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I. Letters of Credit
A. Definition and Nature of Letter of Credit
BPI v. De Reny Fabric Industries,
Aurora T. Tuyo and Aurora
Carcereny alias Aurora C. Gonzales
October 16, 1970
Ponente: Castro, J.
Digest Maker: JM Arcilla
SUMMARY:
De Reny Fabric Industries, Inc. applied to the Bank for irrevocable
commercial letters of credit to cover the purchase by the corporation of
goods. De Reny made partial payments to the Bank. Further payments
were discontinued by the corporation when it became established that
the goods that arrived in Manila were colored chalks instead of
dyestuffs. The corporation also refused to take possession of these
goods. The Supreme Court held that De Reny Fabrics is liable under
the letter of Credit.
DOCTRINE:
In the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory nation. Article 10
thereof provides: .
In documentary credit operations, all parties concerned deal in
documents and not in goods. — Payment, negotiation or
acceptance against documents in accordance with the terms
and conditions of a credit by a Bank authorized to do so binds
the party giving the authorization to take up the documents
and reimburse the Bank making the payment, negotiation or
acceptance.
FACTS:
De Reny Fabric Industries, Inc. applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation of goods
from its American supplier, the J.B. Distributing Company.
As each shipment arrived in the Philippines, the De Reny Fabric Industries,
Inc. made partial payments to the Bank. Further payments were, however,
subsequently discontinued by the corporation when it became established, as
a result of a chemical test conducted, that the goods that arrived in Manila
were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this
reason, the Bank caused them to be deposited with a bonded warehouse
paying therefor the amount of P12,609.64 up to the filing of its complaint
with the court.
The lower court ordered the the defendants-appellants to pay to the plaintiff-
appellee the amount of P291,807.46, with interest thereon, as provided for in
the L/C Agreements, at the rate of 7% per annum from October 31, 1962 until
fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the
foreign correspondent banks of the Bank of the Philippine Islands to take the
necessary precaution to insure that the goods shipped under the covering
L/Cs conformed with the item appearing therein, and, that the foregoing
banks having failed to perform this duty, no claim for recoupment against the
defendants-appellants, arising from the losses incurred for the non-delivery
or defective delivery of the articles ordered, could accrue.
ISSUES/HELD:
WON De Reny Fabrics is liable under the letter of Credit. YES
RATIO:

Under the terms of their Commercial Letter of Credit Agreements with
the Bank, the appellants agreed that the Bank shall not be responsible
for the "existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for any
difference in character, quality, quantity, condition, or value of the property
from that expressed in documents," or for "partial or incomplete shipment, or
failure or omission to ship any or all of the property referred to in the Credit,"
as well as "for any deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property the shippers or
vendors and ourselves [purchasers] or any of us." Having agreed to these
terms, the appellants have, therefore, no recourse but to comply with
their covenant.
But even without the stipulation recited above, the appellants cannot shift the
burden of loss to the Bank on account of the violation by their vendor of its
prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks,
in providing financing in international business transactions such as those
entered into by the appellants, do not deal with the property to be exported
or shipped to the importer, but deal only with documents.
The existence of a custom in international banking and financing circles
negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually tallies
with what was loaded aboard ship, having been positively proven as a fact,
the appellants are bound by this established usage. They were, after all, the
ones who tapped the facilities afforded by the Bank in order to engage in
international business.
Phil. Virginia Tobacco v. De Los
Angeles
Aug. 19, 1988
Paras, J.
Gabe Ruaro
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SUMMARY:
DOCTRINE:
FACTS:
Timoteo Sevilla, as owner and GM of Philippine Associated Resources,
together with the Nationwide Agro-Industrial Development Corp. and the
Consolidated Agro-Producers, Inc., were, after public bidding, awarded the
right to import Virginia Leaf Tobacco in a public bidding. Afterwards,
Nationwide and Consolidated assigned their rights to the Philippine Virginia
Tobacco Administration (PVTA). This left Sevilla’s Philippine Associated
Resources as the only private firm allowed to export 1 kilo of PVTA and
farmer’s low-grade tobacco for every 9 kilos of leaf tobacco actually
exported.1
The contract entered into between PVTA and Sevilla was for the
importation of 85 million kilos of Virginia tobacco, with a counterpart
obligation to export 7.63 million kilos of PVAT and/or farmer’s tobacco. In
accordance with this contract, Sevilla bought and exported 2,101 kilos of
tobacco. However, before he could import the Virginia tobacco to be used for
blending, RA 4155 took effect, authorizing the PVTA to grant import
privileges at 4:1 instead of 9:1 and to dispose of all of its tobacco stock at the
best price available.
As a result, the contract was amended, first because of prevailing
market prices, and then to give Sevilla the benefits under RA 4155, subject to
the condiditions that the purchase price be P3.00, that he liquidiate his
unpaid balance, and, pertinently, that he open an irrevocable letter of
credit with the Prudential Bank and Trust Company to secure the payment of
the balance, drawable upon release of the imported tobacco of the Virginia
tobacco.
While Sevilla was negotiating the reduction of procurement costs,
PVTA prepared 2 drafts to be drawn against the LOC.
1 Virginia leaf tobacco is of a higher grade and is more expensive than low-grade
tobacco. The concession here is that Sevilla can mix some of the cheap tobacco
with the higher grade tobacco when he exports.

This led Sevilla to file a complaint for damages for P5,000,000. The
complaint was dismissed by the lower court. However, while on MR, the LC,
through Judge De los Angeles, issued an order directing Prudential Bank to
release the funds under the letter of credit. Before PVTA could file an MR to
challenge the order, Sevilla was able to secure the release of P300,000.
Hence this petition for certiorari, prohibition, and mandamus.
ISSUES/HELD:
1. WON there was GAD in the LC order, because the letter of credit is
irrevocable. (Yes)
RATIO:
In issuing the order, Judge De Los Angeles violated the irrevocability of letters
of credit. An irrevocable letter of credit cannot be cancelled or modified
during its lifetime without the express permission of the beneficiary.
Petition given due course. RTC orders set aside.
Reliance Commodities v. Daewoo
Industrial
December 17, 1993
Ponente: Feliciano, J.
Rheg Peralta
SUMMARY: Seller (Daewoo) asks for damages on account of the failure
of the buyer (Reliance) to open a letter or credit as agreed upon. The
Court held that such failure is a breach of contract which entitles the
seller to claim damages.
DOCTRINE: The failure of a buyer/importer to open a letter of credit as
stipulated amounts to a breach of contract which would entitle the
seller/exporter to claim damages for such breach.
FACTS: Reliance Commodities, Inc. (importer/buyer) and Daewoo Industrial
Co., Ltd. (seller) entered into a contract for the purchase of foundry pig iron,
which stipulated that a letter of credit should be opened on a specified date.
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Reliance failed to open the L/C as agreed upon. Daewoo was compelled to sell
the iron to another buyer at a lower price.
Reliance filed an action for damages against Daewoo. Daewoo responded,
inter alia, with a counterclaim for damages, contending that Reliance was
guilty of breach of contract when it failed to open an L/C.
ISSUE/HELD: WON the failure of an importer (Reliance) to open a letter of
credit on the date agreed upon makes it liable to the exporter (Daewoo) for
damages. [YES]
RATIO: Reliance and Daewoo, having reached "a meeting of minds" in respect
of the subject matter of the contract, the price thereof, and other principal
provisions, "they had a perfected contract." The failure of Reliance to open
the appropriate L/C did not prevent the birth of that contract, and neither did
such failure extinguish that contract. The L/C provided for in that contract
was the mode or mechanism by which payment was to be effected by Reliance
of the price of the pig iron.
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 other arrangement. Hence, the failure of a buyer seasonably to
furnish an agreed letter of credit is a breach of the contract between buyer
and seller. Where the buyer fails to open a letter of credit as stipulated, the
seller or exporter is entitled to claim damages for such breach. Damages for
failure to open a commercial credit may, in appropriate cases, include the loss
of profit which the seller would reasonably have made had the transaction
been carried out.
Rodzssen Supply vs. Far East Bank
May 9, 2001
Panganiban, J.
Oswald P. Imbat

SUMMARY: Rodzssen opened a letter of credit (LC) with Far East Bank in
favor of Ekman for the purchase of hydraulic loaders. Far East bank paid
Ekman the price of some of the loaders after the LC expired. Rodzssen
refused to pay. Far East Bank sued Rodzssen. The RTC, CA, and SC ruled
that, while Rodzssen cannot be held liable under the LC, it is liable under
Article 2142, CC, since a quasi-contract arose when Rodzssen voluntarily
accepted the loaders from Ekman and Far East Bank paid for them.
DOCTRINE: When both parties to a transaction are mutually negligent in
the performance of their obligations, the fault of one cancels the negligence
of the other and their rights and obligations may be determined equitably
under the law proscribing unjust enrichment.
An issuing bank which paid the beneficiary of an expired letter of credit
can recover payment from the applicant which obtained the goods from
the beneficiary to prevent unjust enrichment.
FACTS:
1. On January 15, 1979, Rodzssen Supply, Inc. (Rodzssen) opened with Far
East Bank and Trust Co. (Far East Bank) a 30-day domestic letter of credit
(LC) in the amount of P190,000, to expire on February 15, 1979.
a. The LC was in favor of Ekman and Company, Inc. (Ekman) for the
purchase from Ekman of five (5) units of hydraulic loaders.
b. The LC was then extended up to October 16, 1979.
2. Three (3) units were delivered to Rodzssen on March 16, 1979.
a. Far East Bank paid Ekman P114,000 under the LC.
b. Rodzssen duly paid Far East Bank the same amount.
3. Far East Bank, in its complaint to recover from Rodzssen, alleged that:
a. The two (2) remaining units, valued at P76,000, were delivered by
Ekman, and readily received by Rodzssen before the LC expired.
b. Upon Ekman's presentation of the necessary documents, Far East Bank
paid P76,000.
c. Upon its demand on Rodzssen, however, the latter refused to pay.
4. Rodzssen, on the other hand, argued that:
a. Far East Bank, knowing that the two (2) remaining units were
delivered after the LC expired, paid Ekman in bad faith.
b. Rodzssen offered to return the two (2) units but Far East Bank refused
to take possession.
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5. The RTC of Bacolod City ordered Rodzssen to pay Far East Bank, including
12% interest, finding that:
a. Rodzssen refused to pay Ekman. As such, Ekman pressed Far East Bank
for payment.
b. Far East Bank, in honest belief that it was still obligated under the LC,
paid Ekman P76,000, upon the latter's persentation of the necessary
documents.
c. This voluntary and lawful act of payment gave rise to a quasi-contract
between Far East Bank and Rodzssen.
d. Rodzssen cannot be allowed to escape liability, thereby enriching itself
at the expense of Far East Bank.
e. Rodzssen offered to return the two (2) loaders only three (3) years
after receipt thereof, when Far East Bank demanded payment. By its
voluntary acceptance, estoppel works against it.
6. The CA rejected Rodzssen's imputation of bad faith and negligence upon
Far East Bank. It ruled that, while the goods were delivered after the LC
expired, to absolve Rodzssen is to allow it to get away with unjust
enrichment at the expense of Far East Bank.
ISSUES/RULINGS:
1. May Rodzssen be held liable under the LC? No.
2. Is Rodzssen nonetheless liable to Far East Bank? Yes.
3. Should the rate of interest be 12%? No.
RATIO:
1. Rodzssen cannot be held liable under the LC because it had already
expired when Far East Bank paid Ekman.
a. The LC expressly restricted the negotiation to Far East Bank and
specifically instructed Ekman to tender the following documents:
i. Delivery receipt duly acknowledged by the buyer;
ii. Accepted draft; and
iii. Duly signed commercial invoices.
b. Far East Bank paid Ekman when it was no longer bound under the LC.
i. It paid on March 14, 1980, or five (5) months after the LC expired.
ii. In fact, on December 27, 1979, it informed Rodzssen of the
cancellation of the commercial paper and credited P22,800 to the
account of the latter, which represented the marginal deposit, which

Rodzssen had been required to put up for the unnegotiated portion
of the LC (P79,000).
c. The LC had become invalid upon the lapse of the period fixed therein.
d. It is of no moment that Ekman presented, within the prescribed period,
all the documents necessary for collection.
2. Be that as it may, Rodzssen is liable under Article 2142, CC, not on the
inefficacious LC.
a. Article 2142 provides: Certain lawful, voluntary and unilateral acts give
rise to the juridical relation of quasi-contract to the end that no one
shall be unjustly enriched or benefited at the expense of another.
b. Based on equitable considerations, recovery should be allowed.
c. While Far East Bank erred in paying Ekman, Rodzssen itself was not
without fault in the transaction.
i. Rodzssen had voluntarily received and kept the loaders since
October 1979.
ii. While Rodzssen claims that it accepted the late delivery of the
equipment, only because it was bound to accept it under its trust
receipt arrangement with Far East Bank, for almost four (4) years, it
did not act to validate the ownership or possession of the loaders.
iii. It only formalized its offer to return the goods after demand for
payment, more than three (3) years after it accepted delivery.
d. When both parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the
negligence of the other and, as in this case, their rights and obligations
may be determined equitably under the law proscribing unjust
enrichment.
3. The interest rate should be 6% computed from April 7, 1983, when Far
East Bank demanded payment, based on Eastern Shipping Lines v. CA and
Article 2009, CC. Although the sum of money involved was payable to a
bank, it was not a loan or forbearance of money. From the finality of the
judgment until its satisfaction, the interest shall be 12% per annum.
Transfield vs. Luzon Hydro
November 22, 2004
Justice Tinga
Denn
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SUMMARY: Transfield and Luzon Hydro entered into a Trunkey Contract
wherein Transfield was obligated to construct a hydro-electric power station.
To secure its obligation, Transfield opened in favour of LHC 2 standby L/Cs
with ANZ Bank and Security Bank. Transfield’s requests for extensions of time
to complete the project were denied by LHC. Because Transfield failed to
comply with its obligation on time, LHC filed arbitration requests, in
compliance with their contract. While these requests were pending, LHC
notified Transfield and the Banks that it would call on the Standby L/Cs
because of the delay on the part of Transfield to fulfil its obligations. This
caused Transfield to file a complaint for injunction against LHC and the banks.
The SC, citing the so-called “independence principle”, ruled in favour of LHC.
DOCTRINE: A letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the
addressee.
Commercial credits involve the payment of money under a contract of sale.
Such credits become payable upon the presentation by the seller-beneficiary
of documents that show he has taken affirmative steps to comply with the
sales agreement. In the standby type, the credit is payable upon certification
of a party's nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of the standby
credit must certify that his obligor has not performed the contract.
FACTS:
26 March 1997: Transfield and Luzon Hydro Corporation (LHC) entered into
a Turnkey Contract
- The Project: Transfield, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a 70-Megawatt hydro-electric power
station at the Bakun River in the provinces of Benguet and Ilocos Sur.
It was given the sole responsibility for the design, construction,
commissioning, testing and completion.
o Target completion date: 1 June 2000, or such later date as
may be agreed upon.

o Transfield is entitled to claim extensions of time (EOT) for
reasons such as force majeure, and delays caused by LHC
itself.
o In case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other
means.
To secure performance of its obligation, Transfield opened in favor of LHC 2
standby letters of credit both dated 20 March 2000, each in the amount of
US$8,988,907.00.
- 1 Standby L/C with the local branch of respondent Australia and New
Zealand Banking Group Limited (ANZ Bank), and 1 Standby L/C with
respondent Security Bank Corporation (SBC)
Transfield sought various extensions of time allegedly due to several factors
which prevented the completion of the Project on target date, such as force
majeure occasioned by typhoon Zeb, barricades and demonstrations.
However, LHC denied the requests, which gave rise to a series of legal actions
between the parties.
1) Request for Arbitration filed by LHC before the Construction Industry
Arbitration Commission (CIAC)
2) Request for Arbitration filed by Transfield before the International
Chamber of Commerce (ICC)
Meanwhile, Transfield, in two separate letters, advised respondent banks of
the arbitration proceedings already pending in connection with its alleged
default in the performance of its obligations.
- Since LHC had no right to call on the Standby L/Cs until the
resolution of disputes before the arbitral tribunals, Transfield
warned the banks that any transfer, release, or disposition of the
Standby L/Cs in favor of LHC or any person claiming under LHC
would constrain it to hold said banks liable for liquidated damages.
LHC sent notice to Transfield that pursuant to the Turnkey Contract, it failed
to comply with its obligation to complete the Project. Despite the letters sent,
both banks informed Transfield that they would pay on the Standby L/Cs if
and when LHC calls on them.
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- LHC declared Transfield in default/delay in the performance of its
obligations under the Turnkey Contract and demanded the payment
of US$75,000.00 for each day of delay beginning 28 June 2000 until
actual completion of the Project. LHC also served notice that it would
call on the securities for the payment of liquidated damages for the
delay.
Transfield filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against LHC and the
banks before the RTC of Makati, seeking to restrain LHC from calling on the
Securities (standby L/Cs) and the banks from transferring, paying on, or in
any manner disposing of the Securities or any renewals or substitutes thereof.
- RTC issued a 72-hour TRO which was later extended for 17 days
- RTC: denied application for a WPI. Transfield had no legal right and
suffered no irreparable injury to justify the issuance of the writ.
o Employing the principle of “independent contract” in letters
of credit, it ruled that LHC should be allowed to draw on the
Securities for liquidated damages.
o RTC further ruled that the banks were mere custodians of
the funds and as such they were obligated to transfer the
same to the beneficiary for as long as the latter could submit
the required certification of its claims.
Transfield went to the CA via a Petition for Certiorari under Rule 65.
- Transfield: LHC’s call on the Securities was premature considering
that the issue of its default had not yet been resolved with finality by
the CIAC and/or the ICC.
- LHC: The Securities are independent of the main contract between
them as shown on the face of the 2 Standby L/Cs which both provide
that the banks have no responsibility to investigate the authenticity
or accuracy of the certificates or the declarant’s capacity or
entitlement to so certify.
- CA issued a TRO but after it expired, representatives of LHC trooped
to ANZ Bank and withdrew the total amount of US$4,950,000.00,
thereby reducing the balance in ANZ Bank to US$1,852,814.00.
- CA Decision: dismissed the petition. LHC could call on the Securities
because the credit itself is independent of the underlying transaction

and that as long as the beneficiary complied with the credit, it was of
no moment that he had not complied with the underlying contract.
Transfield filed a Petition for Review with the SC.
ISSUES/HELD:
1. WON the “Independence Principle” on Letters of Credit maybe invoked by
a beneficiary thereof where the beneficiary’s call thereon is wrongful or
fraudulent
2. WON the LHC has the right to call and draw on the securities before the
resolution of Transfield’s and LHC’s disputes by the appropriate tribunal
3. WON ANZ Bank and Security Bank are justified in releasing the amounts
due under the Standby L/Cs despite being notified that the LHC;s call
thereon is wrongful.
(NOTE: Since the case assigned to me falls under “Definition and Nature of
L/Cs’, in this digest I included only the pronouncements by the Court relevant
to such topic.)
COURT’S DISCUSSION:
DEFINITION:
A letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the addressee.
NATURE:
The letter of credit evolved as a mercantile specialty. It is an entity unto itself.
- Relationship between the beneficiary and the issuer of an L/C not
strictly contractual: both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right.
- Not a third-party beneficiary contract: the issuer must honor drafts
drawn against a letter regardless of problems subsequently arising in
the underlying contract.
- Not an assignment by the customer to the beneficiary: the bank’s
customer cannot draw on the letter.
- Not a contract of suretyship or guarantee: it entails a primary liability
following a default.
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- Not a negotiable instrument: it is not payable to order or bearer and
is generally conditional, yet the draft presented under it is often
negotiable.
In commercial transactions, 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.
- The use of credits in commercial transactions serves to reduce the
risk of nonpayment of the purchase price under the contract for the
sale of goods.
- However, credits are also used in non-sale settings where they serve
to reduce the risk of nonperformance. Generally, credits in the non-
sale settings have come to be known as standby credits.
Commercial credits involve the payment of money under a contract of sale.
Such credits become payable upon the presentation by the seller-beneficiary
of documents that show he has taken affirmative steps to comply with the
sales agreement. In the standby type, the credit is payable upon certification
of a party's nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of the standby
credit must certify that his obligor has not performed the contract.

