by witness Mamerto Villaluz, the same would
have been a gross income. Therefrom should be deducted or removed, expenses for maintenance
and repairs . . . Therefore, in the determination of the actual damages or unrealized rental income
sued upon, there is a good basis to calculate that at least four months in a year, the machineries in
dispute would have been idle due to absence of a lessee or while being repaired. In the light of the
foregoing rationalization and computation, We believe that a net unrealized rental income of
P20,000.00 a month, since November 1986, is more realistic and fair. 25

As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals
deleted. But according to the CA, there was no clear showing that petitioners acted malevolently,
wantonly and oppressively. The evidence, however, shows otherwise.It is a requisite to award
exemplary damages that the wrongful act must be accompanied by bad faith,26 and the guilty acted in
a wanton, fraudulent, oppressive, reckless or malevolent manner. 27 As previously stressed, petitioner
Tsai's act of purchasing the controverted properties despite her knowledge of EVERTEX's claim was
oppressive and subjected the already insolvent respondent to gross disadvantage. Petitioner PBCom
also received the same letters of Atty. Villaluz, responding thereto on March 24, 1987. 28 Thus,
PBCom's act of taking all the properties found in the factory of the financially handicapped respondent,
including those properties not covered by or included in the mortgages, is equally oppressive and
tainted with bad faith. Thus, we are in agreement with the RTC that an award of exemplary damages
is proper.

The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil
Code provides that no proof of pecuniary loss is necessary for the adjudication of exemplary damages,
their assessment being left to the discretion of the court in accordance with the circumstances of each
case.29 While the imposition of exemplary damages is justified in this case, equity calls for its reduction.
In Inhelder Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30, 1983),
we laid down the rule that judicial discretion granted to the courts in the assessment of damages must
always be exercised with balanced restraint and measured objectivity. Thus, here the award of
exemplary damages by way of example for the public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered when exemplary
damages are awarded.30 In our view, RTC's award of P50,000.00 as attorney's fees and expenses of
litigation is reasonable, given the circumstances in these cases.

WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of Appeals
in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners Philippine Bank of
Communications and Ruby L. Tsai are hereby ordered to pay jointly and severally Ever Textile Mills,
Inc. the following: (1) P20,000.00 per month, as compensation for the use and possession of the
properties in question from November 1986 31 until subject personal properties are restored to
respondent corporation; (2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as
attorney's fees and litigation expenses. Costs against petitioners.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

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.

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.

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.
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.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code, real property
consists of —

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.

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.

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.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

BOARD OF ASSESSMENT APPEALS, CITY ASSESSOR and CITY TREASURER OF QUEZON
CITY, petitioners,
vs.
MANILA ELECTRIC COMPANY, respondent.

Assistant City Attorney Jaime R. Agloro for petitioners.

Ross, Selph and Carrascoso for respondent.

PAREDES, J.:

From the stipulation of facts and evidence adduced during the hearing, the following appear:

On October 20, 1902, the Philippine Commission enacted Act No. 484 which authorized the Municipal
Board of Manila to grant a franchise to construct, maintain and operate an electric street railway and
electric light, heat and power system in the City of Manila and its suburbs to the person or persons
making the most favorable bid. Charles M. Swift was awarded the said franchise on March 1903, the
terms and conditions of which were embodied in Ordinance No. 44 approved on March 24, 1903.
Respondent Manila Electric Co. (Meralco for short), became the transferee and owner of the franchise.

Meralco's electric power is generated by its hydro-electric plant located at Botocan Falls, Laguna and
is transmitted to the City of Manila by means of electric transmission wires, running from the province
of Laguna to the said City. These electric transmission wires which carry high voltage current, are
fastened to insulators attached on steel towers constructed by respondent at intervals, from its hydro-
electric plant in the province of Laguna to the City of Manila. The respondent Meralco has constructed
40 of these steel towers within Quezon City, on land belonging to it. A photograph of one of these steel
towers is attached to the petition for review, marked Annex A. Three steel towers were inspected by
the lower court and parties and the following were the descriptions given there of by said court:

The first steel tower is located in South Tatalon, España Extension, Quezon City. The findings were
as follows: the ground around one of the four posts was excavated to a depth of about eight (8) feet,
with an opening of about one (1) meter in diameter, decreased to about a quarter of a meter as it we
deeper until it reached the bottom of the post; at the bottom of the post were two parallel steel bars
attached to the leg means of bolts; the tower proper was attached to the leg three bolts; with two cross
metals to prevent mobility; there was no concrete foundation but there was adobe stone underneath;
as the bottom of the excavation was covered with water about three inches high, it could not be
determined with certainty to whether said adobe stone was placed purposely or not, as the place
abounds with this kind of stone; and the tower carried five high voltage wires without cover or any
insulating materials.

