LETTER OF CREDIT (Art.

567-572 Code of Commerce) LETTER OF CREDIT Letter of credit an arrangement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance w/ the conditions specified in the credit. Internationally accepted definition of a LC as provided in the Uniform Customs and Practices for Documentary Credit (UCPDC): Letter of Credit any arrangement, however named or described, whereby a bank also known as the issuing bank, acting upon the request or instruction of another(applicant or customer) or on its own behalf, binds itself to: 1. Pay to the order of a 3rd person known as beneficiary OR 2. Accepts and pay any draft that may be drawn by the beneficiary, OR 3. Authorize another bank to: Pay to the order of a 3rd person known as the beneficiary. Accept and pay any draft by the beneficiary, OR 4. Authorize another bank to negotiate against the stipulated documents. Note: We are bound by the UCPDC issued by the International Chamber of Commerce. Sec. 2 of the Code of Commerce states that in the absence of any particular provision in the code of Commerce, commercial transactions shall be governed by the usages and customs generally observed (BPI vs. Nery). A Letter of Credit is a special contract designed to answer two concerns: Sellers refusal to part with his goods before being paid coupled with the Buyers want of ownership over the goods before pa ying. Note: The opening of a LC does not involve specific appropriation of money in favor of the beneficiary. The correspondent bank does not receive in advance the money form the buyer or issuing bank but pays the amount out of its own funds and then later on seek reimbursement from the issuing bank. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. Note: An LC is not a negotiable instrument. It does Not conform w/ Section 1 of the Negotiable Instruments Law. This is because it does not contain an unconditional promise to pay a sum certain in money. The LC is conditioned to the submission of certain documents. Moreover, the LC is issued in favor of a definite person and not to order. Therefore, it also lacks the words of negotiability required. LC is conditioned on 1. Submission of stipulated documents 2. Compliance with the terms of the LC Is LC a commercial transaction? YES. Because it is governed by the Code of Commerce. PARTIES TO THE TRANSACTION: Basic parties to a letter of credit: 1. Applicant/buyer/importer the one who procures the letter of credit and obliges himself to reimburse the Issuing Bank (IB) upon the receipt of the documents of title. He is the party who initiates the operation of the Letter of Credit transaction as the buyer of the merchandise and also of the credit instrument. 2. Issuing Bank is usually the buyers bank; it issues the letter of credit and undertakes to pay the seller upon receipt of the draft and pr oper documents to the buyer upon reimbursement. Seller/beneficiary is the one who in compliance w/ the contract of sale ships the goods to the buyer and delivers the documents of title and drafts to the issuing bank to recover payment. He is the beneficiary of the instrument because the instrument is addressed to him and in his favor.

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Additional party/parties to the LC: 4. Correspondent Bank TYPES OF CORRESPONDENT BANK: 1. Advising/Notifying Bank does not have any contractual relations w/ the buyer but merely serves as an agent of the issuing bank. Its only responsibility is to transmit the LC. Thus, it could validly refuse to negotiate or accept, even if the seller tenders all the documents required under the LC and it does not become liable as the beneficiary has no cause of action against the bank. Confirming Bank lends credence to the LC issued by a lesser known bank. It assumes direct obligation to the seller/beneficiary and becomes principally liable. A notifying bank, who also assumes the role of a negotiating bank does not include assuming the role of a confirming bank and is therefore not liable to the beneficiary. To be liable, there must be an absolute assurance that it will undertake the issuing banks obligation as its own. If it does confirm, the beneficiary become entitled to proceed against either or both banks in case of breach. 3. 4. Paying Bank the bank w/c pays the beneficiary. It may either be the opening/issuing bank or any other bank in the place of the beneficiary. Negotiating Bank any bank in the place of the beneficiary w/c buys or discounts the sellers draft. Its liability depends on the stage of negotiation. If BEFORE negotiation, such that it suggests its willingness to negotiate, it has no liability w/ respect to the seller. But if AFTER negotiation, a contractual relationship will then prevail between them.

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Note: A bank does not become a negotiating bank unless he pays the draft and becomes the holder of said document. As such, the IB may notify the seller of the opening of the LC either directly or through a correspondent bank, w/c may either be a mere advising bank or a Confirming Bank. Note: The IB has the option to tap a correspondent bank or not. The liability of a Correspondent Bank depends on what kind of function it plays in the LC transaction. RELATIONSHIP OF THE PARTIES is governed by1. Issuing bank and applicant the relationship is governed by the terms of the application and agreement for the issuance of the LC by the bank. 2. Issuing bank and the Beneficiary the relationship is governed by the terms of the LC issued by the bank 3. Applicant and beneficiary the relationship is governed by the contract they entered into. ex. Sales INDEPENDENCE PRINCIPLEThe bank in determining compliance with the terms of the LC is required only to examine the shipping document presented by the seller and is precluded from determining whether the main contract is accomplished or not DOCTRINE OF STRICT COMPLIANCEThe document tendered by the seller must strictly conform to the terms of the LC . The correspondent bank which departs from what has been stipulated under the LC, as when it accepts a faulty tender , acts on his own risk and may not thereafter recover from the buyer or issuing bank , the money paid to the benefic In short, the documents presented must comply w/ those stipulated on. In a LC, the banks only deals w/ documents and not w/ goods. Can a breach of contract be invoked against the Issuing Bank? NO. Because if all the documents stipulated have been submitted and the IB finds that they conform w/t the LC requires, then the IB must pay the seller. In a LC transaction the banks deal only w/ documents not goods, so banks pays if the documents are OK and gets reimbursed by the buyer. This relationship is independent so if ever the goods are in bad condition, the applicant still pays the bank. Note: A loan transaction may give rise to LC. An LC does not arise only because of sale or importation. Example: Standby LC. Standby Letter of Credit (SLC) it is a bank issued option on loan involving 3 parties: the bank issuing the credit, the party requesting for such issuance (otherwise known as the account party) and the beneficiary. Under the terms of a SLC, the beneficiary has the right to trigger the loan option (referred to as TAKING DOWN THE LOAN) if the account party fails to meet its commitment, in w/c case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. SLCs may support non-financial obligations such as those of bidders, or financial obligations such as those of borrowers. In the latter case, the borrower purchases an SLC and names the lender as beneficiary. Should the borrower default, the beneficiary has the right to take down the SLC and receive the principal balance from the issuing bank. The borrowers loan obligation is then passed to the bank. When the Notifying Bank (NB) may be held liable: The NB is liable if: 1. It did not notify the seller of the opening of the LC, or 2. It did not determine the apparent authenticity of the required documents. Note: Only the APPARENT AUTHENTICITY is to be determined. The NB does not warrant the authenticity of the LC but only its apparent authenticity. So if the LC turns out to be spurious, NB is not liable for damages unless obvious that it is not authentic. Therefore, Notifying Bank/Advising Bank is liable if it acts beyond the scope of its authority. When may the Advising Bank (AB) be equally liable with the Issuing Bank (IB)? Ordinarily, an AB, whose obligation is merely to advise the seller/beneficiary of the opening of a LC has no liability. The opening of a LC does not make the IB liable at once because there is no liability. The liability is conditioned and dependent on the tender or submission of the documents stipulated upon by the parties. If the beneficiary requires that the obligation of the IB shall also be made the obligation of the AB to him, there is what is known as a CONFIRMED COMMERCIAL CREDIT and the AB shall become a Confirming Bank. In this situation, the liability of the CB is primary and it is as if the credit were issued by the IB and the CB jointly, thus giving the beneficiary or holder for value of the drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. The CB is liable only when the documents are submitted and gets reimbursed by the IB because there is no privity of contract with the applicant. Thus, an AB becomes a CB when the above mentioned conditions occur. In such a case, the CB acquires the same liabilities as the Issuing Bank and is bound by the same conditions as an IB. Function of a Negotiating Bank (NB): It accepts or gives value to the draft and w/c later on sells the draft to the IB. The IB then reimburses the NB. What happens is that the NB buys the draft at a discounted price and then sells it to the IB for its face value. If LC is disowned by the IB, can the Negotiating Bank ask reimbursement from the seller? Under what principle? YES. Seller is a drawer of the draft accepted and paid by the Negotiating Bank. Therefore, the seller has contingent liability on such draft. Can a Confirming Bank become a Notifying Bank? NEVER, because they have different liabilities. The CBs liability is primary while the NBs liability comes only af ter negotiation (Before negotiation, there is no liability). It is the application for the opening of a LC w/c governs the relationship between the buyer and the IB. This implies that the buyer/applicant is not concerned w/ the terms of the LC between the IB and the seller/beneficiary. As to the IB, it is not a guarantor because its liability is not subsidiary since the condition of the submission of the document is determinative of the liability not the nonpayment of the buyer. The IB opens a LC for a consideration w/c comes in the form of a commission.

