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What are the purposes of Trust Receipt Law (PD 115)?

The following are the purposes of the Trust Receipt Law:

1. To encourage and promote the use of the trust receipts as an additional and convenient aid to
commerce and trade;
2. To regulate trust receipt transactions in order to assure the protection of the rights and the
enforcement of the obligations of the parties involved therein; and
3. To declare the misuse and/or misappropriation of goods or proceeds realized from the sale,
goods, documents or instruments released under trust receipts as a criminal offense punishable
under Art 315 of the Revised Penal Code (swindling or estafa).

What is a trust receipt transaction?

Trust Receipt Transaction is a transaction between an entruster and an entrustee whereby the entruster,
who owns or holds absolute title or security in 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 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 the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of (Sec. 4, PD No. 115).

Who are the parties in a trust receipt transaction?

1. Entruster - the person holding title over the goods, documents or instruments subject of a trust
transaction, or any successor in interest of such person. He is not the owner of the goods but merely a
holder of security interest.

2. Entrustee - the person having or taking possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such person for the purpose or purposes specified in
the trust receipt agreement. He is the owner of the goods purchased. In fact, the law imposes on him the
risk of loss of the goods (res perit domino)

3. Seller of the goods – not strictly and actually a party to the trust receipt transaction; but a party to the
contract of sale with the buyer/importer (entrustee).

What are the rights of the entruster?

The rights of the entruster are the following:

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1. To receive the proceeds of the sale of the goods, documents or instruments released under the
trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in
the trust receipt;
2. To the return of the goods, documents or instruments in case of non-sale;
3. To the enforcement of all other rights conferred on him in the trust receipt;
4. To cancel the trust in case the entrustee defaults and to take possession of the goods;
5. To sell, after proper notice to the entrustee, of the goods, documents or instruments at public or
private sale and apply the proceeds to his claims and charges

What are the obligations of the entruster?

1. To give possession of the goods to the entrustee;
2. To give at least 5 days notice to the entrustee of the intention to sell the goods at public sale

What are the rights of the entrustee?

1. To receive the surplus from the public sale;
2. To have possession of the goods as a condition for his liability under the trust receipt law.

What are the obligations of the entrustee?

1. Hold the goods, documents or instruments in trust for the entruster and shall dispose of them
strictly in accordance with, the terms and conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster and turn over the same to the enstruster to the
extent of the amount owing to the entruster or, as appears on the trust receipt;
3. Insure the goods for their total value against the loss from fire, theft, pilferage or other casualties;
4. Keep the goods or proceeds separate and identifiable as property of the entruster;
5. Return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and
6. Observe all other terms and conditions of the trust receipt not contrary to the provisions of PD 115

Distinguished from:

Pledge – In a pledge, the financer possesses the property; in a trust receipt, the person financed
possesses the property 

Conditional Sale – In a conditional sale, there is a sale of the property from the seller to the buyer; in a
trust receipt, there is no sale of the property from the entruster to entrustee
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Chattel Mortgage – A chattel mortgage involves the creation of a lien upon the property; a trust receipt
does not involve the creation of a lien

Consignment – In a consignment, the consignor retains title to the property to secure the indebtedness
due from the consignee [bipartite]; in a trust receipt, the seller does not retain title to the property but
transfers such title to the entruster (not to the entrustee) [tripartite]

What is the required form of trust receipt?

A trust receipt need not be in any particular form but every such receipt must contain:
1. Description of the goods, documents or instruments subject of the trust receipt; 
2. The total invoice value of the goods and the amount of the draft to be paid by the entrustee; 
3. An undertaking or commitment of the entrustee
1. to hold in trust for the entruster the goods, documents or instruments;
2. to dispose of them in the manner provided for in the trust receipt;
3. to turn over the proceeds of the sale of the goods, documents or instruments to the
entruster to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return the goods, documents or instruments in the event of their non-sale.
4. The terms and conditions agreed by the parties 

Who shall be liable in case of loss of goods?

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

What is the right of the purchaser for value and in good faith?

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

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
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agreement.

What is the penalty for breach by the entrustee?

Under the Trust Receipts Law, the failure of the entrustee to surrender the goods held under trust, or to
account for the proceeds of the sales thereof, of the entrustor, is estafa, which can make the entrustee
criminally liable under both the Trust Receipts Law and the Revised Penal Code, and liable to the payment
of damages under Art. 33 of the Civil Code. The penal provisions of PD No. 115 encompasses any act
violative of the obligation covered by the trust receipt. It is not limited to transaction in goods which are to
be sold (retailed, reshipped or stored) but also applies, to goods processed as a component of a product
ultimately sold to the general public.

What are the alternative obligation of the entrustee?

1. To return to the entruster the PROCEEDS of the sale of goods (entregarla)
2. To return the GOODS themselves in case the goods are not sold (devolvera)
● Thus, under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn
over the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when the
entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms of
the trust receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative – the
return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed. When
both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is
not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized
under Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return
of the proceeds of the sale transaction.  This transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the purchase of the goods. (Landbank vs. Perez,  G.R. No.
166884, June 13, 2012)

What is the effect of non-compliance of the said obligation?

1. Criminal liability under both the TRL and RPC;
2. Civil liability for damages under Art. 33 of the Civil Code without need of proving intent to defraud
because it is malum prohibitum.

What is the effect of compliance of the said obligation?

1. Before criminal charge – no criminal liability
2. After charge, before conviction – extinguishment of criminal liability
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The liability of the entrustee accrues on his failure to comply with his obligation to return. It is not
absolutely necessary that the entruster cancel the trust and take possession of the goods to be able to
enforce his rights under the TRL

2 innovations of PD 115 on civil law concept:

1. Exception to the principle of “Nemo Dat Quod Non Habet” – Under Art. 1505 of the Civil Code, where
there is a contract of sale, the buyer is to acquire only whatever title the seller had at time the sale was
perfected. Under PD 115, although the entrustee is not the owner of the goods under a trust receipt
(ownership retained by the entrustor), anyone who acquires the goods from the entrustee acquires good
title (ownership) over the goods

2. Exception to Rule “Res Perit Domino” – Contrary to the civil law principle that generally it is the owner
who bear the risk of loss of the object, under a trust receipt arrangement, although the entrustee is not the
owner of the goods covered by a trust receipt, should the goods be lost while in his possession,
ENTRUSTEE will bear the risk of loss.

Jurisprudence:

Does the trust receipt law violate the constitutional guarantee against imprisonment for non-payment of
debt?

TRL not violative of the guarantee against imprisonment for non-payment of a debt. What is sought to be
punished by the law is not the failure of the entrustee to pay the loan but his failure to comply with his
alternative obligation. TRL does not seek to enfoce payment of loan, rather it punishes dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of another.

What is the nature of a trust receipt?

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."

Can the entruster who has taken actual and juridical possession of the goods subsequently avail of the
right to demand from entrustee the deficiency amount covered by the trust receipt?

Yes. Trust receipt arrangements being only a security for the loan agreement, the full turn-over of the
goods subject of the trust receipts does not suffice to divest debtors of their obligations to repay the
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principal amount of their loan. Section 7 of PD 115 expressly provides that the entrustee shall be liable to
the entruster for any deficiency.

May the entrustee abandon the goods to set-off loan?

Entrustee-borrower cannot be relieved of his obligation to pay the loan simply by abandoning property
with bank.

Is the acquittal of the entrustee from criminal charge extinguish civil liability on the underlying loan?

A trust receipt arrangement with a bank for the importation of goods, does not make the bank an investor
in the venture as to extinguish the lender-creditor relationship, and the acquittal of the entrustee in the
criminal charge of estafa does not dissolve the civil liability arising from the trust receipt arrangement.
The trustee cannot extinguish his civil obligation under the trust receipts by surrendering the goods if the
lender is not willing to accept them.

Is the violation of TRL malum prohibitum?

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.

What is the loan and security feature of the trust receipt transaction?

