Star Two (SPV-AMV) vs.

Paper City
*RCBC was substituted by Star Two
Facts:
On 1990-91, respondent Paper City applied
for and was granted various loans and credit
accommodation by RCBC. These loans were
secured by 4 Deeds of Continuing Chattel
Mortgages on its machineries and equipment
inside the paper plant. Later on, RCBC
executed a unilateral cancellation of the
Deed of Continuing Chattel Mortgages over
the merchandise and stock in trade covered
by chattel mortgage.
On 1992, RCBC, Metrobank and Union Bank
(creditor banks, with RCBC as trustee bank)
entered into a Mortgage Trust Indenture
(MTI) with Paper City. In the MTI, Paper City
obtained an additional loan of 170M in
addition to its previous loan (110M). The old
loan was partly secured by various parcels of
land in Valenzuela pursuant to 5 Deeds of
Real Estate Mortgages. The new loan is
secured by same 5 Deeds of REM and an
additional real and personal properties
which
includes
the
machineries
and
equipments of Paper City.
Subsequently, the MTI was amended and two
supplemental indentures were executed by
the parties. All of which included the
machineries and equipments as part of the
mortgaged properties.
Paper City later on defaulted on its obligation
and as a result the RCBC filed a petition for
Extra-judicial foreclosure against the REM
executed by Paper City. A certificate of sale
was later on issued to creditor banks as
highest bidders.
Due to the foreclosure, Paper City filed a
complaint to declare the foreclosure null and
void for lack of prior notice and attendance
of bad faith. RCBC and Paper City thereafter
entered into a compromise agreement. While
Union bank and Metro bank and Paper City
were still under negotiation, Paper City filed
with the RTC a Manifestation with motion to
remove
Machine
reasoning
that
the
machineries are not included in foreclosure
and it is only appropriate that it be removed
and sold it to third parties.
RTC Ruling: RTC denied the prayer of Paper
City. However, upon MR RTC granted the
petition and ruled that the subject

machineries and equipments are chattels by

agreement through their inclusion in the 4
deeds of chattel mortgages. It further ruled
that the cancellation made by the RCBC was
not valid since it was done without the
consent of mortgagor Paper City and the
cancellation
only
pertains
to
the
merchandise and stock-in-trade.
CA
Ruling:
Ruled
that
the
subject
machineries were not included in the
extrajudicial foreclosure sale. The claim for
inclusion made by RCBC was contradicted by
the very caption of the petition itself:
Petition for Extra-Judicial Foreclosure of Real
Estate Mortgage. It further ruled that this
inclusion was further contradicted in the
Certificate of Sale which enumerated only
the mortgaged real properties without the
subject machineries.
RCBC now contends that the machineries
were regarded as real properties as stated in
the
MTI,
its
amendment
and
the
supplemental indentures. Also, it argues that
the cancellation of chattel mortgaged is valid
though made without consent of mortgagor
pursuant to chattel mortgage law.
Issue: WON the machineries and equipments
are considered as real properties?
Held:
Yes, the machineries and equipments are
included in the foreclosed properties and
hence cannot be removed and be sold to
third persons by Paper City.
The plain and literal interpretation of the
MTIs must be applied. The MTI, its
amendment,
and
the
supplemental
indentures clearly state that the properties
mortgaged are various parcels of land
including
the
buildings
and
existing
improvements thereon as well as the
machineries and equipments.
Moreover,
although
the
petition
was
captioned as a Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage, the said
petition was likewise based on the MTI, its
amendment and its supplemental indentures
which
include
the
machineries
and
equipments as mortgaged properties. As
such,
the
subject
machineries
and

equipments are surely part of the foreclosure

of the real estate properties.

estate mortgages superseded the earlier

chattel mortgages.

Furthermore, the lower court failed to notice

the fact that the chattel mortgages were
already averted when the real estate
mortgages which specifically included the
machineries was executed. Hence, the real

Lastly, the real estate mortgage over the

machineries and equipments is even in full
accord with the classification of properties by
the Civil Code as immovable property as
stated in Article 415 paragraph 5.