LETTERS OF CREDIT

Definition
Applicable laws
Parties to a letter of credit
Transactions involved in a letter of credit (See: Independence Principle; Fraud
Exception Principle and Rule of Strict Compliance)
Types of letters of credit
irrevocable letter of credit
confirmed letter of credit
standby letter of credit
others

CASES:
Bank of the Philippine Islands vs. De Reny Fabric Industries, Inc., G.R. No. L-24821,
16 October 1970;

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias
AURORA C. GONZALES, defendants-appellants.

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.

This is an appeal from the decision of the Court of First Instance of Manila ordering the
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the
Bank), jointly and severally, the value of the credit it extended to them in several letters of credit
which the Bank opened at the behest of the defendants appellants to finance their importation of
dyestuffs from the United States, which however turned out to be mere colored chalk upon
arrival and inspection thereof at the port of Manila.

The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries,
Inc., a Philippine corporation through its co-defendants-appellants, Aurora
Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively
of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to
cover the purchase by the corporation of goods described in the covering L/C applications as
"dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. All the
applications of the corporation were approved, and the corresponding Commercial L/C
Agreements were executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as joint and solidary
debtors with the corporation. Pursuant to banking regulations then in force, the corporation
delivered to the Bank peso marginal deposits as each letter of credit was opened.

The dates and amounts of the L/Cs applied for and approved as well as the peso marginal
deposits made were, respectively, as follows:.

Date Application Amount Marginal

& L/C No. Deposit

Oct. 10, 1961 61/1413 $57,658.38 P43,407.33

Oct. 23, 1961 61/1483 $25,867.34 19,473.64

Oct. 30, 1961 61/1495 $19,408.39 14,610.88

Nov. 10, 1961 61/1564 $26,687.64 20,090.90

TOTAL .... $129,621.75 P97,582.75

By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United States, with uniform instructions for them to
notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned the respectively, if accompanied,
upon presentation, by a full set of negotiable clean "on board" ocean bills of lading covering the
merchandise appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B.
Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts
covering the amounts of the merchandise ostensibly being exported by it, together with clean
bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs
as above indicated. These correspondent banks then debited the account of the Bank of the
Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing
Company, plus commission thereon, and, thereafter, endorsed and forwarded all documents to
the Bank of the Philippine Islands.

In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in
the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank
amounting, in the aggregate, to P90,000. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods that arrived in Manila
were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the Bank
caused them to be deposited with a bonded warehouse paying therefor the amount of
P12,609.64 up to the filing of its complaint with the court below on December 10, 1962.

On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-
defendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46,
with interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from
October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign correspondent
banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the
goods shipped under the covering L/Cs conformed with the item appearing therein, and, that the
foregoing banks having failed to perform this duty, no claim for recoupment against the
defendants-appellants, arising from the losses incurred for the non-delivery or defective delivery
of the articles ordered, could accrue.

We can appreciate the sweep of the appellants' argument, but we also find that it is nestled
hopelessly inside a salient where the valid contract between the parties and the internationally
accepted customs of the banking trade must prevail. 1

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to be represented by
documents; for any difference in character, quality, quantity, condition, or value of the property
from that expressed in documents," or for "partial or incomplete shipment, or failure or omission
to ship any or all of the property referred to in the 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.  2

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: .

In documentary credit operations, all parties concerned deal in documents and not in goods. —
Payment, negotiation or acceptance against documents in accordance with the terms and
conditions of a credit by a Bank authorized to do so binds the party giving the authorization to
take up the documents and reimburse the Bank making the payment, negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the
part of a bank to verify whether what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having been positively proven as a
fact, the appellants are bound by this established usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in order to engage in international business.

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without

prejudice to the Bank, in proper proceedings in the court below in this same case proving and
being reimbursed additional expenses, if any, it has incurred by virtue of the continued storage of
the goods in question up to the time this decision becomes final and executory.

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.

Concepcion, C.J., is on leave.

 

# Footnotes.

1 The power of our courts to accept in evidence, international customas evidence of general
practice accepted as law, may be said to be derived from both Constitutional as well as statutory
sources. Section 3, Article II of the Constitution provides that "The Philippines renounces war as
an instrument of national policy and adopts the generally accepted principles of international law
of the Nation." Art. 9 of the New Civil Code Provides that "No court or judge shall decline to
render judgment by reason of the silence, obscurity or insufficiency of the law," and Art. 12 of the
same Code provides that "A custom must be proved as fact, according to the rules of evidence."
The Code of Commerce, in its Article 2, likewise provides that "Acts of commerce, whether those
who execute them be merchants or not, should be governed by the provisions contained init, in
their absence, by the usages of commerce generally observed in each place; and in the absence
of both rules, by those of the civil law." "Those acts contained in this Code and all others of
analogous character, shall be deemed acts of commerce." It must be noted that certain
principles governing the issuance, acceptance and payment of letters of credit are specifically
provided for in the Code of Commerce.

2 Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: "The users of the
Credit shall be deemed our agents and we assume all risks of their acts or omissions. Neither
you nor your correspondents shall be responsible: for the existence, character, quality, quantity,
condition, packing, value, or delivery of the property purporting to be represented by documents;
for any difference in character, quality, quantity, condition, or value of the property from that
expressed in documents; ... for partial or incomplete shipment, or failure or omission to ship any
or all of the property referred to in the Credit; ... for any deviation from instructions, delay, default
or fraud by the shipper or anyone else in connection with the property or the shipping thereof; ...
for any breach of contract between the shipper or vendors and ourselves or any of
us; ... We are responsible to you for all obligations imposed upon you with respect to the Credit
or the relative drafts, documents or property. In furtherance and extension and not in limitation of
the specific provisions hereinbefore set forth, we agree that any action taken by you or by any
correspondent of yours under or in connection with the Credit or the relative drafts, documents or
property, if taken in good faith, shall be binding on us and shall not put you or your
correspondent under any resulting liability to us; and we make like agreement as to any inaction
or omission, unless in breach of good faith".

Feati Bank & Trust Company vs. Court of Appeals, G.R. No. 94209, 30 April 1991;

G.R. No. 94209             April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,

vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990
which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants
Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally.

The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters
of lauan logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de
Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of
Credit No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of
the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the
latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11)

The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by the following documents:

Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that —

All terms and conditions of the purchase order have been complied with and that all logs are fresh cut
and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970, and
that all logs have been marked "BEV-EX."

One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one
set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

Tally sheets in quadruplicate.

2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel
Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi
Trade Development Company, Ltd., Seoul, Korea.

Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been approved
prior to shipment in accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp.
11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary
Credits (1962 Revision).

The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its
loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from
the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the
Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the
logs.

After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo
which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the
certification as required in paragraph 4 of the letter of credit, despite several requests made by the private
respondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to
advance the payment on the letter of credit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private
respondent receiving any certification from Christiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the
matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes
of negotiating documents. Any provision in any letter of credit covering log exports requiring certification
of buyer's agent or representative that said logs have been approved for shipment as a condition
precedent to negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development
Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10
per cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber
Company at Inchon, Korea. (Rollo, p. 39)

Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz,
on September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the
Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner
was impleaded as defendant before the lower court only to afford complete relief should the court a quo order
Christiansen to execute the required certification.

The complaint prayed for the following:

Christiansen be ordered to issue the certification required of him under the Letter of Credit;

Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to accept
negotiation of the Letter of Credit and make payment thereon to Villaluz;

Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the
Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with
Christiansen.

The trial court, in its order dated August 29, 1979, admitted the amended complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand
payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them
loaded in his chartered vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi
Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had
clearly arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
 The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to
defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that
would have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the
plaintiff in his answer of fraud, intimidation, violence and deceit. These accusations said defendant did
not attempt to prove, as in fact he left the country without even notifying his own lawyer. It was to the
Court's mind a pure swindle.

The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his
(sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the
absence of CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was
illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face,
is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California,
undertook by its terms that the same shall be honored upon its presentment. On the other hand, the
notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the
issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter
of credit.

x x x           x x x          x x x

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the
notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed
on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it
was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and
must be held liable for damages and loss resulting to the plaintiff from its failure to perform that
obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in
effect represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter
of credit and presents the same to the BANK together with the documents mentioned therein the said
BANK will pay the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the
strength of this letter of credit and this implied representation of the defendant BANK that the plaintiff
delivered the logs to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank
with whom plaintiff had no business connections and CHRISTIANSEN had not offered any other
Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its commitment
and liability under the letter of credit:

A holder of a promissory note given because of gambling who indorses the same to an
innocent holder for value and who assures said party that the note has no legal defect, is in
estoppel from asserting that there had been an illegal consideration for the note, and so, he
has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition
precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only
because of the clear declaration of the Central Bank that such a requirement was illegal, but because
the BANK, with all the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo,
pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The
dispositive portion of its decision reads:

WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:

$54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
 P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs
shipment in question;

P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971,
when the complaint was filed, until fully paid:

P70,000.00 as moral damages;

P30,000.00 as exemplary damages; and

P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5,
1986, it filed a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the
ground that the appeal of the petitioner was frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.

The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of
execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition
for certiorari and prohibition with preliminary injunction to enjoin the immediate execution of the judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution,
the dispositive portion of the decision states:

WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated
December 29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion
to suspend the writ of execution against its properties are hereby annulled and set aside insofar as they
are sought to be enforced and implemented against the petitioner Feati Bank & Trust Company, now
Citytrust Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case
No. 15121. However, the execution of the same decision against defendant Axel Christiansen did not
appeal said decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution
dated June 29, 1987 denied the motion for reconsideration.

In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its
decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20,
1986 and ruled that:

Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to negotiate
the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp. 156,
157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before the letter
of credit was presented for payment, Feati Bank had already made an advance payment of P75,000.00 to
Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of the letter
of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the same also
its own obligation. This ruling finds support in the authority cited by Villaluz:
 A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening
bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will
confirm the opening bank's obligation by making it also its own undertaking, or commitment, or guaranty
or obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of
the letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be
made by notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or
meaningful only with respect to a future transaction, that is, negotiation. Hence, even before actual
negotiation, the notifying bank, by the mere act of notifying the beneficiary of the letter of credit,
assumes as of that moment the obligation of the issuing bank.

Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or client, i.e.
Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as
though refusal was made by Feati Bank itself. Feati Bank should have taken steps to secure the certification from
Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit issued in Villaluz's
favor and guaranteed by Feati Bank.

The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since Villaluz"
draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal to negotiate it
was justified," did not dispose of this question on the merits. In that case, the question involved was jurisdiction
or discretion, and not judgment. The quoted pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.

The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to the
transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other
hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which had directly
dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means by which
the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)

Hence, this petition for review.

The petitioner interposes the following reasons for the allowance of the petition.

First Reason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS

AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT,
THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE
RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,

Second Reason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.

Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED

THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of
credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all
documents required by the letter. A correspondent bank which departs from what has been stipulated under the
letter of credit, as when it accepts a faulty tender, acts on its own risks and it 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 Thus the
rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict
compliance. In the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of
strict compliance.

We have heretofore held that these letters of credit are to be strictly complied with which documents,
and shipping documents must be followed as stated in the letter. There is no discretion in the bank or
trust company to waive any requirements. The terms of the letter constitutes an agreement between the
purchaser and the bank. (p. 743)gzz

Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the
other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents.
Since a bank deals only with documents, it is not in a position to determine whether or not the documents
required by the letter of credit are material or superfluous. The mere fact that the document was specified therein
readily means that the document is of vital importance to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in
the letter of credit resulted in the applicability of the said rules in the governance of the relations between the
parties.

And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to
the applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this
jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that
in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed
by the usages and customs generally observed.

