Case Summary (G.R. No. 123486)
Factual Background
On April 26, 1926, Mabalacat Sugar Company, Inc. secured a loan from Cu Unjieng e Hijos by executing a first mortgage 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 the sugar mill, whether existing or to be installed in the future.
Acquisition of Additional Machinery
By letter dated October 5, 1926, B. A. Green (president of Mabalacat Sugar Co., Inc.) requested that Berkenkotter advance funds to purchase machinery and equipment to increase daily milling capacity from 150 to 250 tons. Berkenkotter agreed, supplying a total of ₱25,750 plus a ₱22,000 credit for unpaid salary. The new machinery was delivered and installed in the mill.
Attempted Additional Loan
On June 10, 1927, Green applied to Cu Unjieng e Hijos for a further loan of ₱75,000, offering the newly installed machinery (and any future installations) as additional security. The application was denied.
Trial Court Holding
The Court of First Instance of Manila dismissed Berkenkotter’s complaint seeking to exclude the new machinery and equipment from the existing mortgage, concluding that they were subject to Cu Unjieng e Hijos’ mortgage lien. Berkenkotter appealed.
Legal Issue
Whether machinery and equipment installed in a mortgaged sugar central after the mortgage’s execution become subject to that mortgage as permanent improvements.
Governing Legal Provisions
• Civil Code, Art. 1877: “A mortgage includes all natural accessions, improvements… whether the estate continues in the possession of the person who mortgaged it or whether it passes into the hands of a third person.”
• Civil Code, Art. 334(5): Real property includes machinery expressly adapted for an industry carried on in a building or land.
• Mortgage Law, Arts. 110–111 and jurisprudence (Bischoff vs. Pomar; Cea vs. Villanueva) establish that improvements and fixtures permanently attached to mortgaged property fall within the mortgage unless expressly excluded by the parties.
Appellant’s Arguments
- The machinery was not a permanent improvement because Green promised, in the event his additional loan failed, to hold the machinery as security exclusively for Berkenkotter’s reimbursement and not to encumber it further.
- Ownership of the machinery resided in Berkenkotter upon sale, thus excluding it from the original mortgage’s coverage.
Court’s Analysis
- Under Article 1877, any improvement permanently affixed to mortgaged premises, including machinery essential to the sugar mill’s operation, becomes part of the mortgaged property.
- Article 334(5) classifies industry-specific machinery as real property once installed. Here, the new machinery was integral to the central’s industrial function and thus permanent in character.
- Green’s private agreement to hold the machinery without further encumbrance did not negate its permanence or prevent its inclusion under the existing first mortgage; at most, it could have formed the basis for a subordinate
Case Syllabus (G.R. No. 123486)
Facts of the Case
- On April 26, 1926, Mabalacat Sugar Co., Inc. obtained a loan from Cu Unjieng e Hijos, secured by a first mortgage on 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.”
- On October 5, 1926, the corporation resolved to expand milling capacity from 150 to 250 tons daily by acquiring new machinery and equipment at an estimated cost of ₱100,000.
- B. A. Green, president of the corporation, solicited an advance from appellant B. H. Berkenkotter, promising reimbursement upon securing a further loan from Cu Unjieng e Hijos.
- Between October 9 and an unspecified later date, Berkenkotter advanced ₱25,750 in cash and had an existing credit of ₱22,000 for unpaid salary; these sums funded the acquisition and installation of the additional machinery and equipment.
- On June 10, 1927, Green applied for a second loan of ₱75,000 from Cu Unjieng e Hijos, offering the new machinery as collateral; the application was refused.
- Berkenkotter sued, claiming that the newly installed machinery and equipment were not covered by the original mortgage and thus should not be subject to Cu Unjieng e Hijos’ prior lien.
Legal Issues
- Whether machinery and equipment purchased and installed after the original mortgage was constituted constitute permanent improvements subject to that mortgage.
- Whether a side agreement to hold such machinery as security for a private lender’s advance alters their character as improvements under the mortgage.
- The l