Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-41506 March 25, 1935

PHILIPPINE REFINING CO., INC., plaintiff-appellant,
vs.
FRANCISCO JARQUE, JOSE COROMINAS, and ABOITIZ & CO., defendants.
JOSE COROMINAS, in his capacity as assignee of the estate of the insolvent Francisco
Jarque, appellee.
Thos. G. Ingalls, Vicente Pelaez and DeWitt, Perkins and Brady for appellant.
D.G. McVean and Vicente L. Faelnar for appellee.

MALCOLM, J.:

First of all the reason why the case has been decided by the court in banc needs
explanation. A motion was presented by counsel for the appellant in which it was
asked that the case be heard and determined by the court sitting in banc because the
admiralty jurisdiction of the court was involved, and this motion was granted in
regular course. On further investigation it appears that this was error. The mere
mortgage of a ship is a contract entered into by the parties to it without reference to
navigation or perils of the sea, and does not, therefore, confer admiralty jurisdiction.
(Bogart vs. Steamboat John Jay [1854], 17 How., 399.)

Coming now to the merits, it appears that on varying dates the Philippine Refining Co.,
Inc., and Francisco Jarque executed three mortgages on the motor vessels Pandan and
Zaragoza. These documents were recorded in the record of transfers and
incumbrances of vessels for the port of Cebu and each was therein denominated a
"chattel mortgage". Neither of the first two mortgages had appended an affidavit of
good faith. The third mortgage contained such an affidavit, but this mortgage was not
registered in the customs house until May 17, 1932, or within the period of thirty days
prior to the commencement of insolvency proceedings against Francisco Jarque; also,
while the last mentioned mortgage was subscribed by Francisco Jarque and M. N.
Brink, there was nothing to disclose in what capacity the said M. N. Brink signed. A
fourth mortgage was executed by Francisco Jarque and Ramon Aboitiz on the
motorship Zaragoza and was entered in the chattel mortgage registry of the register
of deeds on May 12, 1932, or again within the thirty-day period before the institution
of insolvency proceedings. These proceedings were begun on June 2, 1932, when a
petition was filed with the Court of First Instance of Cebu in which it was prayed that
Francisco Jarque be declared an insolvent debtor, which soon thereafter was granted,
with the result that an assignment of all the properties of the insolvent was executed
in favor of Jose Corominas.

On these facts, Judge Jose M. Hontiveros declined to order the foreclosure of the
mortgages, but on the contrary sustained the special defenses of fatal defectiveness
of the mortgages. In so doing we believe that the trial judge acted advisedly.

Vessels are considered personal property under the civil law. (Code of Commerce,
article 585.) Similarly under the common law, vessels are personal property although
occasionally referred to as a peculiar kind of personal property. (Reynolds vs. Nielson
[1903], 96 Am. Rep., 1000; Atlantic Maritime Co vs. City of Gloucester [1917], 117 N.
E., 924.) Since the term "personal property" includes vessels, they are subject to
mortgage agreeably to the provisions of the Chattel Mortgage Law. (Act No. 1508,
section 2.) Indeed, it has heretofore been accepted without discussion that a
mortgage on a vessel is in nature a chattel mortgage. (McMicking vs. Banco Espaol-
Filipino [1909], 13 Phil., 429; Arroyo vs. Yu de Sane [1930], 54 Phil., 511.) The only
difference between a chattel mortgage of a vessel and a chattel mortgage of other
personalty is that it is not now necessary for a chattel mortgage of a vessel to be
noted n the registry of the register of deeds, but it is essential that a record of
documents affecting the title to a vessel be entered in the record of the Collector of
Customs at the port of entry. (Rubiso and Gelito vs. Rivera [1917], 37 Phil., 72; Arroyo
vs. Yu de Sane, supra.) Otherwise a mortgage on a vessel is generally like other
chattel mortgages as to its requisites and validity. (58 C.J., 92.)

The Chattell Mortgage Law in its section 5, in describing what shall be deemed
sufficient to constitute a good chattel mortgage, includes the requirement of an
affidavit of good faith appended to the mortgage and recorded therewith. The absence
of the affidavit vitiates a mortgage as against creditors and subsequent
encumbrancers. (Giberson vs. A. N. Jureidini Bros. [1922], 44 Phil., 216; Benedicto de
Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros [1923], 46
Phil., 753.) As a consequence a chattel mortgage of a vessel wherein the affidavit of
good faith required by the Chattel Mortgage Law is lacking, is unenforceable against
third persons.

