COMMERCIAL LAW

Branch of Private Law which governs the rights, obligations and relations of per
sons engaged in commerce or trade
It necessarily includes the purchase, sale, exchange ,traffic or distribution of
goods, commodities ,productions, services of property, (tangible or intangible)
including the instruments and agencies by which they are promoted and the means
and appliances by which they are carried on (4blue95)
Constitutional Provisions:
1. Economic Nationalism
Art. XII, Sec. 1. The goals of the national economy are a more equitable distri
bution of opportunities, income and wealth; a sustained increase in the amount o
f goods and services produced by the nation for the benefit of the people; and a
n expanding productivity as the key to raising the quality of life for all, espe
cially the underprivileged.
The State shall promote industrialization and full employment based on sound agr
icultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
domestic and foreign markets. However, the State shall protect Filipino enterp
rises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the
country shall be given optimum opportunity to develop. Private enterprises, in
cluding corporations, cooperatives, and similar collective organizations, shall
be encouraged to broaden the base of their ownership.
2. Filipino First Policy
Art. XII, Sec. 12. The State shall promote the preferential use of Filipino lab
or, domestic materials, and locally produced goods, and adopt measures that help
make them competitive.
Sources:
1.contracts or transactions whose terms and conditions had been held as binding
as law on the contracting parties unless they are contrary to law ,moral, custom
s, public order or public policy.
2. Statutes (like the Code of Commerce, Banking laws etc.)
3. Commercial usages generally observed in such place in default of the provisio
ns of the Code of Commerce.
Characteristics:
1Equitability- involved exchange of value or consideration
2. Progressive-it keeps abreast with the contemporary developments in usages and
customs practiced by merchants
3. Universality-accepted internationally in every civilized society
COMMERCIAL TRANSACTIONS:
Acts governed by Code of Commerce shall be deemed as Commercial Transactions whe
ther performed by merchants or not.
4blue95 notes: civil transactions are those governed by the provisions of the Ci
vil Code such as agency, barter, mortgage, loan, deposit and partnership
COMMERCIAL CONTRACT
Agreement between two or more merchants or non-merchants binding themselves to g
ive or to do something in commercial transactions
Such are governed in all matters not expressly provided for in this code or in s
pecial laws by the general rules of the civil law.
Contract by correspondence- entered into by correspondence like letters, telegra
ms but not including those made by phone or through agents. It is perfected from
moment the offeree accepts the offer even before knowledge of said acceptance b
y the offeror-MANIFESTATION THEORY (others follow the rule of the NCC, that is u
pon knowledge of offeror of offeree s acceptance COGNITION THEORY).
4blue95 notes: Theory of cognition states that contract thru mail or corresponde
nce is perfected upon knowledge of acceptance of the offer by the offeror.
4blue95 notes: Theory of Manifestation states that the contract is perfected fro
m the time an answer is made accepting the proposition or the condition by which
the latter is modified.
MERCHANTS (Natural or Artificial being)
4blue95 notes: Merchants can be an artificial or natural being. In terms of Natu
ral being, Merchants can be a Filipino Merchant or a Foreign Merchant.
Foreign Merchants
1. Engaging in Commerce
As to foreign corporations engaging in business in the Philippines, they need a
license from the Securities and Exchange Commission as a general rule.
However, the Board of Investments under PD 1789 may impose requirements other th
an those set by the Corporation Code (Continental v Santiago)
2. Investing in the Philippines
Regulated by the Foreign Investment Act of 1991.
Filipino Merchants
Commercial and industrial companies created in accordance with the Code of comme
rce including those of special laws are merchants.
Natural Persons, to be merchants, must have legal capacity to engage in commerce
and should habitually engage themselves therein. To have legal capacity, a nat
ural person must be at least 18 yrs of age and should have free disposition of t
he property.
Wife:
2005 notes: a married woman may engage in business provided she has the qualific
ations of a merchant. The obligations contracted by her in due course will bind
the conjugal partnership since whatever profits she earns from such business, i
s income from industry, hence, conjugal.
2005 notes: to avoid liability, the husband should have objected to the act of t
he wife engaging in business, alleging and proving that his income is sufficient
for the family according to its social standing and that his opposition is foun
ded on serious and valid grounds.
--to bind third persons, the latter must have actual knowledge of said objection
or wife should have registered said objection in the mercantile registry if wif
e is a registered merchant.
Minor: If Pilipino should have guardian or parents, if foreign, if law of his na
tion allows him to go to business, then it is also allowed here in RP.
2005 notes: A minor cannot engage in commerce except where minor merely continue
s the business engage in by his deceased parents in which case, he may do so thr
ough his guardian. A minor may invest in stocks of a corporation.
2005 notes: Under PD 734, a minor at least 7 yrs old, able to read and write and
with sufficient discretion, may open with a bank savings or time deposits and w
ithdraw the same without assistance of parents or guardian.
DISQUALIFIED TO BE MERCHANTS:
Absolute disqualifications:
1. Serving the penalty of civil interdiction
2. Insolvents
3. Absolutely disqualified by special laws
Relative disqualifications:
1. Judicial and prosecuting officials in active service
2. Admin, economic and military chiefs
3. Govt collection agents and custodian
4. Stock and commercial brokers
5. Those who by special laws cannot trade in specified territories
Books of Merchants
1. Those required by Code of Commerce
2. National Internal Revenue Code
3. Special laws
Probative Value of such books:
1. Evidence against the merchants themselves
2. If books of 2 merchants conflict, those kept properly shall prevail
3. If one keeps the books, the other does not and cannot explain their absence,
the books of the former shall be admitted against the latter
4. If both keep their books properly, but the entries conflict, the court shall
accept other proofs.
REGISTRATION
Registration by Individual is optional, while registration of corporation is com
pulsory.
Registries provided are: Registry for individual merchants kept by Bureau of Dom
estic Trade for individual, Register of Deeds for individual merchants in provin
ce, and Registry for Juridical persons kept by the SEC for corporations and part
nerships (capital of P3000 or more) and Registry of Vessels kept by bureau of co
ast guard.
Joint Account Partnership- is a business arrangement whereby 2/more persons inte
rest themselves in the business of another making contributions and participatin
g in the results of the business.
Differ from Commercial partnership is that former has no common name, no common
fund and no juridical personality and only the ostensible partner is liable and
manage by the ostensible partner alone.
Joint Account transaction of merchants where other merchants agree to contribute
the amount of capital agreed upon, and participating in the favorable or unfavor
able results thereof in the proportion they may determine.
A particular partnership is distinguished from a joint adventure, to wit: (a) a
joint adventure is a sort of informal partnership with no firm name and no legal
personality. In a joint account, the participating merchants can transact busin
ess under their own name and can be individually be liable. (b) A joint adventur
e is limited to a single transaction although business of pursuing to a successf
ul termination may continue for a number of years, a partnership relates to a co
ntinuing business of various transactions of certain kind.
BULK SALES LAW
This was enacted during the Philippine Commission. It was patterned after the l
aws of the different states in the United States but I think this was patterned
after the bulk sales law of New York because the bulk sales law of the different
states varies specially in the Midwest where the bulk sales law would even cove
r agricultural products.
The bulk sales law must be interpreted strictly for two reasons:
(1) It is penal;
(2) It is in derogation of the natural right to dispose of one s property.
The purpose of the law is to prevent the fraudulent sale of the goods in bulk.
Section 2 defines what a sale in bulk is. It says sale, transfer, and mortgage.
So mortgage is included or assignment of stocks of goods, wares, etc.
There are three transactions contemplated here.
(1) A sale of stock of goods other than in the ordinary course of trade. So peo
ple just buy commodities in the department store and there is no violation. If
somebody goes there and buys everything, lock, stock and barrel, so that will be
a sale in bulk.
(2) A sale of all or substantially all of the business or trade. Again it would
cover sales, transfer, mortgage or assignment of all or substantially all of th
e business or trade.
(3) The sale, transfer, mortgage or assignment of all or substantially all of th
e fixtures and equipment used in the business of the seller. The book says the
term fixtures refers to things which merchants annex to their premises, which st
ores, handle and display their goods.
The commentators say that this law refers to first merchants, the middleman betw
een the Manufacturer and the consumer. It does not apply to manufacturers. When
Ford Philippines closed its factory here in 1978, they sold their plant without
complying with the bulk sales law. They were manufacturers. The bulk sales la
w did not apply to them. You must be a merchant. The only decisions we have ap
plying this law is from the Court of Appeals. An old case, somebody who owned a
foundry shop sold the shop and the C.A. said it was not covered by the law beca
use it was not engaged in selling goods. It was involved in lease of services b
ecause it would only fabricate some wrought iron products if the customer goes t
here and makes an order and they would make it in accordance with his specificat
ion. Like if the customer wants grills for his house, they will fabricate the g
rills incorporating the design that he wants. So if the customer wants a steel
gate, this fellow will fabricate in accordance with the design. Or he wants a w
rought iron set for his garden so this must be fabricated. That s why you have mo
re recently the Union Glass case where Union Glass became insolvent and they liq
uidated their indebtedness to Development Bank. They made a dacion en pago of t
heir factory and that was being questioned. The Court said that Union Glass was
engaged in the lease of services. They would only make a glass product if a cu
stomer goes in and places the order in accordance with the specifications of the
latter. Example, here is somebody opening a restaurant and he would like mirro
rs in the foyer to give a spacious look. So they will design it and let s say put
peacocks or flowers depending on the design which the customer wants. In those
two cases, it was held that the conveyance was not covered by the bulk sales la
w.
The law also does not apply to sales by executors, administrators, receivers, as
signees in insolvency or public officers acting under judicial force like writ o
f execution, foreclosure of mortgage since the sale is made under the supervisio
n of the court. The law presumes that it is not fraudulent so it is exempted.
If a sale is covered by the bulk sales law, there are three obligations which th
e seller has to comply with.
(1) Under Section 3, he will prepare an affidavit stating an inventory of all hi
s debts. So that affidavit will indicate the names of his creditors, their addr
esses, and the amount due them. When we talk of creditors, we do not refer only
to a lender. It may be someone who has a claim for damages because he was inju
red in an accident or somebody suing damages for libel. So creditor here is com
prehensive. So that s the first obligation. They must prepare that sworn invento
ry and must register it with the Department of Trade and Industry. So you must
give an inventory to the buyer and register that with the Dept. of Trade and Ind
ustry. Before it was the Bureau of Commerce who was in charge of that and tha
t was transferred to the Bureau of Domestic Trade, although the last time I hear
d it was transferred to the Bureau of Consumer Protection of the Dept. of Trade
and Industry. So that is what you do. Prepare a sworn inventory, give a copy t
o the buyer, and register it with the Dept. of Trade.
(2) At least 10 days before the delivery, you must make an inventory of the prop
erties that you will deliver and give the terms and conditions of the sale and g
ive that to his creditors.
(3) He must apply the proceeds of the sale in payment of the claims of his credi
tors pro rata.
If a sale is covered by this law and the seller does not comply with this, the s
ale will be void. But there is an alternative way of complying with this law. T
he other one is to get a written waiver from all your creditors. This was asked
in the bar exam many years ago, what are the alternative ways by which a seller
can comply with the bulk sales law? First one is he does these things-makes hi
s inventory, give a copy to the buyer, register with DTI, and at least 10 days b
efore the delivery he makes an inventory of the properties he will deliver and s
tate the terms and conditions of the sale and notify his creditors. The third,
he applies the proceeds to pay his creditors. The alternative method is getting
a written waiver from all his creditors.
INSOLVENCY LAW
Our insolvency law, the portion of this on suspension of payment was copied form
the Code of Commerce for there is no such provision in the American law.
Chapter 2 Suspension of Payments
This chapter that deals with suspension of payments is different from the suspen
sion of payment that you file in the court with the transfer of jurisdiction of
intra-corporate cases to the RTC. The Insolvency law contemplates a situation wh
ere the borrower is not insolvent his assets exceed his liability, except that h
e has a liquidity problem. It contemplates a situation where the debtor will not
be able to pay off his debts when they become due. Like when you have a real es
tate developer and sales are poor. The developer has a numerous lots and houses
but since he cannot sell them, he doesn t have money to pay off his debts.
SECTION 2 says that when a debtor has sufficient properties to cover his debts b
ut he foresees that he will be unable to pay them when they become due; he may f
ile a petition for suspension of payment.
The following documents shall be attached to the petition:
1. A verified schedule containing a full and true statement of the debts and lia
bilities of the petitioner with a list of creditors, their addresses, sum due ea
ch, nature of liability, consideration thereof, and any existing pledge, lien or
security
2. A verified inventory containing a list of creditors, an accurate description
of all property, real and personal, of the petitioner including property exempt
from execution and a statement of the value of each property, its location, and
encumbrances thereon, if any
3. The proposed agreement he requests of his creditors
The court will then call a meeting of the creditors to be published in a newspap
er of general circulation and in addition, notice to be sent to the creditors.
