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Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 142618 July 12, 2007

PCI LEASING AND FINANCE, INC., Petitioner,


vs.
GIRAFFE-X CREATIVE IMAGING, INC., Respondent.

DECISION

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as
amended by R.A. No. 8556 in relation to Articles 1484 and 1485 of the Civil Code,
petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for short) has directly come to
this Court via this petition for review under Rule 45 of the Rules of Court to nullify and
set aside the Decision and Resolution dated December 28, 1998 and February 15,
2000, respectively, of the Regional Trial Court (RTC) of Quezon City, Branch 227, in its
Civil Case No. Q-98-34266, a suit for a sum of money and/or personal property with
prayer for a writ of replevin, thereat instituted by the petitioner against the herein
respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a
Lease Agreement,1 whereby the former leased out to the latter one (1) set of Silicon
High Impact Graphics and accessories worth P3,900,00.00 and one (1) unit of Oxberry
Cinescan 6400-10 worth P6,500,000.00. In connection with this agreement, the
parties subsequently signed two (2) separate documents, each denominated as Lease
Schedule.2 Likewise forming parts of the basic lease agreement were two (2) separate
documents denominated Disclosure Statements of Loan/Credit Transaction (Single
Payment or Installment Plan)3 that GIRAFFE also executed for each of the leased
equipment. These disclosure statements inter alia described GIRAFFE, vis--vis the
two aforementioned equipment, as the "borrower" who acknowledged the "net
proceeds of the loan," the "net amount to be financed," the "financial charges," the
"total installment payments" that it must pay monthly for thirty-six (36) months,
exclusive of the 36% per annum "late payment charges." Thus, for the Silicon High
Impact Graphics, GIRAFFE agreed to pay P116,878.21 monthly, and for Oxberry
Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCI
LEASING for 36 months of the lease, exclusive of monetary penalties imposable, if
proper, is as indicated below:

P116,878.21 @ month (for the


Silicon High
Impact Graphics) x 36 months = P 4,207,615.56
-- PLUS--
P181,362.00 @ month (for the
Oxberry
Cinescan) x 36 months = P 6,529,032.00
Total Amount to be paid by
GIRAFFE P
(or the NET CONTRACT AMOUNT) 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount of
P3,120,000.00 by way of "guaranty deposit," a sort of performance and compliance
bond for the two equipment. Furthermore, the same agreement embodied a standard
acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or
other accounts due.

A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-
payment obligations. And following a three-month default, PCI LEASING, through one
Atty. Florecita R. Gonzales, addressed a formal pay-or-surrender-equipment type of
demand letter4 dated February 24, 1998 to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant
case against GIRAFFE. In its complaint, 5 docketed in said court as Civil Case No. 98-
34266 and raffled to Branch 227 6 thereof, PCI LEASING prayed for the issuance of a
writ of replevin for the recovery of the leased property, in addition to the following
relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the
defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the subject properties;

b. Ordering the defendant to pay the balance of rental/obligation in the total amount
of P8,248,657.47 inclusive of interest and charges thereon;

c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit.
(Words in bracket added.)

Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of replevin,
paving the way for PCI LEASING to secure the seizure and delivery of the equipment
covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein


arguing that the seizure of the two (2) leased equipment stripped PCI LEASING of its
cause of action. Expounding on the point, GIRAFFE argues that, pursuant to Article
1484 of the Civil Code on installment sales of personal property, PCI LEASING is barred
from further pursuing any claim arising from the lease agreement and the companion
contract documents, adding that the agreement between the parties is in reality a
lease of movables with option to buy. The given situation, GIRAFFE continues, squarely
brings into applicable play Articles 1484 and 1485 of the Civil Code, commonly
referred to as the Recto Law. The cited articles respectively provide:

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee's failure to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to recover any unpaid balance of
the price. Any agreement to the contrary shall be void. (Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts purporting to be leases
of personal property with option to buy, when the lessor has deprived the lessee of
the possession or enjoyment of the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies
to its contractual relation with PCI LEASING because the lease agreement in question,
as supplemented by the schedules documents, is really a lease with option to buy
under the companion article, Article 1485. Consequently, so GIRAFFE argues, upon the
seizure of the leased equipment pursuant to the writ of replevin, which seizure is
equivalent to foreclosure, PCI LEASING has no further recourse against it. In brief,
GIRAFFE asserts in its Motion to Dismiss that the civil complaint filed by PCI LEASING
is proscribed by the application to the case of Articles 1484 and 1485, supra, of the
Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with
GIRAFFE is a straight lease without an option to buy. Prescinding therefrom, PCI
LEASING rejects the applicability to the suit of Article 1484 in relation to Article 1485
of the Civil Code, claiming that, under the terms and conditions of the basic
agreement, the relationship between the parties is one between an ordinary lessor
and an ordinary lessee.

