Haystack: Associated Insurance & Surety v. Iya (GRs L-10837-38, 30 May 1958)

Associated Insurance & Surety v. Iya
[G.R. Nos. L-10837-38. May 30, 1958.]
En Banc, Felix (J): 9 concur

Facts: Spouses Adriano and Lucia A. Valino were the owners and possessors of a house of strong materials constructed on Lot 3, Block 80 of the Grace Park Subdivision in Caloocan, Rizal, which they purchased on installment basis from the Philippine Realty Corporation. On 6 November 1951, to enable her to purchase on credit rice from the NARIC, Lucia Valino filed a bond (P11,000.00; AISCO Bond 971) subscribed by the Associated Insurance & Surety Co. and as counter-guaranty therefor, the Valinos 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 6 December 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 18 October 1958, a certificate of title in their name (TCT 27884). Subsequently, however, or on 24 October 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. Later, 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. The surety company demanded reimbursement from the Valinos, who failed to do so. The company foreclosed the chattel mortgage over the house as a consequence. A public sale was conducted thereafter by the Provincial Sheriff of Rizal on 26 December 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 25128).

Sometime in July 1953, the surety company learned of the existence of the real estate mortgage over the lot covered by TTC 26884 together with the improvements thereon; thus, said surety company instituted Civil Case 2162 with the CFI Manila naming Adriano and Lucia Valino and Isabel Iya, the mortgagee, as defendants. On the other hand, on 29 October 1953, Isabel Iya filed a civil action against the Valinos and the surety company (Civil Case 2504 with CFI Manila) praying for a decree of foreclosure of the land, building and improvements thereon to be sold at public auction and the proceeds applied to satisfy the demands; this pursuant to the contract of mortgage as the Valinos have failed to pay interest for more than 6 months already; the surety company included as it claims to have an interest on the residential house covered by said mortgage.

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 8 March 1956, holding that the chattel mortgage in favor of the Associated Insurance & Surety 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 personalty and a chattel mortgage over the same was proper. However, as the mortgagors were already the owners of the lot 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. 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 encumbrancer. 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.

The Supreme Court reversed the decision of the lower court, recognized Isabel Iya's right to foreclose not only the land but also the building erected thereon, and ordered that the proceeds of the sale thereof at public auction (if the land has not yet been sold), be applied to the unsatisfied judgment in favor of Isabel Iya. The decision however is without prejudice to any right that the Associated Insurance & Surety may have against the Valinos on account of the mortgage of said building they executed in favor of said surety company. Without pronouncement as to costs.

1. Nature of property encumbered is the decisive factor in determination of preferential right
The decisive factor in resolving the issue as to which of these encumbrances should receive preference over the other is the determination of the nature of the structure litigated upon, for where it be considered a personalty, 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.

2. Building always immovable
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).

3. Building cannot be divested of character as realty when constructed on land belonging to another
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.

4. Execution of a chattel mortgage over a building invalid and a nullity
As personal properties could only be the subject of a chattel mortgage (Section 1, Act 3952), the execution of the chattel mortgage covering a building is clearly invalid and a nullity. While it is true that said document was correspondingly registered in the Chattel Mortgage Register, 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).

5. No right acquired by chattel mortgage creditor who purchases real properties in an extrajudicial foreclosure sale
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).

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