1.

CONSOLIDATED BANK AND TRUST
COMPANY V. CA
G.R. No. 114286
April 19, 2001
FACTS:
Respondents Continental Cement Corporation
(hereinafter, respondent Corporation) and
Gregory T. Lim (hereinafter, respondent Lim)
obtained from petitioner Consolidated Bank and
Trust Corporation Letter of Credit in the amount
of P1,068,150.00 for the purchase of 500k L of
bunker fuel oil from Petrophil Corporation, which
the latter delivered directly to respondent.
Respondent Corporation paid a marginal deposit
of P320,445.00 to petitioner. A trust receipt for
the amount of P1,001,520.93 was executed by
respondent Corporation, with respondent Lim as
signatory for the payment of the abovementioned
Bunker fuel. [The value of the trust receipt fully
debited the Respondents for the whole amount of
tis face value
In the case at bar, the delivery to respondent
Corporation of the goods subject of the trust
receipt occurred long before the trust receipt
itself was executed. More specifically, delivery of
the bunker fuel oil to respondent Corporations
Bulacan plant commenced on July 7, 1982 and
was completed by July 19, 1982. Further, the oil
was used up by respondent Corporation in its
normal operations by August, 1982. On the other
hand, the subject trust receipt was only executed
nearly two months after full delivery of the oil
was made to respondent Corporation, or on
September 2, 1982. Also, 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 since the deposit
of the respondent should be set off with the face
value of the letter of credit.
Petitioner is ordered to reimburse respondent
Continental Cement Corporation the amount of
P490,228.90 with interest thereon at the legal
rate from July 26, 1988 until fully paid.

Petitioner filed a complaint for sum of money

claiming that respondents failed to turn over the
goods covered by the trust receipt or the
proceeds thereof.

Respondents averred that the transaction

between them was a simple loan and not a trust
receipt transaction, and that the amount claimed
by petitioner did not take into account payments
already made by them. Respondent Lim also
denied any personal liability in the subject
transactions.

ISSUE:

Whether or not the transaction is a trust receipt

agreement.

HELD:

The transaction is 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. In a pure trust receipt
transaction, the goods belong in ownership to the
bank and are only released to the importer in
trust after the loan is granted.
 2. Vintola v. Insular Bank of Asia and goods the Vintolas had purchased through IBAA
America financing remain their own property and they
hold it at their own risk. The trust receipt
FACTS: arrangement did not convert the IBAA into an
investor, the latter remained a lender and
The spouses Vintola are owners of a
creditor. Since the IBAA is not the factual owner
business which is engaged in manufacturing
of the goods, the Vintolas cannot justifiably claim
seashells which they are converting into a finish
that because they have surrendered the goods to
product. They are operating in the trade name of
IBAA and subsequently deposited them in the
Dax Kin International.
custody of the court, they are absolutely relieved
On August 20, 1975, they applied for of their obligation to pay their loan because of
domestic letter of credit to Insular Bank of Asia their inability to dispose of the goods. The fact
and America (IBAA) which was granted. After that they were unable to sell the seashells in
that, they executed a Trust Receipt Agreement question does not affect IBAAs right to recover
with Insular Bank stipulating that the Vintolas the advances it had made under the Letter of
shall hold the goods in trust for IBAA. Having Credit
defaulted on their obligation, IBAA demanded
3. Development
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 crime of Estafa was dismissed by the

trial court.

ISSUE:

Whether Vintolas who were absolved of

Estafa is relieved from their liability to IBAA

HELD:

No.

