Case Summary (G.R. No. 40411)
Procedural Posture
A separate suit brought by Davao Light & Power Co., Inc. resulted in a judgment against Davao Saw Mill Co., Inc.; a writ of execution issued and the machinery and related properties were levied upon and sold as personal property by the sheriff. No third-party claim or timely protest was filed by Davao Saw Mill Co., Inc. at the time of sale. The present action contests the character of the properties and the effect of the levy and sale. The trial court found the properties to be personalty and dismissed the plaintiff’s complaint; the Supreme Court affirmed.
Contractual Terms and Factual Findings
Under the written lease between the sawmill company (lessee) and the landowner (lessor), all improvements and buildings introduced and erected by the lessee were to pass to the lessor on expiration or abandonment of the lease without compensation, except that “machineries and accessories are not included in the improvements which will pass to the party of the first part.” The sawmill company erected a building housing machinery; some implements were clearly personal property, while other machines were mounted on cement foundations. The sawmill company had, on multiple occasions, treated the machinery as chattels by executing chattel mortgages; one of those mortgages and its assignments are in the chain now asserted by appellees.
Applicable Law
The court relied on the Civil Code provisions invoked in the record (Article 334, subdivisions 1 and 5): real property includes land, buildings, roads and constructions adhering to the soil (par. 1), and also may include, by destination, machinery, instruments or implements intended by the owner of a tenement for use in its industry or trade and expressly adapted to meet those requirements (par. 5). The court also considered controlling authority from U.S. Supreme Court precedent interpreting the Puerto Rican civil-law rule that movable machinery may become immovable by destination only when the owner of the tenement gives it a permanent destination.
Legal Issues Presented
- Whether the machinery and implements installed or mounted by the lessee became part of the realty (immovable by destination) or remained movables (personal property).
- Whether the levy and sale under execution of the allegedly personal property were valid as against the lessee and third-party claimants.
- The effect of the lessee’s prior characterization and treatment of the machinery (e.g., chattel mortgages) and the lessee’s failure to register a protest or file a third-party claim at the time of sale.
Court’s Analysis and Reasoning
- Nature of the machinery: The court emphasized the distinction in Article 334 between movables and movables becoming immovable by destination. The pivotal factor is whose intention and action created the permanent destination. Under the cited authorities, machinery placed in a plant becomes immovable by destination when the owner of the land or plant gives it that permanent destination; machinery placed by a tenant or other temporary possessor generally retains its movable character unless the placement is effectively done as agent of the owner or the lease itself gives the owner a permanent right to the machinery.
- Effect of the lease provisions: The lease at bar expressly excluded machinery and accessories from the improvements that would pass to the lessor on lease expiration. This contractual exclusion indicates that the machinery was not intended by the owner to be given the permanent destination necessary to make it immovable by destination. Because the machines were placed by the lessee and the lease did not convert them into the lessor’s property, the lessee’s interest in the machinery remained that of personal property.
- Parties’ own characterization: The lessee’s repeated treatment of the machinery as chattels (execution of chattel mortgages) was persuasive evidence of the parties’ intent and supported the conclusion that the machinery remained movable property. The court noted that while such characterization is not conclusive, it is indicative of intention.
- Remedies and procedural defaults: The court observed that the appellant should have registered a protest or filed a third-party claim at the time of the execution sale. The failure to do so weakened the appellant’s position and militated against overturning the sheriff’s sale.
- Precedent application: The court relied on the reasoning in Valdes v. Central Altagracia (U.S. Supreme Court interpreting Puerto Rican law) to clarify that machinery placed by a temporary possessor does not ordinarily become immovable by destination, unless the owner’s contractual arrangements produce legal immobilization by effectively making the tenant the owner’s agent in placing the machinery. That precedent supported the conclusion that machinery placed by the lessee here did not lose its character as movables.
Holding
The Supreme Court found no reversible error in the trial court’s determin
Case Syllabus (G.R. No. 40411)
Citation and Court
- Reported at 61 Phil. 709.
- G.R. No. 40411.
- Decision rendered August 07, 1935.
- Opinion authored by Justice Malcolm; Justices Villa-Real, Imperial, Butte, and Goddard concurred.
Parties
- Plaintiff and Appellant: Davao Saw Mill Co., Inc.
- Defendants and Appellees: Aproniano G. Castillo and Davao Light & Power Co., Inc.
- Additional factual actors: owner of the land on which the sawmill stood; sheriff of Davao (who levied and executed sales); third persons who were mortgagees to whom the sawmill executed chattel mortgages; one such mortgagee assigned rights to an appellee.
Procedural History
- The trial court framed the issue as the determination of the nature (real or personal) of the properties described in the complaint.
- The trial court found the properties to be personal in nature and absolved the defendants from the complaint, with costs against the plaintiff.
- In a separate action, Davao Light & Power Co., Inc. was plaintiff and Davao Saw Mill Co., Inc. was defendant; judgment in favor of Davao Light & Power issued, a writ of execution issued, and the questioned properties were levied upon as personalty by the sheriff.
- The sheriff executed certificates of sale in favor of the purchaser (the plaintiff in that separate action and defendant herein), who consummated the sale and took possession of the machinery and other properties.
- No third-party claim was filed for the properties at the time of sale, as shown by the record produced by the plaintiff-appellant in the present appeal.
- Appellant appealed the trial court's ruling to the higher court resulting in the present decision.
Factual Background
- Davao Saw Mill Co., Inc. held a lumber concession from the Government of the Philippine Islands and operated a sawmill in the sitio of Maa, barrio of Tigatu, municipality of Davao, Province of Davao.
- The land on which the sawmill business was conducted belonged to another person (i.e., the sawmill company was a lessee).
- On that land the sawmill company erected a building to house its machinery.
- Some implements used by the sawmill were clearly personal property; the dispute centered on certain machines placed and mounted on foundations of cement.
- The sawmill company on multiple occasions treated its machinery as personal property by executing chattel mortgages in favor of third persons; one of those third persons, by assignment from the original mortgagees, is an appellee in the present matter.
Lease Provision at Issue (as quoted in the record)
- The lease contained a provision governing the ownership of improvements and machinery:
- "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 tho first part on the expiration or abandonment of the land leased."
Legal Issue
- Whether the properties (specifically the machinery, including machines mounted on cement foundations) described in the complaint and levied upon were real property (immovable) by destination or personal property (movable), thus determining the rights of levy, sale, and subsequent ownership.
Applicable Statutory Provision Cited
- Article 334, Civil Code (paragraphs 1 and 5 referenced in the opinion):
- Paragraph 1: Real property consists of "Land, buildings, roads and constructions of all kinds adhering to the soil; * * * * * * *"
- Paragraph 5: Real prope