Letters Of Credit And Trust Receipt Cases 5b3s5k

Letters of Credit Definition and Nature: > 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 the seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying > To break the ime, the buyer may be required to contract a bank to issue a letter of credit, the issuing bank can authorize the seller to raw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit . The buyer and seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer > Once the letter of credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents and documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank > The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the 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. 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. It is any arrangement, however named or described, whereby a bank (issuing bank), acting at the request and on the instructions of a customer (applicant) or on its own behalf, binds itself to:

1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or 2. Authorize another bank to pay or to accept and pay such drafts, or 3. authorizes another bank to negotiate, against stipulated document(s),

Provided, the and conditions of the credit are complied with (Art. 2, Uniform Customs & Practice for Documentary Credits.) Note: They are in effect absolute undertakings to pay the money advanced or for the amount for which the credit is given on the faith of the instrument.

LAWS GOVERNING A LETTER OF CREDIT TRANSACTION It is the Uniform Customs and Practice (U) for documentary Credits for International Chamber of Commerce governs the Letters of credit (Metropolitan Waterworks vs. Daway, G.R. No. 160723, July 21, 2004) Articles 567 to 572 of the Code of Commerce on Letters of Credit are obsolete. However, in the absence of any provision in the Code of Commerce, commercial transaction shall be governed by the usages and customs generally observed. (Sec. 2, Code of Commerce)

Bar Question: Is irrevocable letter of credit and confirmed letter of credit synonymous? Answer: An irrevocable letter of credit is not synonymous with a confirmed letter of credit. In an irrevocable letter of credit, the issuing bank may not, without the consent of the beneficiary and the applicant, revoke its undertaking under the letter, whereas, 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 according to the and condition of the credit. (Prudential Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992)

Parties to a Letter of Credit 1. Buyer—procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title. He is the one initiating the operation of the transaction as buyer of the merchandise and also of the credit instrument. His contract with the bank which is to issue the instrument and is represented by the Commercial Credit Agreement form which he signs, ed by the mutually made promises contained in the agreement

2. Opening bank—usually the buyer’s bank which issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of titles to surrender the documents to the buyer upon reimbursement. As it is the one issuing the instrument, it should be a strong bank, well known and well regarded in international trading circles. 3. Seller—in compliance with the contract of sale, ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. He is also the beneficiary of the credit instrument because the instrument is addressed to him and is in his favor. While the bank cannot compel the seller to ship the goods and avail of the benefits of the instruments, however, the seller may recover from the bank the value of his shipment is made within the of the instrument, even though he hasn’t given the bank any direct consideration for the bank’s promises contained in the instrument 4. Correspondent bank/advising bank—to convey to the seller the existence of the credit or a confirming bank which will lend credence to the letter of credit issued by the lesser known issuing bank or paying bank which undertakes to encash the drafts drawn by the exporter. Furthermore, another bank known as the negotiating bank may be approached by the buyer to have the draft discounted instead of going to the place of the issuing bank to claim payment