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
 4. NG V PEOPLE
619 SCRA 291
FACTS:
Petitioner Anthony Ng, then engaged in
the business of building and fabricating
telecommunication towers under the trade name
"Capitol Blacksmith and Builders," applied for a
credit line of PhP 3,000,000 with Asiatrust
Development Bank, Inc. (Asiatrust).
Asiatrust approved petitioners loan
application. Petitioner was then required to sign
several documents, among which are the Credit
Line Agreement, Trust Receipt Agreements, and
Promissory Notes. Though the Promissory Notes
matured on their maturity dates, the two Trust
Receipt Agreements did not bear any maturity
dates as they were left unfilled or in blank by
Asiatrust.
After petitioner received the goods
(chemicals and metal plates from his suppliers)
he utilized them to fabricate the communication
towers ordered from him by his clients which
were installed in three project sites (Isabel,
Leyte; Panabo, Davao; and Tongonan).
As petitioner realized difficulty in
collecting from his client Islacom, he failed to pay
his loan to Asiatrust. Asiatrust then conducted a
surprise ocular inspection of petitioners business
through Linga, Asiatrusts representative
appraiser. Linga reported to Asiatrust that he
found that approximately 97% of the subject
goods of the Trust Receipts were "sold-out and
that only 3 % of the goods remained." Asiatrust
then endorsed petitioners account to its Account
Management Division for the possible
restructuring of his loan. The parties held a series
of conferences to work out the problem and to
determine a way for petitioner to pay his debts.
However, efforts towards a settlement failed to
be reached.
A Complaint-Affidavit was before the
Office of the City Prosecutor of Quezon City.
Thereafter, an Information 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, was filed with the RTC
stating that the petitioner defrauded Ma. Girlie C.
Bernardez by entering into a Trust Receipt
Agreement with said complainant whereby said
petitioner as entrustee received in trust from the
said complainant various chemicals with the
obligation to hold the said chemicals in trust as
property of the entruster with the right to sell the
same for cash and to remit the proceeds thereof
to the entruster, or to return the said chemicals if
unsold but said petitioner misappropriated,
misapplied and converted the said amount to his
own personal use and benefit.
Petitioner Ng argued that the loan was
granted as his working capital and that the Trust
Receipt Agreements he signed with Asiatrust
were merely preconditions for the grant and
approval of his loan.
RTC: found petitioner guilty of the crime of Estafa
CA: Denied the appeal, affirmed the decision of
the RTC
ISSUE: Whether or not petitioner is liable for
Estafa under Art. 315, par. 1(b) of the RPC in
relation to PD 115.
HELD: No.
PD 115 does not apply. Petitioner Ng is
not liable for Estafa both under the RPC and PD
115. The transaction between petitioner and
Asiatrust is not a trust receipt transaction but one
of simple loan.
A trust receipt transaction 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.
A trust receipt is considered 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. (Samo v People). The transactions in
relation to trust receipts mainly involved sales.
Petitioner was transparent to Asiatrust
from the very beginning that the subject goods
were not being held for sale but were to be used
for the fabrication of steel communication towers.
He was commissioned to build, out of the
materials received, steel communication towers,
not to sell them.
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.
Further, Linga showed that he had no real
personal knowledge or proof of the fact that the
goods were indeed sold during the ocular 5. PNB vs. PINEDA
inspection. The Memorandum of Linga, which was
based only on his presumption and not any actual A letter of credit is a financial device
personal knowledge, should not have been used developed by merchants as a
by the trial court to prove that the goods have in convenient and relatively safe mode of
fact been sold. dealing with sales of goods to satisfy the
Petitioner is not liable for Estafa under seemingly irreconcilable interests of the
Sec. 13 of PD 115 because it provides that an seller, who refuses
entrustee is only liable for Estafa when he fails to part with his goods before he is p
"to turn over the proceeds of the sale of the aid, and a buyer, who wants to have
goods x x x covered by a trust receipt to the control of the goods before paying
extent of the amount owing to the entruster or as To break the impasse, the buyer may be
appears in the trust receipt x x x in accordance required to contract a bank to
with the terms of the trust receipt." issue a letter of credit, the issuing ba
There was no misappropriation or nk can authorize the seller to
conversion on his part, because his liability for raw drafts and engage to pay the
the amount of the goods subject of the trust m upon their presentment
receipts arises and becomes due only upon simultaneously with the tender of
receipt of the proceeds of the sale and not prior documents required by the letter of
to the receipt of the full price of the goods. credit. The buyer and seller agree on
Petitioner was only obligated to turn over the what documents are to be
proceeds as soon as he received payment. presented for payment, but ordinarily t
However, the evidence reveals that petitioner hey are documents of title evidencing
experienced difficulties in collecting payments or attesting to the shipment of the goods
from his clients for the communication towers. to the buyer
Thus, absent proof that the proceeds have been Once the letter of credit is established
actually and fully received by petitioner, his , the seller ships the goods to the
obligation to turn over the same to Asiatrust buyer and in the process secures the
never arose. 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 an
d 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 whil
e the buyer acquires the said
documents and control over the goods
only after reimbursing the bank.
Trust Receipt

