1.

A bank’s act of extending the maturity of an outstanding TR does

not automatically extinguish the criminal component of the entrustee’s
liability thereunder. This is especially true if the parties did not intend to
supersede or abrogate the obligations under the trust receipt. In the 2012
case of Philippine National Bank v. Lilian S. Soriano1 the Court held –

Well-settled is the rule that, with respect to obligations to pay a sum

of money, the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment,
adds other obligations not incompatible with the old ones, or the
new contract merely supplements the old one. Besides, novation
does not extinguish criminal liability. It stands to reason therefore,
that Soriano’s criminal liability under the TR’s subsists considering
that the civil obligations under the Floor Stock Line secured by TR’s
were not extinguished by the purported restructured Omnibus Line.

In Transpacific Battery Corporation v. Security Bank and Trust

Company, we held that the restructuring of a loan agreement
secured by a TR does not per se novate or extinguish the
criminal liability incurred thereunder:

x x x Neither is there an implied novation since the restructuring

agreement is not incompatible with the trust receipt transactions.

Indeed, the restructuring agreement recognizes the obligation

due under the trust receipts when it required "payment of all
interest and other charges prior to restructuring." With
respect to Michael, there was even a proviso under the agreement
that the amount due is subject to "the joint and solidary liability of
Spouses Miguel and Mary Say and Michael Go Say." While the
names of Melchor and Josephine do not appear on the
restructuring agreement, it cannot be presumed that they have
been relieved from the obligation. The old obligation continues to
subsist subject to the modifications agreed upon by the parties.

The circumstance that motivated the parties to enter into a

restructuring agreement was the failure of petitioners to account
for the goods received in trust and/or deliver the proceeds thereof.
To remedy the situation, the parties executed an agreement to
restructure Transpacific's obligations.

1
G.R. No. 03 October 2012. Other citations omitted. Emphases and underscoring supplied.
 The Bank only extended the repayment term of the trust receipts
from 90 days to one year with monthly installment at 5% per
annum over prime rate or 30% per annum whichever is higher.
Furthermore, the interest rates were flexible in that they are
subject to review every amortization due. Whether the terms
appeared to be more onerous or not is immaterial. Courts are
not authorized to extricate parties from the necessary
consequences of their acts. The parties will not be relieved from
their obligations as there was absolutely no intention by the
parties to supersede or abrogate the trust receipt transactions.
The intention of the new agreement was precisely to revive the
old obligation after the original period expired and the loan
remained unpaid. Well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is not novated
by an instrument that expressly recognizes the old, changes only
the terms of payment, adds other obligations not incompatible
with the old ones, or the new contract merely supplements the old
one.

2. On the other hand, it is submitted that:

(a) if the parties’ intent to novate the old obligation under

the TR agreement is expressed in the subsequent
restructuring agreement; or

(b) if such intent to novate may be clearly seen from the

absolute incompatibility of the subsequent restructuring
agreement with the terms of the TR; or

(c) there is an absence of dishonesty and abuse of

confidence on the part of the defaulting borrower,

then the defaulting borrower cannot be held criminally liable under the
Trust Receipts Law.

In the 2002 case of Pilipinas Bank v. Alfredo T. Ong and Leoncia

2
Lim , the borrower-corporation experienced serious liquidity problems
and thus defaulted in the payment of its obligations to the Bank, which
were secured by trust receipts. The borrower then filed with the Securities

2
G.R. No. 133176, 08 August 2002. Other citations omitted. Emphases and underscoring
supplied.
and Exchange Commission (SEC) a Petition for Rehabilitation and for a
Declaration in a State of Suspension of Payments, and informed its
creditors including the Bank of such filing. The Bank and borrower-
corporation thereafter entered into a Memorandum of Agreement (MOA)
rescheduling the payment of the borrower-corporation’s existing debts.

When the borrower-corporation again defaulted in its obligations

under the MOA, the Bank charged its officers with estafa, on the premise
that the MOA did not novate, much less extinguish, the existing
obligations of the borrower under the trust receipt agreement. According
to the Bank, the MOA was executed merely to assist the borrower to
settle its obligations by rescheduling the same. Hence, the Bank argued
that when the borrower defaulted in its payment, all the Bank’s rights,
including the right to charge the borrower’s officers for violation of the
Trust Receipts Law, were revived. However, the Court disagreed,
ratiocinating as follows –

Mere failure to deliver the proceeds of the sale or the goods, if not
sold, constitutes violation of PD No. 115. However, what is being
punished by the law is the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner.

