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Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 142618 July 12, 2007

PCI LEASING AND FINANCE, INC., Petitioner,vs.GIRAFFE-X CREATIVE IMAGING, INC., Respondent.

D E C I S I O N

GARCIA, J .:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as amended byR.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 reviewunder Rule 45 of the Rules of Court to nullify and set aside the Decision and Resolution datedDecember 28, 1998 and February 15, 2000, respectively, of the Regional Trial Court (RTC) ofQuezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money and/orpersonal property with prayer for a writ of replevin, thereat instituted by the petitioner against theherein respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a LeaseAgreement,1whereby the former leased out to the latter one (1) set of Silicon High Impact Graphicsand accessories worthP3,900,00.00 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.2Likewise forming parts of the basiclease agreement were two (2) separate documents denominated Disclosure Statements ofLoan/Credit Transaction (Single Payment or Installment Plan)3that GIRAFFE also executed for eachof the leased equipment. These disclosure statements inter alia described GIRAFFE, vis--vis thetwo 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 mustpay 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 forOxberry Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCILEASING for 36 months of the lease, exclusive of monetary penalties imposable, if proper, is asindicated below:

P116,878.21 @ month (for the Silicon HighImpact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the OxberryCinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE
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(or the NET CONTRACT AMOUNT)P 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 thetwo 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-paymentobligations. And following a three-month default, PCI LEASING, through one Atty. Florecita R.Gonzales, addressed a formal pay-or-surrender-equipment type of demand letter4dated February24, 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,

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docketed in said court as Civil Case No. 98-34266 and raffled to Branch2276thereof, PCI LEASING prayed for the issuance of a writ of replevin for the recovery of theleased 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 amountof 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 inbracket added.)

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

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein arguing thatthe 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 oninstallment sales of personal property, PCI LEASING is barred from further pursuing any claimarising from the lease agreement and the companion contract documents, adding that theagreement 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 theCivil 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;
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(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 thevendee's failure to pay cover two or more installments. In this case, he shall have no furtheraction against the purchaser to recover any unpaid balance of the price. Any agreement tothe contrary shall be void. (Emphasis added.)

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

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies to itscontractual relation with PCI LEASING because the lease agreement in question, as supplementedby the schedules documents, is really a lease with option to buy under the companion article, Article1485. Consequently, so GIRAFFE argues, upon the seizure of the leased equipment pursuant to thewrit of replevin, which seizure is equivalent to foreclosure, PCI LEASING has no further recourseagainst it. In brief, GIRAFFE asserts in its Motion to Dismiss that the civil complaint filed by PCILEASING 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 isa straight lease without an option to buy. Prescinding therefrom, PCI LEASING rejects theapplicability 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 onebetween an ordinary lessor and an ordinary lessee.

In a decision7dated December 28, 1998, the trial court granted GIRAFFEs motion to dismiss mainlyon the interplay of the following premises: 1) the lease agreement package, as memorialized in thecontract 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 ofreplevin 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 asfollows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any claim to thepersonal properties subject of replevin which are now in the possession of the plaintiff [PCILEASING], plaintiff is DEEMED fully satisfied pursuant to the provisions of Articles 1484 and 1485 ofthe New Civil Code. By virtue of said provisions, plaintiff is DEEMED estopped from further actionagainst the defendant, the plaintiff having recovered thru (replevin) the personal property sought tobe payable/leased on installments, defendants being under protection of said RECTO LAW. In viewthereof, 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 legalissue of whether or not the underlying Lease Agreement, Lease Schedules and the DisclosureStatements that embody the financial leasing arrangement between the parties are covered by andsubject 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 withthe 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
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outside the application and coverage of the Recto Law. To the petitioner, R.A. No. 5980 defines andauthorizes 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 regulationof the operations of financing companies. As couched, it does not specifically define the rights andobligations of parties to a financial leasing arrangement. In fact, it does not go beyond definingcommercial or transactional financial leasing and other financial leasing concepts. Thus, therelevancy of Article 18 of the Civil Code which reads:

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

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on installment salesof movable property, does not apply to a financial leasing agreement because such agreement, bydefinition, 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, asunderstood under R.A. No. 8556, prevents the application thereto of Articles 1484 and 1485 of theCivil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to appear as afinancial leasing,9a 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 lessorpurchases or acquires, at the instance of the lessee, machinery, equipment, office machines, andother 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 oracquisition cost, including any incidental expenses and a margin of profit over an obligatory period ofnot 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-lessorat the end of the lease contract.

In its previous holdings, however, the Court, taking into account the following mix: the imperatives ofequity, 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 differentcontractual relationship. Notable among the Courts decisions because of its parallelism with thiscase is BA Finance Corporation v. Court of Appeals10which involved a motor vehicle. Thereat, theCourt has treated a purported financial lease as actually a sale of a movable property oninstallments 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 financingcompany would, in effect, initially purchase a mobile equipment and turn around to lease it to a clientwho gets, in addition, an option to purchase the property at the expiry of the lease period. xxx.

x x x x x x x x x

The pertinent provisions of [RA] 5980, thus implemented, read:
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"'Financing companies,' are primarily organized for the purpose of extending credit facilities toconsumers either by leasing of motor vehicles, and office machines and equipment, andother 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 financingcompany to a client in acquiring a motor vehicle and allowing the latter to obtain the immediatepossession 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 alsocontained [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 companyhad in its hands the amount of P62,470.59 as against the total agreed "rentals" of P60,821.28 or anexcess of P1,649.31.

The respondent appellate court considered it only just and equitable for the guaranty deposit madeby the private respondent to be applied to his arrearages and thereafter to hold the contractterminated. 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 becredited in his favor, in the interest of fairness, justice and equity. The plaintiff should not be allowedto unduly enrich itself at the expense of the defendant. xxx This is even more compelling in this casewhere although the transaction, on its face, appear ostensibly, to be a contract of lease, it is actuallya financing agreement, with the plaintiff financing the purchase of defendant's automobile . TheCourt is constrained, in the interest of truth and justice, to go into this aspect of the transactionbetween the plaintiffand 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 thefacts. xxx.

x x x x x x x x x

Considering the factual findings of both the court a quo and the appellate court, the only logicalconclusion 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 thepetitioner to recognize it as an exercise of the option by the private respondent. The result wouldthereby 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 theoriginal; underscoring supplied and words in bracket added.)

