Star Two (SPV-AMC), Inc. vs. Paper City Corporation of the Philippines

Machineries and equipment bolted to buildings on mortgaged land are included in the extrajudicial foreclosure of the real estate mortgage where the Mortgage Trust Indenture and its amendments expressly list them as mortgaged properties and describe them as forming part of the improvements on the mortgaged parcels of land. The real estate mortgages, being subsequent to the chattel mortgages, superseded the latter, and the foreclosure petition's prayer for foreclosure of "real properties, including all improvements thereon" encompassed the machineries and equipment.

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank), and Union Bank of the Philippines (Union Bank) are banking corporations that extended loans and credit accommodations to Paper City Corporation of the Philippines, a domestic corporation engaged in the manufacture of paper products. RCBC was substituted by Star Two (SPV-AMC), Inc. as petitioner by virtue of Republic Act No. 9182, the Special Purpose Vehicle Act of 2002, under which RCBC sold the subject loan account to Star Two, thereby subrogating the latter to RCBC's rights. The loans were secured first by chattel mortgages on machineries and equipment, and later by a Mortgage Trust Indenture (MTI) and real estate mortgages over parcels of land, buildings, improvements, and the same machineries and equipment.

From 1990 to 1991, Paper City Corporation of the Philippines obtained from Rizal Commercial Banking Corporation (RCBC) a series of loans totaling approximately ₱50,615,000 in peso and dollar denominations, secured by four Deeds of Continuing Chattel Mortgage on its machineries and equipment located inside its paper plants. On August 25, 1992, RCBC unilaterally executed a Cancellation of Deed of Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade over the merchandise and stocks-in-trade covered by the continuing chattel mortgages.

On August 26, 1992, RCBC, Metrobank, and Union Bank, with RCBC as trustee bank, entered into a Mortgage Trust Indenture (MTI) with Paper City. Under the MTI, Paper City obtained an additional loan of ₱170,000,000, increasing the total loan obligation to ₱280,000,000. The old loan of ₱110,000,000 was partly secured by various parcels of land in Valenzuela City under five Deeds of Real Estate Mortgage. The new loan of ₱170,000,000 was to be secured by the same five Deeds of Real Estate Mortgage and additional real and personal properties described in Annex "B" of the MTI, which covered the machineries and equipment of Paper City. The MTI was amended on November 20, 1992 to increase the contributions of RCBC and Union Bank, and the Deed of Amendment expressly included as part of the mortgaged properties the machineries and equipment listed in Annexes "A" and "B," stating that they "form part of the improvements listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real Estate Mortgage."

A Second Supplemental Indenture was executed on June 7, 1994, increasing the loan from ₱280,000,000 to ₱408,900,000, secured against existing properties composed of land, building, machineries and equipment, and inventories described in Annexes "A" and "B." A Third Supplemental Indenture followed on January 24, 1995, increasing the loan to ₱555,000,000 with additional security composed of a newly constructed two-storey building and other improvements, machineries, and equipment. Paper City was able to meet its loan obligations until July 1997, when economic crisis led to payment defaults. Its outstanding obligation eventually reached ₱901,801,484.10, inclusive of interest and penalty charges.

On October 21, 1998, RCBC filed a Petition for Extrajudicial Foreclosure Under Act No. 3135 against the real estate mortgage, covering eight parcels of land including all improvements thereon. A Certificate of Sale was executed on February 8, 1999, certifying that the eight parcels of land with improvements were sold on November 27, 1998 for ₱702,351,796.28 in favor of the creditor banks as highest bidders. Paper City then filed a complaint on June 15, 1999 seeking to nullify the extrajudicial sale for lack of prior notice and gross bad faith, or alternatively to declare its obligation fully paid and extinguished. During the pendency of the case, Paper City and Union Bank entered into a compromise agreement approved by the trial court on November 19, 2001.

On December 18, 2002, Paper City filed a Manifestation with Motion to Remove and/or Dispose Machinery, arguing that the machineries inside the foreclosed land and building were deteriorating and, since they were not included in the foreclosure of the real estate mortgage, should be removed and sold to a third party. The trial court denied the motion on February 28, 2003, but granted Paper City's reconsideration on August 15, 2003, finding that the machineries and equipment were chattels by agreement of the parties through the four deeds of chattel mortgage, and that the unilateral cancellation of the chattel mortgage by RCBC was invalid for lack of Paper City's consent. RCBC's motion for reconsideration was denied on December 1, 2003. The Court of Appeals affirmed these orders on March 8, 2005, finding that the plain language of the MTIs described the machineries as personal properties and that they were not included in the foreclosure sale.

