G.R. No. 168557             February 16, 2007

FELS ENERGY, INC., Petitioner, vs.THE PROVINCE OF BATANGAS and

THE OFFICE OF THE PROVINCIAL ASSESSOR OF BATANGAS, Respondents.

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

G.R. No. 170628            February 16, 2007

NATIONAL POWER CORPORATION, Petitioner, vs.LOCAL BOARD OF ASSESSMENT APPEALS OF BATANGAS, LAURO C. ANDAYA, in his capacity as the Assessor of the Province of Batangas, and the PROVINCE OF BATANGAS represented by its Provincial Assessor, Respondents.

D E C I S I O N

CALLEJO, SR., J.:

Before us are two consolidated cases docketed as G.R. No. 168557 and G.R. No. 170628, which were filed by petitioners FELS Energy, Inc. (FELS) and National Power Corporation (NPC), respectively. The first is a petition for review on certiorari assailing the August 25, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 67490 and its Resolution2 dated June 20, 2005; the second, also a petition for review on certiorari, challenges the February 9, 2005 Decision3 and November 23, 2005 Resolution4 of the CA in CA-G.R. SP No. 67491. Both petitions were dismissed on the ground of prescription.

The pertinent facts are as follows:

On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW diesel engine power barges moored at Balayan Bay in Calaca, Batangas. The contract, denominated as an Energy Conversion Agreement5 (Agreement), was for a period of five years. Article 10 reads:

10.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes, import duties, fees, charges and other levies imposed by the National Government of the Republic of the Philippines or any agency or instrumentality thereof to which POLAR may be or become subject to or in relation to the performance of their obligations under this agreement (other than (i) taxes imposed or calculated on the basis of the net income of POLAR and Personal Income Taxes of its employees and (ii) construction permit fees, environmental permit fees and other similar fees and charges)

and (b) all real estate taxes and assessments, rates and other charges in respect of the Power Barges.6

Subsequently, Polar Energy, Inc. assigned its rights under the Agreement to FELS. The NPC initially opposed the assignment of rights, citing paragraph 17.2 of Article 17 of the Agreement.

On August 7, 1995, FELS received an assessment of real property taxes on the power barges from Provincial Assessor Lauro C. Andaya of Batangas City. The assessed tax, which likewise covered those due for 1994, amounted to P56,184,088.40 per annum. FELS referred the matter to NPC, reminding it of its obligation under the Agreement to pay all real estate taxes. It then gave NPC the full power and authority to represent it in any conference regarding the real property assessment of the Provincial Assessor.

In a letter7 dated September 7, 1995, NPC sought reconsideration of the Provincial Assessor’s decision to assess real property taxes on the power barges. However, the motion was denied on September 22, 1995, and the Provincial Assessor advised NPC to pay the assessment.8 This prompted NPC to file a petition with the Local Board of Assessment Appeals (LBAA) for the setting aside of the assessment and the declaration of the barges as non-taxable items; it also prayed that should LBAA find the barges to be taxable, the Provincial Assessor be directed to make the necessary corrections.9

In its Answer to the petition, the Provincial Assessor averred that the barges were real property for purposes of taxation under Section 199(c) of Republic Act (R.A.) No. 7160.

Before the case was decided by the LBAA, NPC filed a Manifestation, informing the LBAA that the Department of Finance (DOF) had rendered an opinion10 dated May 20, 1996, where it is clearly stated that power barges are not real property subject to real property assessment.

On August 26, 1996, the LBAA rendered a Resolution11 denying the petition. The fallo reads:

WHEREFORE, the Petition is DENIED. FELS is hereby ordered to pay the real estate tax in the amount ofP56,184,088.40, for the year 1994.

SO ORDERED.12

The LBAA ruled that the power plant facilities, while they may be classified as movable or personal property, are nevertheless considered real property for taxation purposes because they are installed at a specific location with a character of permanency. The LBAA also pointed out that the owner of the barges–FELS, a private corporation–is the one being taxed, not NPC. A mere agreement making NPC responsible for the payment of all real estate taxes and assessments will not justify the exemption of FELS; such a

privilege can only be granted to NPC and cannot be extended to FELS. Finally, the LBAA also ruled that the petition was filed out of time.

Aggrieved, FELS appealed the LBAA’s ruling to the Central Board of Assessment Appeals (CBAA).

On August 28, 1996, the Provincial Treasurer of Batangas City issued a Notice of Levy and Warrant by Distraint13over the power barges, seeking to collect real property taxes amounting to P232,602,125.91 as of July 31, 1996. The notice and warrant was officially served to FELS on November 8, 1996. It then filed a Motion to Lift Levy dated November 14, 1996, praying that the Provincial Assessor be further restrained by the CBAA from enforcing the disputed assessment during the pendency of the appeal.

On November 15, 1996, the CBAA issued an Order14 lifting the levy and distraint on the properties of FELS in order not to preempt and render ineffectual, nugatory and illusory any resolution or judgment which the Board would issue.

Meantime, the NPC filed a Motion for Intervention15 dated August 7, 1998 in the proceedings before the CBAA. This was approved by the CBAA in an Order16 dated September 22, 1998.

During the pendency of the case, both FELS and NPC filed several motions to admit bond to guarantee the payment of real property taxes assessed by the Provincial Assessor (in the event that the judgment be unfavorable to them). The bonds were duly approved by the CBAA.

On April 6, 2000, the CBAA rendered a Decision17 finding the power barges exempt from real property tax. The dispositive portion reads:

WHEREFORE, the Resolution of the Local Board of Assessment Appeals of the Province of Batangas is hereby reversed. Respondent-appellee Provincial Assessor of the Province of Batangas is hereby ordered to drop subject property under ARP/Tax Declaration No. 018-00958 from the List of Taxable Properties in the Assessment Roll. The Provincial Treasurer of Batangas is hereby directed to act accordingly.

SO ORDERED.18

Ruling in favor of FELS and NPC, the CBAA reasoned that the power barges belong to NPC; since they are actually, directly and exclusively used by it, the power barges are covered by the exemptions under Section 234(c) of R.A. No. 7160.19 As to the other jurisdictional issue, the CBAA ruled that prescription did not preclude the NPC from pursuing its claim for tax exemption in accordance with Section 206 of R.A. No. 7160. The Provincial Assessor filed a motion for reconsideration, which was opposed by FELS and NPC.

In a complete volte face, the CBAA issued a Resolution20 on July 31, 2001 reversing its earlier decision. The fallo of the resolution reads:

WHEREFORE, premises considered, it is the resolution of this Board that:

(a) The decision of the Board dated 6 April 2000 is hereby reversed.

(b) The petition of FELS, as well as the intervention of NPC, is dismissed.

(c) The resolution of the Local Board of Assessment Appeals of Batangas is hereby affirmed,

(d) The real property tax assessment on FELS by the Provincial Assessor of Batangas is likewise hereby affirmed.

SO ORDERED.21

FELS and NPC filed separate motions for reconsideration, which were timely opposed by the Provincial Assessor. The CBAA denied the said motions in a Resolution22 dated October 19, 2001.

Dissatisfied, FELS filed a petition for review before the CA docketed as CA-G.R. SP No. 67490. Meanwhile, NPC filed a separate petition, docketed as CA-G.R. SP No. 67491.

On January 17, 2002, NPC filed a Manifestation/Motion for Consolidation in CA-G.R. SP No. 67490 praying for the consolidation of its petition with CA-G.R. SP No. 67491. In a Resolution23 dated February 12, 2002, the appellate court directed NPC to re-file its motion for consolidation with CA-G.R. SP No. 67491, since it is the ponente of the latter petition who should resolve the request for reconsideration.

NPC failed to comply with the aforesaid resolution. On August 25, 2004, the Twelfth Division of the appellate court rendered judgment in CA-G.R. SP No. 67490 denying the petition on the ground of prescription. The decretal portion of the decision reads:

WHEREFORE, the petition for review is DENIED for lack of merit and the assailed Resolutions dated July 31, 2001 and October 19, 2001 of the Central Board of Assessment Appeals are AFFIRMED.

SO ORDERED.24

On September 20, 2004, FELS timely filed a motion for reconsideration seeking the reversal of the appellate court’s decision in CA-G.R. SP No. 67490.

Thereafter, NPC filed a petition for review dated October 19, 2004 before this Court, docketed as G.R. No. 165113, assailing the appellate court’s decision in CA-G.R. SP No. 67490. The petition was, however, denied in this Court’s Resolution25 of November

8, 2004, for NPC’s failure to sufficiently show that the CA committed any reversible error in the challenged decision. NPC filed a motion for reconsideration, which the Court denied with finality in a Resolution26 dated January 19, 2005.

Meantime, the appellate court dismissed the petition in CA-G.R. SP No. 67491. It held that the right to question the assessment of the Provincial Assessor had already prescribed upon the failure of FELS to appeal the disputed assessment to the LBAA within the period prescribed by law. Since FELS had lost the right to question the assessment, the right of the Provincial Government to collect the tax was already absolute.

NPC filed a motion for reconsideration dated March 8, 2005, seeking reconsideration of the February 5, 2005 ruling of the CA in CA-G.R. SP No. 67491. The motion was denied in a Resolution27 dated November 23, 2005.

The motion for reconsideration filed by FELS in CA-G.R. SP No. 67490 had been earlier denied for lack of merit in a Resolution28 dated June 20, 2005.

On August 3, 2005, FELS filed the petition docketed as G.R. No. 168557 before this Court, raising the following issues:

A.

Whether power barges, which are floating and movable, are personal properties and therefore, not subject to real property tax.

B.

Assuming that the subject power barges are real properties, whether they are exempt from real estate tax under Section 234 of the Local Government Code ("LGC").

C.

Assuming arguendo that the subject power barges are subject to real estate tax, whether or not it should be NPC which should be made to pay the same under the law.

D.

Assuming arguendo that the subject power barges are real properties, whether or not the same is subject to depreciation just like any other personal properties.

