Trust Receipt Law Notes

What are the purposes of Trust Receipt Law (PD 115)?

The following are the purposes of the Trust Receipt Law:

1. To encourage and promote the use of the trust receipts as an additional and convenient aid to
commerce and trade;
2. To regulate trust receipt transactions in order to assure the protection of the rights and the
enforcement of the obligations of the parties involved therein; and
3. To declare the misuse and/or misappropriation of goods or proceeds realized from the sale,
goods, documents or instruments released under trust receipts as a criminal offense punishable
under Art 315 of the Revised Penal Code (swindling or estafa).

What is a trust receipt transaction?

Trust Receipt Transaction is a transaction between an entruster and an entrustee whereby the
entruster, who owns or holds absolute title or security in 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 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 the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of (Sec. 4, PD No. 115).

Who are the parties in a trust receipt transaction?

1. Entruster - the person holding title over the goods, documents or instruments subject of a trust
transaction, or any successor in interest of such person. He is not the owner of the goods but merely a
holder of security interest.

2. Entrustee - the person 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 or purposes specified in
the trust receipt agreement. He is the owner of the goods purchased. In fact, the law imposes on him
the risk of loss of the goods (res perit domino)

3. Seller of the goods – not strictly and actually a party to the trust receipt transaction; but a party to
the contract of sale with the buyer/importer (entrustee).

What are the rights of the entruster?

The rights of the entruster are the following:

 1. To receive the proceeds of the sale of the goods, documents or instruments released under the
trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears
in the trust receipt;
2. To the return of the goods, documents or instruments in case of non-sale;
3. To the enforcement of all other rights conferred on him in the trust receipt;
4. To cancel the trust in case the entrustee defaults and to take possession of the goods;
5. To sell, after proper notice to the entrustee, of the goods, documents or instruments at public
or private sale and apply the proceeds to his claims and charges

What are the obligations of the entruster?

1. To give possession of the goods to the entrustee;
2. To give at least 5 days notice to the entrustee of the intention to sell the goods at public sale

What are the rights of the entrustee?

1. To receive the surplus from the public sale;
2. To have possession of the goods as a condition for his liability under the trust receipt law.

What are the obligations of the entrustee?

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 enstruster 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 the loss from fire, theft, pilferage or other
casualties;
4. Keep the goods or proceeds separate and identifiable 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 PD
115

Distinguished from:

Pledge – In a pledge, the financer possesses the property; in a trust receipt, the person financed
possesses the property

Conditional Sale – In a conditional sale, there is a sale of the property from the seller to the buyer; in a
trust receipt, there is no sale of the property from the entruster to entrustee

Chattel Mortgage – A chattel mortgage involves the creation of a lien upon the property; a trust receipt
does not involve the creation of a lien

Consignment – In a consignment, the consignor retains title to the property to secure the indebtedness
due from the consignee [bipartite]; in a trust receipt, the seller does not retain title to the property but
transfers such title to the entruster (not to the entrustee) [tripartite]
What is the required form of trust receipt?

A trust receipt need not be in any particular form but every such receipt must contain:

1. Description of the goods, documents or instruments subject of the trust receipt;

2. The total invoice value of the goods and the amount of the draft to be paid by the entrustee;
3. An undertaking or commitment of the entrustee
a. to hold in trust for the entruster the goods, documents or instruments;
b. to dispose of them in the manner provided for in the trust receipt;
c. to turn over the proceeds of the sale of the goods, documents or instruments to the
entruster to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return the goods, documents or instruments in the event of their non-sale.
4. The terms and conditions agreed by the parties

Who shall be liable in case of loss of goods?

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the
subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault
or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

What is the right of the purchaser for value and in good faith?

Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through
their customary form of transfer, who buys the goods, documents, or instruments for value and in good
faith from the entrustee, acquires said goods, documents or instruments free from the entruster's
security interest.

Validity of entruster's security interest as against creditors

The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a
trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt
agreement.

What is the penalty for breach by the entrustee?