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.
FACTS:
In 1963, Ignacio Arroyo, married to Lourdes
Tuason Arroyo (the Arroyo Spouses), obtained a
loan of P580,000.00 from petitioner bank (PNB)
to purchase 60% of the subscribed capital stock
of private respondent Tayabas Cement Company,
Inc. (TCC). As security for said loan, the spouses
Arroyo executed a real estate mortgage (REM)
over a parcel of land in Quezon City known as the
La Vista property.
Thereafter, TCC filed with PNB an application and
agreement for the establishment of an eight (8)
year deferred letter of credit (L/C) for
$7,000,000.00 in favor of Toyo Menka Kaisha,
Ltd. of Tokyo, Japan, to cover the importation of
a cement plant machinery and equipment. Upon
approval of said application and opening of an
L/C by PNB in favor of Toyo Menka Kaisha, Ltd.
for the account of TCC, the Arroyo spouses
executed a Security Agreement and a Covenant
to secure this loan accommodation.
The imported cement plant machinery and
equipment arrived from Japan and were released
to TCC under a trust receipt agreement.
Subsequently, Toyo Menka Kaisha, Ltd. made the
corresponding drawings against the L/C as
scheduled. TCC, however, failed to remit and/or
pay the corresponding amount covered by the
drawings. Thus, pursuant to the trust receipt
agreement, PNB notified TCC of its intention to
repossess, as it later did, the imported machinery
and equipment for failure of TCC to settle its
obligations under the L/C.
In the meantime, the personal accounts of the
spouses Arroyo, which included another loan of
P160,000.00 secured by a real estate mortgage
over parcels of agricultural land known as
Hacienda Bacon located in Isabela, Negros
Occidental, had likewise become due. The
spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to
foreclose the real estate mortgages executed by
the spouses Arroyo in its favor. The La Vista
property was foreclosed with PNB winning the
bid. However, when said property was about to
be awarded to PNB, the representative of the
mortgagor-spouses objected and demanded from
the PNB the difference between the bid price of
P1,000,001.00 and the indebtedness of
P499,060.25 of the Arroyo spouses on their
personal account. It was the contention of the
spouses Arroyo's representative that the
foreclosure proceedings referred only to the
personal account of the mortgagor spouses
without reference to the account of TCC.
PNB filed a supplemental petition requesting the
Sheriff's Office to proceed with the sale of the
subject real properties to satisfy not only the
amount owed by the spouses Arroyos on their
personal account but also the amount owed by
said spouses as sureties of TCC.
Subsequently, PNBs petition for mandamus was
granted and the sheriff was directed to proceed
with the foreclosure sale of the mortgaged
properties. Before the decision could attain
finality, TCC filed a complaint seeking, inter alia,
the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over
the La Vista property and Hacienda Bacon. It also
asked a declaration that its obligation with PNB
had been fully paid by reason of the latter's
repossession of the imported machinery and
equipment.
The CFI, thru respondent Judge Gregorio Pineda,
issued a restraining order and granted a writ of
preliminary injunction. Hence, this petition.
ISSUE:
Whether or not TCC's liability has been
extinguished by the repossession of PNB of the
imported cement plant machinery and
equipment.
HELD:
No.
It must be remembered that PNB took possession Proceeding from this finding, PNB has the right to
of the imported cement plant machinery and foreclose the mortgages executed by the spouses
equipment pursuant to the trust receipt Arroyo as sureties of TCC. A surety is considered
agreement executed by and between PNB and in law as being the same party as the debtor in
TCC giving the former the unqualified right to the relation to whatever is adjudged touching the
possession and disposal of all property shipped obligation of the latter, and their liabilities are
under the Letter of Credit until such time as all interwoven as to be inseparable. As sureties, the
the liabilities and obligations under said letter Arroyo spouses are primarily liable as original
had been discharged. promisors and are bound immediately to pay the
creditor the amount outstanding.
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.

PNB's possession of the subject machinery

and equipment being precisely as a form of
security for the advances given to TCC
under the Letter of Credit, said possession
by itself cannot be considered payment of
the loan secured thereby. Payment would
legally result only after PNB had foreclosed on
said securities, sold the same and applied the
proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by
the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale
itself.

