Commercial Laws 1: Trust Receipts Law
1. Basic Concepts.
When a letter of credit (LC) is issued, there is a contract between the buyer (also known as the Account Party who procures the LC) and the issuing bank whereby the latter agrees to issue the letter of credit and to pay the seller/beneficiary according to the terms of the letter of credit, while the buyer agrees to reimburse the issuing bank for amounts that may be paid to the seller/beneficiary.
Thus, there is in effect a loan agreement between the buyer and the issuing bank.
Under this agreement, the issuing bank will advance the price of the goods in favor of the buyer.
The buyer, in turn, will reimburse the issuing bank whatever amount the bank pays to the seller.
Example:
If the buyer is only concerned with the obligation of the seller to deliver the goods, that is, he is only concerned in making sure that delivery will be made, the said buyer may immediately pay the issuing bank when the latter turns over the document/s of title covering the goods.
However, the agreement may be one where the money advanced by the issuing bank will be paid by the buyer out of the proceeds of the sale of the goods.
In these instances, the obligation of the buyer may be secured by different security arrangements like mortgage on other properties of the buyer, suretyship, or guaranty.
Trust Receipt as Security.
The obligation of the buyer to pay the issuing bank may also be secured by trust receipts.
The governing law is Presidential Decree No. 115 known as the Trust Receipts Law.
Under the law:
the bank becomes the entruster of the goods delivered by the seller
the buyer-importer is the entrustee.
The goods will in effect be released by the bank to the buyer by the delivery of the document of title/bill of lading covering the goods.
The buyer as entrustee is obligated:
to sell the goods and
to apply the proceeds thereof to the payment of the loan extended by the entruster-bank.
The buyer will only get the balance of the proceeds of the sale after making such application.
Security Interest.
The entruster only retains security interest over the goods.
Thus, the entrustee-buyer bears the loss of the goods after delivery thereof by bank-entruster.
Nevertheless, the entrustee may still be liable for estafa if he fails:
to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or
to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt.
1.01. Rationale.
Landl and Co. (Phil) Inc. vs. MBTC, G.R. No. 159622, July 30, 2004:
The Trust Receipts Law was enacted:
to safeguard commercial transactions and
to offer an additional layer of security to the lending bank.
Trust receipts are indispensable contracts in international and domestic business transactions.
Main thrusts of the Trust Receipts Law:
the prevalent use of trust receipts
the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held in trust for the entruster banks, and
the need for regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties involved.
Colinares v. Court of Appeals G.R. No. 90828, September 5, 2000:
The Trust Receipts Law does not seek to enforce payment of the loan; rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner.
2. Trust Receipt Transaction Defined.
Section 4, P.D. 115: A trust receipt transaction
is any transaction by and between
a person referred to as the entruster, and
another person referred to as entrustee,
whereby the entruster,
who owns or holds absolute title or security interests over certain specified goods, documents or instruments,
releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster
of a signed document called a "trust receipt"
wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for the entruster and
to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt
or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.
The transaction can be for purposes substantially equivalent to any of the following:
In the case of goods or documents:
to sell the goods or procure their sale; or
to manufacture or process the goods with the purpose of ultimate sale:
Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or
(c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or
In the case of instruments:
to sell or procure their sale or exchange; or
to deliver them to a principal; or
to effect the consummation of some transactions involving delivery to a depository or register; or
to effect their presentation, collection or renewal.
2.01 Nature of Transactions.
Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000:
This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan.
The bank acquires a "security interest" in the goods as holder of a security title for the advances it had made to the entrustee.
The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.
To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession.
In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price.
Trust receipt transactions are intended to aid in financing importers and retail dealers who:
❌ do not have sufficient funds or resources to finance the importation or purchase of merchandise, and
❌ who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.
The antecedent acts in a trust receipt transaction consist of the:
application and approval of the letter of credit,
the making of the marginal deposit and
the effective importation of goods through the efforts of the importer.
2.02 Not Applicable to Sale.
Trust receipts usually involve importation of goods.
They serve as security of the bank in letters of credit transactions and loan agreements to finance the importation or acquisition of goods.
The law is explicit that they cannot secure:
❌ contracts to sell or
❌ any other contract where the ownership of the good is retained by the seller.
Example: Lease Agreements
The Trust Receipts Law provides in Section 4 thereof as follows:
The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.
Land Bank v. Perez, G.R. No. 166884, June 13, 2012:
The Supreme Court reveals the reason why contracts of sale are not covered by the Trust Receipts Law:
There are two obligations in a trust receipt transaction.
The first is covered by the provision that refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise sold.
The second is covered by the provision referring to merchandise received under the obligation to return it (devolvera) to the owner.
Thus, under the Trust Receipts Law, intent to defraud is presumed when:
the entrustee fails to turn over the proceeds of the sale of goods covered by the trust receipt to the entruster; or
when the entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative – the return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed.
When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115;
the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction.
This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
2.03. Not Applicable to Simple Loan.
The antecedent acts in a trust receipt transaction consist of the:
application and approval of the letter of credit,
the making of the marginal deposit and
the effective importation of goods through the efforts of the importer.
Hence, the Trust Receipts Law is not applicable if the real contract is simple loan.
Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000:
The petitioners received the merchandise from the supplier on October 30, 1979. On that day, ownership over the merchandise was already transferred to petitioners who were to use the materials for their construction project. It was only a day later, October 31, 1979, that they went to the bank to apply for a loan to pay for the merchandise.
Clearly, ownership was transferred to the borrower prior to the date of execution of the trust receipt. The ownership over the goods was already transferred to the debtor.
This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted.
