Star Two (SPV-AMC), Inc., vs Paper City Corporation of the Philippines, G.R. No.

169211, March 6, 2013

Facts:
From 1990-1991, Paper City applied for and was granted four (4) loans and credit accommodations by Rizal
Commercial Banking Corporation (RCBC), now substituted by Star Two (SPV-AMC), Inc by virtue of Republic
Act No. 9182. The loans were secured by four (4) Deeds of Continuing Chattel Mortgages on its machineries and
equipments found inside its paper plants. However, RCBC eventually executed a unilateral Cancellation of Deed
of Contining Chattel Mortgage. In 1992, RCBC, as the trustee bank, together with Metrobank and Union Bank,
entered into a Mortgage Trust Indenture (MTI), with Paper City. In the said MTI, Paper City acquired additional
loans secured by five (5) Deed of Real Estate Mortgage, plus real and personal properties in an annex to the MTI,
which covered the machineries and equipment of Paper City. The MTI was later on amended and supplemented
three (3) times, wherein the loan was increased and included the same mortgages with an additional building and
other improvements inthe plant site. Paper City was able to comply with the loans but only until 1997 due to an
economic crisis. RCBC filed a petition for extra-judicial foreclosure against the real estate executed by Paper City
including all the improvements because of payment default. The property was foreclosed and subjected to public
acution. The three banks and the highest bidder were issued a Certificate of Sale. Paper City filed a complaint
alleging that the sale was null and void due to lack of prior notice. During the pendency of the complaint, Paper
City filed a motion to remove machinery out of the foreclosed land and building, that the same were not included in
the foreclosure of the real estate mortgage. The trial court denied the motion, ruling that the machineries and
equipment were included. Thereafter, Paper City's Motion for Reconsideration, the trial court granted the same and
justified the reversal by finding that the machineries and equipment are chattels by agreement thru the four Deeds of
Continuing Chattel Mortgages; and that the deed of cancellation executed by RCBC of said mortgage was not valid
because it was one unilaterally. RCBC's Motion for Reconsideration was denied. The case was petitioned at CA
that 1. That Paper City gave its consent to consider the disputedmachineries and equipment as real properties when
they signed the MTI's and all its amendments; 2. That the machineries and equipment are the same as inthe MTI's,
hence treated by agreement of the parties as real properties. The CA affirmed the orders of the trial court because it
relied on the plain language of the MTI's stating that nowhere from any of the MTIs executed by the parties can we
find the alleged "express" agreement adverted to by petitioner. There is no provision in any of the parties MTI,
which expressly states to the effect that the parties shall treat the equipments and machineries as real property. On
the contrary, the plain and unambiguous language of the aforecited MTIs, which described the same as personal
properties, contradicts petitioners claims.
Issue:
Whether the subsequent contracts of the parties such as Mortgage Trust Indenture as well as the subsequent
supplementary amendments included in its coverage of mortgaged properties the subject machineries and
equipment; and
Whether or not the subject machineries and equipment were considered real properties and should therefore be
included in the extra-judicial foreclosure which in turn were sold to the banks.

Ruling:
Petition was granted.
1.

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. As held in Gateway Electronics Corp. v. Land Bank of the Philippines, 49 the rule in this jurisdiction is
that the contracting parties may establish any agreement, term, and condition they may deem advisable,
provided they are not contrary to law, morals or public policy. The right to enter into lawful contracts
constitutes one of the liberties guaranteed by the Constitution.

2. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage
extends to the improvements
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.
3.

Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the machineries and
equipments of respondent. 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. The real estate mortgages which specifically
included the machineries and equipments were subsequent to the chattel mortgages. 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;
xxxx
(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;

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 REINSTATE