Rights and Obligations of parties RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS > If the beneficiary is to be advised by the issuing bank by cable, the services of an ADVISING OR NOTIFYING BANK must always be utilized. > The responsibility of the NOTIFYING BANK is merely to convey or transmit to the seller or beneficiary the existence of the credit. However, if the beneficiary requires that the obligation of the issuing bank shall also be made the obligation of the bank to himself, there is what is known as a CONFIRMED COMMERCIAL CREDIT and the bank notifying the beneficiary of the credit shall become a CONFIRMING BANK. In this case, the liability of the confirming bank is primary and it is as if the credit were issued by the issuing and confirming banks tly, thus giving the beneficiary or a holder for value of drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. > The paying bank on which the drafts are to be drawn it may be the issuing bank or the advising bank. If the beneficiary is to draw and receive payment in his own currency, the advising bank may be indicated as the paying bank also. When the draft is to be paid in this manner, the paying bank assumes no responsibility but merely pays the beneficiary and debits the payment immediately to the which the issuing bank has with it. IF THE ISSUING BANK HAS NO WITH THE PAYING BANK, the paying bank reimburses itself by drawing a bill of exchange on the issuing bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at the buyeing rate for dollar exchange. The beneficiary is entirely out of the transaction because his draft is completely discharged by the payment, and the credit arrangement between the paying bank and issuing bank doesn’t concern him. > If the draft contemplated by the credit instrument, is to be drawn on the issuing bank or on other designated banks not in the city of the seller, any bank in the city of the seller which buys or discounts the draft of the beneficiary becomes a negotiating bank. As a rule, whenever, the facilities of an advising or notifying bank are used, the beneficiary is apt to offer his drafts to the advising bank for negotiation, thus giving the advising bank the character of a negotiating bank becomes an endorser and bona fide holder of the drafts and within the protection of the credit instrument. It is also protected by the drawer’s signature, as the drawer’s contingent liability, as drawer, continues until discharged by the actual payment of the bills of exchange. LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS > A commercial bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risk, and it may not thereafter be able to recover from the buyer or issuing bank, as the case may be, the money thus paid to the beneficiary > In the case of a discounting arrangement, wherein a negotiating bank pays the draft of a beneficiary of a letter of credit in order to save such beneficiary from the hardship of presenting the documents directly to the issuing bank, the negotiating bank can seek reimbursement of what has been paid to the beneficiary who as drawer of the draft continues to assume a contingent liability thereon. Thus, the negotiating bank has the ordinary right of recourse against the seller or beneficiary in the event of dishonor by the issuing bank.

PRINCIPLES IN LETTERS OF CREDIT 1.

Rule of Strict Compliance

What is the doctrine of strict compliance? The documents tendered by the seller/beneficiary must strictly conform to the of the letter of credit. The tender of documents must include all documents required by the letter. Thus, a correspondent bank which departs from what has been stipulated under the LC acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991)

Case: FEATI BANK v. CA Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. 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 also provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents. The logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated requests by the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the logs. Because of the absence of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the certification proved futile, he filed an action for mandamus and specific performance against Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an amended complaint making Feati Bank and Trust Company. Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the 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. In the case of a confirming bank, the correspondent 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 merely provided that the petitioner “forward the enclosed original credit to the beneficiary.” (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there. At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal by the petitioner to accept the tender of the private respondent is justified.

Independent Principle: What characterizes letters of credit, as distinguished from other accessory contract, 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. What is the independence principle? The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the LC has been fulfilled or not because in transactions involving LC, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-‐2481, Oct. 16, 1970). In effect, the buyer has no course of action against the issuing bank.

What is the effect of the buyer’s failure to procure a Letter of Credit to the main contract? The Letter of Credit is independent from the contract of sale. Failure of the buyer to open the Letter of Credit does not prevent the birth of the Sales Contract. (Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993) The opening of the Letter of Credit is only a mode of payment. The LC is not an essential requisite to the contract of sale. CASE: Transfield v. Luzon Hydro Corp

Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project. The contract provides for a period for which the project is to be completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for extension of time citing typhoon and various disputes delaying the construction. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee. Because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time. Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case Held: LHC can collect! Transfield’s argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. The independent nature of the letter of credit 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 letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be ened if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. 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 “fraud exception principle” is an exception to the independence principle. The untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to an injunction against payment. The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is a clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud in the main agreement; and © irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

Where the applicant entered into a Turnkey contract whereby it undertook to construct, on a turnkey basis, a seventy (70) megawatt hydro electric power station, the performance of which is secured by a standby letter of credit, the resort to arbitration by the applicant/ contractor to arbitration to determine if the latter is guilty of delay does not preclude the beneficiary to draw on the letter of credit upon the issuance of certificate of default because whether or not the issuance of certification of default amounted to fraud was not raised in the lower court and the parties did not stipulate that all dispute regarding delay should first be settled through arbitration before the beneficiary would be allowed to call upon the letter of credit. If drawing upon the letter of credit was wrongful due to the non-existent of the fact of default, the right of the applicant to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principle of law.

