INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty.
Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
LETTERS OF CREDIT
Letters of Credit, defined
1. Under the Code of Commerce 1
A type of commercial paper used in a commercial transaction
defined as “those issued by one merchant to another for the
purpose of attending to a commercial transaction.”
2. According to De Leon
“Letter from a merchant or a bank or a banker in one place
addressed to another in another place or country requesting
the addressee to pay money or deliver goods to a third person
named therein, the writer of the letter undertaking to provide
him to provide the goods or to repay him.”
Atty. Amago: In short, it is an undertaking of a bank upon the
instance of its customer, which is usually by the buyer of certain
goods, to pay the seller or beneficiary upon presentation of certain
documents or compliance of certain conditions.
Important: Based on the definition, there are three parties involved:
(1) the buyer, (2) the seller, and (3) the bank.
Contracts Involved
Three Contracts Involved
1 - Contract of sale between the buyer and the seller
2 - Contract between the buyer and the issuing bank
Buyer opens the letter of credit with the bank. This is not yet the letter
of credit. Bank has not yet undertaken to pay the seller.
3 - Letter of credit proper between the seller and the bank
Bank undertakes to pay the seller upon compliance of certain
conditions.
For the protection of the seller and buyer
Before a letter of credit is entered into, there is an underlying
transaction involving the buyer and the seller which transaction may
involve delivery of goods and the tendering of payment. It becomes an
issue if the places of the parties are distant from each other (i.e. Seller
is from Cebu while buyer is from U.S.).
If you are the seller, you would not want to let go of your goods
unless there is payment. On the part of the buyer, he also would not
want to let go of his money unless he sees the goods. So to protect
the interest of both parties, a letter of credit is opened so that the
buyer can make use of its credit from the bank, and the seller, after
complying with the conditions, gets the payment. In that sense, the
seller will be assured that there will be payment made once he has
complied with the conditions under the letters of credit.
Independence Principle; Fraud Exception Rule
GR: Independence Principle
The relationship between the buyer and the bank is separate and
distinct from the relationship between the buyer and the seller in the
main contract.
XPN: Fraud Exception Rule
1
Governs letters of credit as no law has been passed to govern it.
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Independence Principle
Independence Principle
The contracts are not considered one and the same. They should
perpetually be separated.
The relationship between the buyer and the bank is separate and
distinct from the relationship between the buyer and the seller in the
main contract. The bank is not required to investigate whether the
contract underlying the letter of credit has been fulfilled or not
because of the transactions involving letters of credit, banks only deal
with documents and not goods.
In effect, the buyer has no course of action against the issuing bank if
ever a problem/issue will arise with the contract between the buyer
and the seller because the contract in the LC is independent and
separate.
BPI v. De Reny Fabric Industries (1970)
Facts
There was a buyer for dyestuffs while the seller still has to ship the
goods. In order to facilitate the transaction, they entered into a letter
of credit. The letter of credit was opened with Bank A which, upon
securing all the documents required from the seller, paid the seller. It
turned out that that the goods shipped from the seller to the buyer are
colored chalks only and not dyestuffs as ordered by the buyer. The
buyer sued the bank for paying the seller.
Ruling
Since there is a separate contract between 1) the buyer and the seller
and that of 2) the seller and the bank and 3) even that of the bank
and the buyer, these 3 contracts are considered independent.
Whatever happens to the contract between the buyer and the seller
has nothing to do with the letters of credit. For as long as the seller
was able to comply with all the documentary requirements, the bank
has no reason not to pay the seller. In fact, it will be held liable if it will
not pay the seller when the seller has complied with all the conditions.
In that case, the buyer has no recourse with the bank.
Fraud Exception Rule
Fraud Exception Rule
Transfield Philippines Inc. v. Luzon Hydro Corp.
The untruthfulness of a certificate accompanying a demand for
payment under a standby letter of credit may qualify as fraud sufficient
to support an injunction against payment.
If the letter of credit was secured under a fraudulent transaction, SC
would apply the fraud exception rule.
In this case, however, it turned out that there was really no fraud. The
SC only had the occasion to mention the fraud exception rule but it
was not applied.
Atty Amago: There is really no clear instance when it is to be applied,
but as I understand it, it is to be applied when the buyer has informed
the bank that there is fraud involving the transaction so the letter of
credit should not be paid even if the seller has complied with all the
conditions.
When Fraud Exception Rule applies
1. If notification was made to the buyer
2. If the bank finds something irregular in the documents
When this happens, the bank informs the seller that there is something
wrong. If there really is no fraud, the bank may be liable for damages
to seller.
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
Application of the principle of unjust enrichment
The bank is supposed to pay because there is a contract between the
bank and the seller but if the seller will be made to receive payment
out of a fraudulent transaction, then that will be unjust enrichment.
The bank may still argue. The most equitable situation is for the bank
to stop payment under the letters of credit.
When invoked
It should be done before payment is made by the bank to the seller.
Otherwise, there is no use. The fraud exception rule is the defense
that will be used by the opening bank in not paying the seller.
Supposedly, it is a separate contract. Whatever happens between the
two of them is not supposed to include the bank.
Important: The bank will not act on its own. It will have to get
information first if received or known to them that there was fraud.
Invocation of the rule does not need court intervention
To invoke the Fraud Exception Rule, there is no need to go to court.
That is just the defense of the bank. i.e. Bank to Seller: “We received
an information from our client that we should not pay because this
transaction is deemed to be irregular."
Effect of erroneous invocation of the rule
The bank may refuse to pay under the fraud exception rule but it
stands the risk to be sued.2
Illustration: Independence Principle; Fraud Exception Rule
The seller did not deliver the goods to the buyer. The buyer now asks
the bank not to pay. Then supposedly, the seller will not go to the
bank since it cannot show proof that it has complied with the condition
before getting paid (i.e. proof of shipment and other documents).
Unless, he will create a document that there is shipment when in fact
there is none. In this case, the bank will not know the there is no
shipment due to the fabricated document. Then, it will pay the seller—
the independent principle rule will apply.
But the bank can refuse payment by posing a defense that there was
fraud. The bank may refuse to pay under the Fraud Exception Rule,
then it will be freed from liability.
If the bank paid, then it can recover the payment under the principle
of unjust enrichment.
Parties to the Letters of Credit
Usual parties Correspondent Banks
1. Buyer 4. Notifying Bank
2. Seller 5. Negotiating Bank
3. Opening Bank 6. Paying Bank
7. Confirming Bank
Parties
1. Buyer - Importer
2. Seller - Beneficiary/Consignee of the LC
3. Opening Bank - Buyer’s Bank where he applied for LC
2 IBL Notes: The bank cannot use the FER as a ground for denying payment in
itself, however, the rule allows the bank to go to court to ask for an injunction.
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Correspondent Banks
Other parties involved
Each has different liabilities depending on what role they play in the
transaction.
4. Notifying Bank - Correspondent bank of opening bank tasked
to inform the seller than an LC has been opened
It assumes no liability. This usually happens when the opening bank
does not have a branch in the place where the seller is located.
Example
There is no more Standard Chartered Bank in Cebu, but an LC was
opened in the US under Standard Chartered bank. It will course it thru
BDO—which will inform the seller that a letter of credit has already
been opened. This is necessary for the seller to be able to start
complying with the conditions
Atty Amago: Sometimes assumes the position of a negotiating bank
5. Negotiating Bank - Bank in seller’s place which gets the
documents and makes payment out of the LC, even if it is not
the one which actually issued the LC.
When it makes payment on the letter of credit, it assumes liability.
When it confirms, the seller is made to believe that everything is
already in order by the negotiating bank by virtue of the payment.
6. Paying Bank - buys or discounts the draft
This could be the issuing bank itself or a different bank. It discounts
the DRAFT of the seller.
Important: Draft - one of the documents that has to be submitted
back by the seller to the bank; a bill of exchange submitted by the
seller to the bank.
7. Confirming Bank - confirms the LC upon seller’s request
It confirms the validity of the LC issued by the opening bank upon the
seller's request
Example
If the seller from the Philippines will sell apples to the buyer in US, the
seller will open a letter of credit with the Opening Bank. The bank’s
affiliate in the US or the Notifying Bank will just merely notify the
buyer that a letter of credit has been opened in his favor.
The Notifying bank may also notify the buyer that a letter of credit has
been opened in his favor, only that the requirements and documents
to effect payment must be given to another bank or the Negotiating
Bank. The Negotiating Bank may be the one that will pay, or it may be
another bank as the case may be.
In an alternate situation, the Opening bank will go directly to a
Confirming bank, and the latter will notify and confirm the buyer of the
opening of a letter of credit. The Confirming bank will then have to pay
because he confirmed the letter of credit.
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017