Hence, the Trust Receipts Law does not apply because the transaction with the bank was only a simple loan
The Supreme Court also explained the danger in characterizing a simple loan as a trust receipt transaction:
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible.
Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation.
PROBLEM:
Sps. De la Cruz v. Planter's Products, Inc., G.R. No. 158649, February 18, 2013:
Sps. Quirino V. Dela Cruz and Gloria Dela Cruz, the petitioners, operated the Barangay Agricultural Supply, an agricultural supply store in Aliaga, Nueva Ecija engaged in the distribution and sale of fertilizers and agricultural chemicals, among other products.
At the time material to the case, Quirino, a lawyer, was the Municipal Mayor of Aliaga, Nueva Ecija. On March 23, 1978, Gloria applied for and was granted by respondent Planters Products, Inc. (PPI) a regular credit line of ₱200,000.00 for a 60- day term, with trust receipts as collaterals. Quirino and Gloria submitted a list of their assets in support of her credit application for participation in the Special Credit Scheme (SCS) of PPI.
On August 28, 1978, Gloria signed in the presence of the PPI distribution officer/assistant sales representative two documents labeled "Trust Receipt/Special Credit Scheme," indicating the invoice number, quantity, value, and names of the agricultural inputs (i.e., fertilizer or agricultural chemicals) she received "upon the trust" of PPI. She thereby agreed to hold said goods in trust for PPI, as its property, with liberty to deliver and sell the same for PPI's account in favor of farmers accepted to participate in PPI's Special Credit Scheme (SCS) within 60 days from receipt of inputs from PPI. In case of such delivery and sale, she agreed to require the execution of a Trust Agreement by the farmer-participants in my/our favor, which Agreement she will in turn assign in favor of PPI with Recourse. In the event she cannot deliver/serve to the farmer-participants all the inputs within 60 days, then she agreed that the undelivered inputs will be charged to their credit line, in which case, the corresponding adjustment of price and interests shall be made by PPI.
Is the Trust Receipts Law applicable in this case? No.
The obligation assumed by Gloria under the Trust Receipt/ SCS involving "the execution of a Trust Agreement by the farmer-participants" in her favor, which, in tum, she would assign "in favor of PPI with recourse" in case of delivery and sale to the farmer participants, was not a trust receipt transaction under Section 4 of the Trust Receipts Law which provides that the sale of goods by a person in the business of selling goods for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, or who sells the goods to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of the law.
The transaction involved in the transaction with the farmers was a sale.
3. The Parties.
An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement.
While the entruster is usually a bank, the TRL applies even if the entruster is not a bank.
Osental v. People of the Philippines, G.R No. 225697. September 5, 2018:
The petitioner Osental was found guilty of estafa under par. 1(b) of Article 315 of the Revised Penal Code, in relation to Presidential Decree No. 115.
In this case, petitioner Osental approached Maria Emilyn Te (Te) and convinced her to sell ready-to-wear (RTW) goods in Roxas City. Osental claimed she had contacts in Manila and Iloilo City from whom she could acquire the RTW goods.
On August 21, 2008, Te agreed and delivered P262,225.00 to Osental for the purchase of the RTW goods. On the same date, Te entered into a trust receipt agreement with Osental in which the latter agreed to deliver the proceeds of the sale of the RTW on October 21, 2008.
Osental failed to pay Te the proceeds of the sale of the RTW amounting to P262,225.00 and was consequently convicted of estafa.
Allied Banking Corp. v. Equitable PCI Bank, Inc. G.R No.191939, March 14, 2018:
If the entrustee becomes insolvent and undergoes rehabilitation, the Stay Order that the Rehabilitation Court issues would apply to the claim under the TRL.
The Financial Rehabilitation and Insolvency Act (FRIA) and its implementing rules are deemed incorporated in the Trust Receipt Agreement, thereby limiting the entruster's right to enforce its claim against the entrustee once a stay or suspension order is issued.
The principle on inviolability of contracts is not violated.
3.01. Entrustee.
Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006, 481 SCRA
609:
The entrustee is obliged to: HD-RT-IKRO
hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;
receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt;
insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;
return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.
3.02. Entruster.
Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006, 481 SCRA 609:
The entruster shall be entitled to: PRE
the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt;
the return of the goods, documents or instruments in case of non-sale; and
to the enforcement of all other rights conferred on him in the trust receipt.
4. Purpose of Acquisition of Goods.
In most cases, the goods that are covered by the trust receipt are meant for sale or disposition by the entrustee.
Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale.
Two-fold Obligation
As a consequence of the release of the goods and the execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely:
to hold the designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of them; and
to turn over to the entruster either the proceeds thereof to the extent of
the amount owing to the entruster or
as appears in the trust receipt,
or the goods, documents, or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.
Other Purposes Substantially Equivalent
The goods need not be released to the entrustee for immediate sale. They may be released to the entrustee for a purpose that is connected with their ultimate or subsequent sale.
Hence, the goods may also be released for other purposes substantially equivalent to the following:
Their sale or the procurement of their sale; or
Their manufacture or processing with the purpose of ultimate sale in which case the entruster retains his title over the said goods whether in their original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or
The loading, unloading, shipment, or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale.
4.01. Effect if the Goods are not Sold.
It is not necessary that the goods are ultimately sold to be covered by the TRL.
They may be released for the purpose of installing them in the machineries and equipment of the entrustee.
The goods may have been imported as:
spare parts or components of the existing facilities,
machineries, and
equipment of the entrustee
and they are released to the latter by the entruster-bank for such purpose.
