CASE DIGEST: PCI Leasing vs. Trojan Metal

G.R. No. 176381 : December 15, 2010

PCI LEASING AND FINANCE, INC., Petitioner, v. TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, and JOHN DOE, Respondents.

CARPIO,J.:


FACTS:

Respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment TMI owned. Hard-pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of saleevidencing TMIs sale to PCILF of various equipments. PCILF and TMI then entered into a lease agreement whereby the latter leased from the former the various equipment it previously owned. The lease agreement required TMI to give PCILF a guaranty deposit which would serve as security for the timely performance of TMIs obligations under the lease agreement, to be automatically forfeited should TMI return the leased equipment before the expiration of the lease agreement. Further, spousesWalfridoandElizabethDizon, as TMIs President and Vice-President, respectively executed in favor of PCILF a Continuing Guaranty of Lease Obligations.Under the continuing guaranty, theDizonspouses agreed to immediately pay whatever obligations would be due PCILF in case TMI failed to meet its obligations under the lease agreement. To obtain additional loan from another financing company,TMI used the leased equipment as temporary collateral.PCILF considered the second mortgage a violation of the lease agreement. PCILF sent TMI a demand letterfor the payment of the latters outstanding obligation. PCILFs demand remained unheeded. PCILF filed with the RTC a complaintagainst TMI, spousesDizon, and John Doe (collectively referred to as respondents hereon) for recovery of sum of money and personal property. The RTC issued the writ of replevin PCILF prayed for, directing the sheriff to take custody of the leased equipment. Not long after, PCILF sold the leased equipment to a third party and collected the proceeds.

The RTC ruled in favor of PCILF. On appeal, the Court of Appeals ruled that the sale with lease agreement was in fact a loan secured by chattel mortgage. It set aside the Decision of the RTC.

ISSUE: Whether or not the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel mortgage.

HELD: Court of Appeals decision is affirmed.

CIVIL LAW: financial lease v. loan secured by chattel mortgage

Leasing shall refer to financial leasing which is a mode of extending credit through a non-cancelable contract under which thelessorpurchases or acquires at the instance of the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business and office machines, and other movable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit, over the lease period. The contract shall extend over an obligatory period during which the lessee has the right to hold and use the leased property and shall bear the cost of repairs, maintenance, insurance, and preservation thereof, but with no obligation or option on the part of the lessee to purchase the leased property at the end of the lease contract. Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in exchange for the latters periodic payment of a fixed amount of rental. In this case, however, TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the parties in this case cannot be deemed to be in the nature of a financial leasing as defined by law.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for reformation of an instrument is ten years. The right of action for reformation accrued from the date of execution of the lease agreement on 8 April 1997. TMI timely exercised its right of action when it filed an answer on 14 February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMIs default, PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILFs sale to a third party of the mortgaged equipment and collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage as creditor-mortgagee. The Court of Appeals correctly ruled that the transaction between the parties was simply a loan secured by a chattel mortgage.

The petition for review isDENIED.

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