Draft When Correspondent Banks are Involved

Draft, illustrated It gets complicated when there are correspondent banks

involved
Opening bank: BPI
When there are correspondent banks involved, the draft will not
Buyer: Atty Amago
Seller: Danrey change. It has to be in the name of the issuing bank (payee). The
negotiating bank will have to accept this, at the back it has to endorse.
It will transfer the document to the opening bank, the latter will accept
The buyer applies to the opening bank a Letter of Credit. The bank will
it because, after all, the negotiating bank holds that everything is in
then inform the seller that there is an LC opened in favor of the latter.
order. By negotiating an instrument, you endorse it and warrant that
the instrument is genuine and in all respects what it purports to be.
The seller will then comply with the conditions which includes the
making of the draft as follows:
Negotiating bank liable

To: Atty Amago
Pay BPI or order the amount of P500,000 on Feb 14, 2017.
Sgd.
Alvin
Important: The draft made by the seller must be addressed to the
buyer since the bank must collect from the buyer. The draft in a letter
of credit transaction looks like a bill of exchange
Seller executes the draft
The seller is the one executing the draft. The purpose of the draft is
for the bank to to present an evidence that it was the seller. It has to
be complied with as part of the condition. Otherwise, the opening bank
will not be able to collect from the buyer.
The negotiating bank will be liable on the instrument because it made
the endorsement which warranted that everything is in order.
Notifying bank not liable
It is different if you are just a notifying bank wherein you are a
stranger to the entire transaction. You’re done with the instruction that
you’ve complied with to inform the seller that you there is a letter of
credit open for you.
Paying bank
The paying bank will receive the document, so most likely, the
negotiating bank is also the paying bank because it accepted the
instrument and makes payment on the draft.
It is usually the bank where the seller is at because it is him who will
most likely pay.

Seller makes such document because it wants to receive payment. The
bank draft will be used as proof of payment of the bank to the seller.
In turn, the buyer will pay the bank.
Purpose
The purpose of the draft then is to prove that there was payment
already made by the bank to the seller.
If the opening bank has a branch in the seller’s place, then this bank is
the one paying the seller.
Confirming bank
It confirms the validity of the LOC. It is defined as a bank which upon
the request of the beneficiary, confirms the letter of credit issued by
the opening bank.

Reason
The seller has to issue a draft even if it is him who should be paid
because there is a need for the bank to present something to the
buyer so that the buyer will pay the bank.
Example
You don’t get paid as a seller because there is something wrong with
the application for the LOC and it was confirmed by a particular bank.
That particular bank is liable on the LOC, whether it is deficient or not.
There is a liability for you have confirmed that the LOC is open.

Liability of the seller for issuing the draft
He is liable as a drawer of the document.
Illustration
The LOC is a separate contract, which says that you will pay upon
compliance with all the conditions. If all conditions are complied with,
and this is confirmed by the confirming bank, and if you don’t receive
payment upon complying with all the conditions, the confirming bank
should be held liable for having confirmed the opening of the LOC.

Letter of Credit Transaction If there is a negotiating bank, the draft is still addressed to
the opening bank
Simplest transaction involving LOC At the end of the day, the opening bank is to be the one paid. So, the
1. Buyer opens a letter of credit with the bank seller has to issue the draft in favor of the opening bank. Otherwise,
2. Bank pays the seller it’s not the opening bank that will be paid.
3. Bank receives he draft from the seller
4. Seller presents to the buyer Indorsement of the negotiating bank
5. Buyer will receive payment from him. The negotiating bank will indorse it thru any indorsement in the NIL—
Blank or special, but most likely, the indorsement is in blank.
In addition to the draft, there has to be a bill of lading or proof of
shipping the goods. When negotiating bank classified as the paying bank
It can be the paying bank if it pays. Most likely, it will pay if it
negotiates, but if it only indorses without actually paying the seller,
and the seller is okay with this, then it also holds itself liable if there is
something wrong with the document. But most likely, the negotiating