Neither can said repossession amount

to dacion en pago. Dation in payment takes
place when property is alienated to the
creditor in satisfaction of a debt in money
and the same is governed by sales. Dation in
payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of
the obligation. As aforesaid, the repossession
of the machinery and equipment in question
was merely to secure the payment of TCC's
loan obligation and not for the purpose of
transferring ownership thereof to PNB in
satisfaction of said loan. Thus, no dacion en
pago was ever accomplished.
 6. PRUDENTIAL BANK vs. NLRC
FACTS:
Interasia Container Industries, Inc.
(INTERASIA) was embroiled in three labor cases
which were all resolved against it. Monetary
awards consisting of 13th month pay differentials
and other benefits were granted to complainants.
It was recomputed and separation pay totaling
P125, 788.30 was included due to the illegal
closure of operations of INTERASIA plus P1, 188,
466.32 as wage differentials, separation pay and
other benefits.
Upon finality writs of execution were
issued and the Sheriff levied on execution
personal properties located in the factory.
Petitioner filed an Affidavit of Third-Party
Claim asserting ownership over the seized
properties on the strength of trust receipts
executed by INTERASIA in its favor. As a result,
the Sheriff suspended the public auction sale. But
the LA denied the petitioners claim and declared
Angel Peliglorio as highest bidder.
LA ordered the release of the properties to
Peliglorio. Peliglorio alleged that the public
auction was conducted without notice and in a
place other than the premises of INTERASIA.
It also raises issue on the extent of its
security title over the properties subject of the
levy on execution, submitting that while it may
not have absolute ownership over the properties,
still it has right, interest and ownership consisting
of a security title which attaches to the
properties.
Petitioner differentiates a trust receipt,
which is a security for the payment of the
obligations of the importer, from a real estate
mortgage executed as security for the payment
of an obligation of a borrower. Petitioner argues
that in the latter the ownership of the mortgagor
may not necessarily have any bearing on its
acquisition, whereas in the case of a trust receipt
the acquisition of the goods by the borrower
results from the advances made by the bank. It
concludes that the security title of the bank in a
trust receipt must necessarily be of the same or
greater extent than the nature of the security
arising from a real estate mortgage. Petitioner
maintains that it is a preferred claimant to the
proceeds from the foreclosure to the extent of its
security title in the goods which are valued at
P46,100,253.92 otherwise its security title will
become useless.
Private respondent submits that
petitioners negligence to immediately assert its
right to cancel the Trust Receipt Agreements,
upon INTERASIA's failure to comply with its
obligation, is fatal to its claim.
NLRC: Trust receipts are mere security
transactions which do not vest upon petitioner
any title of ownership, and that although the
Trust Receipt Agreements described petitioner as
owner of the goods, there was no showing that it
canceled the trust receipts and took possession
of the goods.
HELD:
The petition is impressed with merit. We
cannot subscribe to NLRC's simplistic
interpretation of trust receipt arrangements. In
effect, it has reduced the Trust Receipt
Agreements to a pure and simple loan
transaction.
The mechanics and effects flowing from a
trust receipt transaction, particularly the
importance given to the security held by the
entruster, i.e., the person holding title over the
goods, were fully discussed in earlier decisions,
as follows
By this arrangement a banker advances
money to an intending importer, and thereby
lends the aid of capital, of credit, or of
business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this
trade could hardly be carried on by any other
means, and therefore it is of the first
importance that the fundamental factor in the
transaction, the banker's advance of money
and credit, should receive the amplest
protection. Accordingly, in order to secure
that the banker shall be repaid at the critical
point that is, when the imported goods
finally reach the hands of the intended
vendee the banker takes the full title to
the goods at the very beginning; he
 takes it as soon as the goods are bought
and settled for by his payments or
acceptances in the foreign country, and
he continues to hold that title as his
indispensable security until the goods are
sold in the United States and the vendee is
called upon to pay for them. This security is
not an ordinary pledge by the importer to the
banker, for the importer has never owned the
goods, and moreover, he is not able to deliver
the possession; but the security is the
complete title vested originally in the
bankers, and this characteristic of the
transaction has again and again been
recognized and protected by the
courts. Of course, the title is at bottom a
security title, as it has sometimes been
called, and the banker is always under
the obligation to reconvey; but only after
his advances have been fully repaid and
after the importer has fulfilled the other
terms of the contract.
trust and take possession of the
goods. 11 Consequently, petitioner 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.
Besides, as earlier stated, the law warrants
the validity of petitioner's security interest in the
goods pursuant to the written terms of the trust
receipt as against all creditors of the trust receipt
agreement. 12 The only exception to the rule is
when the properties are in the hands of an
innocent purchaser for value and in good faith.
The records however do not show that the
winning bidder is such purchaser. Neither can
private respondents plead preferential claims to
the properties as petitioner has the primary right
to them until its advances are fully paid.