Under the Trust Receipts Law, the failure of the entrustee to surrender the goods held under trust, or to
account for the proceeds of the sales thereof, of the entrustor, is estafa, which can make the entrustee
criminally liable under both the Trust Receipts Law and the Revised Penal Code, and liable to the
payment of damages under Art. 33 of the Civil Code. The penal provisions of PD No. 115 encompasses
any act violative of the obligation covered by the trust receipt. It is not limited to transaction in goods
which are to be sold (retailed, reshipped or stored) but also applies, to goods processed as a component
of a product ultimately sold to the general public.
What are the alternative obligation of the entrustee?

1. To return to the entruster the PROCEEDS of the sale of goods (entregarla)

2. To return the GOODS themselves in case the goods are not sold (devolvera)
● Thus, under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn
over the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when the
entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms
of the trust receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative – the
return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed.
When both parties enter into an agreement knowing that the return of the goods subject of the trust
receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the
goods. (Landbank vs. Perez, G.R. No. 166884, June 13, 2012)

What is the effect of non-compliance of the said obligation?

1. Criminal liability under both the TRL and RPC;

2. Civil liability for damages under Art. 33 of the Civil Code without need of proving intent to
defraud because it is malum prohibitum.

What is the effect of compliance of the said obligation?

1. Before criminal charge – no criminal liability
2. After charge, before conviction – extinguishment of criminal liability
The liability of the entrustee accrues on his failure to comply with his obligation to return. It is not
absolutely necessary that the entruster cancel the trust and take possession of the goods to be able to
enforce his rights under the TRL

2 innovations of PD 115 on civil law concept:

1. Exception to the principle of “Nemo Dat Quod Non Habet” – Under Art. 1505 of the Civil Code, where
there is a contract of sale, the buyer is to acquire only whatever title the seller had at time the sale was
perfected. Under PD 115, although the entrustee is not the owner of the goods under a trust receipt
(ownership retained by the entrustor), anyone who acquires the goods from the entrustee acquires
good title (ownership) over the goods

2. Exception to Rule “Res Perit Domino” – Contrary to the civil law principle that generally it is the owner
who bear the risk of loss of the object, under a trust receipt arrangement, although the entrustee is not
the owner of the goods covered by a trust receipt, should the goods be lost while in his possession,
ENTRUSTEE will bear the risk of loss.
Jurisprudence:

Does the trust receipt law violate the constitutional guarantee against imprisonment for non-payment
of debt?

TRL not violative of the guarantee against imprisonment for non-payment of a debt. What is sought to
be punished by the law is not the failure of the entrustee to pay the loan but his failure to comply with
his alternative obligation. TRL does not seek to enfoce payment of loan, rather it punishes dishonesty
and abuse of confidence in the handling of money or goods to the prejudice of another.

What is the nature of a trust receipt?

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."

Can the entruster who has taken actual and juridical possession of the goods subsequently avail of the
right to demand from entrustee the deficiency amount covered by the trust receipt?

Yes. Trust receipt arrangements being only a security for the loan agreement, the full turn-over of the
goods subject of the trust receipts does not suffice to divest debtors of their obligations to repay the
principal amount of their loan. Section 7 of PD 115 expressly provides that the entrustee shall be liable
to the entruster for any deficiency.

May the entrustee abandon the goods to set-off loan?

Entrustee-borrower cannot be relieved of his obligation to pay the loan simply by abandoning property
with bank.

Is the acquittal of the entrustee from criminal charge extinguish civil liability on the underlying loan?

A trust receipt arrangement with a bank for the importation of goods, does not make the bank an
investor in the venture as to extinguish the lender-creditor relationship, and the acquittal of the
entrustee in the criminal charge of estafa does not dissolve the civil liability arising from the trust receipt
arrangement. The trustee cannot extinguish his civil obligation under the trust receipts by surrendering
the goods if the lender is not willing to accept them.

Is the violation of TRL malum prohibitum?

The finding that there was no fraud and deceit is likewise misplaced considering that the offense is
punished as a malum prohibitum regardless of the existence of intent or malice. A mere failure to
deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes
prejudice not only to another, but more to the public interest.