E.

Whether the right of the petitioner to question the patently null and void real property tax assessment on the petitioner’s personal properties is imprescriptible.29

On January 13, 2006, NPC filed its own petition for review before this Court (G.R. No. 170628), indicating the following errors committed by the CA:

I

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE APPEAL TO THE LBAA WAS FILED OUT OF TIME.

II

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE POWER BARGES ARE NOT SUBJECT TO REAL PROPERTY TAXES.

III

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE ASSESSMENT ON THE POWER BARGES WAS NOT MADE IN ACCORDANCE WITH LAW.30

Considering that the factual antecedents of both cases are similar, the Court ordered the consolidation of the two cases in a Resolution31 dated March 8, 2006.1awphi1.net

In an earlier Resolution dated February 1, 2006, the Court had required the parties to submit their respective Memoranda within 30 days from notice. Almost a year passed but the parties had not submitted their respective memoranda. Considering that taxes—the lifeblood of our economy—are involved in the present controversy, the Court was prompted to dispense with the said pleadings, with the end view of advancing the interests of justice and avoiding further delay.

In both petitions, FELS and NPC maintain that the appeal before the LBAA was not time-barred. FELS argues that when NPC moved to have the assessment reconsidered on September 7, 1995, the running of the period to file an appeal with the LBAA was tolled. For its part, NPC posits that the 60-day period for appealing to the LBAA should be reckoned from its receipt of the denial of its motion for reconsideration.

Petitioners’ contentions are bereft of merit.

Section 226 of R.A. No. 7160, otherwise known as the Local Government Code of 1991, provides:

SECTION 226. Local Board of Assessment Appeals. – Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the province or city by filing a petition under oath in the form

prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.

We note that the notice of assessment which the Provincial Assessor sent to FELS on August 7, 1995, contained the following statement:

If you are not satisfied with this assessment, you may, within sixty (60) days from the date of receipt hereof, appeal to the Board of Assessment Appeals of the province by filing a petition under oath on the form prescribed for the purpose, together with copies of ARP/Tax Declaration and such affidavits or documents submitted in support of the appeal.32

Instead of appealing to the Board of Assessment Appeals (as stated in the notice), NPC opted to file a motion for reconsideration of the Provincial Assessor’s decision, a remedy not sanctioned by law.

The remedy of appeal to the LBAA is available from an adverse ruling or action of the provincial, city or municipal assessor in the assessment of the property. It follows then that the determination made by the respondent Provincial Assessor with regard to the taxability of the subject real properties falls within its power to assess properties for taxation purposes subject to appeal before the LBAA.33

We fully agree with the rationalization of the CA in both CA-G.R. SP No. 67490 and CA-G.R. SP No. 67491. The two divisions of the appellate court cited the case of Callanta v. Office of the Ombudsman,34 where we ruled that under Section 226 of R.A. No 7160,35 the last action of the local assessor on a particular assessment shall be the notice of assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure likewise does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor. The pertinent holding of the Court in Callanta is as follows:

x x x [T]he same Code is equally clear that the aggrieved owners should have brought their appeals before the LBAA. Unfortunately, despite the advice to this effect contained in their respective notices of assessment, the owners chose to bring their requests for a review/readjustment before the city assessor, a remedy not sanctioned by the law. To allow this procedure would indeed invite corruption in the system of appraisal and assessment. It conveniently courts a graft-prone situation where values of real property may be initially set unreasonably high, and then subsequently reduced upon the request of a property owner. In the latter instance, allusions of a possible covert, illicit trade-off cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system.36

For its part, the appellate court declared in CA-G.R. SP No. 67491:

x x x. The Court announces: Henceforth, whenever the local assessor sends a notice to the owner or lawful possessor of real property of its revised assessed value, the former

shall no longer have any jurisdiction to entertain any request for a review or readjustment. The appropriate forum where the aggrieved party may bring his appeal is the LBAA as provided by law. It follows ineluctably that the 60-day period for making the appeal to the LBAA runs without interruption. This is what We held in SP 67490 and reaffirm today in SP 67491.37

To reiterate, if the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due with respect to the taxpayer’s property becomes absolute upon the expiration of the period to appeal.38 It also bears stressing that the taxpayer’s failure to question the assessment in the LBAA renders the assessment of the local assessor final, executory and demandable, thus, precluding the taxpayer from questioning the correctness of the assessment, or from invoking any defense that would reopen the question of its liability on the merits.39

In fine, the LBAA acted correctly when it dismissed the petitioners’ appeal for having been filed out of time; the CBAA and the appellate court were likewise correct in affirming the dismissal. Elementary is the rule that the perfection of an appeal within the period therefor is both mandatory and jurisdictional, and failure in this regard renders the decision final and executory.40

In the Comment filed by the Provincial Assessor, it is asserted that the instant petition is barred by res judicata; that the final and executory judgment in G.R. No. 165113 (where there was a final determination on the issue of prescription), effectively precludes the claims herein; and that the filing of the instant petition after an adverse judgment in G.R. No. 165113 constitutes forum shopping.

FELS maintains that the argument of the Provincial Assessor is completely misplaced since it was not a party to the erroneous petition which the NPC filed in G.R. No. 165113. It avers that it did not participate in the aforesaid proceeding, and the Supreme Court never acquired jurisdiction over it. As to the issue of forum shopping, petitioner claims that no forum shopping could have been committed since the elements of litis pendentia or res judicata are not present.

We do not agree.

Res judicata pervades every organized system of jurisprudence and is founded upon two grounds embodied in various maxims of common law, namely: (1) public policy and necessity, which makes it to the interest of the State that there should be an end to litigation – republicae ut sit litium; and (2) the hardship on the individual of being vexed twice for the same cause – nemo debet bis vexari et eadem causa. A conflicting doctrine would subject the public peace and quiet to the will and dereliction of individuals and prefer the regalement of the litigious disposition on the part of suitors to the preservation of the public tranquility and happiness.41 As we ruled in Heirs of Trinidad De Leon Vda. de Roxas v. Court of Appeals:42

x x x An existing final judgment or decree – rendered upon the merits, without fraud or collusion, by a court of competent jurisdiction acting upon a matter within its authority – is conclusive on the rights of the parties and their privies. This ruling holds in all other actions or suits, in the same or any other judicial tribunal of concurrent jurisdiction, touching on the points or matters in issue in the first suit.

x x x

Courts will simply refuse to reopen what has been decided. They will not allow the same parties or their privies to litigate anew a question once it has been considered and decided with finality. Litigations must end and terminate sometime and somewhere. The effective and efficient administration of justice requires that once a judgment has become final, the prevailing party should not be deprived of the fruits of the verdict by subsequent suits on the same issues filed by the same parties.

This is in accordance with the doctrine of res judicata which has the following elements: (1) the former judgment must be final; (2) the court which rendered it had jurisdiction over the subject matter and the parties; (3) the judgment must be on the merits; and (4) there must be between the first and the second actions, identity of parties, subject matter and causes of action. The application of the doctrine of res judicata does not require absolute identity of parties but merely substantial identity of parties. There is substantial identity of parties when there is community of interest or privity of interest between a party in the first and a party in the second case even if the first case did not implead the latter.43

To recall, FELS gave NPC the full power and authority to represent it in any proceeding regarding real property assessment. Therefore, when petitioner NPC filed its petition for review docketed as G.R. No. 165113, it did so not only on its behalf but also on behalf of FELS. Moreover, the assailed decision in the earlier petition for review filed in this Court was the decision of the appellate court in CA-G.R. SP No. 67490, in which FELS was the petitioner. Thus, the decision in G.R. No. 165116 is binding on petitioner FELS under the principle of privity of interest. In fine, FELS and NPC are substantially "identical parties" as to warrant the application of res judicata. FELS’s argument that it is not bound by the erroneous petition filed by NPC is thus unavailing.

On the issue of forum shopping, we rule for the Provincial Assessor. Forum shopping exists when, as a result of an adverse judgment in one forum, a party seeks another and possibly favorable judgment in another forum other than by appeal or special civil action or certiorari. There is also forum shopping when a party institutes two or more actions or proceedings grounded on the same cause, on the gamble that one or the other court would make a favorable disposition.44

Petitioner FELS alleges that there is no forum shopping since the elements of res judicata are not present in the cases at bar; however, as already discussed, res judicata may be properly applied herein. Petitioners engaged in forum shopping when they filed G.R. Nos. 168557 and 170628 after the petition for review in G.R. No. 165116. Indeed,

petitioners went from one court to another trying to get a favorable decision from one of the tribunals which allowed them to pursue their cases.

It must be stressed that an important factor in determining the existence of forum shopping is the vexation caused to the courts and the parties-litigants by the filing of similar cases to claim substantially the same reliefs.45 The rationale against forum shopping is that a party should not be allowed to pursue simultaneous remedies in two different fora. Filing multiple petitions or complaints constitutes abuse of court processes, which tends to degrade the administration of justice, wreaks havoc upon orderly judicial procedure, and adds to the congestion of the heavily burdened dockets of the courts.46

Thus, there is forum shopping when there exist: (a) identity of parties, or at least such parties as represent the same interests in both actions, (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts, and (c) the identity of the two preceding particulars is such that any judgment rendered in the pending case, regardless of which party is successful, would amount to res judicata in the other.47

Having found that the elements of res judicata and forum shopping are present in the consolidated cases, a discussion of the other issues is no longer necessary. Nevertheless, for the peace and contentment of petitioners, we shall shed light on the merits of the case.

As found by the appellate court, the CBAA and LBAA power barges are real property and are thus subject to real property tax. This is also the inevitable conclusion, considering that G.R. No. 165113 was dismissed for failure to sufficiently show any reversible error. Tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise.48 Besides, factual findings of administrative bodies, which have acquired expertise in their field, are generally binding and conclusive upon the Court; we will not assume to interfere with the sensible exercise of the judgment of men especially trained in appraising property. Where the judicial mind is left in doubt, it is a sound policy to leave the assessment undisturbed.49 We find no reason to depart from this rule in this case.