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INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
bank is the paying bank because the seller will not part ways with the
draft if it does not get paid.
Nature of a Letter of Credit
A primary obligation, not a contract of guarantee
De Leon mentions that it is a contract of guarantee but the Supreme
Court has mentioned that it is not a contract of guarantee as it is a
primary obligation, not an accessory obligation. The letter of credit
itself is a separate contract from the transaction between the seller
and buyer. So, it runs counter to the principle that it is a primary
obligation if it is just a contract of guarantee.
Payable to a specified person, not a negotiable instrument
If you follow the requirement under the Code of Commerce, which
says that it has to be payable to a definite person then the letter of
credit cannot be a negotiable instrument because the negotiable
instrument is payable to order or to bearer, not a specified person.
Under Article 5683 of the Code of Commerce, the letter of credit has to
be payable to a definite person specifically.
Atty. Amago: Later on, you will learn that the code of commerce is
not the only law governing the letters of credit. In fact, seldom does
the Supreme Court refer to it.
Right to receive money, assignable
The bearer of the letter of credit is not bound to receive the money as
in the case of a notifying bank; or in fact the seller itself is not bound
to receive money as in the case where it does not want to issue a
draft. Instead, it can assign its right to someone else. And it will be
that person who will comply and receive money from the letter of
credit.
Buyer must have an account with the opening bank
Letter of credit is a commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have his credit
against the applicant of the letter. It is a commitment by the opening
bank that the seller will be paid and it will be collected against the
credit of the buyer. That’s why, the opening bank has to be the bank
of the buyer because the bank will not allow a letter of credit if the
buyer doesn’t have any account with the opening bank. So most likely,
the buyer has opened a letter of credit has an account in the bank.
Bank’s right to offset
The bank can offset the amount from the account of the buyer. This
can be done once the opening bank has made payment to the seller. If
you look at the cases, it is always the bank that is being sued by the
buyer.
Purpose
Historically, the purpose of the letter of credit is to facilitate the sale of
goods between the distant and unfamiliar buyers and sellers. But now,
it is used because there is distance between buyers and sellers.
3 4
Art 568. The essential conditions of letters of credit shall be:
To be issued in favor of a definite person and not to order.
1. To be limited to a fixed and specified amount, or to one or more
undetermined amounts, but within a maximum the limits of which has to
be stated exactly.
4|U N I V E R S I T Y O F S A N C A R L O S
Legal Relations
Because you have three separate contracts, you also have
three separate legal relations, viz:
1. Between the buyer and the seller
Governed by the law on sales, for example, if that’s the transaction
that they have.
2. Between the buyer and the opening bank
Governed by the application of the letter of credit. So whatever are the
policies or terms and conditions provided in the application form for
the letter of credit, that will govern the relation.
3. Between the seller and the issuing bank
Governed by the letter of credit itself under the Rule of Strict
Compliance which mean that the seller has to comply with all the
conditions and all the documentary requirements strictly for it to
receive payment from the opening bank.
Example
There is a certification that is ought to be issued by the seller and the
seller did not make it. The seller cannot compel the bank to pay him
because there has to be strict compliance of all the requirements
before payment can be received out of the letter of credit.
When transaction deemed consummated
Consummation of a letter of credit transaction
The transaction is deemed consummated at the time the opening bank
pays the seller. The contract between the seller and the
issuing/correspondent bank is the only contract involving the letter of
credit proper. In letters of credit, what we are looking at is the
undertaking of paying the seller. So once the seller receives payment,
the transaction is deemed consummated.
Applicability of Uniform Customs and Practices
Applicability of Uniform Customs and Practices
UCP is applicable on documentary credit in the Philippines. The Code
of Commerce, Article 24 provides that if there is no law applicable to a
particular situation, reference to customs and practices may be
resorted to. Then, the UCP for documentary credit should be resorted
to in relation to certain situations where it is not provided under the
law.
Atty. Amago: We have to understand that we just borrowed
Commercial Credit from abroad and UCP has also been revised through
the years.
You may check the provisions of the Code of Commerce, but they are
not enough to cover the transaction. The rules are laid down in
jurisprudence and under the UCP, so you can include that as part of
the law that you will present.
Code of Commerce, Article 2. Commercial transactions, whether performed by
merchants or not, and whether or not specified in this Code, shall be governed
by provisions contained herein, in default of such provisions, by the commercial
usages generally observed in each place and in the absence of both, by the rules
of civil law.
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017

What you do is maybe you can just ask for a notice: "Can you give me
Kinds of Letter of Credit
a confirmation that it has been opened?"
Kinds of letters of credit But in practice, the bank will not respond to your email. Usually, the
1. Commercial letter of credit transaction is from one bank to another.
Where there is a sale transaction between the buyer and the seller and 2. When you say letter of credit, does it really mean a piece
what has to be complied with by the seller is the condition and of paper?
presentation of certain documents
Not necessarily. It can be a letter because if you are the buyer, you
2. Standby letter of credit have to show proof to your seller that there has been a letter of credit
that has been opened. So it is the letter from your bank saying that
A security arrangement for the performance of a certain obligation. there is a letter of credit approved by the bank in your favor. That's
You can only draw against it if it is a transaction or undertaking which what you show to your seller, but again, the seller will not believe you.
has not yet been performed. This can be used in lieu of performance The seller will still have to ask the bank.
bond because it is sort of an undertaking by the opening bank that he
will pay the beneficiary if the transaction or the certain activity is not 3. Should there be at least 2 banks involved?
performed.
Not necessarily. It could just be one bank if the buyer and seller stay
Example in the same place, or even if not in the same place but there is a
In the case of a construction contract where the contractor promises branch there. Take note of the “One bank entity rule” under banking
to build the project and as a guarantee that he will do this, he will laws. There will be 2 banks if there is no branch, a corresponding
have to issue a performance bond. What it needs to prove is that there bank.
is non-performance of an obligation, then it will just draw on the
standby letter of credit. 4. What is the rationale of the seller why he should be the
one to draw the documents and present it to the bank?
Commercial letter of credit vs. Standby letter of credit On the part of the bank it must have to show proof that it made
payment to the seller. The proof would be the draft of the seller saying
Commercial letter of credit Standby letter of credit
that you should pay this bank because he made payment to me.
You have to prove that you have You have to prove that there is
complied with the conditions. no performance of an obligation
on the part of the buyer or the 7. The transaction between the bank and the seller are
one who opened the letter of independent but what the seller made is a negotiable
credit. instrument, will the seller be liable?
Transfield Philippines Inc. v. Luzon Hydro Corp. The seller will be liable as a drawer. He is liable as seller and drawer of
that draft. But then again, you would be at peace, because this is a
Distinctions transaction which actually happened.
Commercial letter of credit Standby letter of credit
1. Involves the payment of 1. Used in a non-sale setting Who will pay it? The seller is only liable to pay the bank (payee). The
money under the contract of sale seller-drawer will be liable to the payee bank only if the drawee will
not pay.
2. The credit is payable upon the 2. The credit is payable upon
presentation of the seller certification of a party's non- Important: The draft can also be negotiated.
beneficiary of documents that performance of the agreement
show that he has taken Atty. Amago: As buyer, he is required to pay the bank if the bank will
affirmative steps to comply with pay the seller. That's why the seller will tell the buyer to pay the bank.
the sales agreement When you apply for letters of credit, the buyer did not yet pay
3. Beneficiary must demonstrate 3. Beneficiary must certify that anything to the bank. It is just a document. That's why it will have to
by documents that he has his obligor has not performed the receive payment again from the buyer in case there will really be a
performed the contract contract draw out on the letters of credit.

Atty. Amago: Item 2 pertains to when the letter of credit becomes

payable, while item 3 pertains to what the beneficiary must do to get
payment.

Q & A Portion

1. Do the letters of credit remain with the opening bank or

can they be given to the buyer?
It remains with the bank but you can also have a copy signifying that
it's open, but the application form is the one with the bank. The bank
is the one which makes a notice to the buyer that it has already been
opened and of course what the buyer does is inform the seller. It can
happen that the bank will also ask the correspondent bank to notify
the seller that it has already opened.

If you are the seller, you will not automatically believe the seller if he
says that a letter of credit has been opened. The opening bank must
confirm it.