A 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. 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. (Sps. Vintola vs. Insular Bank of Asia
and America, G.R. No. 73271, May 29, 1987)

Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features. The loan is brought about
by the fact that the entruster financed the importation or purchase of the goods under TR. Until and unless
this loan is paid, the obligation to pay subsists. If the entrustee is made to appear as the owner, it was but
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an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods
in any manner that it wants, which it cannot do. To consider the entrustee as the true owner from the
inception of the transaction would be to disregard the loan feature thereof. (Rosario Textile Mills Corp. v.
Home Bankers Savings and Trust Company, G.R. No. 137232. June 29, 2005)

What is the penal sanction if offender is a corporation?

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.  (Ong vs.
CA, G.R. No. 119858, April 29, 2003)

In the event of default by the entrustee on his obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the trust and take possession of the goods to be able to
enforce his right thereunder?

The law uses the word "may" in granting to the entruster the right to cancel the trust and take possession
of the goods. Consequently, the entrustee 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.  (South City Homes, Inc. v. BA Finance Corporation, G.R. No. 135462, Dec. 7, 2001)

What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for conditions incompatible
with the trust receipt agreement, the obligation under the trust receipt is extinguished. Hence, the breach
in the subsequent agreement does not give rise to a criminal liability under P.D. 115 but only civil
liability. (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8, 2002)

Can deposits in a savings account opened by the buyer subsequent to the TR transaction be applied to
outstanding obligations under the TR account?

No, the receipt of the bank of a sum of money without reference to the trust receipt obligation does not
obligate the bank to apply the money received against the trust receipt obligation. Neither does
compensation arise because compensation is not proper when one of the debts consists in civil liability
arising from criminal.  (Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).
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Bar Questions:

Q: What is a trust receipt? [BAR Q. 1951, 1959].

A: Trust receipt refers to:
1. document executed between an entrustor and an enstrustee, under which the goods are released
to the latter who binds himself to hold the goods in trust or to sell or dispose of the goods with an
obligation to turn over the proceeds to the entrustor to the context of the entrustee's obligation to
him, if unsold, to return the goods.
2. a security agreement to which a bank acquires a "security interest" in the goods.

Q: Explain briefly the general liabilities and obligations of the trustee? ( BAR Q. 1951).
A: The entrustee is liable:
1. for any loss of the goods, documents. or instruments (Sec. 10, PD No. 115). 
2. for estafa for failure to turn over the proceeds (Sec. 13, PD No. 115).

Q: X, a dealer in imported textiles, opened with Y Bank an irrevocable letter of credit in favor of his
American supplier, ABC Textile Inc. in the amount of $50,000.00 covering the full invoice value of 2,000
vales of suiting material. He paid Y Bank a marginal deposit of $40,000.00 and the correspondent bank of
Y Bank in the United States paid ABC textile the amount of $50,000.00. The clothing materials were
subsequently shipped by ABC textiles to Manila, with Y Bank as consignee. Y Bank took delivery of the
shipment and had it stored in its bodega. Thereafter X executed the corresponding trust receipt, but
before X could take possession of the goods, a fire of unknown origin gutted the bodega of Y Bank ,
resulting in the total loss of the goods. When sued for the balance of $10,000.00 X denied liability,
contending that Y Bank, as consignee and owner of the goods, should bear the loss. Is the contention of X
tenable? Reason? (BAR Q. 1982).

A: The contention of X is not tenable.

First, the entrustor in a trust receipt is not the owner of the goods but merely a holder of a security title.
The entrustee merchant (X) is the owner of the goods and its return or inability to sell the goods does not
relieve it of its obligation to pay for the money borrowed."

Second, under Sec. 30: "Loss of goods, documents, or instruments which are the subject of a trust receipt,
pending their disposition, irrespective of whether or not it was due to the fault or negligence of the
entrustee, shall not extinguish the obligation tot he entruster for the value therefore. "(Sec. 30, Trust
Receipts Law).
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BANK OF AMERICA, NT & SA, petitioners,

vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO,
JOHN DOE AND JANE DOE, respondents.

 A "fiasco," involving an irrevocable letter of credit

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 On 05 March 1981, petitioners 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," (petitioner as advising bank and private respondent Inter-Resin Industrial
Corporation as beneficiary)
 On 11 March 1981, Bank of America wrote Inter-Resin informing them of the foregoing and
transmitting, along with the bank's communication, the letter 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.
 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.
 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 
 Sensing a fraud, Bank of America sought the assistance of the (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.
 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.
 the trial court ruled for Inter-Resin
(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
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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.6
 Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America.

(a) whether it has warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it
has acted merely as an advising bank or as a confirming bank;

(b) whether Inter-Resin has actually shipped the ropes specified by the letter of credit; and

(c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial availment of the letter of credit.8

 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.

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
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only by examining the shipping documents presented; it is precluded from determining whether the main
contract is actually accomplished or not. 11

There would at least be three (3) parties: (a) the buyer, 12 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, 13 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, 14 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 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank, 17 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, 18 to have the draft discounted.

Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof.

 The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is
outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on
appeal. We cannot agree. 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. 22
 Court said: Where the issues already raised also rest on other issues not specifically presented, as long as
the latter issues bear relevance and close relation to the former and as long as they arise from the matters
on record, the court has the authority to include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions not particularly raised by the parties
surface as necessary for the complete adjudication of the rights and obligations of the parties, the
interests of justice dictate that the court should consider and resolve them. The rule that only issues
or theories raised in the initial proceedings may be taken up by a party thereto on appeal should only
refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The
evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters
that are properly litigated in the lower court and appear on record.
 It cannot seriously be disputed, 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.
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 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." 24 This written reservation by Bank of America limits its obligation only to being an
advising bank
 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. 25 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, 26 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. 27 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. 28 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."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. 29 Clarifying its meaning, Webster's Ninth New Collegiate
Dictionary 30 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."

May Bank of America 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? The
answer is 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. 31

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
 14

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 . . . 33

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. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did issue the letter
of credit and whether or not the main contract of sale that has given rise to the letter of credit has been breached,
are not relevant to this controversy. They are matters, instead, that can only be of concern to the herein parties
in an appropriate recourse against those, who, unfortunately, are not impleaded in these proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted
merely as a notifying bank and did not assume the responsibility of a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as
beneficiary of the letter of credit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can
be made, in this instance, there being no sufficient evidence to warrant any such finding.

WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is
ordered to refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with legal
interest from the filing of the complaint until fully paid.

No costs.

SO ORDERED.

G.R. No. L-10195           November 29, 1958

BELMAN COMPAÑIA INCORPORADA, plaintiff-appellee,

vs.
CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.

on 18 March 1955 in the CFI of Manila the plaintiff, a corporation, alleges as a successful bidder to supply the Republic
of the Philippines with 1,000 reams of onion skin paper,

on 21 September 1950 it applied to the PNB for a letter of credit in the sum of $4,300, in favor of Getz Bros. & Co., San
Francisco, California, U.S.A., to pay for such reams, and the PNB approved and granted the application for the letter of
credit;

PNB, through the Crocker First National Bank, its correspondent in the United States, paid to the payee the sum of
$4,300, United States Currency;
 15

26 April 1951 when the plaintiff paid its account to the PNB in Manila, the defendant, pursuant to RA No. 601, as
amended, assessed and collected from it 17% special excise tax amounting to P1,474.70 which the plaintiff paid to the
defendant under protest for the reason that as the letter of credit was approved and granted on 21 September 1950, or
before 28 March 1951, the date of the enactment or approval of Republic Act No. 601

the plaintiff corporation made a demand in writing upon the defendant bank for the refund of the aforesaid sum; bank
refused to make the refund.

The plaintiff corporation prays that the 17% special excise tax assessed and collected from it be declared illegal; and that
the defendant bank be ordered to refund to it the sum of P1,474.70 illegally assessed and collected

defendant bank moved for the dismissal of the complaint on the ground that —

1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17% special excise tax is in accordance
with law, because it was a tax collected after March 28, 1951, when the 17% special excise tax law went into effect,
when the plaintiff paid to the PNB on April 25, 1951 the peso equivalent

2. The transaction in which foreign exchange was sold subject to the 17% excise tax is not one of those exempted or
refundable under Section 2, 3, 4, and 8 of said 17% tax law, Republic Act No. 601.

plaintiff corporation objected to the motion to dismiss; defendant bank filed a reply thereto; and the plaintiff a
"rejoinder to defendant's reply." the Court denied the motion to dismiss.

the defendant filed its answer reiterating that although the plaintiff corporation had applied for and been granted a
commercial letter of credit on 21 September 1950, before the effectivity of Republic Act No. 601, as amended, no sale of
foreign exchange took place on that date, because such sale actually took place on 26 April 1951, when the plaintiff paid
to the PNB the amount in Philippine currency of the foreign exchange sold. Hence it was subject to the 17% special
excise tax.

