Prudential Bank vs.
Intermediate Appellate Court court to reverse or modify the decision, petitioner
G.R. No. 74886 (1992)
Facts:
1. On August 8, 1962, defendant-appellant
Philippine Rayon Mills, Inc. entered into a
contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-
year deferred payment plan.
2. To effect payment for said machineries, the
defendant-appellant applied for a commercial
letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of
Credit No. DPP-63762 for $128,548.78.
3. Against this letter of credit, drafts were drawn and
issued by Nissho, which were all paid by the
Prudential Bank through its correspondent in
Japan, the Bank of Tokyo, Ltd. As indicated on
their faces, two of these drafts were accepted by
the defendant-appellant through its president,
Anacleto R. Chi, while the others were not.
4. Upon the arrival of the machineries, the
Prudential Bank indorsed the shipping
documents to the defendant-appellant which
accepted delivery of the same. To enable the
defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement
with the Prudential Bank, a trust receipt which
was signed by Anacleto R. Chi in his capacity as
President of defendant-appellant company.
5. At the back of the trust receipt is a printed form to
be accomplished by two sureties who, by the very
terms and conditions thereof, were to be jointly
and severally liable to the Prudential Bank should
the defendant-appellant fail to pay the total
amount or any portion of the drafts issued by
Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of
the textile machineries and installed the same at
its factory site.
6. Sometime in 1967, the defendant-appellant
ceased business operation. On December 29,
1969, defendant-appellant's factory was leased
by Yupangco Cotton Mills for an annual rental of
P200,000.00. The lease was renewed on January
3, 1973. On January 5, 1974, all the textile
machineries in the defendant-appellant's factory
were sold to AIC Development Corporation for
P300,000.00.
7. The obligation of the defendant-appellant arising
from the letter of credit and the trust receipt
remained unpaid and unliquidated. Repeated
formal demands for the payment of the said trust
receipt yielded no result.
8. Hence, the present action for the collection of the
principal amount of P956,384.95 was filed on
October 3, 1974 against the defendant-appellant
and Anacleto R. Chi. In their respective answers,
the defendants interposed identical special
defenses, viz., the complaint states no cause of
action; if there is, the same has prescribed; and
the plaintiff is guilty of laches.
9. Trial court sentenced the defendant Philippine
Rayon Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due, with interest at
6% per annum beginning September 15, 1974
until fully paid. Insofar as the amounts involved,
the same not having been accepted by defendant
Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the
instant case is premature. Insofar as defendant
Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant
Anacleto R. Chi the sum of P20,000.00 as
attorney's fees. With costs against defendant
Philippine Rayon Mills, Inc.
10. Petitioner appealed the decision to the then
Intermediate Appellate Court. In urging the said
alleged in its Brief that the trial court erred in (a)
disregarding its right to reimbursement from the
private respondents for the entire unpaid balance
of the imported machines, the total amount of
which was paid to the Nissho Company Ltd.,
thereby violating the principle of the third party
payor's right to reimbursement provided for in the
second paragraph of Article 1236 of the Civil
Code and under the rule against unjust
enrichment; (b) refusing to hold Anacleto R. Chi,
as the responsible officer of defendant
corporation, liable under Section 13 of P.D No
115 for the entire unpaid balance of the imported
machines covered by the bank's trust receipt; (c)
finding that the solidary guaranty clause signed
by Anacleto R. Chi is not a guaranty at all; (d)
controverting the judicial admissions of Anacleto
R. Chi that he is at least a simple guarantor of the
said trust receipt obligation; (e) contravening,
based on the assumption that Chi is a simple
guarantor, Articles 2059, 2060 and 2062 of the
Civil Code and the related evidence and
jurisprudence which provide that such liability had
already attached; (f) contravening the judicial
admissions of Philippine Rayon with respect to its
liability to pay the petitioner the amounts involved
in the drafts; and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon before
the latter could be held liable thereon.
11. As to the first and last assigned errors, RTC ruled
that the provision on unjust enrichment, Article
2142 of the Civil Code, applies only if there is no
express contract between the parties and there is
a clear showing that the payment is justified. In
the instant case, the relationship existing
between the petitioner and Philippine Rayon is
governed by specific contracts, namely the
application for letters of credit, the promissory
note, the drafts and the trust receipt. With respect
to the last ten (10) drafts which had not been
presented to and were not accepted by Philippine
Rayon, petitioner was not justified in unilaterally
paying the amounts stated therein. The public
respondent did not agree with the petitioner's
claim that the drafts were sight drafts which did
not require presentment for acceptance to
Philippine Rayon because paragraph 8 of the
trust receipt presupposes prior acceptance of the
drafts. Since the ten (10) drafts were not
presented and accepted, no valid demand for
payment can be made.
12. Public respondent also disagreed with the
petitioner's contention that private respondent
Chi is solidarily liable with Philippine Rayon
pursuant to Section 13 of P.D. No. 115 and based
on his signature on the solidary guaranty clause
at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the
civil liability provided for in said Section 13
attaches only after conviction. As to the second,
it expressed misgivings as to whether Chi's
signature on the trust receipt made the latter
automatically liable thereon because the so-
called solidary guaranty clause at the dorsal
portion of the trust receipt is to be signed not by
one (1) person alone, but by two (2) persons; the
last sentence of the same is incomplete and
unsigned by witnesses; and it is not
acknowledged before a notary public. Besides,
even granting that it was executed and
acknowledged before a notary public, Chi cannot
be held liable therefor because the records fail to
show that petitioner had either exhausted the
properties of Philippine Rayon or had resorted to
all legal remedies as required in Article 2058 of
the Civil Code. As provided for under Articles
2052 and 2054 of the Civil Code, the obligation of
a guarantor is merely accessory and subsidiary,
respectively. Chi's liability would therefore arise
 only when the principal debtor fails to comply with
his obligation.
13. Both the trial court and the public respondent
ruled that Philippine Rayon could be held liable
for the two (2) drafts because only these appear
to have been accepted by the latter after due
presentment. The liability for the remaining ten
(10) drafts did not arise because the same were
not presented for acceptance. In short, both
courts concluded that acceptance of the drafts by
Philippine Rayon was indispensable to make the
latter liable thereon.
Issues/s:
1. Whether presentment
for acceptance of the
drafts was indispensable
to make Philippine
Rayon liable thereon;
2. Whether Philippine
Rayon is liable on the
basis of the trust receipt;
3. Whether private
respondent Chi is jointly
and severally liable with
Philippine Rayon for the
obligation sought to be
enforced and if not,
whether he may be
considered a guarantor;
in the latter situation,
whether the case should
have been dismissed on
the ground of lack of
cause of action as there
was no prior exhaustion
of Philippine Rayon's
properties.
Ruling:
1. No. The Court is unable to agree with this
proposition. The transaction in the case at bar
stemmed from Philippine Rayon's application for
a commercial letter of credit with the petitioner in
the amount of $128,548.78 to cover the former's
contract to purchase and import loom and textile
machinery from Nissho Company, Ltd. of Japan
under a five-year deferred payment plan.
Petitioner approved the application. As correctly
ruled by the trial court in its Order of 6 March
1975: . . . By virtue of said Application and
Agreement for Commercial Letter of Credit,
plaintiff bank was under obligation to pay through
its correspondent bank in Japan the drafts that
Nisso Company, Ltd., periodically drew against
said letter of credit from 1963 to 1968, pursuant
to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine
Rayon Mills, Inc., was obligated to pay plaintiff
bank the amounts of the drafts drawn by Nisso
Company, Ltd. against said plaintiff bank together
with any accruing commercial charges, interest,
etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of
Commercial Letter of Credit.
A letter of credit is defined as an engagement by
a bank or other person made at the request of a customer
that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in
the credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for one of its customers
who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. In the instant
case then, the drawee was necessarily the herein
petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the
cases expressly provided for in Section 143 of the
Negotiable Instruments Law (NIL). The said section
reads: Sec. 143. When presentment for acceptance must
be made. — Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other
case, where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary
in order to render any party to the bill liable.
Obviously then, sight drafts do not require
presentment for acceptance. The acceptance of a bill is
the signification by the drawee of his assent to the order
of the drawer; this may be done in writing by the drawee
in the bill itself, or in a separate instrument. The parties
herein agree, and the trial court explicitly ruled, that the
subject, drafts are sight drafts. Corollarily, they are,
pursuant to Section 7 of the NIL, payable on demand.
Section 7 provides:
Sec. 7. When payable on demand. — An
instrument is payable on demand —
(a)
When
so it is
express
ed to be
payable
on
demand
, or at
sight, or
on
present
ation; or
(b) In
which
no time
for
paymen
t in
express
ed.
Where an instrument is issued, accepted,
or indorsed when overdue, it is, as
regards the person so issuing, accepting,
or indorsing it, payable on demand.
Paragraph 8 of the Trust Receipt which reads:
"My/our liability for payment at maturity of any accepted
draft, bill of exchange or indebtedness shall not be
extinguished or modified" does not, contrary to the
holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner.
Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued
were sight drafts And even if these were not sight drafts,
thereby necessitating acceptance, it would be the
petitioner — and not Philippine Rayon — which had to
accept the same for the latter was not the drawee.
Presentment for acceptance is defined an the production
of a bill of exchange to a drawee for acceptance. The trial
court and the public respondent, therefore, erred in ruling
that presentment for acceptance was an indispensable
requisite for Philippine Rayon's liability on the drafts to
attach. Contrary to both courts' pronouncements,
Philippine Rayon immediately became liable thereon
upon petitioner's payment thereof. Such is the essence of
the letter of credit issued by the petitioner. A different
conclusion would violate the principle upon which
commercial letters of credit are founded because in such
a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be
placed at the mercy of Philippine Rayon even if the latter
had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank
and Trust Co. vs. J. Aron & Co., Inc., thus: Commercial
letters of credit have come into general use in
international sales transactions where much time
necessarily elapses between the sale and the receipt by
a purchaser of the merchandise, during which interval
great price changes may occur. Buyers and sellers
struggle for the advantage of position. The seller is
desirous of being paid as surely and as soon as possible,
realizing that the vendee at a distant point has it in his
power to reject on trivial grounds merchandise on arrival,
and cause considerable hardship to the shipper. Letters
of credit meet this condition by affording celerity and
certainty of payment. Their purpose is to insure to a seller
payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has
nothing to do with the quality of the merchandise.
Disputes as to the merchandise shipped may arise and
be litigated later between vendor and vendee, but they
may not impede acceptance of drafts and payment by the
issuing bank when the proper documents are presented.
2. Yes. The trial court and the public respondent
likewise erred in disregarding the trust receipt and
in not holding that Philippine Rayon was liable
thereon. In People vs. Yu Chai Ho, this Court
explains the nature of a trust receipt by quoting In
re Dunlap Carpet Co., thus: By this arrangement
a banker advances money to an intending
importer, and thereby lends the aid of capital, of
credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by
any other means, and therefore it is of the first
importance that the fundamental factor in the
transaction, the banker's advance of money and
credit, should receive the amplest protection.
Accordingly, in order to secure that the banker
shall be repaid at the critical point — that is, when
the imported goods finally reach the hands of the
intended vendee — the banker takes the full title
to the goods at the very beginning; he takes it as
soon as the goods are bought and settled for by
his payments or acceptances in the foreign
country, and he continues to hold that title as his
indispensable security until the goods are sold in
the United States and the vendee is called upon
to pay for them. This security is not an ordinary
pledge by the importer to the banker, for the
importer has never owned the goods, and
moreover he is not able to deliver the possession;
but the security is the complete title vested
originally in the bankers, and this characteristic of
the transaction has again and again been
recognized and protected by the courts. Of
course, the title is at bottom a security title, as it
has sometimes been called, and the banker is
always under the obligation to reconvey; but only
after his advances have been fully repaid and
after the importer has fulfilled the other terms of
the contract.
As further stated in National Bank vs. Viuda e
Hijos de Angel Jose, trust receipts: In a certain manner, .
. . partake of the nature of a conditional sale as provided
by the Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported merchandise as
soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner thereof
or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been
sold, the proceeds of the sale should be turned over to
him by the importer or by his representative or successor
in interest.
Under P.D. No. 115, otherwise known an the
Trust Receipts Law, which took effect on 29 January
1973, a trust receipt transaction is defined 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 the "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, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and
conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the
following: . . ."
It is alleged in the complaint that private
respondents "not only have presumably put said
machinery to good use and have profited by its operation
and/or disposition but very recent information that
reached plaintiff bank that defendants already sold the
machinery covered by the trust receipt to Yupangco
Cotton Mills," and that "as trustees of the property covered
by the trust receipt, . . . and therefore acting in fiduciary
capacity, defendants have willfully violated their duty to
account for the whereabouts of the machinery covered by
the trust receipt or for the proceeds of any lease, sale or
other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any
money realized from the lease, sale, and other disposition
of said machinery." While there is no specific prayer for
the delivery to the petitioner by Philippine Rayon of the
proceeds of the sale of the machinery covered by the trust
receipt, such relief is covered by the general prayer for
"such further and other relief as may be just and equitable
on the premises." And although it is true that the
petitioner commenced a criminal action for the violation of
the Trust Receipts Law, no legal obstacle prevented it
from enforcing the civil liability arising out of the trust,
receipt in a separate civil action. Under Section 13 of the
Trust Receipts Law, the failure of an entrustee to turn over
the proceeds of the sale of goods, documents or
instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appear 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 315,
paragraph 1(b) of the Revised Penal Code. Under Article
33 of the Civil Code, a civil action for damages, entirely
separate and distinct from the criminal action, may be
brought by the injured party in cases of defamation, fraud
and physical injuries. Estafa falls under fraud.
3. No. The Court concludes that private respondent
Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine
Rayon. The trial court based the dismissal, and
the respondent Court its affirmance thereof, on
the theory that Chi is not liable on the trust receipt
in any capacity — either as surety or as guarantor
— because his signature at the dorsal portion
thereof was useless; and even if he could be
bound by such signature as a simple guarantor,
 he cannot, pursuant to Article 2058 of the Civil
Code, be compelled to pay until after petitioner
has exhausted and resorted to all legal remedies
against the principal debtor, Philippine Rayon.
The records fail to show that petitioner had done
so. Reliance is thus placed on Article 2058 of the
Civil Code which provides:
Art. 2056. The guarantor cannot be
compelled to pay the creditor unless the
latter has exhausted all the property of
the debtor, and has resorted to all the
legal remedies against the debtor.
Simply stated, there is as yet no cause of action
against Chi.
Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern
Motors, Inc. vs. Barbosa, this Court stated:
4. Although an ordinary personal
guarantor — not a mortgagor or pledgor
— may demand the aforementioned
exhaustion, the creditor may, prior
thereto, secure a judgment against said
guarantor, who shall be entitled,
however, to a deferment of the execution
of said judgment against him until after
the properties of the principal debtor shall
have been exhausted to satisfy the
obligation involved in the case.
However, Chi's liability is limited to the principal
obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter,
he shall only be liable for those costs incurred after being
judicially required to pay. Interest and damages, being
accessories of the principal obligation, should also be
paid; these, however, shall run only from the date of the
filing of the complaint. Attorney's fees may even be
allowed in appropriate cases. In the instant case, the
attorney's fees to be paid by Chi cannot be the same as
that to be paid by Philippine Rayon since it is only the trust
receipt that is covered by the guaranty and not the full
extent of the latter's liability. All things considered, he can
be held liable for the sum of P10,000.00 as attorney's fees
in favor of the petitioner. Thus, the trial court committed
grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner
to pay him P20,000.00 as attorney's fees.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE
AND JANE DOE, respondents.
Facts:
1. On 05 March 1981, petitioner Bank of America,
NT & SA, Manila, received by registered mail an
Irrevocable Letter of Credit No. 20272/81
purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General
Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic
ropes and "agricultural files," with the petitioner as
advising bank and private respondent Inter-Resin
Industrial Corporation as beneficiary.
2. On 11 March 1981, Bank of America wrote Inter-
Resin informing the latter of the foregoing and
transmitting, along with the bank's
communication, the latter of credit. Upon receipt
of the letter-advice with the letter of credit, Inter-
Resin sent Atty. Emiliano Tanay to Bank of
America to have the letter of credit confirmed. The
bank did not. Reynaldo Dueñas, bank employee
in charge of letters of credit, however, explained
to Atty. Tanay that there was no need for
confirmation because the letter of credit would not
have been transmitted if it were not genuine.
3. Between 26 March to 10 April 1981, Inter-Resin
sought to make a partial availment under the
letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales
of polyethylene rope to General Chemicals
valued at US$1,320,600.00, the corresponding
packing list, export declaration and bill of lading.
Finally, after being satisfied that Inter-Resin's
documents conformed with the conditions
expressed in the letter of credit, Bank of America
issued in favor of Inter-Resin a Cashier's Check
for P10,219,093.20, "the Peso equivalent of the
draft (for) US$1,320,600.00 drawn by Inter-Resin,
after deducting the costs for documentary
stamps, postage and mail issuance." 1 The check
was picked up by Inter-Resin's Executive Vice-
President Barcelina Tio. On 10 April 1981, Bank
of America wrote Bank of Ayudhya advising the
latter of the availment under the letter of credit
and sought the corresponding reimbursement
therefor.
4. Meanwhile, Inter-Resin, through Ms. Tio,
presented to Bank of America the documents for
the second availment under the same letter of
credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set,
evidencing the second shipment of goods.
Immediately upon receipt of a telex from the Bank
of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the
authenticity of the letter of credit. 3 Bank of
America kept Inter-Resin informed of the
developments. Sensing a fraud, Bank of America
sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of
the Philippine Embassy at Bangkok, as well as
the police and customs personnel of Thailand, the
NBI agents, who were sent to Thailand,
discovered that the vans exported by Inter-Resin
did not contain ropes but plastic strips, wrappers,
rags and waste materials. Here at home, the NBI
also investigated Inter-Resin's President
Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally
charged for estafa through falsification of
commercial documents. The case, however, was
eventually dismissed by the Rizal Provincial
Fiscal who found no prima facie evidence to
warrant prosecution.
5. Bank of America sued Inter-Resin for the
recovery of P10,219,093.20, the peso equivalent
of the draft for US$1,320,600.00 on the partial
availment of the now disowned letter of credit. On
the other hand, Inter-Resin claimed that not only
was it entitled to retain P10,219,093.20 on its first
shipment but also to the balance
US$1,461,400.00 covering the second shipment.
6. On 28 June 1989, the trial court ruled for Inter-
Resin, holding that:
(a) Bank of America made assurances that
enticed Inter-Resin to send the merchandise to
Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving,
hence, hearsay, but even assuming that the letter
of credit was fake, "the fault should be borne by
the BA which was careless and negligent" 5 for
failing to utilize its modern means of
communication to verify with Bank of Ayudhya in
Thailand the authenticity of the letter of credit
before sending the same to Inter-Resin; (c) the
loading of plastic products into the vans were
under strict supervision, inspection and
verification of government officers who have in
 their favor the presumption of regularity in the
performance of official functions; and (d) Bank of
America failed to prove the participation of Inter-
Resin or its employees in the alleged fraud as, in
fact, the complaint for estafa through falsification
of documents was dismissed by the Provincial
Fiscal of Rizal.
7. On appeal, the Court of Appeals sustained the
trial court; hence, this present recourse by
petitioner Bank of America.
8. In rebuttal, Inter-Resin holds that: (a) Bank of
America cannot, on appeal, belatedly raise the
issue of being only an advising bank; (b) the
findings of the trial court that the ropes have
actually been shipped is binding on the Court;
and, (c) Bank of America cannot recover from
Inter-Resin because the drawer of the letter of
credit is the Bank of Ayudhya and not Inter-Resin.
Issue/s:
1. Whether Bank of America has acted merely as an
advising bank or as a confirming bank;
2. Whether the Bank of America may then recover what it
has paid under the letter of credit when the corresponding
draft for partial availment thereunder and the required
documents were later negotiated with it by Inter-Resin.
Ruling:
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. 9 To break the
impasse, the buyer may be required to contract a bank to
issue a letter of credit in favor of the seller so that, by virtue
of the latter of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents
required by the letter of credit. 10 The buyer and the seller
agree on what documents are to be presented for
payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the
buyer.
Once the credit is established, the seller ships the goods
to the buyer and in the process secures the required
shipping documents or documents of title. To get paid, the
seller executes a draft and presents it together with the
required documents to the issuing bank. The issuing bank
redeems the draft and pays cash to the seller if it finds that
the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the
issuing bank and acquires the documents entitling him to
the goods. Under this arrangement, the seller gets paid
only if he delivers the documents of title over the goods,
while the buyer acquires said documents and control over
the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the
issuing bank to pay the seller of the draft and the required
shipping documents are presented to it. In turn, this
arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By
this so-called "independence principle," the bank
determines compliance with the letter of credit only by
examining the shipping documents presented; it is
precluded from determining whether the main contract is
actually accomplished or not.
There would at least be three (3) parties: (a) the buyer,
who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of
credit, which undertakes to pay the seller upon receipt of
the draft and proper document of titles and to surrender
the documents to the buyer upon reimbursement; and, (c)
the seller, who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be
increased. Thus, the services of an advising (notifying)
bank may be utilized to convey to the seller the existence
of the credit; or, of a confirming bank which will lend
credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, which undertakes to
encash the drafts drawn by the exporter. Further, instead
of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed
the negotiating bank, to have the draft discounted.
Being a product of international commerce, the impact of
this commercial instrument transcends national
boundaries, and it is thus not uncommon to find a dearth
of national law that can adequately provide for its
governance. This country is no exception. Our own Code
of Commerce basically introduces only its concept under
Articles 567-572, inclusive, thereof. It is no wonder then
why great reliance has been placed on commercial usage
and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules.
The rules were later developed into what is now known as
the Uniform Customs and Practice for Documentary
Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for,
to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of
Appeals, we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this
international commercial credit regulatory set of rules.
In Bank of Phil. Islands v. De Nery, we have said that the
observances of the U.C.P. is justified by Article 2 of the
Code of Commerce which expresses that, in the absence
of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages
and customs generally observed. We have further
observed that there 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
U.C.P. is undeniable.
1. ADVISING BANK. The crucial point of dispute in
this case is whether under the "letter of credit,"
Bank of America has incurred any liability to the
"beneficiary" thereof, an issue that largely is
dependent on the bank's participation in that
transaction; as a mere advising or notifying bank,
it would not be liable, but as a confirming bank,
had this been the case, it could be considered as
having incurred that liability.
It cannot seriously be disputed, looking at this
case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly
evident, among other things, by the provisions of the letter
of credit itself, the petitioner bank's letter of advice, its
request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That Bank of
America has asked Inter-Resin to submit documents
required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming
bank. The fact, too, that the draft required by the letter of
credit is to be drawn under the account of General
Chemicals (buyer) only means the same had to be
presented to Bank of Ayudhya (issuing bank) for payment.
It may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to
pay the draft.
No less important is that Bank of America's letter
of 11 March 1981 has expressly stated that "[t]he
enclosure is solely an advise of credit opened by the
abovementioned correspondent and conveys no
engagement by us." This written reservation by Bank of
America in limiting its obligation only to being an advising
bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America
did not incur any obligation more than just notifying Inter-
Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit. The bare statement of the bank
employees, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's
letter of advise, nor can it justify the conclusion that the
bank must now assume total liability on the letter of credit.
Indeed, Inter-Resin itself cannot claim to have been all
that free from fault. As the seller, the issuance of the letter
of credit should have obviously been a great concern to
it. It would have, in fact, been strange if it did not, prior to
the letter of credit, enter into a contract, or negotiated at
the every least, with General Chemicals. In the ordinary
course of business, the perfection of contract precedes
the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is
the primordial obligation of an advising bank. The view
that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by
using advanced mode of business communications,
before dispatching the same to Inter-Resin finds no real
support in U.C.P. Article 18 of the U.C.P. states that:
"Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in
transit of any messages, letters or documents, or for
delay, mutilation or other errors arising in the transmission
of any telecommunication . . ." As advising bank, Bank of
America is bound only to check the "apparent authenticity"
of the letter of credit, which it did. Clarifying its meaning,
Webster's Ninth New Collegiate Dictionary explains that
the word "APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more
rigorous examination or greater knowledge."
2. Yes. This kind of transaction is what is commonly
referred to as a discounting arrangement. This
time, Bank of America has acted independently
as a negotiating bank, thus saving Inter-Resin
from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment.
(Inter-Resin, of course, could have chosen other
banks with which to negotiate the draft and the
documents.) As a negotiating bank, Bank of
America has a right to recourse against the issuer
bank and until reimbursement is obtained, Inter-
Resin, as the drawer of the draft, continues to
assume a contingent liability thereon.
While bank of America has indeed failed to allege
material facts in its complaint that might have likewise
warranted the application of the Negotiable Instruments
Law and possible then allowed it to even go after the
indorsers of the draft, this failure, 32/ nonetheless, does
not preclude petitioner bank's right (as negotiating bank)
of recovery from Inter-Resin itself. Inter-Resin admits
having received P10,219,093.20 from bank of America on
the letter of credit and in having executed the
corresponding draft. The payment to Inter-Resin has
given, as aforesaid, Bank of America the right of
reimbursement from the issuing bank, Bank of Ayudhya
which, in turn, would then seek indemnification from the
buyer (the General Chemicals of Thailand). Since Bank of
Ayudhya disowned the letter of credit, however, Bank of
America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there
is the usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of
the credit are indicated to be without recourse therefore,
the negotiating bank has the ordinary right of recourse
against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the
negotiating bank may be one and the same does not
affect its rights and obligations in either capacity, although
a special agreement is always a possibility . . .
The additional ground raised by the
petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of
a letter of credit, the involved banks deal only with
documents and not on goods described in those
documents.
G.R. No. 160732 June 21, 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
Facts:
1. 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 agreement which, among
other things, consisted of payments of petitioner’s
mostly foreign loans.
2. 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.
3. In compliance with this requirement, Maynilad
arranged 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 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.
4. 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 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) 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 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,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, 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.
5. As part of this agreement, Maynilad committed,
among other things, to:
a) infuse the amount of UD$80.0 million as
additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases
pending before the Court of Appeals and with
Minor Dispute Appeals Panel.
6. 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.
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 by
MWSS. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. Respondent Maynilad seeks to refute this argument
by alleging that:
a) 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
records13 and that public respondent had the
authority to issue the same;
b) 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;
c) 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;
d) 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 upon publication of
the notice of commencement;" and
e) the obligations under the Standby Letter of
Credit are not solidary and are not exempt from
the coverage of the stay order.
Issue/s:
1. WON 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
2. WON Respondent Maynilad’s claim that the
banks are not solidarily liable with the debtor is
correct.
Ruling:
1. No. 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.
2. No. 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 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.
Letters of credit were developed for the purpose
of insuring to a seller payment of a definite amount upon
the presentation of documents 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. 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. 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. 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."
We have accepted, in Feati Bank and Trust
Company v. Court of Appeals and Bank of America NT &
SA v. Court of Appeals, 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. Nery 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, 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
Agreement 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.
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.
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.
Facts:
1. 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.
2. After inspecting the logs, Christiansen issued
purchase order No. 76171.
3. 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.
4. 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."
5. The letter of credit further provided that the draft to be
drawn is on Security Pacific National Bank.
6. 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, 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.
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.
7. 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.
8. 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.
9. 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.
10. 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.
11. Since the demands by the private respondent for
Christiansen to execute the certification proved
futile, Villaluz 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:
1. Christiansen be ordered to issue the
certification required of him under the Letter of
Credit;
2. 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;
3. Order Christiansen to pay damages to the
plaintiff.
12. 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.
13. The trial court admitted the amended complaint. 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.
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 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.
 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)
14. RTC ruled in favor of the private respondent.
15. The Court of Appeals granted the petition and
nullified the order of execution
16. In the meantime, the appeal filed by the petitioner
before the Court of Appeals was given due
course. It ruled that:
1. 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. 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.
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.
2. 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.
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.
Issue/s:
1. WON a correspondent bank is to be held liable
under the letter of credit despite non-compliance
by the beneficiary with the terms thereof.
2. WON 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" is correct.
Ruling:
1. No. 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.
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.
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. 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.
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.
In this case, the letter merely provided that the petitioner
"forward the enclosed original credit to the beneficiary."
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.
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 perspicuously
explained the relationship between the seller and the
negotiating bank:
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.
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."
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.
2. No. 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. 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 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.
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. 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. 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 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.
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.
G.R. No. L-100831 December 17, 1993
RELIANCE COMMODITIES, INC., petitioner,
vs.
DAEWOO INDUSTRIAL CO., LTD., respondent.
6. After trial, the trial court ruled that:
Facts:
1. Petitioner Reliance Commodities, Inc. ("reliance")
and private respondent Daewoo Industrial Co.,
Ltd. ("Daewoo") entered into a contract of sale
under the terms of which the latter undertook to
ship and deliver to the former 2,000 metric tons of
foundry pig iron for the price of US$404,000.00.
Pursuant to this contract, Daewoo shipped from
Pohang, Republic of Korea, 2,000 metric tons of
foundry pig iron on board the M/S Aurelio III for
carriage to and delivery in Manila to its consignee,
Reliance. The shipment was fully paid for. Upon
arrival in Manila, the subject cargo was found to
be short of 135.655 metric tons as only 1,864.345
metric tons were discharged and delivered to
Reliance.
2. Another contract was entered into between the
same parties for the purchase of another 2,000
metric tons of foundry pig iron. Daewoo
acknowledged the short shipment of 135.655
metric tons under the 9 January 1980 contract
and, to compensate Reliance therefor, bound
itself to reduce the price by US$1 to US$2 per
metric ton of pig iron for succeeding orders. This
undertaking was made part of the 2 May 1980
contract. However, that contract was not
consummated and was later superseded by still
another contract dated 31 July 1980.
3. Reliance, through its Mrs. Samuel Chuason, filed
with the China Banking Corporation, an
application for a Letter of Credit (L/C) in favor of
Daewoo covering the amount of US$380,600.00.
The application was endorsed to the Iron and
Steel Authority (ISA) or approval but the
application was denied. Reliance was instead
asked to submit purchase orders from end-users
to support its application for a Letter of Credit.
However, Reliance was not able to raise
purchase orders for 2,000 metric tons. Reliance
alleges that it was able to raise purchase orders
for 1,900 metric tons. Daewoo, upon the other
hand, contends that Reliance was only able to
raise purchase orders for 900 metric tons. An
examination of the exhibits presented by
Reliance in the trial court shows that only
purchase orders for 900 metric tons were
stamped "Received" by the ISA. The other
purchase orders for 1,000 metric tons allegedly
sent by prospective end users to Reliance were
not shown to have been duly sent and exhibited
to the ISA. Whatever the exact amount of the
purchase orders was, Daewoo rejected the
proposed L/C for the reason that the covered
quantity fell short of the contracted tonnage.
Thus, Reliance withdrew the application for the
L/C on 14 August 1980.
4. Subsequently, Daewoo leaned that the failure of
Reliance to open the L/C as stipulated in contract
was due to the fact that as early as May 1980,
Reliance has already exceeded its foreign
exchange allocation for 1980. Because of the
failure of Reliance to comply with its undertaking
under the 31 July 1980 contract, Daewoo was
compelled to sell the 2,000 metric tons to another
buyer at a lower price, to cut losses and expenses
Daewoo had begun to incur due to its inability to
ship the 2000 metric tons to Reliance under their
contract.
5. Reliance wrote Daewoo requesting payment of
the amount of P226,370.48, representing the
value of the short delivery of 135.655 metric tons
of foundry pig iron under the contract of 9 January
1980. Not being heeded, Reliance filed an action
for damages against Daewoo with the trial court.
Daewoo responded, with a counterclaim for
damages, contending that Reliance was guilty of
breach of contract when it failed to open an L/C
as required in the 31 July 1980 contract.
(1) the 31 July 1980 contract did not
extinguish Daewoo's obligation for short
delivery pursuant to the 9 January 1980
contract and must therefore pay Reliance
P226,370.48 representing the value of
the short delivered goods plus interest
and attorney's fees; and
 (2) Reliance is in turn liable for breach of
contract for its failure to open a letter of
credit in favor of Daewoo pursuant to the
31 July 1980 contract and must therefore
pay the latter P331,920.97 as actual
damages with legal interest plus
attorney's fees.
7. Reliance appealed the second part of the trial court's
judgment. Public respondent Court of Appeals found no
merit in the appeal and in affirming the decision of the trial
court ruled that:
1) the trial court's finding that Reliance
could not have opened the Letter of
Credit in favor of Daewoo because it had
already exhausted its foreign exchange
allocation at the time of its application,
was amply supported by evidence; and
2) the opening of a letter of credit is not
such a future and uncertain event as to
make it a suspensive condition within the
contemplation of law; but, only mode of
payment agreed upon by the parties, and
a standard mode at that when one of the
parties to the transaction is a foreigner
and the consideration is payable in
foreign exchange.
8. In the present Petition for Review, Reliance assails the
award of damages in favor of Daewoo. Reliance contends