• Consent to Treat as Real Property: Petitioner argued that Paper City gave its conformity to consider the subject machineries and equipment as real properties when its president and Executive Vice President signed the MTI and its subsequent amendments and all pages of the annexes thereto, which itemized all properties that were mortgaged.
• Validity of Unilateral Cancellation: Petitioner contended that under Section 8 of Act No. 1508 (The Chattel Mortgage Law), the consent of the mortgagor is not required to cancel a chattel mortgage, rendering the August 25, 1992 Cancellation of Deed of Continuing Chattel Mortgage valid and binding on Paper City even if executed unilaterally.
• Estoppel and Ratification: Petitioner asserted that Paper City's unreasonable delay of ten years in assailing the characterization of the disputed machineries and equipment as personal properties amounted to estoppel and ratification of their characterization as real properties.
• Improper Relief Sought: Petitioner argued that the removal of the subject machineries was not among the reliefs prayed for in Paper City's June 11, 1999 Complaint, and was sought only in the December 18, 2002 Manifestation.
• Lack of Specification: Petitioner maintained that Paper City did not specify in its various motions the subject machineries and equipment allegedly excluded from the extrajudicial foreclosure sale.
• Identity of Machineries: Petitioner contended that the machineries and equipment mentioned in the four deeds of chattel mortgage were the same as those included in the MTI and supplemental amendments, and were therefore treated by agreement of the parties as real properties.

• No Consent to Treat as Real Property: Respondent refuted the claim that it gave consent to consider the machineries and equipment as real properties, alleging that the disputed properties remained within the purview of the existing chattel mortgages, as acknowledged by RCBC in the MTI's Section 11.07, which apportioned the mortgage obligations into Real Estate Mortgage (₱206,815,000.00) and Chattel Mortgage (₱13,800,000.00).
• Exclusion from Foreclosure: Respondent argued that the subject machineries and equipment were not included in the foreclosure of the mortgage on real properties, particularly the eight parcels of land, and that the Certificate of Sale referred only to "lands and improvements" without specification or mention of the subject properties.

• Estoppel: Whether Paper City's unreasonable delay of ten years in assailing that the disputed machineries and equipment were personal properties amounted to estoppel.
• Validity of Unilateral Cancellation: Whether the Cancellation of Deed of Continuing Chattel Mortgage dated August 25, 1992 is valid despite having been executed without the consent of the mortgagor Paper City.
• Inclusion in MTI Coverage: Whether the MTI dated August 26, 1992 and its subsequent supplementary amendments included the subject machineries and equipment in the coverage of mortgaged properties.
• Inclusion in Foreclosure Sale: Whether the subject machineries and equipment were included in the extrajudicial foreclosure dated October 21, 1998 and sold to the creditor banks as evidenced by the Certificate of Sale dated February 8, 1999.

• Inclusion in MTI Coverage: Yes. The MTI and its amendments expressly included the machineries and equipment as mortgaged properties, with the granting clause listing "real and personal properties" in Annexes "A" and "B," and the Deed of Amendment specifically stating that the machineries and equipment "form part of the improvements" on the mortgaged parcels of land.
• Inclusion in Foreclosure Sale: Yes. The foreclosure petition was based on the Indenture, which expressly included the machineries and equipment as part of the improvements on the mortgaged land, and the prayer for foreclosure of "real properties, including all improvements thereon" encompassed them.
• Validity of Unilateral Cancellation: Rendered moot by the supersession of the chattel mortgages by the subsequent real estate mortgages, which included the same machineries and equipment.
• Estoppel: Rendered moot, the Court having found on the merits that the machineries and equipment were included in the mortgage and foreclosure.