Court rendered judgment ordering the defendant bank to refund to the plaintiff corporation the sum of P1,474.70,
with legal interest thereon from 25 April 1951 until fully paid and to pay the costs. A motion to set aside the judgment
thus rendered was denied. The defendant has appealed.

Foreign exchange is the conversion of an amount of money or currency of one country into an equivalent amount of
money or currency of another.1 

The appellant claims that the grant or approval on an application for a letter of credit for an amount payable in foreign
currency is only an executory contract, in the sense that until payment, return, or settlement of the amount paid and
delivered by, or collected from, the bank in foreign currency be made by the debtor, the contract is not executed or
consummated. Hence, if on the date of payment by the debtor to the bank of the amount of foreign exchange sold the
law imposing the excise tax was already in force, such tax must be collected.

the appellee contends that, upon the approval or grant of an application for a letter of credit for an amount payable in
foreign currency, the contract is perfected or consummated. Hence, if on the date of such approval or grant the law
imposing the excise tax was not yet in existence, such tax can not be assessed and collected. Both contentions cannot
be sustained.

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
 16

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.

The contention of the appellee that as there was a meeting of the minds and of contracting parties as to price and
object of the contract2 upon the approval or grant of an application for a letter of credit for an amount payable in
payable in foreign currency, the contract was a valid and executed contract of sale of foreign exchange. True, there was
such a contract in the sense that one party who has performed his part may compel the other to perform his.3 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. The payment of the amount in foreign currency to the
creditor by the bank or its agent or correspondent is necessary to consummate the contract. Hence the date of such
payment or delivery of the amount in foreign currency to the creditor determines whether such amount of foreign
currency is subject to the tax imposed by the Government of the country where such letter of credit was granted.

It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by the appellant
must be drawn and presented or negotiated in San Francisco, California, U.S.A., not later than 19 October 1950 (Exhibit
H), it may be presumed that the payment of $4,300 in favor of Getz Bros., Inc. in San Francisco, California, U.S.A., for
the account of the appellee was paid by the Crocker First National Bank, as agent or correspondent of the Philippine
National Bank, on or before 19 October 1950. Such being the case, the excise tax at the rate of 17% on the amount to
be paid by the appellant in Philippine currency for the foreign exchange sold is not subject to such tax, because
Republic Act No. 601 imposing such tax took effect only on 28 March 1951. 4

The judgment appealed from is affirmed, without pronouncement as to costs.5

 17

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.

 On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000
cubic meters of lauan logs at $27.00 per cubic meter FOB.
 After inspecting the logs, Christiansen issued purchase order No. 76171.
 On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd.,
de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000.00, the total
purchase price of the lauan logs.
 The letter of credit was mailed to the Feati (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary."
 The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and
that it be accompanied by the following documents:

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

a. All terms and conditions of the purchase order have been complied with and that all logs are
fresh cut and quality equal to or better and that all logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed to
Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company
and one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.

2. Tally sheets in quadruplicate.

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

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

Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade Development Company,
Ltd., Seoul, Korea.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase Order.

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary
Credits
 18

 The logs were loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its
loading, the logs were inspected by custom inspectors from the Bureau of Customs and representatives
of the Bureau of Forestry 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.
 Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused
to advance the payment on the letter of credit.
 The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private
respondent receiving any certification from Christiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring
the matter before the Central Bank.

. . . 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.

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

The complaint prayed for the following:

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.

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

The trial court

 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 (Art. 1585, Civil Code), his obligation
 19

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,
 The defendant Feati must be held liable together with his (sic) co-defendant : 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) (Rollo,
pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent.

The petitioner received a copy of the decision and it filed a notice of appeal.
 20

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

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

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

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

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

CA:

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.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating
bank, even before the letter of credit was presented for payment, Feati Bank had already made an
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank,
Feati Bank, by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific),
confirmed such letter of credit and made the same also its own obligation. This ruling finds support in
the authority cited by Villaluz:

A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening
bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will
confirm the opening bank's obligation by making it also its own undertaking, or commitment, or
guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p.
77).

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

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. (sic) Such being the case, when Christiansen refused to issue the
 21

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.

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

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

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

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

Hence, this petition for review.

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

First Reason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS

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

Second Reason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT

PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT,
CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS
GUARANTOR OF THE ISSUING BANK.

Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT

AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
 22

The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter
of credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must
strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be
able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary
Thus the rule of strict compliance.

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

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

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

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:

 23

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
 24

bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp.
81-83)

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

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

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

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

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

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

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

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

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only
with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore
that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against
the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)
 25

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

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

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

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

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

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

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

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

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

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

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

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any
definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent,
the refusal by the petitioner to accept the tender of the private respondent is justified.
 26

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

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

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

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

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

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

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

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

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

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it
has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the
letter of credit.
 27

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

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

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

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

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

The failure by him to submit the certification was fatal to his case.1âwphi1 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.

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

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

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

There is no merit in the respondent's contention that the certification required in condition No. 4 of the
letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central
Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was
 28

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

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

SO ORDERED.

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

DECISION

AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the
Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc.
(Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was thereby:

xxx     xxx     xxx

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

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

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

xxx     xxx     xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by respondent
Maynilad, issued the herein questioned Order3 which stated that it thereby:
 29

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

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

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

ANTECEDENTS OF THE CASE

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

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

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of
foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit6 in the
amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations to MWSS as
aforestated.

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

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

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

b) resume payment of the concession fees; and

 30

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

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

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

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

PETITIONER’S CASE

Petitioner hereby raises the following issues:

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

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

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

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

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets
of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling under the
purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad.

Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process
for the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

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
 31

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;14

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 x x x upon publication of the notice of commencement;15" and

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

OUR RULING

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

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

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

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the
commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and
under the Interim Rules and the order of public respondent.

Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of
the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.
 32

We disagree.

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

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

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

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

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

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

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not
should be governed by the provisions contained in it; in their absence, by the usages of commerce generally observed in
each place; and in the absence of both rules, by those of the civil law."
 33

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

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

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

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

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

ADDITIONAL ISSUES

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

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules itself
which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set conditions for
the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that the public
respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions filed by
respondent Maynilad on November 21 and 24, 2003,30 where the parties including the creditors, Suez and Chinatrust
Commercial "presented their respective arguments."31 The public respondent then ruled, "after carefully
considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the
creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions of
the records, this court is of the considered and humble view that the issue must perforce be resolved in favor of
 34

Maynilad."32 Hence to pursue their opposition before the same court would result in the presentation of the same
arguments and issues passed upon by public respondent.

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

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

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

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

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

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

No costs.

SO ORDERED.

G.R. No. 105387 November 11, 1993

JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under the name and style
"PHILIPPINE SJ INDUSTRIAL TRADING," respondents.
 35

In this petition for review on certiorari, petitioner questions the reversal by the Court of Appeals 1 of the trial
court's ruling that a contract of sale had been perfected between petitioner and private respondent over bus spare
parts.

The facts as quoted from the decision of the Court of Appeals are as follows:

Sometime in 1981, defendant 2 established contact with plaintiff 3 through the Philippine

Consulate General in Hamburg, West Germany, because he wanted to purchase MAN bus spare
parts from Germany. Plaintiff communicated with its trading partner. Johannes Schuback and
Sohne Handelsgesellschaft m.b.n. & Co. (Schuback Hamburg) regarding the spare parts
defendant wanted to order.

