“A Loan that Became Real Property”
Facts
Mabalacat Sugar Central (MS Co) decided to improve its sugar cane mill, so it borrowed money from Mr. Berkenkotter. In exchange, MS Co mortgaged the sugar cane mill. When it received the loan, it purchased additional machinery and attached it to the existing sugar central. Again, they used that improved sugar central as security to borrow money from Cu Unjieng. Berkenkotter opposed this because he contends that: (1) The factory improvements made from his money should not be used as security for another loan. (2) He and MS Co had an agreement not to mortgage the sugar central. Court of First Instance Manila ruled in favor of MS Co on the ground that the improvements of the sugar mill are part of real property mortgage. Berkenkotter appealed to the Supreme Court:
Are improvements on machinery part of the building or real property? Yes.
- Article 1877 of the Old Civil Code: “a mortgage includes all… improvements”
- Cea vs. Villanueva: “Mortgage of real estate includes improvements”
If the mortgagor (MS Co) violated his agreement with his creditor (Berkenkotter), will it change the nature of the machinery improvements? No.
- Improvements made on the machinery (attached to the land as essential and principal elements for the industry) automatically converts them to immovable property. (Article 415 of the NCC)
- What is the term for the improvements? “Immovable by incorporation.”
When you lend money to be used by the debtor as improvements, does that make you the owner of the improvements? No.
- A creditor cannot exercise rights of ownership over the proceeds acquired by the money that he lent to his debtor.
- Under Article 415(5) of the NCC, it must be the owner of the machinery that places them on the land or building as an essential and principal element of an industry, to convert such machineries to real property.
English