The second tower inspected was located in Kamuning Road, K-F, Quezon City, on land owned by the
petitioner approximate more than one kilometer from the first tower. As in the first tower, the ground
around one of the four legs was excavate from seven to eight (8) feet deep and one and a half (1-½)
meters wide. There being very little water at the bottom, it was seen that there was no concrete
foundation, but there soft adobe beneath. The leg was likewise provided with two parallel steel bars
bolted to a square metal frame also bolted to each corner. Like the first one, the second tower is made
up of metal rods joined together by means of bolts, so that by unscrewing the bolts, the tower could
be dismantled and reassembled.

The third tower examined is located along Kamias Road, Quezon City. As in the first two towers given
above, the ground around the two legs of the third tower was excavated to a depth about two or three
inches beyond the outside level of the steel bar foundation. It was found that there was no concrete
foundation. Like the two previous ones, the bottom arrangement of the legs thereof were found to be
resting on soft adobe, which, probably due to high humidity, looks like mud or clay. It was also found
that the square metal frame supporting the legs were not attached to any material or foundation.

On November 15, 1955, petitioner City Assessor of Quezon City declared the aforesaid steel towers
for real property tax under Tax declaration Nos. 31992 and 15549. After denying respondent's petition
to cancel these declarations, an appeal was taken by respondent to the Board of Assessment Appeals
of Quezon City, which required respondent to pay the amount of P11,651.86 as real property tax on
the said steel towers for the years 1952 to 1956. Respondent paid the amount under protest, and filed
a petition for review in the Court of Tax Appeals (CTA for short) which rendered a decision on
December 29, 1958, ordering the cancellation of the said tax declarations and the petitioner City
Treasurer of Quezon City to refund to the respondent the sum of P11,651.86. The motion for
reconsideration having been denied, on April 22, 1959, the instant petition for review was filed.

In upholding the cause of respondents, the CTA held that: (1) the steel towers come within the term
"poles" which are declared exempt from taxes under part II paragraph 9 of respondent's franchise; (2)
the steel towers are personal properties and are not subject to real property tax; and (3) the City
Treasurer of Quezon City is held responsible for the refund of the amount paid. These are assigned
as errors by the petitioner in the brief.

The tax exemption privilege of the petitioner is quoted hereunder:

PAR 9. The grantee shall be liable to pay the same taxes upon its real estate, buildings, plant (not
including poles, wires, transformers, and insulators), machinery and personal property as other
persons are or may be hereafter required by law to pay ... Said percentage shall be due and payable
at the time stated in paragraph nineteen of Part One hereof, ... and shall be in lieu of all taxes and
assessments of whatsoever nature and by whatsoever authority upon the privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee from which taxes and
assessments the grantee is hereby expressly exempted. (Par. 9, Part Two, Act No. 484 Respondent's
Franchise; emphasis supplied.)
The word "pole" means "a long, comparatively slender usually cylindrical piece of wood or timber, as
typically the stem of a small tree stripped of its branches; also by extension, a similar typically
cylindrical piece or object of metal or the like". The term also refers to "an upright standard to the top
of which something is affixed or by which something is supported; as a dovecote set on a pole;
telegraph poles; a tent pole; sometimes, specifically a vessel's master (Webster's New International
Dictionary 2nd Ed., p. 1907.) Along the streets, in the City of Manila, may be seen cylindrical metal
poles, cubical concrete poles, and poles of the PLDT Co. which are made of two steel bars joined
together by an interlacing metal rod. They are called "poles" notwithstanding the fact that they are no
made of wood. It must be noted from paragraph 9, above quoted, that the concept of the "poles" for
which exemption is granted, is not determined by their place or location, nor by the character of the
electric current it carries, nor the material or form of which it is made, but the use to which they are
dedicated. In accordance with the definitions, pole is not restricted to a long cylindrical piece of wood
or metal, but includes "upright standards to the top of which something is affixed or by which something
is supported. As heretofore described, respondent's steel supports consists of a framework of four
steel bars or strips which are bound by steel cross-arms atop of which are cross-arms supporting five
high voltage transmission wires (See Annex A) and their sole function is to support or carry such wires.

