STAR TWO INC. v.

PAPER CITY CORP

FACTS:

90-91 Respondent Paper City applied for loands and credit

accommodations by RCBC. The loans were secured by 4 Deeds of
Continuing Chattel Mortgage on its machineries and equipment found
inside its paper plants.

92, a unilateral Cancellation of Deed of Continuing Chattel Mortgage

on Inventory of Merchandise/Stocks in Trade was executed by RCBC
over the merchandise and stocks in trade covered by the continuing
chattel mortgages.

Banks entered into a Mortgage Trust Indenture (MTI) with Paper

City. Hence, Paper City acquired another loan of 170M in addition to
the previous 110M.

Previous loan was partly secured by various parcels of land pursuant

to 5 Deeds of REM.

The new loan of 170M would be secured by the same 5 REM and
additional real and personal properties which covered the
machineries and equipment of Paper City.

The MTI was amended to increase the contributions of RCBC and

UnionBank to 80M and 70M. Hence, they executed a Deed of
Amendment to MTI but still included the machineries and equipment
located in and bolted to and/or forming part of buildings

A Second Supplemental Indenture to the MTI was executed to

incread the amount of the loan from 280M to 408.9M secured vs. the
existing properties composed of land, building, machineries and
equipments and inventories.
Finally, a 3rd Supp. Indenture to increase the loan to 550M with an
additional security composed of a new constructed building and
other improvements, machineries and equipment located in the
existing plant site.

There was the event of an Economic Crises which made it diff for
Paper City to meet the terms of its Obligations leading to defaults.
Hence, RCBC filed a petition for EJ Foreclosure against the REM of 8
parcels of land including all improvements thereon including all the
Supplemental Indentures.

Obligation of 901.8M inclusive of interest and penalty.

Auction and Highest bidder: the 3 Banks.

Paper City; filed a complaint against the banks alleging that the EJ sale
of the prop and plants was void due to lack of prior notice and
attendance of gross and evident bad faith on the part of the creditor
banks.

Alternative, it prayed that the sale is valid, to render the whole

obligation as fully paid and extinguish. And to return 5M as excessive
penalty and the payment of damages and attorney’s fees.

Paper City filed with the trial court a Manifestation with Motion to
Remove and/or Dispose Machinery, reasoning that the
machineries located inside the foreclosed land and building were
deteriorating. It posited that since the machineries were not included
in the foreclosure of the real estate mortgage, it is appropriate that it
be removed from the building and sold to a third party.
Acting on the said motion, the trial court issued an Order denying the
prayer and ruled that the machineries and equipment were included
in the annexes and form part of the MTI.

Paper City filed its MR which was favorably granted by the trial
court with justification that the disputed machineries and equipment
are chattels by agreement of the parties through their inclusion in the
four Deeds of Chattel Mortgage and the deed of cancellation executed
by RCBC was not valid because it was done unilaterally and without
the consent of Paper City.

The CA affirmed the Order.

ISSUE:

Whether the subject machineries and equipment were included in the

mortgage, extrajudicial foreclosure and in the consequent sale.

RULING:

Yes. By contracts, all uncontested in this case, machineries and

equipment are included in the mortgage in favor of RCBC, in the
foreclosure of the mortgage and in the consequent sale on foreclosure
also in favor of petitioner.

Repeatedly, the parties stipulated that the properties mortgaged by

Paper City to RCBC are various parcels of land including the buildings
and existing improvements thereon as well as the machineries and
equipment, which as stated in the granting clause of the original
mortgage, are "more particularly described and listed that is to say,
the real and personal properties listed in Annexes ‘A’ and ‘B’.”

The plain language and literal interpretation of the MTIs must be

applied. The petitioner, other creditor banks and Paper City intended
from the very first execution of the indentures that the machineries
and equipment enumerated in Annexes "A" and "B" are included.
Obviously, with the continued increase in the amount of the loan,
totaling hundreds of millions of pesos, Paper City had to offer all
valuable properties acceptable to the creditor banks.

The MTIs did not describe the equipment and machineries as

personal property. Notably, while "personal" appeared in the
granting clause of the original MTI, the subsequent Deed of
Amendment specifically stated that:
x x x The machineries and equipment listed in Annexes "A" and "B"
form part of the improvements listed above and located on the
parcels of land subject of the Mortgage Trust Indenture and the Real
Estate Mortgage.

Considering that the Indenture which is the instrument of the

mortgage that was foreclosed exactly states through the Deed of
Amendment that the machineries and equipment listed in Annexes
"A" and "B" form part of the improvements listed and located on the
parcels of land subject of the mortgage, such machineries and
equipment are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in the
petition.

The real estate mortgage over the machineries and equipment is even
in full accord with the classification of such properties by the Civil
Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to
the soil;
xxxx
(5) Machinery, receptacles, instruments or implements 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 which tend directly
to meet the needs of the said industry or works;

FELS ENERGY v. PROV. OF BATANGAS

FACTS:

January 1993, NPC entered into a lease contract with Polar Energy
over MW diesel engine power barges in Batangas for a period of 5
years. Subsequently, Polar assigned its rights under the agreement to
FELS. NPC initially opposed.

