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STAR TWO (SPV-AMC) v. PAPER CITY CORPORATION

FACTS:

The petitioner, Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank), and Union Bank of the Philippines (Union Bank), are banking corporations, while respondent Paper City Corporation is a domestic corporation engaged in the manufacture of paper products. Paper City obtained several loans from RCBC, secured by Deeds of Continuing Chattel Mortgages on its machineries and equipments. Later, RCBC, Metrobank, and Union Bank entered into a Mortgage Trust Indenture (MTI) with Paper City, wherein Paper City acquired an additional loan, secured by Deeds of Real Estate Mortgage and additional properties, including the machineries and equipments of Paper City. Paper City defaulted on its loan obligations, leading RCBC to file a petition for extrajudicial foreclosure. The foreclosure sale took place, with the creditor banks as the highest bidders.

Paper City filed a complaint against the creditor banks, claiming that the foreclosure sale was null and void due to lack of prior notice and gross bad faith. Paper City also requested the return of an excessive penalty, as well as the payment of damages and attorney's fees. During the proceedings, Paper City entered into a compromise agreement with Union Bank, settling Union Bank's share in the foreclosure proceeds and Paper City's remaining liabilities. Paper City also agreed to waive its claims and charges against Union Bank.

While negotiations with the other creditor banks were ongoing, Paper City filed a motion to remove or dispose of machinery located within the foreclosed property. The trial court initially denied the motion, ruling that the machinery was included in the mortgage deed. However, the court later reversed its decision and declared the disputed machinery as chattel based on the terms of the chattel mortgage deeds. The court also found the deed of cancellation executed by RCBC as invalid and lacking Paper City's consent.

RCBC filed a motion for reconsideration, which was denied. RCBC then filed a petition with the Court of Appeals (CA) seeking the annulment of the trial court's orders. RCBC argued that Paper City had consented to consider the machinery as real property and that its delay in questioning the characterization of the machinery amounted to estoppel and ratification. RCBC also contended that Paper City had not specified the machinery excluded from the foreclosure sale and that the machinery mentioned in the chattel mortgage deeds was the same included in the mortgage trust indenture.

Paper City refuted RCBC's claims and emphasized that the disputed properties remained within the purview of the chattel mortgage deeds.

ISSUES:

  1. Whether the subject machineries and equipments were included in the mortgage contracts, foreclosure, and sale on foreclosure.

  2. Whether the subsequent contracts between the parties included the subject machineries and equipments.

  3. Whether the subject machineries and equipments were included in the extrajudicial foreclosure and subsequent sale.

  4. Whether the machineries and equipment owned by Paper City are included in the Mortgage Trust Indenture and Real Estate Mortgage.

  5. Whether the inclusion of the machineries and equipment in the mortgage is in accordance with the parties' intent.

  6. Whether the mortgage on the machineries and equipments was validly included in the foreclosure proceedings.

  7. Whether the inclusion of the machineries and equipments in the foreclosure is in accordance with law and jurisprudence.

  8. Whether the Court of Appeals erred in upholding the Orders of the Valenzuela Regional Trial Court.

  9. Whether the original Order of the trial court should be reinstated.

RULING:

  1. The subject machineries and equipments were included in the mortgage contracts, foreclosure, and sale on foreclosure. The mortgage contracts explicitly stated that the mortgagor will assign, transfer, and convey by way of a registered first mortgage the various parcels of land, buildings and existing improvements, as well as the machinery and equipment listed in the annexes of the contracts.

  2. The subsequent contracts between the parties, including the amendments and supplements to the mortgage trust indenture, also included the subject machineries and equipments.

  3. The subject machineries and equipments were not included in the extrajudicial foreclosure and subsequent sale. The inclusion was contradicted by the caption of the petition for extrajudicial foreclosure, as well as the Certificate of Sale which only listed the mortgaged real properties bought by the petitioner without the subject properties.

  4. The machineries and equipment owned by Paper City are included in the Mortgage Trust Indenture and Real Estate Mortgage. The plain language and literal interpretation of the Mortgage Trust Indentures (MTIs) clearly show the intention of the parties to include the machineries and equipment as part of the mortgage properties. The inclusion of these properties escaped the attention of the Court of Appeals and their exclusion based on the "description" of personal property was erroneous.

  5. The mortgage on the machineries and equipments was validly included in the foreclosure proceedings. The mortgage documents specifically state that the machineries and equipments listed in the annexes form part of the improvements listed and located on the parcels of land subject to the mortgage. Thus, these properties are included in the "real estate properties, including all improvements thereon" as prayed for in the foreclosure petition.

  6. The inclusion of the machineries and equipments in the foreclosure is in accordance with law and jurisprudence. Article 2127 of the Civil Code provides that the mortgage extends to the improvements, including machinery, and accessories, whether the estate remains in the possession of the mortgagor or it passes into the hands of a third person. Furthermore, previous cases have ruled that chattels permanently located in a building, for the service of some industry even if placed there after the creation of the mortgage, are considered mortgaged with the estate. The principle that the accessory follows the principal is also applied in determining the inclusion of properties in the mortgage. Additionally, the Civil Code classifies machineries and equipments intended for an industry or works in a building as immovable property, further justifying their inclusion in the foreclosure.

  7. The Court REVERSED and SET ASIDE the Orders of the Valenzuela Regional Trial Court, and REINSTATED the original Order of the trial court denying the motion of the respondent to remove or dispose of machinery.

PRINCIPLES:

  • Contracts should be interpreted according to the plain and unambiguous language used.

  • The specific provisions of a contract should prevail over general provisions.

  • In foreclosure proceedings, only the properties included in the mortgage contract may be subject to extrajudicial foreclosure and subsequent sale.

  • 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 court's purpose in examining a contract is to interpret the intent of the contracting parties, and if the written terms of the contract are clear and unambiguous, the court will interpret the contract as a matter of law.

  • The mortgage extends to the improvements, including machinery and accessories, whether expressly stated in the mortgage documents or not. (Article 2127 of the Civil Code)

  • Chattels permanently located in a building, for the service of some industry even if placed there after the creation of the mortgage, are considered mortgaged with the estate. (Bischoff v. Pomar and Cia. General de Tabacos)

  • The accessory follows the principal, and therefore, properties that are integral parts of an estate are included in the mortgage. (Cu Unjieng e Hijos v. Mabalacat Sugar Co.)

  • The inclusion of machineries and accessories in a mortgage is upheld even if they were installed after the constitution of the mortgage. (Spouses Paderes v. Court of Appeals)

  • Machineries and equipments intended for an industry or works in a building are classified as immovable property. (Article 415(5) of the Civil Code)

None provided in the provided excerpt.