In this case, no dishonesty nor abuse of confidence can be

attributed to respondents. Record shows that BMC failed to comply
with its obligations upon maturity of the trust receipts due to
serious liquidity problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of Suspension of
Payments. It bears emphasis that when petitioner bank made a
demand upon BMC on February 11, 1994 to comply with its
obligations under the trust receipts, the latter was already
under the control of the Management Committee created by
the SEC in its Order dated January 8, 1992. The Management
Committee took custody of all BMC’s assets and liabilities,
including the red lauan lumber subject of the trust receipts, and
authorized their use in the ordinary course of business operations.
Clearly, it was the Management Committee which could settle
BMC’s obligations. Moreover, it has not escaped this Court’s
observation that respondent Ong paid P21,000,000.00 in
compliance with the equity infusion required by the MOA. The
mala prohibita nature of the offense notwithstanding, respondents’
intent to misuse or misappropriate the goods or their proceeds has
not been established by the records.

Did the MOA novate the trust agreement between the parties?

In Quinto vs. People, this Court held that there are two ways which
could indicate the presence of novation, thereby producing the
effect of extinguishing an obligation by another which substitutes
the same. The first is when novation has been stated and declared
in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand
together. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or
principal conditions, otherwise, the change is merely
modificatory in nature and insufficient to extinguish the
original obligation.

Contrary to petitioner's contention, the MOA did not only

reschedule BMC’s debts, but more importantly, it provided
principal conditions which are incompatible with the trust
agreement. The undisputed points of incompatibility between the
two agreements are:

Points of incompatibility Trust Receipt / MOA

1) Nature of contract Trust Receipt / Loan
2) Juridical relationship Trustor-Trustee / Lender-Borrower
3) Status of obligation Matured / Payable within 7 years
4) Governing law Criminal / Civil & Commercial
5) Security offered Trust Receipts / Real estate/chattel mortgages
6) Interest rate per annum (Unspecified) / 14%
7) Default charges 24% / 14%
8) No. of parties 3 / 16

Hence, applying the pronouncement in Quinto, we can safely

conclude that the MOA novated and effectively extinguished
BMC's obligations under the trust receipt agreement.

Petitioner bank's argument that BMC's non-compliance with the

MOA revived respondents’ original liabilities under the trust
 receipt agreement is completely misplaced. Section 8.4 of the
MOA on termination reads:

"8.4 Termination. Any provision of this Agreement to the

contrary notwithstanding, if the conditions for rescheduling
specified in Section 7 shall not be complied with on such later
date as the Qualified Majority Lenders in their sole and
absolute discretion may agree in writing, then
(i) the obligation of the Lenders to reschedule the Existing
Credits as contemplated hereby shall automatically terminate
on such date:
(ii) the Existing Agreements shall continue in full force and
effect on the remaining loan balances as if this Agreement had
not been entered into;
(iii) all the rights of the lenders against the borrower and
Spouses Ong prior to the agreement shall revest to the lenders."

Indeed, what is automatically terminated in case BMC failed to

comply with the conditions under the MOA is not the MOA itself
but merely the obligation of the lender (the bank) to reschedule the
existing credits. Moreover, it is erroneous to assume that the
revesting of "all the rights of lenders against the borrower" means
that petitioner can charge respondents for violation of the Trust
Receipts Law under the original trust receipt agreement. As
explained earlier, the execution of the MOA extinguished
respondents’ obligation under the trust receipts. Respondents’
liability, if any, would only be civil in nature since the trust receipts
were transformed into mere loan documents after the execution of
the MOA. This is reinforced by the fact that the mortgage contracts
executed by the BMC survive despite its non-compliance with the
conditions set forth in the MOA.

To recapitulate, if a Bank enters into a subsequent agreement

restructuring the payment a borrower’s existing debt, the latter being
secured by a TR, and such subsequent restructuring either expressly
provides for abrogation of the borrower’s obligations under the trust
receipt, or the restructuring agreement is incompatible with the trust
receipt agreement to the extent that the old and new contracts cannot
stand together, the borrower’s obligation becomes civil in nature and he
cannot be held liable for estafa under the Trust Receipts Law in case of
default.
 Likewise, if the circumstances unerringly point to an absence of
dishonesty and abuse of confidence on the part of a defaulting entrustee, a
criminal action against him for estafa under the Trust Receipts Law might
not prosper, notwithstanding the malum prohibitum nature of the offense.