FELS received an assessment of real property taxes on the barges.

FELS referred the matter to NPC reminding it of its obligation under
the agreement to pay the real estate taxes. NPC sought for
reconsideration of the decision but the motion was denied.

NPC filed a petition to the Local Board Assessment Appeals. The

provincial Assessor averred that the barges were real property for
the purpose of taxation. LBAA still denied the petition filed by NPC
and ordered FELS to pay the taxes.

LBAA Ruling: power plant facilities are considered real property

because they are installed at a specific location with a character of
permanency. The owner of the barges-FELS is a private corporation-
is the one being taxed, not NPC. The agreement will not justify the
exemption of FELS.

FELS then appealed to Central BAA. CBAA rendered it’s decision

finding the power barges exempt from real property tax; since they
are ADE used by it, the power barges are covered by the exemption
under Sect of RA 7160
Held:
YES. The CBAA and LBAA power barges are real property and are
thus subject to real property tax. This is also the inevitable
conclusion, considering that G.R. No. 165113 was dismissed for
failure to sufficiently show any reversible error.

Tax assessments by tax examiners are presumed correct and made in

good faith, with the taxpayer having the burden of proving otherwise.
Besides, factual findings of administrative bodies, which have
acquired expertise in their field, are generally binding and conclusive
upon the Court; we will not assume to interfere with the sensible
exercise of the judgment of men especially trained in appraising
property. Where the judicial mind is left in doubt, it is a sound policy
to leave the assessment undisturbed. We find no reason to depart
from this rule in this case.

Moreover, Article 415 (9) of the New Civil Code provides that “docks
and structures which, though floating, are intended by their nature
and object to remain at a fixed place on a river, lake, or coast” are
considered immovable property. Thus, power barges are categorized
as immovable property by destination, being in the nature of
machinery and other implements intended by the owner for an
industry or work which may be carried on in a building or on a piece
of land and which tend directly to meet the needs of said industry or
work.

Petitioners maintain nevertheless that the power barges are exempt

from real estate tax under Section 234 (c) of R.A. No. 7160 because
they are actually, directly and exclusively used by petitioner NPC, a
government- owned and controlled corporation engaged in the
supply, generation, and transmission of electric power.

We affirm the findings of the LBAA and CBAA that the owner of the
taxable properties is petitioner FELS, which in fine, is the entity being
taxed by the local government. As stipulated under Section 2.11,
Article 2 of the Agreement:

“OWNERSHIP OF POWER BARGES. POLAR shall own the Power

Barges and all the fixtures, fittings, machinery and equipment on the
Site used in connection with the Power Barges which have been
supplied by it at its own cost. POLAR shall operate, manage and
maintain the Power Barges for the purpose of converting Fuel of
NAPOCOR into electricity.”

It follows then that FELS cannot escape liability from the payment of
realty taxes by invoking its exemption in Section 234 (c) of R.A. No.
7160.

Indeed, the law states that the machinery must be actually, directly
and exclusively used by the government owned or controlled
corporation; nevertheless, petitioner FELS still cannot find solace.

LRT v. CBAA (Central Board of Assessment Appeals)

FACTS:

LRTA is a GOCC under EO 603.

LRTA acquired real properties x x x constructed structural

improvements, such as buildings, carriageways, passenger terminal
stations, and installed various kinds of machinery and equipment and
facilities for the purpose of its operations.

It entered a Contract of Mngt with the Meralcro Transit Org subject to

the specific stipulations contained in said agreement, including
payments of real prop taxes.
Respondent assessed the real properties of LRT.

LRT paid its real property taxes on all its real property holdings,
except the carriageways and passenger terminal stations including
the land where it is constructed on the ground that the same are not
real properties under the Real Property Tax Code, and if the same are
real properties, these x x x are for public use/purpose, therefore,
exempt from realty taxation

Respondent City Assessor filed an appeal with the LBAA (Local Board
Of Assessment Appeals) which denied LRT’s appeal, and declared
that carriageways and passenger terminal stations are
improvements, therefore, are real properties.

CA: True, the government owned the real property upon which the
carriageways and terminal stations were built. However, they were
still taxable, because beneficial use had been transferred to
petitioner, a taxable entity.

Main Issue:
May Real Property Taxes be Assessed and Collected?

Petitioner does not dispute that its subject carriageways and stations
may be considered real property under Article 415 of the Civil Code.

However, it resolutely argues that the same are improvements, not of

its properties, but of the government-owned national roads to which
they are immovably attached. They are thus not taxable as
improvements under the Real Property Tax Code. In essence, it
contends that to impose a tax on the carriageways and terminal
stations would be to impose taxes on public roads.

True, petitioner's carriageways and terminal stations are anchored,

at certain points, on public roads. However, it must be emphasized
that these structures do not form part of such roads, since the former
have been constructed over the latter in such a way that the flow of
vehicular traffic would not be impeded. These carriageways and
terminal stations serve a function different from that of the public
roads. The former are part and parcel of the light rail transit (LRT)
system which, unlike the latter, are not open to use by the general
public. The carriageways are accessible only to the LRT trains, while
the terminal stations have been built for the convenience of LRTA
itself and its customers who pay the required fare.