In a decision7 dated December 28, 1998, the trial court granted GIRAFFEs motion to
dismiss mainly on the interplay of the following premises: 1) the lease agreement
package, as memorialized in the contract documents, is akin to the contract
contemplated in Article 1485 of the Civil Code, and 2) GIRAFFEs loss of possession of
the leased equipment consequent to the enforcement of the writ of replevin is "akin to
foreclosure, the condition precedent for application of Articles 1484 and 1485 [of
the Civil Code]." Accordingly, the trial court dismissed Civil Case No. Q-98-34266,
disposing as follows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any


claim to the personal properties subject of replevin which are now in the possession of
the plaintiff [PCI LEASING], plaintiff is DEEMED fully satisfied pursuant to the
provisions of Articles 1484 and 1485 of the New Civil Code. By virtue of said
provisions, plaintiff is DEEMED estopped from further action against the defendant,
the plaintiff having recovered thru (replevin) the personal property sought to be
payable/leased on installments, defendants being under protection of said RECTO
LAW. In view thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in its
resolution of February 15, 2000, 8 petitioner has directly come to this Court via this
petition for review raising the sole legal issue of whether or not the underlying Lease
Agreement, Lease Schedules and the Disclosure Statements that embody the financial
leasing arrangement between the parties are covered by and subject to the
consequences of Articles 1484 and 1485 of the New Civil Code.
As in the court below, petitioner contends that the financial leasing arrangement it
concluded with the respondent represents a straight lease covered by R.A. No. 5980,
the Financing Company Act, as last amended by R.A. No. 8556, otherwise known as
Financing Company Act of 1998, and is outside the application and coverage of the
Recto Law. To the petitioner, R.A. No. 5980 defines and authorizes its existence and
business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or
regulatory legislation, merely providing a regulatory framework for the organization,
registration, and regulation of the operations of financing companies. As couched, it
does not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional
financial leasing and other financial leasing concepts. Thus, the relevancy of Article 18
of the Civil Code which reads:

Article 18. - In matters which are governed by special laws, their deficiency shall be
supplied by the provisions of this [Civil] Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement
because such agreement, by definition, does not confer on the lessee the option to
buy the property subject of the financial lease. To the petitioner, the absence of an
option-to-buy stipulation in a financial leasing agreement, as understood under R.A.
No. 8556, prevents the application thereto of Articles 1484 and 1485 of the Civil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to
appear as a financial leasing,9 a term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
office machines, and other movable or immovable property in consideration of the
periodic payment by the lessee of a fixed amount of money sufficient to amortize at
least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2)
years during which the lessee has the right to hold and use the leased property but
with no obligation or option on his part to purchase the leased property from the
owner-lessor at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the following mix: the
imperatives of equity, the contractual stipulations in question and the actuations of
parties vis--vis their contract, treated disguised transactions technically tagged as
financing lease, like here, as creating a different contractual relationship. Notable
among the Courts decisions because of its parallelism with this case is BA Finance
Corporation v. Court of Appeals10 which involved a motor vehicle. Thereat, the Court
has treated a purported financial lease as actually a sale of a movable property on
installments and prevented recovery beyond the buyers arrearages. Wrote the Court
in BA Finance:

The transaction involved is one of a "financial lease" or "financial leasing," where a


financing company would, in effect, initially purchase a mobile equipment and turn
around to lease it to a client who gets, in addition, an option to purchase the property
at the expiry of the lease period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' are primarily organized for the purpose of extending credit
facilities to consumers either by leasing of motor vehicles, and office
machines and equipment, and other movable property."

"'Credit' shall mean any loan, any contract to sell, or sale or contract of sale of
property or service, under which part or all of the price is payable subsequent to
the making of such sale or contract; any rental-purchase contract; .;"

The foregoing provisions indicate no less than a mere financing scheme extended by a
financing company to a client in acquiring a motor vehicle and allowing the latter to
obtain the immediate possession and use thereof pending full payment of the
financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for
thirty six (36) months at a "monthly rental" (P1,689.40), or for a total amount of
P60,821.28. The contract also contained [a] clause [requiring the Lessee to give a
guaranty deposit in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding the guaranty
deposit of P20,800.00, he stopped further payments. Putting the two sums together,
the financing company had in its hands the amount of P62,470.59 as against the total
agreed "rentals" of P60,821.28 or an excess of P1,649.31.

The respondent appellate court considered it only just and equitable for the guaranty
deposit made by the private respondent to be applied to his arrearages and thereafter
to hold the contract terminated. Adopting the ratiocination of the court a quo, the
appellate court said:

xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant
should and must be credited in his favor, in the interest of fairness, justice and equity.
The plaintiff should not be allowed to unduly enrich itself at the expense of the
defendant. xxx This is even more compelling in this case where although the
transaction, on its face, appear ostensibly, to be a contract of lease, it is actually a
financing agreement, with the plaintiff financing the purchase of defendant's
automobile . The Court is constrained, in the interest of truth and justice, to go into
this aspect of the transaction between the plaintiff and the defendant with all the
facts and circumstances existing in this case, and which the court must consider in
deciding the case, if it is to decide the case according to all the facts. xxx.

xxx xxx xxx

Considering the factual findings of both the court a quo and the appellate court, the
only logical conclusion is that the private respondent did opt, as he has claimed, to
acquire the motor vehicle, justifying then the application of the guarantee deposit to
the balance still due and obligating the petitioner to recognize it as an exercise of the
option by the private respondent. The result would thereby entitle said respondent to
the ownership and possession of the vehicle as the buyer thereof. We, therefore, see
no reversible error in the ultimate judgment of the appellate court. 11 (Italics in the
original; underscoring supplied and words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals, 12 the Court viewed and thus
declared a financial lease agreement as having been simulated to disguise a simple
loan with security, it appearing that the financing company purchased equipment
already owned by a capital-strapped client, with the intention of leasing it back to the
latter.

