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COMMERCIAL LAW REVIEW || Special Commercial Laws 1
Letters of Credit 1-8, Trust Receipts 1-10
1. TRANSFIELD PHILIPPINES, INC., VS.LUZON LHC denied the requests. This gave rise to a series of legal
HYDRO CORPORATION, AUSTRALIA AND NEW actions between the parties which culminated in the instant
ZEALAND BANKING GROUP LIMITED AND petition. The first of the actions was a Request for Arbitration
SECURITY BANK CORPORATION, which LHC filed before the Construction Industry Arbitration
G.R. NO. 146717, NOVEMBER 22, 2004 Commission (CIAC). Second, another Request for Arbitration,
filed by petitioner before the International Chamber of
It asserts that the "fraud exception" exists when the Commerce (ICC) . In both arbitration proceedings, the
beneficiary, for the purpose of drawing on the credit, common issues presented were: [1) whether typhoon Zeb and
fraudulently presents to the confirming bank, documents that any of its associated events constituted force majeure to justify
contain, expressly or by implication, material representations the extension of time sought by petitioner; and [2) whether LHC
of fact that to his knowledge are untrue. In such a situation, had the right to terminate the Turnkey Contract for failure of
petitioner insists, injunction is recognized as a remedy petitioner to complete the Project on target date.
available to it.
Meanwhile, foreseeing that LHC would call on the Securities
Facts: pursuant to the pertinent provisions of the Turnkey Contract,
petitioner,in two separate letters, advised respondent
Petitioner and respondent Luzon Hydro Corporation (LHC) banks,asserting that LHC had no right to call on the Securities
entered into a Turnkey Contract whereby petitioner, as Turnkey until the resolution of disputes before the arbitral tribunals,
Contractor, undertook to construct, on a turnkey basis, a 70- petitioner warned respondent banks that any transfer, release,
Megawatt hydro-electric power station at the Bakun River in the or disposition of the Securities in favor of LHC or any person
provinces of Benguet and Ilocos Sur. Petitioner was given the claiming under LHC would constrain it to hold respondent
sole responsibility for the design, construction, commissioning, banks liable for liquidated damages. LHC sent notice to
testing and completion of the Project. petitioner that pursuant to Clause 8.2 of the Turnkey Contract,
it failed to comply with its obligation to complete the Project.
To secure performance of petitioner's obligation on or Despite the letters of petitioner, however, both banks informed
before the target completion date, petitioner opened in favor of petitioner that they would pay on the Securities if and when
LHC two (2) standby letters of credit both dated 20 March 2000 LHC calls on them.
(hereinafter referred to as "the Securities"), to wit: Standby
Letter of Credit with the local branch of respondent Australia Petitioner as plaintiff filed a Complaint for Injunction, with
and New Zealand Banking Group Limited and Standby Letter of prayer for temporary restraining order and writ of preliminary
Credit with respondent Security Bank Corporation each in the injunction, against herein respondents as defendants before the
amount of US$8,988,907.00. RTC of Makati. Petitioner sought to restrain respondent LHC
from calling on the Securities and respondent banks from
Petitioner sought various EOT(extension of time) to complete transferring, paying on, or in any manner disposing of the
the Project allegedly due to several factors which prevented the Securities or any renewals or substitutes thereof. The RTC
completion of the Project on target date, such as force majeure issued a seventy-two (72)-hour temporary restraining order on
occasioned by typhoon Zeb, barricades and demonstrations. the same day. The trial court issued an Order, extending the
temporary restraining order for a period of seventeen (17) days intended. As beneficiary of the letter of credit, LHC asserts it is
or until 26 November 2000. entitled to invoke the principle.
The RTC, in its Order dated 24 November 2000, denied Issue:

petitioner's application for a writ of preliminary injunction. It
ruled that petitioner had no legal right and suffered no Whether The "Independence Principle" On Letters Of Credit
irreparable injury to justify the issuance of the writ. Employing May Be Invoked By A Beneficiary Thereof Where The
the principle of "independent contract" in letters of credit, the Beneficiary's Call Thereon Is Wrongful Or Fraudulent?
trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's Ruling:
contention that the principle of "independent contract" could be
invoked only by respondent banks since according to it 1.Article 3 of the UCP (Uniform Customs and Practice for
respondent LHC is the ultimate beneficiary of the Securities. Documentary Credits to standardize practices in the letter of
The trial court further ruled that the banks were mere credit area) provides that credits, by their nature, are separate
custodians of the funds and as such they were obligated to transactions from the sales or other contract(s) on which they
transfer the same to the beneficiary for as long as the latter may be based and banks are in no way concerned with or bound
could submit the required certification of its claims. CA affirmed by such contract(s), even if any reference whatsoever to such
the RTC decision. Court of Appeals issued a temporary contract(s) is included in the credit. Consequently, the
restraining order, enjoining LHC from calling on the Securities undertaking of a bank to pay, accept and pay draft(s) or
or any renewals or substitutes thereof and ordering respondent negotiate and/or fulfill any other obligation under the credit is
banks to cease and desist from transferring, paying or in any not subject to claims or defenses by the applicant resulting from
manner disposing of the Securities. his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual
However, the appellate court failed to act on the application relationships existing between the banks or between the
for preliminary injunction until the temporary restraining order applicant and the issuing bank.
expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the Thus, the engagement of the issuing bank is to pay the seller
total amount of US$4,950,000.00, thereby reducing the or beneficiary of the credit once the draft and the required
balance in ANZ Bank to US$1,852,814.00. documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt
Petitioner filed the instant Petition for Review.Petitioner payment independent of any breach of the main contract and
insists that the independence principle does not apply to the precludes the issuing bank from determining whether the main
instant case and assuming it is so, it is a defense available only contract is actually accomplished or not. Under this principle,
to respondent banks. LHC, on the other hand, contends that it banks assume no liability or responsibility for the form,
would be contrary to common sense to deny the benefit of an sufficiency, accuracy, genuineness, falsification or legal effect of
independent contract to the very party for whom the benefit is any documents, 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, beneficiary of the letter of credit, can be rest assured of being
quantity, weight, quality, condition, packing, delivery, value or empowered to call on the letter of credit as a security in case the
existence of the goods represented by any documents, or for the commercial transaction does not push through, or the applicant
good faith or acts and/or omissions, solvency, performance or fails to perform his part of the transaction. It is for this reason
standing of the consignor, the carriers, or the insurers of the that the party who is entitled to the proceeds of the letter of
goods, or any other person whomsoever. credit is appropriately called "beneficiary."
Can the beneficiary invoke the independence principle? As Next, petitioner invokes the "fraud exception" principle. It avers
discussed above, in a letter of credit transaction, such as in this that LHC's call on the Securities is wrongful because it
case, where the credit is stipulated as irrevocable, there is a fraudulently misrepresented to ANZ Bank and SBC that there is
definite undertaking by the issuing bank to pay the beneficiary already a breach in the Turnkey Contract knowing fully well that
provided that the stipulated documents are presented and the this is yet to be determined by the arbitral tribunals. It asserts
conditions of the credit are complied with. Precisely, the that the "fraud exception" exists when the beneficiary, for the
independence principle liberates the issuing bank from the duty purpose of drawing on the credit, fraudulently presents to the
of ascertaining compliance by the parties in the main contract. confirming bank, documents that contain, expressly or by
As the principle's nomenclature clearly suggests, the obligation implication, material representations of fact that to his
under the letter of credit is independent of the related and knowledge are untrue. In such a situation, petitioner insists,
originating contract. In brief, the letter of credit is separate and injunction is recognized as a remedy available to it.
distinct from the underlying transaction.
Petitioner should not be allowed in this instance to bring into
Given the nature of letters of credit, petitioner's argument— play the fraud exception rule to sustain its claim for the issuance
that it is only the issuing bank that may invoke the of an injunctive relief. Matters, theories or arguments not
independence principle on letters of credit—does not impress brought out in the proceedings below will ordinarily not be
this Court. To say that the independence principle may only be considered by a reviewing court as they cannot be raised for the
invoked by the issuing banks would render nugatory the first time on appeal.The lower courts could thus not be faulted
purpose for which the letters of credit are used in commercial for not applying the fraud exception rule not only because the
transactions. As it is, the independence doctrine works to the existence of fraud was fundamentally interwoven with the issue
benefit of both the issuing bank and the beneficiary. of default still pending before the arbitral tribunals, but more
so, because petitioner never raised it as an issue in its pleadings
Letters of credit are employed by the parties desiring to enter filed in the courts below. At any rate, petitioner utterly failed to
into commercial transactions, not for the benefit of the issuing show that it had a clear and unmistakable right to prevent LHC's
bank but mainly for the benefit of the parties to the original call upon the Securities.
transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present With respect to the issue of whether the respondent banks
the letter of credit to the beneficiary as a security to convince the were justified in releasing the amounts due under the Securities,
beneficiary to enter into the business transaction. On the other this Court reiterates that pursuant to the independence
hand, the other party to the business transaction, i.e., the principle the banks were under no obligation to determine the
veracity of LHC's certification that default has occurred. Neither merchandise ostensibly being exported by it, together with
were they bound by petitioner's declaration that LHC's call clean bills of lading, and collected the full value of the drafts up
thereon was wrongful. To repeat, respondent banks' to the amounts appearing in the L/Cs as above indicated. These
undertaking was simply to pay once the required documents are correspondent banks then debited the account of the Bank of
presented by the beneficiary. the Philippine Islands with them up to the full value of the drafts
presented by the J.B. Distributing Company.
2. BANK OF THE PHILIPPINE ISLANDS, VS.DE
RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO In the meantime, as each shipment (covered by the above-
AND AURORA CARCERENY ALIAS AURORA C. mentioned letters of credit) arrived in the Philippines, the De
GONZALES Reny Fabric Industries, Inc. made partial payments to the Bank
G. R. NO. L-24821 OCTOBER 16, 1970 amounting, in the aggregate, to P90,000. Further payments
were, however, subsequently discontinued by the corporation
In documentary credit operations, all parties concerned deal when as a result of a chemical test conducted by the National
in documents and not in goods. Science Development Board, that the goods that arrived in
Manila were colored chalks instead of dyestuffs.The corporation
Facts: also refused to take possession of these goods, and for this
reason, the Bank caused them to be deposited with a bonded
De Reny Fabric Industries, Inc., a Philippine corporation warehouse paying therefor the amount of P12,609.64 up to the
through its co-defendants-appellants, Aurora Carcereny and filing of its complaint with the court below on December 10,
Aurora T. Tuyo, president and secretary, respectively of the 1962.
corporation, applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the The lower court rendered its decision ordering the corporation
corporation of goods described in the covering L/C applications and its co-defendants to pay to the plaintiff-appellee the
as "dyestuffs of various colors" from its American supplier, the amount of P291,807.46The defendants-appellants contended
J.B. Distributing Company. All the applications of the that it was the duty of the foreign correspondent banks of the
corporation were approved, and the corresponding Commercial Bank of the Philippine Islands to take the necessary precaution
L/C Agreements were executed pursuant to banking to insure that the goods shipped under the covering L/Cs
procedures. Pursuant to banking regulations then in force, the conformed with the item appearing therein, and, that the
corporation delivered to the Bank peso marginal deposits as foregoing banks having failed to perform this duty, no claim for
each letter of credit was opened. recoupment against the defendants-appellants, arising from the
losses incurred for the non-delivery or defective delivery of the
Bank issued irrevocable commercial letters of credit articles ordered, could accrue.
addressed to its correspondent banks in the United States, with
uniform instructions for them to notify the beneficiary thereof,
the J.B. Distributing Company.Consequently, the J.B.
Distributing Company drew upon, presented to and negotiated
with these banks, its sight drafts covering the amounts of the
Issue:
In documentary credit operations, all parties concerned
Whether or not the bank has the duty to insure that the goods deal in documents and not in goods. — Payment, negotiation or
described in Letters of credit conformed with the goods acceptance against documents in accordance with the terms and
shipped? conditions of a credit by a Bank authorized to do so binds the
party giving the authorization to take up the documents and
Ruling: reimburse the Bank making the payment, negotiation or
acceptance.
Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants (defendant) agreed The existence of a custom in international banking and
that the Bank shall not be responsible for the "existence, financing circles negating any duty on the part of a bank to
character, quality, quantity, conditions, packing, value, or verify whether what has been described in letters of credits or
delivery of the property purporting to be represented by drafts or shipping documents actually tallies with what was
documents; for any difference in character, quality, quantity, loaded aboard ship, having been positively proven as a fact, the
condition, or value of the property from that expressed in appellants are bound by this established usage. They were, after
documents," or for "partial or incomplete shipment, or failure all, the ones who tapped the facilities afforded by the Bank in
or omission to ship any or all of the property referred to in the order to engage in international business.
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.
But 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
Bank introduced in evidence a provision contained in the
"Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce," to which the Philippines is a signatory
nation. Article 10 thereof provides: .
3. BANK OF AMERICA, NT & SA v. CA shipment of goods. Immediately upon receipt of a telex from
G.R. No. 105395, December 10, 1993 Bank of Ayudhya declaring the letter of credit fraudulent, Bank
of America stopped the processing of Inter-Resin's documents.
An advising bank is bound only to check the “apparent Sensing a fraud, Bank of America sought the assistance of the
authenticity” of the letter of credit. NBI. The NBI agents, who were sent to Thailand, discovered
that the vans exported by Inter--Resin did not contain ropes but
Facts: plastic strips, wrappers, rags and waste materials. Hence, Bank
of America sued Inter-Resin for the recovery of the peso
Bank of America received a Letter of Credit issued by Bank of equivalent of the draft.
Ayudhya for the account of General Chemicals of Thailand in
the amount of US$2,782,000 to cover the sale of plastic ropes Issue’s:
and "agricultural files," with the petitioner as advising bank and
respondent Inter-Resin as beneficiary. Bank of America wrote 1. Whether Bank of America acted merely as an advising
Inter-Resin informing the latter of the foregoing and bank or as a confirming bank?
transmitting the letter of credit. Upon receipt of the letter-
advice with the letter of credit, Inter-Resin sent Atty. Tanay to 2. Whether Bank of America may recover against Inter-
Bank of America to have the letter of credit confirmed. The bank Resin under the draft executed in its partial availment of
did not. Dueñas, bank employee in charge of letters of credit, the letter of credit?
however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been Ruling:
transmitted if it were not genuine.
1. Bank of America has is only an advising bank, not a
Inter-Resin sought to make a partial availment under confirming bank, and this is evident from the following
the letter of credit by submitting to Bank of America invoices, provisions of the letter of credit itself; the petitioner bank's
covering the shipment of polyethylene rope, the corresponding letter of advice, its request for payment of advising fee, and the
packing list, export declaration and bill of lading. After being admission of Inter-Resin that it has paid the same. As advising
satisfied that Inter-Resin's documents conformed with the bank, Bank of America is bound only to check the "apparent
conditions expressed in the letter of credit, Bank of America authenticity" of the letter of credit, which it did. Clarifying its
issued in favor of Inter-Resin a Cashier's Check. Thereafter, meaning, Webster's Dictionary explains that the word
Bank of America wrote Bank of Ayudhya advising the latter of "APPARENT suggests appearance to unaided senses that is not
the availment under the letter of credit and sought the or may not be borne out by more rigorous examination or
corresponding reimbursement therefor. greater knowledge."
2. Yes. This kind of transaction is what is commonly referred to
Meanwhile, Inter-Resin presented to Bank of America as a discounting arrangement. This time, Bank of America, has
the documents for the second availment under the same letter acted independently as a negotiating bank, thus saving Inter-
of credit consisting of a packing list, bill of lading, invoices, Resin from the hardship of presenting the documents directly
export declaration and bills in set, evidencing the second to Bank of Ayudhya to recover payment. (Inter-Resin, of course,
could have chosen other banks with which to negotiate the draft Trust refused to advance the payment on the letter of credit.
and the documents.) As a negotiating bank, Bank of America has Thus, Villaluz instituted an action for specific performance
a right of recourse against the issuer bank and until against Christiansen and the Feati Bank and Trust.
reimbursement is obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent liability thereon. Issue:
4. FEATI BANK AND TRUST VS. CA Whether or not Feati Bank and Trust is liable under the letter of
GR No. 94209, Apr 30, 1991 credit despite non-compliance by the beneficiary with the terms
thereof?
An irrevocable letter of credit is not synonymous with a
confirmed letter of credit; in an irrevocable letter of credit, the Ruling:
issuing bank may not, without the consent of the beneficiary
and the applicant revoke his undertaking under the letter; No.
whereas, in a confirmed letter of credit, the correspondent An irrevocable credit is not synonymous with a
bank gives and absolute assurance to the beneficiary that it confirmed credit. An irrevocable credit refers to the duration of
will undertake the issuing bank’s obligation as its own the letter of credit. What it simply means is that the issuing bank
according to the terms and conditions of the credit. may not without the consent of the beneficiary (seller) and the
applicant (buyer) revoke his undertaking under the letter. The
Facts: issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind
Villaluz agreed to sell to Christiansen lauan logs. After of obligation assumed by the correspondent bank. In this case,
inspecting the logs, Christiansen issued purchase order. On the the correspondent bank gives an absolute assurance to the
arrangements made and upon the instructions of the consignee beneficiary that it will undertake the issuing bank’s obligation
(Hanmi Trade Development), the Security Pacific National as its own according to the terms and conditions of the credit.
Bank in California issued an Irrevocable Letter of Credit in favor In this case, the letter merely provided that the
of Villaluz for $54,000, the total price of the lauan logs. petitioner "forward the enclosed original credit to the
beneficiary." Considering the aforesaid instruction to the
The letter of credit was mailed to the Feati Bank and Trust with petitioner by the issuing bank, the Security Pacific National
the instruction t that it "forward the enclosed letter of credit to Bank, petitioner is only a notifying bank and not a confirming
the beneficiary." The letter of credit further provided that the bank. If the petitioner was a confirming bank, then a categorical
draft to be drawn is on Security Pacific National Bank. declaration should have been stated in the letter of credit that
the petitioner is to honor all drafts drawn in conformity with the
The logs were thereafter loaded on the vessel which was letter of credit. What was simply stated therein was the
chartered by Christiansen. However, Christiansen refused to instruction that the petitioner forward the original letter of
issue the certification as required in paragraph 4 of the letter of credit to the beneficiary.
credit, despite several requests made by Villaluz. Because of the
absence of the certification by Christiansen, Feati Bank and
In order that the petitioner may be held liable, there

