FIRST DIVISION

in CA-G.R. CV No. 63230, affirming, with modification, an

earlier

decision

of

the

Regional

Trial

Court

(RTC)

DOMINGO R. LUMAYAG and

FELIPA N. LUMAYAG,
Petitioners,

G.R. No. 162112

Present:

of Ozamiz City which ruled that the instrument entitled Deed

petitioners by the respondents is actually an equitable

- versus -

PUNO, C.J., Chairperso

n,
*
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

HEIRS OF JACINTO NEMEO

and DALMACIA DAYANGCONEMEO,
represented
by
MELITON NEMEO,
Respondents.

of Sale with Pacto De Retro executed in favor of the herein

mortgage.
The facts:
During their lifetime, the spouses Jacinto Nemeo and
Dalmacia Dayangco-Nemeo, predecessors-in-interest of the

Promulgated:
July 3, 2007

herein respondent heirs, owned two (2) parcels of coconut

land located in Manaca, Ozamiz City. The parcels are: Lot No.
4049, with an area of five (5) hectares and covered by

x--------------------------------------------------------------------------

Original Certificate of Title (OCT) No. 0-1743 and Lot No.

--------------x

4035 C-4, consisting of 4,420 square meters and covered by

Tax Declaration No. 13750.
DECISION
In 1979, Dalmacia died survived by her husband,

GARCIA, J.:

Jacinto, and their six (6) children, to wit: Meliton, Eleuteria,

Timoteo, Justo, Saturnino (now deceased) and Felipa.

Challenged and sought to be set aside in this petition for

review on certiorari under Rule 45 of the Rules of Court is the

On February 25, 1985, Jacinto, joined by his five (5) children,

decision

namely, Meliton, Eleuteria, Timoteo, Justo and Saturnino,

[1]

dated September 30, 2003 of the Court of Appeals

(CA), as reiterated in its resolution

[2]

of January 9, 2004

conveyed to his daughter Felipa and the latters husband

Domingo Lumayag the aforementioned Lot Nos. 4049 and

was in Domingos possession but the same was lost when a

4035 C-4. The instrument of conveyance is denominated

typhoon

as Deed of Sale with Pacto De Retro.[3]Thereunder, it was

Talisay, Cebu on November

stipulated that the consideration for the alleged sale of the

opposed by the other heirs of Jacinto and Dalmacia who

two (2) aforementioned lots was Twenty Thousand Pesos

claimed that the owners duplicate copy of the same OCT was

(P20,000.00) and that the vendors a retro have the right to

actually in the possession and custody of their brother

repurchase the same lots within five (5) years from the date

Meliton Nemeo, the administrator of the property, when it

of the execution of the instrument on February 25, 1985. It

was burned in a fire on May 22, 1992. In an order

was likewise agreed thereunder that in the event no

dated December 20, 1996,[4] the RTC resolved said petition by

purchase is effected within the said stipulated period of five

ordering the issuance of a new owners duplicate copy of OCT

(5) years conveyance shall become absolute and irrevocable

No. 0-1743 and its delivery to the heirs of Jacinto

without the necessity of drawing up a new absolute deed of

and Dalmacia.

hit

and

destroyed
12,

the

couples

1990.

The

house

petition

in
was

sale, subject to the requirements of law regarding

consolidation of ownership of real property.
On April 4, 1985, Jacinto died while undergoing
treatment at the MHARS General Hospital in Ozamiz City.

Such were the state of things when, on December 24, 1996,

in the same RTC, the heirs of Jacinto and Dalmacia, namely,
their children Meliton, Eleuteria, Timoteo and Justo and

More than a decade later, or on August 28, 1996, the

grandchildren Ricky and Daisy who are the heirs of Saturnino,

spouses Domingo Lumayag and Felipa Nemeo-Lumayag filed

(hereinafter collectively referred to as the respondent heirs)

with the RTC of Ozamiz City a petition for the reconstitution

filed against the spouses Domingo Lumayag and Felipa

of the owners duplicate copy of OCT No. 0-1743 covering Lot

N. Lumayag a complaint[5] for Declaration

No. 4049, one of the two lots subject of the earlier Deed

Equitable Mortgage, Accounting and Redemption with

of Sale with Pacto De Retro.In that petition, the Lumayags

Damages. In their complaint, docketed in the trial court as

alleged that said owners duplicate copy of OCT No. 0-1743

Civil Case No. 96-69 and raffled to Branch 35 thereof, the

of

Contract

as

plaintiff heirs prayed that the Deed of Sale with Pacto De

Justo Nemeos, of the subject lots with the petitioner spouses

Retro executed on February 25, 1985 in favor of the

only given two-thirds share of the harvest therefrom; and (5)