Fraud Exception Rule The “Fraud exception rule.” It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to an injunction against payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)

OTHER CASES Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970) FACTS: -On four (4) diffierent occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation, applied to the Bank for four (4) 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. -Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened. -By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the JB. Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, 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 of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands. -In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000. -Further payments were, however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the National Science Development Board, 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 below on December 10, 1962. LOWER COURT: Ordered the corporation and its co-defendants (the herein appellants) to pay BPI the amount of the LC agreement. DEFENSE OF DE RENY: It was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precautions to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and, that the foreign 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.

HELD: Under the of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible for the "existence, chancier, 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 front that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship my 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 inyone else in connection with the property or the shipping thereof," and "for any breach of contract between the shippers or vendors and ourselves, [purchasers] or any of us." Having agreed to these , the appellants have, therefore, no recourse but to comply with their covenant to the rules of evidence." The Code of Commerce, in its Article 2, likewise provides that "Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not, should be governed by the provisions contained in it, in their absence, b) the usages of commerce generally observed in each place, and in the absence of both rules, by those of the civil law" "Those acts contained in this Code and all Others of analogous character, shall be deemed acts of commerce." It must be noted that certain principles governing the issuance, acceptance and payment of letters of credit arc specifically provided for in the Code of Commerce. But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on of the violation by their vendor of its prestation. 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 Bank 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: "Its documentary credit operations, all parties concerned deal in documents and not in goods. payment, negotiation or acceptance against documents in accordance with the and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and reimbursed 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 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 me 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. Bank of Commerce v. Serrano, 451 SCRA 484 (2005) FACTS: - Via Moda International, through Serrano, obtained an export packing loan from, Bank of Commerce (BOC) secured by a Deed of Assignment over Irrevocable Transferable Letter of Credit. Serrano executed in favor of BOC Promissory Note. Via Moda then opened a deposit for the proceeds of the said loan. -BOC issued to Via Moda, Irrevocable Letter of Credit for the purchase and importation of fabric and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, Serrano, in representation of Via Moda, executed Trust Receipt . -Under the of the trust receipt, Via Moda agreed to hold the goods in trust for BOC as the latter’s property and to sell the same for the latter’s . In case of sale, the proceeds are to be remitted to the bank as soon as it is received, but not later than the maturity date. Said proceeds are to be applied to the relative acceptances, with interest and penalty or in the alternative, to return the goods in case of non-sale. -The goods covered by the trust receipt were shipped by Via Moda to its consignee in New Jersey, USA, who sent an Export Letter of Credit issued by the Bank of New York, in favor of BOC. The Regional Operations Officer of BOC signed the export declarations to show consent to the shipment. The proceeds of the entrusted goods sold were not credited to the trust receipt but, were applied by the bank to the principal, penalties and interest of the export packing loan. The excess was applied to the trust receipt, leaving a balance. - BOC sent a demand letter to Via Moda to pay the said amount plus interest and penalty charges, or to return the goods covered by Trust Receipt within 5 days from receipt.The demand was not heeded.

-Serrano was charged with the crime of estafa under Article 315 (b) of the Revised Penal Code in relation to Presidential Decree No. 115.

ISSUE: Whether or not Serrano is tly and severally liable with Via Moda under the guarantee of the Letter of Credit secured by the Trust Receipt.

HELD: - A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is 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. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of 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. By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and 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 return the goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the and conditions specified in the trust receipt. - Serrano cannot be held civilly liable under the trust receipt since she was not made personally liable nor was she a guarantor therein . The parties stipulated during the pre-trial that respondent Serrano executed the trust receipt in representation of Via Moda, Inc., which has a separate personality from Serrano, and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate fiction. It thus ruled that this was not Serrano’s personal obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda. ______________________________________________