In the present case, petitioner acquired the office equipment in question for their
subsequent lease to the respondent, with the latter undertaking to pay a monthly
fixed rental therefor in the total amount of P292,531.00, or a total of P10,531,116.00
for the whole 36 months. As a measure of good faith, respondent made an up-front
guarantee deposit in the amount of P3,120,000.00. The basic agreement provides that
in the event the respondent fails to pay any rental due or is in a default situation, then
the petitioner shall have cumulative remedies, such as, but not limited to, the
following:13

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty deposit may be applied
towards the payment of "liquidated damages";

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it not been cancelled, as
additional penalty;

5. Recovery of any and all amounts advanced by PCI LEASING for GIRAFFEs account
xxx;

6. Recover all expenses incurred in repossessing, removing, repairing and storing the
property; and,

7. Recover all damages suffered by PCI LEASING by reason of the default.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be
forfeited in the event the respondent, for any reason, returns the equipment before
the expiration of the lease.

At bottom, respondent had paid the equivalent of about a years lease rentals, or a
total of P3,510,372.00, more or less. Throw in the guaranty deposit (P3,120,000.00)
and the respondent had made a total cash outlay of P6,630,372.00 in favor of the
petitioner. The replevin-seized leased equipment had, as alleged in the complaint, an
estimated residual value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was
instituted on May 4, 1998. Adding all cash advances thus made to the residual value
of the equipment, the total value which the petitioner had actually obtained by virtue
of its lease agreement with the respondent amounts to P13,530,372.00
(P3,510,372.00 + P3,120,000.00 + P6,900.000.00 = P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment and the
Oxberry Cinescan was, as stated in no less than the petitioners letter to the
respondent dated November 11, 199614 approving in the latters favor a lease facility,
was P8,100,000.00. Subtracting the acquisition cost of P8,100,000.00 from the total
amount, i.e., P13,530,372.00, creditable to the respondent, it would clearly appear
that petitioner realized a gross income of P5,430,372.00 from its lease transaction
with the respondent. The amount of P5,430,372.00 is not yet a final figure as it does
not include the rentals in arrears, penalties thereon, and interest earned by the
guaranty deposit.

As may be noted, petitioners demand letter 15 fixed the amount of P8,248,657.47 as


representing the respondents "rental" balance which became due and demandable
consequent to the application of the acceleration and other clauses of the lease
agreement. Assuming, then, that the respondent may be compelled to pay
P8,248,657.47, then it would end up paying a total of P21,779,029.47
(P13,530,372.00 + P8,248,657.47 = P21,779,029.47) for its use - for a year and two
months at the most - of the equipment. All in all, for an investment of P8,100,000.00,
the petitioner stands to make in a years time, out of the transaction, a total of
P21,779,029.47, or a net of P13,679,029.47, if we are to believe its outlandish legal
submission that the PCI LEASING-GIRAFFE Lease Agreement was an honest-to-
goodness straight lease.

A financing arrangement has a purpose which is at once practical and salutary. R.A.
No. 8556 was, in fact, precisely enacted to regulate financing companies operations
with the end in view of strengthening their critical role in providing credit and services
to small and medium enterprises and to curtail acts and practices prejudicial to the
public interest, in general, and to their clienteles, in particular. 16 As a regulated
activity, financing arrangements are not meant to quench only the thirst for profit.
They serve a higher purpose, and R.A. No. 8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and
obligations, as between each other, of the financial lessor and the lessee. In
determining the respective responsibilities of the parties to the agreement, courts,
therefore, must train a keen eye on the attendant facts and circumstances of the case
in order to ascertain the intention of the parties, in relation to the law and the written
agreement. Likewise, the public interest and policy involved should be considered. It
may not be amiss to state that, normally, financing contracts come in a standard
prepared form, unilaterally thought up and written by the financing companies
requiring only the personal circumstances and signature of the borrower or lessee; the
rates and other important covenants in these agreements are still largely imposed
unilaterally by the financing companies. In other words, these agreements are usually
one-sided in favor of such companies. A perusal of the lease agreement in question
exposes the many remedies available to the petitioner, while there are only the
standard contractual prohibitions against the respondent. This is characteristic of
standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter 17 sent to the
respondent, petitioner fashioned its claim in the alternative: payment of the full
amount of P8,248,657.47, representing the unpaid balance for the entire 36-month
lease period or the surrender of the financed asset under pain of legal action. To quote
the letter:

Demand is hereby made upon you to pay in full your outstanding balance in the
amount of P8,248,657.47 on or before March 04, 1998 OR to surrender to us the one
(1) set Silicon High Impact Graphics and one (1) unit Oxberry Cinescan 6400-10

