Haystack: Berkenkotter v. Cu Unjieng (GR 41643, 31 July 1935)

Berkenkotter v. Cu Unjieng
[G.R. No. 41643. July 31, 1935.]
En Banc, Villa-real (J): 4 concur

Facts: On 26 April 1926, the Mabalacat Sugar Company obtained from Cu Unjieng e Hijos, a loan secured by a first mortgage constituted on 2 parcels of land "with all its buildings, improvements, sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever forms part or is a necessary complement of said sugar-cane mill, steel railway, telephone line, now existing or that may in the future exist in said lots.”

On 5 October 1926, the Mabalacat Sugar Company decided to increase the capacity of its sugar central by buying additional machinery and equipment, so that instead of milling 150 tons daily, it could produce 250. The estimated cost of said additional machinery and equipment was P100,000. In order to carry out this plan, B. A. Green, president of said corporation, proposed to the B. H. Berkenkotter, to advance the necessary amount for the purchase of said machinery and equipment, promising to reimburse him as soon as he could obtain an additional loan from the mortgagees, Cu Unjieng e Hijos, and that in case B. A. Green should fail to obtain an additional loan from Cu Unjieng e Hijos, said machinery and equipment would become security therefor, said B. A. Green binding himself not to mortgage nor encumber them to anybody until Berkenkotter be fully reimbursed for the corporation's indebtedness to him.. Having agreed to said proposition made in a letter dated 5 October 1926, B. H. Berkenkotter, on 9 October 1926, delivered the sum of P1,710 to B. A. Green, the total amount supplied by him to B. A. Green having been P25,750. Furthermore, B. H. Berkenkotter had a credit of P22,000 against said corporation for unpaid salary. With the loan of P25,750 and said credit of P22,000, the Mabalacat Sugar Co., Inc., purchased the additional machinery and equipment.

On 10 June 1927, B. A. Green applied to Cu Unjieng e Hijos for an additional loan of P75,000 offering as security the additional machinery and equipment acquired by said B. A. Green and installed in the sugar central after the execution of the original mortgage deed, on 27 April 1927, together with whatever additional equipment acquired with said loan. B. A. Green failed to obtain said loan.

The case facts do not provide for the instance when the case was filed with the lower court, and details of such controversy

The CFI Manila dismissed Berkenkotter’s complaint, with costs. Hence, the appeal.

The Supreme Court affirmed the appealed judgment in all its parts, with costs to the appellant.

1. Mortgage include all natural accessions, improvements, growing fruits and rents not collected
Article 1877 of the Civil Code provides that mortgage includes all natural accessions, improvements, growing fruits, and rents not collected when the obligation falls due, and the amount of any indemnities paid or due the owner by the insurers of the mortgaged property or by virtue of the exercise of the power of eminent domain, with the declarations, amplifications, and limitations established by law, whether the state continues in the possession of the person who mortgaged it or whether it passes into the hands of a third person.

2. Mortgage includes improvements and fixtures
It is a rule, established by the Civil Code and also by the Mortgage Law, with which the decisions of the courts of the United States are in accord, that in a mortgage of real estate, the improvements on the same are included; therefore, all objects permanently attached to a mortgaged building or land, although they may have been placed there after the mortgage was constituted, are also included. (Arts. 110 and 111 of the Mortgage Law, and 1877 of the Civil Code; decision of U.S. Supreme Court in the matter of Royal Insurance Co. vs. R. Miller, liquidator, and Amadeo [26 Sup. Ct. Rep., 46; 199 U.S., 353] as cited in Bischoff vs. Pomar and Compañia General de Tabacos; further cited in Cea vs. Villanueva)

3. Exclusion of machinery from mortgage; necessity of stipulation
In order that it may be understood that the machinery and other objects placed upon and used in connection with a mortgaged estate are excluded from the mortgage, when it was stated in the mortgage that the improvements, buildings, and machinery that existed thereon were also comprehended, it is indispensable that the exclusion thereof be stipulated between the contracting parties (Bischoff vs. Pomar and Compañia General de Tabacos; further cited in Cea vs. Villanueva).

4. Machinery has character of real property
Article 334, paragraph 5, of the Civil Code gives the character of real property to machinery, liquid containers, instruments or implements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade or industry. The installation of a machinery and equipment in a mortgaged sugar central, in lieu of another of less capacity, for the purpose of carrying out the industrial functions of the latter and increasing production, constitutes a permanent improvement on said sugar central and subjects said machinery and equipment to the mortgage constituted thereon (article 1877, Civil Code).

5. Personal security does not alter permanent character of machinery’s incorporation with the central
The fact that the purchaser of the new machinery and equipment has bound himself to the person supplying him the purchase money to hold them as security for the payment of the latter's credit, and to refrain from mortgaging or otherwise encumbering them does not alter the permanent character of the incorporation of said machinery and equipment with the central. The fact that B. A. Green bound himself to Berkenkotter to hold said machinery and equipment as security for the payment of the latter's credit and to refrain from mortgaging or otherwise encumbering them until Berkenkotter has been fully reimbursed therefor, is not incompatible with the permanent character of the incorporation of said machinery and equipment with the sugar central of the Mabalacat Sugar Co., Inc., as nothing could prevent B. A. Green from giving them as security at least under a second mortgage.

6. Creditor not vested with right of ownership but only with right of redemption
The sale of the machinery and equipment in question by the purchaser who was supplied the money, after the incorporation thereof with the mortgaged sugar central, does not vest the creditor with ownership of said machinery and equipment but simply with the right of redemption. Thus, while the mortgage constituted on said sugar central to Cu Unjieng e Hijos remained in force, only the right of redemption of the vendor Mabalacat Sugar Co., Inc., the sugar central with which said machinery and equipment had been incorporated, was transferred thereby, subject to the right of Cu Unjieng e Hijos under the first mortgage.

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