defendant spouses Domingo Lumayag and Felipa N. Lumayag

the pactum

over Lot Nos. 4049 and 4035 C-4 be declared as an equitable

contract. Thus, the heirs pray for a judgment (a) declaring

mortgage and considered as already redeemed, with

the subject Deed of Sale with Pacto de Retro as an equitable

accounting and damages.

mortgage and considering the lots subject thereof as

Essentially, the

subject

subject Deed of Sale with Pacto De Retro was executed only

accounting of the fruits and/or income of the coconut lands

for the purpose of securing the payment of a loan

from 1985 to 1996 and to return whatever remains of the

ofP20,000.00

spouses in

amount with interest at the legal rate after deducting

connection with the medication and hospitalization of the

the P20,000.00 loan; and (c) ordering the same defendants to

then ailing Jacinto Nemeo. To support their claim that the

pay litigation expenses and attorneys fees.

the

defendant

that

the

redeemed; (b) ordering the defendant spouses to render an

from

alleged

in

the

obtained

complaint

commissorium stipulation

contract in question was an equitable mortgage, the plaintiff

heirs materially pointed out the following: (1) the grossly
inadequate price of the subject lots considering that Lot No.
4049 with an area of 5 hectares has a market value
of P40,760.00 and an assessed value of P15,230.00, as shown
by Tax Declaration No. 94-07335-A, while Lot No. 4035 C-4
with an area of 4,420 square meters has a market value
of P4,120.00 and an assessed value of P1,460.00, per Tax
Declaration No. 94-07355-A;(2) their (plaintiffs) continued
payment of realty taxes; (3) the land title and tax
declaration remained in the names of Jacinto Nemeo and
Dalmacia Dayangco-Nemeo; (4) their possession, particularly

In their Answer,[6] the spouses Lumayag denied that

the contract in question was an equitable mortgage and
claimed that the amount of P20,000.00 received by the
plaintiff heirs was the consideration for the sale of the two
lots and not a loan. By way of affirmative defenses, the
spouses Lumayag asserted that the action was already barred
by laches and prescription and the complaint itself states no
cause of action.

With the pre-trial conference having failed to bring the

3.

parties to any amicable settlement, trial on the merits

ensued.

Ordering
the
defendants to pay the
cost of this suit.

SO ORDERED.
Eventually, in a decision[7] dated February 3, 1999, the trial
court adjudged the subject Deed of Sale with Pacto De
Retro as an equitable mortgage and ordered the defendant

Dissatisfied, both parties appealed to the CA. Unfortunately,

spouses to reconvey Lot Nos. 4049 and 4035 C-4 to the

for failure of the plaintiff heirs to submit their appeal brief,

plaintiff heirs for P20,000.00. We quote the fallo of the

their appeal was dismissed, leaving that of the defendant

decision:

spouses which was docketed as CA-G.R. CV No. 63230.

As stated at the threshold hereof, the appellate

WHEREFORE, in the light of the foregoing,

judgment is hereby rendered to wit:
1.

2.

Declaring
the
Deed of Sale with Pacto
de Retro marked annex A
to the Complaint as
equitable mortgage;
Ordering
the
defendants to reconvey
the
properties
in
litigation to the plaintiffs
in
the
amount
of
P20,000.00 within 30
days after the decision
has become final and
executory;

court, in its Decision of September 30, 2003, affirmed that

of the trial court but with the modification that the
mortgaged properties are subject to foreclosure should the
respondents fail to redeem the same within thirty (30) days
from finality of the decision. More specifically, the CA
decision dispositively reads:
WHEREFORE, premises considered, the
Decision dated February 3, 1999 rendered by
the Regional Trial Court, Branch 35, Ozamiz
City
in
Civil
Case
No.
96-69
is
herebyAFFIRMED with MODIFICATION, in that
[petitioners] could foreclose the mortgaged
properties in the event [private respondents]

