Case Digest: Star Two v. Paper City. G.R. No. 169211, March 6, 2013

Property | Immovable Property, Machineries and Equipment

Art. 415. The following are immovable property:

1. Land, buildings, roads and constructions of all kinds adhered to the soil;
2. Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable;
3. Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object;
4. Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements;
5. Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;
6. Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included;
7. Fertilizer actually used on a piece of land;
8. Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant;
9. Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast;
10.  Contracts for public works, and servitudes and other real rights over immovable property. 

Facts: 

• From 1990 to 1991, Paper City obtained several loans from RCBC, secured by chattel mortgages on its machinery and equipment.
• In 1992, RCBC unilaterally cancelled a deed of chattel mortgage on Paper City's merchandise and stocks-in-trade in 1992.
• RCBC, Metrobank, and Union Bank entered into a Mortgage Trust Indenture (MTI) with Paper City, increasing the loan to ₱280,000,000 and securing it with real estate mortgages and additional real and personal properties.
• Amendments to the MTI increased the loan, with additional securities, including newly constructed buildings and equipment located in the existing plant site.
• In 1997, Paper City defaulted on its loan obligations. RCBC foreclosed the properties listed in the MTI through an extrajudicial foreclosure sale.
• In 2002, Paper City filed a Manifestation with Motion to Remove and/or Dispose Machinery arguing that the machineries located inside the foreclosed land and building were deteriorating. And since the machineries were not included in the foreclosure of the real estate mortgage, it is appropriate that it be removed from the building and sold to a third party.

Issue: 

• Whether the subject machineries and equipment of Paper City Corporation (Paper City) are movable properties by agreement of the parties and cannot be considered as included in the extrajudicial foreclosure sale of the mortgaged land and building of Paper City. NO

Held:

By contracts, all uncontested in this case, machineries and equipment are included in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also in favor of petitioner.

Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various parcels of land including the buildings and existing improvements thereon as well as the machineries and equipments, which as stated in the granting clause of the original mortgage, are "more particularly described and listed that is to say, the real and personal properties listed in Annexes ‘A’ and ‘B’ x x x of which the Paper City is the lawful and registered owner." Significantly, Annexes "A" and "B" are itemized listings of the buildings, machineries and equipments typed single spaced in twenty-seven pages of the document made part of the records.

The plain language and literal interpretation of the MTIs must be applied.

The plain and obvious inclusion in the mortgage of the machineries and equipments of Paper City escaped the attention of the CA which, instead, turned to another "plain language of the MTI" that "described the same as personal properties." It was error for the CA to deduce from the "description" exclusion from the mortgage.

1. The MTIs did not describe the equipments and machineries as personal property. Had the CA looked into Annexes "A" and "B" which were referred to by the phrase "real and personal properties," it could have easily noted that the captions describing the listed properties were "Buildings," "Machineries and Equipments," "Yard and Outside," and "Additional Machinery and Equipment." No mention in any manner was made in the annexes about "personal property." Notably, while "personal" appeared in the granting clause of the original MTI, the subsequent Deed of Amendment specifically stated that:

x x x The machineries and equipment listed in Annexes "A" and "B" form part of the improvements listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real Estate Mortgage.

The word "personal" was deleted in the corresponding granting clauses in the Deed of Amendment and in the First, Second and Third Supplemental Indentures.

2. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage extends to the improvements.

Article 2127 of the Civil Code provides:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person.

In the early case of Bischoff v. Pomar and Cia. General de Tabacos,53 the Court ruled that even if the machinery in question was not included in the mortgage expressly, Article 111 of the old Mortgage Law provides that chattels permanently located in a building, either useful or ornamental, or for the service of some industry even though they were placed there after the creation of the mortgage shall be considered as mortgaged with the estate, provided they belong to the owner of said estate. The provision of the old Civil Code was cited. Thus:

Article 1877 provides that a mortgage includes the natural accessions, improvements, growing fruits, and rents not collected when the obligation is due, and the amount of the indemnities granted or due the owner by the underwriters of the property mortgaged or by virtue of the exercise of eminent domain by reason of public utility, with the declarations, amplifications, and limitations established by law, in case the estate continues in the possession of the person who mortgaged it, as well as when it passes into the hands of a third person.

The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. relied on this provision. The issue was whether the machineries and accessories were included in the mortgage and the subsequent sale during public auction. This was answered in the affirmative by the Court when it ruled that the machineries were integral parts of said sugar central hence included following the principle of law that the accessory follows the principal.

Further, in the case of Manahan v. Hon. Cruz, this Court denied the prayer of Manahan to nullify the order of the trial court including the building in question in the writ of possession following the public auction of the parcels of land mortgaged to the bank. It upheld the inclusion by relying on the principles laid upon in Bischoff v. Pomar and Cia. General de Tabacos and Cu Unjieng e Hijos v. Mabalacat Sugar Co.

In Spouses Paderes v. Court of Appeals, we reiterated once more the Cu Unjieng e Hijos ruling and approved the inclusion of machineries and accessories installed at the time the mortgage, as well as all the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the machineries and equipments of respondent. While captioned as a "Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended," the averments state that the petition is based on "x x x the Mortgage Trust Indenture, the Deed of Amendment to the Mortgage Trust Indenture, the Second Supplemental Indenture to the Mortgage Trust Indenture, and the Third Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively referred to as the Indenture) duly notarized and entered as x x x."60 Noting that herein respondent has an outstanding obligation in the total amount of Nine Hundred One Million Eight Hundred One Thousand Four Hundred Eighty Four and 10/100 Pesos (₱901,801,484.10), the petition for foreclosure prayed that a foreclosure proceedings "x x x on the aforesaid real properties, including all improvements thereon covered by the real estate mortgage be undertaken and the appropriate auction sale be conducted x x x."

Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly states through the Deed of Amendment that the machineries and equipments listed in Annexes "A" and "B" form part of the improvements listed and located on the parcels of land subject of the mortgage, such machineries and equipments are surely part of the foreclosure of the "real estate properties, including all improvements thereon" as prayed for in the petition.

Indeed, the lower courts ought to have noticed the fact that the chattel mortgages adverted to were dated 8 January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. The real estate mortgages which specifically included the machineries and equipments were subsequent to the chattel mortgages dated 26 August 1992, 20 November 1992, 7 June 1994 and 24 January 1995. Without doubt, the real estate mortgages superseded the earlier chattel mortgages.

The real estate mortgage over the machineries and equipments is even in full accord with the classification of such properties by the Civil Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

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(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;

WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of the Court of Appeals dated 8 March 2005 and 8 August 2005 upholding the 15 August 2003 and 1 December 2003 Orders of the Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE and the original Order of the trial court dated 28 February 2003 denying the motion of respondent to remove or dispose of machinery is hereby REINSTATED.