FACTS:

PCI Leasing and Giraffe entered into a lease agreement for equipment worth P10,400,000. Giraffe failed to make the monthly rental payments, prompting PCI Leasing to file a case seeking the recovery of the leased property and payment of the outstanding balance. A writ of replevin was issued, allowing the seizure and delivery of the equipment. Giraffe filed a Motion to Dismiss, arguing that the lease agreement is a lease with an option to buy, making certain provisions of the Civil Code applicable. The trial court dismissed PCI Leasing's complaint, stating that the lease agreement is akin to the contract contemplated in Article 1485 of the Civil Code. PCI Leasing's motion for reconsideration was also denied. PCI Leasing appealed to the Supreme Court, contending that the lease agreement is covered by the Financing Company Act and not subject to the Recto Law. However, the Supreme Court upheld the trial court's ruling, treating the lease agreement as a disguised installment sale. A related case involves a financing company and a client engaged in financial leasing. The financing company purchases mobile equipment and leases it to the client, who has the option to purchase the property at the end of the lease period. The contract in this case was for thirty-six months, with a monthly rental of P1,689.40. The client stopped making payments, and the financing company had an excess amount from the total agreed rentals. The appellate court ordered the financing company to return the excess amount to the client.

ISSUES:

1. Whether the guaranty deposit made by the debtor can be applied to his arrearages in a financing agreement.

2. Whether the debtor has the right to exercise the option to acquire the motor vehicle in a financing agreement.

3. Whether the lease facility between the petitioner and respondent is a financing arrangement or a lease with an option to purchase.

4. Whether the petitioner is entitled to demand the return of the equipment or payment of the outstanding balance.

5. Whether the lease agreement is in fact a lease with an option to purchase.

6. Whether the petitioner waived its right to bring an action to recover unpaid rentals by choosing to deprive the respondent of possession of the leased equipment.

7. Whether the petitioner can simultaneously sue for the recovery of the unpaid balance and the return of the leased equipment.

8. Whether the petitioner is entitled to the attorney's fees he claimed from the respondent.

9. Whether the Recto Law is applicable in the present case.

RULING:

1. The Court held that the guaranty deposit made by the debtor should be credited in his favor to settle his arrearages. The Court emphasized that it would be unjust for the financing company to enrich itself at the expense of the debtor. The Court recognized that the transaction, although labeled as a lease, was actually a financing agreement. Thus, fairness, justice, and equity require that the guaranty deposit be utilized to settle the debtor's outstanding balance.

2. The Court ruled that the debtor has the right to exercise the option to acquire the motor vehicle. The Court considered the factual findings of both the trial court and the appellate court, which showed that the debtor opted to acquire the motor vehicle. Therefore, the guaranty deposit applied to the outstanding balance should be recognized as an exercise of the debtor's option, entitling him to ownership and possession of the vehicle.

3. The lease facility between the petitioner and respondent is a lease with an option to purchase. The lease agreement provided for the payment of monthly rentals, but the demand letter sent by the petitioner stated that the respondent could either pay the outstanding balance or return the equipment. This implies that the respondent had the option to acquire the equipment by paying the unpaid balance of the purchase price.

4. The petitioner is not entitled to demand the return of the equipment if the respondent pays the outstanding balance. The demand letter used the word "or" instead of "and" in relation to the payment of the outstanding balance and the return of the equipment. The use of "or" signifies a choice and suggests that the respondent can keep possession of the equipment if it exercises its option to acquire them by paying the outstanding balance.

5. Yes, the lease agreement is deemed to be a lease with an option to purchase. The absence of a "purchase option" clause in the basic "lease agreement" does not negate the fact that the parties entered into a lease agreement with an option to purchase. The Court has recognized the practice of vendors labeling contracts as leases, but which are actually sales of personal property by installments. In this case, the payment of the agreed amount would result in the transfer of title to the lessee.

6. Yes, the petitioner waived its right to recover unpaid rentals by choosing to deprive the respondent of possession of the leased equipment through replevin. When the lessor chooses to deprive the lessee of possession or enjoyment of the leased property, they shall have no further action against the lessee to recover any unpaid balance. This is in accordance with Article 1484 of the Civil Code.

7. No, the petitioner cannot simultaneously sue for the recovery of the unpaid balance and the return of the leased equipment. The remedies provided in Article 1484 of the Civil Code are alternative and not cumulative. The exercise of one remedy bars the exercise of the others. Additionally, the petitioner's demand letter clearly indicates that if the respondent pays the balance, it can keep the equipment, and if not, it should return them. The word "or" in the demand letter conveys the intention not to claim both the unpaid balance and the equipment.

8. The instant petition is denied and the trial court's decision is affirmed. The petitioner is not entitled to the attorney's fees he claimed from the respondent. The Recto Law is applicable in the present case.

PRINCIPLES:

• The terms and nature of a transaction should be analyzed based on the actual arrangement and substance, rather than merely relying on the labels or appearances used by the parties.

• In a financing agreement, the guaranty deposit may be applied to the debtor's arrearages to achieve fairness, justice, and equity.

• The debtor has the right to exercise the option to acquire the subject property in a financing agreement.

• Financing arrangements have a purpose of providing credit and services to small and medium enterprises and curbing acts and practices prejudicial to the public interest.

• In determining the respective responsibilities of the parties to a lease agreement, courts should consider the intention of the parties, the law, the written agreement, and the public interest and policy involved.

• Financing contracts are often one-sided in favor of financing companies, with important covenants imposed unilaterally by them.

• The word "or" in a demand letter signifies a choice and indicates that the members of an enumeration should be taken separately.

• Contracts labeled as leases, but which are actually sales of personal property by installments, may be treated as lease agreements with an option to purchase.

• When the lessor chooses to deprive the lessee of possession or enjoyment of the leased property, they shall have no further action against the lessee to recover any unpaid balance. This is in accordance with Article 1484 of the Civil Code.

• The remedies provided in Article 1484 of the Civil Code are alternative and not cumulative. The exercise of one remedy bars the exercise of the others.

• The intentions of the parties, as manifested in their conduct and written communication, are given weight in determining the nature of the lease agreement and the rights of the parties.

• The Recto Law prohibits lawyers from acquiring by purchase or assignment the property and rights involved which are the object of the litigation in which they take part.

• The Recto Law aims to prevent lawyers from taking advantage of their professional relationship with their clients and from speculating or making unjust profits at the expense of their clients.