TRUST RECEIPT CASES Colinares v CA G.R. No. 90828. September 5, 2000 Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s convent at Camaman-an, Cagayan de Oro City. Colinares applied for a commercial letter of credit with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of credit for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust receipt as security. PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of the loan. After the initial payment, the spouses defaulted. PBC wrote to Petitioners demanding that the amount be paid within seven days from notice. Instead of complying with PBC’s demand, Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle the . Colinares proposed that the of payment of the loan be modified P2,000 on or before 3 December 1980, and P1,000 per month . Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980, and thereafter P500 on 11 February 1981, 16 March 1981, and 20 April 1981. Concurrently with the separate demand for attorney’s fees by PBC’s legal counsel, PBC continued to demand payment of the balance. On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code During trial, petitioner Veloso insisted that the transaction was a “clean loan” as per verbal guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed the documents without reading the fine print, only learning of the trust receipt implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere formality. 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. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust Receipt Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was only a day later, 31 October 1979, that they went to the

bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a “security interest” in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. There are 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. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code, without need of proving intent to defraud. ________________________ Ng vs People Facts: Anthony Ng was engaged in the business of building and fabricating telecommunication towers under the trade name Capitol Blacksmith and Builders. Petitioner applied for a credit line of Php 3,000,000 with Asiatrust. In of Asiatrust’s credit investigation, petitioner voluntarily submitted the following documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said telecommunication companies to build several steel towers; and, (3) the collectible amounts he has with the said companies. Asiatrust approved petitioner’s loanapplication. Petitioner was thenrequired to sign several documents, among which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements,[4] and Promissory Notes. Though the Promissory Notes had maturity dates, the two Trust Receipt Agreements did not bear any maturity dates. After petitioner received the goods, consisting of chemicals and metal plates from his suppliers, he utilized them to fabricate the communication towers ordered from him by his clients. As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrusts representative appraiser reported that approximately 97% of the subject goods of the Trust Receipts were sold-out and that only 3 % of the goods remained. E fforts toward a settlement failed to be reached. Asiatrust O fficer filed a Complaint-A ffidavit for Estafa, as defined and penalized under Art. 315,par. 1(b) of the RPC in relation to Sec.3, PD 115 or the Trust Receipts Law. Issue: Whether the petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. Ruling: 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. 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 (entregarla) to the owner of the merchandise sold, while the second refers to the merchandise received under the obligation to return it (devolvera) 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, viz: Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. A trust receipt is considered a security transaction intended to aid in financing importers and retail dealers who do not have su fficient 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 principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions. Regardless of whether the transaction is foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales. The release of such goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds himself to hold the specific goods in trust for the entruster and to sell or otherwise dispose of the goods with the obligation to turn over to the

entruster the proceeds to the extent of the amount owing to the entruster or the goods themselves if they are unsold. 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. Petitioner is correct that there was no misappropriation or conversion on his part, because his liability for the amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the proceeds of the sale and not prior to the receipt of the full price of the goods. PD 115 provides that an entrustee is only liable for Estafa when he fails to turn over the proceeds of the sale of the goods covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt in accordance with the of the trust receipt.