In Consolidated Edison Company of New York, Inc., et al. v. The City of New York, et al.,50 a power company brought an action to review property tax assessment. On the city’s motion to dismiss, the Supreme Court of New York held that the barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxation.

Moreover, Article 415 (9) of the New Civil Code provides that "[d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast" are considered immovable property. Thus, power barges are categorized as immovable property by destination, being in the nature of machinery and other implements intended by the owner for an industry or work which may be carried

on in a building or on a piece of land and which tend directly to meet the needs of said industry or work.51

Petitioners maintain nevertheless that the power barges are exempt from real estate tax under Section 234 (c) of R.A. No. 7160 because they are actually, directly and exclusively used by petitioner NPC, a government- owned and controlled corporation engaged in the supply, generation, and transmission of electric power.

We affirm the findings of the LBAA and CBAA that the owner of the taxable properties is petitioner FELS, which in fine, is the entity being taxed by the local government. As stipulated under Section 2.11, Article 2 of the Agreement:

OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges and all the fixtures, fittings, machinery and equipment on the Site used in connection with the Power Barges which have been supplied by it at its own cost. POLAR shall operate, manage and maintain the Power Barges for the purpose of converting Fuel of NAPOCOR into electricity.52

It follows then that FELS cannot escape liability from the payment of realty taxes by invoking its exemption in Section 234 (c) of R.A. No. 7160, which reads:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property tax:

x x x

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; x x x

Indeed, the law states that the machinery must be actually, directly and exclusively used by the government owned or controlled corporation; nevertheless, petitioner FELS still cannot find solace in this provision because Section 5.5, Article 5 of the Agreement provides:

OPERATION. POLAR undertakes that until the end of the Lease Period, subject to the supply of the necessary Fuel pursuant to Article 6 and to the other provisions hereof, it will operate the Power Barges to convert such Fuel into electricity in accordance with Part A of Article 7.53

It is a basic rule that obligations arising from a contract have the force of law between the parties. Not being contrary to law, morals, good customs, public order or public policy, the parties to the contract are bound by its terms and conditions.54

Time and again, the Supreme Court has stated that taxation is the rule and exemption is the exception.55 The law does not look with favor on tax exemptions and the entity that would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.56 Thus, applying the rule of strict construction of laws granting tax exemptions, and the rule that doubts should be resolved in favor of provincial corporations, we hold that FELS is considered a taxable entity.

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible for the payment of all real estate taxes and assessments, does not justify the exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas.

It must be pointed out that the protracted and circuitous litigation has seriously resulted in the local government’s deprivation of revenues. The power to tax is an incident of sovereignty and is unlimited in its magnitude, acknowledging in its very nature no perimeter so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay for it.57 The right of local government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of local governments58 and the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals.59

In conclusion, we reiterate that the power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.60

WHEREFORE, the Petitions are DENIED and the assailed Decisions and Resolutions AFFIRMED.

SO ORDERED.

G.R. No. L-40411             August 7, 1935

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;

x x x           x x x           x x x

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 Yorkvs. 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.

x x x           x x x           x x x

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.

G.R. No. L-11658            February 15, 1918

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.

G.R. No. L-11139             April 23, 1958

SANTOS EVANGELISTA, petitioner, vs.ALTO SURETY & INSURANCE CO., INC., respondent.

Gonzalo D. David for petitioner.Raul A. Aristorenas and Benjamin Relova for respondent.

CONCEPCION, J.:

This is an appeal by certiorari from a decision of the Court of Appeals.

Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista, instituted Civil Case No. 8235 of the Court of First, Instance of Manila entitled " Santos Evangelista vs. Ricardo Rivera," for a sum of money. On the same date, he obtained a writ of attachment, which levied upon a house, built by Rivera on a land situated in Manila and leased to him, by filing copy of said writ and the corresponding notice of attachment with the Office of the Register of Deeds of Manila, on June 8, 1949. In due course, judgment was rendered in favor of Evangelista, who, on October 8, 1951, bought the house at public auction held in compliance with the writ of execution issued in said case. The corresponding definite deed of sale was issued to him on October 22, 1952, upon expiration of the period of redemption. When Evangelista sought to take

possession of the house, Rivera refused to surrender it, upon the ground that he had leased the property from the Alto Surety & Insurance Co., Inc. — respondent herein — and that the latter is now the true owner of said property. It appears that on May 10, 1952, a definite deed of sale of the same house had been issued to respondent, as the highest bidder at an auction sale held, on September 29, 1950, in compliance with a writ of execution issued in Civil Case No. 6268 of the same court, entitled "Alto Surety & Insurance Co., Inc. vs. Maximo Quiambao, Rosario Guevara and Ricardo Rivera," in which judgment, for the sum of money, had been rendered in favor respondent herein, as plaintiff therein. Hence, on June 13, 1953, Evangelista instituted the present action against respondent and Ricardo Rivera, for the purpose of establishing his (Evangelista) title over said house, securing possession thereof, apart from recovering damages.

In its answer, respondent alleged, in substance, that it has a better right to the house, because the sale made, and the definite deed of sale executed, in its favor, on September 29, 1950 and May 10, 1952, respectively, precede the sale to Evangelista (October 8, 1951) and the definite deed of sale in his favor (October 22, 1952). It, also, made some special defenses which are discussed hereafter. Rivera, in effect, joined forces with respondent. After due trial, the Court of First Instance of Manila rendered judgment for Evangelista, sentencing Rivera and respondent to deliver the house in question to petitioner herein and to pay him, jointly and severally, forty pesos (P40.00) a month from October, 1952, until said delivery, plus costs.

On appeal taken by respondent, this decision was reversed by the Court of Appeals, which absolved said respondent from the complaint, upon the ground that, although the writ of attachment in favor of Evangelista had been filed with the Register of Deeds of Manila prior to the sale in favor of respondent, Evangelista did not acquire thereby a preferential lien, the attachment having been levied as if the house in question were immovable property, although in the opinion of the Court of Appeals, it is "ostensibly a personal property." As such, the Court of Appeals held, "the order of attachment . . . should have been served in the manner provided in subsection (e) of section 7 of Rule 59," of the Rules of Court, reading:

The property of the defendant shall be attached by the officer executing the order in the following manner:

(e) Debts and credits, and other personal property not capable of manual delivery, by leaving with the person owing such debts, or having in his possession or under his control, such credits or other personal property, or with, his agent, a copy of the order, and a notice that the debts owing by him to the defendant, and the credits and other personal property in his possession, or under his control, belonging to the defendant, are attached in pursuance of such order. (Emphasis ours.)

However, the Court of Appeals seems to have been of the opinion, also, that the house of Rivera should have been attached in accordance with subsection (c) of said section 7, as "personal property capable of manual delivery, by taking and safely keeping in his

custody", for it declared that "Evangelists could not have . . . validly purchased Ricardo Rivera's house from the sheriff as the latter was not in possession thereof at the time he sold it at a public auction."

Evangelista now seeks a review, by certiorari, of this decision of the Court of Appeals. In this connection, it is not disputed that although the sale to the respondent preceded that made to Evangelists, the latter would have a better right if the writ of attachment, issued in his favor before  the sale to the respondent, had been properly executed or enforced. This question, in turn, depends upon whether the house of Ricardo Rivera is real property or not. In the affirmative case, the applicable provision would be subsection (a) of section 7, Rule 59 of the Rules of Court, pursuant to which the attachment should be made "by filing with the registrar of deeds a copy of the order, together with a description of the property attached, and a notice that it is attached, and by leaving a copy of such order, description, and notice with the occupant of the property, if any there be."

Respondent maintains, however, and the Court of Appeals held, that Rivera's house is personal property, the levy upon which must be made in conformity with subsections (c) and (e) of said section 7 of Rule 59. Hence, the main issue before us is whether a house, constructed the lessee of the land on which it is built, should be dealt with, for purpose, of attachment, as immovable property, or as personal property.

It is, our considered opinion that said house is not personal property, much less a debt, credit or other personal property not capable of manual delivery, but immovable property. As explicitly held, in Laddera vs. Hodges (48 Off. Gaz., 5374), "a true building (not merely superimposed on the soil) is immovable or real property, whether it is erected by the owner of the land or by usufructuary or  lessee. This is the doctrine of our Supreme Court in Leung Yee vs. Strong Machinery Company, 37 Phil., 644. And it is amply supported by the rulings of the French Court. . . ."

It is true that the parties to a deed of chattel mortgage may agree to consider a house as personal property for purposes of said contract (Luna vs. Encarnacion, * 48 Off. Gaz., 2664; Standard Oil Co. of New York vs. Jaramillo, 44 Phil., 630; De Jesus vs. Juan Dee Co., Inc., 72 Phil., 464). However, this view is good only insofar as thecontracting parties are concerned. It is based, partly, upon the principle of estoppel. Neither this principle, nor said view, is applicable to strangers to said contract. Much less is it in point where there has been no contractwhatsoever, with respect to the status of the house involved, as in the case at bar. Apart from this, in Manarang vs. Ofilada (99 Phil., 108; 52 Off. Gaz., 3954), we held:

The question now before us, however, is: Does the fact that the parties entering into a contract regarding a house gave said property the consideration of personal property in their contract, bind the sheriff in advertising the property's sale at public auction as personal property? It is to be remembered that in the case at bar the action was to collect a loan secured by a chattel mortgage on the house. It is also to be remembered that in practice it is the judgment creditor who

points out to the sheriff the properties that the sheriff is to levy upon in execution, and the judgment creditor in the case at bar is the party in whose favor the owner of the house had conveyed it by way of chattel mortgage and, therefore, knew its consideration as personal property.