a) that its failure to open a Letter of Credit was due to the
failure of Daewoo to accept the purchase orders for 1,900
metric tons instead of 2,000 metric tons; b) that the
opening of the Letter of Credit was a condition precedent
to the effectivity of the contract between Reliance and
Daewoo; and c) that since such condition had not
occurred, the contract never came into existence and,
therefore, Reliance should not have been held liable for
damages.
Issue/s:
WON the failure of an importer (Reliance) to open a letter
of credit on the date agreed upon makes him liable to the
exporter (Daewoo) for damages.
Ruling:
Yes. The nature of a letter of credit was extensively
discussed in Bank of America, NT & SA v. Court of
Appeals, et al.:
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. To
break the impasse, the buyer may be
required to contract a bank to issue a
letter of credit in favor of the seller so that,
by virtue of the letter of credit, the issuing
bank can authorize the seller to draw
drafts and engage to pay them upon their
presentment simultaneously with the
tender of documents required by the
letter of credit. The buyer and seller
agree on what documents are to be
presented for payment, but ordinarily
they are documents of title evidencing or
attesting to the shipment of the goods to
the buyer.
Once the credit is established, the seller
ships the goods to the buyer and in the
process secures the required shipping
documents or documents of title. To get
paid, the seller executes a draft and pays
cash to the seller if it finds that the
documents submitted by the seller
conform with what the letter of credit
requires. The bank then obtains
possession of the documents upon
paying the seller. The transaction is
completed when the buyer reimburses
the issuing bank and acquires the
documents entitling him to the goods.
Under this arrangement, the seller gets
paid only if he delivers the documents of
title over the goods, while the goods only
after reimbursing the bank.
A letter of credit is one of the modes of payment, set out
in Sec. 8, Central Bank Circular No. 1389, "Consolidated
Foreign Exchange Rules and Regulations," dated 13 April
1993, by which commercial banks sell foreign exchange
to service payments for, e.g., commodity imports. The
primary purpose of the letter of credit is to substitute for
and therefore support, the agreement of the
buyer/importer to pay money under a contract or other
arrangement. It creates in the seller/exporter a secure
expectation of payment.
A letter of credit transaction may thus be seen to be a
composite of at least three (3) distinct but intertwined
relationships being concretized in a contract:
(a) One contract relationship links the
party applying for the L/C (the account
party or buyer or importer) and the party
for whose benefit the L/C is issued (the
beneficiary or seller or exporter). In this
contract, the account party, here
Reliance, agrees, among other things
and subject to the terms and conditions
of the contract, to pay money to the
beneficiary, here Daewoo.
(b) A second contract relationship is
between the account party and the
issuing bank. Under this contract,
(sometimes called the "Application and
Agreement" or the "Reimbursement
Agreement"), the account party among
other things, applies to the issuing bank
for a specified L/C and agrees to
reimburse the bank for amounts paid by
that bank pursuant to the L/C.
(c) The third contract relationship is
established between the issuing bank
and the beneficiary, in order to support
the contract, under
(a) above, of the account party and the
beneficiary to, inter alia, pay certain
monies to the latter.
Certain other parties may be added to the foregoing, but
the above three are the indispensable ones.
The issue raised in the Petition at bar relates principally to
the first component contractual relation above: that
between account party or importer Reliance and
beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out
in the 31 July 1980 contract, the Court considers that
under that instrument, the opening of an L/C upon
application of Reliance was not a condition precedent for
the birth of the obligation of Reliance to purchase foundry
pig iron from Daewoo. We agree with the Court of Appeals
that Reliance and Daewoo, having reached "a meeting of
minds" in respect of the subject matter of the contract
(2000 metric tons of foundry pig iron with a specified
chemical composition), the price thereof (US
$380,600.00), and other principal provisions, "they had a
perfected contract." The failure of Reliance to open, the
appropriate L/C did not prevent the birth of that contract,
and neither did such failure extinguish that contract. The
opening of the L/C in favor of Daewoo was an obligation
of Reliance and the performance of that obligation by
Reliance was a condition of enforcement of the reciprocal
obligation of Daewoo to ship the subject matter of the
contract — the foundry pig iron — to Reliance. But the
contract itself between Reliance and Daewoo had already
sprung into legal existence and was enforceable.
The L/C provided for in that contract was the mode or
mechanism by which payment was to be effected by
Reliance of the price of the pig iron. In undertaking to
accept or pay the drafts presented to it by the beneficiary
according to the tenor of an L/C, and only later on being
reimbursed by the account party, the issuing bank in effect
extends a loan to the account party. This loan feature,
combined with the bank's undertaking to accept the
beneficiary's drafts drawn on the bank, constitutes the L/C
as a mode of payment. 10 Logically, before the issuing
bank open an L/C, it will take steps to ensure that it would
indeed be reimbursed when the time comes. Before an
L/C can be opened, specific legal requirements must be
complied with.
The need for permits or clearances from appropriate
government agencies arises when regulated commodities
are to be imported. Certain commodities are classified as
"regulated commodities" for purposes of their importation,
"for reasons of public health and safety, national security,
international commitments, and
development/rationalization of local industry." The
petitioner in the instant case entered into a transaction to
import foundry pig iron, a regulated commodity. In respect
of the importation of this particular commodity, the Iron
and Steel Authority (ISA) is the government agency
designated to issue the permit or clearance. 14 Prior to the
issuance of such permit or clearance, ISA asks the
buyer/importer to comply with particular requirements,
such as to show the availability of foreign exchange
allocations. The issuance of an L/C becomes, among
other things, an indication of compliance by the
buyer/importer with his own government's regulations
relating to imports and to payment thereof.
The records shows that the opening of the L/C in the
instant case became very difficult because Reliance had
exhausted its dollar allocation. Reliance knew that it had
already exceeded its dollar allocation for the year 1980
when it entered into the 31 July 1980 transaction with
Daewoo. As a rule, when the importer has exceeded its
foreign exchange allocation, his application would be
denied. However, ISA could reconsider such application
on a case to case basis. Thus, in the instant case, ISA
required Reliance to support its application by submitting
purchase orders from end-users for the same quantity the
latter wished to import. As earlier noted, Reliance was
able to present purchase orders for only 900 metric tons
of the subject pig iron. For having exceeded its foreign
exchange allocation before it entered into the 31 July
1980 contract with Daewoo, petitioner Reliance can hold
only itself responsible. for having failed to secure end-
users purchase orders equivalent to 2,000 metric tons,
only Reliance should be held responsible.
Daewoo rejected Reliance's proposed reduced tonnage.
It had the right to demand compliance with the terms of
the basic contract and had no duty to accept any unilateral
modification of that contract. Compliance with Philippine
legal requirements was the duty of Reliance; it is not
disputed that ISA's requirements were legal and valid, and
not arbitrary or capricious. Compliance with such
requirements, like keeping within one's dollar allocation
and complying with the requirements of ISA, were within
the control of Reliance and not of Daewoo. The Court is
compelled to agree with the Court of Appeals that the non-
opening of the L/C was due to the failure of Reliance to
comply with its duty under the contract.
The Court believes and so holds that failure of a buyer
seasonably to furnish an agreed letter of credit is a breach
of he contract between buyer and seller. Where the buyer
fails to open a letter of credit as stipulated, the seller or
exporter is entitled to claim damages for such breach.
Damages for failure to open a commercial credit may, in
appropriate cases, include the loss of profit which the
seller would reasonably have made had the transaction
been carried out.
The Court of Appeals committed no reversible error when
it ruled that the damages incurred by Daewoo were
sufficiently proved with the testimony of Mr. Ricardo
Fernandez and "the various documentary evidence
showing the loss suffered by the defendant when it was
compelled to sell the subject goods at a lower price."
[G.R. No. 117913. February 1, 2002.]
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO,
ALFONSO YAP, RICHARD VELASCO and ALFONSO
CO, Petitioners, v. COURT OF APPEALS and
PHILIPPINE BANK OF
COMMUNICATIONS, Respondents.
[G.R. No. 117914. February 1, 2002.]
MICO METALS CORPORATION, Petitioner, v. COURT
OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, Respondents.
Facts:
1. On March 2, 1979, Charles Lee, as President of
MICO wrote private respondent Philippine Bank
of Communications (PBCom) requesting for a
grant of a discounting loan/credit line in the sum
of Three Million Pesos (P3,000,000.00) for the
purpose of carrying out MICO’s line of business
as well as to maintain its volume of business.
2. On the same day, Charles Lee requested for
another discounting loan/credit line of Three
Million Pesos (P3,000,000.00) from PBCom for
the purpose of opening letters of credit and trust
receipts.
3. In connection with the requests for discounting
loan/credit lines, PBCom was furnished by MICO
the following resolution which was adopted
unanimously by MICO’s Board of Directors:
That the President, Mr. Charles Lee, and the
Vice-President and General Manager, Mr.
Mariano A. Sio, singly or jointly, be and they are
duly authorized and empowered for and in behalf
of this Corporation to apply for, negotiate and
secure the approval of commercial loans and
other banking facilities and accommodations,
such as, but not limited to discount loans, letters
of credit, trust receipts, lines for marginal deposits
on foreign and domestic letters of credit,
negotiate out-of-town checks, etc. from the
Philippine Bank of Communications, 216 Juan
Luna, Manila in such sums as they shall deem
advantageous, the principal of all of which shall
not exceed the total amount of TEN MILLION
PESOS (P10,000,000.00), Philippine Currency,
plus any interests that may be agreed upon with
said Bank in such loans and other credit lines of
the same kind and such further terms and
conditions as may, upon granting of said loans
and other banking facilities, be imposed by the
Bank; and to make, execute, sign and deliver any
contracts of mortgage, pledge or sale of one,
some or all of the properties of the Company, or
any other agreements or documents of whatever
nature or kind, including the signing, indorsing,
cashing, negotiation and execution of promissory
 notes, checks, money orders or other negotiable
instruments, which may be necessary and proper
in connection with said loans and other banking
facilities, or with their amendments, renewals and
extensions of payment of the whole or any part
thereof.
4. On March 26, 1979, MICO availed of the first loan
of One Million Pesos (P1,000,000.00) from
PBCom. Upon maturity of the loan, MICO caused
the same to be renewed, the last renewal of which
was made on May 21, 1982 under Promissory
Note BNA No. 26218. 5
5. Another loan of One Million Pesos
(P1,000,000.00) was availed of by MICO from
PBCom which was likewise later on renewed, the
last renewal of which was made on May 21, 1982
under Promissory Note BNA No. 26219. 6 To
complete MICO’s availment of Three Million
Pesos (P3,000,000.00) discounting loan/credit
line with PBCom, MICO availed of another loan
from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous
loans, this was rolled over or renewed, the last
renewal of which was made on May 25, 1982
under Promissory Note BNA No. 26253. 7
6. As security for the loans, MICO through its Vice-
President and General Manager, Mariano Sio,
executed on May 16, 1979 a Deed of Real Estate
Mortgage over its properties situated in Pasig,
Metro Manila.
7. On March 26, 1979 Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap and Richard Velasco,
in their personal capacities executed a Surety
Agreements 8 in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the
prompt payment on due dates or at maturity of
overdrafts, promissory notes, discounts, drafts,
letters of credit, bills of exchange, trust receipts,
and other obligations of every kind and nature, for
which MICO may be held accountable by
PBCom. It was provided, however, that the
liability of the sureties shall not at any one time
exceed the principal amount of Three Million
Pesos (P3,000,000.00) plus interest, costs,
losses, charges and expenses including
attorney’s fees incurred by PBCom in connection
therewith.
8. On July 14, 1980, petitioner Charles Lee, in his
capacity as president of MICO, wrote PBCom and
applied for an additional loan in the sum of Four
Million Pesos (P4,000,000.00). The loan was
intended for the expansion and modernization of
the company’s machineries. Upon approval of the
said application for loan, MICO availed of the
additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory
Note TA No. 094. 9
9. As per agreement, the proceeds of all the loan
availments were credited to MICO’s current
checking account with PBCom. To induce the
PBCom to increase the credit line of MICO,
Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co
(hereinafter referred to as petitioners-sureties),
executed another surety agreement 10 in favor of
PBCom on July 28, 1980, whereby they jointly
and severally guaranteed the prompt payment on
due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of
exchange, trust receipts and all other obligations
of any kind and nature for which MICO may be
held accountable by PBCom. It was provided,
however, that their liability shall not at any one
time exceed the sum of Seven Million Five
Hundred Thousand Pesos (P7,500,000.00)
including interest, costs, charges, expenses and
attorney’s fees incurred by MICO in connection
therewith.
10. On July 29, 1980, MICO furnished PBCom with a
notarized certification issued by its corporate
secretary, Atty. P.B. Barrera, that Chua Siok Suy
was duly authorized by the Board of Directors to
negotiate on behalf of MICO for loans and other
credit availments from PBCom. Indicated in the
certification was the following resolution in which
Mr. Chua Siok Suy be, as he is hereby authorized
and empowered, on behalf of MICO METALS
CORPORATION from time to time, to borrow
money and obtain other credit facilities, with or
without security, from the PHILIPPINE BANK OF
COMMUNICATIONS in such amount(s) and
under such terms and conditions as he may
determine, with full power and authority to
execute, sign and deliver such contracts,
instruments and papers in connection therewith,
including real estate and chattel mortgages,
pledges and assignments over the properties of
the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit
facilities granted thereunder, either for lesser or
for greater amount(s), the intention being that
such credit facilities and all securities of whatever
kind given as collaterals therefor shall be a
continuing security.
That said bank is hereby authorized, empowered
and directed to rely on the authority given
hereunder, the same to continue in full force and
effect until written notice of its revocation shall be
received by said Bank.
11. On July 2, 1981, MICO filed with PBCom an
application for a domestic letter of credit in the
sum of Three Hundred Forty-Eight Thousand
Pesos (P348,000.00). 12 The corresponding
irrevocable letter of credit was approved and
opened under LC No. L-16060. 13 Thereafter, the
domestic letter of credit was negotiated and
accepted by MICO as evidenced by the
corresponding bank draft issued for the purpose.
14 After the supplier of the merchandise was
paid, a trust receipt upon MICO’s own initiative,
was executed in favor of PBCom.
12. MICO applied for another domestic letter of credit
with PBCom in the sum of Two Hundred Ninety
Thousand Pesos (P290,000.00). The
corresponding irrevocable letter of credit was
issued on September 22, 1981 under LC No. L-
16334. After the beneficiary of the said letter of
credit was paid by PBCom for the price of the
merchandise, the goods were delivered to MICO
which executed a corresponding trust receipt in
favor of PBCom.
13. MICO applied for authority to open a foreign letter
of credit in favor of Ta Jih Enterprises Co., Ltd.,
and thus, the corresponding letter of credit was
then issued by PBCom with a cable sent to the
beneficiary, Ta Jih Enterprises Co., Ltd. advising
that said beneficiary may draw funds from the
account of PBCom in its correspondent bank’s
New York Office. PBCom also informed its
corresponding bank in Taiwan, the Irving Trust
Company, of the approved letter of credit. The
correspondent bank acknowledged PBCom’s
advice through a confirmation letter and by
debiting from PBCom’s account with the said
correspondent bank the sum of Eleven Thousand
Nine Hundred Sixty US Dollars ($11,960.00). As
in past transactions, MICO executed in favor of
PBCom a corresponding trust receipt.
14. MICO applied, for authority to open a foreign
letter of credit in the sum of One Thousand Nine
Hundred US Dollars,($1,900.00), with PBCom.
Upon approval, the corresponding letter of credit
denominated as LC No. 6229 was issued
whereupon PBCom advised its correspondent
bank and MICO of the same. Negotiation and
proper acceptance of the letter of credit were then
made by MICO. Again, a corresponding trust
receipt was executed by MICO in favor of
PBCom.
15. MICO obtained from PBCom another loan in the
sum of Three Hundred Seventy-Seven Thousand
 Pesos (P377,000.00) covered by Promissory
Note.
16. Upon maturity of all credit availments obtained by
MICO from PBCom, the latter made a demand for
payment. For failure of petitioner MICO to pay the
obligations incurred despite repeated demands,
private respondent PBCom extrajudicially
foreclosed MICO’s real estate mortgage and sold
the said mortgaged properties in a public auction
sale held on November 23, 1982. PBCom then
demanded the settlement of the aforesaid
obligations from herein petitioners-sureties who,
however, refused to acknowledge their
obligations to PBCom under the surety
agreements.
17. Hence, PBCom filed a complaint with prayer for
writ of preliminary attachment before the
Regional Trial Court of Manila alleging that MICO
was no longer in operation and had no properties
to answer for its obligations. PBCom further
alleged that petitioner Charles Lee has disposed
or concealed his properties with intent to defraud
his creditors.
18. Petitioners (MICO and herein petitioners-
sureties) denied all the allegations of the
complaint filed by respondent PBCom.
19. The trial court gave credence to the testimonies
of herein petitioners and dismissed the complaint
filed by PBCom. The trial court likewise declared
the real estate mortgage and its foreclosure null
and void. In ruling for herein petitioners, the trial
court said that PBCom failed to adequately prove
that the proceeds of the loans were ever delivered
to MICO. The trial court pointed out, among
others, that while PBCom claimed that the
proceeds of the Four Million Pesos
(P4,000,000.00) loan covered by promissory note
TA 094 were deposited to the current account of
petitioner MICO, PBCom failed to produce the
ledger account showing such deposit. The trial
court added that while PBCom may have loaned
to MICO the other sums of Three Hundred Forty-
Eight Thousand Pesos (P348,000.00) and Two
Hundred Ninety Thousand Pesos (P290,000.00),
no proof has been adduced as to the existence of
the goods covered and paid by the said amounts.
Hence, inasmuch as no consideration ever
passed from PBCom to MICO, all the documents
involved therein, such as the promissory notes,
real estate mortgage including the surety
agreements were all void or nonexistent for lack
of cause or consideration. The trial court said that
the lack of proof as regards the existence of the
merchandise covered by the letters of credit
bolstered the claim of herein petitioners that no
purchases of the goods were really made and that
the letters of credit transactions were simply
resorted to by the PBCom and Chua Siok Suy to
accommodate the latter in his financial
requirements.
20. The Court of Appeals reversed the ruling of the
trial court, saying that the latter committed an
erroneous application and appreciation of the
rules governing the burden of proof. Citing
Section 24 of the Negotiable Instruments Law
which provides that "Every negotiable instrument
is deemed prima facie to have been issued for
valuable consideration and every person whose
signature appears thereon to have become a
party thereto for value", the Court of Appeals said
that while the subject promissory notes and
letters of credit issued by the PBCom made no
mention of delivery of cash, it is presumed that
said negotiable instruments were issued for
valuable consideration. The Court of Appeals
also cited the case of Gatmaitan v. Court of
Appeals 31 which holds that "there is a
presumption that an instrument sets out the true
agreement of the parties thereto and that it was
executed for valuable consideration." The
appellate court noted and found that a notarized
Certification was issued by MICO’s corporate
secretary, P.B. Barrera, that Chua Siok Suy, was
duly authorized by the Board of Directors of MICO
to borrow money and obtain credit facilities from
PBCom.
21. Petitioners contend that there was no proof that
the proceeds of the loans or the goods under the
trust receipts were ever delivered to and received
by MICO. But the record shows otherwise.
Petitioners-sureties further contend that
assuming that there was delivery by PBCom of
the proceeds of the loans and the goods, the
contracts were executed by an unauthorized
person, more specifically Chua Siok Suy who
acted fraudulently and in collusion with PBCom to
defraud MICO.
Issue/s:
1. WON the proceeds of the loans and letters of
credit transactions were ever delivered to MICO.
2. WON the individual petitioners, as sureties, may
be held liable under the two (2) Surety
Agreements executed on March 26, 1979 and
July 28, 1980.
Ruling:
1. Yes.
In civil cases, the party having the burden of proof must
establish his case by preponderance of evidence.
Preponderance of evidence means evidence which is
more convincing to the court as worthy of belief than that
which is offered in opposition thereto. Petitioners contend
that the alleged promissory notes, trust receipts and
surety agreements attached to the complaint filed by
PBCom did not ripen into valid and binding contracts
inasmuch as there is no evidence of the delivery of money
or loan proceeds to MICO or to any of the petitioners-
sureties. Petitioners claim that under normal banking
practice, borrowers are required to accomplish
promissory notes in blank even before the grant of the
loans applied for and such documents become valid
written contracts only when the loans are actually
released to the borrower.
The Court is not convinced.
Under Section 3, Rule 131 of the Rules of Court the
following presumptions, among others, are satisfactory if
uncontradicted: a) That there was a sufficient
consideration for a contract and b) That a negotiable
instrument was given or indorsed for sufficient
consideration. As observed by the Court of Appeals, a
similar presumption is found in Section 24 of the
Negotiable Instruments Law which provides that every
negotiable instrument is deemed prima facie to have been
issued for valuable consideration and every person
whose signature appears thereon to have become a party
for value. Negotiable instruments which are meant to be
substitutes for money, must conform to the following
requisites to be considered as such a) it must be in writing;
b) it must be signed by the maker or drawer; c) it must
contain an unconditional promise or order to pay a sum
certain in money; d) it must be payable on demand or at
a fixed or determinable future time; e) it must be payable
to order or bearer; and f) where it is a bill of exchange, the
drawee must be named or otherwise indicated with
reasonable certainty. Negotiable instruments include
promissory notes, bills of exchange and checks. Letters
of credit and trust receipts are, however, not negotiable
instruments. But drafts issued in connection with letters of
credit are negotiable instruments.
Private respondent PBCom presented documentary
evidence to prove petitioners’ credit availments and
liabilities. The documents presented have not merely
created a prima facie case but have actually proved the
solidary obligation of MICO and the petitioners, as
sureties of MICO, in favor of respondent PBCom. While
the presumption found under the Negotiable Instruments
Law may not necessarily be applicable to trust receipts
and letters of credit, the presumption that the drafts drawn
in connection with the letters of credit have sufficient
consideration. Under Section 3(r), Rule 131 of the Rules
of Court there is also a presumption that sufficient
consideration was given in a contract. Hence, petitioners
should have presented credible evidence to rebut that
presumption as well as the evidence presented by private
respondent PBCom. The letters of credit show that the
pertinent materials/merchandise have been received by
MICO. The drafts signed by the beneficiary/suppliers in
connection with the corresponding letters of credit proved
that said suppliers were paid by PBCom for the account
of MICO. On the other hand, aside from their bare denials
petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent
PBCom. Petitioner MICO did not proffer a single piece of
evidence, apart from its bare denials, to support its
allegation that the loan transactions, real estate
mortgage, letters of credit and trust receipts were issued
allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-Laws
34 of Mico Metals Corporation (MICO) to prove that only
the president of MICO is authorized to borrow money,
arrange letters of credit, execute trust receipts, and
promissory notes and consequently, that the loan
transactions, letters of credit, promissory notes and trust
receipts, most of which were executed by Chua Siok Suy
in representation of MICO were not allegedly authorized
and hence, are not binding upon MICO.
Petitioners-sureties also presented a letter of their
counsel, addressed to private respondent PBCom
purportedly to show that PBCom knew that Chua Siok Suy
allegedly used the credit and good names of the
petitioner-sureties for his benefit, and that petitioner-
sureties were made to sign blank documents and were
furnished copies of the same. The letter, however, is in
fact merely a reply of petitioners-sureties’ counsel to
PBCom’s demand for payment of MICO’s obligations, and
appears to be an inconsequential piece of self-serving
evidence.
In addition to the foregoing, MICO and petitioners-sureties
cited the decision of the trial court which stated that there
was no proof that the proceeds of the loans were ever
delivered to MICO. Although the private respondent’s
witness, Mr. Gardiola, testified that the proceeds of the
loans were deposited in MICO’s current account with
PBCom, his testimony was allegedly not supported by any
bank record, note or memorandum. A careful scrutiny of
the record including the transcript of stenographic notes
reveals, however, that although private respondent
PBCom was willing to produce the corresponding account
ledger showing that the proceeds of the loans were
credited to MICO’s current account with PBCom, MICO in
fact vigorously objected to the presentation of said
document. That point is shown in the testimony of
PBCom’s witness, Gardiola.
Petitioners allege that PBCom presented no evidence that
it remitted payments to cover the domestic and foreign
letters of credit. Petitioners placed much reliance on the
erroneous decision of the trial court which stated that
private respondent PBCom allegedly failed to prove that
it actually made payments under the letters of credit since
the bank drafts presented as evidence show that they
were made in favor of the Bank of Taiwan and First
Commercial Bank.
Petitioners’ allegations are untenable.
Modern letters of credit are usually not made between
natural persons. They involve bank to bank transactions.
Historically, the letter of credit was developed to facilitate
the sale of goods between, distant and unfamiliar buyers
and sellers. It was an arrangement under which a bank,
whose credit was acceptable to the seller, would at the
instance of the buyer agree to pay drafts drawn on it by
the seller, provided that certain documents are presented
such as bills of lading accompanied the corresponding
drafts. Expansion in the use of letters of credit was a
natural development in commercial banking. 38 Parties to
a commercial letter of credit include (a) the buyer or the
importer, (b) the seller, also referred to as beneficiary, (c)
the opening bank which is usually the buyer’s bank which
actually issues the letter of credit, (d) the notifying bank
which is the correspondent bank of the opening bank
through, which it advises the beneficiary of the letter of
credit, (e) negotiating bank which is usually any bank in
the city of the beneficiary. The services of the notifying
bank must always be utilized if the letter of credit is to be
advised to the beneficiary through cable, (f) the paying
bank which buys or discounts the drafts contemplated by
the letter of credit, if such draft is to be drawn on the
opening bank or on another designated bank not in the
city of the beneficiary. As a rule, whenever the facilities of
the opening bank are used, the beneficiary is supposed to
present his drafts to the notifying bank for negotiation and
(g) the confirming bank which, upon the request of the
beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being
usually bank to bank transactions, involve more than just
one bank. Consequently, there is nothing unusual in the
fact that the drafts presented in evidence by respondent
bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of
Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier
of the goods covered by the foreign letter of credit. Having
paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBCom’s correspondent
bank in Taiwan, the Irving Trust Company — which
explains the reason why on its face, the draft was made
payable to the Bank of Taiwan. Irving Trust Company
accepted and endorsed the draft to PBCom. The draft was
later transmitted to PBCom to support the latter’s claim for
payment from MICO. MICO accepted the draft upon
presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that
legal possession of the merchandise be transferred to
PBCom by way of trust receipts. Petitioners insist that
assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same
would be illegal since PBCom, being a banking institution,
is not authorized by law to engage in the business of
importing and selling goods.
A trust receipt is considered 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. 39 A trust receipt, therefor, is a document of
security pursuant to which a bank acquires a "security
interest" in the goods under trust receipt. Under a letter of
credit-trust receipt arrangement, a bank extends a loan
covered by a letter of credit, with the trust receipt as a
security for the loan. The transaction involves a loan
feature represented by a letter of credit, and a security
feature which is in the covering trust receipt which secures
an indebtedness.
2. Yes. Petitioners’ contend that the letters of credit,
surety agreements and loan transactions did not
ripen into valid and binding contracts since no
part of the proceeds of the loan transactions were
delivered to MICO or to any of the petitioners-
sureties. Petitioners-sureties allege that Chua
Siok Suy was the beneficiary of the proceeds of
the loans and that the latter made them sign the
surety agreements in blank. Thus, they maintain
 that they should not be held accountable for any
liability that might arise therefrom.
It has not escaped our notice that it was petitioner-
surety Charles Lee, as president of MICO Metals
Corporation, who first requested for a discounting
loan of Three Million Pesos (P3,000,000.00) from
PBCom as evidenced by his letter dated March 2,
1979. On the same day, Charles Lee, as President of
MICO, requested for a Letter of Credit and Trust
Receipt line in the sum of Three Million Pesos
(P3,000,000.00). Still, on the same day, Charles Lee
again as President of MICO, wrote another letter to
PBCOM requesting for a financing line in the sum of
One Million Five Hundred Thousand Pesos
(P1,500,000.00) to be used exclusively as marginal
deposit for the opening of MICO’s foreign and local
letters of credit with PBCom. More than a year later,
it was also Charles Lee, again in his capacity as
president of MICO, who asked for an additional loan
in the sum of Four Million Pesos (P4,000,000.00). The
claim therefore of petitioners that it was Chua Siok
Suy, in connivance with the respondent PBCom, who
applied for and obtained the loan transactions and
letters of credit strains credulity considering that even
the Deed of the Real Estate Mortgage in favor of
PBCom was executed by petitioner-surety Mariano
Sio in his capacity as general manager of MICO to
secure the loan accommodations obtained by MICO
from PBCom.
Petitioners-sureties allege that they were made to
sign the surety agreements in blank by Chua Siok
Suy.
The court considers as incredible and unacceptable
the claim of petitioners-sureties that the Board of
Directors of MICO was so careless about the
business affairs of MICO as well as about their own
personal reputation and money that they simply relied
on the say so of Chua Siok Suy on matters involving
millions of pesos.
Petitioners failed to contest the genuineness of the
said Certification which is notarized and to show any
written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok
Suy to negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform
the petitioners-sureties individually about the terms of
the loans, letters of credit and other loan documents.
The petitioners-sureties themselves happen to
comprise the Board of Directors of MICO, which gave
full authority to Chua Siok Suy to negotiate for loans
in behalf of MICO. Notice to MICO’s authorized
representative, Chua Siok Suy, was notice to MICO.
The Certification issued by PBCom’s corporate
secretary, Atty. P.B. Barrera, indicated that Chua Siok
Suy had full authority to negotiate and sign the
necessary documents, in behalf of MICO, for loans
from PBCom. Respondent PBCom therefore had the
right to rely on the said notarized Certification of
MICO’s Corporate Secretary.
Anent petitioners-sureties contention that they
obtained no consideration whatsoever on the surety
agreements, we need only point out that the
consideration for the sureties is the very consideration
for the principal obligor, MICO, in the contracts of
loan. In the case of Willex Plastic Industries
Corporation v. Court of Appeals, 46 we ruled that the
consideration necessary to support a surety
obligation need not pass directly to the surety, a
consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the
same consideration that makes the contract effective
between the parties thereto. It is not necessary that a
guarantor or surety should receive any part or benefit,
if such there be, accruing to his principal.
B. Laws governing letter of credit
Bank of the Philippine Islands vs De Reny fabric
Indsutries (GR No. L-24821, Oct. 16, 1970)
FACTS:
• Defendant De Reny (Phil Corporation) through its co-
defendants (president and secretary of the company),
applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase of
goods described in the letters of credit as
“DYESTUFFS OF VARIOUS COLORS” from
American supplier (JB Distributing Co.).
• All the applications were approved by the Bank.
• The corresponding Commercial Letters of Credit
Agreements were executed.
• The officers mentioned were bound personally as
joint and solidary debtors with the De Reny
Corporation.
• The De Reny Corp delivered to the Bank peso
marginal deposits as each letter of credit was opened.
• The dates for the four L/C were –Oct 10-Oct 23 – Oct
30 – Nov 10 of 1961.
• TOTAL Marginal deposits made was 97,582.25
• After, the petitioner Bank issued irrevocable
commercial letters of credit addressed to its
correspondent bank in the United States, with
instructions to notify the beneficiary (distributing
company), and that they have been authorized to
negotiate.
• JB distributing Company drew upon, presented to and
negotiated with these banks, its drafts covering the
amounts of the merchandise being exported, together
with the Bill of Lading, and collected the full value of
the drafts appearing in the letters of Credit.
• The Correspondent bank (US) debited the account of
petitioner BPI up to the full value of the drafts
presented by JB Distributing, plus commissions and
forwarded all documents to the BPI.
• Respondent De Reny made partial payment to the
Bank amounted P90,000.
• Subsequent payments were discontinued by the
respondent de reny because of the result of a
chemical test that the goods arrived in Manila were
colored chalks instead of dyestuffs.
• The Corporation refused to take possession and the
bank caused to deposit in in a warehouse which
caused them P12K up to the filing of its complaint with
the Court.
• The lower Court rendered its decision that the
corporation and the co-defendants must pay the
petitioner bank.
ISSUE:
WON De Reny Fabrics is liable under the Letters of Credit
despite the goods shipped does NOT conformed with the
item appearing in the letters of credit.
RULING:
YES.
• Under the terms of their Commercial Letter of Credit
Agreements with the Bank, De Reny Fabric 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.
• Having agreed to these terms written in the L/C, the
corporation have no recourse but to comply with
their covnant.
• De Reny Fabric Corporation cannot shift the
burden of loss to the Bank on account of the
violation by their vendor of its prestation.
• 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
nations.
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 the bank to verify whether what has been
described in letters of credit or drafts or shipping
documents actually tallies with what was loaded.
D. Perfection
Belman Compania Incorporada vs Central Bank of the
Philippines (Gr No. L10195, Nov 29, 1958)
FACTS:
• On September 21, 1950, petitioner applied to the
Philippine National Bank (PNB) for a letter of credit
amounting to $4,300, having been chosen by the
Republic of the Philippines to supply with 1,000 reams
of onion skin paper, in favor of Getz Bros & Co (US
Based).
• The PNB approved and granted the application; and
that the PNB through the Croker First National Bank
(Correspondent Bank in the United States), paid to
the payee the sum of $4,300.
• On April 26, 1951 when the petitioner Belman paid its
account to the PNB.
• Defendant Central bank of the Phil, pursuant to RA
601 (An act to impose a special excise tax on foreign
exchange sold by the central bank of the Philippines
and its agents), assessed and collected from
petitioner 17% special excise tax amounting to
P1,474.70 which the petitioner paid to the defendant
under the protest for the reason that as the letter of
credit was approved and granted on September 21,
1950 OR before March 28 , 1951 (approval of RA
601).
• Also, that the amount of foreign exchange sold by the
defendant bank by the letter of credit to the plaintiff
corporation was not subject to such excise tax.
• On December 28, 1954, the plaintiff corporation made
a demand in writing for the refund of the aforesaid
amount. But the bank refused to make the refund
• Belman Corporation prays that the 17% special
excise tax be declared illegal and ordered the bank to
make a refund.
• The defendant bank moved for the dismissal of the
complaint and alleged that the special excise tax is in
accordance with law.
• Also, defendant alleged that although the plaintiff
corporation had applied for and been granted a
commercial letter of credit on September 21, 1950,
before the effectivity of RA 601, no sale of foreign
exchange took place on that date, because the
sale took place on April 26, 1951, when the plaintiff
paid to the PNB.
• The Court rendered judgment ordering the defendant
bank to refund to the corporation the sum of
P1,474.70 with legal interest.
• The defendant appealed.
ISSUE:
WON the irrevocable letter of credit became a
consummated contract on April 26, 1951 when the
petitioner corporation paid its account to PNB.
RULING:
NO.
• An irrevocable letter of credit granted by a bank,
which authorizes a creditor in a foreign country to
draw upon a debtor of another and to negotiate the
draft through the agent or correspondent bank or any
bank in the country of the creditor, is a consummated
contract, when the agent or correspondent bank or
any bank in the country of the creditor pays or delivers
to the latter the amount in foreign currency, as
authorized by the bank in the country of the debtor in
compliance with the letter of credit granted by it.
• It is the date of the payment of the amount in
foreign currency to the creditor in his country by
the agent or correspondent bank of the bank in
the country of the debtor that turns from
executory to executed or consummated contract.
• It is NOT the date of payment by the debtor to the
bank in his country of the amount of foreign exchange
sold that makes the contract executed or
consummated, because the bank may grant the
debtor extension of time to pay such debt.
• There was a contract in the sense that one party who
has performed his part may compel the other to
perform his.
• Still until payment be made in foreign currency of the
amount applied for in the letter of credit and approved
and granted by the bank, the same is NOT an
executed or consummated contract.
• Therefore, the excise tax at the rate of 17% on the
amount to be paid by the corporation in Phil currency
for the foreign exchange sold is NOT SUBJECT to
such tax under RA 601 which took effect only March
28, 1951.
D. Perfection
Johannes Schuback & Sons Philippine Trading Corp
vs CA, Ramon San Jose aka Phil SJ Industrial
(GR 105387, Nov 11 1993)
FACTS:
• Private defendant wanted to purchase MAN bus
spare parts from Germany and established contact
with plaintiff wherein the plaintiff communicated to its
counterpart (Johannes Schuback and Sohne
Handelsgesellschaft m.b.n. & Co. aka “SCHUBACK
HAMBURG”) in Hamburg.
• On Oct 16, 1981, defendant submitted to plaintiff a list
of the part he wanted to purchase with its
specifications.
• Plaintiff referred the list to Schuback Hamburg and
sent a letter to defendant enclosing its offer on the
items listed by defendant.
• Plaintiff submitted its formal offer containing the item
number, quantity, part number, description, unit price
and total to defendant.
• On December 24, 1981, defendant informed
plaintiff of his desire to avail of the prices of the
parts and enclosed its Purchase Order No., wherein
it contained the item number, part number and
description.
• On December 29, 1981, defendant personally
submitted the quantities he wanted to the General
Manager of plaintiff.
• Plaintiff immediately ordered the items needed by
defendant from Schuback Hamburg to enable
defendant to avail of the old prices.
• Schuback Hamburg ordered the items from a supplier
in West Germany.
• Schuback Hamburg sent plaintiff a pro-forma invoice
to be used by defendant in applying for a leter of
credit.
• Said invoice required that the letter of credit be
opened in favor of Schuback Hamburg and defendant
acknowledged receipt of the invoice.
• An order confirmation was later sent to Schuback
Hamburg to plaintiff which was forwarded to and
received by defendant.
• Plaintiff reminded defendant to open the letter of
credit to avoid delay in shipment and payment of
interest.
• Defendant replied that he encountered difficulty in
securing the required dollar allocations and applying
for the letter of credit, procuring a loan and looking for
a partner-financier, and of finding ways to proceed.
• Schuback Hamburg received invoices from NDK for
partial deliveries which was paid by the former and
NDK confirmed receipt of payment.
• Plaintiff again reminded defendant of his order
