[SIMPLE LOAN OR MUTUUM]
08 LANDL V. METROPOLITAN BANK
30 July 2004 | Ynares-Santiago, J. |
Petitioner/s: LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and
MANUEL P. LUCENTE
Respondent/s: METROPOLITAN BANK & TRUST COMPANY
Facts:
 Landl & Company (Phil.) Inc. (Landl) is engaged in the business of selling
imported welding rods and alloys
 June 17, 1983: opened Commercial Letter of Credit No. 2998 with
Metropolitan Bank (Metrobank)
o US$19,606.77 ≈ P218,733.32 (at the time the transaction was
consummated)
o Opened to purchase various welding rods and electrides from
Perma Alloys, Inc.
o Landl put up a marginal deposit of P50,414.00
 Metrobank required Percival Llaban and Manuel Lucente (directors) to
execute a Continuing Suretyship Agreement
o P400,000.00
 Lucente also executed a Deed of Assignment in favor of Metrobank to cover
the amount of Landl’s obligation
 An irrevocable letter of credit for Landl was opened by Metrobank.
 Metrobank required the execution of a Trust Receipt in an amount equivalent
to the letter of credit, on the condition that Landl would hold the goods in
trust for Metrobank, with the right to sell the goods and the obligation to turn
over the proceeds od the sale
o If the goods remained unsold, Landl had the obligation to return
them to Metrobank on or before November 23, 1983
 Landl took possession and custody of goods upon their arrival in the PH
 November 23, 1983: Landl defaulted in the payment of its obligation to
Metrobank
 July 24, 1984: Metrobank demanded that Llaban and Lucente, as
entrustees, turn over the goods subject of the trust receipt
 September 24, 1984: Llaban and Lucente turned over the goods to
Metrobank
 July 31, 1985: the goods were sold at public aution
o Sold for P30,000.00 to Metrobank as highest bidder
 However, the proceeds of the auction sale were insufficient to completely
satisfy Landl’s outstanding obligation to Metrobank
o This is even if the time deposit account of Lucente was already
applied
 Metrobank demanded that Llaban and Lucente pay the remaining balance
 Metrobank filed a complaint for sum of money against Landl and its
directors, Llaban and Lucente
 TC: in favor of Metrobank; ordered Llaban and Lucente to pay Metrobank
 CA: affirmed TC
Ruling:
W/N in a trust receipt transaction, an entruster which had taken actual and juridical
possession of the goods covered by the trust receipt may subsequently avail of the
right to demand from the entrustee the deficiency of the amount covered by the trust
receipt – YES, as the full turn-over of the goods DOES NOT suffice to divest
Landl of their obligation to repay the principal amount of their loan obligation
 Landl:
o When the entrustee fails to settle his principal loan, the entruster
may choose between two separate and alternative remedies:
 (1) return of the goods covered by the trust receipt
 entruster acquires ownership of goods which the
entrustee failed to sell
 (2) cancel the trust and take possession of the goods for
the purpose of selling the same at a private sale or public
auction
 entruster does not acquire ownership
o Availment of one bars the availment of the other
o As Metrobank availed of the remedy of demanding the return of the
goods (1), the return completely extinguished Landl’s liability
 A trust receipt is inextricably linked with the primary agreement between the
parties. A trust receipt agreement is merely a collateral agreement, the
purpose of which is to serve as security for a loan.
o Abad v. CA: In a letter of credit-trust receipt arrangement, a bank
extends a loan covered by the letter of credit, with the trust receipt
as 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.
 The bank then acquires a “security interest” in the goods.
A trust receipt secures an indebtedness and there can be
no such thing as security interest that secures no
obligation.
 The Trust Receipts Law was enacted to safeguard commercial
transactions and to offer an additional layer of security to the lending
bank.
o Trust receipts are indispensable contracts in international and
domestic business transactions.