Allied Banking Corporation v. Ordonez G.R. No. 82495, December 10, 1990, 192 SCRA 247:
the penal provisions of the Trust Receipts Law apply when the goods covered by the trust receipt do not form part of the finished products that are ultimately sold but are instead utilized or used in the operation of equipment and machineries of the entrustee.
The Court observed that criminal liability may still exist because "non-payment of the amount covered by a trust receipt is an act violative of the entrustee's obligation to pay."
It was likewise noted that the penal provision of P.D. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold (retailed), reshipped, stored, or processed as a component of a product ultimately sold."
According to the High Court, a contrary ruling would contravene not only the letter but the spirit of Presidential Decree No. 115.
The Court took judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries, and supplies used in manufacturing operations.
Development Bank of the Philippines v. Prudential Bank, G.R. No. 143772, November 22, 2005, 475 SCRA 623:
Presidential Decree No. 115 was applied although the goods that were covered by trust receipts were installed in the entrustee's textile mill and used in its business.
Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006, 481 SCRA 609:
the penal provision of the law was held to be applicable although the goods were used in operating the machineries of the entrustee and not for resale.
The Court cited Colinares v. Court of Appeals, where the Court declared that there are two possible situations in a trust receipt transaction.
The first is covered by the provision that refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise sold.
The second is covered by the provision referring to merchandise received under the obligation to return it (devolvera) to the owner.
In Metropolitan Bank & Trust Co. v. Hon. Secretary of Justice, 1394 Phil 106; 339 SCRA 609 (2000):
the Supreme Court ruled that there may still be violation of the Trust Receipts Law even if the person sought to be made liable did not sell the goods but allowed the goods to be used by the sister company.
The Court observed that the offense punished under Presidential Decree No. 115 is in the nature of malum prohibitum.
A mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes a criminal offense that causes prejudice not only to another, but more to the public interest.
4.02. Goods are not Intended to be Sold.
Hur Tin Yang v. People, G.R. No. 195117, August 14, 2013:
The Supreme Court ruled that "when both parties enter into an agreement knowing fully well that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1 (b) of the RPC, as the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction.
This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
Thus, no liability under the TRL may be imposed where the entruster bank knew even before the execution of the trust receipt agreements that the construction materials covered were never intended by the entrustee for resale or for the manufacture of items to be sold. The transaction is a simple loan and not a trust receipts transaction.
Ng v. People, G.R. No. 173905, April 23, 2010, 619 SCRA 291:
A businessman engaged in the business of building and fabricating telecommunication towers, applied for a credit line with Asiatrust Development Bank, Inc.
Prior to the approval of the loan, Mr. Ng informed Asiatrust that the proceeds would be used for purchasing construction materials necessary for the completion of several steel towers he was commissioned to build by several telecommunication companies.
Asiatrust approved the loan but required Mr. Ng to sign a trust receipt agreement. When Mr. Ng failed to pay the loan, Asiatrust filed a criminal case for Estafa under the Revised Penal Code (RPC) in relation to the TRL.
The Supreme Court acquitted Mr. Ng and ruled that the law was enacted "to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased."
The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115 which states that a trust receipt is to be utilized "as a convenient business device to assist importers and merchants solve their financing problems." Obviously, the State, in enacting the law, sought to find a way to assist importers and merchants in their financing in order to encourage commerce in the Philippines.
Similarly, American Jurisprudence demonstrates that trust receipt transactions always refer to a method of "financing importations or financing sales." The principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions. Regardless of whether the transaction is foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales.
Following the precept of the law, such transactions affect situations wherein the entruster, who owns or holds absolute title or security interests over specified goods, documents, or instruments, releases the subject goods to the possession of the entrustee.
The release of such goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds himself:
to hold the specific goods, documents or instruments in trust for the entruster and
to sell or otherwise dispose of the goods, documents, or instruments
with the obligation to turn over to the entruster:
the proceeds to the extent of the amount owing to the entruster or
the goods, documents, or instruments themselves if they are unsold.
The entruster is entitled "only to the proceeds derived from the sale of goods released under a trust receipt to the entrustee."
To emphasize, the Trust Receipts Law was created to 'to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have known that the said agreement could not possibly apply to petitioner.
Land Bank of the Philippines v. Perez G.R. No. 166884, June 13, 2012, 672 SCRA 117:
The officers of Asian Construction and Development Corporation (ACDC), a corporation engaged in the construction business, executed in favor of Land Bank of the Philippines (LBP) trust receipts to secure the purchase of construction materials that they needed in their construction projects. When the trust receipts matured, ACDC failed to return to LBP the proceeds of the construction projects or the construction materials subject of the trust receipts.
After several demands went unheeded, LBP filed a complaint for Estafa or violation of par. l(b), Article 316 of the RPC, in relation to Presidential Decree No. 115, against the officers of ACDC.
The Supreme Court, like in Ng, acquitted all the officers on the postulate that the parties really intended a simple contract of loan and not a trust receipts transaction, viz.:
"When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
Thus, in concluding that the transaction was a loan and not a trust receipt, we noted in Colinares that the industry or line of work that the borrowers were engaged in was construction.
We pointed out that the borrowers were not importers acquiring goods for resale. Indeed, goods sold in retail are often within the custody or control of the trustee until they are purchased. In the case of materials used in the manufacture of finished products, these finished products - if not the raw materials or their components - similarly remain in the possession of the trustee until they are sold.
But the goods and the materials that are used for construction project are often placed under the control and custody of the clients employing the contractor, who can only be compelled to return the materials if they fail to pay the contractor and often only after the requisite legal proceedings.
The contractor's difficulty and uncertainty in claiming these materials (or the buildings and structures which they become part of), as soon as the bank demands them, disqualify them from being covered by trust receipt agreements.