The filing of the petition will produce the following effects:
1. The court will enjoin the creditor from disposing of his properties except in
the ordinary course of business.
Example:
A department store can continue selling its merchandise to customers but it cann
ot enter into bulk sales.
2. The court shall enjoin the petitioner from making any payment other than nece
ssary expenses of business.
Example:
You will have to continue paying, for example, rent, employees salaries, electric
ity, and taxes.
3. Upon request to the court, all pending executions against the debtor shall be
suspended except execution against property especially mortgaged
If there is a writ of execution issued against the debtor, that writ will be sus
pended. The debtor should file a motion to suspend execution unless it is a mort
gage indebtedness because then the mortgagee may proceed to foreclose the mortga
ge
The court will send notices to creditors and only those creditors who were inclu
ded in the schedule filed by the petitioner shall be cited to appear and take pa
rt in the meeting of creditors. They will be required to bring with them written
proof of their respective claims, otherwise they will not be allowed to partici
pate in the meeting.
DOUBLE MAJORITY
You need a double majority of the creditors to agree on the same proposition to
effect a suspension of payments. The majority shall be 2/3 of the creditors voti
ng upon the same proposition, which 2/3 represent at least 3/5 of the total liab
ilities of the petitioner.
Example:
In the petition for suspension of payments, the borrower will state there that w
hat his proposal is. The proposal says payment in 2 years. The judge will call f
or a vote. Assuming that there are ten creditors, and the borrower owes them a t
otal of P1M. There should be 2/3, so at least 7 creditors must agree to that, an
d those who agree must represent at least 3/5 of the entire debt, meaning P600k.
If rejected, the court will ask for any other suggestion. Then someone will sug
gest 18 months. Vote again. Rejected again. Another suggests 1 year. Then they w
ill vote again. If you muster the required double majority, the court will order
the parties to abide by that. If no double majority could be mustered on any pr
oposal, then the court will dismiss the case and every creditor will be free to
pursue his claim.
The law provides for certain claims which could not be covered by suspension of
payments. Creditors not affected by order of suspension of payments:
1. Those having claims for personal labor, maintenance, expenses for the last il
lness and funeral of the wife or children of the debtor incurred in the 60 days
immediately preceding the filing of the petition
2. Those having legal contractual mortgages.
If the creditors agree on a proposition, anybody who does not agree may object b
ased on the three grounds mentioned in the law:
1. Defects in the call for the meeting, in the holding thereof, and the delibera
tions had thereat which prejudice the rights of the creditors
2. Fraudulent connivance between one or more creditors and the debtor to vote in
favor of the proposed agreement
3. Fraudulent conveyance of claims for the purpose of obtaining a majority
Example:
One of the creditors is a crony of the debtor. He assigns his credit to 4 person
s for the purpose of getting a majority and they will agree to what the debtor i
s proposing.
So that vote, when approved by double majority, is binding upon all persons who
took part in the meeting, but not those who did not attend or did not vote unles
s they consent to the result of the voting.
If the debtor fails to comply with what was agreed upon, then the rights of the
creditors will be revived as if no suspension of payments took place.
VOLUNTARY INSOLVENCY
Chapter 3 deals with voluntary insolvency. Here, the assets of the debtor are le
ss than his liabilities. The law says that if the debtor is insolvent, he can be
thrown into insolvency if he owes more than P1000. This was enacted in 1909 so
the amount is unrealistic.
Creditors
SUSPENSION
INSOLVENCY
Purpose
Debtor
The amount
has
does
isreceive
OFnotindebtedness
to
sufficient
of PAYMENTS
delay
discharge
have
less
orsufficient
properties
suspend
than
theistheir
debtor
not
the
properties
tocredits,
affected
payment
from
pay his
payment
ofdebts
to
and debts
pay
inofcases
his
debts
debts
where there are preferen
ces, some creditors may not receive anything at all
In voluntary insolvency, it is the debtor who will voluntarily file the petition
. He will file an inventory stating his assets and liabilities and he shall incl
ude even his properties which are exempt from execution because he should not ta
ke it upon himself to make the judgment that certain properties should not be in
cluded. He should let the court decide whether or not they should be excluded in
his estate for being exempt from execution.
If he failed to include certain assets or certain creditors in the inventory he
submitted, if he acted in good faith, that can be amended to correct the omissio
n. But if there was a fraudulent intent, then he will not be entitled to a disch
arge, because the main idea behind voluntary insolvency is to give somebody who
is insolvent a chance to be discharged of his debts and to make a fresh start.
When the court receives the petition, it will issue an order declaring the petit
ioner insolvent and will order the sheriff to take possession of his properties
except those which are exempt from execution. Meanwhile, the debtors of the peti
tioner will be prohibited from paying him or delivering to him any property belo
nging to him which may be in their possession.
The court will then call a meeting of the creditors to appoint an assignee, an a
dministrator who will take over all the assets of the insolvent in favor of the
creditors. The main idea behind this is to have an orderly and systematic way of
distributing the remaining assets among the creditors, otherwise it will be fre
e for all, each creditor trying to grab and attach whatever he can so he gets mo
re than the other creditors. So, to avoid that mad scramble where everybody s tryi
ng to get an advantage over the other, everything just goes to a common pot that
will be distributed according to the rules of concurrence and preference of cre
dits. So the court will call a meeting of the creditors that will be published i
n the newspaper and they will also be given copies of the order.
While action is pending, the insolvent shall be suspended (don t know what this me
ans). Once an assignee has been appointed by the court, the sheriff shall turn o
ver to him properties of the insolvent and legal title will be vested upon the a
ssignee for the benefit of the creditors.
If a claim is secured by a mortgage or a pledge, and a case is already pending,
the case shall be suspended until an assignee is appointed by the court. Once an
assignee is appointed, what the secured creditor should do is to file a MOTION
TO BE EXCLUDED from the insolvency proceeding because he intends to pursue his l
ien on the mortgage.
If the case has not yet been filed, the creditor should file in the insolvency c
ourt a MOTION FOR LEAVE OF COURT to file the case because he intends to enforce
his lien to foreclose the mortgage. Once the assignee has been appointed, he wil
l be allowed to proceed.
If the claim is unsecured and a complaint was already filed in court as an ordin
ary claim, the case may be allowed to continue but only for the purpose of deter
mining how much is really due to the creditor. Once there is a final judgment, t
he creditor cannot ask for execution. He has to join the other creditors in shar
ing the common pot according to the rules on concurrence and preference of credi
ts. He will now file a claim with the insolvency court based on the decision.
But if a case has not been filed, the creditor cannot file a claim because what
he should do is to file his claim in the insolvency proceedings once an assignee
has been appointed.
PHIL. TRUST CO. V NATIONAL BANK
Effect of filing a Petition: Once a petition is filed, it ipso facto takes away
and deprives the debtor petitioner of the right to do or commit any act of prefe
rence as to creditors, pending the final adjudication.
ACTS OF INSOLVENCY
In voluntary insolvency, the filing of a petition for voluntary insolvency is an
act of insolvency.
In involuntary insolvency, the following are considered act of insolvency and th
e petition for involuntary insolvency must set forth one or more of the followin
g:
1. Intention to depart from the Philippines with t defraud creditors
2. Absence from the Philippines to defraud creditors
3. Concealing self to avoid service of legal processes
4. concealing pr removing property to avoid its being attached or taken on legal
process
5. confession of judgment in favor of a creditor to defraud other creditors
6. allowing default judgment in favor of a creditor to defraud other creditors
7. Allowing property to be taken under legal process in preference of a particul
ar creditor to defraud other creditors
8. Making conveyance, assignment or transfer of his property to defraud his cred
itors
9. Making conveyance, assignment or transfer of his property in contemplation of
insolvency
10. Default of a merchant or tradesman to pay his current obligations for a peri
od of 30 days
11. Failure to pay money on deposit or received in a fiduciary capacity for a pe
riod of 30 days after demand
12. Insufficiency of property to satisfy execution against him
Assets of the insolvent which are not exempt from execution will then be distrib
uted among his creditors in accordance with the rules of concurrence in preferen
ce of credits in the Civil Code. There is a provision in the Labor Code which
says the claim of laborer s take over and priority over all other place including
taxes of the government.
CHAPTER 4 INVOLUNTARY INSOLVENCY
Chapter 4 deals with involuntary insolvency. In this case, it is the creditors w
ho will file the petition. Three or more creditors who are residents of the Phil
ippines whose total credits exceed P1000. But none of them must have been a cred
itor by assignment within 30 days upon the filing of the petition.
Notice this recurring 30-day cut-off period in the law. The law usually presumes
that things done within 30 days before the filing of a petition is fraudulent i
n nature.
The creditors must be residents of the Philippines and their credits must have b
een approved in the Philippines.
STATE INVESTMENT HOUSE, INC.
Citibank, Bank of America and Standard Chartered Bank joined in filing a petitio
n to declare a debtor insolvent. It was argued that they are not residents becau
se they are foreign corporations. Held: Foreign corporations licensed to do busi
ness in the Philippines are residents and may therefore file a case for involunt
ary insolvency.
The debts must further be approved here. Taking, for example the above-mentioned
foreign banks, if the debt was approved from a branch abroad, then you cannot f
ile a petition here for insolvency.
The petitioners will be required to post a bond to answer for damages should the
petition be dismissed. This is important because once a petition for insolvency
is filed against the debtor, its reputation will definitely be tarnished and it
s name shall appear in the list circulated to Credit Managers Association of the
Philippines.
When the petition is filed, the court will order the borrower to explain why he
should not be declared an insolvent. Meanwhile, all the people who owe him shall
be ordered not to deliver to him any money or properties which are in their pos
session. If the court finds the petition is not meritorious, then it shall be di
smissed. On the other hand, if the court finds the petition to be meritorious, t
he borrower will be declared insolvent and he will be required to submit a sched
ule of his assets and liabilities. The sheriff shall be ordered to take possessi
on of his properties until an assignee can be appointed by the court. The court,
as in the case of voluntary insolvency, shall cause a notice to call a meeting
of the creditors for the appointment of an assignee and that will published in a
newspaper of general circulation and copies of the order shall be sent to the c
reditors.
The rule on stay of cases against the insolvent is the same as in the case of vo
luntary insolvency.
If the interest of the parties shall be subserved by the sale, the court may ord
er property belonging to the debtor to be sold. The court cannot wait until the
case is finally terminated because some properties may be perishable or maybe th
e articles are stored in a warehouse and storage fees will only accumulate, or t
he articles may also deteriorate as in cement which will harden and will become
unfit for use and steel bars that will become rusty.
The court will call a meeting to elect an assignee, and for a creditor to be abl
e to participate he must file his claim at least 2 days before the meeting to el
ect the assignee and if the claim of a creditor is barred by prescription, he ca
nnot participate.
The case of people who have secured claims, mortgage or pledge, they cannot part
icipate as a rule because normally, what this fellow will do, is he will later o
n after assignment file a motion asking to be excluded because he intends to enf
orce his lien. But he may participate in two instances:
1. If he will waive his lien (but of course he would be crazy to do that because
he will become an unsecured creditor)
2. If the lien is not sufficient to pay for his claim (for the deficiency, the c
reditor may participate)
Again, a double majority is needed to agree on the assignee majority as to numbe
rs and majority as to amount. But if the creditors cannot agree, the court can a
lways appoint an assignee of its own choice. Once an assignee has been appointed
, he will take over the assets of the debtor in trust for the creditors.
Any attachment levied within one month before the filing of the insolvency case
shall be set aside. Any judgment entered in an action filed within 30 days befor
e the filing of the insolvency proceeding shall be set aside. The judgment enter
ed by default or confession of judgment within 30 days shall be set aside.
CASE
An attachment was issued more that 4 months before the filing of the petition fo
r insolvency. Held: Since the attachment was made more than 30 days prior to the
filing of the petition, such is not vacated by the filing of the petition for i
nsolvency.
The assignee will take over in prosecuting and defending actions involving the i
nsolvent except those which are personal in character. Can sue and be sued in be
half of the debtor and will be substituted in actions already pending. Sum of mo
ney substituted. Annulment of marriage on the ground of psychological incapacity
no substitution.
Debts contracted within 30 days before the filing of the petition cannot be set-
off. If you are a debtor of the insolvent, you cannot say that the insolvent als
o borrowed money from you so you are not anymore a debtor of the insolvent, if t
he transaction occurred within 30 days before the filing of the petition.
When the debtor knows that an insolvency case is filed and he disposes of his pr
operties. He tells his crony you hide my jewelry and the crony keeps the jewelry,
the crony will be liable for double the value of the property.
Debts which cannot be collected without unreasonable delay may be assigned. If t
he amount is small and you will just incur expenses if you file a claim, you can
just assign that to a credit collection agency. But sometimes, people use the s
trong arm method to collect and every morning a van will be parked in front of y
our house or they will go to your office everyday or call you up in the middle o
f the night. Resort to high-handed methods of collecting is a quasi-delict and i
s actionable.