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INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
TRUST RECEIPTS LAW
P.D. No. 115
Trust Receipts Law
Financing Characteristic
Intention
Relevant provision
WHEREAS, the utilization of trust receipts, as a convenient business
device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and
domestic business practices, particularly in commercial banking
transactions
Trust receipts vs Letters of Credit
It allows financing which you cannot find in the letters of credit. Even
if you do not have any account with the bank, through the trust
receipt, they will still allow you to complete your transaction with your
seller.
Advantage of entering into a trust receipt transaction
The financing characteristic in a trust receipt transaction makes it
relevant. It is the edge of trust receipt over other commercial papers.
The reason for entering into a trust receipt transaction is not just to
facilitate commercial transaction because there are lot of commercial
papers.
Example
You have a security transaction intended for importers and merchants
especially those who do not have sufficient funds or resources to
finance their transaction.
Trust Receipt Transaction
Trust receipt transaction, defined5
Relevant provision
Section 4. What constitutes a trust receipt transaction. A trust receipt
transaction, within the meaning of this Decree, is any transaction by
and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents,
(a) to sell the goods or procure their sale; or
(b) to manufacture or process the goods with the purpose of ultimate
sale:
5 reason why the entruster is willing to enter into such transaction is
Atty. Amago: In the bar exam, it is advisable that you memorize this because
most of the questions involving trust receipts would just be whether or not a
particular activity falls within the definition of a trust receipt transaction.
6|U N I V E R S I T Y O F S A N C A R L O S
Provided, That, in the case of goods delivered under trust receipt for
the purpose of manufacturing or processing before its ultimate sale,
the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or
tranship or otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments,
(a) to sell or procure their sale or exchange; or
(b) to deliver them to a principal; or
(c) to effect the consummation of some transactions involving delivery
to a depository or register; or
(d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the
business of selling goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who sells
the same to the buyer on credit, retaining title or other interest as
security for the payment of the purchase price, does not constitute a
trust receipt transaction and is outside the purview and coverage of
this Decree.
Security interest remains in the entruster
The security interest which the entruster continues to hold on even if
the goods has already been released to the entrustee.
Obligations of the Entrustee
Relevant provision
Section 9. Obligations of the entrustee. The entrustee shall:
(1) hold the goods, documents or instruments in trust for the
entruster and shall dispose of them strictly in accordance
with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over
the same to the entruster to the extent of the amount
owing to the entruster or as appears on the trust receipt;
(3) insure the goods for their total value against loss from fire,
theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether in money or
whatever form, separate and capable of identification as
property of the entruster;
(5) return the goods, documents or instruments in the event of
non-sale or upon demand of the entruster; and
(6) observe all other terms and conditions of the trust receipt
not contrary to the provisions of this Decree.
Requirement to exert effort to sell the goods covered
We look in to the real intention of TRT which is to facilitate the sale
transaction of the importer of the goods. The entrustee must be willing
to sell the goods.
Consideration of entruster in entering in to TRT
Promise by the entrustee that they will pay the entruster in the form of
the proceeds of the goods.
Purpose of Trust Receipt Transaction
It is a security transaction to govern a sale transaction, preparatory to
a sale transaction. It is used to facilitate the transaction of the
importer of the goods.
Atty Amago: Most likely, the TRT will result to a sale. That’s why the
entrustee obliges himself to return the proceeds of the sale. In fact the
because of the promise of the entrustee to pay the entruster.
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
Rights of the Entruster
Relevant provision
Section 7. Rights of the entruster. The entruster shall be entitled
to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the
extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments
in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt provided such are not
contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or
failure of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between the
entruster and the entrustee, and the entruster in possession of the
goods, documents or instruments may, on or after default, give notice
to the entrustee of the intention to sell, and may, not less than five
days after serving or sending of such notice, sell the goods, documents
or instruments at public or private sale, and the entruster may, at a
public sale, become a purchaser. The proceeds of any such sale,
whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee’s indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall be deemed
sufficiently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee’s last
known business address.
Does it mean that the entrustee cannot transfer ownership to
a third person?6
Consequence of transfer of goods to the entrustee
The entruster continues to have ownership over the goods so he can
cancel the transaction anytime.
Effect of sale of goods covered by the Trust Receipts
The proceeds of the sale does not belong to the entrustee but to the
entruster, but only to the extent of how much is placed in the TR.
Even if the proceeds is more than the TRT, it is only up to the extent
of the TR.
Liability of entrustee for loss
Relevant provision
Section 10. Liability of entrustee for loss. The risk of loss shall
be borne by the entrustee. Loss of goods, documents or
instruments which are the subject of a trust receipt, pending their
disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation to the
entruster for the value thereof.
Section 11. Rights of purchaser for value and in good faith.
Any purchaser of goods from an entrustee with right to sell, or of
documents or instruments through their customary form of transfer,
who buys the goods, documents, or instruments for value and in good
faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.
6
This was not answered during the discussion.
7|U N I V E R S I T Y O F S A N C A R L O S
Risk of loss is borne by the entrustee
The risk of loss over the goods is borne by the entrustee even if there
remains a security interest in the person of the entruster or that the
latter retains ownership. Security interest does not include risk of loss.
Important: The entrustee bears the risk of loss and if there is
something that will happen to the goods, it’s the entrustee’s loss.
Consequence of loss of goods in the possession of entrustee
The consequence is that entrustee will be liable for the value of the
goods, as if the goods were actually sold. It will be treated as if the
goods were sold when in fact it’s just lost. It’s as if there is a sale
because the risk of loss is borne by the entrustee.
Motivation of entrustee to sell goods
The motivation of the entrustee is that if he can sell the goods covered
by the trust receipts, then he will apply the proceeds of the sale in
order to pay his obligations with the bank.
Construction materials to be used by entrustee cannot be
covered by trust receipts
There was a new case wherein the SC said that it cannot be covered
by the trust receipt because there was no intention to sell such
construction materials.
Important: This new case is controlling.
Atty. Amago: There was an isolated and older case wherein the SC
held that it is can still be covered by the trust receipt such that it will
just be considered sold by the entrustee himself, but the new case is
controlling.
Security interest of entrustor despite sale of the goods to a
third-person
The entrustor continues to have security interest over the goods
depending on whether the buyer is in good faith or bad faith.
Buyer is in Good Faith Buyer is in Bad Faith
Security interest of entrustor Security interest of entrustor
ceases. continues.
Advantages of a Trust Receipt Transaction
Relevant Provision
Section 12. Validity of entruster's security interest as against
creditors. The entruster's security interest in goods, documents, or
instruments pursuant to the written terms of a trust receipt shall be
valid as against all creditors of the entrustee for the duration of the
trust receipt agreement.
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 terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as
the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017

Advantage of a trust receipt over a loan and mortgage Atty Amago: That is how you connect the letter of credit transaction
with the trust receipt transaction. It is just the security of Bank X, the
The bank enters into a trust receipt agreement instead of a loan and
opening and paying bank, and that of the buyer. This is only the
mortgage because security interest remains with the entrustor even if
contract within the letter of credits that is governed by the trust
goods are transferred to the entrustee.
receipt transaction.
Advantage of a trust receipt over a chattel mortgage
Parties
Goods subject to chattel mortgage cannot be sold because the
intention is for the goods to be preserved by the mortgagor. If you Usual Parties
intend to sell the goods to third persons, you cannot have a chattel 1. Importer
mortgage over such goods. 2. Merchant
3. Bank
Subject to Estafa in case of failure to turn over or return
goods Important: It is not necessary that one of the parties is a bank. The
This trust receipt transaction can motivate the entrustee more to pay parties can be anybody.
the entrustor otherwise he will be liable for estafa of RPC. This is
under estafa with misappropriation (Art. 315 par. 4). Atty Amago: In practice, instead of entering into a loan agreement,
a trust receipt transaction is entered into, even if the goods are
Trust Receipt in Letters of Credit Transaction already delivered to the buyer.

