Star Two v.

Paper City

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 Citys
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. Whether the subject machineries and equipment were considered

real properties and should therefore be included in the extra-judicial
foreclosure which in turn were sold to the banks.
Ruling:
1. Yes
Ratio:
1. Explanation of Answer to Issue 1

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 including buildings and existing improvements
thereon as well as the machineries and equipment.

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 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.