TRUST RECEIPTS LAW

(PD 115 January 29, 1973)

A. Definition

Section 4. What constitutes a trust receipt 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 entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession
of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein
the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents,

(a) to sell the goods or procure their sale; or

(b) to manufacture or process the goods with the purpose of ultimate sale:

Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or
processed form until the entrustee has complied fully with his obligation under the trust receipt; or

(c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments,

a) to sell or procure their sale or exchange; or

b) to deliver them to a principal; or

c) to effect the consummation of some transactions involving delivery to a depository or register; or

d) to effect their presentation, collection or renewal

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.

LETTER OF CREDIT V. TRUST RECEIPT (Bank of Commerce v. Serrano)

DOawphi1.nétBOA letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed
as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is
an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands
for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes
its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.

By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain
goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the
goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the
entruster, or as appears in the trust receipt, or return the goods, documents or instruments themselves if they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.15

B. Nature and Object

WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their
financing problems, had gained popular acceptance in international and domestic business practices, particularly in
commercial banking transactions;
WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions, especially the rights and
obligations of the parties involved therein and the enforcement of the said rights in case of default or violation of the terms of
the trust receipt agreement;

WHEREAS, the recommendations contained in the report on the financial system which have been accepted, with certain
modifications by the monetary authorities included, among others, the enactment of a law regulating the trust receipt
transactions;

Ng v. People

The sale of good, documents or instruments by a person in the business of selling goods, documents or instruments for profit
who, at the outset of 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.

In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the price of
the sale, or if the merchandise is not sold, to return the merchandise to the entruster.

Two obligations in a trust receipt transaction:

1. money received under the obligation involving the duty to turn it over (entregarla) to the owner of the
merchandise sold,

2. merchandise received under the obligation to "return" it (devolvera) to the owner.

 A violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided
in Sec. 13 of PD 115

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.

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. Regardless of whether the transaction is
foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales.

Rosario Textile Mills v. Home Bankers

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." 8 Section 3 (h) of
the Trust Receipts Law (P.D. No. 115) defines a "security interest”.

"If under the trust receipt, the bank 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 it wants, which it cannot do, just to give consistency
with 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..."

Landl v. Metrobank

The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency after
the proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments, and the satisfaction of the entrustee's indebtedness to the entruster.

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.

A letter of credit-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 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.

C. FORMS AND CONTENTS OF TR

Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires, the term
 (a) "Document" shall mean written or printed evidence of title to goods.

(b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the
trust receipt agreement.

(c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust
receipt transaction, and any successor in interest of such person.

(d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to
land as to become a part thereof.

(e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of
stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of
deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary
course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of
possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in
this Decree.

(f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable.

(g) "Purchaser" means any person taking by purchase.

(h) "Security Interest" means a property interest in goods, documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for security only.

(i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation,
business trust or other association, and two more persons having a joint or common interest.

(j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying with the provisions of this Decree. No further formality of
execution or authentication shall be necessary to the validity of a trust receipt.

(k) "Value" means any consideration sufficient to support a simple contract.

Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must
substantially contain

(1) a description of the goods, documents or instruments subject of the trust receipt;

(2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee;

(3) an undertaking or a commitment of the entrustee

(a) to hold in trust for the entruster the goods, documents or instruments therein described;

(b) to dispose of them in the manner provided for in the trust receipt; and

(c) to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of
their non-sale within the period specified therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove
enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws,
public policy or morals, public order or good customs.

D. PARTIES (refer to Item C)

E. OBLIGATIONS AND LIABILITIES OF A TR

Section 9. Obligations of the entrustee. The entrustee shall

(1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the trust receipt;
 (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;
and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this
Decree.

F. RIGHTS OF THE ENTRUSTER

Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing
to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in
case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided
such are not contrary to the provisions of this Decree.

G. CANCELLATION OF A TR

The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the trust receipt or any other agreement between the
entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on
or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after
serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and
the entruster may, at a public sale, become a purchaser.

The proceeds of any such sale, whether public or private, shall be applied
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustee's indebtedness to the entruster.

The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.
Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee
or sent by post-paid ordinary mail to the entrustee's last known business address.

H. RISK OF LOSS

Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods,
documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of
whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof.

I. RIGHT OF A PURCHASER FOR VALUE AND GOOD FAITH

Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee
with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods,
documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.

Prudential Bank v. NLRC

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of
capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance
that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the
amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point —
that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full
title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his
payments or acceptances in the foreign country, and he continues to hold that title as his indispensable
security until the goods are sold in the United States and the vendee is called upon to pay for them. This
security is not an ordinary pledge by the importer to the banker, for the importer has never owned the
goods, and moreover, he is not able to deliver the possession; but the security is the complete title vested
originally in the bankers, and this characteristic of the transaction has again and again been recognized
and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey; but only after his advances have been
fully repaid and after the importer has fulfilled the other terms of the contract (emphasis supplied). 7
 . . . . [I]n a certain manner, (trust receipt contracts) partake of the nature of a conditional sale as provided
by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise
as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner
thereof or in the person who has advanced payment, until he has been paid in 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 his
representative or successor in interest (emphasis supplied). 8

More importantly, owing to the vital role trust receipts play in international and domestic commerce, Sec. 12 of P.D. No.
1159 assures the entruster of the validity of his claim against all creditors —

Sec. 12. Validity of entruster's security interest as against creditors. — The entruster's security interest in
goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against
all creditors of the entrustee for the duration of the trust receipt agreement.

From the legal and jurisprudential standpoint it is clear that the security interest of the entruster is not merely an empty or idle
title. To a certain extent, such interest, such interest becomes a "lien" on the goods because the entruster's advances will have
to be settled first before the entrustee can consolidate his ownership over the goods. A contrary view would be disastrous. For
to refuse to recognize the title of the banker under the trust receipt as security for the advance of the purchase price would be to
strike down a bona fide and honest transaction of great commercial benefit and advantage founded upon a well-recognized
custom by which banking credit is officially mobilized for manufacturers and importers of small means. 

Consequently, the bank(entruster) 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 anytime upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust agreement.

The law warrants the validity of petitioner's security interest in the goods pursuant to the written terms of the trust receipt as
against all creditors of the trust receipt agreement. 12 The only exception to the rule is when the properties are in the hands of
an innocent purchaser for value and in good faith. The records however do not show that the winning bidder is such purchaser.
NLRC cannot plead preferential claims to the properties as petitioner has the primary right to them until its advances are fully
paid.

J. REPOSSESSION BY THE ENTRUSTER OF GOODS

Landl v. Metrobank

In this case, 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. Neither can said repossession amount to dacion en pago. Dation in payment takes place when
property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is
the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.

K. PENALTIES FOR VIOLATION

Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
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 and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from
the criminal offense.

Gonzales v. HSBC

In general, a trust receipt transaction imposes upon the entrustee the obligation to deliver to the entruster the price of the sale,
or if the merchandise is not sold, to return the same to the entruster. There are thus two obligations in a trust receipt
transaction: the first, refers to money received under the obligation involving the duty to turn it over (entregarla) to the owner
of the merchandise sold,38 while the second refers to merchandise received under the obligation to "return" it (devolvera) to the
owner.39 A violation of any of these undertakings constitutes estafa defined under Art. 315(1)(b) of the Revised Penal Code, as
provided by Sec. 13 of Presidential Decree 115 or Penalties for violation.

That Gonzalez neither had the intent to defraud respondent HSBC nor personally misused/misappropriated the goods subject
of the trust receipts is of no moment. The offense punished under Presidential Decree No. 115 is in the nature of malum
prohibitum. A mere failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes
prejudice not only to another, but more to the public interest.

Sia v. People

ISSUE: whether the violation of a trust receipt constitutes estafa under Art. 315 (1-[2]) of the Revised Penal Code, as also
raised by the petitioner.

RULING: No, he cannot be charged of the crime. PD 115 includes an express provision that if the violation or offense is
committed by a corporation, partnership, association or other juridical entities the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without
prejudice to civil liabilities arising from the criminal offense.

One view is to consider the transaction as merely that of a security of a loan, and that the trust element is but and inherent
feature of the security aspect of the arrangement where the goods are placed in the possession of the "entrustee," to use the
term used in P.D. 115, violation of the element of trust not being intended to be in the same concept as how it is understood in
the criminal sense.

-The other view is that the bank as the owner and "entrustor" delivers the goods to the "entrustee, " with the authority to sell
the goods, but with the obligation to give the proceeds to the "entrustor" or return the goods themselves if not sold, a trust
being thus created in the full sense as contemplated by Art. 315, par. 1 (b).

It is also worthy of note that while the trust receipt speaks of authority to sell, the fact is undisputed that the imported goods
were to be manufactured into finished products first before they could be sold, as the Bank had full knowledge of. This fact is,
however, not embodied in the trust agreement, thus impressing on the trust receipt vagueness and ambiguity which should not
be the basis for criminal prosecution, in the event of a violation of the terms of the trust receipt. Again, P.D. 115 has express
provision relative to the "manufacture or process of the good with the purpose of ultimate sale," as a distinct condition from
that of "to sell the goods or procure their sale" (Section 4, (1). Note that what is embodied in the receipt in question is
the sale of imported goods, the manufacture thereof not having been mentioned.

OTHER PERTINENT PROVISIONS:

Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue
of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under
the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the
entrustee.

Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents,
or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the
duration of the trust receipt agreement.