UNION BANK v.

JUNIAT
G.R No. 171569, August 1, 2011
Facts:

Petitioner: Union Bank of the Philippines (Union Bank) is a universal banking corporation organized and
existing under Philippine laws.
Respondent/s:
1. Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations
engaged in the business of apparel manufacturing.
2. Both respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French
national based in Hongkong.
3. Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture
and sale of various types of nonwoven fabrics.

Union Bank filed with RTC of Makati a Complaint with prayer for the issuance of ex-parte writs of
preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the
mortgaged motorized sewing machines and equipment.

Union Bank alleged that:

1. Juniat, acting in behalf of Winwood and Wingyan, executed a promissory note (on April 11, 1992) and a
Chattel Mortgage (on March 27, 1992) over several motorized sewing machines and other allied equipment to
secure their obligation arising from export bills transactions to Union Bank in the amount of P1,131,134.35;
2. Juniat executed a Continuing Surety Agreement as additional security for the obligation in favor of Union
Bank;
3. The loan remains unpaid; and
4. The mortgaged motorized sewing machines are insufficient to answer for the obligation.

RTC of Makati issued writs of preliminary attachment and replevin in favor of Union Bank and that such writs were
served by the Sheriff to Nonwoven as it was in possession of the motorized sewing machines and equipment.

Nonwoven filed an Answer contending that unnotarized Chattel Mortgage executed in favor of Union Bank has no
binding effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment
because these were assigned to it by Juniat pursuant to their Agreement.

Union Bank filed a Motion to Sell Chattels Seized by Replevin, praying that the motorized sewing machines and
equipment be sold to avoid depreciation and deterioration.

However, before the RTC could act on the motion, Union Bank sold the attached properties for the amount of
P1,350,000.00.

Nonwoven moved to cite the officers of Union Bank in contempt for selling the attached properties, but the RTC
denied the same on the ground that Union Bank acted in good faith.

RULING OF RTC MAKATI:

ruled in favor of Union Bank
ruled that both the Chattel Mortgage in favor of Union Bank and the Agreement in favor of Nonwoven have no
obligatory effect on third persons because these documents were not notarized.
Since the Chattel Mortgage in favor of Union Bank was executed earlier, Union Bank has a better right over
the motorized sewing machines and equipment under the doctrine of "first in time, stronger in right" (prius
tempore, potior jure).
declared Union Bank entitled to the proceeds of the sale of the subject machineries.
declared respondents to be jointly and severally liable to Union Bank, for the deficiency between the proceeds
of the sale of the machineries and original claim of Union Bank
Ruling of CA:
reversed the ruling of RTC.

ruled that the contract of pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.
Thus, CA declared Nonwoven entitled to the proceeds of the sale of attached properties.

Issue/s:
1. Whether Union Bank had a better right over the machineries seized or levied upon in the proceedings before the
trial court and/or the proceeds of the sale thereof.
2. Whether Nonwoven has a valid claim over the subject sewing machines.
Held:

PETITION IS GRANTED.

Union bank's Arguments:

1. It insists that it has a better title to the proceeds of the sale.
2. It also insists that although the Chattel Mortgage executed in its favor was not notarized, it is nevertheless
valid, and thus, has preference over a subsequent unnotarized Agreement.
3. It claims that no other evidence was presented by Nonwoven to show that the motorized sewing machines
and equipment were indeed transferred to them by Juniat/Winwood/Wingyan.

Nonwoven's Arguments:
1. It claims ownership over the proceeds of the sale pursuant to Art. 1544 of the Civil Code on double sale.
2. It contends that since its prior possession over the motorized sewing machines and equipment was in good
faith, it has a better title over the proceeds of the sale.
3. It also contends that Union Bank has no right over the proceeds of the sale because the Chattel Mortgage
executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.

The unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of
Union Bank does not bind Nonwoven. Thus, the fact that the Chattel Mortgage executed in favor of Union Bank
was not notarized does not affect Union Banks cause of action.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and
boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of the Civil
Code, "[a] pledge shall not take effect against third persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument." Hence, just like the chattel mortgage executed in favor of
petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

No evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by
way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized
sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyans and
Winwoods obligation. It bears stressing that there can be no transfer of ownership if the delivery of the property to
the creditor is by way of security.

In case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a
pledge as this involves a lesser transmission of rights and interests.

Nonwoven is not entitled to the proceeds of the sale of the attached properties because it failed to show that it has
a better title over the same.

PCI LEASING FINANCE AND FINANCE, INC. v. TROJAN METAL INDUSTRIES INC.
G.R No. 176381, December 15, 2010
Facts:

PCI Leasing and Finance, Inc. (PCILF) came to Trojan Metal Industries, Inc. (TMI) to seek a loan. However,
instead of extending a loan, PCILF offered to buy various equipment TMI owned.