If the IB does not advance the payment in favor of the seller/beneficiary, may the buyer/applicant recover the commission paid? No More because this is the consideration. But he may recover the margin fee. What among other things, should be stipulated upon the application for a LC? The documents w/c the seller should submit to the IB. In LC transactions, the IB deals only w/ the documents, not w/ goods. The IB is not bound or required to examine the goods. For as long as the required documents are submitted by the seller, the IB pays the seller. If the goods turned out to be defective, is this a valid defense to avoid payment by the IB to the seller? NO. As long as the documents submitted by the seller are complete and in conformity w/ what the LC requires, the IB is bound to pay the seller. This is true even if the goods turned out to be defective.

How about the buyer, is he still bound to reimburse the IB despite the defective goods received by him? YES. The buyer has no course of action against the IB. The buyer has a COA against the seller. If the documents submitted by the seller are incomplete and the IB still pays the seller, is the buyer still bound to pay the IB? NO. Because the IB should not have paid the seller knowing the documents to be incomplete. The IB deals only w/ documents. Can the beneficiary demand payment form the CB? YES. Since the CB is equally liable w/ the IB. If the beneficiary proceeds against the CB, the CB may ask reimbursement from the IB. But if the beneficiary proceeds directly against the CB; it has no right to collect from the IB. The beneficiary may compel the CB to accept drafts it has drawn. How is payment made by the Issuing Bank? Payment by the IB is done through: 1. Direct payment or wire transfer or credit in the account of the beneficiary 2. Drawing of a draft by the beneficiary against the IB pay to my order 3. IB may authorize the Confirming Bank to pay 4. Authorize Correspondent Bank to accept and pay any draft drawn 5. Authorize the negotiation of any draft drawn by the beneficiary. Note: If the drawee doesnt pay, go to the drawer who is secondarily liable. Apart form the bill of lading, what additional documents may be needed as a condition of the LC for honoring a draft? 1. Commercial invoice it is a document signed and issued by the seller and contains a precise description of the merchandise and the terms of the sale such as unit prices, amount due form the buyer and shipping conditions related to charges such as FOB (Free on Board), FAS (Free Alongside), C and F (Cost and Freight) or CIF (Cost, Insurance, Freight). Consular invoice document issued by the consulate of the importing country to provide customs information and statistics for that country and to help prevent false declaration of value. Certificate of analysis may be required to ascertain that certain specifications of weight, purity, sanitation, etc., have been met. These specifications may be required by health or other officials of the importing country, or they may be insisted by the importer as assurance that it is receiving what it ordered. Export declaration it is a document prepared by the exporter to assist the government to prepare export statistics.

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Note: Documents to be passed are not unilaterally determined by the bank but agreed upon by the buyer and seller. Document of Title (Bill of Lading) given to the seller upon shipment of goods. This is to be given to the IB to be able for the seller to get payment.

Is there a scheme where the IB may release the documents of title to the buyer w/o being reimbursed first by the buyer? YES. By the IB letting the buyer execute a trust receipt. Failure of the buyer to open the Letter of Contract does not prevent the birth of the Sales Contract. The opening of the letter of credit is only a mode of payment. The letter of the credit is not an essential requisite to the contract of sale. WAREHOUSE RECEIPTS LAW (Act No. 2137)

PURPOSE of the WRL To prescribe the rights and duties of a warehouseman and to regulate the relationship between a warehouseman and the depositor of goods, or the holder of a warehouse receipt for the goods, or other persons. Warehouse receipt 1. It is a written acknowledgement by a warehouseman that he has received certain goods in his warehouse and that he holds the same in trust for the person to whom the document is issued or for any person lawfully entitled to such goods. 2. It is an evidence of title to the property in storage 3. Serves both as an acknowledgement of the receipt of goods and as a contract as between the parties where their rights and obligations are stipulated therein.

Warehouse Receipts Law Covers both bonded and unbonded warehouses.

General Bonded Warehouse Law (Act No. 3839) Covers only bonded warehouses.

As differentiated from DOCUMENTS OF TITLE under the Civil Code, Documents of Title cover documents of bailment OTHER THAN warehouse receipts. Warehouseman a person (natural or juridical) lawfully engaged in the business of storing goods for profit. If the person other than a warehouseman as defined by law is the one who issued the WR, then forget applying the WRL. Will WRL apply if a document is issued in accordance w/ the form prescribed by law but not issued by a warehouseman? NO. The law applicable in that case is the law on deposit under the CC. Does WRL supercede the CC provisions on documents of title? NO. In fact there is no inconsistency between the 2. The CC provisions on documents of title covers documents of title OTHER THAN WR. WRL being a specific law covers WR exclusively. Is a WR considered a negotiable instrument? Give their distinctions. NO. A WR even if negotiable is a non-negotiable instrument w/in the meaning of the Negotiable Instruments Law WR 1. Does not contain an unconditional promise to pay a sum certain in money. 2. The subject is merchandise. 3. WR itself is not the object of value. 4. Intermediate parties are not liable for the warehousemans failure to deliver the goods. Is the concept of a holder in due course applicable in WR? NO. Since it is not a negotiable instrument. Who may issue a WR? 1. By a warehouseman, whether public or private, bonded or not. 2. A person authorized by a warehouseman. What are the CONTENTS the receipt? Essential Termsthe following stipulations MUST BE PRESENT in the Warehouse Receipt: 1.) Location of the Warehouse; 2.) Date the Receipt was issued; 3.) Number of the receipt; 4.) Statement whether instrument is deliverable to bearer to a specified person or his order; 5.) Storage charges; 6.) Description of the stored goods; 7.) Signature of the warehouseman or his agent; 8.) Fact of the warehousemans ownership over the goods if any; and 9.) Statements of advances made and liabilities incurred by the depositor for which the lien was constituted. Effect of failure to include any of the above terms? It will not affect the validity of the WR but the warehouseman shall be liable to any person injured by such omission. What are the terms that cannot be included: 1. Terms contrary to the Warehouse Receipts Law 2. Terms reducing the degree of diligence imposed by law on the warehouseman 3. Terms that are against public policy What is the degree of care required of a warehouseman in the safekeeping of the goods entrusted to him? ORDINARY DILIGENCE 2 kinds of a warehouse receipt: 1. 2. Negotiable receipt it is expressly stated that the goods are deliverable to bearer or to the order of a person specified therein. Non-negotiable receipt it is stated that the goods received will be delivered to the depositor or to any specified person. It should be stamped on its face NON-NEGOTIABLE. NEGOTIABLE INSTRUMENT 1. Contain an unconditional promise to pay a sum certain in money. 2. Subject is money. 3. The NI is the object of value. 4. Intermediate parties become secondarily liable.