______________________________________________ Spouses Vintola v Insular Bank of America (IBAA) G.R. No. 73271 May 29, 1987 Facts: On August 20, 1975 the spouses Tirso and Loreta Vintola (VINTOLAS), doing business under the name and style “Dax Kin International,” were granted a domestic letter of credit by the Insular Bank of Asia and America (IBAA), Cebu City. in the amount of P40,000.00. The Letter of Credit authorized the bank to negotiate for their drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. In consideration thereof, the VINTOLAS, tly and severally, agreed to pay the bank “at maturity, in Philippine currency, the equivalent, of the aforementioned amount or such portion thereof as may be drawn or paid, upon the faith of the said credit together with the usual charges. On the same day, having received from Stalin Tan the puka and olive shells worth P40,000.00, the VINTOLAS executed a Trust Receipt agreement with IBAA, Cebu City. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the “latter’s property with liberty to sell the same for its , ” and “in case of sale” to turn over the proceeds as soon as received to (IBAA) the due date indicated in the document was October 19, 1975. Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS in a letter dated January 1, 1976. The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for their own personal use and benefit the aforesaid goods. During the trial of the criminal case the VINTOLAS turned over the seashells to the custody of the Trial Court. The VINTOLAS rest their present appeal on the principal allegation that their acquittal in the Estafa case bars IBAA’s filing of the civil action because IBAA had not reserved in the criminal case its right to enforce separately their civil liability. Issue: Whether or not Vintolas in their criminal liability are absolved by settlement of their liability to IBAA Held: Entruster does not become the real owner of the goods but merely the holder of a security title for the advances made under the Letter of Credit —Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor. Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in question does not affect IBAA’s right to recover the advances it had made under the Letter of Credit. The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared that the facts from which the civil action might arise, did not exist, for, it will be recalled that the decision of acquittal expressly declared that “the remedy of the Bank is civil and not criminal in nature.” This amounts to a reservation of the civil action in IBAA’s favor, for the Court would not have dwelt on a civil liability that it had intended to extinguish by the same decision. The VINTOLAS are liable ex contractu for breach of the Letter of Credit—Trust Receipt, whether they did or they did not “misappropriate, misapply or convert” the merchandise as charged in the criminal case. Their civil liability does not arise ex delicto, the action for the recovery of which would have been deemed instituted with the criminal action (unless waived or reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist would have extinguished the civil action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed regardless of the result of the latter. Allied Banking Corporation v Ordonez GR No. 82495 : December 10, 1990. Facts: Philippine Blooming Mills (PBM, for short) thru its duly authorized officer, private respondent Alfredo Ching, applied for the issuance of commercial letters of credit with petitioner’s Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot High Fired Refractory Sliding Nozzle Bricks. Allied Bank issued an irrevocable letter of credit in favor of Nikko Industry Co., Ltd. (Nikko) by virtue of which the latter drew four (4) drafts which were accepted by PBM and duly honored and paid by the petitioner bank. To secure payment of the amount covered by the drafts, and in consideration of the transfer by petitioner of the possession of the goods to PBM, the latter as entrustee, thru private respondent, executed four (4) Trust Receipt Agreements with maturity dates on acknowledging petitioner’s ownership of the goods and its (PBM’S) obligation to turn over the proceeds of the sale of the goods, if sold, or to return the same, if unsold within the stated period. PBM defaulted on the payment of the trust receipts.. Despite repeated demands, PBM failed and refused to either turn over the proceeds of the sale of the goods or to return the same. Allied Bank filed a criminal complaint against private respondent for violation of PD 115 before the office of the

Provincial Fiscal of Rizal. The Fiscal found a prima facie case for violation of PD 115 on four (4) counts and filed the corresponding information in court. PBM contended that since it was under rehabilitation receivership, no criminal liability can be imputed to Ching. Issue: Whether or not rehabilitation bars the filing of the estafa case against Ching Held: It cannot be denied that the offense was consummated long before the appointment of rehabilitation receivers. The filing of a criminal case against respondent Ching is not only for the purpose of effectuating a collection of a debt but primarily for the purpose of punishing an offender for a crime committed not only against the complaining witness but also against the state. The crime of estafa for violation of the Trust Receipts Law is a special offense or mala prohibita. It is a fundamental rule in criminal law that when the crime is punished by a special law, the act alone, irrespective of its motives, constitutes the offense. In the instant case the failure of the entrustee to pay complainant the remaining balance of the value of the goods covered by the trust receipt when the same became due constitutes the offense penalized under Section 13 of P.D. No. 115; and on the basis of this failure alone, the prosecution has sufficient evidence to establish a prima facie case (Res. No. 671, s. 1981; Allied Banking Corporation vs. Reinhard Sagemuller, et al., Provincial Fiscal of Rizal, September 18, 1981). In examination of P.D. 115 shows the growing importance of trust receipts in Philippine business, the need to provide for the rights and obligations of parties to a trust receipt transaction, the study of the problems involved and the action by monetary authorities, and the necessity of regulating the enforcement of rights arising from default or violations of trust receipt agreements. The legislative intent to meet a pressing need is clearly expressed . __________________________________________ People v Judge Nitafan G.R. Nos. 107964-66. February 1, 1999 Facts: Allied Banking Corporation filed an information for estafa against Betty Sia Ang, proprietess of Eckart Enterprises. The comlaint alleged that Ang received from the bank Goardon plastics amounting to P398,000 specified in a trust receipt and covered by a Domestic Letter of Credit. Ang had the obligation to sell the goods and to for the proceeds, if sold, or to return the goods, if not sold, on or before 16 October 1980, or upon demand. Despite repeated demands, Ang paid only P283,115. It was alleged that she misappropriated, misapplied and converted the balance to her own personal use and benefit. Ang filed a motion to quash the information, alleging that violation of the trust receipt constitutes only a civil liability. Judge Nitafan granted the Motion to quash. Ang also questioned the constitutionality of PD 115, contending that it violates the constitutional prohibition for imprisonment for debt . Issue: Whether or not PD 115 is constitutional. Held: 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 or not the latter is the owner. The law does not seek to enforce payment of the loan. There is thus no violation of the Constitutional right imprisonment for non-payment of debts. Section 1(b) of Article 315 states that one of the means by which to commit estafa is “by misappropriating or converting, to the prejudice of another, money, goods received by the offender in trust or under any other obligation involving the duty to make delivery of or to return the same. It is the failure of Ang to for the balance that makes her liable for estafa. Trust receipt arrangements do not involve a simple loan transaction. Apart from a loan feature, the trust receipt arrangement has a security feature covered by the trust receipt itself. The second feature provides needed financial assistance to traders in the importation or purchase of goods through the use of the goods as collateral for the advancements made by the bank. The title of the bank to the security is the one sought to be protected and not the loan which is a separate and distinct agreement. Like BP 22, PD 115 punishes the act as an offense against public order, not against property. The offense is punished as a mala prohibitum regardless of the existence of intent or malice. A mere failure to deliver the proceeds of the sale or the goods constitute a criminal offense that causes prejudice to another and, more importantly, to the public interest. __________________________________________ Tupaz v Court of Appeals G.R. No. 145578 November 18, 2001 Facts: Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (“El Oro Corporation”). El Oro Corporation 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, petitioners, on behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands (“respondent bank”) for two commercial letters of credit. The letters of credit were in favor of El Oro Corporation’s suppliers, Tanchaoco Manufacturing Incorporated Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV (“petitioner Jose Tupaz”) signed, in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made

