Case Summary (G.R. No. 41643)
Petitioner
B. H. Berkenkotter — advanced funds and held an unpaid salary credit against the Mabalacat Sugar Co., Inc.; asserted a claim to the machinery and equipment purchased and installed after the mortgage.
Respondents
Cu Unjieng e Hijos (mortgagees under the first mortgage), Yek Tong Lin Fire and Marine Insurance Company, Mabalacat Sugar Co., Inc. (owner of the mortgaged sugar central), and the Provincial Sheriff of Pampanga (party to enforcement proceedings).
Key Dates and Financial Figures
- Original mortgage executed: April 26, 1926 (mortgage granted by Mabalacat Sugar Co., Inc. to Cu Unjieng e Hijos).
- Agreement and proposal to finance new machinery: letter dated October 5, 1926 (Exhibit E).
- Funds delivered by appellant to president B. A. Green: October 9, 1926 (P710 on that date; total advanced P25,750).
- Appellant also held unpaid salary credit against the corporation: P22,000.
- Estimated cost of additional machinery and equipment: approximately P100,000.
- Application for additional mortgage loan (to encumber new machinery): June 10, 1927 (loan request to Cu Unjieng e Hijos for P75,000); loan not obtained.
Applicable Constitution and Legal Framework
Applicable constitution at the time of decision: the 1935 Philippine Constitution (decision date precedes 1990). Governing statutory and codal provisions relied upon in the decision: Article 1877 of the Civil Code (mortgage includes natural accessions, improvements, fixtures, etc.) and Article 334(5) of the Civil Code (characterization of certain machinery and implements as real property when intended and adapted for use in connection with an industry). The court also applied established jurisprudence, notably Bischoff v. Pomar and Compañia General de Tabacos and Cea v. Villanueva, as well as the referenced U.S. Supreme Court authority cited in those cases.
Factual Background
Mabalacat Sugar Co., Inc., owner of the sugar central, executed a first mortgage on April 26, 1926, covering two parcels of land “with all its buildings, improvements, sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever forms part or is a necessary complement of said sugar-cane mill, steel railway, telephone line, now existing or that may in the future exist in said lots.” Shortly thereafter the corporation sought to increase milling capacity from 150 to 250 tons per day. President B. A. Green proposed that appellant Berkenkotter advance funds to purchase the additional machinery and equipment; Berkenkotter advanced P25,750 and had a P22,000 unpaid salary credit, and the new machinery and equipment were purchased and installed. Green promised to reimburse Berkenkotter upon obtaining an additional loan from the mortgagees and bound himself not to mortgage or encumber those items until reimbursement.
Issue Presented
Whether machinery and equipment acquired and installed in the mortgaged sugar central after the constitution of a prior mortgage are included within and subject to that prior mortgage, notwithstanding arrangements between the purchaser and his private creditor regarding reimbursement or security and any subsequent sale by the purchaser to the private creditor.
Relevant Legal Principles Applied
- Article 1877, Civil Code: A mortgage includes natural accessions, improvements, and fixtures, subject to statutory declarations and limitations.
- Established jurisprudence (Bischoff and Cea): Improvements and objects permanently attached to mortgaged real estate are included in a mortgage even if they are added after the mortgage was constituted; exclusion of such items from a mortgage must be expressly stipulated between contracting parties.
- Article 334(5), Civil Code: Machinery and implements intended by the owner for use in connection with a trade and expressly adapted to it acquire the character of real property and thus can be subject to real-property incidents.
Court’s Reasoning on Permanence and Character of the Machinery
The court analyzed the nature and purpose of the installed machinery and equipment: they were intended to replace less-capacious machinery and to serve as integral elements of the sugar central’s industrial functioning and increased productive capacity. Because the machinery was essential, expressly adapted to the sugar industry carried on at the central, and installed in place of prior machinery, its incorporation was of a permanent character. Under Article 334(5) such machinery becomes real property by reason of its purpose and adaptation to the industry; under Article 1877 improvements and fixtures incorporated into mortgaged property are encompassed by the mortgage. Consequently, the court concluded that the newly installed machinery and equipment were subject to the prior mortgage.