fail to exercise their right of redemption

within thirty (30) days from the finality of this
decision.
SO ORDERED. (Words in brackets supplied.)
Explains the CA in its decision:
xxx xxx xxx
In the instant case, we hold that the
deed of sale with pacto de retro is actually an
equitable mortgage. For one, the supposed
price for the sale with pacto de retro in the
amount of P20,000.00 is unusually inadequate
for the two (2) parcels of land, the total area
of which is almost 5.5 hectares. Also,
[respondents heirs] remained in possession of
the subject properties even after the
execution of the subject instrument. Not only
did [respondent heirs] retain possession of the
subject properties, they also paid for the
realty taxes of the same. Indeed, as the trial
court found the transaction was one of an
equitable mortgage,
Finally, the subject instrument provides that if
the vendors a-retro, herein plaintiffsappellants, fails to exercise their right to
redeem or repurchase the subject properties
within the period stipulated upon, then the
conveyance shall be deemed to be an absolute

and irrevocable sale, without the necessity of

executing any further deed. Such stipulation is
void for being a pactum commissorium. xxx
Having ruled that the instrument executed by
the parties is one of an equitable mortgage,
[respondent heirs] can now redeem the
mortgaged
properties
from
[petitioner
spouses] within thirty (30) days from finality of
this decision. Otherwise, [petitioner spouses]
would be given the option to foreclose the
mortgaged properties, for as a rule, in a real
estate mortgage, when the principal obligation
is not paid when due, the mortgagee has the
right to foreclose the mortgage and to have
the property seized and sold with the view of
applying the proceeds to the payment of the
obligation. xxx. (Words in brackets supplied).
With their motion for reconsideration having been denied by
the appellate court in its equally impugned Resolution of
January 9, 2004, petitioners are now with this Court via the
instant recourse on their submission that:
I
HON. COURT OF APPEALS GRAVELY ERRED IN
NOT REVERSING THE DECISION OF THE TRIAL
COURT AND
DISMISSING
THE
PRIVATE
RESPONDENTS COMPLAINT ON GROUNDS OF
LACHES AND OR PRESCRIPTION.

vendee a retro by operation of law the absolute title and

II
HON. COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT THE DEED OF SALE WITH PACTO
DE RETRO IS ACTUALLY AN EQUITABLE
MORTGAGE.

ownership over the property sold.[10]

Here, there is no issue as regards the fact that the
subject Deed of Sale with Pacto De Retro provided for a 5year redemption period which expired on February 25,
1990. Evidently, then, the failure of the respondent heirs to

III
THE DECISION RENDERED BY THE HON. COURT
OF APPEALS IS NOT SUPPORTED BY THE
EVIDENCE AND CONTRARY TO LAW.[8]

redeem

the

properties

within

the

stipulated

period

indubitably vested the absolute title to and ownership

thereof to the petitioners. But such consequence would
only be true if the contract that was executed between
the parties was indeed a pacto de retro sale and not an

We DENY.

equitable mortgage.

Petitioners initially put the CA to task for not

dismissing the case considering that the titles to the subject
parcels of land had already been consolidated to them by
operation of law because the five (5)-year prescriptive period
for the respondents to repurchase expired in 1990.
Under a pacto de retro sale, title to and ownership of
property are immediately vested in the vendee a retro,
subject only to the resolutory condition that the vendor
repurchases it within the stipulated period.

[9]

The failure of

the vendor a retro to repurchase the property vests upon the

The two (2) courts below unanimously found that the

subject Deed of Sale with Pacto De Retro, while purporting
to be a sale, is in truth and in fact an equitable
mortgage. Such factual finding, more so when supported by
the evidence, as here, commands not only respect but even
finality and is binding on this Court.[11]
An equitable mortgage has been defined as one which
although lacking in some formality, or form or words, or
other requisites demanded by a statute, nevertheless reveals
the intention of the parties to charge real property as

security for a debt, and contains nothing impossible or

contrary to law.[12]
Article 1602 of the Civil Code enumerates the
instances when a contract, regardless of its nomenclature,
may be presumed to be an equitable mortgage, to wit:

In any of the foregoing case, any

money, fruits, or other benefit to be received
by the vendee as rent or otherwise shall be
considered as interest which shall be subject
to the usury laws.
Article 1604 of the Civil Code provides that the
provisions of Article 1602 shall also apply to a contract