several demands for payments but El Oro Corporation made partial payments only. On 27 June 1983 and 28 June 1983, respondent bank’s counsel and its representative respectively sent final demand letters to El Oro Corporation. El Oro Corporation replied that it could not fully pay its debt because the Armed Forces of the Philippines had delayed paying for the survival bolos. Issue: Whether or not Tupaz can escape liability in violation of the Trust Receipt Law by the delayed payment of the bolo Held: A corporate representative g as a solidary guarantee as corporate representative did not undertake to guarantee personally the payment of the corporation’s debts. In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El Oro Corporation. Thus, under petitioner Petronila Tupaz’s signature are the words “Vice-Pres–Treasurer” and under petitioner Jose Tupaz’s signature are the words “Vice-Pres– Operations.” By so g that trust receipt, petitioners did not bind themselves personally liable for El Oro Corporation’s obligation. In Ong v. Court of Appeals, a corporate representative signed a solidary guarantee clause in two trust receipts in his capacity as corporate representative. There, the Court held that the corporate representative did not undertake to guarantee personally the payment of the corporation’s debts. 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. ; Excussion is not a prerequisite to secure judgment against a guarantor; The benefit of excussion may be waived. _____________________________________________________________ Development Bank of the Philippines v Prudential Bank G.R. No. 143772 Facts: Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering “trust receipts” it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. 9 years later, DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the “trust receipts.” Sometime in June 1982, Prudential Bank learned about DBP’s plan for the overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over the various items covered by the “trust receipts” which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the highest bidder. Learning of the intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP reasserting its claim over the items covered by “trust receipts” in its name and advising DBP not to include them in the auction. It also demanded the turn-over of the articles or alternatively, the payment of their value. Issue: Whether or not the chattel mortgage covers the goods under the trust receipt Held: No. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the things pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential Bank’s demand. By its failure to pay or return them despite Prudential Bank’s repeated demands and by selling them to Lyon without Prudential Bank’s knowledge and conformity, DBP became a trustee ex maleficio. As a consequence of the release of the goods and the execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of them and (2) to turn over to the entruster either the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the and conditions specified in the trust receipt. In the case of goods, they may also be released for other purposes substantially equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose of ultimate sale, in which case the entruster retains his title over the said goods whether in their original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale. Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale.