GSIS vs. Calsons, Inc.

Machineries permanently attached to mortgaged land and installed to meet the needs of an industry conducted thereon are immovables under Article 415 of the Civil Code and are covered by a mortgage on the land "together with all buildings and improvements" thereon, without need of a separate chattel mortgage.

Calsons, Inc. acquired five parcels of land at the corner of Globo de Oro and Elizondo Streets, Quiapo, Manila, from Tuason & Sampedro, Inc., for ₱1,100,000 under a Deed of Assignment dated October 29, 1957. To pay the unpaid balance of the purchase price and to finance the construction of a two-storey textile market building on the land, Calsons, Inc. applied for a ₱2,000,000 loan from the Government Service Insurance System (GSIS). Cesario P. Calanoc and Nenita Godinez joined as co-obligors on the promissory note and mortgage. The mortgage contract contained several conditions designed to protect GSIS's security interest, including requirements that the mortgagor reduce its account on the lot to at least ₱819,000, submit certificates of title free from liens, complete construction within twelve months from the first release, and refrain from selling, disposing of, or encumbering the mortgaged properties without prior written consent.

On April 11, 1957, Calsons, Inc. applied for a ₱2,000,000 loan from GSIS to pay the balance of the purchase price of certain parcels of land at the corner of Globo de Oro and Elizondo Streets, Quiapo, Manila, and to finance the construction of a two-storey textile market building thereon. GSIS's Board of Trustees approved the application on August 26, 1957. On October 31, 1957, Calsons, Inc. and co-obligors Cesario P. Calanoc and Nenita Godinez executed a promissory note binding themselves jointly and severally to pay ₱2,000,000 with interest at 7% per annum compounded monthly, in 120 equal monthly installments of ₱23,221.69 each. The first installment was to become due and payable beginning the month following the last release or the month following the expiration of the construction period, whichever was earlier, and subsequent installments on the 7th day of every month thereafter. On the same date, the parties executed a first mortgage in favor of GSIS over five parcels of land, "together with all the buildings and improvements now existing thereon or which may hereafter be constructed on the mortgaged property (ies) of which MORTGAGOR is the absolute owner, free from all liens and encumbrances." These five parcels were among the properties acquired by Calsons, Inc. from Tuason & Sampedro, Inc. for ₱1,100,000 under a Deed of Assignment dated October 29, 1957.

The mortgage contract contained several protective conditions. The first release of ₱819,000 was to be made only after submission of evidence showing reduction of the applicant's account on the lot to at least ₱819,000, submission of certificates of title in the applicant's name, and evidence of payment of realty taxes up to the current year. The check covering the obligation on the lots was to be drawn in favor of the vendor. Subsequent releases were to depend on the progress of construction, with the total amount released not exceeding 60% of the appraised value of the lots and existing improvements. The proposed building was to be completed within twelve months from the date of the first release. The first release of ₱819,000 was made on November 7, 1957, and the second and last release of ₱30,000 on May 15, 1958, both checks drawn in favor of the vendor of the mortgaged properties.

It later appeared that Calsons, Inc. had failed to reduce its account on the lot to ₱819,000, as a balance of ₱280,000 on the purchase price remained unpaid, giving rise to a vendor's lien in favor of the former owners. The old building standing on the mortgaged properties was insured for ₱300,000 on December 1, 1959, with GSIS advancing ₱5,628 for the annual premium, which appellants failed to reimburse. Calsons, Inc. also removed and disposed of a complete band sawmill and filing machine that had been permanently attached to the building on the mortgaged properties, doing so without prior written consent from GSIS. The construction of the proposed textile market building was never begun, much less completed within the twelve-month period from November 7, 1957.

On August 11, 1958, GSIS filed a complaint for foreclosure, alleging that the mortgaged properties had not been freed from liens and encumbrances, that machineries forming part of the mortgaged properties had been removed and disposed of without consent, that Calsons, Inc. had failed to reduce its account on the lot to ₱819,000, and that construction had not commenced. A supplemental complaint filed on August 11, 1959 added the failure to pay amortizations despite demand and the failure to complete construction within twelve months. The trial court found these violations established and rendered judgment on March 3, 1962 ordering foreclosure and payment of the released amounts with interest, the insurance premium, and attorney's fees equivalent to 10% of the foregoing sums.

• No Default Under Mortgage Contract: Appellants maintained that they had not defaulted in any of their obligations under the mortgage contract, contesting each alleged violation.
• Estoppel on Vendor's Lien: Appellants argued that GSIS was estopped from invoking the right to have the mortgaged properties free from the vendor's lien, first because GSIS had prior knowledge of the lien as evidenced by the two releases being drawn directly in favor of the vendor, and second because GSIS's Real Estate Department Manager had committed in a letter dated October 28, 1957 to release the ₱280,000 balance within six months.
• Machineries Not Covered by Mortgage: Appellants contended that the band sawmill and filing machine removed from the properties were not included in the mortgage, implying a separate chattel mortgage would have been required.
• No Due Date for Amortizations: Appellants pointed out that no specific time was provided in the mortgage contract for amortizations to begin, and concluded that payment should commence only when the proposed building started earning rentals, invoking the provision assigning rentals equivalent to the monthly amortization in favor of GSIS.
• Premature Filing of Suit: Appellants argued that the foreclosure action was filed three months before the expiration of the twelve-month construction period, rendering completion impossible and precluding any default in payment.
• Unacted Counterclaim: Appellants asserted that the trial court failed to act upon their counterclaim despite it being fully established by the evidence on record.