[I]n a certain manner, (trust receipt

contracts) partake of the nature of a
conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes
absolute owner of the imported merchandise
as soon as he has paid its price. The
ownership of the merchandise continues to be
vested in the owner thereof or in the person
who has 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

Sec. 12 of PD 115 assures the entruster of

the validity of his claim against all creditors.

From the legal and jurisprudential standpoint

it is clear that the security interest of the
entruster is not merely an empty or idle title. To
a certain extent, such interest, such interest
becomes a "lien" on the goods because the
entruster's advances will have to be settled first
before the entrustee can consolidate his
ownership over the goods.

Significantly, the law uses the word "may" in

granting to the entruster the right to cancel the
 7. ROSARIO TEXTILE MILLS
CORPORATION and EDILBERTO
YUJUICO vs. HOME BANKERS
SAVINGS AND TRUST COMPANY
G.R. No. 137232.
June 29, 2005
FACTS: Sometime in 1989, Rosario textile Mills
Corporation (RTMC) applied from Home Bankers
Savings & Trust Co. for an Omnibus Credit Line
for P10 million. The bank approved RTMCs credit
line but for only P8 million. An officer of RTMC,
Edilberto Yujuico, signed a Surety Agreement in
favor of the bank in which he bound himself
jointly and severally with RTMC for the payment
of all RTMCs indebtedness to the bank from 1989
to 1990. RTMC availed of the credit line by
making numerous drawdowns, each drawdown
being covered by a separate promissory note and
trust receipt. RTMC, represented by Yujuico,
executed in favor of the bank a total of 11
promissory notes. Despite the lapse of the
respective due dates under the promissory notes
and notwithstanding the banks demand letters,
RTMC failed to pay its loans. Hence the bank filed
a complaint for sum of money against RTC and
Yujuico before the RTC. The RTC ruled in favor of
the bank which was affirmed by the appellate
court. RTMC et al. contended that under the trust
receipt contracts between the parties, they
merely held the goods described therein in trust
for Home Bankers Savings and Trust Company
which owns the same. Since the ownership of the
goods remains with the bank, then it should bear
the loss. With the destruction of the goods by
fire, petitioners should have been relieved of any
obligation to pay.
ISSUE: Whether or not Yujuico is absolved from
liability by the grant of the credit line and the
execution of the suretyship agreement
RULING: NO. Petitioners theorize that when
petitioner RTMC imported the raw materials
needed for its manufacture, using the credit line,
it was merely 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. RTMCs role in the transaction was
that of end user of the raw materials and when it
did not accept those materials as they did not
meet the manufacturing requirements, RTMC
made a valid and effective tender of the goods to
the bank. Since the bank refused to accept the
raw materials, RTMC stored them in its
warehouse. When the warehouse and its contents
were gutted by fire, petitioners obligation to the
bank was accordingly extinguished.
Petitioners stance, however, conveniently ignores
the true nature of its transaction with the bank.
In Samo vs. People, we 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.
In Vintola vs. Insular Bank of Asia and
America, we elucidated further that 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. 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.
Petitioners insistence that the ownership of the
raw materials remained with the bank is
untenable. In Sia vs. People,Abad vs. Court of
Appeals, and PNB vs. Pineda, we held that:
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 8. BANK OF THE PHILIPPINE ISLANDS,
true owner from the inception of the plaintiff-appellee, vs. DE RENY
transaction would be to disregard the loan FABRIC INDUSTRIES,INC., AURORA T.
feature thereof. TUYO and AURORA CARCERENY,
defendants-appellants.
Thus, petitioners cannot be relieved of their
obligation to pay their loan in favor of the bank. FACTS: On 4 different occasions in 1961, the De
Reny Fabric Industries, Inc., through its co-
defendants-appellants, Aurora Carcereny, alias
Aurora C. Gonzales, and Aurora T. Tuyo, its
president and secretary, respectively, applied to
the Bank for 4 irrevocable commercial letters of
credit to cover the purchase by the corporation of
goods described in the covering L/C applications
as dye- stuffs 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 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 the Bank peso
marginal deposits as each letter of credit
was opened.