In effect appellant asks us to find that the documents appearing in the record do not
constitute chattel mortgages or at least to gloss over the failure to include the
affidavit of good faith made a requisite for a good chattel mortgage by the Chattel
Mortgage Law. Counsel would further have us disregard article 585 of the Code of
Commerce, but no reason is shown for holding this article not in force. Counsel would
further have us revise doctrines heretofore announced in a series of cases, which it is
not desirable to do since those principles were confirmed after due liberation and
constitute a part of the commercial law of the Philippines. And finally counsel would
have us make rulings on points entirely foreign to the issues of the case. As neither
the facts nor the law remains in doubt, the seven assigned errors will be overruled.
Judgment affirmed, the costs of this instance to be paid by the appellant.

Avancea, C.J., Street, Villa-Real, Abad Santos, Hull, Vickers, Imperial, Butte, and
Goddard, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-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.

Briones and Martinez for appellant.

Araneta, Zaragoza and Araneta for appellees Cu Unjieng e Hijos.

No appearance for the other appellees.

VILLA-REAL, J.:

This is an appeal taken by the plaintiff, B.H. Berkenkotter, from the judgment of the
Court of First Instance of Manila, dismissing said plaintiff's complaint against Cu
Unjiengs e Hijos et al., with costs.

In support of his appeal, the appellant assigns six alleged errors as committed by the
trial court in its decision in question which will be discussed in the course of this
decision.

The first question to be decided in this appeal, which is raised in the first assignment
of alleged error, is whether or not the lower court erred in declaring that the additional
machinery and equipment, as improvement incorporated with the central are subject
to the mortgage deed executed in favor of the defendants Cu Unjieng e Hijos.
It is admitted by the parties that on April 26, 1926, the Mabalacat Sugar Co., Inc.,
owner of the sugar central situated in Mabalacat, Pampanga, obtained from the
defendants, Cu Unjieng e Hijos, a loan secured by a first mortgage constituted on two
parcels and land "with all its buildings, improvements, sugar-cane mill, steel railway,
telephone line, apparatus, utensils and whatever forms part or is necessary
complement of said sugar-cane mill, steel railway, telephone line, now existing or that
may in the future exist is said lots."

On October 5, 1926, shortly after said mortgage had been constituted, the Mabalacat
Sugar Co., Inc., decided to increase the capacity of its sugar central by buying
additional machinery and equipment, so that instead of milling 150 tons daily, it could
produce 250. The estimated cost of said additional machinery and equipment was
approximately P100,000. In order to carry out this plan, B.A. Green, president of said
corporation, proposed to the plaintiff, B.H. Berkenkotter, to advance the necessary
amount for the purchase of said machinery and equipment, promising to reimburse
him as soon as he could obtain an additional loan from the mortgagees, the herein
defendants Cu Unjieng e Hijos. Having agreed to said proposition made in a letter
dated October 5, 1926 (Exhibit E), B.H. Berkenkotter, on October 9th of the same
year, delivered the sum of P1,710 to B.A. Green, president of the Mabalacat Sugar Co.,
Inc., the total amount supplied by him to said B.A. Green having been P25,750.
Furthermore, B.H. Berkenkotter had a credit of P22,000 against said corporation for
unpaid salary. With the loan of P25,750 and said credit of P22,000, the Mabalacat
Sugar Co., Inc., purchased the additional machinery and equipment now in litigation.

On June 10, 1927, B.A. Green, president of the Mabalacat Sugar Co., Inc., applied to
Cu Unjieng e Hijos for an additional loan of P75,000 offering as security the additional
machinery and equipment acquired by said B.A. Green and installed in the sugar
central after the execution of the original mortgage deed, on April 27, 1927, together
with whatever additional equipment acquired with said loan. B.A. Green failed to
obtain said loan.

Article 1877 of the Civil Code provides as follows.

