MAKATI LEASING and FINANCE personal property for purposes of executing a chattel

CORPORATION, petitioner, vs. WEAREVER TEXTILE mortgage thereon as long as the parties to the
MILLS, INC., and HONORABLE COURT OF contract so agree and no innocent third party will be
APPEALS, respondents. prejudiced thereby, there is absolutely no reason why
a machinery, which is movable in its nature and
To obtain financial accommodations from Makati Leasing and becomes immobilized only by destination or purpose,
Finance Corporation, Wearever Textile Mills, Inc. discounted may not be likewise treated as such. This is really
and assigned several receivables with the former under a because one who has so agreed is estopped from
Receivable Purchase Agreement. To secure the collection of denying the existence of the chattel mortgage.
the receivables assigned, Wearever executed a Chattel
Mortgage over certain raw materials inventory as well as a - It must be pointed out that the characterization of the
machinery described as an Artos Aero Dryer Stentering subject machinery as chattel by the private
Range. When Wearever defaulted, MLFC filed a petition for respondent is indicative of intention and impresses
extrajudicial foreclosure of the properties mortgage to it. upon the property the character determined by the
However, the Deputy Sheriff assigned to implement the parties.
foreclosure failed to gain entry into Wearever’s premises and
was not able to effect the seizure of the aforedescribed - Private respondent contends that estoppel cannot
machinery. MLFC thereafter filed a complaint for judicial apply against it because it had never represented nor
foreclosure with the Court of First Instance of Rizal. agreed that the machinery in suit be considered as
personal property but was merely required and
After several incidents, the lower court issued an order lifting dictated on by herein petitioner to sign a printed form
the restraining order for the enforcement of the writ of seizure of chattel mortgage which was in a blank form at the
and an order to break open the premises of Wearever to time of signing. This contention lacks persuasiveness.
enforce said writ. The Court of Appeals set aside the Orders of As aptly pointed out by petitioner and not denied by
the lower court and ordered the return of the drive motor the respondent, the status of the subject machinery
seized by the sheriff pursuant to said Orders, after ruling that as movable or immovable was never placed in issue
the machinery in suit cannot be the subject of replevin, much before the lower court and the Court of Appeals
less of a chattel mortgage, because it is a real property except in a supplemental memorandum in support of
pursuant to Article 415 of the new Civil Code, the same being the petition filed in the appellate court. Moreover,
attached to the ground by means of bolts and the only way to even granting that the charge is true, such fact alone
remove it would be to drill out or destroy the concrete floor, the does not render a contract void ab initio, but can only
reason why all that the sheriff could do to enforce the writ was be a ground for rendering said contract voidable, or
to take the main drive motor of said machinery. The appellate annullable pursuant to Article 1390 of the new Civil
court rejected petitioner's argument that private respondent is Code, by a proper action in court. There is nothing on
estopped from claiming that the machine is real property by record to show that the mortgage has been annulled.
constituting a chattel mortgage thereon. Neither is it disclosed that steps were taken to nullify
the same. On the other hand, as pointed out by
WON the machinery in suit is real or personal property petitioner and again not refuted by respondent, the
from the point of view of the parties, with petitioner latter has indubitably benefited from said contract.
arguing that it is a personality, while the respondent Equity dictates that one should not benefit at the
claiming the contrary – REAL PROPERTY. expense of another. Private respondent could not now
therefore, be allowed to impugn the efficacy of the
- Tumalad v. Vicencio: Although there is no specific chattel mortgage after it has benefited therefrom,
statement referring to the subject house as personal
property, yet by ceding, selling or transferring a - From what has been said above, the error of the
property by way of chattel mortgage defendants- appellate court in ruling that the questioned
appellants could only have meant to convey the machinery is real, not personal property, becomes
house as chattel, or at least, intended to treat the very apparent.
same as such, so that they should not now be allowed
to make an inconsistent stand by claiming otherwise. o Moreover, the case of Machinery and
It is the defendants-appellants themselves, as Engineering Supplies, Inc. v. CA, 96 Phil. 70,
debtors-mortgagors, who are attacking the validity of heavily relied upon by said court is not
the chattel mortgage in this case. The doctrine of applicable to the case at bar, the nature of
estoppel therefore applies to the herein defendants- the machinery and equipment involved
appellants, having treated the subject house as therein as real properties never having been
personality. disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly,
- If a house of strong materials, like what was involved the Tumalad case bears more nearly perfect
in the above Tumalad case, may be considered as
 parity with the instant case to be the more accounts, it agrees to do
controlling jurisprudential authority. as agent and
representative of the
WHEREFORE, the questioned decision and resolution of the Assignee and in trust for
Court of Appeals are hereby reversed and set aside, and the said Assignee
Orders of the lower court are hereby reinstated, with costs  The Assignor guarantees
against the private respondent. the existence and legality
of said accounts
Manila Banking Corporation v. Teodoro receivable, and the due
and punctual payment
thereof unto the
assignee, ... on
DISPUTED MATTER: demand, ... and further,
that Assignor warrants the
WON the Deed of Assignment of Receivables executed by the Teodoros in favor of MBC have the solvency effect of and credit
extinguishing the loan – NO. The Deed clearly stipulated that it will stand as a CONTINUING GUARANTY for future
worthiness of each and
loans that may be contracted by the Teodoros from MBC. every account.