How can you connect a trust receipts transaction to a letter of The intention of the buyer was to loan from the bank in order to pay
credit? the seller, but, the bank instead of entering into a loan agreement
only, the bank will make the buyer sign a trust receipt in order to
insure that there will be a greater penalty on the part of the buyer in
case of non-payment.

This is where the problem begins, if you look at most of the cases
involving trust receipts, instead of just executing a loan agreement,
they also enter into a trust receipt agreement. Which is not the
intention of the Trust Receipt Law.

Requires prior intention to sell the goods to a third person

The Letters of Credit Transaction
Prior to the delivery the person enters into trust receipt agreement
1. The first transaction is a contract of sale between the buyer
with the person who will pay the goods to the seller while the goods
and the seller.
are not yet sold.
2. The buyer will then apply for a letter of credit with the bank.
3. The bank informs the seller that a letter of credit has been
A trust receipt is not a negotiable instrument
opened in his favor.
4. Once notified, the seller will then have to comply with all the They are different types of documents.
requirements including the execution of a draft and bill of
lading. Demand not necessary
5. The bank will then pay the seller under the Letter of Credit. In
Demand is not necessary in trust receipt transactions. Failure to return
order for the bank to be reimbursed by the buyer, bank will
the goods under the trust receipt contract will make the buyer liable.
present to the buyer the Draft.
The trust receipt itself will indicate the period within which to make the
The Trust Receipt Transaction
payment or when to return the goods, unless provided otherwise in
The trust receipt will fall under the transaction between the bank and the contract, the buyer shall be automatically liable in case of
the buyer. nonperformance.

The Paying bank (Bank X) will have to be secured that there will be Trust Receipt is not subject to mortgage
payment of the amount that it just tendered to the seller. Hence, the
Entrustee cannot mortgage the goods since he does not have the free
bank will set up a security interest over the goods of the buyer. In the
disposal of the goods.
trust transaction, it is not necessary that the goods be delivered
directly to the entrustor because it can be delivered to the entrustee
for as long as the trust receipt transaction has already been concluded
PRIOR to the delivery of the goods. So, when the goods are sold to
the buyer and at the time the buyer opens a letter of credit with bank
X, it also executed a trust receipt with the bank.

Important: The bank usually requires the buyer to sign a trust

receipt at the time the buyer applies for the letter of credit. In effect,
the Bank is the entustor who releases the goods to the Buyer who is
the entrustee in trust for the bank.

In that case, if bank X already received the draft and bill of lading from
the seller, the bank will just give the draft and the bill of lading to the
buyer, if the latter is able. Once the goods are claimed and the goods
can now be sold. Upon sale, the buyer will remit to the bank the
proceeds covered by the trust receipts.