(1) When the price of a sale with right to

repurchase is unusually inadequate;

purporting to be an absolute sale, and, in case of doubt, a

(2) When the vendor remains in possession as

lessee or otherwise;

shall be construed as an equitable mortgage.[13]

(3) When upon or after the expiration of the

right
to
repurchase another
instrument
extending the period of redemption or
granting a new period is executed;
(4) When the purchaser retains for himself a
part of the purchase price;
(5) When the vendor binds himself to pay the
taxes on the thing sold;
(6) In any other case where it may be fairly
inferred that the real intention of the parties
is that the transaction shall secure
the payment of a debt or the performance of
any other obligation.

contract purporting to be a sale with right to repurchase

The law requires the presence of any one and not the
concurrence of all of the circumstances enumerated under
Article 1602, supra, to conclude that the transaction is one
of equitable mortgage. So it is that in Socorro Taopo Banga v.
Sps. Jose and Emeline Bello, [14] this Court, citing Aguirre v.
CA,[15] unequivocally ruled:
The presence of even one of the
circumstances in Article 1602 is sufficient basis
to declare a contract as one of equitable
mortgage. The explicit provision of Article
1602 that any of those circumstances would
suffice to construe a contract of sale to be one
of equitable mortgage is in consonance with
the rule that law favors the least transmission
of property rights. To stress, the existence of

any one of the conditions under Article

1602,
not
a
concurrence,
nor
an
overwhelming
number
of
such
circumstances, suffices to give rise to the
presumption that the contract is an
equitable mortgage. (Emphasis ours)

convincing enough to support a

conclusion that

the

transaction in question is really an equitable mortgage.

Evidence is extant on record that the respondent
heirs, as vendors a retro, remained in possession of the
subject lots after the execution of the deed of sale with right

Here, the CA correctly found the presence of not

to repurchase. In stark contrast, evidence is wanting that

merely one but four (4) circumstances indicative of the true

petitioners

nature of the subject transaction as an equitable mortgage,

transaction was really a sale with right to repurchase, as

to

price

claimed by the petitioners, then the latter should have

of P20,000.00 for two (2) parcels of land, the total area of

asserted their rights for the immediate delivery of the lots to

which is almost 5.5 hectares; (b) respondent heirs remained

them instead of allowing some of the respondents to freely

in possession of the subject property even after the

stay in the premises. Well-settled to the point of being

execution of the supposedly Deed of Sale with Pacto de

elementary is the doctrine that where the vendor remains in

Retro; (c) said respondents payment of realty taxes; and (d)

physical possession of the land as lessee or otherwise, the

the provision on pactum commissorium.

contract should be treated as an equitable mortgage.[16]

While we are not in full accord with the CA in its observation

As well, that the parties intended to enter into an equitable

that the consideration of the sale with right to repurchase is

mortgage is further accentuated by respondents continued

grossly inadequate since the market value and assessed value

payment of the real property taxes subsequent to the alleged

of the two lots were not made on or before the date the

sale. Payment of those taxes is a usual burden attached to

subject contract was executed on February 25, 1985 but only

ownership and when, as here, such payment is coupled with

on June 8, 1994, still, there are other circumstances

continuous possession of the property, it constitutes evidence

wit:

(a)

gross

inadequacy

of

the

contract

ever

enjoyed

possession

thereof. If

the

of great weight that a person under whose name the realty

taxes were declared has a valid and rightful claim over the
land.

WHEREFORE, the instant petition is DENIED, and the

assailed decision and resolution of the CA in CA-G.R. CV No.

[17]

63230 are AFFIRMED.

Lastly, the stipulation in the subject deed reading: if
we fail to exercise our rights to repurchase as herein

Costs against petitioners.

granted within the period stipulated, then this conveyance

shall become absolute and irrevocable without the necessity
of drawing a new absolute Deed of Sale, subject to the
requirements of law regarding consolidation of ownership of
real property, - is considered a pactum commissorium. This
stipulation is contrary to the nature of a true pacto de
retro sale since in such sale, ownership of the property sold
is immediately transferred to the vendee a retro upon
execution of the sale, subject only to the repurchase of a
vendor a retro within the stipulated period.[18] Undoubtedly,
the

aforementioned

stipulation

is

a pactum

commissorium because it enables the mortgagee to acquire

ownership of the mortgaged properties without need of any
foreclosure proceedings which is a nullity being contrary to
the provisions of Article 2088[19] of the Civil Code. Indeed, the
inclusion of such stipulation in the deed shows the intention
to mortgage rather than to sell.