FAST SUMMARY:  The Assignor does hereby
guarantee the payment
Anastacio Teodoro Jr. executed a Deed of Assignment of Receivables in favor of Manila Banking Corporation. when It due
is on all sums
stipulated in the Deed that, among others, the title and right of possession to the receivables are retained payable by under the
Teodoro. Additionally, said Deed will stand as a CONTINUING GUARANTY for future loans that may be contracted contracts giving rise to the
by the Teodoros. accounts receivable ...
including reasonable
Years later, Anastacio Jr., his father, and his wife contracted loans from the MBC. Because these loans were fees in enforcing
attorney's
unpaid, Manila Banking Corp. filed a collection suit against all three, but because the father died, only Anastacio Jr.
any rights against the
and his wife were sued as defendants. The CFI of Manila ruled in favor of the bank, ordering Anastacio anddebtorshis wife of the assigned
to pay. They appealed to the CA, but because the issue raised was a pure question of law, the case was forwarded
accounts receivable and
to the SC for resolution. will pay upon demand, the
(See above for disputed matter.) Petition DISMISSED. entire unpaid balance of
said contract in the event
of non-payment by the
 1994 Deed of Assignment said debtors of any
o Anastacio Jr. executed a Deed of monthly sum at its due
Assignment of Receivables from the date or of any other default
Emergency Employment Administration by said debtors
(see Historical Context below).  This Assignment shall also
 Purpose: For and in consideration stand as a continuing
of certain credits, loans, overdrafts guarantee for any and all
and other credit accommodations whatsoever there is or in
extended to the Teodoros as the future there will be
security for the payment of said justly owing from the
sum and the interest thereon. Assignor to the
 In this DoA, the Teodoros remise, Assignee ...
release and quitclaim all its rights,  The April 1966 PN
title, and interest in and to the o The Anastacio Jr., Anastacio Sr., and
accounts receivables. Grace Anna Teodoro executed a
 Additional stipulations: (Anastacio promissory note in favor of Manila Banking
as Assignor, Manila Banking Corp. Corporation (MBC).
as Assignee)  Amount: P10,420
 The title and right of  Payable in 120 days
possession to said  12% interest per annum
accounts receivable is to o They failed to pay despite repeated
remain in the assignee, demands.
and it shall have the right  By then, the loan stood at
to collect the same from P15,137.11 including interest and
the debtor, and service charge.
whatsoever the Assignor  The May and June 1966 PNs
does in connection with o Later, Anastacio Jr. and Anastacio Sr.
the collection of said executed two more promissory notes.
  Amounts: P8,000 (May) and 1,000 o (No explanation as to the discussion of the
(June) issues.)
 Payable in 120 days o The CFI ruled IN FAVOR of MBC, and
 12% interest per annum AGAINST the Teodoros
o Father and son made partial payment on the  CA
May PN but none on the June PN o The Teodoros raised a single assignment of
 By then, the loan stood at error, i.e., that the decision of the CFI
P8,934.74 including interest and amounts to a judicial remaking of the
service charge. contract between the parties and therefore is
 For both PNs a violation of law; hence tantamount to lack
o It was stipulated that any interest due if not or excess of jurisdiction
paid at the end of every month shall be o Because this issue raised involves a pure
added to the total amount then due, the question of law, it was forwarded to the SC.
whole amount to bear interest at the rate of
12% per annum until fully paid. ISSUES/HELD:
o In case of collection through an attorney-at- ● WON the 1994 Deed of Assignment has the effect
law, the makers shall, jointly and severally, of payment of all the loans contracted by the
pay 10% of the amount over-due as Teodoros from MBC – NO. The Deed stipulated that
attorney's fees, which will not be less than it will stand as a CONTINUING GUARANTY for future
P200.00. loans that may be contracted by the Teodoros from
 Collection suit MBC.
o MBC filed the action.
 Originally against Anastacio Jr., o (See definition of “assignment of credit” in
Anastacio Sr., and Grace Ann the Notes below)
 When Anastacio Sr. died, the case
against him was dismissed. o The assignment of receivables executed
 Amounts claimed: by Anastacio Jr. DID NOT transfer the
 P15,037.11 and P8,394.7 ownership of the receivables to MBC and
from the PNs release the Teodoros from their loans.
 10% of the amounts due
as attorney’s fees ▪ The Deed of Assignment provided
 From the stipulations of fact that it was for and in consideration
o MBC admits that it extended loans to the of certain credits, loans, overdrafts,
Teodoros because of the EEA. and their credit accommodations in
 (See Historical Context for EEA) the sum of P10,000.00 extended to
 The EEA contracted with the the Teodoros by MBC, and as
Teodoros for the fabrication of security for the payment of said
fishing boats. sum and the interest thereon
 Later on, the EEA got dissolved and
was replaced by the Philippine ▪ The Teodoros as assignors, remise,
Fisheries Commission (PFC).
release, and quitclaim to MBC all
o The non-payment of the PNs by the
their rights, title and interest in and
Teodoros was because the PFC did not pay to the accounts receivable
the Teodoros for the fishing boats. assigned.
o Even if MBC demanded directly from the
PFC, no collection was effected.
▪ It was further stipulated that the
 CFI of Manila assignment will also stand as a
continuing guaranty for future loans
o The issues raised were: and correspondingly the
assignment shall also extend to all
 WON MBC’s claim is already the accounts receivable the
considered paid by the 1994 Deed Teodoros will obtain in the future,
of Assignment of Receivables until the consideration on the loans
shall have been fully paid.
 WON it is MBC who should directly
sue the PFC for collection. o The character of the transactions
between the parties is not, however,
determined by the language used in the
document but by their intention.
 ▪ In case of doubt as to whether a Teodoros – NO. The Teodoros are the principal
transaction is a pledge or a debtors of MBC, and not mere guarantors.
dation in payment, the
presumption is in favor of o Their obligation under the PNs not having
pledge, the latter being the lesser been released by the assignment of
transmission of rights and receivables, the Teodoros remain as the
interests. principal debtors of MBC rather than mere
guarantors.
▪ In People’s Bank v. Odom, the
Court ruled that an assignment to ▪ The deed of assignment merely
guarantee an obligation is in guarantees said obligations.
effect a mortgage and not an
absolute conveyance of title ▪ That the guarantor cannot be
which confers ownership on the compelled to pay the creditor
assignee. unless the latter has exhausted all
the property of the debtor, and has
o The claim of the Teodoros that the Deed resorted to all the legal remedies
of Assignment is a QUITCLAIM, NOT against the debtor, under Article
MERE GUARANTY, is UNTENABLE. 2058 of the New Civil Code does
not therefore apply to them.
