Title
Orix Metro Leasing and Fice Corp. vs. Cardline, Inc.
Case
G.R. No. 201417
Decision Date
Jan 13, 2016
Cardline defaulted on lease payments; Orix sued, won, and sought execution. CA annulled execution, but SC reversed, enforcing full payment, citing solidary liability and no offset for returned machines or deposit.
replevin
sum of money
damages

Case Summary (G.R. No. 201417)

Factual Background

Cardline leased four machines from Orix under three lease agreements with substantially similar terms. To guarantee Cardline’s obligations, the principal stockholders and officers of Cardline—Mary C. Calubad, Sony N. Calubad, and Ng Beng Sheng—signed suretyship agreements in their personal capacities, securing Cardline’s rentals and other obligations arising from each lease.

Cardline defaulted in paying rent. As of July 12, 2007, Cardline’s unpaid obligations totaled P9,369,657.00. Orix demanded payment, but Cardline refused to settle the arrears. In response, Orix filed a complaint for replevin, sum of money, and damages before the RTC, docketed as Civil Case No. 07-855, naming Cardline and the individual respondents.

RTC Proceedings and the Judgment on the Merits

The RTC issued a writ of seizure, allowing Orix to recover the machines from Cardline. Cardline and the individual respondents failed to file an answer, prompting the RTC to declare them in default and to allow Orix to present evidence ex parte. The respondents later moved to set aside the order of default, but the RTC denied the motion.

On May 6, 2008, the RTC rendered judgment in Orix’s favor. It ordered the respondents to pay Orix: (a) P9,369,657.00 or whatever may be the balance of defendants’ outstanding obligation still owing after recovery or sale of the machines, as actual damages under Section 9, Rule 60, together with interest and penalty charges as stipulated from 12 July 2007 until fully paid; (b) attorney’s fees equal to thirty (30%) percent of the total amount due as stipulated in the continuing surety; (c) liquidated damages equal to twenty-five (25%) percent of the total amount due as stipulated in the continuing surety; and (d) expenses incurred in securing the leased properties through manual delivery.

On appeal, the respondents argued that the RTC erred in declaring them in default. The CA and, subsequently, this Court denied the appeal. The Court’s denial in G.R. No. 189877 became final and executory. Thereafter, Ng Beng Sheng filed a petition for annulment of judgment, alleging that the RTC lacked jurisdiction over his person due to improper service of summons. The CA denied the petition on forum shopping and res judicata, explaining that the jurisdictional issue had been previously addressed by the RTC and on review by the CA and this Court.

Execution, the RTC’s Orders, and the Prohibition Petition

After finality of the main judgment, Orix sought issuance of a writ of execution. The RTC granted the request in its December 1, 2010 order and thereafter, the RTC clerk issued a writ of execution commanding the sheriff to enforce the May 6, 2008 judgment. The respondents moved for a status quo ante order, but the RTC denied the motion.

The respondents then filed a petition for prohibition under Rule 65 with the CA, docketed as CA-GR SP No. 118226. They challenged the December 1, 2010 execution order and argued that their rental obligations were offset by (i) the market value of the returned machines and (ii) the guaranty deposit.

CA’s Ruling in CA-GR SP No. 118226

The CA granted the prohibition petition. It annulled the RTC’s order dated December 1, 2010 and prohibited the sheriff from executing the judgment dated May 6, 2008. The CA reasoned that, under Sections 19.2(d) in relation to Section 19.3 of the lease agreements, the debt of P9,369,657.00 had been satisfied when Orix recovered machines valued at P14,481,500.00 and received a security deposit amounting to P1,635,638.89. The CA treated the judgment as already fully satisfied and held that execution had become unnecessary.

Orix’s motion for reconsideration was denied, prompting its petition to the Supreme Court.

The Parties’ Contentions before the Supreme Court

In its petition, Orix argued that: first, the market value of the returned machines and the guaranty deposit did not offset the outstanding obligations; second, the individual respondents were solidarily liable with Cardline and were not entitled to the benefit of excussion; and third, the respondents and their counsel engaged in willful and deliberate forum shopping.

The respondents’ comment maintained that: first, the RTC judgment should be interpreted such that, if Orix recovers the properties, the machines’ market values should be deducted from the respondents’ outstanding obligations; second, the individual respondents acted only as guarantors rather than sureties; and third, there was no forum shopping because no cases were pending when they filed the prohibition petition.