On October 16, 1981, defendant submitted to plaintiff a list of the parts (Exhibit B) he wanted to
purchase with specific part numbers and description. Plaintiff referred the list to Schuback
Hamburg for quotations. Upon receipt of the quotations, plaintiff sent to defendant a letter dated
25 November, 1981 (Exh. C) enclosing its offer on the items listed by defendant.

On December 4, 1981, defendant informed plaintiff that he preferred genuine to replacement

parts, and requested that he be given 15% on all items (Exh. D).

On December 17, 1981, plaintiff submitted its formal offer (Exh. E) 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 at that time and
enclosed Purchase Order No. 0101 dated 14 December 1981 (Exh. F to F-4). Said Purchase
Order contained the item number, part number and description. Defendant promised to submit
the quantity per unit he wanted to order on December 28 or 29 (Exh. F).

On December 29, 1981, defendant personally submitted the quantities he wanted to Mr. Dieter
Reichert, General Manager of plaintiff, at the latter's residence (t.s.n., 13 December, 1984, p. 36).
The quantities were written in ink by defendant in the same Purchase Order previously
submitted. At the bottom of said Purchase Order, defendant wrote in ink above his signature:
"NOTE: Above P.O. will include a 3% discount. The above will serve as our initial P.O." (Exhs.
G to G-3-a).

Plaintiff immediately ordered the items needed by defendant from Schuback Hamburg to enable
defendant to avail of the old prices. Schuback Hamburg in turn ordered (Order No. 12204) the
items from NDK, a supplier of MAN spare parts in West Germany. On January 4, 1982,
Schuback Hamburg sent plaintiff a proforma invoice (Exhs. N-1 to N-3) to be used by defendant
in applying for a letter of credit. Said invoice required that the letter of credit be opened in favor
of Schuback Hamburg. Defendant acknowledged receipt of the invoice (t.s.n., 19 December
1984, p. 40).

An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to plaintiff which was
forwarded to and received by defendant on February 3, 1981 (t.s.n., 13 Dec. 1984, p. 42).

On February 16, 1982, plaintiff reminded defendant to open the letter of credit to avoid delay in
shipment and payment of interest (Exh. J). Defendant replied, mentioning, among others, the
 36

difficulty he was encountering 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 with our orders" (Exh. K).

In the meantime, Schuback Hamburg received invoices from, NDK for partial deliveries on
Order No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3). Schuback Hamburg paid NDK. The
latter confirmed receipt of payments made on February 16, 1984 (Exh.C-Deposition).

On October 18, 1982, Plaintiff again reminded defendant of his order and advised that the case
may be endorsed to its lawyers (Exh. L). Defendant replied that he did not make any valid
Purchase Order and that there was no definite contract between him and plaintiff (Exh. M).
Plaintiff sent a rejoinder explaining that there is a valid Purchase Order and suggesting that
defendant either proceed with the order and open a letter of credit or cancel the order and pay the
cancellation fee of 30% of F.O.B. value, or plaintiff will endorse the case to its lawyers (Exh. N).

Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff enclosing therewith Debit
Note (Exh. O) charging plaintiff 30% cancellation fee, storage and interest charges in the total
amount of DM 51,917.81. Said amount was deducted from plaintiff's account with Schuback
Hamburg (Direct Interrogatories, 07 October, 1985).

Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983 and June 9, 1983
were to no avail (Exhs R and S).

Consequently, petitioner filed a complaint for recovery of actual or compensatory damages, unearned profits,
interest, attorney's fees and costs against private respondent.

In its decision dated June 13, 1988, the trial court4 ruled in favor of petitioner by ordering private respondent to
pay petitioner, among others, actual compensatory damages in the amount of DM 51,917.81, unearned profits in
the amount of DM 14,061.07, or their peso equivalent.

Thereafter, private respondent elevated his case before the Court of Appeals. On February 18, 1992, the
appellate court reversed the decision of the trial court and dismissed the complaint of petitioner. 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 January 1982.

The issue posed for resolution is whether or not a contract of sale has been perfected between the parties.

We reverse the decision of the Court of Appeals and reinstate the decision of the trial court. It bears
emphasizing that a "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. . . . " 5

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 to us indicate that consent on
both sides has been manifested.
 37

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. 0l01 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.

Although said purchase order did not contain the quantity he wanted to order, private respondent made good,
his promise to communicate the same on December 29, 1981. At this juncture, it should be pointed out that
private respondent was already in the process of executing the agreement previously reached between the
parties.

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 Appeals that there as no confirmed price on or about the last week of December
1981 and/or the first week of January 1982 was erroneous.

While we agree with the trial court's conclusion that indeed a perfection of contract was reached between the
parties, we differ as to the exact date when it occurred, for perfection took place, not on December 29, 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 occurred.

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 the 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 etter 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.
 38

To adopt the Court of Appeals' ruling that the contract of sale was dependent on the opening of a letter of credit
would be untenable from a pragmatic point of view because private respondent would not be able to avail of the
old prices which were open to him only for a limited period of time. This explains why private respondent
immediately placed the order with petitioner which, in turn promptly contacted its trading partner in Germany.
As succinctly stated by petitioner, "it would have been impossible for respondent to avail of the said old prices
since the perfection of the contract would arise much later, or after the end of the year 1981, or when he finally
opens the letter of credit." 6

WHEREFORE, the petition is GRANTED and the decision of the trial court dated June 13, 1988 is
REINSTATED with modification.

SO ORDERED.

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

 Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of
Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter
involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to
the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine
Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.X

The facts which gave rise to the instant controversy are summarized by the public respondent as follows:

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 (Exhibit B, Plaintiff's Folder of
Exhibits, p 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 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and
issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), 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 (Exhibit X and X-1, Ibid.,
pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

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 (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
 39

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 at 69 Obudan
Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-
appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The
lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the
defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust
receipt yielded no result 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. 2X

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum
of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15,
1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, 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.

SO ORDERED. 3X

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify
the decision, petitioner 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 (Exhibit "C"); (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 (Exhibits "X", "X-l" to
"X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held
liable thereon. 4X
 40

In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it 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 (Exhibits "X-2" to
"X-11") 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.

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. 5X

Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June
1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:X

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR
FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO.
LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND
UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO
WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH
ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
 41

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7X

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto
by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to
submit their respective memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

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.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts,
Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The
liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) 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. We are 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: 9X

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to
pay through its correspondent bank in Japan the drafts that Nisso (sic) 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 (sic)
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 Annex "A".X

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. 11 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. 12 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). 13 The said section reads:X

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
 42

(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; 14 this may be done in
writing by the drawee in the bill itself, or in a separate instrument. 15X

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank
has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X &
X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16X

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 expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment in expressed.

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. (emphasis supplied)

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" 17 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. 18 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., 19 thus:X

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
 43

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.

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, 20 this Court explains the nature of a trust receipt by
quoting In re Dunlap Carpet Co., 21 thus:X

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, 22 trust receipts:X

. . . [I]n 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 (sic) 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 (sic) capacity, defendants have willfully
 44

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." 23 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." 24 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. 25 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.X

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private
respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon.
The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause",
reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally
agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the
said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any
event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its
remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. Chi

ANACLETO R. CHI 26X

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee
Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit
"C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and
executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two
persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the
plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these
show that the alleged guaranty provision was disregarded and, therefore, not consummated.
 45

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-
appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither
exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-
appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article
2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-
appellee arises only when the principal debtor fails to comply with his obligation. 27X

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is
only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted
was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty
as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we
jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the
liability existing between themselves. It does not refer to the undertaking between either one or both of them on the
one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated,
their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29X

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively
disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary
public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who
signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi
became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not
required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form
they may have been entered into, provided all the essential requisites for their validity are present; however, when the
law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain
way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for
the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is
required to make the same a  public document, under Article 1358 of the Civil Code, a contract of guaranty does not have
to appear in a public document.X

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal
proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal
proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115.
Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the
phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the
 46

terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or
other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It
is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities,
the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for
the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud
as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the
civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities
arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud
under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to
enforce the civil liability arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi.
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 33 Reliance is thus placed on Article 2058 of the Civil Code which
provides:X

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.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor.
In Southern Motors, Inc.  vs.  Barbosa, 34 this Court stated:X

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.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case
No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of
parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising
out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative,
may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where
any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court
 47

may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder
of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary
work, trouble and expense. 35X

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. 36 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.37X

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.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of
Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and
SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to
"X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in
the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages,
if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face
value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-
19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of
execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

SO ORDERED.