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


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In the present case, petitioner acquired the office equipment in question for their subsequent leaseto the respondent, with the latter undertaking to pay a monthly fixed rental therefor in the totalamount of P292,531.00, or a total of P10,531,116.00 for the whole 36 months. As a measure ofgood faith, respondent made an up-front guarantee deposit in the amount of P3,120,000.00. Thebasic agreement provides that in the event the respondent fails to pay any rental due or is in adefault 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 thepayment 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, asadditional 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 theproperty; 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 theevent 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 totalof 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 ofP6,630,372.00 in favor of the petitioner. The replevin-seized leasedequipment had, as alleged in the complaint, an estimated residual value of P6,900.000.00 at thetime Civil Case No. Q-98-34266 was instituted on May 4, 1998. Adding all cash advances thus madeto the residual value of the equipment, the total value which the petitioner had actually obtained byvirtue 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 Cinescanwas, as stated in no less than the petitioners letter to the respondent dated November 11,199614approving in the latters favor a lease facility, was P8,100,000.00. Subtracting the acquisitioncost of P8,100,000.00 from the total amount, i.e.,P13,530,372.00, creditable to the respondent, itwould clearly appear that petitioner realized a gross income ofP5,430,372.00 from its leasetransaction with the respondent. The amount of P5,430,372.00 is not yet a final figure as it does notinclude the rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioners demand letter15fixed the amount of P8,248,657.47 as representing therespondents "rental" balance which became due and demandable consequent to the application ofthe acceleration and other clauses of the lease agreement. Assuming, then, that the respondent maybe 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 themost - of the equipment. All in all, for an investment of P8,100,000.00, the petitioner stands to make
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in a years time, out of the transaction, a total of P21,779,029.47, or a net of P13,679,029.47, if weare to believe its outlandish legal submission that the PCI LEASING-GIRAFFE Lease Agreementwas 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 andto curtail acts and practices prejudicial to the public interest, in general, and to their clienteles, inparticular.16As a regulated activity, financing arrangements are not meant to quench only the thirstfor 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 respectiveresponsibilities of the parties to the agreement, courts, therefore, must train a keen eye on theattendant facts and circumstances of the case in order to ascertain the intention of the parties, inrelation to the law and the written agreement. Likewise, the public interest and policy involved shouldbe considered. It may not be amiss to state that, normally, financing contracts come in a standardprepared form, unilaterally thought up and written by the financing companies requiring only thepersonal circumstances and signature of the borrower or lessee; the rates and other importantcovenants in these agreements are still largely imposed unilaterally by the financing companies. Inother words, these agreements are usually one-sided in favor of such companies. A perusal of thelease agreement in question exposes the many remedies available to the petitioner, while there areonly the standard contractual prohibitions against the respondent. This is characteristic of standardprinted form contracts.

There is more. In the adverted February 24, 1998 demand letter17sent to the respondent, petitionerfashioned its claim in the alternative: payment of the full amount of P8,248,657.47, representing theunpaid balance for the entire 36-month lease period or the surrender of the financed asset underpain 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 HighImpact 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 ofthe equipment; only either one of the two was required. The demand letter was prepared and signedbyAtty. 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 natureof 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 mannerthat the word was employed in the letter.

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

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an alternative. Itoften connects a series of words or propositions indicating a choice of either. When "or" is used, thevarious members of the enumeration are to be taken separately.19
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The word "or" is a disjunctive term signifying disassociation and independence of one thing fromeach of the other things enumerated.20

The demand could only be that the respondent need not return the equipment if it paidthe P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent can keeppossession 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 itsoption 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. Theso-called monthly rentals are in truth monthly amortizations of the price of the leased officeequipment.

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

The present case reflects a situation where the financing company can withhold and conceal - up tothe last moment - its intention to sell the property subject of the finance lease, in order that theprovisions 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 notnecessarily argue against the idea that what the parties are into is not a straight lease, but a leasewith option to purchase. This Court has, to be sure, long been aware of the practice of vendors ofpersonal property of denominating a contract of sale on installment as one of lease to prevent theownership 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 makingcontracts in the form of leases either with options to the buyer to purchase for a small considerationat the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rentthroughout the term is paid, title shall thereupon vest in the lessee. It is obvious that suchtransactions are leases only in name. The so-called rent must necessarily be regarded as paymentof the price in installments since the due payment of the agreed amount results, by the terms of thebargain, in the transfer of title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili,22a lease agreement was declaredto 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 suchcome within the purview of the above article [Art. 1454-A of the old Civil Code on sale of personalproperty by installment]. xxx

Being leases of personal property with option to purchase as contemplated in the above article, thecontracts in question are subject to the provision that when the lessor in such case "has chosen todeprive 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 thecontrary being null and void."
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In choosing, through replevin, to deprive the respondent of possession of the leased equipment, thepetitioner 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:

x x x x x x x x x

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

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

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,23the remedies provided forin Article 1484 of the Civil Code are alternative, not cumulative. The exercise of one bars theexercise of the others. This limitation applies to contracts purporting to be leases of personalproperty with option to buy by virtue of the same Article 1485. The condition that the lessor hasdeprived the lessee of possession or enjoyment of the thing for the purpose of applying Article 1485was fulfilled in this case by the filing by petitioner of the complaint for a sum of money with prayer forreplevin to recover possession of the office equipment.24By virtue of the writ of seizure issued by thetrial court, the petitioner has effectively deprived respondent of their use, a situation which, by forceof the Recto Law, in turn precludes the former from maintaining an action for recovery of "accruedrentals" 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: HumanRelations, provide another reason why we must hold the petitioner to its word as embodied in itsdemand letter. Else, we would witness a situation where even if the respondent surrendered theequipment voluntarily, the petitioner can still sue upon its claim. This would be most unfair for therespondent. 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 theequipment. It is not difficult to discern why: if we add up the amounts paid by the respondent, theresidual value of the property recovered, and the amount claimed by the petitioner as sued uponherein (for a total of P21,779,029.47), then it would end up making an instant killing out of thetransaction at the expense of its client, the respondent. The Recto Law was precisely enacted toprevent 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 mayfall prey to a similar scheme.

