PART VI: TRUST RECEIPTS LAW.

Now, under The Trust Receipts Law you have Section 4. Under section 4 of the trust receipt law trust receipt is defined as
a written document signed by the trustee in favor of the entruster whereby the latter releases the goods to the possession
of the former upon the trustees promise to hold the said goods in trust for the entruster (the one who delivered the goods)
to sell or dispose of the goods and to return the proceeds thereof to the extent of the amount owing to the entruster or to
return the goods if unsold or not otherwise disposed.
Purpose of the law:
(1) To punish dishonesty and abuse of confidence of one who tends in the handling of money or goods to the
prejudice of the owner regardless of whether or not the latter is the owner. (crime of estafa);
(2) To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade;
(3) To regulate of trust receipts transactions in order to assure the protection of the rights and enforcement of
obligations of the parties involved therein;
(4) To declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, released
under trust receipts as a criminal offense punishable under the revised penal code.(art 315)
Under section 4 of the same law the trust receipt need not be in any particular form however it must substantially contain
the following essential terms:
(a) a description of the goods, value of the goods, undertaking or a commitment of the entrustee to hold in trust for
the entruster the goods;
(b) to dispose of them in the manner provided for inthe trust receipt; and
(c) to turn over the proceeds of the sale of the goods
In a trust receipt transaction, no agency relationship is established. However, as you have learned in Criminal Law, an
entrustees breach of trust may subject him to criminal liability like for estafa as well as civil liability.
What is the coverage of a trust receipt agreement? It applies to items destined for sale, process as a component of a
product ultimately sold and manufactured, and used to repair equipment used to maintain in business. Under the same
section, section 4, the trust receipt law does not cover the sale of goods, document or instruments by a person in the
business of selling goods, documents or instruments for profit who has general property rights in such goods documents
or installments or sells the same to the buyer on credit retaining title and other interest as security of the payment of the
purchase price.
So you have to distinguish a trust receipt transaction from other arrangements.
There is no trust receipt transaction if the agreement is for mere consignment of goods with the obligation on the part of
the person to whom it is delivered to remit proceeds of the sale or return when unsold.
Distinguish a trust receipt transaction from a contract of pledge. In a trust receipt transaction, there is a person who is
being financed, possesses the property. In a contract of pledge, it is the financer that possesses the property as a form of
security.
In a trust receipt transaction there is no contract of sale. In a trust receipt, there is no lien created over the goods that
were delivered unlike that of a chattel mortgage which subjects the property to lien.
In a trust receipts you have three parties. However the seller does not retain title to the property. Compare it to
consignment, you have the consignor and the consignee, bipartite, where the consignor retains ownership of the property.
So who are essentially the parties here? You have the seller, entruster and entrustee. These three are the parties in a true
trust receipt agreement. However, the seller here is not strictly a party to a trust receipt transaction but he is a party to the
contract of sale wherein he is the seller and who is the buyer? It is the buyer/importer-entrustee. Now you have here the
entruster. The entruster here is the lender or the financier. He is the person holding title over the goods. He holds title over
the goods but he is not the owner of the good but actually, he is merely a holder of security interest.
On the other hand you have the entrustee, the borrower, the buyer, the importer, to whom the goods are delivered for sale
or processing in trust with the obligation to return the proceeds of the sale or to return the goods if unsold. So essentially
the entrustee here is considered as the owner of the goods. While the entruster holds title as a form of security. So the law
imposes on the entrustee the risk of loss of the goods.

So take note here it is a unique arrangement. As a general rule, res perit domino. Owner bears the loss. But here, if you
take into consideration the entruster holds title of the goods but you cannot say if the goods were lost due to a fortuitous
event, the entruster would be the one who would suffer the loss.
So take note that in a true trust receipt agreement covered by the trust receipts law, what are the rights available to the
entruster?
(1) Entitled to the proceeds
(2) Entitled to the return of the goods if unsold
(3) As against an innocent purchaser for value of the goods subject to a trust receipts agreement. As against an innocent
purchaser for value, the entruster is not preferred. As against the creditors of the entrustee, the entruster is preferred.
(Section 11)
(4) The entruster has the right to transfer the trust take possession of the goods and to sell the goods in a public sale
(Section 12)
(5) The entruster likewise has the right to purchase the same goods at the intended public sale(Section 7)
Obligations of an entruster
(1) to give possession of the goods to the entrustee and to give at least 5 day notice to the entrusteeof the intention to sell
the goods at an intended public sale. The entrustee on the other hand has the right to receive the surplus in case of a
public sale as provided under section 7.
(2) To have possession of the goods as a condition for his liability.
Obligations of the entrustee
(1) To hold the goods or the sale proceeds;
(2) To return the goods in the event of non-sale or upon demand of the entruster;
(3) To comply with his alternative obligation to return the proceeds or the goods. The return of the proceeds- entre garla.
The obligation to return the goods unsold- vevol vera;
(4) To ensure against loss of the goods;
(5) To keep the goods and sale proceeds separate and identifiable;
(6) If there are other conditions provided under the trust receipt, observe those conditions.
Rosario Textile Mills Corp. vs Home Bankers Savings and Trust Company, GR No. 137232, June 29, 2005.