INSOLVENCY LAW PARTNERSHIPS AND CORPORATIONS (SECS. 51-52)
SECTION 51. Partnerships. A partnership, during the continuation of the part
nership business, or after its dissolution and before the final settlement there
of, may be adjudged insolvent, either on the petition of the partners or any one
of them, or on the petition of three or more creditors of the partnership, qual
ified as provided in section twenty of this Act, in either of which cases the co
urt shall issue an order in the manner provided by this Act, upon which all the
property of the partnership, and also all the separate property of each of the p
artners, if they are liable, shall be taken, excepting such parts thereof as may
be exempt by law; and all creditors of the partnership, and the separate credit
ors of each partner, shall be allowed to prove their respective claims; and the
assignee shall be chosen by the creditors of the partnership, and shall also kee
p separate accounts of the property of the partnership, and of the separate esta
te of each member thereof. The expenses of the proceedings shall be paid from th
e partnership property and the individual property of the partners in such propo
rtions as the court shall determine. The net proceeds of the partnership propert
y shall be appropriated to the payment of the partnership debts and the net proc
eeds of the individual estate of each partner to the payment of his individual d
ebts. Should any surplus remain of the property of any partner after paying his
individual debts, such surplus shall be added to the partnership assets and be a
pplied to the payment of the partnership debts. Should any surplus of the partne
rship property remain after paying the partnership debts, such surplus shall be
added to the assets of the individual partners in the proportion of their respec
tive interests in the partnership. Certificate of discharge shall be granted or
refused to each partner as the same would or ought to be if the proceedings had
been by or against him alone under this Act; and in all other respects the proce
edings as to the partners shall be conducted in like manner as if they had been
commenced and prosecuted by or against one person alone. If such partners reside
in different provinces, the court in which the petition is first filed shall re
tain exclusive jurisdiction over the case. If the petition to be filed by less t
han all the partners of a partnership those partners who do not join in the peti
tion shall be ordered to show cause why they, as individuals, and said partnersh
ip, should not be adjudged to be insolvent, in the same manner as other debtors
are required to show cause upon a creditor's petition, as in this Act provided;
and no order of adjudication shall be made in said proceedings until after the h
earing of said order to show cause.
SECTION 52. Corporations and sociedades anonimas; Banking The provisions of t
his Act shall apply to corporations and sociedades anonimas, and upon the petiti
on of any officer of any corporation or sociedad anonima, duly authorized by the
vote of the board of directors or trustees, at a meeting specially called for t
hat purpose, or by the assent in writing of a majority of the directors or trust
ees as the case may be, or upon a creditor's petition made and presented in the
manner provided in respect to debtors, of the like proceedings shall be had and
taken as are provided in the case of debtors: Provided, That in case the article
s of association or by-laws of any corporation the or sociedad anonima provide a
method for such proceedings, such method shall be followed. All the provisions
of this Act which apply to the debtor, or set forth his duties, examination, and
liabilities, or prescribe penalties, or relate to fraudulent conveyances, payme
nts, and assignments, apply to each and every officer of any corporation or soci
edad anonima in relation to the same matters concerning the corporation. Wheneve
r any corporation is declared insolvent, its property and assets shall be distri
buted to the creditors; due at but no discharge shall be granted to any corporat
ion. The provisions of this Act shall not apply to corporations engaged principa
lly in the banking business, or to any other corporation as to which there is a
ny special provision of law for its liquidation in case of insolvency.
A Partnership may be declared insolvent by a petition of the partners or any one
of them or three or more creditors who can also petition for insolvency.
Note: A partnership may declared insolvent
* When: during the continuation of the partnership business or after its dissolu
tion and before the final settlement thereof
* By Whom:
In case of Voluntary Insolvency: either on the petition of the partners, or any
of them,
In case of Involuntary Insolvency: or on the petition of 3 or more creditors of
the partnership
In case of a corporation, by a majority of the directors upon petition of the cr
editors. Unlike other debtors, a corporation is not given a discharge because i
t has limited liability meaning the liability is limited to the subscription of t
he stocks and assets of the corporation.
Who may petition for the declaration of Insolvency of a corporation:
Sec. 52: The petition may be filed by any officer duly authorized by the vote of
the board of directors or trustees at a meeting especially called for that purp
ose, or by the assent in writing of the majority of the directors, or trustees,
as the case may be.
Effect when corporation declared insolvent:
Whenever any corporation is declared insolvent, its property and assets shall be
distributed to the creditors, but no DISCHARGE shall be granted to any corporat
ion. (sec. 52)
*Discharge is the formal and judicial release of an insolvent debtor from his debt
s with the exception of those expressly reserved by law.
There is an advantage for a creditor in filing a case for insolvency against a c
orporation.
For example, a corporation is favoring one creditor as against the other credito
rs because that creditor is a good friend of a corporation, so that nothing left
for the other corporation. They may file a petition for insolvency so that in t
he distribution assets they would share in the remaining assets of the corporat
ion, if any. We have to file claims and those claims would be litigated just li
ke collection case. Otherwise those claims are barred by prescription and cann
ot be entertained. If you have a creditor who files the claims but in turn owes
the corporation, there would be compensation. Therefore only the excess of the
amount due to him [the creditor] would be filed as a claim against the corpora
tion. But no set-off should be allowed if the claim should be transferred to
him before the filing of the petition within 30 days.
In the case of the mortgagee or the pledgee, the normal practice is for him to f
ile a motion asking that he be excluded from the proceedings because he has a le
ad [mortgage-collateral] already and he intends to pursue his lead. If the mort
gage is not enough to satisfy his claim, then he can still file a claim for def
iciency. (Note that the mortgagee can only claim for deficiency if he elects to
be excluded from the insolvency proceeding.)
If the proceeds of the sale of the property exceeds the amount of the claim, lik
e in a sale of P10M and sold for P8m. The amount of P2M surplus will be turned
over to the assignee to be distributed to the creditors in accordance with the
rules of concurrence and preference of credit.
If someone and other creditor has been given a new preference, as in substantial
ly paid, it cannot prove the claim unless he surrenders the property for payment
given to him and that gave him preference three months from the time the debto
r was declared insolvent but not later than one year, he should file a petition
to be discharge. After that he can make a fresh start without being hampered by
unpaid debts. If he fails to file that motion, he should not be discharged, for
that he will file a motion to be discharged.
SECTION 64. Discharge. At any time after the expiration of three months from
the adjudication of insolvency, but not later than one year from such adjudicat
ion, unless the property of the insolvent has not been converted unto money, the
debtor may apply to the court for a discharge from his debts, and the court sha
ll thereupon order notice to be given to all creditors who have proved their deb
ts to appear on a day appointed for that purpose and show cause why a discharge
should not be granted to the debtor; said notice shall be given by registered ma
il and by publication 28 at least once a week, for six weeks, in a newspaper pub
lished in the province or city, or, if there be none, in a newspaper which, in t
he opinion of the judge, will best give notice to the creditors of the said inso
lvent: Provided, That if no debts have been proven, such notice shall not be req
uired.
SECTION 65. Invalid discharge. No discharge shall be granted, or if granted
shall be valid,
(1) if the debtor shall have sworn falsely in his affidavit annexed to his petit
ion, schedule, or inventory, or upon any examination in the course of the procee
dings in insolvency, in relation to any material fact concerning his estate or h
is debts or to any other material fact; or
(2) if he has concealed any part of his estate or effects, or any books or writi
ng relating thereto; or
(3) if he has been guilty of fraud or willful neglect in the care or custody of
his property or in the delivery to the assignee of the property belonging to him
at the time of the presentation of his petition and inventory, excepting such p
roperty as he is permitted to retain under the provisions of this Act; or
(4) if, within one month before the commencement of such proceedings, he has pro
cured his real estate, goods, moneys, or chattels to be attached or seized on ex
ecution; or
(5) if he has destroyed, mutilated, altered, or falsified any of his books, docu
ments, papers, writings, or securities, or has made, or been privy to the making
of, any false or fraudulent entry in any book of account or other document with
intent to defraud his creditors; or
(6) if he has given any fraudulent preference, contrary to the provisions of thi
s Act, or has made any fraudulent payment, gift, transfer, conveyance, or assign
ment of any part of his property, or has admitted a false or fictitious debt aga
inst his estate; or
(7) if, having knowledge that any person has proven such false or fictitious de
bt, he has not disclosed the same to his assignee within one month after such kn
owledge; or
(8) if, being a merchant or tradesman, he has not kept proper books of account
in Arabic numerals and in accordance with the provisions of the Code of Commerce
; or
(9) if he, or any other person on his account, or in his behalf, has influenced
the action of any creditor, at any stage of the proceedings, by any pecuniary co
nsideration or obligation; or
(10) if he has, in contemplation of becoming insolvent, made any pledge, payment
, transfer, assignment, or conveyance of any part of his property, directly or i
ndirectly, absolutely or conditionally, for the purpose of preferring any credit
or or person having a claim against him, or who is, or may be, under liability f
or him, or for the purpose of preventing the property from coming into the hands
of the assignee, or of being distributed under this Act in satisfaction of his
debts; or
(11) if he has been convicted of any misdemeanor under this Act, or has been gui
lty of fraud contrary to the true intent of this Act; or
(12) in case of voluntary insolvency, has received the benefit of this or any o
ther Act of insolvency or bankruptcy within six years next preceding his applica
tion for discharge; or
(13) if insolvency proceedings in which he could have applied for a discharge a
re pending by or against him in the Court of First Instance of any other provinc
e or city in the Philippine Islands. Before any discharge is granted, the debtor
shall take and subscribe an oath to the effect that he has not done, suffered,
or been privy to any act, matter, or thing specified in this Act as grounds for
withholding such discharge or as invalidating such discharge, if granted.
SECTION 68. Debts not released under this Act No tax or assessment due the I
nsular Government or any provincial or municipal government, whether proved or
not as provided for in this Act, shall be discharged. Nor shall any debt created
 by the fraud or embezzlement of the debtor, or by his defalcation as a public o
fficer or while acting in a fiduciary capacity, be discharged under this Act, bu
t the debt may be proved, and the dividend thereon shall be a payment on account
of said debt. No discharge solvent granted under this Act shall release, discha
rge, or affect any person liable for the same debt, for or with the debtor, eith
er as partner, joint contractor, indorser, surety, or otherwise.
SECTION 69. Effect of discharge under this Act A discharge, duly granted und
er this Act, shall, with the exceptions aforesaid, release the debtor from all c
laims, debts, liabilities, and demands set forth in his schedule, or which were
or might have been proved against his estate in insolvency, and may be pleaded b
y a simple averment that on the day of its date such discharge was granted to hi
m, setting forth the same in full, and the same shall be a complete bar to all s
uits brought on any such debts, claims, liabilities, or demands, and the certifi
cate shall be prima facie evidence in favor of such fact and of the regularity o
f such discharge: Provided, however, That any creditor whose debt was proved or
provable against the estate in insolvency who shall see fit to contest the valid
ity of such discharge on the ground that it was fraudulently obtained and who ha
s discovered the facts constituting the fraud subsequent to the discharge, may,
at any time within one year after the date thereof, apply to the court which gra
nted it to set it aside and annul the same.
If they committed fraud, discharge will not be granted, like he conceal some of
his assets or made undue preference to some creditors and if a creditor discover
s fraud, e.g., 1 yr. From the time of discharge was granted within which to have
a discharge set aside.
There are certain debts which are not discharged.(Justice Vitug, Chairman) What
are these claims? First, taxes due the National government of any provincial /mu
nicipal government. Secondly, debts created by fraud, embezzlement, defalcation
as a public officer or while acting in a fiduciary capacity. The former one inv
olves taxes with the government, the latter involves a public officer in a confi
dential or fiduciary capacity.