3. Considering the aforementioned rulings of the Court, it becomes

clear that the criminal aspect of an entrustee’s liability under a trust
receipt may still be retained despite subsequent restructuring of payments,
if the agreement for such restructuring remains compatible with the terms
of the trust receipt agreement in all material points, to the extent that the
two contracts can stand together. In fact, the parties are not precluded
from expressly recognizing the TR in the new agreement for extension of
maturity thereof, with a provision, if applicable, requiring payment of all
interest and charges prior to restructuring. As seen in PNB v. Soriano3
cited above, what must be clear in the subsequent agreement is the intent
of the parties to remain bound by the TR despite subsequent restructuring
of payment, even if the restructured terms appear more onerous than the
terms under the TR.

Criminal liability under the Trust Receipts Law likewise cannot be

extinguished absent an actual restructuring agreement entered into by the
Bank and the defaulting entrustee, and even if the Bank had already
shown interest in extending the maturity of the trust receipt through
negotiations for restructuring, and despite the defaulting entrustee’s
belated attempt at payment.

The 2000 case of Metropolitan Bank and Trust Company v.

Joaquin Tonda and Ma. Cristina Tonda is illustrative. Here, the spouses
Tonda, after defaulting in their obligations worth Php2.8 million to
Metrobank which were secured by 11 TRs, submitted a proposed Loan
Restructuring Scheme to Metrobank. However, despite negotiations, the
parties failed to agree on the terms of restructuring. The spouses then
deposited four checks for the total amount of the obligation in a joint
account of Joaquin Tonda and one Wang Tien Eng with Metrobank,
pursuant to their proposed restructuring scheme. They likewise obtained a
written acknowledgment of receipt of the checks, issued by a Metrobank
officer. The Court of Appeals ordered the dismissal of the criminal
complaint filed by Metrobank against the spouses, on the theory that that
the amount of P2.8 Million representing the outstanding obligation of the
3
Supra Note 1.
spouses Tonda under the trust receipts account had already been settled
by them in compliance with the loan restructuring proposal; and that in
the absence of a loan restructuring agreement, Metrobank could still
validly apply the amount as payment thereof.

The Court disagreed and held as follows –

First, the amount of P2.8 million was not directly paid to

METROBANK to settle the trust receipt accounts, but deposited in
a joint account of Joaquin G. Tonda and a certain Wang Tien En. In
a letter dated February 28, 1992, signed by HTAC's Vice President
for Finance, METROBANK was informed that the amount "may
be applied anytime to the payment of the trust receipts account
upon implementation of the parties of the terms of the
restructuring." The parties failed to agree on the terms of the loan
restructuring agreement as the offer by the TONDAS to restructure
the loan was followed by a series of counter-offers which yielded
nothing. It is axiomatic that acceptance of an offer must be
unqualified and absolute to perfect a contract. The alleged payment
of the trust receipts accounts never became effectual on account of
the failure of the parties to finalize a loan restructuring
arrangement.

Second, the handwritten note by the METROBANK officer

acknowledging receipt of the checks amounting to P2.8 Million
made no reference to the TONDAS' trust receipt obligations, and
we cannot presume that it was anything more than an ordinary
bank deposit. The Court of Appeals citing the case of Tan Tiong
Tick vs. American Apothecories implied that in making the
deposit, the TONDAS are entitled to set off, by way of
compensation, their obligations to METROBANK. However,
Article 1288 of the Civil Code provides that "compensation
shall not be proper when one of the debts consists in civil
liability arising from a penal offense" as in the case at bar . The
raison d'etre for this is that, "if one of the debts consists in civil
liability arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of such
obligation is imperative."

Third, reliance on the negotiations for the settlement of the

trust receipts obligations between the TONDAS and
METROBANK is simply misplaced. The negotiations pertain and
 affect only the civil aspect of the case but does not preclude
prosecution for the offense already committed. It has been held
that "[a]ny compromise relating to the civil liability arising
from an offense does not automatically terminate the criminal
proceeding against or extinguish the criminal liability of the
malefactor." All told, the P2.8 Million deposit could not be
considered as having settled the trust receipts obligations of the
TONDAS to the end of extinguishing any incipient criminal
culpability arising therefrom.