▪ Definitely, the assignment of the
receivables did not result from a ▪ It is of course of the essence of a
sale transaction. It cannot be said contract of pledge or mortgage that
to have been constituted by virtue when the principal obligation
of a dation in payment for the becomes due, the things in which
Teodoros’ loans with the bank the pledge or mortgage consists
evidenced by the PNs because at may be alienated for the payment to
the time the deed of assignment the creditor (Article 2087, New Civil
was executed, said loans were non- Code).
existent yet.
● But in the instant case, the
▪ At most, it was a DATION IN Teodoros are both the
PAYMENT for P10,000.00, the principal debtors and the
amount of credit from MBC pledgors or mortgagors.
indicated in the deed of Resort to one is, therefore,
assignment. At the time the resort to the other.
assignment was executed, there
was no obligation to be o MBC already tried to collect against the PFC.
extinguished except the amount of
P10,000.00.
▪ The Office of the President
disapproved the claim.
▪ Moreover, in order that an
obligation may be extinguished by
▪ The receivable became virtually
another which substitutes the same,
worthless leaving the Teodoros'
it is imperative that it be so declared
loans from MBC unsecured.
in unequivocal terms, or that the old
and the new obligations be on
every point incompatible with each DISPOSITIVE:
other. Petition DISMISSED. CFI Decision AFFIRMED.

FELICIANO, J.,  concurring:
o Obviously, the Deed was intended as
collateral security for the bank loans of
the Teodoros, as a continuing guaranty  In addition to the statement above that “the
for whatever sums would be owing to character of the transactions between the parties
MBC, as stated in the Deed. is not, however, determined by the language used
in the document but by their intention”:
● WON MBC must first exhaust all legal remedies
against PFC before it can proceed against the o This statement is basically NOT
EXCEPTIONABLE, so far as it goes.
o However, the intent of the parties to the  Without such formally
transaction is to be determined in the first unlimited conveyance of
instance, by the VERY LANGUAGE which title, the assignee would
they use. have to treat the deed of
assignment as no more
 The deed of assignment contains than a deed of pledge or of
language which suggest that the chattel mortgage.
parties intended to effect a
complete alienation of title to and  In other words, should the
rights over the receivables which assignee seek to realize
are the subject of the assignment. upon the security given to
him through the deed of
 This language is comprised of assignment (which would
works like "remise," "release and then have to comply with
quitclaim" and clauses like "the title the documentation and
and right of possession to said registration requirements
accounts receivable is to remain in of a pledge or chattel
said assignee" who "shall have the mortgage), the assignee
right to collect directly from the would have to foreclose
debtor." upon the securities or
credits assigned and place
 The same intent is also suggested them on public sale and
by the use of the words "agent and there acquire the same.
representative of the assignee" in
referring to the assignor.  It should be recalled that
under the principle which
o Although in its form, the Deed partakes of forbids a pactum
the nature of a complete alienation of the commisorium Article 2088,
receivables assigned, such form should be Civil Code), a mortgagee
taken in conjunction with, and indeed must or pledgee is prohibited
be qualified and controlled by, other from simply taking and
language showing an intent of the parties appropriating the personal
that title to the receivables shall pass to the property turned over to
assignee for the limited purpose of securing him as security for the
another, principal obligation owed by the payment of a principal
assignor to the assignee. obligation. A deed of
assignment by way of
security avoids the
 Title moves from assignor to
necessity of a public sale
assignee but that title is defeasible
impose by the rule
being designed to collateralize the
on pactum commisorium,
principal obligation.
by in effect placing the
sale of the collateral up
 The assignee is burdened with an front.
obligation of taking the proceeds of
the receivables assigned and
o The deed of assignment of receivables
applying such proceeds to the
combines elements of both a complete or
satisfaction of the principal
absolute alienation of the credits being
obligation and returning any
assigned and a security arrangement to
balance remaining thereafter to the
assure payment of a principal obligation.
assignor.

 Where there is nothing to indicate

 The parties gave the deed of
that the parties intended the deed
assignment the form of an
of assignment to function as a
ABSOLUTE CONVEYANCE OF
security device, it would follow that
TITLE OVER THE RECEIVABLES
the simple absolute conveyance
assigned, essentially for the
embodied in the deed of
convenience of the assignee.
assignment would be operative; the
assignment would constitute
 essentially a mode of payment the assignee's request to encash her time deposit certificates
or dacion en pago. and obtaining her verbal conformity thereto, the Bank agreed
to encash the certificates. It delivered to Cams Trading the
 In order that a deed of assignment sum of P283,737.75 only, as one time deposit certificate (No.
of receivables which is in form an 0048120954) lacked the proper signatures. Upon being
absolute conveyance of title to the informed of the encashment, Mrs. Chu demanded from the
credits being assigned, may be Bank and Cams Trading that her time deposit be restored.
qualified and treated as a security When neither complied, she filed a complaint to recover the
arrangement, language to such sum of P283,737.75 from them.
effect must be found in the
document itself and that language, The trial court dismissed the complaint for lack of merit. Chu
precisely, is embodied in the deed appealed to the Court of Appeals (CA-G.R. CV No. 03269)
of assignment in the instant case. which affirmed the dismissal of her complaint.