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

Costs against petitioner.

SO ORDERED.

CANCIO C. GARCIAAssociate Justice
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WE CONCUR:

REYNATO S. PUNOChief JusticeChairperson

(On leave)ANGELINA SANDOVAL-GUTIERREZ*

Associate Justice

RENATO C. CORONAAssociate Justice

ADOLFO S. AZCUNAAssociate Justice

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the abovedecision had been reached in consultation before the case was assigned to the writer of the opinionof the Courts Division.

REYNATO S. PUNOChief Justice


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epublic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 141480 November 29, 2006

CARLOS B. DE GUZMAN, Petitioner,vs.TOYOTA CUBAO, INC., Respondent.

D E C I S I O N

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul theOrder,1dated September 9, 1999, of the Regional Trial Court of Quezon City (the RTC), Branch 105,which dismissed the complaint for damages filed by petitioner Carlos B. De Guzman againstrespondent Toyota Cubao, Inc.

On November 27, 1997, petitioner purchased from respondent a brand new white Toyota Hi-Lux 2.4SS double cab motor vehicle, 1996 model, in the amount of P508,000. Petitioner made a downpayment of P152,400, leaving a balance of P355,600 which was payable in 36 months with 54%interest. The vehicle was delivered to petitioner two days later. On October 18, 1998, petitionerdemanded the replacement of the engine of the vehicle because it developed a crack aftertraversing Marcos Highway during a heavy rain. Petitioner asserted that respondent should replace

the engine with a new one based on an implied warranty. Respondent countered that the allegeddamage on the engine was not covered by a warranty.

On April 20, 1999, petitioner filed a complaint for damages2against respondent with the RTC.Respondent moved to dismiss the case on the ground that under Article 1571 of the Civil Code, thepetitioners cause of action had prescribed as the case was filed more than six months from the datethe vehicle was sold and/or delivered.

In an Order dated September 9, 1999, the RTC granted respondents motion and dismissed thecomplaint, thus:

For the Courts consideration are: (1) defendants Motion to Dismiss; (2) plaintiffs Opposition

thereto; (3) defendants Reply; and (4) plaintiffs Rejoinder.

The Court agrees with the plaintiffs counsel that the subject pick -up is a consumer product becauseit is used for personal, family or agricultural purposes, contrary to defendant counsels claim that it isnot because it is a non-consumable item.

Since no warranty card or agreement was attached to the complaint, the contract of sale of thesubject pick-up carried an implied warranty that it was free from any hidden faults or defects, or any
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charge or encumbrance not declared or known to the buyer. The prescriptive period thereof is six (6)months under the Civil Code (Art. 1571).

Under RA No. 7394, the provisions of the Civil Code on conditions and warranties shall govern allcontracts of sale with condition and warranties (Art. 67). The duration of the implied warranty (notaccompanied by an express warranty) shall endure not less than sixty days nor more than one (1)

year following the sale of new consumer products (Art. 68, par. [e]). The two (2) year prescriptiveperiod under Art. 169 cannot prevail over Art. 68 because the latter is the specific provision on thematter.

The Court has noted that the prescriptive period for implied and express warranties cannot be thesame. In the Civil Code, a redhibitory action for violation of an implied warranty against hiddendefects prescribes in six (6) months, while if it based on an express warranty[,] the action prescribesin four (4) years. Under RA No. 7394, the implied warranty cannot be more than one (1) year;however, the implied warranty can only be of equal duration to that an express warranty when theimplied warranty of merchantability accompanies an express warranty (Art. 68, par. [e]). Therefore,the prescriptive period of two years under Art. 169 does not cover an implied warranty, which is notaccompanied by an express warranty. It is applicable to cases where there is an express warranty inthe sale of the consumer product.

Relative to plaintiffs argument that the claim for moral and exemplary damages and attorneys feesis based on quasi-delict or breach of contract, such are merely ancillary to the main cause of actionwhich is based on warranty against hidden defects. Without the latter, the former cannot standalone.

Based on the record, the subject vehicle was purchased on 27 November 1997 and delivered on 29November 1997. This case was filed only on 20 April 1999 or almost nineteen (19) months from [the]sale and/or delivery. Applying Art. 1571 of Civil Code, the action is barred by prescription becausethe complaint was filed more than six (6) months after the sale and/or delivery of the vehicle. Inaddition, the duration of the implied warranty of not more than one (1) year under Art. 68, par (e) ofRA No. 7394 has already elapsed.

Accordingly, defendants Motion is granted and the plaintiffs Complaint is ordered dismissed.

SO ORDERED3

On December 21, 1999, the RTC denied petitioners motion for reconsideration, as follows:

Submitted for resolution are: (1) plaintiffs Motion for Reconsideration; (2) defendants Opposition;and (3) plaintiffs Reply.

Although plaintiffs motion was filed beyond the ten-day period, the Court is convinced that it was notfor the purpose of delay; hence, it cannot be considered as a mere scrap of paper.

After a thorough study, the Court resolves that while reference to Art. 68, par. (e) of RA No. 7394may have been misplaced, yet the subject sale carried an implied warranty whose prescriptiveperiod is six (6) months under Art. 1571 of the Civil Code.

Accordingly, plaintiffs Motion for Reconsideration is DENIED.

SO ORDERED.4
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Petitioner thereupon filed a petition for review on certiorariwith this Court.

The petition should be denied.

First, on procedural grounds, the petition should forthwith be denied for violation of the hierarchy ofcourts. Petitioner states that the present petition is an "appeal by certiorarion pure questions of law,

from the final Order of Branch 105 of the Regional Trial Court of Quezon City in Civil Case No. Q-99-37381 under Rule 45 of the Rules of Court." Upon receipt of the Order of the RTC, datedSeptember 9, 1999, on September 21, 1999, petitioner filed a motion for reconsideration onSeptember 28, 1999. On December 21, 1999, the RTC denied petitioners motion. When petitionerreceived a copy of the said order on January 18, 2000, he had fifteen (15) days from receipt withinwhich to appeal to the Court of Appeals by filing a notice of appeal under Section 2(a) of Rule 41,from an order of the RTC issued in the exercise of its original jurisdiction. The RTCs order datedSeptember 9, 1999 and its subsequent order dated December 21, 1999 partake of the nature of afinal disposition of the case. Hence, the appropriate remedy petitioner should have taken was to filea notice of appeal from the RTC to the Court of Appeals, not a petition for reviewon certioraridirectly with this Court.

