Letters of Credit

BPI v De Reny Fabric GR L-24821 Oct 16, 1970

Facts: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4)
irrevocable commercial letters of credit with the Bank of Philippine Islands (BPI). The
letter of credits was used to cover the purchase of goods by De Reny from its American
supplier, the J.B. Distributing Company. As each shipment arrived in the Philippines, the
De Reny Fabric Industries, Inc. made partial payments to the Bank amounting to
12,000. Further payments were, however, subsequently discontinued by the corporation
when it became established, as a result of a chemical test conducted by the National
Science Development Board, that the goods that arrived in Manila were colored chalks
instead of dyestuffs. The corporation also refused to take possession of these goods,
and for this reason, the Bank caused them to be deposited with a bonded warehouse
paying therefor the amount of P12,609.64 up to the filing of its complaint with the court.
Issue: WON De Reny fabrics is liable under the letter of Credit
Ruling: Even without the stipulation recited above, the appellants cannot shift the
burden of loss to the Bank on account of the violation by their vendor of its prestation. It
was uncontrovertibly proven by the Bank during the trial below that banks, in providing
financing in international business transactions such as those entered into by the
appellants, do not deal with the property to be exported or shipped to the importer, but
deal only with documents. The existence of a custom in international banking and
financing circles negating any duty on the part of a bank to verify whether what has
been described in letters of credits or drafts or shipping documents actually tallies with
what was loaded aboard ship, having been positively proven as a fact, the appellants
are bound by this established usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in international business.
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the “existence, character,
quality, quantity, conditions, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, quality, quantity, condition,
or value of the property from that expressed in documents,” or for “partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the
Credit,” as well as “for any deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property the shippers or vendors and
ourselves [purchasers] or any of us.” Having agreed to these terms, the appellants
have, therefore, no recourse but to comply with their covenant.
MWSS v Daway GR 160732, Jun 21, 2004
Facts: Metropolitan Water and Sewerage System (MWSS) granted Maynilad Water
Services, Inc. (MWSI), under a Concession Agreement (“agreement”), a 20-year period
to manage, operate, repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service Area, for which MWSI
undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement which, among other things, consisted of payments of MWSS’s mostly foreign
loans. To secure the concessionaire’s performance of its obligations under the
agreement, MWSI was required to put up a bond, bank guarantee or other security
acceptable to MWSS. In compliance with this requirement, MWSI arranged for a 3-year
facility with a number of foreign banks, led by Citicorp International Limited (CIL), for the
issuance of an Irrevocable Standby Letter of Credit

(L/C) in favor of MWSS for the full and prompt performance of MWSI’s obligations to
MWSS.
A few years later, however, MWSI served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the agreement and an
amendment thereto regarding the adjustment mechanism that would cover MWSI’s
foreign exchange losses. Consequently, MWSI filed a Notice of Early Termination of the
agreement, which was challenged by MWSS. This matter was eventually brought by
MWSS before the Appeals Panel, which eventually ruled that there was no Event of
Termination as defined under the agreement and that, therefore,

MWSI should pay the concession fees that had fallen due.
Upon the finality of the panel’s award, MWSS submitted a written notice to CIL, as agent
for the participating banks, that by virtue of MWSI’s failure to perform its obligations under
the agreement, it was drawing on the Irrevocable Standby L/C and thereby demanded
payment. Prior to this demand, however, MWSI filed a petition for rehabilitation before the
Regional Trial Court of Quezon City – which resulted in the issuance of a Stay Order
enjoining MWSS from drawing on the Standby L/C.

Issue: Is the Standby L/C within the in rem jurisdiction of a rehabilitation court because it
is a “claim against the debtor, its guarantors and sureties not solidarily liable with the
debtor” and that since there is nothing in the Standby L/C nor in law nor in the nature of
the obligation that would show or require the obligation of the banks with MWSI is
solidary?

Ruling:: No. The concept of guarantee vis-à-vis the concept of an irrevocable L/C are
inconsistent with each other. The guarantee theory destroys the independence of the
bank’s responsibility from the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s
obligation is merely collateral and it arises only upon the default of the person primarily
liable. On the other hand, in an irrevocable L/C, the bank undertakes a primary obligation.
We have also defined a L/C as an engagement by a bank or other person made at the
request of a customer that the issuer shall honor drafts or other demands of payment
upon compliance with the conditions specified in the credit.
L/C were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documents and is thus a commitment by the issuer that the party
in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter. They are in effect
absolute undertakings to pay the money advanced or the amount for which credit is given
on the faith of the instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted thereby into contracts
of guaranty. What distinguishes L/C from other accessory contracts is the engagement of
the issuing bank to pay the seller once the draft and other required shipping documents
are presented to it. They are definite undertakings to pay at sight once the documents
stipulated therein are presented.

