LEUNG YEE, PLAINTIFF AND APPELLANT, VS. FRANK L. STRONG MACHINERY COMPANY AND J. G. WILLIAMSON, DEFENDANTS AND APPELLEES.

The “Compañia Agricola Filipina” bought a considerable quantity of
rice-cleaning machinery 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 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,t 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 transferred to the person who may have 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 here 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 “Compania 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 registry of the instrument
purporting to be a chattel mortgage of the building and the machinery installed
therein, nor 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
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 ihe 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 in 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 Marañon [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 duiy 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 plaintiff’s claim against the “Compania 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 conceived 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 or 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 it
afterwards develops that the title was in fact defective, and it appears that he
had such notice of the defect as would have led to its discovery had he acted
with that measure of precaution which may reasonably be required of a prudent
man in a like situation. Good faith, or the lack of it, is in its last 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 vs. Miller, 108 Cal., 250; Breaux-Renoudet, Cypress 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 the
costs of this instance against the appellant. So ordered.

Arellano, C. J., Johnson, Araullo, Street, and Malcolm,
JJ., concur.

Torres, Avanceña, and Fisher, JJ., did not take
part.