Note: A holder of a non-negotiable receipt not stamped non-negotiable believing it to be negotiable may treat the receipt as negotiable. When is WR negotiable? Sec. 5. A WR is negotiable when the goods are deliverable to: 1. A specified person or to his order; or to the order of a specified person 2. Bearer How is the negotiable WR negotiated? 1. If deliverable to bearer either by mere delivery or blank indorsement plus delivery

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If deliverable to order by proper indorsement plus delivery of the receipt

What if deliverable to order but it was transferred only by delivery w/o any indorsement. Who will then hold a better title between the owner of the goods and the innocent purchaser for value? The owner-depositor. The Innocent purchaser for value never acquired the negotiable title of the WR. He has however the right to compel the assignor to make the proper indorsement. If WR is negotiable, what is the effect if the words non-negotiable are inserted in the WR? Such insertion is void and the receipt remains negotiable. Rights of a person to whom a negotiable receipt has been negotiated? A. IF INDORSED: 1. Acquires title to the goods as the person negotiating the receipt has or had ability to convey to a purchaser in good faith and for value. 2. Acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman directly contracted w/ him (Sec. 41). B. IF NOT INDORSED: He may compel indorsement, OTHERWISE, he would only acquire title as that of an Advantages of a negotiable WR? 1. It can easily pass form one person to another 2. It protects a purchaser in good faith and for value 3. The goods conveyed by it cannot be attached or levied upon in execution UNLESS the receipt is surrendered or its negotiation enjoined, or impounded by the court 4. If properly negotiated, the holder acquires the direct obligation of the warehouseman to hold possession, w/o need of giving notice to the warehouseman, of the goods for him 5. The goods covered by the receipt cannot be defeated by the sellers lien on or the right to stop the goods in transitu. Sec. 44: 1. 2. 3. 4. 5. Warranties of an indorser: That the receipt is genuine That he has legal right to negotiate or transfer That he has no knowledge of any fact w/c would impair the validity of the receipt and That he has the right to transfer the title of the goods That the goods are merchantable.

Is the rule stated in Sec. 45 (that the indorser is not a guarantor) absolute? NO. This only means that he is not liable for any failure on the part of the warehouseman or prior indorsers to fulfill their respective obligations. HOWEVER, he could still be held liable if he violated or breached any of the warranties provided in Sec. 44. Non-negotiable WR when it is indicated therein that the goods received will be delivered to the depositor or to any other specified person. If the WR is non-negotiable, the warehouseman has the duty to indicate to indicate on its face of such fact. Effect of his failure to do so? The holder through subsequent negotiation or the present holder (not the original holder) can treat it as negotiable PROVIDED: 1. He purchased the WR for value 2. He supposed it to be negotiable. In this case, said holder may treat the receipt as his option, the receipt as imposing upon the warehouseman the same liabilities as the warehouseman would have incurred had the receipt been negotiable. Such right is ONLY enforceable against the warehouseman (Roman vs. Asia Banking Corporation-46 Phil705). Rights of a person to whom a non-negotiable WR has been issued? 1. He acquires the title subject to the terms of the deed of transfer 2. To inform the warehouseman of such transfer and thereafter acquires the obligation of the warehouseman to hold possession of the goods for him. Note: Prior to the notification to the warehouseman, the title of the transferee to the goods and the right to acquire the direct obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by the creditor of the transferor. Negotiable WR over Non-negotiable WR RIGHTS ACQUIRED BY PERSON HOLDING A NEGOTIABLE WR 1.. IF INDORSED: a) Acquires title to the goods as the person negotiating the receipt has or had ability to convey to a purchaser in good faith and for value. b) Acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman directly contracted w/ him (Sec. 41). 2. IF NOT INDORSED: He may compel indorsement; OTHERWISE, he would only acquire title as that of an assignee (Sec. 42). 2. To inform the warehouseman of such transfer and thereafter acquires the obligation of the warehouseman to hold possession of the goods for him. RIGHTS ACQUIRED BY A PERSON HOLDING A NON-NEGOTIABLE WR 1. He acquires the title subject to the terms of the deed of transfer

ADVANTAGES OF NEGOTIABLE WR OVER NON-NEGOTIANLE WR NEGOTIABLE WR 1. The goods covered under this cannot be garnished/attached or levied on execution UNLESS: 1. Receipt is surrender 2. Its negotiation is enjoined by the court or 3. The goods are impounded by the court. Note: The sheriff cannot compel the warehouseman to attach the property deposited even if armed with a court order. 2.If properly negotiated, the holder acquires the direct obligation of the warehouseman to hold possession, w/o need of giving notice to the warehouseman, of the goods for him 3. The goods covered by the receipt cannot be defeated by: a) creditors/sellers lien or b) The right to stop the goods in transitu. NON-NEGOTIABLE WR The rights if the transferee can be defeated by a judgment creditor pending notification to the warehouseman of the fact of transfer (Assignee still need to notify the warehouseman).

2. Acquires the direct obligation in his favor only after notifying the warehouseman.

3. Acquires the title as that of his transferor.

What are the OBLIGATIONS, DUTIES, AND RIGHTS of the Warehouseman? A) OBLIGATIONS AND DUTIES To deliver the goods. WHEN? The warehouseman is obliged to deliver the goods when demand to deliver is accompanied by any of the following: a) An offer to satisfy warehousemans lien; b) An offer to surrender the receipt, if negotiable, together with the proper indorsements; and c) A readiness and willingness to sign an acknowledgement receipt when requested by the warehouseman. TO WHOM? a) To the person in lawful title over the goods; b) To specified name or his agent in a non-negotiable instrument; c) To the lawful order of a negotiable receipt. When is the refusal to deliver the goods by the warehouseman justified? 1. If he had been requested by a person lawfully entitled to a right of property or possession in the goods not to make delivery to any person. 2. If he had information that the delivery to be made was not the one lawfully entitled to the possession of the goods. 3. If several persons claim the goods. 4. If the warehouseman needs reasonable time to ascertain the validity of the claim if someone other than the depositor claims title to the goods. 5. If the goods are lost, despite ordinary care by the warehouseman. 6. If the warehousemans LIEN IS NOT SATISFIED BY THE CLAIMANTS. 7. If the goods are sold to satisfy the warehousem ans lien or because of their perishable or hazardous nature. Note: The warehouseman cannot refuse to deliver the goods on the ground that he is the owner of the said goods UNLESS his title over the goods is derived: 1. Directly or indirectly from the transfer made by the depositor at the time of the deposit or subsequent thereto. 2. From the warehousemans lien. In the event the goods are subject to several claimants, the warehouseman may do the following: a) Refrain delivery until warehouseman ascertains the true ownership over the goods; b) Require claimants to file interpleader action to determine ownership over the goods. Attachment or execution over the goods may prosper only upon surrender of negotiable receipt or its negotiation refrained. Could the warehouseman commingle the goods? General rule: NO. Sec. 22. Exception: Yes, if the goods are: 1. Fungible and of the same kind and grade and 2. There is an agreement (either by stipulation or custom) that commingling is allowed. Note: Both requisites must concur. Note: The rule is different on Law on Deposit. It provides that fungible goods of the same kind and quality may be co-mingled UNLESS otherwise stipulated. So the rule on Law on Deposit is: Gen. Rule: Co-mingling of fungible goods of same kind and quality is allowed. Exception: If there is a stipulation to the contrary. Rules in the alteration of the WR (Note that the rule is different under the NIL): The effects are: 1. If the alteration is IMMATERIAL, whether fraudulent or not, authorized or not, the warehouseman is liable according to the original tenor of the WR. 2. If the alteration is MATERIAL BUT AUTHORIZED, the warehouseman is liable to the terms as altered. 3. If the alteration is MATERIAL BUT UNAUTHORIZED W/O FRAUDULENT INTENT, the warehouseman is liable according to the original tenor.