should be proof that it confirmed the letter of credit. The records At the back of the trust receipt was printed a form to be
are, however, bereft of any evidence which will disclose that it accomplished by 2 sureties who, by the very terms and
has confirmed the letter of credit. Since the petitioner was only conditions thereof, were to be jointly and severally liable to the
a notifying bank, its responsibility was solely to notify and/or Prudential Bank should the PRMI fail to pay the total amount
transmit the documentary of credit to Villaluz and its obligation or any portion of the drafts issued by Nissho and paid for by
ends there. Prudential Bank. . PRMI was able to take delivery of the textile
machineries and installed the same at its factory site. Chi argued
5. PRUDENTIAL BANK vs. INTERMEDIATE that presentment for acceptance was necessary to make PRMI
APPELLATE COURT, PHILIPPINE RAYON MILLS liable. The trial court ruled that that presentment for
INC. and ANACLETO R. CHI acceptance was an indispensable requisite for Philippine
G.R. No. 74886, December 8, 1992 Rayon’s liability on the drafts to attach.
Through a letter of credit, the bank merely substitutes its own Issue:
promise to pay for one of its customers who in return promises
to pay the bank the amount of funds mentioned in the letter of Whether or not presentment for acceptance was needed in order
credit plus credit or commitment fees mutually agreed upon. for PRMI to be liable under the draft.
Facts: Ruling:
Philippine Rayon Mills, Inc.(PRMI) entered into a NO. Presentment for acceptance is defined an the production of
contract with Nissho Co., Ltd. of Japan for the importation of a bill of exchange to a drawee for acceptance. Acceptance,
textile machineries under a 5-year deferred payment plan. To however, was not even necessary in the first place because the
effect the payment, PRMI applied for a commercial letter of drafts which were eventually issued were sight drafts. Even if
credit with the Prudential Bank and Trust Company in favor of these were not sight drafts, thereby necessitating acceptance, it
Nissho. Prudential Bank opened Letter of Credit No. DPP- would be the Bank (Bank of America) — and not Philippine
63762 for $128,548.78 Against this letter of credit, drafts were Rayon — which had to accept the same for the latter was not the
drawn and issued by Nissho, which were all paid by the drawee.
Prudential Bank through its correspondent in Japan, the Bank
of Tokyo, Ltd. Two of the original drafts were accepted by PRMI The trial court and the public respondent, therefore, erred in
through its president, Anacleto R. Chi, while the others were ruling that presentment for acceptance was an indispensable
not. Upon the arrival of the machineries, the Prudential Bank requisite for Philippine Rayon’s liability on the drafts to attach.
indorsed the shipping documents to the PRMI which accepted Contrary to both courts’ pronouncements, Philippine Rayon
delivery of the same. To enable PRMI to take delivery of the immediately became liable upon Bank of America’s payment on
machineries, it executed, by prior arrangement with the the letter of credit. Such is the essence of the letter of credit
Prudential Bank, a trust receipt which was signed by Anacleto issued by the petitioner. A different conclusion would violate the
R. Chi in his capacity as President of PRMI company. principle upon which commercial letters of credit are founded
because in such a case, both the beneficiary and the issuer, sight once the documents stipulated therein are presented.
Nissho Company Ltd. and the petitioner, respectively, would be (Emphasis supplied)
placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had Facts:
fully paid for it.
Metropolitan Waterworks and Sewerage System
In fact, there was no need for acceptance as the issued drafts are (MWSS) entered into a Concession Agreement with Maynilad
sight drafts. Presentment for acceptance is necessary only in the Water Services, Inc. (Maynilad) for 20 years. The agreement
cases expressly provided for in Section 143 of the Negotiable vests upon Maynilad to manage, operate, repair, decommission
Instruments Law (NIL). and refurbish the existing MWSS water delivery and sewerage
services in West Zone Service Area. It included the
In the instant case then, the drawee was necessarily the herein responsibility of Maynilad to pay the corresponding concession
the Bank of America. It was to the latter that the drafts were fee on the dates agreed upon consisting, among other things,
presented for payment. MWSS’ mostly foreign loans. As security, Maynilad is required
to put up a bond, bank guarantee or other security pursuant to
Sec. 6.9 of the contract.
6.METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM vs. HON. REYNALDO B. DAWAY, in his To secure the concession, as required by said agreement,
capacity as Presiding Judge of RTC QC, Branch 90 and an Irrevocable Standby Letter of Credit for $120M was issued
MAYNILAD WATER SERVICES, INC. by a number of foreign banks led by Citicorp International
G.R. No. 160732, June 21, 2004 Limited (Citicorp), in behalf of Maynilad, to MWSS.
The purpose of letters of credit is to insure a seller for payment A Force Majeure Notice was sent by Maynilad to MWSS
of a definite amount upon the presentation of documents. It is upon failure of the former to ask for consideration from MWSS
a commitment by the issuer that the party in whose favor it is to recover losses by virtue of the Peso against the Dollar.
issued and who can collect upon it will have his credit against Maynilad also suspended the payment of concession fees.
the applicant of the letter, duly paid in the amount specified in
the letter. They are absolute undertakings to pay the money A Memorandum of Agreement (MOA) was entered with
advanced or the amount for which credit is given on the faith respect to the recovery of foreign exchange losses. However, a
of the instrument. They are primary obligations and not second Force Majeure Notice was sent to which MWSS
accessory contracts and while they are security arrangements, disagreed thereby giving way for the amendment of the
they are not converted thereby into contracts of guaranty. Concession Agreement as ordered by the Appeals Panel for
What distinguishes letters of credit from other accessory arbitration.
contracts, is the engagement of the issuing bank to pay the
seller once the draft and other required shipping documents A Notice of Event of Termination was sent by
are presented to it. They are definite undertakings to pay at Mayniladfollowed by a Notice of Early Termination. The
Appeals Panel said that there was no Event of Termination and
that Maynilad is liable for the due concession fees. This decision
became final on November 22, 2003. Herein, Citicorp is solidarily liable with Maynilad and is not
within the scope of Sec. 6(b) of Rule 4 of the Interim Rules
MWSS demanded the payment of $98,923,640.15 from which enjoin the enforcement of all claims against guarantors
Maynilad because it (MWSS) was drawing on the letter of credit and sureties who are not solidarily liable with the debtor. In fact,
for Maynilad’s failure to perform its obligations under the the Irrevocable Stanby Letter of Credit was issued at the request
Concession Agreement. of and on the account of Maynilad in favor of MWSS as a bond
for the full and prompt performance of the obligations by the
However, before the decision of the Appeals Panel concessionaire under the Concession Agreement. MWSS is
became final, a Petition for Rehabilition was filed by Maynilad authorized by the by the banks to draw on it by the simple act of
beforehand or on November 13, 2003before RTC QC before delivering to the agent a written certification of the Letter of
respondent Judge Reynaldo Daway (Judge Daway). A Stay Credit.
Order was issued.
Being solidary, the claims against them can be pursued
MWSS contends that the claim on the bond is not proper separately from and independently of the rehabilitation case, as
as it is not the property of Maynilad and that Judge Daway held in Traders Royal Bank v. Court of Appealsand reiterated
violated the order of the Appeals Pannel issued on November in Philippine Blooming Mills, Inc. v. Court of Appeals,where we
22, 2003 for payment of $98M by issuing a Stay Order. said that property of the surety cannot be taken into custody by
the rehabilitation receiver (SEC) and said surety can be sued
Issue: separately to enforce his liability as surety for the debts or
obligations of the debtor. The debts or obligations for which a
Whether or not Judge Daway exceeded his jurisdiction surety may be liable include future debts, an amount which may
in holding that he was competent to act on the obligation of the not be known at the time the surety is given.
banks under the Letter of Credit under the argument that this
was not a solidary obligation with that of the debtor Maynilad. Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
Ruling: documentsand is thus a commitment by the issuer that the party
in whose favor it is issued and who can collect upon it will have
YES. Judge Daway exceeded his jurisdiction for he was his credit against the applicant of the letter, duly paid in the
wrong to rule that the obligation of Citicorp was not solidary amount specified in the letter. They are in
with Maynilad through the Irrevocable Stanby Letter of Credit. effect absolute undertakings to pay the money advanced or the
amount for which credit is given on the faith of the instrument.
By the nature of letters of credit as dictated by jurisprudence, They are primary obligations and not accessory contracts and
customs and usage in the banking and commercial practice, the while they are security arrangements, they are not converted
obligation of the banks in issuing the letters of credit are thereby into contracts of guaranty. What distinguishes letters of
solidary with the requesting person or entity unless there is a credit from other accessory contracts, is the engagement of the
stipulation to the contrary. issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. They are definite Mendoza contracted with Insular Bank for the issuance of two
undertakings to pay at sight once the documents stipulated irrevocable standby L/C in favor of Philam Life for the total
therein are presented. amount of P600,000. These L/Cs were, in turn, secured by a
In Feati Bank & Trust Company v. Court of Appealsthat real estate mortgage on the property of the spouses in favor of
the concept of guarantee vis-à-vis the concept of an irrevocable Insular Bank.
letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the bank’s responsibility The Mendozas failed to pay Philam Life the amortizations that
from the contract upon which it was opened and the nature of fell due on 11 June 1978, thus, Philam Life informed Insular
both contracts is mutually in conflict with each other. In Bank that it was declaring both loans "entirely due and
contracts of guarantee, the guarantor’s obligation is merely demandable", and demanded the payment of PhP492,996.30.
collateral and it arises only upon the default of the person Insular Bank contested the propriety of calling in the entire
primarily liable. On the other hand, in an irrevocable letter of loan, and philam life desisted. However, the spouses once again
credit, the bank undertakes a primary obligation. We have also defaulted on their amortization, causing Philam Life to declare
defined a letter of credit as an engagement by a bank or other the remaining PhP 274,779.56 entirely due and demandable
person made at the request of a customer that the issuer shall again. By way of defense, Insular Bank claimed that, as a mere
honor drafts or other demands of payment upon compliance guarantor of the spouses, its remaining obligation under the two
with the conditions specified in the credit. standby L/Cs were only PhP30,100.60. Later, the bank even
claimed that it made an overpayment to Philam Life, and
7. Insular Bank of Asia & America vs. IAC, No. L- demanded a refund of the same.
74834. November 17, 1988.
Philam life filed a suit against the spouses and Insular Bank for
The subject standby letters of credit are in effect an absolute the recovery of the amount of the loan allegedly still owed to
undertaking to pay the money advanced or the amount for them. The trial court ruled that Insular Bank, "as surety", was
which credit is given on the faith of the instrument. discharged of its liability to the extent of the payment made by
the spouses, as the principal debtors, to Philam Life. Upon
Letters of credit are strictly construed most strongly against appeal of Philam Life and the spouses, the appellate court
the writer, and so as to be reasonable and consistent with reversed the lower court's decision, and ruled that insular
honest intention. bank's liability was not reduced by virtue of the payments made
by Mendoza.
Facts:
The Sps. Mendoza obtained 2 loans from Philam Life in the Issue:
amount of P600,000. The loans, with a 14% nominal interest
rate, were to be liquidated in equal amortizations over a period Whether the partial payments made by the Spouses Mendoza
of 5 years. To secure payment, Philam Life required that the said would have the effect of reducing the liability of the Insular
amortizations be guaranteed by an irrevocable standby letter of Bank as guarantor or surety under the terms of the standby
credit (L/C) of a commercial bank. Because of this, the Spouses Letter of Credit in question.
Ruling:
8. BANK OF AMERICA, NT & SA VS. COURT OF
NO, the partial payments made will not reduce the liability of APPEALS, G.R. NO. 105395, DECEMBER 10, 1993
Insular Bank.
A letter of credit is a financial, device developed by merchants
Unequivocally, the subject standby Letters of Credit secure the as a convenient and relatively safe mode of dealing with sales
payment of any obligation of the Mendozas to Philam Life of goods to satisfy the seemingly irreconcilable interests of a
including all interests, surcharges and expenses thereon but not seller, who refuses to part with his goods before he is paid, and
to exceed P600,000.00. But while they are a security a buyer, who wants to have control of the goods before paying.
arrangement, they are not converted thereby into contracts of To break the impasse, the buyer may be required to contract a
guaranty. They are primary obligations and not accessory bank to issue a letter of credit in favor of the seller so that, by
contracts. Being separate and independent agreements, the virtue of the letter of credit, the issuing bank can authorize the
payments made by the Mendozas cannot be added in computing seller to draw drafts and engage to pay them upon their
IBBA's liability under its own standby letters of credit. presentment simultaneously with the tender of documents
Payments made by the Mendozas directly to Philam Life are in required by the letter of credit.
compliance with their own prestation under the loan
agreements. And although these payments could result in the Facts:
reduction of the actual amount which could ultimately be
collected from IBAA, the latter's separate undertaking under its Bank of America received an Irrevocable Letter of Credit issued
L/Cs remains. by Bank of Ayudhya for the Account of General Chemicals Ltd.,
Inc. for the sale of plastic ropes and agricultural files with Bank
The amount of P222,000.00 as found by the trial court, of America as advising bank and Inter-Resin Industrial Corp. as
therefore, considered as "any obligation of the accountee" under beneficiary.
the L/Cs will still have to be paid by Insular Bank under the
explicit terms thereof, which the bank had itself supplied. Upon receipt of the letter advice with letter of credit by Inter-
Letters of credit are strictly construed to the end that the rights Resin told Bank of America to confirm said letter of credit, but
of those directly parties to them may be preserved and their the bank did not confirm such. Bank of America explained that
interest safeguarded. Like any other writing, it will be construed there was no need for confirmation.
most strongly against the writer and so as to be reasonable and
consistent with honest intentions. Inter-Resin made a partial availment of the Letter of Credit after
presentment of the required documents to Bank of America.
After confirmation of all the documents BA issued a check in
favor of IR. BA advice Bank of Ayudhya of IR’s availment under
the letter of credit and asked for the corresponding
reimbursement.
IR presented documents for the second availment under the There would at least be three (3) parties: (a) the buyer, who
same LC but BA stopped the processing of such after they procures the letter of credit and obliges himself to reimburse the
received a telex from Bank of Ayudhya delaring that the LC issuing bank upon receipts of the documents of title; (b) the
fraudulent. BA sued IR for the recovery of the first LC payment. bank issuing the letter of credit, which undertakes to pay the
seller upon receipt of the draft and proper document of titles
Issue: and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the
Whether or not Bank of America may recover what it has paid contract of sale ships the goods to the buyer and delivers the
under the letter of credit to Inter-Resin? documents of title and draft to the issuing bank to recover
payment.
Ruling:
The number of the parties, not infrequently and almost
invariably in international trade practice, may be increased.
YES. First, given the factual findings of the lower courts, the SC
Thus, the services of an advising (notifying) bank may be
concluded that petitioner Bank of America has acted merely as
utilized to convey to the seller the existence of the credit; or, of
a notifying bank and did not assume the responsibility of a
a confirming bank which will lend credence to the letter of credit
confirming bank; and second, petitioner bank, as a negotiating
issued by a lesser known issuing bank; or, of a paying bank,
bank, is entitled to recover on Inter-Resin's partial availment as
which undertakes to encash the drafts drawn by the exporter.
beneficiary of the letter of credit which has been disowned by
Further, instead of going to the place of the issuing bank to
the alleged issuer bank.
claim payment, the buyer may approach another bank, termed
the negotiating bank, to have the draft discounted.
A letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of
It cannot seriously be disputed that Bank of America has, in fact,
goods to satisfy the seemingly irreconcilable interests of a seller,
only been an advising, not confirming, bank, and this much is
who refuses to part with his goods before he is paid, and a buyer,
clearly evident, among other things, by the provisions of the
who wants to have control of the goods before paying. To break
letter of credit itself, the petitioner bank's letter of advice, its
the impasse, the buyer may be required to contract a bank to
request for payment of advising fee, and the admission of Inter-
issue a letter of credit in favor of the seller so that, by virtue of
Resin that it has paid the same. That Bank of America has asked
the latter of credit, the issuing bank can authorize the seller to
Inter-Resin to submit documents required by the letter of credit
draw drafts and engage to pay them upon their presentment
and eventually has paid the proceeds thereof, did not obviously
simultaneously with the tender of documents required by the
make it a confirming bank. The fact, too, that the draft required
letter of credit. The buyer and the seller agree on what
by the letter of credit is to be drawn under the account of
documents are to be presented for payment, but ordinarily they
General Chemicals (buyer) only means the same had to be
are documents of title evidencing or attesting to the shipment of
presented to Bank of Ayudhya (issuing bank) for payment. It
the goods to the buyer.
may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to pay
the draft.
As an advising or notifying bank, Bank of America did not incur