• Vendor's Lien as Legal Encumbrance: Respondent countered that the vendor's lien representing the unpaid balance of ₱280,000 was a legal encumbrance effective although not recorded, and that the steps taken by GSIS—requiring conditions for the release of funds and drawing checks in favor of the vendor—negated any inference of waiver of the right to have the properties free from all liens.
• Manager's Commitment Not Binding: Respondent argued that the commitment made by the Real Estate Department Manager to release the ₱280,000 balance within six months was not recognized by the GSIS Board of Trustees, as shown by its absence from the mortgage contract executed on October 31, 1957, a later date than the manager's letter.
• Machineries as Immovables: Respondent maintained that the machineries were permanently attached to the property and installed by the former owner to meet the needs of an industry conducted thereon, making them immovables under Article 415 of the Civil Code and thus covered by the mortgage on the land and improvements.
• Amortizations Due per Promissory Note: Respondent pointed to the express terms of the promissory note, which fixed the due date of the first installment as the month following the last release or the month following the expiration of the construction period, whichever was earlier.

• Vendor's Lien and Estoppel: Whether GSIS was estopped from requiring the mortgaged properties to be free from the vendor's lien given its knowledge of the unpaid balance and the release checks drawn in favor of the vendor.
• Inclusion of Machineries: Whether the band sawmill and filing machine permanently attached to the mortgaged properties were covered by the mortgage on the land and improvements.
• Due Date of Amortizations: Whether the amortizations on the loan were already due and payable at the time demand was made.
• Propriety of Foreclosure and Award: Whether the violations established justified the foreclosure of the mortgage and the award of the amounts due, interest, insurance premium, and attorney's fees, and whether the counterclaim was properly disregarded.

• Vendor's Lien and Estoppel: No. GSIS was not estopped from requiring the mortgaged properties to be free from the vendor's lien. The conditions imposed on the release of funds and the drawing of checks in favor of the vendor were precisely designed to ensure the reduction of the account and the removal of liens, negating any inference of waiver.
• Inclusion of Machineries: Yes. The machineries permanently attached to the property and installed to meet the needs of an industry conducted thereon were immovables under Article 415 of the Civil Code and covered by the mortgage on the land "together with all buildings and improvements" thereon, without need of a separate chattel mortgage.
• Due Date of Amortizations: Yes. The promissory note expressly fixed the first installment as due the month following the last release or the month following the expiration of the construction period, whichever was earlier. The construction period expired on November 7, 1958, making the first installment due on December 7, 1958.
• Propriety of Foreclosure and Award: Yes. The multiple violations of the mortgage contract—failure to reduce the account, removal of machineries, failure to complete construction, and failure to pay amortizations—constituted sufficient grounds for foreclosure, and the sixth and seventh assignments of error were without merit.

• Vendor's Lien and Estoppel: The mortgage contract expressly required the mortgaged properties to be "free from all liens and encumbrances." To ensure compliance, GSIS imposed conditions on the first release: submission of evidence showing reduction of the applicant's account on the lot to at least ₱819,000, submission of certificates of title in the applicant's name, and drawing of the check in favor of the vendor. The first release of ₱819,000 was made upon submission of transfer certificates of title already in Calsons, Inc.'s name without any annotation except the mortgage itself. It turned out, however, that a balance of ₱280,000 remained unpaid, giving rise to a vendor's lien. The steps taken by GSIS—directing the release checks to the vendor and conditioning releases on evidence of account reduction—negated any inference that it agreed to waive its right to have the properties free from liens. As to the second ground of estoppel, the commitment made by the Real Estate Department Manager in his letter of October 28, 1957 to release the ₱280,000 balance within six months was not recognized by the GSIS Board of Trustees, as evidenced by its absence from the mortgage contract executed three days later on October 31, 1957. The mortgage contract defined the schedule of subsequent releases but made no mention of the manager's commitment. Accordingly, GSIS was not estopped from enforcing the mortgage's requirement that the properties be free from encumbrances.

• Inclusion of Machineries: The mortgage covered the lands "together with all the buildings and improvements now existing or which may hereafter be constructed" thereon. The trial court found that the band sawmill and filing machine were permanently attached to the property and installed by the former owner to meet the needs of certain works or industry conducted therein. Under Article 415 of the Civil Code, such machineries are immovables by incorporation or by destination. Being immovables, they formed part of the mortgaged property and need not be the subject of a separate chattel mortgage to be deemed encumbered in favor of the mortgagee. Their removal and disposal by the mortgagor without prior written consent therefore violated the mortgage contract.