There being no specific provision which governs the legal complexities arising from transactions involving letters
of credit not only between the banks themselves but also between banks and seller and/or buyer, the
applicability of the U.C.P. is undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit
will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without
engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to
 confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking
of the confirming bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on their face to
be in accordance with the terms and conditions of the credit,"

Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in accordance
with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the bank which has effected the payment,
acceptance or negotiation. (Emphasis Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents
tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since
a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document
required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the
beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of
the documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying
bank but a confirming bank, we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its
decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that
the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed
the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed
credit. These types of letters have different meanings and the legal relations arising from there varies. A credit
may be an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank
may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the
letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of
credit pertains to the kind of obligation assumed by the correspondent bank. In this case, 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 conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp.
81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank
in accepting the instructions of the issuing bank has also confirmed the letter of credit./ Another error which the
lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are
classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218
N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a correspondent bank which buys or
discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then
prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567
[1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1,
p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability
is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import
Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security
Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as
ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of
credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated
therein was the instruction that the petitioner forward the original letter of credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that
the notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with
that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that
when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the
petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank
of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed
the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter
of credit. The only evidence in this case, and upon which the private respondent premised his argument, is the
P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the
letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement
between them be construed as an act of confirmation is rather far-fetched, for it depends principally on
speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake
the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an
emphatic assurance that it will carry out the issuing bank's obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary
credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that
it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively
that such "act" should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the
only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a
collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a
negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no
contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller
and the negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty
toward the person for whose benefit the letter is written to discount or purchase any draft drawn against
the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank
and the beneficiary of the letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any
definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the
refusal by the petitioner to accept the tender of the private respondent is justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the
beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the
legal title to which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon the
person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained,
the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing
bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of
money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter
of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of
money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the
sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the
tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund
that has been advanced by the issuing bank, rather it gets the money from its own funds and then later seeks
reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is
only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part
resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private
respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty
under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the
issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and
the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v.
New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the issuing
bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the agreement
between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of
credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by
Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has
also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter
of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract
upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default
of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary
obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73
[1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an
agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions
of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. ( See Kronman v. Public
National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the
issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to
buyer with whom it has no contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may
refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement
is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the
amount under the letter. As we have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case.  The U.C.P. which is incorporated in the letter
1âwphi1

of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered
are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons
why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or
not the buyer has performed his responsibility towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the
controversy on the basis of what the law is, for the law is not meant to favor only those who have been
oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single
individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states
but what we believe it should declare. Dura lex sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the
private respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition
before it for certiorari and prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition No. 4 of the
letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central
Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was
issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum
on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had
already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is
difficult to see how such a condition could be categorized as illegal or unreasonable since all that
 plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the
vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been
approved by him to be in accordance with the terms and conditions of his purchase order. Apparently,
Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the
terms and conditions of the letter of credit had been strictly complied with, so that there would be no
hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the
decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.

SO ORDERED.

Transfield Philippines, Inc. vs. Luzon Hydro Corp., G.R. No. 146717,22 November
2004;

G.R. No. 146717             November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION, respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in
international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of
parties involved and its supranational character.

Petitioner has appealed from the Decision of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
1 

Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001. 2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a
3 

seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos
Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. 4

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or
such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons
enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC
itself. Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation
5 

and such other means enumerated under Clause 20.3 of the Turnkey Contract. 6
To secure performance of petitioner's obligation on or before the target completion date, or such time for
completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby
letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of
Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited
(ANZ Bank) and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation
7 

(SBC) each in the amount of US$8,988,907.00.

8  9

In the course of the construction of the project, petitioner sought various EOT to complete the Project. The
extensions were requested allegedly due to several factors which prevented the completion of the Project on
target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the
requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant
petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration
Commission (CIAC) on 1 June 1999. This was followed by another Request for Arbitration, this time filed by
10 

petitioner before the International Chamber of Commerce (ICC) on 3 November 2000. In both arbitration
11 

proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right
to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey
Contract, petitioner—in two separate letters both dated 10 August 2000—advised respondent banks of the
12  13 

arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or
disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 of the 14 

Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner,
however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them. 15

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in
default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay. 16

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining
order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial
Court (RTC) of Makati. Petitioner sought to restrain respondent LHC from calling on the Securities and
17 

respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or
substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The
case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or until 26 November 2000. 18

The RTC, in its Order dated 24 November 2000, denied petitioner's application for a writ of preliminary
19 

injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the
writ. Employing the principle of "independent contract" in letters of credit, the trial court ruled that LHC should be
allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention that the principle of
"independent contract" could be invoked only by respondent banks since according to it respondent LHC is the
ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the
funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the
case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction. Petitioner submitted to the appellate court that
20 

LHC's call on the Securities was premature considering that the issue of its default had not yet been resolved
with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no
right to draw on the Securities for liquidated damages.

Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the
Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract
between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have
no responsibility to investigate the authenticity or accuracy of the certificates or the declarant's capacity or
entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining
LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to
cease and desist from transferring, paying or in any manner disposing of the Securities.

However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ
Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed
conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of
preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari,
unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A

BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR
FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE
UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS
WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE
EVENT THAT:

LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES. 21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit
when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the
supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner
continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle
against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from
the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition and Supplemental Memorandum, alleging that
22  23 

in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came
out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing
of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays— notwithstanding its knowledge and admission that delays were excused under
the Turnkey Contract—to be able to draw against the Securities. Reiterating that fraud constitutes an exception
to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the
Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer
grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to
return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003, LHC contends that the supplemental pleadings filed by petitioner
24 

present erroneous and misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004, petitioner alleges that on 18 February 2004, the ICC handed
25 

down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was
entitled to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004, stating that petitioner's Manifestation dated 12 April
26 

2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC
notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain
the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro
Corporation," in which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled
"Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12
April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses
that the question of whether the funds it drew on the subject letters of credit should be returned is outside the
issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within
the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping
by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the
Makati court.

Respondent SBC in its Memorandum, dated 10 March 2003 contends that the Court of Appeals correctly
27 

dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter's
capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 posits that its actions could
28 

not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to
ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that
since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary
injunction had been rendered moot and academic.

At the core of the present controversy is the applicability of the "independence principle" and "fraud exception
rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as
"credits," would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize
that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its
terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's
customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary.
Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often negotiable. 29

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with 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. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase
30 

price under the contract for the sale of goods. However, credits are also used in non-sale settings where they
serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known
as standby credits.31

There are three significant differences between commercial and standby credits. First, commercial credits involve
the payment of money under a contract of sale. Such credits become payable upon the presentation by the
seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In
the standby type, the credit is payable upon certification of a party's non-performance of the agreement. The
documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not performed the contract.32

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to
33 

completion ends up as a binding contract between the issuing and honoring banks without any regard or relation
to the underlying contract or disputes between the parties thereto. 34

Since letters of credit have gained general acceptability in international trade transactions, the ICC has published
from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize
practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP. First published in
35 

1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993. 36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., this Court ruled that the observance of the
37 

UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by usages and customs
generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals, this Court ruled that there
38 

being no specific provisions which govern the legal complexities arising from transactions involving letters of
credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the
case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s),
even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a
bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject
to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships existing between the banks or between
the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called "independence principle" assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not. Under this principle, banks assume
no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of 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, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any
other person whomsoever. 39
The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent
from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or
repayment standby, which is identical with the same obligations under the underlying agreement. In both cases
the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit. 40

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a
defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to
common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended.
As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit are complied with. Precisely, the independence
41 

principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract.
As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the underlying
transaction.

Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may invoke the
independence principle on letters of credit—does not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are
used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank
and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from
the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand,
the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the commercial transaction does not push through,
or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called "beneficiary."

Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of
credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a
guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If
a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and
the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial
credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are usually triggered by a factual
determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one
hand and the standby credit on the other, the distinction between surety contracts and credits merits
some reflection. The two commercial devices share a common purpose. Both ensure against the
obligor's nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance,
usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of
 determining whether the obligor defaulted (a matter over which the surety and the beneficiary often
litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong financial institution that will perform if the
obligor does not. The beneficiary also should understand that such performance must await the
sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety's
performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the
event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation
with the obligor (the applicant) over the nature of the applicant's performance takes place. The standby
credit has this opposite effect of the surety contract: it reverses the financial burden of parties during
litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligor's performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of
delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his
money promptly upon presentation of the required documents. It may be that the applicant has, in fact,
performed and that the beneficiary's presentation of those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to
determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the
issuer to litigate the performance question before payment to the beneficiary. 42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to
honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC
cannot invoke the independence principle and highlights its puerility, more so in this case where the banks
concerned were impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the amounts due
under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted
that it was "ministerial" for them to honor the call for payment.
43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the
Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be
in form and substance acceptable to the Employer and may be provided on an annually renewable
basis.44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way
of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every
day or part of a day that shall elapse between the Target Completion Date and the Completion Date,
provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day
of the delay on the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due to the Contractor and/or by drawing on the
Security." 45
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which according to their nature, may be in keeping with good faith, usage, and
law. A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities
46 

answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it
upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use
of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities
in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey
Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud
exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the
confirming bank, documents that contain, expressly or by implication, material representations of fact that to his
knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits
and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial
function of the credit. If it does not serve those functions, application of the principle is not warranted, and the
commonlaw principles of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default
which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of
delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon
the issue of default—such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement. 47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud
sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction. However,
48 

injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent
abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c)
irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously
damaged. 49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two
hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for
extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages. 50

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a
cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is
entirely within the discretion of the court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner provided by law. 51

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there
exists a right to be protected and that the acts against which the writ is to be directed are violative of the said
right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the
52 

right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to
prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing
53 

necessity to avoid injurious consequences which cannot be remedied under any standard compensation. 54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the
Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of
LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey
Contract. Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw
55 

upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities,
stating the nature of the default for which the claim on any of the Securities is to be made, provided that
no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of
their expiration in accordance with Clause 4.2.2. 56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security. 57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or
fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would be allowed to call upon the
Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner
invoke the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert
58 

before the courts below was the fact that LHC's draws on the Securities would be premature and without basis in
view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play
the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments
not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be
raised for the first time on appeal. The lower courts could thus not be faulted for not applying the fraud exception
59 

rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending
before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in
the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent
LHC's call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral
tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not
require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the contracting parties and should be complied
with in good faith. More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306
60 

of the Civil Code, petitioner could have incorporated in its Contract with LHC, a proviso that only the final
61 

determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities.
However, the fact is petitioner did not do so; hence, it would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the
Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation
to determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's
declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay
once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the
Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation, dated 30 March 2001, LHC informed this Court that the subject letters of credit had
62 

been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait
accompli or an accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this Court ruled that
63  64 

where the period within which the former employees were prohibited from engaging in or working for an
enterprise that competed with their former employer—the very purpose of the preliminary injunction —has
expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual
case or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot—
for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have
no practical effect on the existing controversy. The other issues raised by petitioner particularly with respect to
65 

its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed
out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its
Counter-Manifestation dated 29 June 2004 LHC alleges that petitioner presented before this Court the same
66 

claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case
No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should
be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for
Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the
present appeal and at the same time pursuing Civil Case No. 04-332—wherein petitioner pressed for judgment
on the issue of whether the funds LHC drew on the Securities should be returned—petitioner resorted to forum-
shopping. In both instances, however, petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in
different courts, simultaneously or successively, all substantially founded on the same transactions and the same
essential facts and circumstances, and all raising substantially the same issues either pending in, or already
resolved adversely, by some other court. It may also consist in the act of a party against whom an adverse
67 

judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum
other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court might look with favor upon the other
party. To determine whether a party violated the rule against forum-shopping, the test applied is whether the
68 

elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in
another. Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the
69 

multiple petitions and direct contempt of court. 70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation,
the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, 

MWSS vs. Hon. Daway, G.R. No. 160732, 21 June 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon
City, Branch 90 and Maynilad Water Services, Inc., respondents

DECISION

AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that
the Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water
Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order 1 which states, in part, that
the court was thereby:
 xxx     xxx     xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is
by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with
the petitioner;

Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its properties
except in the ordinary course of business;

Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the
petition;

xxx     xxx     xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by
respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:

"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the
payment by the banks of US$98 million out of the US$120 million standby letter of credit so the banks
have to make good such call/drawing of payment of US$98 million by MWSS not later than November
27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-quoted sub-paragraph
2.) of the dispositive portion of this Court’s Stay Order dated November 17, 2003.

2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written
certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES
void any payment by the banks to MWSS in the event such written certification/notice of draw is not
withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."

Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review
by way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been
issued without or in excess of the lower court’s jurisdiction or that the court a quo acted with grave abuse of
discretion amounting to lack or excess of jurisdiction.4

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to
manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services
in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the
dates agreed upon in said agreement5 which, among other things, consisted of payments of petitioner’s mostly
foreign loans.

To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was
required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to
MWSS.

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of
foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit 6 in
the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations
to MWSS as aforestated.

Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to
recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the
Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on
March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a Memorandum of Agreement (MOA) 7 on June 8, 2001 wherein
Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them.
Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree
with the terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for arbitration.
This resulted in the parties agreeing to resolve the issues through an amendment of the Concession Agreement
on October 5, 2001, known as Amendment No. 1, 8 which was based on the terms set down in MWSS Board of
Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees Resolution No. 487-2001, 9 which
provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had incurred or
would incur under the terms of the Concession Agreement.

As part of this agreement, Maynilad committed, among other things, to:

infuse the amount of UD$80.0 million as additional funding support from its stockholders;

resume payment of the concession fees; and

mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute
Appeals Panel.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that
MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding
the adjustment mechanism that would cover Maynilad’s foreign exchange losses. On December 9, 2002,
Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was
eventually brought before the Appeals Panel on January 7, 2003 by MWSS. 10 On November 7, 2003, the
Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due.

The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written
notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by
virtue of Maynilad’s failure to perform its obligations under the Concession Agreement, it was drawing on the
Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court  a
quo which resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November
27, 2003.12

PETITIONER’S CASE

Petitioner hereby raises the following issues:

DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.

DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT
A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS
WERE NOT SOLIDARY IN NATURE.

DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK
A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of
Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to
the in rem rehabilitation jurisdiction of the trial court.