These considerations notwithstanding, we hold that the rules on execution do not allow, and, we should notinterpret them in such a way as to allow, the special consideration that parties to a contract may have desired to impart to real estate, for example, as personal property, when they are, not ordinarily so. Sales on execution affect the public and third persons. The regulation governing sales on execution are for public officials to follow. The form of proceedings prescribed for each kind of property is suited to its character, not to the character, which the parties have given to it or desire to give it. When the rules speak of personal property, property which is ordinarily so considered is meant; and when real property is spoken of, it means property which is generally known as real property. The regulations were never intended to suit the consideration that parties may have privately given to the property levied upon. Enforcement of regulations would be difficult were the convenience or agreement of private parties to determine or govern the nature of the proceedings. We therefore hold that the mere fact that a house was the subject of the chattel mortgage and was considered as personal property by the parties does not make said house personal property for purposes of the notice to be given for its sale of public auction. This ruling is demanded by the need for a definite, orderly and well defined regulation for official and public guidance and would prevent confusion and misunderstanding.

We, therefore, declare that the house of mixed materials levied upon on execution, although subject of a contract of chattel mortgage between the owner and a third person, is real property within the purview of Rule 39, section 16, of the Rules of Court as it has become a permanent fixture of the land, which, is real property. (42 Am. Jur. 199-200; Leung Yee vs. Strong Machinery Co., 37 Phil., 644; Republic vs. Ceniza, et al., 90 Phil., 544; Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.)

The foregoing considerations apply, with equal force, to the conditions for the levy of attachment, for it similarly affects the public and third persons.

It is argued, however, that, even if the house in question were immovable property, its attachment by Evangelista was void or ineffective, because, in the language of the Court of Appeals, "after presenting a Copy of the order of attachment in the Office of the Register of Deeds, the person who might then be in possession of the house, the sheriff took no pains to serve Ricardo Rivera, or other copies thereof." This finding of the Court of Appeals is neither conclusive upon us, nor accurate.

The Record on Appeal, annexed to the petition for Certiorari, shows that petitioner alleged, in paragraph 3 of the complaint, that he acquired the house in question "as a

consequence of the levy of an attachment and execution of the judgment in Civil Case No. 8235" of the Court of First Instance of Manila. In his answer (paragraph 2), Ricardo Rivera admitted said attachment execution of judgment. He alleged, however, by way a of special defense, that the title of respondent "is superior  to that of plaintiff because it is based on a public instrument," whereas Evangelista relied upon a "promissory note" which "is only a private instrument"; that said Public instrument in favor of respondent "is superior also to the judgment in Civil Case No. 8235"; and that plaintiff's claim against Rivera amounted only to P866, "which is much below the real value" of said house, for which reason it would be "grossly unjust to acquire the property for such an inadequate consideration." Thus, Rivera impliedly admitted that his house had been attached, that the house had been sold to Evangelista in accordance with the requisite formalities, and that said attachment was valid, although allegedly inferior to the rights of respondent, and the consideration for the sale to Evangelista was claimed to be inadequate.

Respondent, in turn, denied the allegation in said paragraph 3 of the complaint, but only "  for the reasons stated in its special defenses" namely: (1) that by virtue of the sale at public auction, and the final deed executed by the sheriff in favor of respondent, the same became the "legitimate owner of the house" in question; (2) that respondent "is a buyer in good faith and for value"; (3) that respondent "took possession and control of said house"; (4) that "there was no valid attachment by the plaintiff and/or the Sheriff of Manila of the property in question as neither took actual or constructive possession or control of the property at any time"; and (5) "that the alleged registration of plaintiff's attachment, certificate of sale and final deed in the Office of Register of Deeds, Manila, if there was any, is likewise, not valid as there is no registry of transactions covering houses erected on land belonging to or leased from another." In this manner, respondent claimed a better right, merely under the theory that, in case of double sale of immovable property, the purchaser who first obtains possession in good faith, acquires title, if the sale has not been "recorded . . . in the Registry of Property" (Art. 1544, Civil Code of the Philippines), and that the writ of attachment and the notice of attachment in favor of Evangelista should be considered unregistered, "as there is no registry of transactions covering houses erected on land belonging to or leased from another." In fact, said article 1544 of the Civil Code of the Philippines, governing double sales, was quoted on page 15 of the brief for respondent in the Court of Appeals, in support of its fourth assignment of error therein, to the effect that it "has preference or priority over the sale of the same property" to Evangelista.

In other words, there was no issue on whether copy of the writ and notice of attachment had been served on Rivera. No evidence whatsoever, to the effect that Rivera had not been served with copies of said writ and notice, was introduced in the Court of First Instance. In its brief in the Court of Appeals, respondent did not aver, or even, intimate, that no such copies were served by the sheriff upon Rivera. Service thereof on Rivera had been impliedly admitted by the defendants, in their respective answers, and by their behaviour throughout the proceedings in the Court of First Instance, and, as regards respondent, in the Court of Appeals. In fact, petitioner asserts in his brief herein (p. 26) that copies of said writ and notice were delivered to Rivera, simultaneously with copies

of the complaint, upon service of summons, prior to the filing of copies of said writ and notice with the register deeds, andthe truth of this assertion has not been directly and positively challenged or denied in the brief filed before us by respondent herein. The latter did not dare therein to go beyond making a statement — for the first time in the course of these proceedings, begun almost five (5) years ago (June 18, 1953) — reproducing substantially the aforementioned finding of the Court of Appeals and then quoting the same.

Considering, therefore, that neither the pleadings, nor the briefs in the Court of Appeals, raised an issue on whether or not copies of the writ of attachment and notice of attachment had been served upon Rivera; that the defendants had impliedly admitted-in said pleadings and briefs, as well as by their conduct during the entire proceedings, prior to the rendition of the decision of the Court of Appeals — that Rivera had received copies of said documents; and that, for this reason, evidently, no proof was introduced thereon, we, are of the opinion, and so hold that the finding of the Court of Appeals to the effect that said copies had not been served upon Rivera is based upon a misapprehension of the specific issues involved therein and goes beyond  the range of such issues, apart from being contrary  to the aforementioned admission by the parties, and that, accordingly, a grave abuse of discretion was committed in making said finding, which is, furthermore, inaccurate.

Wherefore, the decision of the Court of Appeals is hereby reversed, and another one shall be entered affirming that of the Court of First Instance of Manila, with the costs of this instance against respondent, the Alto Surety and Insurance Co., Inc. It is so ordered.

G.R. No. L-8437             March 23, 1915

THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellee, vs.ALDECOA & CO., in liquidation, JOAQUIN IBAÑEZ DE ALDECOA Y PALET, ZOILO IBAÑEZ DE ALDECOA Y PALET, CECILIA IBAÑEZ DE ALDECOA Y PALET, and ISABEL PALET DE GABARRO, defendants-appellants. WILLIAM URQUHART, intervener-appellant.

Antonio Sanz and Chicote and Miranda for appellants.Hausermann, Cohn and Fisher for appellee.

TRENT, J.:

This action was brought on January 31, 1911, by the plaintiff bank against the above-named defendants for the purpose of recovering from the principal defendant, Aldecoa & Co., an amount due from the latter as the balance to its debit in an account current with the plaintiff, and to enforce the subsidiary liability of the other defendants for the payment of this indebtedness, as partners of Aldecoa & Co., and to foreclose certain mortgages executed by the defendants to secure the indebtedness sued upon.

Judgment was entered on the 10th of August, 1912, in favor of the plaintiff and against the defendants for the sum of P344,924.23, together with interest thereon at the rate of 7 per cent per annum from the date of the judgment until paid, and for costs, and for the foreclosure of the mortgages. The court decreed that in the event of there being a deficiency, after the foreclosure of the mortgages, the plaintiff must resort to and exhaust the property of the principal defendant before taking out execution against the individual defendants held to be liable in solidumwith the principal defendant, but subsidiarily. Judgment was also entered denying the relief sought by the intervener. All of the defendants and the intervener have appealed.

The defendants, Joaquin Ibañez de Alcoa, Zoilo Ibañez de Alcoa, and Cecilia Ibañez de Alcoa, were born in the Philippine Islands on March 27, 1884, July 4, 1885, and . . . , 1887, respectively, the legitimate children of Zoilo Ibañez de Alcoa and the defendant, Isabel Palet. Both parents were native of Spain. The father's domicile was in Manila, and he died here on October 4, 1895. The widow, still retaining her Manila domicile, left the Philippine Islands and went to Spain in 1897 because of her health, and did not return until the latter part of 1902. the firm of Aldecoa & Co., of which Zoilo Ibañez de Aldecoa, deceased, had been a member and managing director, was reorganized in December, 1896, and the widow became one of the general or "capitalistic" partners of the firm. The three children, above mentioned, appear in the articles of agreement as industrial partners.

On July 31, 1903, Isabel Palet, the widowed mother of Joaquin Ibañez de Aldecoa and Zoilo Ibañez de Aldecoa, who were then over the age of 18 years, went before a notary public and executed two instruments (Exhibits T and U), wherein and whereby she emancipated her two sons, with their consent and acceptance. No guardian of the person or property of these two sons had ever been applied for or appointed under or by virtue of the provisions of the Code of Civil Procedure since the promulgation of the Code in 1901. After the execution of Exhibit T and U, both Joaquin Ibañez de Aldecoa and Zoilo Ibañez de Aldecoa participated in the management of Aldecoa and Co, as partners by being present and voting at meetings of the partners of the company upon matters connected with its affairs.

On the 23rd of February, 1906, the defendant firm of Aldeco and Co. obtained from the bank a credit in account current up to the sum of P450,000 upon the terms and conditions set forth in the instrument executed on that date (Exhibit A). Later it was agreed that the defendants, Isabel Palet and her two sons, Joaquin and Zoilo, should mortgage, in addition to certain securities of Aldecoa and Co., as set forth in Exhibit A, certain of their real properties as additional security for the obligations of Aldecoa and Co. So, on March 23, 1906, the mortgage, Exhibit B, was executed wherein certain corrections in the description of some of the real property mortgaged to the bank by Exhibit A were made and the amount for which each of the mortgaged properties should be liable was set forth. These two mortgages, Exhibits A and B, were duly recorded in the registry of property of the city of Manila on March 23, 1906.