G.R. No. 146717             May 19, 2006

TRANSFIELD PHILIPPINES, INC., Petitioner,

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

RESOLUTION
 48

TINGA, J.:

The adjudication of this case proved to be a two-stage process as its constituent parts involve two segregate but equally
important issues. The first stage relating to the merits of the case, specifically the question of the propriety of calling on
the securities during the pendency of the arbitral proceedings, was resolved in favor of Luzon Hydro Corporation (LHC)
with the Court’s Decision1 of 22 November 2004. The second stage involving the issue of forum-shopping on which the
Court required the parties to submit their respective memoranda2 is disposed of in this Resolution.X

The disposal of the forum-shopping charge is crucial to the parties to this case on account of its profound effect on the
final outcome of the international arbitral proceedings which they have chosen as their principal dispute resolution
mechanism.3X

LHC claims that Transfield Philippines, Inc. (TPI) is guilty of forum-shopping when it filed the following suits:

1. Civil Case No. 04-332 filed on 19 March 2004, pending before the Regional Trial Court (RTC) of Makati, Branch 56 for
confirmation, recognition and enforcement of the Third Partial Award in case 11264 TE/MW, ICC International Court of
Arbitration, entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation.4X

2. ICC Case No. 11264/TE/MW, Transfield Philippines, Inc. v. Luzon Hydro Corporation filed before the International Court
of Arbitration, International Chamber of Commerce (ICC) a request for arbitration dated 3 November 2000 pursuant to
the Turnkey Contract between LHC and TPI;

3. G.R. No. 146717, Transfield Philippines, Inc. v. Luzon Hydro Corporation, Australia and New Zealand Banking Group
Limited and Security Bank Corp.  filed on 5 February 2001, which was an  appeal by certiorari with prayer for
TRO/preliminary prohibitory and mandatory injunction, of the Court of Appeals Decision dated 31 January 2001 in CA-
G.R. SP No. 61901.

a. CA-G.R. SP No. 61901 was a petition for review of the Decision in Civil Case No. 00-1312, wherein TPI claimed that
LHC’s call on the securities was premature considering that the issue of default has not yet been resolved with finality;
the petition was however denied by the Court of Appeals;

b. Civil Case No. 00-1312 was a complaint for injunction with prayer for temporary restraining order and/or writ of
preliminary injunction dated 5 November 2000, which sought to restrain LHC from calling on the securities and
respondent banks from transferring or paying of the securities; the complaint was denied by the RTC.

On the other hand, TPI claims that it is LHC which is guilty of forum-shopping when it raised the issue of forum-shopping
not only in this case, but also in Civil Case No. 04-332, and even asked for the dismissal of the other case based on this
ground. Moreover, TPI argues that LHC is relitigating in Civil Case No. 04-332 the very same causes of action in ICC Case
No. 11264/TE/MW, and even manifesting therein that it will present evidence earlier presented before the arbitral
tribunal.5X

Meanwhile, ANZ Bank and Security Bank moved to be excused from filing a memorandum. They claim that with the
finality of the Court’s Decision dated 22 November 2004, any resolution by the Court on the issue of forum-shopping will
not materially affect their role as the banking entities involved are concerned.6 The Court granted their respective
motions.X

On 1 August 2005, TPI moved to set the case for oral argument, positing that the resolution of the Court on the issue of
forum-shopping may have significant implications on the interpretation of the Alternative Dispute Resolution Act of
2004, as well as the viability of international commercial arbitration as an alternative mode of dispute resolution in the
 49

country.7 Said motion was opposed by LHC in its opposition filed on 2 September 2005, with LHC arguing that the
respective memoranda of the parties are sufficient for the Court to resolve the issue of forum-shopping.8 On 28 October
2005, TPI filed its Manifestation and Reiterative Motion9 to set the case for oral argument, where it manifested that the
International Chamber of Commerce (ICC) arbitral tribunal had issued its Final Award ordering LHC to pay TPI
US$24,533,730.00 (including the US$17,977,815.00 proceeds of the two standby letters of credit). TPI also submitted a
copy thereof with a Supplemental Petition10 to the Regional Trial Court (RTC), seeking recognition and enforcement of
the said award.11X

The essence of forum-shopping is the filing of multiple suits involving the same parties for the same cause of action,
either simultaneously or successively, for the purpose of obtaining a favorable judgment.12 Forum-shopping has likewise
been defined as the act of a party against whom an adverse judgment has been rendered in one forum, seeking and
possibly getting a favorable opinion in another forum, other than by appeal or the special civil action of certiorari, or the
institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other
court would make a favorable disposition.13X

Thus, for forum-shopping to exist, there must be (a) identity of parties, or at least such parties as represent the same
interests in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts;
and (c) the identity of the two preceding particulars is such that any judgment rendered in the other action will,
regardless of which party is successful, amount to res judicata in the action under consideration.14X

There is no identity of causes of action between and among the arbitration case, the instant petition, and Civil Case No.
04-332.

The arbitration case, ICC Case No. 11264 TE/MW, is an arbitral proceeding commenced pursuant to the Turnkey
Contract between TPI and LHC, to determine the primary issue of whether the delays in the construction of the project
were excused delays, which would consequently render valid TPI’s claims for extension of time to finish the project.
Together with the primary issue to be settled in the arbitration case is the equally important question of monetary
awards to the aggrieved party.

On the other hand, Civil Case No. 00-1312, the precursor of the instant petition, was filed to enjoin LHC from calling on
the securities and respondent banks from transferring or paying the securities in case LHC calls on them. However, in
view of the fact that LHC collected the proceeds, TPI, in its appeal and petition for review asked that the same be
returned and placed in escrow pending the resolution of the disputes before the ICC arbitral tribunal.15X

While the ICC case thus calls for a thorough review of the facts which led to the delay in the construction of the project,
as well as the attendant responsibilities of the parties therein, in contrast, the present petition puts in issue the
propriety of drawing on the letters of credit during the pendency of the arbitral case, and of course, absent a final
determination by the ICC Arbitral tribunal. Moreover, as pointed out by TPI, it did not pray for the return of the proceeds
of the letters of credit. What it asked instead is that the said moneys be placed in escrow until the final resolution of the
arbitral case. Meanwhile, in Civil Case No. 04-332, TPI no longer seeks the issuance of a provisional relief, but rather the
issuance of a writ of execution to enforce the Third Partial Award.

Neither is there an identity of parties between and among the three (3) cases. The ICC case only involves TPI and LHC
logically since they are the parties to the Turnkey Contract. In comparison, the instant petition includes Security Bank
and ANZ Bank, the banks sought to be enjoined from releasing the funds of the letters of credit. The Court agrees with
TPI that it would be ineffectual to ask the ICC to issue writs of preliminary injunction against Security Bank and ANZ Bank
since these banks are not parties to the arbitration case, and that the ICC Arbitral tribunal would not even be able to
compel LHC to obey any writ of preliminary injunction issued from its end.16 Civil Case No. 04-322, on the other hand,
 50

logically involves TPI and LHC only, they being the parties to the arbitration agreement whose partial award is sought to
be enforced.X

As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for provisional
reliefs. The Rules of the ICC, which governs the parties’ arbitral dispute, allows the application of a party to a judicial
authority for interim or conservatory measures.17 Likewise, Section 14 of Republic Act (R.A.) No. 876 (The Arbitration
Law)18 recognizes the rights of any party to petition the court to take measures to safeguard and/or conserve any matter
which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known as the "Alternative Dispute
Resolution Act of 2004," allows the filing of provisional or interim measures with the regular courts whenever the
arbitral tribunal has no power to act or to act effectively.19X

TPI’s verified petition in Civil Case No. 04-332, filed on 19 March 2004, was captioned as one "For: Confirmation,
Recognition and Enforcement of Foreign Arbitral Award in Case 11264 TE/MW, ICC International Court of Arbitration,
‘Transfield Philippines, Inc. v. Luzon Hydro Corporation (Place of arbitration: Singapore)."20 In the said petition, TPI
prayed:X

1. That the THIRD PARTIAL AWARD dated February 18, 2004 in Case No. 11264/TE/MW made by the ICC International
Court of Arbitration, the signed original copy of which is hereto attached as Annex "H" hereof, be confirmed, recognized
and enforced in accordance with law.

