• Spouses Valino possess a house of strong materials which they bought from Ph Realty Corp (PRC). In 1951, they allegedly executed a chattel mortgage on such house with Associated Insurance Surety (Surety). [Supreme Court: This is null and void]
• At that time, the land was still owned by PRC [Curious: Is it possible to buy the house separately back then?]
• In 1952, the spouses executed a real estate mortgage (REM) over the house and lot in favor of Isabel Iya. [The Spouses are shrewed or maybe forgetful because this is the second time that they mortgaged the house] [This is the beginning of the conflict]
• The spouses failed to pay. So the Surety Company foreclosed the chattel mortgage over the house and sold it.
• In 1958, the Spouses acquired title for the lot of the said house.
|Petitioner Surety’s Arguments||Defendant Iya’s Arguments|
|“Exclude the house from the Real Estate Mortgage”||“No, I have a better right over the house and lot by virtue of the 1952 R.E. mortgage”|
|“Recognize our ownership because it was first mortgaged to us” [SC: No, because registering the house in a chattel mortgage is void. See Leung Yee]||“Chattel mortgage in 1951 on the house is void” [SC: This is correct]|
RTC Decision: Favored the Surety because the Spouses are not yet the owners of the house and lot, hence, the house is still a personal property and therefore the chattel mortgage is valid.
Does the Surety have a better right than Isabel Iya over the foreclosed building/house because they are the ones who first registered the building in the Chattel Mortgage?
No. The effect of registering the building in the chattel mortgage is a futile act/null and void. (Leung Yee vs. Strong Machinery).
Rationale: A building (e.g. house) does not change its character (from immovable to movable) if the land on which it stands belong to the different owner (PRC or Iya in this case). If it does change, it will create confusion because a situation will be created where the nature of the house changes because the ownership of the land changes.
Co-purchasing a real property from a void mortgage will not cure its defect. It remains void.
Iya has a better right to foreclose both the building and the land.