On the 31st day of December, 1906, the firm of Aldecoa and Co. went into liquidation on account of the expiration of the term for which it had been organized, and the intervener, Urquhart, was duly elected by the parties as liquidator, and be resolution dated January 24, 1907, he was granted the authority expressed in that resolution (Exhibit G).

On June 30, 1907, Aldeco and Co. in liquidation, for the purposes of certain litigation about to be commenced in its behalf, required an injunction bond in the sum of P50,000, which was furnished by the bank upon the condition that any liability incurred on the part of the bank upon this injunction bond would be covered by the mortgage of February 23, 1906. An agreement to this effect was executed by Aldecoa and Co. in liquidation, by Isabel Palet, by Joaquin Ibañez de Aldecoa, who had then attained his full majority, and by Zoilo Ibañez de Aldecoa, who was not yet twenty-three years of age. In 1908, Joaquin Ibañez de Aldecoa, Zoilo Ibañez de Aldecoa, and Cecilia Ibañez de Aldecoa commenced an action against their mother, Isabel Palet, and Aldecoa and Co., in which the bank was not a party, and in September of that year procured a judgment of the Court of First Instance annulling the articles of copartnership of Aldecoa and Co., in so far as they were concerned, and decreeing that they were creditors and not partners of that firm.

The real property of the defendant Isabel Palet, mortgaged to the plaintiff, corporation by the instrument of March 23, 1906 (Exhibit B), was, at the instance of the defendant, registered under the provisions of the Land Registration Act, subject to the mortgage thereon in favor of the plaintiff, by decree, of the land court dated March 8, 1907.

On the 6th of November, 1906, the defendants, Isabel Palet and her three children, Joaquin Ibañez de Aldecoa, Zoilo Ibañez de Aldecoa, and Cecilia Ibañez de Aldecoa, applied to the land court for the registration of their title to the real property described in paragraph 4 of the instrument of March 23, 1906 (Exhibit B), in which application they stated that the undivided three-fourths of said properties belonging to the defendants, Isabel Palet, Joaquin Ibañez de Aldecoa, and Zoilo Ibañez de Aldecoa, were subject to the mortgage in favor of the plaintiff to secure the sum of P203,985.97 under the terms of the instrument dated March 22, 1906. Pursuant to this petition the Court of Land Registration, by decree dated September 8, 1907, registered the title to the undivided three-fourths interest therein pertaining to the defendants, Isabel Palet and her two sons, Joaquin and Zoilo, to the mortgage in favor of the plaintiff to secure the sun of P203,985.97.

On December 22, 1906, Aldecoa and Co., by a public instrument executed before a notary public, as additional security for the performance of the obligations in favor of the plaintiff under the terms of the contracts Exhibits A and B, mortgaged to the bank the right of mortgage pertaining to Aldecoa and Co. upon certain real property in the Province of Albay, mortgaged to said company by one Zubeldia to secure an indebtedness to that firm. Subsequent to the execution of this instrument, Zubeldia caused his title to the mortgaged property to be registered under the provisions of the Land Registration Act, subject to a mortgage of Aldecoa and Co. to secure the sum of

P103,943.84 and to the mortgage of the mortgage right of Aldecoa and Co. to the plaintiff.

As the result of the litigation Aldecoa and Co. and A. S. Macleod, wherein the injunction bond for P50,000 was made by the bank in the manner and for the purpose above set forth, Aldecoa and Co. became the owner, through a compromise agreement executed in Manila on the 14th of August, 1907, of the shares of the Pasay Estate Company Limited (referred to in the contract of March 13, 1907, Exhibit V), and on the 30th day of August of that year Urquhart, as liquidator, under the authority vested in him as such, and in compliance with the terms of the contract of June 13, 1907, mortgaged to the plaintiff, by way of additional security for the performance of the obligations set forth in Exhibits A and B, the 312 shares of the Pasay Estate Company, Limited, acquired by Aldecoa and Co.

On the 31st day of March, 1907, Aldecoa and Co. mortgaged, as additional security for the performance of those obligations, to the plaintiff the right of mortgage, pertaining to the firm of Aldecoa and Co., upon certain real estate in that Province of Ambos Camarines, mortgaged to Aldecoa and Co. by one Andres Garchitorena to secure a balance of indebtedness to that firm of the sum of P20,280.19. The mortgage thus created in favor of the bank was duly recorded in the registry of deeds f that province. On the 31st day of March, 1907, Aldecoa and Co. mortgaged as further additional security for the performance of the obligations set forth in Exhibits A and B, the right of mortgage pertaining to the firm of Aldecoa and Co. upon other real property in the same province, mortgaged by the firm of Tremoya Hermanos and Liborio Tremoya, to secure the indebtedness of that firm to the firm of Aldecoa and Co. of P43,117.40 and the personal debt of the latter of P75,463.54. the mortgage thus created in favor of the bank was filed for record with the registrar of deeds of that province.

On the 30th day of January, 1907, Aldecoa and Co. duly authorized the bank to collect from certain persons and firms, named in the instrument granting this authority, any and all debts owing by them to Aldecoa and Co. and to apply all amounts so collected to the satisfaction, pro tanto, of any indebtedness of Aldecoa and Co. to the bank.

By a public instrument dated February 18, 1907, Aldecoa and Co. acknowledged as indebtedness to Joaquin Ibañez de Aldecoa in the sum of P154,589.20, a like indebtedness to Zoilo Ibañez de Aldecoa in the sum of P89,177.07. On September 30, 1908, Joaquin, Zoilo, and Cecilia recovered a judgment in the Court of First Instance of Manila for the payment to them f the sum of P155,127.31, as the balance due them upon the indebtedness acknowledged in the public instrument dated February 18, 1907.

On November 30, 1907, Joaquin, Zoilo, and Cecilia instituted an action in the Court of First Instance of the city of the Manila against the plaintiff bank for the purpose of obtaining a judicial declaration to the effect that the contract whereby Aldecoa and Co. mortgaged to the bank the shares of the Pasay Estate Company recovered from Alejandro S. Macleod, was null and void, and for a judgment of that these shares be sold and applied to the satisfaction of their judgment obtained on September 30, 1908.

Judgment was rendered by the lower court in favor of the plaintiffs in that action in accordance with their prayer, but upon appeal this court reversed that judgment and declared that the mortgage of the shares of stock in the Pasay Estate Co. to the bank was valid.

In October, 1908, Joaquin and Zoilo Ibañez de Aldecoa instituted an action against the plaintiff bank for the purpose of obtaining a judgment annulling the mortgages created by them upon their interest in the properties described in Exhibits A and B, upon the ground that the emancipation buy their mother was void and of no effect, and that, therefore, they were minors incapable of creating a valid mortgage upon their real property. The Court of First Instance dismissed the complaint as to Joaquin upon the ground that he had ratified those mortgages after becoming of age, but entered a judgment annulling said mortgages with respect to Zoilo. Both parties appealed from this decision and the case was given registry No. 6889 in the Supreme Court.1

On the 31st day of December, 1906, on which date the defendant Aldecoa and Co. went into liquidation, the amount of indebtedness to the bank upon the overdraft created by the terms of the contract, Exhibit A, was P516,517.98. Neither the defendant Aldecoa and Co., nor any of the defendants herein, have paid or caused to be paid to the bank the yearly partial payments due under the terms of the contract, Exhibit A. But from time to time the bank has collected and received from provincial debtors of Aldecoa and Co. the various sums shown in Exhibit Q, all of which sums so received have been placed to the credit of Aldecoa and Co. and notice duty given. Also, the bank, from time to time, since the date upon which Aldecoa and Co. went into liquidation, has received various other sums from, or for the account of, Aldecoa and Co., all of which have been duly placed to the credit of that firm, including the sum of P22,552.63, the amount of the credit against one Achaval, assigned to the bank by Aldecoa and Co. The balance to the credit of the bank on the 31st day of December, 1911, as shown on the books of Aldecoa and Co., was for the sum of P416.853.46. It appeared that an error had been committed by the bank in liquidating the interest charged to Aldecoa and Co., and this error was corrected so that the actual amount of the indebtedness of Aldecoa and Co. to the plaintiff on the 15th of February, 1912, with interest to December 10, 1912, the date of the judgment, the amount was P344,924.23.

The trial court found that there was no competent evidence that the bank induced, or attempted to induce, any customer of Aldecoa and Co. to discontinue business relations with that company. The court further found that Urquhart had failed to show that he had any legal interest in the matter in litigation between plaintiff and defendants, or in the success of either of the parties, or an interest against both, as required by section 121 of the Code of Civil Procedure. No further findings, with respect to the facts alleged in the complaint of the intervener, were made.

Aldecoa and Co. insist that the court erred:

1. In overruling the defendant's demurrer based upon the alleged ambiguity and vagueness of the complaint.

2. In ruling that there was no competent evidence that the plaintiff had induced Aldecoa and Co.'s provincial debtors to cease making consignments to that firm.

3. In rendering a judgment in a special proceeding for the foreclosure of a mortgage, Aldecoa and Co. not having mortgaged any real estate of any kind within the jurisdiction of the trial court, and the obligation of the persons who had signed the contract of suretyship in favor of the bank having been extinguished by operation of law.

The argument on behalf of the defendant in support of its first assignment of error from the complaint that Aldecoa and Co. authorized the plaintiff bank, by the instrument Exhibit G, to make collections on behalf of this defendant, and that the complaint failed to specify the amount obtained by the bank in the exercise of the authority conferred upon it, the complaint was thereby rendered vague and indefinite. Upon this point it is sufficient to say that the complaint alleges that a certain specific amount was due from the defendant firm as a balance of its indebtedness to the plaintiff, and this necessarily implies that there were no credits in favor of the defendant firm of any kind whatsoever which had not already been deducted from the original obligation.

