Haystack: People’s Bank v. Dahican Lumber (GR L-17500, 16 May 1967)

People’s Bank v. Dahican Lumber
[G.R. No. L-17500. May 16, 1967.]
En Banc, Dizon (J): 8 concur.

Facts: On 8 September 1948, Atlantic Gulf & Pacific Company of Manila (ATLANTIC) sold and assigned all its right in the Dahican lumber concession to Dahican Lumber Company (DALCO) for P500,000.00 of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank (P200,000.00, as of 13 July 1950). DALCO also obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of Washington D.C. (through 5 promissory notes of $50,000.00 each, maturing on different dates), executed by both DALCO and the Dahican American Lumber Corporation (DAMCO), a foreign corporation and a stockholder of DALCO, all payable to the BANK. As security, DALCO executed on 13 July 1950 a deed of mortgage covering live parcels of land situated in the province of Camarines Norte, together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte in favor of the BANK. On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00. Both deeds contained a provision extending the mortgage lien to properties to be subsequently acquired by the mortgagor. Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations. Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to 1 April 1953 to pay the overdue promissory note.

After 13 July 1950, DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it. Pursuant to the provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO the sum of P452,860.55 as due to Connell Bros. Company (CONNEL) and the sum of P2,151,678.34 to DAMCO. On 16 December 1952, the Board of Directors of DALCO passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed.

On 23 January 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that the agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on 12 February 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the CFI Camarines Norte against DALCO and DAMCO. Upon motion of the parties, the Court, on 30 September 1953, issued an order transferring the venue of the action to the CFI Manila (Civil Case 20987). On 30 August 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one half (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on 15 July 1960, rendered Judgment against Dahican Lumber Co, ordering it to pay the bank, ATLANTIC, CONNEL and DAMCO; and adjudicating the half of the sum realized from sale of the properties unto the plaintiffs; and the other half to both the plaintiffs and defendant DAMCO and CONNELL. The Court further ordered that the cost of the receivership shall be borne by the Bank, Atlantic, Connell and DAMCO. On the following day, the Court issued a supplementary decision ordering the sale at public auction of lands object to the mortgages if DALCO fails to pay the bank and Atlantic. Therafter, all the parties appealed.

The Supreme Court modified the appealed judgment and affirmed in all other respects. With costs.

1. On “after acquired properties,” stipulation is clear and valid
The stipulation in the Deed of Mortgage states that all property of every nature, buildings, machinery, etc. taken in exchange or replacement by the mortgagor "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". No clearer language could have been chosen. Further, such stipulation is common is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. It is only logical in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used (thus subject to wear and tear); they shall be replaced with others to be thereafter acquired by the mortgagor, such understanding either express or implied. If such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract.

2. Registry of chattel mortgage as to affect third party does not apply to the case
Though it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, such law does not apply to the present case (?reason).

3. Whether old or new civil code to be used as guide irrelevant in this case
The mortgages in question were executed on 13 July 1950 with the old Civil Code still in force. There can be no doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens, however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Article 415 and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under consideration.

4. Civil code does not define real property but enumerates them
Article 415 does not define real property but enumerates what are considered as such, among them being 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.

5. Chattels place in real properties mortgaged within the operation of Art 415 (5), and 2127 of the New Civil Code; Illustrative cases: Berkenkotter v. Cu Unjieng and Cu Unjieng Hijos v. Mabalacat Sugar
The chattels, placed in the real properties mortgaged to plaintiffs, came within the operation of Art. 415, paragraph 5 and Art. 2127 of the new Civil Code. This is consistent with previous rulings of the court. (1) In Berkenkotter vs. Cu Unjieng (61 Phil. 663), Article 334 [5] of the old Civil Code gives the character of real property to machinery, liquid containers, instruments or replacements 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; and (2) In Cu Unjieng Hijos vs. Mabalacat Sugar Co. (58 Phil. 439), a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

6. “After acquired properties” immobilized; No need for second registration as Chattel Mortgage in light of existing real estate mortgage
The "after acquired properties" were purchased in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on 13 July 1950. In law, they must be deemed to have been immobilized, with the result that the real estate mortgages involved therein, which were registered as such, did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

7. Davao Sawmill case not on all fours; Intent of parties relevant
The facts in the Davao Sawmill case are not on all fours with the current case. In the former, Davao Sawmill had repeatedly treated the machinery therein involved as personal property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was stated that the characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties. In the present case, the characterization of the "after acquired properties" as real property was made not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus impresses upon the properties the character determined by the parties who must now be held in estoppel to question it.

8. Valdez v. Central Altagracia relevant; Knowledge of suppliers of real mortgage stipulations
Valdez vs. Central Altagracia Inc. (225 U.S. 58) was quoted in the Davao Sawmill case, holding that machinery placed on property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient notice of such stipulation. In the present case, the "after acquired properties" are not disputed to be placed on and be used in the development of its lumber concession, and agreed further that the same shall become immediately subject to the lien constituted by the questioned mortgages. DAMCO and CONNELL, having full notice of such stipulation, must be deemed barred from denying that the properties in question had become immobilized.

9. Connell and Damco not “unpaid suppliers”; They do not have superior right to lien
DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of DALCO. Further, the report of the auditors and its annexes show that neither DAMCO nor CONNELL had supplied any of the goods of which they respectively claimed to be the unpaid seller; that all items were supplied by different parties. If DALCO still owes them any amount in this connection, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure.

10. Defense of “prematurity” does not hold if debtor is insolvent
When the law permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient guaranty, must concede that the causes of action for collection of the notes were not premature. In the present case, plaintiffs, as a matter of grace, conceded an extension of time to pay up to 1 April 1953, months after the action to foreclose was filed 12 February 1953; without debate that DALCO was already insolvent at the date of the time of filing.g

11. Proceeds from the sale of “after acquired properties” and the “undebated properties” awarded exclusively to plaintiff
In view of the Court’s opinion sustaining the validity of the mortgages in relation thereto, that proceeds obtained from the sale of the "after acquired properties" and the "undebated properties" should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the mortgages under foreclosure.

12. Claims for damages supported
The law (Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them, and that any third person who induces another to violate his contract shall be liable for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21 — which may be given retroactive effect (Arts. 2252-53) — or under Arts. 1902 and 2176 of the Old Civil Code. In the present case, the facts clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired properties".

13. Expenses of receivership considered; other damages cannot be computed
Considering that the sale of the real properties subject to the mortgages under foreclosure has not been effected, and considering further the lack of evidence showing that the true value of all the properties already sold was not realized because their sale was under stress, The true elements or factors that should determine the amount of damages that plaintiffs are entitled to recover from defendants are not present. However, all the expenses of the Receivership, which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by all the defendants, jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly and severally, the attorney's fees awarded in the appealed judgment.

	This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.