Although petitioner intended his petition, filed on February 2, 2000, to be one filed under Rule 45 andhe filed it well within the 15-day reglementary period counted from January 18, 2000, the same wasin effect a petition forcertiorariunder Rule 65, and is therefore dismissible for violation of thehierarchy of courts under Section 4 thereof. Petitioner failed to show that special and importantreasons or exceptional and compelling circumstances exist to justify a direct filing of the petition withthis Court instead of first taking an appeal to the Court of Appeals.5Likewise, petitioner cannot findrefuge in the argument that he was raising pure questions of law. The sole matter petitioner assailsin this action is the RTCs order of dismissal of his complaint for damages on the ground ofprescription which was tantamount to an adjudication on the merits. Again, petitioner should haveresorted to the remedy of appealing the case to the Court of Appeals by filing a notice of appeal withthe RTC.

Second, even if the Court were to disregard the procedural infirmity, the petition should be denied for

lack of merit.

In his complaint, petitioner alleged and prayed, thus:

2. Last 27 November 1997, the plaintiff purchased from the defendant a brand new ToyotaHilux 2.4 motor vehicle with [E]ngine [N]o. 2-L-9514743. It was delivered to the plaintiff on 29November 1997. Copies of the Vehicle Sales Invoice and Vehicle Delivery Note issued bythe defendant are hereto attached as Annexes "A" and "B," respectively.

3. Last 18 October 1998, after only 12,000 kilometers of use, the vehicles engine cracked.Although it was previously driven through a heavy rain, it didnt pass through flooded streetshigh enough to stop sturdy and resistant vehicles. Besides, vehicles of this class are

advertised as being capable of being driven on flooded areas or rugged terrain.

4. As plaintiff knows no reason why the vehicles engine would crack just like that, the samecould only be due to the fact that said engine and/or the vehicle itself was defective evenfrom the time it was bought.

5. Brought to the attention, defendant refused to answer for this defect saying it is notcovered by the vehicles warranty. It refused to replace the vehicle as plaintiff demanded (orat least its engine, or even repair the damage).
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6. As a result of defendants actions, plaintiff suffered mental anxiety and sleepless nights forwhich he demands an award of P200,000.00 moral damages.

7. By way of example for the public good, plaintiff should also be awarded exemplarydamages in the amount of P200,000.00.

8. Forced to litigate to enforce his rights, plaintiff incurred, and shall further incur, litigation-related expenses (including those for his counsels fees) in the total estimated sumof P100,000.

WHEREFORE, it is respectfully prayed that judgment be rendered ordering defendant:

a. to replace the subject vehicle with a brand new one or at least to replace its engine all atdefendants cost;

b. pay the plaintiff:

i. P200,000 moral damages;

ii. P200,000 exemplary damages;

iii. P200,000attorneys fees and litigation expenses; and

iv. the costs of suit.

Other reliefs just and equitable are, likewise, prayed for.6

Petitioner contends that the dismissal on the ground of prescription was erroneous because theapplicable provision is Article 169 of Republic Act No. 7394 (otherwise known as "The Consumer Actof the Philippines" which was approved on April 13, 1992), and not Article 1571 of the Civil Code.

Petitioner specifies that in his complaint, he neither asked for a rescission of the contract of sale nordid he pray for a proportionate reduction of the purchase price. What petitioner claims is theenforcement of the contract, that is, that respondent should replace either the vehicle or its enginewith a new one. In this regard, petitioner cites Article 169 of Republic Act No. 7394 as the applicableprovision, so as to make his suit come within the purview of the two-year prescriptive period.Tangentially, petitioner also justifies that his cause of action has not yet prescribed because thispresent suit, which was an action based on quasi-delict, prescribes in four years.

On the other hand, respondent maintains that petitioners cause of action was already barred by thestatute of limitations under Article 1571 of the Civil Code for having been filed more than six monthsfrom the time the vehicle was purchased and/or delivered. Respondent reiterates that Article 169 ofRepublic Act No. 7394 does not apply.

Petitioners argument is erroneous. Article 1495 of the Civil Code states that in a contract of sale, thevendor is bound to transfer the ownership of and to deliver the thing that is the object of sale.Corollarily, the pertinent provisions of the Code set forth the available remedies of a buyer againstthe seller on the basis of a warranty against hidden defects:

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thingsold may have, should they render it unfit for the use for which it is intended, or should they diminishits fitness for such use to such an extent that, had the vendee been aware thereof, he would not


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have acquired it or would have given a lower price for it; but said vendor shall not be answerable forpatent defects or those which may be visible, or for those which are not visible if the vendee is anexpert who, by reason of this trade or profession, should have known them. (Emphasis supplied)

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold,even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated and the vendor was not aware ofthe hidden faults or defects in the thing sold.

Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after sixmonths from the delivery of the thing sold.

(Emphasis supplied)

Under Article 1599 of the Civil Code, once an express warranty is breached, the buyer can accept orkeep the goods and maintain an action against the seller for damages. In the absence of an existingexpress warranty on the part of the respondent, as in this case, the allegations in petitioners

complaint for damages were clearly anchored on the enforcement of an implied warranty againsthidden defects, i.e., that the engine of the vehicle which respondent had sold to him was notdefective. By filing this case, petitioner wants to hold respondent responsible for breach of impliedwarranty for having sold a vehicle with defective engine. Such being the case, petitioner should haveexercised this right within six months from the delivery of the thing sold.7Since petitioner filed thecomplaint on April 20, 1999, or more than nineteen months counted from November 29, 1997 (thedate of the delivery of the motor vehicle), his cause of action had become time-barred.

Petitioner contends that the subject motor vehicle comes within the context of Republic Act No.7394. Thus, petitioner relies on Article 68 (f) (2) in relation to Article 169 of Republic Act No. 7394.

Article 4 (q) of the said law defines "consumer products and services" as goods, services andcredits, debts or obligations which are primarily for personal, family, household or agriculturalpurposes, which shall include, but not limited to, food, drugs, cosmetics, and devices. The followingprovisions of Republic Act No. 7394 state:

Art. 67. Applicable Law on Warranties. The provisions of the Civil Code on conditions andwarranties shall govern all contracts of sale with conditions and warranties.