and advised that the case may be endorsed to its
lawyers.
• Defendant replied that he did not make any valid
purchase order and there was no definite contract
between him and plaintiff.
• Plaintiff sent a rejoinder explaining that there is a valid
Purchase Order and suggested that defendant either
proceed with the order and open letter of credit OR
cancel the order and pay cancellation fee of 30% FOB
value.
• Petitioner filed a complaint for recovery of actual or
compensatory damages, unearned profits, interest,
attorney’s fees and costs against private respondent.
• The trial court ruled in favor of petitioner by ordering
private respondent to pay petitioner.
• Private respondent elevated his case before the CA
• CA reversed the decision of the TC. It ruled that
there was no perfection of contract since there was
no meeting of the minds as to the price between the
last week of December 1981 and the first week of
1982.
ISSUE:
WON a contract of sale has been perfected between the
parties.
RULING:
YES.
• Contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the
object of the contract and upon the price.
• Article 1319 of the Civil Code states: "Consent is
manifested by the meeting of the offer and
acceptance upon the thing and the cause which are
to constitute the contract.”
• The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a
counter offer." The facts presented indicate that
consent on both sides has been manifested.
• The offer by petitioner was manifested on December
17, 1981 when petitioner submitted its proposal
containing the item number, quantity, part
number, description, the unit price and total to
private respondent.
• On December 24, 1981, private respondent
informed petitioner of his desire to avail of the
prices of the parts at that time and simultaneously
enclosed its Purchase Order No. 0101 dated
December 14, 1981.
• At this stage, a meeting of the minds between
vendor and vendee has occurred, the object of the
contract being the spare parts and the consideration,
the price stated in petitioner's offer dated December
17, 1981 and accepted by the respondent on
December 24, 1981.
• Private respondent made good his promise to
communicate the same on December 29, 1981.
• Below Exh. G-3, marked as Exhibit G-3-A, there
appears this statement made by private respondent:
"Note. above P.O. will include a 3% discount. The
above will serve as our initial P.O." This notation on
the purchase order was another indication of
acceptance on the part of the vendee, for by
requesting a 3% discount, he implicitly accepted the
price as first offered by the vendor.
• The immediate acceptance by the vendee of the offer
was impelled by the fact that on January 1, 1982,
prices would go up, as in fact, the petitioner informed
him that there would be a 7% increase effective
January 1982.
• On the other hand, concurrence by the vendor with
the said discount requested by the vendee was
manifested when petitioner immediately ordered
the items needed by private respondent from
Schuback Hamburg which in turn ordered from
NDK, a supplier of MAN spare parts in West
Germany.
• When petitioner forwarded its purchase order to NDK,
the price was still pegged at the old one.
• Thus, the pronouncement of the Court of Appeals that
there was no confirmed price on or about the last
week of December 1981 and/or the first week of
January 1982 was erroneous.
• Perfection took place on on December 24, 1981.
• Although the quantity to be ordered was made
determinate only on December 29, 1981, quantity is
immaterial in the perfection of a sales contract.
• What is of importance is the meeting of the minds
as to the object and cause, which from the facts
disclosed, show that as of December 24, 1981,
these essential elements had already concurred.
• On the part of the buyer, the situation reveals that
private respondent failed to open an irrevocable letter
of credit without recourse in favor of Johannes
Schuback of Hamburg, Germany.
• This omission, however, does not prevent the
perfection of the contract between the parties, for
the opening of a letter of credit is not to be deemed a
suspensive condition.
• The facts herein do not show that petitioner reserved
title to the goods until private respondent had opened
a letter of credit.
• Petitioner, in the course of its dealings with private
respondent, did not incorporate any provision
declaring their contract of sale without effect until
after the fulfillment of the act of opening a letter
of credit.
• The opening of a letter of credit in favor of a
vendor is only a mode of payment.
• It is not among the essential requirements of a
contract of sale enumerated in Article 1305 and 1474
of the Civil Code, the absence of any of which will
prevent the perfection of the contract from taking
place.
E. Rights and obligation of parties (f. Confirming
Bank)
Insular Bank of Asia & America vs IAC (GR No. 74834,
Nov 17 1988)
FAC
• Respondent Sps. Mendoza obtained two loans from
respondent Phil. American Life Insurance Co. (Philam
Life) in the amount of 600k to finance the construction
of their residential house at Mandaue City.
• The said loans, with a 14% nominal interest rate, were
to be liquidated in equal amortizations over a period
of 5 years.
• To secure payment, Philam Life required that
amortizations be guaranteed by an irrevocable
standby letter of credit of a commercial bank.
• Sps. Mendoza contracted with petitioner Insular Bank
of Asia and America for the issuance of two
irrevocable standby letters of credit in favor of Philam
life for 600k.
• The first L/C for 500k was to expire on Oct 1 1981
• The second L/C for 100k was to expire on Jan 1 1982.
• The two irrevocable standby L/C were secured by
REM for the same amount on the property of the Sps
in favor of Insular Bank.
• Mendozas executed two promissory note in favor of
Insular Bank wherein it authorized Insular Bank to sell
at public or private sale such securities or things for
the purpose of applying to the payments that the Sps.
May have to Insular Bank.
• Sps. failed to pay Philam Life for the amortization and
the latter informed Insular Bank that it was declaring
both loans as entirely due and demandable.
• Insular Bank contested the propriety of calling in
the entire loan, Philam Life desisted and resumed
availing of the L/Cs by drawing on them for 5 more
amortizations
• Philam life again informed Insular Bank that it was
declaring the entire balance outstanding on both
loans, immediately due and payable.
• Philam Life demanded from Insular Bank but the bank
took the position that, as a mere guarantor of the Sps
who are principal debtors, its remaining outstanding
obligation amounted to P30k but later on corrected
that there was in fact an overpayment.
• On April 21, 1980, the REM, which secured the two
(2) standby L/Cs, was extrajudicially foreclosed by
and sold at public auction, to petitioner Insular Bank
as the lone and highest bidder.
• In RTC, Philam Life filed suit against Sps Mendoza
and Insular Bank for the recovery of the sum of
P274,779, still owing under the loan. RTC took
position that Insular Bank “as surety” was
discharged of its liability to the extent of the
payment made by the Mendozas, as the principal
debtors.
• Philam Life and Sps. Mendoza appealed to
respondent Appellate Court and reversed the RTC
decision and ruled that Insular Bank’s iability was
NOT reduced by virtue of the payments made by
the mendozas.
• Hence this petition.
ISSUE:
WON the partial payments made by the principal obligors
would have the corresponding effect of reducing the
liability of the petitioner as guarantor or surety under the
terms of the standby LCs.
RULING:
NO
• In construing the terms of a Letter of Credit, as in
other contracts, it is the intention of the parties that
must govern.
• "Letters of credit and contracts for the issuance of
such letters are subject to the same rules of
construction as are ordinary commercial contracts.
• They are to receive a reasonable and not a technical
construction and although usage and custom cannot
control express terms in letters of credit, they are to
be construed with reference to all the surrounding
facts and circumstances, to the particular and often
varying terms in which they may be expressed, the
circumstances and intention of the parties to them,
and the usages of the particular trade of business
contemplated."
• The subject standby Letters of Credit secure the
payment of any obligation of the Mendozas to
Philam Life including all interests, surcharges and
expenses thereon but not to exceed P600,000.00. But
while they are a security arrangement, they are not
converted thereby into contracts of guaranty.
• That would make them ultra vires rather than a letter
of credit, which is within the powers of a bank (Section
74[e], RA 337, General Banking Act).
• The standby L/Cs are, "in effect an absolute
undertaking 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.
• Being separate and independent agreements, the
payments made by the Mendozas CANNOT be
added in computing IBAA's liability under its own
standby letters of credit.
• Payments made by the Mendozas directly to Philam
Life are in compliance with their own prestation under
the loan agreements.
• And although these payments could result in the
reduction of the actual amount which could ultimately
be collected from IBAA, the latter's separate
undertaking under its L/Cs remains.
• Pursuant to its absolute undertaking under the L/Cs,
therefore, IBAA cannot escape the obligation to
pay Philam Life for this unexpended balance.
Philippine Virginia Tobacco Administration vs De Los
Angeles (Gr No L27829, Aug 19, 1988)
FACTS:
• Respondent Tomoteo Sevilla, proprietor and GM of
the Phil. Associated Resources (PAR) together with
two other entities were awarded in a public bidding
the right to import Virginia leaf tobacco at a rate of
one(1) kilo of imported tobacco for every nine (9) kilos
of leaf tobacco actually exported. (1:9)
• The contract entered into between the petitioner
PVTA and respondent Sevilla was for the importation
of 85 million kilos of Virginia leaf tobacco and a
counterpart exportation of 2.53 million kilos of PVTA
and 5.1 million kilos of farmer's and or PVTA at P3.00
a kilo.
• In accordance with their contract respondent Sevilla
purchased from petitioner PVTA and actually
exported 2,101.470 kilos of tobacco, paying the PVTA
the sum of P2,482,938.50 and leaving a balance of
P3,713,908.91.
• Before respondent Sevilla could import the
counterpart blending Virginia tobacco, amounting to
525,560 kilos, Republic Act No. 4155 was passed
and took effect on June 20, 1964, authorizing the
PVTA to grant import privileges at the ratio of 4 to 1
instead of 9 to 1 and to dispose of all its tobacco
stock at the best price available.
• The prevailing export or world market price under
which respondent will be exporting at a loss was
further amended to require respondent Sevilla
would open an irrevocable letter of credit with the
Prudential Bank and Trust Co. in favor of the PVTA to
secure the payment of said balance, drawable upon
the release from the Bureau of Customs of the
imported Virginia blending tobacco.
• While respondent Sevilla was trying to negotiate the
reduction of the procurement cost of the 2,101.479
kilos of PVTA tobacco already exported which
attempt was denied by petitioner and also by the
Office of the President, petitioner PVTA prepared
two drafts to be drawn against said letter of credit
for amounts which have already become due and
demandable.
• Respondent Sevilla then filed a complaint for
damages with preliminary injunction against petitioner
PVTA.
• Petitioner filed an answer with counterclaim,
admitting the execution of the contract. It alleged
however that respondent Sevilla violated the terms
thereof by causing the issuance of the preliminary
injunction to prevent the former from drawing from the
letter of credit for amounts due and payable and thus
caused petitioner additional damage of 6% per
annum.
• A writ of preliminary injunction was issued by
respondent judge enjoining petitioner PVTA from
drawing against the letter of credit.
• The lower court, on motion of respondent Sevilla,
dismissed the complaint on April 19, 1967 without
prejudice and lifted the writ of preliminary injunction
but petitioner's motion for reconsideration was
granted on June 5, 1967 and the Order of April 19,
1967 was set aside.
• On July 1, 1967 Sevilla filed an urgent motion for
reconsideration of the Order of June 5, 1967 praying
that the Order of dismissal be reinstated.
• But pending the resolution of respondent's motion
and without notice to the petitioner, respondent judge
issued the assailed Order of July 17, 1967 directing
the Prudential Bank & Trust Co. to make the
questioned release of funds from the Letter of Credit.
• Before petitioner PVTA could file a motion for
reconsideration of said order, respondent Sevilla was
able to secure the release of P300,000.00 and the
rest of the amount.
• Hence this petition.
ISSUE:
WON respondent Judge violated the irrevocability of the
letter of credit issued by respondent Bank in favor of
petitioner.
RULING:
YES.
• Respondent Judge violated the irrevocability of the
letter of credit issued by respondent Bank in favor of
petitioner.
• An irrevocable letter of credit cannot during its
lifetime be cancelled or modified without the express
permission of the beneficiary .
• (NOTE: Remedial Law Discussion) Consequently, if
the finding after the trial on the merits is that
respondent Sevilla has an unpaid balance due the
petitioner PVTA, such unpaid obligation would be
unsecured.
• In the issuance of the aforesaid Order, respondent
Judge likewise violated: Section 4 of Rule 15 of the
Revised Rules of Court which requires that notice of
a motion be served by the applicant to all parties
concerned at least three days before the hearing
thereof; Section 5 of the same Rule which provides
that the notice shall be directed to the parties
concerned, and shall state the time and place for the
hearing of the motion; and Section 6 of the same Rule
which requires proof of service of the notice thereof,
except when the Court is satisfied that the rights of
the adverse party or parties are not affected.
• A motion which does not meet the requirements of
Sections 4 and 5 of Rule 15 of the Revised Rules of
Court is considered a worthless piece of paper which
the Clerk has no right to receive and the respondent
court a quo has no authority to act thereon.
• The three-day notice required by law in the filing of a
motion is intended not for the movant's benefit but to
avoid surprises upon the opposite party and to give
the latter time to study and meet the arguments of the
motion.
• More specifically, Section 5 of Rule 58 requires notice
to the defendant before a preliminary injunction is
granted unless it shall appear from facts shown by
a􀁌davits or by the verified complaint that great or
irreparable injury would result to the applicant before
the matter can be heard on notice.
• Once the, application is filed with the Judge, the latter
must cause an Order to be served on the defendant,
requiring him to show cause at a given time and place
why the injunction should not be granted. The hearing
is essential to the legality of the issuance of a
preliminary injunction. It is an abuse of discretion on
the part of the court to issue an injunction without
hearing the parties and receiving evidence thereon.
f. Confirming Bank
Case No. 4 - Reliance: already in (A. Definiation and
nature)
Case No. 5 - Prudential : already in (A. Definiation and
nature)
Case. No. 6.
Rodzssen Supply Co. Inc., vs Far East Bank & Trust
Co.,
G.R. No. 109087
May 9, 2001
(petition for review on certiorari)
FACTS:
On January 15, 1979, Rodzssen Supply,Inc opened a 30-
day domestic letter of credit (LC) with Far East Bank in
the amount of Php 190,000.00 in favor of Ekman and
Company for the purchase of five units of hydraulic
loaders. Its expiry is on Feb 15, 1979 and subsequent
amendments up to Oct 16, 1979.
On March 16, 3 units were delivered to Rodzssen for
which Far East paid Ekman Php 114,000.00. The
remaining 2 units (Php 76,000.00) sent by Ekman “were
readily received by Rodzssen” before the expiry date of
the LC. Far East paid Php 76,000.00 covering the
remaining 2 units.
Upon demand of Far East from Rodzssen for the
payment, the latter refused to pay without any valid
reason. In its Answer, Rodzssen contends, by way of
special and affirmative defenses, that
a. Far East had no cause of action;
b. There was breach of contract by Far East who
in bad faith paid Ekman knowing that
the 2 units were delivered beyond the expiry date
c. Rodzssen offfered to return to Far East the 2
units but the latter refused to take
possession
RTC: ruled that Far East was entitled to recover from
Rodzssen Php 76,000.00 on the ground:
Under the contract of sale of the 5 loaders and
upon delivery and acceptance of
Rodzssen of the 2 remaining units, Rodzssen
became liable to Ekman for the payment
of the 2 units but no payment was made. Ekman
went to Far East for the payment of
the 2 units.
Far East, on the belief that it was still under
obligation and considering that the
necessary documents were presented,
voluntarily paid. Such payment gave rise to a
quasi-contract between Far East and Rodzssen
and if the latter escaped the liability, it
would result to unjust enrichment at the expense
of Far East.
- ordered Rodzssen to pay Far East
a. Php 76,000 (principal) plus 12%
interest
b. Sum equivalent to 25% of the total
amount collectible; and
c. Costs of the suit
CA: rejected the contention of Rodzssen that Far East
was in bad faith and negligence for paying for the
remaining units which had been delivered after the expiry
date of the LC.
- it pointed out that Rodzssen received the units
after the LC had expired.
- "To absolve defendant from liability for the price
of the same," the CA explained, "is to allow it to get away
with its unjust enrichment at the expense of the plaintiff.”
- affirmed the order of RTC but modified that
Rodzssen be made to pay the sum equivalent to 10% of
the total amount due and collectible.
ISSUES:
1. WON it is proper for a banking institution to pay
a letter credit which has expired or been cancelled - NO
2. WON Rodzssen liable to Far East - YES
RULINGS:
FIRST ISSUE:
- the subject Letter of Credit had become invalid upon the
lapse of the period fixed therein. Thus, Far East should
not have paid Ekman; it was not obliged to do so. In the
same vein, of no moment was Ekman's presentation,
within the prescribed period, of all the documents
necessary for collection, as the Letter of Credit had
already expired and had in fact been cancelled.
- The Letter of Credit expressly restricted the negotiation
to respondent bank and specifically instructed Ekman
and Company Inc. to tender the following documents:
(1) delivery receipt duly acknowledged by the
buyer,
(2) accepted draft, and (3) duly signed
commercial invoices. Likewise, the instrument
contained a provision with regard to its expiration date.
- Clearly, the bank paid Ekman when the former was no
longer bound to do so under the subject Letter of
Credit. The records show that Far Easrt paid the latter
P76,000 for the last two hydraulic loaders on March 14,
1980, five months after the expiration of the Letter of
Credit on October 16, 1979. In fact, on December 27,
1979, the bank had informed Rodzssen of the
cancellation of the commercial paper and credited
P22,800 to the account of the latter. The amount
represented the marginal deposit, which petitioner had
been required to put up for the unnegotiated portion of
the Letter of Credit — P76,000 for the two hydraulic
loaders.
SECOND ISSUE:
SC agreed with CA that Rodzssen should pay Far East
for the amount it paid for the equipment delivered by
Ekman which was voluntarily received and kept by
Rodzssen. Such right to seek recovery is based on
Article 2142 of CC: "Certain lawful, voluntary and
unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched
or benefited at the expense of another."
Rodzssen claims that it accepted the late delivery for the
fact that it is what is stipulated under the company’s trust
receipt arrangement with Far East but SC recognized
that there was an unexplained inaction by Rodzssen for 4
years with regard to the status of ownership or
possession.
When both parties to a transaction are mutually negligent
in the performance of their obligations, the fault of one
cancels the negligence of the other and, as in this case,
their rights and obligations may be determined equitably
under the law proscribing unjust enrichment.
As to the interest rate, SC decreased the rate to 6%.
Although the sum of money involved in this case was
payable to a bank, the present factual milieu clearly shows
that it was not a loan or forbearance of money. Thus,
pursuant to established jurisprudence and Article 2009 of
the Civil Code, petitioner is bound to pay interest at 6
percent per annum.
CASE NO. 7
Abad vs CA
G.R. No. L-42735
January 22, 1990
(petition for review)
FACTS:
On Oct. 31, 1963, TOMCO Inc. (known as Southeast
Timber Co, Inc.), applied and was granted by the Phil.
Commercial and Industrial Bank (PCIB) a domestic letter
of credit (LC) for Php 80,000.00 in favor of Oregon
Industries Inc to pay for Skagit Yarder with accessories.
PCIB paid Oregon the cost of the machinery against a bill
of exchange for Php 80,000, with recourse, presentment
and notice of dishonor waived.
On Nov. 5, TOMCO made the required marginal deposit
of Php 28,000 and signed and delivered to the a bank a
trust receipt acknowledging receipt of the merchandise in
trust for the bank and the same as property of PCIB with
a right to sell the same for cash as long as the entire
proceeds are turned over to the bank and apply against
debt of TOMCO.
Ramon Abad signed a “Deed of Continuing Guaranty” for
the release of TOMCO by PCIB of the the machinery
covered by the trust receipt, promising to pay jointly and
severally with TOMCO. Aside from the deposit made by
TOMCO, no other payment was made to PCIB.
PCIB sued TOMCO and Abad and presented a
“Statement of Draft Drawn” showing that TOMCO was
obligated who did not deny the liability but rather alleged
that it already made a marginal deposit which should first
be deducted from the principal obilgation, leaving Php
52,000 balance.
TRIAL COURT:
-
ordered TOMCO and Abad to pay jointly and severally
PCIB Php 125, 766.13 with interest and charges plus
attorneys fees and costs.
CA- confirmed in toto the decision.
Abad filed a petition for review.
ISSUES:
Whether the marginal deposit should be first deducted
before computing the interest and other charges which
would otherwise result to unjust enrichment in favor of the
bank.- YES
RULINGS:
The petition for review is granted. The decision of the
Court of Appeals is modified by deducting TOMCO's
marginal deposit of P28,000 from the principal
amount of P80,000 covered by its letter of credit. The
interests and other charges of the bank should be
computed on the outstanding loan balance of P52,000
only. The decision is affirmed in other respects, with costs
against the respondent Philippine Commercial and
Industrial Bank.
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. 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.
A trust receipt is considered 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. The bank does not become the real owner
of the goods. It is merely the holder of a security title
for the advances it had made to the importer. A letter of
credit-trust receipt arrangement is endowed with its
own distinctive features and characteristics. Under that
setup, 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.
CASE NO. 8
Consolidated Bank and Trust Corp (Solidbank) vs CA
G.R. No. 114286
April 19, 2001
(petition for review)
FACTS:
On July 13, 1982, Continental Cement Corporation
(respondent) and Gregory Lim obtained from Solidbank
Letter of Credit (LC) in the amount of Php 1,068,150.00
wherein the Corp paid a marginal deposit of Php
320,445.00. The LC was used to purchase around 5,000
liters of bunker fuel oil from Petrophil Corp which delivered
directly to the Corp in the Bulacan plant. A trust receipt for
Php 1,001,520.93 was executed by the Corp with Lim as
signatory.
Solidbank filed a complaint for sum of money for the
failure of the Corp to turn over the goods covered by the
trust receipt.
In its Answer, the Corp contends that the transaction was
a simple loan and not a trust receipt and the amount
claimed did not take into account the payments already
made. Lim also denied any personal liability. Moreover,
in the Supplemental Answer, it prayed for reimbursement
for the alleged overpayment of Php 490,228.90.
RTC: dismissed the complaint and ordered Solidbank to
pay the Corp:
a. The overpayment, with interest
b. Php 10,000.00 as atty’s fees and costs.
CA: modified the Decision; deleted the atty’s fees and
instead ordered the Corp to pay Solidbank Php
36,469.22.
ISSUES:
1. WON CA erred in holding that there was overpayment
despite absence of any computation.
2. WON manner of computation of the marginal
deposit by CA is in accordance with banking
practice.
3. WON the agreement as to the floating of interest valid
4. WON CA erred in considering the transaction as a
trust receipt transaction
5. WON CA erred in not holding the Lim under the trust
receipt transaction
RULINGS:
Petition: denied.
First issue: overpayment
It is well-settled rule (and principle) that the SC is not a
trier of facts. The findings of fact by the CA affirming the
factual findings of the trial court will not be disturbed
unless the findings are not supported by evidence.
Second issue: manner of computation
SC note that the RTC’s finding of overpayment is
supported by evidence presented. The Court reviewed
and computed the payments together with the interest
and penalty charges due and found that the overpayment
made by Solidbank in the amount of Php 563,070.13 was
more than what was ordered reimbursed by the lower
court.
As to the marginal deposit made, 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
respondent Corporation paid to it. The interests and
other charges on the subject letter of credit should be
computed only on the balance of P681,075.93, which
was the portion actually loaned by the bank to respondent
Corporation.
Third issue:
SC finds no error when RTC and CA set aside as invalid
the floating interest rate. The trust receipt agreement
stipulates that “agree to any increase or decrease in the
interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rate, and to pay
additionally the penalty of 1% per month until the
amount/s or installment/s due and unpaid under the trust
receipt on the reverse side hereof is/are fully paid.” A
stipulation ostensibly signifying an agreement to "any
increase or decrease in the interest rate," without more,
cannot be accepted by this Court as valid for it leaves
solely to the creditor the determination of what interest
rate to charge against an outstanding loan.
Fourth issue:
The delivery to the Corp of the goods occurred before the
trust receipt was executed nearly 2 months after full
delivery of the oil to the Corp which was used in its normal
operations. It was apparent, through the statements made
in the witness stand, that there was no trust receipt
transaction. The Corp was required to sign the trust
receipt simply to facilitate collection by the bank of the
loan it had extended.
Fifth issue:
SC: Lim and his spouse should not be personally liable
under the subject trust receipt. Lim entered the
transactions in his official capacity as the Vice Pres. The
personality of the corp is separate and distinct from the
persons composing it.
Case No. 9.
Marphil Export Corp vs Allied Banking Corp
G.R. No. 187922
September 21, 2016
FACTS:
Marphil, a domestic corp, is engaged in exporting
cuttlefish, cashew nuts and similar agricultural products.
Allied Bank granted Marphil a credit line where the latter
availed several loans evidenced by promissory notes in
order to finance the purchase and export of the products.
The loans were secured by 3 Continuing Guaranty or
Continuing Surety (CG/CS) Agreements executed by
Ireneo Lim, Lim Shiao Tong and Enrique Ching. Aside
from the said Agreements, irrevocable letters of credit
were issued as collateral for the loans where a Letter of
Agreement was executed undertaking that Allied Bank will
be reimbursed in the event the export bills/drafts covering
the letters of credit are refused by the drawee.
The transaction involved in this petition is the export of
cashew nuts to Intan Trading Ltd. Hongkong (Intan) in
Hong Kong. Upon application of Intan, Nanyang
Commercial Bank (Nanyang Bank), a bank based in
China, issued irrevocable letters of credit. These were
Letter of Credit (L/C) No. 22518 and L/C No. 21970, with
Marphil as beneficiary and Allied Bank as correspondent
bank. These covered two (2) separate purchase
contracts/orders for cashew nuts made by Intan.
Allied Bank credited Marphil’s credit line in the amount
Php 1,986,7002.70 which was deducted from the existing
loans for the first order of cashew nuts after the shipment
was made.
Upon the 2nd order, Marphil availed additional loans in the
credit line where Intan also applied for LC with Nanyang
Bank with Marphil as the beneficiary and Allied Bank as
correspondent bank. After receiving the export
documents including the draft issued by Marphil, Allied
Bank credited Marphil in the amount of P1,913,763.45,
the peso value of the amount in the letter of credit.
Allied Bank informed Marphil that there was a cable from
Nanyang Bank noting some discrepancies in the shipping
documents and similar cable was again sent and Intan
refused to accept the discrepancies. Nanyang Bank
refused to reimburse Allied Bank which the latter had
credited in Marphil’s credit line.
Marphil filed a Complaint for declaratory relief and
damages against Allied Bank asking the court to one
promissory note and to declare as fully paid the other
obligation to Allied Bank and to award it actual, moral and
exemplary damages, and attorney's fees. Marphil
maintained that it had fully paid its account with Allied
Bank, and that PN No. 4202, which Lim executed on
September 9, 1988, was void for lack of consideration.
Marphil alleged that it was constrained to send back the
shipment to the Philippines thereby incurring expenses
and tremendous business losses. It attributed bad faith to
Allied Bank because the latter did nothing to protect its
interest; Allied Bank merely accepted Nanyang Bank's
position despite L/C No. 21970 being irrevocable, and
Allied Bank allegedly confirmed Nanyang Bank's
revocation.
In its Answer with Compulsory Counterclaim and Petition
for Writ of Prelim. Attachment, Allied Bank maintained that
the promissory note was supported with consideration
and Marphil has fully paid its obligation. It sought to collect
the 3 prom.notes.
-Allied Bank filed a Complaint with Petition for Writ of
Preliminary Attachment and sued there as sureties under
the CG/CS Agreements for the loan obligations of Marphil
under three (3) promissory notes in the total amount of
Php 2,505,391,36. It also prayed for the issuance of a writ
of preliminary attachment on the ground that Lim was
guilty of fraud in contracting his obligations.
Lim, in his Answer, raised the defense that Marphil had
fully paid the loan covered by the prom.notes and
maintained that he could bot be held personally liable for
the CG/CS Agreement because he could not
remembered that he had signed it.
RTC:
1. Granted ex parte the prayer for prelim attachment
2. Rendered Omnibus Decision and granted Marhpil’s
complaint for declaratory relief and declared one of
the prom. notes void but held Marphil and/or Lim
jointly and severally liable for any balance on the
obligation.
CA:
-modified the RTC’s decision and declared the 2 prom.
notes fully paid but held Marphil and/or Lim iable for the
amount of P1,913,763.45, the amount equal to the face
value of L/C No. 2197.
- it CA found that Allied Bank is not directly liable for the
P1,913,763.45 under L/C No. 21970 because it was
not a confirming bank and did not undertake to
assume the obligation of Nanyang Bank to Marphil as
its own. At most, it could only be a discounting bank
which bought drafts under the letter of credit. as the
negotiating bank, has the ordinary right of recourse
against the exporter in the event of dishonor by the
issuing bank. A negotiating bank has a right of recourse
against the issuing bank, and until reimbursement is
obtained, the drawer of the draft continues to assume
a contingent liability on the draft. That there is no
assumption of direct obligation is further affirmed by the
terms of the Letter Agreement.
- On the writ of preliminary attachment, the CA noted that
petitioners did not file any motion to discharge it on the
ground of irregular issue. The CA found that no forum
shopping existed because the causes of actions for
declaratory relief and collection suit are different
ISSUES:
Whether or not Allied Bank is a confirming bank which
undertakes Nanyang Bank's obligation as issuing bank?
RULINGS:
SC affirmed the RTC and CA's findings that Allied Bank
did not act as confirming bank in L/C No. 21970 but at
most, buys the drafts drawn by Marphil as exporter at a
discount.
In finding that Allied Bank, as correspondent bank, did not
act as confirming bank; the CA reviewed the instructions
of Nanyang Bank to Allied Bank in L/C No. 21970. It found
that based on the instructions, there is nothing to support
Marphil's argument that Allied Bank undertook, as its own,
Nanyang Bank's obligations in the letter of credit.
- the instant case, the letter of Nanyang to Allied
provided the following instructions:
1) the negotiating bank is kindly requested to
forward all documents to Nanyang in one lot;
2) in reimbursement for the negotiation(s),
Nanyang shall remit cover to Allied upon receipt of
documents in compliance with the terms and conditions
of the credit;
3) the drafts drawn must be marked "drawn under
Nanyang Commercial Bank"; and
4) to advise beneficiary.
- From the above-instructions, it is clear that Allied did
not undertake to assume the obligation of Nanyang to
Marphil is its own, as if it had itself issued the L/C. At
most, it can only be a discounting bank which bought
the drafts under the L/C. Following then the rules laid
down in the case of Bank of America, a negotiating
bank has a right of recourse against the issuing bank,
and until reimbursement is obtained, the drawer of the
draft continues to assume a contingent liability thereon.
- we find that Allied Bank may seek reimbursement of
the amount credited to Marphil's account on an
independent obligation it undertook under the Letter
Agreement. In the Letter Agreement, Marphil
expressly bound itself to refund the amount paid by
Allied Bank in purchasing the export bill or draft, in case
of its dishonor by the drawee bank.
- the Letter of Agreement is a contract between Marphil
and Allied Bank where the latter agreed to purchase the
draft and credit the former its value on the undertaking
that Allied Bank will be reimbursed in case the draft is
dishonored. This obligation is direct, and is independent,
not only from the obligation under the draft, but also from
the obligation under L/C No. 2 1970. In this connection,
the CA is incorrect to say that the Letter Agreement
bolsters the bank's claim that it did not undertake direct
obligation under the letter of credit. The Letter Agreement
simply creates a separate obligation on Marphil's part to
refund the amount of the proceeds, in case of dishonor.
As an independent obligation, Marphil is bound to fulfill
this obligation to reimburse Allied Bank.
Bank of America, NT & SA vs CA
Facts:
An Irrevocable Letter of Credit No. 20272/81 was received
by petitioner Bank of America NT & SA which was issued
by Bank of Ayudhya, Samyaek Branch for the account of
General Chemicals, Ltd., of Thailand to pay for the sale of
plastic ropes and “agricultural files” with the petitioner as
advising bank and private respondent Inter-Resin
Industrial Corporation as beneficiary. Petitioner bank then
informed Inter-Resin about the said letter of credit. Upon
receipt, the private respondent sent Atty. Emiliano Tanay
to Bank of America to confirm the said letter of credit. The
bank however did not confirm the said letter of credit
because Reynaldo Dueñas said that there was no need
of confirmation.
The Inter-Resin made a partial availment of the Letter of
Credit after presentment of the required documents to
Bank of America. And after confirmation of all the
documents, petitioner issued a check in favor of
respondent. Bank of America then advised Bank of
Ayudhya of IR’s availment of the Letter of Credit and
asked to be reimbursed. Upon the presentation of
documents for the second availment, BA stopped the
processing upon receipt of telex from Bank of Ayudhya
declaring said Letter of Credit as fraudulent. Petitioner
then sued respondent for recovery of the first LC payment.
Inter-Resin however contended that Bank of America
should have checked the authenticity of the said Letter of
Credit.
Issue:
Whether or not Bank of America can recover from the
payment done under the letter of credit to Inter-Resin.
Ruling:
Yes, the Bank of America may recover the payment done
to Inter-Resin because the transaction was a discounting
arrangement. The Bank of America has acted
independently as a negotiating bank by saving Inter-Resin
from the hardship of presenting the documents directly to
Bank of Ayudhya to recover payment. As a negotiating
bank, they have the right of recourse against the issuer
bank and until they are reimbursed, the respondent
assumes the liability as the drawer of the draft.
The primary obligation of an advising bank is merely to
bring the letter of credit to the attention of the seller. They
do not assume any liability or responsibility for the
consequences arising out of the delay and/or loss in
transit of any messages, letters or documents. They are
only bound to check the “apparent authenticity” of the
letter of credit, which it already did.
Philippine Virginia Tobacco Administration vs De Los
Angeles
Facts:
Respondent Timoteo Sevilla, the proprietor and General
Manager of Philippine Associated Resources (PAR), was
awarded the right to import Virginia leaf tobacco together
with two other entities namely Nationwide Agro-Industrial
Development and Consoldiated Agro-Producers Inc. The
two other entities then assigned their rights to Philippine
Virginia Tobacco Administration and respondent
remained the only private entity accorded with the said
privilege. The said contract entered into by the petitioner
and respondent Sevilla was the importation of 85 million
kilos of Virginia leaf tobacco and a counterpart exportation
of 2.53 million kilos of PVTA and 5.1 million kilos of
farmer’s and or PVTA at P3 per kilo. The respondent then
purchased from the petitioner and actually exported
2,101.470 kilos of tobacco, paying the PVTA the sum of
Php 3,482,938.50 with an outstanding balance of Php
3,713,908.91. Before the counterpart blending Virginia
Tobacco was imported, RA 4155 was passed and took
effect which authorizes the PVTA to grant import
privileges at the ration of 4 to 1 compared to the 9 to 1
ratio.
Their contract was then amended to ensure that
respondent will not be exporting at a loss subject to the
condition that the previous purchase price for the kilos
already purchased and exported shall remain the same
and the remaining balance be liquidated and paid. Lastly,
that respondent Sevilla should open an irrevocable Letter
of Credit, which he did with the Prudential Bank and Trust
Co. in favor of PVTA.
Respondent’s negotiation to reduce the procurement cost
was denied by the petitioner and Office of the President.
When PVTA tried to collect from the letter of credit with
Prudential, Sevilla filed an injunction for the release of
funds with Prudential in Judge Delos Santos’ sala which
was approved and was subsequently ordered to release
the funds to Sevilla.
Issue:
Whether or not there was grave abuse of discretion in
releasing the funds to the applicant of the letter of credit.
Ruling:
Yes, Judge Delos Santos exercised grave abuse of
discretion because the respondent Judge violated the
irrevocability of the letter of credit which was issued by the
respondent Bank in favor of petitioner. An irrevocable
letter of credit cannot, during its lifetime, cannot be
cancelled or modified without the express permission of
the beneficiary. At the case at bar, the respondent judged
erred in issuing the said injunction and indeed there was
grave abuse of discretion in his part when he ordered the
dissolution of the letter of credit on the basis of
assumptions that cannot be established except by a
hearing on the merits nor does it show that RA 4155 shall
be applied retroactively to the respondent.
Keng Hua Paper Products Co Inc. vs CA
Facts:
A sealed container which contains seventy-six bales of
“unsorted waste paper” was received by the carrier on
June 29, 1982 which will be shipped to the consignee in
Manila. It was covered by a bill of lading which the
consignee received immediately after arrival but refused
to accept such shipment because it exceeded 10 metric
tons.
The shipment was discharged at the Manila International
Container Port but was not discharged by the consignee
during the grace period despite the notices of arrival and
remained inside for 481 days. During the said 481-day
period, demurrage charges accrued while the shipper
demanded payment which was refused by herein
petitioner.
Issue:
Whether or not there was a valid bill of lading and
perfected contract.
Ruling:
Yes, the said bill of lading was proper and perfected.
Section 17 of the Bill of Lading provided that the shipper
and consignee were liable for the payment of the
demurrage charges for the failure the discharge to
containerized shipment despite the lapse of the grace
period allowed.
A bill of lading has two functions: (1) a receipt for the
goods shipped, and (2) contract between the three parties
namely the shipper, carrier and consignee. The
acceptance and delivery of such, even if not signed,
perfects the contract because the said acceptance of a
paper which contains the terms of a proposed contract
constitutes an acceptsance of the contract and all of its
terms and conditions set forth which the acceptor has
actual or constructive notice.
The bill of lading is separate from the other letter of credit
of arrangements, thus, the said contract of carriage must
be treated independently of the contract of sale between
the seller and the buyer, and the contract for the issuance
of a letter of credit between the buyer and issuing bank.
Any discrepancy between the amount if goods and
amount of the goods described will not affect the validity
and enforcement of the contract of carriage.
Landbank of the Philippines vs Monet’s Export and
Manufacturing Corp.
Facts:
An Export Packing Credit Line Agreement was executed
between Land Bank of the Philippines (Land Bank) and
Monet’s Export and Manufacturing Corporation giving a
credit line in the amount of Php 250,000.00 to Monet
secured by the proceeds of its export letters of credit. It
was subsequently renewed and amended until it reached
Php 5,000,000.00. Monet then appointed Land Bank as
an assignor to demand, collect and receive the proceeds
of the said letters of credit from their clients.
Wishbone Trading Company of Hongkong, drew the
amount of USD 38,768.40 on the letter of credit which
Land Bank failed to collect from Wishbone. As a
consequence, Monet alleged that they are not liable for
the letter of credit.
Issue:
Whether or not Landbank’s failure to collect from
Wishbone Trading Company of Hong Kong absolves
Monet from liability?
Ruling:
What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the
issuing bank to pay the seller once the draft and the
required shipping documents are presented to it. It
assures the seller of prompt payment independent of any
breach of the main sales contract. By the Independence
principle, the bank determines compliance with the letter
of credit only by examining the shipping documents
presented and is precluded from determining whether the
main contract is actually accomplished or not.
The banks therefore do not assume any liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and other conditions. They
do not also assume any liability or responsibility for the
description, weight, quality, condition and others
represented by any document. However, on the
Wishbone transaction wherein Petitioner failed to collect
from the interests
PNB vs San Miguel
San Miguel Corporation and a certain Rodolfo Goroza
entered into an Exclusive Dealership Agreement wherein
Goroza was given by SMC the right to trade, deal, market
or otherwise sell its beer products. When he applied for a
letter of credit with SMC, they required a letter of credit
which Goroza applied to and was granted by PNB in the
amount of two million pesos. Subsequently, Goroza
applied for an additional credit line which reached four
million four hundred thousand pesos by 1997. Initially,
Goroza was able to diligently pay his credit purchases but
became delinquent by 1998. Demands were made
against Goroza and PNB but neither of them paid.
On April 2003, SMC filed a complaint for collection of sum