With respect to the contention set forth in the second assignment of error to the effect that the bank has prejudiced Aldecoa and Co. by having induced customers of the latter to cease their commercial relations with this defendant, the ruling of the court that there is no evidence to show that there was any such inducement is fully supported by the record. It may be possible that some of Aldecoa and Co.'s customers ceased doing business with that firm after it went into liquidation. This is the ordinary effect of a commercial firm going consideration, for the reason that it was a well known fact that Aldecoa and Co. was insolvent. It is hardly probable that the bank, with so large a claim against Aldecoa and Co. and with unsatisfactory security for the payment of its claim, would have taken any action whatever which might have had the effect of diminishing Aldecoa and Co.'s ability to discharge their claim. The contention that the customers of Aldecoa and Co. included in the list of debtors ceased to make consignments to the firm because they had been advised by the bank that Aldecoa and Co. had authorized the bank to collect these credits from the defendant's provincial customers and apply the amounts so collected to the partial discharge of the indebtedness of the defendant to the bank. Furthermore, the bank was expressly empowered to take any steps which might be necessary, judicially or extrajudicially, for the collection of these credits. The real reason which caused the defendant's provincial customers to cease making shipments was due to the fact that the defendant, being out of funds, could not give its customers any further credit. It is therefore clear that the bank, having exercised the authority conferred upon it by the company in a legal manner, is not responsible for any damages which might have resulted from the failure of the defendant's provincial customers to continue doing business with that firm.

In the third assignments of errors two propositions are insisted upon: (1) that in these foreclosure proceedings the court was without jurisdiction to render judgment against Aldecoa and Co. for the reason that firm had mortgaged no real property within the city

of Manila to the plaintiff; and (2) that the mortgages given by this defendant have been extinguished by reason of the fact that the bank extended the time within which the defendant's provincial debtors might make their payments.

We understand that the bank is not seeking to exercise its mortgages rights upon the mortgages which the defendant firm holds upon certain real properties in the Provinces of Albay and Ambros Camarines and to sell these properties at public auction in these proceedings. Nor do we understand that the judgment of the trial courts directs that this be done. Before that property can be sold the original mortgagors will have to be made parties. The banks is not trying to foreclose, in this section, any mortgages on real property executed by Aldecoa and Co. It is true that the bank sought and obtained a money judgment against that firm, and at the same time and in the same action obtained a foreclosure judgment against the other defendants. If two or more persons are in solidumthe debtors mortgage any of their real property situate in the jurisdiction of the court, the creditor, in case of the solidary debtors in the same suit and secure a joint and several judgment against them, as well as judgments of foreclosure upon the respective mortgages.

The contention that the extensions granted to Aldecoa and Co.'s debtors, with the consent and authority of that firm itself, has resulted in extinguishment of the mortgages created by Aldecoa and Co. or of the mortgages created by partners of that company to secure its liabilities to the bank, is not tenable. The record shows that all the sureties were represented by Urquhart, the person elected by them as liquidator of the firm, when he agreed with the bank upon the extensions granted to those debtors. The authority to grant these extensions was conferred upon the bank by the liquidator, and he was given authority by all the sureties to authorized the bank to proceed in this manner.

With respect to the contention that the bank should be required to render an account of collections made under authority of Exhibit G, it is sufficient to say that the bank has properly accounted for all amounts collected from the defendant's debtors, and has applied all such amounts to the partial liquidation of the defendant's debt die to the bank. It is true that the sum for which judgment was rendered against Aldecoa and Co. is less than the amount originally demanded in the complaint, but this difference is due to the fact that certain amounts which had been collected from Aldecoa and Co.'s provincial debtors by the bank were credited to the latter between the date on which the complaint was filed and the date when the case came on for trial, and the further fact that it was necessary to correct an entry concerning one of the claims inasmuch as it appears that this claim had been assigned to the bank absolutely, and not merely for the purposes of collection, as the bookkeeper of the bank supposed, the result being that instead of crediting Aldecoa and Co. with the full face value of this claim, the bookkeeper had merely credited from time to time the amounts collected from this debtor. We, therefore, find no error prejudicial to the rights of this defendant.

Doña Isabel Palt makes the following assignment of errors:

1. That the court erred in failing to hold that her obligation as surety had been extinguished in accordance with the provisions of article 1851 of the Civil Code.

2. That the court erred in refusing to order for the benefit of this appellant that the property of Aldecoa and Co. should be exhausted before the plaintiff firm should be entitled to have recourse to the property of this defendant and appellant for the satisfaction of its judgment.

This appellant does not contend that she is not personally liable in solidum with Aldecoa and Co. for the liability of the latter firm to the plaintiff in the event that the appeal taken by Aldecoa and Co. should unsuccessful. We have just held that the judgment appealed from by Aldecoa and Co. should be affirmed. But Doña Isabel Palet does not contend that her liability as a partner for the obligations of Aldecoa and Co., although solidary, is subsidiary, and that she is entitled to insist that the property of Aldecoa and Co. be first applied in its entirety to the satisfaction of the firm's obligations before the bank shall proceed against her in the execution of its judgment.

The trial court directed that the mortgaged properties, including the properties mortgaged in the event that Aldecoa and Co. should fail to pay into court the amount of the judgment within the time designated for that purpose. the court recognized the subsidiary character of the personal liability of Doña Isabel Palet as a member of the firm of Aldecoa and Co. and decreed that as to any deficiency which might result after the sale of the mortgaged properties, execution should not issue against the properties of Doña Isabel Palet until all the property of Aldecoa and Co. shall have been exhausted. The properties mortgaged by Doña Isabel Palet were so mortgaged not merely as security for the performance of her own solidary subsidiary obligation as a partner bound for all the debts of Aldecoa and Co., but for the purpose of securing the direct obligation of the firm itself to the bank. We are, therefore, of the opinion that the trial court committed no error upon this point.

It is urged on behalf of Doña Isabel Palet that the mortgages executed by her upon her individual property have been canceled. The ground for this contention is that Aldecoa and Co. undertook by the contract of February 23, 1906, to discharge its liability to the plaintiff bank at the rate of not less than P50,000 per annum, and that therefore it was the duty of the bank to sue Aldecoa and Co. as soon as that firm failed to pay at maturity any one of the partial payments which it had promised to make, and to apply the proceeds, from the sale of the property of Aldecoa and Co. to the satisfaction of this indebtedness, and that the fact that the bank failed to do so is equivalent to an extension of the term of the principal debtor, and that the effect of this extension has been to extinguish the obligation of this defendant as a surety of Aldecoa and Co. It is also contended that the bank expressly extended the term within which Aldecoa and Co. was to satisfy its obligation by allowing Aldecoa and Co. to furnish additional security. Doña Isabel Palet alleges that all these acts were done without her knowledge or consent.

The extension of the term which, in accordance with the provisions of article 1851 of the Civil Code produces the extinction of the liability of the surety must of necessity be based on some new agreement between the creditor and principal debtor, by virtue of which the creditor deprives himself of his right to immediately bring an action for the enforcement of his claim. The mere failure to bring an action upon a credit, as soon as the same or any part of its matures, does not constitute an extension of the term of the obligation.

Doña Isabel Palet is a personal debtor jointly and severally with Aldecoa and Co. for the whole indebtedness of the latter firm to the bank, and not a mere surety of the performance of the obligations of Aldecoa and Co. without any solidary liability. It is true that certain additional deeds of mortgage and pledge were executed by Aldecoa and Co. in favor of the bank as additional security after Aldecoa and Co. had failed to meet its obligation to pay the first installment due under the agreement of February 23, 1906, but there is no stipulation whatever in any of these documents or deeds which can in any way be interpreted in the sense of constituting an extension which would bind the bank to waiter for the expiration of any new term before suing upon its claim against Aldecoa and Co. We find nothing in the record showing either directly or indirectly that the bank at any time has granted any extension in favor of Aldecoa and Co. for the performance of its obligations. The liquidator of Aldecoa and Co. authorized the bank to grant certain extensions to some of the provincial debtors of Aldecoa and Co. whose debts were to be paid to the bank under the authority conferred upon the bank by Aldecoa and Co. There is a marked difference between the extension of time within which Aldecoa and Co.'s debtors might pay their respective debts, and the extension of time for the payment of Aldecoa and Co.'s own obligations to the bank. If the bank was had brought suit on its credit against Aldecoa and Co., for the amount then due, on the day following the extension of the time of Aldecoa and Co.'s debtors for the payments of their debts, it is evident that the fact of such extension having been granted could not served in any sense as a defense in favor of Aldecoa and Co. against the bank's action, although this extension would have been available to Aldecoa and Co.'s debtors if suit had been brought to enforce their liabilities to Aldecoa and Co. We must, therefore, conclude that the judgment appealed from, in so far as it relates to Doña Isabel Palet, must likewise be affirmed.

The intervener, William Urquhart, assigns these errors:

1. The court erred in holding that the proof fails to show a case for intervention within the meaning of section 121 of the Code of Civil Procedure.

2. The court erred in failing to give preference to the credit of the liquidator Urquhart for his salary.

The trial court found, as we have said, that Urquhart had failed to show that he had any legal interest in the matter in litigation between the plaintiffs and the defendants, or in the success of any of the parties, or any interest against both. The proof upon this branch of the case consists of the following agreed statement of facts:

Mr. Urquhart is a creditor of Aldecoa and Co. in the sum of P21,000 due him for money loaned by him to Aldecoa and Co. before they went into liquidation.

Aldecoa and Co., in liquidation, owe Mr. Urquhart the liquidator P14,000 as salary.

Section 121 of the Code of civil Procedure provides that:

A person may, at any period of a trial, upon motion, be permitted by the court to intervene in an action or proceeding, if he has legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both.