Finality of the RTC Judgment and Review of an Order of Execution

The Supreme Court commenced its analysis by recognizing that the RTC’s May 6, 2008 judgment had attained finality and could no longer be altered. It emphasized that once a judgment becomes final and executory, only execution remains. The RTC’s December 1, 2010 order issued within that context. The Court held that an order of execution is generally not appealable, because allowing appeals would prevent cases from ever ending. It recognized exceptions where the terms of the judgment are unclear, or where other circumstances justify judicial intervention, such that an aggrieved party may seek a stay or quashal.

Although the respondents’ resort to a special civil action under Rule 65 was recognized as generally available against an execution-related action taken in excess or without jurisdiction, the Court found a procedural deficiency: the respondents filed prohibition in the CA without first filing a motion to stay or quash the writ of execution before the RTC. As a result, the prohibition petition should have been dismissed for failure to show that there was no other plain, speedy, and adequate remedy. Nonetheless, because the CA gave due course and ruled on the merits by concluding that the judgment had been satisfied, the Supreme Court addressed the substantive correctness of that interpretation.

Issue One: Whether the CA Correctly Prohibited Execution Based on Satisfaction of the Judgment

The pivotal question was whether the CA properly interpreted the RTC’s quoted judgment portion stating that the respondents were to pay the sum of P9,369,657.00 or whatever may be the balance of outstanding obligation still owing after recovery or sale of the machines as actual damages.

The Supreme Court held that the CA erred in its interpretation. It found that the CA incorrectly relied on Sections 19.2(d) and 19.3 of the lease agreements. The agreements, read closely, supported that Orix’s remedies in default included either repossession and recovery of unpaid rentals, and, only where Orix chose to re-lease or sell the property, would the contractual scheme on “proceeds derived” govern application to rental due.

The Court reasoned that when Cardline defaulted, Orix was authorized under Section 19 and particularly Section 19.2 to cancel and to repossess, and then to recover accrued and unpaid rental. It noted that Section 19.2(d) and Section 19.3 address the situation after repossession when Orix re-lease[s] or sell[s] the property, with proceeds applied first to expenses and legal costs, and then to rental due. However, in the case at bar, Orix did not re-lease or sell the machines. Therefore, Sections 19.2(d) and 19.3 did not apply. Even assuming those provisions were applicable, the Court emphasized that Section 19.3 refers to the proceeds derived from sale or re-leasing, not to the machines’ market value as an accounting offset. The CA’s interpretation would lead to an unreasonable and inequitable result by requiring Cardline to satisfy its liabilities using Orix’s own properties, which the Court declined to affirm.

Accordingly, the Supreme Court held that the return or recovery of the machines—absent sale or re-leasing under the contract—could not automatically reduce the outstanding debt determined by the RTC judgment.

Issue One Continued: Proper Treatment of the Guaranty Deposit

The Supreme Court also rejected the CA’s deduction of the guaranty deposit from the unpaid obligation. It examined the lease agreements’ provisions on the guaranty deposit, particularly Section 6.1 and Section 19.2(b). These provisions indicated that the guaranty deposit was held as security for faithful performance and, if the property were returned to the lessor due to any reason including the lessee’s default, the guaranty deposit was forfeited automatically in favor of the lessor as an additional penalty. The forfeiture was “without prejudice” to Orix’s right to recover unpaid rental and other amounts. The agreements further explained that the lessor might apply the guaranty deposit towards payment of liquidated damages, but that this was framed as an option consistent with penalty treatment.

Based on these contractual lenses, the Court concluded that the parties did not intend the guaranty deposit to be deducted from unpaid rent. The guaranty deposit was intended for automatic forfeiture as penalty, and in any case, Orix retained the right to recover unpaid rent but did not exercise the option to apply the deposit to liquidated damages. Thus, the CA’s deduction of the deposit from the outstanding rent contravened the agreements.

The Supreme Court therefore concluded that Cardline’s actual damages remained P9,369,657.00, and that the CA’s reading of the RTC judgment was legally infirm.

Issue Two: Whether the Individual Respondents Could Invoke the Benefit of Excussion

The next issue was whether the individual respondents could invoke the benefit of excussion. The Court observed that this issue had already been raised before the CA in relation to an earlier case and that the CA and this Court treated it as not appropriately revisitable. Still, the Supreme Court briefly addressed it for clarity.

The Court reiterated that contractual stipulations govern. When parties agree on joint and several liability, the obligation is solidary. Further, even where liability is that of a guarantor, excus

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