In Star Two (SPV-AMC), Inc. v. Paper City Corporation of the Philippines, the Supreme Court addressed whether certain machineries and equipment should be considered real or personal property in the context of a foreclosure. The Court ruled that the explicit agreements in the Mortgage Trust Indentures (MTIs) between the parties determined the classification of the properties, overriding any prior chattel mortgages. This decision clarifies that when parties expressly agree to include machineries and equipment as part of real estate mortgages, those properties are subject to foreclosure as real property, offering legal certainty for financial institutions and borrowers alike. This ruling emphasizes the importance of clearly defined terms in mortgage contracts.

From Chattel to Fixture: Deciding the Fate of Paper City’s Machines

Paper City Corporation, a manufacturer of paper products, obtained loans from Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank), and Union Bank of the Philippines. These loans were initially secured by chattel mortgages on Paper City’s machineries and equipment. Later, a Mortgage Trust Indenture (MTI) was executed, which included the same machineries and equipment as security, along with real properties. When Paper City defaulted on its loans, RCBC initiated extrajudicial foreclosure proceedings on the real estate mortgage. The central issue arose when Paper City attempted to remove the machineries and equipment, arguing they were personal property and not included in the foreclosure. The Valenzuela Regional Trial Court (RTC) initially denied this motion but later reversed its decision, siding with Paper City. RCBC then elevated the case to the Court of Appeals (CA), which affirmed the RTC’s decision, prompting RCBC to bring the case before the Supreme Court.

The Supreme Court began its analysis by examining the Mortgage Trust Indentures (MTIs) and their subsequent amendments. The Court emphasized that these contracts explicitly included the machineries and equipment as part of the mortgaged properties. Specifically, the original MTI dated August 26, 1992, stated that Paper City assigned and conveyed, by way of a registered first mortgage, various parcels of land, including buildings and existing improvements, as well as the machinery and equipment. Annexes “A” and “B” of the MTI provided detailed listings of these properties.

Further solidifying this point, the Deed of Amendment to MTI dated November 20, 1992, expressly included as part of the mortgaged properties, by way of a first mortgage, various machineries and equipment owned by Paper City, located in and bolted to and forming part of the buildings. This amendment clarified that the machineries and equipment listed in Annexes “A” and “B” formed part of the improvements located on the parcels of land subject to the Mortgage Trust Indenture and the Real Estate Mortgage. The Second and Third Supplemental Indentures reinforced this inclusion by stating that the increased loan amounts were secured against the existing properties, including land, buildings, machineries, equipment, and inventories.

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’ x x x of which the [Paper City] is the lawful and registered owner.”

The Court then cited the principle that contracting parties have the autonomy to establish any agreements, terms, and conditions they deem advisable, provided they are not contrary to law, morals, or public policy. This principle, as articulated in Gateway Electronics Corp. v. Land Bank of the Philippines, underscores the importance of upholding the parties’ intentions as expressed in their contracts. The Court reiterated the importance of interpreting the intent of the contracting parties as objectively manifested by them. This involves examining whether the contract is ambiguous, and if the terms are clear and unambiguous, the court must interpret the contract as a matter of law.

The Supreme Court found that the MTIs were clear and unambiguous, requiring a plain and literal interpretation. It noted that the petitioner, other creditor banks, and Paper City intended from the very first execution of the indentures that the machineries and equipment enumerated in Annexes “A” and “B” were included in the mortgage. This intention was evident in the continuous increase in the loan amount, which necessitated that Paper City offer all valuable properties acceptable to the creditor banks as security. The CA’s error, according to the Supreme Court, was in focusing on a perceived description of the properties as “personal properties” rather than recognizing their express inclusion in the mortgage agreements. Had the CA examined Annexes “A” and “B,” it would have noted that the properties were described as “Buildings,” “Machineries and Equipments,” and “Additional Machinery and Equipment,” without any reference to “personal property.”

Building on this, the Court emphasized that even if not expressly stated, a mortgage extends to improvements on the property. Article 2127 of the Civil Code provides that a mortgage extends to natural accessions, improvements, growing fruits, and rents or income not yet received when the obligation becomes due. This principle has been consistently upheld in Philippine jurisprudence. In Bischoff v. Pomar and Cia. General de Tabacos, the Court ruled that even if machinery is not expressly included in the mortgage, chattels permanently located in a building for the service of an industry are considered mortgaged with the estate, provided they belong to the owner of said estate. This principle was also applied in Cu Unjieng e Hijos v. Mabalacat Sugar Co., where machineries integral to a sugar central were deemed included in the mortgage.