MWSS vs. HON. DAWAY AND MAYNILAD
June 21, 2004
Azcuna, J.
Mica Maurinne M. Adao
SUMMARY: MWSS and Maynilad entered into a Concession Agreement.
As a rewuirement, Maynilad arranged for the issuance of an Irrevocable
Standby Letter of Credit in favor of MWSS for the full and prompt
performance of Maynilad obligations to MWSS. The Concession
Agreement was terminated after unresolved issues between the two
parties. To enforce the unpaid concession fees, MWSS demanded
payment from the participating banks. However, prior to such, Maynilad
had filed a petition for rehabilitation and secured a Stay Order. An Order
also enjoing MWSS to seek payment from the participating banks was
also issued. MWSS questioned this Order via Rule 65. SC ruled that
MWSS can enforce payment through the Letters of Credit because it is
not covered by the Stay Order.
DOCTRINE: The Stay Order issued under the Interim Rules of
Procedure on Corporate Rehabilitation does not apply to one in whose
favor a standby letter of credit was set up (beneficiary: MWSS). The
prohibition is on the enforcement of claims against guarantors or
sureties of the debtors whose obligations are not solidary with the
debtor. The participating banks’ obligation in a Letter of Credit
arrangement is solidary with the applicant (Maynilad) in that it is a
primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtor’s assets. These are
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the same characteristics of a surety or solidary obligor. Being solidary,
the claims against them can be pursued separately from and
independently of the rehabilitation case.
LETTERS OF CREDIT were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents and is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his credit
against the applicant of the letter, duly paid in the amount specified in
the letter. They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted
thereby into contracts of guaranty. What distinguishes letters of credit
from other accessory contracts, is the engagement of the issuing bank to
pay the seller once the draft and other required shipping documents are
presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
FACTS: MWSS granted Maynilad under a Concession Agreement to manage,
operate, repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding concession fees which, among
other things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, Maynilad was
required under to put up a bond, bank guarantee or other security acceptable
to MWSS. In compliance with this requirement, Maynilad arranged for a
three-year facility with a number of foreign banks, led by Citicorp Int’l Ltd.,

for the issuance of an Irrevocable Standby Letter of Credit in favor of
MWSS for the full and prompt performance of Maynilads obligations to
MWSS.
Later, Maynilad asked MWSS for a mechanism by which it hoped to recover
the losses it had allegedly incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US Dollar. In trying to get what
it desired, Maynilad unilaterally suspended the payment of the concession
fees. Their issues were initially resolved through an amendment to their
Concession Agreement.
However, Maynilad subsequently served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under
the Concession Agreement and its Amendment. Maynilad filed a Notice of
Early Termination of the concession, which was challenged by MWSS. MWSS
brought this before the Appeals Pannel which ruled that there was no Event
of Termination and, therefore, Maynilad should pay the concession fees that
had fallen due. This award became final.
MWSS, thereafter, submitted a written notice to Citicorp Int’l Ltd, as agent for
the participating banks, that by virtue of Maynilads failure to perform its
obligations under the Concession Agreement, it was drawing on the
Irrevocable Standby Letter of Credit and thereby demanded payment.
Prior to this, however, Maynilad had filed on a petition for rehabilitation
before the RTC of Quezon City which resulted in the issuance of the Stay
Order which stays the “enforcement of all claims, whether for money or
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otherwise and whether such enforcement is by court action or otherwise,
against the petitioner, its guarantors and sureties not solidarily liable with the
petitioner.” An Order enjoining MWSS from seeking payment through the
letter of credit arrangement and declaring any payment by the participating
banks in the Standby Letter of Credit to MWSS as void was also issued. Hence,
this petition for review by way of certiorari under Rule 65 filed by MWSS
questioning such Order.
ISSUE: Did the rehabilitation court sitting as such, act in excess of its
authority or jurisdiction when it enjoined herein petitioner from seeking the
payment of the concession fees from the banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of respondent
Maynilad?
RULING: YES. The rehabilitation court exceeded its jurisdiction, in holding
that he was competent to act on the obligation of the banks under the Letter
of Credit under the argument that this was not a solidary obligation with that
of the debtor. Being a solidary obligation, the letter of credit is excluded from
the jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of Credit to which it
had a clear right under the law and the terms of said Standby Letter of Credit,
it acted in excess of his jurisdiction.
RATIO:
The claim is not one against Maynilad but against the Citicorp as agent of the
participating banks, an entity that Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.

Sec. 6 (b) of Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor. Maynilad’s claim
that the banks are not solidarily liable with the debtor does not find support
in jurisprudence.
In Feati Bank & Trust Company v. Court of Appeals that the concept of
guarantee vis-à-vis the concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it
was opened and the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On
the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. A letter of credit has also been defined as an engagement
by a bank or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.
(See Doctrine, paragraph 2)
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply
to MWSS as the prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not solidary with
the debtor. The participating banks’ obligation are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute undertaking
to pay and is not conditioned on the prior exhaustion of the debtor’s assets.
These are the same characteristics of a surety or solidary obligor. Being
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solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit do not show that the
obligations of the banks are not solidary with those of respondent Maynilad.
On the contrary, it is issued at the request of and for the account of Maynilad,
in favor of MWSS, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement and
MWSS is authorized by the banks to draw on it by the simple act of delivering
to the agent a written certification substantially in the form Annex “B” of the
Letter of Credit. It provides further in Sec. 6, that for as long as the Standby
Letter of Credit is valid and subsisting, the Banks shall honor any written
Certification made by MWSS in accordance with Sec. 2, of the Standby Letter
of Credit regardless of the date on which the event giving rise to such Written
Certification arose
B. Parties to a Letter of Credit
1. Rights and Obligations of Parties
BANK OF THE PHILIPPINE ISLANDS, plaintiff-
appellee, vs.
DE RENY FABRIC INDUSTRIES, INC., et al.
defendants-appellants.
October 16, 1970
Ponente: Castro, J.
Kathleen Tuason

SUMMARY: De Reny Fabric discontinued payments to BPI when it
found out that the goods they ordered which were subject of L/Cs were
colored chalks instead of dyestuffs. De Reny also refused to take
possession of these goods, and for this reason BPI caused the goods to
be deposited in a bonded warehouse. De Reny contended that it was
the duty of the foreign correspondent banks of BPI to take the
necessary precaution to insure that the goods shipped under the
covering L/Cs conformed with the item appearing therein, and, that the
foregoing banks having failed to perform this duty, no claim for
recoupment against them could accrue.
DOCTRINE: A buyer who applied for a letter of credit to pay for
imported dyestuffs must reimburse the issuing bank which paid the
beneficiary, even if the shipment contained colored chalks. Banks are
not required to investigate if the contract underlying the letter of credit
has been fulfilled or not because in a transaction involving a letter of
credit, banks only deal with documents and not with goods.
FACTS:
On 4 different occasions in 1961, De Reny Fabric through its president and
secretary, applied to the Bank of the Philippine Islands (BPI) four irrevocable
commercial letters of credit to cover the purchase by the corporation of goods
described in the covering L/C applications as "dyestuffs of various colors"
from its American supplier, the J.B. Distributing Company.
All the applications of the corporation were approved, and the corresponding
Commercial L/C Agreements were executed pursuant to banking procedures.
Under these agreements, the aforementioned officers of the corporation
bound themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the corporation
delivered to BPI peso marginal deposits as each letter of credit was opened.
BPI issued irrevocable commercial letters of credit addressed to its
correspondent banks in the US, with uniform instructions for them to notify
the beneficiary thereof, the J.B. Distributing Company, that they have been
authorized to negotiate the latter's sight drafts up to the amounts mentioned
the respectively, if accompanied, upon presentation, by a full set of negotiable
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clean "on board" ocean bills of lading covering the merchandise appearing in
the LCs that is, dyestuffs of various colors.
Consequently, the J.B. Distributing Company drew upon, presented to and
negotiated with these banks, its sight drafts covering the amounts of the
merchandise ostensibly being exported by it, together with clean bills of
lading, and collected the full value of the drafts up to the amounts appearing
in the L/Cs as above indicated.
These correspondent banks then debited the account of BPI with them up to
the full value of the drafts presented by the J.B. Distributing Company, plus
commission thereon, and, thereafter, endorsed and forwarded all documents
to BPI.
As each shipment arrived in the Philippines, De Reny Fabric made partial
payments to BPI. Further payments were, however, subsequently
discontinued when they found out as a result of a chemical test conducted
that the goods that arrived in Manila were colored chalks instead of dyestuffs.
De Reny also refused to take possession of these goods, and for this reason,
BPI caused them to be deposited with a bonded warehouse and pay for the
same until the filing of the complaint.
ISSUE:
WON the foreign correspondent banks of BPI had the duty to take the
necessary precaution to insure that the goods shipped under the L/Cs
conformed with the items appearing therein, and that with the failure to
perform this duty, no claim for recoupment arising from the losses
incurred for the non-delivery or defective delivery could accrue. NO
RATIO:
Under the terms of their Commercial Letter of Credit Agreements with BPI,
De Reny Fabric agreed that BPI shall not be responsible for the "existence,
character, quality, quantity, conditions, packing, value, or delivery of the
property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that
expressed in documents," or for "partial or incomplete shipment, or failure or
omission to ship any or all of the property referred to in the Credit," as well as

"for any deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property the shippers or vendors and
ourselves [purchasers] or any of us." Having agreed to these terms, De Reny
Fabric has no recourse but to comply.
BUT even without the stipulation recited above, De Reny Fabric cannot shift
the burden of loss to BPI on account of the violation by their vendor of its
prestation.
It was uncontrovertibly proven by BPI that banks, in providing financing in
international business transactions such as those entered into by De Reny
Fabric, do not deal with the property to be exported or shipped to the
importer, but deal only with documents.
 BPI introduced in evidence a provision contained in the "Uniform
Customs and Practices for Commercial Documentary Credits
Fixed for the Thirteenth Congress of International Chamber of
Commerce," to which the Philippines is a signatory nation.
 Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal
in documents and not in goods. — Payment, negotiation or
acceptance against documents in accordance with the terms
and conditions of a credit by a Bank authorized to do so
binds the party giving the authorization to take up the
documents and reimburse the Bank making the payment,
negotiation or acceptance.
The existence of a custom in international banking and financing circles
negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually tallies
with what was loaded aboard ship, having been positively proven as a fact, De
Reny Fabric was bound by this established usage.
Insular Bank v. IAC
G.R. No. 74834/17 November 1988/Second Division/Appeal by Certiorari
Insular Bank of Asia & America (Now Philippine Commercial International
Bank) – petitioner
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Intermediate Appellate Court, Philippine American Life Insurance Company,
and the Spouses Ben & Juanita Mendoza – respondents
Decision by J. Melencio-Herrera, Digest by Pip
Short Version: The Mendozas obtained two loans from Philam Life
amounting to P600K. The loans were secured by two L/Cs obtained from
IBAA, which were in turn secured by a real estate mortgage. After the
Mendozas defaulted on two amortizations, Philam Life sued them and
IBAA. IBAA argued that it had in fact overpaid, since of P600K the
Mendozas had paid about P280K already and Philam Life had drawn over
P372K from IBAA. The Court ruled in favor of Philam Life, explaining that
a letter of credit is not an accessory contract of guaranty or surety, but
rather a primary obligation. Under the L/Cs, IBAA was liable up to the full
P600K, and the payments made by the Mendozas could not be subtracted
from the amount that could be collected from IBAA. The Mendozas’
payments were in compliance with their own prestation under the loan
agreements.
Facts: Sometime in 1976 and 1977, the Mendozas obtained two loans
from Philam Life in the total amount of P600,000.00 to finance the
construction of their residential house in Mandaue City. The loans had a
14% nominal interest rate and were to be liquidated in equal
amortizations over a period of five years from March 1977 to March 1982.
To secure payment, Philam Life required that the amortizations be
guaranteed by an irrevocable standby letter of credit of a commercial
bank. In order to comply, the Mendozas contracted with IBAA for the
issuance of two irrevocable standby letters of credit in favor of Philam
Life. The first L/C for P500,000.00 was to expire on 1 October 1981 and
the second L/C for P100,000.00 on 1 January 1982. The L/Cs were in turn
secured by a real estate mortgage on the property of the Mendozas in
favor of IBAA.
In May and June 1977, the Mendozas executed two promissory notes
in favor of IBAA, each for an amount P100,000.00 plus 19% interest per
annum and payable after two years. Both notes authorized IBAA to “sell at

public or private sale such securities or things for the purpose of applying
their proceeds to such payments of any particular obligation or
obligations” the Mendozas may have had to IBAA.
When the Mendozas failed to pay an amortization due on 1 June 1978,
Philam Life informed IBAA that it was declaring both loans “entirely due
and demandable” (the amount came up to P492K). After IBAA contested
the propriety of “calling ill” the entirety of both loans, Philam Life desisted
and instead drew on the L/Cs for five more amortizations.
However, in September 1979 the Mendozas again defaulted on their
due amortization and Philam Life again informed IBAA that it was
declaring the entire balance on both loans (and liquidated damages)
immediately due and payable (about P274K). IBAA argued that as merely
a guarantor of the Mendozas, the principal debtors, its remaining
outstanding obligation under the two L/Cs was only about P30K. IBAA
then recomputed and informed Philam Life that it had in fact overpaid: of
the P600,000.00 owed by the Mendozas, the spouses had already paid
about P280K and Philam Life had drawn about P372K on the L/Cs = P52K
overpayment. Meanwhile, in April 1980 the mortgage securing the two
L/Cs was extrajudicially foreclosed by IBAA for P775K.
In a date that does not appear in the record, Philam Life sued the
Mendozas and IBAA before the RTC of Manila for the recovery of the
supposed balance of the loan. The RTC found that IBAA had only paid
Philam Life about P342K because of a stale manager’s check in the
amount of P30K. Hence the overpayment only amount to P22K, which the
RTC ordered Philam Life to refund to IBAA. The Mendozas were ordered
to pay Philam Life P322K. The RTC’s position was that IBAA “as surety
was discharged of its liability to the extent of the payment made by the
Mendozas, the principal debtors.”
On appeal, the IAC reversed and ruled instead that IBAA’s liability for
the full amount of the loans was original and primary, and was therefore
not reduced by virtue of the payments made by the Mendozas. After doing
its own computations, the IAC ordered the Mendozas and IBAA to jointly
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 13
and severally pay Philam Life P222K. IBAA’s claim for refund was
dismissed.
Issue: Did the partial payments made by the principal obligors have the
effect of reducing the liability of IBAA as guarantor/surety under the
terms of the standby L/Cs? NO.
Ruling: Judgment modified.
Ratio: Letters of credit and contracts for the issuance of such letters are
subject to the same rules of construction as are ordinary commercial
contracts. They are to receive a reasonable and not a technical
construction and although usage and custom cannot control express
terms in letters of credit, they are to be construed with reference to all the
surrounding facts and circumstances, to the particular and often varying
terms in which they may be expressed, the circumstances and intention of
the parties to them, and the usages of the particular trade of business
contemplated.
In this case, the L/Cs read (in part) that “This credit secures the
payment of any obligation of the accountee to you under that Loan
Agreement hereto attached as Annex ‘A’ and made a part hereof, including
those pertaining to (a) surcharges on defaulted account; stallments, (b)
increased interest charges (in the event the law should authorize this
increase), and (c) liabilities connected with taxes stipulated to be for
Accountee’s and provided however, that our maximum liabilities
hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for
the other LC).” In other words, the L/Cs unequivocally secured the
payment of any obligation of the Mendozas to Philam Life.
While L/Cs were security arrangements, they were not converted
into contracts of guaranty. That would make them ultra vires, since
Section 74 of the General Banking Act prohibits banks and banking
institutions from entering into contracts of guaranty or surety.
Rather, the L/C is an absolute undertaking to pay the money

advanced or the amount for which credit is given on the faith of the
instrument.
A letter of credit is therefore a primary obligation and not an
accessory contract. In this case, being separate and independent
agreements, the payments made by the Mendozas could not be
added in computing IBAA’s liability under its own standby letters of
credit. Payments made by the Mendozas directly to Philam Life were in
compliance with their own prestation under the loan agreements. And
although these payments could result in the reduction of the actual
amount which could ultimately be collected from IBAA, the latter’s
separate undertaking under its L/Cs remained.
Following the IAC’s computations, the Court found that IBAA had only
paid P303K, hence it was still liable under the L/Cs for up to P296K. As to
the Mendozas liability, the Court found that since IBAA was able to
recover P432K from the foreclosure of the real estate mortgage and the
Mendozas had already paid IBAA about P255K, between the Mendozas
and IBAA there had been full liquidation. The remaining P222K loan of
the Mendozas was therefore IBAA’s sole responsibility under the L/Cs.
Voting: Paras, Sarmiento and Regalado, JJ., concur.
Padilla, J., no part.
Feati Bank & Trust Company vs.
Court of Appeals
April 30, 1991
Ponente: GUTIERREZ, JR., J
Flores
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SUMMARY:
An irrevocable letter of credit was issued by Pacific National Bank
(issuing bank) in favor of Villaluz (beneficiary). The letter of credit was
mailed to Feati Bank with the instruction to the latter that it "forward
the enclosed letter of credit to the beneficiary. The buyer/applicant
failed to execute a document necessary for the payment of the letter of
credit. Villaluz tried to make Feati Bank liable.
DOCTRINE:
The mere fact that a letter of credit is irrevocable does not necessarily
imply that the correspondent bank, in accepting the instructions of the
issuing bank, has also confirmed the letter of credit. Feati Bank, as a
notifying bank, assumes no liability except to notify the beneficiary of
the existence of the letter of credit; it does not give an absolute
assurance to the beneficiary that it will undertake the issuing bank’s
obligation as its own according to the terms and conditions of the
credit.
FACTS:
Villaluz agreed to sell lauan logs to Christiansen. Christiansen issued a
purchase order. Upon the instruction of the consignee Hanmi Trade Security,
Pacific National Bank issued an irrevocable letter of credit available at sight in
favor of Villaluz.
The letter of credit was mailed to the Feati Bank and Trust Company with the
instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary. The letter of credit provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied with several
documents (invoices, tally sheets, bills of lading and certification from
Christiansen).
The logs arrived at Inchon, Korea and were received by the consignee, Hanmi
Trade.
Villaluz demanded Christiansen to execute the certification needed. When
this proved futile, Villaluz filed an action for mandamus and specific
performance against Christiansen. Feati Bank was impleaded only to afford
complete relief. Villaluz prayed that the court order Feati Bank to accept the

negotiation of the letter of credit and pay him; or if the certification is still
necessary before payment can be made, then order Christiansen to first
execute the required certification.
While the case was still pending, Christiansen left the Philippines. Hence,
Villaluz, filed an amended complaint to make Feati Bank solidarily liable with
Christiansen.
Trial Court held Feati Bank liable. It ruled that Feati Bank was wrong in its
refusal to negotiate the letter of credit in the absence the certification because
the letter of credit was irrevocable and the issuing bank, the Security Pacific
National Bank, undertook that the same shall be honored upon its
presentment. On the other hand, the notifying bank, Feati Bank, by accepting
the instructions from the issuing bank, assumed the same undertaking as the
issuing bank under the terms of the letter of credit.
CA affirmed the trial court. It added that the negotiating bank, Feati Bank, by
notifying Villaluz of the letter of credit in behalf of the issuing bank,
confirmed such letter of credit and made the same also its own obligation.
Thus Feati Bank, according to the CA, is also confirming bank.
ISSUES/HELD:
WON the Feati Bank is liable. No.
RATIO:
CA erred in ruling that Feati bank was a confirming bank. CA mixed up the
meaning of an irrevocable credit with that of a confirmed credit. An
irrevocable credit means that the issuing bank may not without the consent
of the beneficiary and the applicant revoke his undertaking under the letter.
On the other hand, in a confirmed letter of credit the correspondent bank
gives an absolute assurance to the beneficiary that it will undertake the
issuing bank's obligation as its own.
A notifying bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit.
A negotiating bank is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 15
negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the
negotiating bank and the seller.
A confirming bank assumes a direct obligation to the seller and its liability is
a primary one as if the correspondent bank itself had issued the letter of
credit.
In this case, the letter provided that Feati Bank "forward the enclosed original
credit to the beneficiary." Thus Feati Bank is only a notifying bank and not a
confirming bank.
The notifying bank may suggest to the seller its willingness to negotiate, but
this fact alone does not imply that the notifying bank promises to accept the
draft drawn under the letter of credit.
In order that Feati Bank may be held liable, there should be proof that the it
confirmed the letter of credit. However there is no evidence to that effect.
Prudential Bank v IAC, Phil. Rayon
Mills Inc. and Anacleto Chi
December 8, 1992
Ponente: Davide, Jr., J.
Kitty
SUMMARY: PRMI applied for a commercial L/C with Prudential Bank.
Against this L/C, drafts were drawn and issued by Nissho which were
all paid by Prudential Bank through its correspondent in Japan. Of
these, 2 were accepted by PRMI while 10 were not. The machineries
subject of the L/C arrived and PRMI executed a TR. They were
subsequently installed in the factory of PRMI. When the company
closed shop, the factory was leased to Yupangco Cotton Mills and the
machineries were later on sold to AIC Development Corporation. The
drafts remained unpaid and Prudential filed an action for collection
against PRMI and its President Anacleto Chi. The TC found PRMI liable
on the 2 accepted drafts and dismissed the case against Chi. The IAC

sustained the TC fully. SC ruled that PRMI that the drafts were sight
drafts and did not need acceptance. Thus PRMI was liable on all 12
drafts. It also found PRMI liable on the TR. Chi was not solidarily but
only secondarily liable on the TR.
DOCTRINE: Presentment for acceptance of drafts is not needed in
order for the applicant to become liable to pay the issuer of the L/C.
Through an L/C, the bank merely substitutes its own promise to pay
for one of its customers who in return promises to pay the bank the
amount of funds mentioned in the L/C plus credit or commitment fees
mutually agreed upon.
FACTS:
 August 8, 1962: Philippine Rayon Mills Inc. (PRMI) entered into a
contract with Nissho Co. Ltd. Of Japan for the importation of textile
machineries under a 5-year deferred payment plan. To effect
payment, PRMI applied for a commercial letter of credit with
Prudential Bank in favor of Nissho.
 By virtue of PRMI’s application, Prudential Bank opened Letter of
Credit No. DPP-63762 for $128,548.78.
 Against the Letter of Credit, drafts were drawn and issued by Nissho
which were all paid by Prudential through its correspondent in
Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of the
drafts were accepted by PRMI through its President, Anacleto Chi,
while the others were not.
 Upon arrival of the machineries, Prudential Bank indorsed the
shipping documents to PRMI which accepted their delivery. To enable
PRMI to take delivery of the machines, it executed a trust receipt
which was signed by Anacleto Chi in his capacity as President.
o At the back of the TR was a printed form to be accomplished
by 2 sureties who were to be jointly and severally liable to
Prudential Bank should PRMI fail to pay the total amount or
any portion of the drafts issued by Nissho and paid by
Prudential.
o PRMI was able to take the machineries and installed them in
their factory in Quezon City.
 1967: PRMI ceased business operations.
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 December 29, 1969: PRMI’s factory was leased by Yupangco Cotton
Mills.
 January 5, 1974: The machineries in PRMI’s factory were sold to AIC
Development Corporation.
 The obligation of PRMI from the L/C and TR remained unpaid and
unliquidated. Repeated formal demands yielded no result.
 October 3, 1974: Prudential Bank filed an action for collection
against PRMI and Anacleto Chi. The defendant interposed identical
special defenses – that the complaint states no cause of action; if
there is, the same has prescribed; and that the plaintiff is guilty of
laches.
 TC: sentenced PRMI to pay the plaintiff on the amounts due under
the two accepted drafts but not on the amounts on the unaccepted
drafts. The case against Chi was dismissed.
 IAC: sustained the TC on all respects. IAC did not agree with
Prudential’s claim that the drafts were sight drafts which did not
require presentment for acceptance because paragraph 8 of the TR
presupposes prior acceptance of the drafts. Since 10 of them were
not presented and accepted, no valid demand for payment could be
made. IAC also disagreed with the contention that Chi is solidarily
liable with PRMI based on his signature on the solidar guarantee
clause on the TR.
ISSUES/HELD:
4. Is presentment for acceptance of the drafts indispensable to make
PRMI liable thereon? NO.
5. Is PRMI liable on the basis of the TR? YES.
6. Is Chi jointly and severally liable with PRMI? NO.
RATIO
1. On the presentment for acceptance
 A letter of credit is defined as an engagement by a bank or
other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit.
o Through an L/C, the bank merely substitutes its
own promise to pay for one of its customers who in
return promises to pay the bank the amount of

funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon.
o In the instant case then, the drawee was necessarily
the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there
was no need for acceptance as the issued drafts are
sight drafts.
 Presentment for acceptance is necessary
only in the cases expressly provided for in
Section 143 of the Negotiable Instruments
Law.
 Paragraph 8 of the TR which read: "My/our liability for
payment at maturity of any accepted draft, bill of exchange
or indebtedness shall not be extinguished or modified" did
not contemplate prior acceptance by Philippine Rayon, but
by the petitioner.
o Acceptance, however, was not even necessary in the
first place because the drafts which were eventually
issued were sight drafts
o Even if these were not sight drafts, it would not be
PRMI which had to accept the same for the latter
was not the drawee.
2. On the liability on the basis of the TR
 Under P.D. No. 115, a TR transaction is defined as "any
transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in
this Decree as the entrustee, whereby the entruster, who
owns or holds absolute title or security interests' over
certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document
called the 'trust receipt’ wherein the entrustee binds himself
to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the
goods, documents or instrument with the obligation to turn
over to the entruster the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust
receipt or the goods, instruments themselves if they are
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unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trusts receipt, or for
other purposes substantially equivalent …”
o In this case, the machineries were sold to AIC
Development Corporation as early as 1974.
3. On the liability of Chi
 The obligation of Chi is only that of a guarantor, on the basis
of the guaranty clause2. The last sentence which speaks of
waiver of exhaustion is ineffective in this case because the
space therein for the party whose property may not be
exhausted was not filled up.
 As a guarantor, however, he can be made secondarily, though
not solidarily, liable with PRMI. The case against him was
inappropriately dismissed by the TC.
o Art. 2058 of the CC provides that the guarantor
cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor,
and has resorted to all the legal remedies against
the debtor.
 BUT excussion is not a condition sine qua
non for the institution of an action against a
guarantor.
 Southern Motors Inc v Barbosa: “Although
an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor
may, prior thereto, secure a judgment
against said guarantor, who shall be
2 In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we
jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon
us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or
non-fulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps
or exhaust its remedy against aforesaid: ______________
before making demand on me/us.
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entitled, however, to a deferment of the General Chemicals, Ltd. with Inter-Resin Industrial Corporation (IR) as the
execution of said judgment against him beneficiary. BA notified the beneficiary of the existence of the LC.
until after the properties of the principal  Beneficiary IR complied with the shipment of 24,000 bales of polyethylene
debtor shall have been exhausted to satisfy ropes to General Chemicals Ltd. IR presented the invoices, export declaration
the obligation involved in the case.” and bill of lading to BA showing partial compliance to the LC. BA paid RA
 Thus, there was then nothing procedurally with the amount equivalent to the partial delivery.
objectionable in impleading private  BA received a telex from the Bank of Ayudhya declaring that the LC is
respondent Chi as a co-defendant in Civil fraudulent. BA then refused to process the second availment of IR on the LC.
Case No. Q-19312 before the trial court. BA requested a determination of authenticity of the LC from the Bank of
Ayudhya.
DISPOSITIVE  Investigation by the NBI revealed that IR’s export did not contain the goods
 WHEREFORE, the instant Petition is hereby GRANTED. purchased.
 BA sued IR to recover the amount paid on the first availment on the LC.
 RTC ruled in favor of IR holding that BA was negligent and careless for not
Bank of America, NT & SA vs. CA ensuring the authenticity of the LC and that there is presumption that IR
10 December 1993 complied with its obligation on the LC.
 CA affirmed.
Vitug, J.
Kaye de Chavez
ISSUES:
1. WON BA warranted the genuineness and authenticity of the letter of credit
Summary: Bank of America (BA) acted as the notifying bank in relation to the
(NO)
Irrevocable LC purportedly issued by Bank of Aydhya for the account of General
2. Is BA an advising or a confirming bank? (ADVISING BANK)
Chemicals, Ltd. with Inter-Resin Industrial Corporation (IR) as the beneficiary. BA 3. WON Bank of America may recover against Inter-Resin (YES)
notified the beneficiary of the existence of the LC. Thus, the beneficiary complied with
the shipment of polyethylene ropes to General Chemicals Ltd. Inter-Resin presented HELD:
the documents showing partial compliance to the LC to BA. BA paid IR. Eventually,  BA did not warrant the genuineness and authenticity of the letter of credit. It
they discovered that the LC is fraudulent. BA seeks to recover the amount paid to merely acted as an advising bank.
Inter-Resin. o 3 main parties to a LC
 Buyer – procures the LC and obliges himself to reimburse
Doctrine: Independence Principle – The bank determines compliance with the LC the issuing bank upon receipt of the documents of title
only by examining the shipping documents, it is precluded from determining whether  Bank – issues the LC and undertakes to pay the seller
the main contract is actually accomplished or not. upon receipt of the draft and proper document of titles
and to surrender the documents to the buyer upon
reimbursement
FACTS:  Seller – ships the goods to the buyer and delivers the
 Bank of America (BA) acted as the notifying bank in relation to the documents of title and draft to the issuing bank to recover
Irrevocable LC purportedly issued by Bank of Aydhya for the account of payment
o Other parties to a LC

 Advising or Notifying Bank – convey to the seller the
existence of the credit
 Confirming bank – lends credence to the letter of credit
issued by a lesser known issuing bank
 Paying bank – undertakes to encash the drafts drawn by
the exporter
 Negotiating bank - to have the draft discounted.
o BA has, in fact, only been an advising, not confirming, bank, and this
much is clearly evident, among other things, by the provisions of
the letter of credit itself, the petitioner bank's letter of advice, its
request for payment of advising fee, and the admission of IR that it
has paid the same.
 That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually
has paid the proceeds thereof, did not obviously make it a
confirming bank.
 The fact, too, that the draft required by the letter of credit
is to be drawn under the account of General Chemicals
(buyer) only means the same had to be presented to Bank
of Ayudhya (issuing bank) for payment. It may be
significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to
pay the draft.
 No less important is that BA’s letter of 11 March 1981 has
expressly stated that
 "the enclosure issolely an advise of credit
opened by the abovementioned correspondent
and conveys no engagement by us."
 As an advising or notifying bank, BA did not incur any obligation more than
just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit.
o Bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 19
o The view that BA should have first checked the authenticity of the
letter of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to IR finds
no real support in U.C.P. Article 18 of the U.C.P. states that:
"Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in
transit of any messages, letters or documents, or for delay,
mutilation or other errors arising in the transmission of
any telecommunication "
o As advising bank, BA is bound only to check the "apparent
authenticity" of the letter of credit, which it did.
o “Apparent” suggests appearance to unaided senses that is not or
may not be borne out by more rigorous examination or greater
knowledge."
 Bank of America may recover what it has paid under the letter of credit when
the corresponding draft for partial availment and the required documents
were negotiated with it by IR.
o This kind of transaction is what is commonly referred to as a
discounting arrangement. BA has acted independently as a
negotiating bank, thus saving IR from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. As
a negotiating bank, BA has a right to recourse against the issuer
bank and until reimbursement is obtained, IR, as the drawer of the
draft, continues to assume a contingent liability thereon.
Abad v. CA
January 22, 2009
Grino-Aquino
SUMMARY: TOMCO was granted a letter of credit for P80,000 by PCIB, with
Abad as surety. TOMCO paid a marginal deposit of P28,000. TOMCO and
Abad failed to pay any other amount. PCIB sued TOMCO and Abad, and both
TC and CA adjudged both defendants liable for the entire P80,000 plus
interest and charges, totaling P125,766.13. SC ruled that the marginal
deposit already paid should first be deducted from P80,000, and the interest

and charges only applied to the balance.
DOCTRINE: It is only fair then that the importer's marginal deposit (if one
was made, as in this case), should be set off against his debt because the
bank, apart from being able to use said deposit for its own purposes, also
earns interest on the money it loaned to the importer. . Requiring the
importer to pay interest on the entire letter of credit without deducting the
marginal deposit first would be a clear case of unjust enrichment by the
bank.
FACTS:
TOMCO, Inc. was granted by the Philippine Commercial and Industrial Bank
("PCIB"), a domestic letter of credit for P 80,000 in favor of its supplier,
Oregon Industries, Inc., for one Skagit Yarder with accessories. PCIB paid to
Oregon Industries the cost of.
TOMCO made a required marginal deposit of P28,000 and delivered to PCIB
a trust receipt acknowledging receipt of the merchandise in trust for the
bank, with the obligation "to hold the same in storage" as property of PCIB,
with a right to sell it for cash provided that the proceeds are turned over to
the bank, to be applied against any indebtedness of TOMCO.
Ramon Abad signed an undertaking entitled, "Deed of Continuing Guaranty"
appearing on the back of the trust receipt, promising to pay the obligation
jointly and severally with TOMCO, Inc.
Except for TOMCO's P28,000 marginal deposit in the bank, no payment was
made to PCIB by either TOMCO, Inc. or its surety, Abad.
The bank sued TOMCO, Inc. and Abad in "Philippine Commercial and
Industrial Bank vs. TOMCO, Inc. and Ramon Abad." PCIB presented a
"Statement of Draft Drawn" showing that TOMCO owed it P125,766.13 as of
August 26, 1970.
TOMCO did not deny its liability but alleged that the marginal deposit of
P28,000 should have been deducted from its principal obligation, leaving a
balance of P52,000 only, on which the interest, bank charges, and attorney's
fees was to be computed.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 20
The Trial Court ruled for PCIB. The case was brought to the CA to no avail.
ISSUE/RULING:
WON the cash marginal deposit is deductible from the principal
obligation under a letter of credit and the interest charges computed
only on the balance of the said obligation- YES
RATIO:
[The SC first discussed trust receipts and letters of credit, obiter but
baka ito important satin]
. . . . A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral of
the merchandise imported or purchased, ... . The bank does not become the
real owner of the goods. It is merely the holder of a security title for the
advances it had made to the importer. The goods the importer had purchased
through the bank financing, remain the importer's property and he holds it at
his own risk. The trust receipt arrangement does not convert the bank into an
investor; it remains a lender and creditor. This is so because the bank had
previously extended a loan which the letter of credit represents to the
importer, and by that loan, the importer should be the real owner of the
goods. If under the trust receipt, the bank is made to appear as the owner, it
was but an artificial expedient, more of a legal fiction than fact, for if it were
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with the purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To consider the bank
as the true owner from the inception of the transaction would be to disregard
the loan feature involved.
. . . . A letter of credit-trust receipt arrangement is endowed with its own
distinctive features and characteristics. Under that set-up, a bank extends a
loan covered by the letter of credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan feature represented by

the letter of credit, and a security feature which is in the covering trust
receipt. . . . .
A trust receipt, therefore, is a security agreement, pursuant to which a bank
acquires a "security interest" in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation.
[WON the marginal deposit should be deducted from the letter of credit
to determine indebtedness]
The marginal deposit requirement is a Central Bank measure to cut off excess
currency liquidity which would create inflationary pressure. It is a collateral
security given by the debtor, and is supposed to be returned to him upon his
compliance with his secured obligation. Thus, the bank pays no interest on
the marginal deposit, unlike an ordinary bank deposit which earns interest in
the bank. The marginal deposit requirement for letters of credit has been
discontinued, except in those cases where the applicant for a letter of credit is
not known to the bank or does not maintain a good credit standing therein
(Bankers Associations of the Philippines Policy, Rules 6 and 7).
It is only fair then that the importer's marginal deposit (if one was made, as
in this case), should be set off against his debt because the bank, apart from
being able to use said deposit for its own purposes, also earns interest on the
money it loaned to the importer. Compensation is proper and should take
effect by operation of law because the requisites in Article 1279 of the Civil
Code are present and should extinguish both debts to the concurrent amount
(Art. 1290, Civil Code). Although Abad is only a surety, he may set up
compensation as regards what the creditor owes the principal debtor, TOMCO
(Art. 1280, Civil Code).
It can be assumed the bank used TOMCO's marginal deposit to partially
fund the P80,000 letter of credit it issued to TOMCO, thus, the interests and
other charges on the letter of credit should be applied only on the balance of
P52,000 which was the portion that was actually funded or loaned by the
bank from its own funds. Requiring the importer to pay interest on the entire
letter of credit without deducting the marginal deposit first would be a clear
case of unjust enrichment by the bank.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 21
DISPOSITIVE:
WHEREFORE, the petition for review is granted. The decision of the Court
of Appeals is modified by deducting TOMCO's marginal deposit of P28,000
from the principal amount of P80,000 covered by its letter of credit. The
interests and other charges of the bank should be computed on the
outstanding loan balance of P52,000 only. The decision is affirmed in other
respects, with costs against the respondent Philippine Commercial and
Industrial Bank.
SO ORDERED.
THE CONSOLIDATED BANK AND
TRUST CORPORATION
(SOLIDBANK) (petitioner) v CA,
CONTINENTAL CEMENT
CORPORATION, GREGORY LIM and
SPOUSE (respondents)
April 19 2001 | Ynares-Santiago, J. | Leigh
Letters of Credit; Parties to a Letter of Credit; Rights and Obligations of
Parties
SUPERFACTS! Corporation obtained a L/C from Bank for P1 million. Corporation paid
a marginal deposit. Bank eventually sued the corporation for sum of money, but the
bank contended that the amount claimed by the bank did not take into account the
payments already made. Lower courts and the SC ruled in favor of the corporation.
The bank’s contention that the marginal deposit made by the corporation should not
be deducted outright from the amount of the letter of credit is untenable. The bank
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 22

argues that the marginal deposit should be considered only after computing the
principal plus accrued interests and other charges. However, to sustain the bank on
this score would be to countenance a clear case of unjust enrichment, for while a
marginal deposit earns no interest in favor of the debtor-depositor, the bank is not
only able to use the same for its own purposes, interest-free, but is also able to earn
interest on the money loaned to respondent corporation. Compensation is proper and
should take effect by operation of law because the requisites in Article 1279 of the
Civil Code are present and should extinguish both debts to the concurrent amount.
and costs. Both parties appealed to the CA, which partially modified the
Decision by deleting the award of attorney’s fees in favor of respondents. The
bank filed petition for review, seeking to partially set aside the decision of the
CA insofar as it oders the bank to reimburse the corporation P490,228.90.
RULING: petition DENIED. CA decision AFFIRMED.

ISSUES/HELD:

FACTS:
Was there overpayment by respondents to the bank in the amount of
Respondents Continental Cement Corporation and Gregory Lim obtained P490,228.90, as found by the CA, despite absence of any computation
from petitioner Consolidated Bank and Trust Corporation a Letter of Credit in made in the decision? YES
the amount of P1,068,150. The corporation paid a marginal deposit of
P320,445 to the bank. The L/C was used to purchase around 500k liters of
bunker fuel oil from Petrophil Corporation, which was delivered directly to The bank decries the lack of computation by the lower court as basis for its
respondent corporation. A trust receipt for the amount of P1,001,520.93 was ruling that there was an overpayment made. While such a computation may
executed by the corporation, with Lim as signatory. not have appeared in the Decision itself, we note that the trial court’s finding
of overpayment is supported by evidence presented before it. We
Claiming that respondents failed to turn over the goods covered by the trust
painstakingly reviewed and computed the payments together with the
receipt or the proceeds thereof, the bank filed a complaint for sum of money
interest and penalty charges due thereon and found that the amount of
with application for preliminary attachment before the RTC
overpayment made by the corporation to the bank, i.e., P563,070.13, was
Manila. Respondents averred that the transaction between them was a simple
more than what was ordered reimbursed by the lower court. However, since
loan and not a trust receipt transaction, and that the amount claimed by the
respondents did not file an appeal in this case, the amount ordered
bank did not take into account payments already made by them. Lim also
reimbursed by the lower court should stand.
denied any personal liability in the subject transactions. Respondents prayed
for reimbursement of alleged overpayment to the bank of the amount of
P490,228.90.
[pertinent to discussion] Was the manner of computation of the
RTC dismissed the complaint and ordered the bank to pay respondents the marginal deposit by the CA in accordance with banking practice? YES
following amounts under their counterclaim: P490,228.90 representing
overpayment of the corporation with interest; P10,000.00 as attorney’s fees;

The bank’s contention that the marginal deposit made by the corporation
should not be deducted outright from the amount of the letter of credit is
untenable. The bank argues that the marginal deposit should be considered
only after computing the principal plus accrued interests and other charges.
However, to sustain the bank on this score would be to countenance a clear
case of unjust enrichment, for while a marginal deposit earns no interest in
favor of the debtor-depositor, the bank is not only able to use the same for its
own purposes, interest-free, but is also able to earn interest on the money
loaned to respondent corporation. Indeed, it would be onerous to compute
interest and other charges on the face value of the letter of credit which the
bank issued, without first crediting or setting off the marginal deposit which
the corporation paid to it. Compensation is proper and should take effect by
operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount. Hence
the interests and other charges on the L/C should be computed only on the
balance of P681,075.93, which was the portion actually loaned by the bank to
the corporation.
Was the agreement of the parties as to the floating of interest rate
invalid? YES
Neither do we find error when the lower court and CA set aside as invalid the
floating rate of interest exhorted by the bank to be applicable. The pertinent
provision in the trust receipt agreement of the parties fixing the interest rate
states:
I, WE jointly and severally agree to any increase or decrease in the interest rate which
may occur after July 1, 1981, when the Central Bank floated the interest rate, and to
pay additionally the penalty of 1% per month until the amount/s or installment/s due
and unpaid under the trust receipt on the reverse side hereof is/are fully paid.
We agree with the CA that the foregoing stipulation is invalid, there being no
reference rate set either by it or by the Central Bank, leaving the
determination thereof at the sole will and control of the bank.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 23
While it may be acceptable, for practical reasons given the fluctuating
economic conditions, for banks to stipulate that interest rates on a loan not be
fixed and instead be made dependent upon prevailing market conditions,
there should always be a reference rate upon which to peg such variable
interest rates. A stipulation ostensibly signifying an agreement to “any
increase or decrease in the interest rate,” without more, cannot be accepted
by this Court as valid for it leaves solely to the creditor the determination of
what interest rate to charge against an outstanding loan.
Was the transaction at bar a trust receipt transaction? NO
The bank also failed to convince us that its transaction with the corporation is
really a trust receipt transaction instead of merely a simple loan, as found by
the lower courts. The delivery to the corporation of the goods subject of the
trust receipt occurred long before the trust receipt itself was executed. On the
other hand, the subject trust receipt was only executed nearly two months
after full delivery of the oil was made to the corporation. The danger in
characterizing a simple loan as a trust receipt transaction was explained in
Colinares v CA: The Trust Receipts Law does not seek to enforce payment of
the loan, rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether
the latter is the owner. The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them under the threats of
criminal prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless borrowers at the mercy of
banks, and is prone to misinterpretation, as had happened in this case.
RODZSSEN SUPPLY CO. INC.,
petitioner,
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 24

vs.  Upon Ekman’s presentation of the documents to Far East, it paid

Ekman the P76,000 on March 15, 1980 (5 months after the

FAR EAST BANK & TRUST CO., 

expiration of the LC).
However, upon Far East’s demand upon Rodzssen, Rodzssen
refused to pay without valid reason.
respondent.  Thus, Far East filed a complaint against Rodzssen to collect the
P76,000 plus interest.
May 9, 2001  Rodzssen’s defenses:
o That Far East had not cause of action against it
Panganiban, J. o That there was a breach of contract by Far East who in bad
faith paid Ekman, knowing that the two units of hydraulic
Digest by Ces
loaders had been delivered to defendant after the expiry date
of subject LC
 The RTC ruled that Far East was entitled to recover the P76,000
Short version: Rodzssen opened an LC with Far East Bank, for the purchase of 5 hydraulic loaders from Ekman. The first 3 were delivered and properly paid for. The final 2 loaders
were delivered, and Far East paid for them 5 months after the expiration of the LC. Thus, Rodzssen refused to pay back Far East for them. Far East filed a case against Rodzssen to
collect the amount. The RTC, CA, and SC all ruled in favor of Far East.

The SC held that even though Far East did not anymore have an obligation to pay Ekman because the LC was expired, it could recover from Rodzssen since Rodzssen voluntarily
received and kept the equipment. It applied Article 2142 of the Civil Code and held that Rodzssen should pay Far East to avoid unjust enrichment.