ART. 1877. A mortgage includes all natural accessions, improvements, growing fruits,
and rents not collected when the obligation falls due, and the amount of any
indemnities paid or due the owner by the insurers of the mortgaged property or by
virtue of the exercise of the power of eminent domain, with the declarations,
amplifications, and limitations established by law, whether the estate continues in the
possession of the person who mortgaged it or whether it passes into the hands of a
third person.
In the case of Bischoff vs. Pomar and Compaia General de Tabacos (12 Phil., 690),
cited with approval in the case of Cea vs. Villanueva (18 Phil., 538), this court laid
shown the following doctrine:

1. REALTY; MORTGAGE OF REAL ESTATE INCLUDES IMPROVEMENTS AND FIXTURES.

It is a rule, established by the Civil Code and also by the Mortgage Law, with which the
decisions of the courts of the United States are in accord, that in a mortgage of real
estate, the improvements on the same are included; therefore, all objects
permanently attached to a mortgaged building or land, although they may have been
placed there after the mortgage was constituted, are also included. (Arts. 110 and 111
of the Mortgage Law, and 1877 of the Civil Code; decision of U.S. Supreme Court in
the matter of Royal Insurance Co. vs. R. Miller, liquidator, and Amadeo [26 Sup. Ct.
Rep., 46; 199 U.S., 353].)

2. ID.; ID.; INCLUSION OR EXCLUSION OF MACHINERY, ETC. In order that it may be

understood that the machinery and other objects placed upon and used in connection
with a mortgaged estate are excluded from the mortgage, when it was stated in the
mortgage that the improvements, buildings, and machinery that existed thereon were
also comprehended, it is indispensable that the exclusion thereof be stipulated
between the contracting parties.

The appellant contends that the installation of the machinery and equipment claimed
by him in the sugar central of the Mabalacat Sugar Company, Inc., was not permanent
in character inasmuch as B.A. Green, in proposing to him to advance the money for
the purchase thereof, made it appear in the letter, Exhibit E, that in case B.A. Green
should fail to obtain an additional loan from the defendants Cu Unjieng e Hijos, said
machinery and equipment would become security therefor, said B.A. Green binding
himself not to mortgage nor encumber them to anybody until said plaintiff be fully
reimbursed for the corporation's indebtedness to him.

Upon acquiring the machinery and equipment in question with money obtained as
loan from the plaintiff-appellant by B.A. Green, as president of the Mabalacat Sugar
Co., Inc., the latter became owner of said machinery and equipment, otherwise B.A.
Green, as such president, could not have offered them to the plaintiff as security for
the payment of his credit.

Article 334, paragraph 5, of the Civil Code gives the character of real property to
"machinery, liquid containers, instruments or implements intended by the owner of
any building or land for use in connection with any industry or trade being carried on
therein and which are expressly adapted to meet the requirements of such trade or
industry.
If the installation of the machinery and equipment in question in the central of the
Mabalacat Sugar Co., Inc., in lieu of the other of less capacity existing therein, for its
sugar industry, converted them into real property by reason of their purpose, it cannot
be said that their incorporation therewith was not permanent in character because, as
essential and principal elements of a sugar central, without them the sugar central
would be unable to function or carry on the industrial purpose for which it was
established. Inasmuch as the central is permanent in character, the necessary
machinery and equipment installed for carrying on the sugar industry for which it has
been established must necessarily be permanent.

Furthermore, the fact that B.A. Green bound himself to the plaintiff B.H. Berkenkotter
to hold said machinery and equipment as security for the payment of the latter's
credit and to refrain from mortgaging or otherwise encumbering them until
Berkenkotter has been fully reimbursed therefor, is not incompatible with the
permanent character of the incorporation of said machinery and equipment with the
sugar central of the Mabalacat Sugar Co., Inc., as nothing could prevent B.A. Green
from giving them as security at least under a second mortgage.

As to the alleged sale of said machinery and equipment to the plaintiff and appellant
after they had been permanently incorporated with sugar central of the Mabalacat
Sugar Co., Inc., and while the mortgage constituted on said sugar central to Cu
Unjieng e Hijos remained in force, only the right of redemption of the vendor
Mabalacat Sugar Co., Inc., in the sugar central with which said machinery and
equipment had been incorporated, was transferred thereby, subject to the right of the
defendants Cu Unjieng e Hijos under the first mortgage.