WON the encashment of her time deposit certificates is

DEFINITION OF TERMS:
a pactum commissorium – NO.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or donation, and without- the The
needCA found that ofthe
of the consent thedeeds
debtor,of assignment were
contracts of pledge, but, as the collateral was also
transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it
money or an exchange of "peso for peso," the
to the same extent as the assignor could have enforced it against the debtor.
provision in Article 2112 of the Civil Code for the sale
of the thing pledged at public auction to convert it into
HISTORICAL CONTEXT: money to satisfy the pledgor's obligation, did not have
to be followed. All that had to be done to convert the
The Emergency Employment Administration, under the Office of the President of the Philippines,
pledgor's time depositis certificates
responsible into cash was to
for planning out and helping to execute an emergency public employment program present them to the bankmaximum
designed to create for encashment after due
employment opportunities in the following government-financed projects:notice large-scale land clearance and
to the debtor.
establishment of agricultural estates; agricultural extension; promotion of - cottage industries; of
The encashment conservation
the depositand certificates was not
reforestation of forest resources; public works projects which promote economic growth, such
a pacto commissorio which as ispower
prohibited under Art.
development projects, national and communal irrigation, river control and drainage;
2088 airports andCode.
of the Civil ports construction
and improvements; shore protection; construction and maintenance of highwayso andA pacto feeder roads connecting a provision for
commissorio is
agricultural areas with market centers.
the automatic appropriation of the pledged or
mortgaged property by the creditor in
payment of the loan upon its maturity. The
VICTORIA YAU CHU, assisted by her husband MICHAEL prohibition against a pacto commissorio is
CHU, petitioners, vs. HON. COURT OF APPEALS, FAMILY intended to protect the obligor, pledgor, or
SAVINGS BANK and/or CAMS TRADING ENTERPRISES, mortgagor against being overreached by his
INC., respondents. creditor who holds a pledge or mortgage
over property whose value is much more
than the debt.
Since 1980, Victoria Yau Chu, had been purchasing cement on
o Where, as in this case, the security for the
credit from CAMS Trading Enterprises, Inc.. To guaranty
payment for her cement withdrawals, she executed in favor of debt is also money deposited in a bank, the
Cams Trading deeds of assignment of her time deposits in the amount of which is even less than the debt, it
total sum of P320,000 in the Family Savings Bank. Except for was not illegal for the creditor to encash the
the serial numbers and the dates of the time deposit time deposit certificates to pay the debtors'
certificates, the deeds of assignment, which were prepared by overdue obligation, with the latter's consent.
her own lawyer, uniformly provided —
WON the obligations secured by her time deposits had
... That the assignment serves as a collateral already been paid – FACTUAL QUESTION.
or guarantee for the payment of my
obligation with the said CAMS TRADING - Whether the debt had already been paid as now
ENTERPRISES, INC. on account of my alleged by the debtor, is a factual question which the
cement withdrawal from said company, per Court of Appeals found not to have been proven for
separate contract executed between us. the evidence which the debtor sought to present on
appeal, were receipts for payments made prior to July
Cams Trading notified the Bank that Mrs. Chu had an unpaid 18, 1980.
account with it in the sum of P314,639.75. It asked that it be - Since the petitioner signed on July 18, 1980 a letter
allowed to encash the time deposit certificates which had been admitting her indebtedness to be in the sum of
assigned to it by Mrs. Chu. After verbally advising Mrs. Chu of P404,500, and there is no proof of payment made by
 her thereafter to reduce or extinguish her debt, the RTC granted the prayer of PCILF in its complaint. The RTC
application of her time deposits, which she had ruled that the lease agreement must be presumed valid as the
assigned to the creditor to secure the payment of her law between the parties even if some of its provisions
debt, was proper. The Court of Appeals did not constituted unjust enrichment on the part of PCILF. The CA
commit a reversible error in holding that it was so. ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. Since PCILF sold the equipment
WHEREFORE, the petition for review is denied. Costs against to a third party for ₱1,025,000.00 and TMI paid PCILF a
the appellant. guaranty deposit of ₱1,030,000.00, PCILF had in its hands the
sum of ₱2,055,250.00, as against TMI’s remaining obligation of
PCI LEASING AND FINANCE, INC., Petitioner, vs. TROJAN ₱888,423.48, or an excess of ₱1,166,826.52, which should be
METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, returned to TMI in accordance with Section 14 of the Chattel
ELIZABETH DIZON, and JOHN DOE, Respondents. Mortgage Law. The Court of Appeals set aside the Decision of
the RTC. The Court of Appeals entered a new one dismissing
PCILF’s complaint and directing PCILF to pay TMI, by way of
Sometime in 1997, Trojan Metal Industries, Inc. (TMI) came to
refund, the amount of ₱1,166,826.52.
petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a
loan. Instead of extending a loan, PCILF offered to buy various
equipment TMI owned, namely: a Verson double action WON the sale with lease agreement the parties entered
hydraulic press with cushion, a Hinohara powerpress 75-tons into was a financial lease or a loan secured by chattel
capacity, a USI-clearing powerpress 60-tons capacity, a mortgage – LOAN.
Watanabe powerpress 60-tons capacity, a YMGP powerpress
30-tons capacity, a YMGP powerpress 15-tons capacity, a - Since the lease agreement in this case was executed
lathe machine, a vertical milling machine, and a radial drill. on 8 April 1997, Republic Act No. 5980 (RA 5980),
Hard-pressed for money, TMI agreed. PCILF and TMI otherwise known as the Financing Company Act,
immediately executed deeds of sale evidencing TMI’s sale to governs as to what constitutes financial leasing.
PCILF of the various equipment in consideration of the total Section 1, paragraph (j) of the New Rules and
amount of ₱ 2,865,070.00. Regulations to Implement RA 5980 defines financial
leasing as follows:
PCILF and TMI then entered into a lease agreement, whereby
the latter leased from the former the various equipment it o LEASING shall refer to financial leasing
previously owned. Pursuant to the lease agreement, TMI which is a mode of extending credit through
issued postdated checks representing 24 monthly installments. a non-cancelable contract under which the
The lease agreement required TMI to give PCILF a guaranty lessor purchases or acquires at the instance
deposit of ₱1,030,350.00, which would serve as security for of the lessee heavy equipment, motor
the timely performance of TMI’s obligations under the lease vehicles, industrial machinery, appliances,
agreement, to be automatically forfeited should TMI return the business and office machines, and other
leased equipment before the expiration of the lease movable property in consideration of the
agreement. Further, spouses Walfrido and Elizabeth Dizon, as periodic payment by the lessee of a fixed
TMI’s President and Vice-President, respectively executed in amount of money sufficient to amortize at
favor of PCILF a Continuing Guaranty of Lease least 70% of the purchase price or
Obligations. Under the continuing guaranty, the Dizon spouses acquisition cost, including any incidental
agreed to immediately pay whatever obligations would be due expenses and a margin of profit, over the
PCILF in case TMI failed to meet its obligations under the lease period. The contract shall extend over
lease agreement. an obligatory period during which the lessee
has the right to hold and use the leased
To obtain additional loan from another financing company, TMI property and shall bear the cost of repairs,
used the leased equipment as temporary collateral. PCILF maintenance, insurance, and preservation
considered the second mortgage a violation of the lease thereof, but with no obligation or option on
agreement. PCILF sent TMI a demand letter for the payment of the part of the lessee to purchase the leased
the latter’s outstanding obligation. PCILF’s demand remained property at the end of the lease contract.
