Makati Leasing and Finance Corporation vs. Wearever Textile Mills, Inc.

The governing principle is that contracting parties may, by mutual agreement, treat property that is by nature immovable as personal property for the execution of a chattel mortgage, provided no innocent third party is prejudiced. A debtor-mortgagor who voluntarily executes a chattel mortgage over such equipment and receives financial benefits under the agreement is estopped from later asserting that the property constitutes real property to defeat the mortgage.

Wearever Textile Mills, Inc. secured financial accommodations from Makati Leasing and Finance Corporation by discounting and assigning several receivables under a Receivable Purchase Agreement. To guarantee collection, Wearever executed a chattel mortgage over specific raw materials and an Artos Aero Dryer Stentering Range machinery. Upon Wearever’s default, Makati Leasing initiated extrajudicial foreclosure proceedings. When the assigned deputy sheriff was barred from entering Wearever’s premises to seize the mortgaged equipment, Makati Leasing filed a complaint for judicial foreclosure and applied for a writ of replevin before the Court of First Instance of Rizal, Branch VI. The trial court issued the writ, temporarily restrained its enforcement upon motion, and subsequently ordered the lifting of the restraint and the breaking open of the premises to effect the seizure. The sheriff ultimately removed the main drive motor of the machinery.

• Wearever Textile Mills, Inc. obtained financing from Makati Leasing and Finance Corporation through a Receivable Purchase Agreement involving discounted and assigned receivables.
• To secure the assigned receivables, Wearever executed a chattel mortgage over its raw materials inventory and an Artos Aero Dryer Stentering Range machinery.
• Following Wearever’s default, Makati Leasing attempted extrajudicial foreclosure, but the sheriff was unable to enter the premises to seize the mortgaged machinery.
• Makati Leasing initiated judicial foreclosure proceedings and secured a writ of replevin from the Court of First Instance of Rizal, Branch VI.
• The trial court initially restrained the writ’s enforcement upon Wearever’s motion but later lifted the restraint and authorized the sheriff to break open the premises to effect seizure.
• The sheriff executed the order by detaching and removing the main drive motor of the machinery.
• Wearever successfully petitioned the Court of Appeals for certiorari and prohibition, which nullified the trial court’s orders, classified the machinery as real property under Article 415 of the Civil Code due to its attachment to the ground, and ordered the motor’s return.
• Makati Leasing returned the motor but expressly reserved its right to appeal, subsequently elevating the case to the Supreme Court via petition for review on certiorari.

• Petitioner maintained that the machinery constitutes personal property for the purposes of the chattel mortgage because the parties expressly intended to treat it as such.
• Petitioner argued that the doctrine of estoppel bars respondent from asserting the machinery is real property after voluntarily executing a chattel mortgage and receiving financial benefits under the agreement.
• Petitioner contended that the return of the seized motor did not moot the petition, as the surrender was expressly conditioned as without prejudice to the pending appeal.

• Respondent argued that the machinery is real property under Article 415 of the Civil Code because it was permanently attached to the ground by bolts, and its removal would require drilling or destroying the concrete floor.
• Respondent maintained that the chattel mortgage is void ab initio because the subject matter is immovable property.
• Respondent asserted that estoppel cannot be invoked against it because the chattel mortgage was executed on a blank printed form dictated by petitioner, without genuine agreement on the property’s classification.
• Respondent claimed the petition was rendered moot and academic by petitioner’s voluntary return of the seized drive motor.

• Procedural Issues: Whether the petition is rendered moot and academic by the petitioner’s return of the seized motor drive after the Court of Appeals decision.
• Substantive Issues: Whether the subject machinery constitutes real or personal property for purposes of the chattel mortgage, and whether the mortgagor is estopped from claiming it is real property after executing a chattel mortgage thereon.

• Procedural: The petition is not moot. Because the petitioner expressly reserved its right to question the Court of Appeals decision when returning the motor, as evidenced by a signed receipt acknowledging the return was without prejudice, the controversy remains alive and subject to judicial review.
• Substantive: The Court reversed the Court of Appeals and held that the machinery is personal property for purposes of the mortgage. The parties’ express agreement to treat the equipment as chattel impresses upon it the character of personalty. The Court applied the doctrine of estoppel, ruling that a debtor-mortgagor who voluntarily executes a chattel mortgage and benefits from the loan cannot subsequently impugn the contract by reclassifying the property as immovable. The Court found that the contract’s validity is not negated by the alleged use of a blank printed form, which at most renders the contract voidable under Article 1390, not void ab initio. Since no action for annulment was filed and respondent benefited from the contract, equity precludes it from denying the mortgage’s validity. The trial court’s orders authorizing seizure were reinstated.

• Estoppel by Contract / Parties’ Intention Doctrine — Contracting parties may, by mutual agreement, treat property that is by nature immovable as personal property for the execution of a chattel mortgage, provided no innocent third party is prejudiced. The Court applied this doctrine to prevent the mortgagor from adopting an inconsistent position after executing the mortgage and receiving financial accommodation, thereby barring it from challenging the mortgage’s validity on a classification technicality.
• Tumalad v. Vicencio Doctrine — A mortgagor who cedes, sells, or transfers property by way of chattel mortgage is deemed to have intended to convey the property as personalty and is estopped from later claiming it is real property to defeat the mortgage. The Court found perfect parity with the instant case, extending the principle from a house built on a rented lot to industrial machinery attached to a concrete floor.

• "If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such." — The Court utilized this passage to extend the principle of contractual classification to industrial equipment, emphasizing that the parties’ agreement controls the property’s character for mortgage purposes.
• "Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom." — This statement anchored the Court’s application of estoppel, highlighting that the respondent’s receipt of financial accommodation precluded it from later invalidating the security instrument on a classification technicality.

• Tumalad v. Vicencio, 41 SCRA 143 — Cited as controlling precedent establishing that a mortgagor is estopped from claiming property is real after executing a chattel mortgage on it, provided the parties intended to treat it as personalty and no third party is prejudiced.
• Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630 — Cited to support the proposition that contracting parties may agree to treat real property as personal property for mortgage purposes without violating the law.
• Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70 — Distinguished by the Court on the ground that the nature of the machinery in that case was never disputed, nor was it the subject of a chattel mortgage, rendering it inapplicable to the present controversy.
• Lopez v. Orosa, Jr., Leung Yee v. F.L. Strong Machinery & Williamson, and the Iya cases — Referenced to contrast situations where third parties assailed a chattel mortgage, distinguishing them from cases where the debtor-mortgagor themselves attack the validity of their own security instrument.

• Article 415, New Civil Code — Defines real property, including machinery permanently attached to a building or land. The Court acknowledged its general classification but held that contractual intent and estoppel prevail between the immediate parties to the mortgage.
• Article 1390, New Civil Code — Enumerates grounds for voidable contracts. The Court invoked this provision to clarify that even if the respondent’s claim of signing a blank form were true, it would only render the contract voidable, not void ab initio, and no action for annulment was ever pursued.

• Justice Abad Santos — Concurred in the result, indicating agreement with the dispositive reversal of the Court of Appeals and reinstatement of the trial court orders, without appending separate reasoning to the main opinion.