Facts: Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers
Savings & Trust Co. for an Omnibus Credit Line for P10 million. The bank approved RTMCs
credit line but for only P8 million. 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 RTMCs indebtedness to the
bank from 1989 to 1990. RTMC availed of the credit line by making numerous drawdowns, each
drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by
Yujuico, executed in favor of the bank a total of 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: Whether or not Yujuico is absolved from liability by the grant of the credit line and the
execution of the suretyship agreement (WON there is violation of trust receipts law?)
Held: No, hindi sya absolved from liability BUT there is NO violation of the trust receipts law.

Yujuicos 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 customers line of credit is nearly exhausted, he is
expected to reduce his indebtedness by payments before making any further drawings.
Q: How is security interest defined in trust receipt law?
A: (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.
Q: How do you reconcile it with the fact that the trust receipts were executed as security for the contract of loan? Why is it
that there is no violation even if it were trust receipts issued as security or collateral?
A: The trust receipts executed were mere securities. No violation because security sya for the contract of loan, wherein
the obligation of Rosario Textiles is isa lang: To pay. If under the Trust receipt, the bank was made to appear as the owner,
more of legal fiction that in fact, it could not be considered as owner of the raw materials. The Supreme Court held, here
the trust receipt was issued by the bank, so the bank was deemed the entruster/lender/financier. To consider the bank as
the true owner from the inception of the transaction would be to disregard the loan feature thereof. Because again, the
bank here is considered the holder of the title merely for purpose of security. If the materials were indeed defective, RT
could not go after the bank kasi di naman ang bank ang nag supply sa kanila.

Land Bankof the Philippines v. Perez

Erwin Fuentes
G.R. No. 166884
June 13, 2012
FACTS:

Petitioner Land Bank of the Philippines (LBP) is a government financial institution and the official depository of the
Philippines. Respondents were officers of Asian Construction and Development Corporation (ACDC), a corporation
engaged in the construction business. On several occasions, respondents executed in favor of Land Bank of the
Philippines (LBP) trust receipts to secure the purchase of construction materials that they will need in their construction
projects. When the trust receipts matured, ACDC failed to return to LBP the proceeds of the construction projects or the
construction materials subject of the trust receipts. After several demands went unheeded, LBP filed a complaint for
Estafa or violation of Art. 315, par. 1(b) of the RPC, in relation to PD 115, against the respondent officers of ACDC.

ISSUE:
1. WON the disputed transactions is a trust receipt or a loan?
HELD:
1. LOAN
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,
intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods covered by the
trust receipt to the entruster; or (2) when the entrustee fails to return the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative the return of the proceeds
of the sale or the return or recovery of the goods, whether raw or processed. When both parties enter into an agreement
knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon
by the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the purchase of the goods.
Q: In this case what is the obligation of the officers of ACDC?
A: To pay the loan acquired from Landbank.
Q: Was there a violation of the trust receipt law?
A: No, there was none. The obligation of ACDC was to pay the loan and not return the materials.
In Land Bank of the Philippine vs Perez et al, wherein what is the effect thereof? There was a demand or in this case, a
complaint was filed against the entrustee for estafa. But the Supreme Court held therein that this was not the trust receipt
agreement covered under the trust receipts law to be held liable for estafa. Because the arrangement here was that the
trust receipt was issued merely to secure the contract of loan by virtue of the letter of credit. So read that case for you to
understand more when to make a person liable for estafa under the trust receipt law and when is he not liable. Because, if
you take into consideration criminal liability for estafa for violation of the trust receipts law, the entrustee fails to turn over
the proceeds of the sale of goods covered by the trust receipt to the entruster. Or the entrustee fails to return the goods
under the trust agreement if not disposed in accordance with the agreement of the trust receipt. But if you take a look at
the true nature of this kinds of transaction, on the part of X, his obligation is not really to return the goods subject of the
trust receipt if it is not sold or if it is sold to remit the proceeds. His obligation is just to pay the loan and the trust receipt
was issued as a form of security-interest.
Do also take note that in this case the SC also enumerated the elements of estafa in relation to the trust receipts law, in
this case no dishonesty or abuse of confidence is present in the handling of the construction of materials.

