PCI LEASING AND FINANCE, INC. v. TROJAN METAL INDUSTRIES CA: reversed.
CA: reversed. It held that the lease agreement was in fact a loan secured by chattel
INCORPORATED, WALFIRDO DIZON, ELIZABETH DIZON and JOHN DOE Peñafiel
Doctrine: Financial leasing contemplates the extension of credit to assist a buyer in
acquiring movable property which he can use and eventually own; whereas, if the
immoveable property already belongs to the borrower-lessee, the transaction is a loan
with mortgage in the guise of a lease.
*Note: I included the 2nd issue regarding the amount to be refunded just to make it
complete, in case she asks.
Facts:
 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 that TMI owned. TMI agreed to this; hence, TMI and PCILF
executed a deed of sale with a total consideration of P2,865,070.00.
 Thereafter, they entered into a lease agreement, whereby TMI leased from
PCILF the various equipment it previously owned. Pursuant to this, TMI issued
postdated checks (for 24 monthly installments).
 The lease agreement required TMI to give PCILF a guaranty deposit of
P1,030,350.00, which would serve as security for the timely performance of
TMI’s obligations under the said agreement. This deposit would be
automatically forfeited should TMI return the leased equipment before the
expiration of the agreement.
 Then, spouses Walfrido and Elizabeth Dizon (TMI’s Pres. and Vice-Pres,
respectively) executed in favor of PCILF a Continuing Guaranty of Lease
Obligations. Under this 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 2 nd mortgage
a violation of the lease agreement. Then, PCILF demanded from TMI its
outstanding obligations, but it was unheeded.
 Due to this, PCILF filed a complaint against TMI, spouses Dizon and John
Doe for the recovery of the sum of money and personal property with prayer
for issuance of replevin.
RTC: issued a writ of replevin, directing the sheriff to take custody of the leased
equipment. Thereafter, PCILF sold the said equipment to a 3rd party.
Respondents argued that the sale with lease agreement was a mere scheme to
facilitate the financial lease between them PCILF & TMI; that in a simulated financial
lease, the property of debtor would be sold to creditor to be repaid through rentals, and
at the end of the lease period, the property would revert back to the debtor. All the
respondents prayed that they be allowed to reform the lease agreement to show the
true agreement between the parties, which was a loan secured by a chattel mortgage.
RTC ruled in favor of PCILF. It held that PCILF is entitled to possession of the
machineries and ordered respondents to pay the remaining obligations.
mortgage. It also held that since PCILF sold the equipment for P1,025,000.00 and TMI
paid a guaranty deposit of P1,030,000.00, PCILF had a total of P2,055,250.00 as
against TMI’s remaining obligation of P888,423.25, or an excess of P1,166,826.52. CA
ordered PCILF to refund the amount to TMI.
Issue: (1) WON the sale with lease agreement the parties entered into was a financial
lease or a loan secured by chattel mortgage; and (2) WON PCILF should refund the
said amount to TMI.
Held:
[First Issue] LOAN SECURED BY CHATTEL MORTGAGE. In a true financial leasing
under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped
lessee the equipment the latter wants to buy but, due to financial limitations, is
incapable of doing so. The finance company then leases the equipment to the lessee
in exchange for the latter’s period payment of a fixed rental.
However, in this case, TMI already owned the equipment before it transacted with
PCILF. Hence, the transaction cannot be a financial lease as defined by law.
In Cebu Contractors Consortium Co. v. CA and Investors Finance Corporation v. CA,
the Court ruled that the transaction between the parties was not a true financial leasing
because the intention of the parties was not to enable the borrower-lessee to acquire
and use the heavy equipment, which already belonged to him, but to extend to him a
loan to use as capital for businesses. The lease agreement was simulated to disguise
the true transaction between parties, which was a simple loan secured by heavy
equipment.
Financial leasing contemplates the extension of credit to assist a buyer in acquiring
movable property which he can use and eventually own; whereas, if the immoveable
property already belongs to the borrower-lessee, the transaction is a loan with
mortgage in the guise of a lease.
In this case, since TMI already owned the equipment, the transaction was a simple loan
secured by the various equipment owned by TMI. Upon TMI’s default, PCILF was
entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for
the purpose of foreclosing the chattel mortgage. PCILF’s sale to 3 rd party of the
mortgaged equipment and collection of the proceeds of the sale can be deemed in the
exercise of its right to foreclose the chattel mortgage.
[Second Issue] YES.
Records show that PCILF paid TMI P2,865,070.00 as consideration for acquiring the
mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of
P1,030,350.00. Thus, the amount of the principal loan was P1,834,720.00, which
was the net amount actually received by TMI (proceeds of the sale of the
equipment to PCILF minus the guaranty deposit). Against the principal loan of
P1,834,720.00 plus the applicable interest should be deducted loan payments, totaling
P1,717,091.00. Since PCILF sold the mortgaged equipment to a third party for
P1,025,000.00, the proceeds of the said sale should be applied to offset the remaining
balance on the principal loan plus applicable interest.
With regard to the interest computation: Following the rules from Eastern Shipping
Lines v. CA, the following formula must be followed:
TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on
interest], where:

Interest = remaining balance * 12% per annum * no. of years from due date (Dec. 8,
1998, when demand was made) until the date of sale to a 3rd party.

Interest on interest = interest computed as of the filing of the complaint on May 7, 1999
* 12% * no. of years until the date of sale to a 3rd party.

From the computed total amount should be deducted P1,205,000.00 representing the
proceeds of the sale already in PCILF’s hands. The difference represents the
overpayment by TMI, which the law PCILF to refund to TMI.

Here is an application I made of the entire formula:

Payment of PCILF -> TMI for sale of latter's properties ₱2,865,070.00

Guaranty Deposit of TMI -> PCILF ₱(1,030,350.00)

Net Amount Received by TMI (also the Principal Loan) ₱1,834,720.00
Total Loan Payments of TMI -> PCILF ₱(1,717,091.00)
Subtotal ₱117,629.00
Legal Interest (there was no stipulation on interest) 12%
Total Amount Due from TMI *to be determined by RTC*
Proceeds from PCILF's sale of mortgaged property to 3rd
Person ₱(1,025,000.00)
Overpayment by TMI (Amount to refunded to TMI) *to be determined by RTC*

*The case was remanded to RTC to determine the Total Amount Due.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5

October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in
CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is hereby ORDERED
to PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess amount
to be computed by the Regional Trial Court based on the formula specified above, with
interest at 12% per annum from finality of this Decision until fully paid.
Costs against petitioner.
SO ORDERED.