QUESTION: What is the loan and security feature of the trust receipt transaction?

A: A trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the Letter of
Credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a
security feature which is in the covering trust receipt. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a "security
interest" in the goods. It secures an indebtedness and there can be no such thing
as security interest that secures no obligation. (Sps. Vintola vs. Insular Bank of
Asia and America, G.R. No. 73271, May 29, 1987)

QUESTION: Who is the owner of the articles subject of the TR?

A: The entrustee. A trust receipt has two features, the loan and security features.
The loan is brought about by the fact that the entruster financed the importation
or purchase of the goods under TR. Until and unless this loan is paid, the
obligation to pay subsists. If the entrustee is made to appear as the owner, it was
but an artificial expedient, more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner that it wants, which it cannot do.
To consider the entrustee as the true owner from the inception of the transaction
would be to disregard the loan feature thereof. (Rosario Textile Mills Corp. v.
Home Bankers Savings and Trust Company, G.R. No. 137232. June 29, 2005)

QUESTION: What is the penal sanction if offender is a corporation?

A: The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law
makes the officers or employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. The reason is obvious, corporations,
partnerships, associations and other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human agent responsible for the
violation of the Trust Receipts Law. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

QUESTION: In the event of default by the entrustee on his obligation under the
trust receipt agreement, is it absolutely necessary for the entruster to cancel the
trust and take possession of the goods to be able to enforce his right thereunder?
A: The law uses the word "may" in granting to the entruster the right to cancel the
trust and take possession of the goods. Consequently, the entrustee has the
discretion to avail of such right or seek any alternative action, such as a third
party claim or a separate civil action which it deems best to protect its right, at
any time upon default or failure of the entrustee to comply with any of the terms
and conditions of the trust agreement. (South City Homes, Inc. v. BA Finance
Corporation, G.R. No. 135462, Dec. 7, 2001)

Q. What is the effect of novation of a trust agreement?

A. Where the entruster and entrustee entered into an agreement which provides for
conditions incompatible with the trust receipt agreement, the obligation under the
trust receipt is extinguished. Hence, the breach in the subsequent agreement does
not give rise to a criminal liability under P.D. 115 but only civil liability.
(Philippine Bank v. Ong, G.R. No. 133176, Aug. 8, 2002)

QUESTION: Can deposits in a savings account opened by the buyer subsequent to the
TR transaction be applied to outstanding obligations under the TR account?
A: No, the receipt of the bank of a sum of money without reference to the trust
receipt obligation does not obligate the bank to apply the money received against
the trust receipt obligation. Neither does compensation arise because compensation
is not proper when one of the debts consists in civil liability arising from
criminal. (Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16,
2000).
What is a trust receipt transaction?
It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds absolute title or security interests
over certain specified goods, documents or instrument, releases the same to the
possession of entrustee upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the designated goods in trust for
the entruster and, in case of default, to sell such goods, documents or instrument
with the obligation to turn over to the entruster the proceeds to the extent of
the amount owing to it or to turn over the goods, documents or instrument itself
if not sold. (Sec. 4, P.D. 115)

What is a trust receipt (TR)?

It is the written or printed document signed by the entrustee in favor of the
entruster containing terms and conditions substantially complying with the
provisions of PD 115.

WAREHOUSE RECEIPTS LAW

QUESTION: What is a warehouse receipt?

A: A written acknowledgment by the warehouseman that he has received and holds
certain goods therein described in his warehouse for the person to whom the
document is issued. The warehouse receipt has two-‐fold functions, that is, it is
a contract and a receipt. (Telengtan Bros. & Sons v. CA, G.R. No. L-‐110581, Sept
21, 1994)
QUESTION: Coco was issued by a warehouseman a negotiable receipt for safekeeping by
the latter of his goods. Can the judgment creditor of Coco levy by execution the
goods covered by the negotiable receipt?