Hur Tin Yang v. People of the Philippines, G.R. No. 195117, August 14, 2013.
Facts:
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the construction business. 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 and Vice-President for Internal
Affairs of Supermax, to sign twenty-four(24) 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 24 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, through petitioner, 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, through its representative, Winnie M. Villanueva, filed the instant criminal complaints against petitioner
For his defense, 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. In support of this argument, petitioner presented as witness, Priscila Alfonso, who testified that the construction
materials covered by the trust receipts were delivered way before petitioner signed the corresponding trust receipts.
Further, petitioner argued that Metrobank knew all along that the construction materials subject of the trust receipts were
not intended for resale but for personal use of Supermax relating to its construction business.
Issue:
Whether or not the trial court and the appellate court correctly held petitioner guilty of Estafa under the Trust Receipts
Law.
Held:
No, this was a contract of loan.
In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor
in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the
contract but by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement. As
such, therefore, documentary and parol evidence may be submitted and admitted to prove such intention. In the instant
case, the factual findings of the trial and appellate courts reveal that the dealing between petitioner and Metrobank was
not a trust receipt transaction but one of simple loan. Petitioners admissionthat he signed the trust receipts on behalf of
Supermax, which failed to pay the loan or turn over the proceeds of the sale or the goods

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. 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.
Q: In other words, when could the issuance of a trust receipt be considered within the scope of
the trust receipt law?
A: When the goods will be delivered to the entrustee, the intention should be to sell, which is not
present in the cases we discussed. The intention was only for loan. No intention of resale of the
goods, that is why not covered by Trust Receipt Law.
It has been the practice of banks to make borrowers sign trust receipts to facilitate collection of
loans and then place them under the criminal threat for estafa should they be unable to pay. The
SC said this is unjust and equitable since these agreements are contracts of adhesion. The mere
fact that there are trust receipts issued does not automatically make it covered under the trust
receipts law or that the entrustee would be liable for estafa. In this case the bank knew even
before the execution of the trust receipt agreement that the construction materials covered were
never intended for resale or for the manufacture of items to be sold. It was a simple loan.

So you look at the intention. And look at WON the entrustee has the alternative obligation to
deliver the proceeds of the sale of the goods covered by the trust receipts or to return the goods
unsold. The transaction becomes a mere loan where the borrower is obligated to pay the bank
the amount spent for the purchase of goods.
Now notice here that the information of this case were all dated March 15, 2002, and as we have
read or hopefully read, we have here a try and try until you succeed, because why? The trial
court would find them guilty, the Court of appeals would uphold the decision, and the SC even
initially dismissed the case. Tingnan nyo, 2002 gi-file ang criminal action until 2013 na-dismiss
na lahat ng criminal liability for estafa.
How about letters of credit? LOC in Code of Commerce specifically Articles 567 to 572.
Art. 567 Letters of credit are those issued by one merchant to another or for the purpose of attending to
a commercial transaction.

However, this definition has become obsolete, since nowadays, LOC are strictly bank-to-bank
transactions. It is issued by a bank that guarantees its clients ability to pay for imported goods or
services.
Underlying Idea of a Letter of Credit Roughly at least 85% of importations are financed by letters
of credit. The underlying idea of a letter of credit is to ensure certainty of payment. Seller is
assured of payment because the bank intervenes and makes the commitment to pay. The idea
behind it is like your credit card. You walk into a department store and they sell to you on credit
although youre a total stranger because you show your credit card, which means that the bank
which issued the credit card tells the seller that it will pay the goods being bought.
Governing Rules Letters of credit are governed by the Uniform Customs on Documentary Credits
issued by the International Chamber of Commerce.
A basic principle in letters of credit is that the bank deals with documents only. Aside from
certain conditions, the seller will be required to submit certain documents together with the draft
that he will draw in order to collect. These documents shall be negotiated and agreed upon
between the buyer and the seller. Normally, the seller would have to submit together with the
draft a bill of lading, packing list, commercial invoice. As banks deal with documents only, they
are not qualified to deal with goods. Theyre not competent to deal with a thousand and one type
of goods. They will act on the basis of the documents only.
A letter of credit is also not a contract of guarantee or suretyship, because it entails a primary
liability on the part of the issuer-borrowee in default. And moreover, it is not a negotiable
instrument.