any obligation more than just notifying Inter-Resin of the letter
of credit issued in its favor, let alone to confirm the letter of
credit. The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty.
Tanay, Inter-Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of novating the
letter of credit and Bank of America's letter of advice, nor can it
justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot
claim to have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously been a
great concern to it. It would have, in fact, been strange if it did
not, prior to the letter of credit, enter into a contract, or
negotiated at the very least, with General Chemicals. In the
ordinary course of business, the perfection of contract precedes
the issuance of a letter of credit.
TRUST RECEIPTS failed to comply with the demand letter, LBP filed the affidavit-
complaint.
1. LAND BANK OF THE PHILIPPINES VS.
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. The respondents filed a joint affidavit wherein they
ESTELITA P. ANGELES-PANLILIO, AND stated that they signed the trust receipt documents on or about
NAPOLEON O. GARCIA the same time LBP and ACDC executed the loan documents;
G.R. NO. 166884, JUNE 13, 2012 their signatures were required by LBP for the release of the
loans. The trust receipts in this case do not contain (1) a
Facts: 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.
Petitioner Land Bank of the Philippines (LBP) is a government 115.
financial institution and the official depository of the
Philippines. The complaint was dismissed. However upon appeal
with the Secretary of Justice, it reversed the decision of the
Respondents are the officers and representatives of Asian Makati Assistant City Prosecutor. The Secretary of Justice
Construction and Development Corporation (ACDC), a pointed out that there was no question that the goods covered
corporation incorporated under Philippine law and engaged in by the trust receipts were received by ACDC. He likewise
the construction business. adopted LBPs argument that while the subjects of the trust
receipts were not mentioned in the trust receipts, they were
LBP filed a complaint for estafa or violation of Article listed in the letters of credit referred to in the trust receipts. He
315, paragraph 1(b) of the Revised Penal Code, in relation to also noted that the trust receipts contained maturity dates and
P.D. 115, against the respondent before the City Prosecutors clearly set out their stipulations. He further rejected the
Office in Makati City. In the affidavit-complaint, the LBPs respondents defense that ACDC failed to remit the payments to
Account Officer for the Account Management Development, LBP due to the failure of the clients of ACDC to pay them.
Edna L. Juan, stated that LBP extended a credit accommodation
to ACDC through the execution of an Omnibus Credit Line Issue:
Agreement (Agreement)between LBP and ACDC and that in
various instances, ACDC used the Letters of Credit/Trust Whether or not the transactions involved are of trust receipt?
Receipts Facility of the Agreement to buy construction
materials. The respondents, as officers and representatives of Ruling:
ACDC, executed trust receipts in connection with the
construction materials. The trust receipts matured, but ACDC NO. The disputed transactions are not trust receipts. Section 4
failed to return to LBP the proceeds of the construction projects of P.D. 115 defines a trust receipt transaction in this manner:
or the construction materials subject of the trust receipts. Thus,
LBP sent ACDC a demand letter, for the payment of its debts, Section 4. What constitutes a trust receipt
including those under the Trust Receipts Facility. When ACDC 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 would be the return of the proceeds of the sale transaction. This
entruster, and another person referred to in this Decree transaction becomes a mere loan, where the borrower is
as entrustee, whereby the entruster, who owns or holds obligated to pay the bank the amount spent for the purchase of
absolute title or security interests over certain specified the goods.
goods, documents or instruments, releases the same to
the possession of the entrustee upon the latter's Article 1371 of the Civil Code provides that [i]n order to
execution and delivery to the entruster of a signed judge the intention of the contracting parties, their
document called a "trust receipt" wherein the entrustee contemporaneous and subsequent acts shall be principally
binds himself to hold the designated goods, documents considered. Under this provision, we can examine the
or instruments in trust for the entruster and to sell or contemporaneous actions of the parties rather than rely purely
otherwise dispose of the goods, documents or on the trust receipts that they signed in order to understand the
instruments with the obligation to turn over to the transaction through their intent.
entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust We note in this regard that at the onset of these
receipt or the goods, documents or instruments transactions, LBP knew that ACDC was in the construction
themselves if they are unsold or not otherwise disposed business and that the materials that it sought to buy under the
of, in accordance with the terms and conditions letters of credit were to be used for the following projects: the
specified in the trust receipt, or for other purposes Metro Rail Transit Project and the Clark Centennial Exposition
substantially equivalent to any of the following: Project. LBP had in fact authorized the delivery of the materials
on the construction sites for these projects, as seen in the letters
In the case of goods or documents, (a) to sell the of credit it attached to its complaint. Clearly, they were aware of
goods or procure their sale; or (b) to manufacture or the fact that there was no way they could recover the buildings
process the goods with the purpose of ultimate sale: or constructions for which the materials subject of the alleged
Provided, That, in the case of goods delivered under trust receipts had been used.
trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall Based on these premises, we cannot consider the agreements
retain its title over the goods whether in its original or between the parties in this case to be trust receipt transactions
processed form until the entrustee has complied fully because (1) from the start, the parties were aware that ACDC
with his obligation under the trust receipt; or (c) to load, could not possibly be obligated to reconvey to LBP the
unload, ship or tranship or otherwise deal with them in materials or the end product for which they were used; and (2)
a manner preliminary or necessary to their sale[.] from the moment the materials were used for the government
projects, they became public, not LBPs, property.
When both parties enter into an agreement knowing
that the return of the goods subject of the trust receipt is not Since these transactions are not trust receipts, an action
possible even without any fault on the part of the trustee, it is for estafa should not be brought against the respondents, who
not a trust receipt transaction penalized under Section 13 of P.D. are liable only for a loan.
115; the only obligation actually agreed upon by the parties
As the law stands today, violations of Trust Receipts Law Ng and Asiatrust could not reach a settlement
are criminally punishable, but no criminal complaint for prompting Asiatrust to file a case of Estafa in relation to Sec. 3
violation of Article 315, paragraph 1(b) of the Revised Penal of PD115 against Anthony Ng.
Code, in relation with P.D. 115, should prosper against a
borrower who was not part of a genuine trust receipt Issue:
transaction.
Whether or not the transaction in the case is a trust receipt
2. ANTHONY L. NG VS. PEOPLE OF THE transaction?
PHILIPPINES
G.R. NO. 173905, APRIL 23, 2010 Ruling:
Facts: NO. It is not a trust receipt transaction.
Anthony Ng applied for a credit line of P3,000,000 with The sale of good, documents or instruments by a person
Asiatrust. In support of Asiatrust’s investigation, Ng submitted in the business of selling goods, documents or instruments for
the following: (1) the contracts he had Islacom, Smart and profit who, at the outset of transaction, has, as against the buyer,
Infocom; (2) the list projects wherein he was commissioned by general property rights in such goods, documents or
the said companies to build several steel towers; and (3) the instruments, or who sells the same to the buyer on credit,
collectible amount he had with those companies. retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction
Asiatrust approved Ng’s loan application. Ng was then and is outside the purview and coverage of this Decree.
required to submit the following: (1) the Credit Line Agreement;
(2) Application and Agreement for Irrevocable L/C; (3) Trust In other words, a trust receipt transaction is one where
Recepit Agreements; and (4) PromissoryNotes. The promissory the entrustee has the obligation to deliver to the entruster the
notes had maturity dates however the trust receipt agreements price of the sale, or if the merchandise is not sold, to return the
did not. merchandise to the entruster.
After receiving the goods, Ng used them to fabricate the There are, therefore, two obligations in a trust receipt
communication towers for his clients. transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the
Ng realized difficulty in collecting from his client owner of the merchandise sold, while the second refers to the
Islacom, thus, he failed to pay his loan to Asiatrust. merchandise received under the obligation to "return" it
(devolvera) to the owner.13 A violation of any of these
Asiatrust’s representative appraiser reported undertakings constitutes Estafa defined under Art. 315, par. 1(b)
approximately 97% of the subject goods of the Trust Receipts of the RPC, as provided in
were sold-out and that only 3% of the goods remained. Sec. 13 of PD 115, viz:
Section 13. Penalty Clause.—The failure of an entrustee Considering that the goods in this case were never
to turn over the proceeds of the sale of the goods, intended for sale but for use in the fabrication of steel
documents or instruments covered by a trust receipt to communication towers, the trial court erred in ruling that the
the extent of the amount owing to the entruster or as agreement is a trust receipt transaction.
appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred fifteen,
paragraph one (b) of Act Numbered Three thousand
eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code. x xx (Emphasis
supplied.)
A thorough examination of the facts obtaining in the