Spouses Dela Cruz v. Planters Products, Inc., G.R. No. 158649, Februazy 18, 2013:
There is no liability for Estafa if the trust receipts were only collaterals for the credit line granted to the borrower.
The transaction is not a trust receipt transaction where the alleged entrustee obtained goods from the supposed entruster under a credit line arrangement.
Observations.
The ruling in Ng v. People, Land Bank of the Philippines v. Perez, and Hur Tin Yang v. People to the effect that the transaction is not covered by the TRL can be reconciled with the ruling in Allied Banking Corporation v. Ordonez, Development Bank of the Philippines v. Prudential Bank, and Ching v. Secretary of Justice, Metropolitan Bank & Trust Co. v. Hon. Secretary of Justice, by stating that the TRL does not apply if there is no intent to sell or dispose of the goods from the very beginning.
The intent of the parties is just to enter into a contract of loan in the Ng, LBP, and Yang cases.
However, the TRL applies:
if the parties agreed that the goods are to be sold;
if the entrustee represented that the goods are to be sold;
if the goods are released for manufacture or processing with the purpose of ultimate sale (in which case the entruster retains his title over the said goods whether in their original or processed form); or
if the goods are released for loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale.
In all these cases, if the entrustee uses the goods for its own purpose or delivers it to another entity like a subsidiary or a sister company, then the transaction is still covered by the TRL and the entrustee and its officers may be then held liable if the loan is not paid.
It is well to note however that although the Supreme Court cites the requisites of par. 1(b), Article 315 of the RPC in some cases involving violation of the TRL, the violation need not fall neatly under par.1(b), Art. 315 ofthe RPC.
Although there is liability for Estafa, the crime is still malum prohibitum; hence, intent of the parties is not a requirement.
PROBLEM:
Spouses Dela Cruz v. Planters Products, Inc., G.R. No. 158649. February 18, 2013:
One of the issues resolved by the court is whether or not the transaction is one that is covered by Trust Receipt Law.
These established circumstances comprised by the contemporaneous and subsequent acts of Gloria and Quirino that manifested their intention to enter into the creditor-debtor relationship with PPI show that the CA properly held the petitioners fully liable to PPI. The law of contracts provides that in determining the intention of the parties, their contemporaneous and subsequent acts shall be principally considered. Consequently, the written terms of their contract with PPI, being clear upon the intention of the contracting parties, should be literally applied.
The first circumstance was the credit line of ₱200,000.00 that commenced the business relationship between the parties.
A credit line is really a loan agreement between the parties. According to Rosario Textile Mills Corporation v. Home Bankers Savings and Trust Co.:
x x x [A] credit line is "that amount of money or merchandise which a banker, a merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance." It is a fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a series of transactions in which case, when the customer’s line of credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making any further drawings.
The second circumstance was the offer by Gloria of trust receipts as her collateral for securing the loans that PPI extended to her.
A trust receipt is "a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased."
It is a security agreement that "secures an indebtedness and there can be no such thing as security interest that secures no obligation."
The third circumstance was the offer of Gloria and Quirino to have their conjugal real properties beef up the collaterals for the credit line.
Gloria signed the list of the properties involved as "dealer," thereby ineluctably manifesting that Gloria considered herself a dealer of the products delivered by PPI under the credit line.
In this connection, a dealer is "a person who makes a business of buying and selling goods, especially as distinguished from a manufacturer, without altering their condition." In other words, a dealer is "one who buys to sell again."
The fourth circumstance had to do with the undertakings under the trust receipts.
The position of the petitioners was that the farmers-participants alone were obligated to pay for the goods delivered to them by Gloria. However, such position had no factual and legal legs to prop it up.
A close look at the Trust Receipt/SCS indicates that the farmer-participants were mentioned therein only with respect to the duties and responsibilities that Gloria personally assumed to undertake in holding goods "in trust for PPI."
Under the notion of relativity of contracts embodied in Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns and heirs.
Hence, the farmer-participants, not being themselves parties to the contractual documents signed by Gloria, were not to be thereby liable.
At this juncture, the Court clarifies that the contract, its label notwithstanding, was not a trust receipt transaction in legal contemplation or within the purview of the Trust Receipts Law (Presidential Decree No. 115) such that its breach would render Gloria criminally liable for estafa.
Under Section 4 of the Trust Receipts Law, the sale of goods by a person in the business of selling goods for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, or who sells the goods to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of the law.
It is not amiss to point out that the RTC even erred in citing Section 4 of the Trust Receipts Law as its basis for ordering Gloria to pay the total amount of ₱240,355.10. Section 13 of the Trust Receipts Law considers the "failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt" as constituting the crime of estafa under Article 315 (b) of the Revised Penal Code. However, had PPI intended to charge Gloria with estafa, it could have then done so. Instead, it brought this collection suit, a clear indication that the trust receipts were only collaterals for the credit line as agreed upon by the parties.
5. Nature of Entruster’s Right over the Goods.
In a trust receipt transaction, the goods are released by the entruster to the entrustee on the latter's execution and delivery to the entruster of a trust receipt.
Section 4 of the Trust Receipts Law expressly acknowledges that the trust receipt evidences the "absolute title or security interest" of the entruster over the goods.
5.01. View that Ownership is not Acquired by Entruster.
A line of Supreme Court decisions maintains that the entruster-bank does not acquire real ownership over the subject goods.
It is maintained in these decisions that mere security interest is acquired.
