G.R. No. L-14224; April 25, 1960
REHABILITATION FINANCE CORPORATION (now DEVELOPMENT BANK OF THE PHILIPPINES), petitioner, vs. LUCIO JAVILLONAR, ET AL., respondents.

FACTS

On September 9, 1947, Consuelo Agrava Vda. de Agoncillo mortgaged a house (No. 2, Bulusan St., Quezon City) as personal property to Paz R. de Tubangui to secure a P11,000 loan. The house was built on a lot not then owned by Agoncillo. The chattel mortgage was registered on September 17, 1947. Agoncillo defaulted. Tubangui filed a collection suit (Civil Case No. 338), attached the house, obtained judgment via amicable settlement on March 2, 1948, and after Agoncillo’s non-compliance, levied on and purchased the house and land at an execution sale on May 27, 1948. The Sheriff executed an Officer’s Deed of Sale on June 21, 1949. Tubangui later sold the house to respondent Lucio Javillonar on August 14, 1951.
Meanwhile, Agoncillo acquired the lot. On March 8, 1948, she mortgaged the lot and its improvements (including the same house) to petitioner Rehabilitation Finance Corporation (RFC) to secure a P42,000 loan. This real estate mortgage was registered on March 10, 1948, and annotated on the Torrens title. Agoncillo defaulted, RFC foreclosed, bought the property at auction on November 29, 1948, and obtained title. RFC took possession of the house and collected rentals.
Javillonar sued, seeking declaration of his ownership, nullity of RFC’s mortgage over the house, and recovery of possession and rentals from RFC.

ISSUE

Whether the right of RFC, as mortgagee and subsequent purchaser of the house and lot, is superior to the right of Javillonar derived from Tubangui’s prior chattel mortgage and execution sale of the house.

RULING

No. The right of Javillonar (via Tubangui) is superior. The Court of Appeals’ decision, affirmed by the Supreme Court, held that Tubangui’s lien and right over the house were superior to RFC’s. RFC had actual knowledge of Tubangui’s credit and lien before executing its mortgage on March 8, 1948, as the loan agreement stipulated that P11,000 of RFC’s loan would be paid to Tubangui. RFC was also chargeable with knowledge that Tubangui’s debt was overdue and that a judgment in Tubangui’s favor existed as of March 2, 1948. Applying the principle from Leung Yee vs. F.L. Strong Machinery Co., RFC’s failure to act with the diligence of a prudent man in light of this knowledge precluded it from being an innocent mortgagee for value. Furthermore, under the doctrine in Parsons Hardware Co., Inc. vs. Villahermosa, RFC’s prior knowledge of Tubangui’s claim was equivalent to registration, making Tubangui’s lien superior to RFC’s subsequent mortgage lien over the house. The appealed decision was affirmed.