We trust you will give this matter your serious and preferential attention. (Emphasis
added).
Evidently, the letter did not make a demand for the payment of the P8,248,657.47
AND the return of the equipment; only either one of the two was required. The
demand letter was prepared and signed by Atty. Florecita R. Gonzales, presumably
petitioners counsel. As such, the use of "or" instead of "and" in the letter could hardly
be treated as a simple typographical error, bearing in mind the nature of the demand,
the amount involved, and the fact that it was made by a lawyer. Certainly Atty.
Gonzales would have known that a world of difference exists between "and" and "or"
in the manner that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive term signifying
dissociation and independence of one thing from other things enumerated unless the
context requires a different interpretation. 18

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an


alternative. It often connects a series of words or propositions indicating a choice of
either. When "or" is used, the various members of the enumeration are to be taken
separately.19

The word "or" is a disjunctive term signifying disassociation and independence of one
thing from each of the other things enumerated.20

The demand could only be that the respondent need not return the equipment if it
paid the P8,248,657.47 outstanding balance, ineluctably suggesting that the
respondent can keep possession of the equipment if it exercises its option to acquire
the same by paying the unpaid balance of the purchase price. Stated otherwise, if the
respondent was not minded to exercise its option of acquiring the equipment by
returning them, then it need not pay the outstanding balance. This is the logical
import of the letter: that the transaction in this case is a lease in name only. The so-
called monthly rentals are in truth monthly amortizations of the price of the leased
office equipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE
lease agreement is in reality a lease with an option to purchase the equipment. This
has been made manifest by the actions of the petitioner itself, foremost of which is
the declarations made in its demand letter to the respondent. There could be no other
explanation than that if the respondent paid the balance, then it could keep the
equipment for its own; if not, then it should return them. This is clearly an option to
purchase given to the respondent. Being so, Article 1485 of the Civil Code should
apply.

The present case reflects a situation where the financing company can withhold and
conceal - up to the last moment - its intention to sell the property subject of the
finance lease, in order that the provisions of the Recto Law may be circumvented. It
may be, as petitioner pointed out, that the basic "lease agreement" does not contain
a "purchase option" clause. The absence, however, does not necessarily argue against
the idea that what the parties are into is not a straight lease, but a lease with option
to purchase. This Court has, to be sure, long been aware of the practice of vendors of
personal property of denominating a contract of sale on installment as one of lease to
prevent the ownership of the object of the sale from passing to the vendee until and
unless the price is fully paid. As this Court noted in Vda. de Jose v. Barrueco:21

Sellers desirous of making conditional sales of their goods, but who do not wish openly
to make a bargain in that form, for one reason or another, have frequently resorted to
the device of making contracts in the form of leases either with options to the buyer
to purchase for a small consideration at the end of term, provided the so-called rent
has been duly paid, or with stipulations that if the rent throughout the term is paid,
title shall thereupon vest in the lessee. It is obvious that such transactions are leases
only in name. The so-called rent must necessarily be regarded as payment of the
price in installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili, 22 a lease agreement
was declared to be in fact a sale of personal property by installments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease on which
the present action is based were veritable leases of personal property with option to
purchase, and as such come within the purview of the above article [Art. 1454-A of
the old Civil Code on sale of personal property by installment]. xxx

Being leases of personal property with option to purchase as contemplated in the


above article, the contracts in question are subject to the provision that when the
lessor in such case "has chosen to deprive the lessee of the enjoyment of such
personal property," "he shall have no further action" against the lessee "for the
recovery of any unpaid balance" owing by the latter, "agreement to the contrary being
null and void."

In choosing, through replevin, to deprive the respondent of possession of the leased


equipment, the petitioner waived its right to bring an action to recover unpaid rentals
on the said leased items. Paragraph (3), Article 1484 in relation to Article 1485 of the
Civil Code, which we are hereunder re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

xxx xxx xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee's failure to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to recover any unpaid balance of
the price. Any agreement to the contrary shall be void.

ART. 1485. The preceding article shall be applied to contracts purporting to be leases
of personal property with option to buy, when the lessor has deprived the lessee of
the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals, 23 the


remedies provided for in Article 1484 of the Civil Code are alternative, not cumulative.
The exercise of one bars the exercise of the others. This limitation applies to contracts
purporting to be leases of personal property with option to buy by virtue of the same
Article 1485. The condition that the lessor has deprived the lessee of possession or
enjoyment of the thing for the purpose of applying Article 1485 was fulfilled in this
case by the filing by petitioner of the complaint for a sum of money with prayer for
replevin to recover possession of the office equipment. 24 By virtue of the writ of
seizure issued by the trial court, the petitioner has effectively deprived respondent of
their use, a situation which, by force of the Recto Law, in turn precludes the former
from maintaining an action for recovery of "accrued rentals" or the recovery of the
balance of the purchase price plus interest. 25
The imperatives of honest dealings given prominence in the Civil Code under the
heading: Human Relations, provide another reason why we must hold the petitioner to
its word as embodied in its demand letter. Else, we would witness a situation where
even if the respondent surrendered the equipment voluntarily, the petitioner can still
sue upon its claim. This would be most unfair for the respondent. We cannot allow the
petitioner to renege on its word. Yet more than that, the very word "or" as used in the
letter conveys distinctly its intention not to claim both the unpaid balance and the
equipment. It is not difficult to discern why: if we add up the amounts paid by the
respondent, the residual value of the property recovered, and the amount claimed by
the petitioner as sued upon herein (for a total of P21,779,029.47), then it would end
up making an instant killing out of the transaction at the expense of its client, the
respondent. The Recto Law was precisely enacted to prevent this kind of aberration.
Moreover, due to considerations of equity, public policy and justice, we cannot allow
this to happen.1avvphil.zw+ Not only to the respondent, but those similarly situated
who may fall prey to a similar scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision is AFFIRMED.