Facts: from Rodzssen. It ruled that Far East’s voluntary payment to

 On January 15, 1979, Rodzssen Supply, Inc. opened a 30-day
domestic letter of credit with Far East Bank and Trust Co., in the
amount of P190,000.00 in favor of Ekman and Company, Inc.
(Ekman) for the purchase from Ekman of five units of hydraulic
loaders, to expire on February 15, 1979. Subsequent amendments
extended the validity of said LC up to October 16, 1979.
 On March 16, 1979, three units of the hydraulic loaders were
delivered to Rodzssen. Far East Bank paid Ekman P114,000, and
Rodzssen then paid back Far East before the expiry date of the LC.
 The remaining 2 units if hydraulic loaders valued at P76,000 was
sent by Ekman and received by Rodzssen (allegedly) before the
expiry date of the LC.
Ekman created a quasi-contract between Rodzssen and Ekman.
Otherwise, Rodzssen would be unjustly enriched at Far East’s
expense.
 The CA affirmed the RTC decision.
 Thus, Rodzssen filed a petition via Rule 45 with the SC.
Issue: Is it proper for a banking institution to pay a letter of credit
which has long expired or been cancelled? NO (but Far East can
recover to avoid unjust enrichment)

Ratio:
1) The Letter of Credit expressly restricted the negotiation to
respondent bank and specifically instructed Ekman and Company
Inc. to tender the following documents: (1) delivery receipt duly
acknowledged by the buyer, (2) accepted draft, and (3) duly signed
commercial invoices. It also contained a provision with regard to
its expiration date.
2) Since Far East paid Ekman 5 months after the expiration of the LC,
then clearly, the bank paid Ekman when it was no longer bound to
do so under the subject Letter of Credit.
3) On December 27, 1979, the bank had actually informed Rodzssen
of the cancellation of the commercial paper and credited P22,800
to its account. The amount represented the marginal deposit,
which Rodzssen had been required to put up for the unnegotiated
portion of the Letter of Credit (P76,000 for the two hydraulic
loaders).
4) The LC had become invalid upon the lapse of the period fixed. It
didn’t matter if Ekman presented all the required documents.
5) Despite all that, though, Rodzssen should pay Far East because
Rodzssen voluntarily received and kept the equipment. This is
based on Article 2142 of the Civil Code, which states that "Certain
lawful, voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly
enriched or benefited at the expense of another."”
6) Rodzssen kept the equipment for almost 4 years before offering to
return the equipment to the bank. It actually only offered to return
it after Far East demanded payment.
CA decision affirmed.
C. Basic Principles of Letter of Credit
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 25
1. Doctrine of Independence
TRANSFIELD PHILIPPINES, INC. vs.
LUZON HYDRO CORPORATION,
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
19 May 2006 . J. Tinga. Paula
Summary: Transfield and LHC entered into a Turnkey Contract (a contract where
the contractor builds whatever it is it agreed upon with the principal and the
contractor just sells to the principal the final product. Principal usually has no
control over the specifications of the thing built.). To secure performance under the
contract, Transfield opened 2 standby L/Cs in favor of LHC. For failure to complete
the project on time, arbitration ensued and LHC wanted to call on the L/Cs but
Transfield refused. Court held that Transfield had no right to prevent LHC from
calling on the L/Cs due to the independence principle.
Doctrine: Beneficiary may invoke the independence principle. Injunction is only a
proper remedy in case of wrongful or fraudulent calls on the L/C if the following are
met: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of
the independent purpose of the L/C and not only fraud under the main agreement;
and (c) irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously damaged.
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 26

Facts
Transfield and Luzon Hydro Corp. (LHC) entered into a Turnkey Contract
where Transfield, as Turnkey Contractor, was to construct a 70-megawatt
hydro electric power station at the Bakun River in Benguet and Ilocos Sur.
RTC issued a TRO to prevent the bank from issuing the securities, but in its
order, ruled that Transfield had no legal right and suffered no irreparable
injury to justify issuance of a writ of injunction based on the principle of
"independent contract" in L/Cs. RTC ruled that LHC was allowed to draw on
the securities.

The Turnkey Contract (1) the target completion date of the Project shall be on
1 June 2000, or such later date as may be agreed upon between petitioner
and respondent LHC or otherwise determined in accordance with the CA dismissed the petition for certiorar filed before it by Transfield and
Turnkey Contract; and (2) petitioner is entitled to claim extensions of time affirmed the RTC.
(EOT) for reasons enumerated in the Turnkey Contract, among which are
variations, force majeure, and delays caused by LHC itself. Further, in case of
dispute, the parties are bound to settle their differences through mediation,
Issues: (1) WON the "independence principle" may be invoked by a
conciliation and such other means enumerated under Clause 20.3 of the
beneficiary where the beneficiary's call is fraudulent; (2) WON LHC has the
Turnkey Contract.
right to draw on the securities before resolution of their dispute; (3) WON the
To secure performance of Transfield's obligation, the latter opened in favor of 2 banks are justified in releasing the amounts due
LHC 2 standby L/Cs both dated 20 March 2000 with Australia and New
Zealand Banking Group Limited (ANZ Bank) and Security Bank Corp. (SBC)
each in the amount of US$8,988,907.00. Ruling: WHEREFORE, the instant petition is DENIED, with costs against
petitioner.
In the course of construction, Transfield requested an EOT to complete the
project due to several factors such as force majeure (Typhoon Zeb; barricades
and demonstrations). LHC denied the request and thus legal actions ensued.
Petitioner is hereby required to answer the charge of forum-shopping within
Transfield, foreseeing that LHC would call on the L/Cs, advised the 2 banks of fifteen (15) days from notice. SO ORDERED.
the arbitration proceedings pending before the Construction Industry
Arbitration Commission (CIAC) and the International Chamber of Commerce
(ICC) and that should they release the funds before resolution of the
proceedings, Transfield would hold the banks liable for liquidated damages. Ratio
The banks, however, informed Transfield that they would pay the securities if
Discussion on L/C
and when LHC calls on them.
The L/C evolved as a mercantile specialty, and the only way to understand all
its facets is to recognize that it is an entity unto itself. The relationship

between the beneficiary and the issuer of a L/C is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts drawn against a
letter regardless of problems subsequently arising in the underlying contract.
Since the bank’s customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because
it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable
In commercial transactions, a L/C 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. The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price
under the contract for the sale of goods. However, credits are also used in
non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as standby
credits.
Significant differences between commercial and standby credits
First, commercial credits involve the payment of money under a contract of
sale. Such credits become payable upon the presentation by the seller-
beneficiary of documents that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the credit is payable upon
certification of a party's nonperformance of the agreement. The documents
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 27
that accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of the standby
credit must certify that his obligor has not performed the contract.
By definition, a L/C is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the addressee. A L/C,
however, changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying contract or
disputes between the parties thereto.
Independence principle
Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based
and banks are in no way concerned with or bound by such contract(s), even if
any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of
the credit once the draft and the required documents are presented to it. The
so-called “independence principle” assures the seller or the beneficiary of

prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability
or responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever.
The independent nature of the L/C may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate
obligation from the underlying agreement like for instance a typical standby;
or
(b) independence may be only as to the justification aspect like in a
commercial L/C or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the payment may
be enjoined if in the light of the purpose of the credit the payment of the
credit would constitute fraudulent abuse of the credit.
Can the beneficiary invoke the independence principle? YES.
In a L/C transaction, there is a definite undertaking by the issuing bank to pay
the beneficiary provided that the stipulated documents are presented and the
conditions of the credit are complied with. The L/c is separate and distinct
from the underlying transaction. As is, the independence doctrine works to
the benefit of both the issuing bank and the beneficiary.
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Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly for
the benefit of the parties to the original transactions. With the L/C from the
issuing bank, the party who applied for and obtained it may confidently
present the L/C to the beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand, the other party to the
business transaction, i.e., the beneficiary of the L/C, can be rest assured of
being empowered to call on the L/C as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part
of the transaction. It is for this reason that the party who is entitled to the
proceeds of the L/C is appropriately called “beneficiary.”
Further, the Turnkey Contract itself provides that LHC may call on the said
securities. A contract once perfected, binds the parties not only to the
fulfillment of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping with good
faith, usage, and law. A careful perusal of the Turnkey Contract reveals the
intention of the parties to make the Securities answerable for the liquidated
damages occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for
which the Securities have been proffered.
Fraud exception principle
Court did not rule on the issue because the propriety of LHC's call on the
securities is intertwined with the fact of default which was an issue pending
before the arbitral tribunals.

Injunction as the proper remedy to restrain alleged wrongful draws on the
securities.
The remedy for fraudulent abuse is an injunction. However, injunction should
not be granted unless: (a) there is clear proof of fraud; (b) the fraud
constitutes fraudulent abuse of the independent purpose of the L/C and not
only fraud under the main agreement; and (c) irreparable injury might follow
if injunction is not granted or the recovery of damages would be seriously
damaged.
Generally, injunction is a preservative remedy for the protection of one’s
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. There must be a clear showing
in the complaint the existence of a right to be protected and that the acts
against which the writ is to be directed are violative of the said right.
Transfield failed to show that it had a clear and unmistakble right to restrain
LHC's call on the securities. Their contract itself states that LHC has a right to
call on the said securities in case of default.
The pendency of the arbitration proceedings would not per se make LHC’s
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 29
Banks justified in releasing amounts due under the L/Cs
Pursuant to the independence principle the banks were under no obligation
to determine the veracity of LHC’s certification that default has occurred.
Neither were they bound by petitioner’s declaration that LHC’s call thereon
was wrongful. The banks' undertaking was simply to pay once the required
documents are presented by the beneficiary.
Land Bank v Monet’s Export and
Manufacturing Corporation
10 March 2005
Ponente: Ynares-Santiago,, J.
Krys
SUMMARY:
Land Bank and Monet executed an Export Packing Line Agreement.
Despite several demands, Monet failed to pay its indebtedness and the
amount it owed to Land Bank grew to P11M. Because of this, Land
Bank filed a Complaint for Collection of Sum of Money. In Monet’s
Answer with Compulsory Counterclaim, one of its allegations was that
Land Bank should be made liable for making unauthorized payments
on Monet’s import letter of credit to Beautilike in the amount of $38K,
which seriously damaged Monet’s business.
RTC and the CA held that Land Bank failed to protect Monet’s interest
when it paid the suppliers despite discrepancies in the shipment vis-aà -
vis the order specifications of Monet. SC held otherwise and ruled that
Land Bank was correct when it paid Beautilike despite the fact that
there was a breach of the underlying contract.
DOCTRINE:
Under the “independence principle”, the obligation of the issuing bank
to pay the beneficiary arises once the latter is able to submit the
stipulated documents under the letter of credit. Hence, the bank is not
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 30

liable for damages even if the shipment did not conform to the suffered from lack of financial resources to meet customer orders. As
specifications of the applicant. regards the Beautline account, Land Bank failed to protect Monet’s
interest when it paid the suppliers despite discrepancies in the
shipment vis-aà -vis the order specifications of Monet.

ISSUES/HELD:
7. *relevant* WON Land Bank could be made liable for paying the
supplier, Beautilike, despite discrepancies in the shipment vis-aà -vis
FACTS:
the order specifications of Monet. (Land Bank is NOT liable)
i. Petitioner Land Bank of the Philippines (Land Bank) and Monet’s
Export (Monet) executed an Export Packing Line Agreeement under
8. WON Land Bank liable to Monet with respect to the Wishbone
which Monet was given a credit line in the amount of P250,000,
transaction for non-collection. (Land Bank is liable)
secured by, among others, the proceeds of its export letters of credit.
RATIO:
Such credit line agreement was renewed and amended and
1. Land Bank cannot be faulted for paying Beautilike.
eventually increased to P5M.
a. [Bank of America v CA, on the nature of the letter of credit and the
letter of credit transaction process] A letter of credit is a financial
ii. Monet continually failed and refused to pay its indebtedness
device developed by merchants as a convenient and relatively safe
amounting to P11,464,246.19 to Land Bank despite several demands,
mode of dealing with sales of goods to satisfy the seemingly
so a Complaint for Collection of Sum of Money with Prayer from
irreconcilable interests of a seller, who refuses to part with his
Preliminary Attachment was filed by Land Bank with the RTC of
goods before he is paid, and a buyer, who wants to have control of
Manila.
the goods before paying.
i. To break the impasse, the buyer may be required to contract a
iii. In Monet’s Answer with Compulsory Counterclaim, it alleged that:
bank to issue a letter of credit in favor of the seller so that, by
a. Land bank failed and refused to collect the receivables on their
virtue of the letter of credit, the issuing bank can authorize
export letter of credit against Wishbone Trading of Hong Kong in
the seller to draw drafts and engage to pay them upon their
the sum of $33,434
presentment simultaneously with the tender of documents
b. Land Bank made unauthorized payments on their import letter
required by the letter of credit. The buyer and the seller
of credit to Beautilike Ltd. In the amount of $38,768.40, which
agree on what documents are to be presented for payment,
seriously damaged the business of Monet.
but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
iv. Although RTC recognized Monet’s indebtedness to Land Bank, it
granted Monet’s counterclaim and ordered Land Bank to pay $30,000
ii. Once the credit is established, the seller ships the goods to the
as compensation for Monet’s lost income.
buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller
v. CA affirmed the RTC’s decision and ruled that Land Bank was
executes a draft and presents it together with the required
responsible for the mismanagement of Monet’s accounts with
documents to the issuing bank. The issuing bank redeems the
Wishbone and Beautilike. Because of the non-collection and
draft and pays cash to the seller if it finds that the documents
unauthorized payment made by Land Bank, and because Monet
submitted by the seller conform with what the letter of credit
could no longer draw from its credit line with the bank, Monet

requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires
the said documents and control over the goods only after
reimbursing the bank.
iii. What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the issuing
bank to pay the seller once the draft and the required
shipping documents are presented to it. In turn, this
arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By this
so-called “independence principle,” the bank determines
compliance with the letter of credit only by examining the
shipping documents presented; it is precluded from
determining whether the main contract is actually
accomplished or not.
b. According to Art. 3 of the UCP (Uniform Customs and Practice) for
Documentary Credits, by their nature, credits are separate
transactions from the sales or other contracts on which they may
be based and banks are in no way concerned with or bound by
such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit.
i. Art. 15 of the UCP provides: “Banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the
documents or superimposed thereon; nor do they assume
any liability or responsibility for the description, weight,
quality, condition, packing, delivery, value or existence of
the goods represented by any documents, or for the good
faith or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.”
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 31
c. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the
main contract and precludes the issuing bank from
determining whether the main contract is actually
accomplished or not. (Transfield Philippines v Luzon Hydro)
d. If the letter of credit is drawable only after the settlement of any
dispute on the main contract entered into by the applicant of the
said letter of credit and the beneficiary, then there would be no
practical and beneficial use for letters of credit in commercial
transactions.
e. Land Bank is correct in arguing that, as the issuing bank in the
Beautilike transaction, it only deals in documents and it is not
involved in the contract between the parties. Upon receipt by Land
Bank of the documents of title which conform with what the letter
of credit requires, it is duty bound to pay the seller, as it did in this
case. Thus, no fault or acts of mismanagement can be attributed to
Land Bank relative to Monet’s import letter of credit.
2. As to the second issue, Land Bank was held liable because the records
reveal that Land Bank was the attorney-in-fact of Monet wrt its export
transactions with Wishbone. Land Bank cannot disclaim responsibility in
handling the Wishbone account because, as stated in the Deed of
Assignment, Monet gave Land Bank the responsibility to demand, collect
and receive the proceeds of the export letters of credit.
a. As attorney-in-fact, Land Bank should have exercise diligence in
collecting the amounts due to Monet, but the records are bereft of
evidence showing that Land Bank exercised the requisite diligence.
DISPOSITIVE: Land Bank’s liability to Monet is reduced to $15,000
Philippine National Bank vs. San Miguel Corporation. G.R. No.
186063, January 15, 2014

Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307
(2004) (supra)
2. Fraud Exception Principle
Feati Bank & Trust Company v CA
30 April 1991
Ponente: Gutierrez
rachel29012015
SUMMARY: Villaluz agreed to sell to Christiansen logs. A letter of
credit was issued by a bank in the States in favor of Villaluz. Such L/C
required, among others, a certification from Christiansen as Ship and
Merchandise Broker that the logs have been approved prior to
shipment. Christiansen never complied with these requirements, and
then disappeared, so Villaluz went after Feati Bank.
DOCTRINE: Feati Bank is not liable due to the missing document. The
rule of strict compliance applies. Also, well-accepted rules (e.g. UCP)
apply in our jurisdiction insofar as there are no existing/applicable
laws. Hence, the bank may only negotiate, accept, or pay, if the
documents tendered to it are on their face in accordance with the
terms and conditions. Also, absent any definitive proof that it has
confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by Feati to accept Villaluz’s tender is
justified.
RATIO:
Settled rule: In commercial transactions involving letters of credit, the
documents tendered must strictly conform to the terms of the letter of credit.
The tender of documents by the beneficiary/seller must include all
documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not later be able to recover from the
buyer or the issuing bank the money thus paid to the beneficiary. In the US,
commercial transactions involving letters of credit are governed by the “rule
of strict compliance”. In the Philippines, the same rule holds true.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 32
Anglo-South America Trust v Uhe et al (American case, 1933): Banks or trust
companies have no discretion to waive any requirements. The terms of the
letter constitutes an agreement between the purchaser and the bank.
Although some American decisions granted a little discretion to accept a
faulty tender as when the other documents may be considered immaterial or
superfluous, this theory could lead to dangerous precedents.
Banks only deal with documents, so how can they tell whether documents
required by the letter of credit are material or superfluous? Rather, the mere
fact that the document was specified lends to the fact that the document was
of vital importance to the buyer.
Moreover, the incorporation of the “Uniform Customs and Practice for
Documentary Credit” (UCP) in the letter of credit resulted in the applicability
of the said rules in the governance of the relations between the parties here.
Even if UCP was NOT incorporated in the subject letter of credit, it would still
apply, as has already been ruled in previous cases.
Article 2 of the Code of Commerce provides that in the absence of any
particular provision in the said Code, commercial transactions shall be
governed by the usages and customs generally observed. There is no specific
provision which governs the legal complexities arising from transactions
involving letters of credit (not only between the banks themselves but also
between banks and seller and/or buyer). THEREFORE, pertinent provisions
of the UCP undeniably apply.
Under the UCP, the bank may only negotiate, accept, or pay, if the documents
tendered to it are on their face in accordance with the terms and conditions of
the documentary credit. Since the correspondent bank (i.e. Feati Bank)
principally deals only with documents, the absence of any document required
in the documentary credit justifies the refusal by the correspondent bank to
negotiate, accept, or pay the beneficiary.
II. Trust Receipts Law
A. Definition and Concept of a Trust Receipt Transaction

1. Loan Security Feature
PEOPLE OF THE PHIL & ALLIED
BANK V HON. NITAFAN & BETTY SIA
Doctrine: loan feature of trust receipts only a secondary
purpose.
1980: Allied Bank and Betty Sia entered into a trust receipt
transaction whereby Betty Sia received, in trust for the bank,
plastic sheeting valued at 398K. Under the trust receipt, Betty
Sia had the obligation of selling the same and of returning the
proceeds of the sale to the bank. When the receipt became due,
Sia was only able to return 283K leaving a 114K balance.
Hence, Allied bank filed a complaint for estafa against Sia.
Sia: filed a motion to quash
RTC: granted MTQ
- PD 115, which punishes the failure to return proceeds of sale
as estafa, is unconsitutional as it violates the constitutional
prohibition on imprisonment for non-payment of debt.
WON PD 115 is constitutional. YES. Grant of MTQ wrong.
1. Trust receipt transaction =/= loan transaction
RTC judge and accused misunderstood PD 115 and the basic
concept of trust receipts.
A trust receipt arrangement does not involve a simple loan
transaction between a creditor and debtor-importer. Apart from
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 33
a loan feature, the trust receipt arrangement has a security
feature that is covered by the trust receipt itself. That second
feature is what provides the much needed financial assistance to
our traders in the importation or purchase of goods or
merchandise through the use of those goods or merchandise as
collateral for the advancements made by a bank. (Samo v. People,
supra). 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.
2. PD 115
The Trust Receipts Law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner or not. The
law does not seek to enforce payment of the loan. Thus, there
can be no violation of a right against imprisonment for non-
payment of a debt.
METROPOLITAN BANK and TRUST COMPANY
vs. JOAQUIN TONDA and MA. CRISTINA TONDA
(2000)
SUMMARY:
Metrobank granted commercial letters of credit to Spouses Tonda. The
Tondas executed 11 trust receipts to HTAC. Upon demand by Metrobank,
Spouses Tonda failed to comply with their obligations under the said trust
receipts. Metrobank filed with the provincial prosecutor a
complaint/affidacit against the TONDAS for violation of P.D. No. 115 (Trust
Receipts Law) in relation to Article 315 (1) (b) of the Revised Penal Code. The
provincial prosecutor dismissed the complaint but DOJ ordered the filing of
the same. CA reversed the DOJ. SC reversed CA saying that Metrobank has

shown prima facie violation of the trust receipts law in relation to RPC.
FACTS
Spouses Joaquin Tonda and Ma. Cristina Tonda (TONDAS), applied for
and were granted commercial letters of credit by petitioner Metropolitan
Bank and Trust Company (METROBANK) for a period of eight (8) months
beginning June 14, 1990 to February 1, 1991 in connection with the
importation of raw textile materials to be used in their manufacturing of
garments.
The TONDAS acting both in their capacity as officers of Honey Tree
Apparel Corporation (HTAC) and in their personal capacities, executed 11
trust receipts to secure the release of the raw materials to HTAC. The
imported fabrics with a principal value of P2,803,000.00 were withdrawn by
HTAC under the 11 trust receipts executed by the TONDAS.
Due to their failure to settle their obligations under the trust receipts
upon maturity, METROBANK sent a letter dated August 10, 1992, making its
final demand upon the TONDAS to settle their accounts. They were informed
that by said date, the obligations would amount to P4,870,499.13.
Despite repeated demands therefor, the TONDAS failed to comply with
their obligations stated in the trust receipts agreements – which were to
account to METROBANK the goods and/or proceeds of sale of the
merchandise, subject of the trust receipts.
Consequently, on November 9, 1992, Metrobank filed with the Provincial
Prosecutor of Rizal a complaint/affidavit against the TONDAS for violation of
P.D. No. 115 (Trust Receipts Law) in relation to Article 315 (1) (b) of the
Revised Penal Code.
Rizal Provincial Prosecutor dismissed the complaint on the ground
that the complainants had failed to establish the existence of the essential
elements of Estafa as charged. Metrobank appealed.
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Undersecretary Esguerra of DOJ reversed Rizal Provincial Prosecutor
ordered the latter to file the appropriate information against the TONDAS as
charged in the complaint.
The TONDAS twice sought reconsideration but was also denied twice.
Hence they filed with the Court of Appeals a special civil action
for certiorari and prohibition with application for a temporary restraining
order or a writ of preliminary injunction,
The Court of Appeals granted the TONDAS' petition and ordered the
criminal complaint against them dismissed. The Court of Appeals held that
METROBANK had failed to show a prima facie case that the TONDAS violated
the Trust Receipts Law in relation to Art. 315 (1) (b) of the Revised Penal
Code in the face of convincing proof that "that the amount of P2.8 Million
representing the outstanding obligation of the TONDAS under the trust
receipts account had already been settled by them in compliance with the
loan restructuring proposal; and that in the absence of a loan restructuring
agreement, METROBANK could still validly apply the amount as payment
thereof."
ISSUE : WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION OF
THE TRUST RECEIPTS LAW IN RELATION TO ART. 315 OF THE REVISED
PENAL CODE – yes
RATIO:
- The Court of Appeals gravely erred in reversing the Department of
Justice on the finding of probable cause to hold the TONDAS for
trial. The documentary evidence presented during the preliminary
investigation clearly show that there was probable cause to warrant a
criminal prosecution for violation of the Trust Receipts Law.
- The relevant penal provision of P.D. 115 provides:
o
SEC. 13. Penalty Clause. - The failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the

amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if
they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three Hundred
and Fifteen, Paragraph One (b), of Act Numbered Three
Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation
or offense is committed by a corporation, partnership,
association or other judicial entities, the penalty provided
for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
- Section 1 (b), Article 315 of the Revised Penal Code under which the
violation is made to fall, states:
o
"x x x Swindling (estafa). - Any person who shall defraud
another by any of the mans mentioned herein below x x x:
b. By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond;
or by denying having received such money, goods, or other
property.”
- The law is violated whenever the entrustee or the person to whom
the trust receipts were issued in favor of fails to: (1) return the
goods covered by the trust receipts; or (2) return the proceeds of the
sale of the said goods. The foregoing acts constitute estafa punishable
under Article 315 (1) (b) of the Revised Penal Code.
- In the case at bar, given that various trust receipts were executed by
the TONDAS and that as entrustees, they did not return the proceeds
from the goods sold nor the goods themselves to METROBANK, there
is no dispute that that the TONDAS failed to comply with the
obligations under the trust receipts despite several demands from
METROBANK.
- The findings of the CA are erroneous
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 35
a. Court of Appeals: The TONDAS opened a savings account of P2.8
Million to pay the entire principal of the outstanding trust receipts
account
SC: untenable
o
the amount of P2.8 million was not directly paid to
METROBANK to settle the trust receipt accounts, but
deposited in a joint account of Joaquin G. Tonda and a certain
Wang Tien En.
o
In a letter dated February 28, 1992, signed by HTAC's Vice
President for Finance, METROBANK was informed that the
amount "may be applied anytime to the payment of the trust
receipts account upon implementation of the parties of the
terms of the restructuring.”
o
The parties failed to agree on the terms of the loan
restructuring agreement as the offer by the TONDAS to
restructure the loan was followed by a series of counter-
offers which yielded nothing. It is axiomatic that acceptance
of an offer must be unqualified and absolute to perfect a
contract.
b. Court of Appeals: The TONDAS obtained from a METROBANK office a
written acknowledgement of receipt of checks totaling P2.8 Million in
order to show proof of compliance with the loan
restructuring proposal
SC: untenable
o
The handwritten note by the METROBANK officer
acknowledging receipt of the checks amounting to P2.8
Million made no reference to the TONDAS' trust receipt
obligations, and we cannot presume that it was anything
more than an ordinary bank deposit.
o
Article 1288 of the Civil Code provides that "compensation
shall not be proper when one of the debts consists in civil
liability arising from a penal offense" as in the case at bar.
o
if one of the debts consists in civil liability arising from a
penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is
imperative."
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 36

c. Court of Appeals: It was settled between the parties that the amount act "not as an offense against property, but as an offense
of 2.8 Million should be paid to cover all outstanding obligations against public order."
under the trust receipts account o
The finding that there was no fraud and deceit is likewise
SC: untenable misplaced Considering that the offense is punished as
o
any compromise relating to the civil liability arising from an malum prohibitum regardless of the existence of intent or
offense does not automatically terminate the criminal malice. A mere failure to deliver the proceeds of the sale or
proceeding against or extinguish the criminal liability of the the goods if not sold, constitutes a criminal offense that
malefactor. causes prejudice not only to another, but more to the public
d. Court of Appeals: there is no evidence suggesting that interest.
METROBANK has been damaged by the proposal and the deposit or
that the TONDAS employed fraud and deceit in their dealings with HELD: Petition granted
the bank.
SC: untenable
o
Damage can be traced from the non-fulfillment of an
entrustee's obligation under the trust receipts.
o
The nature of trust receipt agreements and the damage
caused to trade circles and the banking community in case of
violation thereof was explained in Vintola vs. IBAA and
echoed in People vs. Nitafan, as follows:"[t]rust receipt
arrangements do not involve a simple loan transaction
between a creditor and a debtor-importer. Apart from a loan
feature, the trust receipt arrangement has a security feature
that is covered by the trust receipt itself. The second feature
is what provides the much needed financial assistance to
traders in the importation or purchase of goods or
merchandise through the use of those goods or merchandise
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." xxx "Trust receipts are indispensable contracts
in international and domestic business transactions. The
prevalent use of trust receipts, the danger of their misuse
and/or misappropriation of the goods or proceeds realized
from the sale of goods, documents or instruments held in
trust for entruster-banks, and the need for regulation of
trust receipt transactions to safeguard the rights and enforce
the obligations of the parties involved are the main thrusts of
P.D. 115. P.D. 115, like Bata Pambansa Blg. 22, punishes the

Lee v. CA
1 February 2002
De Leon Jr., J.
Manzano
SUMMARY: MICO Metals and PBCom entered in various loan transactions.
In some instances, PBCom issued letters of credit in favor of MICO. On the
other hand, MICO issued trust receipts in favor of PBCom. MICO defaulted in
its obligations. Hence, PBCom filed a collection case against it. MICO and its
sureties, Lee, et al., argued that they did not receive the proceeds of said
loan. They further argued that the issuance of trust receipt would be illegal
since PBCom, a banking institution, is not authorized by law to engage in the
business of importing and selling goods. SC defined a trust receipt
transaction and ultimately ruled in favor of PBCom.
DOCTRINE: A trust receipt is considered as a security transaction intended
to aid in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as
collateral of the merchandise imported or purchased. A trust
receipt, therefor, is a document of security pursuant to which a bank
acquires a “security interest” in the goods under trust receipt. Under a letter
of credit-trust receipt arrangement, a bank extends a loan covered by a
letter of credit, with the trust receipt as a security for the loan. The
transaction involves a loan feature represented by a letter of credit, and a
security feature which is in the covering trust receipt which secures an
indebtedness.
FACTS:
1. Petitioners Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap,
Richard Velasco and Alfonso Co executed surety agreements for the
various loans executed by PBCom in favor of MICO Metals.
2. In some of PBCom and MICO Metal’s transactions, MICO would
obtain letters of credit and would issue trust-receipts in favor of
PBCom.
3. Some of these transactions include:
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 37
a. On July 2, 1981, MICO filed with PBCom an application for a
domestic letter of credit. The irrevocable letter of credit was
approved. After the supplier of the merchandise was paid, a
trust receipt upon MICO’s own initiative, was executed in favor
of PBCom.
b. On September 14, 1981, MICO applied for another domestic
letter of credit with PBCom in the sum of P290,000. After the
beneficiary of the said letter of credit was paid by PBCom for the
price of the merchandise, the goods were delivered to MICO
which executed a corresponding trust receipt in favor of PBCom.
c. On November 10, 1981, MICO applied for authority to open a
foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd., and
thus, the corresponding letter of credit was then issued
by PBCom with a cable sent to the beneficiary. As in past
transactions, MICO executed in favor of PBCom a corresponding
trust receipt.
d. On January 4, 1982, MICO applied for authority to open a
foreign letter of credit in the sum of $1,900.00, with PBCom. The
corresponding letter of credit was issued. Again, a
corresponding trust receipt was executed by MICO in favor
of PBCom.
4. Upon maturity of all credit availments obtained by MICO
from PBCom, the latter made a demand for payment. MICO failed to
pay all its obligations despite repeated demands. PBCom, thus,
extrajudicially foreclosed MICO’s real estate mortgage. PBCom
emerged as the highest bidder in the auction sale. This left an unpaid
balance of P5,441,663.90 exclusive of penalty and interest charges.
Aside from the said unpaid balance, MICO still had other standing
obligations in the sum of P461,600.06 representing its trust receipts
liabilities to private respondent. PBCom then demanded the
settlement of the aforesaid obligations from herein petitioners-
sureties who refused to acknowledge their obligations
to PBCom under the surety agreements. Hence, PBCom filed a
complaint with prayer for writ of preliminary attachment.
5. Petitioners (MICO and herein petitioners-sureties): denied all the
allegations of the complaint filed by respondent PBCom, and alleged
that: a) MICO was not granted the alleged loans and neither did it
receive the proceeds of the aforesaid loans; b) Chua Siok Suy was
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 38

never granted any valid Board Resolution to sign for and in behalf of
MICO; c) PBCom acted in bad faith in granting the alleged loans and DISPOSITIVE: CA affirmed. SC ruled in favor of PBCom.
in releasing the proceeds thereof; d) petitioners were never advised Colinares vs. Court of Appeals, 339 SCRA 609 (2000)
of the alleged grant of loans and the subsequent releases therefor, if
any; e) since no loan was ever released to or received by MICO, the
corresponding real estate mortgage and the surety agreements
signed concededly by the petitioners-sureties are null and void.
6. The TC gave credence to the testimonies of petitioners and dismissed Consolidated Bank v CA
the complaint filed by PBCom. April 19, 2001
7. CA reversed the ruling of the trial court Ynares-Santiago, J.
Gabe Ruaro

ISSUE:
SUMMARY:
1. WON the trust receipts issued by MICO in favor of PBCom are
. Continetal cement obtained a LOC for the importation of fuel. Continental
valid? Yes.
claimed that it overpaid. The Lower Court and the Supreme court agreed
that it did, becauset the marginal deposit made by Continental should be
Petitioners: MICO never requested that legal possession of the merchandise
deducted outright from the amount of the letter of credit.
be transferred to PBCom by way of trust receipts. Assuming that MICO
transferred possession of the merchandise to PBCom by way of trust receipts,
DOCTRINE:
the same would be illegal since PBCom, being a banking institution, is not
While a marginal deposit, a collateral security, earns no interest in favor of
authorized by law to engage in the business of importing and selling goods.
the applicant, the bank is not only able to use the same for its own purposes,
interest-free, but it is also able to earn interest on the money loaned to the
SC: A trust receipt is considered as a security transaction intended to aid
applicant. The buyer/importer's marginal deposit should then be set off
in financing importers and retail dealers who do not have sufficient
against his debt, for it would be onerous to compute interest and other
funds or resources to finance the importation or purchase of
charges on the face value of the letter of credit which the bank issued,
merchandise, and who may not be able to acquire credit except through
without first crediting or setting off the marginal deposit which the
utilization, as collateral of the merchandise imported or purchased. A
importer paid to the bank.
trust receipt, therefor, is a document of security pursuant to which a
bank acquires a “security interest” in the goods under trust receipt.
Under a letter of credit-trust receipt arrangement, a bank extends a loan
FACTS:
covered by a letter of credit, with the trust receipt as a security for the
Continental Cement Corporation and Gregory Lim obtained a letter of credit
loan. The transaction involves a loan feature represented by a letter of
from Consolidated Bank for P1.068M. Consolidated then made a marginal
credit, and a security feature which is in the covering trust receipt which
deposit of P320k to Consolidated. The LOC was used to buy 500,000 liters of
secures an indebtedness.
bunker fuel oil from Petrophil Coproration, which was delivered to
In the case at bar, respondent PBCom presented sufficient documentary Continental’s Bulacan plant. A trust receipt was issued to cover the same
and testimonial evidence that proved by preponderance of evidence its same transaction, with Lim as signatory.
subject collection case against the defendants who are the petitioners herein. Claiming that Continental and Lim failed to turn over the goods
covered by the trust receipt or the proceeds thereof, Consolidated filed a

complaint for sum of money before the RTC of Manila. At the pre-trial
conference, the parties agreed on the following issues:
The RTC dismissed the case, ordering Consolidated to pay P490k to
Continental and Lim as overpayment by them. CA modified by deleting the
award of attorney’s fees in favor of respondents and, instead ordered the
Corporation to pay the Bank P37,469.22 as attorney’s fees and litigation
expenses.
Hence this petition for review.
ISSUE:
1. WON there was overpayment. (Yes)
2. WON the marginal deposit was properly computed. (No)
3. WON the agreement as to floating of interest rate is valid. (No)
4. WON this is a trust receipt transaction. (No)
5. WON the Lims are liable under this transaction. (No)
RATIO:
1. The SC was bound by such findings of the lower court. While there
was no computation, the finding of overpayment was correct.
2. Pertinent ruling
Consolidated’s contention that the marginal deposit made by Continental
should not be deducted outright from the amount of the letter of credit is
untenable. To consider the marginal deposit only after computing the
principal plus accrued interests and other charges, would be a clear case of
unjust enrichment, for while a marginal deposit earns no interest in favor of
the debtor-depositor, the bank is not only able to use the same for its own
purposes, interest-free, but is also able to earn interest on the money loaned
to respondent Corporation. Indeed, it would be onerous to compute interest
and other charges on the face value of the letter of credit which the petitioner
issued, without first crediting or setting off the marginal deposit which the
respondent Corporation paid to it. Compensation is proper and should take
effect by operation of law because the requisites in Article 1279 of the Civil
Code are present and should extinguish both debts to the concurrent amount.
Hence, the interests and other charges on the subject letter of credit
should be computed only on the balance of P681,075.93, which was the
portion actually loaned by the bank to respondent Corporation.
*****end****
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 39
3. The floating rate of interest is invalid. Because, there being no
reference rate set either by it or by the Central Bank, the rate is left at
the determination at the sole will and control of the bank.
4. This is merely a simple loan, not a trust receipt transaction.
Inasmuch as the debtor received the goods subject of the trust receipt
before the trust receipt itself was entered into, the transaction in question
was a simple loan and not a trust receipt agreement. Prior to the date of
execution of the trust receipt, ownership over the goods was already
transferred to the debtor. This situation is inconsistent with what normally
obtains in a pure trust receipt transaction, wherein the goods belong in
ownership to the bank and are only released to the importer in trust after the
loan is granted.
5. Since it’s not a trust receipt transaction, they can’t be held liable
under it.
Petition denied. CA affirmed.
DBP v. Prudential Bank
November 22, 2005
Ponente: Corona, J.
Rheg Peralta
SUMMARY: Entrustee (Litex) mortgaged to DBP various items covered
by a prior trust receipt agreement with Prudential Bank (entruster).
DBP foreclosed on the mortgaged articles. SC ruled that the mortgage
and subsequent foreclosure are not valid. The entrustee, not being the
absolute owner, cannot mortgage the articles covered by the trust
receipts.
DOCTRINE: In a trust receipt transaction, the entrustee has neither
absolute ownership, free disposal nor the authority to freely dispose of
the articles subject of the agreement. Since the goods could not have
been subjected to a valid mortgage, there can also be no valid
foreclosure especially when the mortgagee who subsequently
foreclosed and purchased the said goods were in bad faith, having
knowledge of the inclusion of such articles in a trust receipt agreement.

FACTS: In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank, in connection with its
importation of spindles. These were released to Litex under covering “trust
receipts” it executed in favor of Prudential Bank.
In 1980, DBP granted Litex a foreign currency loan secured by real
estate and chattel mortgages on the latter’s machineries including those
articles covered by the “trust receipts.” Upon learning this, Prudential Bank
notified DBP of its claim over the various items covered by the “trust
receipts”.
For failure of Litex to pay its obligation, DBP extra-judicially
foreclosed on the real estate and chattel mortgages, including the articles
covered by the “trust receipts.” During the foreclosure sale, DBP acquired the
foreclosed properties as the highest bidder.
Prudential Bank again informed DBP that it was the absolute and
juridical owner of the said items and they were thus not part of the
mortgaged assets that could be legally ceded to DBP. Since its demands
remained unheeded, Prudential Bank filed a complaint for a sum of money
with damages against DBP.
ISSUE/HELD: WON the articles covered by the trust receipts can be validly
mortgaged by the entrustee. [NO]
RATIO: The various agreements between Prudential Bank and Litex
commonly denominated as “trust receipts” were valid. Hence, the articles
were owned by Prudential Bank and they were only held by Litex in trust.
While it was allowed to sell the items, Litex had no authority to dispose of
them or any part thereof or their proceeds through conditional sale, pledge or
any other means.
Litex had neither absolute ownership, free disposal nor the authority to
freely dispose of the articles. Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void and had no legal effect.
There being no valid mortgage, there could also be no valid foreclosure or
valid auction sale especially when the mortgagee who subsequently
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 40
foreclosed and purchased the said goods were in bad faith, having knowledge
of the inclusion of such articles in a trust receipt agreement.
No one can transfer a right to another greater than what he himself has.
Nemo dat quod non habet. Hence, Litex could not transfer a right that it did
not have over the disputed items. DBP merely stepped into the shoes of Litex
as trustee of the imported articles with an obligation to pay their value or to
return them on Prudential Bank’s demand.
B. Rights of the Entruster
1. Validity of the Security Interest as Against the Creditors of the
Entrustee/Innocent Purchaser for Value
Prudential Bank vs. National Labor Relations Commission, 251 SCRA
412 (1995)
C. Obligation and Liability of the Entrustee
RAMOS vs. CA
August 21, 1987
Justice Narvasa
Denn
SUMMARY: Trinidad Ramos was charged with estafa under Art. 315, par. (1)
of the RPC for her failure to turn over the proceeds of the sale of the goods
subject of the 4 trust receipts issued by her in favour of PNCB. As proof of
delivery of such goods to her, the prosecution presented the commercial
invoices submitted by Ramos in her application for letters of credit. Ramos
claims that the goods subject of the trust receipt were ever delivered to her.
However, the lower courts convicted her of estafa. When the case reached the
SC, the Court reviewed the evidence on record and acquitted her due to the
prosecution’s failure to prove her guilt beyond reasonable doubt. The Court
held that the prosecution failed to prove that the goods were in fact delivered
to Ramos. The commercial invoices were not sufficient proof of such delivery.

DOCTRINE: Commercial invoices are actually nothing more than lists of the
items sought to be purchased and their prices; and it can scarcely be believed
that goods worth no mean sum actually transferred hands without the unpaid
vendor requiring the vendee to acknowledge this fact in some way, even by a
simple signature on these documents alone if not in fact by the execution of
some appropriate document, such as a delivery receipt.
In a trust receipt transaction, the entrustee usually undertakes: (a) to hold the
merchandise received in storage as the property of entrustor, (b) to sell the
same for cash and for entrustor’s account provided the proceeds thereof are
turned over in their entirety to said entrustor to be applied against any
indebtedness to the same.
FACTS:
Trinidad Ramos filed with the Philippine National Cooperative Bank (PNCB) 4
applications for letters of credit.
- The first on September 14, 1964 and the last three all on August 24,
1965
- Amounts of P10,000.00, P22,300.00, P24,000.00 and P24,600.00
(Total: P80,900.00)
Applications were processed and approved  Domestic letters of credit were
opened on the same dates of the applications and in the amounts applied for.
- Among the papers filed for the issuance of the L/Cs were
commercial invoices of the different suppliers of the merchandise
sought to be purchase, also bearing the same dates of the
applications for L/Cs.
The different suppliers then drew sight drafts against applicant Ramos
payable to the order of the PNCB, also bearing the same dates as the
respective applications.
- PNCB then drew its own drafts against Ramos as the buyer of the
merchandise. These drafts were accepted by Ramos also on the same
dates of the respective applications. After such acceptance, the
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corresponding trust receipts were signed by Ramos also on the
same dates of the respective applications.
The 4 trust receipts signed by Ramos uniformly contain the following
stipulation:
The undersigned hereby acknowledges to have received in trust from
the ... (PNCB) the merchandise covered by the above-mentioned
documents and agrees to hold said merchandise in storage as the
property of said bank, with the liberty to sell the same for cash and for
its account provided the proceeds thereof are turned over in their
entirety to the said bank to be applied against any acceptance(s) and
any other indebtedness of the undersigned to the said bank.
After the drafts became due, no payments were made except partial payments
made on certain dates, in pursuance of written demands for payment
addressed by the PNCB to Ramos. After the last formal demand was
addressed to Ramos, an estafa case was filed against her.
Both the lower court and the CA found Ramos guilty of estafa under par. 1,
Article 315 of the Revised Penal Code.
Trinidad Ramos pleads for acquittal on the proposition that the factual
predicate on which her conviction is laid is chiefly comprised of speculations,
conjectures and presumptions without substantial and actual support in the
evidence.
- The prosecution should prove the essential elements thereof,
numbering four, to wit: (1) that the accused received the thing
subject of the offense; (2) that the thing received is personal property
susceptible of appropriation; (3) that the thing was received for safe-
keeping, or on commission, or for administration, or under any other
obligation involving the duty to make delivery of or return the same;
and (4) that there was misappropriation or conversion by the
accused of the thing received to the prejudice of another.
- However, in her case (1) there is no adequate proof of her receipt of
the goods subject of the trust receipts in question or of her having
paid anything on account thereof or in connection therewith; (2)
complainant Bank had suffered no damage whatever, since it had
made no payment at all on account of the commercial invoices for
which the trust receipts were issued; and (3) under the laws at the
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time, transactions involving trust receipts could only give rise to - The issue could quite easily have been resolved by the prosecution’s
purely civil liability. production of the delivery receipts or the testimony of the employees
who made the supposed deliveries. However, the prosecution made
no effort to bring it before the Court, although it could have done so
ISSUE/HELD: WON Trinidad Ramos is guilty of Estafa – NO routinely and without any difficulty whatever. Certainly, this
omission cannot be taken against the accused, who is presumed
RATIO: innocent until the contrary is proved beyond reasonable doubt. It is
After examining the evidence of record, the SC found that the assailed factual after all the duty of the prosecution to establish the existence of all
findings as to the receipt of the merchandise and the damage sustained by the the elements of the crime charged.
Bank cannot stand. The proofs are indeed inadequate on these propositions
of fact. CONCLUSION: Having found the record to contain insufficient evidence of the
- COMMERCIAL INVOICES: It is difficult to accept the prosecution's essential elements of the crime charged, Ramos must be ACQUITTED of the
theory that it has furnished sufficient proof of delivery by the crime charged.
introduction in evidence of the commercial invoices attached to the
applications for the letters of credit and of the trust receipts. The
invoices are actually nothing more than lists of the items sought to be
purchased and their prices; and it can scarcely be believed that goods PILIPINAS BANK, petitioner, vs.
worth no mean sum actually transferred hands without the unpaid
vendor requiring the vendee to acknowledge this fact in some way, ALFREDO T. ONG and LEONCIA LIM,
even by a simple signature on these documents alone if not in fact by
the execution of some appropriate document, such as a delivery respondents.
receipt.
- TRUST RECEIPTS: The trust receipts do not fare any better as proofs
of the delivery to Ramos of the goods. Except for the invoices, and August 8, 2002
documents relating to each trust receipt agreement, including the Ponente: Sandoval Gutierrez, J.
trust receipts themselves, appear to be standard Bank forms Kathleen Tuason
accomplished by the Bank personnel, and were all signed by Ramos
in one sitting, no doubt with a view to facilitating the pending
transactions between the parties. If Ramos was made to believe that
bank usage or regulations require the signing of the papers in this
way, i.e., on a single occasion, there was neither reason nor
opportunity for her to question the statement therein of receipt of
the goods since it was evidently assumed that delivery to her of the
goods would shortly come to pass.