4. A trust receipt transaction becomes a mere loan in several

instances. First, as expressly provided in Sec. 4, P.D. 115, itself –

The sale of goods, documents or instruments by a person in the

business of selling goods, documents or instruments for profit who,
at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or other interest
as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.

Thus, in Spouses Dela Cruz v. Planters Products, Inc.4, the Court

ruled that [i]n all trust receipt transactions, both obligations on the part of
the trustee exist in the alternative – the return of the proceeds of the sale
or the return or recovery of the goods, whether raw or processed. When
both parties enter into an agreement knowing that the return of the
goods subject of the trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust receipt transaction
penalized under Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the
purchase of the goods.

Likewise, in Hur Tin Yang v. People of the Philippines, 5 the Court

held –

4
G.R. No. 158649, 18 February 2013. Other citations omitted.
5
G.R. No. 195117, 14 August 2013. Other citations omitted.
 Nonetheless, when both parties enter into an agreement knowing
fully well that the return of the goods subject of the trust receipt is
not possible even without any fault on the part of the trustee, it is
not a trust receipt transaction penalized under Sec. 13 of PD 115 in
relation to Art. 315, par. 1(b) of the RPC, as the only obligation
actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount
spent for the purchase of the goods.

xxxx

Considering that the goods in this case were never intended for sale
but for use in the fabrication of steel communication towers, the
trial court erred in ruling that the agreement is a trust receipt
transaction.

xxxx

The fact that the entruster bank, Metrobank in this case, knew even
before the execution of the alleged trust receipt agreements that the
covered construction materials were never intended by the
entrustee (petitioner) for resale or for the manufacture of items to
be sold would take the transaction between petitioner and
Metrobank outside the ambit of the Trust Receipts Law.

Second, the Court in Consolidated Bank and Trust Corporation v.

Court of Appeals, et al.6, citing Colinares v. Court of Appeals 7, found
that that “xxxx inasmuch as the debtor received the goods subject of
the trust receipt before the trust receipt itself was entered into, the
transaction in question was a simple loan and not a trust receipt
agreement. Prior to the date of execution of the trust receipt,
ownership over the goods was already transferred to the debtor. This
situation is inconsistent with what normally obtains in a pure trust receipt
transaction, wherein the goods belong in ownership to the bank and are
only released to the importer in trust after the loan is granted.”

6
G.R. No. 114286, 19 April 2001.
7
G.R. No. 90828, 05 September 2000.
 Third, as discussed earlier, a trust receipt transaction becomes a
loan in the event that the former is validly novated, expressly or
impliedly, by a subsequent agreement restructuring the payment terms of
the obligation secured by said trust receipt.

5. In the event that any of the instances mentioned in No. 4 are

present, it is submitted that the credit transaction should be secured by a
Promissory Note instead of a Trust Receipt, for the following reasons –

(a) All the instances mentioned in No. 4 have the effect of

removing the subject transaction from the ambit of the
Trust Receipts Law; thus, even if the transaction were in
fact secured by a Trust Receipt, criminal prosecution
under the Trust Receipts Law in case of default would
be futile as the same would, in all likelihood, result in
dismissal simply for being excluded from the coverage
of P.D. 115. The only remedy available to the Bank
against the “trustee” in these instances would be to
enforce payment in a collection suit, absent any other
contract securing the obligation such as mortgage.

(b) On the other hand, the Court has long recognized the
binding character of Promissory Notes. In Armando
Sierra v. Hon. Court of Appeals, et al.8, it was held that
[a] promissory note is a solemn acknowledgment of a
debt and a formal commitment to repay it on the
date and under the conditions agreed upon by the
borrower and the lender. A person who signs such an
instrument is bound to honor it as a legitimate
obligation duly assumed by him through the
signature he affixes thereto as a token of his good
faith. If he reneges on his promise without cause, he
forfeits the sympathy and assistance of [the] Court and
deserves instead its sharp repudiation. The Court in said
case likewise held that a promissory note does not
have to be notarized to be binding. It suffices that the
debtors indeed duly signed the same sans duress, fear, or
undue influence.

8
G.R. No. 90270, 24 July 1992.