GR 107199; (July, 2003) (Digest)
G.R. No. 107199 ; July 22, 2003
Cebu Contractors Consortium Co., Petitioner, vs. Court of Appeals and Makati Leasing & Finance Corporation, Respondents.
FACTS
Respondent Makati Leasing and Finance Corporation (MLFC) filed a complaint for sum of money with replevin against petitioner Cebu Contractors Consortium Company (CCCC) for defaulting on lease rentals under a 1976 agreement. MLFC alleged it leased various equipment to CCCC, secured by a chattel mortgage over CCCC’s other equipment. CCCC countered that the transaction was not a genuine lease but a “sale and lease back” financing scheme, constituting an equitable mortgage. CCCC, needing capital for a government construction project, was induced by MLFC to sell its equipment to MLFC and then lease it back, with rentals treated as installment payments for repurchase. CCCC further claimed it executed a deed of assignment of its receivables from the Ministry of Public Highways to MLFC and that the total amounts collected by MLFC under this assignment and from foreclosed chattels had already extinguished or even overpaid its obligation.
ISSUE
The primary issue is whether the “sale and lease back” transaction is a genuine financial lease or an equitable mortgage. Subsidiary issues involve the legal effect of the deed of assignment and whether there was overpayment.
RULING
The Supreme Court ruled that the transaction is a legitimate financial lease, not an equitable mortgage. The Court explained that a financing lease, including a sale-lease back arrangement, is a recognized sui generis contract under commercial law, as defined by the Financing Company Act ( R.A. No. 5980 ). In such a lease, legal title rests with the lessor (MLFC), while the lessee (CCCC) has possession and use, with periodic rentals enabling the lessor to recover its costs and profit. The contract contained no stipulation for CCCC to recover ownership upon full payment of rentals, a key characteristic of an equitable mortgage. Thus, reformation of the contract was unjustified.
Regarding the deed of assignment, the Court held it was merely an additional security for the transaction, not a novation that extinguished the primary obligation to pay lease rentals. On the claim of overpayment, the Court affirmed the factual findings of the Court of Appeals, which computed CCCC’s remaining indebtedness at ₱1,048,655.00. The Supreme Court noted that CCCC’s computation was incomplete for failing to include stipulated penalties for default, and found no reason to disturb the appellate court’s factual conclusions. Consequently, CCCC’s claim for damages was also denied. The decision of the Court of Appeals was affirmed.