Berkenkotter v. Cu Unjieng
REITERATIONFacts
The Antecedents: On April 26, 1926, Mabalacat Sugar Co., Inc. (Mabalacat) executed a first mortgage in favor of Cu Unjieng e Hijos (Cu Unjieng) on its sugar central, including all its buildings, improvements, and appurtenances. Subsequently, on October 5, 1926, Mabalacat decided to increase its milling capacity and purchased additional machinery and equipment. B.H. Berkenkotter (Berkenkotter) advanced P25,750 for this purchase, with the understanding that he would be reimbursed upon Mabalacat obtaining an additional loan from Cu Unjieng. Berkenkotter also had an outstanding credit of P22,000 against Mabalacat for unpaid salary. In June 1927, Mabalacat applied for an additional loan from Cu Unjieng, offering the newly acquired machinery and equipment as security, but the loan was not granted. Berkenkotter later claimed ownership of the machinery and equipment. Procedural History: The Court of First Instance of Manila dismissed Berkenkotter's complaint. The Petition: Berkenkotter appealed the dismissal, assigning six alleged errors to the trial court's decision, primarily questioning whether the additional machinery and equipment were subject to the mortgage deed executed in favor of Cu Unjieng.
Issue(s)
Whether the additional machinery and equipment incorporated into the mortgaged sugar central are subject to the mortgage deed. Whether the installation of the machinery and equipment was permanent in character. Whether the agreement by B.A. Green to hold the machinery and equipment as security for Berkenkotter's credit altered its permanent character. Whether the alleged sale of the machinery and equipment to Berkenkotter vested him with ownership.
Ruling
The Supreme Court affirmed the decision of the Court of First Instance, holding that the additional machinery and equipment are subject to the mortgage deed executed in favor of Cu Unjieng e Hijos.
Ratio Decidendi
On whether the additional machinery and equipment are subject to the mortgage deed: The Court held that under Article 1877 of the Civil Code, a mortgage includes all natural accessions and improvements. Citing Bischoff vs. Pomar, the Court reiterated that in a mortgage of real estate, improvements are included, and all objects permanently attached to the mortgaged property, even if placed after the mortgage, are also included. For machinery and equipment to be excluded from a mortgage that explicitly includes improvements, such exclusion must be stipulated by the contracting parties. In this case, no such stipulation was made, and the machinery was essential for the sugar central's operation. On the permanence of the installation: The Court found that the installation of the machinery and equipment was permanent in character. Article 334, paragraph 5, of the Civil Code classifies as real property machinery intended by the owner for use in connection with an industry carried on in a building or land, and expressly adapted to meet the requirements of such trade. The new machinery was installed to increase the capacity and efficiency of the sugar central, making it an essential and principal element for its industrial purpose. Therefore, its incorporation was permanent, as the central itself is permanent. On the effect of the agreement to hold as security: The Court ruled that B.A. Green's agreement with Berkenkotter to hold the machinery and equipment as security for the purchase money and to refrain from mortgaging them did not alter the permanent character of their incorporation with the sugar central. Such an agreement is not incompatible with the permanent character of the machinery, as it could still be subject to a second mortgage or other encumbrances, and it did not negate the fact that they became integral parts of the mortgaged property. On the alleged sale to Berkenkotter: The Court held that the alleged sale of the machinery and equipment to Berkenkotter after their permanent incorporation into the sugar central, while the first mortgage was in force, did not vest Berkenkotter with ownership. Instead, it merely transferred the right of redemption of the vendor (Mabalacat Sugar Co., Inc.), which was subject to the prior rights of the defendants Cu Unjieng e Hijos under their first mortgage.
Main Doctrine
Machinery and equipment installed in a mortgaged sugar central, in lieu of older machinery, for the purpose of carrying out industrial functions and increasing production, constitute a permanent improvement subject to the mortgage. The character of such incorporation is not altered by the purchaser's agreement to hold them as security for the purchase money or by a subsequent sale of the machinery to the supplier of the funds, which only transfers the right of redemption.