Art. 68. Additional Provisions on Warranties. In addition to the Civil Code provisions on sale withwarranties, the following provisions shall govern the sale of consumer products with warranty:

e) Duration of warranty. The seller and the consumer may stipulate the period within which theexpress warranty shall be enforceable. If the implied warranty on merchantability accompanies anexpress warranty, both will be of equal duration. 1wphi1

Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) yearfollowing the sale of new consumer products.

f) Breach of warranties xxx

x x x


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2) In case of breach of implied warranty, the consumer may retain in the goods and recoverdamages, or reject the goods, cancel the contract and recover from the seller so much of thepurchase price as has been paid, including damages. (Emphasis supplied.)

Consequently, even if the complaint is made to fall under the Republic Act No. 7394, the sameshould still be dismissed since the prescriptive period for implied warranty thereunder, which is one

year, had likewise lapsed.

WHEREFORE, the petition is DENIED for being in violation of the hierarchy of courts, and in anyevent, for lack of merit.

No costs.

SO ORDERED.

ADOLFO S. AZCUNAAssociate Justice

WE CONCUR:

REYNATO S. PUNOChairperson

Associate Justice

ANGELINA SANDOVAL-GUTIERREZAssociate Justice

RENATO C. CORONAAssociate Justice

CANCIO C. GARCIAAssociate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision were reached in consultation before the case wasassigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNOAssociate JusticeChairperson, Second Division


Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, it ishereby certified that the conclusions in the above Decision had been reached in consultation beforethe case was assigned to the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBANChief Justice


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Republic of the Philippines

SUPREME COURTManila

THIRD DIVISION

G.R. No. 152695 July 25, 2011

VICTORIA CLARAVALL, assisted by her husband, LORETO CLARAVALL, Petitioner,vs.RICARDO LIM, ROBERTO LIM, and ROGELIO LIM, Respondents.

D E C I S I O N

PERALTA, J .:

Before the Court is a petition for review on certiorariunder Rule 45 of the Rules of Court whichseeks to set aside the Decision1of the Court of Appeals (CA) dated March 18, 2002 in CA-G.R. CVNo. 38859. The assailed CA Decision affirmed the Decision2of the Regional Trial Court (RTC) ofIsabela, Branch 17, in Civil Case No. 2583.

The instant petition arose from a Complaint for Consolidation of Ownership of Real Properties filedby herein respondents against herein petitioner, alleging as follows:

x x x x

3. That sometime on December 3, 1976, the defendant, with the marital consent of herhusband, executed a DEED OF SALE WITH THE RIGHT OF REPURCHASE SELLING AND

CONVEYING unto the plaintiffs the following described properties, to wit:

A COMMERCIAL LOT located in the Centro of Ilagan, Isabela x x x.

A DWELING HOUSE with a ground area of 108 square meters, more or less, constructedwith wooden materials and with G.I. roofing, erected on the above-described commercial lotx x x.

4. That the consideration of the sale is TWO HUNDRED FIFTY THOUSAND PESOS(P250,000.00), Philippine Currency paid by the plaintiffs to the defendant;

5. That the condition of said sale is that the defendant reserved the right to repurchase,

within two (2) years from said date, said commercial lot and dwelling house by paying andreturning unto the plaintiffs the purchase [price] of P250,000.00 stipulated in the Deed, acopy of which is hereto attached and made part hereof marked Annex "A"; that within [six] (6)months before the expiration of the date of repurchase, the defendant is under obligation togive plaintiffs written notice that she is in a position to repurchase said properties before theexpiration of said period; and for failure to give such notice, the plaintiffs who arevendees-a-retro shall automatically become the absolute owners thereof upon the expiration of saidperiod;
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6. That defendant never gave written notice to plaintiffs that she was in a position torepurchase said commercial lot and dwelling house as described above; neither diddefendant offer to repurchase the same upon the expiration of said period; and that afternotifying the defendant that she may still repurchase said properties three months after theexpiration of said period, she failed to repurchase the same;

7. That considering that the dwelling house is already an old house and has depreciated alot, the purchase price of the building and house indicated in the deed justly represents thefair market value of said properties;

8. That considering that the defendant failed to repurchase the dwelling house andcommercial lot described in paragraph 3 hereof on or before December 3, 1976, the plaintiffsare now entitled to the consolidation of their ownership of the same.

x x x x3

In her Answer with Counterclaim, petitioner denied the material allegations of the Complaint andraised the following Special and Affirmative Defenses:

1 That on December 3, 1976, the plaintiffs and the defendant entered into a contract ofsale with right of repurchase over the properties mentioned and described in the deed x x xfor a consideration and/or price of Two Hundred Fifty Thousand Pesos (P250,000.00), x x x;

2 That after the plaintiffs have paid to the defendant One Hundred Fifty Thousand Pesos(P150,000.00), out of the stipulated consideration and/or price of Two Hundred FiftyThousand Pesos (P250,000.00), the former demanded and/or required upon the latter asadditional obligation to require her brother-in-law, Francisco alias Enrique alias IgmeClaravall from whom the dwelling house was bought by her in 1967, to execute another deedof sale over the same dwelling house in their (plaintiffs') favor, with right of repurchase of theformer;

3 That upon the failure and/or refusal of the defendant to comply with the additionalobligation imposed upon her by the plaintiffs mentioned in the next preceding paragraph, thelatter also refused and/or failed to pay their balance of One Hundred Thousand Pesos(P100,000.00), to the former, although said plaintiffs, on the occasions of their refusal to paysaid balance, promised to the defendant that should she win her case then pending beforethe Court of Appeals, involving another bigger residential lot, with a very much bigger andconcrete house thereon, also situated in Centro, Ilagan, Isabela, the former shall be readyand willing to cancel the said contract of sale with right of repurchase and instead and/or inlieu thereof, to execute with the latter, another contract of sale with right of repurchase oversaid bigger residential lot with a bigger and concrete dwelling house thereon, for aconsideration and/or price of Five Hundred Thousand Pesos (P500,000.00), in addition tothe One Hundred Fifty Thousand Pesos (P150,000.00) already paid by them under the deed,

x x x and for a longer period of five (5) years within which to repurchase;