SO ORDERED.

The facts:
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).

On December 4, 1996, petitioner PCI LEASING and respondent

GIRAFFE entered into a Lease Agreement,1whereby the
former leased out to the latter one (1) set of Silicon High
Impact Graphics and 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 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 =
-- PLUS--

P 4,207,615.56

P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months =
Total Amount to be paid by GIRAFFE
(or the NET CONTRACT AMOUNT)

2. After trial, judgment be rendered in favor of plaintiff [PCI

P 6,529,032.00 LEASING] and against the defendant [GIRAFFE], as follows:
a. Declaring the plaintiff entitled to the possession of
the subject properties;
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 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-orsurrender-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 2276 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:

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-9834266, 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.

concepts. Thus, the relevancy of Article 18 of the Civil Code

which reads:

With its motion for reconsideration having been denied by

the trial court in its resolution of February 15,
2000,8petitioner 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.

Article 18. - In matters which are governed by special

laws, their deficiency shall be supplied by the provisions of
this [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

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 optionto-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.

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;

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.

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 ofP6,630,372.00 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 ofP5,430,372.00 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 letter15 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
ofP13,679,029.47, 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
letter17 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

(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.

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."

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.

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 rereproducing, 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

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.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson
(On leave)
ANGELINA SANDOVALGUTIERREZ*
Associate Justice

RENATO C. CORONA
Associate Justice

ADOLFO S. AZCUNA
Associate Justice
C E R T I F I CAT I O N
Pursuant to Section 13, Article VIII of the Constitution, I
certify that the conclusions in the above decision had been
reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

FIRST DIVISION
[G.R. No. 94828. September 18, 1992.]
SPOUSES ROMULO DE LA CRUZ and DELIA DE LA CRUZ, and
DANIEL FAJARDO, Petitioners, v. ASIAN CONSUMER AND
INDUSTRIAL FINANCE CORPORATION and the HONORABLE
COURT OF APPEALS, Respondents.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SALE; REMEDIES OF
UNPAID SELLER OF PERSONAL PROPERTY PAYABLE IN
INSTALLMENT; RULE. The instant case is covered by the socalled "Recto Law", now Art. 1484 of the New Civil Code,
which provides: "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 vendees failure to pay cover two or
more installments; (3) Foreclose the chattel mortgage on the
thing sold, if one has been constituted, should the vendees
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." In this jurisdiction, the three (3)
remedies provided for in the "Recto Law" are alternative and
not cumulative; the exercise of one would preclude the other
remedies. Consequently, should the vendee-mortgagor
default in the payment of two or more of the agreed

installments, the vendor-mortgagee has the option to avail of

any of these three (3) remedies: either to exact fulfillment
of the obligation, to cancel the sale, or to foreclose the
mortgage on the purchased chattel, if one was constituted.
(Pacific Commercial Co. v. De la Rama, 72 Phil. 380 (1941);
Manila Motor, Inc. v. Fernandez, 99 Phil. 782 (1956);
Radiowealth v. Lavin, L-18563, April 27, 1963, 7 SCRA 804).
2. ID.; ID.; ID.; ID.; EFFECT OF FAILURE OF VENDOR TO
FORECLOSE THE MORTGAGED PROPERTY. It is thus clear
that while ASIAN eventually succeeded in taking possession of
the mortgaged vehicle, it did not pursue the foreclosure of
the mortgage as shown by the fact that no auction sale of the
vehicle was ever conducted. As we ruled in Filinvest Credit
Corp. v. Phil. Acetylene Co., Inc. (G.R. No. 50449, January
1982, 111 SCRA 421) "Under the law, the delivery of
possession of the mortgaged property to the mortgagee, the
herein appellee, can only operate to extinguish appellants
liability if the appellee had actually caused the foreclosure
sale of the mortgaged property when it recovered possession
thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356
[1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161
[1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782
[1956]). It is worth noting that it is the fact of foreclosure
and actual sale of the mortgaged chattel that bar recovery
by the vendor of any balance of the purchasers outstanding
obligation not satisfied by the sale (New Civil Code, par. 3,
Article 1484). As held by this Court, if the vendor desisted,
on his own initiative, from consummating the auction sale,
such desistance was a timely disavowal of the remedy of
foreclosure, and the vendor can still sue for specific
performance" (Industrial Finance Corp. v. Tobias, 78 SCRA 28
[1977]; Radiowealth, Inc. v. Lavin, L-18563, April 27, 1963, 7