The intervener is seeking to have himself declared a preferred creditor over the bank. According to the above- quoted agreed statement of facts, he is a mere creditor of Aldecoa and Co. for the sum of P21,000, loaned that firm before it went into liquidation. This amount is not evidenced by a public document, or any document for that matter, nor secured by pledge or mortgage, while the amount due the bank appears in a public instrument and is also secured by pledges and mortgages on the property of Aldecoa and Co., out of which the intervener seeks to have his indebtedness satisfied. It is, therefore, clear that the intervener is not entitled to the relief sought, in so far as the P21,000 is concerned.

The bank insists that, as the intervener had been in the employ of Aldecoa and Co. for several years prior to the time that the latter went into liquidation, it cannot be determined what part of the P14,000 is for salary as such employee and what part is for salary as liquidator. We find no trouble in reaching the conclusion that all of the P14,000 represents Urquhart's salary as liquidator of the firm of Aldecoa and Co. The agreed statement of facts clearly supports this view. It is there stated that Aldecoa and Co. in liquidation owed the liquidator P14,000 as salary. The agreement does not say, nor can it be even inferred from the same, that Aldecoa and Co. owed Urquhart P14,000, or any other sum for salary as an employee of that firm before it went into liquidation. Under these facts, is the intervener a preferred creditor over the bank for this amount?

In support of his contention that he should be declared a preferred creditor over the bank for the P14,000, the appellant cites the decision of the supreme court of Spain of March 16, 1897, and quotes the following from the syllabus of that case:

That the expense of maintenance of property is bound to affect such persons as have an interest therein, whether they be the owners or creditors of the property; therefore payment for this object has preference over any other debt, since such other debts are recoverable to the extent that the property is preserved and maintained.

There can be no question about the correctness of this ruling of the supreme court of Spain to the effect that the fees of a receiver, appointed by the court to preserve property in litigation, must be paid in preference to the claims of creditors. But this is not

at all the case under consideration, for the reason that Urquhart was elected liquidator by the members of the firm of Aldecoa and Co. Neither do we believe that the contention of the appellant can be sustained under article 1922 of the Civil Code, which provides that, with regard to specified personal property of the debtor, the following are preferred:

1. Credits for the construction, repair, preservation, or for the amount of the sale of personal property which may be in the possession of the debtor to the extent of the value of the same.

The only personal property of Aldecoa and Co. is 16 shares of the stock of the Banco-Español-Filipino; 450 shares of the stock of the Compañia Maritima; 330 shares of the stock of the Pasay Estate Co., Ltd; and certain claims against debtors of Aldecoa and Co., mentioned in Exhibit G.

The shares of stock in the Banco Español-Filipino and the Compañia Maritima were pledged to the bank before Aldecoa and Co. went into liquidation, so Urquhart had nothing to do with the preservation of these. The stock of the Pasay Estate co., Ltd., was pledged to the bank on August 30, 1907, on the same day that it came into the possession of Aldecoa and Co. and by the terms of the pledge the bank was authorized to collect all dividends on the stock and apply the proceeds to the satisfaction of its claim against Aldecoa and Co. The credits set forth in Exhibit G were assigned to the bank on January 30, 1907, so, it will be seen, that the Pasay Estate shares were in the possession of Aldecoa and Co., or its liquidator, only one day. Urquhart had been liquidator twenty-eight days when the credits, mentioned in Exhibit G, were assigned to the bank. If it could be held that these two items bring him within the above quoted provisions of article 1922, he could not be declared a preferred creditor over the bank for the P14,000 salary for the reason that, according to his own showing, he had been paid for his services as liquidator up to January, 1910. It is the salary since that date which is now in question. The only property of Aldecoa and Co. which the liquidator had anything to do with after 1910 was the real estate mortgages on real property cannot be regarded as personal property, and it is only of personal property that article 1922 speaks.

The judgment appealed from, in so far as it relates to Urquhart, being in accordance with the law and the merits of the case, is hereby affirmed.

The appellants, Joaquin and Zoilo Ibañez de Aldecoa, make the following assignments of error:

1. The court erred in not sustaining the plea of lis pendens with respect to the validity of mortgages claimed by the plaintiff, which plea was set up as a special defense by the defendants Joaquin and Zoilo Ibañez de Aldecoa, and in taking jurisdiction of the case and in deciding therein a matter already submitted for adjudication and not yet finally disposed of.

2. The court erred in hot sustaining the plea of res adjudicata set up as a special defense by these defendants with respect to the contention of plaintiff that these defendants are industrial and general partners of the firm of Aldecoa and Co.

3. The court erred in holding that the defendants Joaquin and Zoilo Ibañez de Aldecoa were general partners (socios colectivos) of the firm of Aldecoa and Co., and is rendering judgment against them subsidiarily for the payment of the amount claimed in the complaint.

The basis of the first alleged error is the pendency of an action instituted by the appellants, Joaquin and Zoilo, in 1908, to have the mortgages which the bank seeks to foreclose in the present action annulled in so far as their liability thereon is concerned. That action was pending in this Supreme Court on appeal when the present action was instituted (1911), tried, and decided in the court below.

The principle upon which plea of another action pending is sustained is that the latter action is deemed unnecessary and vexatious. (Williams vs. Gaston, 148 Ala., 214; 42 Sou., 552; 1 Cyc. 21; 1 R. C. L., sec. 1.) A statement of the rule to which the litigant to its benefits, and which has often met with approval, is found in Watson vs. Jones (13 Wall., 679, 715; 20 L. ed., 666):

But when the pendency of such a suit is set up to defeat another, the case must be the same. There must be the same parties, or at least such as represent the same interest, there must be the same rights asserted, and the same relief prayed for. This relief must be founded on the same facts, and the title or essential basis of the relief sought must be the same. The identity in these particulars should be such that if the pending case has already been disposed of, it could be pleaded in bar as a former adjudication of the same matter between the same parties.

It will be noted that the cases must be identical in a number of ways. It will be conceded that in so far as the plea is concerned, the parties are the same in the case at bar as they were in the action to have the mortgages annulled. Their position is simple reversed, the defendants there being the plaintiffs here, and vice versa. This fact does not affect the application of the rule. The inquiry must therefore proceed to the other requisites demanded by the rule. Are the same rights asserted? Is the same relief prayed for?

The test of identity in these respects is thus stated in 1 Cyc., 28:

A plea of the pendency of a prior action is not available unless the prior action is of such a character that, had a judgment been rendered therein on the merits, such a judgment would be conclusive between the parties and could be pleaded in bar of the second action.

This test has been approved, citing the quotation, in Williams vs. Gaston (148 Ala., 214; 42 Sou., 552); Van Vleck vs. Anderson (136 Iowa, 366; 113 N. W., 853); Wetzstein vs. Mining Co. (28 Mont., 451; 72 P., 865). It seems to us that unless the pending action, which the appellants refer to, can be shown to approach the action at bar to this extent, the plea ought to fail.

The former suit is one to annul the mortgages. The present suit is one for the foreclosure of the mortgages. It may be conceded that if the final judgment in the former action is that the mortgages be annulled, such an adjudication will deny the right of the bank to foreclose the mortgages. But will a decree holding them valid prevent the bank from foreclosing them. Most certainly not. In such an event, the judgment would not be a bar to the prosecution of the present action. The rule is not predicated upon such a contingency. It is applicable, between the same parties, only when the judgment to be rendered in the action first instituted will be such that, regardless of which party is successful, it will amount to res adjudicata against the second action. It has often been held that a pending action upon an insurance policy to recover its value is not a bar to the commencement of an action to have the policy reformed. The effect is quite different after final judgment has been rendered in an action upon the policy. Such a judgment may be pleaded in bar to an action seeking to reform the policy. The case are collected in the note toNational Fire Insurance Co. vs. Hughes (12 L. R. A., [N. S.], 907). So, it was held in the famous case of Sharon vs. Hill (26 Fed., 337), that the action brought by Miss hill for the purpose of establishing the genuineness of a writing purporting to be a declaration of marriage and thereby establishing the relation of husband and wife between the parties could not be pleaded in abatement of Senator Sharon's action seeking to have the writing declared false and forged. The court said:

This suit and the action of Sharon vs. Sharon are not brought on the same claim or demand. The subject matter and the relief sought are not identical. This suit is brought to cancel and annul an alleged false and forged writing, and enjoin the use of it by the defendant to the prejudice and injury of the plaintiff, while the other is brought to establish the validity of said writing as a declaration of marriage, as well as the marriage itself, and also to procure a dissolution thereof, and for a division of the common property, and for alimony.

Incidentally, it was held in this case that a judgment of the trial court declaring the writing genuine was not res adjudicata after an appeal had been taken from the judgment of the Supreme Court. So, in the case ta bar, the fact that the trial court in the former action holds the mortgages invalid as to one of the herein appellants is not final by reason of the appeal entered by the bank from that judgment.

Cases are also numerous in which an action for separation has been held not to be a bar to an action for divorce or vice versa. (Cook vs. Cook, [N. C.], 40 L. R. S., [N. S.], 83, and cases collected in the note.) In Cook vs. Cook  it was held that a pending action for absolute divorce was not a bar to the commencement of an action for separation. The above authorities are so analogous in principle to the case at bar that we deem the conclusion irresistible, that the pending action to annul the liability of the two appellant

children on the mortgages cannot operates as a plea in abatement in the case in hand which seeks to foreclose these mortgages. The subject matter and the relief asked for are entirely different. The facts do not conform to the rule and it is therefore not applicable.

With reference to the second alleged error, it appears that a certified copy of the judgment entered in the former case, wherein it was declared that these two appellants, together with their sister Cecilia, were creditors and partners of Aldecoa and Co., was offered in evidence and marked Exhibit 5. This evidence was objected to by the plaintiff on the ground that it was res inter alios acta and not competent evidence against the plaintiff or binding upon it in any way because it was not a party to that action. This objection was sustained and the proffered evidence excluded. If the evidence had been admitted, what would be its legal effect? That was an action inpersonam and the bank was not a party. The judgment is, therefore, binding only upon the parties to the suit and their successors in interest (sec. 306, Code of Civil Procedure, No. 2).