The Bank issued irrevocable commercial letters of

credit addressed to its banks in the USA, with
instructions for them to notify the beneficiary,
the J.B. Distributing Company, that they have
been authorized to negotiate the latters sight
drafts up to the amounts mentioned therein.

J.B. Distributing Company drew upon and

collected the full value of the drafts up to the
amounts appearing in the L/Cs as above
indicated.

The correspondent banks debited the account of

the BPI with them up to the full value of the
drafts presented by the J.B. Distributing
Company, plus commission and thereafter,
endorsed and forwarded all documents to BPI.

Each shipment 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
subsequently discontinued by the corporation
when it was 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 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.
ISSUE: WON 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 are in conformity with the item appearing
therein.
RULING: No.
It was incontrovertibly proven by the Bank during
the trial 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.
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.
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.
9. PHIL. BANKING CORP. V. CHOA TIEK
SENG
No. 45233-R
November 29, 1978
FACTS
Defendant Choa Tiek Seng applied for the
issuance of a letter of credit (LOC) in the amount
of $4,875, on a shipment of 1,200 cartons of
raisins. An irrevocable LOC in favor of Mutual
International, Inc., San Francisco, California, USA
was opened by plaintiff Phil. Banking Corp.,
through its correspondent in San Francisco, the
Crocker-Citizens National Bank. Said
correspondent debited plaintiffs account in the
amount of $4,884.75 representing a sight draft
plus commissions and other charges. A debit
advice, together with the shipping documents,
was given to plaintiff. Despite demands of
plaintiff, defendant refused to pay his obligation.
The refusal of defendant to pay was premised on
the claim that the LOC required that the draft be
accompanied by a set of 2 original on board
bills of lading and that the defendant never
received the said shipment.
ISSUES
1. WON when a commercial bank issues a letter
of credit covering an importation of
merchandise, the bank warrants the quiality
and quantity oof the merchandise or the
geniuneness of the shipping documents NO
2. WON there was a failure to comply with the
requirement that among the supportinf
documents should be on board bills of
lading NO
3. WON it is material whether the correspondent
improperly honored the beneficiarys draft
NO
HELD
1. The LOC is distinct and separate from the
contract between the importer and the
exporter. Banks deal in documents and not in
merchanidse to be exported or shipped to the
importer. Hence, a defect in the goods or
non-arrival of the same is not the kind of risk
a bank bargains for when it issues a
commercial credit.
2. An on board bill of lading is issued when the
goods have been actually placed aboard the
ship with every reasonable expecttion that
the shipment is as good as on its way. The bill
of lading carried the notation on board Oct.
21, 1966 with an initial. This is sufficient
compliance with the requirement that the
notation be dated and signed or initiated by
the carrier or his agent. In the absence of
evidence to the contrary, the presumption is
that every person has performed his duty.
3. It is immaterial because plaintiff is not
answerable to defendant for the act of or for
any error, neglect or default of any of its
correspondents, which may be gleaned from
the appellants Application and Agreement for
LOC.
DECISION
Judgment affirmed except for modification in
attorneys fees.
10. FEATI Bank & Trust Company v.
Court of Appeals
FACTS: Bernardo Villaluz agreed to sell to Axel
Christiansen, a ship and merchandise broker,
2,000 cubic meters of lauan logs $27 per cubic
meter. Security Pacific National Bank of LA
(SPNB) issued an Irrevocable Letter of Credit
available at sight in favor of Villaluz for the total
purchase price of the logs. After inspecting the
logs, Christiansen issued a purchase order for the
said logs. The Letter of Credit was mailed to
FEATI Bank and Trust Company (FBTC) with
instruction that the draft to be drawn is on SPNB
and that it be accompanied by the following
documents, among others: a Certification from
Chirstiansen stating that the logs have been
approved prior to shipment in accordance with
terms and conditions of corresponding purchase
order.
The logs were thereafter loaded on the
vessel Zenlin Glory which was chartered by
Christiansen. The logs arrived at Korea and were
received by the consignee Hanmi Trade Devt
Comp. and were subsequently sold to another
party. However Christiansen failed and refused to
issue the certificate despite repeated demands by
Villaluz. Due to the absence of the said