*Debts not discharged
1. Taxes and assessments due the Government, whether national or local
2. Any debt created by the fraud or embezzlement of the debtor;
3. Any debt created by the defalcation of the debtor as a public officer or whil
e acting in a fiduciary capacity;
4. Debt of any person liable for the same debt, for or with the insolvent debtor
, either as partner, joint contractor, indorser, surety or otherwise
5. Debts of a corporation
6. claim for support
7. discharged debt but revived by a subsequent new promise to pay
8. debts which have not been duly scheduled in time for proof and allowance, unl
ess the creditors had notice or actual knowledge of the insolvency proceedings,
are not discharged as to such creditors;
9. claims for unliquidated damages arising out of pure tort;
10. claims of secured creditors
11. claims not in existence or not mature at the time of discharge
12. claims that are contingent at the time of discharge
FRAUDULENT PREFERENCES (Sec. 70)
* If any debtor, being insolvent, or in contemplation of insolvency,
* within thirty days before the filing of a petition by or against him,
* with a view to giving a preference to any creditor or person having a claim ag
ainst him or who is under any liability for him,
o procures any part of his property to be attached, sequestered, or seized on ex
ecution,
o or makes any payment, pledge, mortgage, assignment, transfer, sale, or convey
ance of any part of his property, either directly or indirectly, absolutely or c
onditionally, to anyone,
o the person receiving such payment, pledge, mortgage, assignment, transfer, sal
e, or conveyance, or to be benefited thereby, or by such attachment or seizure,
* having reasonable cause to believe that such debtor is insolvent, and that suc
h attachment, sequestration, seizure, payment, pledge, mortgage, conveyance, tra
nsfer, sale, or assignment is made with a view to prevent his property from comi
ng to his assignee in insolvency,
* or to prevent the same from being distributed ratably among his creditors, or
to defeat the object of, or in any way hinder, impede, or delay the operation of
or to evade any of the provisions of this Act,
? such attachment, sequestration, seizure, payment, pledge, mortgage, transfer,
sale, assignment, or conveyance is void,
? and the assignee, or the receiver, may recover the property, or the value ther
eof, as assets of such insolvent debtor.
? If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer i
s not made in the usual and ordinary course of business of the debtor, or if suc
h seizure is made under a judgment which the debtor has confessed or offered to
allow, that fact shall be prima facie evidence of fraud.
* Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of pr
operty of whatever character made by the insolvent within one month before the f
iling of a petition in insolvency by or against him, except for a valuable pecun
iary consideration made in good faith, shall be void.
* All assignments, transfers, conveyances, mortgages, or encumbrances of real es
tate shall be deemed, under this section, to have been made at the time the inst
rument conveying or affecting such realty was filed for record in the office of
the register of deeds of the province or city where the same is situated.
If the payment is not made in the usual course of business or attachment is made
under a confession of judgment, that will be considered prima facie evidence o
f fraud. The fact that it was not in the ordinary course of business or the att
achment is made by confession of judgment, any payment, transfer or property, pl
edge, mortgage made in one month before the quotation except for a valuable pecu
niary consideration made in good faith shall be void. Note that the mortgages,
conveyance of property made within one month are not absolutely void. If they w
ere made in good faith and for value, the conveyance will still be valid.
Fraudulent preference is committed when the debtor procures any part of his proper
ty to be attached, sequestered, or seized on execution or makes any payment, ple
dge, mortgage, assignment, transfer, sale or conveyance of any part of his prope
rty, whether directly or indirectly, absolutely or conditionally, to any one und
er the following circumstances:
1. The debtor is insolvent or in contemplation of insolvency;
2. The transaction in question is made within 30 days before the filing of a pet
ition by or against the debtor;
3. It is made with a view to giving preference to any creditor or person having
a claim against him;
4. and the person receiving a benefit thereby has reasonable cause to believe
5. that the transfer is made with a view to prevent his property from coming to
his assignee in insolvency or to prevent the same from being distributed ratably
among his creditors or to defeat the object of or any way hinder the operation
of or evade the provisions of the Insolvency Law. (sec. 70)
When Presumption of Fraud exists.
If such payment, pledge, mortgage, assignment, transfer, sale or conveyance is n
ot made in the usual and ordinary course of business of the debtor, or if such s
eizure is made under a judgment which the debtor has confessed or offered to all
ow, that fact shall be prima facie evidence of fraud.
*Jack said that if it is made in good faith and for value it is a valid conveyance
.
Meaning of transfer under Insolvency Law includes the sale and every other and dif
ferent modes of disposing of or parting with property, or the possession of prop
erty, absolutely or conditionally, as a payment, pledge, mortgage, gift or secur
ity. A deposit of money is NOT transfer.
Equal exchange not preference An exchange of securities within the 30 day period i
s not a fraudulent preference under the law even when both parties know that the
debtor is insolvent, if the security given up is a valid one at the time the ex
change is made and of equal value with the one received in exchange. The reason
is that the exchange takes away nothing from the other creditor.
Effect of fraudulent transfer---As against the creditors of the insolvent debtor
, any conveyance or assignment fraudulently made is void.
* In all actions to set aside or nullify fraudulent preference or transactions a
s void under the provisions of sec. 70, the assignee appears form and represents
the general creditors. The creditors of the insolvent are not authorized to ins
titute an independent action to annul such fraudulent preferences.
GENERAL BONDED WAREHOUSE LAW
(Act No. 3893, as amended)
What is the purpose of the law?
To bring the State into what were formerly private transactions between deposito
rs of commodities and warehousemen.
A warehouse is deemed to mean every building, structure or other protected inclo
sure in which commodity is kept in storage. (Sec. 2, Act 3893, as amended by RA
247)
A warehouseman is a person engaged in the business of receiving commodity for st
orage. The term person includes corporations or partnerships or two or more person
s having joint or common interest. (Sec. 2)
What commodities may be deposited in a warehouse?
All products which may be traded or dealt in openly and legally. (In short, all
products which are not illegal.) (Sec. 2, Act 3893, as amended by RA 247)
What contracts or transactions are included in the phrase the business of receivi
ng commodity for storage ?
(1) those wherein the warehouseman is obligated to return the very same commodi
ty delivered to him or pay its value;
(2) those wherein the commodity delivered is to be milled for and on account of
the owner thereof;
(3) those wherein the commodity delivered is commingled with the commodity deli
vered by or belonging to other persons and the warehouseman is obligated to retu
rn the commodity of the same kind or pay its value. (Sec. 2)
What are the requisites before a warehouseman can do business?
Every warehouseman accepting commodity for storage must:
(1) obtain prior license from Bureau of Commerce (terminology of the law; perhap
s this is now the Department of Trade and Industry?)
(2) file a bond in an amount equivalent to 33 1/3% of the capacity of the wareho
use against which bond depositors may sue directly.
For palay and corn license, a bond with the National Grains Authority and insura
nce coverage are required.
What are the duties of a bonded warehouseman?
(1).To insure the commodity received for storage against fire (Sec. 6);
(2)To receive for storage any commodity of the kind customarily stored by him in
the warehouse, so far as his license and the capacity of his warehouse will per
mit, without making any discrimination between persons desiring to avail themsel
ves of warehouse facilities (Sec. 8);
(3)To keep a complete record of all commodities received by him, of the receipts
issued therefor, of the withdrawals, of the liquidation, and of all receipts re
turned to and canceled by him (Sec. 9).
What are the rights of a person injured by the breach by the warehouseman of any
of his obligations under the law?
Such person is entitled to sue on the warehouseman s bond in his own name in any c
ourt of competent jurisdiction to recover the damages he may have sustained by s
uch breach.
In case the bond given is not sufficient to respond for the full market value of
the commodity received by such warehouseman, the injured party may go after the
warehouseman s property or assets. (Sec. 7)
What offenses are punishable under the General Bonded Warehouse Act?
Offenses
Engaging in the business without license
(Sec. 3, 11)
If licensed, receiving a quantity of commodity greater than that specif
ied in one s application and license (Sec. 12)
Conniving or combining with any warehouseman not licensed under the A
ct, with the purpose of evading the provisions of Sec. 3 of the
Act (i.e., the licensing requirement) (Sec. 13)
Using the word bonded either partly or wholly as trade name or busines
s name of any entity owning, maintaining or operating a warehouse tha
t is neither:
Penalty
Imprisonment > 1 month, or Fine < P 5,000.00, or both
Fine of 2x the market value of the commodity received in excess of authorized q
uantity
Imprisonment < 1 month, or Fine < P 200.00, or both
Imprisonment < 5 years, or Fine < P 5,000.00, or both
A. licensed under the Act;
B. established under Chapter 39, Art. XIII Sec. 1302 and 1304 of the Admin Code
of 1917 as amended;
as well as naming, designating or advertising
such warehouse (Sec. 3, as amended by RA 247)
Who are not covered?
Cooperative marketing associations of commodity producers organized under Act 34
25 (Cooperative Marketing Law), provided that they do not receive, for storage,
commodity from non-members in a quantity greater than of the total quantity of c
ommodity received from members, at any time. (Sec. 15)
Gonzales v. Go Tiong
Facts: GT operated a bonded warehouse and accepted deliveries of palay among w
hich were several sacks belonging to RG. The issues which GT issued were ordina
ry receipts, not the warehouse receipts defined by the Warehouse Receipts Act.
One day, the warehouse burned, together with its contents of palay, which includ
ed RG s sacks. RG sued on GT s bond with Luzon Surety to recover his loss. GT and
Luzon Surety opposed this, saying among others that: (1) RG s claim was covered b
y the Civil Code and not the Bonded Warehouse Law since the receipts were ordina
ry receipts and not the warehouse receipts prescribed by the Warehouse Receipts
Act; (2) The deposits of palay by RG were gratuitous, and therefore the destruc
tion of the goods by fire extinguished GT s obligation. During the trial, it was
found that GT had been accepting deposits in excess of the limit permitted under
his license.
Ruling: GT and Luzon Surety are liable to RG for the destruction of the
goods under the Warehouse Receipts Act. Any deposit made with a bonded warehou
seman is necessarily governed by the General Bonded Warehouse Act. The kind or
nature of the receipts issued for the deposits is not very material, much less d
ecisive. The issuance of warehouse receipts in the provided by Sec. 1 of the Wa
rehouse Receipts Act is merely permissive and directory, and not obligatory. [N
ote: Under the General Bonded Warehouse Act, the term receipt means any receipt i
ssued by a warehouseman for commodity delivered to him. (Sec. 2)]
The defense that the palay was destroyed by fire and thus loss of the thing exem
pts the obligor in a contract of deposit from depositing the goods is not availi
ng here. The fact that GT exceeded the limit of his authorized deposit militate
s against his defense of non-liability.
The surety cannot avoid liability from the mere failure of GT to issue the presc
ribed warehouse receipt. Such defense is not available in an action on the bond
.
Limjoco v. Director of Commerce
Facts: Mr. & Mrs. L owned a rice mill ( kiskisan ) and were engaged in the
business of milling palay. Such kiskisan was licensed under the General Bonded W
arehouse Act. However, when Mr. L died and Mrs. L took over the management, she
did not renew her license, claiming that her business does not fall within the
purview of such Act inasmuch as Mrs. L did not charge anything for keeping the p
alay (it was merely a favor done for the customers). She likewise alleged that
her camalig was neither adequate nor suitable for storage.
When Mrs. L refused to renew her license despite the ruling of the Director of C
ommerce that her rice milling business falls within the Act, the Director filed
a petition for declaratory relief with the CFI.
Ruling:
Sec.2 of the General Bonded Warehouse Act is too clear to permit of any exercise
in construction or semantics. It is enough that the palay be delivered to Mrs.
L, even if only for milling, for the Act to apply.
The alleged inadequacy of the construction for storage insofar as the safety of
the palay is concerned is not a valid reason to remove it from the operation of
the statute. Otherwise, the very fact of non-compliance with the legal requirem
ents in this respect would be its own excuse from the liabilities imposed.
WAREHOUSE RECEIPTS LAW (Act No. 2137)
The Warehouse Receipts Act prescribes the mutual rights and duties of a warehous
eman, who issues warehouse receipts, and his depositor, and covers all warehouse
s, whether bonded or not. This is to be distinguished from the General Bonded W
arehouse Law, which on the other hand, regulates and supervises only those wareh
ouses which put up a bond.
I. Warehouse
A warehouse is a building where goods are deposited and stored for profit.
II. Warehouse receipt (also known as quedan)
* A warehouse receipt is a written acknowledgment by a warehouseman that he has
received the goods described therein and holds the same for the person to whom i
t is issued or as the latter may order.
* It is a contract between the owner of the goods or the person authorized by th
e owner to transfer ownership or possession over the goods, on one hand, and the
warehouseman, on the other hand, for the latter to store the goods and the form
er to pay the compensation for that service.
* A warehouse receipt need not be in any particular form. However, it must cont
ain certain essential elements:
(1) Location of warehouse (Note: This is for the purpose of legal action.)
(2) Date of issue of receipt
(3) Consecutive number of receipt
(4) A statement whether the goods received will be delivered to the bearer, spec
ified person, or to specified person or his order (to whom delivered)
(5) Rate of storage charges
(6) Description of goods and packages
(7) Signature of warehouseman
(8) Fact of warehouseman s ownership or interest in goods, if any
(9) Statement of amount of advances made and of liabilities incurred for which w
arehouseman claims as lien (Sec. 3)
What is the effect of failure to include any of the essential terms?
A warehouseman shall be liable to any person injured thereby for all damages cau
sed by the omission. (Sec. 3)
There are certain terms that cannot be inserted in a warehouse receipt:
(1)Those contrary to the provisions of the Act;
(2) Those that would impair a warehouseman s obligation to exercise that degree o
f care in the safekeeping of the goods entrusted to him. Thus, a warehouseman c
annot stipulate that the owner will bear the loss of the goods.