• Inclusion in MTI Coverage: The Court examined the plain language of the original MTI and all its amendments. The original MTI's granting clause assigned, transferred, and conveyed by way of a registered first mortgage the parcels of land, buildings, existing improvements, and the machinery and equipment described in Annexes "A" and "B," referring to them collectively as "real and personal properties." The Deed of Amendment dated November 20, 1992 deleted the word "personal" from the granting clause and expressly stated that the machineries and equipment "form part of the improvements listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real Estate Mortgage." The Second and Third Supplemental Indentures contained similar provisions including machineries and equipment in the collateral pool. The Court applied the rule that where the written terms of a contract are clear and unambiguous, the contract must be interpreted as written, citing Norton Resources and Development Corporation vs. All Asia Bank Corporation and Benguet Corporation vs. Cabildo. The Court found that the CA erred in deducing exclusion from the "description" of the properties as personal; the annexes themselves contained no mention of "personal property," using instead captions such as "Buildings," "Machineries and Equipments," and "Additional Machinery and Equipment."

• Inclusion in Foreclosure Sale: The Court noted that while the foreclosure petition was captioned as a "Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended," its averments stated that it was based on the MTI and all its amendments. The petition prayed for foreclosure of "real properties, including all improvements thereon." Because the Deed of Amendment expressly stated that the machineries and equipment formed part of the improvements on the mortgaged parcels of land, they were necessarily included in the foreclosure. The Court further held that the real estate mortgages, being subsequent to the chattel mortgages (the latter dated January 1990 to November 1991, the former dated August 1992 to January 1995), superseded the earlier chattel mortgages. Under Article 2127 of the Civil Code, a mortgage extends to improvements, and under Article 415(5), machinery intended by the owner for an industry carried on in a building or on land is immovable property. Jurisprudence from Bischoff vs. Pomar and Cia. General de Tabacos through Spouses Paderes vs. Court of Appeals consistently held that machineries and accessories installed in a mortgaged property are included in the mortgage and subsequent sale, following the principle that the accessory follows the principal.

• Validity of Unilateral Cancellation and Estoppel: The Court found it unnecessary to separately resolve these issues, as the dispositive resolution on the merits — that the machineries and equipment were included in the mortgage and foreclosure — rendered the questions of the chattel mortgage cancellation's validity and the estoppel claim academic. The real estate mortgages superseded the chattel mortgages, and the inclusion of the machineries in the foreclosure was established independently of these issues.

• Plain Meaning Rule in Contract Interpretation — Where the written terms of a contract are clear and unambiguous and can only be read one way, the court will interpret the contract as a matter of law; if the language used is as clear as day and readily understandable by any ordinary reader, there is no need for construction. The Court applied this rule to the MTI and its amendments, finding that their plain language expressly included the machineries and equipment as mortgaged properties.
• Mortgage Extends to Improvements (Article 2127, Civil Code) — The mortgage extends to the natural accessions, improvements, growing fruits, and rents or income not yet received when the obligation becomes due. The Court relied on this provision to hold that even if the machineries were not expressly included in the mortgage, they would still be covered as improvements on the mortgaged land.
• Accessory Follows the Principal — Machineries and accessories that are integral parts of a building or industrial plant on mortgaged land are included in the mortgage and subsequent sale, following the principle that the accessory follows the principal. The Court traced this doctrine from Bischoff vs. Pomar and Cia. General de Tabacos through Cu Unjieng e Hijos vs. Mabalacat Sugar Co., Manahan vs. Hon. Cruz, and Spouses Paderes vs. Court of Appeals.
• Supersession of Chattel Mortgages by Subsequent Real Estate Mortgages — Where real estate mortgages executed subsequent to chattel mortgages cover the same machineries and equipment, the real estate mortgages supersede the earlier chattel mortgages. The chattel mortgages were dated January 1990 to November 1991, while the real estate mortgages and MTI were dated August 1992 to January 1995.
• Classification of Machinery as Immovable Property (Article 415(5), Civil Code) — Machinery, receptacles, instruments, or implements intended by the owner of the tenement for an industry or works 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, are immovable property. The Court found that the real estate mortgage over the machineries and equipment was in full accord with this classification.