Furthermore, the Court noted that the extra-judicial foreclosure of the mortgage included the machineries and equipment. While the petition was captioned as a “Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended,” it was based on the MTIs, which expressly included the machineries and equipment as part of the improvements on the real properties. This inclusion was further supported by the Deed of Amendment, which stated that the machineries and equipment listed in Annexes “A” and “B” formed part of the improvements listed and located on the parcels of land subject to the mortgage.

Issue	Chattel Mortgage (Earlier)	Real Estate Mortgage (Later)
Nature of Security	Personal Property	Real Property
Governing Agreements	Deeds of Chattel Mortgage	Mortgage Trust Indentures (MTIs) and Amendments
Effect of Agreements	Initially secured as personal property	Subsequent agreements superseded the chattel mortgages, including machinery as real property

The Court also addressed the fact that the real estate mortgages, which specifically included the machineries and equipment, were subsequent to the chattel mortgages. This sequence was significant because the later agreements superseded the earlier ones. The Court emphasized that the real estate mortgage over the machineries and equipment was in full accord with the classification of such properties under Article 415 of the Civil Code, which defines immovable property to include machinery intended by the owner for an industry or works carried on in a building or on a piece of land. This classification further supported the inclusion of the machineries and equipment in the foreclosure proceedings.

In conclusion, the Supreme Court held that the explicit agreements in the Mortgage Trust Indentures (MTIs) between RCBC and Paper City determined the classification of the machineries and equipment as real property, subject to the real estate mortgage and subsequent foreclosure. The Court reversed the Court of Appeals’ decision, reinstating the trial court’s original order that denied Paper City’s motion to remove or dispose of the machinery.

FAQs

What was the key issue in this case?	The key issue was whether the machineries and equipment of Paper City should be considered real or personal property for purposes of foreclosure, given conflicting chattel and real estate mortgage agreements. The Court determined their classification based on the parties’ explicit agreements in the Mortgage Trust Indentures (MTIs).
What is a Mortgage Trust Indenture (MTI)?	A Mortgage Trust Indenture (MTI) is a legal agreement where a borrower mortgages assets to a trustee, who holds the mortgage for the benefit of multiple lenders. In this case, the MTI outlined the terms of the loan and the properties used as security.
How did the Court interpret the Mortgage Trust Indentures (MTIs) in this case?	The Court interpreted the MTIs based on their plain language, emphasizing that the parties explicitly agreed to include the machineries and equipment as part of the real estate mortgage. This express agreement superseded any prior chattel mortgages.
What is the significance of Article 2127 of the Civil Code in this case?	Article 2127 of the Civil Code states that a mortgage extends to improvements on the property, even if not expressly stated. The Court used this provision to support the inclusion of the machineries and equipment as improvements on the mortgaged land.
How did the prior chattel mortgages affect the Court’s decision?	The Court held that the subsequent real estate mortgages, which specifically included the machineries and equipment, superseded the earlier chattel mortgages. The later agreements reflected the parties’ intent to treat the properties as real property.
What practical lesson can be derived from this ruling?	The practical lesson is the importance of clearly defining the nature and scope of properties included in mortgage agreements. Clear and unambiguous terms can prevent disputes during foreclosure proceedings.
How does this case relate to Article 415 of the Civil Code?	Article 415 of the Civil Code defines immovable property, including machinery intended for an industry or works carried on a building or land. The Court noted that the inclusion of the machineries and equipment in the real estate mortgage was consistent with this classification.
Can parties agree to treat personal property as real property in a mortgage agreement?	Yes, parties can agree to treat personal property as real property in a mortgage agreement, provided the agreement is clear and unambiguous. The Court upheld this principle based on the autonomy of contracting parties to establish their own terms.

In conclusion, the Supreme Court’s decision in Star Two (SPV-AMC), Inc. v. Paper City Corporation of the Philippines reinforces the significance of clear and explicit agreements in mortgage contracts. By upholding the parties’ intentions as expressed in the Mortgage Trust Indentures (MTIs), the Court provided clarity on the classification of properties and the scope of foreclosure proceedings. This case serves as a reminder for both lenders and borrowers to ensure that all terms and conditions are clearly defined and understood, minimizing the potential for disputes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Star Two (SPV-AMC), Inc. v. Paper City Corporation of the Philippines, G.R. No. 169211, March 06, 2013