of money against PNB and Goroza. Goroza was
considered in default when he failed to answer the
complaint.
Issue:
Whether or not the CA erred in rendering a supplemental
judgment and amended order against the bank despite
the perfection of appeal of one of the defendants.
Ruling:
No, the CA did not err.
The intention of the trial court is to conduct separate
proceedings to determine the respective liability of the
parties. Although rendering a single decision to both
parties seems ideal, it is contrary to the Rules of Court.
A letter of credit is a written instrument where the writer
requests or authorizes the addressee to pay money or
deliver goods to a third person and assumes
responsibility. It however changes its nature as different
transactions occur and if carried until the completion ends
up as a binding contract. Thus, as issuing bank, they are
obligated to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it.
This assures the seller or beneficiary prompt payment
independent of any breach of the main contract and
precludes the bank from determining whether the main
contract is actually accomplished or not.
[ G.R. No. 183486, February 24, 2016 ]
THE HONGKONG & SHANGHAI BANKING
CORPORATION, LIMITED, PETITIONER, VS.
NATIONAL STEEL CORPORATION AND CITYTRUST
BANKING CORPORATION (NOW BANK OF THE
PHILIPPINE ISLANDS), RESPONDENTS.
Facts:
• 1.National Steel Corporation (NSC) sold to
Klockner prime cold rolled coils.
• According to the contract, Klockner applied for a
letter of credit with HSBC in favor of NSC as the
beneficiary
• HSBC issued the letter of credit to NSC where the
former is required to pay immediately upon
presentment of the documents listed in the letter
of credit
• NSC claimed its payment through City Trust.
• City Trust sent a collection order to HSBC stating
that the proceeds are remitted to SCB-M.
• HSBC sent City Trust a message stating that
payment will be handled under the Uniform Rules
of Collection (URC 322)
• HSBC told SCB-M that its payment is conditioned
upon the payment of Klockner to the former.
• The letter of credit expired and Klockner
continued to refuse payment
• HSBC returned to City Trust the documents and
stated that it considers itself to been discharged
of liability.
• City Trust now claims payment from HSBC
considering the former has complied with all the
documents .
• NSC then sent a letter to HSBC demanding
payment under the letter of cred and another
letter as final demand four months after the expiry
of the letter of credit.
• NSC filed a complaint against HSBC for a
collection of a sum of money in RTC Makati.
• HSBC denied liability arguing that City Trust
modified the obligation in its collection order
stating that the transaction is subject to the URC
322 and not under the UCP 400.
• City Trust argued that it was only an agent and
cannot modify the letter of credit without all the
parties’ consent.
• RTC Makati ruled in favor of HSBC stating that
the latter is not liable to pay NSC the amount and
that the applicable law is the URC 322 which was
the law chosen by City Trust to apply the
 transaction. Under the said law, HSBC has no
liability when Klockner refused payment.
• NSC and City Trust appealed to the CA. The CA
reversed the RTC ruling. According to the CA the
terms of the letter of credit clearly stated that UCP
400 applied and that even if it hadn’t stated, PH
jurisdiction has always recognized UCP 400.
Applying the UCP 400, the CA explained that the
obligation of the issuing bank is to pay the seller
or beneficiary the credit once the draft and
required documents are presented. Under the
independence principle, the issuing bank’s
obligation to pay under the letter of credit is
separate from the compliance of the parties on
the main contract.
Issue: Whether or not HSBC is liable
Ruling: The SC rules that HSBC is liable for the payment
of the letter of credit to NSC
1. UCP 400 is the applicable law in the transaction.
a. letters of credit are governed primarily by
their own provisions, by laws specifically
applicable to them, and by usage and
custom. Consistent with our rulings in
several cases, usage and custom refers
to UCP 400. When the particular issues
are not covered by the provisions of the
letter of credit, by laws specifically
applicable to them and by UCP 400, our
general civil law finds suppletory
application.
b. Letters of credit are defined and their
incidences regulated by Articles 567 to
572 of the Code of Commerce. These
provisions must be read with Article 2 of
the same code which states that acts of
commerce are governed by their
provisions, by the usages and customs
generally observed in the particular place
and, in the absence of both rules, by civil
law. In addition, Article 50 also states that
commercial contracts shall be governed
by the Code of Commerce and special
laws and in their absence, by general civil
law.
c. UCP has been continuously recognized
as binding in Philippine jurisprudence.
i. Bank of the Philippine Islands v.
De Reny Fabric Industries, Inc.:
the use of international custom in
our jurisdiction is justified by
Article 2 of the Code of
Commerce which provides that
acts of commerce are governed
by, among others, usages and
customs generally observed.
ii. Feati Bank & Trust Company v.
Court of Appeals: UCP should be
applied in cases where the letter
of credit expressly states that it is
the governing rule; the UCP
applies even if it is not
incorporated into the letter of the
credit.
iii. Metropolitan Waterworks and
Sewerage System v. Daway:
letters of credit have long been
and are still governed by the
provisions of the Uniform
Customs and Practice for
Documentary Credit[s] of the
International Chamber of
Commerce.
2. From the moment that HSBC agreed to the terms
of the Letter of Credit - which states that UCP 400
applies - its actions in connection with the
transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC
322 is an international custom that has been
recognized in commerce, this does not change
the fact that HSBC, as the issuing bank of a letter
of credit, undertook certain obligations dictated by
the terms of the Letter of Credit itself and by UCP
400.
3. UCP 400 states that an irrevocable credit payable
on sight, such as the Letter of Credit in this case,
constitutes a definite undertaking of the issuing
bank to pay, provided that the stipulated
documents are presented and that the terms and
conditions of the credit are complied with.
Further, UCP 400 provides that an issuing bank
has the obligation to examine the documents with
reasonable care. Thus, when City Trust
forwarded the Letter of Credit with the attached
documents to HSBC, it had the duty to make a
determination of whether its obligation to pay
arose by properly examining the documents. An
issuing bank acting in accordance with UCP 400
has the duty to pay the amount stated in the letter
of credit upon due presentment.
4. UCP 322 on the other hand provides that a bank
acting in accordance with the terms of the URC
322 merely facilitates collection. Its duty is to
forward the letter of credit and the required
documents from the entity seeking payment to
another entity which has the duty to pay. HSBC
failed to prove that URC 322 constitutes custom
practice and usage recognized in commerce.
5. It is significant to stress that an irrevocable letter
of credit cannot, during its lifetime, be cancelled
or modified without the express permission of the
beneficiary. The subsequent correspondences of
[CityTrust] to HSBC, thus, could not in any way
affect or amend the letter of credit, as it was not a
party thereto. As a notifying bank, it has nothing
to do with the contract between the issuing bank
and the buyer regarding the issuance of the letter
of credit.
6. As a bank, HSBC has the duty to observe the
highest degree of diligence. In all of its
transactions, it must exercise the highest
standard of care and must fulfill its obligations
with utmost fidelity to its clients. Notwithstanding
any statements by City Trust in the Collection
Order as to the applicable rules, FISBC had the
independent duty of ascertaining whether the
presentment of the Letter of Credit and the
attached documents gave rise to an obligation
which it had to Klockner (its client) and NSC (the
beneficiary). Regardless of any error that City
Trust may have committed, the standard of care
expected of LISBC dictates that it should have
made a separate determination of the
significance of the presentment of the Letter of
Credit and the attached documents. Regardless
of what City Trust’s order of collection states, had
HSBC exercised its duty with the highest degree
of diligence it would have known, that with the
documents presented by City Trust, it was
actually a presentment.
7. The independence principle of law on letters of
credit provide that in transactions where the letter
of credit is payable on sight, as in this case, the
issuer must pay upon due presentment. This
obligation is imbued with the character of
definiteness in that not even the defect or breach
in the underlying transaction will affect the issuing
bank's liability.
a. Article 17 of UCP 400 explains that under
this principle, an issuing bank assumes
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..."
8. Thus as long as the proper documents are
presented, the issuing bank has the obligation to
pay even if the buyer should later refuse payment.
Hence Klockner’s refusal carries no effect on
HSBC’s obligation. To allow HSBC to refuse to
honor the Letter of Credit simply because it could
 not collect first from Klockner is to countenance a
breach of the Independence Principle.
Insular Bank of Asia & America (PCIB) vs IAC, PhilAm Life
Insurance, & Sps Mendoza
Facts:
• Spouses Mendoza obtained 2 loans from Philam
Life amounting to P 600, 000 for the construction
of their residential house.
• The Mendozas contracted with Insula Bank
(IBAA) for the issuance of 2 irrevocable standby
letters of credit(L/C) in favor of Philam Life for the
amount of P600,000. The L/Cs were in turn
secured by a real estate mortgage in favor of
Insular Bank
• The Mendozas failed to pay Philam Life the
amortization so the it informed IBAA that it was
declaring both loans as entirely due and
demandable and demanded pay of P492, 996.30.
• IBAA contested the propriety of calling ill the
entire loan Philam life desisted.
• The Mendozas defaulted again on an
amortization so Philam informed IBAA that it was
declaring the entire balance outstanding in both
loans as immediately due and payable.
• Philam again demanded payment but IBAA
argued that it actually overpaid.
• The real estate mortgage was foreclosed and
sold at P775,000 to IBAA.
• Philam Life filed a suit against Spouses Mendoza
and IBAA before the RTC Manila for the recovery
of the sum of P 274, 779.56.
• The RTC ruled that IBAA had overpaid with the
amount of P 22 420 due to a stale IBAA
Manager’s check (P 30 100. 60)
• RTC ordered the Mendozas to pay Philam P
322,000 plus 2% interest/month; ordered Philam
to pay the overpayment by IBAA.
• RTC ruled that IBAA, "as surety" was discharged
of its liability to the extent of the payment made
by the Mendozas, as the principal debtors, to the
creditor, Philam Life.
• IAC reversed decision ruling that IBAA's liability
was not reduced by virtue of the payments made
by the Mendozas and dimissed IBAA’s claim for
refund of the overpayment.
Issue: Whether or not the partial payments of the
Mendozas have a corresponding effect of reducing the
liability of the petitioner as guarantor or surety underthe
terms of the standby LCs
Ruling: The SC rules in the negative, in favor of the
respondents.
1. In construing the terms of a Letter of Credit, as in
other contracts, it is the intention of the parties
that must govern.
2. Unequivocally, the subject standby Letters of
Credit secure the payment of any obligation of the
Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to
exceed P600,000.00. But while they are a
security arrangement, they are not converted
thereby into contracts of guaranty. That would
make them ultra vires rather than a letter of credit,
which is within the powers of a bank (Section
74[e], RA 337, General Banking Act). The
standby L/Cs are, "in effect an absolute
undertaking to pay the money advanced or the
amount for which credit is given on the faith of the
instrument."
3. They are primary obligations and not accessory
contracts. Being separate and independent
agreements, the payments made by the
Mendozas cannot be added in computing IBAA's
liability under its own standby letters of credit.
Payments made by the Mendozas directly to
Philam Life are in compliance with their own
prestation under the loan agreements. And
although these payments could result in the
reduction of the actual amount which could
ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains.
4. The amount of P222,000.00, therefore,
considered as "any obligation of the accountee"
under the L/Cs will still have to be paid by IBAA
under the explicit terms thereof, which IBAA had
itself supplied.
Transfield Philippines Inc vs Luzon Hydro Corp(LHC)
Facts:
• LHC and Transfield entered into a Turnkey
Contract where the latter undertook, on a turnkey
basis, to construct a hydro electric power station.
Petitioner was given the sole responsibility for the
design, construction, commissioning, testing and
completion of the Project.
• To secure the 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.
• In the course of the construction of the project,
petitioner sought various EOT to complete the
Project. LHC denied the requests, however. This
gave rise to a series of legal actions between the
parties which culminated in the instant petition.
• 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 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
• LHC sent notice to petitioner that pursuant to the
contract, if failed to comply with its obligation to
complete the project. Despite petitioners letters to
the banks, the banks informed petitioner that they
would pay the securities if and when the LHC
calls on them.
• Petitioner filed a Complaint for Injunction against
respondent in the RTC Makati seeking to restrain
the latter from calling on the securities and the
banks from paying.
• The RTC denied petitioner’s application for a writ
of preliminary injunction on the reason that in had
no legal right. 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.
• Petitioner elevated the case to the CA but
dismissed the same, conforming to the RTC’s
ruling. . 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.
Issue: Whether or not LHC can invoke the independence
principle and hence call upon the securities
Ruling: The SC rules in the affirmative, in favor of LHC
1. A letter of credit for the benefit of both parties, the
applicant and the beneficiary. Invocation of the
independence principle is not restricted to banks
only.
a. 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.
b. 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.”
c. 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.
2. Most writers agree that fraud is an exception to
the independence principle. Professor John F.
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.
a. The remedy for fraudulent abuse is an
injunction. However, 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
b. 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.
3. The case is actually mooted with the LHC fully
drawing the securities.
South City Homes Inc., Fortune Motors (Phils.), Palawan
Lumber Manufacturing Corporation vs BA Finance
Corporation
Facts:
• On January 17, 1983, Joseph L. G. Chua,
President of Fortune Motors Corporation
executed in favor of BA Finance a Continuing
Suretyship Agreement in which he "jointly and
severally unconditionally" guaranteed the "full,
faithful and prompt payment and discharge of any
and all indebtedness" of Fortune Motors
Corporation to BA Finance Corporation.
• On February 3, 1983, Palawan Lumber
Manufacturing Corporation represented by
Joseph L.G. Chua, George D. Tan, Edgar C.
Rodrigueza and Joselito C. Baltazar, executed in
favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation
"jointly and severally unconditionally" guaranteed
the "full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune
Motors Corporation to BA Finance Corporation.
• On the same date, South City Homes, Inc.
represented by Edgar C. Rodrigueza and Aurelio
F. Tablante, likewise executed a Continuing
Suretyship Agreement in which said corporation
"jointly and severally unconditionally" guaranteed
the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation.
• Subsequently, Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its
own favor, payable thirty (30) days after sight,
charged to the account of Fortune Motors
Corporation. Fortune Motors executed trust
receipts covering the motor vehicles delivered to
it by CARCO where it agreed to remit to the latter
the proceeds of any sale and immediately
surrender unsold vehicle. The drafts and trust
receipts were assigned to plaintiff-appellant,
under Deeds of Assignment executed by
CARCO.
• Fortune Motors failed to do so and BA Finance
send demand letter to petitioners.
• Failing to pay their account, BA Finance file for
sum of money with preliminary attachment with
RTC Manila.
• Petitioners moved to dismiss arguing that the
subrogation effected a novation without consent
of the debtor which extinguished the latter’s
liability and that, as regards the trust receipt
transaction, it was premature under P. D. No. 115
to immediately file a complaint for a sum of money
as the remedy of the entruster is an action for
specific performance; that the suretyship
agreements are null and void for having been
entered into without an existing principal
obligation; and that being such sureties does not
make them solidary debtors.
• The RTC rendered a decision ordering petitioners
to pay the drafts drawn.
• The CA affirmed the RTC ruling.
Issue: Whether or not respondent BA Finance has a valid
cause of action for a sum of money following the drafts
and trust receipts transactions
Ruling: The SC rules in the affirmative
 1. A trust receipt is 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. In the
event of default by the entrustee on his
obligations under the trust receipt agreement, it is
not absolutely necessary that the entruster cancel
the trust and take possession of the goods to be
able to enforce his rights thereunder.
2. Significantly, the law uses the word "may" in
granting to the entruster the right to cancel the
trust and take possession of the goods.
Consequently, petitioner has the discretion to
avail of such right or seek any alternative action,
such as a third party claim or a separate civil
action which it deems best to protect its right, at
any time upon default or failure of the entrustee
to comply with any of the terms and conditions of
the trust agreement.
Ching vs CA, PP, and Allied Banking Corp
Facts:
• Alfredo Ching was charged in RTC Makati with 4
counts of estafa under Art 312 RPC in relation to
PD 115 “Trust Receipts Law”.
• The informations charged accused as having
executed a trust receipt agreement in favor of
Allied Banking in consideration of receipt by
Ching of goods described as ‘12 Containers (200
M/T) Magtar Brand Dolomites’; ‘18 Containers
(Zoom M/T) Magtar Brand Dolomites’; ‘High Fired
Refractory Sliding Nozzle Bricks’; and ‘High Fired
Refractory Sliding Nozzle Bricks’ for which there
is now due the sum of (P 278, 917.80; P
419,719.20; P 387, 551. 95; and P389, 085.14
respectively) under the terms of which the
accused agreed to sell the same for cash with the
express obligation to remit to the complainant
bank the proceeds of the sale and/or to turn over
the goods, if not sold, on demand, but the
accused, once in possession of said goods, far
from complying with his obligation and with grave
abuse of confidence, did then and there, willfully,
unlawfully and feloniously misappropriate,
misapply and convert to his own personal use and
benefit the said goods and/or the proceeds of the
sale thereof, and despite repeated demands,
failed and refused and still fails and refuses, to
account for and/or remit the proceeds of sale
thereof to the Allied Banking Corporation.
• Subsequently, Ching filed before RTC Manila for
declaration of nullity of documents against Allied
Banking.
• Ching filed a petition in RTC Makati for
suspension of criminal proceedings on the
ground of prejudicial question but was denied and
instead schedule for arraignment and pre trial.
• Ching filed for certiorari and prohibition in the CA
which denied the same.
• RTC Manila, in the mean time, admitted Ching’s
amended complaint which now prays that the
court declare the transaction as that of simple
loan without any trust receipt.
• Ching filed the instant petition
Issue: Whether the pendency of a civil action for damages
and declaration of nullity of documents, specifically trust
receipts, warrants the suspension of criminal proceedings
instituted for violation of Article 315 1(b) of the Revised
Penal Code, in relation to P.D. 115, otherwise known as
the "Trust Receipts Law".
Ruling: The SC rules in the negative; affirms CA in that
there is no prejudicial question in the present case
1. Verily, under the prevailing circumstances, the
alleged prejudicial question in the civil case for
declaration of nullity of documents and for
damages, does not juris et de jure determine the
guilt or innocence of the accused in the criminal
action for estafa. Assuming arguendo that the
court hearing the civil aspect of the case
adjudicates that the transaction entered into
between the parties was not a trust receipt
agreement, nonetheless the guilt of the accused
could still be established and his culpability under
penal laws determined by other evidence. To put
it differently, even on the assumption that the
documents are declared null, it does not ipso
facto follow that such declaration of nullity shall
exonerate the accused from criminal prosecution
and liability.
a. the criminal liability of the accused for
violation of Article 315 1(b) of the Revised
Penal Code, may still be shown through
the presentation of evidence to the effect
that: (a) the accused received the subject
goods in trust or under the obligation to
sell the same and to remit the proceeds
thereof to Allied Banking Corporation, or
to return the goods, if not sold; (b) that
accused Ching misappropriated or
converted the goods and/or the proceeds
of the sale; (c) that accused Ching
performed such acts with abuse of
confidence to the damage and prejudice
of Allied Banking Corporation; and (d)
that demand was made by the bank to
herein petitioner.
2. Presidential Decree 115, otherwise known as the
"Trust Receipts Law", specifically Section 13
thereof, provides:
a. "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”
b. We must stress though, that an act
violative of a trust receipt agreement is
only one mode of committing estafa
under the abovementioned provision of
the Revised Penal Code. Stated
differently, a violation of a trust receipt
arrangement is not the sole basis for
incurring liability under Article 315 1(b) of
the Code.
3. 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.
4. Further, a trust receipt is a document in which is
expressed a security transaction whereunder the
lender, having no prior title in the goods on which
the lien is to be given and not having possession
which remains in the borrower, lends his money
to the borrower on security of the goods which the
borrower is privileged to sell clear of the lien with
an agreement to pay all or part of the proceeds of
the sale to the lender.[28] It 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.
5. Clearly, a trust receipt partakes the nature of a
security transaction. It could never be a mere
 additional or side document as alleged by
petitioner. Otherwise, a party to a trust receipt
agreement could easily renege on its obligations
thereunder, thus undermining the importance and
defeating with impunity the purpose of such an
indispensable tool in commercial transactions.
Spouse Tirso I. Vintola and Loreto Dy Vintola
Vs
Insular Bank of Asia and America
Facts:
• Vintolas do business under the name “Dax Kin
International” enganged in the manufacture of
raw sea shells into finished products , applied for
and were granted a domestic letter of credit by
(IBAA).
• In the amount of P 40,000, 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.
• Vintolas defaulted and the IBAA demanded
payment in a letter date Jan 1 1976.
• 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.
• CFI Cebu acquitted the Vintolas of the crime
charged on the ground that the element of
misappropriation or conversion was nonexistent.
• IBAA filed to recover the value of goods before
the RTC. The RTC order the Vintolas to pay IBAA
the sum of P 72,982.00. It was appealed to the
CA but was referred to the SC on pure question
of law.
Issue: Whether or not an acquittal in estafa bars IBAA's
filing of the civil action
Ruling: The SC rules in the negative, the judgment of the
lower court is affirmed
1. 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.
2. Thus, Section 4 of P.D. No. 115 defines a trust
receipt transaction as:
a. ... 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:
i. 1. In the case of goods or
documents, (a) to sell the goods
or procure their sale,
3. 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."
4. As elucidated in Samo vs. People "a trust receipt
is considered 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."
5. 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.
6. Since IBAA is not the owner of the goods,
depositing said goods with the court does not strip
the Vintolas of liability
7. The acquittal does not free the Vintolas from
liability as they are liable ex contractu and not ex
delicto.
Rosario Textile Mills Corporation (RTMC) and Edilberto
Yujuico vs Home Bankers Savings and Trust Company
Facts:
• In 1989, RTMC applied with Home Bankers for an
Omnibus Credit line for P 10 million but was only
approved P 8 million.
• Yujuico signed a Surety Agreement in favor of the
bank where he bound himself with RTMC for
payment of all the latter’s debt from 1989 to 1990.
• RTMC, represented by Yujuico, executed in favor
of the bank a total of eleven (11) promissory
notes.
• RTMC failed to pay its loans. The bank filed for a
complaint of sum of money against RTMC and
Yujuico in RTC Manila.
• Yujuico argued that the bank told him that the
surety agreement was only a formality where he
was not actually liable. They argued that imported
raw materials under the credit line was with a
grant of option to turn over them to the bank
should they comply with required specifications.
• The raw materials did not comply with such but
the bank still refused to accept the same. The
materials were destroyed in a fire.
• The RTC ruled in favor of the bank.
• RTMC and Yujuico appealed to CA arguing that
under the trust receipt contracts between 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 CA affirmed the RTC ruling holding that the
bank is merely the holder of the security while the
goods belong to petitioners.
Issue: Whether or not petitioners are still liable to the bank
considering that the raw material purchased under the
credit line are destroyed by fire
Ruling: SC rules in the affirmative
1. The transaction between parties was one of
loan.
a. The petitioners cannot argue that
they were only the end user while the
bank owned the materials (and
hence, res perit domino).
2. 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.” 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.
3. 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.
a. In Samo vs. People, 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.”
b. 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:
i. “(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.”
c. In Sia vs. People,[9] Abad vs. Court
of Appeals,[10] and PNB vs.
Pineda,[11] we held that:
i. “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...”[
COLINARES v CA
FACTS:
Petitioners, Colinares and Veloso, were
contracted by the Carmelite Sisters of Cagayan de Oro
City to renovate the latter’s convent. They were able to
obtain numerous materials from CM Builders Centre for
the construction project. Petitioners applied for a
commercial letter of credit with the Philippine Banking
Corp, in favor of CM Builders and later on was approved.
Such letter of credit covered the full invoice value of the
goods and petitioners signed a pro-forma trust receipt as
security. The loan was due on Jan 29, 1980. PBC made
a partial payment of the loan. PBC demanded that the
amount be paid within seven days from notice and instead
of complying Veloso confessed they lost a certain amount
in the Carmelite Monastery Project and requested for a
grace period. PBC sent a new demand letter but
petitioners proposed to modify the terms of payment of
the loan. PBC continued to demand payment of the
balance. Now, petitioners were charged with the violation
of the PD 115 (Trust Receipts Law) in relation to Art 315
of RPC (Estafa). Veloso contended that it was a “clean
loan” as per verbal guarantee of PBC’s former manager.
Petitioners signed the documents without reading the fine
print, only learning of the trust receipt implication much
later. When Veloso brought this to the attention of PBC,
the manager assured him that the trust receipt was a mere
formality. Trial Court convicted petitioners of estafa and to
solidarily indemnify PBC. It considered the transaction
between PBC and petitioners as a trust receipt
transaction under Sec 4, PD 115. It also considered
petitioners’ use of the goods in their Carmelite monastery
project an act of “disposing” as in Sec 13, PD 115, and
treated the charge invoice for goods issued by CM
Builders as a “document” in Sec 3. It concluded that failure
of petitioners to turn over the amount they owed to PBC
constituted estafa. Petitioners appealed to the CA. CA
modified the judgement and held that documentary
evidence of the prosecution prevails over Veloso’s
testimony.
ISSUE:
Assuming there was a valid trust receipt, whether
the accused were properly charged, tried and convicted
for violation of Sec 13, PD 115 in relation to Art 315 RPC
notwithstanding the novation of the so-called trust receipt
converting the trustor-trustee relationship to creditor-
debtor situation.
RULING:
NO.
The Supreme Court ruled in favor of Petitioners.
It showed that the transaction intended by the parties was
a simple loan, not a trust receipt agreement.
Section 4, P.D. No. 115, the Trust Receipts Law, defines
a trust receipt transaction 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.
Failure of the entrustee to turn over the proceeds
of the sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed
of in accordance with the terms of the trust receipt shall
be punishable as estafa under Article 315 (1) of the
Revised Penal Code, without need of proving intent to
defraud.
The petitioners received the merchandise from
CM Builders and on that day, ownership was already
transferred to petitioners. It was only a day later that they
went to the bank to apply for a loan to pay for the
merchandise. This is normally a pure trust receipt
transaction where goods are owned by the bank and only
released to the importer in trust subsequent to the grant
of the loan. The bank acquires a "security interest" in the
goods as holder of a security title for the advances it had
made to the entrustee. The ownership of the merchandise
continues to be vested in the person who had advanced
payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by
his representative or successor in interest. To secure that
the bank shall be paid, it takes full title to the goods at the
very beginning and continues to hold that title as his
indispensable security until the goods are sold and the
vendee is called upon to pay for them; hence, the importer
has never owned the goods and is not able to deliver
possession. In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer
becomes absolute owner of the imported merchandise as
soon as he has paid its price. Trust receipt transactions
are 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. Petitioners were then acquitted.
NG v. PEOPLE
FACTS:
Petitioner, Ng, then engaged in the business of
building and fabricating telecommunication towers,
applied for a credit line with Asiatrust. Petitioner
voluntarily submitted documents in support of Asiatrust’s
credit investigation. Asiatrust approved the loan
application with the credit line agreement, Application and
Agreement for Irrevocable L/C, Trust Receipt
Agreements, and Promissory Notes. Though the
Promissory Notes matured on September 18, 1997, the
two (2) aforementioned Trust Receipt Agreements did not
bear any maturity dates as they were left unfilled or in
blank by Asiatrust. After petitioner received the goods,
consisting of chemicals and metal plates from his
suppliers, he utilized them to fabricate the communication
towers ordered from him by his clients which were
installed in three project sites. Petitioner realized difficulty
in collecting from his client Islacom, he failed to pay his
loan to Asiatrust. Asiatrust then conducted a surprise
ocular inspection of petitioner’s business, through their
appraiser, Linga, who found out that approximately 97%
of the subject goods of the Trust Receipts were "sold-out
and that only 3 % of the goods pertaining to Promissory
Note remained." Asiatrust endorsed for the possible
restructuring of the loan, the parties failed to reach a
settlement to work out the problem and determine a way
for petitioner to pay his debts. A complaint for Estafa,
under Art 315 RPC in relation to Sec 3 PD 115(Trust
Receipts Law) was filed with the RTC. Petitioner argued
that the loan was granted as his working capital and that
the Trust Receipt Agreements he signed with Asiatrust
were merely preconditions for the grant and approval of
his loan and that the trust receipt agreements and letters
of credit were contracts of adhesion, since the stipulations
found in the documents were prepared by Asiatrust in fine
print. The RTC found petitioner guilty and held that
petitioner could not simply argue that the contracts he had
entered into with Asiatrust were void as they were
contracts of adhesion. It reasoned that petitioner is
presumed to have read and understood and is, therefore,
bound by the provisions of the Letters of Credit and Trust
Receipts. It also held that petitioner, being the entrustee
stated in the Trust Receipts issued by Asiatrust, is thus
obliged to hold the goods in trust for the entruster and
shall dispose of them strictly in accordance with the terms
and conditions
of the trust receipts; otherwise, he is obliged to return the
goods in the event of non-sale or upon demand of the
entruster, failing thus, he evidently violated the Trust
Receipts Law. CA affirmed RTC decision. CA stated that
it was undisputed that petitioner entered into a trust
receipt agreement with Asiatrust and he failed to pay the
bank his obligation when it became due. MR was denied
by the CA.
ISSUE:
Whether petitioner is liable for Estafa under Art
315 RPC in relation to PD 115.
RULING:
NO.
The Supreme Court rules that PD 115 does not
apply since petitioner was transparent to Asiatrust from
the very beginning that the subject goods were not being
held for sale but were to be used for the fabrication of steel
communication towers in accordance with his contracts
with Islacom, Smart, and Infocom. In these contracts, he
was commissioned to build, out of the materials received,
steel communication towers, not to sell them. 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. Asiatrust was aware that
petitioner was not engaged in selling the subject goods
and that petitioner will use them for the fabrication and
installation of communication towers. Before granting
petitioner the credit line, Asiatrust conducted an
investigation, which showed that petitioner fabricated and
installed communication towers for well-known
communication companies to be installed at designated
project sites. In fine, there was no abuse of confidence to
speak of nor was there any intention to convert the subject
goods for another purpose, since petitioner did not
withhold the fact that they were to be used to fabricate
steel communication towers to Asiatrust. Hence, no
malice or abuse of confidence and misappropriation
occurred in this instance due to Asiatrust’s knowledge of
the facts. Furthermore, Asiatrust was informed at the time
of petitioner’s application for the loan that the payment for
the loan would be derived from the collectibles of his
clients. Petitioner informed Asiatrust that he was having
extreme difficulties in collecting from Islacom the full
contracted price of the towers. Thus, the duty of petitioner
to remit the proceeds of the goods has not yet arisen since
he has yet to receive proceeds of the goods. Again,
petitioner could not be said to have misappropriated or
converted the proceeds of the transaction since he has
not yet received the proceeds from his client, Islacom.
LAND BANK OF THE PHILS v. PEREZ
FACTS:
Petitioners, Land Bank of the Phils, filed a
complaint for estafa or violation of Art 315 RPC in relation
to PD 115 against respondents, the officers and rep of
Asian Construction and Development Corporation. LBP’s
account officer stated that LBP extended a credit
accommodation to ACDC through an agreement between
them. ACDC used the Letters of Credit/Trust Receipts
Facility of Agreement to buy construction materials.
Respondents executed trust receipts with the construction
materials. When the trust receipts matured, ACDC failed
to return to LBP the proceeds of the construction projects
or materials subject to the trust receipts. LBP demanded
payment but ACDC failed to comply. LBP then filed the
complaint however respondents stated that they signed
the trust receipt documents on or about the same time
LBP and ACDC executed the loan documents; their
signatures were required by LBP for the release of the
loans. They alleged that ACDC acted as a subcontractor
for government projects since their 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. Makati Assistant City Prosecutor Pineda
dismissed the complaint pointing 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. LBP filed for MR
but was denied. They appealed to the Secretary of Justice
and it was reversed. Petition for review before the CA was
filed and the CA applied the Colinares doctrine, wherein it
ruled that this case did not involve a trust receipt
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 and that since no payment for the
construction projects had been received by ACDC, its
officers could not have been guilty of misappropriating
any payment.
ISSUE:
Whether CA erred in reversing the resolutions by
applying the ruling of Colinares case, which is not
applicable in this case.
RULING:
NO.
The Supreme Court held that the transactions are
not trust receipts. 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
several government projects. LBP had in fact authorized
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
constructions for which the materials subject of the
alleged trust receipts had been used. 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. It held that 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. No dishonesty or abuse of
confidence existed in the handling of the construction
materials.
HUR TIN YANG v. PEOPLE
FACTS:
Metrobank extended several commercial letters
of credit to Supermax, a domestic construction business
corp. These commecial letters of credit were used by
Supermax to pay for the delivery of several construction
materials which will be used in their business. Metrobank
required petitioner, rep of Supermax, to sign 24 trust
receipts as security for the materials and to hold it or the
proceeds 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
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 but failed, so
Metrobank filed the complaint against petitioner.
Petitioner, 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. 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. Trial court found petitioner guilty of
estafa under Art 315 RPC. CA upheld RTC decision but
further 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.
ISSUE:
Whether petitioner is liable for Estafa under Art
315 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.
RULING:
NO. The Supreme Court ruled 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. Further the court ruled 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. The Court’s
ruling in Colinares v. Court of Appeals 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.
SPOUSES DELA CRUZ v. PLANTERS PRODUCTS,
INC.
FACTS:
Petitioners, Sps Dela Cruz, operated the
Barangay Agricultural Supply engaged im the distribution
and sale of fertilizers and agricultural chemical products.
Gloria applied for and was granted by respondent,
Planters Products Inc. (PPI), a regular credit line of
P200,000 for a 60-day term, with trust receipts as
collaterals. Petitioners submitted a list of their assets in
support of her credit application for participation in the
Special Credit Scheme (SCS) of PPI. Gloria signed in the
presence of the PPI distribution officer/assistant sales
representative two documents, called the Trust
Receipt/Special Credit Sheme. Gloria executed three
more documents and she filled up customer order forms
for fertilizer and agricultural chemical products which was
release under the supervision of PPI. The 60-day credit
term lapsed without Gloria paying her obligation under the
Trust Receipt/SCS. Hence, PPI wrote collection letters.
Receiving no response from her, the PPI District
Distribution Manager, sent her on June 8, 1979 a demand
letter on her "long overdue account". Several follow up
and demand letters was given stating the total
accountability of Gloria. RTC rendered judgement
ordering the petitioners to pay. RTC found that based on
the terms and conditions of the SCS Program, a creditor-
debtor relationship was created between Gloria and PPI;
that her liability was predicated on Section 4 of theTrust
Receipts Law (Presidential Decree No. 115) and on the
ruling in Robles v. Court of Appeals to the effect that the
failure of the entrustee (Gloria) to turn over to the entruster
(plaintiff) the proceeds of the sale of goods covered by the
delivery trust receipts or to return the goods constituted
estafa punishable under Article 315(1)(b) of the Revised
Penal Code. CA affirmed the RTC
ISSUE:
Whether the parties entered into a creditor-debtor
relationship.
RULING:
YES. The Supreme Court ruled that the following
circumstances manifested their intention to enter into the
creditor-debtor relationship with PPI and that the CA
properly held the petitioners fully liable to PPI. The law of
contracts provides that in determining the intention of the
parties, their contemporaneous and subsequent acts shall
be principally considered. Consequently, the written terms
of their contract with PPI, being clear upon the intention of
the contracting parties, should be literally applied credit
line of ₱200,000.00 that commenced the business
relationship between the parties. A credit line is really a
loan agreement between the parties. The first
circumstance was the credit line of ₱200,000.00 that
commenced the business relationship between the
parties. A credit line is really a loan agreement between
the parties. The second circumstance was the offer by
Gloria of trust receipts as her collateral for securing the
loans that PPI extended to her. The contract, its label
notwithstanding, was not a trust receipt transaction in
legal contemplation or within the purview of the Trust
Receipts Law (Presidential Decree No. 115) such that its
breach would render Gloria criminally liable for estafa.
Under Section 4 of the Trust Receipts Law, the sale of
goods by a person in the business of selling goods for
profit who, at the outset of the transaction, has, as against
the buyer, general property rights in such goods, or who
sells the goods to the buyer on credit, retaining title or
other interest as security for the payment of the purchase
price, does not constitute a trust receipt transaction and is
outside the purview and coverage of the law. The last
circumstance was that the petitioners now focus on the
amount of liabilities adjudged against them by the lower
courts. They thereby bolster the finding that they fully
knew and accepted the legal import of the documents
Gloria had signed of rendering them personally liable
towards PPI for the value of the inputs granted to the
farmer-participants through them. The finding is further
confirmed by her admission of paying to PPI the amount
of which payment, albeit allegedly made grudgingly,
solidified the existence of a creditor-debtor relationship
between them. Indeed, Gloria would not have paid that
amount except in acknowledgement of an indebtedness
towards PPI.
PEOPLE OF THE PILIPPINES VS NITAFAN
GR NO. 81559-60
FACTS:
Petitioner Allied Banking Corporation charged Betty Sia
Ang with estafa:
“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.
The accused filed a motion to quash the information on
the ground that the facts charged do not constitute an
offense – GRANTED. 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.

