Case: Prudential Bank vs NLRC

Facts

- Interasia was a party in 3 labor cases, wherein they were ordered to pay monetary awards. When the
writs of execution were issued, the sheriff levied the personal properties in the factory of Interasia for
the satisfaction of the writ. However, Prudential bank filed an Affidavit of Third Party Claim asserting
ownership over the properties seized based on the trust receipts issued by Interasia in its favor. The
Labor Arbiter denied the claim and ordered the sheriff to continue with the sale. Since the first sale was
unsuccessful, the sheriff conducted another sale wherein Angel Peliglorio was the highest bidder.
Thereafter, the Labor Arbiter ordered the release of the properties to Angel.
- The NLRC denied the third party claim of Prudential Bank. Hence this petition. Prudential Bank assails
the public sale because of the lack notice and the sale not being conducted in the premises of Interasia,
and that Prudential has security title over the properties based on the trust receipts, therefore it is a
preferred claimant over the proceeds from the foreclosure to the extent of its security title. The
respondents submit that it was Prudential’s negligence in exercising its right to cancel the trust receipt
arrangement when Interasia failed to comply. The NLRC also relies on the pronouncement on trust
receipts in Vintola v Insular Bank, when a third party claim on the ground of trust receipts was dismissed
because since there was no showing that the trust receipt was cancelled.

Issue

- Is Prudential Bank a preferred claimant?

Held

- Yes. Under the Trust Receipts Law, Sec 12., the security interest of the entruster (Prudential) is not a
mere empty title. Such interest becomes a lien on the goods because the advances of Prudential must
be settled first before the entrustee can consolidate his ownership over the goods. As discussed in
People v Nitafan, citing Vintola, the nature of a trust receipt arrangement does not involve a simple
loan. There is also a security feature covered by the trust receipt. The second feature is separate and
distinct from the first, and it serves as the title of the bank to the security which is to be protected.
Therefore, the claim of Prudential is valid against all creditors of Interasia, and is only defeated is when
the properties are in the hands of an innocent purchaser for value and in good faith. It was not shown in
this case that Angel was such a purchaser.
- It was also discussed in other jurisprudence that the entruster obtains FULL title over the goods at the
time he buys the goods and continues to hold such title as his security until the goods are sold.

Doctrine

- The security interest of an entruster is valid as against all creditors of the entrustee. Therefore, the
credit of the entruster should be settled first before the others. Except as against an innocent purchaser
for value and in good faith.
- There are two features to a trust receipt arrangement, the loan feature and the security feature, which
are separate and distinct from one another.