The conclusion of the CTA that the steel supports in question are embraced in the term "poles" is not
a novelty. Several courts of last resort in the United States have called these steel supports "steel
towers", and they denominated these supports or towers, as electric poles. In their decisions the words
"towers" and "poles" were used interchangeably, and it is well understood in that jurisdiction that a
transmission tower or pole means the same thing.

In a proceeding to condemn land for the use of electric power wires, in which the law provided that
wires shall be constructed upon suitable poles, this term was construed to mean either wood or metal
poles and in view of the land being subject to overflow, and the necessary carrying of numerous wires
and the distance between poles, the statute was interpreted to include towers or poles. (Stemmons
and Dallas Light Co. (Tex) 212 S.W. 222, 224; 32-A Words and Phrases, p. 365.)
The term "poles" was also used to denominate the steel supports or towers used by an association
used to convey its electric power furnished to subscribers and members, constructed for the purpose
of fastening high voltage and dangerous electric wires alongside public highways. The steel supports
or towers were made of iron or other metals consisting of two pieces running from the ground up some
thirty feet high, being wider at the bottom than at the top, the said two metal pieces being connected
with criss-cross iron running from the bottom to the top, constructed like ladders and loaded with high
voltage electricity. In form and structure, they are like the steel towers in question. (Salt River Valley
Users' Ass'n v. Compton, 8 P. 2nd, 249-250.)

The term "poles" was used to denote the steel towers of an electric company engaged in the
generation of hydro-electric power generated from its plant to the Tower of Oxford and City of
Waterbury. These steel towers are about 15 feet square at the base and extended to a height of about
35 feet to a point, and are embedded in the cement foundations sunk in the earth, the top of which
extends above the surface of the soil in the tower of Oxford, and to the towers are attached insulators,
arms, and other equipment capable of carrying wires for the transmission of electric power
(Connecticut Light and Power Co. v. Oxford, 101 Conn. 383, 126 Atl. p. 1).

In a case, the defendant admitted that the structure on which a certain person met his death was built
for the purpose of supporting a transmission wire used for carrying high-tension electric power, but
claimed that the steel towers on which it is carried were so large that their wire took their structure out
of the definition of a pole line. It was held that in defining the word pole, one should not be governed
by the wire or material of the support used, but was considering the danger from any elevated wire
carrying electric current, and that regardless of the size or material wire of its individual members, any
continuous series of structures intended and used solely or primarily for the purpose of supporting
wires carrying electric currents is a pole line (Inspiration Consolidation Cooper Co. v. Bryan 252 P.
1016).

It is evident, therefore, that the word "poles", as used in Act No. 484 and incorporated in the petitioner's
franchise, should not be given a restrictive and narrow interpretation, as to defeat the very object for
which the franchise was granted. The poles as contemplated thereon, should be understood and taken
as a part of the electric power system of the respondent Meralco, for the conveyance of electric current
from the source thereof to its consumers. If the respondent would be required to employ "wooden
poles", or "rounded poles" as it used to do fifty years back, then one should admit that the Philippines
is one century behind the age of space. It should also be conceded by now that steel towers, like the
ones in question, for obvious reasons, can better effectuate the purpose for which the respondent's
franchise was granted.
Granting for the purpose of argument that the steel supports or towers in question are not embraced
within the term poles, the logical question posited is whether they constitute real properties, so that
they can be subject to a real property tax. The tax law does not provide for a definition of real property;
but Article 415 of the Civil Code does, by stating the following are immovable property:

(1) Land, buildings, roads, and constructions of all kinds adhered to the soil;

xxx xxx xxx

(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated
therefrom without breaking the material or deterioration of the object;

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 in a building or on a piece of land, and which tends directly to
meet the needs of the said industry or works;

xxx xxx xxx

The steel towers or supports in question, do not come within the objects mentioned in paragraph 1,
because they do not constitute buildings or constructions adhered to the soil. They are not construction
analogous to buildings nor adhering to the soil. As per description, given by the lower court, they are
removable and merely attached to a square metal frame by means of bolts, which when unscrewed
could easily be dismantled and moved from place to place. They can not be included under paragraph
3, as they are not attached to an immovable in a fixed manner, and they can be separated without
breaking the material or causing deterioration upon the object to which they are attached. Each of
these steel towers or supports consists of steel bars or metal strips, joined together by means of bolts,
which can be disassembled by unscrewing the bolts and reassembled by screwing the same. These
steel towers or supports do not also fall under paragraph 5, for they are not machineries, receptacles,
instruments or implements, and even if they were, they are not intended for industry or works on the
land. Petitioner is not engaged in an industry or works in the land in which the steel supports or towers
are constructed.