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but
only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim"
falling under the purview of the stay order as alleged by respondent as it is not directed against the assets of
respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the
process for the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

the order objected to was strictly and precisely worded and issued after carefully considering/evaluating
the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust
Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records 13 and that
public respondent had the authority to issue the same;

public respondent never considered nor held that the Performance bond or assets of the issuing banks
are part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent
Maynilad has not and has never claimed to be;14

what is relevant is not whether the performance bond or assets of the issuing banks are part of the
estate of respondent Maynilad but whether the act of petitioner in commencing the process for the
payment by the banks of US$98 million out of the US$120 million performance bond is covered and/or
prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;

the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;15" and

the obligations under the Standby Letter of Credit are not solidary and are not exempt from the
coverage of the stay order.

OUR RULING

We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of
the petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the banks
that issued the Irrevocable Standby Letter of Credit in its favor and for the account of respondent Maynilad?

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its
jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part
"that jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice
of commencement of proceedings in a newspaper of general circulation" and goes further to define rehabilitation
as an in rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where
jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the
court’s jurisdiction to secure the same for the benefit of creditors. The reference to "all those affected by the
proceedings" covers creditors or such other persons or entities holding assets belonging to the debtor under
rehabilitation which should be reflected in its audited financial statements. The banks do not hold any assets of
respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad liable to the banks
at this point.

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable
Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is not.
In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did
not belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of
its jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that
the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited
by and under the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties
not solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the
nature of the obligation that would show or require the obligation of the banks to be solidary with the respondent
Maynilad.

We disagree.

First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to
answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the
payment of concession fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily
liable with the debtor. Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does
not find support in jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals 16 that the concept of guarantee vis-à-vis the concept
of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or
other demands of payment upon compliance with the conditions specified in the credit.17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the
presentation of documents18 and is thus a commitment by the issuer that the party in whose favor it is issued and
who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in
the letter.19 They are in effect absolute undertakings to pay the money advanced or the amount for which credit
is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they
are security arrangements, they are not converted thereby into contracts of guaranty. 20 What distinguishes letters
of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft
and other required shipping documents are presented to it.21 They are definite undertakings to pay at sight once
the documents stipulated therein are presented.

Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice
for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2
that "the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however
made or described, whereby a bank acting at the request and on instructions of a customer or on its own behalf
is to make payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on
an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit
are complied with, to pay at sight if the Credit provides for sight payment."22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals 23 and Bank of America NT & SA v.
Court of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international
credit regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P)
issued by the International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was
justified under Art. 2 of the Code of Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this
Code or not should be governed by the provisions contained in it; in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by those of the civil law."

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are
not solidary with the debtor. The participating banks’ obligation are solidary with respondent Maynilad in that it is
a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of
the debtor’s assets. These are the same characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation
case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v.
Court of Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation
receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or
obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an
amount which may not be known at the time the surety is given.

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not
solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of
Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the
full and prompt performance of the obligations by the concessionaire under the Concession Agreement28 and
herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long
as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by
MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event
giving rise to such Written Certification arose.29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed
over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of
credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of
the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents required therein.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the
obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with
that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the
rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to
which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.

ADDITIONAL ISSUES

We proceed to consider the other issues raised in the oral arguments and included in the parties’ memoranda:

Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules
itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set
conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that
the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions
filed by respondent Maynilad on November 21 and 24, 2003,30 where the parties including the creditors, Suez
and Chinatrust Commercial "presented their respective arguments." 31 The public respondent then ruled, "after
carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS
and/or the creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or
pertinent portions of the records, this court is of the considered and humble view that the issue must perforce be
resolved in favor of Maynilad."32 Hence to pursue their opposition before the same court would result in the
presentation of the same arguments and issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning
the orders of the rehabilitation court since they are immediately executory and a petition for review or an
appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate
court." In this situation, it had no other remedy but to seek recourse to us through this petition
for certiorari.

In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a
party from making use of the extraordinary remedy of certiorari but that such remedy be an adequate
remedy which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the
future may offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of
 the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the
danger of failure of justice without the writ, that must usually determine the propriety of certiorari.34

Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit,
petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean
hands and should therefore be denied any relief.

It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of
Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on
the Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order.

Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without
merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not.
The propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent was correct in enjoining the
petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by
public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does
not pre-empt the original jurisdiction of the rehabilitation court.

WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court
of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein
previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately
executory.

No costs.

SO ORDERED.

TRUST RECEIPTS

Trust receipt transaction (Sec. 4, TRL)

Form of trust receipt (Sec. 5, TRL)
Parties to a trust receipt transaction
Rights of the entruster (Sec. 7, 8, & 12 TRL)
Obligations/Liabilities of the entrustee (Sec. 9 & 10, TRL)
Rights of purchaser (Sec. 11, TRL)
Penalties (Sec. 13)

CASES:
People vs. Nitafan, G.R. Nos. 81559-60, 06 April 1992;

PEOPLE OF THE PHILIPPINES, (public petitioner) and ALLIED BANKING CORPORATION (private

petitioner),
vs.
HON. JUDGE DAVID G. NITAFAN (public respondent) and BETTY SIA ANG (private respondent).

GUTIERREZ, JR., J.:
This petition for certiorari involves an issue that has been raised before this Court several times in the past. The
petitioner, in effect, is asking for a re-examination of our decisions on the issue of whether or not an entrustee in
a trust receipt agreement who fails to deliver the proceeds of the sale or to return the goods if not sold to the
entruster-bank is liable for the crime of estafa.

Petitioner Allied Banking Corporation charged Betty Sia Ang with estafa in Criminal Case No. 87-53501 in an
information which alleged:

That on or about July 18, 1980, in the City of Manila, Philippines, the said accused, being then
the proprietress of Eckart Enterprises, a business entity located at 756 Norberto Amoranto
Avenue, Quezon City, did then and there wilfully, unlawfully and feloniously defraud the Allied
Banking Corporation, a banking institution, represented by its Account Officer, Raymund S. Li,
in the following manner, to wit: the said accused received in trust from the aforesaid bank
Gordon Plastics, plastic sheeting and Hook Chromed, in the total amount of P398,000.00,
specified in a trust receipt and covered by Domestic Letter of Credit No. DLC-002-801254,
under the express obligation on the part of said accused to sell the same and account for the
proceeds of the sale thereof, if sold, or to return said merchandise, if not sold, on or before
October 16, 1980, or upon demand, but the said accused, once in possession of the said
articles, far from complying with the aforesaid obligation, notwithstanding repeated demands
made upon her to that effect, paid only the amount of P283,115.78, thereby leaving
unaccounted for the amount of P114,884.22 which, once in her possession, with intent to
defraud, she misappropriated, misapplied and converted to her own personal use and benefit,
to the damage and prejudice of said Allied Banking Corporation in the aforesaid sum of
P114,884.22, Philippine Currency. (Rollo, pp. 13-14)

The accused filed a motion to quash the information on the ground that the facts charged do not constitute an
offense.

On January 7, 1988, the respondent judge granted the motion to quash. The order was anchored on the premise
that a trust receipt transaction is an evidence of a loan being secured so that there is, as between the parties to
it, a creditor-debtor relationship. The court ruled that the penal clause of Presidential Decree No. 15 on the Trust
Receipts Law is inoperative because it does not actually punish an offense mala prohibita.  The law only refers to
the relevant estafa provision in the Revised Penal Code. The Court relied on the judicial pronouncements
in People v. Cuevo,  104 SCRA 312 [1981] where, for lack of the required number of votes, this Court upheld the
dismissal of a charge for estafa for a violation of a trust receipt agreement; and in Sia v. People,  121 SCRA 655
[1983] where we held that the violation merely gives rise to a civil obligation. At the time the order to quash was
issued or on January 7, 1988, these two decisions were the only most recent ones. Hence, this petition.

The private respondent adopted practically the same stance of the lower court. She likewise asserts that P.D.
115 is unconstitutional as it violates the constitutional prohibition against imprisonment for non-payment of a
debt. She argues that where no malice exists in a breach of a purely commercial undertaking, P.D. 115 imputes
it.

This Court notes that the petitioner bank brought a similar case before this Court in G.R. No. 82495,
entitled Allied Banking Corporation v. Hon. Secretary Sedfrey Ordoñez and Alfredo Ching  which we decided on
December 10, 1990 (192 SCRA 246). In that case, the petitioner additionally questioned, and we accordingly
reversed, the pronouncement of the Secretary of Justice limiting the application of the penal provision of P.D.
115 only to goods intended to be sold to the exclusion of those still to be manufactured.

As in G.R. No. 82495, we resolve the instant petition in the light of the Court's ruling in Lee v. Rodil, 175 SCRA
100 [1989] and Sia v. Court of Appeals, 166 SCRA 263 [1988]. We have held in the latter cases that acts
involving the violation of trust receipt agreements occurring after 29 January 1973 (date of enactment of P.D.
115) would make the accused criminally liable for estafa under paragraph 1 (b), Article 315 of the Revised Penal
Code (RPC) pursuant to the explicit provision in Section 13 of P.D. 115.

The relevant penal provision of P.D. 115 provides:

Sec. 13 of P.D. No. 115 provides:

 . . . 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.

Section 1 (b), Article 315 of the RPC under which the violation is made to fall, states:

. . . Swindling  (estafa). — Any person who shall defraud another by any of the means
mentioned herein below . . . :

xxx xxx xxx

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other

personal property received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of or to return the same, even
though such obligation be totally or partially guaranteed by a bond; or by denying having
received such money, good, or other property.

The factual circumstances in the present case show that the alleged violation was committed sometime in 1980
or during the effectivity of P.D. 115. The failure, therefore, to account for the P114,884.22 balance is what makes
the accused-respondent criminally liable for estafa. The Court reiterates its definitive ruling that, in
the Cuevo and Sia (1983) cases relied upon by the accused, P.D. 115 was not applied because the questioned
acts were committed before its effectivity. (Lee v. Rodil, supra,  p. 108) At the time those cases were decided, the
failure to comply with the obligations under the trust receipt was susceptible to two interpretations. The Court
in Sia  adopted the view that a violation gives rise only to a civil liability as the more feasible view "before the
promulgation of P.D. 115," notwithstanding prior decisions where we ruled that a breach also gives rise to a
liability for estafa. (People v. Yu Chai Ho, 53 Phil. 874 [1929]; Samo v. People, 115 Phil. 346 [1962]; Philippine
National Bank v. Arrozal, 103 Phil. 213 [1958]; Philippine National Bank v. Viuda e Hijos de Angel Jose, 63 Phil.
814 [1936]).

Contrary to the reasoning of the respondent court and the accused, a trust receipt arrangement does not involve
a simple loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself. (Vintola v. Insular Bank of Asia and
America, 151 SCRA 578 [1987]) That second feature is what provides the much needed financial assistance to
our traders in the importation or purchase of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by a bank. (Samo v. People, supra). The title of the bank
to the security is the one sought to be protected and not the loan which is a separate and distinct agreement.

The Trust Receipts Law punishes 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 or not. The law does not seek to enforce
payment of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt.

Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use
of trust receipts, the danger of their misuse and/or misappropriation of the goods or proceeds realized from the
sale of goods, documents or instruments held in trust for entruster-banks, and the need for regulation of trust
receipt transactions to safeguard the rights and enforce the obligations of the parties involved are the main
thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like Batas Pambansa Blg. 22,
punishes the act "not as an offense against property, but as an offense against public order. . . ." The misuse of
trust receipts therefore should be deterred to prevent any possible havoc in trade circles and the banking
community (citing Lozano v. Martinez, 146 SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public
interest that the law now specifically designates a breach of a trust receipt agreement to be an act that "shall"
make one liable for estafa.
The offense is punished as a malum prohibitum regardless of the existence of intent or malice. 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.

We are continually re-evaluating the opposite view which insists that the violation of a trust receipt agreement
should result only in a civil action for collection. The respondent contends that there is no malice involved. She
cites the dissent of the late Chief Justice Claudio Teehankee in Ong v. Court of Appeals,  (124 SCRA 578 [1983])
to wit:

The old capitalist orientation of putting importers in jail for supposed estafa or swindling for
non-payment of the price of the imported goods released to them under trust receipts (a purely
commercial transaction) under the fiction of the trust receipt device, should no longer be
permitted in this day and age.

As earlier stated, however, the law punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the bank.

The Court reiterates that the enactment of P.D. 115 is a valid exercise of the police power of the State and is,
thus, constitutional. (Lee v. Rodil, supra; Lozano v. Martinez, supra) The arguments of the respondent are
appropriate for a repeal or modification of the law and should be directed to Congress. But until the law is
repealed, we are constrained to apply it.

WHEREFORE, the petition is hereby GRANTED. The Order of the respondent Regional Trial Court of Manila,
Branch 52 dated January 7, 1988 is SET ASIDE. Let this case be remanded to the said court for disposition in
accordance with this decision.

SO ORDERED.

Rosario Textile Mills Corp., et al. vs. Home Bankers Savings & Trust Co., G.R. No.
137232, 29 June 2005;

G.R. No. 137232               June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO, petitioners,

vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the petition for review on certiorari assailing the Decision1 of the Court of Appeals dated
March 31, 1998 in CA-G.R. CV No. 48708 and its Resolution dated January 12, 1999.

The facts of the case as found by the Court of Appeals are:

"Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust Co.
for an Omnibus Credit Line for ₱10 million. The bank approved RTMC’s credit line but for only ₱8 million. The
bank notified RTMC of the grant of the said loan thru a letter dated March 2, 1989 which contains terms and
conditions conformed by RTMC thru Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement
in favor of the bank, in which he bound himself jointly and severally with RTMC for the payment of all RTMC’s
indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making numerous drawdowns,
each drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico,
executed in favor of the bank a total of eleven (11) promissory notes.
Despite the lapse of the respective due dates under the promissory notes and notwithstanding the bank’s
demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank filed a complaint for sum of
money against RTMC and Yujuico before the Regional Trial Court, Br. 16, Manila.

In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they should be absolved from liability. They
claimed that although the grant of the credit line and the execution of the suretyship agreement are admitted, the
bank gave assurance that the suretyship agreement was merely a formality under which Yujuico will not be
personally liable. They argue that the importation of raw materials under the credit line was with a grant of option
to them to turn-over to the bank the imported raw materials should these fail to meet their manufacturing
requirements. RTMC offered to make such turn-over since the imported materials did not conform to the required
specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which
gutted down RTMC’s premises.

For failure of the parties to amicably settle the case, trial on the merits proceeded. After the trial, the Court  a
quo rendered a decision in favor of the bank, the decretal part of which reads:

‘WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against
defendants who are ordered to pay jointly and severally in favor of plaintiff, inclusive of stipulated 30% per
annum interest and penalty of 3% per month until fully paid, under the following promissory notes:

90-1116 6-20-90 ₱737,088.25 9-18-90

(maturity)
90-1320 7-13-90 ₱650,000.00 10-11-90
90-1334 7-17-90 ₱422,500.00 10-15-90
90-1335 7-17-90 ₱422,500.00 10-15-90
90-1347 7-18-90 ₱795,000.00 10-16-90
90-1373 7-20-90 ₱715,900.00 10-18-90
90-1397 7-27-90 ₱773,500.00 10-20-90
90-1429 7-26-90 ₱425,750.00 10-24-90
90-1540 8-7-90 ₱720,984.00 11-5-90
90-1569 8-9-90 ₱209,433.75 11-8-90
90-0922 5-28-90 ₱747,780.00 8-26-90

The counterclaims of defendants are hereby DISMISSED.

SO ORDERED." (OR, p. 323; Rollo, p. 73)."2

Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of Appeals, contending that under the
trust receipt contracts between the parties, they merely held the goods described therein in trust for
respondent Home Bankers Savings and Trust Company (the bank) which owns the same. Since the
ownership of the goods remains with the bank, then it should bear the loss. With the destruction of the goods by
fire, petitioners should have been relieved of any obligation to pay.

The Court of Appeals, however, affirmed the trial court’s judgment, holding that the bank is merely the holder of
the security for its advance payments to petitioners; and that the goods they purchased, through the credit line
extended by the bank, belong to them and hold said goods at their own risk.

Petitioners then filed a motion for reconsideration but this was denied by the Appellate Court in its Resolution
dated January 12, 1999.
Hence, this petition for review on certiorari ascribing to the Court of Appeals the following errors:

"I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ACTS OF THE
PETITIONERS-DEFENDANTS WERE TANTAMOUNT TO A VALID AND EFFECTIVE TENDER OF THE
GOODS TO THE RESPONDENT-PLAINTIFF.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF ‘RES PERIT
DOMINO’ IN THE CASE AT BAR CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE DEFECTIVE
RAW MATERIALS BY THE PETITIONERS-DEFENDANTS TO THE RESPONDENT-PLAINTIFF AND THE
EXPRESS STIPULATION IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH THE
RESPONDENT-PLAINTIFF.

III

THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF THE CIVIL CODE AND THE LONG-
STANDING JURISPRUDENCE THAT ‘INTENTION OF THE PARTIES IS PRIMORDIAL’ IN ITS FAILURE TO
UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY AGREEMENT WAS A MERE FORMALITY
AND DID NOT INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.

IV

ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS VALID AND EFFECTIVE, THE

HONORABLE COURT OF APPEALS VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT
LIABLE UNLESS THE DEBTOR IS HIMSELF LIABLE.

THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF TRUST RECEIPT LAW IN
HOLDING THE PETITIONERS LIABLE TO THE RESPONDENT."

The above assigned errors boil down to the following issues: (1) whether the Court of Appeals erred in holding
that petitioners are not relieved of their obligation to pay their loan after they tried to tender the goods to the bank
which refused to accept the same, and which goods were subsequently lost in a fire; (2) whether the Court of
Appeals erred when it ruled that petitioners are solidarily liable for the payment of their obligations to the bank;
and (3) whether the Court of Appeals violated the Trust Receipts Law.

On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials needed for its
manufacture, using the credit line, it was merely acting on behalf of the bank, the true owner of the goods by
virtue of the trust receipts. Hence, under the doctrine of res perit domino, the bank took the risk of the loss of said
raw materials. RTMC’s role in the transaction was that of end user of the raw materials and when it did not
accept those materials as they did not meet the manufacturing requirements, RTMC made a valid and effective
tender of the goods to the bank. Since the bank refused to accept the raw materials, RTMC stored them in its
warehouse. When the warehouse and its contents were gutted by fire, petitioners’ obligation to the bank was
accordingly extinguished.

Petitioners’ stance, however, conveniently ignores the true nature of its transaction with the bank. We recall that
RTMC filed with the bank an application for a credit line in the amount of ₱10 million, but only ₱8 million was
approved. RTMC then made withdrawals from this credit line and issued several promissory notes in favor of the
bank. In banking and commerce, a credit line is "that amount of money or merchandise which a banker,
merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance." 3 It is the fixed
limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter
may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a
series of transactions in which case, when the customer’s line of credit is nearly exhausted, he is expected to
reduce his indebtedness by payments before making any further drawings.4

It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC
used the proceeds of this loan to purchase raw materials from a supplier abroad. In order to secure the payment
of the loan, RTMC delivered the raw materials to the bank as collateral. Trust receipts were executed by the
parties to evidence this security arrangement. Simply stated, the trust receipts were mere securities.

In Samo vs. People,5 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."6

In Vintola vs. Insular Bank of Asia and America,7 we elucidated further that "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" 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 absolute, whenever such title is in substance taken or retained for security only."

Petitioners’ insistence that the ownership of the raw materials remained with the bank is untenable. In Sia vs.
People,9 Abad vs. Court of Appeals,10 and PNB vs. Pineda,11 we held that:

"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..."12

Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Anent the second issue, petitioner Yujuico contends that the suretyship agreement he signed does not bind him,
the same being a mere formality.

We reject petitioner Yujuico’s contentions for two reasons.

First, there is no record to support his allegation that the surety agreement is a "mere formality;" and

Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by petitioner Yujuico binds
him. The terms clearly show that he agreed to pay the bank jointly and severally with RTMC. The parole
evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in point, thus:

"SEC. 9. Evidence of written agreements. – When the terms of an agreement have been reduced in writing, it is
considered as containing all the terms agreed upon and there can be, between the parties and their successors
in interest, no evidence of such terms other than the contents of the written agreement.

However, a party may present evidence to modify, explain, or add to the terms of the written agreement if he
puts in issue in his pleading:

An intrinsic ambiguity, mistake, or imperfection in the written agreement;

The failure of the written agreement to express the true intent and agreement of the parties thereto;

The validity of the written agreement; or

 The existence of other terms agreed to by the parties or their successors in interest after the execution
of the written agreement.

x x x."

Under this Rule, the terms of a contract are rendered conclusive upon the parties and evidence aliunde is not
admissible to vary or contradict a complete and enforceable agreement embodied in a document. 13 We have
carefully examined the Suretyship Agreement signed by Yujuico and found no ambiguity therein. Documents
must be taken as explaining all the terms of the agreement between the parties when there appears to be no
ambiguity in the language of said documents nor any failure to express the true intent and agreement of the
parties.14

As to the third and final issue – At the risk of being repetitious, we stress that the contract between the parties is
a loan. What respondent bank sought to collect as creditor was the loan it granted to petitioners. Petitioners’
recourse is to sue their supplier, if indeed the materials were defective.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 48708 are AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.

Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ., concur.

Landl Company vs. Metrobank, G.R. No. 159622, 30 July 2004;

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.

DECISION

YNARES-SANTIAGO, J.:

At issue in this petition for review on certiorari is whether or not, 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.

As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as follows:

Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of money against
Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban and Manuel P. Lucente before the
Regional Trial Court of Cebu City, Branch 19, docketed as Civil Case No. CEB-4895.

Respondent alleged that petitioner corporation is engaged in the business of selling imported welding rods and
alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 with respondent bank, in the amount
of US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the time the transaction was
consummated. The letter of credit was opened to purchase various welding rods and electrodes from Perma
Alloys, Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner
corporation put up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan.

As an additional security, and as a condition for the approval of petitioner corporation's application for the
opening of the commercial letter of credit, respondent bank required petitioners Percival G. Llaban and Manuel
P. Lucente to execute a Continuing Suretyship Agreement to the extent of P400,000.00, excluding interest, in
favor of respondent bank. Petitioner Lucente also executed a Deed of Assignment in the amount of P35,000.00
in favor of respondent bank to cover the amount of petitioner corporation's obligation to the bank. Upon
compliance with these requisites, respondent bank opened an irrevocable letter of credit for the petitioner
corporation.

To secure the indebtedness of petitioner corporation, respondent bank required the execution of a Trust Receipt
in an amount equivalent to the letter of credit, on the condition that petitioner corporation would hold the goods in
trust for respondent bank, with the right to sell the goods and the obligation to turn over to respondent bank the
proceeds of the sale, if any. If the goods remained unsold, petitioner corporation had the further obligation to
return them to respondent bank on or before November 23, 1983.

Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof.

On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted in the payment of
its obligation to respondent bank and failed to turn over the goods to the latter. On July 24, 1984, respondent
bank demanded that petitioners, as entrustees, turn over the goods subject of the trust receipt. On September
24, 1984, petitioners turned over the subject goods to the respondent bank.

On July 31, 1985, in the presence of representatives of the petitioners and respondent bank, the goods were
sold at public auction. The goods were sold for P30,000.00 to respondent bank as the highest bidder.

The proceeds of the auction sale were insufficient to completely satisfy petitioners' outstanding obligation to
respondent bank, notwithstanding the application of the time deposit account of petitioner Lucente. Accordingly,
respondent bank demanded that petitioners pay the remaining balance of their obligation. After petitioners failed
to do so, respondent bank instituted the instant case to collect the said deficiency.

On March 31, 1997, after trial on the merits, the trial court rendered a decision, the dispositive portion of which
reads:

WHEREFORE, foregoing premises considered, Judgment is hereby rendered in favor of the plaintiff
and against the defendant by (1) ordering the defendant to pay jointly and severally to the plaintiff the
sum of P292,172.23 representing the defendant's obligation, as of April 17, 1986; (2) to pay the interest
at the rate of 19% per annum to be reckoned from April 18, 1986 until [the] obligation is fully paid; (3) to
pay service charge at the rate of 2% per annum starting April 18, 1986; (4) to pay the sum equivalent to
10% per annum of the total amount due collectible by way of Attorney's Fees; (5) to pay Litigation
Expenses of P3,000.00 and to pay the cost of the suit; and (6) to pay penalty charge of 12% per annum.

SO ORDERED. 1

Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not respondent bank has the
right to recover any deficiency after it has retained possession of and subsequently effected a public auction sale
of the goods covered by the trust receipt; (2) whether or not respondent bank is entitled to the amount of
P3,000.00 as and for litigation expenses and costs of the suit; and (3) whether or not respondent bank is entitled
to the award of attorney's fees.

On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision of the trial court. 2

Hence, this petition for review on the following assignment of errors:

I.
 THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL COURT'S
RULING THAT RESPONDENT HAD THE RIGHT TO CLAIM THE DEFICIENCY FROM PETITIONERS
NOTWITHSTANDING THE FACT THAT THE GOODS COVERED BY THE TRUST RECEIPT WERE
FULLY TURNED OVER TO RESPONDENT.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL COURT'S
PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION, INTEREST, ATTORNEY'S FEES,
AND PENALTY AGAINST THE PETITIONERS. 3

The instant petition is partly meritorious.

The resolution of the first assigned error hinges on the proper interpretation of Section 7 of Presidential Decree
No. 115, or the Trust Receipts Law, which reads:

Sec. 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.

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.

There is no question that petitioners failed to pay their outstanding obligation to respondent bank. They contend,
however, that when the entrustee fails to settle his principal loan, the entruster may choose between two
separate and alternative remedies: (1) the return of the goods covered by the trust receipt, in which case, the
entruster now acquires the ownership of the goods which the entrustee failed to sell; or (2) cancel the trust and
take possession of the goods, for the purpose of selling the same at a private sale or at public auction.
Petitioners assert that, under this second remedy, the entruster does not acquire ownership of the goods, in
which case he is entitled to the deficiency. Petitioners argue that these two remedies are so distinct that the
availment of one necessarily bars the availment of the other. Thus, when respondent bank availed of the remedy
of demanding the return of the goods, the actual return of all the unsold goods completely extinguished
petitioners' liability.
4

Petitioners' argument is bereft of merit.