Ramos has categorically and consistently denied ever having received the
goods either from the Bank or the suppliers. The suppliers simply refused to
part with the goods as no payment had been made therefor by the Bank.

SUMMARY: BMC, the entrustee, failed to comply with its Trust Receipt
Agreement with Pilipinas Bank. It failed to pay despite due demands,
which were made by the entrustor while the entrustee was under
rehabilitation. The Cout held that this was not a violation of the Trust
Receipts Law, since their failure to comply did not amount to
dishonesty and abuse of confidence.
DOCTRINE: When there is a violation of the Trust Receipts Law, what
is being punished is the dishonesty and the abuse of confidence in the
handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. However, failure to comply with the
obligations due to serious liquidity problems and after the entrustee
was placed under rehabilitation does not amount to dishonesty and
abuse of confidence, thus the entrustee cannot be said to have violated
the law.
FACTS:
On April 1991, Baliwag Mahogany Corporation (BMC), through its president,
Ong, applied for a domestic commercial letter of credit with Pilipinas Bank to
finance the purchase of about 100,000 board feet of "Air Dried, Dark Red
Lauan" sawn lumber.
The bank approved the application and issued Letter of Credit in the amount
of P3,500,000.00. To secure payment of the amount, BMC, through Ong,
executed 2 trust receipts providing that it shall turn over the proceeds of the
goods to the bank, if sold, or return the goods, if unsold, upon maturity on July
28, 1991 and August 4, 1991.
On due dates, BMC failed to comply with the trust receipt agreement. BMC
filed with the SEC a Petition for Rehabilitation and for a Declaration in a State
of Suspension of Payments.
On January 8, 1992, the SEC issued an order creating a Management
Committee wherein Pilipinas Bank was represented. The Committee took
custody and control of all its existing assets and liabilities, study, review and
evaluate its operation and/or the feasibility of its being restructured.
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On October 13, 1992, BMC and a consortium of 14 of its creditor banks
entered into a MOA rescheduling the payment of BMC’s existing debts.
Subsequently the SEC rendered a Decision approving the Rehabilitation Plan
of BMC and declaring it in a state of suspension of payments.
However, BMC and respondent Ong defaulted in the payment of their
obligations under the rescheduled payment scheme provided in the MOA.
Pilipinas Bank filed a complaint charging Ong and Lim (Treasurer) with
violation of the Trust Receipts Law, alleging failure to pay despite demand.
LECTURE PART:
Section 4 of the Trust Receipts Law defines a trust receipt as any
transaction by and between a person referred to as the entruster, and another
person referred to as the entrustee, whereby the entruster who owns or holds
absolute title or security interest over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed document called a
"trust receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt, or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.
- Failure of the entrustee to turn over the proceeds of the sale of the
goods covered by a trust receipt to the entruster or to return the
goods, if they were not disposed of, shall constitute the crime of
estafa under Article 315, par. 1(b) of the RPC.
o If the violation or offense is committed by a corporation, the
penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
Mere failure to deliver the proceeds of the sale or the goods, if not sold,
constitutes violation of the Trust Receipts Law. However, what is being
punished by the law is the dishonesty and abuse of confidence in the handling

of money or goods to the prejudice of another regardless of whether the latter
is the owner.
ISSUE:
WON there was dishonesty and abuse of confidence by the respondents
in the handling of money or goods to the prejudice of another, which
constitutes a violation of the Trust Receipts Law. NO
RATIO:
BMC failed to comply with its obligations upon maturity of the trust receipts
due to serious liquidity problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of Suspension of Payments.
When Pilipinas Bank made a demand upon BMC to comply with its
obligations under the trust receipts, the latter was already under the control
of the Management Committee. The Management Committee took custody of
all BMC’s assets and liabilities, including the red lauan lumber subject of the
trust receipts, and authorized their use in the ordinary course of business
operations. Clearly, it was the Management Committee which could settle
BMC’s obligations.
Moreover, the Court noted that Ong paid P21m in compliance with the equity
infusion required by the MOA. The mala prohibita nature of the offense
notwithstanding, respondents’ intent to misuse or misappropriate the goods
or their proceeds has not been established
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods,
Documents or Instruments
Ng v. People
G.R. No. 173905/23 April 2010/Third Division/Petition for Review
Anthony Ng – petitioner
People of the Philippines – respondent
Decision by J. Velasco, Digest by Pip
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Short Version: Ng built steel towers for telecom companies. He
applied for a credit line with Asiatrust in order to obtain the chemicals
and materials needed. He was then made to sign a trust receipt
agreement covering the goods. Because Ng’s clients failed to pay, he
was also unable to pay Asiatrust. After Asiatrust’s appraiser reported
that the goods were mostly sold (because they were not in the
warehouse), Asiatrust filed a complaint for estafa against Ng in
accordance with Section 13 of P.D. 115, the Trust Receipts Law.
The Court overturned Ng’s conviction on the ground that the
transaction was not covered by the Trust Receipts Law. As defined, a
trust receipt transaction is one where the entrustee holds the
entruster’s goods in trust with the obligation to (1) sell the goods and
turn over the proceeds; or (2) return unsold goods. The goods here
were never meant to be sold but rather used in Ng’s construction
business. The transaction was therefore one of simple loan.
Facts: Ng’s business, “Capitol Blacksmith and Builders”, was engaged
in building and fabricating telecommunication towers. In 1997, he
applied for a credit line of about P3M with Asiatrust Development
Bank, Inc. In compliance with Asiatrust’s credit investigation, Ng
voluntarily submitted documents showing that he had contracts with
several telecommunication companies to build steel towers (ISLACOM,
SMART, and Infocom).
Asiatrust granted Ng the credit line, after which he was made to
sign several documents, among them trust receipt agreements.
Asiatrust left the trust receipt agreements in blank, hence they bore no
maturity date. The goods covered by the trust receipts were chemicals
and metal plates that Ng would use to construct the steel towers for
his clients.
Ng eventually failed to pay his loan to Asiatrust because of
difficulties in collecting from his own clients (e.g. ISLACOM). Asiatrust

conducted a surprise ocular inspection of Ng’s business, after which
the appraiser reported that about 97% of the goods covered by the
trust receipts were “sold-out.”
Despite a series of conferences to find a way for Ng to pay his
debts, efforts at settlement failed. In March 1999, Asiatrust filed a
complaint against Ng which resulting in him being charged for estafa
under Article 315(b) of the Revised Penal Code in relation to Section 3
of P.D. 115 (the Trust Receipts Law). Ng was convicted. On appeal, the
Court of Appeals affirmed his conviction.
On appeal before the Supreme Court, Ng insisted that because the
goods covered by the trust receipt agreements were never intended
for sale, but for use in Ng’s construction business, then the transaction
was not covered by the Trust Receipts Law.
Issue: Could Ng be charged with estafa in relation to the Trust
Receipts Law even if the goods covered by the agreement were not
intended for sale? NO.
Ruling: Appeal granted, CA reversed, Ng acquitted.
Ratio: As provided in Section 4 of P.D. 115, a trust receipt
transaction is “any transaction by and between a person referred to
in this Decree as the entruster, and another person referred to in this
Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the
entrustee upon the latter’s execution and delivery to the entruster of a
signed document called a trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or instruments
in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 45
to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt xxx.”
In sum, in a trust receipt transaction the entrustee should either
(1) turn over to the entruster the proceeds of the merchandise sold; or
(2) return the unsold merchandise to the entruster. Failing to comply
with these obligations would constitute estafa under Section 13 of P.D.
115.
In this case, the goods were never held in trust by Ng. It was
made clear to Asiatrust that the goods were not going to be sold
by Ng (or returned in the event of non-sale) but used in his
construction of steel towers for his clients. Since the goods were
never intended for sale, the transaction in this case was not a
trust receipt transaction. Asiatrust’s appraised reported that most of
the goods were sold, but after reviewing his testimony the Court noted
that he had no personal knowledge that the goods had been sold—all
he saw was that they were not in the warehouse when he conducted
the inspection. His report, therefore, was a mere presumption.
As provided in the whereas clause of P.D. 115, the nature of a
trust receipt is that it is a tool to promote commerce; a convenient
business device to assist importers and merchants who need
financing. A trust receipt is considered a security transaction
intended to aid in financing importers and retail dealers who have
insufficient funds for the importation or purchase of merchandise and
who may not be able to acquire credit except through utilization (as
collateral) of the merchandise imported or purchased.
Since the transaction was not a trust receipt transaction, the
penal provision in P.D. 115 was inapplicable and Ng’s liability was
limited to his obligation under the credit line agreement. From the

facts of the case, it was clear to the Court that the parties merely
intended to enter into a loan agreement. Citing an earlier case, the
Court pointed out that the trust receipt agreement Ng was made to
sign was a contract of adhesion which was “unjust and inequitable, if
not reprehensible” because it threatened “poor and hapless
borrowers” with criminal prosecution.
Other possibly useful but side-line tidbits:
1. Even assuming that the transaction was a trust receipt
transaction, Ng could not be liable for estafa. The law provides
that an entrustee becomes liable when he fails to turn over the
proceeds in accordance with the terms of the trust receipt. The
trust receipt agreement provided that Ng was obliged to turn
over the proceeds as soon as he received payment from his
clients.
2. The trust receipt agreements had no maturity dates, which is
highly irregular in ordinary banking practice. The only way for
Ng’s obligation to mature, therefore, was if Asiatrust
demanded that Ng pay—which Asiatrust never did.
3. While the case was pending before the Supreme Court, Ng paid
his obligation in full.
Voting: Corona, Abad, Perez, and Mendoza, JJ., concur.
Land Bank of the Philippines vs.
Perez
June 13, 2012
Ponente: BRION, J.
Flores
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 46
SUMMARY:
ACDC executed trust receipts in favor of LBP covering materials to be
used for their construction projects. When the receipts expired they
failed to turn over the proceeds or goods.
DOCTRINE:
Under the Trust Receipts Law, intent to defraud is presumed when the
entrustee (1) fails to turn over the proceeds; or (2) fails to return the
goods under trust, if they are not disposed of in accordance with the
terms of the trust receipts. When both parties know that the entrustee
could not have complied with the obligations under the trust receipt
without his fault, as when the goods subject of the agreement were not
intended for sale or resale, the transaction cannot be considered a
trust receipt but a simple loan, where the liability is limited to the
payment of the purchase price.
FACTS:
Land Bank of the Philippines (LBP) extended a credit accommodation to
Asian Construction and Development Corporation (ACDC) through the
execution of an Omnibus Credit Line Agreement. In various instances, ACDC
used the Letters of Credit/Trust Receipts to buy construction materials.
However when the trust receipts matured, ACDC failed to return the proceeds
or the goods. Thus LBP filed a complaint for estafa against ACDC.
The officers of ACDC alleged they were required to sign the trust receipts for
the release of the loans. ACDC further alleged that the trust receipts do not
contain (1) a description of the goods placed in trust, (2) their invoice values,
and (3) their maturity dates, in violation of P.D. 115.
The prosecutor dismissed the complaint because the evidence failed to state
the date when the goods were released to ACDC.
On appeal, the Justice Secretary reversed the prosecutor’s resolution. He said
that there was no question that the goods were received by ACDC. He also
ruled that while the subjects of the trust receipts were not mentioned, they
were listed in the letters of credit referred to in the trust receipts.
ISSUES/HELD:

WON the ACDC is guilty of estafa. No.
RATIO:
There are two obligations in a trust receipt transaction and they exist in the
alternative - to return of the proceeds of the sale or the return of the goods.
When both parties enter into an agreement knowing that the return of the
goods is not possible, it is not a trust receipt transaction penalized under P.D.
115; the only obligation actually agreed upon by the parties would be the
return of the proceeds of the sale transaction. This transaction becomes a
mere loan. Article 1371 of the Civil Code provides that “[i]n order to judge
the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.”
In this case, LBP knew that ACDC was in the construction business and that
the materials that it sought to buy under the letters of credit were to be used
for MRT and the Clark Centennial Exposition Project. LBP should have been
aware that the materials were to be used for the construction of an
immovable property, as well as a property of the public domain.
FACTS:
Even assuming that the transactions were trust receipts, the complaint still
should have been dismissed. In this case misappropriation could be
committed should the entrustee fail to turn over the proceeds or fail to return
the goods. ACDC could not have failed to return the proceeds since their
clients had not paid for the projects. What can only be attributed to the
respondents would be the failure to return the goods subject of the trust
receipts. However LBP should have been aware that it could not possibly
recover the processed materials as they would become part of government
projects two of which had even become part of the operations of public
utilities vital to public service. ACDC’s failure to return the goods at the time
these “trust receipts” expired could not be attributed to its volition.
Hur Tin Yang v People of the
Philippines
August 14, 2013
Ponent: Velasco, Jr., J.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 47
Kitty
SUMMARY: Hur Tin Yang was the representative and VP for Internal
Affairs of Supermax. He was required to sign 24 TRs as a security for
the construction materials purchased by Sucpermax using funds
provided by Metrobank through a commercial L/C. When the 24 TRs
fell due and went unpaid, 24 cases of estafa under Art. 315 of the RPC,
in relation to PD 115, was filed against Hur. The TC and CA found him
guilty. SC reversed, holding that the transaction was that of a simple
loan and not a trust receipt.
DOCTRINE: When both parties enter into an agreement knowing fully
well that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a
trust receipt transaction penalized under Sec. 13 of PD 115 in relation
to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale
transaction.
 Supermax Philippines Inc. is a domestic corporation engaged in the
construction business. On various occasions in the months of April,
May, July, August, September, October and November 1998,
Metropolitan Bank and Trust Corporation extended several
commercial L/Cs to Supermax.
 Supermax used the L/Cs to pay for the delivery of construction
materials to be used in their business. Thereafter, Metrobank
required Hur Tin Yang, as representative and VP for Internal Affairs
of Suprmax, to sign 24 TRs as security for the construction materials
and to hold those materials or the proceeds of the sales in trust for
Metrobank to the extent of the amount in the TRs.
 When the 24 TRs fell due and despite receipt of a demand letter,
Supermax failed to pay or deliver the goods. Instead, it requested the
restructuring of the loan.
 When the restructuring did not materialize, Metrobank sent another
demand letter. When all the demands fell on deaf ears, Metrobank
filed the instant cases against the petitioner Hur.
 Hur was charged in 24 consolidated informations of the crime of
Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115.

o Hur’s defense: While he admitted signing the TRs, he argued
that they were demanded by Metrobank as additional
security for Supermax’s loans. He alleged that Metrobank
knew all along that the construction materials subject of the
TR were not intended for resale but for personal use.
 TC: found Hur guilty as charged.
 CA: upheld the findings of the RTC. It ruled that since the offense
punished under PD 115 is in the nature of malum prohibitum, a mere
failure to deliver the proceeds of the sale or goods, if not sold, is
sufficient to justify a conviction under PD 115.
ISSUES/HELD:
9. Is Hur Tin Yang liable for estafa under Art. 315 of the RPC, in relation
to PD 115? NO.
RATIO
 In determining the nature of a contract, courts are not bound by the
title or name given by the parties. The decisive factor in evaluating
such agreement is the intention of the parties, as shown not
necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds prior to, during and immediately
after the execution of the agreement.
 In the instant case, factual findings of the TC and A reveal that the
dealing between petitioner and Metrobank was not a trust receipt
transaction but one of simple loan.
 A trust receipt transaction is one where the entrustee has the
obligation to deliver to the entruster the price of the sale, or if the
merchandise is not sold, to return the merchandise to the entruster.
o There are, therefore, two obligations in a trust receipt
transaction: the first refers to money received under the
obligation involving the duty to turn it over to the owner of
the merchandise sold, while the second refers to the
merchandise received under the obligation to "return" it to
the owner.
 A violation of any of these undertakings constitutes
Estafa defined under Art. 315, par. 1(b) of the RPC,
as provided in Sec. 13 of PD 115
 When both parties enter into an agreement knowing fully well that
the return of the goods subject of the trust receipt is not possible
even without any fault on the part of the trustee, it is not a trust
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 48
receipt transaction penalized under Sec. 13 of PD 115 in relation to
Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale
transaction.
o This transaction becomes a mere loan, where the borrower
is obligated to pay the bank the amount spent for the
purchase of the goods
 Considering that the goods in this case were never intended for sale
but for use in the fabrication of steel communication towers, the trial
court erred in ruling that the agreement is a trust receipt transaction.
DISPOSITIVE
 WHEREFORE, the Resolution dated February 1, 2012, upholding the
CA’s Decision dated July 28, 2010 and Resolution dated December 20,
2010 in CA-GR No. 30426, is hereby RECONSIDERED. Petitioner Hur
Tin Yang is ACQUITTED of the charge of violating Art. 315, par. 1 (b)
of the RPC, in relation to the pertinent provision of PD 115 in
Criminal Case Nos. 04-223911 to 34. SO ORDERED.
2. Return of Goods, Documents or Instruments in Case of Non-Sale
Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987)
3. Liability for Loss of Goods, Documents or Instruments
ROSARIO TEXTILE MILLS CORP. v.
HOME BANKEERS SAVINGS AND
TRUST CO.
June 29, 2005
Sandoval-Gutierrez
SUMMARY: Rosario Textile Mills Corp was granted a credit line by Home
Bankers Savings & Trust Co. RTMC used the proceeds of the loan to import
materials, covered by trust receipts in favor of the bank. The materials

burned down and RTMC refused to pay the loan, claiming that the bank
should bear the loss, being the owners of the materials under the trust
receipts. Lower courts and SC ruled in favor of the bank and held RTMC
liable, since the trust receipts were only a security for the credit line, and
the bank could not be considered the true owners of the materials.
DOCTRINE: a trust receipt as “a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of
the merchandise imported or purchased.”
“If under the trust receipt, the bank is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the
loan feature thereof...”
FACTS:
Rosario Textile Mills Corporation (RTMC) applied from Home Bankers
Savings & Trust Co. for an Omnibus Credit Line for P10 million. The bank
approved only P8 million. Edilberto V. Yujuico signed a Surety Agreement in
favor of the bank. RTMC availed of the credit line by making numerous
drawdowns, each drawdown being covered by a separate promissory note
and trust receipt. RTMC executed a total of eleven (11) promissory notes.
RTMC failed to pay its loans. The bank filed a complaint for sum of money
against RTMC and Yujuico. RTMC claimed that the materials they imported
were lost in the fire, and since the bank was the owner of the materials under
the trust receipt, they should bear the loss. Yujuico claimed that his
suretyship was a mere formality. The lower courts ruled for the bank.
ISSUE/RULING:
(1) WON the loss should be borne by the bank- NO
(2) WON Yujuico is liable-YES
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 49
RATIO:
(1) WON the loss should be borne by the bank- NO
RTMC claims that when they imported the raw materials needed for its
manufacture using the credit line, it was acting on behalf of the bank, the true
owner of the goods by virtue of the trust receipts. Hence, under the doctrine
of res perit domino, the bank took the risk of the loss of said raw materials.
Thus, when RTMC made a valid and effective tender of the goods but the bank
refused, RTMC stored them in its warehouse. When the warehouse and its
contents were gutted by fire, RTMC’s obligation to the bank was accordingly
extinguished.
RTMCs’ theory ignores the true nature of its transaction with the bank. It
filed with the bank an application for a credit line. It then made withdrawals
from this credit line and issued several promissory notes in favor of the bank.
In banking and commerce, a credit line is “that amount of money or
merchandise which a banker, merchant, or supplier agrees to supply to a
person on credit and generally agreed to in advance.” It is the fixed limit of
credit granted by a bank, retailer, or credit card issuer to a customer, to the
full extent of which the latter may avail himself of his dealings with the
former but which he must not exceed and is usually intended to cover a series
of transactions in which case, when the customer’s line of credit is nearly
exhausted, he is expected to reduce his indebtedness by payments before
making any further drawings.
The principal transaction between petitioner RTMC and the bank is a contract
of loan. RTMC used this loan to purchase raw materials from a supplier
abroad. In order to secure the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts were executed by the
parties to evidence this security arrangement. The trust receipts were mere
securities.
In Samo vs. People, the court described a trust receipt as “a security
transaction intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.” A trust
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 50

receipt, therefore, is a security agreement, pursuant to which a bank acquires
a ‘security interest’ in the goods. It secures an indebtedness and there can be
no such thing as security interest that secures no obligation. Section 3 (h) of
the Trust Receipts Law (P.D. No. 115) defines a “security interest” as follows:
“(h) Security Interest means a property interest in goods, documents, or
instruments to secure performance of some obligation of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only.”
Thus, the ownership of the raw materials did not remain with the bank.
“If under the trust receipt, the bank is made to appear as the owner, it was but
an artificial expedient, more of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants, which it cannot do, just to
give consistency with purpose of the trust receipt of giving a stronger security
for the loan obtained by the importer. To consider the bank as the true owner
from the inception of the transaction would be to disregard the loan feature
thereof...”
However, a party may present evidence to modify, explain, or add to the terms
of the written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written
agreement;
(b) The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors
in interest after the execution of the written agreement.
x x x.”
DISPOSITIVE: WHEREFORE, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are AFFIRMED IN
TOTO. Costs against petitioners.
SO ORDERED.
4. Penal Sanctions if Offender is a Corporation