SCRA 804; Pacific Commercial Co. v. dela Rama, 72 Phil. 380

[1941]). Consequently, in the case before Us, there being no
actual foreclosure of the mortgaged property, ASIAN is
correct in resorting to an ordinary action for collection of the
unpaid balance of the purchase price.
3. ID.; ID.; ID.; ID.; ID.; POSSESSION OF MORTGAGED
PROPERTY SHOULD BE RETURNED TO MORTGAGEE-VENDEE
UPON PAYMENT OF UNPAID BALANCE; CASE AT BAR. We note
however that the trial court, as well as the Court of Appeals
failed to consider that the vehicle was already in the
possession of ASIAN when it directed petitioners herein to
pay P184,466.67 representing the balance of the purchase
price of the mortgaged property. Law and equity will not
permit ASIAN to have its cake and eat it too, so to speak. By
allowing ASIAN to retain possession of the vehicle and then
directing petitioners to pay the unpaid balance would
certainly result in unjust enrichment of the former.
Accordingly, the ownership and possession of the vehicle
should be returned to petitioners by ASIAN in the condition
that it was when delivered to it, and if this be no longer
feasible, to deduct from the adjudged liability of petitioners
the amount of P60,000.00, its corresponding appraised value.
DECISION
BELLOSILLO, J.:
The pivotal point before Us is whether a chattel mortgagee,
after opting to foreclose the mortgage but failing afterwards
to sell the property at public auction, may still sue to

recover the unpaid balance of the purchase price.

On 22 September 1982, the spouses Romulo de la Cruz and
Delia de la Cruz, and one Daniel Fajardo, petitioners herein,
purchased on installment basis one (1) unit Hino truck from
Benter Motor Sales Corporation (BENTER for brevity). To
secure payment, they executed in favor of BENTER a chattel
mortgage over the vehicle 1 and a promissory note for
P282,360.00 payable in thirty (30) monthly installments of
P9,412.00. 2 On the same date, BENTER assigned its rights
and interest over the vehicle in favor of private respondent
Asian Consumer and Industrial Finance Corporation (ASIAN for
brevity). 3 Although petitioners initially paid some
installments they subsequently defaulted on more than two
(2) installments. Thereafter, notwithstanding the demand
letter of ASIAN, 4 petitioners failed to settle their obligation.
On 26 September 1984, by virtue of a petition for
extrajudicial foreclosure of chattel mortgage, the sheriff
attempted to repossess the vehicle but was unsuccessful
because of the refusal of the son of petitioner, Rolando de la
Cruz to surrender the same. Hence, the return of the sheriff
that the service was not satisfied.chanrobles law library : red
On 10 October 1984, petitioner Romulo de la Cruz brought
the vehicle to the office of ASIAN and left it there where it
was inventoried and inspected. 5
On 27 November 1984, ASIAN filed an ordinary action with
the court a quo for collection of the balance of P196,152.99
of the purchase price, plus liquidated damages and
attorneys fees. 6

After trial, the court below rendered judgment in favor of

ASIAN.
On appeal, the Court of Appeals affirmed the judgment and
held that
". . . no extrajudicial foreclosure of chattel mortgage ever
transpired in the case at bar. Undoubtedly, plaintiff had first
chosen to extrajudically foreclose the mortgage, but this did
not materialize through no fault of plaintiff, as defendant
refused to surrender the Hino truck. The mere fact that the
writ in now in possession of plaintiff and a Technical and
Inspection Report was made in connection therewith is not
conclusive of the extrajudicial foreclosure, for in this kind of
foreclosure, possession of the chattel by the sheriff is
necessary, aside from the sale at public auction."cralaw
virtua1aw library
"Though the remedy of foreclosure was first chosen, this
remedy however proved ineffectual due to no fault of
plaintiff. Therefore, plaintiff may exercise other remedies
such as exact fulfillment of the obligation and thereafter
recover the deficiency. This is the essence of the rule of
alternative remedies under Article 1484." cralawnad
Petitioners take exception. While they do not dispute that
where the mortgagee elects the remedy of foreclosure
which, according to them, includes the option to sell in a
public or private sale, commences and pursues it, and in
consideration of which he also performs everything that is
incumbent upon him to do to implement the foreclosure
they nevertheless insist that he should not later be allowed
to change course midway in the process, abandon the