Costs against petitioner.

SO ORDERED

FIRST DIVISION

[G.R. No. 146698. September 24, 2002]

PHILIPPINE AIRLINES, petitioner, vs. SPOUSES SADIC AND AISHA KURANGKING and
SPOUSES ABDUL SAMAD T. DIANALAN AND MORSHIDA L. DIANALAN, respondents.

DECISION

VITUG, J.:

In April 1997, respondents, all Muslim Filipinos, returned to Manila from their
pilgrimage to the Holy City of Mecca, Saudi Arabia, on board a Philippines Airlines
(PAL) flight. Respondents claimed that they were unable to retrieve their checked-in
luggages. On 05 January 1998, respondents filed a complaint with the Regional Trial
Court (RTC) of Marawi City against PAL for breach of contract resulting in damages due
to negligence in the custody of the missing luggages.

On 02 March 1998, PAL filed its answer invoking, among its defenses, the limitations
under the Warsaw Convention. On 19 June 1998, before the case could be heard on
pre-trial, PAL, claiming to have suffered serious business losses due to the Asian
economic crisis, followed by a massive strike by its employees, filed a petition for the
approval of a rehabilitation plan and the appointment of a rehabilitation receiver
before the Securities and Exchange Commission (SEC). On 23 June 1998, the SEC
issued an order granting the prayer for an appointment of a rehabilitation receiver,
and it constituted a three-man panel to oversee PALs rehabilitation. On 25 September
1998, the SEC created a management committee conformably with Section 6(d) of
Presidential Decree (P.D.) 902, as amended, declaring the suspension of all actions for
money claims against PAL pending before any court, tribunal, board or body.
Thereupon, PAL moved for the suspension of the proceedings before the Marawi City
RTC. On 11 January 1999, the trial court issued an order denying the motion for
suspension of the proceedings on the ground that the claim of respondents was only
yet to be established. PALs motion for reconsideration was denied by the trial court.

PAL went to the Court of Appeals via a petition for certiorari. On 16 April 1999, the
appellate court dismissed the petition for the failure of PAL to serve a copy of the
petition on respondents. PAL moved for a reconsideration. In its resolution, dated 08
October 1999, the appellate court denied the motion but added that a second motion
for reconsideration before the trial court could still be feasible inasmuch as the
assailed orders of the trial court were merely interlocutory in nature. Consonantly, PAL
filed before the trial court a motion for leave to file a second motion for
reconsideration. The trial court, however, denied leave of court to admit the second
motion for reconsideration. Again, PAL filed a motion for reconsideration which sought
reconsideration of the denial of the prayed leave to file a second motion for
reconsideration. In an order, dated 28 December 2000, the trial court denied the
motion.

On the thesis that there was no other plain, speedy and adequate remedy available to
it, PAL went to this Court via a petition for review on certiorari under Rule 45 of the
Rules of Court, raising the question of -

"Whether or not the proceedings before the trial court should have been suspended
after the court was informed that a rehabilitation receiver was appointed over the
petitioner by the Securities and Exchange Commission under Section 6(c) of
Presidential Decree No. 902-A.i[1]

In their comment to the petition, private respondents posited (a) that the instant
petition under Rule 45 would not lie, the assailed orders of the court a quo being
merely interlocutory; (b) that PAL was already operational and thus claims and actions
against it should no longer be suspended; (c) that the SEC, not the RTC, should have
the prerogative to determine the necessity of suspending the proceedings; and (d)
that the only claims or actions that could be suspended under P.D. 902-A were those
pending with the SEC.

While a petition for review on certiorari under Rule 45 would ordinarily be


inappropriate to assail an interlocutory order, in the interest, however, of arresting the
perpetuation of an apparent error committed below that could only serve to
unnecessarily burden the parties, the Court has resolved to ignore the technical flaw
and, also, to treat the petition, there being no other plain, speedy and adequate
remedy, as a special civil action for certiorari. Not much, after all, can be gained if the
Court were to refrain from now making a pronouncement on an issue so basic as that
submitted by the parties.

