Primary Holding

Machinery installed in a leased building by the lessee for its own industry, which is movable by nature and not intended to be a permanent fixture belonging to the landowner, especially when the lease agreement explicitly excludes machineries from improvements passing to the lessor, retains its character as personal property and is therefore subject to chattel mortgage and execution as such.

Background

Davao Saw Mill operated a sawmill business on land it leased. They erected a building and installed machinery within it, some affixed to cement foundations. A lease agreement stipulated that improvements and buildings would become the property of the landowner upon lease expiration, but specifically excluded machineries from these improvements.

Facts

• 1. Davao Saw Mill Co., Inc. held a lumber concession and operated a sawmill on leased land. They constructed a building and installed sawmill machinery, some mounted on cement foundations. The lease contract contained a provision stating that upon expiration or abandonment, all improvements and buildings, except machineries and accessories, would become the lessor's property without obligation to compensate. Davao Light & Power Co., Inc., a creditor of Davao Saw Mill, levied on the machinery as personal property after winning a case against Davao Saw Mill. The machinery was sold at auction as personalty.

Arguments of the Petitioners

• 1. Davao Saw Mill argued that the sawmill machineries were real property under Article 334, paragraphs 1 and 5 of the Civil Code. They contended that the machinery, being attached to the land and used for their industry, should be classified as immovable property, emphasizing the phrase 'buildings and constructions of all kinds adhering to the soil' and 'machinery... intended by the owner... for use in connection with any industry'.

Arguments of the Respondents

• 1. Davao Light & Power Co., Inc. argued that the machineries remained personal property. They emphasized that the machinery was installed by a lessee, not the landowner, for the lessee's own business purposes and was intended to be removable. They pointed to the lease agreement which explicitly excluded machineries from the improvements that would transfer to the lessor, indicating the intent to treat them as separate personal property. They also highlighted that Davao Saw Mill itself had treated the machinery as personalty by executing chattel mortgages on them.

Issues

• 1. Is the sawmill machinery installed by Davao Saw Mill Co., Inc. on leased land considered real property or personal property for the purpose of execution and chattel mortgage?

Ruling

• 1. The Supreme Court ruled that the sawmill machinery was personal property. The Court reasoned that while machinery can become immobilized by destination under Article 334, paragraph 5 of the Civil Code, this typically applies when installed by the owner of the land or building. In this case, the machinery was installed by the lessee, Davao Saw Mill, for its own industry and not by the landowner. Furthermore, the lease agreement itself indicated the parties' intent to treat the machinery as personal property by excluding it from the improvements to be transferred to the lessor. The Court also noted Davao Saw Mill’s prior actions of mortgaging the machinery as chattels as further indication of their intent. Therefore, the levy and sale of the machinery as personal property were deemed valid.

Doctrines

• 1. Immovable Property by Destination: This doctrine under Article 334(5) of the Civil Code, which can classify inherently movable property as immovable if intended by the owner for industry on the land, was discussed but deemed inapplicable in this case because the machinery was installed by a lessee, not the landowner.
• 2. Intention of the Parties: The Court emphasized that the intention of the parties, particularly as expressed in the lease agreement which differentiated between improvements (excluding machinery) and machineries themselves, is a crucial factor in determining the nature of the property.
• 3. Characterization by the Owner: The Court considered Davao Saw Mill's actions of executing chattel mortgages on the machinery as evidence of their own understanding and treatment of the machinery as personal property.

Key Excerpts

• 1. "Machinery which is movable in its nature only becomes immobilized when placed in a plant by the owner of the property or plant, but not when so placed by a tenant? a usufructuary, or any person having only a temporary right, unless such person acted as the agent of the owner."
• 2. "To determine this question involves fixing the nature and character of the property from the point of view of the rights of Valdes and its nature and character from the point of view of Nevers & Callaghan as a judgment creditor of the Altagracia Company..."

Precedents Cited

• 1. Standard Oil Co. of New York vs. Jaramillo (44 Phil., 630): Cited to show that the characterization of property as chattels by the party claiming it to be real property is indicative of intention and influences the determination of its nature.
• 2. Valdes vs. Central Altagracia (225 U.S., 58): Cited as a persuasive authority from the US Supreme Court (regarding Puerto Rican law, which is rooted in Civil Law tradition similar to the Philippines) to support the principle that machinery installed by a tenant does not automatically become immobilized in the same manner as machinery installed by the property owner.

Statutory and Constitutional Provisions

• 1. Article 334, paragraphs 1 and 5 of the Civil Code of the Philippines.
• 2. Code Napoleon, Articles 516, 518 et seq., to and inclusive of Article 534.
• 3. Porto Rican Code, Sections 334 and 335.