A trust receipt is inextricably linked with the primary agreement between the parties. Time and again, we have
emphasized that a trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as
security for a loan. Thus, in Abad v. Court of Appeals, we ruled:
5 

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. x x x.
 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. 6

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional layer of
security to the lending bank. Trust receipts are indispensable contracts in international and domestic business
transactions. The prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods
or proceeds realized from the sale of goods, documents or instruments held in trust for entruster banks, and the
need for regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties
involved are the main thrusts of the Trust Receipts Law. 7

The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of 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. More specifically, 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". The law further provides that "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."

The trust receipt between respondent bank and petitioner corporation contains the following relevant clauses:

The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust and take possession
of the goods/documents/instruments subject hereof or of the proceeds realized therefrom wherever they
may then be found, upon default or failure of the ENTRUSTEE to comply with any of the terms and
conditions of this Trust Receipt or of any other agreement between the BANK/ENTRUSTER and the
ENTRUSTEE; and the BANK/ENTRUSTER having taken repossession of the
goods/documents/instruments object hereof may, on or after default, give at least five (5) days' previous
notice to the ENTRUSTEE of its intention to sell the goods/documents/instruments at public or private
sale, at which public sale, it may become a purchaser; Provided, that 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 retaking, keeping and storing the goods/documents/instruments; (c) to the
satisfaction of all of the ENTRUSTEE's indebtedness to the BANK/ENTRUSTER; and Provided, further,
that the ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency. x x x

No act or omission on the part of the BANK/ENTRUSTER shall be deemed and considered a waiver of
any of its rights hereunder or under any related letters of credit, drafts or other documents unless such
waiver is expressly made in writing over the signature of the BANK/ENTRUSTER. 8

The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second paragraph of Section
7 of the Trust Receipts Law. The right of repossession and subsequent sale at public auction which were availed
of by respondent bank were rights available upon default, and which were conferred by statute and reinforced by
the contract between the parties.

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. Petitioners are apparently laboring under the mistaken impression that the full
turn-over of the goods suffices to divest them of their obligation to repay the principal amount of their loan
obligation. This is definitely not the case. In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas
Cement Company, Inc., we had occasion to rule:
9 

PNB's possession of the subject machinery and equipment being precisely as a form of security for the
advances given to TCC under the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on
said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere
 possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself.

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. As aforesaid, the repossession of the
machinery and equipment in question was merely to secure the payment of TCC's loan obligation and
not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus,
no dacion en pago was ever accomplished. (Citations omitted, underscoring supplied) 10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America, we struck down the position of the
11 

petitioner-spouses that their obligation to the entruster bank had been extinguished when they relinquished
possession of the goods in question. Thus:

A trust receipt… 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. As defined in our laws:

(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.

xxx      xxx      xxx

Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of the goods. It was
merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the
VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their
own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a
lender and creditor.

"x x x for the bank has previously extended a loan which the L/C represents to the importer,
and by that loan, the importer should be the real owner of the goods. If under the 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. x x x"

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. The fact that they were unable to sell the seashells in question does not affect
IBAA's right to recover the advances it had made under the Letter of Credit. (Citations omitted.) 12

Respondent bank's repossession of the properties and subsequent sale of the goods were completely in
accordance with its statutory and contractual rights upon default of petitioner corporation.

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.

In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation's
indebtedness to the respondent bank. Respondent bank was thus well within its rights to institute the instant
case to collect the deficiency.
We find, however, that there has been an error in the computation of the total amount of petitioners'
indebtedness to respondent bank.

Although respondent bank contends that the error of computation is a question of fact which is beyond the power
of this Court to review, the total amount of petitioners' indebtedness in this case is not a question of fact. Rather,
13 

it is a question of law, i.e., the application of legal principles for the computation of the amount owed to
respondent bank, and is thus a matter properly brought for our determination.

The first issue involves the amount of indebtedness prior to the imposition of interest and penalty charges. The
initial amount of the trust receipt of P218,733.92, was reduced to P192,265.92 as of June 14, 1984, as per
respondent's Statement of Past Due Trust Receipt dated December 1, 1993. This amount presumably includes
14 

the application of P35,000.00, the amount of petitioner Lucente's Deed of Assignment, which amount was
applied by respondent bank to petitioners' obligation. No showing was made, however, that the P30,000.00
proceeds of the auction sale on July 31, 1985 was ever applied to the loan. Neither was the amount of
P50,414.00, representing the marginal deposit made by petitioner corporation, deducted from the loan. Although
respondent bank contends that the marginal deposit should not be deducted from the principal obligation, this is
completely contrary to prevailing jurisprudence allowing the deduction of the marginal deposit, 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. 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 value of the letter
of credit which the bank issued, without first crediting or setting off the marginal deposit which the
importer paid to the bank. Compensation is proper and should take place by operation of law because
the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the
concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation
as regards what the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code). 15

The net amount of the obligation, represented by respondent bank to be P292,172.23 as of April 17, 1986, would
thus be P211,758.23.

To this principal amount must be imposed the following charges: (1) 19% interest per annum, in keeping with the
terms of the trust receipt; and (2) 12% penalty per annum, collected based on the outstanding principal
16 

obligation plus unpaid interest, again in keeping with the wording of the trust receipt. It appearing that petitioners
17 

have paid the interest and penalty charges until April 17, 1986, the reckoning date for the computation of the
foregoing charges must be April 18, 1986.

A perusal of the records reveals that the trial court and the Court of Appeals erred in imposing service charges
upon the petitioners. No such stipulation is found in the trust receipt. Moreover, the trial court and the Court of
Appeals 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.

Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner corporation is untenable.
As co-signatories of the Continuing Suretyship Agreement, they bound themselves, inter alia, to pay the principal
sum in the amount of not more than P400,000.00; interest due on the principal obligation; attorney's fees; and
expenses that may be incurred in collecting the credit. The amount owed to respondent bank is the amount of
the principal, interest, attorney's fees, and expenses in collecting the principal amount. The Continuing
Suretyship Agreement expressly states the nature of the liability of Lucente and Llaban:
 The liability of the SURETY shall be solidary, direct and immediate and not contingent upon the bank's
pursuit of whatever remedies the BANK have [sic] against the Borrower or the securities or liens the
BANK may possess and the SURETY will at any time, whether due or not due, pay to the BANK with or
withour demand upon the Borrower, any of the instruments of indebtedness or other obligation hereby
guaranteed by the SURETY. 18

Solidary liability is one of the primary characteristics of a surety contract, and the Continuing Suretyship
19 

Agreement expressly stipulates the solidary nature of Lucente and Llaban's liability. All three petitioners thus
share the solidary obligation in favor of respondent bank, which is given the right, under the Civil Code, to
proceed against any one of the solidary debtors or some or all of them simultaneously. 20

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is AFFIRMED with MODIFICATIONS. Accordingly,
petitioners are ordered to pay respondent bank the following: (1) P211,758.23 representing petitioners' net
obligation as of April 17, 1986; (2) interest at the rate of 19% per annum and penalty at the rate of 12% per
annum reckoned from April 18, 1986; (3) attorney's fees equivalent to 10% of the total amount due and
collectible; and (4) litigation expenses in the amount of P3,000.00. The service charge at the rate of 2% per
annum beginning April 18, 1986 is deleted. Costs against petitioners.

SO ORDERED.

Vintola vs. Insular Bank, G.R. No. 73271, 29 May 1987;

TIRSO I. VINTOLA and LORETO DY VINTOLA, defendants-appellants,

vs.
INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellee.

MELENCIO-HERRERA, J.:

This case was appealed to the Intermediate Appellate Court which, however, certified the same to this Court, the
issue involved being purely legal.

The facts are not disputed.

On August 20, 1975 the spouses Tirso and Loreta Vintola (the VINTOLAS, for short), doing business under the
name and style "Dax Kin International," engaged in the manufacture of raw sea shells into finished products,
applied for and were granted a domestic letter of credit by the Insular Bank of Asia and America (IBAA), Cebu
City. 1 in the amount of P40,000.00. The Letter of Credit authorized the bank to negotiate for their account drafts drawn by their
supplier, one Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. In consideration thereof, the
VINTOLAS, jointly and severally, agreed to pay the bank "at maturity, in Philippine currency, the equivalent, of the aforementioned
amount or such portion thereof as may be drawn or paid, upon the faith of the said credit together with the usual charges."

On the same day, August 20, 1975, having received from Stalin Tan the puka and olive shells worth P40,000.00,
the VINTOLAS executed a Trust Receipt agreement with IBAA, Cebu City. Under that Agreement, the
VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's property with liberty to sell the same for its
account, " and "in case of sale" to turn over the proceeds as soon as received to (IBAA) the due date indicated in
the document was October 19, 1975.

Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS in a letter dated January 1,
1976. The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the goods.
IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their
undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for their own
personal use and benefit the aforesaid goods. During the trial of the criminal case the VINTOLAS turned over the
seashells to the custody of the Trial Court.

On April 12, 1982, the then Court of First Instance of Cebu, Branch VII, acquitted the VINTOLAS of the crime
charged, after finding that the element of misappropriation or conversion was inexistent. Concluded the Court:

Finally, it should be mentioned that under the trust receipt, in the event of default and/or non-
fulfillment on the part of the accused of their undertaking, the bank is entitled to take
possession of the goods or to recover its equivalent value together with the usual charges. In
either case, the remedy of the Bank is civil and not criminal in nature. ...  2

Shortly thereafter, IBAA commenced the present civil action to recover the value of the goods before the
Regional Trial Court of Cebu, Branch XVI.

Holding that the complaint was barred by the judgment of acquittal in the criminal case, said Court dismissed the
complaint. However, on IBAA's motion, the Court granted reconsideration and:

Order(ed)defendants jointly and severally to pay the plaintiff the sum of Seventy Two Thousand Nine
Hundred Eighty Two and 27/100 (P72,982.27), Philippine Currency, plus interest of 14% per annum and
service charge of one (1%) per cent per annum computed from judicial demand and until the obligation
is fully paid;

Ordered defendants jointly and severally to pay attorney's fees to the plaintiff in the sum of Four
Thousand (P4,000.00) pesos, Philippine Currency, plus costs of the suit.  3

The VINTOLAS rest their present appeal on the principal allegation that their acquittal in the Estafa case bars
IBAA's filing of the civil action because IBAA had not reserved in the criminal case its right to enforce separately
their civil liability. They maintain that by intervening actively in the prosecution of the criminal case through a
private prosecutor, IBAA had chosen to file the civil action impliedly with the criminal action, pursuant to Section
1, Rule 111 of the 1985 Rules on Criminal Procedure, reading:

Section 1. Institution of criminal and civil action. —  When a criminal action is instituted, the civil
action for the recovery of civil liability arising from the offense charged is impliedly instituted
with the criminal action, unless the offended party expressly waives the civil action or reserves
his right to institute it separately. ...

and that since the judgment in the criminal case had made a declaration that the facts from which the civil action
might arise did not exist, the filing of the civil action arising from the offense is now barred, as provided by
Section 3-b of Rule 111 of the same Rules providing:

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the
extinction proceeds from a declaration in a final judgment that the fact from which the civil
might arise did not exist. In other cases, the person entitled to the civil action may institute it in
the jurisdiction in the manner provided by law against the person who may be liable for
restitution of the thing and reparation or indemnity for the damage suffered.

Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as,
through no fault of their own, they were unable to dispose of the seashells, and that they have relinguished
possession thereof to the IBAA, as owner of the goods, by depositing them with the Court.

The foregoing submission overlooks the nature and mercantile usage of the transaction involved. 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 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.

Thus, Section 4 of P.D. No. 115 defines a trust receipt transaction as:
 ... any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as the 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 instrument 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 one of the following:

In the case of goods or documents, (a) to sell the goods or procure their sale, ...

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."   As defined in our laws:
4

(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. 5

As elucidated in Samo vs. People  "a trust receipt is considered as a security transaction intended to aid in
6

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."

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the
holder of a security title for the advances it had made to the VINTOLAS The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor.