unheeded.
- The above definition of financial leasing gained
PCILF filed in the Regional Trial Court a complaint against statutory recognition with the enactment of Republic
TMI, spouses Dizon, and John Doe for recovery of sum of Act No. 8556 (RA 8556), otherwise known as the
money and personal property with prayer for the issuance of a Financing Company Act of 1998. Section 3(d) of RA
writ of replevin. The RTC issued the writ of replevin PCILF 8556 defines financial leasing as:
prayed for, directing the sheriff to take custody of the leased
equipment. Not long after, PCILF sold the leased equipment to o a mode of extending credit through a non-
a third party and collected the proceeds amounting to cancelable lease contract under which the
₱1,025,000.00. lessor purchases or acquires, at the instance
 of the lessee, machinery, equipment, motor mortgage. PCILF’s sale to a third party of the
vehicles, appliances, business and office mortgaged equipment and collection of the proceeds
machines, and other movable or immovable of the sale can be deemed in the exercise of its right
property in consideration of the periodic to foreclose the chattel mortgage as creditor-
payment by the lessee of a fixed amount of mortgagee.
money sufficient to amortize at least seventy
(70%) of the purchase price or acquisition WON PCILF should pay TMI, by way of refund, the amount
cost, including any incidental expenses and of ₱1,166,826.52 – YES.
a margin of profit over an obligatory period of
not less than two (2) years during which the - The Court of Appeals should have taken into account
lessee has the right to hold and use the the proceeds of the sale to PCILF less the guaranty
leased property with the right to expense the deposit paid by TMI. After deducting payments made
lease rentals paid to the lessor and bears the by TMI to PCILF, the balance plus applicable interest
cost of repairs, maintenance, insurance and should then be applied against the aggregate cash
preservation thereof, but with no obligation already in PCILF’s hands.
or option on his part to purchase the leased
property from the owner-lessor at the end of
- Records show that PCILF paid TMI ₱2,865,070.00 as
the lease contract.
consideration for acquiring the mortgaged equipment.
In turn, TMI gave PCILF a guaranty deposit of
- Thus, in a true financial leasing, whether under RA ₱1,030,350.00. Thus, the amount of the principal
5980 or RA 8556, a finance company purchases on loan was ₱1,834,720.00, which was the net
behalf of a cash-strapped lessee the equipment the amount actually received by TMI (proceeds of the
latter wants to buy but, due to financial limitations, is sale of the equipment to PCILF minus the
incapable of doing so. The finance company then guaranty deposit). Against the principal loan of
leases the equipment to the lessee in exchange for ₱1,834,720.00 plus the applicable interest should be
the latter’s periodic payment of a fixed amount of deducted loan payments, totaling
rental. ₱1,717,091.00. Since PCILF sold the mortgaged
equipment to a third party for ₱1,025,000.00, the
- In the present case, since the transaction between proceeds of the said sale should be applied to offset
PCILF and TMI involved equipment already owned by the remaining balance on the principal loan plus
TMI, it cannot be considered as one of financial applicable interest.
leasing, as defined by law, but simply a loan secured
by the various equipment owned by TMI. - However, the exact date of the sale of the mortgaged
equipment, which is needed to compute the interest
- Articles 1359 and 1362 of the Civil Code provide: on the remaining balance of the principal loan, cannot
be gleaned from the facts on record. We thus remand
o Art. 1359. When, there having been a the case to the RTC for the computation of the total
meeting of the minds of the parties to a amount due from the date of demand on 8 December
contract, their true intention is not expressed 1998 until the date of sale of the mortgaged
in the instrument purporting to embody the equipment to a third party, which amount due shall be
agreement, by reason of mistake, fraud, offset against the proceeds of the sale.
inequitable conduct, or accident, one of the
parties may ask for the reformation of the - In the absence of stipulation, the applicable interest
instrument to the end that such true intention due on the remaining balance of the loan is the legal
may be expressed. rate of 12% per annum, computed from the date
PCILF sent a demand letter to TMI on 8 December
o Art. 1362. If one party was mistaken and the 1998. No interest can be charged prior to this date
other acted fraudulently or inequitably in because TMI was not yet in default prior to 8
such a way that the instrument does not December 1998. The interest due shall also earn
show their true intention, the former may ask legal interest from the time it is judicially demanded,
for the reformation of the instrument. pursuant to Article 2212 of the Civil Code, which
provides:
- Hence, had the true transaction between the parties
been expressed in a proper instrument, it would have o Art. 2212. Interest due shall earn legal
been a simple loan secured by a chattel mortgage, interest from the time it is judicially
instead of a simulated financial leasing. Thus, upon demanded, although the obligation may be
TMI’s default, PCILF was entitled to seize the silent upon this point.
mortgaged equipment, not as owner but as creditor-
mortgagee for the purpose of foreclosing the chattel
- Applying the rules in the computation of interest, the interest at 12% per annum from finality of this
remaining balance of the principal loan subject of the Decision until fully paid.
chattel mortgage must earn the legal interest of 12%
per annum, which interest, as long as unpaid, also WHEREFORE, we DENY the petition. We AFFIRM with
earns legal interest of 12% per annum, computed MODIFICATION the 5 October 2006 Decision and the 23
from the filing of the complaint on 7 May 1999. January 2007 Resolution of the Court of Appeals in CA-G.R.
CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
o TOTAL AMOUNT DUE = [principal – partial hereby ORDERED to PAY respondent Trojan Metal Industries,
payments made] + [interest + interest on Inc., by way of refund, the excess amount to be computed by
interest], where Interest = remaining balance the Regional Trial Court based on the formula specified above,
x 12% per annum x no. of years from due with interest at 12% per annum from finality of this Decision
date (8 December 1998 when demand was until fully paid.
made) until date of sale to a third party
CITIBANK AND INVESTORS FINANCE CORPORATION VS
o Interest on interest = interest computed as of MODESTA SABENIANO
the filing of the complaint on 7 May 1999 x
12% x no. of years until date of sale to a Modesta Sabeniano is a client of Citibank and FNCB Finance.
third party On February 1978, Sabeniano obtained a loan of Php 200,000
from Citibank. This loan was followed with several other loans
- From the computed total amount should be deducted – some were paid, while some were not. Those that were not
₱1,025,000.00 representing the proceeds of the sale paid upon maturity were rolled over, reflecting a total unpaid
already in PCILF’s hands. The difference represents loan of Php 1,069,847.40 as of September 1979. These loans
overpayment by TMI, which the law requires PCILF to were secured by Sabeniano’s money market placements with
refund to TMI. FNCB Finance through a Deed of Assignment plus a
Declaration of Pledge which states that all present and future
fiduciary placements held in her personal and/or joint name
- Section 14 of Act No. 1508, otherwise known as the
with Citibank Switzerland, will secure all claims that Citibank
Chattel Mortgage Law, provides:
may have or, in the future, acquire against her. The Deeds of
Assignment were duly notarized, while the Declaration of
o Section 14. Sale of property at public Pledge was not notarized and Citibank’s copy was undated,
auction; officer’s return; fees; disposition of while that of Sabeniano bore the date, September 24, 1979.
proceeds. x x x The proceeds of such sale Since Sabeniano failed to pay her obligations to Citibank, the
shall be applied to the payment, first, of the latter sent demand letters to request payment. Her total unpaid
costs and expenses of keeping and sale, loan initially amounted to Php 2,123,843.20 (inclusive of
and then to the payment of the demand or interests). Still failing to pay, Citibank executed the Deeds of
obligation secured by such mortgage, and Assignment and used the proceeds of Sabeniano’s money
the residue shall be paid to persons holding market placement from FNCB Finance which totaled Php
subsequent mortgages in their order, and the 1,022,916.66 and her deposits with Citibank which totaled Php
balance, after paying the mortgages, shall be 31,079.14 to set-off her loan. This reduced the unpaid balance
paid to the mortgagor or person holding to Php 1,069,847.40 as previously mentioned. Since the loan
under him on demand. remains unpaid, Citibank proceeded to execute the Declaration
of Pledge and remitted a total of $149,632.99 from
- Section 14 of the Chattel Mortgage Law expressly Sabeniano’s Citibank-Geneva accounts to off-set the loan.
entitles the debtor-mortgagor to the balance of the Sabeniano then filed a complaint against Citibank for damages
proceeds, upon satisfaction of the principal loan and and specific performance (for proper accounting and return of
costs. Prevailing jurisprudence also holds that the the remitted proceeds from her personal accounts). She also
Chattel Mortgage Law bars the creditor-mortgagee contended that the proceeds of 2 promissory notes (PN) from
from retaining the excess of the sale proceeds. her money market placements with Citibank were rolled over or
reinvested into the petitioner bank, and these should also be
- TMI’s right to the refund accrued from the time PCILF returned to her.
received the proceeds of the sale of the mortgaged
equipment. However, since TMI never made a
Regarding the execution of the pledge, the RTC declared this
counterclaim or demand for refund due on the
illegal, null and void. Citibank was ordered to return the
resulting overpayment after offsetting the proceeds of
$149,632.99 to Sabeniano’s Citibank-Geneva account with a
the sale against the remaining balance on the
legal interest of 12% per annum. The RTC also ordered
principal loan plus applicable interest, no interest
Sabeniano to pay her outstanding loan to Citibank without
applies on the amount of refund due. Nonetheless, in
interests and penalty charges. Both parties appealed to the CA
accord with prevailing jurisprudence, the excess
which affirmed the RTC’s decision, but further ruled entirely in
amount PCILF must refund to TMI is subject to
favor of Sabeniano – holding that Citibank failed to establish
her indebtedness and that all the executed deeds should be complaints with the Regional Trial Court (RTC) of Cebu City.
returned to her account. The case has now reached the The actions sought the declaration of nullity of the pledge
Supreme Court. agreements. However the RTC dismissed the complaint and
gave "due course to the foreclosure and sale at public auction
of the various pledges subject of these two cases." This
WON Citibank’s execution of deeds and pledge to off-set
decision attained finality after it was affirmed by the Court of
Sabeniano’s loan was valid and legal – YES.
Appeals and the Supreme Court.