certificate, FBTC refused to advance the payment
on the letter of credit. Central Bank issued a
memorandum declaring that the requirement of
certification is not allowed. Nevertheless, such
memo only came out after the letter of credit has
already lapsed.
RTC ruled in favor of Villaluz and held FBTC
and Christiansen solildarily liable, it held that:
FBTC is liable because it failed to negotiate the
letter of credit in the absence of the certification
even if the Central Bank held such requirement
as void. The Letter of Credit is irrevocable, the
issuing bank, SPNB, is deemed to honor it upon
presentment. And by accepting the instructions
from the issuing bank, FBTC assumed the same
undertaking. Under the principles and laws on
trust and estoppels, when FBTC accepted its role
as the notifying and negotiating bank in behalf of
the issuing bank, it in effect accepted a trust
reposed on it and became a trustee in relation to
Villaluz.
CA affirmed and further held: The Letter of
Credit in which the notifying bank gives its
assurance also that the opening banks obligation
will be performed. The notifying bank in will not
simply transmit but will confirm the opening
banks obligation by making it also its own
understanding, commitment or guaranty or
obligation.
ISSUE: Whether or not FBTC, as correspondent
bank, is to be held liable under the Letter of
Credit?
HELD: No. It is a settled rule in commercial
transactions involving Letters of Credit that the
documents tendered must strictly conform to its
terms. The tender of documents by the
beneficiary (seller) must include all documents
required by the Letters of Credit. 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 be able to recover from the
buyer or the issuing bank, the money thus paid
to the beneficiary. Moreover, under the Uniform
Customs and Practices for Documentary Credit,
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. And since a correspondent
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, as it is not its obligation to look
beyond the documents. It merely has to rely on
the completeness of the documents tendered by
the beneficiary.
An irrevocable credit refers to the duration
of the Letter of Credit. It means that the issuing
bank may not without the consent of the
beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke
the credit. On the other hand, a confirmed Letter
of Credit pertains to the kind of obligation
assumed by the correspondent bank. In this
case, 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 terms and conditions of the credit. Hence,
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.
11. INSULAR BANK OF ASIA & AMERICA
vs. IAC
G.R. No. L-74834
November 17, 1988
FACTS:
The Spouses Mendoza obtained two loans from
Philam Life totalling PhP 600,000. The loans
(together with a 14% nominal interest rate) were
to be liquidated in equal amortizations over a
period of 5 years. To secure payment, Philam Life
required that the said amortizations be
guaranteed by an irrevocable standby letter of
credit (L/C) of a commercial bank. As such, the
Spouses Mendoza contracted with Insular Bank
for the issuance of two irrevocable standby L/C in
favor of Philam Life for the total amount of PhP
600,000. These L/Cs were, in turn, secured by a
real estate mortgage on the property of the
spouses in favor of Insular Bank.
The Mendozas failed to pay Philam Life the
amortizations that fell due on 11 June 1978,
thus, Philam Life informed Insular Bank that it
was declaring both loans "entirely due and
demandable", and demanded the payment of
PhP492,996.30. Insular Bank contested the
propriety of calling in the entire loan, and philam
life desisted. However, the spouses once again
defaulted on their amortization, causing Philam
Life to declare the remaining PhP 274,779.56
entirely due and demandable again. By way of
defense, Insular Bank claimed that, as a mere
guarantor of the spouses, its remaining obligation
under the two standby L/Cs were only
PhP30,100.60. Later, the bank even claimed that
it made an overpayment to Philam Life, and
demanded a refund of the same.
Philam life filed a suit against the spouses and
Insular Bank for the recovery of the amount of
the loan allegedly still owed to them. The trial
court ruled that Insular Bank, "as surety", was
discharged of its liability to the extent of the
payment made by the spouses, as the principal
debtors, to Philam Life.
Upon appeal of Philam Life and the spouses, the strongly against the writer and so as to be
appellate court reversed the lower court's reasonable and consistent with honest intentions.
decision, and ruled that insular bank's liability
was not reduced by virtue of the payments made
by Mendoza.

ISSUE:

Whether the partial payments made by the

Spouses Mendoza would have the effect of
reducing the liability of the Insular Bank as
guarantor or surety under the terms of the
standby L/C in question.