... for the bank has previously extended a loan which the L/C represents to the importer, and
by that loan, the importer should be the real owner of the goods. If under the 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. ... 7

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. The fact
that they were unable to sell the seashells in question does not affect IBAA's right to recover the advances it had
made under the Letter of Credit. In so arguing, the VINTOLAS conveniently close their eyes to their application
for a Letter of Credit wherein they expressly obligated themselves in these terms:

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine
Currency the equivalent of the above amount or such portion thereof as may be drawn or paid
upon the faith of said credit together with the usual charges. ... (Exhibit "A")

They further agreed that their marginal deposit of P8,000.00, later increased to P11,000.00

be applied, without further proceedings or formalities to pay or reduce our obligation under this
letter of credit or its corresponding Trust Receipt. (Emphasis supplied)  8
The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to
the institution of a civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment in the
estafa case had declared that the facts from which the civil action might arise, did not exist, for, it will be recalled
that the decision of acquittal expressly declared that "the remedy of the Bank is civil and not criminal in nature."
This amounts to a reservation of the civil action in IBAA's favor, for the Court would not have dwelt on a civil
liability that it had intended to extinguish by the same decision.   The VINTOLAS are liable ex contractu for
9

breach of the Letter of Credit — Trust Receipt, whether they did or they did not "misappropriate, misapply or
convert" the merchandise as charged in the criminal case. 10 Their civil liability does not arise ex delicto, the action for the
recovery of which would have been deemed instituted with the criminal-action (unless waived or reserved) and where acquittal based
on a judicial declaration that the criminal acts charged do not exist would have extinguished the civil action.  11 Rather, the civil suit
instituted by IBAA is based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed
regardless of the result of the latter. Under the situational circumstances of the parties, they are governed by Article 31 of the Civil
Code, explicitly providing:

Art. 31. When the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter.

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED. No
costs.

SO ORDERED.

Yap (Chairman),

Pilipinas vs. Ong, G.R. No. 133176, 8 August 2002;

PILIPINAS BANK, petitioner,
vs.
ALFREDO T. ONG and LEONCIA LIM, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari of the Resolutions dated January 9, 1998 and March 25, 1998 of the Court of
1  2 

Appeals in CA-G.R. SP No. 42005, "Pilipinas Bank vs. The Honorable Secretary of Justice, the City Prosecutor
of Makati City, Alfredo T. Ong and Leoncia Lim," reversing its Decision dated August 29, 1997.

On April 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent Alfredo T. Ong, applied
for a domestic commercial letter of credit with petitioner Pilipinas Bank (hereinafter referred to as the bank) to
finance the purchase of about 100,000 board feet of "Air Dried, Dark Red Lauan" sawn lumber.

The bank approved the application and issued Letter of Credit No. 91/725-HO in the amount of P3,500,000.00.
To secure payment of the amount, BMC, through respondent Ong, executed two (2) trust receipts providing inter 3 

alia  that it shall turn over the proceeds of the goods to the bank, if sold, or return the goods, if unsold, upon
maturity on July 28, 1991 and August 4, 1991.

On due dates, BMC failed to comply with the trust receipt agreement. On November 22, 1991, it filed with the
Securities and Exchange Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of
Suspension of Payments under Section 6 (c) of P.D. No. 902-A, as amended, docketed as SEC Case No. 4109.
4 

After BMC informed its creditors (including the bank) of the filing of the petition, a Creditors' Meeting was held to:

inform all creditor banks of the present status of BMC to avert any action which would affect the
company's operations, and (b) reach an accord on a common course of action to restore the company
to sound financial footing.
On January 8, 1992, the SEC issued an order creating a Management Committee wherein the bank is
5 

represented. The Committee shall, among others, undertake the management of BMC, take custody and control
of all its existing assets and liabilities, study, review and evaluate its operation and/or the feasibility of its being
restructured.

On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a Memorandum of
Agreement (MOA) rescheduling the payment of BMC’s existing debts.
6 

On November 27, 1992, the SEC rendered a Decision approving the Rehabilitation Plan of BMC as contained in
7 

the MOA and declaring it in a state of suspension of payments.

However, BMC and respondent Ong defaulted in the payment of their obligations under the rescheduled
payment scheme provided in the MOA. Thus, on April 1994, the bank filed with the Makati City Prosecutor’s
Office a complaint charging respondents Ong and Leoncia Lim (as president and treasurer of BMC, respectively)
8 

with violation of the Trust Receipts Law (PD No. 115), docketed as I.S. No. 94-3324. The bank alleged that both
respondents failed to pay their obligations under the trust receipts despite demand. 9

On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a Resolution recommending the dismissal
10 

of the complaint. On July 11, 1994, the Resolution was approved by Provincial Prosecutor of Rizal Herminio T.
Ubana, Sr. The bank filed a motion for reconsideration but was denied.
11 

Upon appeal by the bank, the Department of Justice (DOJ) rendered judgment denying the same for lack of
12 

merit. Its motion for reconsideration was likewise denied. 13

On July 5, 1996, the bank filed with this Court a petition for certiorari and mandamus seeking to annul the
resolution of the DOJ. In a Resolution dated August 21, 1996, this Court referred the petition to the Court of
Appeals for proper determination and disposition. 14

On August 29, 1997, the Court of Appeals rendered judgment, the dispositive portion of which reads:

"WHEREFORE, in view of all the foregoing, the assailed resolutions of the public respondents are hereby SET
ASIDE and in lieu thereof a new one rendered directing the public respondents to file the appropriate criminal
charges for violation of P.D. No. 115, otherwise known as The Trust Receipts Law, against private
respondents." 15

However, upon respondents’ motion for reconsideration, the Court of Appeals reversed itself, holding that the
execution of the MOA constitutes novation which "places petitioner Bank in estoppel to insist on the original trust
relation and constitutes a bar to the filing of any criminal information for violation of the trust receipts law."
16

The bank filed a motion for reconsideration but was denied. Hence this petition.
17 

Petitioner bank contends that the MOA did not novate, much less extinguish, the existing obligations of BMC
under the trust receipt agreement. The bank, through the execution of the MOA, merely assisted BMC to settle
its obligations by rescheduling the same. Hence, when BMC defaulted in its payment, all its rights, including the
right to charge respondents for violation of the Trust Receipts Law, were revived.

Respondents Ong and Lim maintain that the MOA, which has the effect of a compromise agreement, novated
BMC’s existing obligations under the trust receipt agreement. The novation converted the parties’ relationship
into one of an ordinary creditor and debtor. Moreover, the execution of the MOA precludes any criminal liability
on their part which may arise in case they violate any provision thereof.

The only issue for our determination is whether respondents can be held liable for violation of the Trust Receipts
Law.

Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any transaction by and between a
person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who
owns or holds absolute title or security interest 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 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. 18

Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust receipt to the
entruster or to return the goods, if they were not disposed of, shall constitute the crime of estafa under Article
315, par. 1(b) of the Revised Penal Code. If the violation or offense is committed by a corporation, the penalty
19 

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. It is on this premise that
20 

petitioner bank charged respondents with violation of the Trust Receipts Law. 1âwphi1

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
21 

money or goods to the prejudice of another regardless of whether the latter is the owner.  22

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
23 

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. 24

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,
25 

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

Nature of contract Trust Receipt Loan 26

Juridical relationship Trustor-Trustee Lender-Borrower

Status of obligation Matured Payable within 7 years 27

Governing law Criminal Civil & Commercial 28

Security offered Trust Receipts Real estate/chattel mortgages 29

 Interest rate per annum (Unspecified) 14% 30

Default charges 24% 14% 31

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

the obligation of the Lenders to reschedule the Existing Credits as contemplated hereby shall
automatically terminate on such date:

the Existing Agreements shall continue in full force and effect on the remaining loan balances
as if this Agreement had not been entered into;

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.

All told, we find no reversible error committed by the Court of Appeals in rendering the assailed Resolutions.

WHEREFORE, the petition is DENIED. The assailed Resolutions of the Court of Appeals dated January 9, 1998
and March 25, 1998 in CA-G.R. SP No. 42005 are hereby AFFIRMED.

SO ORDERED.

Land Bank of the Philippines v. Lamberto C. Perez, Nestor C. Kun, Ma. Estelita
Angeles-Panlilio, and Napoleon O. Garcia, G.R. No. 166884, June 13, 2012;

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. ESTELITA P. ANGELES-PANLILIO, and NAPOLEON O.
GARCIA, Respondents.

DECISION

BRION, J.:
Before this Court is a petition for review on certiorari, under Rule 45 of the Rules of Court, assailing the
1 

decision dated January 20, 2005 of the Court of Appeals in CA-G.R. SP No. 76588. In the assailed decision, the
2 

Court of Appeals dismissed the criminal complaint for estafa against the respondents, Lamberto C. Perez, Nestor
C. Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon Garcia, who allegedly violated Article 315, paragraph 1(b)
of the Revised Penal Code, in relation with Section 13 of Presidential Decree No. (P.D.) 115 – the "Trust
Receipts Law."

Petitioner Land Bank of the Philippines (LBP) is a government financial institution and the official depository of
the Philippines. Respondents are the officers and representatives of Asian Construction and Development
3 

Corporation (ACDC), a corporation incorporated under Philippine law and engaged in the construction business. 4

On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315, paragraph 1(b) of the Revised Penal
Code, in relation to P.D. 115, against the respondents before the City Prosecutor’s Office in Makati City. In the
affidavit-complaint of June 7, 1999, the LBP’s Account Officer for the Account Management Development, Edna
5 

L. Juan, stated that LBP extended a credit accommodation to ACDC through the execution of an Omnibus Credit
Line Agreement (Agreement) between LBP and ACDC on October 29, 1996. In various instances, ACDC used
6 

the Letters of Credit/Trust Receipts Facility of the Agreement to buy construction materials. The respondents, as
officers and representatives of ACDC, executed trust receipts in connection with the construction materials, with
7 

a total principal amount of ₱52,344,096.32. The trust receipts matured, but ACDC failed to return to LBP the
proceeds of the construction projects or the construction materials subject of the trust receipts. LBP sent ACDC a
demand letter, dated May 4, 1999, for the payment of its debts, including those under the Trust Receipts Facility
8 

in the amount of ₱66,425,924.39. When ACDC failed to comply with the demand letter, LBP filed the affidavit-
complaint.

The respondents filed a joint affidavit wherein they stated that they signed the trust receipt documents on or
9 

about the same time LBP and ACDC executed the loan documents; their signatures were required by LBP for
the release of the loans. The trust receipts in this case do not contain (1) a 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. 115. Moreover, they
alleged that ACDC acted as a subcontractor for government projects such as the Metro Rail Transit, the Clark
Centennial Exposition and the Quezon Power Plant in Mauban, Quezon. Its clients for the construction projects,
which were the general contractors of these projects, have not yet paid them; thus, ACDC had yet to receive the
proceeds of the materials that were the subject of the trust receipts and were allegedly used for these
constructions. As there were no proceeds received from these clients, no misappropriation thereof could have
taken place.

On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda issued a Resolution dismissing the
10 

complaint. He pointed out that the evidence presented by LBP failed to state the date when the goods described
in the letters of credit were actually released to the possession of the respondents. Section 4 of P.D. 115
requires that the goods covered by trust receipts be released to the possession of the entrustee after the latter’s
execution and delivery to the entruster of a signed trust receipt. He adds that LBP’s evidence also fails to show
the date when the trust receipts were executed since all the trust receipts are undated. Its dispositive portion
reads:

WHEREFORE, premises considered, and for insufficiency of evidence, it is respectfully recommended that the
instant complaints be dismissed, as upon approval, the same are hereby dismissed. 11

LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor denied in his order of January
7, 2000.12

On appeal, the Secretary of Justice reversed the Resolution of the Assistant City Prosecutor. In his resolution of
August 1, 2002, the Secretary of Justice pointed out that there was no question that the goods covered by the
13 

trust receipts were received by ACDC. He likewise adopted LBP’s argument that while the subjects of the trust
receipts were not mentioned in the trust receipts, they were listed in the letters of credit referred to in the trust
receipts. He also noted that the trust receipts contained maturity dates and clearly set out their stipulations. He
further rejected the respondents’ defense that ACDC failed to remit the payments to LBP due to the failure of the
clients of ACDC to pay them. The dispositive portion of the resolution reads:

WHEREFORE, the assailed resolution is REVERSED and SET ASIDE. The City Prosecutor of Makati City is
hereby directed to file an information for estafa under Art. 315 (1) (b) of the Revised Penal Code in relation to
Section 13, Presidential Decree No. 115 against respondents Lamberto C. Perez, Nestor C. Kun, [Ma. Estelita P.
Angeles-Panlilio] and Napoleon O. Garcia and to report the action taken within ten (10) days from receipt
hereof.14

The respondents filed a motion for reconsideration of the resolution dated August 1, 2002, which the Secretary of
Justice denied. He rejected the respondents’ submission that Colinares v. Court of Appeals does not apply to
15  16 

the case. He explained that in Colinares, the building materials were delivered to the accused before they
applied to the bank for a loan to pay for the merchandise; thus, the ownership of the merchandise had already
been transferred to the entrustees before the trust receipts agreements were entered into. In the present case,
the parties have already entered into the Agreement before the construction materials were delivered to ACDC.

Subsequently, the respondents filed a petition for review before the Court of Appeals.