2. That the corresponding writ of execution to enforce Question 31 of the said Third Partial Award, be issued, also in
accordance with law.

3. That TPI be granted such other relief as may be deemed just and equitable, and allowed, in accordance with law.21X

The pertinent portion of the Third Partial Award22 relied upon by TPI were the answers to Questions 10 to 26, to wit:X

"Question 30 Did TPI [LHC] wrongfully draw upon the security?

Yes

"Question 31 Is TPI entitled to have returned to it any sum wrongfully taken by LHC for liquidated damages?

Yes

"Question 32 Is TPI entitled to any acceleration costs?

TPI is entitled to the reasonable costs TPI incurred after Typhoon Zeb as a result of LHC’s 5 February 1999 Notice to
Correct.23X

According to LHC, the filing of the above case constitutes forum-shopping since it is the same claim for the return of
US$17.9 Million which TPI made before the ICC Arbitral Tribunal and before this Court. LHC adds that while Civil Case
No. 04-332 is styled as an action for money, the Third Partial Award used as basis of the suit does not authorize TPI to
seek a writ of execution for the sums drawn on the letters of credit. Said award does not even contain an order for the
payment of money, but instead has reserved the quantification of the amounts for a subsequent determination, LHC
argues. In fact, even the Fifth Partial Award,24 dated 30 March 2005, does not contain such orders. LHC insists that the
declarations or the partial awards issued by the ICC Arbitral Tribunal do not constitute orders for the payment of money
and are not intended to be enforceable as such, but merely constitute amounts which will be included in the Final Award
and will be taken into account in determining the actual amount payable to the prevailing party.25X
 51

R.A. No. 9825 provides that international commercial arbitrations shall be governed shall be governed by the Model Law
on International Commercial Arbitration ("Model Law") adopted by the United Nations Commission on International
Trade Law (UNCITRAL).26 The UNCITRAL Model Law provides:X

ARTICLE 35. Recognition and enforcement

(1) An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon
application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36.

(2) The party relying on an award or applying for its enforcement shall supply the duly authenticated original award or a
duly certified copy thereof, and the original arbitration agreement referred to in article 7 or a duly certified copy thereof.
If the award or agreement is not made in an official language of this State, the party shall supply a duly certified
translation thereof into such language.

Moreover, the New York Convention,27 to which the Philippines is a signatory, governs the recognition and enforcement
of foreign arbitral awards. The applicability of the New York Convention in the Philippines was confirmed in Section 42 of
R.A. 9285. Said law also provides that the application for the recognition and enforcement of such awards shall be filed
with the proper RTC. While TPI’s resort to the RTC for recognition and enforcement of the Third Partial Award is
sanctioned by both the New York Convention and R.A. 9285, its application for enforcement, however, was premature,
to say the least. True, the ICC Arbitral Tribunal had indeed ruled that LHC wrongfully drew upon the securities, yet there
is no order for the payment or return of the proceeds of the said securities. In fact, Paragraph 2142, which is the final
paragraph of the Third Partial Award, reads:X

2142. All other issues, including any issues as to quantum and costs, are reserved to a future award.28X

Meanwhile, the tribunal issued its Fifth Partial Award29 on 30 March 2005. It contains, among others, a declaration that
while LHC wrongfully drew on the securities, the drawing was made in good faith, under the mistaken assumption that
the contractor, TPI, was in default. Thus, the tribunal ruled that while the amount drawn must be returned, TPI is not
entitled to any damages or interests due to LHC’s drawing on the securities.30 In the Fifth Partial Award, the tribunal
ordered:X

6. Order

6.1 General

166. This Fifth Partial Award deals with many issues of quantum.1avvphil.net However, it does not resolve them all. The
outstanding quantum issues will be determined in a future award. It will contain a reconciliation of the amounts
awarded to each party and a determination of the net amount payable to Claimant or Respondent, as the case may be.

167. In view of this the Tribunal will make no orders for payment in this Fifth Partial Award. The Tribunal will make a
number of declarations concerning the quantum issues it has resolved in this Award together with the outstanding
liability issues. The declarations do not constitute orders for the payment of money and are not intended to be
enforceable as such. They merely constitute amounts which will be included in the Final Award and will be taken into
account in determining the actual amount payable.31 (Emphasis Supplied.)X

Further, in the Declarations part of the award, the tribunal held:

6.2 Declarations

168. The Tribunal makes the following declarations:

 52

xxx

3. LHC is liable to repay TPI the face value of the securities drawn down by it, namely, $17,977,815. It is not liable for any
further damages claimed by TPI in respect of the drawdown of the securities.

x x x.32X

Finally, on 9 August 2005, the ICC Arbitral tribunal issued its Final Award, in essence awarding US$24,533,730.00, which
included TPI’s claim of U$17,977,815.00 for the return of the securities from LHC.33X

The fact that the ICC Arbitral tribunal included the proceeds of the securities shows that it intended to make a final
determination/award as to the said issue only in the Final Award and not in the previous partial awards. This supports
LHC’s position that when the Third Partial Award was released and Civil Case No. 04-332 was filed, TPI was not yet
authorized to seek the issuance of a writ of execution since the quantification of the amounts due to TPI had not yet
been settled by the ICC Arbitral tribunal. Notwithstanding the fact that the amount of proceeds drawn on the securities
was not disputed the application for the enforcement of the Third Partial Award was precipitately filed. To repeat, the
declarations made in the Third Partial Award do not constitute orders for the payment of money.

Anent the claim of TPI that it was LHC which committed forum-shopping, suffice it to say that its bare allegations are not
sufficient to sustain the charge.

WHEREFORE, the Court RESOLVES to DISMISS the charges of forum-shopping filed by both parties against each other.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 159622             July 30, 2004

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P.

LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.

At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction, an entruster
which had taken actual and juridical possession of the goods covered by the trust receipt may subsequently avail
of the right to demand from the entrustee the deficiency of the amount covered by the trust receipt.

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

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

Respondent alleged that petitioner corporation is engaged in the business of selling imported welding rods and
alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 with respondent bank, in the amount
of US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the time the transaction was
consummated. The letter of credit was opened to purchase various welding rods and electrodes from Perma
 53

Alloys, Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner
corporation put up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan.

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

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

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

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

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

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

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

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

SO ORDERED.1

Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not respondent bank has the
right to recover any deficiency after it has retained possession of and subsequently effected a public auction sale
 54

of the goods covered by the trust receipt; (2) whether or not respondent bank is entitled to the amount of
P3,000.00 as and for litigation expenses and costs of the suit; and (3) whether or not respondent bank is entitled
to the award of attorney's fees.

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

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

I.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL

COURT'S RULING THAT RESPONDENT HAD THE RIGHT TO CLAIM THE DEFICIENCY
FROM PETITIONERS NOTWITHSTANDING THE FACT THAT THE GOODS COVERED BY
THE TRUST RECEIPT WERE FULLY TURNED OVER TO RESPONDENT.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL

COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION, INTEREST,
ATTORNEY'S FEES, AND PENALTY AGAINST THE PETITIONERS. 3

The instant petition is partly meritorious.

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

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

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of
the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust receipt or any other agreement between the
entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may,
on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days
after serving or sending of such notice, sell the goods, documents or instruments at public or private
sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of
the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to
the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and
either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known
business address.
 55

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

Petitioners' argument is bereft of merit.

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

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust
receipt as security for the loan. In other words, the transaction involves a loan feature represented by the
letter of credit, and a security feature which is in the covering trust receipt. x x x.