RULING:

NO, the partial payments made will not reduce

the liability of Insular Bank.

Unequivocally, the subject standby Letters of

Credit secure the payment of any obligation of
the Mendozas to Philam Life including all
interests, surcharges and expenses thereon but
not to exceed P600,000.00. But while they are a
security arrangement, they are not converted
thereby into contracts of guaranty. They are
primary obligations and not accessory contracts.
Being separate and independent agreements, the
payments made by the Mendozas cannot be
added in computing IBBA's liability under its own
standby letters of credit. Payments made by the
Mendozas directly to Philam Life are 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
remains.

The amount of P222,000.00 as found by the trial

court, therefore, considered as "any obligation of
the accountee" under the L/Cs will still have to be
paid by Insular Bank under the explicit terms
thereof, which the bank had itself supplied.
Letters of credit are strictly construed to the end
that the rights of those directly parties to them
may be preserved and their interest safeguarded.
Like any other writing, it will be construed most
 12. BANK OF AMERICA, NT & SA, vs.
COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE,
G.R. No. 105395
December 10, 1993
FACTS: Bank of America received an Irrevocable
Letter of Credit issued by Bank of Ayudhya for
the Account of General Chemicals Ltd., Inc. for
the sale of plastic ropes and agricultural files with
Bank of America as advising bank and Inter-
Resin Industrial Corp. as beneficiary. Upon
receipt of the letter advice with letter of credit by
Inter- Resin told Bank of America toconfirm said
letter of credit, but the bank did not confirm
such. Bank of America explained that there was
no need for confirmation. Inter-Resin made a
partial availment of the Letter of Credit after
presentment of the required documents to Bank
of America. After confirmation of all the
documents BA issued a check in favor of IR. BA
advice Bank of Ayudhya of IRs availment under
the letter of credit and asked for the
corresponding reimbursement. IR presented
documents for the second availment under the
same LC but BA stopped the processing of such
after they received a telex from Bank of Ayudhya
declaring that the LC fraudulent. BA sued IR for
the recovery of the first LC payment.
ISSUE: Whether or not Bank of America may
recover what it has paid under the letter of credit
to Inter-Resin?
HELD: In fine, we hold that
First, given the factual findings of the courts
below, we conclude that petitioner Bank of
America has acted merely as a notifying bank
and did not assume the responsibility of a
confirming bank; and
Second, petitioner bank, as a negotiating bank, is
entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit
which has been disowned by the alleged issuer
bank.
A letter of credit is a financial device developed
by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying. To break the impasse, the
buyer may be required to contract a bank to
issue a letter of credit in favor of the seller so
that, by virtue of the latter of credit, the issuing
bank can authorize the seller to draw drafts and
engage to pay them upon their presentment
simultaneously with the tender of documents
required by the letter of credit. The buyer and
the seller agree on what documents 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.
There would at least be three (3) parties: (a) the
buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank
upon receipts of the documents of title; (b) the
bank issuing the letter of credit, which
undertakes to pay the seller upon receipt of the
draft and proper document of titles and to
surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who 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.
The number of the parties, not infrequently and
almost invariably in international trade practice,
may be increased. Thus, the services of an
advising (notifying) bank may beutilized to
convey to the seller the existence of the credit;
or, of a confirming bank which will end credence
to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, which
undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of
the issuing bank to claim payment, the buyer
may approach another bank, termed the
negotiating bank, to have the draft discounted.
It cannot seriously be disputed, looking at this
case, that Bank of America 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
Inter-Resin 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.
As an advising or notifying bank, Bank of America
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. The bare statement of the bank
employees, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of
credit certainly did not have the effect of
novating the letter of credit and Bank of
America's letter of advise, nor can it justify the
conclusion that the bank must now assume
totalliability on the letter of credit. Indeed, Inter-
Resin itself cannot claim to have been all that
freefrom fault. As the seller, the issuance of the
letter of credit should have obviously been a
great concern to it. It would have, in fact, been
strange if it did not, prior to the letter of credit,
enter into a contract, or negotiated at the every
least, with General Chemicals. In the ordinary
course of business, the perfection of contract
precedes the issuance of a letter of credit.
13.TRANSFIELD PHILIPPINES VS LUZON
HYDRO ELECTRIC CORP.
GR No 146717, Nov 22, 2004
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:
Transfields 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
enjoined 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.