Note: that it is the holder of the goods who determines whether a warehouse rece
ipt is negotiable or non-negotiable.
* Also note that warehouse receipts can only be issued by a warehouseman, or by
his authorized representative. (Sec. 1)
Marks to be made on a warehouse receipt
(1) A non-negotiable receipt must be clearly marked as such. Otherwise, the hold
er of the receipt, who purchased it for value and who supposed it to be negotiab
le, may treat it as negotiable. (sec. 7)
(2) Duplicate receipts must be so marked. Otherwise, the warehouseman is liable
for all damages suffered by a holder believing the same to be the original. (sec
. 6)
Warranties of a warehouseman as to duplicate receipts
When a warehouseman issues duplicate receipts, he warrants that:
(1) The duplicate is an accurate copy of the original receipt.
(2) Such original receipt has not been cancelled at the date of the issue of the
duplicate (Sec. 15)
What is the effect of alteration of a receipt on the liability of the warehousem
an? (Sec. 13)
(1) If the alteration is IMMATERIAL (the tenor of the receipt is not changed), w
hether fraudulent or not, authorized or not, the warehouseman is liable on the a
ltered receipt according to the original tenor.
(2) If the alteration is MATERIAL but AUTHORIZED, he is liable according to the
terms of the altered receipt.
(3) If the alteration is MATERIAL, UNAUTHORIZED but INNOCENTLY MADE (that is, wi
thout fraudulent intent), he is liable on the altered receipt according to the o
riginal tenor.
(4) If the alteration is MATERIAL AND FRAUDULENTLY MADE, he is liable:
(a) To the purchaser of the receipt for value and without notice of the alterati
on according to the tenor of the original receipt
(b) To the alterer according to the terms of the original receipt
(c) To subsequent purchasers with notice of the alteration according to the term
s of the original receipt.
What are the effects of misdescription of goods? (Sec. 20)
(1) A warehouseman is under the obligation to deliver the identical property sto
red with him and if he fails to do so, he is liable directly to the owner.
(2) As against a bona fide purchaser of a warehouse receipt, the warehouseman is
 estopped from denying that he received the goods described in the receipt.
(3) BUT if the description consists merely or marks or label upon the goods or u
pon the packages containing them, the warehouseman is not liable even if the goo
ds are not of the kind as indicated in the marks or labels
NEGOTIABLEreceipt deliverable to bearer or to order of a person specified therei
Warehouse
Definition
NON-NEGOTIABLE
n.
Manner
Negotiated
May
Warehouse
be transferred
of transfer
receipt
either by
deliverable
bydelivery
its delivery
to indorsement
or a to
specified
the transferee
person. accompanied by a deed of as
signment, donation, or other form of transfer. It cannot be negotiated. (Sec. 3
9)
If
Effect
the words
of errornon-negotiable
in designationare
of receipt
inserted,
asthe
negotiable
insertion
/ non-negotiable
is void, and the receipt r
emains
If the receipt
negotiable.
is not stamped with the words non-negotiable, the holder may treat
the receipt as negotiable. (Sec. 7)
Moreover, the warehouse-man will be liable for damages suffered by a holder of s
uch receipt who purchases it for value supposing it to be negotiable. Such hold
er may treat, at his option, such receipt as imposing upon the warehouseman the
same liabilities
Rights
Indorsee acquired
acquiresbyhethe
indorsee
would
direct
have
/obligation
transferee
incurred of
hadthe
thewarehouseman
receipt beentonegotiable.
hold possession o
f the goods for him as if the warehouseman had contracted directly with him. (
Sec. 41) acquires the title of the goods subject to the terms of any agreement
Transferee
with the transferor. He also acquires the right to inform the warehouseman of
such transfer, and thereafter acquires the obligation of the warehouseman to ho
ldperson
ATo possess-ion
whom goods
in possession
are
of tothebegoods
ofdelivered
theforreceipt,
him. (Sec.
the terms
42) of which the goods are delivere
d:
(a) To him or order;
(b) To bearer;
(c) Indorsed to him;
(d) Indorsed in blank by the person to whom delivery was promised (S.9)
A person entitled to delivery by the terms of the receipt, or one to whom he has
Effect
The
given
goods
written
on attachment
cannot
authorization
be attached
/ executionor levied
upon the
upongoods
unless the receipt is first surrende
red totothenotification
Prior warehousemanoforthethewarehouseman
negotiationbyenjoined.
the transferor or transferee, the w
arehouseman is not bound to the transferee whose right may be defeated by the cr
editor of the transferor or by a non-notification to such warehouseman of the su
bsequent sale of the goods (sec. 42)

Differentiate a negotiable instrument under the NIL and a negotiable warehouse r

eceipt.
NEGOTIABLE
Object
Merchandise
Money
Subject
Instrument
The
Liability
Secondary.
goods
of of
value
which
INSTRUMENT
WAREHOUSE
itself
Indorsement
intermediate
are the
RECEIPT
subject
of parties
the instrument
of the receipt
is a contract where the indorser warra
nts that had
Indorser he will
no liability
pay the instrument
in the event
if that
partytheprimarily
warehouseman
liablefails
failstotodeliver
do so.th
e goods.
What
An indorsee,
if it isifstolen?
he is a holder in due course, may obtain a title better than tha
t of the person who indorsed the instrument to him.
There is no such thing as a holder in due course here. The indorsee only obtains
Effect
Instrument
The
Original
AWill
such
special
receipt
always
title
ofbearer
deliberate
indorsement
isremain
asnull
is the
valid
instrument
person
and
so alteration
but
payable
converts
void.
may
negotiating
only
regardless
thebereceipt
enforced
hadofover
tohowone
according
the
itdeliverable
goods.
has been
to its
indorsed.
tooriginal
order, and
tenor.
thus
requires indorsement and delivery for further negotiation.
III. Warehouseman
A warehouseman is a person lawfully engaged in the business of storing goods for
profit. (Sec. 58)
What are the obligations of a warehouseman?
1.He has the duty to deliver the goods upon demand made by the holder of the rec
eipt or by the depositor.
2.He has to exercise such care in regard the goods as a reasonable careful owner
of similar goods would exercise. (Sec. 21)
3. He has to keep the goods separate from the goods of other depositors.
A. Delivery
In the absence of some lawful excuse provided by the Act, a warehouseman is boun
d to deliver the goods upon a demand made either by: (1) the holder of a receip
t for the goods, or (2) the depositor, provided that such demand is accompanied
by:
1.an offer to satisfy the warehouseman s lien;
2.an offer to surrender the receipt if it is negotiable; and
3.a readiness and willingness to sign an acknowledgment, when the goods are deli
vered, that they have been delivered if such is requested by the warehouseman.
(Sec. 8)
A warehouseman is justified in delivering the goods to:
A. the person lawfully entitled to the possession of the goods, or to his agent.
These include:
1.Person to whom a competent court has ordered the delivery of the goods
Where a negotiable instrument has been lost or destroyed, the court may order de
livery to a person upon satisfactory proof of such loss or destruction and upon
proper posting of a bond to protect the warehouseman from any liability or expen
se which he may incur by reason of the original receipt remaining outstanding (S
ec.14)
2An attaching creditor
A creditor whose debtor is the owner of a negotiable receipt can resort to th
e courts to have such receipt attached. (Sec. 26) It must be noted, however, t
hat the goods covered by the receipt cannot be attached or levied upon under an
execution UNLESS:
a. the negotiable receipt is first surrendered to the warehouseman; or
b. its negotiation is enjoined; or
c. the receipt is impounded by the court (Sec. 25)
3.The purchaser in case of sale of the goods by the warehouseman to enforce his
lien (Sec. 33)
4.The purchaser when perishable or hazardous goods are sold at a private or pub
lic sale (Sec.34)
a. the person who is himself entitled to delivery of the goods by the terms of a
non-negotiable receipt or who has been authorized to take delivery of the goods
by the person entitled to such delivery, which authority is endorsed upon the r
eceipt or written on another paper;
b. the person in possession of a negotiable receipt by the terms of which the go
ods are deliverable to him or order, or to bearer, or which has been endorsed to
him or in blank by the person to whom delivery was promised by the terms of the
receipt by his immediate indorsee. (Sec. 9)
If the warehouseman refuses or fails to deliver the goods in compliance with the
holder or depositor s demand, he has the burden of proving that he had a lawful e
xcuse for such refusal or failure. (Sec. 8) Such lawful excuses include the fo
llowing:
==> The warehouseman has acquired title or right to the possession of the goods,
either:
(a) through a direct or indirect transfer made by the depositor at the t
ime of deposit for storage or subsequent thereto; or
(b) from the warehouseman s lien.
==> When several persons claim the goods. In this case, the warehouseman has 2
options:
(a) He can refuse to deliver the goods to any one of them until he has had reas
onable time to ascertain the validity of the various claims (Sec. 18);
(b) He can require all claimants to interplead, either as a defense to an actio
n brought against him for non-delivery of the goods, or as an original suit, whi
chever is appropriate. Note that a warehouseman can resort to an action for im
pleader only when the title to the goods is in issue.
==> The goods to be delivered have been lost. This is of course without prejudi
ce to liabilities which the warehouseman may incur due to such loss.
==> The warehouseman s lien has not yet been satisfied (Sec. 31);
==> The goods have been lawfully sold or disposed of because of their perishable
or hazardous nature (Sec. 36)
Except in cases where the warehouseman has either (1) required parties having co
nflicting claims to the goods to interplead, or (2) ascertained the validity of
the adverse claims, he cannot raise the defense that his refusal to deliver the
goods to the depositor or person claiming under him is due to the ground that ad
verse title to the goods belongs to a 3rd person. (sec. 19)
When would a warehouseman be liable for misdelivery?
A warehouseman would be liable for misdelivery or conversion if he delivers the
goods to one who is not in fact lawfully entitled to the possession of the goods
as follows:
(a) The person does not fall under Sec. 9 (b) or (c); or
(b) The person falls under Sec. 9 (b) or (c), but prior to the delivery, the war
ehouseman either:
1.had been requested by the person lawfully entitled to the delivery not to make
such delivery; or
2.had information that the delivery about to be made was to one not lawfully ent
itled to the possession of the goods (Sec.10)
In these cases, the warehouseman shall be liable for conversion to all having a
right to property or possession of the goods.
Can goods for which a negotiable receipt has been issued be attached or levied?
YES, but only if the receipt is surrendered to the warehouseman first, or the ne
gotiation of the receipt has been enjoined.
In no case shall the warehouseman be compelled to deliver up the actual possessi
on of the goods until the receipt is surrendered to him or impounded by the cour
t. (Sec. 25)
Does the warehouseman have a lien over the goods on deposit with him? Against w
hat property may the lien be enforced? How can the lien be lost?
YES. A warehouseman shall have a lien on goods deposited or on the proceeds the
reof in his hands for:
1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced, interest, insurance, transportation, la
bor, weighing, cooperating and other charges and expenses in relation to such go
ods;
3. All reasonable charges and expenses for notice and advertisement of sale and
for sale of the goods where default has been made in satisfying the warehouseman s
lien (Sec. 27).
A warehouseman s lien may be enforced against:
1. all goods, whenever deposited, belonging to the depositor who is liable to t
he warehouseman as debtor for the claims in regard to which the lien is asserted
, and
2. all goods belonging to other persons which has been deposited at any time by
the depositor, provided that such depositor had the authority to validly pledge
such goods (sec. 28)
Since the warehouseman s lien is possessory, it is lost once the warehouseman eith
er:
1.surrenders possession of the goods without requiring payment of the lien, or
2.wrongly refuses to deliver the goods when a demand is made with which he is bo
und to comply under the Act. (Sec. 29)
A warehouseman may enforce his lien as follows:
1.By refusing to deliver the goods until lien is satisfied (sec. 31)
2.By causing the extrajudicial sale of the property and applying the proceeds to
the value of the lien (Secs. 33 & 34); or
3.By filing a civil action for unpaid charges or by way of counterclaim in an a
ction to recover property from him (Sec. 35)
Note: that the warehouseman s lien does not preclude other remedies. Whether or n
ot a warehouseman has a lien upon the goods, he is entitled to all remedies allo
wed by a law to a creditor against a debtor for the collection from the deposito
r of all charges and advances which the depositor has expressly or impliedly con
tracted with the warehouseman to pay. (Sec. 32)
What happens if there is proper delivery or partial delivery but the warehousema
n fails to cancel the receipt or record such partial delivery on the receipt?
* If goods covered by a negotiable warehouse receipt are delivered by a warehous
eman but he fails to take and cancel the receipt, then he is still liable to one
who purchases the receipt for value and in good faith.
* If he makes partial delivery of the goods but fails to record the partial deli
very on the receipt, then he may still be held liable for the entire receipt to
one who purchases it for value and in good faith.