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest"
in the goods. It secures an indebtedness and there can be no such thing as security interest that secures
no obligation.6

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

The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of default
or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee. More specifically, the entruster "may cancel the trust and
take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom
at any time". The law further provides that "the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days
after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and
the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or
private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-
taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency."

The trust receipt between respondent bank and petitioner corporation contains the following relevant clauses:
 56

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

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

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

The initial repossession by the bank of the goods subject of the trust receipt did not result in the full satisfaction
of the petitioners' loan obligation. Petitioners are apparently laboring under the mistaken impression that the full
turn-over of the goods suffices to divest them of their obligation to repay the principal amount of their loan
obligation. This is definitely not the case. In Philippine National Bank v. Hon. Gregorio G. Pineda and
Tayabas Cement Company, Inc.,9 we had occasion to rule:

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

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is
alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in
payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. As aforesaid, the repossession of the
machinery and equipment in question was merely to secure the payment of TCC's loan obligation and
not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus,
no dacion en pago was ever accomplished. (Citations omitted, underscoring supplied)10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down the position of the
petitioner-spouses that their obligation to the entruster bank had been extinguished when they relinquished
possession of the goods in question. Thus:
 57

A trust receipt… is a security agreement, pursuant to which a bank acquires a "security interest" in the
goods. It secures an indebtedness and there can be no such thing as security interest that secures no
obligation. As defined in our laws:

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

xxx      xxx      xxx

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

"x x x for the bank has previously extended a loan which the L/C represents to the importer, and
by that loan, the importer should be the real owner of the goods. If under the trust receipt, the
bank is made to appear as the owner, it was but an artificial expedient, more of a legal fiction
than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot
do, just to give consistency with the purpose of the trust receipt of giving a stronger security for
the loan obtained by the importer. To consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature thereof. x x x"

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the
court, they are absolutely relieved of their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the seashells in question does not affect
IBAA's right to recover the advances it had made under the Letter of Credit. (Citations omitted.)12

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

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

In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation's
indebtedness to the respondent bank. Respondent bank was thus well within its rights to institute the instant case
to collect the deficiency.

We find, however, that there has been an error in the computation of the total amount of petitioners'
indebtedness to respondent bank.
 58

Although respondent bank contends that the error of computation is a question of fact which is beyond the
power of this Court to review,13 the total amount of petitioners' indebtedness in this case is not a question of fact.
Rather, it is a question of law, i.e., the application of legal principles for the computation of the amount owed to
respondent bank, and is thus a matter properly brought for our determination.

The first issue involves the amount of indebtedness prior to the imposition of interest and penalty charges. The
initial amount of the trust receipt of P218,733.92, was reduced to P192,265.92 as of June 14, 1984, as per
respondent's Statement of Past Due Trust Receipt dated December 1, 1993.14 This amount presumably includes
the application of P35,000.00, the amount of petitioner Lucente's Deed of Assignment, which amount was
applied by respondent bank to petitioners' obligation. No showing was made, however, that the P30,000.00
proceeds of the auction sale on July 31, 1985 was ever applied to the loan. Neither was the amount of
P50,414.00, representing the marginal deposit made by petitioner corporation, deducted from the loan.
Although respondent bank contends that the marginal deposit should not be deducted from the principal
obligation, this is completely contrary to prevailing jurisprudence allowing the deduction of the marginal
deposit, thus:

The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which
would create inflationary pressure. It is a collateral security given by the debtor, and is supposed to be
returned to him upon his compliance with his secured obligation. Consequently, the bank pays no
interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a
matter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in
those cases where the applicant for a letter of credit is not known to the bank or does not maintain a
good credit standing therein.

It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set
off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart from
being able to use said deposit for its own purposes, also earns interest on the money it loaned to the
importer. It would be onerous to compute interest and other charges on the face value of the letter of
credit which the bank issued, without first crediting or setting off the marginal deposit which the
importer paid to the bank. Compensation is proper and should take place by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the
concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation
as regards what the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code).15

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

To this principal amount must be imposed the following charges: (1) 19% interest per annum, in keeping with
the terms of the trust receipt;16 and (2) 12% penalty per annum, collected based on the outstanding principal
obligation plus unpaid interest, again in keeping with the wording of the trust receipt.17 It appearing that
petitioners have paid the interest and penalty charges until April 17, 1986, the reckoning date for the
computation of the foregoing charges must be April 18, 1986.

A perusal of the records reveals that the trial court and the Court of Appeals erred in imposing service charges
upon the petitioners. No such stipulation is found in the trust receipt. Moreover, the trial court and the Court of
Appeals erred in computing attorney's fees equivalent to 10% per annum, rather than 10% of the total amount
 59

due. There is no basis for compounding the interest annually, as the trial court and Court of Appeals have done.
This amount would be unconscionable.

Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner corporation is
untenable. As co-signatories of the Continuing Suretyship Agreement, they bound themselves, inter alia, to pay
the principal sum in the amount of not more than P400,000.00; interest due on the principal obligation;
attorney's fees; and expenses that may be incurred in collecting the credit. The amount owed to respondent bank
is the amount of the principal, interest, attorney's fees, and expenses in collecting the principal amount. The
Continuing Suretyship Agreement expressly states the nature of the liability of Lucente and Llaban:

The liability of the SURETY shall be solidary, direct and immediate and not contingent upon the bank's
pursuit of whatever remedies the BANK have [sic] against the Borrower or the securities or liens the
BANK may possess and the SURETY will at any time, whether due or not due, pay to the BANK with
or withour demand upon the Borrower, any of the instruments of indebtedness or other obligation hereby
guaranteed by the SURETY.18

Solidary liability is one of the primary characteristics of a surety contract,19 and the Continuing Suretyship
Agreement expressly stipulates the solidary nature of Lucente and Llaban's liability. All three petitioners thus
share the solidary obligation in favor of respondent bank, which is given the right, under the Civil Code, to
proceed against any one of the solidary debtors or some or all of them simultaneously.20

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

SO ORDERED.

G.R. No. 143772 November 22, 2005

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
PRUDENTIAL BANK, Respondent.

Development Bank of the Philippines (DBP) assails in this petition for review on certiorari under Rule 45 of the
Rules of Court the December 14, 1999 decision1 and the June 8, 2000 resolution of the Court of Appeals in CA-
G.R. CV No. 45783. The challenged decision dismissed DBP’s appeal and affirmed the February 12, 1991
decision of the Regional Trial Court of Makati, Branch 137 in Civil Case No. 88-931 in toto, while the
impugned resolution denied DBP’s motion for reconsideration for being pro forma.
 60

In 1973, 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.

On October 10, 1980, 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.

Subsequently, DBP caused to be published in the September 2, 1984 issue of the Times Journal an invitation to
bid in the public sale to be held on September 10, 1984. It called on interested parties to submit bids for the sale
of the textile mill formerly owned by Litex, the land on which it was built, as well as the machineries and
equipments therein. 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.

An exchange of correspondences ensued between Prudential Bank and DBP. In reply to Prudential Bank’s
September 6, 1984 letter, DBP requested documents to enable it to evaluate Prudential Bank’s claim. On
September 28, 1994, Prudential Bank provided DBP the requested documents. Two months later, Prudential
Bank followed up the status of its claim. In a letter dated December 3, 1984, DBP informed Prudential Bank
that its claim had been referred to DBP’s legal department and instructed Prudential Bank to get in touch with
its chief legal counsel. There being no concrete action on DBP’s part, Prudential Bank, in a letter dated July 30,
1985, made a final demand on DBP for the turn-over of the contested articles or the payment of their value.
Without the knowledge of Prudential Bank, however, DBP sold the Litex textile mill, as well as the machineries
and equipments therein, to Lyon Textile Mills, Inc. (Lyon) on June 8, 1987.

Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money with damages
against DBP with the Regional Trial Court of Makati, Branch 137, on May 24, 1988. The complaint was
docketed as Civil Case No. 88-931.

