G.R. No. L-9299; November 3, 1914
E. C. MCCULLOUGH & CO., INC., plaintiff-appellant, vs. PEDRO G. ZOBOLI, defendant-appellee. ENRIQUE AYLLON, intervener.

FACTS:
Plaintiff E. C. McCullough & Co., Inc., a corporation in Manila, sued defendant Pedro G. Zoboli to collect a debt of P705.62. Zoboli confessed judgment, and an execution was issued, leading to a sheriff’s sale of Zoboli’s merchandise on April 3, 1912, which the plaintiff purchased. Subsequently, the plaintiff employed Zoboli as manager with an agreement that he could regain ownership after settling the judgment, but Zoboli refused to turn over the store. The plaintiff then filed an action for replevin.

Intervener Enrique Ayllon claimed a prior chattel mortgage over the same goods, executed by Zoboli on January 12, 1912, to secure a P2,500 debt. However, the mortgage was only presented for registration on March 3, 1912, after the sheriff had already levied on the property in late March. The trial court ruled in favor of the intervener, holding that his mortgage gave him a preferred right over the goods. The plaintiff appealed.

ISSUE:
Whether the chattel mortgage in favor of the intervener is valid against the plaintiff, a judgment creditor who levied upon and purchased the property at an execution sale prior to the mortgage’s registration.

RULING:
The Supreme Court REVERSED the trial court’s decision.

The Court held that under Section 4 of Act No. 1508 (the Chattel Mortgage Law), a chattel mortgage is invalid against third persons unless either (1) possession of the property is delivered to and retained by the mortgagee, or (2) the mortgage is recorded in the proper registry. Here, the intervener’s mortgage was not registered until March 3, 1912, which was after the sheriff had already levied on the property in late March. At the time of registration, the property was in the sheriff’s custody by virtue of the execution levy; thus, neither actual nor symbolic delivery (through registration) could be effected as against the plaintiff.

Consequently, while the mortgage was valid between Zoboli and Ayllon, it was void as against the plaintiff, a judgment creditor who had acquired rights through levy and execution sale prior to the mortgage’s registration. The case must be decided as if the mortgage never existed with respect to the plaintiff. The plaintiff, therefore, had a superior right to the goods.

Concurring Opinion: Justice Moreland noted that a chattel mortgage may be foreclosed extrajudicially without the need for a court action, by seizing and selling the property under the terms of the mortgage.

Decision: Judgment reversed in favor of the plaintiff-appellant. No costs awarded.