8|U N I V E R S I T Y O F S A N C A R L O S
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
Assigned Cases
1. Anthony Ng v. PP of the Philippines, G.R. 173905 (April
23, 2010)
Facts
Anthony Ng, then engaged in the business of building and fabricating
telecommunication towers, applied for a credit line of PhP 3,000,000
with Asiatrust Development Bank, Inc. Prior to the approval of the
loan, Anthony Ng informed Asiatrust that the proceeds would be used
for purchasing construction materials necessary for the completion of
several steel towers he was commissioned to build by several
telecommunication companies. Asiatrust approved the loan but
required Anthony Ng to sign a trust receipt agreement. When Anthony
Ng failed to pay the loan, Asiatrust filed a criminal case for Estafa in
relation to PD 115 or the Trust Receipts Law.
Issues and Held
1. Whether or not the agreement is a trust receipt
transaction
This Court acquitted Anthony Ng and ruled that the Trust Receipts Law
was created “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.” Since Asiatrust
knew that Anthony Ng was neither an importer nor retail dealer, it
should have known that the said agreement could not possibly apply
to petitioner, viz:
The true nature of a trust receipt transaction can be found in the
“whereas” clause of PD 115 which states that a trust receipt is to be
utilized “as a convenient business device to assist importers and
merchants solve their financing problems.” Obviously, the State, in
enacting the law, sought to find a way to assist importers and
merchants in their financing in order to encourage commerce in the
Philippines.
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. Similarly,
American Jurisprudence demonstrates that trust receipt transactions
always refer to a method of “financing importations or financing sales.”
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.
Following the precept of the law, such transactions affect situations
wherein the entruster, who owns or holds absolute title or security
interests over specified goods, documents or instruments, releases the
subject goods to the possession of the entrustee. 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, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the
proceeds to the extent of the amount owing to the entruster or the
goods, documents or instruments themselves if they are unsold. x x x
[T]he entruster is entitled “only to the proceeds derived from the sale
of goods released under a trust receipt to the entrustee.”
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.
9|U N I V E R S I T Y O F S A N C A R L O S
2. Whether or not petitioner is guilty of estafa
The first element of estafa under Art. 315, par. 1(b), requires that the
money, goods, or other personal property must be received by the
offender in trust or on commission, or for administration or under any
other obligation involving the duty to make delivery of, or to return it.
The second element requires that there be misappropriation or
conversion or such money or property by the offender.
The second element is the very essence of estafa under Art. 315, par.
1(b). The words “convert” and “misappropriated” connote an act of
using or disposing of another’s property as if it were one’s own, or of
devoting it to a purpose or use different from that agreed upon. To
misappropriate for one’s own use includes not only conversion to one’s
personal advantage, but also every attempt to dispose of the property
of another without a right. Here, the goods received by petitioner were
not held in trust, neither were they intended for sale. Petitioner did not
likewise have any duty to return them as the goods were only intended
for use in the fabrication of steel communication towers. Neither was
there any misappropriation as petitioner’s liability for the amount of
the goods 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.
2. MBTC v. Jimmy Go, et.al, G.R. 155647 (November 23,
2007)
Facts
Metrobank, through its Assistant Vice- President Leonardo B. Lejano,
executed a Credit Line Agreement in favour of its client, BGB Industrial
Textile Mills, Inc. in the total amount of P10,000,000.00. As security
for an obligation, private respondent Benjamin Go (now deceased)
officer of BGB, executed a Continuing Surety Agreement in favour of
Metrobank. He binds himself solidarily with Metrobank.
Thereafter, respondent General Manager of BGB Jimmy Go applied for
11 commercial letters of credit to cover the shipments. Metrobank
issued the 11 irrevocable letters of credit. The shipments were
delivered to and accepted by BGB. Consequently, 11 trust receipts
were executed by BGB thru Jimmy & Benjamin, as entrustees in favour
of Metrobank entruster.
BGB agreed by the terms to hold the goods in trust for Metrobank and,
in case of sale of goods, to hand the proceeds to the bank to be
applied against the total obligation object of the trust receipts. On
maturity dates of the trust receipts, because the goods remain unsold,
BGB, Jimmy and Benjaminfailed to satisfy their obligation. Metrobank
filed 3 complaints against BGB For collection of sum of money
equivalent to the value of the goods subject of the trust receipts and
later instituted 11 criminal charges for violation of PD115. after
preliminary investigation, the Office of the City Prosecutor of Manila
issued a Resolution recommending dismissal of the case
Issue: Whether or not respondents can be validly prosecuted for
estafa under Art 315(1)(b) of the RPC.
Held
In an appeal via certiorari, only questions of law may be raised
because this Court is not a trier of facts. Metrobank wants to make this
case an exception to the rule, unfortunately, there is no adequate
support for this imputation.
“In order that respondents Jimmy and Benjamin Go may be validly
prosecuted for estafa under Art 315, par 1(b) of the RPC, in relation to
Sec 13 of the Trust Receipts Law, the following elements must be
established: (a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to
Metrobank, or to return the goods if not sold; (b) they misappropriated
or converted the goods and/or the proceeds of the sale; (c) they
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
performed such acts with abuse of confidence to the damage and
prejudice of Metrobank; and (d) demand was made on them by
Metrobank for the remittance of the proceeds or the return of the
unsold goods. “
According to the findings of the City Prosecutor and Secretary of
Justice, Jimmy and Benjamin cannot be prosecuted for estafa since the
2nd (misappropriation/conversion) and 4th (demand) elements of the
offense are not present. “Both offices similarly found that the failure of
the respondents to account for the proceeds of the sale or of the
goods only created a disputable presumption that either the proceeds
or the goods themselves were converted or misappropriated, but the
presumption was overturned when the goods were offered to be
inventoried and returned as they remained intact in the warehouse at
the Bataan Export Processing Zone. Accordingly, they both ruled that
the liability of Jimmy and Benjamin Go was merely civil in nature, and
the criminal complaints were dismissed for lack of probable cause.”
The trust receipts subject of this case partake of the nature of
contracts of adhesion. Being contracts of adhesion, are not per se
invalid and inefficacious. But should there be ambiguities therein, such
ambiguities are to be strictly construed against Metrobank, the party
that prepared them.
There is no doubt as to the obligation of Jimmy and Benjamin Go to
turn over the proceeds of the sale of the goods or to return the unsold
goods. However, an ambiguity exists as to when this obligation arises,
whether upon maturity of the trust receipts or upon demand by
Metrobank. A strict construction of the provisions of the contracts of
adhesion dictates that the reckoning point should be the demand
made by Metrobank. While there was a stipulation of a presumptive
admission on the part of Jimmy and Benjamin Go of misappropriation
or conversion upon failure to account for the goods or for the proceeds
of the sale thereof within 30 days from demand, which will authorize
Metrobank to pursue legal remedies in court, the fact of demand made
by Metrobank was not established by competent evidence.
Metrobank never demanded because it was always their position that
the goods were sold. So even if at the point when the ruling of the SC
was made, the goods were not yet returned the court said that it does
not matter because their obligation to return did not arise because
Metrobank did not make a demand.
3. MBTC v. Secretary of Justice, et. Al., G.R. 180165 (April
7, 2009)
Facts
Respondents on behalf of Visaland, a domestic corporation engaged in
real estate business, applied with MBTC for 24 letters of credit, the
aggregate amount of which reached the sum of P68,749,487.96. Such
will be used to finance the importation of materials necessary for the
operations of its sister company.
Simultaneous with the issuance of the letters of credit, respondents
signed trust receipts in favor of MBTC. Respondents bound themselves
to sell the goods covered by the letters of credit and to remit the
proceeds to petitioner, if sold, or to return the goods, if not sold, on or
before their agreed maturity dates.
When the trust receipts matured, private respondents failed to return
the goods to petitioner, or to return the amount despite demand.
Thus, petitioner filed a criminal complaint for estafa against Visaland
and respondents.
RESPONDENTS CONTENTION:
They claimed that the contract entered into by the parties was a
Contract of Loan secured by a Real Estate Mortgage over two parcels
of land situated at Tagaytay City and registered under the name of the
spouses Wilbert and Isabelita King. According to them, MBTC made
10 | U N I V E R S I T Y O F S A N C A R L O S
them sign documents bearing fine prints without apprising them of the
real nature of the transaction involved and they came to know of the