instant case, however, reveals that the transaction between
petitioner and Asiatrust is not a trust receipt transaction but one
of simple loan.
It must be remembered that petitioner was transparent

to Asiatrust from the very beginning that the subject goods were
not being held for sale but were to be used for the fabrication of
steel communication towers in accordance with his contracts
with Islacom, Smart, and Infocom.
In these contracts, he was commissioned to build, out of

the materials received, steel communication towers, not to sell
them.
The true nature of a trust receipt transaction can be

found in the "whereas" clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient business device to assist
importers and merchants solve their financing problems."
Obviously, the State, in enacting the law, sought to find a way to
assist importers and merchants in their financing in order to
encourage commerce in the Philippines.
3. ILDEFONSO S. CRISOLOGO VS. PEOPLE OF THE Novachem. Petitioner contends that the CA erred in declaring him
PHILIPPINES, et. al civilly liable under the subject L/Cs which are corporate
G.R. No. 199481, DEC. 3, 2012 obligations of Novachem.
Section 13 of the Trust Receipts Law explicitly provides that if the Issue:
violation or offense is committed by a corporation, as in this
case, the penalty provided for under the law shall be imposed Whether or not the Petitioner as the President of Novachem is
upon the directors, officers, employees or other officials or personally and solidarily liable with Novachem for the Trust
person responsible for the offense, without prejudice to the civil Receipt Agreements dated May 24, 1989 and August 31, 1989 in
liabilities arising from the criminal offense.. favor of Chinabank.
Facts: Ruling:
Petitioner, as President of Novachemical Industries, Inc. YES. But the court held that the Petitioner is only liable
(Novachem), applied for commercial letters of credit from private with respect to the Trust Receipt Agreement dated May 24, 1989
respondent China Banking Corporation (Chinabank) to finance but not for Trust Receipt Agreement dated August 31, 1989.
the purchase of 1,6004 kgs. of amoxicillin trihydrate micronized
from Hyundai Chemical Company based in Seoul, South Korea Section 13 of the Trust Receipts Law explicitly provides
and glass containers from San Miguel Corporation (SMC). that if the violation or offense is committed by a corporation, as
in this case, the penalty provided for under the law shall be
Subsequently, Chinabank issued Letters of Credit. After imposed upon the directors, officers, employees or other officials
petitioner received the goods, he (Petitioner) executed for and in or person responsible for the offense, without prejudice to the
behalf of Novachem the corresponding Trust Receipt Agreements civil liabilities arising from the criminal offense.
dated May 24, 1989 and August 31, 1989 in favor of Chinabank.
Consequently, Chinabank filed before the City Prosecutor's Office In this case, petitioner was acquitted of the charge for
of Manila a Complaint-Affidavit charging petitioner for violation violation of the Trust Receipts Law in relation to Article 315 1(b)13
of P.D. No. 115 in relation to Article 315 1(b) of the RPC for his of the RPC. As such, he is relieved of the corporate criminal
purported failure to turn-over the goods or the proceeds from the liability as well as the corresponding civil liability arising
sale thereof, despite repeated demands. After due proceedings, therefrom. However, as correctly found by the RTC and the CA,
the RTC acquitted petitioner of the criminal charges. However, he may still be held liable for the trust receipts and L/C
adjudged him civilly liable to Chinabank transactions he had entered into in behalf of Novachem. Settled is
the rule that debts incurred by directors, officers, and employees
On appeal of the civil aspect, the CA affirmed the RTC acting as corporate agents are not their direct liability but of the
Decision holding petitioner civilly liable. CA held that by signing corporation they represent, except if they contractually
"Guarantee Clause" of the trust receipt agreements in his personal agree/stipulate or assume to be personally liable for the
capacity and even waived the benefit of excussion against corporation’s debts, as in this case.
Novachem. As such, he is personally and solidarily liable with
However, a review of the records shows that petitioner When the trust receipts matured, private respondents
signed only the guarantee clauses of the Trust Receipt dated May failed to return the goods to petitioner, or to return their value
24, 1989. With respect to the Trust Receipt dated August 31, 1989 amounting to P68, 749,487.96 despite demand. Thus, petitioner
issued to SMC for the glass containers, the second pages of these filed a criminal complaint for Estafa against Visaland and private
documents reveals that the same does not bear the signature of respondents with the Office of the City Prosecutor of Manila.
the petitioner in the guarantee clause. Hence, it was error for the Private respondents denied having entered into a trust receipt
CA to hold petitioner likewise liable for the obligation secured by agreement but a Contract of Loan with petitioner. The City
the said trust receipt. Prosecutor understood that for a charge of Estafa with grave
abuse of confidence to prosper, previous demand is an
4. METROBANK VS. SECRETARY OF JUSTICE RAUL indispensable requisite. This was reversed after a motion for
GONZALES, et. al reconsideration was filed hence it was filed in court. However, in
G.R. NO. 180165 APRIL 7, 2009 the interim, private respondents appealed the resolution of the
prosecutor before the Secretary of Justice who ruled that there
A mere failure to deliver the proceeds of the sale or the goods, if was no probable cause to prosecute private respondents for Estafa
not sold, constitutes a criminal offense that causes prejudice not in relation to Presidential Decree No. 115 and directed the
only to another, but more to the public interest. Even more withdrawal of the information. The detective was complied with.
incredible is the contention of private respondents that they did The Court of Appeals upheld the Secretary of Justice’s resolution.
not give much significance to the documents they signed,
considering the enormous value of the transaction involved. Issue:
Thus, it is highly improbable to mistake trust receipt documents
for a contract of loan when the heading thereon printed in bold Is there probable cause to hold private respondents liable for
and legible letters reads: Trust Receipts. Estafa in relation to violation of the Trust Receipts Law?
Facts: Ruling:
In order to finance the importation of materials necessary YES. As found in the complaint-affidavit of petitioner,
for the operations of its sister company, Titan Ikeda Construction private respondents were charged with failing to account for or
and Development Corporation (TICDC), private respondents, on turn over to petitioner the merchandise or goods covered by the
behalf of Visaland, applied with petitioner for 24 letters of credit, trust receipts or the proceeds of the sale thereof in payment of
the aggregate amount of which reached the sum of P their obligations there under. The following pieces of evidence
68,749,487.96. Simultaneous with the issuance of the letters of adduced from the affidavits and documents submitted before the
credit, private respondents signed trust receipt in favor of City Prosecutor are sufficient to establish the existence of
petitioner. Private respondents bound themselves to sell the probable cause. To wit:
goods covered by the letters of credit and to remit the proceeds to
petitioner, if sold, or return the goods, if not sold, on or before First, the trust receipts bearing the genuine signatures of
their agreed maturity dates. private respondents; second, the demand letter of petitioner
addressed to respondents; and Third, the initial admission by
private respondents of the receipt of the imported goods from 5. ALFREDO CHING VS. COURT OF APPEALS, HON.
petitioner. ZOSIMO Z. ANGELES, RTC-BR. 58, MAKATI, METRO
MANILA, PEOPLE OF THE PHILIPPINES AND
There is ample evidence on record to warrant a finding ALLIED BANKING CORPORATION
that there is a probable cause to warrant the prosecution of private G.R. NO. 110844, APRIL 27, 2000
respondents for Estafa. Probable cause does not require an
inquiry into whether there is sufficient evidence to procure a The penal provision of Section 13 of P.D. 115 provides:
conviction. It is enough that it is believed that the act or omission
complained of constitutes the offense charged. The failure of an entrustee to turn over the
That private respondents did not sell the goods under the proceeds of the sale of the goods, documents, or instruments
trust receipt but allowed it to be used by their sister company is of covered by a trust receipt to the extent of the amount owing to
no moments. The offense punished under P.D No. 115 is in the the entruster or as appears in the trust receipt or to
nature of malum prohibitum. A mere failure to deliver the return said goods, documents or instruments if they were not
proceeds of the sale or the goods, if not sold, constitutes a criminal sold or disposed of in accordance with the terms of the trust
offense that causes prejudice not only to another, but more to the receipt shall constitute the crime the crime of estafa,
public interest. Even more incredible is the contention of private punishable under the provisions of Article 315, as amended,
respondents that they did not give much significance to the otherwise known as the Revised Penal Code. (Emphasis
documents they signed, considering the enormous value of the supplied)
transaction involved. Thus, it is highly improbable to mistake Facts:
trust receipt documents for a contract of loan when the heading
thereon printed in bold and legible letters reads: Trust Receipts. Alfredo Ching (Ching) was charged with four (4) counts
Without prejudice, by merely glancing at the documents of estafa in relation to Presidential Decree 115 (P.D. 115) or the
submitted by petitioner entitled Trust Receipts and the Trust Receipts Law before RTC Makati.
arguments advanced by private respondents, the court is
convinced that there is probable cause to file the case and to hold The information contained that Ching executed a trust
them for trial. receipt in favor of Allied Banking Corporation (Allied) in
consideration of the receipt by the said accused of
goods: Magtar Brand Dolomites, “High Fired Refractory Sliding
Nozzle Bricks” and “High Fired Refractory Sliding Nozzle
Bricks. Under the terms of the agreement, Ching agreed to sell
the same for cash with express obligation to remit to Allied the
proceeds of the sale and/or to turn over the goods, if not sold,
on demand. However, upon possession of the
goods, Ching misappropriated, misapplied and converted it to
his own use and benefit. Despite repeated
demands, Ching failed and refused to account and remit the
proceeds of the sale to Allied.
instruments if they were not sold or disposed of in