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If the alteration is MATERIAL BUT UNAUTHORIZED AND W/ FRAUDULENT INTENT, the warehouseman is liable according to the original tenor. (This rule does not relieve him to deliver the goods, only w/ regard to his liability). Note: But as to the purchaser in good faith and for value, the warehouseman is liable as if the receipt was not altered at the time of the purchase.

B. RIGHTS To be paid. Extent of the LIEN of the goods to be deposited. a) Storage charges; b) Claims for money advanced; and c) Reasonable charges for sales advertisement over the goods. AGAINST whose goods is the lien enforceable? a) Debtors goods; and b) Goods belonging to other persons but entrusted to the debtor How is the lien ENFORCEABLE? The lien is enforceable by sale at public auction, upon proper notice and publication, in such quantities as to satisfy the lien. How is the lien LOST? a) By surrendering possession thereof; b) By refusing delivery of the goods when demanded. Note: If the lien is lost, it does not mean that the warehouseman does not have anymore any remedy. He could still exercise other remedies as may be provided by law like an action for collection. TRUST RECEIPTS LAW (P.D. No. 115) What is a TRUST RECEIPT? A Trust Receipt is a document executed between bank and buyer whereby the goods are released to the buyer. In turn, the buyer binds himself to hold the goods in trust, or to sell or dispose the goods. Buyer is obligated to turn over the proceeds to the Bank to the extent of the buyers obligation to him, or if unsold, to return the goods. Purposes of the Trust Receipts Law: 1. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade. 2. To regulate trust receipt transactions in order to ensure the protection of the rights and the enforcement of the obligations of the parties involved therein. 3. To declare the misuse and/or misappropriation of goods or the proceeds realized form the sale of goods, documents, or instruments released under trust receipts as a criminal offense punishable under Art. 315 of the RPC (i.e., swindling, estafa). The TRL being a special law, criminal intent is not necessary. The good faith or bad faith of the entrustee is immaterial. The mere failure of the entrustee to deliver the proceeds of the goods or return the goods to the entruster if unsold would give rise to his criminal liability. Nature and usage of trust receipts: Under the set-up, a bank extends loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the TR transaction has 2 features: 1. LOAN FEATURE represented by the Letter of Credit, and a 2. SECURITY FEATURE w/c is in the covering trust receipt (Vintola vs. Insular Bank of America). Note: The bargaining power of the bank is stronger through the TR because of the criminal liability that may attach because of the some breach of the obligations of the entrustor in the TRA. Entruster the person holding title over the goods, documents, instruments, subject of a trust receipt transaction, and any successor in interest of such person. Entrustee the person having or taking possession of goods. Documents or instruments subject of a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust agreement. What are the rights and obligations between the parties? BUYER receives the goods under a trust receipt issued by the BANK in favor of said buyer. The bank financed the whole transaction. The Buyer is obligated to return the proceeds from the sale of the goods until the full amount advanced by the bank is paid. In event of non-sale, buyer is obligated to return the goods to the Bank. The Bank is also known as the ENTRUSTOR. The entrustor of a trust receipt is not the owner of the goods, as the entrustor-bank merely holds security title. If the trust receipt vests title to the entrustor-bank, the act is an artificial expedient, more fiction than fact. Consequently, the buyers return of the goods to entrustor-bank does not relieve the buyer from his obligation to pay the bank. Imprisonment for non-payment of the buyer does not contravene the Constitutional provision guaranteeing freedom from imprisonment due to nonpayment of debt. Imprisonment for violating the Trust Receipt Law is allowed because it is violation is malum prohibitum. What is penalized is the dishonesty in failing to comply w/ the entrustees obligation such that it constitutes a breach of trust. PD 115 is a valid excuse of the police power of the State (People vs. Nifatan). Intent here is immaterial. Can there be a verbal TR agreement? NO (Sec. 5 PD 115). Although there is no particular form required, by implication, it should be in writing (but need not be notarized, done under oath) as it is required that the following terms be indicated:

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Description of goods subject of TR. Total invoice value of the goods and amount of draft to be paid by the entrustee. Undertaking or commitment of entrustee.

Note: The TR may contain other terms and conditions provided it they are not contrary to law. RIGHTS OF THE ENTRUSTER1. 2. 3. To receive the proceeds of the sale of the goods, document or instruments released under a TR to the extent of the amount owing to the entruster. To the return of the goods document or instruments release under TR , in case it could not be sold. To cancel the trust in case the entrustee defaults and take possession of the goods document or instruments ,to sell the same in a private /public sale.

OBLIGATION OF THE ENTRUSTEE 1. 2. 3. 4. 5. To hold the goods , document or instruments in trust for the entruster and dispose the same strictly in accordance with the terms of the TR To receive the proceeds of the sale in trust for the entruster to the extent of the amount owing to the entruster To insure the goods , document or instruments for their total value against loss , pilferage and other casualties. To keep the goods , document or instruments , or the proceeds thereof , whether in money or other form , separate and capable of identification as property of the entruster. To return the goods, documents or instrument in case they could not be sold.

The entruster in a TR agreement is not the owner of the goods but merely a holder of a security title over the goods, document or instruments. The entrustee merchant is the owner of the goods document or instruments and its return does not extinguish its obligation to pay for the money borrowed. The surrender would only extinguish the criminal liability under the TR law , but not the civil liability. The entrustee being the owner of the goods, document or instrument bears the risk of loss. Loss of the subject matter of the TR , pending their disposition regardless of w/not it was due to fault or negligence of the entrustee shall not extinguish his obligation under the TR for the value thereof. DEFENSES OF AN ENTRUSTEEE1. 2. 3. 4. 5. Non delivery of goods The transaction is not a TR within the meaning of PD 115 ex. Loan (Colinares vs.CA) Entruster cancels the TR , and take possession of the goods PROVIDED that the goods are eventually sold and proceeds applied to the obligation OTHERWISE , the liability is not extinguished. Entrustee fulfilled the obligation by returning the proceeds of the sale of the goods / surrendering the goods if unsold. LOSS of goods: Civil liability is not extinguished Criminal liability may or may not be extinguished by loss : If loss thru fraud not extinguished If loss in good faith not extinguished Novation which result to the conversion of trust receipt transaction to loan (PILIPINAS BANK vs. ONG). Compromise If the compromise was made before the case is filed in court.