ISSUE:
W/N 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.
RULING: YES
The Court notes that the petitioner bank brought a similar
case before this Court in G.R. No. 82495, Allied Banking
Corporation v. Hon. Secretary Sedfrey Ordoñez and
Alfredo Ching which we decided on December 10, 1990.
In that case, the petitioner additionally questioned, and
the court 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.
The court 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 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.
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.
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. 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. 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. Further, 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.
METROPOLITAN BANK and TRUST COMPANY vs.
JOAQUIN TONDA & MA. CRISTINA TONDA
G.R. No. 134436 August 16, 2000
FACTS:
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda,
hereinafter referred to as the TONDA, applied for and
were granted commercial letters of credit by petitioner
Metropolitan Bank and Trust Company, hereinafter
referred to as METROBANK for a period of eight (8)
months beginning June 14, 1990 to February 1, 1991 in
connection with the importation of raw textile materials to
be used in the manufacturing of garments. The TONDA
acting both in their capacity as officers of Honey Tree
Apparel Corporation (HTAC) and in their personal
capacities, executed eleven (11) trust receipts to secure
the release of the raw materials to HTAC. The imported
fabrics with a principal value of P2,803,000.00 were
withdrawn by HTAC under the 11 trust receipts executed
by the TONDA. Due to their failure to settle their
obligations under the trust receipts upon maturity,
METROBANK through counsel, sent a letter dated August
10, 1992, making its final demand upon the TONDA to
settle their past due TR/LC accounts on or before August
15, 1992. They were informed that by said date, the
obligations would amount to P4,870,499.13. Despite
repeated demands therefor, the TONDA failed to comply
with their obligations stated in the trust receipts
agreements, i.e. the TONDA failed to account to
METROBANK the goods and/or proceeds of sale of the
merchandise, subject of the trust receipts. The RTC
convicted the spouses. However, the Court of Appeals
citing the case of Tan Tiong Tick vs. American
Apothecaries implied that in making the deposit, the
TONDA are entitled to set off, by way of compensation,
their obligations to METROBANK on their trust receipt
liability.
ISSUE:
W/N the Spouses Tonda are liable for Estafa
notwithstanding that the
RULING:
Compensation is not proper when one of the debts
consists in civil liability arising from a penal offense, the
raison d’etre for this being that if one of the debts consists
in civil liability arising from a penal offense, compensation
would be improper and inadvisable because the
satisfaction of such obligation is imperative.—The
handwritten note by the METROBANK officer
acknowledging receipt of the checks amounting to P2.8
Million made no reference to the TONDA’ trust receipt
obligations, and we cannot presume that it was anything
more than an ordinary bank deposit. The Court of Appeals
citing the case of Tan Tiong Tick vs. American
Apothecaries implied that in making the deposit, the
TONDA are entitled to set off, by way of compensation,
their obligations to METROBANK. However, Article 1288
of the Civil Code provides that “compensation shall not be
proper when one of the debts consists in civil liability
arising from a penal offense” as in the case at bar. The
raison d’etre for this is that, “if one of the debts consists in
civil liability arising from a penal offense, compensation
would be improper and inadvisable because the
satisfaction of such obligation is imperative.”
Any compromise relating to the civil liability arising from
an offense does not automatically terminate the criminal
proceeding against or extinguish the criminal liability of
the malefactor. Reliance on the negotiations for the
settlement of the trust receipts obligations between the
TONDA and METROBANK is simply misplaced. The
negotiations pertain and affect only the civil aspect of the
case but does not preclude prosecution for the offense
already committed. It has been held that “[a]ny
compromise relating to the civil liability arising from an
offense does not automatically terminate the criminal
proceeding against or extinguish the criminal liability of
the malefactor.” All told, the P2.8 Million deposit could not
be considered as having settled the trust receipts
obligations of the TONDA to the end of extinguishing any
incipient criminal culpability arising therefrom.
The 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.—The finding that there was no fraud and
deceit is likewise misplaced considering that 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.
COLINARES VS. CA
G.R. NO. 90828. SEPTEMBER 5, 2000
FACTS:
Melvin Colinares and Lordino Veloso (hereafter
Petitioners) were contracted for a consideration
of P40,000 by the Carmelite Sisters of Cagayan de Oro
City to renovate the latter’s convent at Camaman-an,
Cagayan de Oro City. Colinares applied for a commercial
letter of credit with the Philippine Banking Corporation,
Cagayan de Oro City branch (hereafter PBC) in favor of
CM Builders Centre. PBC approved the letter of
credit for P22,389.80 to cover the full invoice value of the
goods. Petitioners signed a pro-forma trust receipt as
security.
PBC debited P6,720 from Petitioners’ marginal deposit as
partial payment of the loan. After the initial payment, the
spouses defaulted. PBC wrote to Petitioners demanding
that the amount be paid within seven days from notice.
Instead of complying with PBC’s demand, Veloso
confessed that they lost P19,195.83 in the Carmelite
Monastery Project and requested for a grace period of
until 15 June 1980 to settle the account. Colinares
proposed that the terms of payment of the loan be
modified P2,000 on or before 3 December 1980,
and P1,000 per month . Pending approval of the proposal,
Petitioners paid P1,000 to PBC on 4 December 1980, and
thereafter P500 on 11 February 1981, 16 March 1981,
and 20 April 1981. Concurrently with the separate
demand for attorney’s fees by PBC’s legal counsel, PBC
continued to demand payment of the balance. On 14
January 1983, Petitioners were charged with the violation
of P.D. No. 115 (Trust Receipts Law) in relation to Article
315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction
was a “clean loan” as per verbal guarantee of Cayo Garcia
Tuiza, PBC’s former manager. He and petitioner
Colinares signed the documents without reading the fine
print, only learning of the trust receipt implication much
later. When he brought this to the attention of PBC, Mr.
Tuiza assured him that the trust receipt was a mere
formality. The Trust Receipts Law does not seek to
enforce payment of the loan, rather it 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. Here, it is crystal clear that
on the part of Petitioners there was neither dishonesty nor
abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to
meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
ISSUE:
W/N the transaction of Colinares falls within the ambit of
the Law on Trust Receipt
RULING:
Colinares received the merchandise from CM Builders
Centre on 30 October 1979. On that day, ownership over
the merchandise was already transferred to Petitioners
who were to use the materials for their construction
project. It was only a day later, 31 October 1979, that they
went to the bank to apply for a loan to pay for the
merchandise. This situation belies what normally obtains
in a pure trust receipt transaction where goods are owned
by the bank and only released to the importer in trust
subsequent to the grant of the loan.
The bank acquires a “security interest” in the goods as
holder of a security title for the advances it had made to
the entrustee. The ownership of the merchandise
continues to be vested in the person who had advanced
payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by
his representative or successor in interest. To secure that
the bank shall be paid, it takes full title to the goods at the
very beginning and continues to hold that title as his
indispensable security until the goods are sold and the
vendee is called upon to pay for them; hence, the importer
has never owned the goods and is not able to deliver
possession. In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer
becomes absolute owner of the imported merchandise as
soon as he has paid its price. There are two possible
situations in a trust receipt transaction. The first is covered
by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by
the provision which refers to merchandise received under
the obligation to “return” it (devolvera) to the owner.
Failure of the entrustee to turn over the proceeds of the
sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed
of in accordance with the terms of the trust receipt shall
be punishable as estafa under Article 315 (1) of the
Revised Penal Code, without need of proving intent to
defraud.
The ownership of the merchandise continues to be vested
in the person who had advanced payment until he has
been paid in full, or if the merchandise has already been
sold, the proceeds of the sale should be turned over to
him by the importer or by his representative or successor
in interest.
DEVELOPMENT BANK OF THE PHILIPPINES VS
PRUDENTIAL BANK
G.R. NO. 143772
FACTS:
Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with respondent Prudential
Bank for US$498,000. This was in connection with its
importation of 5,000 spindles for spinning machinery with
drawing frame, simplex fly frame, ring spinning frame and
various accessories, spare parts and tool gauge. These
were released to Litex under covering “trust receipts” it
executed in favor of Prudential Bank. Litex installed and
used the items in its textile mill located in Montalban,
Rizal. 9 years later, DBP granted a foreign currency loan
in the amount of US$4,807,551 to Litex. To secure the
loan, Litex executed real estate and chattel mortgages on
its plant site in Montalban, Rizal, including the buildings
and other improvements, machineries and equipments
there. Among the machineries and equipments
mortgaged in favor of DBP were the articles covered by
the “trust receipts.” Sometime in June 1982, Prudential
Bank learned about DBP’s plan for the overall
rehabilitation of Litex. In a July 14, 1982 letter, Prudential
Bank notified DBP of its claim over the various items
covered by the “trust receipts” which had been installed
and used by Litex in the textile mill. Prudential Bank
informed DBP that it was the absolute and juridical owner
of the said items and they were thus not part of the
mortgaged assets that could be legally ceded to DBP. For
the failure of Litex to pay its obligation, DBP extra-
judicially foreclosed on the real estate and chattel
mortgages, including the articles claimed by Prudential
Bank. During the foreclosure sale held on April 19, 1983,
DBP acquired the foreclosed properties as the highest
bidder. Learning of the intended public auction,
Prudential Bank wrote a letter dated September 6, 1984
to DBP reasserting its claim over the items covered by
“trust receipts” in its name and advising DBP not to
include them in the auction. It also demanded the turn-
over of the articles or alternatively, the payment of their
value.
ISSUE:
W/N the chattel mortgage covers the goods under the
trust receipt
RULING: NO.
Article 2085 (2) of the Civil Code requires that, in a
contract of pledge or mortgage, it is essential that the
pledgor or mortgagor should be the absolute owner of the
things pledged or mortgaged. Article 2085 (3) further
mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and
in the absence thereof, that he be legally authorized for
the purpose. Litex had neither absolute ownership, free
disposal nor the authority to freely dispose of the articles.
Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void and
had no legal effect. There being no valid mortgage, there
could also be no valid foreclosure or valid auction sale.
Thus, DBP could not be considered either as a mortgagee
or as a purchaser in good faith.
No one can transfer a right to another greater than what
he himself has. Nemo dat quod non habet. Hence, Litex
could not transfer a right that it did not have over the
disputed items. Corollarily, DBP could not acquire a right
greater than what its predecessor-in-interest had. The
spring cannot rise higher than its source. DBP merely
stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return
them on Prudential Bank’s demand. By its failure to pay
or return them despite Prudential Bank’s repeated
demands and by selling them to Lyon without Prudential
Bank’s knowledge and conformity, DBP became a trustee
ex maleficio. As a consequence of the release of the
goods and the execution of the trust receipt, a two-fold
obligation is imposed on the entrustee, namely: (1) to hold
the designated goods, documents or instruments in trust
for the purpose of selling or otherwise disposing of them
and (2) to turn over to the entruster either 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. In the case of
goods, they may also be released for other purposes
substantially equivalent to (a) their sale or the
procurement of their sale; or (b) their manufacture or
processing with the purpose of ultimate sale, in which
case the entruster retains his title over the said goods
whether in their original or processed form until the
entrustee has complied fully with his obligation under the
trust receipt; or (c) the loading, unloading, shipment or
transshipment or otherwise dealing with them in a manner
preliminary or necessary to their sale. Thus, in a trust
receipt transaction, the release of the goods to the
entrustee, on his execution of a trust receipt, is essentially
for the purpose of their sale or is necessarily connected
with their ultimate or subsequent sale.
Litex could not have subjected the goods under the trust
receipt to a chattel mortgage. Thus, the inclusion in the
mortgage was void and had no legal effect. There being
no valid mortgage, there could also be no valid
foreclosure or valid auction sale. Thus, DBP could not be
considered either as a mortgagee or as a purchaser in
good faith
SPOUSES RAMON R. NACU AND LOURDES I.
NACUVS.THE COURT OF APPEALS AND PILIPINAS
BANK
G.R. NO. L-108638 MARCH 11, 1994
FACTS:
Petitioners spouses are the registered owners of the
subject property covered by TCT No. 276891 of the
Registry of Deeds for Quezon City, located at 12
YakanStreet, La Vista Subdivision, Quezon City. On July
12, 1982, respondent Pilipinas Bank extended to Home
Construction-Joint venture, represented by
HoracioMendoza, Julio Matias and Ramon Nacu,
Irrevocable Stand-by LC No. 82/408-HO in the amount of
P4,400,000.00to guarantee the ten per cent (10%)
mobilization fund to be released by the Ministry of Public
Works and Highwaysin connection with a Lucana Fishing
Port and Construction Project.
To secure this Home Construction-Joint Venture credit
accommodation, petitioners spouses, together with
Spouses Horacio S. Mendoza and Leonisa D. Mendoza
and Spouses Julio D. Matias and Lydia Sison constituted
real estate mortgages on five (5) distinct properties in
favor of respondent Bank.
The subject deed of real estate mortgage dated June 7,
1982 executed by petitioner spouses, together with the
aforementioned co-mortgagors, provides, among other
things, that the mortgage shall secure the payment of the
said loan and those others that the mortgagee may extend
to the mortgagor including interest thereon and expenses
incurred incidental thereto and other obligations owing by
the mortgagor to the mortgagee, whether direct or
indirect, principal or secondary as appearing in the
accounts, books and records of the mortgagee.
In due time, the principal obligation mentioned in the said
real estate mortgage extended to the Home
Construction— Joint Venture was fully paid and
extinguished.
Upon request, respondent Bank effected the
cancellation/release of the titles subject of the said real
estate mortgage, particularly the properties of the co-
mortgagors, Horacio Mendoza and Julio Matias.
Petitioners spouses did not immediately request for the
issuance of the corresponding certificate of
cancellation/release of mortgage of TCT No. 276891 from
respondent Bank.
On February 24, 1983, 2 corporations under the Joint
Venture — JBS Construction, Inc., represented by its
president, Jose B. Sahagun and P.I. Construction and
Services Co., Inc., represented by its president, petitioner
Nacu secured from respondent Bank, under letters of
credit (L/C) Nos. 83/13786-HO and 83/13801-HO, a loan
accommodation for the importation of several pieces of
construction machinery and equipment to be used by said
joint venture in a construction project, located at
Mindanao.
In consideration of this JBS and PI Construction Joint
Venture credit accommodation, Jose Sahagun and
petitioner Nacu executed in their capacities as executive
officers thereof, a Continuing Security Agreement in favor
of respondent Bank. Said debtor corporations,
represented by their respective presidents, were also
made to sign trust receipts in favor of respondent Bank.
Later, petitioner spouses requested from respondent
Bank the issuance of the Certificate of
Cancellation/Release ofthe Real Estate Mortgage on TCT
No. 276891. The respondent Bank refused despite its
admission that the Home Construction loan had been fully
paid and despite the release of the properties of the co-
mortgagors, Horacio Mendoza and Julio Matias.
The demands in writing for the release of the questioned
encumbrance were not heeded. Petitioners spouses
thereby decided to file an action against respondent bank
before the Regional Trial Court. – Decided in favor of
plaintiffs. The respondent Bank appealed from the
aforesaid decision of the trial court. It reversed the RTC
decision. Petitioner spouses filed a MR but it was denied.
ISSUE:
W/N the real estate mortgage undertaken by Spouses
Ramon R. Nacu and Lourdes Nacu, in favor of Home
Construction — Joint Venture was extended, amplified or
modified to cover the loan transaction of Ramon R. Nacu,
in his capacity as one of the executive officers of the Joint
Venture of JBS Construction, Inc. and P.I. Construction
and Services Co., Inc., by virtue alone of the
comprehensive provision in the mortgage contract that:
. . . it shall also stand as security for the payment of the
said promissory note or notes, and/or accommodations
without the necessity of executing a new contract and this
mortgage shall have the same force and effect as if the
said promissory note or notes and/or accommodations
were existing as of the date thereof. . . .
RULING: NO
True, the real estate mortgage categorically provides that
it shall also stand as security for the payment of the said
promissory note or notes; and/or accommodations
without the necessity of executing a new contract and that
the mortgage shall have the same force and effect as if
the said promissory note or notes and/or
accommodations were existing on the date thereof.
However, the July 12, 1982 Home Construction loan
transaction and the February 24, 1983 JBS and
P.I.Construction — Joint Venture loan transaction are
totally alien to each other. Clearly, the two (2) loan
transaction involved different sets of parties. While it is
true that petitioner Nacu is a party inboth transactions, he
acted in totally different capacities.
To allow the 1982 mortgage contract to be amplified to
include the 1983 Continuing Surety Agreement would be
stretching too far the former contract's extent. Interpreting
the same as respondent Bank would want us to do would
make the provision too comprehensive and all-
encompassing as to amount to absurdity.
Besides, there is nothing in the loan accommodation
subsequently contracted that TCT 276891 is mortgaged.
Said loan was not even duly annotated on said title. Under
Section 60 of Act No. 496, a mortgage deed and all
instruments assigning discharging and otherwise dealing
with the mortgage are required to be registered. Without
registration, they cannot have any effect on the title.
Rather than support the position of respondent Bank, the
trust receipt agreement shows that the 1982 real estate
mortgage is no longer operative because otherwise, there
would have been no need for the execution of said trust
agreement to secure the second loan.
Under pertinent laws, the trust receipt is a separate and
independent security transaction intended to aid in
financing importers whereby the imported goods are held
as security by the lending institution for the loan
obligation.
If the parties intended the 1982 real estate mortgage to
apply to the 1983 loan transaction, respondent Bank
should have required petitioners spouses to execute the
proper loan documents clearly and categorically
constituting upon the same property a real estate
mortgage. The respondent Bank failed in this regard and
must therefore suffer the consequences.
Respondent Bank's actuation in refusing to cancel the
encumbrance annotated on petitioners spouses' Transfer
Certificate of Title on the ground that the latter's property
is still liable for an unpaid loan obligation of J.B.S.
Construction, Inc. and P.I. Construction and Services Co.,
Inc. was a clever attempt to extend by implication, beyond
the terms of the real estate mortgage contract, the latter's
force and effect. Respondent Bank should not be allowed
to take this "short-cut" to collect an indebtedness due it.
Principles of fairplay demand that it should not resort to
the expedience of enforcing a real estate mortgage when
there is none duly constituted.
SPOUSES VINTOLA V INSULAR BANK OF AMERICA
(IBAA)
G.R. NO. 73271 MAY 29, 1987
FACTS:
On August 20, 1975 the spouses Tirso and Loreta Vintola
(VINTOLAS), doing business under the name and style
“Dax Kin International,” were granted a domestic letter of
credit by the Insular Bank of Asia and America (IBAA),
Cebu City. 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, 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. 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.
ISSUE:
W/N Vintolas in their criminal liability are absolved by
settlement of their liability to IBAA
RULING:
Entruster does not become the real owner of the goods
but merely the holder of a security title for the advances
made under the Letter of Credit—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. 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.
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 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. 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. 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.
The entruster does not become the real owner of the
goods but merely the holder of a security title for the
advances made under the Letter of Credit. 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.
DAMIAN ROBLES vs. COURT OF APPEALS
G.R. No. L-59640 July 15, 1991
Facts:
1. Roberto Ng is the owner of Paramount Business
Machines, a firm dealing in office equipment.
2. In 6 separate transactions, Roberto entrusted to
Damian Robles several office equipment
(calculators, typewriters, adding machines),
which were covered by delivery trust receipts, for
the purpose of selling them. Robles likewise
issued postdated checks for the items. Robles
was to remit the proceeds of the sale, if sold, or
return the office equipment if not sold. It was
stipulated in the delivery trust receipts that:
“In trust for and as the property of said
Paramount Business Machines the above described
merchandise having been delivered to me/us for trial
and with the obligation on my/our part to return the
same in good order and condition within 2 days from
the date hereof unless before the expiration of said
period, I/we definitely purchase the same and pay the
price hereof.
In the meantime, pending the sales of the
above described merchandise to me/us, I/we agree
and undertake to be absolutely responsible as insurer
for the proper care and conservation of said property
and to be liable for any loss or destruction.
I/we further agree to keep the said property in
my/our residence or place of business at the address
indicated herein above and not to remove the same
from said promise without the previous knowledge
and consent of Paramount Business Machines.”
3. However, the postdated checks were dishonored
due to Robles causing the stoppage of its
payment. Robles also refused to return the office
equipment, despite demands, and defrauded
Roberto by misappropriating and converting the
office equipment for his own personal use.
4. The RTC found him guilty of estafa. Robles
appealed but CA affirmed the RTC’s decision.
The CA held that under the delivery trust receipts
Robles received the office equipment in trust or
with the obligation to account for the proceeds
thereof, or to return the same.
5. Robles appealed to SC with the contention that:
a. the delivery trust receipts were
"merely intended to evidence the fact
that the articles therein listed were
delivered to and received by him."
b. The documents do not reflect the true
intention of the parties considering that
even before he could comply with the
stipulations in those receipts, that is, to
return the articles enumerated therein
within the period of 2 days from the date
of the receipt, Roberto delivered to him
other articles without demanding
compliance with the condition imposed
by the earlier delivery trust receipts.
c. In short, the delivery trust receipts are
"mere formalities" whose printed terms
and conditions appearing therein were
not intended by the parties to govern
their transactions;
d. The transactions were in fact sales on
trial basis for a period of 2 days.
e. Thus, when he failed to return the
various pieces of equipment within the
two-day period, he was deemed to have
purchased the same and his liability
should therefore be only civil, i.e., to pay
the purchase price.
Issue: WON Robles’ contentions are correct and he is not
guilty of estafa
Ruling: No. He is guilty of estafa.
The quoted provisions of the trust receipts show clearly
(1) that Paramount retained ownership of the office
equipment covered by the receipts;
(2) that possession of the goods was conveyed to
petitioner subject to a fiduciary obligation either to return
them within a specified period of time or to pay or account
for the price of proceeds thereof. Surrounding
circumstances also showed that the transactions were not
ordinary sales on trial basis. There were 6 transactions
involved, not just one. In each transaction, there were
several items of equipment delivered to petitioner, instead
of just one, thereby indicating that petitioner was not an
ordinary buyer who would himself use the articles bought,
but rather a commission merchant. Additional items of
equipment were delivered to petitioner even before
compliance with his duty under one trust receipt to return
within 2 days the office equipment he had received. He
admitted in his Affidavit that he was Paramount's sales
agent. Petitioner, however, failed to return the machines
upon demand by Paramount and at the same time, failed
to account for the sale proceeds thereof.
The ordinary and accepted meaning of the phrase "in
trust" is an obligation upon a person arising out of a
confidence reposed in him to apply properly, faithfully and
according to such confidence.
The provisions of the conditions embodied in the trust
receipts need no further interpretation or elucidation for
the same is clear, specific and explicit. The Court has
observed the accused to be an intelligent man far from his
qualification of being a college professor and that he must
have fully understood the contents of the stipulations
appearing on the face of the delivery trust receipts which
he actually signed upon receipt of the articles described
therein.
We note in this connection that the delivery trust receipts
here involved in fact constituted trust receipts within the
meaning of Presidential Decree No. 115, known as the
"Trust Receipts Law,". Section 4 thereof defines a "trust
receipt" and a "trust receipt transaction" for purposes of
the decree in the following terms:
Sec. 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 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 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.
Under Section 13 of the Trust Receipts Law, the violation
by an entrustee of his obligations under a trust receipt
document, more specifically his failure to turnover the
proceeds of the sale of the goods covered by the trust
receipt, or to return said goods as they were not sold or
disposed of, would constitute the crime of estafa under
Article 315 (1) (b), Revised Penal Code.