Court’s Analysis of the Agreement Between Green and Appellant
The court examined the effect of the private arrangement in which Green promised Berkenkotter reimbursement and agreed not to mortgage or encumber the machinery until reimbursement. The court held that such a private agreement did not alter the legal character of the machinery as permanent improvements upon the mortgaged property; it did not negate their inclusion within the preexisting mortgage. The court noted that the private obligation could have been secured by other means (e.g., by a second mortgage) and that mere contractual undertakings between the debtor and a private creditor cannot defeat the rights of a prior mortgagee in property that has become part of the mortgaged estate.
Court’s Treatmen
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Procedural Posture
- Appeal from the judgment of the Court of First Instance of Manila dismissing the complaint of plaintiff-appellant B. H. Berkenkotter against defendants-appellees Cu Unjieng e Hijos, Yek Tong Lin Fire and Marine Insurance Company, Mabalacat Sugar Company, and the Provincial Sheriff of Pampanga, with costs.
- The appeal raises six assignments of alleged error by the trial court; the decision addresses the first assignment first, concerning whether additional machinery and equipment installed in the mortgaged sugar central were subject to the earlier mortgage in favor of defendants Cu Unjieng e Hijos.
- Judgment of the lower court was affirmed by the Court of Appeals (supreme court panel headed by Justice Villa-Real), with costs to the appellant. Justices Malcolm, Imperial, Butte, and Goddard concurred.
Relevant Facts
- On April 26, 1926, Mabalacat Sugar Co., Inc., owner of the sugar central in Mabalacat, Pampanga, obtained a loan from Cu Unjieng e Hijos secured by a first mortgage on two parcels of land described to include "with all its buildings, improvements, sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever forms part or is a necessary complement of said sugar-cane mill, steel railway, telephone line, now existing or that may in the future exist in said lots."
- On October 5, 1926, shortly after the mortgage, Mabalacat Sugar Co., Inc. decided to increase the central's capacity from milling 150 tons daily to 250 tons by acquiring additional machinery and equipment, estimated to cost about P100,000.
- B. A. Green, president of Mabalacat Sugar Co., Inc., proposed to plaintiff-appellant B. H. Berkenkotter, by letter dated October 5, 1926 (Exhibit E), that Berkenkotter advance the funds for the machinery and equipment, with a promise to reimburse him as soon as an additional loan could be obtained from the mortgagees Cu Unjieng e Hijos.
- On October 9, 1926, Berkenkotter delivered P710 to B. A. Green. The total amount advanced by Berkenkotter to Green amounted to P25,750. Berkenkotter also had a credit of P22,000 against Mabalacat Sugar Co., Inc. for unpaid salary.
- With the P25,750 loan from Berkenkotter and the P22,000 credit, Mabalacat Sugar Co., Inc. purchased the additional machinery and equipment now in dispute.
- On June 10, 1927, B. A. Green applied to Cu Unjieng e Hijos for an additional loan of P75,000, offering as security the additional machinery and equipment acquired and installed in the central after the original mortgage (on April 27, 1927), together with additional equipment that might be acquired with that loan. The application for that loan failed (B. A. Green did not obtain the P75,000 loan).
Mortgage Instrument and Express Language
- The mortgage executed April 26, 1926, secured the loan by first mortgage on two parcels of land and expressly included "all its buildings, improvements, sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever forms part or is a necessary complement of said sugar-cane mill, steel railway, telephone line, now existing or that may in the future exist in said lots."
- The mortgage language thus expressly contemplated inclusion of future improvements and apparatus that form part of or are necessary complements to the mortgaged sugar-cane mill and related infrastructure.
Statutory Provision Cited
- Article 1877, Civil Code: "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."
Precedent and Authority Cited
- Bischoff vs. Pomar and Compania General de Tabacos, 12 Phil. 690, cited with approval in Cea vs. Villanueva, 18 Phil. 538:
- Principle 1: In a mortgage of real estate, improvements