4 That when the defendant refused to agree to the promise and/or proposal of the plaintiffsmentioned in the next preceding paragraph, the latter insisted on their refusal to pay theirbalance of One Hundred Thousand Pesos (P100,000.00) x x x;

5 That by reason of the refusal of the plaintiffs to pay to the defendant their balance of OneHundred Thousand Pesos (P100,000.00), and/or for having retained the same forthemselves, the latter, on December 1, 1978, executed a "Cautionary Notice", addressed to
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the Register of Deeds and Provincial Assessor of Isabela, registering and/or manifesting heropposition to any consolidation of ownership which may be made by the plaintiffs inconnection with the Deed of Sale with Right of Repurchase x x x;

6 That considering the fact that the plaintiffs, as vendees, retained for themselves OneHundred Thousand Pesos (P100,000.00), which is a part of the consideration and/or price of

the contract of sale with right of repurchase and that the defendant, as vendor, retainedpossession of the properties sold, the document executed by and between the partiesplaintiffs and defendant on December 3, 1976, x x x, is consequently presumed to be a mereequitable mortgage;

x x x x.4

After the issues were joined, trial on the merits ensued.

On August 5, 1991, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiffs and

against the defendant:

1. Declaring the plaintiffs to be the absolute owners of the commercial lot and dwelling housedescribed in par. 3 of the Complaint;

2. Declaring the defendant to have waived her right to repurchase said properties;

3. Ordering the defendant to pay attorney's fees of P2,000.00; and

4. Ordering the defendant to pay costs of this suit.

SO ORDERED.5

Aggrieved by the judgment of the RTC, petitioner filed an appeal with the CA.

On March 18, 2002, the CA promulgated the presently assailed Decision affirming the judgment ofthe RTC.

Hence, the instant petition with the following assignment of errors:

A. THE RESPONDENT COURT SERIOUSLY ERRED IN NOT FINDING THAT THEPOSSESSION OF THE PROPERTY SUBJECT OF THE DEED OF SALE WITH RIGHT TOREPURCHASE, REMAINED WITH PETITIONER VICTORIA CLARAVALL, AS LESSOR, TOENRIQUE CLARAVALL, AS LESSEE;

B. THE RESPONDENT COURT GRAVELY ERRED IN NOT FINDING THAT BY CLEARINFERENCE RESPONDENTS EXTENDED THE PERIOD OF PETITIONER VICTORIA H.CLARAVALL TO EXERCISE HER RIGHT TO REPURCHASE THE PROPERTY WHICH ISTHE SUBJECT OF THE DEED OF SALE WITH RIGHT TO REPURCHASE (EXHIBIT A);

C. THE RESPONDENT COURT GRAVELY ERRED IN NOT FINDING THAT BY THEUNASSAILABLE RECEIPTS, RESPONDENTS PAID ONLY ONE HUNDRED [FIFTY]


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THOUSAND (P150,000.00) PESOS AND REFUSED TO PAY THE BALANCE OF ONEHUNDRED THOUSAND PESOS;

D. THE RESPONDENT COURT SERIOUSLY ERRED IN NOT FINDING THAT THE DEEDOF SALE WITH RIGHT TO REPURCHASE (EXH. A) IS AN EQUITABLE MORTGAGE; AND

E. EVEN ASSUMING THAT EXHIBIT A IS A BONA FIDEDEED OF SALE WITH RIGHT TOREPURCHASE, THE RESPONDENT COURT SERIOUSLY ERRED IN NOT GRANTINGPETITIONER VICTORIA CLARAVALL'S RIGHT TO EXERCISE HER RIGHT TOREPURCHASE WITHIN THIRTY (30) DAYS FROM THE TIME OF FINAL JUDGMENTPURSUANT TO ARTICLE 1606 OF THE CIVIL CODE.6

At the outset, it bears to reiterate the well-settled rule that, in a petition for review on certiorariunderRule 45 of the Rules of Court, only questions of law may be raised by the parties and passed uponby this Court.7This restriction of the review to questions of law has been institutionalized in Section1, Rule 45 of the Rules of Court, the second sentence of which provides that the petition shall raiseonly questions of law which must be distinctly set forth. Indeed, in the exercise of its power of review,the Court is nota trier of facts and, subject to certain exceptions,8which the Court finds to be absent

in the instant case, it does not normally undertake the re-examination of the evidence presented bythe contending parties during the trial.9Perforce, the findings of fact by the CA, affirming that of theRTC, are conclusive and binding on the Court.10In the instant case, a perusal of petitioner's first fourassigned errors would readily show that the issues raised are factual in nature; thus, necessitating areview of the evidence presented by the parties. Without doubt, the following questions raised in theinstant petition, to wit: (1) whether the property subject of the instant case is in the possession ofpetitioner; (2) whether petitioner's right to repurchase is extended; (3) whether respondents wereonly able to pay a portion of the purchase price for the subject property, and (4) whether the subjectdeed of sale with right of repurchase is actually an equitable mortgage, are all questions of factwhich are beyond the province of a petition for review oncertiorari.

Even granting, arguendo, that the foregoing issues of fact can be validly raised in the instant petition,the Court still finds petitioner's arguments to be without merit.

Echoing her arguments raised before the CA, petitioner's bone of contention in the present petition isthat the contract she entered into with respondents is an equitable mortgage, claiming that: (1) sheremained in possession of the subject property; (2) her right to repurchase has not yet expired; and(3) respondents retained a portion of the purchase price. Petitioner argues that, under Article 1602 ofthe Civil Code,11these circumstances indicate that her contract with respondents is an equitablemortgage. However, the Court finds no cogent reason to depart from the findings of both the CA andthe RTC that petitioner failed to substantiate her claims and that the subject contract is, in fact, oneof sale with right of repurchase.