A Petition for Declaration of Nullity of Documents and accordance with the terms of the trust receipt shall
for Damages was filed by Ching and Philippine Blooming Mills constitute the crime the crime of estafa, punishable
Co. Inc. (PBM) before RTC Manila for: (1) failure to express the under the provisions of Article 315, as amended,
true intent and agreement of the parties; and (2) that the said otherwise known as the Revised Penal Code.”
documents, i.e. trust receipts, were mere loan documents. PBM (Emphasis supplied)
is an importer that will use, consume and destroy the goods.
It must be noted, however, that a violation of a trust
A Petition for the Suspension of the Criminal receipt agreement is not the sole basis for incurring
Proceedings was filed by Ching with RTC Makati on the ground liability under Article 315 1(b) of the Code.
of prejudicial question in a civil action. It was denied. Upon
appeal, the CA denied the petition. It ratiocinated that the Second, a prejudicial question is one that arises in a case
declaration of nullity of the trust receipts in question is not a the resolution of which is a logical antecedent of the
prejudicial question to the pending criminal case for estafa. issue involved therein, and the cognizance of which pertains to
another tribunal. The prejudicial question must be
Notwithstanding the decision by the Court of Appeals, determinative of the case before the court but the jurisdiction to
RTC Manila admitted Ching’s amended complaint. try and resolve the question must be lodged in another court or
tribunal.
Issue:
Herein, the alleged prejudicial question in the civil case
Whether the pendency of a civil action for damages and for declaration of nullity of documents and for damages, does
declaration of nullity of documents, specifically trust receipts, not juris et de jure determine the guilt or innocence of the
warrants the suspension of criminal proceedings instituted for accused in the criminal action for estafa. Even on the
violation of Article 315 1(b)1 of the Revised Penal Code in assumption that the documents are declared null, it does
relation to P.D. 115 (Trust Receipts Law). not ipso facto follow that such declaration of nullity shall
exonerate the accused from criminal prosecution and
Ruling: liability. Estafa can still be proven by presenting evidence to the
effect that:
NO. No prejudicial question exists herein.
1. Ching received the subject goods in trust or under the
First, Section 13 of P.D. 115 provides: obligation to sell the same and to remit the proceeds
thereof to Allied Banking Corporation, or to return the
“The failure of an entrustee to turn over the goods, if not sold;
proceeds of the sale of the goods, documents, or 2. Ching misappropriated or converted the goods and/or
instruments covered by a trust receipt to the extent of the proceeds of the sale;
the amount owing to the entruster or as appears in the
trust receipt or to return said goods, documents or
3. Ching performed such acts with abuse of confidence to stored or processed as a component of a product
the damage and prejudice of Allied Banking ultimately sold. A construction should be avoided when it
Corporation; and affords an opportunity to defeat compliance with the terms of a
4. that demand was made to Ching. statue.
The records show that Ching signed and executed trust Lastly, while it may be true that the truth or falsity of the
receipt documents in favor of Allied Banking to finance the parties’ respective claims as regards the true nature of the
purchase of imported goods. Ching alleges that the trust transaction and of the documents, shall have to be first
receipts are evidence of a pure loan or that the same were determined by RTC Manila, which is the court hearing the civil
additional or side documents that actually stood as promissory case, the Supreme Court may, on certain exceptional instances,
notes and not a collateral or security resolve the merits of a case on the basis of the records and other
arrangement. Ching cannot assume a position inconsistent with evidence before it, most especially when the resolution of these
his previous allegations in his civil complaint that the trust issues would best serve the ends of justice and promote the
receipts were intended as mere collateral or security. It speedy disposition of cases.
ratiocinated that whether Ching signed the trust receipts as
such trust receipts or as a mere evidence of a pure and simple
loan transaction is besides the fact that a trust receipt is
a security agreement of an indebtedness.
A trust receipt is considered 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.
Further, as a security transaction, it could never be a

mere additional or side document as alleged by petitioner.
Otherwise, a party to a trust receipt agreement could easily
renege on its obligations thereunder, thus undermining the
importance and defeating with impunity the purpose of such as
indispensible tool in commercial transactions.
Furthermore, the penal provision of P.D. 115