 Contrary to Landl’s contention, the initial repossession by the bank of the
goods subject of the trust receipt did not result in the full satisfaction of the
petitioners’ loan obligation.
o The full turn-over of the goods DOES NOT suffice to divest
them of their obligation to repay the principal amount of their
loan obligation.
o PNB v. Hon. Pineda and Tayabas Cement Company, Inc.:
Possession by itself cannot be considered payment of the loan
secured thereby. Payment would legally result only after the bank
had foreclosed on the securities, sold the same and applied the
proceeds thereof to the loan obligation.
o Neither can said repossession amount to dacion en pago as the
repossession of the machinery and equipment was merely to
secure the payment of the loan obligation and not for the purpose of
 transferring ownership thereof to the bank in satisfaction of the W/N Lucente and Llaban are solidarily liable with Landl – YES, as they bound
loan. themselves as surety to Landl’s obligation
 Hence, Metrobank’s repossession of the properties and subsequent sale of  Solidary liability is one of the primary characteristics of a surety
the goods were completely in accordance with its statutory and contractual contract, and the Continuing Suretyship Agreement expressly stipulates the
rights upon default of Landl. solidary nature of Lucente and Llaban’s liability.
o The second paragraph of Section 7 expressly provides that the  All three petitioners (Landl, Lucente, and Llaban) thus share the solidary
entrustee shall be liable to the entruster for any deficiency after obligation in favor of Metrobank, which is given the right, under the Civil
the proceeds of the sale have been applied to the payment of the Code, to proceed against any one of the solidary debtors or some or all of
expenses of the sale, the payment of the expenses of re-taking, them simultaneously. 2
keeping and storing the goods, documents or instruments, and the
satisfaction of the entrustee’s indebtedness to the entruster. Dispositive
o Here, the proceeds of the auction sale were insufficient to satisfy WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED.
entirely Landl’s indebtedness to the Metrobank. Metrobank was The decision of the Court of Appeals in CA-G.R. CV No. 58193 dated February 13,
thus well within its rights to collect the deficiency. 2003 is AFFIRMED with MODIFICATIONS. Accordingly, petitioners are ordered to
W/N the total amount of Landl’s indebtedness to Metrobank is correct – NO, as pay Metrobank the following: (1) P211,758.23 representing petitioners’ net obligation
marginal deposit should be deducted from the principal obligation as of April 17, 1986; (2) interest at the rate of 19% per annum and penalty at the rate
 Amount of indebtedness prior to the imposition of interest and penalty of 12% per annum reckoned from April 18, 1986; (3) attorney’s fees equivalent to
charges 10% of the total amount due and collectible; and (4) litigation expenses in the amount
o Initial amount of the trust receipt: P218,733.92, reduced to of P3,000.00. The service charge at the rate of 2% per annum beginning April 18,
P192,265.92 as of June 14, 1984, as per Metrobank’s Statement of 1986 is deleted. Costs against petitioners.
Past Due Trust Receipt dated December 1, 1993
 This presumably includes the application of P35,000.00
(amount of Lucente’s Deed of Assignment), applied by
Metrobank to Landl’s obligation
o However, no showing was made that the P30,000.00 proceeds of
the auction sale on was ever applied to the loan.
o The amount of P50,414.00, representing the marginal deposit
made by Landl, deducted from the loan.
o Prevailing jurisprudence allow the deduction of the marginal deposit
from the principal obligation, thus: The marginal deposit
requirement is a Central Bank measure to cut off excess
currency liquidity which would create inflationary pressure. It
is a collateral security given by the debtor, and is supposed to
be returned to him upon his compliance with his secured
obligation.1
 A perusal of the records reveals that the TC and the CA erred in imposing
service charges upon the petitioners. No such stipulation is found in
the trust receipt.
 Moreover, the TC and the CA erred in computing attorney’s fees equivalent
to 10% per annum, rather than 10% of the total amount due. There is no
basis for compounding the interest annually, as the trial court and Court of
Appeals have done. This amount would be unconscionable.

1
Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which
earns interest in the bank. As a matter of fact, the marginal deposit requirement for letters of credit has been
discontinued, except in those cases where the applicant for a letter of credit is not known to the bank or does
not maintain a good credit standing therein. It is only fair then that the importer’s marginal deposit (if one was
made, as in this case), should be set off against his debt, for while the importer earns no interest on his
marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest
on the money it loaned to the importer. It would be onerous to compute interest and other charges on the face
2
value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
which the importer paid to the bank. Compensation is proper and should take place by operation of law simultaneously. The demand made against one of them shall not be an obstacle to those which may
because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the subsequently be directed against the others, so long as the debt has not been fully collected. (1144a)
concurrent amount (Art. 1290, Civil Code).