The CA correctly held as follows:

The person in actual possession of the property at the time of the execution of the deed of sale withright to repurchase was Enrique Claravall, a lessee of the dwelling unit located on the commerciallot. In the case ofIgnacio vs. CA, the Supreme Court held the transaction between the petitioner andrespondent to be a sale with a right to repurchase observing that "private respondents have not beenin actual possession of the subject property. They had been leasing it out at the time the deed wasexecuted." x x x

x x x x
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The fact that plaintiff instituted the action for consolidation of ownership five months after December3, 1978, the expiry date of the right to repurchase, should not be construed as an extension of theperiod for defendant to exercise her right to repurchase the subject property. Any extension for theexercise of the right to repurchase must be expressly provided in another document to give rise tothe presumption of equitable mortgage, and not merely implied from any act or omission.12

The Court likewise quotes, with approval, the disquisition of the RTC disposing of the issue onrespondents' supposed failure to pay the full amount of the purchase price, thus:

Admittedly, there is no dispute as to the existence and due execution of the Contract embodied insaid Exhibits "A", "A-1" and "A-2". However, defendant [herein petitioner] anchored her evidence onthe theory that although she had affixed her signature on said Deed of Sale with Right toRepurchase as could be gleaned in the aforesaid exhibits, the consideration of P250,000.00 has notyet been fully paid by plaintiffs. This argument is obviously defective and will only merit scantconsideration by the Court. The circumstances obtaining in the instant case argue against suchcontention. The Contract is, undeniably, executed in accordance with the formalities required by lawand as correctly observed by plaintiffs, its contents are clear and couched in unambiguous termswhich would leave no room for interpretation. x x x

Likewise, the Court cannot just lose sight of the fact that the signature of defendant's husband LoretoClaravall, showing his marital conformity to the same, will certainly negate such claim for the balanceof P100,000.00 as defendant would insist. Besides, there are two competent witnesses, namely,Gaudencio Talaue, defendant's driver herself and Estenelie B. Salvador. These witnesses couldhave been utilized by defendant to buttress her theory had her story been based on facts and thetruth. Failing this, the Court can hardly rely on her oral claim[s] which are obviously inconclusive andincredible, if not purely conjectural. By affixing her signature therein, defendant is now estopped inplainly denying having received the whole amount as exactly stated.

Furthermore, even without going deeper into the evidence presented by the parties, defendant'stheory is highly inconceivable, considering the value of the property and the big amount of moneyinvolved therewith. The Court is not inclined to believe that a vendor-a-retro would affix her signature

therein if the consideration thereof is fixed but not yet fully paid, much less if said balance as heretoclaimed involves a big amount of money. Suffice it to say that had plaintiffs still under obligation topay the balance of One Hundred Thousand (P100,000.00) Pesos, as theorized by the defendant, thelatter would certainly have initiated an action to recover the balance or rescind the contractaltogether. Unfortunately, not even a single proof demanding the balance, if any, was adduced bythe defendant. As a matter of fact, even the letters sent by defendant to plaintiffs on June 2, 1978and November 27, 1978 (Exhibits "4" and "5", defendant) did not mention, much less disclose, anyclaim to that effect other than defendant's intention to repurchase said properties.

x x x x

Concededly, while the defendant served plaintiffs written notice of her desire to repurchase said

properties, defendant never made any tender of payment of the repurchase price representing theamount of the sale she received from plaintiffs at the time the contract was executed on December3, 1976. x x x

x x x x13

Indeed, petitioner failed to present any competent evidence, documentary or otherwise, to prove herclaim that the subject contract is an equitable mortgage and not a sale with right of repurchase. It issettled that the party alleging a fact has the burden of proving it and mere allegation is not


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evidence.14In fact, it appears from all indications that petitioner's claim of equitable mortgage issimply an afterthought subsequent to her realization that she cannot repurchase the subject propertywithin the period stipulated in her contract with petitioners. It is plainly a ploy to resurrect a rightwhich has already expired.

With respect to the last assigned error, the Court's discussion in Felicen, Sr. v. Orias,15as reiterated

in the subsequent cases ofHeirs of Vda. de Macoy v. Court of Appeals16

andAgan v. Heirs of theSpouses Andres Nueva and Diosdada Nueva,17with respect to the rationale behind the provisions of

Article 1606 of the Civil Code,18is instructive, to wit:

Article 1606 is intended to cover suits where the seller claims that the real intention was a loan withequitable mortgage but decides otherwise. The seller, however, must entertain a good faith beliefthat the contract is an equitable mortgage. In Felicen, Sr., et al. v. Orias, et al., cited by petitioner,the Court explained:

The application of the third paragraph of Article 1606 is predicated upon the bona fides of thevendora retro. It must appear that there was a belief on his part, founded on facts attendant uponthe execution of the sale withpacto de retro, honestly and sincerely entertained, that the agreement

was in reality a mortgage, one not intended to affect the title to the property ostensibly sold, butmerely to give it as security for a loan or obligation. In that event, if the matter of the real nature ofthe contract is submitted for judicial resolution, the application of the rule is meet and proper: that thevendora retro be allowed to repurchase the property sold within 30 days from rendition of final

judgment declaring the contract to be a true sale with right to repurchase. Conversely, if it shouldappear that the parties agreement was really one of sale transferring ownership to the vendee,

but accompanied by a reservation to the vendor of the right to repurchase the property and there

are no circumstances that may reasonably be accepted as generating some honest doubt as to theparties intention, theproviso is inapplicable. The reason is quite obvious. If the rule were otherwise,it would be within the power of every vendora retro to set at naught apacto de retro, or resurrect anexpired right of repurchase, by simply instituting an action to reform the contract known to him to

be in truth a sale withpacto de retro into an equitable mortgage. As postulated by the petitioner,

"to allow herein private respondent to repurchase the property by applying said paragraph x x x tothe case at bar despite the fact that the stipulated redemption period had already long expired whenthey instituted the present action, would in effect alter or modify the stipulation in the contract as tothe definite and specific limitation of the period for repurchase (2 years from the date of sale or onlyuntil June 25, 1958) thereby not simply increasing but in reality resuscitating the expired right torepurchase x x x and likewise the already terminated and extinguished obligation to resell by hereinpetitioner." The rule would thus be made a tool to spawn, protect and even reward fraud and badfaith, a situation surely never contemplated or intended by the law.

This court has already had occasion to rule on the proper interpretation of the provision in question.InAdorable v. Inacala, where the proofs established that there could be no honest doubt as to theparties intention, that the transaction was clearly and definitely a sale withpacto de retro, the Courtadjudged the vendora retro not to be entitled to the benefit of the third paragraph of Article 1606.