6. 7.

Can the TR be denominated in foreign currency? Yes. Sec. 6 of TRL allows it. Also allowed under RA 8183(allows parties to stipulate as to what currency is to be used). Is there a possibility that the stipulated currency in peso but still the denomination is still in foreign currency? YES. Mexican peso. Should payment be made in peso or in the currency agreed upon? If w/stipulation as to the currency pay in that currency. If w/ no stipulation payment can be made in peso at the prevailing exchange rate at the time of payment. Between the creditors of entrustee and entrustrer, who has a better right over the goods under the TR? The entruster (Sec. 12). His security liens extend to the goods in the duration of the TRA. Prudential Bank vs. NLRC (Sec. 110 of the Labor Code was not yet effective that time). Which shall prevail Sec. 110 of the Labor Code or Sec. 12 of the TRL? Sec. 110 of the LC applies only when there is insolvency proceeding or if the proceeding is in rem (settlement of estate, dissolution) w/c would cause adjudication of all claims of the creditors. Who can defeat the right of the entruster over the goods subject to the TRA? An Innocent purchaser for value. IPFV has a better right than the entruster. If ownership over the goods is already transferred to the applicant before he signed the TR agreement, then the transaction is merely a loan (Colinares vs. CA). Sec. 7 par. 2. Entrustee is liable for the deficiency. However, any excess shall go to him.

What is the penalty for the breach of the entrustee? Under the TRL, the failure of the entrustee to surrender the goods held in trust, or to account for the proceeds of the sales thereof to the entrustor, is estafa. This can make the entrustee liable under both the TRL and the RPC. He is also liable to pay damages under Art. 33 of the Civil Code (Prudential Bank vs. IAC). Not all the obligations enumerated in Sec. 9 will result in criminal liability upon breach of such obligation but it is merely limited to the following: 1. Failure to return the proceeds of the sale to the extent owing to the entrustor or 2. Failure to return the goods if not sold. Note: The failure to give the proceeds or return the goods is the gravamen of estafa under the TRL. NEW CENTRAL BANK ACT (RA no. 7653) Declared Policy The Bangko Central ng Pilipinas is the States Central Monetary Authority (Sec 2) mandated in the 1987 Philippine Constitution, which shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit.

What are the Powers / Duties of Bangko Sentral? (1) (2) (3) to provide policy directions in the areas of money, banking, and credit. to have supervision over the operations of banks and with regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions. to maintain price stability conducive to a balanced and sustainable growth of the economy.

(4) to promote and maintain monetary stability and the convertibility of the peso. (Sec 3) Note: BSP has the authority to request from government offices and instrumentalities, or government-owned or controlled corporations, data which it may require for the proper discharge of its functions and responsibilities, with power to issue subpoena for the production of books and records. Supervision and Examination. The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities. (Sec 25) subsidiary - means a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-bank affiliate - means a corporation the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-bank or which is related or linked to such institution or intermediary through common stockholders or such other factors as may be determined by the Monetary Board.

PRIMARY OBJECTIVE OF BSP 1. 2. To maintain the price stability conducive to a balanced and sustainable growth of the economy To promote and maintain monetary stability and convertibility of peso.

Banking institutions and quasi banks , including their subsidiaries and affiliates engaged in allied activities are subject the supervision and periodic or special examination of the BSP. Restraining or injunctions cannot be issued by the court as to enjoin BSP from examining banking institutions and quasi banks , including their subsidiaries and affiliates engaged in allied activities UNLESS; 1. There is convincing proof that the action of the BSP is plainly arbitrary and made in bad faith; and 2. The petitioner files with the clerk of court or the judge of the court in which the action is pending a bond executed in favor of BSP , in an amount to be fixed by the court.

Prohibitions on Bank Officers, Directors, Lawyers, Agents BSP Personnel are prohibited from: (a) being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, EXCEPT: non-stock savings and loan associations and provident funds organized Sentral, and except as otherwise provided in this Act; exclusively for employees of the Bangko

(b) directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; (c) revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any institution; and (d) borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board

CONSERVATOR One appointed if the bank is in a state of illiquidity or a bank refuses or fails to maintain a state of illiquidity adequate to protect its depositors and creditors. The Bank in this case , still has more asset than its liabilities but the assets is not in cash or liquid thus it cannot pay it obligation as they fall due. IF MB finds that a bank or quasi bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors , the MB may appoint a conservator who shall be competent and knowledgeable in bank operations and management) to ; a. b. c. d. Take charge of the assets , liabilities ,and management of the bank or quasi bank. Reorganize the management thereof Collect all monies and debts due it; and Exercise all powers necessary to restore its viability.

The MB shall terminate the conservatorship a. b. It is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary When it determines that the continuance in the business of the institution would involve probable loss to its creditors and depositors (In which case the institution may be closed)

In any case , the Conservatorship shall not exceed 1 year. Conservator may only revoke contracts that are , under existing law , deemed defective. He does not have the power to repudiate perfected and valid contracts of the bank (First Philippine International Bank vs. CA) RECEIVER One appointed when the bank is already insolvent which means that its liabilities is greater than its assets. MB shall appoint a RECEIVER and PROHIBIT a bank or quasi bank from doing business on the Philippines on the ff grounds ; 1. 2. 3. 4. 5. 6. If the bank or quasi bank is unable to pay its liabilities as they fall due in the ordinary course of its business. If the bank or quasi bank has insufficient realizable assets to meet its liabilities. If the bank or quasi bank has willfully violated a cease and desist order under Sec 37 (Administrative sanctions) that has become final and involves transactions which amounts to fraud or dissipation of assets. If the bank or quasi bank cannot continue its business without involving probable losses to its creditors and depositors. If the bank or quasi bank in any matter suspends the payment of its deposit liabilities continuously for more than 30 days. Bank persist in conducting its business in an unsafe and unsound manner.

What is the effect when a bank is put under receivership? The CB may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. What are the Functions and Obligations of Receiver? The receiver shall: (a) (b) (c) immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors; exercise the general powers of a receiver determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public;

Note: Any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. Sec 29 of the CB Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of subsequent judicial review. Close Now and Hear Later scheme is for the purpose of protecting the depositors , creditors, stockholders, and general public. (Central Bank vs. CA 220 SCRA 536 )

When may CB place a bank under liquidation? If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted; Convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code. Institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution.

(2)

(3) (4)

Note: The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator is not a precondition to the designation of a receiver.

The regular courts have no jurisdiction over actions filed by claimants against an insolvent bank other than in the liquidation proceedings. xxx The requirement that all claims against the bank shall be pursued in the liquidation proceedings filed by the CB is intended to prevent multiplicity of against the bank and designed to establish due process and orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. (Ong vs. CA 253 SCRA 105 (1996) ) Valuation reserves- amount the bank set up to cover losses; allowance for probable loses; Regarding Issuance of Peso Coins as Legal Tender: Legal Tender Power. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private. Illustration: A went to the mall to buy shoes. She got her coin purse, the teller told her that they accept only bills. Coins are legal tender only for specific amount which are: - 25 cents or less not exceeding P20; 50 cents and up not exceeding P50 Replacement of Currency Unfit for Circulation (Sec 56) The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and dem 7onetized without compensation to the bearer. Retirement of Old Notes and Coins. (Sec 57). The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old. Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call. After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. Demand deposits - means all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks.