It is finally contended that the CTA erred in ordering the City Treasurer of Quezon City to refund the
sum of P11,651.86, despite the fact that Quezon City is not a party to the case. It is argued that as the
City Treasurer is not the real party in interest, but Quezon City, which was not a party to the suit,
notwithstanding its capacity to sue and be sued, he should not be ordered to effect the refund. This
question has not been raised in the court below, and, therefore, it cannot be properly raised for the
first time on appeal. The herein petitioner is indulging in legal technicalities and niceties which do not
help him any; for factually, it was he (City Treasurer) whom had insisted that respondent herein pay
the real estate taxes, which respondent paid under protest. Having acted in his official capacity as City
Treasurer of Quezon City, he would surely know what to do, under the circumstances.

IN VIEW HEREOF, the decision appealed from is hereby affirmed, with costs against the petitioners.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Regala,
JJ., concur.
SERG'S PRODUCTS, INC., and SERGIO T. GOQUIOLAY, petitioners,
vs.
PCI LEASING AND FINANCE, INC., respondent.

DECISION

PANGANIBAN, J.:

After agreeing to a contract stipulating that a real or immovable property be considered as personal or
movable, a party is estopped from subsequently claiming otherwise. Hence, such property is a proper
subject of a writ of replevin obtained by the other contracting party.

The Case

Before us is a Petition for Review on Certiorari assailing the January 6, 1999 Decision of the Court of
1

Appeals (CA) in CA-GR SP No. 47332 and its February 26, 1999 Resolution denying reconsideration.
2 3

The decretal portion of the CA Decision reads as follows:

"WHEREFORE, premises considered, the assailed Order dated February 18, 1998 and Resolution
dated March 31, 1998 in Civil Case No. Q-98-33500 are hereby AFFIRMED. The writ of preliminary
injunction issued on June 15, 1998 is hereby LIFTED." 4

In its February 18, 1998 Order, the Regional Trial Court (RTC) of Quezon City (Branch 218) issued a
5 6

Writ of Seizure. The March 18, 1998 Resolution denied petitioners’ Motion for Special Protective
7 8

Order, praying that the deputy sheriff be enjoined "from seizing immobilized or other real properties in
(petitioners’) factory in Cainta, Rizal and to return to their original place whatever immobilized
machineries or equipments he may have removed." 9

The Facts

The undisputed facts are summarized by the Court of Appeals as follows: 10

"On February 13, 1998, respondent PCI Leasing and Finance, Inc. ("PCI Leasing" for short) filed with
the RTC-QC a complaint for [a] sum of money (Annex ‘E’), with an application for a writ of replevin
docketed as Civil Case No. Q-98-33500.
"On March 6, 1998, upon an ex-parte application of PCI Leasing, respondent judge issued a writ of
replevin (Annex ‘B’) directing its sheriff to seize and deliver the machineries and equipment to PCI
Leasing after 5 days and upon the payment of the necessary expenses.

"On March 24, 1998, in implementation of said writ, the sheriff proceeded to petitioner’s factory, seized
one machinery with [the] word that he [would] return for the other machineries.

"On March 25, 1998, petitioners filed a motion for special protective order (Annex ‘C’), invoking the
power of the court to control the conduct of its officers and amend and control its processes, praying
for a directive for the sheriff to defer enforcement of the writ of replevin.

"This motion was opposed by PCI Leasing (Annex ‘F’), on the ground that the properties [were] still
personal and therefore still subject to seizure and a writ of replevin.

"In their Reply, petitioners asserted that the properties sought to be seized [were] immovable as
defined in Article 415 of the Civil Code, the parties’ agreement to the contrary notwithstanding. They
argued that to give effect to the agreement would be prejudicial to innocent third parties. They further
stated that PCI Leasing [was] estopped from treating these machineries as personal because the
contracts in which the alleged agreement [were] embodied [were] totally sham and farcical.

"On April 6, 1998, the sheriff again sought to enforce the writ of seizure and take possession of the
remaining properties. He was able to take two more, but was prevented by the workers from taking
the rest.