As earlier discussed, the Court finds no error in the conclusions reached by both the CA and theRTC that the unmistakable and definite intention of petitioner and respondents was that thetransaction they entered into is one of sale with right of repurchase. Hence, petitioner is not entitledto the reprieve provided for under the third paragraph of Article 1606 of the Civil Code.

WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated March18, 2002 in CA-G.R. CV No. 38859, is AFFIRMED.
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SO ORDERED.

DIOSDADO M. PERALTAAssociate Justice

WE CONCUR:

ANTONIO T. CARPIOAssociate Justice

PRESBITERO J. VELASCO, JR.Associate Justice

ROBERTO A. ABADAssociate Justice

JOSE CATRAL MENDOZAAssociate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the casewas assigned to the writer of the opinion of the Courts Division.

PRESBITERO J. VELASCO, JR.Associate JusticeThird Division, Chairperson


Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, Icertify that the conclusions in the above Decision had been reached in consultation before the casewas assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONAChief Justice


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Republic of the Philippines

SUPREME COURTManila

SECOND DIVISION

G.R. No. 155716 October 2, 2009

ROCKVILLE EXCEL INTERNATIONAL EXIM CORPORATION, Petitioner,vs.SPOUSES OLIGARIO CULLA and BERNARDITA MIRANDA, Respondents.

D E C I S I O N

BRION, J.:

Whether a Deed of Absolute Sale is really an absolute sale of real property or an equitablemortgage is the main issue now before us. Petitioner Rockville Excel International EximCorporation (Rockville) prays in this petition1that we reverse the October 9, 2002 decision2ofthe Court of Appeals (CA) in CA G.R. SP No. 66070, denying its appeal and affirming thedecision of the Regional Trial Court (RTC), Batangas City, Branch 2 in Civil Case No. 4789,which dismissed their complaint for specific performance against the respondents SpousesOligario (Oligario) and Bernardita Culla.

BACKGROUND FACTS

The spouses Oligario and Bernardita (Sps. Culla) are the registered owners of a parcel of land

covered by Transfer Certificate of Title (TCT) No. 5416. They mortgaged this property to PSBank to secure a loan ofP1,400,000.00.

Sometime in 1993, the Office of the Clerk of Court and the Ex-Officio Sheriff issued a SheriffsNotice of Sale for the extrajudicial foreclosure of the property. To prevent the foreclosure,Oligario approached Rockville represented by its president and chairman, Diana Young forfinancial assistance. Rockville accommodated Oligarios request and extended him a loanof P1,400,000.00. This amount was increased by P600,000.00 for the cash advances Oligariorequested, for a total loan amount of P2,000,000.00.

According to Rockville, when Oligario failed to pay the P2,000,000.00 loan after repeateddemands and promises to pay, the Sps. Culla agreed to pay their indebtedness by selling to

Rockville another property the spouses owned in Brgy. Calicanto, Batangas City (property). Theproperty has an area of approximately 7,074 square meters and is covered by TCT No. T-19538. Since a survey of the surrounding properties revealed that the property is worth morethan the Sps. Cullas P2,000,000.00 loan, the parties agreed to fix the purchase priceatP3,500,000.00.

As narrated by Rockville, it accepted the offer for a dacion en pago; on June 25, 1994, Rockvilleand Oligario executed a Deed of Absolute Sale over the property. While the property was a
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conjugal property of the Sps. Culla, only Oligario signed the Deed of Absolute Sale. Rockvilleasserted that, by agreement with the Sps. Culla, Rockville would pay theadditional P1,500,000.00 after Bernardita affixes her signature to the Deed of Absolute Sale.

Rockville claimed that it had always been ready and willing to comply with its obligation todeliver theP1,500,000.00. In fact, Rockville initially deposited this whole amount with May Bank

of Malaysia, with notice to Oligario, which amount was subsequently transferred to Rockvilleslaw firm. However, when Bernardita continued to refuse to sign the Deed of Absolute Sale,Rockville caused the annotation of an adverse claim on TCT No. T-19538 in order to protect itsinterest in the property. Furthermore, Rockville tried to transfer the title of the property in itsname but the Registry of Deeds refused to carry out the transfer, given the absence ofBernarditas signature in the Deed of Absolute Sale.

On February 4, 1997, Rockville filed a complaint for Specific Performance and Damages beforethe Regional Trial Court (RTC) of Batangas City, Branch 2 against the Sps. Culla, praying thatthe lower court order Bernardita to sign the Deed of Absolute Sale or, in the alternative, toauthorize the sale even without Bernarditas signature.

In their Answer, the Sps. Culla alleged that the purported Deed of Absolute Sale failed to reflecttheir true intentions, as the deed was meant only to guarantee the debt to Diana Young, not toRockville. Contrary to Rockvilles contention, the agreement was that the P1,500,000.00 had tobe paid before Bernardita would sign the Deed of Absolute Sale. When neither Rockville norDiana Young paid the P1,500,000.00, the Sps. Culla volunteered to repay the P2,000,000.00and opted to rescind the sale.

On October 26, 1999, the RTC decided the case in the respondents favor,3dismissingRockvilles complaint after finding that the transaction between the parties was in reality anequitable mortgage, not an absolute sale. The dispositive portion of the RTC decision states:

WHEREFORE, in view of all the foregoing, the complaint filed by the plaintiff, Rockville ExcelInternational Exim Corporation against defendants Oligario Culla and Bernardita Miranda ishereby DISMISSED. The Absolute Deed of Sale executed between the said plaintiff anddefendants on June 25, 1994 is hereby declared as an equitable mortgage and, defendants arehereby entitled to redeem the mortgaged property upon full payment of their mortgaged debt tothe plaintiff in the total amount of two million pesos (P2,000,000.00) with legal rate of interestfrom June 25, 1994, the time the loan matured, until it is fully satisfied. With costs against theplaintiff.

SO ORDERED.

THE CA DECISION

Rockville appealed to the CA. In the assailed October 9, 2002 decision, the CA concluded thatthe purported contract of sale between Rockville and the Sps. Culla was in reality an equitablemortgage based on the following factual circumstances: (a) the glaring inadequacy in theconsideration for the sale and the actual market value of the property; (b) the fact that the Sps.Culla re

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