PCILF and TMI immediately executed deeds of sale in the total amount of P 2,865,070.00.

PCILF and TMI then entered into a lease agreement whereby the TMI leased from the PCILF the various
equipment it previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing 24
monthly installments. Under the lease agreement, TMI is required to give to PCILF a guaranty deposit which
would serve as a security for the timely performance of TMI's obligations, to be automatically forfeited should TMI
return the leased equipment before the expiration of the lease agreement.

Further, Spouses Dizon (TMI's President and VP) executed in favor of PCILF a Continuing Guaranty of Lease
Obligations, on which the Spouses agreed to immediately pay whatever obligations would be due PCILF in case
TMI failed to meet its obligations.

TMI used the leased equipment as temporary collateral to obtain additional loan from another financing company.
PCILF considered the second mortgage a violation of the lease agreement.

PCILF sent a demand letter for the payment of TMI's outstanding obligation.

PCILF filed in RTC Quezon City a complaint for recovery of sum of money and personal property with prayer for
the issuance of a writ of replevin against TMI and Spouses Dizon.

RTC of Quezon City issued the writ of replevin and thus directing the Sheriff to take custody of the leased
equipment. . Not long after, PCILF sold the leased equipment to a third party and collected the proceeds
amounting to P1,025,000.00.

TMI claimed that the sale with lease agreement was a mere scheme to facilitate the financial lease between
PCILF and TMI. They explained that in a simulated financial lease, property of the debtor would be sold to the
creditor to be repaid through rentals; at the end of the lease period, the property sold would revert back to the
debtor. TMI prayed that they be allowed to reform the lease agreement to show that the true agreement between
the parties is a loan secured by a chattel mortgage.

Ruling of RTC QC:

granted the prayer of PCILF in its complaint.
ruled that the lease agreement must be presumed valid as the law between the parties even if some of its
provisions constituted unjust enrichment on the part of PCILF.
PCILF to be entitled to the possession of the machineries.
Ruling of CA:
reversed and set aside the decision of RTC and directed PCILF to pay TMI, by way of refund, the amount of
P1,166,826.52.
ruled that the sale with lease agreement was in fact a loan secured by Chattel Mortgage.
held that since PCILF sold the equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty
deposit of P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMIs remaining
obligation of P888,423.48, or an excess of P1,166,826.52, which should be returned to TMI in accordance
with Section 14 of the Chattel Mortgage Law.
Issue/s:
1. Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel
mortgage; and
2. Whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.

Held:

PETITION DENIED.

TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the
parties in this case cannot be deemed to be in the nature of a financial leasing as defined by law but simply
a loan secured by the various equipment owned by TMI.
Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing 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, motor vehicles, appliances, business and 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 with the right to expense the lease
rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, 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.
Thus, in a true financial leasing, whether under RA 5980 (Financing Company Act) or RA 8556, a finance
company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to
financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in
exchange for the latters periodic payment of a fixed amount of rental.

The facts in the instant case are analogous to those in Cebu Contractors Consortium Co. v. Court of Appeals
where the court held that the transaction between CCCC and MLFC was not one of financial leasing as defined by
law, but simply a loan secured by a chattel mortgage over CCCCs equipment. The Court went on to explain that
where the client already owned the equipment but needed additional working capital and the finance company
purchased such equipment with the intention of leasing it back to him, the lease agreement was simulated to
disguise the true transaction that was a loan with security. In that instance, continued the Court, the intention of
the parties was not to enable the client to acquire and use the equipment, but to extend to him a loan.

In Investors Finance Corporation v. Court of Appeals, the Court said that financial leasing contemplates the
extension of credit to assist a buyer in acquiring movable property which he can use and eventually own. If the
movable property already belonged to the borrower-lessee, the transaction between the parties, according to the
Court, was a loan with mortgage in the guise of a lease.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention
is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable
conduct, or accident, one of the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for
reformation of an instrument is ten years. The right of action for reformation accrued from the date of execution of
the lease agreement on 8 April 1997. TMI timely exercised its right of action when it filed an answer on 14
February 2000 asking for the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a proper instrument, it would have
been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMIs
default, PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the
purpose of foreclosing the chattel mortgage. PCILFs sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage
as creditor-mortgagee.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds,
upon satisfaction of the principal loan and costs.
Section 14. Sale of property at public auction; officers return; fees; disposition of proceeds. x x x The
proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and
then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to
persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid
to the mortgagor or person holding under him on demand.

In PAMECA Wood Treatment Plant, Inc. v. CA, 369 Phil. 544 (1999), also holds that the Chattel Mortgage Law
bars the creditor-mortgagee from retaining the excess of the sale proceeds.