Only banks duly authorized to do so may accept funds or create liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board. Legal Character of Checks (sec 60). Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor However: A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. Ordinary checks are not legal tender under Art. 1249 of the Civil Code while cashiers check and manager checks are . A cashiers check is a check drawn by a bank against itself . The drawee or drawer is the bank. The payee is the person indicated therein. It is considered as legal tender if issued by a bank with good standing bank is supposed to have good credit standing. International Reserves (Sec 65) In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. Composition of the International Reserves (Sec 66) The international reserves of the Bangko Sentral may include but shall not be limited to the following assets: (a) gold; and (a) (b) assets in foreign currencies in the form of: documents and instruments customarily employed for the international transfer of funds; demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins.

EXEMPTION FROM EXECUTION OF FOREIGN CURRENCY DEPOSIT. Sec 113 of the CB Circular 960 provides that foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court , legislative body, government agencies or any administrative body whatsoever . It is copied verbatim from RA 6426 as amended by PD 1246 , and meant to assure the development and speedy growth of the foreign currency deposit system and the off-shore banking system in the Philippines, as well as to encourage the inflow of foreign currency deposits in the banking institutions. HOWEVER: Salvacion vs. CB , 86 SCAD 144, 278 SCRA 27 (1997), held that the exempting provisions of section 113 of CB cir 968 and PD No. 1246, in so far as it amends Sec 8 of RA 6426, were held to be inapplicable in the dollar accounts of a transient American tourist arising out of a heinous crime committed on a Filipino minor. A bank cannot be ordered to pay interest on the duration of its closure because it cannot derive income to cover payment of such interest by virtue of the closure . (Fidelity & Savings and Mortgage Bank vs. Cenzon). QUESTIONS: 2. Explain specifically why a letter of credit and a warehouse receipt are not negotiable instruments under the Negotiable Instruments Law. (5 pts) What is meant by the strict compliance rule and the independence principle as applied to a letter of credit? (5 pts) 3. X opened a letter of credit with ABC Bank for the importation of dyestuffs. When the shipment arrived, the goods turned out to be mere colored chalks instead of dyestuffs. X refused to reimburse ABC Bank on the ground that he did not receive the goods as ordered from the seller. Discuss the rights and liabilities of all the parties to the letter of credit as determined by the presented facts. (15 pts) 4. X, a dealer in imported textiles, opened with Y Bank an irrevocable letter of credit in favor of his American supplier, ABC Textile, Inc., in the amount of $50,000.00 covering the full invoice value of 200 bales of suiting materials. He paid Y Bank a marginal deposit of $40,000.00, and the correspondent bank of Y Bank in the United States paid ABC Textile the amount of $50,000.00. The clothing materials were subsequently shipped by ABC Textiles to Manila, with Y Bank as consignee. Y Bank took delivery of the shipment and had it stored in its bodega. Thereafter, X executed the corresponding trust receipt, but before X could take possession of the goods, a fire of unknown origin gutted the bodega of Y Bank, resulting in the total loss of the goods. When sued for the balance off $10,000.00 X denied liability, contending that Y Bank, as consignee and owner of the goods, should bear the loss. Is the contention of X tenable? (10 pts) 5. H opens a letter of credit with ABC Banking Corporation for the importation of 500 cases of Black Label Whisky with an invoice value of US$50,000.00. The goods and the covering documents arrive and H would like to take possession of the 500 goods to him under a trust receipt, subject to the condition that H holds the 500 cases in trust for the bank, and for him to turn over the

proceeds of the sale of said whisky, or to return the goods in the event of their non-sale within 90 days from the date thereof. H sells the 500 cases to various customers but fails to turn over the proceeds within the period stipulated, despite repeated demands from ABC Banking Corporation. The bank files an estafa case against H with the Office of the City Prosecutor. In his defense, H contends that he should not be held liable because the transaction emanates from a letter of credit, which he claims is civil in nature. He invokes the constitutional provision that no one should be imprisoned for non-payment of indebtedness. Are the contentions of H tenable? (10 pts) 8. On January 5, 2009, Juan delivered six crates of goods to ABC Warehousing Company and received a non-negotiable warehouse receipt. On January 14, 2009, Juan transferred the receipt for value to Manuel. In the meantime, Jose obtained a judgment against Juan for an unpaid debt. A writ of execution followed, by virtue of which, the sheriff levied on the goods covered by the warehouse receipt. What are the obligations of ABC Warehousing Company under the circumstances? (5 pts) Would your answer be the same if the warehouse receipt was negotiable? (5 pts) 9. Jaime deposits with XYZ Warehouse Company several goods stolen from Maria. The goods are covered by a warehouse receipt where the goods are deliverable to the order of Jaime. Jaime then endorses and delivers the receipt to Juan for value. Juan has no notice of the infirmity in the ownership of the goods. Before Juan can demand delivery of the goods, the company receives notice that Maria owns the goods and that they should not be delivered to Juan. The company ignores the notice and delivers the goods to Juan. Is the company liable for a misdelivery? (5 pts) Assuming Juan had endorsed and delivered the warehouse receipt to Jose who likewise had no knowledge of any infirmity, would the company still be liable for a misdelivery by releasing the goods to him despite the notice of Maria not to deliver to Juan? (5 pts) 10. Explain the essentials of the warehousemans lien. (5 pts)

1. a. b. c. d. 12. a. b. c. d.

A warehouse receipt is considered as a: Negotiable instrument because it can be payable to a specified person, or order Negotiable instrument because it can be payable to a specified person or to bearer (a) and (b) Non-negotiable instrument because it is not an object of value and its subject is merchandise In a trust receipt transaction, which of the following statements is false? The property subject of the trust receipt is in the possession of the person financed The property subject of the trust receipt is not considered as having been sold by the entruster to the entrustee No lien is created by a trust receipt upon the subject property The seller of the property made subject of a trust receipt retains title to the property