The criminal liability springs from the violation of the trust
receipt.
Even in the absence of the provisions of Section 13 of the
Trust Receipt Law, the failure of Damian Robles to comply
with his fiduciary obligation under the delivery trust
receipts here involved, constituted the offense of estafa
punishable under Article 315 (1) (b) of the Revised Penal
Code. In other words, the elements of the offense of
estafa set out in Article 315 (1) (b) are present in the
instant case. Those elements are:
(1) unfaithfulness or abuse of confidence
(2) misappropriating money or goods
(3) received by the offender in trust or on commission or
under any other obligation involving the duty to make
delivery of or to return the same
(4) to the prejudice of another
The failure to account, upon demand, for funds or property
held in trust is evidence of misappropriation which, not
having been explained away or rebutted by petitioner
Damian Robles, warranted his conviction for estafa under
the Revised Penal Code.
Allied Banking Corp VS Hon. Ordonez (Public
Respondent) and Alfredo Ching (Private Respondent)
GR No 82495
10 Dec 1990
Facts:
1. Philippine Blooming Mills (PBM) thru its duly authorized
officer, private respondent Alfredo Ching, applied for
commercial letters of credit with petitioner to finance the
purchase of 500 M/T Magtar Branch Dolomites and
one1 Lot High Fired Refractory Sliding Nozzle Bricks.
2. Petitioner issued an irrevocable letter of credit in favor
of Nikko Industry Co., Ltd. (Nikko) by virtue of which the
latter drew 4 drafts which were accepted by PBM and
duly honored and paid by the petitioner bank.
3. To secure payment of the amount covered by the
drafts, and in consideration of the transfer by petitioner
of the possession of the goods to PBM, the latter as
entrustee, executed 4 Trust Receipt Agreements
acknowledging petitioner's ownership of the goods and
PBM's obligation to turn over the proceeds of the sale
of the goods, if sold, or to return the same, if unsold
within the stated period.
4. However, the obligation became overdue and despite
repeated demands, PBM failed and refused to either
turn over the proceeds of the sale of the goods or to
return the same.
5. Petitioner filed a criminal complaint against private
respondent for violation of PD 115. The Fiscal found a
prima facie case for violation of PD 115 and filed the
corresponding information.
6. Private respondent appealed the Fiscal's resolution to
the Department of Justice on three (3) grounds:
a) Lack of proper preliminary investigation
b) The Provincial Fiscal of Rizal did not have jurisdiction
over the case, as respondent's obligation was purely
civil
c) There had been a novation of the obligation by the
substitution of the person of the Rehabilitation
Receivers in place of both PBM and private respondent
Ching
7. Secretary of Justice held that private respondent’s
contention that respondent's obligation was purely a
civil one, is without any merit.
8. Private respondent filed a motion for reconsideration
which was denied.
9. Another motion for reconsideration was filed by
respondent. Private respondent also filed a
supplemental request for reconsideration with 2
additional grounds, namely:
a. there is no evidence on record to show that
respondent was in particeps criminis in the act
complained of
b. there could be no violation of the trust receipt
agreements because the articles imported by the
corporation and subject of the trust receipts were
fungible or consummable goods and do not form part
of the steel product itself. These goods were not
procured to be sold in whatever state or condition
they were in or were supposed to be after the
manufacturing process.
10. Because of private respondent's clarification that the
goods subject of the trust receipt agreements were
dolomites which were specifically used for patching
purposes over the surface of furnaces and nozzle
bricks which do not form part of the steel product itself,
Justice Secretary reversed its decision and held that
what the law contemplates or covers are goods which
have, for their ultimate destination, the sale thereof or if
unsold, their surrender to the entruster, this whether the
goods are in their original form or in their
manufactured/processed state. Since the goods
covered by the trust receipts and subject matter of
these proceedings are to be utilized in the operation of
the equipment and machineries of the corporation, they
could not have been contemplated as being covered by
PD 115. Thus, not all transactions covered by trust
receipts may be considered as trust receipt
transactions defined and penalized under PD 115. The
trust receipt agreements were executed as security for
the payment of the drafts. As such, the main transaction
was that of a loan. In essence, therefore, the
relationship between the Bank and the corporation,
consequently, the respondent, is that of debtor and
creditor. And that trust receipts under PD 115 are
treated as security documents for basically loan
transactions, so much so that criminal liability is virtually
obliterated and limiting liability of the accused to the
civil aspect only.
11. Petitioner Allied Bank filed a motion for
reconsideration which was denied.
Issues:
1. WON the goods covered by the trust receipts are
outside the contemplation of PD 115 - No
2. WON a violation of PD 115 criminally punishable - Yes
Ruling:
The penal provision of PD 115 (Trust Receipts Law)
encompasses any act violative of an obligation covered
by the trust receipt; it is not limited to transactions in goods
which are to be sold (retailed), reshipped, stored or
processed as a component of a product ultimately sold.
Hence, the penal provision of PD 115 applies when the
goods covered by a Trust Receipt do not form part of the
finished products which are ultimately sold but are
instead, utilized/used up in the operation of the equipment
and machineries of the entrustee-manufacturer.
Section 4 of said PD 115 says in part:
Sec. 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 entrustee, 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 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.
Respondent Ching contends that PBM is not in the
business of selling Magtar Branch Dolomites or High
Fired Refractory Sliding Nozzle Bricks, it is a
manufacturer of steel and steel products. Despite this,
PBM, as entrustee under the trust receipts still has the
obligations enumerated under Sec. 9 of PD 115.
The entrustee binds himself to sell or otherwise dispose
of the entrusted goods with the obligation to turn over to
the entruster the proceeds if sold, or return the goods if
unsold or not otherwise disposed of. A violation of this
undertaking constitutes estafa under Sec. 13, PD 115.
In an attempt to escape criminal liability, private
respondent claims PD 115 covers goods which are
ultimately destined for sale and not goods for use in
manufacture. But the wording of Sec. 13 covers failure to
turn over the proceeds of the sale of entrusted goods, or
to return said goods if unsold or disposed of in accordance
with the terms of the trust receipts. Private respondent
claims that at the time of PBM's application for the
issuance of the LC's, it was not represented to the
petitioner that the items were intended for sale, hence,
there was no deceit resulting in a violation of the trust
receipts which would constitute a criminal liability. Again,
we cannot uphold this contention. The non-payment of the
amount covered by a trust receipt is an act violative of the
entrustee's obligation to pay. There is no reason why the
law should not apply to all transactions covered by trust
receipts, except those expressly excluded.
To uphold the Justice Department's ruling would
contravene not only the letter but the spirit of PD 115.
There is customary banking and business practices
where trust receipts are used for importation of heavy
equipment, machineries and supplies used in
manufacturing operations. P.D. 115 seeks to protect trust
receipts in Philippine business, to provide for the rights
and obligations of parties to a trust receipt transaction and
regulate the enforcement of rights arising from default or
violations of trust receipt agreements.
Prudential Bank Vs. National Labor Relations
Commission
G.R. No. 112592 December 19, 1995
Facts:
1. Interasia Container Industries, Inc. (INTERASIA) had 3
labor cases in which it lost. Thus, NLRC granted
monetary awards (13th-month pay differentials,
separation pay, etc.) to the complainants.
2. Writs of execution were issued. The Sheriff levied on
execution personal properties (plastic sacks, sling
sacks, bags of plastic resins, plastic linings) located in
the factory of INTERASIA.
3. Petitioner filed an Affidavit of Third-Party Claim
asserting ownership over the seized properties on the
strength of trust receipts executed by INTERASIA in its
favor. Thus, the Sheriff suspended the public auction.
4. The LA denied the claim of petitioner and directed the
Sheriff to proceed with the levy of the properties.
5. Petitioner appealed to the NLRC.
6. In the public auction, the Sheriff declared Peliglorio as
the highest bidder and the LA ordered the release of
the properties to Peliglorio.
7. INTERASIA filed a Motion to Set Aside and/or Declare
Public Auction Sale Null and Void Ab Initio for
noncompliance with legal requisites. LA denied the
motion and directed the Sheriff to take possession of
the auctioned properties.
8. INTERASIA moved to reconsider the order. The
records were forwarded to NLRC. On the other hand,
petitioner filed a Third-Party Claimant's Appeal /
Memorandum. NLRC dismissed both. INTERASIA and
petitioner moved to reconsider but motions were
denied. It ruled that, according to the case of Vintola vs
Insular Bank, trust receipts are mere security
transactions which do not vest upon petitioner any title
of ownership, and that although the Trust Receipt
Agreements described petitioner as owner of the
goods, there was no showing that it canceled the trust
receipts and took possession of the goods.
9. Petitioner’s contention:
a) the public auction was conducted without notice and in
a place other than the premises of INTERASIA.
b) the extent of its security title over the properties subject
of the levy on execution, submitting that while it may
not have absolute ownership over the properties, still it
has right, interest and ownership consisting of a
security title which attaches to the properties.
c) Petitioner differentiates a trust receipt, which is a
security for the payment of the obligations of the
importer, from a real estate mortgage executed as
security for the payment of an obligation of a borrower.
Arguing that in the latter the ownership of the mortgagor
may not necessarily have any bearing on its
acquisition, whereas in the case of a trust receipt the
acquisition of the goods by the borrower results from
the advances made by the bank. It concludes that the
security title of the bank in a trust receipt must
necessarily be of the same or greater extent than the
nature of the security arising from a real estate
mortgage. Petitioner maintains that it is a preferred
claimant to the proceeds from the foreclosure to the
extent of its security title in the goods otherwise its
security title will become useless.
10. Private respondent’s contention:
a) Petitioner's negligence to immediately assert its right to
cancel the Trust Receipt Agreements, upon
INTERASIA's failure to comply with its obligation, is
fatal to its claim.
Issue: WON a Trust Receipt Agreement is simple loan
transaction (NLRC’s interpretation)
Ruling: No.
The security interest of the entruster is not merely an
empty or idle title. To a certain extent such interest
becomes a "lien" on the goods because the entruster's
advances will have to be settled first before the entrustee
can consolidate his ownership over the goods.
People vs. Nitafan case:
Nature of a trust receipt —
(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. 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. 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.
Reliance cannot be placed upon the Vintola case as an
excuse for the dismissal of petitioner's claim. For in that
case we sustained, rather than frustrated, the claim of the
bank for payment of the advances it had made to the
purchaser of the goods, notwithstanding that it was not
the factual owner thereof and that petitioners had already
surrendered the goods to it due to their inability to sell
them. We stated that the fact that the Vintolas were
unable to sell the seashells in question did not affect
IBAA's right to recover the advances it had made under
the loan covered by the Letter of Credit, with the trust
receipt as a security for the loan. Thus, except for our
disquisition on the nature of a trust receipt as restated in
Nitafan, Vintola hardly has any bearing on the case at
bench since the issue here involves the effect and
enforcement of the security aspect whereas the former
case deals with the loan aspect of a trust receipt
transaction.
The mechanics and effects from a trust receipt
transaction, particularly the importance given to the
security held by the entruster, i.e., the person holding title
over the goods:
By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of capital, of
credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could
hardly be carried on by any other means, and therefore it
is of the first importance that the fundamental factor in the
transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in
order to secure that the banker shall be repaid at the
critical point — that is, when the imported goods finally
reach the hands of the intended vendee — the banker
takes the full title to the goods at the very beginning; he
takes it as soon as the goods are bought and settled for
by his payments or acceptances in the foreign country,
and he continues to hold that title as his indispensable
security until the goods are sold and the vendee is called
upon to pay for them. This security is not an ordinary
pledge by the importer to the banker, for
the importer has never owned the goods, and moreover,
he is not able to deliver the possession; but the security is
the complete title vested originally in the bankers, and this
characteristic of the transaction has been recognized and
protected by the courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the
banker is always under the obligation to reconvey; but
only after his advances have been fully repaid and after
the importer has fulfilled the other terms of the contract.
Trust receipt contracts partake of the nature of a
conditional sale as provided by the Chattel Mortgage Law,
that is, the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price.
The ownership of the merchandise continues to be vested
in the owner thereof or in the person who has advanced
payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by
his representative or successor in interest.
Sec. 12 of P.D. No. 1159 assures the entruster of the
validity of his claim against all creditors —
Sec. 12. Validity of entruster's security interest as against
creditors. — The entruster's security interest in goods,
documents, or instruments pursuant to the written terms
of a trust receipt shall be valid as against all creditors of
the entrustee for the duration of the trust receipt
agreement.
The only exception to the rule is when the properties are
in the hands of an innocent purchaser for value and in
good faith. The records however do not show that the
winning bidder is such purchaser. Neither can private
respondents plead preferential claims to the properties as
petitioner has the primary right to them until its advances
are fully paid.
The NLRC argues that inasmuch as petitioner did not
cancel the Trust Receipt Agreements and took
possession of the properties it could not claim ownership
of the properties. We do not agree. The law uses the word
"may" in granting to the entruster the right to cancel the
trust and take possession of the goods. Consequently,
petitioner has the discretion to avail of such right or seek
any alternative action, such as a third-party claim or a
separate civil action which it deems best to protect its
right, at anytime upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust
agreement.
Hence, the NLRC committed grave abuse of discretion in
disregarding the third-party claim of petitioner. The
auction sale is set aside.
Landl & Company (Phil.) Inc. Vs. Metropolitan Bank &
Trust Company
G.R. No. 159622
July 30, 2004
Facts:
1. Petitioner corporation is engaged in the business of
selling imported welding rods and alloys. It opened
Commercial Letter of Credit with respondent bank. The
letter of credit was opened to purchase various welding
rods and electrodes. To cover the amount of petitioner
corporation's obligation to the bank: Petitioner
corporation put up a deposit, petitioners Percival
Llaban and Manuel Lucente executed a Continuing
Suretyship Agreement, and Petitioner Lucente also
executed a Deed of Assignment in favor of respondent
bank.
2. Further, 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.
3. Upon arrival of the goods from the in the Philippines
from the US, petitioner corporation took possession
and custody thereof.
4. Upon 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. Thus, respondent bank demanded that
petitioners, as entrustees, turn over the goods subject
of the trust receipt. Petitioners turned over the subject
goods to the
respondent bank. The goods were sold at public auction
with 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 filed a complaint for
sum of money to collect the said deficiency.
5. Petitioner contends 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. 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.
6. Trial court ruled in favor of respondent bank. Petitioners
appealed. CA affirmed decision of RTC.
Issue: WON an entruster who has 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.
Ruling: Yes.
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 under the
mistaken impression that the full turnover 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.
Section 7 of Presidential Decree No. 115, or the Trust
Receipts Law:
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
nonsale, 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.
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. 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.
A trust receipt is inextricably linked with the primary
agreement between the parties. A trust receipt
agreement is merely a collateral agreement, the purpose
of which is to serve as security for a loan.
A letter of credit-trust receipt arrangement is endowed
with its own distinctive features and characteristics. Under
that set-up, a bank extends a loan covered by the letter of
credit, with the trust receipt as security for the loan. In
other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature
which is in the covering trust receipt.
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.
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.
Possession by itself cannot be considered payment of the
loan secured thereby. Payment would legally result only
after foreclosure on said securities, sale and application
of the proceeds thereof to the 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 property in question
was merely to secure the payment of the loan obligation
and not for the purpose of transferring ownership thereof
in satisfaction of said loan. Thus, no dacion en pago was
ever accomplished.
Hence, the obligation to the entruster bank is not
extinguished when possession of the goods is
relinquished.
"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."
Hur Tin Yang v. People of the Philippines
Gr 195117 August 14, 2013
Facts:
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.
Supermax Philippines, Inc. (Supermax) is a domestic
corporation engaged in the construction business. On
various occasions Metropolitan Bank and Trust Company
(Metrobank) 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. Supermax failed to pay or deliver the
goods or proceeds to Metrobank. Instead, Supermax,
through petitioner, requested the restructuring of the
loan. When the restructuring of the loan did not
materialize, Metrobank sent another demand letter.
However, he demands fell on deaf ears, thus Metrobank,
filed the instant criminal complaints of the crime
of Estafa under the RPC in relation to Presidential Decree
No. 115 (PD 115) or the Trust Receipts Law.
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.
RTC:
The trial found petitioner guilty of the above mentioned
crime.
CA:
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.
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.
Issue:
Whether or not petitioner is liable for Estafa under the
RPC in relation to PD 115.
Ruling:
No. 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.
In determining the nature of a contract, 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.
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 a trust receipts transaction.
In Ng v. People and Land Bank of the Philippines v.
Perez, this Court 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 under PD 115
committed in a trust receipts transaction which refers
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. 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.
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 the crime
of estafa 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.
in Colinares v. Court of Appeals, the court ruled that 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
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.
G. R. No. 119858 - April 29, 2003
EDWARD C. ONG, Petitioner, vs. THE COURT OF
APPEALS AND THE PEOPLE OF THE
PHILIPPINES, Respondents.
Facts:
Petitioner Edward C. Ong filed this petition for review on
certiorari1 to nullify the Decision2 of the Court of Appeals.
The assailed Decision affirmed in toto petitioner's
conviction4 by the Regional Trial Court of Manila, on two
counts of estafa for violation of the Trust Receipts Law, to
wit:

