TITLE: PEOPLES BANK V DAHICAN LUMBER

SUBJECT MATTER
: Chattel mortgage-subject matter: machinery

FACTS
A.
Dahican lumber company (DAMCO) obtained several loans amounting to 250,000pesos
from Peoples bank (BANK) and ,together with DALCO, another loan amounting
to$250,000 from Export-Import bank secured by five promissory notes through peoples
bank. Inboth loans, DAMCO executed and registered respective mortgages with
inclusion of after acquired properties. DAMCO and DALCO failed to satisfy the fifth
promissory note in favor of Export bank so Peoples bank paid it and subsequently filed
an action for the foreclosure ofthe mortgaged properties of DAMCO including the after
acquired machinery, equipment and spare parts upon the latter's failure to fulfill its
obligation.

B. Contention of the Petitioner

Peoples bank asserted that the after acquired machinery and equipment of DAMCO
are subject to the deed of mortgage executed by DAMCO. Hence, these can be
included in the foreclosure proceedings.

C. Contentions of the Respondent

DALCO argued that the mortgages were void as regards the after acquired properties
because they were not registered in accordance with the chattel mortgage law.
Moreover, provision of the fourth paragraph of each of said mortgages did not
automatically make subject to such mortgages the "after acquired properties", the only
meaning thereof being that the mortgagor was willing to constitute a lien over such
properties.

ISSUES TO BE RESOLVED

Whether the after acquired machinery and equipment of DAMCO are included as
subject of the Real Estate mortgage, thus can be foreclosed.

RULING:
Judgment rendered in favor of Plaintiff Peoples bank. The after acquired machinery and
equipment are included in the executed mortgages. It is not disputed in the case at
bar that the "after acquired properties" were purchased by DALCO in connection with,
and for use in the development of its lumber concession and that they were purchased
in addition to, or in replacement of those already existing in the premises on July 13,
1950. In Law, therefore, they must be deemed to have been
immobilized, with the result that the real estate mortgages involved herein which were
registered as such did not have to be registered a second time as chattel mortgages in
order to bind the "after acquired properties" and affect third parties. Under the fourth
paragraph of both deeds of mortgage, it is crystal clear that all property of every nature
and description taken in exchange or replacement, as well as all buildings, machineries,
 fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises that is,
its lumber concession "shall immediately be and become subject to the lien" of both
mortgages in the same manner and to the same extent as if already included therein at
the time of their execution. As the language thus used leaves no room for doubt as to
the intention of the parties,

We see no useful purpose in discussing the matter extensively. Suffice it to say that the
stipulation referred to is common, and we might say logical, in all cases where the
properties given as collateral are perishable or subject to inevitable wear and tear or
were intended to be sold, or to be used thus becoming subject to the inevitable wear
and tear but with the understanding express or implied that they shall be replaced
with others to be thereafter acquired by the mortgagor. Such stipulation is neither
unlawful nor immoral, its obvious purpose being tomaintain, to the extent allowed by
circumstances, the original value of the properties given as security. Indeed, if such
properties were of the nature already referred to, it would be poor judgment on the part
of the creditor who does not see to it that a similar provision is included in the contract

STAR TWO (SPV-AMC), INC., V PAPER CITY CORPORATION OF THE

PHILIPPINES
FACTS
For review is a Petition for Review on Certiorari filed by Rizal Commercial Banking Corporation now
substituted by Star Two (SPV-AMC), Inc.

Respondent Paper City is a domestic corporation engaged in the manufacture of paper

products. Paper City applied for and was granted loans and credit accommodations in peso and
dollar denominations by RCBC secured by 4 Deeds of Continuing Chattel Mortgages on its
machineries and equipments found inside its paper plants.
However, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory of
Merchandise/Stocks-in-Trade was executed by RCBC over the merchandise and stocks-in-trade
covered by the continuing chattel mortgages.
RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the trustee bank)
entered into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI, Paper City acquired
an additional P170, 000,000.00 from the creditor banks in addition to the previous loan from RCBC
amounting to P110, 000,000.00.
The old loan of P110,000,000.00 was partly secured by various parcels of land situated in
Valenzuela City. The new loan obligation of P170,000,000.00 would be secured by the same five (5)
Deeds of Real Estate Mortgage and additional real and personal properties described in an annex to
MTI, Annex "B" which covered the machineries and equipments of Paper City.

Annex "A"
A. Office Building
Building 1, 2, 3, 4, and 5
Boiler House
 Workers Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities
B. Pollution Tank Nos. 1 and 2.
Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"
C. Power Plants Nos. 1 and 2
Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers

Annex "B"
D. D. Material Handling Equipment
Paper Plant No. 3
The MTI was later amended to increase the contributions of the RCBC and Union Bank. As a
consequence, they executed a Deed of Amendment to MTI but still included as part of the
mortgaged properties by way of a first mortgage the various machineries and equipments located in
and bolted to and/or forming part of buildings.
A Second Supplemental Indenture to the MTI was executed to increase the amount of the
loan secured against the existing properties composed of land, building, machineries and
equipments and inventories described in Annexes "A" and "B."
Finally, a Third Supplemental Indenture to the MTI was executed to increase the existing
loan obligation with an additional security composed of a newly constructed two-storey building and
other improvements, machineries and equipments located in the existing plant site.
Paper City was able to comply with its loan obligations but economic crisis ensued which
made it difficult for Paper City to meet the terms of its obligations leading to payment
defaults. Consequently, RCBC filed a Petition for Extrajudicial Foreclosure.
The petition was for the extra-judicial foreclosure of eight parcels of land including all
improvements thereon which were sold in favor of the creditor banks RCBC, Union Bank and
Metrobank as the highest bidders.
This foreclosure sale prompted Paper City to file a Complaint against the creditor banks alleging that
the extra-judicial sale of the properties and plants was null and void due to lack of prior notice and
attendance of gross and evident bad faith on the part of the creditor banks.

Acting on the said motion, the trial court issued an Order denying the prayer and ruled that the
machineries and equipments were included in the annexes and form part of the MTI.

Paper City filed its Motion for Reconsideration which was favorably granted by the trial court with
justification that the disputed machineries and equipments are chattels by agreement of the parties
through their inclusion in the four Deeds of Chattel Mortgage and the deed of cancellation executed
by RCBC was not valid because it was done unilaterally and without the consent of Paper City.

The CA affirmed the Order.

ISSUE
Whether the subject machineries and equipments were included in the mortgage, extrajudicial
foreclosure and in the consequent sale.
RULING
Yes. 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.

Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various
parcels of land including the buildings and existing improvements thereon as well as the machineries
and equipments, which as stated in the granting clause of the original mortgage, are "more
particularly described and listed that is to say, the real and personal properties listed in Annexes A
and B.

The plain language and literal interpretation of the MTIs must be applied. The petitioner, other
creditor banks and Paper City intended from the very first execution of the indentures that the
machineries and equipments enumerated in Annexes "A" and "B" are included. Obviously, with the
continued increase in the amount of the loan, totaling hundreds of millions of pesos, Paper City had
to offer all valuable properties acceptable to the creditor banks.

The MTIs did not describe the equipments and machineries as personal property. Notably, while
"personal" appeared in the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:
x x x 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.

Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly
states through the Deed of Amendment that the machineries and equipments listed in Annexes "A"
and "B" form part of the improvements listed and located on the parcels of land subject of the
mortgage, such machineries and equipments are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in the petition.

The real estate mortgage over the machineries and equipments is even in full accord with the
classification of such properties by the Civil Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(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;