On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the
Interim Rules of Procedure on Corporate Rehabilitation and directed to be transferred
from the SEC to Regional Trial Courts,ii[2] all petitions for rehabilitation filed by
corporations, partnerships, and associations under P.D. 902-A in accordance with the
amendatory provisions of Republic Act No. 8799. The rules require trial courts to issue,
among other things, a stay order in the enforcement of all claims, whether for money
or otherwise, and whether such enforcement is by court action or otherwise, against
the corporation under rehabilitation, its guarantors and sureties not solidarily liable
with it. Specifically, Section 6, Rule 4, of the Interim Rules of Procedure On Corporate
Rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition, issue an
Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying
enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor; (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner any of its properties except in
the ordinary course of business; (d) prohibiting the debtor from making any payment
of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting the
debtors suppliers of goods or services from withholding supply of goods and services
in the ordinary course of business for as long as the debtor makes payments for the
services and goods supplied after the issuance of the stay order; (f) directing the
payment in full of all administrative expenses incurred after the issuance of the stay
order; (g) fixing the initial hearing on the petition not earlier than forty-five (45) days
but not later than sixty (60) days from the filing thereof; (h) directing the petitioner to
publish the Order in a newspaper of general circulation in the Philippines once a week
for two (2) consecutive weeks; (I) directing all creditors and all interested parties
(including the Securities and Exchange Commission) to file and serve on the debtor a
verified comment on or opposition to the petition, with supporting affidavits and
documents, not later than ten (10) days before the date of the initial hearing and
putting them on notice that their failure to do so will bar them from participating in
the proceedings; and (j) directing the creditors and interested parties to secure from
the court copies of the petition and its annexes within such time as to enable
themselves to file their comment on or opposition to the petition and to prepare for
the initial hearing of the petition.

The stay order is effective from the date of its issuance until the dismissal of the
petition or the termination of the rehabilitation proceedings.iii[3]

The interim rules must likewise be read and applied along with Section 6(c) of P.D.
902-A, as so amended, directing that upon the appointment of a management
committee, rehabilitation receiver, board or body pursuant to the decree, all actions
for claims against the distressed corporation pending before any court, tribunal, board
or body shall be suspended accordingly. Paragraph (c) of Section 6 of the law reads:

Section 6. In order to effectively exercise such jurisdiction, the Commission shall


possess the following powers:

xxxxxx xxx.

c) To appoint one or more receivers of the property, real or personal, which is the
subject of the action pending before the Commission in accordance with the pertinent
provisions of the Rules of Court in such other cases whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors: x x x Provided, finally, That upon appointment of a management
committee, the rehabilitation receiver, board or body, pursuant to this Decree, all
actions for claims against corporations, partnerships, or associations under
management or receivership pending before any court, tribunal, board or body shall
be suspended accordingly.

A claim is said to be a right to payment, whether or not It is reduced to judgment,


liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, legal or equitable, and secured or unsecured. iv[4] In Finasia Investments
and Finance Corporationv[5] this Court has defined the word claim, contemplated in
Section 6(c) of P.D. 902-A, as referring to debts or demands of a pecuniary nature and
the assertion of a right to have money paid as well.

Verily, the claim of private respondents against petitioner PAL is a money claim for the
missing luggages, a financial demand, that the law requires to be suspended pending
the rehabilitation proceedings.vi[6] In B.F. Homes, Inc. vs. Court of Appeals, vii[7] the
Court has ratiocinated:

x x x (T)he reason for suspending actions for claims against the corporation should not
be difficult to discover. it is not really to enable the management committee or the
rehabilitation receiver to substitute the defendant in any pending action against it
before any court, tribunal, board or body. Obviously, the real justification is to enable
the management committee or rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extra-judicial interference that might unduly hinder or
prevent the rescue of the debtor company. To allow such other action to continue
would only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in defending claims
against the corporation instead of being directed toward its restructuring and
rehabilitation.viii[8]

WHEREFORE, the petition is GRANTED. The assailed orders of the Regional Trial
Court, Branch 9, of Marawi City, are SET ASIDE. No costs.

SO ORDERED.

RUBBER world v. NLRC [G. R No. 128003, July 26, 2000] FACTS: Petitioner
Rubberworld, Inc filed with the DOLE a notice of temporary shutdown of operation; but
even before the effectivity of such, was forced to prematurely shutdown its operation.
Private Respondents filed with the NLRC a petition for illegal dismissal and non-
payment of separation pay. Rubberworld then filed the SEC a petition for declaration
of suspension of payments with a proposed rehabilitation plan. SEC then ordered an
order, stating that all action for claims against Rubberworld Philippines, Inc. pending
before any court, tribunal, office, board, body, Commission or sheriff are hereby
deemed SUSPENDED. Petitioner submitted to the labor arbiter a motion to suspend
the proceedings invoking the SEC order. The Labor arbiter ignored the motion and
thereafter rendered a decision finding Rubberworld quality of illegal shutdown
ordering it to pay separation pay; and moral and exemplary damages. On appeal, the
NLRC affirmed the decision with modification deleting the award for moral and
exemplary damages.