- The Supreme Court reversed the CA’s findings Respondents then received Notices of Sale which indicated
regarding Sabeniano’s Citibank loan as this was that the pledged shares were to be sold at public auction on 4
properly documented and sufficient in evidence. Thus, November 1991. However, before the scheduled date of
the execution of deeds was valid, especially that the auction, all of respondents caused the consignation with the
agreement was duly notarized, signed and prepared RTC Clerk of Court of various amounts. It was claimed that
in accordance with the law. respondents had attempted to tender these payments to the
Parays, but had been rebuffed. Notwithstanding the
- The court also ordered Citibank to return the amount consignations, the public auction took place as scheduled, with
of P318,897.34 and P203,150.00 plus 14.5% per petitioner Vidal Espeleta successfully bidding the amount
annum to Sabeniano. This is the total amount from of P6,200,000.00 for all of the pledged shares. None of
the 2 PNs which were executed despite being respondents participated or appeared at the auction of 4
reinvested in said bank. The bank was also ordered to November 1991.
pay moral damages of P300,000, exemplary
damages for P250,000, attorney’s fees of P200,000. Respondents instead filed a complaint seeking the declaration
of nullity of the concluded public auction. The Cebu City RTC
- The SC however affirmed the RTC’s decision dismissed the complaint, expressing agreement with the
regarding the pledge. Being a separate entity, position of the Parays. The Court of Appeals Eighth Division
Citibank cannot exercise automatic remittance from however reversed the RTC on appeal, ruling that the
Sabeniano’s Citibank Geneva account to off-set her consignations extinguished the loan obligations and the subject
outstanding loan. pledge contracts; and the auction sale of 4 November 1991 as
null and void. The Court of Appeals likewise found fault with
- The court also noted that the pledge was filled out the auction sale, holding that there was a need to individually
irregularly – it was not notarized and Citibank’s copy sell the various shares of stock as they had belonged to
bore no date. The original copy was not also different pledgors. Thus, it was observed that the minutes of
produced in court. the auction sale should have specified in detail the bids
submitted for each of the shares of the pledgors for the
purpose of knowing the price to be paid by the different
- Regarding Sabeniano’s obligation, the Supreme Court
pledgors upon redemption of the auctioned sales of stock.
affirmed RTC’s decision and ordered her to pay the
remaining balance of her loan which amounts to
P1,069,847.40 as of 5 September 1979. These loans WON the auction was null and void – NO.
continue to earn interest based on the maturity date
that were agreed and stipulated upon by the parties. - The Court of Appeals made three crucial conclusions
favorable to respondents:
SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL
ESPELETA, Petitioners, vs. DRA. ABDULIA C. RODRIGUEZ, o their act of consigning the payments with the
MIGUELA R. JARIOL assisted by her husband ANTOLIN RTC should be deemed done in the exercise
JARIOL, SR., LEONORA NOLASCO assisted by her of their right of redemption
husband FELICIANO NOLASCO, DOLORES SOBERANO
assisted by her husband JOSE SOBERANO, JR., JULIA R. o the buyer at public auction does not ipso
GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. facto become the owner of the pledged
SORONIO assisted by her husband ALFONSO shares pending the lapse of the one-year
SORONIO, Respondents. redemptive period

Respondents owned, in their respective personal capacities, of o the collective sale of the shares of stock
shares of stock in a corporation known as the Quirino-Leonor- belonging to several individual owners
Rodriguez Realty Inc. Sometime during the years 1979 to without specification of the apportionment in
1980, respondents secured by way of pledge of some of their the applications of payment deprives the
shares of stock to petitioners Bonifacio and Faustina Paray individual owners of the opportunity to know
("Parays") the payment of certain loan obligations. When the of the price they would have to pay for the
Parays attempted to foreclose the pledges on account of purpose of exercising the right of
respondents’ failure to pay their loans, respondents filed redemption.
- The appellate court’s dwelling on the right of pledged property in public auction is, by virtue of the
redemption is utterly off-tangent. The right of Civil Code, extrajudicial in character.
redemption involves payments made by debtors after
the foreclosure of their properties, and not those - The right of redemption as affirmed under Rule 39 of
made or attempted to be made, as in this case, before the Rules of Court applies only to execution sales,
the foreclosure sale. The proper focus of the Court of more precisely execution sales of real property.
Appeals should have been whether the consignations
made by respondents sufficiently acquitted them of o No law or jurisprudence establishes or
their principal obligations. A pledge contract is an
affirms such right over personal property.
accessory contract, and is necessarily discharged if
Indeed, no such right exists.
the principal obligation is extinguished.

o The right to redeem property sold as security

- Preliminarily, it must be clarified that the subject sale
for the satisfaction of an unpaid obligation
of pledged shares was an extrajudicial sale,
does not exist preternaturally. Neither is it
specifically a notarial sale, as distinguished from a
predicated on proprietary right, which, after
judicial sale as typified by an execution sale.
the sale of property on execution, leaves the
judgment debtor and vests in the purchaser.
o Under the Civil Code, the foreclosure of a Instead, it is a bare statutory privilege to be
pledge occurs extrajudicially, without exercised only by the persons named in the
intervention by the courts. All the creditor statute.
needs to do, if the credit has not been
satisfied in due time, is to proceed before a
o The right of redemption over mortgaged real
Notary Public to the sale of the thing
property sold extrajudicially is established by
pledged.
Act No. 3135, as amended. The said law
does not extend the same benefit to
- In this case, petitioners attempted as early as 1980 to personal property. In fact, there is no law in
proceed extrajudicially with the sale of the pledged our statute books which vests the right of
shares by public auction. However, extrajudicial sale redemption over personal property. Act No.
was stayed with the filing of Civil Cases No. R-20120 1508, or the Chattel Mortgage Law,
and 20131, which sought to annul the pledge ostensibly could have served as the vehicle
contracts. The final and executory judgment in those for any legislative intent to bestow a right of
cases affirmed the pledge contracts. redemption over personal property, since
that law governs the extrajudicial sale of
o The phrase "giving due course to the mortgaged personal property, but the statute
foreclosure and sale at public auction of the is definitely silent on the point. And Section
various pledges subject of these two cases" 39 of the 1997 Rules of Civil Procedure,
may give rise to the impression that such extensively relied upon by the Court of
sale is judicial in character. While the Appeals, starkly utters that the right of
decision did authorize the sale by public redemption applies to real properties, not
auction, such declaration could not detract personal properties, sold on execution.
from the fact that the sale so authorized is
actually extrajudicial in character. Note that - Since the pledged shares in this case are not subject
the final judgment in said cases expressly to redemption, the Court of Appeals had no business
did not direct the sale by public auction of invoking and applying the inexistent right of
the pledged shares, but instead upheld the redemption.