A: The goods cannot, while in the possession of the warehouseman, be attached by

garnishment or otherwise, or be levied upon under an execution unless the receipt
be first surrendered to the warehouseman, or its negotiation enjoined. The
warehouseman cannot be compelled to deliver the actual possession of the goods
until the receipt is surrendered to it or impounded by the court.
QUESTION: Coco was issued by a warehouseman a negotiable receipt for safekeeping
by the latter of his goods. Can the judgment creditor of Coco levy by execution the
goods covered by the negotiable receipt?
A: The goods cannot, while in the possession of the warehouseman, be attached by
garnishment or otherwise, or be levied upon under an execution unless the receipt
be first surrendered to the warehouseman, or its negotiation enjoined. The
warehouseman cannot be compelled to deliver the actual possession of the goods
until the receipt is surrendered to it or impounded by
the court.
QUESTION: Bon took the goods of Angela without her consent and deposited the same
with a warehouseman. The latter issued to Bon a negotiable receipt which she
indorsed for value to Ryan. Between Angela and Ryan, who has better right over the
goods? Why?
A: Ryan has better right to the goods. The goods are covered by a negotiable
warehouse receipt which was indorsed to Ryan for value. The negotiation to Ryan
was not impaired by the fact that Bon took the goods without the consent of
Angela, as Ryan had no notice of such fact. Moreover, Ryan is in possession of the
warehouse receipt and only he can surrender it to the warehouseman. (Sec. 8, WRL)

What is the exception to the independence principle?

The “Fraud exception rule.” It provides that the untruthfulness of a certificate

accompanying a demand for payment under a standby letter of credit may qualify as
fraud sufficient to support an injunction against payment. (Transfield v. Luzon
Hydro, G.R. No. 146717, Nov. 22, 2004)

What is the doctrine of strict compliance?

The documents tendered by the seller/beneficiary must strictly conform to the terms
of the letter of credit. The tender of documents must include all documents
required by the letter. Thus, a correspondent bank which departs from what has been
stipulated under the LC acts on its own risk and may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be, the money thus paid
to the beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30,
1991)

What is the effect of the buyer’s failure to procure a Letter of Credit to the main
contract?

The Letter of Credit is independent from the contract of sale. Failure of the
buyer to open the Letter of Credit does not prevent the birth of the Sales
Contract. (Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No.
100831, Dec. 17, 1993) The opening of the Letter of Credit is only a mode of
payment. The LC is not an essential requisite to the contract of sale.

What is the independence principle?

The relationship of the buyer and the bank is separate and distinct from the
relationship of the buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying the LC has been fulfilled or not
because in transactions involving LC, banks deal only with documents and not goods
(BPI v. De Reny Fabric Industries, Inc., L-‐2481, Oct. 16, 1970). In effect, the
buyer has no course of action against the issuing bank.

In case the buyer was not able to pay its obligation under the letter of credit,
can the bank take possession over the goods covered by the said letter of credit?

No. The opening of a Letter of Credit did not vest ownership of the goods in the
bank in the absence of a trust receipt agreement. A letter of credit is a mere
financial device developed by merchants as a convenient and relatively safe mode of
dealing with the sales of goods to satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. (Transfield Philippines, Inc. v.
Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)

Can a court order the release to the applicant the proceeds of an irrevocable
letter of credit without the consent of the beneficiary?

No, such order violates the irrevocable nature of the letter of credit. The terms
of an irrevocable letter of credit cannot be changed without the consent of the
parties, particularly the beneficiary thereof. (Phil. Virginia Tobacco
Administration v. De Los Angeles, G.R. No. L-‐27829, Aug. 19, 1988

Is irrevocable letter of credit and confirmed letter of credit synonymous?

An irrevocable letter of credit is not synonymous with a confirmed letter of

credit. In an irrevocable letter of credit, the issuing bank may not, without the
consent of the beneficiary and the applicant, revoke its undertaking under the
letter, whereas, in a confirmed letter of credit, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the issuing bank’s
obligation as its own according to the terms and condition of the credit.
(Prudential Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992)

What a is Letter of Credit (LC)?

It is any arrangement, however named or described, whereby a bank (issuing bank),

acting at the request and on the instructions of a customer (applicant) or on its
own behalf, binds itself to:

1. Pay to the order of, or accept and pay drafts drawn by a third party
(Beneficiary), or
2. Authorize another bank to pay or to accept and pay such drafts, or
3. Authorizes another bank to negotiate, against stipulated document(s),

Provided, the terms and conditions of the credit are complied with (Art. 2, Uniform
Customs & Practice for Documentary Credits.)

Note: They are in effect absolute undertakings to pay the money advanced or for the
amount for which the credit is given on the faith of the instrument.