Section 3(h) of the Trust Receipts Law (P.D. No. 115) defines a "security interest" as follows:
"(h) Security Interest means:
a property interest in goods, documents, or instruments
to secure performance of some obligation
of the entrustee or of some third persons
to the entruster and
includes title,
whether or not expressed to be absolute,
whenever such title is in substance
taken or retained for security only.”
A trust receipt is inextricably linked to the primary agreement between the parties.
The Supreme Court has emphasized that a trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a loan.
Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as security for the loan.
In other words, the transaction involves a:
loan feature represented by the letter of credit, and a
security feature, which is in the covering trust receipt.
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods.
It secures indebtedness and there can be no such thing as security interest that secures no obligation.
Since the trust receipt:
✅ serves as security only
❌ the goods covered thereby cannot be deemed to be owned by the person who entrusted the same.
Samo v. People, 115 Phil. 346; 5 SCRA 354 (1962):
The Supreme Court described a trust receipt as "a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased."
Vintola v. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987, 150 SCRA 578:
The Supreme Court elucidated that "a trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a 'security interest' in the goods.
It secures an indebtedness and there can be no such thing as security interest that secures no obligation.
Sia v. People, G.R. No. 30896, April 28, 1983, 121 SCRA 666:
Abad v. Court of Appeals, G.R. No. 42735, January 22, 1990, 181 SCRA 191:
PNB v. Pineda, G.R. No. 46658, May 13, 1991, 197 SCRA 1:
If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer.
To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof..."
Rosario Textile Mills Corporation and Edilberto Yuico v. Home Bankers Savings and Trust Company, G.R. No. 137232, June 29, 2005, 462 SCRA 88:
The issue was whether the entrustees are not relieved of their obligation to pay their loan after they allegedly tried to tender the goods to the bank which refused to accept the same, and which goods were subsequently lost in a fire.
The Supreme Court ruled that the entrustees were not relieved of their obligation to pay the loan.
The High Court observed that the entruster bank did not become the owner of the goods and the trust receipt was merely signed as a security for the loan.
Loss of the property that served as a security did not extinguish the obligation.
The entruster bears the loss of the goods or property.
5.02. View that the Entruster Owns the Goods.
Development Bank of the Philippines v. Prudential Bank, G.R. No. 143772, November 22, 2005:
The Supreme Court ruled that the entrustee cannot mortgage the properties that are covered by trust receipts because ownership was retained by the entruster-bank.
The articles were owned by Prudential Bank and they were only held by Litex in trust.
While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085(2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged.
Article 2085(3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith.
No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential Bank’s demand. By its failure to pay or return them despite Prudential Bank’s repeated demands and by selling them to Lyon without Prudential Bank’s knowledge and conformity, DBP became a trustee ex maleficio.
Agreements between DBP and Litex.
The agreements involved in Development Bank of the Philippines v. Prudential Bank" uniformly provided that:
the properties belonged to the entruster bank and
the entrustee agreed "to hold said goods in trust for the (entruster-bank) and as its property with liberty to sell the same for its account but without authority to make any other disposition whatsoever of the said goods or any part thereof (or the proceeds thereof) either by way of conditional sale, pledge, or otherwise.
In other words, absolute ownership was expressly reserved and the entrustee did not have free disposal of the subject goods because its right to dispose was limited by contract.
5.03. Observations.
It is believed that the entruster does not retain absolute ownership, as the term "absolute ownership" is understood under our present laws.
The view that absolute ownership is transferred to the entruster is conceptually inconsistent with the reality that:
banks merely finance the needs of its customer and
trust receipts are signed only for purposes of securing the loan.
Banks are financial intermediaries and are not in the business of trading goods.
Earmarks of Ownership.
The right of the entrustee over the goods has all the earmarks of ownership though subject to limitations imposed by law and the agreement of the parties.
The interest of the entrustee as an owner is reflected in the following:
The entrustee sells the goods in his own personal capacity and not as an agent;
The entruster shall not be responsible as vendor under any sale or contract to sell;
The entruster shall sell the goods when the entruster takes possession after cancelling the trust agreement to answer for the obligation;
In a public sale, the entrustee shall be entitled to the surplus of the price paid after deducting the amount owing to the entruster; and
The risk of loss shall be borne by the entrustee consistent with the principle res perit domino.
Development Bank of the Philippines v. Prudential Bank:
The final disposition could still be maintained even if the Court did not rule that absolute ownership pertains to the bank.
The mortgage would still be void even if the entrustee owns the goods because the mortgagor-entrustee did not have free disposal of his property and he was not legally authorized to mortgage under the agreement with the bank.
The trust receipt is a limitation on the ownership of the entrustee.
Besides, Section 12 of the Trust Receipts Law expressly provides that the entruster's security interest in the goods shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.
Hence, the right of the mortgagee-creditor in the Development Bank of the Philippines case was inferior to the security interest of the entrustee under Section 12 of the special law.
Mortgagee-Creditor < Security Interest
c. Only security interest is retained.
The view that only security interest is retained by the entruster is not inconsistent with the rule that the entrustee may be punishable Section 1(b) of Article 315 of the Revised Penal Code.
The focus of the penal provision is the value of the goods rather than the goods themselves.
There may still be criminal liability even if the goods are not intended to be sold.
Hence, it is not necessary for the entrustee to be the owner to be held liable for estafa under Section 115 of the Trust Receipts Law.
There is no need to conceptualize a hybrid type of absolute ownership.
In addition, the crime of violation of the Trust Receipt Law is an offense that need not squarely fit into the concept of estafa under the Revised Penal Code.
The crime is punishable under Article 315 of the Revised Penal Code.
6. Remedies of the Entruster.
Section 7 of the Trust Receipts Law provides for the remedies of the entruster
Sec. 7. Rights of the entruster.