foreclosure and shift to other remedies such as collection of

the balance, especially after having recovered the mortgaged
chattel from them and while retaining possession thereof.
We do not agree with petitioners.
It is not disputed that the instant case is covered by the socalled "Recto Law", now Art. 1484 of the New Civil Code,
which provides:jgc:chanrobles.com.ph
"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 vendees failure to pay cover two or more
installments; (3) Foreclose the chattel mortgage on the thing
sold, if one has been constituted, should the vendees 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."cralaw virtua1aw library
In this jurisdiction, the three (3) remedies provided for in the
"Recto Law" are alternative and not cumulative; the exercise
of one would preclude the other remedies. Consequently,
should the vendee-mortgagor default in the payment of two
or more of the agreed installments, the vendor-mortgagee
has the option to avail of any of these three (3) remedies:
either to exact fulfillment of the obligation, to cancel the
sale, or to foreclose the mortgage on the purchased chattel,
if one was constituted. 7
The records show that on 14 September 1984 ASIAN initiated

a petition for extrajudicial foreclosure of the chattel

mortgage. But the sheriff failed to recover the motor vehicle
from petitioners due to the refusal of the son of petitioners
Romulo and Delia de la Cruz to surrender it. It was not until
10 October 1984, or almost a month later that petitioners
delivered the unit to ASIAN. The action to recover the
balance of the purchase price was instituted on 27 November
1984.chanrobles virtual lawlibrary
It is thus clear that while ASIAN eventually succeeded in
taking possession of the mortgaged vehicle, it did not pursue
the foreclosure of the mortgage as shown by the fact that no
auction sale of the vehicle was ever conducted. As we ruled
in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. 8
"Under the law, the delivery of possession of the mortgaged
property to the mortgagee, the herein appellee, can only
operate to extinguish appellants liability if the appellee had
actually caused the foreclosure sale of the mortgaged
property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors
Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co.,
Inc. v. Fernandez, 99 Phil. 782 [1956]). It is worth noting that
it is the fact of foreclosure and actual sale of the mortgaged
chattel that bar recovery by the vendor of any balance of the
purchasers outstanding obligation not satisfied by the sale
(New Civil Code, par. 3, Article 1484). As held by this Court,
if the vendor desisted, on his own initiative, from
consummating the auction sale, such desistance was a timely
disavowal of the remedy of foreclosure, and the vendor can
still sue for specific performance" (Industrial Finance Corp. v.
Tobias, 78 SCRA 28 [1977]; Radiowealth, Inc. v. Lavin, L18563, April 27, 1963, 7 SCRA 804; Pacific Commercial Co. v.

dela Rama, 72 Phil. 380 [1941]).

Consequently, in the case before Us, there being no actual
foreclosure of the mortgaged property, ASIAN is correct in
resorting to an ordinary action for collection of the unpaid
balance of the purchase price.
We note however that the trial court, as well as the Court of
Appeals failed to consider that the vehicle was already in the
possession of ASIAN when it directed petitioners herein to
pay P184,466.67 representing the balance of the purchase
price of the mortgaged property. Law and equity will not
permit ASIAN to have its cake and eat it too, so to speak. By
allowing ASIAN to retain possession of the vehicle and then
directing petitioners to pay the unpaid balance would
certainly result in unjust enrichment of the former.
Accordingly, the ownership and possession of the vehicle
should be returned to petitioners by ASIAN in the condition
that it was when delivered to it, and if this be no longer
feasible, to deduct from the adjudged liability of petitioners
the amount of P60,000.00, its corresponding appraised value.
9
WHEREFORE, the assailed decision is AFFIRMED, with the
MODIFICATION that the subject vehicle be returned to
petitioners or, at their option, they be allowed to deduct
P60,000.00 from their adjudged liability. No costs.
SO ORDERED.
Grio-Aquino and Medialdea, JJ., concur.
Cruz, J., is on leave.