Taking into consideration our own rulings on the nature of L/C and the customs and usage
developed over the years in the banking and commercial practice of L/C, we hold that
except when a L/C specifically stipulates otherwise, the obligation of the banks issuing
L/C are solidary with that of the person or entity requesting for its issuance, the same
being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the
presentation of the set of documents required therein.

National Comm Bank v Ca 444 Phil 615 (2003)

Facts: National Commercial Bank of Saudi Arabia (NCBSA) filed a case against
respondent Philippine Banking Corporation (PBC) to recover the duplicate payment of the
proceeds of a letter of credit issued by NCBSA in view of the fact that both the head office
and Makati branch of PBC collected the proceeds. (Yung ibang facts, CIVPRO na)

Issue: WON respondent Philippine Banking Corporation should be liable for the duplicate
payment of the proceeds of the letter of credit issued

Ruling:

Yes. The principle of solution indebiti applies in the case. Solutio indebiti applies where:
(1) a payment is made when there exists no binding relation between the payor, who has
no duty to pay, and the person who received the payment, and (2) the payment is made
through mistake, and not through liberality or some other cause33 In the case at bar, PBC
and NCBSA were bound by their contract, the letter of credit, under which NCBSA obliged
itself to pay PBC, subject to compliance by the latter with certain conditions provided
therein. As such, the cause of action was based on a contract, and the prescriptive period
is ten,34 not six years.

Even PBC's defense of laches is bereft of merit, the cause of action not having yet
prescribed at the time NCBSA's complaint was filed.
Courts should never apply the doctrine of laches earlier than the expiration of time limited
for the commencement of actions at law.

And as to PBC's allegation that the trial court erred in finding the existence of double
payment, suffice it to state that PBC, while denying that there was double payment, itself
admitted having received a second set of payment for the same amount covered by the
letter of credit. Petition is GRANTED. [Yan lang talaga related sa letters of credit]

Trust Receipts
Hur Tin Yan v People GR 195117, Aug 14, 2013
Facts:
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the
construction business. On various occasions, Metropolitan Bank and Trust Company
(Metrobank), extended several commercial letters of credit (LCs) to Supermax. These
commercial LCs were used by Supermax to pay for the delivery of several construction
materials which will be used in their construction business. Thereafter, Metrobank
required petitioner, as representative of Supermax, to sign trust receipts as security for
the construction materials and to hold those materials or the proceeds of the sales in trust
for Metrobank to the extent of the amount stated in the trust receipts.

When the trust receipts fell due and despite the receipt of a demand letter, Supermax
failed to pay or deliver the goods or proceeds to Metrobank. Instead, Supermax requested
the restructuring of the loan. When the intended restructuring of the loan did not
materialize, Metrobank sent another demand letter. As the demands fell on deaf ears,
Metrobank, filed the instant criminal complaints against petitioner.

While admitting signing the trust receipts, petitioner argued that said trust receipts were
demanded by Metrobank as additional security for the loans extended to Supermax for
the purchase of construction equipment and materials.

Issue: WON Petitioner is liable for Estafa for violating the trust receipts law
Ruling:
Yes! A trust receipt transaction is one where the entrustee has the obligation to deliver
to the entruster the price of the sale, or if the merchandise is not sold, to return the
merchandise to the entruster. There are, therefore, two obligations in a trust receipt
transaction: the first refers to money received under the obligation involving the duty to
turn it over (entregarla) to the owner of the merchandise sold, while the second refers to
the merchandise received under the obligation to "return" it (devolvera) to the owner. A
violation of any of these undertakings constitutes Estafa defined under Art. 315, par.
1(b) of the RPC, as provided in Sec. 13 of PD 115.
Nonetheless, when both parties enter into an agreement knowing fully well that the
return of the goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD
115 in relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.
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.

To emphasize, the Trust Receipts Law was created to "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 petitioner was neither an importer nor retail dealer, it should have known that the said
agreement could not possibly apply to petitioner.