After both parties submitted their respective Memoranda, the Court of Appeals promulgated the assailed decision
of January 20, 2005. Applying the doctrine in Colinares, it ruled that this case did not involve a trust receipt
17 

transaction, but a mere loan. It emphasized that construction materials, the subject of the trust receipt
transaction, were delivered to ACDC even before the trust receipts were executed. It noted that LBP did not offer
proof that the goods were received by ACDC, and that the trust receipts did not contain a description of the
goods, their invoice value, the amount of the draft to be paid, and their maturity dates. It also adopted ACDC’s
argument that since no payment for the construction projects had been received by ACDC, its officers could not
have been guilty of misappropriating any payment. The dispositive portion reads:

WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE COURSE. The assailed Resolutions of the
respondent Secretary of Justice dated August 1, 2002 and February 17, 2003, respectively in I.S. No. 99-F-9218-
28 are hereby REVERSED and SET ASIDE. 18

LBP now files this petition for review on certiorari, dated March 15, 2005, raising the following error:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND SET ASIDE THE RESOLUTIONS
OF THE HONORABLE SECRETARY OF JUSTICE BY APPLYING THE RULING IN THE CASE OF
COLINARES V. COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN THE CASE AT BAR. 19

On April 8, 2010, while the case was pending before this Court, the respondents filed a motion to dismiss. They
20 

informed the Court that LBP had already assigned to Philippine Opportunities for Growth and Income, Inc. all of
its rights, title and interests in the loans subject of this case in a Deed of Absolute Sale dated June 23, 2005
(attached as Annex "C" of the motion). The respondents also stated that Avent Holdings Corporation, in behalf of
ACDC, had already settled ACDC’s obligation to LBP on October 8, 2009. Included as Annex "A" in this motion
was a certification issued by the Philippine Opportunities for Growth and Income, Inc., stating that it was LBP’s
21 

successor-in-interest insofar as the trust receipts in this case are concerned and that Avent Holdings Corporation
had already settled the claims of LBP or obligations of ACDC arising from these trust receipts.

We deny this petition.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

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:
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[.]

There are two obligations in a trust receipt transaction. The first is covered by the provision that refers to money
under the obligation to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the
provision referring to merchandise received under the obligation to return it (devolvera) to the owner. Thus, under
the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of
22 

the sale of goods covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the goods
under trust, if they are not disposed of in accordance with the terms of the trust receipts. 23

In 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
24 

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
25 

spent for the purchase of the goods.

Article 1371 of the Civil Code provides that "[i]n order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered." Under this provision, we can examine
the contemporaneous actions of the parties rather than rely purely on the trust receipts that they signed in order
to understand the transaction through their intent.

We note in this regard that at the onset of these transactions, LBP knew that ACDC was in the construction
business and that the materials that it sought to buy under the letters of credit were to be used for the following
projects: the Metro Rail Transit Project and the Clark Centennial Exposition Project. LBP had in fact authorized
26 

the delivery of the materials on the construction sites for these projects, as seen in the letters of credit it attached
to its complaint. Clearly, they were aware of the fact that there was no way they could recover the buildings or
27 

constructions for which the materials subject of the alleged trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought the return of the construction materials, its demand
28 

letter dated May 4, 1999 sought the payment of the balance but failed to ask, as an alternative, for the return of
the construction materials or the buildings where these materials had been used. 29

The fact that LBP had knowingly authorized the delivery of construction materials to a construction site of two
government projects, as well as unspecified construction sites, repudiates the idea that LBP intended to be the
owner of those construction materials. As a government financial institution, LBP should have been aware that
the materials were to be used for the construction of an immovable property, as well as a property of the public
domain. As an immovable property, the ownership of whatever was constructed with those materials would
presumably belong to the owner of the land, under Article 445 of the Civil Code which provides:

Article 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made
thereon, belong to the owner of the land, subject to the provisions of the following articles.

Even if we consider the vague possibility that the materials, consisting of cement, bolts and reinforcing steel
bars, would be used for the construction of a movable property, the ownership of these properties would still
pertain to the government and not remain with the bank as they would be classified as property of the public
domain, which is defined by the Civil Code as:

Article 420. The following things are property of public dominion:

Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads, and others of similar character;

Those which belong to the State, without being for public use, and are intended for some public service
or for the development of the national wealth.
In contrast with the present situation, it is fundamental in a trust receipt transaction that the person who
advanced payment for the merchandise becomes the absolute owner of said merchandise and continues as
owner until he or she is paid in full, or if the goods had already been sold, the proceeds should be turned over to
him or to her.
30

Thus, in concluding that the transaction was a loan and not a trust receipt, we noted in Colinares that the industry
or line of work that the borrowers were engaged in was construction. We pointed out that the borrowers were not
importers acquiring goods for resale. Indeed, goods sold in retail are often within the custody or control of the
31 

trustee until they are purchased. In the case of materials used in the manufacture of finished products, these
finished products – if not the raw materials or their components – similarly remain in the possession of the
trustee until they are sold. But the goods and the materials that are used for a construction project are often
placed under the control and custody of the clients employing the contractor, who can only be compelled to
return the materials if they fail to pay the contractor and often only after the requisite legal proceedings. The
contractor’s difficulty and uncertainty in claiming these materials (or the buildings and structures which they
become part of), as soon as the bank demands them, disqualify them from being covered by trust receipt
agreements.

Based on these premises, we cannot consider the agreements between the parties in this case to be trust receipt
transactions because (1) from the start, the parties were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which they were used; and (2) from the moment the
materials were used for the government projects, they became public, not LBP’s, property.

Since these transactions are not trust receipts, an action for estafa should not be brought against the
respondents, who are liable only for a loan. In passing, it is useful to note that this is the threat held against
borrowers that Retired Justice Claudio Teehankee emphatically opposed in his dissent in People v.
Cuevo, restated in Ong v. CA, et al.:
32  33

The very definition of trust receipt x x x sustains the lower court’s rationale in dismissing the information that the
contract covered by a trust receipt is merely a secured loan. The goods imported by the small importer and retail
dealer through the bank’s financing remain of their own property and risk and the old capitalist orientation of
putting them in jail for estafa for non-payment of the secured loan (granted after they had been fully investigated
by the bank as good credit risks) through the fiction of the trust receipt device should no longer be permitted in
this day and age.

As the law stands today, violations of Trust Receipts Law are criminally punishable, but no criminal complaint for
violation of Article 315, paragraph 1(b) of the Revised Penal Code, in relation with P.D. 115, should prosper
against a borrower who was not part of a genuine trust receipt transaction.

Misappropriation or abuse of confidence is absent in this case.

Even if we assume that the transactions were trust receipts, the complaint against the respondents still should
have been dismissed. The Trust Receipts Law punishes 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 or not. The law does
not singularly seek to enforce payment of the loan, as "there can be no violation of [the] right against
imprisonment for non-payment of a debt." 34

In order that the respondents "may be validly prosecuted for estafa under Article 315, paragraph 1(b) of the
Revised Penal Code, in relation with Section 13 of the Trust Receipts Law, the following elements must be
35 

established: (a) they received the subject goods in trust or under the obligation to sell the same and to remit the
proceeds thereof to [the trustor], or to return the goods if not sold; (b) they misappropriated or converted the
goods and/or the proceeds of the sale; (c) they performed such acts with abuse of confidence to the damage and
prejudice of Metrobank; and (d) demand was made on them by [the trustor] for the remittance of the proceeds or
the return of the unsold goods."36

In this case, no dishonesty or abuse of confidence existed in the handling of the construction materials.

In this case, the misappropriation could be committed should the entrustee fail to turn over the proceeds of the
sale of the goods covered by the trust receipt transaction or fail to return the goods themselves. The respondents
could not have failed to return the proceeds since their allegations that the clients of ACDC had not paid for the
projects it had undertaken with them at the time the case was filed had never been questioned or denied by LBP.
What can only be attributed to the respondents would be the failure to return the goods subject of the trust
receipts.

We do not likewise see any allegation in the complaint that ACDC had used the construction materials in a
manner that LBP had not authorized. As earlier pointed out, LBP had authorized the delivery of these materials
to these project sites for which they were used. When it had done so, LBP should have been aware that it could
not possibly recover the processed materials as they would become part of government projects, two of which
(the Metro Rail Transit Project and the Quezon Power Plant Project) had even become part of the operations of
public utilities vital to public service. It clearly had no intention of getting these materials back; if it had, as a
primary government lending institution, it would be guilty of extreme negligence and incompetence in not
foreseeing the legal complications and public inconvenience that would arise should it decide to claim the
materials. ACDC’s failure to return these materials or their end product at the time these "trust receipts" expired
could not be attributed to its volition. No bad faith, malice, negligence or breach of contract has been attributed to
ACDC, its officers or representatives. Therefore, absent any abuse of confidence or misappropriation on the part
of the respondents, the criminal proceedings against them for estafa should not prosper.

In Metropolitan Bank, we affirmed the city prosecutor’s dismissal of a complaint for violation of the Trust
37 

Receipts Law. In dismissing the complaint, we took note of the Court of Appeals’ finding that the bank was
interested only in collecting its money and not in the return of the goods. Apart from the bare allegation that
demand was made for the return of the goods (raw materials that were manufactured into textiles), the bank had
not accompanied its complaint with a demand letter. In addition, there was no evidence offered that the
respondents therein had misappropriated or misused the goods in question.

The petition should be dismissed because the OSG did not file it and the civil liabilities have already been
settled.

The proceedings before us, regarding the criminal aspect of this case, should be dismissed as it does not appear
from the records that the complaint was filed with the participation or consent of the Office of the Solicitor
General (OSG). Section 35, Chapter 12, Title III, Book IV of the Administrative Code of 1987 provides that:

Section 35. Powers and Functions. — The Office of the Solicitor General shall represent the Government of the
Philippines, its agencies and instrumentalities and its officials and agents in any litigation, proceedings,
investigation or matter requiring the services of lawyers. x x x It shall have the following specific powers and
functions:

Represent the Government in the Supreme Court and the Court of Appeals in all
criminal proceedings; represent the Government and its officers in the Supreme
Court, the Court of Appeals and all other courts or tribunals in all civil actions and
special proceedings in which the Government or any officer thereof in his official
capacity is a party. (Emphasis provided.)

In Heirs of Federico C. Delgado v. Gonzalez, we ruled that the preliminary investigation is part of a criminal
38 

proceeding. As all criminal proceedings before the Supreme Court and the Court of Appeals may be brought and
defended by only the Solicitor General in behalf of the Republic of the Philippines, a criminal action brought to us
by a private party alone suffers from a fatal defect. The present petition was brought in behalf of LBP by the
Government Corporate Counsel to protect its private interests. Since the representative of the "People of the
Philippines" had not taken any part of the case, it should be dismissed. 1âwphi1

On the other hand, if we look at the mandate given to the Office of the Government Corporate Counsel, we find
that it is limited to the civil liabilities arising from the crime, and is subject to the control and supervision of the
public prosecutor. Section 2, Rule 8 of the Rules Governing the Exercise by the Office of the Government
Corporate Counsel of its Authority, Duties and Powers as Principal Law Office of All Government Owned or
Controlled Corporations, filed before the Office of the National Administration Register on September 5, 2011,
reads:

Section 2. Extent of legal assistance – The OGCC shall represent the complaining GOCC in all stages of the
criminal proceedings. The legal assistance extended is not limited to the preparation of appropriate sworn
statements but shall include all aspects of an effective private prosecution including recovery of civil liability
arising from the crime, subject to the control and supervision of the public prosecutor.

Based on jurisprudence, there are two exceptions when a private party complainant or offended party in a
criminal case may file a petition with this Court, without the intervention of the OSG: (1) when there is denial of
due process of law to the prosecution, and the State or its agents refuse to act on the case to the prejudice of the
State and the private offended party; and (2) when the private offended party questions the civil aspect of a
39 

decision of the lower court.40

In this petition, LBP fails to allege any inaction or refusal to act on the part of the OSG, tantamount to a denial of
due process. No explanation appears as to why the OSG was not a party to the case. Neither can LBP now
question the civil aspect of this decision as it had already assigned ACDC’s debts to a third person, Philippine
Opportunities for Growth and Income, Inc., and the civil liabilities appear to have already been settled by Avent
Holdings Corporation, in behalf of ACDC. These facts have not been disputed by LBP. Therefore, we can
reasonably conclude that LBP no longer has any claims against ACDC, as regards the subject matter of this
case, that would entitle it to file a civil or criminal action.

WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005 decision of the Court of Appeals in CA-
G.R. SP No. 76588. No costs.

SO ORDERED.

Hur Tin Yang v. People of the Philippines, 14 August 2013

G.R. No. 195117, August 14, 2013

HUR TIN YANG, Petitioner, v.  PEOPLE OF THE PHILIPPINES, Respondent.

RESOLUTION

VELASCO JR., J.:

This is a motion for reconsideration of our February 1, 2012 Minute Resolution1 sustaining the July
28, 2010 Decision2 and December 20, 2010 Resolution3 of the Court of Appeals (CA) in CA-G.R. CR
No. 30426, finding petitioner Hur Tin Yang guilty beyond reasonable doubt of the crime
of Estafa under A11icle 315, paragraph 1 (b) of the Revised Penal Code (RPC) in relation to
Presidential Decree No. 115 (PD 115) or the Trust Receipts Law.

