Star Two v. Paper City
Whether the subject machineries and equipment were considered real
Petitioner: Star Two (SPV-AMC), Inc.,
Respondent: Paper City Corporation of the Philippines
Ponente: Perez, J.
Short Facts and Doctrine/s: Paper City obtained loans from RCBC (substituted by
Star Two) secured by a chattel mortgage over Paper City’s machineries and
equipment. This CM was unilaterally cancelled by RCBC. Subsequently, Paper City
entered into a Mortgage Trust Indenture with RCBC and 2 other banks. In the MTI,
Paper City obtained additional loans secured by a deed of real estate mortgage plus
real and personal property which was annexed. This necessarily included the
machineries and equipment of Paper City. Defaulted. Foreclosed. They were arguing
over whether the machineries and equipment are to be considered as real property
and thus included in the foreclosure. RCBC poses that Paper City gave its consent to
consider the disputed machineries and equipment as real properties. Paper City
contends that the machineries and equipment are chattels by agreement thru the
deeds of CM Held: SC said that the parties stipulated in the MTI that the properties
mortgaged are various parcels of land including buildings and existing improvements
thereon as well as the machineries and equipment. The real estate mortgage over the
machineries and equipment is even in full accord with the classification of such
properties by the NCC as immovable property (Art. 415. Par 5. Machinery,
receptacles, instruments or implements…).
Facts:
 Paper City was granted loans and credit accommodations by RCBC. The
loans were secured by Deeds of Continuing Chattel Mortgages on Paper
City's machineries and equipment. However, RCBC unilaterally cancelled
the deeds.
 Subsequently, RCBC, together with Metrobank and Union Bank, entered
into a Mortgage Trust Indenture with Paper City. In the said MTI, Paper City
acquired additional loans secured by Deeds of Real Estate Mortgage, plus
real and personal properties in an annex to the MTI, which covered the
machineries and equipment of Paper City.
 Paper City defaulted. RCBC filed a petition for extra-judicial foreclosure
against the real estate executed by Paper City – including all the
improvements. As highest bidders, the three banks were issued a Certificate
of Sale.
 Paper City filed with the trial court a motion to remove machinery out of the
foreclosed land and building, saying that the same were not included in the
foreclosure of the real estate mortgage.
 RCBC contends that 1.)That Paper City gave its consent to consider the
disputed machineries and equipment as real properties when they signed
the MTI.
 Paper City argued: 1.) The machineries and equipment are chattels by
agreement thru the Deeds of Continuing Chattel Mortgages and they did not
consent to consider the disputed machineries and equipment as real
property. 2) They also contend that the cancellation of the chattel mortgage
was invalid because it was done unilaterally hence such chattel mortgage
remains subsisting.
Issues: 1.
properties and should therefore be included in the extra-judicial foreclosure which in
turn were sold to the banks.
Ruling:
1. Yes Commented [CM3]: If there is only one issue do not put
Ratio:
numbers anymore. This also applies to the ratio.
1. Explanation of Answer to Issue 1 Commented [CM1]: Italics and bold.
 The SC said that repeatedly in the MTI's, the parties stipulated that the
properties mortgaged by Paper City to RCBC are various parcels of land Commented [CM4]: Make sure to start with the number
including buildings and existing improvements thereon as well as the first then use bullets thereafter. If only one ratio, use
machineries and equipment. bullets na lang.
 The MTI is clear. The plain language and literal interpretation of the MTI's
must be applied. The petitioner, other creditor banks, and Paper City
intended from the very first indenture that the machineries and equipment in
the annex in the MTI's are included.
 Considering that the MTI 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 mortgages which specifically included the machineries and Commented [CM2]: Bullet points.
equipments were subsequent to the chattel mortgages. Without doubt, the
real estate mortgages superseded the earlier chattel mortgages.
 The real estate mortgage over the machineries and equipment are 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:
(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;
Disposition: WHEREFORE, the petition is GRANTED. Accordingly, the Decision and
Resolution of the Court of Appeals dated 8 March 2005 and 8 August 2005 upholding
the 15 August 2003 and 1 December 2003 Orders of the Valenzuela Regional Trial
Court are hereby REVERSED and SET ASIDE and the original Order of the trial court
dated 28 February 2003 denying the motion of respondent to remove or dispose of
machinery is hereby REINSTATED.