"On April 7, 1998, they went to [the CA] via an original action for certiorari."

Ruling of the Court of Appeals

Citing the Agreement of the parties, the appellate court held that the subject machines were personal
property, and that they had only been leased, not owned, by petitioners. It also ruled that the "words
of the contract are clear and leave no doubt upon the true intention of the contracting parties."
Observing that Petitioner Goquiolay was an experienced businessman who was "not unfamiliar with
the ways of the trade," it ruled that he "should have realized the import of the document he signed."
The CA further held:

"Furthermore, to accord merit to this petition would be to preempt the trial court in ruling upon the case
below, since the merits of the whole matter are laid down before us via a petition whose sole purpose
is to inquire upon the existence of a grave abuse of discretion on the part of the [RTC] in issuing the
assailed Order and Resolution. The issues raised herein are proper subjects of a full-blown trial,
necessitating presentation of evidence by both parties. The contract is being enforced by one, and [its]
validity is attacked by the other – a matter x x x which respondent court is in the best position to
determine."

Hence, this Petition. 11

The Issues

In their Memorandum, petitioners submit the following issues for our consideration:

"A. Whether or not the machineries purchased and imported by SERG’S became real property by
virtue of immobilization.

B. Whether or not the contract between the parties is a loan or a lease." 12

In the main, the Court will resolve whether the said machines are personal, not immovable, property
which may be a proper subject of a writ of replevin. As a preliminary matter, the Court will also address
briefly the procedural points raised by respondent.

The Court’s Ruling

The Petition is not meritorious.

Preliminary Matter:Procedural Questions

Respondent contends that the Petition failed to indicate expressly whether it was being filed under
Rule 45 or Rule 65 of the Rules of Court. It further alleges that the Petition erroneously impleaded
Judge Hilario Laqui as respondent.

There is no question that the present recourse is under Rule 45. This conclusion finds support in the
very title of the Petition, which is "Petition for Review on Certiorari."
13
While Judge Laqui should not have been impleaded as a respondent, substantial justice requires that
14

such lapse by itself should not warrant the dismissal of the present Petition. In this light, the Court
deems it proper to remove, motu proprio, the name of Judge Laqui from the caption of the present
case.

Main Issue: Nature of the Subject Machinery

Petitioners contend that the subject machines used in their factory were not proper subjects of the Writ
issued by the RTC, because they were in fact real property. Serious policy considerations, they argue,
militate against a contrary characterization.

Rule 60 of the Rules of Court provides that writs of replevin are issued for the recovery of personal
property only. Section 3 thereof reads:
15

"SEC. 3. Order. -- Upon the filing of such affidavit and approval of the bond, the court shall issue an
order and the corresponding writ of replevin describing the personal property alleged to be wrongfully
detained and requiring the sheriff forthwith to take such property into his custody."

On the other hand, Article 415 of the Civil Code enumerates immovable or real property as follows:

"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;

xxx xxx x x x"

In the present case, the machines that were the subjects of the Writ of Seizure were placed by
petitioners in the factory built on their own land. Indisputably, they were essential and principal
elements of their chocolate-making industry. Hence, although each of them was movable or personal
property on its own, all of them have become "immobilized by destination because they are essential
and principal elements in the industry." In that sense, petitioners are correct in arguing that the said
16

machines are real, not personal, property pursuant to Article 415 (5) of the Civil Code.17

Be that as it may, we disagree with the submission of the petitioners that the said machines are not
proper subjects of the Writ of Seizure.
The Court has held that contracting parties may validly stipulate that a real property be considered as
personal. After agreeing to such stipulation, they are consequently estopped from claiming otherwise.
18

Under the principle of estoppel, a party to a contract is ordinarily precluded from denying the truth of
any material fact found therein.

Hence, in Tumalad v. Vicencio, the Court upheld the intention of the parties to treat a house as a
19

personal property because it had been made the subject of a chattel mortgage. The Court ruled:

"x x x. 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."

Applying Tumalad, the Court in Makati Leasing and Finance Corp. v. Wearever Textile Mills also held
20

that the machinery used in a factory and essential to the industry, as in the present case, was a proper
subject of a writ of replevin because it was treated as personal property in a contract. Pertinent portions
of the Court’s ruling are reproduced hereunder:

"x x x. 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 the present case, the Lease Agreement clearly provides that the machines in question are to be
considered as personal property. Specifically, Section 12.1 of the Agreement reads as follows: 21

"12.1 The PROPERTY is, and shall at all times be and remain, personal property notwithstanding that
the PROPERTY or any part thereof may now be, or hereafter become, in any manner affixed or
attached to or embedded in, or permanently resting upon, real property or any building thereon, or
attached in any manner to what is permanent."
Clearly then, petitioners are estopped from denying the characterization of the subject machines as
personal property. Under the circumstances, they are proper subjects of the Writ of Seizure.