In twenty-four (24) consolidated Informations, all dated March 15, 2002, petitioner Hur Tin Yang
was charged at the instance of the same complainant with the crime of Estafa under Article 315,
par. 1(b) of the RPC,4 in relation to PD 115,5 docketed as Criminal Case Nos. 04-223911 to 34 and
raffled to the Regional Trial Court of Manila, Branch 20. The 24 Informations––differing only as
regards the alleged date of commission of the crime, date of the trust receipts, the number of the
letter of credit, the subject goods and the amount––uniformly recite:
That on or about May 28, 1998, in the City of Manila, Philippines, the said accused being then the
authorized officer of SUPERMAX PHILIPPINES, INC., with office address at No. 11/F, Global
Tower, Gen Mascardo corner M. Reyes St., Bangkal, Makati City, did then and there willfully,
unlawfully and feloniously defraud the METROPOLITAN BANK AND TRUST COMPANY
(METROBANK), a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, represented by its Officer in Charge, WINNIE M. VILLANUEVA, in
the following manner, to wit: the said accused received in trust from the said Metropolitan Bank
and Trust Company reinforcing bars valued at P1,062,918.84 specified in the undated Trust
Receipt Agreement covered by Letter of Credit No. MG-LOC 216/98 for the purpose of holding said
merchandise/goods in trust, with obligation on the part of the accused to turn over the proceeds
of the sale thereof or if unsold, to return the goods to the said bank within the specified period
agreed upon, but herein accused once in possession of the said merchandise/goods, far from
complying with his aforesaid obligation, failed and refused and still fails and refuses to do so
despite repeated demands made upon him to that effect and with intent to defraud and with grave
abuse of confidence and trust, misappropriated, misapplied and converted the said
merchandise/goods or the value thereof to his own personal use and benefit, to the damage and
prejudice of said METROPOLITAN BANK AND TRUST COMPANY in the aforesaid amount of
P1,062,918.84, Philippine Currency.

Contrary to law.6 cralaw virtualaw library

Upon arraignment, petitioner pleaded “not guilty.” Thereafter, trial on the merits then ensued.

The facts of these consolidated cases are undisputed: cralawlibrary

Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the construction

business. On various occasions in the month of April, May, July, August, September, October and
November 1998, Metropolitan Bank and Trust Company (Metrobank), Magdalena Branch, Manila,
extended several commercial letters of credit (LCs) to Supermax. These commercial LCs were
used by Supermax to pay for the delivery of several construction materials which will be used in
their construction business. Thereafter, Metrobank required petitioner, as representative and Vice-
President for Internal Affairs of Supermax, to sign twenty-four (24) trust receipts as security for
the construction materials and to hold those materials or the proceeds of the sales in trust for
Metrobank to the extent of the amount stated in the trust receipts.

When the 24 trust receipts fell due and despite the receipt of a demand letter dated August 15,
2000, Supermax failed to pay or deliver the goods or proceeds to Metrobank. Instead, Supermax,
through petitioner, requested the restructuring of the loan. When the intended restructuring of the
loan did not materialize, Metrobank sent another demand letter dated October 11, 2001. As the
demands fell on deaf ears, Metrobank, through its representative, Winnie M. Villanueva, filed the
instant criminal complaints against petitioner.

For his defense, while admitting signing the trust receipts, petitioner argued that said trust
receipts were demanded by Metrobank as additional security for the loans extended to Supermax
for the purchase of construction equipment and materials. In support of this argument, petitioner
presented as witness, Priscila Alfonso, who testified that the construction materials covered by the
trust receipts were delivered way before petitioner signed the corresponding trust
receipts.7 Further, petitioner argued that Metrobank knew all along that the construction materials
subject of the trust receipts were not intended for resale but for personal use of Supermax relating
to its construction business.8 cralaw virtualaw library

The trial court a quo, by Judgment dated October 6, 2006, found petitioner guilty as charged and
sentenced him as follows:
His guilt having been proven and established beyond reasonable doubt, the Court hereby renders
judgment CONVICTING accused HUR TIN YANG of the crime of estafa under Article 315 paragraph
1 (a) of the Revised Penal Code and hereby imposes upon him the indeterminate penalty of 4
years, 2 months and 1 day of prision correccional to 20 years of reclusion temporal and to pay
Metropolitan Bank and Trust Company, Inc. the amount of Php13,156,256.51 as civil liability and
to pay cost.

SO ORDERED.9 cralaw virtualaw library

Petitioner appealed to the CA. On July 28, 2010, the appellate court rendered a Decision,
upholding the findings of the RTC that the prosecution has satisfactorily established the guilt of
petitioner beyond reasonable doubt, including the following critical facts, to wit: (1) petitioner
signing the trust receipts agreement; (2) Supermax failing to pay the loan; and (3) Supermax
failing to turn over the proceeds of the sale or the goods to Metrobank upon demand. Curiously,
but significantly, the CA also found that even before the execution of the trust receipts, Metrobank
knew or should have known that the subject construction materials were never intended for resale
or for the manufacture of items to be sold.10 cralaw virtualaw library
The CA ruled that since the offense punished under PD 115 is in the nature of malum prohibitum,
a mere failure to deliver the proceeds of the sale or goods, if not sold, is sufficient to justify a
conviction under PD 115. The fallo of the CA Decision reads:
WHEREFORE, in view of the foregoing premises, the appeal filed in this case is
hereby DENIED and, consequently, DISMISSED. The assailed Decision dated October 6, 2006 of
the Rregional Trial Court, Branch 20, in the City of Manila in Criminal Cases Nos. 04223911 to
223934 is hereby AFFIRMED.

SO ORDERED.
Petitioner filed a Motion for Reconsideration, but it was denied in a Resolution dated December 20,
2010. Not satisfied, petitioner filed a petition for review under Rule 45 of the Rules of Court. The
Office of the Solicitor General (OSG) filed its Comment dated November 28, 2011, stressing that
the pieces of evidence adduced from the testimony and documents submitted before the trial
court are sufficient to establish the guilt of petitioner.11
cralaw virtualaw library

On February 1, 2012, this Court dismissed the Petition via a Minute Resolution on the ground that
the CA committed no reversible error in the assailed July 28, 2010 Decision. Hence, petitioner filed
the present Motion for Reconsideration contending that the transactions between the parties do
not constitute trust receipt agreements but rather of simple loans.

On October 3, 2012, the OSG filed its Comment on the Motion for Reconsideration, praying for the
denial of said motion and arguing that petitioner merely reiterated his arguments in the petition
and his Motion for Reconsideration is nothing more than a mere rehash of the matters already
thoroughly passed upon by the RTC, the CA and this Court. 12 cralaw virtualaw library

The sole issue for the consideration of the Court is whether or not petitioner is liable
for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115, even if it was sufficiently
proved that the entruster (Metrobank) knew beforehand that the goods (construction materials)
subject of the trust receipts were never intended to be sold but only for use in the entrustee’s
construction business.

The motion for reconsideration has merit.

In determining the nature of a contract, courts are not bound by the title or name given by the
parties. The decisive factor in evaluating such agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract but by their conduct, words, actions and
deeds prior to, during and immediately after executing the agreement. As such, therefore,
documentary and parol evidence may be submitted and admitted to prove such intention. 13 cralaw virtualaw library

In the instant case, the factual findings of the trial and appellate courts reveal that the dealing
between petitioner and Metrobank was not a trust receipt transaction but one of simple
loan. Petitioner’s admission––that he signed the trust receipts on behalf of Supermax, which
failed to pay the loan or turn over the proceeds of the sale or the goods to Metrobank upon
demand––does not conclusively prove that the transaction was, indeed, a trust receipts
transaction. In contrast to the nomenclature of the transaction, the parties really intended a
contract of loan. This Court––in Ng v. People14 and Land Bank of the Philippines v. Perez,15 cases
which are in all four corners the same as the instant case––ruled that the fact that the entruster
bank knew even before the execution of the trust receipt agreements that the construction
materials covered were never intended by the entrustee for resale or for the manufacture of items
to be sold is sufficient to prove that the transaction was a simple loan and not a trust receipts
transaction.

The petitioner was charged with Estafa committed in what is called, under PD 115, a “trust receipt
transaction,” which is defined as:
Section 4. What constitutes a trust receipts 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: cralawlibrary

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 full with his obligation under the trust receipt; or (c) to load,
unload, ship or transship 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.
Simply stated, 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. There are, therefore, 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, while the second refers to the merchandise received under the obligation
to “return” it (devolvera) to the owner.16 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,
viz:
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 fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. x x x (Emphasis supplied.)
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.17 cralaw virtualaw library

In Ng v. People, Anthony Ng, then engaged in the business of building and fabricating
telecommunication towers, applied for a credit line of PhP 3,000,000 with Asiatrust Development
Bank, Inc. Prior to the approval of the loan, Anthony Ng informed Asiatrust that the proceeds
would be used for purchasing construction materials necessary for the completion of several steel
towers he was commissioned to build by several telecommunication companies. Asiatrust
approved the loan but required Anthony Ng to sign a trust receipt agreement. When Anthony Ng
failed to pay the loan, Asiatrust filed a criminal case for Estafa in relation to PD 115 or the Trust
Receipts Law. This Court acquitted Anthony Ng and ruled that the Trust Receipts Law was created
to “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.” Since Asiatrust knew that Anthony Ng was neither an importer nor
retail dealer, it should have known that the said agreement could not possibly apply to petitioner,
viz:
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. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of “financing importations or
financing sales.” The principle is of course not limited in its application to financing importations,
since the principle is equally applicable to domestic transactions. 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.

Following the precept of the law, such transactions affect situations wherein the entruster, who
owns or holds absolute title or security interests over specified goods, documents or instruments,
releases the subject goods to the possession of the entrustee. The release of such goods to the
entrustee is conditioned upon his execution and delivery to the entruster of a trust receipt wherein
the former binds himself to hold the specific 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 to the extent of the amount owing to the
entruster or the goods, documents or instruments themselves if they are unsold. x x x [T]he
entruster is entitled “only to the proceeds derived from the sale of goods released under a trust
receipt to the entrustee.”

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.

x x x x

To emphasize, the Trust Receipts Law was created to “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.” Since Asiatrust
knew that petitioner was neither an importer nor retail dealer, it should have known
that the said agreement could not possibly apply to petitioner. 18 cralaw virtualaw library

Further, in Land Bank of the Philippines v. Perez, the respondents were officers of Asian
Construction and Development Corporation (ACDC), a corporation engaged in the construction
business. On several occasions, respondents executed in favor of Land Bank of the Philippines
(LBP) trust receipts to secure the purchase of construction materials that they will need in their
construction projects. When the trust receipts matured, ACDC failed to return to LBP the proceeds
of the construction projects or the construction materials subject of the trust receipts. After
several demands went unheeded, LBP filed a complaint for Estafa or violation of Art. 315, par.
1(b) of the RPC, in relation to PD 115, against the respondent officers of ACDC. This Court, like in
Ng, acquitted all the respondents on the postulate that the parties really intended a simple
contract of loan and not a trust receipts transaction, viz:
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.

xxxx

Thus, in concluding that the transaction was a loan and not a trust receipt, we noted
in Colinares that the industry or line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not importers acquiring goods for
resale. Indeed, goods sold in retail are often within the custody or control of the trustee until they
are purchased. In the case of materials used in the manufacture of finished products, these
finished products – if not the raw materials or their components – similarly remain in the
possession of the trustee until they are sold. But the goods and the materials that are used for a
construction project are often placed under the control and custody of the clients employing the
contractor, who can only be compelled to return the materials if they fail to pay the contractor and
often only after the requisite legal proceedings. The contractor’s difficulty and uncertainty in
claiming these materials (or the buildings and structures which they become part of), as
soon as the bank demands them, disqualify them from being covered by trust receipt
agreements.19 cralaw virtualaw library

Since the factual milieu of Ng and Land Bank of the Philippines are in all four corners similar to the
instant case, it behooves this Court, following the principle of stare decisis,20 to rule that the
transactions in the instant case are not trust receipts transactions but contracts of simple loan.
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.

For reasons discussed above, the subject transactions in the instant case are not trust receipts
transactions. Thus, the consolidated complaints for Estafa in relation to PD 115 have really no leg
to stand on.

The Court’s ruling in Colinares v. Court of Appeals21 is very apt, thus:

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and
place them under the threats of criminal prosecution should they be unable to pay it may be
unjust and inequitable. if not reprehensible. Such agreements are contracts of adhesion which
borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme
leaves poor and hapless borrowers at the mercy of banks and is prone to misinterpretation x x x.
Unfortunately, what happened in Colinares is exactly the situation in the instant case. This
reprehensible bank practice described in Colinares should be stopped and discouraged. For this
Court to give life to the constitutional provision of non-imprisonment for nonpayment of debts,22 it
is imperative that petitioner be acquitted of the crime of Estafa under Art. 315, par. 1 (b) ofthe
RPC, in relation to PD 115.

WHEREFORE, the Resolution dated February 1, 2012, upholding theCA's Decision dated July 28,
2010 and Resolution dated December 20, 2010 in CA-G.R. CR No. 30426, is
hereby RECONSIDERED. Petitioner Hur Tin Yang is ACQUITTED of the charge of violating Art.
315, par. 1 (b) of the RPC, in relation to the pertinent provision of PD 115 in Criminal Case Nos.
04-223911 to 34.

SO ORDERED.