right of the Parays to conduct such sale at
their own volition.
o Obviously, since there is no right to redeem
personal property, the rights of ownership
- Indeed, as affirmed by the Civil Code, the decision to vested unto the purchaser at the foreclosure
proceed with the sale by public auction remains in the sale are not entangled in any suspensive
sole discretion of the Parays, who could very well condition that is implicit in a redemptive
choose not to hold the sale without violating the final period.
judgments in the aforementioned civil cases. If the
sale were truly in compliance with a final judgment or
- The Court of Appeals also found fault with the
order, the Parays would have no choice but to stage
apparent sale in bulk of the pledged shares,
the sale for then the order directing the sale arises
notwithstanding the fact that these shares were
from judicial compulsion. But nothing in the dispositive
owned by several people, on the premise the
portion directed the sale at public auction as a
pledgors would be denied the opportunity to know
mandatory recourse, and properly so since the sale of
exactly how much they would need to shoulder to
 exercise the right to redemption. This concern is Article 2098 of the Civil Code provides that the right of
obviously rendered a non-issue by the fact that there the creditor to retain possession of the pledged item
can be no right to redemption in the first place. Rule exists only until the debt is paid. Article 2105 of the
39 of the Rules of Court does provide for instances Civil Code further clarifies that the debtor cannot ask
when properties foreclosed at the same time must be for the return of the thing pledged against the will of
sold separately, such as in the case of lot sales for the creditor, unless and until he has paid the debt and
real property under Section 19. However, these its interest. At the same time, the right of the pledgee
instances again pertain to execution sales and not to foreclose the pledge is also established under the
extrajudicial sales. No provision in the Rules of Court Civil Code. When the credit has not been satisfied in
or in any law requires that pledged properties sold at due time, the creditor may proceed with the sale by
auction be sold separately. public auction under the procedure provided under
Article 2112 of the Code.
- On the other hand, under the Civil Code, it is the
pledgee, and not the pledgor, who is given the right to - The particular pledge contracts did not form part of
choose which of the items should be sold if two or the records elevated to this Court. However, the 5%
more things are pledged.15 No similar option is given monthly interest rate was noted in the statement of
to pledgors under the Civil Code. Moreover, there is facts in the 14 October 1988 RTC Decision which had
nothing in the Civil Code provisions governing the since become final. Moreover, the said decision
extrajudicial sale of pledged properties that prohibits pronounced that even assuming that the interest rates
the pledgee of several different pledge contracts from of the various loans were 5% per month, "it is doubtful
auctioning all of the pledged properties on a single whether the interests so charged were exorbitantly or
occasion, or from the buyer at the auction sale in excessively usurious. This is because for sometime
purchasing all the pledged properties with a single now, usury has become ‘legally inexistent.’" The
purchase price. The relative insignificance of finality of this 1988 Decision is a settled fact, and thus
ascertaining the definite apportionments of the sale the time to challenge the validity of the 5% monthly
price to the individual shares lies in the fact that once interest rate had long passed.
a pledged item is sold at auction, neither the pledgee
nor the pledgor can recover whatever deficiency or - It bears noting that the Court of Appeals also ruled
excess there may be between the purchase price and that respondents had satisfied the requirements under
the amount of the principal obligation. Section 18, Rule 39, which provides that the judgment
obligor may prevent the sale by paying the amount
- A different ruling though would obtain if at the auction, required by the execution and the costs that have
a bidder expressed the desire to bid on a determinate been incurred therein. However, the provision applies
number or portion of the pledged shares. In such a only to execution sales, and not extra-judicial sales,
case, there may lie the need to ascertain with as evidenced by the use of the phrases "sale of
particularity which of the shares are covered by the property on execution" and "judgment obligor." The
bid price, since not all of the shares may be sold at reference is inapropos, and even if it were applicable,
the auction and correspondingly not all of the pledge the failure of the payment to cover the interests due
contracts extinguished. The same situation also would renders it insufficient to stay the sale.
lie if one or some of the owners of the pledged shares
participated in the auction, bidding only on their - The effect of the finality of the judgments in Civil
respective pledged shares. However, in this case, Cases Nos. R-20120 and R-20131 should also not be
none of the pledgors participated in the auction, and discounted. Petitioners’ right to proceed with the
the sole bidder cast his bid for all of the shares. There auction sale was affirmed not only by law, but also by
obviously is no longer any practical reason to a final court judgment. Any subsequent court ruling
apportion the bid price to the respective shares, since that would enjoin the petitioners from exercising such
no matter how slight or significant the value of the right would have the effect of superseding a final and
purchase price for the individual share is, the sale is executory judgment.
completed, with the pledgor and the pledgee not
entitled to recover the excess or the deficiency, as the - Finally, we cannot help but observe that respondents
case may be. To invalidate the subject auction solely may have saved themselves much trouble if they
on this point serves no cause other than to celebrate simply participated in the auction sale, as they are
formality for formality’s sake. permitted to bid themselves on their pledged
properties. Moreover, they would have had a better
WON the consignation of payment extinguished the right had they matched the terms of the highest
obligation – NO. bidder. Under the circumstances, with the high
interest payments that accrued after several years,
- There is no doubt that if the principal obligation is respondents were even placed in a favorable position
satisfied, the pledges should be terminated as well. by the pledge agreements, since the creditor would
 be unable to recover any deficiency from the debtors
should the sale price be insufficient to cover the
principal amounts with interests. Certainly, had
respondents participated in the auction, there would
have been a chance for them to recover the shares at
a price lower than the amount that was actually due
from them to the Parays. That respondents failed to
avail of this beneficial resort wholly accorded them by
law is their loss. Now, all respondents can recover is
the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed

decision of the Court of Appeals is SET ASIDE and the
decision of the Cebu City RTC, Branch 16, dated 18 November
1992 is REINSTATED. Costs against respondents.