G.R. No. 41643 ; July 31, 1935
B.H. BERKENKOTTER, plaintiff-appellant, vs. CU UNJIENG E HIJOS, YEK TONG LIN FIRE AND MARINE INSURANCE COMPANY, MABALACAT SUGAR COMPANY and THE PROVINCE SHERIFF OF PAMPANGA, defendants-appellees.

FACTS

The Mabalacat Sugar Co., Inc. obtained a loan from Cu Unjieng e Hijos secured by a first mortgage on its sugar central, including all existing and future improvements. After the mortgage was constituted, the corporation, through its president B.A. Green, decided to increase the mill’s capacity. Green obtained money from B.H. Berkenkotter (plaintiff-appellant) to purchase additional machinery and equipment, promising to reimburse him with a future loan from the mortgagee and to hold the machinery as security. The new machinery was installed, replacing older equipment. Green failed to secure the additional loan from Cu Unjieng e Hijos. Berkenkotter later claimed ownership of the machinery, arguing it was not part of the mortgaged property. The lower court dismissed his complaint.

ISSUE

Whether the additional machinery and equipment, installed after the mortgage was constituted, are subject to the mortgage deed in favor of Cu Unjieng e Hijos.

RULING

Yes. The Supreme Court affirmed the lower court’s decision. The installation of the machinery and equipment, which replaced older ones to increase the central’s capacity, constituted a permanent improvement to the mortgaged sugar central. Under Article 1877 of the Civil Code, a mortgage includes all improvements and accessions to the mortgaged property. The machinery, being essential to the sugar central’s industrial purpose, became real property by destination under Article 334(5) of the Civil Code. The agreement between Green and Berkenkotter to hold the machinery as security did not alter its permanent character or remove it from the coverage of the prior mortgage. The subsequent sale of the machinery to Berkenkotter only transferred the right of redemption, subject to the first mortgage.

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