encompasses any act violative of an obligation covered
by the trust receipt; it is not limited to transactions
in goods which are to be sold (retailed), reshipped,
6. MELVIN COLINARES VS. COURT OF APPEALS that the trust receipt was a mere formality. The trial court
GR NO. 90828, September 5, 2000 promulgated its decision convicting Petitioners of estafa for
violating P.D. No. 115 in relation to Article 315 of the Revised
Trust receipt transactions are intended to aid in financing Penal Code. The trial court considered the transaction between
importers and retail dealers who do not have sufficient funds PBC and Petitioners as a trust receipt transaction under Section
or resources to finance the importation or purchase of 4, P.D. No. 115.  It considered Petitioners' use of the goods in
merchandise, and who may not be able to acquire credit except their Carmelite monastery project an act of "disposing" as
through utilization, as collateral, of the merchandise imported contemplated under Section 13 P.D. No. 115. Petitioners
or purchased. appealed from the judgment to the Court of Appeals, it modified
the judgment of the trial court by increasing the penalty. It held
Facts: that the documentary evidence of the prosecution prevails
over Veloso's testimony, discredited Petitioners' claim that the
Melvin Colinares and Lordino Veloso (hereafter Petitioners) documents they signed were in blank, and disbelieved that they
were contracted for a consideration of P40,000 by the Carmelite were coerced into signing them.
Sisters of Cagayan de Oro City to renovate the latter's convent
at Camaman-an. Petitioners applied for a commercial letter of Petitioners filed a Motion to Dismiss the case on the ground that
credit with the Philippine Banking Corporation, Cagayan de Oro they had already fully paid PBC on 2 February 1990 the amount
City branch (hereafter PBC) in favor of CM Builders Centre. PBC of P70,000 for the balance of the loan, including interest and
debited P6,720 from Petitioners' marginal deposit as partial other charges, as evidenced by the different receipts issued
payment of the loan Petitioners proposed that the terms of by PBC, and that the PBC executed an Affidavit
payment of the loan be modified as follows: P2,000 on or before of desistance.In its Comment of 30 July 1990, the Solicitor
3 December 1980, and P1,000 per month starting 31 January General opined that payment of the loan was akin to a voluntary
1980 until the account is fully paid. Pending approval of the surrender or plea of guilty which merely serves to mitigate
proposal, Petitioners paid P1,000 to PBC on 4 December 1980, Petitioners' culpability, but does not in any way extinguish their
and thereafter P500 on 11 February 1981,16 March 1981, and 20 criminal liability.
April 1981. Concurrently... with the separate demand for
attorney's fees by PBC's legal counsel, PBC continued to Issue:
demand payment of the balance.
Assuming there was a valid trust receipt, whether or not the
On 14 January 1983, Petitioners were charged with the violation accused were properly charged, tried and convicted for violation
of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of of sec. 13, PD no. 115 in relation to article 315 paragraph (i) (b)
the Revised Penal Code. During trial, petitioner Veloso insisted notwithstanding the novation of the so-called trust receipt
that the transaction was a "clean loan" as per verbal guarantee converting the trustor-trustee relationship to creditor-debtor
of Cayo Garcia Tuiza, PBC's former manager. He and situation?
petitioner Colinares signed the documents without reading the
fine print, only learning of the trust receipt implication. When
he brought this to the attention of PBC, Mr. Tuiza assured him
Ruling: full, or if the merchandise has already been sold, the proceeds
of the sale... should be turned over to him by the importer or by
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust his representative or successor in interest. To secure that the
receipt transaction as any transaction by and between a person bank shall be paid, it takes full title to the goods at the very
referred to as the entruster, and another person referred to as beginning and continues to hold that title as his indispensable...
the entrustee, whereby the entruster who owns or holds security until the goods are sold and the vendee is called upon
absolute title or security interest over certain specified goods, to pay for them; hence, the importer has never owned the goods
documents or instruments, releases the same to the possession and is not able to deliver possession.  In a certain manner, trust
of the entrustee upon the latter's execution and delivery to receipts partake of the nature of a conditional sale... where the
the entruster of a signed document called a "trust receipt" importer becomes absolute owner of the imported merchandise
wherein the entrustee binds himself to hold the... designated as soon as he has paid its price.
goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the The Trust Receipts Law does not seek to enforce payment of the
amount owing to the entruster loan, rather it punishes the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of another
Failure of the entrustee to turn over the proceeds of the sale of regardless of whether the latter is the owner. Here, it is... crystal
the goods, covered by the trust receipt to the entruster or to clear that on the part of Petitioners there was neither dishonesty
return said goods if they were not disposed of in accordance nor abuse of confidence in the handling of money to the
with the terms of the trust receipt shall be punishable as estafa. prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC
In the case at bar reveals that the transaction intended by the acknowledging payment of... the loan.
parties was a simple loan, not a trust receipt agreement.
The Information charges Petitioners with intent to defraud and
Petitioners received the merchandise from CM Builders Centre misappropriating the money for their personal use. The
on 30 October 1979. On that day, ownership over the mala prohibita nature of the alleged offense notwithstanding,
merchandise was already transferred to Petitioners who were to intent as a state of mind was not proved to be present in
use the materials for their construction project. Petitioners' situation. Petitioners employed no artifice in
dealing with PBC and never did they evade payment of their
This situation belies what normally obtains in a pure trust obligation nor attempt to abscond.
receipt transaction where goods are owned by the bank and only
released to the importer in trust subsequent to the grant of the Also, Petitioners are not importers acquiring the goods for re-
loan. The bank acquires a "security interest" in the goods as sale, contrary to the express provision embodied in the trust
holder of a security title... for the advances it had made to receipt. They are contractors who obtained the fungible goods
the entrustee. for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the
The ownership of the merchandise continues to be vested in the Petitioners from CM Builders Centre. This impresses upon the
person who had advanced payment until he has been paid in trust receipt in question vagueness and ambiguity, which should
not be the basis for criminal prosecution in the event of violation Facts:
of its provisions.
Anthony Ng was engaged in the business of building and
The practice of banks of making borrowers sign trust receipts to fabricating telecommunication towers under the trade name
facilitate collection of loans and place them under the threats of Capitol Blacksmith and Builders. Petitioner applied for a credit
criminal prosecution should they be unable to pay it may be line of Php 3,000,000 with Asia trust. In support of Asia trusts
unjust and inequitable, if not reprehensible. Such agreements credit investigation, petitioner voluntarily submitted the
are contracts of adhesion... which borrowers have no option but following documents: (1) the contracts he had with Islacom,
to sign lest their loan be disapproved. The resort to this scheme Smart, and Infocom; (2) the list of projects wherein he was
leaves poor and hapless borrowers at the mercy of banks, and is commissioned by the said telecommunication companies to
prone to misinterpretation, as had happened in this case. build several steel towers; and (3) the collectible amounts he has
Eventually, PBC showed its true colors and admitted that it was with the said companies.
only after collection of the money, as manifested by its Affidavit
of Desistance. Asiatrust approved petitioner’s loan application. Petitioner was
then required to sign several documents, among which are the
7. ANTHONY L. NG VS. PEOPLE OF THE Credit Line Agreement, Application and Agreement for
PHILIPPINES G.R. NO. 173905, APRIL 23, 2010 Irrevocable L/C, Trust Receipt Agreements,[4] and Promissory
Notes. Though the Promissory Notes had maturity dates, the
The Trust Receipts Law was created to "to aid in financing two Trust Receipt Agreements did not bear any maturity dates.
importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of After petitioner received the goods, consisting of chemicals and
merchandise, and who may not be able to acquire credit metal plates from his suppliers, he utilized them to fabricate the
except through utilization, as collateral, of the communication towers ordered from him by his clients. As
merchandise imported or purchased." Since Asia trust petitioner realized difficulty in collecting from his client
knew that Anthony Ng was neither an importer nor retail Islacom, he failed to pay his loan to Asiatrust. Asiatrusts
dealer, it should have known that the said agreement could representative appraiser, reported that approximately 97% of
not possibly apply to petitioner. Regardless of whether the the subject goods of the Trust Receipts were sold-out and that
transaction is foreign or domestic, it is important to note only 3 % of the goods remained. Efforts towards a settlement
that the transactions discussed in relation to trust failed to be reached.
receipts mainly involved sales. Considering that the
goods in this case were never intended for sale but for Asiatrust Account Officer filed a Complaint-Affidavit for Estafa,
use in the fabrication of steel communication towers, the as defined and penalized under Art. 315, par. 1(b) of the RPC in
trial court erred in ruling that the agreement is a trust receipt relation to Sec. 3, PD 115 or the Trust Receipts Law.
transaction.
Issue: the principle is equally applicable to domestic transactions.

Regardless of whether the transaction is foreign or domestic, it
Whether the petitioner is liable for Estafa under Art. 315, par. is important to note that the transactions discussed in relation
1(b) of the RPC in relation to PD 115? to trust receipts mainly involved sales.
Ruling: The release of such goods to the entrustee is conditioned upon

his execution and delivery to the entruster of a trust receipt
A trust receipt transaction is one where the entrustee has the wherein the former binds himself to hold the specific goods in
obligation to deliver to the entruster the price of the sale, or if trust for the entruster and to sell or otherwise dispose of the
the merchandise is not sold, to return the merchandise to the goods with the obligation to turn over to the entruster the
entruster. There are, therefore, two obligations in a trust receipt proceeds to the extent of the amount owing to the entruster or
transaction: the first refers to money received under the the goods themselves if they are unsold.
obligation involving the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the second refers to the Considering that the goods in this case were never intended for
merchandise received under the obligation to return it sale but for use in the fabrication of steel communication
(devolvera) to the owner. A violation of any of these towers, the trial court erred in ruling that the agreement is a
undertakings constitutes Estafa defined under Art. 315, par. trust receipt transaction.
1(b) of the RPC, as provided in Sec. 13 of PD 115, viz:
Petitioner is correct that there was no misappropriation or
Section 13. Penalty Clause. The failure of an entrustee to turn conversion on his part, because his liability for the amount of
over the proceeds of the sale of the goods, documents or the goods subject of the trust receipts arises and becomes due
instruments covered by a trust receipt to the extent of the only upon receipt of the proceeds of the sale and not prior to the
amount owing to the entruster or as appears in the trust receipt receipt of the full price of the goods. PD 115 provides that an
or to return said goods, documents or instruments if they were entrustee is only liable for Estafa when he fails to turn over the
not sold or disposed of in accordance with the terms of the trust proceeds of the sale of the goods covered by a trust receipt to the
receipt shall constitute the crime of estafa, punishable under the extent of the amount owing to the entruster or as appears in the
provisions of Article Three hundred fifteen, paragraph one (b) trust receipt in accordance with the terms of the trust receipt.
of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code.
A trust receipt is considered 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. The principle is of course
not limited in its application to financing importations, since
8. ALLIED BANKING CORPORATION VS. ORDONEZ ABC filed a criminal complaint against Ching for violation of PD
G.R. NO. 82495DECEMBER 10, 1990 115. After preliminary investigation, the fiscal found a prima
facie case for violation of PD 115 on four counts and filed the
In trust receipts, there is an obligation to repay the entruster. corresponding information. Ching appealed the fiscal’s
The entrustee binds himself to sell or dispose of the entrusted resolution alleging that the goods subject of the trust receipt
goods with the obligation to turn over to the entruster the agreements were dolomites which were specifically used for
proceeds if sold, or return the goods if unsold or not otherwise patching purposes over the surface of furnaces and nozzle bricks
disposed of, in accordance with the terms and condition which are insulating materials in the lower portion of the ladle
specified in the trust receipt. A violation of this undertaking which do not form part of the steel product itself.
constitutes estafa under Sec 13 of PD 115.
Justice Secretary Ordonez reversed the resolution saying that
Facts: PD 115 contemplates or covers only goods, which have, for their
ultimate destination, the sale thereof or if unsold, their
On January 21, 1981, Philippine Blooming Mills thru Alfredo surrender to the entruster, this whether the goods are in their
Ching applied for the issuance of commercial letters of credit original form or in their manufactured or processed state. Not
with Allied Banking Corporation’s Makati branch to finance the all transactions covered by trust receipts may be considered as
purchase of 500 M/T Magtar Branch Dolomites and one Lot trust receipt transactions defined and penalized under PD 115.
High Fired Refractory Sliding Nozzle Bricks which would be
utilized in the operation of machinery and equipment. ABC filed a motion for reconsideration of the Ordonez’
resolution.
ABC issued an irrevocable letter of credit in favor of Nikko
Industry Co Ltd by virtue of which the latter drew 4 drafts which Issue:
were accepted by PBM and paid by the bank.
Whether or not the penal provision of PD 115 apply when the
To secure payment of the amount covered by the drafts and in goods covered by a Trust Receipt do not form part of the
consideration of the transfer by ABC of the possession of the finished products which are ultimately sold but are instead
goods to PBM, Ching executed four Trust Receipt Agreements utilized/used up in the operation of the equipment and
acknowledging ABC’s ownership of the goods and its obligation machineries of the entrustee-manufacturer?
to turn over the proceeds of the sale of the goods, if sold, or to
return the same, if unsold within the stated period. Ruling:
Out of the said obligation resulted an overdue amount of Yes. In trust receipts, there is an obligation to repay the
P1,475,274.09. Despite repeated demands, PBM failed and entruster. The entrustee binds himself to sell or dispose of the
refused to either turn over the proceeds of the sale of the goods entrusted goods with the obligation to turn over to the entruster
or to return the same. the proceeds if sold, or return the goods if unsold or not
otherwise disposed of, in accordance with the terms and
condition specified in the trust receipt. A violation of this Facts:

