[G. R. No. 135462.

December 7, 2001]
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN
LUMBER MANUFACTURING CORPORATION, petitioners, vs. BA
FINANCE CORPORATION, respondent.
FACTS:
-Motor vehicles were delivered by Canlubang Automotive Resources Corporation
(CARCO) to Fortune Motors Corporation on the strength of trust receipts or drafts
executed by Fortune, with South City Homes, Palawan Lumber Manufacturing
Corporation and Fortunes President Joseph Chua as sureties.
-The Trust Receipts or draft were assigned/ discounted by CARCO to BA Finance
Corporation, which assumed payment of the vehicles but with the corresponding right
to collect such payment from Fortune and the Sureties.
-When Fortune failed to pay the amounts due under the drafts and remit the proceeds
of motor vehicles sold or return those remaining unsold in accordance with the terms
of the trust receipts agreements, BA Finance demanded from the sureties.
-When the account remained unsettled, BA Finance filed a complaint for sum of money
with preliminary attachment.
-A motion to dismiss was filed, a defendant contending that their obligations to the
creditor (CARCO) were extinguished by the assignment of the drafts and trust receipts
to BA Finance without their knowledge and consent and pursuant to the legal provision
on conventional subrogation a novation was effected, thereby extinguishing the liability
of the sureties; that BA Finance failed to immediately demand the return of the goods under the
trust receipt agreements or exercise the courses of action by entruster as provided for under PD 115;
and that at the time the suretyship agreement agreements were entered into, there were
no principal obligations, thus rendering them null and void. The motion to dismiss was
denied.
RTC and CA ruled that South City Homes is ordered to pay, jointly and
severally, with Fortune Motors, Palawan Lumber and Joseph Chua amounts due under
the 6 drafts and Trust receipts.
ISSUE:
- Whether or not in the event of default by the entrustee on his obligation under the
trust receipt agreement, it is necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder.

RULING:
No. In the event of default by the entrustee on his obligation under the trust receipt
agreement, it is not absolutely necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder. Significantly, the
law uses the word may in granting the entruster the right to cancel the trust and take
possession of the goods. 1 Consequently, the entruster has the discretion to avail of such
right or seek any alternative action, such as third party claim or a separate civil action
which it deems best to protect its right, at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the Trust Agreement.

1 Trust Receipts Law, Sec. 7 (2) - 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.