The entruster shall be entitled:
to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee
to the extent of the:
amount owing to the entruster or
as appears in the trust receipt, or
to the return of the goods, documents or instruments In case of non-sale, and
to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents, or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee,
and the entruster in possession of the goods, documents or instruments:
may on or after default, give notice to the entrustee of the intention to sell, and
may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale,
and the entruster may, at a public sale, become a purchaser.
The proceeds of any such sale, whether public or private, shall be applied:
to the payment of the expenses thereof;
to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments;
to the satisfaction of the entrustee's indebtedness to the entruster.
The entrustee shall:
receive any surplus but shall be
liable to the entruster for any deficiency.
Notice of sale shall be deemed sufficiently given:
if in writing, and
Either:
personally served on the entrustee or
sent by post-paid ordinary mail to the entrustee's last known business address.
6.01. Specific Performance
An action for specific performance is available to the entruster.
The entruster can file an action to compel the entrustee to pay his obligation to pay the loan.
Basis.
The basis of this action may be:
the contract of loan that is independent of the trust receipt or
the trust receipt itself.
Goods Are Sold.
If the goods are sold, the entruster can demand the delivery of the proceeds of the sale of the goods covered by the trust receipt.
This demand is for the performance of an obligation mandated by the Trust Receipts Law.
Security Bank Corp. v. Great Wall Commercial Press Co., Inc., G.R. No. 219345, January 30, 2017:
In a civil case involving a trust receipt, the entrustee's failure to comply with its obligations under the trust receipt constitutes a civil fraud provided that it is alleged, and substantiated with specificity, in the complaint, its attachments and supporting evidence.
Hence, a writ of preliminary attachment may even be prayed for in the case.
6.02. Retaking of Possession.
Additionally, under Section 7:
The entruster may cancel the trust and take possession of the goods, documents, or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee.
The goods will then be sold to satisfy the obligation of the entrustee to the entruster.
Landl & Company (Phil.), Inc., et al. v. Metropolitan Bank and Trust Company:
The right of repossession and subsequent sale at public auction, which are availed of by an entruster bank, are rights available upon default, and which are conferred by statute.
Repossession by the Bank.
The repossession by the bank of the goods by the entruster does not result in the full satisfaction of the entrustee's obligation.
Full Turnover of the Goods.
Full turnover of the goods does not suffice to divest the entrustee of the obligation to repay the principal amount of his loan obligation.
Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement Company, lnc., G.R. No. 46658, May 13, 1991, 197 SCRA 1.
PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby.
Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation.
Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself
Neither can said repossession amount to dacion en pago.
Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales.
Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.
As aforesaid, the repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Vintola v. Insular Bank of Asia and America, 4G.R. No. 73271, May 29, 1987:
The Supreme Court ruled that the obligation of the petitioner-spouses to the entruster bank was not extinguished when they relinquished possession of the goods.
The High Court explained that a trust receipt is a security agreement, pursuant to which a bank acquires a "security interest" in the goods.
The trust receipt arrangement did not convert the entruster bank into an investor; the latter remained a lender and creditor.
7. Penalty Clause.
The penalty clause of the law, Section 13 of Presidential Decree No. 115
Section 13. Penalty Clause.
The failure of an entrustee:
to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of:
the amount owing to the entruster or
as appears in the trust receipt or
to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa punishable under the provisions of Article 315, paragraph 1(b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code.
If the violation or offense is committed by:
a corporation,
partnership,
association or
other juridical entities,
The penalty provided for in this Decree shall be imposed upon the:
directors,
officers
employees or
other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
Malum Prohibitum.
The crime defined in Presidential Decree No. 115 is malum prohibitum but is classified as estafa under par. 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence.
It may be committed by:
a corporation or other juridical entity or
by natural persons.
Criminal intent is irrelevant in prosecuting the violation of the TRL.
A mere failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes prejudice not only to another, but more to the public interest.
Criminally Liable.
The entrustee may be criminally liable under the Trust Receipts Law:
If he did not turn over the proceeds of the sale,
If he did not return the goods when lawfully demanded, or
If the goods are not meant for sale, if he did not pay the value of the goods.
7.01 Liability of Officers.
The law specifically makes the:
officers,
employees or
other officers or
persons responsible for the offense.
without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense.
Rationale.
The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.
When an officer signs the trust receipts, he or she acknowledges:
receipt of the goods covered by the trust receipt; and
that he or she is fully aware of the terms and conditions stated in the trust receipts, including the obligation to turn over the proceeds of the sale or return the goods to the entruster.
Ong v. Court of Appeals, G.R. No. 119858, April 29, 2003:
As a last ditch effort to exculpate himself from the offense charged, petitioner Gonzalez posits that, "the fact that (he) held a high position in MLRC was not sufficient reason to charge him for alleged violation of trust receipts."
Unfortunately, it is but a futile attempt. Though petitioner Gonzalez signed the Trust Receipts merely as a corporate officer of MLRC and had no physical possession of the goods subject of such receipts, he cannot avoid responsibility for violation of Presidential Decree No. 115 for two unpretentious reasons:
first, that the last sentence of Section 13 of the '' Trust Receipts Law," explicitly imposes the penalty provided therein upon "directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense," of a corporation, partnership, association or other juridical entities found to have violated the obligation imposed under the law.
The rationale for making such officers and employees responsible for the offense is that they are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.
And second, a corporation or other juridical entity cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment
Gonzalez v. Hongkong & Shanghai Banking Corp., G.R. No. 164904, October 19, 2007:
It is not a defense that the officer is not in physical possession of the goods covered by the trust receipt.
