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"

1. Office Building
   Building 1, 2, 3, 4, and 5
   Boiler House
   Workers’ Quarter/Restroom
   Canteen
   Guardhouse, Parking Shed, Elevated Guard
   Post and other amenities
2. 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"
3. Power Plants Nos. 1 and 2
   Fabrication Building
   Various Fuel, Water Tanks and Pumps
   Transformers

Annex "B"

4. 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;

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(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;

CONCLUSION

The petition is GRANTED.