trust receipt transaction only after they were served a copy of the
Affidavit-Complaint of the petitioner.
Prosecutor found that there was probable cause for the criminal case
but such was reversed by the Secretary of Justice declaring that the
legitimate transactional relationship between the parties being merely
a contract of loan, violations of the terms thereunder were not covered
by Presidential Decree No. 115. CA then declared that the Secretary
did not act with grave abuse of discretion.
Issues and Held
1. Whether or not the Secretary of Justice acted with
grave abuse of discretion.
Yes. The abuse of discretion is patent in the act of the Secretary of
Justice holding that the contractual relationship forged by the parties
was a simple loan, for in so doing, the Secretary of Justice assumed
the function of the trial judge of calibrating the evidence on record,
done only after a full-blown trial on the merits.
The fact of existence or non-existence of a trust receipt transaction is
evidentiary in nature, the veracity of which can best be passed upon
after trial on the merits, for it is virtually impossible to ascertain the
real nature of the transaction involved based solely on the self-serving
allegations contained in the opposing parties pleadings.
Clearly, the Secretary of Justice is not in a competent position to pass
judgment on substantive matters. The bases of a party’s accusation
and defenses are better ventilated at the trial proper than at the
preliminary investigation.
2. Whether or not probable cause exists for the
prosecution of private respondents for the crime of
Estafa in relation to P.D. no. 115.
Yes. As found in the Complaint-Affidavit of petitioner, private
respondents were charged with failing to account for or turn over to
petitioner the merchandise or goods covered by the trust receipts or
the proceeds of the sale thereof in payment of their obligations
thereunder. The following pieces of evidence adduced from the
affidavits and documents submitted before the City Prosecutor are
sufficient to establish the existence of probable cause, to wit:
a. the trust receipts bearing the genuine signatures of private
respondents;
b. the demand letter of petitioner addressed to respondents
c. the initial admission by private respondents of the receipt of the
imported goods from petitioner.
From the foregoing, we conclude that there is ample evidence on
record to warrant a finding that there is a probable cause to warrant
the prosecution of private respondents for Estafa. It must be once
again stressed that probable cause does not require an inquiry into
whether there is sufficient evidence to procure a conviction. It is
enough that it is believed that the act or omission complained of
constitutes the offense charged.
That respondents did not sell the goods under the trust receipt but
allowed it to be used by their sister company is of no moment. The
offense punished under Presidential Decree No. 115 is in the nature of
malum prohibitum.
A mere failure to deliver the proceeds of the sale or the goods, if not
sold, constitutes a criminal offense that causes prejudice not only to
another, but more to the public interest. Even more incredible is the
contention of private respondents that they did not give much
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
significance to the documents they signed, considering the enormous
value of the transaction involved.
Thus, it is highly improbable to mistake trust receipt documents for a
contract of loan when the heading thereon printed in bold and legible
letters reads: Trust Receipts. We are not prejudging this case on the
merits. However, by merely glancing at the documents submitted by
petitioner entitled Trust Receipts and the arguments advanced by
private respondents, we are convinced that there is probable cause to
file the case and to hold them for trial.
All told, the evidentiary measure for the propriety of filing criminal
charges has been reduced and liberalized to a mere probable cause. As
implied by the words themselves, probable cause is concerned with
probability, not absolute or moral certainty.
The Secretary of Justice is hereby ORDERED to direct the Office of
the City Prosecutor of Manila to forthwith FILE Informations for estafa
against private respondents Oliver T. Yao and Diana T. Yao before the
appropriate court.
4. Landl and Co. P v. MBTC, G.R. No. 159622 (July 30,
2004)
Facts
Petitioner corporation is engaged in the business of selling imported
welding rods and alloys. On June 17, 1983, it opened Commercial
Letter of Credit No. 4998 with respondent bank, in the amount of
US$19,606.77, or P218,733.92.
Respondent bank opened an irrevocable letter of credit for the
petitioner corporation to purchase various welding rods and electrodes
from Perma Alloys, Inc., New York.
To secure the indebtedness of petitioner corporation, respondent bank
required the execution of a Trust Receipt in an amount equivalent to
the letter of credit, on the condition that petitioner corporation would
hold the goods in trust for respondent bank, with the right to sell the
goods and the obligation to turn over to respondent bank the proceeds
of the sale, if any. If the goods remained unsold, petitioner corporation
had the further obligation to return them to respondent bank on or
before November 23, 1983.
Petitioner corporation took possession and custody upon arrival of the
goods in the Philippines. But on November 23, 1983, the maturity date
of the trust receipt, petitioner corporation defaulted in the payment of
its obligation to respondent bank and failed to turn over the goods to
the latter. On July 24, 1984, respondent bank demanded that
petitioners, as entrustees, turn over the goods subject of the trust
receipt. On September 24, 1984, petitioners turned over the subject
goods to the respondent bank.
On July 31, 1985, in the presence of representatives of the petitioners
and respondent bank, the goods were sold at public auction. The
goods were sold for P30,000.00 to respondent bank as the highest
bidder. The proceeds of the auction sale were insufficient to
completely satisfy petitioners' outstanding obligation to respondent
bank.
Accordingly, respondent bank demanded that petitioners pay the
remaining balance of their obligation. After petitioners failed to do so,
respondent bank instituted the instant case to collect the said
deficiency.
Issue and Held
1. Whether or not, in a trust receipt transaction, an
entruster which had taken actual and juridical
possession of the goods covered by the trust receipt
may subsequently avail of the right to demand from
11 | U N I V E R S I T Y O F S A N C A R L O S
the entrustee the deficiency of the amount covered
by the trust receipt.
Yes. Section 7, par. 2 provides a statutory remedy available to an
entruster in the event of default or failure of the entrustee to comply
with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee. More specifically,
the entruster "may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds
realized therefrom at any time". The law further provides that "the
entruster in possession of the goods, documents or instruments may,
on or after default, give notice to the entrustee of the intention to sell,
and may, not less than five days after serving or sending of such
notice, sell the goods, documents or instruments at public or private
sale, and the entruster may, at a public sale, become a purchaser. The
proceeds of any such sale, whether public or private, shall be applied
(a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to
the entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency."
The above provisions were likewise reproduced in the trust receipt
agreement herein. In the case at bar, the proceeds of the auction sale
were insufficient to satisfy entirely petitioner corporation's
indebtedness to the respondent bank. Respondent bank was thus well
within its rights to institute the instant case to collect the deficiency.
2. Issue on the Computation of the deficiency
The amount of indebtedness prior to the imposition of interest and
penalty charges. The initial amount of the trust receipt of P218,733.92,
was reduced to P192,265.92 as of June 14, 1984, as per respondents
Statement of Past Due Trust Receipt dated December 1, 1993.This
amount presumably includes the application of P35,000.00, the
amount of petitioner Lucentes Deed of Assignment, which amount was
applied by respondent bank to petitioners obligation. No showing was
made, however, that the P30,000.00 proceeds of the auction sale on
July 31, 1985 was ever applied to the loan. Neither was the amount of
P50,414.00, representing the marginal deposit made by petitioner
corporation, deducted from the loan. The net amount of the obligation,
represented by respondent bank to be P292,172.23 as of April 17,
1986, would thus be P211,758.23.To this principal amount must be
imposed the following charges: (1) 19% interest per annum, in
keeping with the terms of the trust receipt; and (2) 12% penalty per
annum, collected based on the outstanding principal obligation plus
unpaid interest, again in keeping with the wording of the trust
receipt. It appearing that petitioners have paid the interest and penalty
charges until April 17, 1986, the reckoning date for the computation of
the foregoing charges must be April 18, 1986.A perusal of the records
reveals that the trial court and the Court of Appeals erred in imposing
service charges upon the petitioners. No such stipulation is found in
the trust receipt. Moreover, the trial court and the Court of Appeals
erred in computing attorney’s fees equivalent to 10% per annum,
rather than 10% of the total amount due. There is no basis for
compounding the interest annually, as the trial court and Court of
Appeals have done. This amount would be unconscionable.
5. Colinares v. CA, G.R. No. 90828 (September 5, 2000)
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.
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,
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017