In Criminal Case No. 92-101989, the Information
indicts petitioner and Benito Ong of the crime
of estafa committed as follows:
That on or about July 23, 1990, in the City of
Manila, Philippines, the said accused,
representing ARMAGRI International
Corporation, conspiring and confederating
together did then and there willfully, unlawfully
and feloniously defraud the SOLIDBANK
Corporation represented by its Accountant,
DEMETRIO LAZARO, a corporation duly
organized and existing under the laws of the
Philippines located at Juan Luna Street, Binondo,
this City, in the following manner, to wit: the said
accused received in trust from said SOLIDBANK
Corporation the following, to wit:
10,000 bags of urea
valued at P2,050,000.00 specified in a Trust
Receipt Agreement and covered by a Letter of
Credit No. DOM GD 90-009 in favor of the
Fertiphil Corporation; under the express
obligation on the part of the said accused to
account for said goods to Solidbank Corporation
and/or remit the proceeds of the sale thereof
within the period specified in the Agreement or
return the goods, if unsold immediately or upon
demand; but said accused, once in possession of
said goods, far from complying with the 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,
willfully, unlawfully and feloniously misapplied,
misappropriated and converted the same or the
value thereof to his own personal use and benefit,
to the damage and prejudice of the said
Solidbank Corporation in the aforesaid amount of
P2,050,000.00 Philippine Currency.
Contrary to law.
In Criminal Case No. 92-101990, the Information
likewise charges petitioner of the crime
of estafa committed as follows:
That on or about July 6, 1990, in the City of
Manila, Philippines, the said accused,
representing ARMAGRI International
Corporation, did then and there willfully,
unlawfully and feloniously defraud the
SOLIDBANK Corporation represented by its
Accountant, DEMETRIO LAZARO, a corporation
duly organized and existing under the laws of the
Philippines located at Juan Luna Street, Binondo,
this City, in the following manner, to wit: the said
accused received in trust from said SOLIDBANK
Corporation the following goods, to wit:
125 pcs. Rear diff. assy RNZO 49"
50 pcs. Front & Rear diff assy. Isuzu Elof
85 units 1-Beam assy. Isuzu Spz
all valued at P2,532,500.00 specified in a Trust
Receipt Agreement and covered by a Domestic
Letter of Credit No. DOM GD 90-006 in favor of
the Metropole Industrial Sales with address at
P.O. Box AC 219, Quezon City; under the
express obligation on the part of the said accused
to account for said goods to Solidbank
Corporation and/or remit the proceeds of the sale
thereof within the period specified in the
Agreement or return the goods, if unsold
immediately or upon demand; but said accused,
once in possession of said goods, far from
complying with the 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, willfully, unlawfully and
feloniously misapplied, misappropriated and
converted the same or the value thereof to his
own personal use and benefit, to the damage and
prejudice of the said Solidbank Corporation in the
aforesaid amount of P2,532,500.00 Philippine
Currency.
Contrary to law.
The Court of Appeals ruled that the prosecution need not
prove that petitioner is occupying a position in ARMAGRI
in the nature of an officer or similar position to hold him
the "person(s) therein responsible for the offense." The
Court of Appeals held that petitioner's admission that his
participation was merely incidental still makes him fall
within the purview of the law as one of the corporation's
"employees or other officials or persons therein
responsible for the offense." Incidental or not, petitioner
was then acting on behalf of ARMAGRI, carrying out the
corporation's decision when he signed the trust receipts.
Issue:
In ruling that, by the mere circumstance that petitioner
acted as agent and signed for the entrustee corporation,
petitioner was necessarily the one responsible for the
offense
Ruling:
The Court sustains the conviction of petitioner.
The pivotal issue for resolution is whether petitioner
comes within the purview of Section 13 of the Trust
Receipts Law which provides:
x x x . If the violation 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 offense.
(Emphasis supplied)
The Court held that petitioner is a person responsible for
violation of the Trust Receipts Law.
The Trust Receipts Law is violated whenever the
entrustee fails to: (1) turn over the proceeds of the sale of
the goods, or (2) return the goods covered by the trust
receipts if the goods are not sold.18 The mere failure to
account or return gives rise to the crime which is malum
prohibitum.19 There is no requirement to prove intent to
defraud.
The Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the
offense liable to suffer the penalty of imprisonment. The
reason is obvious: corporations, partnerships,
associations and other juridical entities cannot be put to
jail. Hence, the criminal liability falls on the human agent
responsible for the violation of the Trust Receipts Law.
In the instant case, the Bank was the entruster while
ARMAGRI was the entrustee. Being the entrustee,
ARMAGRI was the one responsible to account for the
goods or its proceeds in case of sale. However, the
criminal liability for violation of the Trust Receipts Law falls
on the human agent responsible for the violation.
Petitioner, who admits being the agent of ARMAGRI, is
the person responsible for the offense for two reasons.
First, petitioner is the signatory to the trust receipts, the
loan applications and the letters of credit. Second, despite
being the signatory to the trust receipts and the other
documents, petitioner did not explain or show why he is
not responsible for the failure to turn over the proceeds of
the sale or account for the goods covered by the trust
receipts.
The Trust Receipts Law expressly makes the
corporation's officers or employees or other persons
therein responsible for the offense liable to suffer the
penalty of imprisonment. In the instant case, petitioner
signed the two trust receipts on behalf of ARMAGRI 24 as
the latter could only act through its agents. When
petitioner signed the trust receipts, he acknowledged
receipt of the goods covered by the trust receipts. In
addition, petitioner was fully aware of the terms and
conditions stated in the trust receipts, including the
obligation to turn over the proceeds of the sale or return
the goods to the Bank.
True, petitioner acted on behalf of ARMAGRI. However, it
is a well-settled rule that the law of agency governing civil
cases has no application in criminal cases. When a
person participates in the commission of a crime, he
cannot escape punishment on the ground that he simply
acted as an agent of another party.26 In the instant case,
the Bank accepted the trust receipts signed by petitioner
based on petitioner's representations. It is the fact of
being the signatory to the two trust receipts, and thus a
direct participant to the crime, which makes petitioner a
person responsible for the offense.
Petitioner could have raised the defense that he had
nothing to do with the failure to account for the proceeds
or to return the goods. Petitioner could have shown that
he had severed his relationship with ARMAGRI prior to
the loss of the proceeds or the disappearance of the
goods. Petitioner, however, waived his right to present
any evidence, and thus failed to show that he is not
responsible for the violation of the Trust Receipts Law.
G. R. No. 164317 February 6, 2006
ALFREDO CHING, Petitioner,
vs.
THE SECRETARY OF JUSTICE, ASST. CITY
PROSECUTOR ECILYN BURGOS-VILLAVERT,
JUDGE EDGARDO SUDIAM of the Regional Trial
Court, Manila, Branch 52; RIZAL COMMERCIAL
BANKING CORP. and THE PEOPLE OF THE
PHILIPPINES, Respondents.
Facts:
Petitioner was the Senior Vice-President of Philippine
Blooming Mills, Inc. (PBMI). Sometime in September to
October 1980, PBMI, through petitioner, applied with the
Rizal Commercial Banking Corporation (respondent
bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods. Respondent
bank approved the application, and irrevocable letters of
credit were issued in favor of petitioner. The goods were
purchased and delivered in trust to PBMI.
Under the receipts, petitioner agreed to hold the goods in
trust for the said bank, with authority to sell but not by way
of conditional sale, pledge or otherwise; and in case such
goods were sold, to turn over the proceeds thereof as
soon as received, to apply against the relative
acceptances and payment of other indebtedness to
respondent bank. In case the goods remained unsold
within the specified period, the goods were to be returned
to respondent bank without any need of demand. Thus,
said "goods, manufactured products or proceeds thereof,
whether in the form of money or bills, receivables, or
accounts separate and capable of identification" were
respondent bank’s property.
When the trust receipts matured, petitioner failed to return
the goods to respondent bank, or to return their value
amounting to ₱6,940,280.66 despite demands. Thus, the
bank filed a criminal complaint for estafa6 against
petitioner in the Office of the City Prosecutor of Manila.
The CA ruled that the assailed resolutions of the
Secretary of Justice were correctly issued for the following
reasons: (a) petitioner, being the Senior Vice-President of
PBMI and the signatory to the trust receipts, is criminally
liable for violation of P.D. No. 115; (b) the issue raised by
the petitioner, on whether he violated P.D. No. 115 by his
actuations, had already been resolved and laid to rest in
Allied Bank Corporation v. Ordoñez;22 and (c) petitioner
was estopped from raising the City Prosecutor’s delay in
the final disposition of the preliminary investigation
because he failed to do so in the DOJ.
Issue:
Whether Ching is liable for the crime of Estafa under the
Trust Receipts Law
Ruling:
PD 115 explicitly allows the prosecution of corporate
officers ‘without prejudice to the civil liabilities arising from
the criminal offense’ thus, the civil liability imposed on
respondent in RCBC vs. Court of Appeals case is clearly
separate and distinct from his criminal liability under PD
115.
In the case at bar, the transaction between petitioner and
respondent bank falls under the trust receipt transactions
envisaged in P.D. No. 115. Respondent bank imported
the goods and entrusted the same to PBMI under the trust
receipts signed by petitioner, as entrustee, with the bank
as entruster.
It must be stressed that P.D. No. 115 is a declaration by
legislative authority that, as a matter of public policy, the
failure of person to turn over the proceeds of the sale of
the goods covered by a trust receipt or to return said
goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions. The Court rules that
although petitioner signed the trust receipts merely as
Senior Vice-President of PBMI and had no physical
possession of the goods, he cannot avoid prosecution for
violation of P.D. No. 115. The crime defined in P.D. No.
115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or
estafa with abuse of confidence. It may be committed by
a corporation or other juridical entity or by natural persons.
However, the penalty for the crime is imprisonment for the
periods provided in said Article 315
In this case, petitioner signed the trust receipts in
question. He cannot, thus, hide behind the cloak of the
separate corporate personality of PBMI. In the words of
Chief Justice Earl Warren, a corporate officer cannot
protect himself behind a corporation where he is the
actual, present and efficient actor.
G.R. No. 145578 November 18, 2005
JOSE C. TUPAZ IV and PETRONILA C.
TUPAZ, Petitioners,
vs.
THE COURT OF APPEALS and BANK OF THE
PHILIPPINE ISLANDS, Respondents.
Facts:
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz
("petitioners") were Vice-President for Operations and
Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation ("El Oro Corporation"). El Oro
Corporation had a contract with the Philippine Army to
supply the latter with "survival bolos."
To finance the purchase of the raw materials for the
survival bolos, petitioners, on behalf of El Oro
Corporation, applied with respondent Bank of the
Philippine Islands ("respondent bank") for two commercial
letters of credit. The letters of credit were in favor of El Oro
Corporation’s suppliers, Tanchaoco Manufacturing
Incorporated3 ("Tanchaoco Incorporated") and Maresco
Rubber and Retreading Corporation4 ("Maresco
Corporation"). Respondent bank granted petitioners’
application and issued Letter of Credit to Tanchaoco
Incorporated and Letter of Credit to Maresco Corporation.
Petitioners signed trust receipts in favor of respondent
bank.
Petitioners did not comply with their undertaking under the
trust receipts. Respondent bank made several demands
for payments but El Oro Corporation made partial
payments only. On 27 June 1983 and 28 June 1983,
respondent bank’s counsel5 and its
representative6 respectively sent final demand letters to
El Oro Corporation. El Oro Corporation replied that it
could not fully pay its debt because the Armed Forces of
the Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under
Section 13, Presidential Decree No. 115 ("Section 13") 7 or
Trust Receipts Law ("PD 115").
Issue:
Whether petitioners bound themselves personally liable
for El Oro Corporation’s debts under the trust receipts
Ruling:
A corporation, being a juridical entity, may act only
through its directors, officers, and employees. Debts
incurred by these individuals, acting as such corporate
agents, are not theirs but the direct liability of the
corporation they represent.12 As an exception, directors or
officers are personally liable for the corporation’s debts
only if they so contractually agree or stipulate.
In the trust receipt dated 9 October 1981, petitioners
signed below this clause as officers of El Oro Corporation.
Thus, under petitioner Petronila Tupaz’s signature are the
words "Vice-Pres–Treasurer" and under petitioner Jose
Tupaz’s signature are the words "Vice-Pres–Operations."
By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation’s
obligation. In Ong v. Court of Appeals,15 a corporate
representative signed a solidary guarantee clause in two
trust receipts in his capacity as corporate representative.
There, the Court held that the corporate representative
did not undertake to guarantee personally the payment of
the corporation’s debts, thus:
[P]etitioner did not sign in his personal capacity the
solidary guarantee clause found on the dorsal portion of
the trust receipts. Petitioner placed his signature after the
typewritten words "ARMCO INDUSTRIAL
CORPORATION" found at the end of the solidary
guarantee clause. Evidently, petitioner did not undertake
to guaranty personally the payment of the principal and
interest of ARMAGRI’s debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we
sustain petitioners’ claim that they are not personally
liable for El Oro Corporation’s obligation.
For the trust receipt dated 30 September 1981, the dorsal
portion of which petitioner Jose Tupaz signed alone, we
find that he did so in his personal capacity. Petitioner Jose
Tupaz did not indicate that he was signing as El Oro
Corporation’s Vice-President for Operations. Hence,
petitioner Jose Tupaz bound himself personally liable for
El Oro Corporation’s debts. Not being a party to the trust
receipt dated 30 September 1981, petitioner Petronila
Tupaz is not liable under such trust receipt.
G.R. No. 122502 December 27, 2002
LORENZO M. SARMIENTO, JR. and GREGORIO
LIMPIN, JR., petitioners,
vs.
COURT OF APPEALS and ASSOCIATED BANKING
CORP., respondents.
Facts:
On September 6, 1978, defendant Gregorio Limpin, Jr.
and Antonio Apostol, doing business under the name and
style of ‘Davao Libra Industrial Sales,’ filed an application
for an Irrevocable Domestic Letter of Credit with the
plaintiff Bank for the amount of P495,000.00 in favor of LS
Parts Hardware and Machine Shop (herein after referred
to as LS Parts) for the purchase of assorted scrap irons.
Said application was signed by defendant Limpin and
Apostol. The aforesaid application was approved, and
plaintiff Bank issued Domestic Letter of Credit in favor of
LS Parts for P495,000.00. Thereafter, a Trust Receipt
dated September 6, 1978, was executed by defendant
Limpin and Antonio Apostol.
In said Trust Receipt, the following stipulation, signed by
defendant Lorenzo Sarmiento, Jr. The defendants failed
to comply with their undertaking under the Trust Receipt.
The defendants claim that they cannot be held liable as
the 825 tons of assorted scrap iron, subject of the trust
receipt agreement, were lost when the vessel transporting
them sunk, and that said scrap iron were delivered to
‘Davao Libra Industrial Sales’, a business concern over
which they had no interest whatsoever.
Issue: Whether Sarmiento was liable
Ruling:
In the present case, private respondent’s complaint
against petitioners was based on the failure of the latter to
comply with their obligation as spelled out in the Trust
Receipt executed by them.20 This breach of obligation is
separate and distinct from any criminal liability for "misuse
and/or misappropriation of goods or proceeds realized
from the sale of goods, documents or instruments
released under trust receipts", punishable under Section
13 of the Trust Receipts Law (P.D. 115) in relation to
Article 315(1), (b) of the Revised Penal Code. Being
based on an obligation ex contractu and not ex delicto,
the civil action may proceed independently of the criminal
proceedings instituted against petitioners regardless of
the result of the latter.
G.R. No. L-46658 May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as
Presiding Judge of the Court of First Instance of Rizal,
Branch XXI and TAYABAS CEMENT COMPANY,
INC., respondents.
Facts:
In 1963, Ignacio Arroyo, married to Lourdes Tuason
Arroyo (the Arroyo Spouses), obtained a loan of
P580,000.00 from petitioner bank to purchase 60% of the
subscribed capital stock, and thereby acquire the
controlling interest of private respondent Tayabas
Cement Company, Inc. (TCC).2 As security for said loan,
the spouses Arroyo executed a real estate mortgage over
a parcel of land known as the La Vista property.
Thereafter, TCC filed with petitioner bank an application
and agreement for the establishment of an eight (8) year
deferred letter of credit (L/C) for $7,000,000.00 in favor of
Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the
importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C
by PNB in favor of Toyo Menka Kaisha, Ltd. for the
account of TCC, the Arroyo spouses executed the
following documents to secure this loan accommodation:
Surety Agreement dated August 5, 19643 and Covenant
dated August 6, 1964.4
The imported cement plant machinery and equipment
arrived from Japan and were released to TCC under a
trust receipt agreement. Subsequently, Toyo Menka
Kaisha, Ltd. made the corresponding drawings against
the L/C as scheduled. TCC, however, failed to remit
and/or pay the corresponding amount covered by the
drawings. Thus, on May 19, 1968, pursuant to the trust
receipt agreement, PNB notified TCC of its intention to
repossess, as it later did, the imported machinery and
equipment for failure of TCC to settle its obligations under
the L/C.
In the meantime, the personal accounts of the spouses
Arroyo, which included another loan of P160,000.00
secured by a real estate mortgage over parcels of
agricultural land known as Hacienda Bacon located in
Isabela, Negros Occidental, had likewise become due.
The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose the
real estate mortgages executed by the spouses Arroyo in
its favor.
Issue:
Whether the subsequent agreement extinguished the civil
and criminal liability of the respondent Judge
Ruling:
The 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.
Further, it must be remembered that PNB took
possession of the imported cement plant machinery and
equipment pursuant to the trust receipt agreement
executed by and between PNB and TCC giving the former
the unqualified right to the possession and disposal of all
property shipped under the Letter of Credit until such time
as all the liabilities and obligations under said Letter had
been discharged.
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.
G.R. 133877. November 14, 2001
RIZAL COMMERCIAL BANKING
CORPORATION, Petitioner, vs. ALFA RTW
MANUFACTURING CORPORATION, BA FINANCE
CORPORATION, NORTH AMERICAN GARMENTS
CORPORATION, JOHNNY TENG, RAMON LEE,
ANTONIO LACDAO, RAMON LUY and ALFA
INTEGRATED TEXTILE MILLS, Respondents.
Facts:
Defendant Alfa RTW Manufacturing Corporation (Alfa
RTW), on separate instances, had applied for and was
granted by the plaintiff Rizal Commercial Banking
Corporation (RCBC) four Letters of Credit to facilitate its
purchase of raw materials for its garments business.
Upon such letters of credit, corresponding bills of
exchange of various amounts were drawn, and charged
to the account of said defendants. The defendant Alfa
RTW, in turn, had executed four Trust Receipts,
stipulating that it had received in trust for the plaintiff bank
the goods and merchandise described therein, and which
were purchased with the drawings upon the letters of
credit.
When the obligations upon the said commercial
documents became due, the plaintiff demanded payment
of the defendants undertakings, citing two documents
allegedly executed by the individual defendants Johnny
Teng, Ramon Lee, Antonio D. Lacdao and Ramon Uy and
Alfa Integrated Textile Mills Inc. (Alfa ITM), labeled
Comprehensive Surety Agreements (Exhibits N and M)
dated September 8, 1978 and October 10, 1979.
Under such Comprehensive Surety Agreements, it was
essentially agreed that for and in consideration of any
existing indebtedness to plaintiff bank of defendant Alfa
RTW and/or in order to induce the plaintiff bank at any
time thereafter to make loans or advances or increases
thereof or to extend credit in any other manner to or for
the account of defendant, Alfa ITM and the signatory
officers agreed to guarantee in joint and several capacity
the punctual payment at maturity to plaintiff bank of any
and all such indebtedness and/or other obligations and
also any and all indebtedness of every kind which was
then or may thereafter become due or owing to plaintiff
bank by the defendant Alfa RTW, together with any and
all expenses of collection, etc., provided, however, that
the liability of individual defendants and defendant Alfa
Integrated Textile Mills, Inc. thereunder shall not exceed
the sum of P4,000,000.00 and P7,500,000.00 and such
interest as may accrue thereon and expenses as may be
incurred by plaintiff bank. (p. 4, Complaint)
Issue: Whether the obligation arose from letter or credit –
trust receipt transaction.
Ruling:
The case involves an obligation arising from a letter of
credit-trust receipt transaction. Under this arrangement, a
bank extends to a borrower a loan covered by the letter of
credit, with the trust receipt as security of the loan. 10 A
trust receipt is 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 thru utilization, as collateral, of the
merchandise imported or purchased.
In contracts contained in trust receipts, the contracting
parties may establish agreements, terms and conditions
they may deem advisable, provided they are not contrary
to law, morals or public order. 12 In the case at bar, there
are specific amounts of interest, service charges and
penalties agreed upon by the parties. Pertinent provisions
in the four (4) trust receipts.
Applying the above-quoted rules of thumb in the
computation of interest, as enunciated by this Court in
Eastern Shipping Lines, Inc., 14 the principal amount of
loans corresponding to each trust receipt must earn an
interest at the rate of sixteen percent (16%) per
annum 15 with the stipulated service charge of two percent
(2%) per annum on the loan principal or the outstanding
balance thereof, 16 from the date of execution until finality
of this Decision. 17 A penalty of six percent (6%) per
annum of the amount due and unpaid must also be
imposed computed from the date of demand (in this case
on March 9, 1982), 18 until finality of Judgment. 19 The
interest of 16% percent per annum, as long as unpaid,
also earns interest, computed from the date of the filing of
the complaint (March 12, 1982) until finality of this Courts
Decision. 20 From such date of finality, the total unpaid
amount (principal + interest + service charge + penalty +
interest on the interest) computed shall earn interest of
12% per annum until satisfied.
Gonzales v. Go Tiong
Principle:
Though it is desirable that receipts issued by a bonded
warehouseman should conform to the provisions of the
Warehouse Receipts Law, said provisions in our opinion
are not mandatory and indispensable in the sense that if
they fell short of the requirements of the Warehouse
Receipts Act, then the commodities delivered for storage
become ordinary deposits and will not be governed by the
provisions of the Bonded Warehouse Act.
Facts:
Go Tiong owned a rice mill and warehouse.
Subsequently, he obtained a license to engage in the
business of a bonded warehouseman. To secure the
performance of his obligations as such bonded
warehouseman, the Luzon Surety Co. executed a
guaranty bond. Go Tiong insured the warehouse and the
palay deposited therein with the Alliance Surety and
Insurance Company.
While the case was pending in court, Gonzales and Go
Tiong entered into a contract of amicable settlement to the
effect that upon the settlement of all accounts due to him
by Go Tiong, he, Gonzales, would have all actions
pending against Go Tiong dismissed. Inasmuch as Go
Tiong failed to settle the accounts, Gonzales prosecuted
his court action.
Issue:
Whether or not the fact that the receipts issued did not
comply with the law is a valid ground to refuse payment?
Ruling:
No, the Supreme Court (SC) held that the fact that the
receipts issued did not comply with the law is a not valid
ground to refuse payment.
Act No. 3893 as amended is a special law regulating the
business of receiving commodities for storage and
defining the rights and obligations of a bonded
warehouseman and those transacting business with him.
The kind or nature of the receipts issued by him for the
deposits is not very material much less decisive. Though
it is desirable that receipts issued by a bonded
warehouseman should conform to the provisions of the
Warehouse Receipts Law, said provisions in our opinion
are not mandatory and indispensable in the sense that if
they fell short of the requirements of the Warehouse
Receipts Act, then the commodities delivered for storage
become ordinary deposits and will not be governed by the
provisions of the Bonded Warehouse Act. Under Section
1 of the Warehouse Receipts Act, one would gather the
impression that the issuance of a warehouse receipt in the
form provided by it is merely permissive and directory and
not obligatory.
The Court also cited Section 2 of the Act, which defines
receipt as any receipt issued by a warehouseman for
commodity delivered to him, showing that the law does
not require as indispensable that a warehouse receipt be
issued. Furthermore, Section 7 of said law provides that
as long as the depositor is injured by a breach of any
obligation of the warehouseman, which obligation is
secured by a bond, said depositor may sue on said bond.
In other words, the surety cannot avoid liability from the
mere failure of the warehouseman to issue the prescribed
receipt.