For the foregoing considerations, we are of the opinion and so hold: (1) That the
installation of a machinery and equipment in a mortgaged sugar central, in lieu of
another of less capacity, for the purpose of carrying out the industrial functions of the
latter and increasing production, constitutes a permanent improvement on said sugar
central and subjects said machinery and equipment to the mortgage constituted
thereon (article 1877, Civil Code); (2) that the fact that the purchaser of the new
machinery and equipment has bound himself to the person supplying him the
purchase money to hold them as security for the payment of the latter's credit, and to
refrain from mortgaging or otherwise encumbering them does not alter the permanent
character of the incorporation of said machinery and equipment with the central; and
(3) that the sale of the machinery and equipment in question by the purchaser who
was supplied the purchase money, as a loan, to the person who supplied the money,
after the incorporation thereof with the mortgaged sugar central, does not vest the
creditor with ownership of said machinery and equipment but simply with the right of
redemption.

Wherefore, finding no error in the appealed judgment, it is affirmed in all its parts,
with costs to the appellant. So ordered.
Malcolm, Imperial, Butte, and Goddard, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-40411 August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,
vs.
APRONIANO G. CASTILLO and DAVAO LIGHT & POWER CO., INC., defendants-appellees.
Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo and Delfin Joven for appellant.
J.W. Ferrier for appellees.

MALCOLM, J.:

The issue in this case, as announced in the opening sentence of the decision in the
trial court and as set forth by counsel for the parties on appeal, involves the
determination of the nature of the properties described in the complaint. The trial
judge found that those properties were personal in nature, and as a consequence
absolved the defendants from the complaint, with costs against the plaintiff.

The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the
Government of the Philippine Islands. It has operated a sawmill in the sitio of Maa,
barrio of Tigatu, municipality of Davao, Province of Davao. However, the land upon
which the business was conducted belonged to another person. On the land the
sawmill company erected a building which housed the machinery used by it. Some of
the implements thus used were clearly personal property, the conflict concerning
machines which were placed and mounted on foundations of cement. In the contract
of lease between the sawmill company and the owner of the land there appeared the
following provision:

That on the expiration of the period agreed upon, all the improvements and buildings
introduced and erected by the party of the second part shall pass to the exclusive
ownership of the party of the first part without any obligation on its part to pay any
amount for said improvements and buildings; also, in the event the party of the
second part should leave or abandon the land leased before the time herein
stipulated, the improvements and buildings shall likewise pass to the ownership of the
party of the first part as though the time agreed upon had expired: Provided, however,
That the machineries and accessories are not included in the improvements which will
pass to the party of the first part on the expiration or abandonment of the land leased.
In another action, wherein the Davao Light & Power Co., Inc., was the plaintiff and the
Davao, Saw, Mill Co., Inc., was the defendant, a judgment was rendered in favor of the
plaintiff in that action against the defendant in that action; a writ of execution issued
thereon, and the properties now in question were levied upon as personalty by the
sheriff. No third party claim was filed for such properties at the time of the sales
thereof as is borne out by the record made by the plaintiff herein. Indeed the bidder,
which was the plaintiff in that action, and the defendant herein having consummated
the sale, proceeded to take possession of the machinery and other properties
described in the corresponding certificates of sale executed in its favor by the sheriff
of Davao.

As connecting up with the facts, it should further be explained that the Davao Saw Mill
Co., Inc., has on a number of occasions treated the machinery as personal property by
executing chattel mortgages in favor of third persons. One of such persons is the
appellee by assignment from the original mortgages.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code,
real property consists of

1. Land, buildings, roads and constructions of all kinds adhering to the soil;

xxx xxx xxx

5. Machinery, liquid containers, instruments or implements intended by the owner of

any building or land for use in connection with any industry or trade being carried on
therein and which are expressly adapted to meet the requirements of such trade of
industry.

Appellant emphasizes the first paragraph, and appellees the last mentioned
paragraph. We entertain no doubt that the trial judge and appellees are right in their
appreciation of the legal doctrines flowing from the facts.

