Case: Pilipinas Bank v Ong

Facts:

- Baliwag Mahogany Corporation (BMC), applied for a letter of credit with Pilipinas Bank (petitioner).
Pilipinas Bank approved the LOC, BMC, in turn, executed a trust receipt in favor of the Bank. However,
BMC failed to comply with the trust receipt arrangement because it was insolvent. BMC filed a petition
for Rehabilitation and Declaration in a State of Suspension. After the creditors of BMC were informed,
SEC created a Management Committee which took custody and control over all of BMC’s assets and
liabilities, thereafter, BMC and all of its creditors entered into a Memorandum of Agreement (MOA)
rescheduling of the debts. This MOA and rehabilitation plan was approved by the SEC and declared BMC
in a state of suspension of payments.
- However, BMC failed to pay for the obligations under the MOA prompting Pilipinas Bank to file a
complaint against BMC for violation of the Trust Receipt Law, arguing that the original Trust Receipt
arrangement was revived when BMC defaulted in its payment under the MOA. The respondents
countered that the MOA novated the trust receipt arrangement. The bank also argues, contrary to the
respondent’s contention, that the MOA did not novate the obligations under the trust receipt
arrangement.

Issue

- Can the respondents be held liable under the Trust Receipts Law?

Held

- No, the respondents cannot be held liable because the MOA novated the obligations under the trust
receipt arrangement.
- Under the Trust Receipts Law, the mere failure to deliver the proceeds from the sale of the goods, or the
goods themselves in the event of non-sale, already constitutes as a violation of the Trust Receipts Law
which punishes dishonesty and abuse of confidence in the handling of money or goods to prejudice of
another. In this case, there is no dishonesty nor abuse of confidence which can be attributed to the
respondents because when the demand of the Bank on BMC for the compliance with the obligations
under the Trust Receipt arrangement, the latter and its assets and liabilities were already under the
control of the Management Committee. Also, the respondents paid P21M in compliance with the equity
infusion required in the MOA, which destroys any showing any intent of the respondents to misuse the
goods or its proceeds.

Doctrine (related to Trust Receipts)

- What is being punished by the Trust Receipts Law is the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another.

Held (regarding the novation)

- Novation occurs in 2 ways: (1) Expressly stated or (2) if the old and new obligations can stand together.
In this case, the obligation under the MOA and the Trust Receipt arrangement are incompatible resulting
in novation, thereby extinguishing BMC’s obligations under the trust receipt arrangement. Therefore,
the liability of the respondents, if any, would only be civil because the trust receipt was transformed into
a simple loan agreement.