undertaking constitutes estafa under Sec 13 of PD 115.
Sometime in 1989, Rosario Textile Mills Corporation
The wording of Sec 13 covers failure to turn over the proceeds of (RTMC) applied from Home Bankers Savings & Trust Co. for an
the sale of entrusted goods, or to return said goods, unsold or Omnibus Credit Line for Php 10 million. The bank approved
disposed of in accordance with the terms of the trust receipts. RTMC’s credit line but for only PhP 8 million. The bank notified
The nonpayment of the amount covered by a trust receipt is an RTMC of the grant of said loan, and on March 3, 1989, Yujuico
act violative of the entrustee’s obligation to pay. There is no signed a surety agreement in favor of the bank, in which he
reason why the law should not apply to all transactions covered bound himself jointly and severally with RTMC for the payment,
by trust receipts, except those expressly excluded. from 1989 to 1990. RTMC availed of the credit line by making
numerous drawdowns, each drawdown being covered by a
The Court takes judicial notice of customary banking and separate promissory note and trust receipt.
business practices where trust receipts are used for importation
of heavy equipment, machineries, and supplies used in Despite the lapse of the respective due dates under the
manufacturing operations. A construction should be avoided promissory notes and notwithstanding the bank’s demand
when it affords an opportunity to defeat compliance with the letters, RTMC failed to pay its loans. Hence, on January 22,
terms of the statute. 1993, the bank filed a complaint for sum of money against
RTMC and Yujuico before the RTC.
The penal provision of PD 115 encompasses any act violative of
an obligation covered by the trust receipt; it is not limited to RTMC and Yujuico contended that they should be
transactions in goods which are to be sold, reshipped, stored, or absolved from liability, because although they admitted the
processed as a component of a product ultimately sold. To grant of credit line and execution of the suretyship agreement,
uphold the Justice Department’s ruling would contravene not the bank gave an assurance that the suretyship agreement was
only the letter but the spirit of PD 115. merely a formality under which Yujuico will not be personally
liable. They argued that the importation of raw materials under
9. ROSARIO TEXTILE MILLS CORPORATION and the credit line was with a grant of option to them to turn-over to
EDILBERTO YUJUICO VS. HOME BANKERS the bank the imported raw materials should these fail to meet
SAVINGS and TRUST COMPANY G.R. No. 137232. their manufacturing requirements. RTMC offered to make such
June 29, 2005 turn-over since the imported materials did not conform to the
required specifications. However, the bank refused to accept the
TRUST RECEIPT is a security transaction intended to aid in same, until the materials were destroyed by a fire which gutted
financing importers and retail dealers who do not have down RTMC’s premises.
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.
Issue: absolute, whenever such title is in substance taken or retained

for security only.”
Whether Petitioners RTMC and Yujuico should be held
jointly and severally liable under the trust receipts which were Petitioners’ insistence that the ownership of the raw
evidence of the security agreement? materials remained with the bank is untenable. In Sia v. People,
Abad v. Court of Appeals, and PNB v. Pineda, we held that:
Ruling: “If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal fiction
Yes. It is thus clear that the principal transaction than fact, for if it were really so, it could dispose of the goods in
between petitioner RTMC and the bank is a contract of loan. any manner it wants, which it cannot do, just to give consistency
RTMC used the proceeds of this loan to purchase raw materials with purpose of the trust receipt of giving a stronger security for
from a supplier abroad. In order to secure the payment of the the loan obtained by the importer. To consider the bank as the
loan, RTMC delivered the raw materials to the bank as true owner from the inception of the transaction would be to
collateral. Trust receipts were executed by the parties to disregard the loan feature thereof.”
evidence this security arrangement. Simply stated, the trust
receipts were mere securities. Thus, petitioners cannot be relieved of their obligation
to pay their loan in favor of the bank.
In Samo v. 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.”
In Vintola v. 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 goods. It secures an indebtedness and there can be
no such thing as a security interest that secures no obligation.”
Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a
“security interest” as follows:
“ (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
10. SPOUSES TIRSO I. VINTOLA and LORETA DY drafts drawn by their supplier, one Stalin Tan, on Dax Kin
VINTOLA, VS. INSULAR BANK OF ASIA and International for the purchase of puka and olive seashells. In
AMERICA, plaintiff-appellee. consideration thereof, the Vintolas, jointly and severally, agreed
G.R. No. 73271. May 29, 1987 to pay the bank “at maturity, in Philippine currency, the
equivalent, of the aforementioned amount or such portion
Section 4 of P.D. No. 115 defines a trust receipt transaction thereof as may be drawn or paid, upon the faith of the said credit
as: together with the usual charges.”
Any transaction by and between a person referred to in On the same day, August 20, 1975, having received from
this Decree as the entruster, and another person referred to in Stalin Tan the puka and olive shells worth PhP 40,000.00, the
this Decree as the entrustee, whereby the entruster, who owns Vintolas executed a Trust Receipt agreement with IBAA. Under
or holds absolute title or security interests over certain that agreement, the Vintolas agreed to hold the goods in trust
specified goods, documents or instruments, releases the same for IBAA as the “latter’s property with liberty to sell the same for
to the possession of the entrustee upon the latter’s execution its account,” and “in case of sale”, to turn-over the proceeds as
and delivery to the entruster of a signed document called a soon as received, to IBAA. The due date indicated in the
“trust receipt” wherein the entrustee binds himself to hold the document was October 19, 1975.
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, Having defaulted on their obligation, IBAA demanded
documents or instrument thereof to the extent of the amount payment from the Vintolas in a letter dated January 1, 1976. The
owing to the entruster or as appears in the trust receipt or the Vintolas who were unable to dispose of the shells, responded by
goods, documents or instruments themselves if they are unsold offering to return the goods. IBAA refused to accept the
or not otherwise disposed of, in accordance with the terms and merchandise, and due to the continued refusal of the Vintolas to
conditions specifified in the trust receipt, or for other purposes make good their undertaking, IBAA charged them with Estafa
substantially equivalent to any one of the following: for having misappropriated, misapplied and converted for their
own personal use and benefit the aforesaid goods. During the
1. In the case of goods or documents, (a) to sell the goods trial of the criminal case, the Vintolas turned-over the seashells
or procure their sale, x x x. to the custody of the Trial Court.
Facts: On April 12, 1982, the Court of First Instance of Cebu,

acquitted the Vintolas of the crime charged, after finding that
On August 20, 1975, the spouses Tirso and Loreta the element of misappropriation or conversion was inexistent.
Vintola (Vintolas) doing business under the name and style Shortly thereafter, IBAA commenced the present civil action to
“Dax Kin International”, engaged in the manufacture of raw sea recover the value of the goods before the Regional Trial Court of
shells into finished products, applied for and were granted a Cebu.
domestic letter of credit by the Insular Bank of Asia and America
(IBAA), Cebu City, in the amount of PhP 40,000.00. The Letter
of Credit authorized the bank to negotiate for their account
Issue: 1. In the case of goods or documents, (a) to sell the goods

or procure their sale, x x x
Whether the Vintolas can justifiably claim that their A trust receipt therefore, is a security agreement,
surrender of the goods to IBAA and subsequent deposit of said pursuant to which a bank acquires a “security interest” in the
goods in the custody of the court, absolutely relieved them of goods. “It secures an indebtedness and there can be no such
their obligation to pay their loan? thing as security interest that secures no obligation.” As defined
in our laws:
Ruling:
(h) “Security Interest” means a property interest in
No. A Letter of Credit-trust receipt arrangement is goods, documents or instruments to secure performance of
endowed with its own distinctive features and characteristics. some obligations of the entrustee or of some third persons to the
Under that set-up, a bank extends a loan covered by the Letter entruster and includes title, whether or not expressed to be
of Credit, with the trust receipt as a security for loan. In other absolute, whenever such title is in substance taken or retained
words, the transaction involves a loan feature represented by for security only.”
the letter of credit, and a security feature which is the covering
trust receipt. As elucidated in Samo v. People, “a trust receipt is
considered as a security transaction intended to aid in financing
Thus, Section 4 of P.D. No. 115, defines a trust receipt importers and retail dealers who do not have sufficient funds or
transaction as: resources to finance the importation or purchase of
merchandise, or who may not be able to acquire credit except
x x x any transaction by and between a person referred through utilization, as collateral of the merchandise imported
to in this Decree as the entruster, and another person referred or purchased.”
to in this Decree as the entrustee, whereby the entruster, who
owns or holds absolute title or security interests over certain Contrary to the allegation of the Vintolas, IBAA did not
specified goods, documents or instruments, release the same to become the real owner of the goods. It was merely the holder of
the possession of the entrustee upon the latter’s execution and a security title for the advances it had made to the Vintolas, the
delivery to the entruster of a signed document called a “trust goods the Vintolas had purchased through IBAA financing
receipt” wherein the entrustee binds himself to hold the remain their own property and they hold it at their own risk. The
designated goods, documents or instrument thereof to the trust receipt arrangement did not convert the IBAA into an
extent of the amount owing to the entruster or as appears in the investor, the latter remain a lender and creditor.
trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in x x x for the bank has previously extended a loan which
accordance with the terms and conditions specified in the trust the Letter of Credit represents to the importer, and by that loan,
receipt, or for other purposes substantially equivalent to any the importer should be the real owner of the goods. If under the
one of the following: trust receipt, the bank is made to appear as the owner, it was but
an artificial expedient, more of a legal fiction than fact, for if it
were so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with the 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.
Since the IBAA is not the factual owner of the goods, the
Vintolas cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of
their obligation to pay their loan because of their inability to
dispose of the goods.

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COMMERCIAL LAW REVIEW || Special Commercial Laws 1

Letters of Credit 1-8, Trust Receipts 1-10

The RTC, in its Order dated 24 November 2000, denied Issue:

But even without the stipulation recited above, the

It was uncontrovertibly proven by the Bank during the trial

In order that the petitioner may be held liable, there

As an advising or notifying bank, Bank of America did not incur

Facts: NO. It is not a trust receipt transaction.

A thorough examination of the facts obtaining in the

It must be remembered that petitioner was transparent

In these contracts, he was commissioned to build, out of

The true nature of a trust receipt transaction can be

instruments if they were not sold or disposed of in

A trust receipt is considered a security

Further, as a security transaction, it could never be a

Furthermore, the penal provision of P.D. 115

Issue: the principle is equally applicable to domestic transactions.

Ruling: The release of such goods to the entrustee is conditioned upon

A trust receipt is considered a security transaction intended to

condition specified in the trust receipt. A violation of this Facts:

Issue: absolute, whenever such title is in substance taken or retained

In Vintola v. Insular Bank of Asia and America, we

“ (h) Security interest means a property interest in goods,

Facts: On April 12, 1982, the Court of First Instance of Cebu,

Issue: 1. In the case of goods or documents, (a) to sell the goods

which it cannot do, just to give consistency with the purpose of

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