RTMC cannot be relieved of their obligation to pay their loan in favor of the
bank.
EDWARD ONG (petitioner) v CA and
(2) WON Yujuico is liable-YES PEOPLE AND THE PHILIPPINES
Yujuico is liable. There is no record to support his allegation that the surety
agreement is a “mere formality;” and the Suretyship Agreement signed by (respondents)
petitioner Yujuico binds him. The terms clearly show that he agreed to pay
the bank jointly and severally with RTMC. The parole evidence rule under April 29 2003 | Carpio, J. | Leigh
Section 9, Rule 130 of the Revised Rules of Court is in point, thus:
Trust Receipts Law; Obligation and Liability of the Entrustee; Penal
“SEC. 9. Evidence of written agreements. – When the terms of an agreement
have been reduced in writing, it is considered as containing all the terms Sanctions if Offender is a Corporation
agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written
agreement.
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 51

SUPERFACTS! Ong, who signed trust receipts representing ARMAGRI
corporation, was charged with estafa for allegedly defrauding Solidbank when
it failed to comply with its obligations under a trust receipt agreement. SC
affirmed his conviction. The TRL recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is a
corporation, the law makes the officers or employees or other persons
responsible for the offense liable to suffer the penalty of imprisonment. Being
the entrustee, ARMAGRI was the one responsible to account for the goods or
its proceeds in case of sale. However, the criminal liability for violation of the
TRL falls on the human agent responsible for the violation. The TRL expressly
makes the corporation’s officers or employees or other persons therein
responsible for the offense liable to suffer the penalty of imprisonment. In the
instant case, Ong signed the two trust receipts on behalf of ARMAGRI as the
latter could only act through its agents. When Ong signed the trust receipts,
he acknowledged receipt of the goods covered by the trust receipts.
FACTS:
Bank. ARMAGRI also undertook the obligation to keep the proceeds in the
form of money, bills or receivables as the separate property of the Bank or to
return the goods upon demand by the Bank, if not sold. In addition, Ong
executed the following additional undertaking stamped on the dorsal portion
of both trust receipts:
I/We jointly and severally agreed to any increase or decrease in the interest
rate which may occur after July 1, 1981, when the Central Bank floated the
interest rates, and to pay additionally the penalty of 1% per month until the
amount/s or installment/s due and unpaid under the trust receipt on the
reverse side hereof is/are fully paid.
Petitioner Ong signed alone the foregoing additional undertaking in the Trust
Receipt for P2,253,500, while both petitioner and Benito Ong signed the
additional undertaking in the Trust Receipt for P2,050,000. When the trust
receipts became due and demandable, ARMAGRI failed to pay or deliver the
goods to the Bank despite several demand letters.

The version of the prosecution is that petitioner Edward Ong, representing

ARMAGRI International Corporation, applied for a letter of credit with
RTC found petitioner Ong guilty beyond reasonable doubt but acquitted
Solidbank Corporation to finance the purchase of different assemblies from
Benito Ong. CA affirmed.
Metropole Industrial Sale. Ong, representing ARMAGRI, executed a trust
receipt acknowledging receipt from the bank of the goods. Petitioner Ong and
Benito Ong, representing ARMAGRI, subsequently applied for another L/C to
finance the purchase of merchandise from Fertiphil Corporation, over which RULING: decision AFFIRMED with MODIFICATION on penalty.
petitioner Ong, signing for ARMAGRI, executed another trust receipt.

HELD: (included only the part of the decision pertinent to topic as found in
Under the trust receipts, ARMAGRI undertook to account for the goods held the syllabus)
in trust for the Bank, or if the goods are sold, to turn over the proceeds to the
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 52

Is Ong liable for the offense by the mere circumstance that he acted as
agent and signed for the entrustee corporation? YES
The pivotal issue for resolution is whether Ong comes within the purview of
Sec. 13 of the Trust Receipts Law. We hold that Ong is a person responsible
for violation of the TRL.
The TRL recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the
law makes the officers or employees or other persons responsible for the
offense liable to suffer the penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other juridical entities cannot be
put to jail. Hence, the criminal liability falls on the human agent responsible
for the violation of the TRL.

In the instant case, the Bank was the entruster while ARMAGRI was the
SEC. 13. Penalty Clause. – The failure of the entrustee to turn over the
entrustee. Being the entrustee, ARMAGRI was the one responsible to account
proceeds of the sale of the goods, documents or instruments covered by a
for the goods or its proceeds in case of sale. However, the criminal liability for
trust receipt to the extent of the amount owing to the entruster or as appears
violation of the TRL falls on the human agent responsible for the violation.
in the trust receipt or to return said goods, documents or instruments if they
Petitioner Ong, who admits being the agent of ARMAGRI, is the person
were not sold or disposed of in accordance with the terms of the trust receipt
responsible for the offense for two reasons. First, he is the signatory to the
shall constitute the crime of estafa, punishable under the provisions of Article
trust receipts, the loan applications and the letters of credit. Second, despite
Three Hundred and Fifteen, Paragraph One (b), of Act Numbered Three
being the signatory to the trust receipts and the other documents, he did not
Thousand Eight Hundred and Fifteen, as amended, otherwise known as the
explain or show why he is not responsible for the failure to turn over the
Revised Penal Code. If the violation or offense is committed by a corporation,
proceeds of the sale or account for the goods covered by the trust receipts.
partnership, association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the
civil liabilities arising from the criminal offense. The Bank released the goods to ARMAGRI upon execution of the trust receipts
and as part of the loan transactions of ARMAGRI. The Bank had a right to
demand payment or at least a return of the goods. ARMAGRI failed to pay or
return the goods despite repeated demands by the Bank.
The TRL is violated whenever the entrustee fails to: (1) turn over the
proceeds of the sale of the goods, or (2) return the goods covered by the trust
receipts if the goods are not sold. The mere failure to account or return gives
rise to the crime which is malum prohibitum. There is no requirement to It is a well-settled doctrine long before the enactment of the TRL that the
prove intent to defraud. failure to account, upon demand, for funds or property held in trust is
evidence of conversion or misappropriation. Under the law, mere failure by
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 53

the entrustee to account for the goods received in trust constitutes estafa. The receipts, and thus a direct participant to the crime, which makes Ong a person
TRL punishes dishonesty and abuse of confidence in the handling of money or responsible for the offense.
goods to the prejudice of public order. The mere failure to deliver the
proceeds of the sale or the goods if not sold constitutes a criminal offense that
causes prejudice not only to the creditor, but also to the public interest.
Ong could have raised the defense that he had nothing to do with the failure
to account for the proceeds or to return the goods. Ong could have shown that
he had severed his relationship with ARMAGRI prior to the loss of the
The TRL expressly makes the corporation’s officers or employees or other proceeds or the disappearance of the goods. Ong, however, waived his right to
persons therein responsible for the offense liable to suffer the penalty of present any evidence, and thus failed to show that he is not responsible for
imprisonment. In the instant case, Ong signed the two trust receipts on behalf the violation of the TRL.
of ARMAGRI as the latter could only act through its agents. When Ong signed
the trust
receipts, he Facts: Jose and Petronila, officers of El Oro, signed trust receipts in behalf of the company, and in favor of BPI. They were not able to fulfill their obligations under the trust receipts.
BPI filed estafa charges against them. They were acquitted but were held solidarily liable with El Oro in the payment of the debt to BPI.

Held: Jose and Petronilla are not liable under one trust receipt because they signed it in their capacities as officers of the corporation. However, But, Jose is liable for the other trust
receipt because he signed it in his personal capacity. However, his liability is not solidary with El Oro; he is liable only as guarantor. The solidary guaranty clause makes guarantors
signing the trust receipt solidarily liable with each other; it does not operate to make them solidarily liable with the company. But, the suit against Jose still stands because
excussion is not a pre-requisite to secure judgment against a guarantor. In fact, excussion can be waived.

Rule: If entrustee is a corporation, criminal liability is imposed upon the officers but the civil liability is imposed upon the corporation.

Exception: If the officer signed the Trust Receipt in his personal capacity, then he is civilly liable together with the corporation.

acknowledged receipt of the goods covered by the trust receipts.

Jose Tupaz IV, and Petronila Tupaz
(Petitioners)
True, Ong acted on behalf of ARMAGRI. However, it is a well-settled rule that
the law of agency governing civil cases has no application in criminal cases. vs
When a person participates in the commission of a crime, he cannot escape
punishment on the ground that he simply acted as an agent of another party.
CA, and Bank of the Philippine
In the instant case, the Bank accepted the trust receipts signed by Ong based Islands (Respondents)
on Ong’s representations. It is the fact of being the signatory to the two trust Date: November 18, 2005
Ponente: Carpio, J.
Digest by Ces

Facts:
- Jose Tupaz IV and Petronila Tupaz were Vice-President for Operations and
Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El
Oro). El Oro had a contract with the Philippine Army to supply the latter with
survival bolos.
- To finance the purchase of the raw materials for the survival bolos, Jose and
Petronila, on behalf of El Oro, applied with BPI for two commercial letters of
credit. The letters of credit were in favor of El Oro Corporation’s suppliers,
Tanchaoco Manufacturing Incorporated (Tanchaoco) and Maresco Rubber
and Retreading Corporation (Maresco). BPI granted the application, and
issued one letter of credit for P564,871.05 to Tanchaoco, and one letter of
credit for P294,000 to Maresco
- Jose and Petronila also signed trust receipts in favor of BPI.
- On September 30, 1981, Jose signed, in his personal capacity, a trust receipt
corresponding to the letter of credit in favor of Tanchaoco. He bound himself
to sell the goods covered by the letter of credit and to remit the proceeds to
BPI, if sold, or to return the goods, if not sold, on or before December 29,
1981.
- On October 9, 1981, Jose and Petronila signed, in their capacities as officers
of El Oro, the trust receipt corresponding to the letter of credit in favor of
Maresco. They bound themselves to sell the goods covered by the letter of
credit and to remit the proceeds to BPI, if sold, or to return the goods, if not
sold, on or before December 8, 1981.
- Tanchaoco and Maresco delivered the goods to El Oro, and they were paid by
BPI.
- Jose and Petronila were not able to comply with their undertaking under the
trust receipts, and El Oro was only able to make partial payments. It alleged
that it could not fully pay the debt because the Army had delayed in paying for
the bolos.
- BPI filed estafa charges against the two for violation of the Trust Receipts
Law. Jose and Petronila pleaded not guilty to the charge.
- The trial court acquitted Jose and Petronila because of reasonable doubt, but
found them solidarily liable with El Oro for the balance of El Oro’s principal
debt under the trust receipts.
- On appeal, the CA affirmed the trial court's decision. Jose, and Petronila's MR
was denied. They now file this petition for review with the SC.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 54
Trust receipts signed by Jose and Petronila provides:
In consideration of your releasing to ………………………………… under the terms
of this Trust Receipt the goods described herein, I/We, jointly and severally,
agree and promise to pay to you, on demand, whatever sum or sums of money
which you may call upon me/us to pay to you, arising out of, pertaining to,
and/or in any way connected with, this Trust Receipt, in the event of default
and/or non-fulfillment in any respect of this undertaking on the part of the
said ……………………………………. I/we further agree that my/our liability in this
guarantee shall be DIRECT AND IMMEDIATE, without any need whatsoever
on your part to take any steps or exhaust any legal remedies that you may
have against the said ……………………………………………. Before making demand
upon me/us.
Issue/Reasoning:
Issue: Whether Jose and Petronila are personally liable for the trust receipts
(Not having signed in their personal capacity, Jose and Petronila are not liable
under the trust receipt dated October 9. Having signed in his personal
capacity, Jose is liable under the trust receipt dated September 30.)
- A corporation, being a juridical entity, may act only through its directors,
officers, and employees. Debts incurred by these individuals, acting as such
corporate agents, are not theirs but the direct liability of the corporation they
represent. As an exception, directors or officers are personally liable for the
corporation’s debts only if they so contractually agree or stipulate.
- In the trust receipt dated October 9, 1981, Jose and Petronila signed as
officers of El Oro; they did not bind themselves personally liable for El Oro ’s
obligation. In Ong vs CA it was held that a corporate representative who
signed in such a capacity in a solidary guarantee clause a trust receipt did not
undertake to guarantee personally the payment of the corporation’s debts.
- For the trust receipt dated September 30, 1981, Jose signed in his personal
capacity. Ha bound himself personally liable for El Oro’s debts. Not being a
party to the said trust receipt, Petronila Tupaz is not liable under it.
Issue: Whether the liability with El Oro is solidary (No. Jose is a guarantor only.
However, the suit against him still stands because excussion is not a pre-
requisite to secure judgment against a guarantor. Excussion may also be
waived.)
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 55

- According to Prudential Bank vs IAC where the Court interpreted a clause in

a trust receipt identical to that signed by Jose, the solidary promise to pay in
the trust receipt made the corporate officer liable as guarantor only. The ALFREDO CHING vs. THE
solidary guaranty clause only pertains to the guarantors. Thus, the guarantors
who sign such a receipt are solidarily liable. It does not, however, make the
guarantors solidarily liable with the principal debtor. It being a contract of
SECRETARY OF JUSTICE, ASST. CITY
adhesion, any doubt as to its true intent should be resolved against that who
drafter the trust receipt. PROSECUTOR CECILYN BURGOS-
- However, BPI’s suit against Jose stands despite the finding that he is liable as
guarantor only. VILLAVERT, JUDGE EDGARDO
- Excussion is not a pre-requisite to secure judgment against a guarantor. He
can still demand deferment of the execution of the judgment against him until
after the assets of the principal debtor shall have been exhausted.
SUDIAM of the Regional Trial Court,
- The benefit of excussion may be waived. In this case, Jose waived such
benefit by signing the trust receipt which stated that his liability is direct and
Manila, Branch 52; RIZAL
immediate without any need for BPI to exhaust other remedies.
COMMERCIAL BANKING CORP. and
Issue: Whether Jose’s acquittal in the criminal case extinguished his civil
liability (No, because of his separate liability under the Trust Receipt) THE PEOPLE OF THE PHILIPPINES
- His liability arose not from the criminal act of which he was acquitted but
from the trust receipt contract of 30 September 1981. Petitioner Jose Tupaz February 06, 2006
signed the trust receipt of 30 September 1981 in his personal capacity.
J. Callejo, Sr.
Other discussion:
- The Court discussed the proper computation of interest and cited Eastern Paula
Shipping Lines vs CA
- The non-extinction of civil liability after the extinction of criminal liability
was also discussed. Summary: RCBC issued in favor of PBMI L/Cs to cover their purchase of various
- The petitioners also raised the issue for the first time on appeal that the goods. As security, Ching signed trust receipts as Senior VP of PBMI in favor of
debt is not yet due and that the trust receipts are simulated. The Court just RCBC. PBMI failed to pay the amount in the trust receipts thus RCBC filed a
said that there is not merit to their contention. criminal complaint against Ching. SC held that Ching is liable as the signatory and
officer of PBMI.
Dispositive:
Doctrine: The fact that the officer who signed the trust receipt on behalf of the
Petition granted in part. CA decision affirmed with the following
entrustee-corporation signed in his official capacity without receiving the goods
modifications: 1) El Oro is liable for the total amount due under the trust
as he had never taken possession of such nor committing dishonesty and abuse
receipts; 2) Jose is liable for El Oro’s total debt under the trust receipt dated
of confidence in transacting with the entrustor, is immaterial. The law
September 30, 1981; 3) Jose and Petronila are not liable under the trust
receipt dated October 9, 1981. specifically makes the director, officer, employee or any person responsible
criminally liable precisely for the reason that a corporation, being a juridical
entity, cannot be the subject of the penalty of imprisonment.

Facts
Sometime in September to October 1980, Philippine Blooming Mills, Inc.
(PBMI), through ching, their Senior VP, applied with RCBC for the issuance of
commercial L/Cs to finance its importation of assorted goods.
RCBC approved the application and irrevocable L/Cs were issued in favor of
Ching. The goods were purchased and delivered in trust to PBMI. Ching
signed 13 trust receipts as surety, acknowledging delivery of various
equipment including ingot molds, spare parts for spectrophotometer, etc.
Ching agreed to hold the goods in trust for RCBC with authority to sell but not
by way of conditional sale, pledge or otherwise. The proceeds of the sales
were to be turned over to be applied against the relative acceptances and
payment of other indebtedness to RCBC. In case of goods unsold within the
specified period, they were to be returned to RCBC without need for demand.
When the trust receipts matures, Ching failed to return the goods nor their
value: P6,940,280.66 despite demand. RCBC thus filed for estafa against
Ching.
The City Prosecutor found probable cause for estafa (Art. 315, par. 1(b), RPC),
in relation to PD 115 (Trust Receipts Law). Ching's MR was granted, thus,
reversing the resolution finding probable cause.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 56
Meanwhile. SC rendered judgment in Allied Banking v. Ordonez, holding that
the penal provision of PD 115, encompasses any act violative of an obligation
covered by the trust receipt; it is not limited to transactions involving goods
which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold. The Court also ruled that "the non-
payment of the amount covered by a trust receipt is an act violative of the
obligation of the entrustee to pay."
RCBC thus re-filed their criminal complaint but the City Prosecutor ruled that
there was no probable cause, Ching's liability being only civil in nature since
he signed the trust receipts as surety. The Sec. of Justice reversed the City
Prosecutor's ruling. The Justice Secretary further stated that the respondent
bound himself under the terms of the trust receipts not only as a corporate
official of PBMI but also as its surety; hence, he could be proceeded against in
two (2) ways: first, as surety as determined by the Supreme Court in its
decision in Rizal Commercial Banking Corporation v. Court of Appeals; 17 and
second, as the corporate official responsible for the offense under P.D. No.
115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the
prosecution of corporate officers "without prejudice to the civil liabilities
arising from the criminal offense." making Ching's liability clearly separate
and distinct from the criminal liability.
CA dismissed the Ching's petition for certiorari, prohibition and mandamus,
ruling that Chings is criminally liable under PD 115.
Issue: WON there was probable cause against Ching for violation of estafa
under Art. 2
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 57

Ruling: IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of Section 4 of P.D. No. 115 defines a trust receipt transaction. 3 Based on the
merit. Costs against the petitioner. aforecited provision, an entrustee is one having or taking possession of
goods, documents or instruments under a trust receipt transaction, and any
successor in interest of such person for the purpose of payment specified in
the trust receipt agreement.
SO ORDERED.

Ratio

3 Section 4.What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as entrustee, whereby the entruster,
who owns or holds absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially equivalent to any of the
following:

1.In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its original or processed form
until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale; or

2.In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection or renewal.

The entrustee is obliged to: (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly in accordance with
the terms and conditions of the trust receipt; (2) receive the proceeds in trust
for the entruster and turn over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the trust receipt; (3) insure
the goods for their total value against loss from fire, theft, pilferage or other
casualties; (4) keep said goods or proceeds thereof whether in money or
whatever form, separate and capable of identification as property of the
entruster; (5) return the goods, documents or instruments in the event of
non-sale or upon demand of the entruster; and (6) observe all other terms
and conditions of the trust receipt not contrary to the provisions of the
decree.
The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to
the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the
trust receipt; provided, such are not contrary to the provisions of the
document.
The transaction between Ching and RCBC falls under the trust receipt
transactions in PD 115. RCBC imported the goods and entrusted them to
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest as security for the payment of the purchase
price, does not constitute a trust receipt transaction and is outside the purview and coverage of
this Decree.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 58
PBMI under the trust receipts signed by Ching as entrustee, RCBC as
entruster.4
P.D. No. 115 is a declaration by legislative authority that, as a matter of public
policy, the failure of person to turn over the proceeds of the sale of the goods
covered by a trust receipt or to return said goods, if not sold, is a public
nuisance to be abated by the imposition of penal sanctions.
4 And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK
as its property with liberty to sell the same within ____ days from the date of the execution of this
Trust Receipt and for the Bank's account, but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds) either by way of conditional
sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage
or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the
BANK, with the understanding that the BANK is, not to be chargeable with the storage premium
or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the
BANK, to apply against the relative acceptances (as described above) and for the payment of any
other indebtedness of mine/ours to the BANK. In case of non-sale within the period specified
herein, I/we agree to return the goods under this Trust Receipt to the BANK without any need of
demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the
form of money or bills, receivables, or accounts separate and capable of identification as property
of the BANK.
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 59

Colinares v. CA: two possible situations in a trust receipt transaction. The first
is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the
owner. Thus, failure of the entrustee to turn over the proceeds of the sale of
the goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust
receipt is a crime under P.D. No. 115, without need of proving intent to
defraud.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
The crime defined in P.D. No. 115 is malum prohibitum but is classified as
estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa
with abuse of confidence. It may be committed by a corporation or other
juridical entity or by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315.
Though the entrustee is a corporation, nevertheless, the law specifically
makes the officers, employees or other officers or persons responsible for the
offense, without prejudice to the civil liabilities of such corporation and/or
board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable.
D. Remedies Available

Section 13.Penalty Clause. The failure of an entrustee to turn over the proceeds Ong v CA
of the sale of the goods, documents or instruments covered by a trust receipt to 2 September 1983
the extent of the amount owing to the entruster or as appears in the trust Ponente: Relova, J.
Krys
receipt or to return said goods, documents or instruments if they were not sold
or disposed of in accordance with the terms of the trust receipt shall constitute
the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership, association or
other juridical entities, the penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from
the criminal offense.

