PEOPLE’S BANK AND TRUST CO. AND ATLANTIC, GULF AND PACIFIC CO. OF MANILA, PLAINTIFFS AND APPELLANTS, VS. DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION AND CONNELL …

People's Bank and Trust Company versus Dahican Lumber Company

The Case

This is a foreclosure case that became a landmark on the treatment of after acquired properties under a real estate mortgage. The People's Bank and Trust Company and the Atlantic, Gulf and Pacific Company of Manila sued the Dahican Lumber Company, the Dahican American Lumber Corporation, and Connell Brothers Company to foreclose two registered real estate mortgages over a lumber concession in Camarines Norte. The fight centered on machinery, equipment, spare parts, and supplies that the mortgagor bought after the mortgages were signed. The lenders said these fell under the mortgage lien. The suppliers said the mortgages were void as to those goods because they were never registered as chattel mortgages. The case matters because the Supreme Court tells us when movable property becomes immovable by destination, and why a real estate mortgage over an industrial plant reaches later acquisitions without a second registration.

Procedural History

The lenders began foreclosure in the Court of First Instance of Camarines Norte in February 1953. They also asked, ex parte, for a receiver and a writ of preliminary injunction. The court granted both and appointed a receiver, but discharged him upon the defendants' motion. Connell Brothers was later allowed to intervene, and the receiver was reinstated. On the parties' motion, venue was transferred to the Court of First Instance of Manila.

After trial, the Manila court rendered judgment in July 1960. It ordered the Dahican Lumber Company to pay the bank, Atlantic Gulf, Connell Brothers, and the Dahican American Lumber Corporation their respective claims, with interest and attorney's fees. It ordered that the proceeds of the sale of the properties, amounting to 175,000 pesos, be divided between the lenders on one hand and the Dahican American Lumber Corporation and Connell Brothers on the other. A supplementary decision added that if the sums were not paid within ninety days, the mortgaged lands would be sold at public auction. All the parties appealed, and the case reached the Supreme Court.

Facts

In September 1948, Atlantic Gulf, a foreign corporation licensed to do business here, sold and assigned its rights in the Dahican lumber concession to the Dahican Lumber Company for 500,000 dollars, of which only 50,000 dollars was paid. To develop the concession, the lumber company borrowed from the People's Bank, reaching 200,000 pesos by July 1950. It also obtained, through the bank, a loan of 250,000 dollars from the Export-Import Bank of Washington, evidenced by five promissory notes of 50,000 dollars each, executed by both the lumber company and the Dahican American Lumber Corporation.

On July 13, 1950, the lumber company executed a first mortgage in favor of the bank, acting for itself and as trustee for the Export-Import Bank, over five parcels of land in Camarines Norte, with the buildings and improvements and its personal properties at its places of business. On the same date it executed a second mortgage over the same properties in favor of Atlantic Gulf to secure the unpaid balance of 450,000 dollars. Both deeds contained a clause extending the lien to after acquired properties, and both were registered with the Register of Deeds of Camarines Norte. Shares of stock were also pledged to the bank.

When the fifth promissory note matured unpaid, the bank paid the Export-Import Bank, which assigned to it the credit and the first mortgage. The bank then gave the debtors until April 1, 1953 to pay. Meanwhile, after July 1950, the lumber company bought machinery, equipment, spare parts, and supplies in addition to, or in replacement of, what it already used. The bank asked for complete lists, but the company refused. In December 1952, the board of the lumber company resolved to rescind the alleged sales of these goods by Connell Brothers and the Dahican American Lumber Corporation. The lenders demanded cancellation of the rescissions, and when the suppliers refused, foreclosure followed.

Issues

• Whether or not the after acquired properties are covered by and subject to the deeds of mortgage under foreclosure.
• Whether or not the mortgages are valid and binding on those properties despite not being registered under the Chattel Mortgage Law.
• Whether or not the rescission of the sales between the lumber company and the Dahican American Lumber Corporation and Connell Brothers affects the mortgage lien.
• Whether or not the action to foreclose was premature.

Applicable Provisions

The fourth paragraph of both deeds of mortgage provides:

All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools, equipment and other property which the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory of such substituted and subsequently acquired property.

This stipulation is the contractual basis for holding that later acquisitions automatically fall under the lien.

Article 415 of the Civil Code, substantially reproducing Article 334 of the old Civil Code, provides:

Article 415. The following things are immovable property: x x x (5) Machinery, receptacles, instruments or replacements 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 shall tend directly to meet the needs of the said industry or works.

This is the provision that immobilizes the machinery and equipment by destination, so that the real estate mortgage reaches them.

Article 2127 of the Civil Code, substantially reproducing Article 1877 of the old Civil Code, provides:

Article 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person.

This extends the mortgage to improvements and accessions without a new registration.

Ruling

On the first issue, the Court held that the after acquired properties are covered. The fourth paragraph of both deeds is clear: such property "shall immediately be and become subject to the lien" of the mortgages as if already included. The Court called the stipulation common and logical where the collateral is perishable, subject to wear and tear, or meant to be used and replaced, and held it neither unlawful nor immoral, its purpose being to maintain the value of the security.

On the second issue, the Court held the mortgages valid and binding even without registration under the Chattel Mortgage Law. The deeds were executed in July 1950 under the old Civil Code, whose Articles 334 and 1877 are substantially reproduced in Articles 415 and 2127 of the new Civil Code. Because the goods were bought for use in developing the lumber concession, in addition to or in replacement of those already there, they are deemed immobilized in law. Being immovable, the registered real estate mortgages bound them without a second registration as chattel mortgages. The Court distinguished the Davao Sawmill case, where the machinery had been treated as personal property through chattel mortgages, from this case, where both parties agreed the goods would be subject to the real estate mortgage, so both are estopped from denying immobilization.

On the third issue, the Court held the rescission ineffectual. The auditors' report showed that neither the Dahican American Lumber Corporation nor Connell Brothers supplied the goods; Connell Brothers merely acted as purchasing agent and collected a five percent service charge. At most they financed some purchases, and as financiers they cannot claim a right superior to the mortgage lien. The rescission was a desperate attempt to assume the role of unpaid suppliers and claim a vendor's lien.

On the fourth issue, the Court rejected the claim of prematurity. The extension of time to pay was a matter of grace, and the action filed in February 1953 was not premature.

Doctrine

Machinery, receptacles, instruments, or replacements intended by the owner of a tenement for an industry or works carried on in a building or on a piece of land, and tending directly to meet the needs of that industry, are immovable property by destination under Article 415 of the Civil Code. A stipulation in a real estate mortgage that after acquired property used in connection with the premises shall immediately become subject to the lien is valid and automatically binds such property. Because the property is immovable, the registered real estate mortgage binds it without registration under the Chattel Mortgage Law. A party who agreed to such a stipulation is estopped from later treating the property as a chattel. A financier or agent who is not the true vendor cannot claim a vendor's lien superior to the mortgage.

Disposition

The Supreme Court affirmed the judgment of the trial court, holding that the after acquired properties were subject to the mortgages and that the rescission did not defeat the lenders' lien.

Remember This

Memorize this line: property immobilized by destination under Article 415 is reached by a registered real estate mortgage without a second registration as a chattel mortgage. Examiners use this case to test immovables by destination, the after acquired property clause, and estoppel against parties who treated the goods as covered by the mortgage.