Prior to the issuance of the license to Go Tiong to operate

as bonded warehouseman, he had on several occasions
received palay for deposit from Ramon Gonzales
(Gonzales), totaling 368 sacks, for which he issued
receipts. After he was licensed as bonded
warehouseman, Go Tiong again received various
deliveries of palay from plaintiff, totaling 492 sacks, for
which he issued the corresponding receipts.

Gonzales demanded from Go Tiong the value of his

deposits in the amount of P8,600, but he was told to return
after two days, which he did, but Go Tiong again told him
to come back. A few days later, the warehouse burned to
the ground. Before the fire, Go Tiong had been accepting
deliveries of palay from other depositors and at the time
of the fire, there were 5,847 sacks of palay in the
warehouse, in excess of the 5,000 sacks authorized
under his license. The receipts issued by Go Tiong to the
Gonzales were ordinary receipts, not the "warehouse
receipts" defined by the Warehouse Receipts Act.

After the burning of the warehouse, the depositors of

palay, including Gonzales, filed their claims with the
Bureau of Commerce, and it would appear that with the
proceeds of the insurance policy, the Bureau of
Commerce paid off some of the claim. Thereafter,
Gonzales filed the present action against Go Tiong and
the Luzon Surety for the sum of P8,600, the value of his
palay, with legal interest, damages in the sum of P5,000
and P1,500 as attorney's fees.
PNB v. Noah’s Ark Sugar Refinery
Principle:
The validity of the negotiation of a receipt is not impaired
by the fact that such negotiation was a breach of duty on
the part of the person making the negotiation or by the
fact that the owner of the receipt was induced by fraud,
mistake or duress or to entrust the possession or custody
of the receipt to such person, if the person to whom the
receipt was negotiated or a person to whom the receipt
was subsequently negotiated paid value therefor, without
notice of the breach of duty, or fraud, mistake or duress.
Facts:
Noah’s Ark Sugar Refinery (Noah’s Ark) issued five
warehouse receipts. The receipts were substantially in
form, and contains the terms prescribed for negotiable
warehouse receipts under Section 2.
by law or in equity in regard to property which
cannot be readily attached or levied upon by
ordinary process. If the quedans were negotiable
in form and duly indorsed to PNB (the creditor),
the delivery of the quedans to PNB makes the
PNB the owner of the property covered by said
quedans and on deposit with Noah, the
warehouseman. PNB's right to enforce the
obligation of Noah as a warehouseman, to deliver
the sugar stock to PNB as holder of the quedans,
does not depend on the outcome of the third-party
complaint because the validity of the negotiation
transferring title to the goods to PNB as holder of
the quedans is not affected by an act of RNS
Merchandising and St. Therese Merchandising,
in breach of trust, fraud or conversion against
Noah's Ark.

Subsequently, the receipts covering sugar deposited by

RNS Merchandising (RNS) and St. Therese
Merchandising (St. Therese) were negotiated and
endorsed to Luis T. Ramos (Ramos). Moreover, the
receipts covering sugar deposited by Rosa Sy (Sy), RNS
and St. Therese were negotiated and endorsed to
Cresencia K. Zoleta (Zoleta). Ramos and Zoleta then
used the quedans as security for two loan agreements
obtained by them from the Philippine National Bank
(PNB).

Unfortunately, Ramos and Zoleta failed to pay their loans

upon maturity, which prompted Noah’s Ark to demand
from Noah’s Ark the delivery of the sugar stocks covered
by the quedans endorsed by Ramos and Zoleta.
However, Noah’s Ark refused to comply with the demand
alleging ownership thereof. As such, PNB filed a
complaint.

Sy and Teresita Ng (Ng) alleged that the transaction

between them and Jimmy T. Go (Go) concerning the
quedans and the sugar thereby covered was bogus and
simulated being part of Go’s complex banking schemes
and financial maneuvers

Issues:
1. Whether or not the non-payment of the purchase
price for the quedans by the original vendees
rendered invalid the negotiation by vendees/first
indorsers to indorsers and the subsequent
negotiation of Ramos and Zoleta to PNB; and
2. Whether or not PNB as indorsee/ pledgee of
quedans was entitled to delivery of sugar stocks
from the warehouseman, Noah's Ark?

Ruling:
1. No, the SC held that the non-payment of the
purchase price for the quedans by the original
vendees did not render invalid the negotiation by
vendees/first indorsers to indorsers and the
subsequent negotiation of Ramos and Zoleta to
PNB.

The validity of the negotiation in favor of PNB

cannot be impaired even if the negotiation
between Noah and its first vendees was in breach
of faith on the part of the vendees or by the fact
that Noah was deprived of the possession of the
same by fraud, mistake or conversion if PNB paid
value in good faith without notice of such breach
of duty, fraud, mistake or conversion. This is in
accordance with Section 47 of the Warehouse
Receipts Law.

2. Yes, the SC held that PNB as indorsee/ pledgee

of quedans was entitled to delivery of sugar
stocks from the warehouseman, Noah's Ark.

PNB whose debtor was the owner of the quedan

shall be entitled to such aid from the court of
appropriate jurisdiction attaching such document
or in satisfying the claim by means as is allowed
PNB v. Sayo, Jr.
Principle:
The loss of the warehouseman's lien, however, does not
necessarily mean the extinguishment of the obligation to
pay the warehousing fees and charges which continues
to be a personal liability of the owners.
Facts:
Noah’s Ark Sugar Refinery (Noah’s Ark) issued five
warehouse receipts. The receipts were substantially in
form, and contains the terms prescribed for negotiable
warehouse receipts under Section 2.
Subsequently, the receipts covering sugar deposited by
RNS Merchandising (RNS) and St. Therese
Merchandising (St. Therese) were negotiated and
endorsed to Luis T. Ramos (Ramos). Moreover, the
receipts covering sugar deposited by Rosa Sy (Sy), RNS
and St. Therese were negotiated and endorsed to
Cresencia K. Zoleta (Zoleta). Ramos and Zoleta then
used the quedans as security for two loan agreements
obtained by them from the Philippine National Bank
(PNB).
Unfortunately, Ramos and Zoleta failed to pay their loans
upon maturity, which prompted Noah’s Ark to demand
from Noah’s Ark the delivery of the sugar stocks covered
by the quedans endorsed by Ramos and Zoleta.
However, Noah’s Ark refused to comply with the demand
alleging ownership thereof. As such, PNB filed a
complaint.
After the decision by the SC in PNB v. Se became final
and executory, various incidents took place before the
trial court. Noah’s Ark and its officers filed a Motion for
Execution of Defendants’
Lien as Warehouseman pursuant to SC’s decision which
was opposed by PNB. The RTC, this time presided Hon.
Marcelino L. Sayo Jr., granted the Motion for Execution.
PNB was immediately served with a Writ of Execution for
the amount of P662,548,611.50. PNB thus filed an Urgent
Motion seeking the deferment of the enforcement of the
Writ of Execution. Nevertheless, the Sheriff levied on
execution several properties of PNB. The said bank also
filed a MR with Urgent Prayer for Quashal of Writ of
Execution. After several exchanges of motions, Judge
Sayo denied with finality for lack of merit the motions filed
by PNB.
Issue:
Whether or not the loss of warehouseman’s lien
extinguishes the obligation of PNB to pay storage
fees and charges?
Ruling:
No, the SC held that the loss of warehouseman’s lien
does not extinguish the obligation of PNB to pay storage
fees and charges.
Where a valid demand by the lawful holder of the quedans
for the delivery of the goods is refused by the
warehouseman, despite the absence of a lawful excuse
provided by the statute itself, the warehouseman’s lien is
thereafter concomitantly lost. As to what the law deems a
valid demand, Section 8 enumerates what must
accompany a demand; while as regards the reasons
which a warehouseman may invoke to legally refuse to
effect delivery of the goods covered by the quedans,
these are:
(1) That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act. (See Sec. 8,
Act No. 2137)
(2) That the warehouseman has legal title in himself on
the goods, such title or right being derived directly or
indirectly from a transfer made by the depositor at the time
of or subsequent to the deposit for storage, or from the
warehouseman's lien. (Sec. 16, Act No. 2137)
(3) That the warehouseman has legally set up the title or
right of third persons as lawful defense for non-delivery of
the goods as follows:
(a) Where the warehouseman has been requested, by or
on behalf of the person lawfully entitled to a right of
property of or possession in the goods, not to make such
delivery (Sec. 10, Act No. 2137), in which case, the
warehouseman may, either as a defense to an action
brought against him for nondelivery of the goods, or as an
original suit, whichever is appropriate, require all known
claimants to interplead (Sec. 17, Act No. 2137);
(b) Where the warehouseman had information that the
delivery about to be made was to one not lawfully entitled
to the possession of the goods (Sec. 14 Act No. 2137), in
which case, the warehouseman shall be excused from
liability for refusing to deliver the goods, either to the
depositor or person claiming under him or to the adverse
claimant, until the warehouseman has had a reasonable
time to ascertain the validity of the adverse claims or to
bring legal proceedings to compel all claimants to
interplead (Sec. 18, Act No. 2137); and
(c) Where the goods have already been lawfully sold to
third persons to satisfy a warehouseman's lien, or have
been lawfully sold or disposed of because of their
perishable or hazardous nature. (Sec. 36, Act No. 2137).
(4) That the warehouseman having a lien valid against the
person demanding the goods refuses to deliver the goods
to him until the lien is satisfied. (Sec. 31 Act No. 2137)
(5) That the failure was not due to any fault on the part of
the warehouseman, as by showing that, prior to demand
for delivery and refusal, the goods were stolen or
destroyed by fire, flood, etc., without any negligence on
his part, unless he has contracted so as to be liable in
such case, or that the goods have been taken by the
mistake of a third person without the knowledge or implied
assent of the warehouseman, or some other justifiable
ground for non-delivery. (67 C.J. 532)
Regrettably, the factual settings do not sufficiently
indicate whether the demand to obtain possession of the
goods complied with Section 8 of the law. The
presumption, nevertheless, would be that the law was
complied with, rather than breached, by petitioner. Upon
the other hand, it would appear that the refusal of private
respondents to deliver the goods was not anchored on a
valid excuse, i.e., non-satisfaction of the warehouseman's
lien over the goods, but on an adverse claim of ownership.
Under the circumstances, this hardly qualified as a valid,
legal excuse. The loss of the warehouseman's lien,
however, does not necessarily mean the extinguishment
of the obligation to pay the warehousing fees and charges
which continues to be a personal liability of the owners,
i.e., the pledgors, not the pledgee, in this case. But even
as to the owners-pledgors, the warehouseman fees and
charges have ceased to accrue from the date of the
rejection by Noah's Ark to heed the lawful demand by
PNB for the release of the goods.
BPI v. Herridge
Principle:
Section 58 provides that within the meaning of the Act, to
purchase includes to take as mortgagee or pledgee and
purchases includes mortgagee and pledgee. It therefore
seems clear that, as to the legal title to the property
covered by a warehouse receipt, a pledgee is on the same
footing as a vendee except that the former is under the
obligation of surrendering his title upon the payment of the
debt secured.
Facts:
The insolvent, Umberto de Poli, was for several years
engaged on an extensive scale in the exportation of
Manila hemp, maguey and other products of the country.
He was also a licensed public warehouseman, though
most of the goods stored in his warehouses appear to
have been merchandise purchased by him for exportation
and deposited there by himself.
In order to finance his commercial operation, De Poli
established credits with some of the leading banking
institutions. He opened a current account credit the bank
against which he drew his checks in payment of the
products bought by him for exportation. Upon the
purchase, the products were stored in one of his
warehouses and the warehouse receipts issued were
endorsed by him to the bank as security for the payment
of his credit in the current account. When the goods stored
by the warehouse receipts are sold and shipped, the
warehouse receipt will then be exchanged for shipping
papers and the entire proceeds of the export sale will be
received by the bank and credited to the current account
of De Poli.
Unfortunately, De Poli was declared insolvent by the trial
court with liabilities to the amount of several million pesos
over and above his assets. An assignee was elected by
the creditors and was later confirmed by the court.
Among the property taken over by the assignee was the
merchandise stored in the various warehouses of the
insolvent. The various banks holding warehouse receipts
issued by De Poli claim ownership of the merchandise
under their respective receipts. However, other creditors
maintained that: (a) the warehouse receipts are not
negotiable; (b) their endorsement to the present holders
conveyed no title to the property; (c) they cannot be
regarded as pledges of the merchandise inasmuch as
they are not public documents; (d) the possession of the
merchandise was not delivered to the claimants; and (d)
the claims of the holders of the receipts have no
preference over those of the ordinary unsecured
creditors.
The lower court held that the receipt in question were valid
negotiable warehouse receipts and ordered the
distribution of the hemp and maguey covered by the
receipts among the holders thereof proportionately by
grades. Hence, this petition.
Issues:
1. Whether or not the warehouse receipt is
negotiable; and
2. Whether or not the warehouse receipt has no
effect without a chattel mortgage or a contract of
pledge under Articles 1867 and 1863 of the Civil
Code?
Ruling:
1. Yes, the SC held that the warehouse receipt is
negotiable.
As will be seen, the receipt is styled Quedan and
contains all requisites of a warehouse receipt as
prescribed by Section 2, except that it does not,
in express terms, state whether the goods
received are to be delivered to bearer, to a
specified person or to his order. The Court,
however, found the intention to make it a
negotiable warehouse receipt clearly from the
document itself: (a) De Poli deposited the goods
in his own warehouse; (b) the warehouse receipt
states that he is the owner of the goods
deposited; (c) there is no statement that the
goods are to be delivered to the bearer of the
receipt or to a specified person; and (d) the
presumption must therefore necessarily be that
the goods are in the warehouse subject to the
orders of their owner De Poli. That the receipt
were intended to be non-negotiable is further
shown by the fact that they were not marked non-
negotiable and that they were transferred by the
endorsement of the original holder, who was also
the warehouseman.
Furthermore, the rule is well-known that wherever
possible writings must be so construed as to give
effect to their general intent and so as to avoid
absurdities. Applying this rule, it is difficult to see
how the phrase in question can be given any
other rational meaning than that suggested.
If the Court were to give the phrase another
meaning, it would reveal no rational purpose. To
say that a warehouseman deposited his own
goods with himself by his own order seems
superfluous and means nothing.
As instruments of credit, warehouse receipts play
a very important role in modern commerce and
the present-day tendency of the courts is towards
a liberal construction of the law in favor of a bona
fide holder of such receipts.
2. No, the SC held that the warehouse receipt has
an effect even without a chattel mortgage or a
contract of pledge under Articles 1867 and 1863
of the Civil Code.
The Court declared that the Warehouse Receipt
Act is complete in itself and is not affected by
previous legislation in conflict with its provisions
or incompatible with its spirit or purpose. Section
58 provides that within the meaning of the Act, to
purchase includes to take as mortgagee or
pledgee and purchases includes mortgagee and
pledgee. It therefore seems clear that, as to the
legal title to the property covered by a warehouse
receipt, a pledgee is on the same footing as a
vendee except that the former is under the
obligation of surrendering his title upon the
payment of the debt secured. To hold otherwise
would defeat one of the principal purposes of the
Act, to furnish a basis for commercial credit.
Estrada v. Court of Agrarian Relations
Principle:
The manager of a bonded warehouse has the right to
refuse to release deposited palay for failure to surrender
the original of the warehouse receipts, since said receipts
may have been negotiated for value in favor of innocent
third parties.
Where the court ordered the manager of the bonded
warehouse to deliver the deposited palay to certain
specified parties, and the person ordered to present the
original warehouse receipts failed to do so because they
were allegedly lost in a fire, the court may order said
manager to release the palay to the proper parties upon
their issuing a receipt therefore, without necessity of
producing and surrendering the original receipts.
Facts:
The SC ordered the owner or manager of the Moncada
Bonded Warehouse (bonded warehouse) to release and
give to petitioners the remaining deposits and that
Faustino Galvan (Galvan) to surrender the original of the
receipts of the palay deposits to the manager or owner of
the bonded warehouse. Notwithstanding service of notice
and in spite of repeated demands, they refused and still
refuse to comply, the former, for the reason that
petitioners could not surrender to him the original of the
warehouse receipts issued for the palay in question, and
the latter, because he could not locate any more said
receipts. Hence, this petition.
Issue:
Whether or not the excuses offered justify their refusal to
comply with the orders?
Ruling:
No, the SC held that the excuses offered do not justify
their refusal to comply with the orders.
The Court found the excuses offered by the manager of
the bonded warehouse and Galvan are not without some
merits. The former unquestionably had the right to protect
the interest of the bonded warehouse of which he was
manager, as the warehouse receipts issued for the palay
in question might have been for the value in favor of
innocent third parties; and the latter (Galvan), might have
in fact lost said warehouse receipts in the manner above
stated, for his allegation to the effect in his answer to
petitioners' motion for contempt until now has not been
contradicted.
Such incidents, however, do not constitute a valid excuse
to evade compliance with the order of this Court that the
palay in question be delivered to the petitioners, and,
considering that the petitioners are in dire need of said
palay for their subsistence, our order must be carried out
in the meantime that these cases have not been finally
decided in order to ameliorate the precarious situation in
which said petitioners find themselves.
Consolidated Terminals, Inc. v. Artex Development
Co., Inc.
Principle:
Where a warehouseman delivers the goods to one who is
not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all
having a right of property or possession in the goods.
Facts:
Consolidated Terminals, Inc. (CTI) was the operator of a
customs bonded warehouse. It received on deposit one
hundred ninety-three (193) bales of high density
compressed raw cotton. It was understood that CTI would
keep the cotton in behalf of Luzon Brokerage Corporation
until the consignee thereof, Paramount Textile Mills, Inc.,
had opened the corresponding letter of credit in favor of
shipper, Adolph Hanslik Cotton of Corpus Christi, Texas.
Allegedly by virtue of a forged permit to deliver imported
goods, purportedly issued by the Bureau
of Customs, Artex was able to obtain delivery of the bales
of cotton after paying CTI the storage and handling
charges. At the time the merchandise was released to
Artex, the letter of credit had not yet been opened and the
customs duties and taxes due on the shipment had not
been paid.
CTI, in its original complaint, sought to recover
possession of the cotton by means of a writ of replevin.
The writ could not be executed. CTI then filed an
amended complaint by transforming its original complaint
into an action for the recovery from Artex.
CTI appealed the decision of the RTC contending that, as
warehouseman, it was entitled to the possession (should
be repossession) of the bales of cotton; that Artex acted
wrongfully in depriving CTI of the possession of the
merchandise because Artex presented a falsified delivery
permit, and that Artex should pay damages to CTI.
Issue:
Whether or not Artex is liable to CTI, the warehouseman
by reason of the former’s use of a falsified
delivery permit?
Ruling:
No, the SC held that Artex is not liable to CTI, the
warehouseman by reason of the former’s use of a falsified
delivery permit.
Its amended complaint does not clearly show that, as
warehouseman, it has a cause of action for damages
against Artex. The real parties interested in the bales of
cotton were Luzon Brokerage Corporation as depositor,
Paramount Textile Mills, Inc. as consignee, Adolph
Hanslik Cotton as shipper and the Commissioners of
Customs and Internal Revenue with respect to the duties
and
taxes. These parties have not sued CTI for damages or
for recovery of the bales of cotton or the
corresponding taxes and duties. In other words, on the
basis of the allegations of the amended complaint, the
lower court could not render a valid judgment in
accordance with the prayer thereof. It could not render
such valid judgment because the amended complaint did
not unequivocally allege what right of CTI was violated by
Artex, or, to use the familiar language of adjective law,
what delict or wrong was committed by Artex against CTI
which would justify the latter in recovering the value of
bales of cotton even if it was not the owner thereof.
PNB v. Se, Jr.
Principle:
The lien may be lost where the warehouseman
surrenders the possession of the goods without requiring
payment of his lien, because a warehouseman’s lien is
possessory in nature.
Facts:
Noah’s Ark Sugar Refinery (Noah’s Ark) issued five
warehouse receipts. The receipts were substantially in
form, and contains the terms prescribed for negotiable
warehouse receipts under Section 2.
Subsequently, the receipts covering sugar deposited by
RNS Merchandising (RNS) and St. Therese
Merchandising (St. Therese) were negotiated and
endorsed to Luis T. Ramos (Ramos). Moreover, the
receipts covering sugar deposited by Rosa Sy (Sy), RNS
and St. Therese were negotiated and endorsed to
Cresencia K. Zoleta (Zoleta). Ramos and Zoleta then
used the quedans as security for two loan agreements
obtained by them from the Philippine National Bank
(PNB).
Unfortunately, Ramos and Zoleta failed to pay their loans
upon maturity, which prompted Noah’s Ark to demand
from Noah’s Ark the delivery of the sugar stocks covered
by the quedans endorsed by Ramos and Zoleta.
However, Noah’s Ark refused to comply with the demand
alleging ownership thereof. As such, PNB filed a
complaint.

The SC ruled in favor of PNB, declaring it as the owner of

the sugar stocks covered by five warehouse receipts. The
respondents instead filed before the trial court an
Omnibus Motion seeking the deferment of the
proceedings until they are heard on their claim for
warehouseman’s lien. The trial court held that there exists
a valid warehouseman’s lien under Section 27 and
ordered that the execution of the judgment be stayed until
the full amount of the lien is satisfied under Section 31.

Issue:
Whether or not the PNB should pay storage fees for sugar
stocks covered by five warehouse receipts?

Ruling:
Yes, the SC held that PNB should pay storage fees for
sugar stocks covered by five warehouse receipts.

The Court found a stipulation in the subject warehouse

receipts which provides for Noah’s Ark’s right to impose
and collect warehouseman’s lien. It is not disputed,
therefore, that, under the subject warehouse receipts’
provision, storage fees are chargeable.

PNB is legally bound to stand by the express terms and

conditions on the face of the warehouse receipts as to the
payment of storage fees. Even in the absence of such a
provision, law and equity dictate the payment of the
warehouseman’s lien pursuant to Sections 27 and 31.

After being declared the warehouseman, the respondents

cannot legally be deprived of their right to enforce their
claim for warehouseman’s lien, reasonable storage fees
and preservation expenses. Pursuant to Section 31, the
goods under storage may not be delivered until said lien
is satisfied.

PNB is in estoppel in disclaiming liability for the payment

of storage fees due to the respondents as warehouseman
while claiming to be entitled to the sugar stocks covered
by the warehouse receipts on the basis of which it anchors
its claim for payment or delivery of the sugar stocks.
While the PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected
only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand

payment of his lien because, in accordance with Section
29, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien
may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his
lien, because a warehouseman’s lien is possessory in
nature.