6. BERKENKOTTER v.

CU UNJIENG JML
G.R. No. 41643, July 31, 1935
Villa-real, J.:

Blurb:

Topic: Classifications > Difference between real and personal > With reference to object >
Corporeal

Doctrine: Machinery and equipment intended by the owner to directly meet the needs of their
industry or work are considered immovable or real property. (NCC 415 (5))

SuperSummary: Mabalacat Sugar Co. Inc. (MSCI) obtained a loan from Cu Unjieng e Hijos, which
was secured by a mortgage on its sugar central and all its existing and future improvements. MSCI
decided to increase milling capacity by purchasing additional machinery and equipment. MSCI
President Green borrowed money from Berkenkotter, promising reimbursement once Green obtains
another loan from Cu Unjieng. Green also promised the machinery as security should he fail to
obtain a loan. Using the money loaned by (and credit he owed) Berkenkotter, MSCI purchased the
machinery and equipment. Green applied for an additional loan to Cu Unjieng and offered the
purchased machinery as security, but failed to obtain the loan. Berkenkotter then filed a complaint
against Cu Unjieng at CFI Manila, but this was dismissed; hence, this appeal. Berkenkotter
specifically questioned the lower court’s declaration that the additional machinery were subject to the
mortgage deed. He argued that the installation of the machinery was not permanent, in that Green
offered it up as security for the purchase price he loaned from Berkenkotter. In resolving the case,
the Court first ruled that the machines were real property because they were installed by the
owner for the purpose of carrying out the functions of the sugar central. Therefore, they were
permanent improvements because they are essential elements of the industry and the central would
not be able to carry out its purpose without them. As such, permanent improvements are subject to
the constituted mortgage. Additionally, holding the machinery as security for payment of Green’s
credit to Berkenkotter does not alter their permanent character. Since the machinery are part of the
mortgage, their sale to Berkenkotter would not vest ownership, but only the right to redemption.

Facts:
● April 26, 1926: Mabalacat Sugar Co. Inc (MSCI) obtained a loan from Cu Unjieng e Hijos, which
was secured by a first mortgage on two parcels of land “with all its buildings, improvements, […]
and whatever forms part or is a necessary complement of said sugar-cane mill, [..] now existing
or that may in the future exist in said lots.”
● MSCI decide to increase the capacity of its sugar central by buying additional machinery and
equipment for milling with an estimated cost of P100,000.
● B.A. Green, president of MSCI, proposed to B.H. Berkenkotter the advance of the necessary
amount, promising reimbursement as soon as Green could obtain an additional loan from the
mortgagees (Cu Unjieng).
○ In the letter containing the proposition, Green also made it appear that should he fail to
obtain the loan, the machinery would become security for Berkenkotter, and that Green
was binding himself not to mortgage or encumber the machines until Berkenkotter is fully
reimbursed.
● Berkenkotter agreed and the total amount he loaned to Green added up to P25,750.
● Using the P25k loan plus Berkenkotter’s credit of P22,000 against the corporation for his unpaid
salary, MSCI purchased the additional machinery and equipment.
● June 10, 1927: Green applied for an additional loan of P75,000 to Cu Unjieng and offered the
additional machinery and equipment as security, but failed to obtain this loan.
● Berkenkotter filed a complaint against Cu Unjieng in CFI Manila

1
 ○ This was dismissed on the basis that the additional machinery and equipment are
improvements incorporated with the central, and are thus subject to the mortgage deed
○ Hence, this case.

Issue: WON the lower court erred in declaring the additional machinery and equipment as
improvements, and therefore, subject to the mortgage deed – NO
(Topic related issue: WON the machinery installed on the sugar central for the purpose of carrying
out the latter’s industrial functions is immovable property – YES)

Ruling:
The machinery and equipment constitute immovable property and also permanent improvements
due to their intended purpose; therefore, they are part of the mortgage. As such, no ownership was
vested unto Berkenkotter, only a right to redemption.

Art. 334, par. 5 (now Art. 415 (5)) defines “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” as real
(immovable) property.

The subject machinery and equipment in this case are necessary to the industrial purpose of the
sugar central. Without the machines they use for milling, the sugar central would be unable to
function. “Inasmuch as the central is permanent in character, the necessary machinery equipment
installed for carrying on the sugar industry for which it has been established must necessary be
permanent.”

Art. 1877 (now Art. 2127) of the Civil Code includes improvements in the coverage of a mortgage.
Bischoff v. Pomar also provides that 1) all objects permanently attached to the mortgaged building or
land, although placed after the mortgage was constituted are also included, and that 2) for
machinery and other objects to be excluded from a mortgage, it must be stipulated between the
contracting parties.

Berkenkotter had contended that the installation of the machinery and equipment was not
permanent, inasmuch as Green made it appear in a letter to him asking for an advance where Green
had offered up the machinery as security should he fail to obtain a loan. However, this is not
incompatible with the permanent character of the machinery, since nothing prevents Green from
giving them as security, at least under a second mortgage. (Basically, it would be like Green took out
a second mortgage, but this time specifically on the machines and for Berkenkotter.) Since the
machines (herein recognized as permanent improvements) were purchased after the sugar central
was mortgaged, the sale of the machines do not vest ownership, only right to redemption.

Disposition:
● Wherefore, finding no error in the appealed judgment, it is affirmed in all its parts, with costs to
the appellant. So ordered.
● IOW, the additional machinery and equipment are improvements incorporated with the central,
and are thus subject to the mortgage deed.