• Due Date of Amortizations: The promissory note expressly provided that the first installment would become due and payable beginning the month following the last release or the month following the expiration of the period for construction of the textile market building, whichever was earlier. The mortgage contract required completion of the building within twelve months from the date of the first release. The first release having been made on November 7, 1957, the construction period expired on November 7, 1958. The first installment therefore became due one month thereafter, on December 7, 1958, and subsequent installments on the 7th day of every month thereafter. Appellants' reliance on the provision assigning rentals equivalent to the monthly amortization was misplaced, as that provision did not defer the due date but merely assigned the rentals as security for payment. The argument that the premature filing of the suit rendered construction impossible was also without merit, as the foreclosure was based on multiple violations, not solely on failure to complete construction.

• Propriety of Foreclosure and Award: The established violations—failure to reduce the account on the lot to ₱819,000, existence of the vendor's lien, removal and disposal of machineries forming part of the mortgaged property, failure to complete construction within twelve months, and failure to pay amortizations due since December 7, 1958—each constituted a breach of the mortgage contract. Under paragraph 4 of the mortgage, failure to pay any amortization or to comply with any obligation rendered all amortizations due and defaulted and entitled the mortgagee to foreclose judicially or extrajudicially. The sixth and seventh assignments of error, challenging the award of the released amounts with interest, the insurance premium, and attorney's fees, and the trial court's failure to act on the counterclaim, were accordingly without merit.

• Immovables by Incorporation or Destination (Article 415, Civil Code) — Machineries permanently attached to a property and installed to meet the needs of an industry or works conducted therein are immovables under Article 415 of the Civil Code. As such, they form part of the real property and are covered by a mortgage on the land "together with all buildings and improvements" thereon, without need of a separate chattel mortgage. The Court applied this doctrine to hold that the band sawmill and filing machine removed by the mortgagor were part of the mortgaged property, and their disposal without the mortgagee's consent violated the mortgage contract.

• Estoppel Against a Corporate Mortgagee — A commitment made by a department manager of a government corporate entity is not binding on the entity's Board of Trustees unless incorporated into the final contract executed by the board. The Court held that GSIS was not estopped by its Real Estate Department Manager's letter promising release of the ₱280,000 balance within six months, because the commitment was not recognized by the Board of Trustees and was not incorporated into the mortgage contract executed three days later.

• Automatic Acceleration Clause in Mortgage Contracts — Where a mortgage contract provides that failure to pay any amortization or to comply with any obligation renders all amortizations due and defaulted, the mortgagee may immediately foreclose upon any breach. The Court found that the multiple violations by the mortgagor triggered this clause, justifying foreclosure.

• "And the machineries, as found by the trial court, were permanently attached to the property, and installed there by the former owner to meet the needs of certain works or industry therein. They were therefore part of the immovable pursuant to Article 415 of the Civil Code, and need not be the subject of a separate chattel mortgage in order to be deemed duly encumbered in favor of appellee." — This passage states the ratio decidendi on the inclusion of permanently attached machineries within the coverage of a real estate mortgage, applying Article 415 of the Civil Code.

• "The steps taken by appellee negate any inference that it agreed to waive its right to have the properties 'free from all liens and encumbrances,' as provided in the mortgage contract." — This passage articulates the Court's rejection of the estoppel argument, emphasizing that conditioning loan releases on the reduction of the account and drawing checks in favor of the vendor evidenced an intent to enforce, not waive, the requirement that the properties be free from liens.

• "The commitment of said Manager was not recognized by the Board of Trustees of the appellee as shown by the fact that it was not incorporated in the mortgage contract, which was executed on a later date — October 31, 1957." — This passage establishes the principle that an agent's commitment is not binding on the principal's governing board unless reflected in the final contract, defeating the estoppel claim based on the Real Estate Department Manager's letter.

• Article 415, Civil Code of the Philippines — Defines immovables, including "machines, 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 Court applied this provision to classify the band sawmill and filing machine as immovables permanently attached to the mortgaged property, making them part of the mortgage security without need of a separate chattel mortgage.
• Act No. 3135, as amended — The law governing extrajudicial foreclosure of real estate mortgages. Referenced in the mortgage contract (paragraph 4) as one of the remedies available to the mortgagee upon default, authorizing GSIS to foreclose judicially or extrajudicially.
• Commonwealth Act No. 186, as amended — The GSIS Charter. Referenced in the mortgage contract as an alternative basis for foreclosure proceedings.
• Act No. 1508, as amended (Chattel Mortgage Law) — Referenced in the mortgage contract as an additional remedy. The Court noted that a separate chattel mortgage was unnecessary for the machineries because they were already immovables covered by the real estate mortgage.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, and Angeles, JJ., concurred. Fernando, J., was on leave.