Rosario Textile Mills Corp v Home Bankers Savings and Trust Co. GR 137232 Jun
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 RTMC’s credit line but for only P8 million. The bank notified RTMC of the grant
of the said loan thru a letter dated March 2, 1989 which contains terms and conditions
conformed by RTMC thru Edilberto V. Yujuico. On March 3, 1989, 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 RTMC’s 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 eleven (11) promissory notes.
Yujuico contend that he should be absolved from liability. They claimed that although the
grant of the credit line and the execution of the suretyship agreement. They alleged that
the bank gave assurance that the suretyship agreement was merely a formality under
which Yujuico will not be personally liable. He theorized that when 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.

Issue: WON Yujuico is absolved from liability by the grant of the credit line and the
execution of the suretyship agreement

Held: No. Yujuico’s argument conveniently ignores the true nature of its transaction with
the bank. A trust receipt is a security agreement pursuant to which a bank acquires a
‘security interest’ in the goods. 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.” 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.”

“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.

RTMC filed with the bank an application for a credit line in the amount of P10 million, but
only P8 million was approved. RTMC then made withdrawals from this credit line and
issued several promissory notes in favor of the bank. In banking and commerce, a credit
line is “that amount of money or merchandise which a banker, merchant, or supplier
agrees to supply to a person on credit and generally agreed to in advance.”[3]It is the
fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the
full extent of which the latter may avail himself of his dealings with the former but which
he must not exceed and is usually intended to cover a series of transactions in which
case, when the customer’s line of credit is nearly exhausted, he is expected to reduce his
indebtedness by payments before making any further drawings.

Land Bank v Perez, Asia Construction and Development Corporation et al GR

166884, Jun 13, 2012
Facts: LBP(petitioner) extended a credit accommodation to ACDC (respondent) through
the execution of an Omnibus Credit Line Agreement (Agreement) between LBP and
ACDC on October 29, 1996. In various instances, ACDC used the Letters of Credit/Trust
Receipts Facility of the Agreement to buy construction materials. The respondents, as
officers and representatives of ACDC, executed trust receipts7 in connection with the
construction materials, with a total principal amount of ₱52,344,096.32. The trust receipts
matured, but ACDC failed to return to LBP the proceeds of the construction projects or
the construction materials subject of the trust receipts. LBP sent ACDC a demand letter,8
dated May 4, 1999, for the payment of its debts, including those under the Trust Receipts
Facility in the amount of ₱66,425,924.39. When ACDC failed to comply with the demand
letter, LBP filed the affidavit-complaint.
Respondents allege they signed the trust receipt documents on or about the same time
LBP and ACDC executed the loan documents; their signatures were required by LBP for
the release of the loans. The trust receipts in this case do not contain (1) a description of
the goods placed in trust, (2) their invoice values, and (3) their maturity dates, in violation
of Section 5(a) of P.D. 115. Moreover, they alleged that ACDC acted as a subcontractor
for government projects such as the Metro Rail Transit, the Clark Centennial Exposition
and the Quezon Power Plant in Mauban, Quezon. Its clients for the construction projects,
which were the general contractors of these projects, have not yet paid them; thus, ACDC
had yet to receive the proceeds of the materials that were the subject of the trust receipts
and were allegedly used for these constructions. As there were no proceeds received
from these clients, no misappropriation thereof could have taken place.
Issue: WON the disputed transactions are trust receipts
Ruling: No. The transactions are not trust receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in this manner:
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: 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[.]
There are two obligations in a trust receipt transaction. The first is covered by the
provision that refers to money under the obligation to deliver it (entregarla) to the owner
of the merchandise sold. The second is covered by the provision referring to merchandise
received under the obligation to return it (devolvera) to the owner. Thus, under the Trust
Receipts Law,22 intent to defraud is presumed when (1) the entrustee fails to turn over
the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when
the entrustee fails to return the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee exist in the
alternative – the return of the proceeds of the sale or the return or recovery of the goods,
whether raw or processed.24 When both parties enter into an agreement knowing that
the return of the goods subject of the trust receipt is not possible even without any fault
on the part of the trustee, it is not a trust receipt transaction penalized under Section 13
of P.D. 115; the only obligation actually agreed upon by the parties would be the return
of the proceeds of the sale transaction. This transaction becomes a mere loan,25 where
the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
LBP knew that ACDC was in the construction business and that the materials that it
sought to buy under the letters of credit were to be used for the following projects: the
Metro Rail Transit Project and the Clark Centennial Exposition Project. LBP had in fact
authorized the delivery of the materials on the construction sites for these projects, as
seen in the letters of credit it attached to its complaint. Clearly, they were aware of the
fact that there was no way they could recover the buildings or constructions for which the
materials subject of the alleged trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought the return of the construction
materials, its demand letter dated May 4, 1999 sought the payment of the balance but
failed to ask, as an alternative, for the return of the construction materials or the buildings
where these materials had been used.
Since these transactions are not trust receipts, an action for estafa should not be brought
against the respondents, who are liable only for a loan. Petition Denied.
Doctrine of Independence
Transfield Philippines, Inc. v. Luzon Hydro Corp.
GR No. 146717 (22 November 2004)