It should be stressed, however, that our holding -- that the machines should be deemed personal
property pursuant to the Lease Agreement – is good only insofar as the contracting parties are
concerned. Hence, while the parties are bound by the Agreement, third persons acting in good faith
22

are not affected by its stipulation characterizing the subject machinery as personal. In any event, there
23

is no showing that any specific third party would be adversely affected.

Validity of the Lease Agreement

In their Memorandum, petitioners contend that the Agreement is a loan and not a lease. Submitting
24

documents supposedly showing that they own the subject machines, petitioners also argue in their
Petition that the Agreement suffers from "intrinsic ambiguity which places in serious doubt the intention
of the parties and the validity of the lease agreement itself." In their Reply to respondent’s Comment,
25

they further allege that the Agreement is invalid.26

These arguments are unconvincing. The validity and the nature of the contract are the lis mota of the
civil action pending before the RTC. A resolution of these questions, therefore, is effectively a
resolution of the merits of the case. Hence, they should be threshed out in the trial, not in the
proceedings involving the issuance of the Writ of Seizure.

Indeed, in La Tondeña Distillers v. CA, the Court explained that the policy under Rule 60 was that
27

questions involving title to the subject property – questions which petitioners are now raising -- should
be determined in the trial. In that case, the Court noted that the remedy of defendants under Rule 60
was either to post a counter-bond or to question the sufficiency of the plaintiff’s bond. They were not
allowed, however, to invoke the title to the subject property. The Court ruled:

"In other words, the law does not allow the defendant to file a motion to dissolve or discharge the writ
of seizure (or delivery) on ground of insufficiency of the complaint or of the grounds relied upon
therefor, as in proceedings on preliminary attachment or injunction, and thereby put at issue the matter
of the title or right of possession over the specific chattel being replevied, the policy apparently being
that said matter should be ventilated and determined only at the trial on the merits." 28
Besides, these questions require a determination of facts and a presentation of evidence, both of
which have no place in a petition for certiorari in the CA under Rule 65 or in a petition for review in this
Court under Rule 45. 29

Reliance on the Lease Agreement

It should be pointed out that the Court in this case may rely on the Lease Agreement, for nothing on
record shows that it has been nullified or annulled. In fact, petitioners assailed it first only in the RTC
proceedings, which had ironically been instituted by respondent. Accordingly, it must be presumed
valid and binding as the law between the parties.

Makati Leasing and Finance Corporation is also instructive on this point. In that case, the Deed of
30

Chattel Mortgage, which characterized the subject machinery as personal property, was also assailed
because respondent had allegedly been required "to sign a printed form of chattel mortgage which
was in a blank form at the time of signing." The Court rejected the argument and relied on the Deed,
ruling as follows:

"x x x. 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. x x x"

Alleged Injustice Committed on the Part of Petitioners

Petitioners contend that "if the Court allows these machineries to be seized, then its workers would be
out of work and thrown into the streets." They also allege that the seizure would nullify all efforts to
31

rehabilitate the corporation.

Petitioners’ arguments do not preclude the implementation of the Writ.1âwphi1 As earlier discussed, law
and jurisprudence support its propriety. Verily, the above-mentioned consequences, if they come true,
should not be blamed on this Court, but on the petitioners for failing to avail themselves of the remedy
under Section 5 of Rule 60, which allows the filing of a counter-bond. The provision states:

"SEC. 5. Return of property. -- If the adverse party objects to the sufficiency of the applicant’s bond,
or of the surety or sureties thereon, he cannot immediately require the return of the property, but if he
does not so object, he may, at any time before the delivery of the property to the applicant, require the
return thereof, by filing with the court where the action is pending a bond executed to the applicant, in
double the value of the property as stated in the applicant’s affidavit for the delivery thereof to the
applicant, if such delivery be adjudged, and for the payment of such sum to him as may be recovered
against the adverse party, and by serving a copy bond on the applicant."

WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals AFFIRMED.
Costs against petitioners.

SO ORDERED.

Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.