CREDIT TRANSACTIONS CASE DIGEST/ PCI LEASING & FINANCE INC. VS. TROJAN META INDUSTRIES, INC., GR NO. 176381, 15 DECEMBER 2010

PCI LEASING & FINANCE INC. VS. TROJAN META INDUSTRIES, INC.,

GR NO. 176381, 15 DECEMBER 2010

TOPIC/DOCTRINE

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing jurisprudence also holds that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds.

Financing leasing contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own, but if the movable property already belonged to the borrower-lessee, the transaction between the parties is a loan with mortgage in the guise of a lease.

FACTS

Sometime in 1997, Trojan Metal Industries, Inc. (TMI) came to 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 sale evidencing TMIs sale to PCILF of the various equipment.

PCILF and TMI then entered into a lease agreement, whereby the latter leased from the former the various equipment it previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly installments. 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, spouses Dizon, as TMIs President and Vice-President, executed in favor of PCILF a Continuing Guaranty of Lease Obligations. Under the continuing guaranty, the Dizon spouses 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 letter for the payment of the latters outstanding obligation. PCILFs demand remained unheeded. RTC ruled that the lease agreement must be presumed valid as the law between the parties even if some of its provisions constituted unjust enrichment on the part of PCILF. On appeal, the CA reversed the RTCs decision.

ISSUE

Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel mortgage.

Is TMI entitled to refund?

RULING

The court held that 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, then the finance company leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount of rental. Financing leasing contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own, but if the movable property already belonged to the borrower-lessee, the transaction between the parties is a loan with mortgage in the guise of a lease.

Here, the court held that the finance company then leases the equipment to the lessee in exchange for the latter’s 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.

 

Yes, as to the second issue.

The court held that Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing jurisprudence also holds that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds.

Here, the court held that TMIs right to the refund accrued from the time PCILF received the proceeds of the sale of the mortgaged equipment. However, since TMI never made a counterclaim or demand for refund due on the resulting overpayment after offsetting the proceeds of the sale against the remaining balance on the principal loan plus applicable interest, no interest applies on the amount of refund due. Nonetheless, in accord with prevailing jurisprudence, the excess amount PCILF must refund to TMI is subject to interest at 12% per annum from finality of this Decision until fully paid.

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