Facts:
Transfield, as a contractor, undertook to construct a hydro-electric power station and
complete the same on or before June 1, 2000. To secure the performance of its
obligation. Transfield opened 2 letters of credits from ANZ Banking Group and Security
Bank in favor of Luzon. Nonetheless, Transfield was unable to complete the project on
the target date allegedly due to force majeure. Both Transfield and Luzon filed before
separate arbitration tribunals, ICC and CIAC respectively, to determine whether force
majeure would justify the delay. Pending the arbitration proceeding, Transfield filed a
complaint for preliminary injunction against the respondent banks to restrain them from
paying on the securities and also against Luzon to prevent it from calling on the
securities. RTC issued a TRO but denied the application for writ of preliminary
injunction. CA affirmed RTC. N.B. When the TRO expired, Luzon was able to withdraw
from ANZ.
Issue: WON the independence principle may be invoked by the beneficiary?
Ruling:
Yes. In a letter of credit transaction where the credit is stipulated as irrevocable, there
is a definite undertaking by the issuing bank to pay the beneficiary provided that
the stipulated documents are presented and the conditions of the credit are
complied with, and particularly, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the parties of the main contract.
As it is, the independence doctrine works for the benefit of both issuing bank and the
beneficiary.

To say that the independence principle may only be invoked by the issuing banks
would render nugatory the purpose for which the letters of credit are used in
commercial transactions. Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing bank but mainly for the
benefit of the parties of the original transaction. With the letter of credit, the party who
obtained the letter of credit may present it to the beneficiary as a security to convince
the latter to enter into the business transaction. On the other hand, the beneficiary can
be rest assured of being empowered to call on the letter of credit as a security in case
the commercial transaction does not push through, or the party who presented the letter
of credit fails to perform his part.

Prior resolution of any dispute before beneficiary is entitled to call on the letter of credit
would convert it into a mere guarantee.

In this case, the Court ruled that ANZ and SBC banks were left with little or no
alternative but to honor the credit and that it was “ministerial for them to honor the call
for payment

Under the independence principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, 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. The independence principle liberates the issuing bank from the duty
of ascertaining compliance by the parties in the main contract.

PNB v. San Miguel Corporation

G.R. No. 186063, January 15, 2014
Facts: SMC entered into an Exclusive Dealership Agreement with a certain Rodolfo R.
Goroza, wherein the latter was given by SMC the right to trade, deal, market or otherwise
sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the credit line
was a letter of credit. Thus, Goroza applied for and was granted a letter of credit by the
PNB in the amount of two million pesos (₱2,000,000.00). Under the credit agreement, the
PNB has the obligation to release the proceeds of Goroza's credit line to SMC upon
presentation of the invoices and official receipts of Goroza's purchases of SMC beer
products to the PNB, Butuan Branch.
On February 11, 1997, Goroza applied for an additional credit line with the PNB. The
latter granted Goroza a one (1) year revolving credit line in the amount not exceeding two
million four hundred thousand pesos (₱2,400,000.00).
Demands to pay the amount of three million seven hundred twenty-two thousand four
hundred forty pesos and 88/100 (₱3,722,440.88) were made by SMC against Goroza and
PNB, but neither of them paid.
After summons, herein petitioner filed its Answer,while Goroza did not. Upon
respondent's Motion to Declare Defendant in Default,5 Goroza was declared in default.
Issue: WON PNB is liable to SMB under the Letter of Credit.
Held: Yes. 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 x x x “
In a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the credit are
complied with. The obligation under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and distinct from the underlying
transaction.
PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza
liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability,
if any, under the letter of credit is yet to be determined.