SUMMARY:
Ong obtained and received machineries from Tramat Mercantile, but
wasn’t able to sell them or thereafter return them to Tramat. An
information for estafa was filed. A few months later, Tramat filed a civil
case for sum of money against Ong and the parties subsequently
entered into a compromise agreement, which the court approved.
Petitioner moved for dismissal of the case on the ground that there was
a novation, but the trial court and the CA denied such motion. SC
affirmed.
DOCTRINE: After the infomation is filed in court, compromise of the
estafa case arising from violation of the Trust Receipts Law will not
amount to novation and will not extinguish the criminal liability of
the accused.
FACTS:
1. Ong obtained and received from Tramat Mercantile Inc several units
of machineries amounting to P133,550, in trust, for the purpose of
selling them, under the express obligation of turning over to Tramat,
the proceeds from the sale thereof, if sold, or of returning to the
latter the said goods, if not sold, within 90 days or immediately upon
demand.
2. Ong failed to perform his obligations under the agreement, so an
information for estafa was filed against him.
3. A few months after this, Tramat filed a civil case for sum of money
with the CFI of Manila. The parties entered into a compromise
agreement to settle the claim in the civil case, which the court
approved.
4. Ong moved to dismiss the criminal charge of estafa on the ground of
the novation because of the compromise agreement entered into
between him and the complainant, but the trial court denied the
motion. CA agreed with the lower court.
5. Ong’s argument is that: The compromise agreement in the civil case
novated the contract embodied in the trust receipts on which the
information in the Criminal Case was based, "inasmuch as there was
a change of object or principal conditions, under Article 1291 of the
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 60
Civil Code. There being a novation, even if such novation took place
after the filing of the Information in the criminal case, the transaction
had nonetheless been converted from a criminal violation to civil
obligation, which would therefore necessitate the consequent
dismissal of the criminal case.
ISSUE/HELD:
10. WON there was a novation of the contract embodied in the trust
receipt that would extinguish the criminal liability of the accused.
(There is no novation)
RATIO:
As correctly ruled by the CA, "novation does not extinguish the criminal
liability if the crime of estafa had been completed”. In the instant case the
crime of estafa had been consummated long before the compromise
settlement was agreed upon. In fact, the criminal case had already been filed
in the court. Therefore, the subsequent agreement did not affect the criminal
culpability of the petitioner."
[People v Nery] The novation theory may perhaps apply to the filing of the
criminal information in court by the state prosecutors because up to that time
the original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended
party may no longer divest the prosecution of its power to exact the
criminal liability, as distinguished from the civil. The crime being an
offense against the state, only the latter can renounce it
[Abeto v People] It may be observed in this regard that novation is not one of
the means recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent
the rise of criminal liability or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility, as when money loaned is made to appear
as a deposit, or other similar disguise is resorted to

Dispositive: Petition DISMISSED.
TEEHANKEE, J., dissenting:
I dissent from the majority opinion on the ground that the trust receipt
transaction, more so when there has been a compromise agreement after the
filing of the information for the discharge of petitioner-accused’s liability
under the importation covered by the trust receipt, gives rise only to civil
liability on the part of the said petitioner-accused. As previously stated by me
in my dissent in People v. Cuevo, the old capitalist orientation of putting
importers in jail for supposed estafa or swindling for non-payment of
the price of the imported goods released to them under trust receipts (a
purely commercial transaction), under the fiction of the trust receipt
device, should no longer be permitted in this day and age.
Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987)
(supra)
Philippine National Bank vs. Pineda, 197 SCRA 1 (1991)
South City Homes Inc et al v BA
Finance Corp
7 December 2001
Ponente: Pardo
rachel29012015
SUMMARY: Canlubang Automotive drew six drafts charged to Fortune
Motors, and the vehicles bought were covered by trust receipts. These
drafts and T/Rs were assigned to BA Finance. When Fortune and its
sureties—South City Homes and Palawan Lumber—failed to pay, BA
Finance filed a complaint for sum of money. The defendants filed a
motion to dismiss, alleging that BA Finance, in failing to first cancel the
trust and take possession of the vehicles, prematurely filed the action.
DOCTRINE: It was discretionary on the part of the entrustee to
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 61
exercise their right under the Trust Receipts Law to cancel the trust, or
to avail of another remedy.
FACTS:
Fortune Motors was availing of BA Finance Corporation’s credit facilities.
Fortune’s president executed in BA’s favor a continuing suretyship agreement
wherein he “jointly and severally unconditionally” guaranteed “full, faithful
and prompt payment and discharge of any and all indebtedness” of Fortune to
BA. Palawan Lumber Manufacturing and South City Homes Inc also executed
similar agreements.
Canlubang Automative Resources Corp drew six drafts in its own favor,
payable 30 days after sight, charged to Fortune’s account. Fortune then
executed trust receipts covering motor vehicles delivered to it by Canlubang.
Under these T/Rs, Fortune agreed to remit to Canlubang the proceeds of any
sale and surrender the remaining unsold vehicles. The drafts and T/Rs were
assigned to BA Finance, under deeds of assignment executed by Canlubang.
When Fortune failed to pay the amounts due under the drafts and remit the
proceeds, or return the unsold vehicles, BA Finance sent demand letters to
South City Homes and Palawan Lumber.
Procedural History
BA later filed a complaint for sum of money against South City Homes,
Fortune Motors and Palawan Lumber. The defendants filed a motion to
dismiss, arguing that conventional subrogation effected a novation without
Fortune’s consent and thus its liability was extinguished. Further, pursuant to
the T/R, it was premature to file a complaint for a sum of money as the
remedy of the entruster was an action for specific performance. The motion
was denied. The trial court ordered the defendants to pay BA Finance. The CA
affirmed the decision.
ISSUES/HELD:
1. Was the suretyship agreement valid? YES
2. Was there a novation of the obligation that extinguished the liability
of the sureties? NO
3. Did BA Finance have a valid cause of action for a sum of money
following the drafts and trust receipts transactions?

RATIO:
Validity of the suretyship agreement
The Civil Code, under Art. 2053, allows a suretyship agreement to secure
future loans even if the amount is not yet known. Fortune Motors v CA:
Comprehensive or continuing suretyship agreements are commonplace in
present-day financial and commercial practice.
Novation extinguishing liability
An assignment of credit was an agreement by virtue of which the owner of a
credit (assignor) by a legal cause (sale, dacion en pago, exchange, or donation)
and without consent of the debtor, transfers his credit and accessory rights to
another (assignee) who acquires the power to enforce it to the same extend
as the assignor could enforce it against the debtor. The third party steps into
the shoes of the original creditor as subrogee of the latter.
BA Finance’s proper remedy
A trust receipt is a security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise imported
or purchased.
In event of default by the entrustee of his obligations under the T/R, it was
not absolutely necessary that the entrustee cancel the trust and take
possession of the goods to enforce his rights under the T/R. Prudential Bank v
NLRC: PD 115 used the word “may” in granting the entruster the right to
cancel the trust and take possession of the goods. Thus, the entruster had the
discretion to avail of this right, or seek alternative action, such as a third-
party claim or a separate civil action, at any time upon default or failure of the
entrustee to comply with the terms and conditions of the T/R.
SARMIENTO JR & LIMPIN V CA &
ASSOCIATED BANKING CORP (2002)
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 62
Limpin sought to purchase 495K worth of iron scrap. To facilitate said
purchase, Associated Banking issused a Domestic Letter of Credit in
favor of Limpin’s supplier. Thereafter, a Trust Receipt was executed by
Limpin. Sarmiento signed as surety of Limpin’s obligation.
When the Trust Receipt became due, the Bank made demands for
Limpin to comply with his obligation, He failed.
Hence, the bank filed a CRIMINAL complaint for Violation of the Trust
Receipt Law against Limpin and Sarmiento. Sarmiento was, however,
dropped as a defendant. Only Limpin was convicted.
Now, Bank seeks to recover civilly from Sarmiento.
Sarmiento argument: Since the Bank failed to expressly reserve their
right to institute a separate civil action against him, it was impliedly
instituted with the criminal action where he was not convicted.
WON Bank may institute a separate civil action against Sarmiento
for civil liability. YES
NCC31: When the civil action is based on an obligation not arising
from the act or omission complained of as a felony, such civil action
may proceed independently of the criminal proceedings and
regardless of the result of the latter
This case:
Bank’s complaint against Sarmiento and Limpin was based on their
failure to comply with their obligation as spelled out in the Trust
Receipt. This breach of obligation is separate and distinct from any
criminal liability for “misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents or instruments
released under trust receipts”, punishable under Section 13 of the

Trust Receipts Law (P.D. 115) in relation to Article 315(1), (b) of the
Revised Penal Code.
PILIPINAS BANK, petitioner,
vs. ALFREDO T. ONG and LEONCIA
LIM, respondents.
SANDOVAL-GUTIERREZ, J.:
SUMMARY:
BMC applied and was granted a letter of credit. To secure payment of
the amount, BMC executed 2 trust receipts. On the due dates, BMC
failed to comply with the trust receipt agreement. BMC filed a petition
for rehabilitation and for declaration in a state of suspension of
payments with the SEC. BMC and a consortium of 14 creditor banks,
including the bank at bar, entered into a MOA rescheduling payment.
BMC defaulted in the payment under the rescheduled scheme in the
MOA. The bank filed a complaint charging BMC with violation of the
Trust Receipts Law. BMC countered that they could not be charged
with violation of the Trust Receipts Law because their trust receipt
agreement was novated by the subsequent MOA. Hence their
relationship with the bank now is only creditor debtor and not
entruster entrustee. SC agreed with BMC.
SUMMARY:
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 63
BMC applied and was granted a letter of credit. To secure payment of
the amount, BMC executed 2 trust receipts. On the due dates, BMC
failed to comply with the trust receipt agreement. BMC filed a petition
for rehabilitation and for declaration in a state of suspension of
payments with the SEC. BMC and a consortium of 14 creditor banks,
including the bank at bar, entered into a MOA rescheduling payment.
BMC defaulted in the payment under the rescheduled scheme in the
MOA. The bank filed a complaint charging BMC with violation of the
Trust Receipts Law. BMC countered that they could not be charged
with violation of the Trust Receipts Law because their trust receipt
agreement was novated by the subsequent MOA. Hence their
relationship with the bank now is only creditor debtor and not
entruster entrustee. SC agreed with BMC.
FACTS
Baliwag Mahogany Corporation (BMC), through its president,
respondent Alfredo T. Ong, applied for a domestic commercial letter of
credit with petitioner Pilipinas Bank (bank) to finance the purchase of
about 100,000 board feet of "Air Dried, Dark Red Lauan" sawn lumber.
The bank approved the application and issued Letter of Credit in the
amount of P3,500,000.00. To secure payment of the amount, BMC,
through Ong, executed 2 trust receipts.
On due dates, BMC failed to comply with the trust receipt
agreement. On November 22, 1991, it filed with the Securities and
Exchange Commission (SEC) a Petition for Rehabilitation and for a
Declaration in a State of Suspension of Payments under Section 6 (c) of
P.D. No. 902-A as amended.
A Creditors’ meeting was held. The SEC subsequently issued an
order creating a Management Committee wherein the bank is
represented. Afterwards, BMC and a consortium of 14 of its creditor
banks entered into a Memorandum of Agreement (MOA) rescheduling
the payment of BMC’s existing debts. On November 27, 1992, the SEC

rendered a Decision approving the Rehabilitation Plan of BMC as
contained in the MOA and declaring it in a state of suspension of
payments.
BMC and Ong defaulted in the payment of their obligations under
the rescheduled payment scheme provided in the MOA.
The bank filed with the Makati City Prosecutor’s Office a
complaint charging respondents with violation of the Trust Receipts
Law PD No. 115 The bank alleged that both respondents failed to pay
their obligations under the trust receipts despite demand.
Provincial Prosecutor of Rizal dismissed the complaint. DOJ
denied the bank’s appeal.
CA, however, ordered the filing of the appropriate
criminal charges for violation of P.D. No. 115, otherwise known as The
Trust Receipts Law, against private respondents. Upon a motion for
reconsideration however, CA reversed itself saying that execution of
the MOA constitutes novation which places the Bank in estoppel to
insist on the original trust relation and constitutes a bar to the filing of
any criminal information for violation of the trust receipts law.
ISSUE 1: WON THE BANK CAN STILL ALLEGE VIOLATION OF THE
TRUST RECEIPTS LAW DESPITE THE MOA IT ENTERED INTO – no
Bank: contends that the MOA did not novate, much less extinguish, the
existing obligations of BMC under the trust receipt
agreement. The bank, through the execution of the MOA,
merely assisted BMC to settle its obligations by rescheduling
the same. Hence, when BMC defaulted in its payment, all its
rights, including the right to charge respondents for violation
of the Trust Receipts Law, were revived.
Respondents maintain that the MOA, which has the effect of a
compromise agreement, novated BMC’s existing obligations
under the trust receipt agreement. The novation converted the
parties’ relationship into one of an ordinary creditor and
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 64
debtor. Moreover, the execution of the MOA precludes any
criminal liability on their part which may arise in case they
violate any provision thereof.
Court:
Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust
receipt as any transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee, whereby
the entruster who owns or holds absolute title or security interest
over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution
and delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing
to the entruster or as appears in the trust receipt, or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.
Failure of the entrustee to turn over the proceeds of the sale of the
goods covered by a trust receipt to the entruster or to return the
goods, if they were not disposed of, shall constitute the crime of estafa
under Article 315, par. 1(b) of the Revised Penal Code
It is on this premise that the bank charged respondents with
violation of the Trust Receipts Law. Mere failure to deliver the
proceeds of the sale or the goods, if not sold, constitutes violation of
PD No. 115. However, what is being punished by the law is the
dishonesty and abuse of confidence in the handling of money or goods
to the prejudice of another regardless of whether the latter is the
owner.
In this case, no dishonesty nor abuse of confidence can be
attributed to respondents. Record shows that BMC failed to comply
with its obligations upon maturity of the trust receipts due to serious
 Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 65

liquidity problems, prompting it to file a Petition for Rehabilitation 3) Status of obligation Matured Payable within 7
and Declaration in a State of Suspension of Payments. It bears years
emphasis that when the bank made a demand upon BMC to comply
with its obligations under the trust receipts, the latter was already 4) Governing law Criminal Civil & Commercial
under the control of the Management Committee. Moreover, it has not
escaped this Court’s observation that respondent Ong paid 5) Security offered Trust Receipts Real estate/chattel
P21,000,000.00 in compliance with the equity infusion required by the mortgages
MOA.
The mala prohibita nature of the offense notwithstanding, 6) Interest rate per annum (Unspecified) 14%
respondents’ intent to misuse or misappropriate the goods or their
proceeds has not been established by the records. 7) Default charges 24% 14%

ISSUE 2: WON THE MOA NOVATED THE TRUST RECEIPT AGREEMENT 8) No. of parties 3 16
BETWEEN THE PARTIES – yes
- Quinto vs. People: two ways which could indicate novation: - Applying the pronouncement in Quinto, we can safely conclude
o When novation has been stated and declared in that the MOA novated and effectively extinguished BMC's
unequivocal terms. obligations under the trust receipt agreement.
o When the old and the new obligations are incompatible - The bank's argument that BMC's non-compliance with the
on every point. The test of incompatibility is whether MOA revived respondents’ original liabilities under the trust
or not the two obligations can stand together. receipt agreement is completely misplaced. As stated in their
- Contrary to petitioner's contention, the MOA did not only agreement, what is automatically terminated in case BMC
reschedule BMC’s debts, but more importantly, it provided failed to comply with the conditions under the MOA is not the
principal conditions which are incompatible with the trust MOA itself but merely the obligation of the lender (the bank) to
agreement. The undisputed points of incompatibility between reschedule the existing credits.
the two agreements are: - Moreover, it is erroneous to assume that the revesting of "all
the rights of lenders against the borrower" means that
Points of incompatibility Trust Receipt MOA petitioner can charge respondents for violation of the Trust
Receipts Law under the original trust receipt agreement. As
explained earlier, the execution of the MOA extinguished
1) Nature of contract Trust Receipt Loan
respondents’ obligation under the trust
receipts. Respondents’ liability, if any, would only be civil in
2) Juridical relationship Trustor-Trustee Lender-Borrower
nature since the trust receipts were transformed into mere
loan documents after the execution of the MOA.

HELD: petition denied
Landl & Co. v. Metrobank
30 July 2004
Ynares-Santiago, J.
Manzano
SUMMARY: Landl entered a letter of credit agreement with Metrobank. This
was secured by a trust receipt. Landl failed to turn over the goods to
Metrobank upon maturity of the trust receipt. Nevertheless, it turned over
the goods upon demand by Metrobank. The goods were sold in an auction
sale where Metrobank won as the highest bidder. Upon application of the
proceeds to Landl’s obligations and costs, there remained a balance of
Landl’s obligation. Landl argued that its turnover of the goods extinguished
its liability. SC found otherwise and ruled in favor of Metrobank.
DOCTRINE: The initial repossession by the bank of the goods subject of the
trust receipt did not result in the full satisfaction of the petitioners’ loan
obligation. The second paragraph of Section 7 expressly provides that the
entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the expenses of the
sale, the payment of the expenses of re-taking, keeping and storing the
goods, documents or instruments, and the satisfaction of the entrustee’s
indebtedness to the entruster. (You may also read Sir’s case outline for a
complete doctrine.)
FACTS:
1. Metropolitan Bank and Trust Company (Metrobank) filed a
complaint for sum of money against Landl and Company (Phil.) Inc.
(Landl) and its directors, Percival G. Llaban and Manuel P. Lucente.
2. Landl is engaged in the business of selling imported welding rods
and alloys. It opened Commercial Letter of Credit with Metrobank,
in the amount of US$19,606.77, which was equivalent to
P218,733.92 in Philippine currency at the time the transaction was
consummated. The letter of credit was opened to purchase various
welding rods and electrodes from Perma Alloys, Inc., New York,
U.S.A.
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 66
3. To secure the indebtedness of Landl & Co., Metrobank required the
execution of a Trust Receipt in an amount equivalent to the letter of
4.
credit.
Upon maturity of the trust receipt, Landl & Co. defaulted in the
payment of its obligation and failed to turn over the goods to the
latter. Metrobank demanded that Landl & Co. turn over the goods
subject of the trust receipt. Landl & Co. turned over the subject
goods to the Metrobank.
5. The goods were sold at public auction. The goods were sold for
P30,000 with Metrobank as the highest bidder.
6. The proceeds of the auction sale were insufficient to completely
satisfy Landl’s outstanding obligation to Metrobank,
notwithstanding the application of the time deposit account of
petitioner Lucente. Accordingly, Metrobank demanded that Landl
pay the remaining balance of their obligation. After Landl failed to
do so, Metrobank instituted the instant case to collect the said
deficiency.
7. TC ruled In favor of Metrobank.
8. Landl & Co. appealed to the CA and raised the issue of: whether or
not Metrobank has the right to recover any deficiency after it has
retained possession of and subsequently effected a public auction
sale of the goods covered by the trust receipt. CA affirmed in toto the
decision of the TC.
ISSUE:
1. WON respondent bank has the right to recover any deficiency
after it has retained possession of and subsequently effected a
public auction sale of the goods covered by the trust receipt?
YES.
Section 7 of Presidential Decree No. 115, or the Trust Receipts Law reads as
follows:
Sec. 7. Rights of the entruster. - The entruster shall be
entitled to the proceeds from the sale of the goods, documents
or instruments released under a trust receipt to the entrustee
to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the

enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this
Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure
of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between
the entruster and the entrustee, and the entruster in
possession of the goods, documents or instruments may, on or
after default, give notice to the entrustee of the intention to
sell, and may, not less than five days after serving or sending of
such notice, sell the goods, documents or instruments at public
or private sale, and the entruster may, at a public sale, become
a purchaser. The proceeds of any such sale, whether public or
private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee’s indebtedness to the
entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency. Notice of sale shall be
deemed sufficiently given if in writing, and either personally
served on the entrustee or sent by post-paid ordinary mail to
the entrustee's last known business address.
Landl failed to pay their outstanding obligation to Metrobank.
Landl: when the entrustee fails to settle his principal loan, the entruster may
choose between two separate and alternative remedies: (1) the return of the
goods covered by the trust receipt, in which case, the entruster now acquires
the ownership of the goods which the entrustee failed to sell; or (2) cancel the
trust and take possession of the goods, for the purpose of selling the same at a
private sale or at public auction. Under this second remedy, the entruster
does not acquire ownership of the goods, in which case he is entitled to the
deficiency. These two remedies are so distinct that the availment of one
necessarily bars the availment of the other. Thus, when Metrobank availed of
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 67
the remedy of demanding the return of the goods, the actual return of all the
unsold goods completely extinguished petitioners’ liability.
SC: The second paragraph of Section 7 provides a statutory remedy available
to an entruster in the event of default or failure of the entrustee to comply
with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee. More specifically, the
entruster “may cancel the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds realized therefrom at
any time”. The law further provides that “the entruster in possession of the
goods, documents or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days after serving
or sending of such notice, sell the goods, documents or instruments at public
or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be
applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to the
entruster. The entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency.”
The initial repossession by the bank of the goods subject of the
trust receipt did not result in the full satisfaction of the petitioners’ loan
obligation. The second paragraph of Section 7 expressly provides that
the entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the expenses of
the sale, the payment of the expenses of re-taking, keeping and storing
the goods, documents or instruments, and the satisfaction of the
entrustee’s indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to
satisfy entirely Landl’s indebtedness to Metrobank. Metrobank was well
within its rights to institute the instant case to collect the deficiency.
We find, however, that there has been an error in the computation of the
total amount of petitioners’ indebtedness to respondent bank.
DISPOSITIVE: CA affirmed with modifications.
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E. Warehousman’s Lien

Philippine National Bank vs. Se, Jr., 256 SCRA 380 (1996)

Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998)