17. X & Co. obtained a loan from a local bank in the amount of P500, 000.00 mortgaging as 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 Letter of Credit, the company and its President and Treasurer executed a Surety Agreement in the local banks 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 mortgaged 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 of the obligations of the company and its officers? a. No, as the taking of possession by the bank of the machinery is an exercise by it of its rights as entruster in the trust receipt agreement. b. No, the obligations of X & Co. are separate and distinct from each other c. No, the taking of the machinery merely extinguished the criminal liability under the Trust Receipts Law. d. Neither (a), (b) or (c) 22. X, a dealer in imported textiles, opened with Y Bank an irrevocable letter of credit in favor of his American supplier, ABC Textile, Inc. in the amount of $50,000 covering the full invoice value of 200 bales of suiting materials. He paid Y Bank a marginal deposit of $40,000.00 and the correspondent bank of Y Bank in the United States paid ABC Textile the amount of $50,000.00. The clothing materials were subsequently shipped by ABC Textiles to Manila, with Y Bank as consignee. Y Bank took delivery of the shipment and had it stored in its bodega. Thereafter, X executed the corresponding trust receipt, but before X could take possession of the goods, a fire of unknown origin gutted the bodega of Y Bank, resulting in the total loss of the goods. When sued for the balance of $10,000.00, X denied liability, contending that Y Bank, as consignee and owner of the goods, should bear the loss. Is the contention of X tenable? a. No, X bears the loss and is still liable for the $ 10,000.00 balance b. No, X and Y Bank bear the loss in proportion c. Yes, Y Bank bears the loss as it was in possession of the textiles d. Yes, ABC Textiles will bear the loss as there is no actual delivery of the textiles to X 25. A steals the rice of B and deposits it with C. C issues a warehouse receipt to A. A negotiates it to D, D negotiates it to E. E is an innocent purchaser. E goes to C to get the rice, who has been informed by B regarding the theft. C may: a. Refuse to deliver to E because he has been informed of the theft by B b. Refuse to deliver to E because he can require B and E to interplead c. May not refuse to deliver because E is a purchaser for value and is in good faith d. May not refuse to deliver as E has not accompanied his demand with an offer to pay the claim of C, to surrender the warehouse receipt and to sign an acknowledgment of delivery 26. In Item (25), who as between B and E who has a better right to the goods? a. B, because he was able to inform C of the theft b. B, because the title to the goods acquired by E is that of the thief, A c. E, because negotiation to him of the warehouse receipt carries with it the direct obligation of C to hold the goods for him as he transacted directly with him d. E, because B is not a party to nor is in possession of the warehouse receipt 30. a. b. altered. c. In relation to an alteration of a warehouse receipt, which among the following statements is false? Where the alteration is immaterial, the warehouseman shall be liable according to the terms of the receipt as originally issued. Where the alteration is immaterial, whether fraudulent or not, authorized or not, the warehouseman is liable according to the terms of the receipt as Where the alteration is material and is authorized, the warehouseman shall be liable according to the terms of the receipts as altered.

d. Where the alteration is material, unauthorized but without fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as they were before the alteration. 36. Mandy executed a trust receipt in favor of XYZ Bank to cover his importation of 100 units of I-Pods worth PHP 600,000.00. After securing the release of the I-Pods, Mandy executed a sale in favor of Ada. The terms of the sale provided that the MP3 units were to be delivered in two batches of 50 each. Upon receipt of the first batch, Ada discovered defects in 10 units. Because of the discovery of the defects, Ada requested and Mandy acceded to delay delivery of the second batch. Unfortunately, an accidental fire struck the warehouse where Mandy had stored the undelivered I-Pods, totally destroying them. Subsequently, XYZ Bank made a demand for payment of PHP 600,000.00 as per the trust receipt and Ada made a claim for a refund for the defective units. In relation to the demand of XYZ Bank: a. Mandy is liable to pay PHP 600,000.00 b. Mandy is liable to pay PHP 600,000.00, less the value of the defective units c. Mandy is liable to pay PHP 600,000.00, less the value of the defective units and those lost in the fire d. Mandy is liable to pay PHP 300,000.00 only 37. In relation to the demand of Ada in Item (36): a. Mandy is liable for the refund b. XYZ Bank is liable for the refund c. The manufacturer is liable for the refund d. (a) and (c), with recourse against the manufacturer 43. The kind of bank that can engage in the borrowing of funds through the issuance, endorsement, or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations is a: a. Universal bank b. Commercial bank c. Thrift Bank d. Cooperative bank 48. A letter of credit that is intended to serve as a means of arranging payment but not as a guarantee of payment is a: a. Revocable letter of credit b. Irrevocable letter of credit c. Confirmed letter of credit d. Unconfirmed letter of credit 49. Which among the following statements is not a function of a Central Bank? a. Lend money to the general public b. Buy and sell foreign exchange c. Control the money supply d. Issue currency II. 3. 2. (a) (b) (c) (d)

When is conservatorship resorted to by the Bangko Sentral ng Pilipinas? (5 pts) How about receivership? (5 pts) Who are the basic parties to a letter of credit and what is their participation in relation thereto? (6 pts) What are the essential conditions of a letter of credit? (2 pts) What is the purpose of a stand-by letter of credit? (2 pts) What makes a letter of credit irrevocable? (2 pts)

3. (b) (c)

(a)

What is a trust receipt? (4 pts)

Distinguish a trust receipt from a pledge and a conditional sale. (4 pts) What acts will constitute a violation of the trust receipt? (4 pts)

4. (b) (c) (d)

(a)

What degree of diligence is required to be exercised by a warehouseman in safekeeping the goods of the depositor? (3 pts)

May a warehouse receipt contain a provision relieving the warehouseman from any liability arising from his negligence or that of his employees? (3 pts) How is the liability of a warehouseman determined if the receipt has been altered without authority but without fraudulent intent? (3 pts) What makes a warehouse receipt non-negotiable? (3 pts) 1.

(a) X opened a letter of credit with ABAC Bank for the importation of dyestuffs. When the shipment arrived, the goods turned out to be mere colored chalks instead of dyestuffs. X refused to reimburse ABC Bank on the ground that he did not receiv e the goods as ordered from the seller. Is Xs refusal to reimburse ABC Bank tenable? (5 pts) (b) Assume the same facts in the immediately preceding problem, except that the bills of lading submitted by the seller to collect on the letter of credit are falsified. May X refuse to reimburse ABC Bank? (5 pts) 2.

X company purchased certain items from Z Company. Two months after the said items were delivered to X Company, it applied for a domestic letter of credit from Y Bank to cover the purchase price of the said items. Y Bank required the president of X Company to sign a trust receipt covering the items. X Company failed to pay Y Bank. What is the liability of X Company under the trust receipt? (5 pts) What action can be filed by Y Bank? (5 pts) 4.

(a) Maingat deposited her personal computer the warehouse of Bodeguero who issued a negotiable receipt undertaking the delivery of the computer to Mayaman or bearer. Mayaman entrusted the receipt to Secretario, his secretary, who, in turn, delivered the receipt to Bumibili, a purchaser for value and in good faith. Secretario needed the money to pay his gambling debts. Who has a better title to the computer, Mayaman or Bumibili? (5 pts) (b) Would the answer be the same if, by the terms of Bodegueros rec eipt, the computer is deliverable to the order of Mayaman? (5 pts) 5. A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said merchant. A month after, a creditor obtained judgment against the said merchant for a sum of money. The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the deposited rice. What advice will you give the Warehouse Company? (5 pts) (b) Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the sheriff. Would the rice mill have better rights tto the rice than the creditor? Explain your answer (5 pts) ANSWER: 1. No. Even if one or both parties are not merchants, the contract entered into by them is still considered a commercial transaction. The Code of Commerce provides that acts of commerce may be executed by merchants or not (Art. 2, Code of Commerce) 2. A joint account is distinguished from a commercial partnership in the following respects: a. Common name none in joint account; there is in partnership b. Common fund none in joint account; there is in partnership c. Juridical personality none in joint account; there is in partnership d. Liability of partners to third persons in joint account, only the ostensible partner is liable; in partnership, all general partners are liable to third persons e. Management a joint account is managed by the ostensible partner alone; in partnership, al partners participate in the management, unless they agree to have a managing partner 3. The following sales are considered to be in bulk; (a) When the sale, transfer or disposition is other than in the ordinary course; (b) When the sale is of all or substantially all of the business; and (c) When the sale is of all or substantially all of the fixtures and equipment. 5. (a) Bumibili has a better title to the computer. The warehouse receipt issued by Bodeguero made the computer deliverable to Mayaman or bearer. It was therefore a bearer negotiable warehouse receipt. Any person who has the possession of the receipt is deemed to be the owne r of it. Hence, Bumibili, who purchased the rceipt from Secretario, had a perfect right to assume that Secretario was the owner of the warehouse receipt. (b) The answer will be different if the warehouse receipt was so worded that the computer is deliverable to the order of Mayaman. The receipt would then be a deliverable to order w arehouse receipt and the first negotiation of the receipt can only be made by Mayaman affixing his signature at the back of the receipt as an indorser. Without the presence of the indorsement of Mayaman, Secretario would not have any authority at all to negotiate the receipt to Bumibili, and no amount of good faith or payment for value by Bumibili to Secretario will give to Bumibili any right at all to the questioned warehouse receipt. 6. No, the warehouseman is not liable to the attaching creditor. In order that goods represented by a negotiable warehouse receipt may be validly attached, garnished or levied on execution by an attaching creditor, it is necessary that the said receipt be first surrendered to the warehouseman, or its further negotiation enjoined. The court order, although providing for garnishment, does not contain any provision to enjoin the further negotiation of said receipt. Hence, the warehouseman may deliver the goods represented by the negotiable receipt to the lawful holder of said receipt, without said warehouseman incurring any liability to the attaching creditor. 7. (a) I Will advise the warehouse company not to deliver the rice to the sheriff. Since a negotiable warehouse receipt was issued, the levy on the goods may be valid only if the receipt is surrendered or its further negotiation enjoined. (b) Yes, the rice mill will have better rights to the rice. If the rice mill can surrender the receipt to the warehouseman, the latter must deliver the rice to the former.