• "By contracts, all uncontested in this case, machineries and equipments are included in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also in favor of petitioner." — This is the Court's core ruling, stated at the outset of the decision's analysis, establishing that the contractual agreements between the parties included the machineries and equipment in both the mortgage and the foreclosure sale.
• "The machineries and equipment listed in Annexes 'A' and 'B' form part of the improvements listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real Estate Mortgage." — This quotation from the Deed of Amendment to the MTI, emphasized by the Court, is the pivotal contractual provision that established the inclusion of the machineries and equipment as part of the improvements on the mortgaged land, directly contradicting the CA's finding of exclusion.
• "Without doubt, the real estate mortgages superseded the earlier chattel mortgages." — This statement resolves the relationship between the earlier chattel mortgages and the subsequent real estate mortgages, establishing that the latter governed the characterization and treatment of the machineries and equipment.
• "The plain and obvious inclusion in the mortgage of the machineries and equipments of Paper City escaped the attention of the CA which, instead, turned to another 'plain language of the MTI' that 'described the same as personal properties.' It was error for the CA to deduce from the 'description' exclusion from the mortgage." — This passage articulates the Court's rejection of the CA's reasoning, clarifying that the word "personal" in the original MTI's granting clause was deleted in subsequent amendments and that the annexes themselves never used the term "personal property."

• Gateway Electronics Corp. vs. Land Bank of the Philippines, 455 Phil. 196 (2003) — Cited for the rule that contracting parties may establish any agreement, term, and condition they deem advisable, provided they are not contrary to law, morals, or public policy, and that the right to enter into lawful contracts is a constitutionally guaranteed liberty.
• Norton Resources and Development Corporation vs. All Asia Bank Corporation, G.R. No. 162523, Nov. 25, 2009 — Cited for the principle that a court's purpose in examining a contract is to interpret the intent of the contracting parties as objectively manifested, and that where the written terms are not ambiguous, the court will interpret the contract as a matter of law.
• Benguet Corporation vs. Cabildo, G.R. No. 151402, Aug. 22, 2008 — Cited through Norton Resources for the rule on contract interpretation and ambiguity.
• Bischoff vs. Pomar and Cia. General de Tabacos, 12 Phil. 691 (1909) — Foundational case establishing that chattels permanently located in a building, either useful or ornamental, or for the service of some industry, are considered mortgaged with the estate, even if placed after the creation of the mortgage, provided they belong to the owner of the estate.
• Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439 (1933) — Applied the principle from Bischoff to hold that machineries and accessories that are integral parts of a sugar central are included in the mortgage and subsequent sale, following the principle that the accessory follows the principal.
• Manahan vs. Hon. Cruz, 158 Phil. 799 (1974) — Denied the prayer to nullify the inclusion of a building in a writ of possession following public auction, relying on Bischoff and Cu Unjieng e Hijos.
• Spouses Paderes vs. Court of Appeals, 502 Phil. 76 (2005) — Reiterated the Cu Unjieng e Hijos ruling and approved the inclusion of machineries and accessories installed at the time of the mortgage, as well as buildings, machinery, and accessories installed after the constitution of the mortgage.
• Insular Investment and Trust Corporation vs. Capital One Equities Corp. and Planters Development Bank, G.R. No. 183308, Apr. 25, 2012 — Cited for the pronouncement that if the language of a contract is as clear as day and readily understandable by any ordinary reader, there is no need for construction.

• Article 2127, Civil Code of the Philippines — Provides that the mortgage extends to the natural accessions, improvements, growing fruits, and rents or income not yet received when the obligation becomes due. The Court relied on this provision to hold that the mortgage over the land extended to the improvements thereon, including the machineries and equipment.
• Article 415(1) and (5), Civil Code of the Philippines — Classifies as immovable property: (1) land, buildings, roads, and constructions of all kinds adhered to the soil; and (5) machinery, 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 found that the real estate mortgage over the machineries and equipment was in full accord with this classification.
• Section 8, Act No. 1508 (The Chattel Mortgage Law) — Petitioner invoked this provision to argue that the consent of the mortgagor is not required to cancel a chattel mortgage. The Court did not rule directly on this provision, having found that the real estate mortgages superseded the chattel mortgages.
• Act No. 3135 (as amended) — The law under which the extrajudicial foreclosure of the real estate mortgage was filed. The Court found that the foreclosure petition, though captioned under Act No. 3135, was based on the MTI and its amendments, which expressly included the machineries and equipment.
• Republic Act No. 9182 (Special Purpose Vehicle Act of 2002) — The law by virtue of which RCBC sold the subject loan account to Star Two (SPV-AMC), Inc., thereby subrogating the latter to RCBC's rights and necessitating the change of caption.

Chief Justice Maria Lourdes P. A. Sereno, Associate Justice Antonio T. Carpio, Associate Justice Mariano C. Del Castillo, and Associate Justice Estela M. Perlas-Bernabe concurred. No separate concurring opinions were noted.