In the same manner, the corporate officer cannot hide under the cloak of the separate personality of the corporation.
A corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor.
7.02. Novation.
If there is novation of the trust receipt agreement to the extent that the same is extinguished, the criminal liability of the corporate officers shall also be considered extinguished.
This may happen if:
there is express novation of the agreement or
if there is implied novation, which substitutes the existing Trust Receipt Agreement.
The latter type of novation may happen if the trust receipt agreement and the new agreement are incompatible on every point or they cannot stand together.
Example:
If the Trust Receipt Agreement was novated by a Memorandum of Agreement that converted the agreement into an ordinary contract of loan, any criminal liability of the corporate officers may also be considered extinguished.
The liability, if any, would be civil in nature.
However, modifications in the agreement do not necessarily result in novation.
Philippine National Bank v. Soriano, G.R. No. 164051, October 3, 2012:
The Supreme Court, quoted Transpacific Battery Corporation v. Security Bank and Trust Company in holding that the restructuring of a loan agreement secured by a TR does not per se novate or extinguish the criminal liability incurred thereunder:
Neither is there an implied novation since the restructuring agreement is not incompatible with the trust receipt transactions.
The restructuring agreement recognizes the obligation due under the trust receipts when it required "payment of all interest and other charges prior to restructuring."
With respect to Michael, there was even a proviso under the agreement that the amount due is subject to "the joint and solidary liability of Spouses Miguel and Mary Say and Michael Go Say."
While the names of Melchor and Josephine do not appear on the restructuring agreement, it cannot be presumed that they have been relieved from the obligation.
The old obligation continues to subsist subject to the modifications agreed upon by the parties.
The circumstance that motivated the parties to enter into a restructuring agreement was the failure of petitioners to account for the goods received in trust and/or deliver the proceeds thereof.
To remedy the situation, the parties executed an agreement to restructure Transpacific's obligations.
The Bank only extended the repayment term of the trust receipts from 90 days to one year with monthly installment at 5% per annum over prime rate or 30% per annum whichever is higher.
Furthermore, the interest rates were flexible in that they are subject to review every amortization due. Whether the terms appeared to be more onerous or not is immaterial. Courts are not authorized to extricate parties from the necessary consequences of their acts.
The parties will not be relieved from their obligations as there was absolutely no intention by the parties to supersede or abrogate the trust receipt transactions.
The intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid.
Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that:
expressly recognizes the old,
changes only the terms of payment,
adds other obligations not incompatible with the old ones, or
the new contract merely supplements the old one.
7.03. Separate Case and Acquittal.
An officer who is acquitted of the charge of violation of the TRL may still be held civilly liable in the same case.
General Rule: Debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation they represent;
Exception: If they contractually agree/stipulate or assume to be personally liable for the corporation's debts.
Sarmiento Jr. v. Court of Appeals, G.R. No. 122502, December 27, 2002:
A complaint based on the failure of the entrustee to comply with his or her obligation as spelled out in the Trust Receipt executed by them is separate and distinct from the criminal case.
This breach of obligation is separate and distinct from any criminal liability for "misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts," punishable under Section 13 of the TRL in relation to Article 316(l)(b) of the RPC.
Being based on an obligation ex contractu and not ex delicto, the civil action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter.
Problems:
DBP v. Prudential Bank, G.R. No. 143772, November 22, 2005
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent Prudential Bank for $498,000. This was in connection with its importation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering "trust receipts"it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal.
On October 10, 1980, DBP granted a foreign currency loan in the amount of $4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries, and equipment there. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the "trust receipts."
Sometime in June 1982, Prudential Bank learned about DBP's plan for the overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over the various items covered by the "trust receipts" which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP
For the failure of Litex to pay its obligation, DBP extrajudicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the highest bidder.
Was the foreclosure valid with respect to the machineries and equipment covered by the trust receipts?
No, the foreclosure was not valid with respect to the machineries and equipment covered by the trust receipts.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles.
Litex could not have subjected the articles to a chattel mortgage.
Their inclusion in the mortgage was void and had no legal effect.
There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith.
Rosario Textile Mills Corporation v Home Bankers Savings and Trust Co:
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied with Home Bankers Savings & Trust Co. for an Omnibus Credit Line for 1"10 million. The bank approved RTMC's credit line but for only P8 million. The bank notified RTMC of the grant of the said loan through a letter dated March 2, 1989 which contains terms and conditions conformed by RTMC through Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly and severally with RTMC for the payment of all of RTMC's indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making numerous drawdowns, each drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of 11 promissory notes. Despite the lapse of the respective due dates under the promissory notes and notwithstanding the bank's demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank filed a complaint for a sum of money against RTMC and Yujuico before the Regional Trial Court, Br. 16, Manila.
In their answer, RTMC and Yujuico contend that they should be absolved from liability. They argue that the importation of raw materials under the credit line was with a grant of option to them to turnover to the bank the imported raw materials should these fa.ii to meet their manufacturing requirements. RTMC offered to make such turnover since the imported materials did not conform to the required specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which gutted down RTMC's premises.
Is RTMC still liable?
Yes, RTMC is still liable despite the destruction of the goods.
The entruster bank did not become the owner of the goods and the trust receipt was merely signed as a security for the loan.
Loss of the property that served as a security did not extinguish the obligation.
The entrustee will then bear the loss of the goods or property.
Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000:
Delano Cruz is in default in the payment of his existing loan from BDP Bank. To extend and restructure this loan, Delano agreed to execute a trust receipt in the bank's favor covering the iron pellets Delano imported from China one year earlier. Delano subsequently succeeded in selling the iron pellets to a smelting plant, but the proceeds went to the payment of the separation benefits of his employees who were laid off as he reduced his operations.