In the first place, it must again be pointed out that the appellant should have
registered its protest before or at the time of the sale of this property. It must further
be pointed out that while not conclusive, the characterization of the property as
chattels by the appellant is indicative of intention and impresses upon the property
the character determined by the parties. In this connection the decision of this court
in the case of Standard Oil Co. of New York vs. Jaramillo ( [1923], 44 Phil., 630),
whether obiter dicta or not, furnishes the key to such a situation.

It is, however not necessary to spend overly must time in the resolution of this appeal
on side issues. It is machinery which is involved; moreover, machinery not intended
by the owner of any building or land for use in connection therewith, but intended by a
lessee for use in a building erected on the land by the latter to be returned to the
lessee on the expiration or abandonment of the lease.

A similar question arose in Puerto Rico, and on appeal being taken to the United
States Supreme Court, it was held that machinery which is movable in its nature only
becomes immobilized when placed in a plant by the owner of the property or plant,
but not when so placed by a tenant, a usufructuary, or any person having only a
temporary right, unless such person acted as the agent of the owner. In the opinion
written by Chief Justice White, whose knowledge of the Civil Law is well known, it was
in part said:

To determine this question involves fixing the nature and character of the property
from the point of view of the rights of Valdes and its nature and character from the
point of view of Nevers & Callaghan as a judgment creditor of the Altagracia Company
and the rights derived by them from the execution levied on the machinery placed by
the corporation in the plant. Following the Code Napoleon, the Porto Rican Code treats
as immovable (real) property, not only land and buildings, but also attributes
immovability in some cases to property of a movable nature, that is, personal
property, because of the destination to which it is applied. "Things," says section 334
of the Porto Rican Code, "may be immovable either by their own nature or by their
destination or the object to which they are applicable." Numerous illustrations are
given in the fifth subdivision of section 335, which is as follows: "Machinery, vessels,
instruments or implements intended by the owner of the tenements for the industrial
or works that they may carry on in any building or upon any land and which tend
directly to meet the needs of the said industry or works." (See also Code Nap., articles
516, 518 et seq. to and inclusive of article 534, recapitulating the things which,
though in themselves movable, may be immobilized.) So far as the subject-matter
with which we are dealing machinery placed in the plant it is plain, both under
the provisions of the Porto Rican Law and of the Code Napoleon, that machinery which
is movable in its nature only becomes immobilized when placed in a plant by the
owner of the property or plant. Such result would not be accomplished, therefore, by
the placing of machinery in a plant by a tenant or a usufructuary or any person having
only a temporary right. (Demolombe, Tit. 9, No. 203; Aubry et Rau, Tit. 2, p. 12,
Section 164; Laurent, Tit. 5, No. 447; and decisions quoted in Fuzier-Herman ed. Code
Napoleon under articles 522 et seq.) The distinction rests, as pointed out by
Demolombe, upon the fact that one only having a temporary right to the possession
or enjoyment of property is not presumed by the law to have applied movable
property belonging to him so as to deprive him of it by causing it by an act of
immobilization to become the property of another. It follows that abstractly speaking
the machinery put by the Altagracia Company in the plant belonging to Sanchez did
not lose its character of movable property and become immovable by destination. But
in the concrete immobilization took place because of the express provisions of the
lease under which the Altagracia held, since the lease in substance required the
putting in of improved machinery, deprived the tenant of any right to charge against
the lessor the cost such machinery, and it was expressly stipulated that the machinery
so put in should become a part of the plant belonging to the owner without
compensation to the lessee. Under such conditions the tenant in putting in the
machinery was acting but as the agent of the owner in compliance with the
obligations resting upon him, and the immobilization of the machinery which resulted
arose in legal effect from the act of the owner in giving by contract a permanent
destination to the machinery.

xxx xxx xxx

The machinery levied upon by Nevers & Callaghan, that is, that which was placed in
the plant by the Altagracia Company, being, as regards Nevers & Callaghan, movable
property, it follows that they had the right to levy on it under the execution upon the
judgment in their favor, and the exercise of that right did not in a legal sense conflict
with the claim of Valdes, since as to him the property was a part of the realty which,
as the result of his obligations under the lease, he could not, for the purpose of
collecting his debt, proceed separately against. (Valdes vs. Central Altagracia [192],
225 U.S., 58.)

Finding no reversible error in the record, the judgment appealed from will be affirmed,
the costs of this instance to be paid by the appellant.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

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