Where the alteration is immaterial, the warehouseman shall be liable according to the terms of the receipt as originally issued. b. Where the alteration is immaterial, whether fraudulent or not, authorized or not, the warehouseman is liable according to the terms of the receipt as altered. c. Where the alteration is material and is authorized, the warehouseman shall be liable according to the terms of the receipts as altered. d. Where the alteration is material, unauthorized but without fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as they were before the alteration.

36. Mandy executed a trust receipt in favor of XYZ Bank to cover his importation of 100 units of I-Pods worth PHP 600,000.00. After securing the release of the I-Pods, Mandy executed a sale in favor of Ada. The terms of the sale provided that the MP3 units were to be delivered in two batches of 50 each. Upon receipt of the first batch, Ada discovered defects in 10 units. Because of the discovery of the defects, Ada requested and Mandy acceded to delay delivery of the second batch. Unfortunately, an accidental fire struck the warehouse where Mandy had stored the undelivered I-Pods, totally destroying them. Subsequently, XYZ Bank made a demand for payment of PHP 600,000.00 as per the trust receipt and Ada made a claim for a refund for the defective units. In relation to the demand of XYZ Bank, what is the liability of Mandy? (5 pts) In relation to the demand of Ada, who is liable? (5 pts) PART II 1. No, Xs refusal to reimburse ABC Bank is not tenable. Under a letter of credit, the bank deals only with the necessary documents. It has nothing to do with any discrepancy or defect in the goods (BPI vs De Reny Fabric Industries, Inc., 35 SCRA 253) 2. No, X cannot refuse to reimburse ABC Bank. If the seller was paid by the bank in good faith without knowledge of the falsity of the bills of lading, the buyer must reimburse the issuing bank because the latter assumes no responsibility for the genuineness of the documents of title over the goods (Philippine Banking Corporation vs. Choa Tiek Seng, 23 CAR [2s] 1045) 2. No, the action against X Company will not prosper. The transaction entered into between X Company and Y Bank is not a trust receipt transaction because X Company was already the owner of the goods by the time the transaction was entered into. Ownership over the goods was already vested in X Company.

This is inconsistent with a trust receipt transaction whereby the goods belonging to the bank (entruster) are released to the buyer (entrustee) in trust after the loan is granted (Consolidated Bank & Trust Corporation vs. CA, 356 SCRA 671) 1. Merchandise was sold with the price thereof unpaid. The merchandise was subsequently deposited in a warehouse by the vendor for which a negotiable warehouse receipt was issued. The vendor then indorsed the warehouse receipt in blank and delivered it to the vendee. The vendee then indorsed the warehouse receipt to a bank to secure a pre-existing obligation. Thereafter, the vendee died. As between the vendor and the bank, who has a better right to the merchandise? a. b. c. d. 2. a. b. c. d. 10. The vendor because he is unpaid The vendor because he has a right of stoppage The bank because it is a purchaser for value in good faith (a) and (b) A letter of credit is considered as a: A negotiable instrument because it can be payable to a specified person, or order A negotiable instrument because it can be payable to a specified person or to bearer (a) and (b) A non-negotiable instrument because it is only payable to a determined person An irrevocable letter of credit is defined as:

a. One in which payments of all drafts drawn against it are guaranteed by the bank b. One that may not be altered without the consent of all the parties c. One that is confirmed and irrevocable d. One which does not require any documents to accompany the draft 17. A steals the rice of B and deposits it with C. C issues a warehouse receipt to A. A negotiates it to D, D negotiates it to E. E is an innocent purchaser. E goes to C to get the rice, who has been informed by B regarding the theft. C may: a. Refuse to deliver to E because he has been informed of the theft by B b. Refuse to deliver to E because he can require B and E to interplead c. May not refuse to deliver because E is a purchaser for value and is in good faith d. May not refuse to deliver as E has not accompanied his demand with an offer to pay the claim of C, to surrender the warehouse receipt and to sign an acknowledgment of delivery 18. In the preceding question, as between B and E who has a better right to the goods? a. b. c. d. B, because he was able to inform C of the theft B, because the title to the goods acquired by E is that of the thief, A E, because negotiation to him of the warehouse receipt carries with it the direct obligation of C to hold the goods for him as he transacted directly with him E, because B is not a party to nor is in possession of the warehouse receipt 4. What are the advantages of a negotiable warehouse receipt over that of a non-negotiable warehouse receipt? (6 pts) 5. James executed a trust receipt in favor of XYZ Bank to cover his importation of 1000 units of MP3 players worth PHP 500,000.00. After securing the release of the MP3 players, James executed a sale in favor of Lebron. The terms of the sale provided that the MP3 units were to be delivered in two batches of 500 each. Upon receipt of the first batch, Lebron discovered defects in 50 units. Because of the discovery of the defects, Lebron requested and James acceded to delay delivery of the second batch. Unfortunately, a fire struck the warehouse where James had stored the undelivered MP3 units totally destroying them. Subsequently, XYZ Bank made a demand for payment of PHP 500,000.00 as per the trust receipt and Lebron made a claim for a refund for the defective MP3 units. What, if any, should be the appropriate response of James to the claims? (10 pts) 7. A warehouse receipt states, among others, that it covers the storage of 100 units of 21 inch Sony Wega television sets. Upon delivery of the television sets to the holder of the receipt, it turned out that the boxes contained Samsung television sets. Is the warehouseman liable for the failure of the goods to correspond to the description as contained in the receipt? (4 pts)

8. XYX Bank has been put under a conservator. Upon examination by the conservator of the transactions of the bank, he came across a contract wherein the bank paid PHP 2,000,000.00 to a security company for consulting services. A further study revealed that for similar services, another security company only charges PHP 1,250,000.00. The conservator then moved to repudiate the agreement and gave instructions for the balance on the contract not to be paid. Consequently, the security company complained and pointed out that the contract with it was a validly entered contract and the fee to be paid to it was justified by the circumstances. The conservator adamantly stood pat on his decision to repudiate and not to pay. Is the action of the conservator authorized? (5 pts)