CEBU CONTRACTORS CONSORTIUM CO. vs. COURT OF APPEALS and MAKATI LEASING & FINANCE CORPORATION G.R. No. 107199 July 22, 2003

CEBU CONTRACTORS CONSORTIUM CO. vs. COURT OF APPEALS and MAKATI LEASING & FINANCE CORPORATION
G.R. No. 107199               July 22, 2003

Ponente: AZCUNA, J.:

Facts:
          MLFC alleges that a lease agreement relating to various equipment was entered into between MLFC, as lessor, and CCCC, as lessee. The terms and conditions of the lease were defined in said agreement and in two lease schedules of payment. To secure the lease rentals, a chattel mortgage, and a subsequent amendment thereto, were executed in favor of MLFC over other various equipment owned by CCCC.
          CCCC began defaulting on the lease rentals,6 prompting MLFC to send demand letters.7 When the demand letters were not heeded, MLFC filed a complaint for the payment of the rentals due and prayed that a writ of replevin be issued in order to obtain possession of the equipment leased and to foreclose on the equipment mortgaged.
          For its part, CCCC alleges that it had a contract with the then Ministry of Public Highways for the construction of the Iligan-Cagayan de Oro-Butuan Road. Being in need of additional capital, it approached MLFC for the purpose of securing a loan. MLFC agreed to extend financial assistance to CCCC but, instead of a customary loan covered by a security, MLFC induced CCCC to adopt and apply a sale and lease back scheme. The arrangement provided for the equipment of CCCC to be made to appear as sold to MLFC and then leased back to CCCC which will then pay lease rentals to MLFC. The rentals will be treated as installment payments to repurchase the equipment. It is CCCC’s claim that the arrangement is nothing more than an equitable mortgage.
          Pursuant to the sale and lease back scheme, CCCC executed two deeds of sale over its equipment in favor of MLFC, which were then leased back to CCCC. To facilitate payment of the rentals, MLFC required CCCC to execute a deed of assignment of its collectibles from the Ministry of Public Highways. In addition, CCCC was also required to execute a chattel mortgage over its other properties as a security.
CCCC’s position is that it is no longer indebted to MLFC because the total amounts collected by the latter from the Ministry of Public Highways, by virtue of the deed of assignment, and from the proceeds of the foreclosed chattels were more than enough to cover CCCC’s liabilities. Finally, CCCC submits that, in any event, the deed of assignment itself already freed CCCC from its obligation to MLFC.

Issue:
          Whether or not respondent court erred in upholding the so-called sale lease back scheme of the private respondent when the same is in reality nothing but an equitable mortgage

Ruling:

The Supreme Court held that When the true intention of the parties to a contract is not expressed in the instrument purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or accident, the remedy of the aggrieved party is to ask for reformation of the instrument under Articles 1359 and 1362 of the Civil Code, to the end that their true agreement may be expressed therein.24 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.25 The right of action for reformation accrued from the date of execution of the contract of lease in 1976.26 This was properly exercised by CCCC when it filed its answer with counterclaim to MLFC’s complaint in 1978 and asked for the reformation of the lease contract.

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