B. Care of the Goods
General rule: A warehouseman is required to exercise such degree of care which a
reasonably careful owner would exercise over similar goods of his own. He shall
be liable for any loss or injury to the goods caused by his failure to exercise
such care. (Sec. 21)
Exception: He shall not be liable for any loss or injury which could not have be
en avoided by the exercise of such care. (Sec. 21)
Exception to the Exception: He may limit his liability to an agreed value of the
property received in case of loss. However, he cannot stipulate that he will no
t be responsible for any loss caused by his negligence.
C. Non-Commingling of Goods
General Rule: A warehouseman may not commingle goods belonging to different depo
sitors or belonging to the same depositor but for which separate receipts have b
een issued (sec. 22). This is to facilitate the identification and redelivery of
the goods deposited.
Exception: A warehouseman may commingle fungible goods of the same kind and grad
e provided he is authorized by agreement or custom. (sec. 23) In such a case, t
he various depositors of the mingled goods shall own the entire mass in common,
and each depositor shall be entitled to such portion thereof as the amount which
he deposited bears to the whole mass.
Note: that the warehouseman shall be severally liable to each depositor for the
care and redelivery of his share of such mass to the same extent and under the s
ame circumstances as if the goods had been kept separate. (Sec. 24)
IV. Negotiation And Transfer Of Receipts
Who may negotiate a negotiable receipt?
(1) The owner of the receipt; or
(2) The person to whom possession of the receipt was entrusted by the owner, pro
vided that either:
(a) by the terms of the receipt, the warehouseman undertakes to deliver the goo
ds to the order of the person to whom the possession or custody of the receipt h
as been entrusted; or
(b) at the time of entrustment of the receipt, it is in such form that it may b
e negotiated by delivery. (Sec. 40)
How is a receipt deliverable to order negotiated?
1. By indorsement in blank, thereby making it deliverable to bearer; or
2. By special indorsement which would require further indorsements for further n
egotiations.
In both cases, indorsements must be coupled with delivery.
How is a receipt deliverable to bearer negotiated?
There is no need to indorse for negotiation. Physical delivery of the instrument
will suffice. However, if the instrument is indorsed specially, the bearer char
acter of the receipt is destroyed and for further negotiation, there will be nee
d for indorsements.
What are the warranties made by a person negotiating or transferring a warehouse
receipt?
1. The receipt is genuine.
2. He has a legal right to negotiate or transfer it.
3. He has no knowledge of any fact which would impair the validity or worth of t
he receipt.
4. He has a right to transfer the title to the goods and that the goods are merc
hantable. (Sec. 44)
* Note that the indorsement of a receipt does not make the indorser liable for a
ny failure on the part of the warehouseman or previous indorsers of the receipt
to fulfill their respective obligations. (Sec. 45)
What rights are acquired by person to whom a negotiable receipt has been duly ne
gotiated?
Such person acquires:
(1) title of the person negotiating the receipt over the goods covered by the r
eceipt;
(2) such title of the person (depositor or owner) to whose order the goods were
to be delivered by the terms of the receipt had or had ability to convey to a pu
rchaser in good faith for value;
(3) the direct obligation of warehouseman to hold possession of the goods for hi
m, as if the warehouseman had directly contracted with him. (Sec. 41)
What rights are acquired by a person to whom a negotiable receipt has been merel
y transferred, not indorsed?
(1) The right to the goods as against the transferor;
(2) The right to compel the transferor to indorse the receipt, unless the intent
ion of the parties is that the receipt should be merely transferred.
Note: Negotiation shall take effect as of the time when indorsement is actual
ly made.

Pledge, sale or chattel mortgage of negotiable receipt

* A holder for security of a receipt (mortgagee or pledgee) who in good faith ac
cepts payment of the debt from a person does not warrant the genuineness of the
receipt nor the quality or the quantity of the goods therein described. (Sec. 46
)
* It is the duty of the purchaser, mortgagee or pledgee of goods for which a neg
otiable receipt has been issued to require the negotiation of the receipt to him
. His failure to do so will have the same effect as an express authorization on
his part to the seller, mortgagor or pledgor to make any subsequent negotiation.
(sec. 48) The subsequent purchaser must have the receipt in good faith and for
value.
* Where the negotiation of a negotiable receipt was attended by breach of duty,
fraud, mistake or duress, the person to whom the receipt was negotiated or a per
son subsequent thereto who paid value for the receipt and who had no notice of t
he breach of duty, fraud, mistake or duress acquires title to the goods. In shor
t, negotiation is valid despite having been made in breach of trust. (sec.47)
Does negotiation of a warehouse receipt defeat the lien of the vendor of the goo
ds covered thereby?
Yes. Where a negotiable receipt has been issued for goods, no vendor s lien or ri
ght of stoppage in transitu shall defeat the rights of any purchaser for value i
n good faith to whom such receipt has been negotiated. This is regardless of wh
ether or not such negotiation was prior or subsequent to the notification to the
warehouseman who issued such receipt of the vendor s claim to a lien or right of
stoppage in transitu. The warehouseman shall not be obliged to deliver or be ju
stified in delivering the goods to an unpaid unless the receipt is first surrend
ered for cancellation. (Sec. 49)
Thus, to protect themselves, creditors of debtors owning warehouse receipts may
obtain a writ of preliminary injunction and serve the same on the depositor befo
re he has a chance to negotiate the receipt. Once enjoined, there will no longer
be a danger that a 3rd person will be prejudiced. Thus, the goods may be attach
ed or levied upon. The vendor s lien or the right of stoppage in transit may also
be exercised. (Sec. 26)
Note the differences between negotiable and non-negotiable receipts. (Refer to
table above.)
May non-negotiable receipts be negotiated?
Obviously not. Even if such receipt are indorsed, the transferee acquires no add
itional right. However, non-negotiable receipts may be transferred or assigned
by delivery.
In these cases, who has the better right to the goods?
(1) Judgment creditor v. holder
Goods should be given to the holder who has the capacity to comply with the requ
irements of Section 8, namely: indorse and deliver the receipt of which he is t
he holder, pay the fees or liens of the warehouseman, and sign a receipt for the
delivery of the goods.
(2) Unpaid seller v. holder
The unpaid seller may get back the goods IF the warehouse receipt is still with
the buyer. However, if the receipt has already been indorsed and delivered to a
holder who paid value therefor in good faith, the latter has a better right ove
r the unpaid seller.
(3) Lessor / Landlord v. holder
Holder can recover goods as he can comply with the requirements of Sec. 8.
(4) Owner (alleged) v. holder
In this case, the warehouseman should not deliver the goods to either of the two
as the title of ownership over the goods is in question. The safe course of ac
tion for the warehouseman to take is to file a complaint for interpleader to com
pel both claimants to litigate against each other for the goods. Otherwise, if t
he warehouseman decides on his own, he runs the risk of being held liable twice
for the goods.
V. What offenses are punishable under the Warehouse Receipts Act?
Offense Who are liable Penalty
* Issuance or assistance in issuance Warehouseman, Imprisonment < 5
years
for which such receipt is issued or servant
or both
have not been actually received by the warehouseman or are not under his actual
control at the time of issuance (Sec. 50
* Issuance or assistance in issuance Warehouseman, Imprisonment < 1
year
of a receipt knowing that it contains or his officer, agent, or fine
< P 2,000.00
any false statement (Sec. 51) or servant or both
* Issuance or assistance in issuance Warehouseman, Imprisonment <
5 years
of a duplicate or additional negotiable or his officer, agent, or fine
< P 10,000.00
receipt knowing that a former negotiable or servant
or both
receipt for the same goods or any part of them is outstanding and uncanceled (an
d there have been no proceedings in accordance with Sec. 14) without plainly
placing the word duplicate upon its face (Sec. 52)
* Issuance or assistance in issuance Warehouseman Imprison
ment < 1 year
of a negotiable receipt for goods owned or any officer, agent,
or fine < P 2,000.00
by a warehouseman without stating such or servant having or both
fact of ownership (Sec. 53) knowledge of such
ownership
* Delivery of goods without obtaining Warehouseman Imprison
ment < 1 year
the possession of the negotiable receipt or any officer, agent,
or fine < P 2,000.00
covering such goods (except upon order or servant or both
of the court for lost/destroyed receipts under Sec. 14, or in cases of lawful sa
le or disposal of the goods under Sec. 36) (Sec. 54)

VI. Cases
Martinez v. PNB (93 Phil 765)
Where the transaction involved in the transfer of a warehouse receipt (quedan) i
s not a sale but a pledge or security, the transferee or endorsee does not becom
e the owner of the goods. He may only have the property sold and then satisfy t
he obligation from the proceeds of the sale.
If the property covered by the quedans is lost without the fault or negligence o
f the mortgagee / pledgee or the transferee / endorsee of the quedans, then said
goods are to be regarded as lost on account of the real owner, mortgagor or ple
dgor.
Estrada, et al v. CAR (2 SCRA 986)
In this case, the lower court ordered the manager of a bonded warehouse to deliv
er the deposited palay to certain specified parties. However, the person ordere
d to present the original warehouse receipts failed to do so because they were a
llegedly lost in a fire. The Supreme Court ordered the manager to release the p
alay to the proper parties upon their issuing a receipt therefor, without necess
ity of producing and surrendering the original receipts.
PNB v. Judge Benito C. Se, Jr. (256 SCRA 380)
A prior judgment holding that a party is a warehouseman obligated to deliver sug
ar stocks covered by the warehouse receipts does not necessarily carry with it a
denial of its lien over the same sugar stocks. Thus where the judgment credito
r (in this case PNB) makes an unconditional presentment of warehouse receipts fo
r delivery of sugar stocks against the warehouseman (Noah s Ark), it
thereby admits the existence and validity of the terms, conditions and stipulati
ons written on the face of the warehouse receipts, including the unqualified rec
ognition of the payment of warehouseman s lien for storage fees and preservation e
xpenses. Thus, PNB may not retrieve the sugar stocks without paying the warehou
seman s lien.
The warehouseman need not file a separate action to enforce payment of storage f
ees. He may enforce his lien before delivering the sugar stocks covered by the
warehouse receipts.
2006 notes: Remedies available to the warehouse to enforce his liens are:
1. refusal to deliver the goods covered by his warehouse receipts
2. sells the goods at public auction to apply the proceeds in satisfaction of hi
s warehouse lien.
3. file an action available to creditors to collect from debtor-depositor.
TRUST RECEIPTS LAW
Presidential Decree No. 115
Providing for the regulation of Trust Receipts Transactions
29 January 1973

What is a trust receipt?

Trust receipt shall refer to the written or printed document signed by the EE in
favor of the ER containing terms and conditions substantially complying with th
e provisions of this Decree. No further formality of execution or authentication
shall be necessary for the validity of a trust receipt. (Sec. 5)
What are the purposes of the law?
1. to encourage and promote the use of trust receipts as an additional and
convenient aid to commerce and trade;
2. to provide for the regulation of trust receipt transactions in order to
assure protection of the rights and the enforcement of obligations of the person
s involved therein; and
3. to declare the misuse and/or misappropriation of goods or proceeds reali
zed from the sale or goods, documents or instruments release under trust receipt
s as a criminal offense punishable under Article 315 of the Revised Penal Code.
What is a trust receipt transaction, and who are the parties to such a transacti
on?
A trust receipt transaction is any transaction by and between the entrus
ter (usually a bank; hereinafter ER) and the entrustee (usually a buyer; hereina
fter EE), whereby the ER, who owns or holds absolute title or security interest
over certain specified goods1, documents2 or instruments3, releases the same to
the possession of the EE upon the latter s execution and delivery to the ER of a s
igned document called a trust receipt wherein the EE binds himself to hold the des
ignated goods, documents or instruments (GDI) in trust for the ER and to sell or
otherwise dispose of the GDI with the obligation to turn over to the ER the pro
ceeds thereof to the extent of the amount owing to the ER or as appears in the t
rust receipt, or the goods, documents or instruments themselves if they are unso
ld or not otherwise disposed of, in accordance with the terms and conditions spe
cified in the trust receipt. (Sec. 4)
Note: that a trust receipt transaction is a tripartite transaction. It necessar
ily involves three (3) parties, namely: the exporter / seller, the importer / b
uyer / EE, and the financer / bank / ER.
What is the nature of a trust receipt transaction?
* A trust receipt is an accessory contract of the Letter of Credit. The set-up
is like this: a bank extends a loan covered by the Letter of Credit, with the t
rust receipt as a security for the loan.