What is the loan and security feature of the trust receipt transaction?

A 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. (Sps. Vintola vs. Insular Bank
of Asia and America, G.R. No. 73271, May 29, 1987)

Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features. The loan is brought
about by the fact that the entruster financed the importation or purchase of the goods under TR. Until
and unless this loan is paid, the obligation to pay subsists. If the entrustee 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 that it wants, which it cannot do. To consider the entrustee as the
true owner from the inception of the transaction would be to disregard the loan feature
thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232. June
29, 2005)

What is the penal sanction if offender is a corporation?

The Trust Receipts Law 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 Trust Receipts Law. (Ong
vs. CA, G.R. No. 119858, April 29, 2003)

In the event of default by the entrustee on his obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the trust and take possession of the goods to be able
to enforce his right thereunder?

The law uses the word "may" in granting to the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee has the discretion to avail of such right or seek
any alternative action, such as a third party claim or a separate civil action which it deems best to
protect its right, at any time upon default or failure of the entrustee to comply with any of the terms
and conditions of the trust agreement. (South City Homes, Inc. v. BA Finance Corporation, G.R. No.
135462, Dec. 7, 2001)
What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for conditions
incompatible with the trust receipt agreement, the obligation under the trust receipt is extinguished.
Hence, the breach in the subsequent agreement does not give rise to a criminal liability under P.D. 115
but only civil liability. (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8, 2002)

Can deposits in a savings account opened by the buyer subsequent to the TR transaction be applied to
outstanding obligations under the TR account?

No, the receipt of the bank of a sum of money without reference to the trust receipt obligation does not
obligate the bank to apply the money received against the trust receipt obligation. Neither does
compensation arise because compensation is not proper when one of the debts consists in civil liability
arising from criminal. (Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

Bar Questions:

Q: What is a trust receipt? [BAR Q. 1951, 1959].

A: Trust receipt refers to:

1. document executed between an entrustor and an enstrustee, under which the goods are
released to the latter who binds himself to hold the goods in trust or to sell or dispose of the
goods with an obligation to turn over the proceeds to the entrustor to the context of the
entrustee's obligation to him, if unsold, to return the goods.
2. a security agreement to which a bank acquires a "security interest" in the goods.

Q: Explain briefly the general liabilities and obligations of the trustee? ( BAR Q. 1951).
A: The entrustee is liable:

1. for any loss of the goods, documents. or instruments (Sec. 10, PD No. 115).
2. for estafa for failure to turn over the proceeds (Sec. 13, PD No. 115).

Q: X, a dealer in imported textiles, opened with Y Bank an irrevocable letter of credit in favor of his
American supplier, ABC Textile Inc. in the amount of $50,000.00 covering the full invoice value of 2,000
vales of suiting material. He paid Y Bank a marginal deposit of $40,000.00 and the correspondent bank
of Y Bank in the United States paid ABC textile the amount of $50,000.00. The clothing materials were
subsequently shipped by ABC textiles to Manila, with Y Bank as consignee. Y Bank took delivery of the
shipment and had it stored in its bodega. Thereafter X executed the corresponding trust receipt, but
before X could take possession of the goods, a fire of unknown origin gutted the bodega of Y Bank ,
resulting in the total loss of the goods. When sued for the balance of $10,000.00 X denied liability,
contending that Y Bank, as consignee and owner of the goods, should bear the loss. Is the contention of
X tenable? Reason? (BAR Q. 1982).

A: The contention of X is not tenable.

First, the entrustor in a trust receipt is not the owner of the goods but merely a holder of a security title.
The entrustee merchant (X) is the owner of the goods and its return or inability to sell the goods does
not relieve it of its obligation to pay for the money borrowed."

Second, under Sec. 30: "Loss of goods, documents, or instruments which are the subject of a trust
receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of
the entrustee, shall not extinguish the obligation tot he entruster for the value therefore. "(Sec. 30,
Trust Receipts Law).