The question raised by the third assignment of errors will be dealt with in a separate opinion wherein the appeal of Cecilia Ibañez de Aldecoa will be disposed of.

The appellants whose appeals are herein determined will pay their respective portions of the cost. So ordered.

Arellano, C. J., Torres and Araullo, JJ., concur. Moreland, J.. concurs in the result. Johnson, J., dissents.

TRENT, J.:

In Hongkong and Shanghai Banking Corporation vs. Aldecoa and Co. et al., R. G. No. 8437, just decided, we said that the correctness of the judgment declaring that the defendants, Joaquin, Zoilo, and Cecilia Ibañez de Aldecoa, are subsidiarily liable to the bank as industrial partners of Aldecoa and Co. for the debts of the latter, would be determined in a separate opinion.

The facts are these: Joaquin, Zoilo, and Cecilia Ibañez de Aldecoa were born in the Philippine Islands, being the legitimate children of Zoilo Ibañez de Aldecoa and Isabel Palet. Both parent were native of Spain, but domiciled in Manila, where the father died in 1895. At the time of his death the father was a member and managing director of an ordinary general mercantile partnership known as Adecoa and Co. In December, 1896, Isabel Palet, for herself and as the parent of her above-named three children, exercising the patria potestad, entered into a new contract with various persons whereby the property and good will, together with the liabilities of the firm of which her husband was a partner, were taken over. The new firm was also an ordinary general mercantile

partnership and likewise denominated Aldecoa and Co. Although having the same name, the new firm was entirely distinct from the old one and was, in fact, a new enterprise. The widow entered into the new partnership as a capitalistic partner and caused her three children to appear in the articles of partnership as industrial partners. At the time of the execution of this new contract Joaquin was twelve years of age, Zoilo eleven, and Cecilia nine.

Clauses 9 and 12 of the new contract of partnership read:

9. The industrial partners shall bear in proportion to the shares the losses which may result to the partnership from bad business, but only from the reserve fund which shall be established, as set forth in the 12th clause, and if the loss suffered shall exhaust said fund the balance shall fall exclusively upon the partners furnishing the capital.

12. The industrial partner shall likewise contribute 50 per cent of his net profits to the formation of said reserve fund, but may freely dispose of the other 50 per cent.

The question is presented, Could the mother of the three children legally bind them as industrial partners of the firm of Aldecoa and Co. under the above facts? If so, are they liable jointly and severally with all their property, both real and personal, for the debts of the firm? That all industrial partners of an ordinary general mercantile partnership are liable with all their property, both personal and real, for all the debts of the firm owing to third parties precisely as a capitalistic partner has long since been definitely settled in this jurisdiction, notwithstanding provisions to the contrary in the articles of agreement. (Compañia Maritima vs. Muñoz, 9 Phil. Re., 326.)

There are various provisions of law, in force in 1896, which must be considered in determining whether or not the mother had the power to make her children industrial partners of the new firm Aldecoa and Co.

Article 5 of the Code of Commerce reads:

Persons under twenty-one years of age and incapacitated persons may continue, through their guardians, the commerce which their parents or persons from whom the right is derived may have been engaged in. If the guardians do not have legal capacity to trade, or have some incompatibility, they shall be under the obligation to appoint one or more factors who possess the legal qualifications, and we shall take their places in the trade.

As the firm of which it is claimed the children are industrial partners was not a continuation of the firm of which their deceased father was a member, but was a new partnership operating under its own articles of agreement, it is clear that article 5, supra, does not sustain the mother's power to bind her children as industrial partners of the new firm.

Article 4 of the Code of Commerce reads:

The persons having the following conditions shall have legal capacity to customarily engage in commerce:

1. Those who have reached the age of twenty-one years.

2. Those who are not subject to the authority of a father or mother or to a marital authority.

3. Those who have the free disposition of their property.

The appellant children had not a single one of these qualifications in 1896 when the mother attempted to enter them as industrial partners of the firm of Aldecoa and Co.

It is claimed that the power of the mother to bind her children as industrial partners is within her parental authority as defined by the Civil Code. Articles 159 to 166 which compose chapter 3 of the Civil Code, entitled "Effect of parental authority with regard to the property of the children," defined the extent of the parental authority over the property of minor children. Article 159 provides that the father, or, in his absence, the mother, is the legal administrator of the property of this children who are under their authority. Article 160 gives to such parent the administration and usufruct of property acquired by the child by its work or industry or for any good consideration. We take it that all the property possessed by the children at the time the contract of partnership was entered into in 1896 had been acquired by them either by their work or industry or for a good consideration. The children were at that time under the authority of their mother.

Article 164 reads:

The father, or the mother in a proper case, cannot alienate the real property of the child, the usufruct or administration of which belongs to them, nor encumber the same, except for sufficient reasons of utility or necessity, and after authorization from the judge of the domicile, upon hearing by the department of public prosecution, excepting the provisions which, with regard to the effects of transfers, the mortgage law establishes.

The mother did not secure judicial approval to enter into the contract of partnership on behalf of her children. Does member ship in an ordinary general mercantile partnership alienate or encumber the real property of an industrial partner? Clearly a partner alienates what he contributes to the firm as capital by transferring its ownership to the firm. But this, in the case of an industrial partner, is nothing. An industrial partner does not alienate any portion of his property by becoming a member of such a firm. Therefore, the mother did not violate this prohibition of article 164 in attempting to make her children industrial partners. But the article in question also prohibited her fromencumbering  their real property. This undoubtedly prohibits formal encumbrances

such as mortgages, voluntary easements, usufructuary rights, and others which create specific liens upon specific real property. it has been held to prohibit the creation of real rights, and especially registrable leases in favor of third persons. (Res., Aug. 30, 1893.) The same word is used in article 317 of the Civil Code in placing restrictions upon the capacity of a child emancipated by the concession of the parent to deal with his own property. In commenting on this latter article, Manresa asks the question, "To what encumbrances does the code in speaking of emancipated children?" and answers it as follows:

The prohibition against encumbering real property is so explicit . . . that we consider it unnecessary to enumerate what are the incumbrances to which the law refers. All that signifies a limitation upon property, such as the creation, modification, or extinction of the right of usufruct, use, habituation, emphyteusis, mortgages, annuities, easements, pensions affecting real property, bonds, etc., is, in an express consent of the persons who are mentioned in the said article 317. (Vol. 2, p. 689.)

In commenting upon the same article, Sanchez Roan says practically the same thing. (Vol. 5, p. 1179.) Neither of these commentators refers to the right of an emancipated child to enter into a contract of partnership without the parent's consent. The question, in so far as we have been able to ascertain, does not appear to have ever been discussed, either by the courts or the commentators. It is significant, however, that a contract of surety is placed by both the above mentioned commentators among the prohibited contracts. The encumbrance placed upon the real property of a surety is precisely the same as the encumbrance placed upon the real property of an industrial partner. That is, prior to judgment on the principal obligation or judgment against the partnership, the property is not specifically liable, and the creditor has n preferred lien thereon or right thereto by reason of the bond or partnership contract, as the case may be. After judgment, the property of the surety or of the industrial partner, both real and personal, is subsidiarily subject to execution. The evident purpose of both article 164, prohibiting the parent from encumbering the real property of his child without judicial approval, and of article 317, placing the same prohibition upon the emancipated child in the absence of the parent's approval, is the same. It is desired that the child's real property shall be frittered away by hasty and ill-advised contracts entered into by the one having the administration thereof. Both articles would fail of their purpose if the parent or the child, as the case might be, could do indirectly what could not be done directly. In other words, there would be little purpose in prohibiting a formal encumbrance by means of a mortgage, for instance, when a subsidiary liability by means of a bond or membership in a partnership could as effectually deprive the child of its real property. This proposition rests upon the theory that the mother could have freely disposed of the child's personal property in 1896 and that the only recourse open to them would have been an action against their mother for the value of such property. If this theory be true, the result would not be changed for the reason that children were either industrial partners or they were not. If they were, they are liable to the extent of both their real and personal property for the debts of the firm. If they were not, they are in no way liable. There can be only two kinds or classes of partners in a firm of this kind,

capitalistic and industrial. Both are personally liable to third persons for the debts of such a firm. To say that the children are industrial partners, but liable only to the extent of their personal property, would be to place them in a different class of partners. As the mother did not secure judicial approval, the contract wherein she attempted to make her children industrial partners, with all the consequences flowing therefrom, was, therefore, defective and that act of itself in no way made the children liable for the debts of the new firm.

The question remains, Did any of the children validly ratify the contract after acquiring capacity to do so? Cecilia was never emancipated and there is no evidence indicating that she has ever ratified the contract by word or deed. She is, therefore, completely exonerated from liability for the debts of Aldecoa and Co.

The other two children, Joaquin and Zoilo, were emancipated by their mother after they had reached the age of eighteen and prior to seeking annullment of the contract of partnership had participated by vote and otherwise in the management of the firm, as is evidenced by Exhibits W, Y, and Z. These various acts sufficiently show a ratification of the partnership contract and would have the effect of making the two children industrial partners if they had been of age at that time. Ratification is in the nature of the contract. It is the adoption of, and assent to be bound by, the act of another. (Words and Phrases, vol. 7, p. 5930.) From the effect of emancipation it cannot be doubted that the two children had capacity, with their mother's consent, to enter into a contract of partnership, and, by so doing, make themselves industrial partners, thereby encumbering their property. Conceding that the children under these circumstances could enter into such a contract with their mother, her express consent to the ratification of the contract by the two children does not appear of record. The result flowing from the ratification being the encumbrance of their property, their mother's express consent was necessary.

For the foregoing reasons the judgment appealed from, in so far as it holds the three children liable as industrial partners, is reversed, without costs in so far as this branch of the case is concerned. So ordered.

Arellano, C. J., Torres and Araullo, JJ., concur. Moreland, J., concurs in the result.