When the extended loan period expired without any significant payment from Delano (not even to the extent of the proceeds of the sale of the iron pellets), BDP Bank consulted you on how to proceed against Delano. The bank is contemplating the filing of estafa pursuant to the provisions of Presidential Decree No. 116 (Trust Receipts Law) to force Delano to turn in at least the proceeds of the sale of the iron pellets.
Would you, as bank counsel and as an officer of the court, advise the bank to proceed with its contemplated action? (2013 Bar)
No. I will advise the Bank not to file a criminal case for estafa against Delano.
The trust receipt involved in this case was executed one year after the importation of the iron pellets.
The ownership of the goods was already acquired by Delano a year before the execution of the trust receipt.
Hence, the transaction involved was only a simple loan.
The nomenclature given by the parties to the contract is not controlling.
2012 Bar:
BBB Banking Corporation issued a Letter of Credit in the amount of P6 million, for the purchase of fivetons of corn by X. Upon arrival of the goods, the goods were delivered to the warehouse of X. Thereafter, he was asked to sign a Trust Receipt covering the goods.
When the goods were sold, X did not deliver the proceeds to BBB Banking Corporation, arguing that he will need the fund for the subsequent importation.
Is there sufficient basis to sue for criminal action?
Yes. The entrustee is obligated to turn over the proceeds of the sale to the bank.
Hence, X's failure as entrustee to turn over the proceeds to the bank is a violation of the Trust Receipts Law.
In addition, violation of Trust Receipts Law is mala prohibita; hence, intention is irrelevant.
2012 Bar:
X secured a loan from BBB Bank to pay for the importation of some dried fruits. Upon arrival of the goods consisting of dried fruits imported by X but before delivery to him, a trust receipt was executed by X to cover the transfer of the dried fruits to his possession. The dried fruits were so saleable but instead of turning over the proceeds of the sale, X used the funds to pay for the medical expenses of his mother who was sick of cancer of the bone.
Is X criminally liable?
Yes, X can be held criminally liable under the Trust Receipts Law.
Violation of Trust Receipts Law is mala prohibita; hence, intention is irrelevant.
In addition, the fact that the funds were used for some urgent need does not excuse the crime.
2012 Bar:
X is the President of AAA Products Corporation. X signs all the Trust Receipts documents for certain importations of the company. In the event of failure to deliver the proceeds of the sale of the goods to the bank.
Is the President liable?
Yes, the president is liable for violation of Trust Receipts Law.
Section 13 of the law provides that "if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense."
2012 Bar:
CCC Car, Inc. is obligated to pay BBB Bank by virtue of the letter of credit which was issued by the latter to fund was used to import ten units of Mercedes Benz S Class vehicles. Upon arrival of the vehicles and before release of said vehicles to CCC Car, Inc., X and Y, the President and Treasurer, respectively, of CCC Car, Inc. signed the Trust Receipt to cover the value of the ten units of Mercedes Benz S Class vehicles after which, the vehicles were all delivered to the car display room of CCC Car, Inc. Sales of the vehicles were slow, and it took a month to dispose of the ten units. CCC Car, Inc. wanted to be in business and to save on various documentations required by the bank, decided that instead of turning over the proceeds of the sales, CCC Car, Inc. used the proceeds to buy another ten units of BMW three series.
Is the action of CCC Car, Inc. legally justified? Explain your answer.
No. The action of CCC Car, Inc. is not legally justified.
CCC Car, Inc. is the en trustee in a trust receipt and under Section 9 of the Trust Receipts Law CCC Car, Inc. is obligated to turn over the proceeds of the sale of the vehicles to BBB Bank to the extent of the amount owing to the latter or as appears in the trust receipt.
Will the corporate officers of CCC Car, Inc. be held liable under the circumstances? Explain your answer.
Yes. Section 13 of the TRL provides that "if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other official or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense."
Hence, the President and the Treasurer of CCC Car, Inc. are liable because they both signed the trust receipts.
8. Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement Company, Inc., G.R. No. 46658, May 13 1991, 197 SCRA 1
X and Co obtained a loan from a local bank in the amount of P500,000.00, mortgaging as a security therefor its real property. Subsequently, the company applied with the same bank for a letter of credit for $200,000.00 in favor of a foreign bank to cover the importation of machinery. To guarantee payment of the obligation under the LC, the company and its president and treasurer executed a surety agreement in the local bank's favor.
The machinery arrived and was released to the company under a trust receipt agreement. As the company defaulted in the payment of its obligations, the bank took possession of the imported machinery. At the same time, it sought to foreclose the mortgage on the property and to hold the company as well as its president and treasurer, liable under the surety agreement.
Did the taking of possession of the machinery by the bank result in the full payment (through actual payment or dacion en pago) of the obligation of the company and its officers? (1992 Bar)
No, the taking of possession of the machinery by the bank did not result in the full payment of the obligation of the company and its officers and the foreclosure of the mortgage.
Full turn over of the goods does not suffice to divest the en trustee of the obligation to repay the principal amount of his loan obligation. The en truster's possession of the machinery being precisely as a form of security for the advances given to entrustee, said possession by itself cannot be considered payment of the loan secured thereby.
Payment would legally result only after creditor had foreclosed on said securities, sold the same and applied the proceeds thereof to the loan obligation.
Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself.
Neither can said repossession amount to dacion en pago.
Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales.
Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.
The repossession of the machinery was merely to secure the payment of the loan obligation and not for the purpose of transferring ownership thereof to the creditor in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Comments
Post a Comment