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.
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 terms 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.

PBC debited P6,720 from Petitioners’ marginal deposit as partial 6. DBP v. Prudential Bank, G.R. No. 143722 (November 22,
payment of the loan. After the initial payment, the spouses 2005)
defaulted. PBC wrote to Petitioners demanding that the amount be
paid within seven days from notice. Instead of complying with PBC’s Facts
demand, Veloso confessed that they lost P19,195.83 in the Carmelite
Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter
Monastery Project and requested for a grace period of until 15 June
of credit with respondent Prudential Bank for US$498,000.These were
1980 to settle the account. Colinares proposed that the terms of
released to Litex under covering trust receipts it executed in favor of
payment of the loan be modified P2,000 on or before 3 December
Prudential Bank. Litex installed and used the items in its textile mill
1980, and P1,000 per month . Pending approval of the proposal,
located in Montalban, Rizal.
Petitioners paid P1,000 to PBC on 4 December 1980, and
thereafter P500 on 11 February 1981, 16 March 1981, and 20 April
On October 10, 1980, DBP granted a foreign currency loan in the
1981. Concurrently with the separate demand for attorney’s fees by
amount of US$4,807,551 to Litex. To secure the loan, Litex executed
PBC’s legal counsel, PBC continued to demand payment of the
real estate and chattel mortgages on its plant site in Montalban, Rizal,
balance. On 14 January 1983, Petitioners were charged with the
including the buildings and other improvements, machineries and
violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315
equipments there. Among the machineries and equipments mortgaged
of the Revised Penal Code
in favor of DBP were the articles covered by the trust receipts.
During trial, petitioner Veloso insisted that the transaction was a “clean
Sometime in June 1982, Prudential Bank learned about DBPs plan for
loan” as per verbal guarantee of Cayo Garcia Tuiza, PBC’s former
the overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential
manager. He and petitioner Colinares signed the documents without
Bank notified DBP of its claim over the various items covered by the
reading the fine print, only learning of the trust receipt implication
trust receipts which had been installed and used by Litex in the textile
much later. When he brought this to the attention of PBC, Mr. Tuiza
mill. Prudential Bank informed DBP that it was the absolute and
assured him that the trust receipt was a mere formality. The Trust
juridical owner of the said items and they were thus not part of the
Receipts Law does not seek to enforce payment of the loan, rather it
mortgaged assets that could be legally ceded to DBP.
punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether the
For the failure of Litex to pay its obligation, DBP extra-judicially
latter is the owner. Here, it is crystal clear that on the part of
foreclosed on the real estate and chattel mortgages, including the
Petitioners there was neither dishonesty nor abuse of confidence in the
articles claimed by Prudential Bank. During the foreclosure sale, DBP
handling of money to the prejudice of PBC. Petitioners continually
acquired the foreclosed properties as the highest bidder.
endeavored to meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
Since its demands remained unheeded, Prudential Bank filed a
complaint for a sum of money with damages against DBP.
Issue: Whether or not the transaction of Colinares falls within the
ambit of the Law on Trust Receipt
Issue: WON the trust receipts executed between Prudential Bank and
Litex were valid.
Held
Colinares received the merchandise from CM Builders Centre on 30 Held
October 1979. On that day, ownership over the merchandise was
The various agreements between Prudential Bank and Litex commonly
already transferred to Petitioners who were to use the materials for
denominated as trust receipts were valid.
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
Section 4. What constitutes a trust receipt transaction. A trust receipt
merchandise. This situation belies what normally obtains in a pure
transaction, within the meaning of this Decree, is any transaction by
trust receipt transaction where goods are owned by the bank and only
and between a person referred to in this Decree as the entruster, and
released to the importer in trust subsequent to the grant of the loan.
another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
The bank acquires a “security interest” in the goods as holder of a
certain specified goods, documents or instruments, releases the same
security title for the advances it had made to the entrustee. The
to the possession of the entrustee upon the latters execution and
ownership of the merchandise continues to be vested in the person
delivery to the entruster of a signed document called a trust receipt
who had advanced payment until he has been paid in full, or if the
wherein the entrustee binds himself to hold the designated goods,
merchandise has already been sold, the proceeds of the sale should be
documents or instruments in trust for the entruster and to sell or
turned over to him by the importer or by his representative or
otherwise dispose of the goods, documents or instruments with the
successor in interest. To secure that the bank shall be paid, it takes full
obligation to turn over to the entruster the proceeds thereof to the
title to the goods at the very beginning and continues to hold that title
extent of the amount owing to the entruster or as appears in the trust
as his indispensable security until the goods are sold and the vendee is
receipt or the goods, documents or instruments themselves if they
called upon to pay for them; hence, the importer has never owned the
are unsold or not otherwise disposed of, in accordance with the terms
goods and is not able to deliver possession. In a certain manner, trust
and conditions specified in the trust receipt, or for other purposes
receipts partake of the nature of a conditional sale where the importer
substantially equivalent to any of the following:
becomes absolute owner of the imported merchandise as soon as he
has paid its price. There are two possible situations in a trust receipt
1. In the case of goods or documents, (a) to sell the goods or procure
transaction. The first is covered by the provision which refers to money
their sale; or (b) to manufacture or process the goods with the
received under the obligation involving the duty to deliver it
purpose of ultimate sale: Provided, That, in the case of goods
(entregarla) to the owner of the merchandise sold. The second is
delivered under trust receipt for the purpose of manufacturing or
covered by the provision which refers to merchandise received under
processing before its ultimate sale, the entruster shall retain its title
the obligation to “return” it (devolvera) to the owner. Failure of the

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INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017
over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale; or
2. In the case of instruments, (a) to sell or procure their sale or
exchange; or (b) to deliver them to a principal; or (c) to effect the
consummation of some transactions involving delivery to a depository
or register; or (d) to effect their presentation, collection or renewal.
In a trust receipt transaction, the goods are released by the entruster
(who owns or holds absolute title or security interests over the said
goods) to the entrustee on the latters execution and delivery to the
entruster of a trust receipt. The trust receipt evidences the absolute
title or security interest of the entruster over the goods. 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 terms 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.
The agreements uniformly provided:
Received, upon the Trust hereinafter mentioned from the
PRUDENTIAL BANK (hereinafter referred to as BANK) the following
goods and merchandise, the property of said BANK specified in
the bill of lading as follows:
Amount of Bill Description of Marks & Nos. Vessel
Security
and in consideration thereof, I/We hereby agree to hold said
goods in trust for the BANK and as its property with liberty to
sell the same for its account but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or the
proceeds thereof) either by way of conditional sale, pledge, or
otherwise.
The articles were owned by Prudential Bank and they were only held
by Litex in trust. While it was allowed to sell the items, Litex had no
authority to dispose of them or any part thereof or their proceeds
through conditional sale, pledge or any other means.
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 thing 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
13 | U N I V E R S I T Y O F S A N C A R L O S
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 Banks demand. By its
failure to pay or return them despite Prudential Banks repeated
demands and by selling them to Lyon without Prudential Banks
knowledge and conformity, DBP became a trustee ex maleficio.
7. Rosario Textile Mills Co. v. Home Bankers Savings and
Trust Co., G.R. 137232 (June 29, 2005)
Facts
Rosario Textile Mills Corporation (RTMC) was granted a Credit Line of
P8 Million (Originally applied for P10M) from Home Bankers Savings
and Trust Co. (Bank). Edilberto Yujuico signed a surety agreement for
the loan making him solidarily liable with RTMC. RTMC was able to
withdraw from this credit line 11 times for the importation of raw
materials and each drawdown was covered by a promissory note and
trust receipt in favour of the bank.
RTMC failed to pay the loan and so the Bank files for collection.
RTMC argues their agreement had a provision allowing them to turn
over the goods to the bank instead of payment which they wanted to
do as the imported goods did not match their specifications but the
bank refused to accept until the materials were destroyed by a fire in
RTMCs premises. Yujuico also denies liability saying he signed the
surety as a mere formality.
The lower court favoured the bank
Issues and Held
1. Whether or not the bank should bear the loss of the
goods being the owner of such according to the trust
receipts executed
No. RTMC bears the loss. We must take into account the true nature
of the transaction.
The principal transaction between RTMC and the bank is a contract of
loan. RTMC used the proceeds to purchase raw materials abroad and
RTMC used the goods as collateral. The trust receipts were evidence of
such security agreement, hence they were mere securities.
In Vintola vs. Insular Bank of Asia and America, a trust receipt 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.
RTMC insistence that the ownership of the raw materials remained
with the bank is untenable. In Sia vs. People,[9] Abad vs. Court of
Appeals, and PNB vs. Pineda, we held that:
INTERNATIONAL INVESTMENT LAW | Pre-finals Reviewer | Atty. Bernardino Amago IV, CPA | For the exclusive use of EH 404 | A.Y. 2016-2017

If under the trust receipt, the bank is made to appear as the owner, it
was but an artificial expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with purpose of the trust
receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature thereof.

2. Whether or not Yujuico is solidarily liable.

Yujuico is liable as surety as there is nothing in the surety agreement

that says it was a mere formality. Parol Evidence rule dictates parties
cannot allege terms outside their written agreement.

Petition denied

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