G.R. No. 169211 ; March 6, 2013
STAR TWO (SPV-AMC), INC. (substituted for Rizal Commercial Banking Corporation), Petitioner, vs. PAPER CITY CORPORATION OF THE PHILIPPINES, Respondent.

FACTS

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co., and Union Bank of the Philippines (creditor banks) extended loans to respondent Paper City Corporation of the Philippines (Paper City). The initial loans from RCBC were secured by four Deeds of Continuing Chattel Mortgage on Paper City’s machineries and equipment. On August 26, 1992, the parties executed a Mortgage Trust Indenture (MTI), wherein Paper City obtained an additional loan, increasing its total obligation to ₱280,000,000. This MTI was secured by real estate mortgages over several parcels of land and, under its Annex “B,” by the same machineries and equipment previously covered by the chattel mortgages. The MTI was subsequently amended and supplemented three times, increasing the total loan to ₱555,000,000 and adding more properties as security, with the machineries and equipment consistently included in the annexes.
Due to Paper City’s payment default, RCBC filed a petition for the extrajudicial foreclosure of the mortgaged real properties (eight parcels of land including all improvements thereon) under Act No. 3135 . A Certificate of Sale was issued after the auction. Paper City filed a complaint challenging the foreclosure sale. During the pendency of this case, Paper City filed a motion with the trial court seeking to remove and sell the machineries, arguing they were not included in the real estate foreclosure as they were movable properties. The trial court initially denied the motion, ruling the machineries were part of the foreclosed properties as they were included in the MTI annexes. Upon reconsideration, the trial court reversed itself, holding that the machineries remained chattels by agreement of the parties, as evidenced by the original chattel mortgages, and that a unilateral Deed of Cancellation executed by RCBC over some chattels was invalid. The trial court’s orders were affirmed by the Court of Appeals. RCBC (later substituted by Star Two (SPV-AMC), Inc.) elevated the case via a Petition for Review on Certiorari.

ISSUE

Whether the subject machineries and equipment of Paper City were included in the extrajudicial foreclosure sale of the mortgaged land and building, or whether they remained movable properties not covered by the real estate mortgage foreclosure.

RULING

The Supreme Court REVERSED the decisions of the Court of Appeals and the Regional Trial Court. The machineries and equipment were deemed immovable by destination and were therefore included in the foreclosure of the real estate mortgage.
The Court held that the character of the properties is determined by law, not by the agreement of the parties. Under Article 415 of the Civil Code, machineries installed in a manufacturing plant are considered immovable property by destination, as they are essential to the industry for which the premises are used. The original chattel mortgages did not permanently characterize the properties as movables. The subsequent execution of the Mortgage Trust Indenture and its supplements, which included the machineries in Annex “B” as part of the security for the entire loan package alongside the real properties, effectively converted them into real estate. By this agreement, the parties treated the machineries as immovables accessionable to the land. The unilateral Deed of Cancellation was irrelevant as it pertained only to merchandise/stocks-in-trade, not the machineries.
Furthermore, the Certificate of Sale explicitly stated that the properties sold included the land “together with all the buildings and all other improvements existing thereon.” Since the machineries, as integral parts of the paper plant, were immovable improvements, they were encompassed by this description. Therefore, the extrajudicial foreclosure validly included the machineries and equipment.