Davao Saw Mill Co. vs. Castillo

Machinery installed by a lessee (not the owner of the land or building) remains personal property and does not become real property by destination under Article 334(5) of the Civil Code where the lease contract expressly provides that such machinery shall not pass to the lessor upon expiration or abandonment of the lease.

The dispute arose from the classification of industrial machinery installed by a lumber concession holder operating on leased land. The classification determined whether the property could be validly levied upon and sold as personalty to satisfy a judgment debt, or whether it was exempt from such execution as real property.

• Filed in RTC (implied from reference to "trial judge" and "decision in the trial court")
• Decision of lower court: Held that the properties were personal in nature; absolved the defendants from the complaint with costs against the plaintiff
• Elevated to SC via appeal

• Davao Saw Mill Co., Inc. (plaintiff-appellant) held a lumber concession from the Government and operated a sawmill in Sitio Maa, Davao, on land owned by another person
• The company erected a building on the leased land housing machinery used in the business; the disputed items were machines placed and mounted on cement foundations
• Lease contract provision: Upon expiration or abandonment of the lease, all improvements and buildings pass to the lessor, BUT "the machineries and accessories are not included in the improvements which will pass to the party of the first part"
• In a separate action, Davao Light & Power Co., Inc. (defendant-appellee) obtained judgment against the sawmill company; a writ of execution issued and the sheriff levied upon the disputed machinery as personalty
• No third party claim was filed at the time of sale; the bidder (Davao Light & Power Co.) consummated the sale and took possession
• The sawmill company had previously executed chattel mortgages on the machinery in favor of third persons (including defendant Castillo by assignment from original mortgagees), treating the machinery as personal property

• The machinery mounted on cement foundations constituted real property under Article 334(1) of the Civil Code as "constructions of all kinds adhering to the soil"
• The machinery was immobilized by destination and thus exempt from execution as personalty
• The sheriff's levy and sale as personalty was improper because the properties were actually real property

• The machinery constituted personal property under Article 334(5) of the Civil Code
• The machinery was intended by the lessee (not the owner of the land) for use in the business, and the lease contract expressly excluded machinery from improvements passing to the lessor, indicating the parties intended the machinery to remain personalty
• The appellant was estopped from claiming the machinery was real property because it had previously executed chattel mortgages thereon, characterizing the items as chattels

• Procedural Issues: Whether the appellant properly registered its protest before or at the time of the sale of the property to preserve its rights
• Substantive Issues:
  • Whether the machinery installed by a lessee on leased land constitutes real or personal property
  • Whether machinery becomes immobilized by destination under Article 334(5) of the Civil Code when placed by a tenant rather than the owner of the land

• Procedural: The appellant failed to register its protest before or at the time of the sale of the property, as borne out by the record.
• Substantive:
  • The machinery constitutes personal property, not real property.
  • Under Article 334(5), machinery becomes immobilized by destination only when placed in a plant by the owner of the property or plant, not when placed by a tenant, usufructuary, or any person having only a temporary right, unless such person acted as the agent of the owner.
  • Here, the lease contract expressly provided that machinery and accessories were not included in improvements passing to the lessor, meaning the lessee retained ownership and the machinery remained movable property.
  • The appellant's prior execution of chattel mortgages on the machinery, while not conclusive, is indicative of intention and impresses upon the property the character determined by the parties.

• Immobilization by Destination (Article 334(5), Civil Code) — Machinery intended by the owner of any building or land for use in connection with industry or trade carried on therein constitutes real property. However, this doctrine applies only when the owner of the building or land intends the immobilization. When machinery is placed by a tenant, usufructuary, or person with temporary right, it does not become immobilized unless such person acts as agent of the owner.
• Party Intention and Characterization — While not conclusive, the characterization of property as chattels by the owner (through execution of chattel mortgages) is indicative of intention and impresses upon the property the character determined by the parties.
• Third Party Claim in Execution Proceedings — A party claiming ownership of property levied upon by a sheriff must register a protest before or at the time of sale to preserve their rights against the execution sale.

• "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."
• "The characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties."
• "It is machinery which is involved; moreover, machinery not intended by the owner of any building or land for use in connection therewith, but intended by a lessee for use in a building erected on the land by the latter to be returned to the lessee on the expiration or abandonment of the lease."

• Standard Oil Co. of New York v. Jaramillo (44 Phil. 630) — Cited for the principle that characterization of property as chattels by the owner is indicative of intention; whether obiter dicta or not, furnishes the key to such a situation.
• Valdes v. Central Altagracia (225 U.S. 58, 1912) — US Supreme Court decision interpreting similar provisions in the Puerto Rican Code (derived from the Code Napoleon); held that machinery only becomes immobilized when placed by the owner of the property, not by a tenant or temporary right holder unless acting as agent of the owner.

• Article 334, paragraphs 1 and 5, Civil Code (Spanish Civil Code) — Definition of real property; paragraph 1 covers land, buildings, roads and constructions adhering to the soil; paragraph 5 covers machinery intended by the owner of the building or land for use in connection with industry or trade carried on therein.

• N/A (Villa-Real, Imperial, Butte, and Goddard, JJ., concurred without separate opinions)