ISSUE: W/N the DOLE, Labor arbiter, or NLRC may legally act on claims despite an
order of the SEC suspending all actions against a company under rehabilitation by a
management committee. HELD: Yes. PD 902-A is clear that all action for claims
against corporation, partnerships or association under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly.
The law did not make any exception in favor of labor claims. The justification for such
to enable the management committee to exercise its powers free from interference
that might hinder or prevent the rescue of the debtor company. To allow the labor
case to proceed would open the defeat the rescue effort of the management
committee. Even if an award is given, the ruling could not enforce as long as
petitioner is under management committee. Coffeeholic Writes at Tues
i

ii Spouses Sobrejuanite v. ASB Devt. Corp.

Spouses Sobrejuanite
v.
ASB Development Corp., G.R. No. 165675

FACTS OF THE CASE

1. On March 7, 2001, spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite)


filed a Complaint for rescission of contract, refund of payments and damages,
against ASB Development Corporation (ASBDC) before the Housing and Land
Use Regulatory Board (HLURB).

2. Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC
over a condominium unit and a parking space in the BSA Twin Tower-B
Condominum located at Bank Drive, Ortigas Center, Mandaluyong City. They
averred that despite full payment and demands, ASBDC failed to deliver the
property on or before December 1999 as agreed. They prayed for the
rescission of the contract; refund of payments amounting to P2,674,637.10;
payment of moral and exemplary damages, attorneys fees, litigation
expenses, appearance fee and costs of the suit.

3. ASBDC filed a motion to dismiss or suspend proceedings in view of the


approval by the Securities and Exchange Commission (SEC) on April 26, 2001
of the rehabilitation plan of ASB Group of Companies, which includes ASBDC,
and the appointment of a rehabilitation receiver. The HLURB arbiter however
denied the motion and ordered the continuation of the proceedings.

ISSUE:
Whether the SECs approval of the corporate rehabilitation plan has the effect
of suspending the proceeding before HLURB.

RULING:
Yes. Section 6(c) of PD No. 902-A empowers the SEC:

c) To appoint one or more receivers of the property, real and personal,


which is the subject of the action pending before the Commission whenever
necessary in order to preserve the rights of the parties-litigants and/or protect
the interest of the investing public and creditors: Provided, finally, That upon
appointment of a management committee, rehabilitation receiver, board or
body, pursuant to this Decree, all actions for claims against corporations,
partnerships or associations under management or receivership pending before
any court, tribunal, board or body shall be suspended accordingly.

The purpose for the suspension of the proceedings is to prevent a creditor from
obtaining an advantage or preference over another and to protect and preserve
the rights of party litigants as well as the interest of the investing public or
creditors. Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable
again, without having to divert attention and resources to litigations in various
fora.

The suspension would enable the management committee or rehabilitation


receiver to effectively exercise its/his powers free from any judicial or extra-
judicial interference that might unduly hinder or prevent the rescue of the
debtor company.

To allow such other action to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims against the corporation instead
of being directed toward its restructuring and rehabilitation.

iii

ivMETROPOLITAN BANK & TRUST COMPANY vs ASB HOLDINGS, INC. CASE


DIGEST
G.R. NO. 166197, February 27, 2007
Metropolitan Bank & Trust Company, petitioner
vs
ASB Holdings, Inc., respondents

FACTS:

Metropolitan Bank and Trust company is a creditor bank of respondents


corporation collectively known as the ASB Group of Companies. ASB group of
companies is owner and developer of condominium and real estate projects
which contracted loans to the petitioner which were secured by real estate
mortgages.

Later, ASB group of companies filed with the Securities and Exchange
Commission a petition for rehabilitation with prayer for suspension of actions
and proceedings against petitioners. However, despite the objection of
Metropolitan bank and trust company for the rehabilitation plan, SEC granted
the same.

Meanwhile, the contention of the petitioner in their objection was that, the
approval on the rehabilitation plan will impair the contract entered into by the
ASB group of companies with the petitioner.

ISSUE:

Whether or not the approval of rehabilitation plan impairs contract entered into
and prejudiced creditors.

HELD:

The Supreme Court were not convinced that the approval of the rehabilitation
plan impair petitioner bank's lien over the mortgaged properties. Section 6 (c)
of P.D. no. 902-A provides that "upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all
actions for claims against corporations, partnership or associations under
management or receivership pending before any curt, tribunal, board or body
shall be suspended." By that statutory provision, it is clear that the approval of
the rehabilitation plan and the appointment of a rehabilitation reciever merely
suspend the action for claims against respondent corporations. Petitioners
banks preferred status over the unsecured creditors relative to the mortgage
liens is retained, but the enforcement of such preference is suspended. the
loan agreement between the parties have not been set aside and petitioner
bank may still enforce its preference when the assets of ASB Group of
companies will be liquidated. considering that the provisions of the loan
agreements and merely suspends, there is no impairment of contracts,
specifically its lien on the mortgaged properties.

The court also emphasized that the purpose of rehabilitating proceedings is to


enable the company to gain new lease on life thereby allows creditors to be
paid their claims from its earnings. rehabilitation contemplates a continuance
of corporate life and activities in an effort to restore ad reinstate the financially
distressed corporation to its former position of successful operation and
solvency. this is in consonance with the state's equitable distribution of wealth
to protect investments and the public. The approval of the rehabilitation plan
by the SEC hearing panel, affirmed by both the SEC en banc and the court of
appeals, is precisely in furtherance if the rationale behind P.D. No. 902-A, as
amended which is "to effect a feasible and viable rehabilitation" of ailing
corporations which affect the public welfare.