* A trust receipt is a security agreement, pursuant to which a bank acquires a se
curity interest in the goods.4 A trust receipt is considered as a security trans
action intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchan
dise, and who may not be able to acquire credit except through utilization, as c
ollateral of the merchandise imported or purchased. (Vintola v. IBAA, 150 SCRA
578) The purpose of the Trust Receipts Law is to sell goods or procure their sal
e, because it is out of the sale of these goods that the obligation will be paid
. (Comment of Sir Catindig)
* The trust receipt arrangement does not convert the ER (bank) into an investor;
neither does it make the ER into the real owner of the goods. The ER (bank)re
mains a lender and creditor. The bank has previously extended a loan for which t
he L/C represents to the importer (EE), and by that loan, the importer should be
the real owner of the goods. If under the trust receipt, the bank is made to a
ppear as the owner, it is but an artificial expedient, more of a legal fiction t
han fact, for if it were so, it could dispose of the goods in any manner it want
s, which it cannot do, just to give consistency with the purpose of the trust re
ceipt of giving a stronger security for the loan obtained by the importer. To c
onsider the bank as the true owner from the inception of the transaction would b
e to disregard the loan feature thereof. (Sia v. People, 121 SCRA 655 as cited i
n Vintola v. IBAA, 150 SCRA 582)
Distinguish a trust receipt transaction from pledge, conditional sale, c
hattel mortgage, and consignment.
Trust receipt v. pledge
In a pledge, the person doing the financing (the pledgee) has possession of the
property. However, in a trust receipt transaction, the property is in the posse
ssion of the person financed.
Trust receipt v. conditional sale
A conditional sale necessarily involves a sale by the financer to the person bei
ng financed. On the other hand, in a trust receipt transaction, the EE acquires
the goods through advances made by the ER, not through a sale.
Trust receipt v. chattel mortgage
A chattel mortgage involves the passing of a defeasible title to, or a lien upon
, the property from the mortgagor directly to the mortgagee. In a trust receipt
transaction, the entruster takes the full title to the goods at the very beginn
ing of the transaction, and continues to hold that title as his indispensable se
curity until the vendee (EE) is called upon to pay for them. No lien is created
.
Trust receipt v. consignment
In consignment, the title of the bailor / consignor is not retained to secure th
e indebtedness due from the bailee or consignee. In a trust receipt transaction
, the ER retains the full title to the goods as his indispensable security until
the vendee (EE) is called upon to pay for them.
Form of trust receipts
? A trust receipt need not be in any particular form, but every such recei
pt must substantially contain:
1. a description of the goods, documents, or instruments subject of the tru
st receipt;
2. the total invoice value of the goods and the amount of the draft to be p
aid by the EE;
3. an undertaking of a commitment of the EE:
a. to hold in trust for the ER the goods, documents or instruments therein
described;
b. to dispose of them in the manner provided for in the trust receipt; and
c. to turn over the proceeds of the sale of the goods, documents or instrum
ents to the ER to the extent of the amount owing to the ER or as appears in the
trust receipt or to return the goods, documents or instruments in the event of t
heir non-sale within the specified period. (Sec. 5)
Can a trust receipt be denominated in foreign currency? (Sec. 6)
YES, for as long as such currency is acceptable and eligible as part of the Phil
ippines international reserves.
If the trust receipt is denominated in foreign currency, payment shall be made i
n equivalent Philippine currency computed on prevailing exchange rate on the dat
e the proceeds of the sale are turned over to the ER, or on such other date as m
ay be stipulated in the trust receipt or other agreements executed between the E
R and the EE.
What are the rights of the entruster? (Sec. 7)
* The ER is entitled to the proceeds from the sale of the goods / documents / in
struments (GDI).
* In case of non-sale, he is entitled to the return of the GDI.
* Upon default or failure of the EE to comply with any other agreement between t
hem, the ER may cancel the trust and take possession of the GDI or the proceeds
at any time. The GDI may then be sold at either a public or a private sale (aft
er proper notice to the EE, and not less than 5 days after serving or sending n
otice), with the proceeds to be applied to payment of expenses for retaking, kee
ping, storing, and the satisfaction of the EE s indebtedness.5
It must be noted that the ER is not limited to such course of action. As held i
n the case of Prudential Bank v. NLRC (251 SCRA 421), the ER has the discretion
to avail of the right to cancel the trust, or to seek any alternative action suc
h as a third-party claim or a separate civil action which it deems best to prote
ct its right at any time upon default or failure of the EE to comply with any of
the terms and conditions of the trust agreement.
* The ER holding a security interest shall not, merely by virtue of such interes
t or having given the EE the liberty of sale or other disposition of the goods,
documents or instruments under the terms of the trust receipt transaction, be re
sponsible as principal or as vendor under any sale or contract to sell made by t
he EE. (Sec. 8) Thus, in a case where Mr. X suffers food poisoning from seafoo
d sold by Mr. Y covered under a trust receipt with ABC Bank, Mr. X cannot sue AB
C Bank. He can only go after the EE Mr. Y.
* The ER s security interest in the GDI shall be valid as against all creditors of
the EE for the duration of the trust receipt agreement. (Sec. 12)
Exception: When the properties are in the hands of an innocent purchaser for va
lue and in good faith. (Prudential Bank v. NLRC, 251 SCRA 421)
What are the obligations of the entrustee? (Sec. 9)
(1) The ER must hold the GDI in trust for the ER and dispose of them strictly i
n accordance with the terms and conditions of the trust receipt.
(2) The EE must receipt the proceeds in trust for the ER and turn over the same
to the ER to the extent of the amount owing to the ER or as appears in the tru
st receipt.
(3) The EE must insure the goods for their total value against loss from fire,
theft, pilferage or other casualties.
(4) The EE must keep said goods and proceeds thereof (whether in money or whate
ver form) separate and capable of identification as property of the ER.
(5) The EE must return the GDI in the event of non-sale or upon demand of the E
R.
(6) The EE must observe all other terms and conditions of the trust receipt not
contrary to the provisions of the Trust Receipts Law.
Liability of EE for loss (Sec. 10)
? The risk of loss shall be borne by the EE.
? Loss of goods, documents or instruments which are the subject of a trust
receipt pending their disposition shall not extinguish the EE s obligation to the
ER for the value thereof. This is irrespective of whether or not such loss was
due to the fault or negligence of the EE (Sec. 10). Thus, in a case where ABC Ba
nk releases to Mr. X 500 crates of grapes under a trust receipt, and the grapes
are stolen while they are in a warehouse, Mr. X is still obliged to pay his obli
gation to ABC Bank notwithstanding the loss of the grapes.
What are the rights of a purchaser for value and in good faith?
? Any purchaser of goods from an EE with right to sell, or of documents or
instruments through their customary form of transfer, who buys the goods, docum
ents, or instruments for value and in good faith from the EE, acquires said good
s, documents or instruments free from the ER s security interest. (Sec. 11)
Liability for estafa (Sec. 13)
? The failure of an EE 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 ER or as appears in the trust receipt or to return said goods, doc
uments or instruments if they were not sold or disposed of in accordance with th
e terms of the trust receipt shall constitute the crime of estafa punishable und
er Article 315 of the Revised Penal Code.
? If the violation or offense is committed by a corporation, partnership o
r association, or other juridical entities, the penalty provided for shall be im
posed upon the directors, officers, employees or other officials or persons ther
ein responsible for the offense, without prejudice to the civil liabilities aris
ing from the criminal offense.
I. Violation of Trust Receipts Law is an offense against public order.
People v. Nitafan 207 SCRA 726
Petitioner Allied Banking Corporation filed an information for estafa against Be
tty Sia Ang. It was alleged that the accused, proprietess of Eckart Enterprises,
received from the bank Goardon plastics, plastic sheeting and Hook Chromed, amo
unting to P398,000 specified in a trust receipt and covered by a Domestic Letter
of Credit. She had the obligation to sell the goods and to account for the proc
eeds, if sold, or to return the goods, if not sold, on or before 16 October 1980
, or upon demand. Despite repeated demands, Ang paid only P283,115. It was alleg
ed that she misappropriated, misapplied and converted the balance to her own per
sonal use and benefit. The accused filed a motion to quash the information, alle
ging that violation of the trust receipt constitutes only a civil liability. The
respondent judge granted the motion.
The Supreme Court held that acts involving the violation of a trust receipt agre
ement after 29 January 1973 (the date of enactment of PD 115) would make the acc
used criminally liable for estafa under Article 315(b) of the Revised Penal Code
.
Section 13 of PD 115 provides that failure of the EE to turn over the proceeds o
f the sale of the goods, documents or instruments covered by a trust receipt or
to return said goods, documents or instruments if they are not sold or disposed
of constitute the crime of estafa, punishable under Article 315 paragraph 1(b) o
f the Revised Penal Code.
Section 1(b) of Article 315 states that one of the means by which to commit esta
fa is by misappropriating or converting, to the prejudice of another, money, good
s received by the offender in trust or under any other obligation involving the
duty to make delivery of or to return the same
It is the failure of Ang to account for the balance that makes her liable for es
tafa.
NOTE: The courts in the cases of People v. Cuevo and Sia v. CA, which were relie
d upon by the respondent judge and the accused in the case above, adopted the vi
ew that a violation of obligations under a trust receipt gave rise only to a civ
il liability because the two cases occurred before the effectivity of PD 115.
Trust receipt arrangements do not involve a simple loan transaction. Apa
rt from a loan feature, the trust receipt arrangement has a security feature cov
ered by the trust receipt itself. The second feature provides needed financial a
ssistance to traders in the importation or purchase of goods through the use of
the goods as collateral for the advancements made by the bank. The title of the
bank to the security is the one sought to be protected and not the loan which is
a separate and distinct agreement.
The Trust Receipts Law punishes the dishonesty and abuse of confidence i
n the handling of money or goods to the prejudice of another, regardless of whet
her or not the latter is the owner. The law does not seek to enforce payment of
the loan. There is thus no violation of the Constitutional right imprisonment fo
r non-payment of debts.
Like BP 22, PD 115 punishes the act as an offense against public order,
not against property. The offense is punished as a mala prohibitum regardless of
the existence of intent or malice. A mere failure to deliver the proceeds of th
e sale or the goods constitute a criminal offense that causes prejudice to anoth
er and, more importantly, to the public interest.
II. The Trust Receipts Law is deemed to cover goods not intended for sale.
Allied Banking Corporation v. Ordoez 192 SCRA 246 (1990)
Philippine Blooming Mills (PBM), a steel manufacturer, through its duly a
uthorized officer, private respondent Alfredo Ching, applied for the issuance of
commercial letters of credit with petitioner bank to finance the purchase of 50
0 M/t Magtar Branch Dolomites and one Lot High Fired Refractory Sliding Noozle B
ricks. Petitioner bank issued an irrevocable letter of credit in favor of Nikko
Industry Co. Ltd. (Nikko) by virtue of which the latter drew four drafts which w
ere accepted by PBM and duly honored and paid by the petitioner bank.
To secure payment of the amount covered by the Drafts, and in considerati
on of the transfer of the goods to PBM, the latter as EE, through private respon
dent, executed four Trust Receipt Agreements acknowledging petitioner s ownership
of the goods and its obligation to turn over the proceeds of the sale of the goo
ds, if sold, or to return the same, if unsold, within the stated period.
Out of the said obligation resulted an overdue amount of P1,475,274. Desp
ite repeated demands, PBM failed and refused to either turn over the proceeds of
the sale of the goods or to return the same.
Allied Bank filed a criminal complaint against private respondent for vio
lation of PD 115.
PBM contents that PD 115 does not cover the transaction he entered into b
ecause the said law only refers to goods which are ultimately intended for sale.
In this case, the dolomites and nuzzle bricks are not part of the steel product
s that they make. Rather, they are used in the operation of PBM s equipment. Furth
ermore, they are not engaged in the sale of dolomites and nozzle bricks.
The issue here is whether the penal provision of PD 115 apply or not when
the goods covered by a Trust Receipt do not form part of the finished products
which are ultimately sold but are, instead, utilized or used up in the operation
of the equipment and machineries of the EE /manufacturer.
SC held that PD 115 applies. The penal provision of PD 115 encompasses an
y act violative of an obligation covered by the trust receipt; it is not limited
to transactions in goods which are to be sold, reshipped, stored or processed a
s a component of a product ultimately sold.
In an attempt to escape criminal liability, PBM claims PD 115 covers good
s which are ultimately destined for sale and not goods for use in manufacture. B
ut the wording of Section 13 of PD 115 covers failure to turn over the proceeds
of the sale of entrusted goods, or to return said goods if unsold or disposed of
in accordance with the terms of the trust receipts.
And even assuming the absence of a clear provision in the trust receipt a
greement, Lee v. Rodil and Sia v. CA have held: Acts involving the violation of
trust receipt agreements occurring after 29 January 1973 (when PD 115 was enacte
d) would render the accused criminal liable for estafa under par. 1(b), Article
315 of the Revised Penal Code, pursuant to the explicit provision in Section 13
of PD 115. The act punishable is malum prohibitum.
LETTER OF CREDIT
A letter of credit is a financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods before paying.
