People's Bank v. Dahican Lumber Company
REITERATIONFacts
The Antecedents: Atlantic Gulf & Pacific Company of Manila (ATLANTIC) sold its lumber concession to Dahican Lumber Company (DALCO) for $500,000.00, with only $50,000.00 paid. DALCO obtained loans from People's Bank & Trust Company (BANK) totaling P200,000.00 and a $250,000.00 loan from Export-Import Bank of Washington D.C., co-signed by Dahican American Lumber Corporation (DAMCO), a stockholder of DALCO. To secure these loans, DALCO executed two deeds of mortgage on July 13, 1950: a first mortgage in favor of the BANK (acting for itself and as trustee for Export-Import Bank) and a second mortgage in favor of ATLANTIC, both covering its properties and including a stipulation for "after acquired properties." Both mortgages were registered. DALCO and DAMCO also pledged shares of stock as security. Upon failure to pay the last promissory note, the BANK paid it and acquired the credit and first mortgage. DALCO subsequently purchased additional machineries and equipment, referred to as "after acquired properties," for its concession. The BANK requested lists of these properties, but DALCO failed to provide them. DALCO's books showed amounts due to Connell Bros. Company (Philippines) (CONNELL), its purchasing agent, and DAMCO. On December 16, 1952, DALCO's Board of Directors passed a resolution rescinding the alleged sales of equipment, spare parts, and supplies by CONNELL and DAMCO to it. The BANK and ATLANTIC demanded cancellation of these rescission agreements, but CONNELL and DAMCO refused. Consequently, the BANK and ATLANTIC commenced foreclosure proceedings on February 12, 1953, and sought a receivership and injunction, which were initially granted but later discharged, then reinstated. CONNELL intervened, claiming ownership of some "after acquired properties." The case was transferred to Manila. The parties agreed to sell all DALCO's machineries, equipment, and supplies for P175,000.00, with half allocated to "undebated properties" and half to "after acquired properties." Procedural History: The Court of First Instance of Camarines Norte (later transferred to Manila) rendered a judgment on July 15, 1960, condemning DALCO to pay sums to the BANK and ATLANTIC, and also to CONNELL and DAMCO. It ordered the distribution of the P175,000.00 proceeds from the sale of properties, with one-half to the plaintiffs and the other half to be adjudicated among the plaintiffs, DAMCO, and CONNELL. A supplementary decision ordered the public auction of lands if sums owed to the BANK and ATLANTIC were not paid within ninety days. All parties appealed. The Petition: Plaintiffs-appellants argued that the "after acquired properties" were subject to their mortgages, that rescission of sales by DAMCO and CONNELL could not prejudice their lien, and that the proceeds from the sale of all properties should have been awarded exclusively to them. They also sought damages for an alleged attempt to defraud them. Defendants-appellants contended that the action was premature, the mortgages were void regarding "after acquired properties" for lack of registration under the Chattel Mortgage Law, the stipulation on "after acquired properties" was merely an executory agreement, and that the proceeds should have been awarded to DAMCO and CONNELL. They also claimed damages for the receivership.
Issue(s)
Whether the "after acquired properties" are covered by and subject to the deeds of mortgage. Whether the mortgages are valid and binding on the "after acquired properties" despite not being registered under the Chattel Mortgage Law. What is the effect of the rescission of sales by DAMCO and CONNELL on the mortgage lien over the "after acquired properties." Whether the action to foreclose the mortgages was premature.
Ruling
The Supreme Court affirmed the appealed judgment with modifications. It ruled that the "after acquired properties" were indeed covered by and subject to the real estate mortgages. The Court held that these properties were immobilized and thus subject to the real estate mortgage lien, rendering separate chattel mortgage registration unnecessary to bind third parties. The rescission of sales by DAMCO and CONNELL was deemed ineffectual as they were not the actual suppliers and had notice of the mortgage stipulation. The action was not premature because DALCO's insolvency led to the forfeiture of the benefit of the period. The proceeds from the sale of the "after acquired properties" and "undebated properties" were to be awarded exclusively to the plaintiffs. The Court remanded the case for determination of damages and ordered defendants to bear receivership expenses and attorney's fees.
Ratio Decidendi
On whether "after acquired properties" are covered by the mortgages: The Court found that the stipulation in the mortgage deeds clearly stated that all property acquired by the mortgagor in exchange or replacement, or constructed, installed, attached, or used in connection with the premises, "shall immediately be and become subject to the lien" of the mortgages. This language left no room for doubt as to the parties' intention to include such properties. Such stipulations are common and logical for maintaining the value of the collateral, especially for perishable or wear-and-tear items intended for use in the mortgagor's business. On the validity and binding effect of mortgages on "after acquired properties" despite lack of chattel mortgage registration: The Court held that the "after acquired properties," consisting of machinery and equipment purchased for the development of the lumber concession, were immobilized under Article 415 (paragraph 5) and Article 2127 of the Civil Code. These articles consider machinery intended for use in an industry on a tenement as real property. Since the real estate mortgages were registered as such, they did not need to be registered again as chattel mortgages to bind the "after acquired properties" and affect third parties. The Court distinguished this case from Davao Sawmill Company vs. Castillo by emphasizing that here, both parties expressly agreed to treat the "after acquired properties" as real property subject to the mortgage lien, creating an estoppel. Furthermore, DAMCO and CONNELL had notice of this stipulation. On the effect of rescission of sales by DAMCO and CONNELL: The Court found that DAMCO and CONNELL were not the actual suppliers of the "after acquired properties." Evidence showed that other parties supplied the goods, and CONNELL acted as a purchasing agent for DALCO, charging a service fee. Their claim to be unpaid sellers was deemed preposterous, especially given DAMCO's status as a stockholder and CONNELL's role as a stockholder and general agent. The rescission of sales was considered a desperate attempt to improve their position, which was ineffectual because they were not unpaid sellers and had prior notice of the mortgage stipulation covering these properties. The Court also noted that a member of DALCO's board, Belden of ATLANTIC, had opposed the rescission. On the prematurity of the foreclosure action: The Court upheld the trial court's finding that the action was not premature. Although DALCO was granted an extension to pay until April 1, 1953, the debtor lost the benefit of the period under Article 1198 of the Civil Code because it was insolvent and failed to provide adequate guaranty or security. Evidence, including a board resolution stating DALCO was "without funds, neither does it expect to have any funds in the foreseeable future," supported the finding of insolvency at the time the action was filed. The inadequacy of the security was evident from the disparity between the total obligations and the value of the properties.
Main Doctrine
Properties acquired by a mortgagor after the execution of a real estate mortgage, which are intended for use in the industry or works carried on in the mortgaged premises, are considered immobilized and subject to the lien of the real estate mortgage, even if they are not registered as chattel mortgages, provided the parties intended them to be part of the security. Rescission of sales of such properties by third parties claiming to be unpaid sellers is ineffective against the prior mortgage lien if the third parties are not the actual suppliers and had notice of the mortgage stipulation.