RCBC vs. IAC G.R. No. 74851, December 9, 1999

Facts: On September 28, 1984, BF Homes filed a Petition for Rehabilitation and
for Declaration of Suspension of Payments with the SEC.

RCBC, one of the creditors listed in BF Homes inventory of creditors and


liabilities, on October 26, 1984, requested the Provincial Sheriff of Rizal to
extra-judicially foreclose its real estate mortgage on some properties of BF
Homes. BF Homes opposed the auction sale and the SEC ordered the issuance
of a writ of preliminary injunction upon petitioners filing of a bond. Presumably
unaware of the filing of the bond on the very day of the auction sale, the sheriff
proceeded with the public auction sale in which RCBC was the highest bidder
for the properties auctioned. But because of the proceedings in the SEC, the
sheriff withheld the delivery to RCBC of the certificate of sale covering the
auctioned properties.

On March 13, 1985, despite the SEC case, RCBC filed with RTC an action for
mandamus against the provincial sheriff of Rizal to compel him to execute in its
favor a certificate of sale of the auctioned properties.
On March 18, 1985, the SEC appointed a Management Committee for BF
Homes.

Consequently, the trial court granted RCBCs motion for judgment on the
pleading ordering respondents to execute and deliver to petitioner the
Certificate of Auction Sale.
On appeal, the SC affirmed CAs decision (setting aside RTCs decision
dismissing the mandamus case and suspending issuance to RCBC of new land
titles until the resolution of the SEC case) ruling that whenever a distressed
corporation asks the SEC for rehabilitation and suspension of payments,
preferred creditors may no longer assert such preference but stand on equal
footing with other creditors. Hence, this Motion for Reconsideration.

Issue: When should the suspension of actions for claims against BF Homes take
effect?

Held: The issue of whether or not preferred creditors of distressed corporations


stand on equal footing with all other creditors gains relevance and materiality
only upon the appointment of a management committee, rehabilitation
receiver, board or body.

Upon cursory reading of Section 6, par (c) of PD 902-A, it is adequately clear


that suspension of claims against a corporation under rehabilitation is counted
or figured up only upon the appointment of a management committee or a
rehabilitation takes effect as soon as the application or a petition for
rehabilitation is filed with the SEC may to some, be more logical and wise but
unfortunately, such is incongruent with the clear language of the law. To insist
on such ruling, no matter how practical and noble would be to encroach upon
legislative prerogative to define the wisdom of the law --- plainly judicial
legislation.

Once a management committee, rehabilitation receiver, board or body is


appointed pursuant to PD 902-A, all actions for claims against a distressed
corporation pending before any court, tribunal, board or body shall be
suspended accordingly; Suspension shall not prejudice or render ineffective the
status of a secured creditor as compared to a totally unsecured creditor. What
it merely provides is that all actions for claims against the corporation,
partnership or association shall be suspended. This should give the receiver a
chance to rehabilitate the corporation if there should still be a possibility for
doing so. In the event that rehabilitation is no longer feasible and claims
against the distressed corporation would eventually have to be settled, the
secured creditors shall enjoy preference over the unsecured creditors subject
only to the provisions of the Civil Code on Concurrence and Preferences of
Credit.

CORDOVA v. REYES DAWAY LIM BERNARDO LINDO ROSALES LAW


OFFICES, (2007)
Common Credits, Art. 2245, Art. 2251

The Civil Code provisions on concurrence and preference of credits are


applicable to the liquidation proceedings.

Issue: Was petitioner a preferred or ordinary creditor under these provisions?


Petitioner argues that he was a preferred creditor because private respondents
illegally withdrew his shares from the custodian banks and sold them without
his knowledge and consent and without authority from the SEC. He quotes
Article 2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following
claims or liens shall be preferred:
(2) Claims arising from misappropriation, breach of trust, or malfeasance by
public officials committed in the performance of their duties, on the movables,
money or securities obtained by them;
He asserts that, as a preferred creditor, he was entitled to the entire monetary
value of his shares.

Held: Petitioners argument is incorrect. Article 2241 refers only to specific


movable property. His claim was for the payment of money, which is generic
property and not specific or determinate. Petitioners CSPI shares were specific
or determinate movable properties. But after they were sold, the money raised
from the sale became generic and were commingled with the cash and other
assets of Philfinance. Unlike shares of stock, money is a generic thing. It is
designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class. This means that once a
certain amount is added to the cash balance, one can no longer pinpoint the
specific amount included which then becomes part of a whole mass of money.

Considering that petitioner did not fall under any of the provisions applicable to
preferred creditors, he was deemed an ordinary creditor under Article 2245:

Credits of any other kind or class, or by any other right or title not
comprised in the four preceding articles, shall enjoy no
preference.

This being so, Article 2251 (2) states that:

Common credits referred to in Article 2245 shall be paid pro


rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was
entitled to a rate of recovery of only 15% of his money claim.

vi

vii

viii