To break the impasse, the buyer may be required to contract a bank to issue a le
tter of credit in favor of the seller so that by virtue of the letter of credit,
the issuing bank can authorize the seller to draw drafts and engage to pay them
upon their presentment simultaneously with the tender of documents required by
the letter of credit. The buyer and the seller agree on what documents of title
evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in t
he process secures the required shipping documents or documents of title. To get
paid, the seller executes a draft and presents it together with the required do
cuments to the issuing bank. The issuing bank redeems the draft and pays cash to
the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires. The bank then obtains possession of the docu
ments upon paying the seller. The transaction is completed when the buyer reimbu
rses the issuing bank and acquires the documents entitling him to the goods. Und
er this arrangement, the seller gets paid only, if he delivers the documents of
title over the goods, while the buyer acquires he said documents and control ove
r the goods only after reimbursing the bank
In a letter of credit, there are three distinct and independent contracts
(1) the contract of sale between the buyer and the seller,
(2) the contract of the buyer with the issuing bank, and
(3) the letter of credit proper in which the bank promises to pay the seller pur
suant to the terms and conditions state therein (Keng Hua vs. CA, 286 SCRA 257)
Letters of Credit Distinguished from Other Accessory on Contracts
What characterizes a letter of credit, as distinguished from other accessory con
tracts, is the engagement of the issuing bank to pay the seller once the draft a
nd the required shipping documents are presented to it. In turn, this arrangemen
t assures the seller of prompt payment, independent of any breach of the main sa
les contract. By this so-called independence principle the bank determines complia
nce with the letter of credit only by examining the shipping documents presented
, it is precluded form determining whether the main contract is actually accompl
ished or not
Bar Question: (1) is a letter of credit a commercial transaction? Explain. (2) I
s it governed by the negotiable Instruments Law? Why? (1968 Bar)
Answer:
(1) A letter of credit is a commercial transaction because it is one of the cont
racts provided by the Code of Commerce not repealed by the Civil Code. It is als
o a form of negotiable instrument where all requisites of negotiability are pres
ent, especially when used in international trade.
(2) if the letter of credit has all of the requisites of negotiability under Sec
1 of the Negotiable Instrument Law, then it is governed by the said law, otherw
ise the code of Commerce provision will govern it
Parties to a Letter of Credit
There would at least be three (3) parties:
(1) the buyer, who procures the letter of credit and obliges himself to reimbu
rse the issuing bank upon receipt of the documents of title;
(2) the bank issuing the letter of credit, which undertakes to pay the seller up
on receipt of the draft and proper documents of title and to surrender the docum
ents to the buyer upon reimbursements, and
(3) the seller, who in compliance with the contract of sale ships the goods to t
he buyer and delivers the documents of title and draft to the issuing bank to re
cover payment.
(4). Other Parties to a Letter of Credit
The number of the parties, not infrequently and almost invariably in internation
al trade practice, may be increased. Thus, the services of an advising (notifyin
g) bank may be utilized to convey to the seller the existence of the credit, or,
or a confirming bank which will lend credence to the letter of credit issued by
a lesser known issuing bank; or, of a paying bank which undertakes to encash th
e drafts drawn by the exporter. Further, instead of going to the place of the is
suing bank to claim payment, the buyer may approach another bank termed the nego
tiating bank, to have the draft discounted
Purpose
The primary purpose of the letter of credit is to substitute for, and therefore
support, the agreement of the buyer/importer to pay money under a contract or ot
her arrangement. A letter of credit is one of the modes of payment, set out in S
ec. 8 Central Bank Circular No. 1389, Consolidated Foreign Exchange Rules and Reg
ulations, dated 13 April 1993, by which commercial banks sell foreign exchange to
service payments for, e.g., commodity imports. In undertaking to accept or pay
the drafts presented to it by the beneficiary according to the tenor of an L/C,
the issuing bank in effect extends a loan to the account party (Reliance vs. Dae
woo, 228 SCRA 545)
Failure of buyer to open the appropriate L/C did not prevent the birth of the co
ntract and neither did such failure extinguish that contract but may constitute
breach thereof
The opening of a letter of credit in favor of a vendor is only a mode of payment
, It is not among the essential requirements of contract of sale enumerated in A
rts. 1305 and 1474 of the Civil Code and therefore does not prevent the perfecti
on of the contract between the parties (Jonhannes vs. CA, 227 SCRA 717).
Bar Question: Does a foreign letter of credit become a consummated contract upon
payment by the debtor to the bank in his country of the amount of foreign excha
nge sold?
Answer: Yes, the payment by the debtor of a letter of credit in his country of t
he amount of foreign exchange sold will operate to consummate the contract.
Under the Negotiable Instrument Law, which is uniform all over the world, paymen
t by the debtor of the negotiable instrument (a) letter of credit is a variation
of a bill of exchange) will operate to discharge the negotiable instrument and
all parties thereto.
Bar Question: In letters of credit in banking transactions, distinguish the liab
ility of a confirming bank from a notifying bank (1994 Bar)
Suggested Answer: (U.P Law Center): In case anything wrong happens to the letter
of credit, a confirming bank incurs liability for the amount of the letter of c
redit, while a notifying bank does not incur any liability.
A standby letter of credit is a security arrangement, not a contract of guaranty
. Payment by the debtor direct to the creditor does not change the letter of cre
dit although the amount the creditor can collect form the bank under the letter
of credit can ultimately be reduced (IBAA vs. IAC, 167 SCRA 450).
An irrevocable letter of credit is not synonymous with a confirmed letter of cre
dit, in an irrevocable letter of credit, the bank may not, without the consent o
f the beneficiary and he applicant, revoke his undertaking under the letter, whe
reas in a confirmed letter of credit, the correspondent bank gives an absolute a
ssurance to the beneficiary that it will undertake the issuing bank s obligation a
s its own, according to the terms and conditions of the credit (Feati vs. CA, su
pra)
Bar Question: B applied for a letter of credit with the Bank of America in favor
of an export company located in Paris, France. The application provides that th
e draft must be drawn and presented not later than May 31, 1978, and X agreed to
pay at maturity any amount that might be drawn or paid upon faith of the applic
ant s credit and to reimburse the bank in said manner. On May 30, 1978, a draft wa
s negotiated by the Bank of America s correspondent bank in Paris against X s credit
, this was then paid by the Bank of America of the rate prevailing. The date of
maturity of the draft was August 26, 1978. before the date of maturity but after
the correspondent bank had paid the draft, the French franc devaluated. At what
rate should X pay the Bank of America in Philippine pesos, at the rate of the f
ranc prevailing on May 30, 1978, or at its devaluated rate on August 26, 1978? (
1979 Bar)
Answer: X is obliged to pay Bank of America at the rate of exchange prevailing
on May 30, 1978, the date when the draft was negotiated by the Bank of America s c
orrespondent bank in Paris against X s credit.
The sale of foreign exchange is consummated upon payment or delivery to the cred
itor by the agent or correspondent bank of the amount in foreign currency author
ized by the transmitting bank to be paid or drawn under the letter of credit.
The determinative factor is not the date of maturity to pay of the foreign curre
ncy involved. But the date the foreign currency allowed under the draft is deliv
ered to the drawee or becomes obligated or committed upon the acceptance of the
draft.
Bar Question: BV agreed to sell to AC, a ship and Merchandise Broker, 2,500 cub
ic meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD issu
ed a purchase order.
On the arrangements made upon instruction of the consignee. H & T Corporation of
Los Angeles, California, the SP Bank of Los Angeles issued an irrevocable lette
r of credit available at sight in favor of BV for the total purchase price of th
e logs. The letter of credit was mailed to FE Bank with the instruction to forwa
rd it to the beneficiary . The letter of credit provided that the draft to be draw
n is on SP Bank and that it be accompanied by, among other things, a certificati
on from AC, stating that the logs have been approved prior to shipment in accord
ance with the terms and conditions of the purchase order.
Before loading on the vessel chartered by AC, the logs were inspected by customs
inspectors and representatives of the Bureau of Forestry, who certified to the
good condition and exportability of the logs. After the loading was completed, t
he Chief Mate of the vessel issued a mate receipt of the cargo which stated that
the logs are in good condition. However, AC refused to issue the required certi
fication in the letter of credit. Because of the absence of the certification. F
e Bank refused to advance payment on the letter of credit.
(1) May Fe Bank be held liable under the letter of credit? Explain.
(2) Under the facts stated above, the seller, BV, argued that FE Bank, by accep
ting the obligation to notify him that the irrevocable letter of credit has been
transmitted to it on his behalf, has confirmed the letter of credit. Consequent
ly, FE Bank is liable under the letter of credit, is the argument tenable? Expla
in (1993 Bar)
Suggested Answer (U.P. Law Center):
(1) No. The letter of credit provides as a condition a certification from A.C. W
ithout such certification, there is no obligation on the part of FE Bank to adva
nce payment of the letter of credit. (Feati Bank v. Court of Appeals, 196 SCRA 5
76).
(2)No. FE Bank may have confirmed the letter of credit when it noticed BV that a
n irrevocable letter of credit has been transmitted to it on its behalf. But the
conditions in the letter of credit must first be complied with namely, that the
draft be accompanied by a certification from AC. Further, confirmation of a let
ter of credit must be expressed (Feati Bank c. Court of Appeals. 196 SCRA 576)
Certificate of Time Deposit
Where a bearer Certificate of Time Deposit (CTD) is delivered to another to guar
antee certain transactions in writing, title over the CTD is not transferred to
the holder and merely constitutes him as holder for value to the extent of the l
ien. As such holder, he would be a pledge but the requirements of Article 2096,
Civil Code, must be complied with (Caltex vs. CA, 212 SCRA 448).
Non-negotiable Documents and Instruments
There are some documents very similar to, but not, negotiable instruments, becau
se they lack one, some or all the requirements of a negotiable instrument under
Sec. 1 of the Negotiable Instruments Law.
Examples are (a) treasury warrants, (b) money orders, (c) warehouse receipts, (d
) bills of lading, and (e) trust receipts.
a. Warehouse Receipts
Bar Question: Are negotiable warehouse receipts negotiable instruments within th
e meaning of the Negotiable Instruments Law? Answer: Warehouse receipts can neve
r be negotiable instruments under the Negotiable Instruments Law because the sub
ject matter of a warehouse receipt consists of goods, and not money.
Bar Question: When is a warehouse receipt a negotiable instrument? (1948 Bar)Tha
t the receipt makes the goods deliverable to a specified person or order, or to
bearer, may make the receipt a negotiable warehouse receipt but never a negotiab
le instrument.
b. Postal Money Order
Postal money orders, according to the weight of authority in the U.S. are not ne
gotiable instruments because (1) the government, in establishing a postal money
order system, is not engaged in commercial transactions, but merely exercises a
government power for public benefit, and (2) restrictions imposed by the postal
laws and regulations on money orders like one indorsement only, or withholding p
ayment for a list causes, are inconsistent with the character of negotiable ins
truments (49 CJS 1153, cited in Philippine Education vs. Soriano, 39 SCRA 587).
Bar Question: A book store received five postal money orders totaling P1,000.00
as part of its sales receipts, and deposited the same with a bank. A day after,
the bank tried to clear them with the Bureau of Posts. It turned out however, th
at the postal money orders were irregularly issued prompting the Bureau of Posts
to serve notice upon all banks not to pay the money orders if presented for pay
ment. The Bureau of Posts further informed the bank that the amount of P1,000.00
had been deducted from the bank s clearing account. For its part, the bank debite
d the book store s account with the same amount.
A complaint was filed by the book store against the Bureau of Posts and the bank
for the recovery of the sum of P 1,000.00 which however, was dismissed by the t
rial court. The book store appealed contending that postal money orders are nego
tiable instruments and that their nature could not have been affected by the not
ice sent by the Bureau of Posts to the banks.
How would you resolve the controversy? (1980, 1975 Bar)
Answer: The contentions of the book store that postal money orders are negotiabl
e instruments and that their nature could not have been affected by the notice s
ent by the Bureau of Posts and all banks are incorrect and are therefore not ten
able.
1?Goods shall include chattels and personal property other than money, things in
action, or thins so affixed to land as to become a part thereof.
2 Document means written or printed evidence of title to goods.
3 Instrument means any negotiable instrument, any certificate of stock, or bond
or debenture for the
payment of money issued by a public or private corporation, or any certificate o
f deposit, participation certificate or receipt, any credit or investment instru
ment of a sort marketed in the ordinary course of business or finance, whereby t
he EE, after the issuance of the trust receipt, appears by virtue of possession
and the face of the instrument to be the owner.

4 Security interest means a property interest in goods, documents or instrument

s to secure performance of some obligations of the EE or of some third persons t
o the ER and includes title, whether or not expressed to be absolute, whenever s
uch titles is in substance taken or retained for security only. (Sec. 3)

5 Note that the EE shall receive any surplus from the sale, but shall not be l
iable to the ER for any deficiency. (Sec. 7)
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