On February 12, 1991, the trial court decided2 in favor of Prudential Bank. Applying the provisions of PD 115,
otherwise known as the "Trust Receipts Law," it ruled:
 61

When PRUDENTIAL BANK released possession of the subject properties, over which it holds absolute title to
LITEX upon the latter’s execution of the trust receipts, the latter was bound to hold said properties in trust for
the former, and (a) to sell or otherwise dispose of the same and to turn over to PRUDENTIAL BANK the
amount still owing; or (b) to return the goods if unsold. Since LITEX was allowed to sell the properties being
claimed by PRUDENTIAL BANK, all the more was it authorized to mortgage the same, provided of course
LITEX turns over to PRUDENTIAL BANK all amounts owing. When DBP, well aware of the status of the
properties, acquired the same in the public auction, it was bound by the terms of the trust receipts of which
LITEX was the entrustee. Simply stated, DBP held no better right than LITEX, and is thus bound to turn over
whatever amount was due PRUDENTIAL BANK. Being a trustee ex maleficio of PRUDENTIAL BANK, DBP
is necessarily liable therefor. In fact, DBP may well be considered as an agent of LITEX when the former sold
the properties being claimed by PRUDENTIAL BANK, with the corresponding responsibility to turn over the
proceeds of the same to PRUDENTIAL BANK.3 (Citations omitted)

The dispositive portion of the decision read:

WHEREFORE, judgment is hereby rendered ordering defendant DEVELOPMENT BANK OF THE

PHILIPPINES to pay plaintiff PRUDENTIAL BANK:

a) ₱3,261,834.00, as actual damages, with interest thereon computed from 10 August 1985 until the entire
amount shall have been fully paid;

b) ₱50,000.00 as exemplary damages; and

c) 10% of the total amount due as and for attorney’s fees.

SO ORDERED.

Aggrieved, DBP filed an appeal with the Court of Appeals. However, the appellate court dismissed the appeal
and affirmed the decision of the trial court in toto. It applied the provisions of PD 115 and held that ownership
over the contested articles belonged to Prudential Bank as entrustor, not to Litex. Consequently, even if Litex
mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn over the
proceeds to Prudential Bank, being the party that advanced the payment for them.

On DBP’s argument that the disputed articles were not proper objects of a trust receipt agreement, the Court of
Appeals ruled that the items were part of the trust agreement entered into by and between Prudential Bank and
Litex. Since the agreement was not contrary to law, morals, public policy, customs and good order, it was
binding on the parties.

Moreover, the appellate court found that DBP was not a mortgagee in good faith. It also upheld the finding of
the trial court that DBP was a trustee ex maleficio of Prudential Bank over the articles covered by the "trust
receipts."

DBP filed a motion for reconsideration but the appellate court denied it for being pro forma. Hence, this
petition.

Trust receipt transactions are governed by the provisions of PD 115 which defines such a transaction as follows:
 62

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

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process
the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt
for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the entrustee has complied fully with his obligation under
the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or
necessary to their sale; or

2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver them to a principal; or
(c) to effect the consummation of some transactions involving delivery to a depository or register; or (d) to
effect their presentation, collection or renewal.

xxxxxxxxx

In a trust receipt transaction, the goods are released by the entruster (who owns or holds absolute title or
security interests over the said goods) to the entrustee on the latter’s execution and delivery to the entruster of a
trust receipt. The trust receipt evidences the absolute title or security interest of the entruster over the goods. 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.4 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.

Here, Litex was not engaged in the business of selling spinning machinery, its accessories and spare parts but in
manufacturing and producing textile and various kinds of fabric. The articles were not released to Litex to be
sold. Nor was the transfer of possession intended to be a preliminary step for the said goods to be ultimately or
subsequently sold. Instead, the contemporaneous and subsequent acts of both Litex and Prudential Bank showed
that the imported articles were released to Litex to be installed in its textile mill and used in its business. DBP
 63

itself was aware of this. To support its assertion that the contested articles were excluded from goods that could
be covered by a trust receipt, it contended:

First. That the chattels in controversy were procured by DBP’s mortgagor Lirag Textile Mills ("LITEX") for
the exclusive use of its textile mills. They were not procured -

(a) to sell or otherwise procure their sale;

(b) to manufacture or process the goods with the

purpose of ultimate sale.5 (emphasis supplied)

Hence, the transactions between Litex and Prudential Bank were allegedly not trust receipt transactions within
the meaning of PD 115. It follows that, contrary to the decisions of the trial court and the appellate court, the
transactions were not governed by the Trust Receipts Law.

We disagree.

The various agreements between Prudential Bank and Litex commonly denominated as "trust receipts" were
valid. As the Court of Appeals correctly ruled, their provisions did not contravene the law, morals, good
customs, public order or public policy.

The agreements uniformly provided:

Received, upon the Trust hereinafter mentioned from the PRUDENTIAL BANK (hereinafter referred to as
BANK) the following goods and merchandise, the property of said BANK specified in the bill of lading as
follows:

Amount of Bill Description of Security Marks & Nos. Vessel

       

and in consideration thereof, I/We hereby agree to hold said goods in trust for the BANK and as its
property with liberty to sell the same for its account but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds thereof) either by way of conditional sale,
pledge, or otherwise.

x x x x x x x x x6 (Emphasis supplied)

The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to
sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through
conditional sale, pledge or any other means.

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 thing 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.
 64

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 void7 and had no legal
effect.8 There being no valid mortgage, there could also be no valid foreclosure or valid auction sale.9 Thus,
DBP could not be considered either as a mortgagee or as a purchaser in good faith.10

No one can transfer a right to another greater than what he himself has.11 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.12 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.

On the matter of actual damages adjudged by the trial court and affirmed by the Court of Appeals, DBP wants
this Court to review the evidence presented during the trial and to reverse the factual findings of the trial court.
This Court is, however, not a trier of facts and it is not its function to analyze or weigh evidence anew.13 The
rule is that factual findings of the trial court, when adopted and confirmed by the CA, are binding and
conclusive on this Court and generally will not be reviewed on appeal.14 While there are recognized exceptions
to this rule, none of the established exceptions finds application here.

With regard to the imposition of exemplary damages, the appellate court agreed with the trial court that the
requirements for the award thereof had been sufficiently established. Prudential Bank’s entitlement to
compensatory damages was likewise amply proven. It was also shown that DBP was aware of Prudential
Bank’s claim as early as July, 1982. However, it ignored the latter’s demand, included the disputed articles in
the mortgage foreclosure and caused their sale in a public auction held on April 19, 1983 where it was declared
as the highest bidder. Thereafter, in the series of communications between them, DBP gave Prudential Bank the
false impression that its claim was still being evaluated. Without acting on Prudential Bank’s plea, DBP
included the contested articles among the properties it sold to Lyon in June, 1987. The trial court found that this
chain of events showed DBP’s fraudulent attempt to prevent Prudential Bank from asserting its rights. It
smacked of bad faith, if not deceit. Thus, the award of exemplary damages was in order. Due to the award of
exemplary damages, the grant of attorney’s fees was proper.15

DBP’s assertion that both the trial and appellate courts failed to address the issue of prescription is of no
moment. Its claim that, under Article 1146 (1) of the Civil Code, Prudential Bank’s cause of action had
prescribed as it should be reckoned from October 10, 1980, the day the mortgage was registered, is not correct.
The written extra-judicial demand by the creditor interrupted the prescription of action.16 Hence, the four-year
prescriptive period which DBP insists should be counted from the registration of the mortgage was interrupted
when Prudential Bank wrote the extra-judicial demands for the turn over of the articles or their value. In
particular, the last demand letter sent by Prudential Bank was dated July 30, 1988 and this was received by DBP
the following day. Thus, contrary to DBP’s claim, Prudential Bank’s right to enforce its action had not yet
prescribed when it filed the complaint on May 24, 1988.

WHEREFORE, the petition is hereby DENIED. The December 14, 1999 decision and June 8, 2000 resolution
of the Court of Appeals in CA-G.R. CV No. 45783 are AFFIRMED.

Costs against the petitioner.

 65

SO ORDERED.

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.

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R.
SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner Alfredo
Ching, and its Resolution2 dated June 28, 2004 denying the motion for reconsideration thereof.

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.3

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. Petitioner signed 13 trust receipts4 as surety,
acknowledging delivery of the following goods:

T/R Nos. Date Granted Maturity Date Principal Description of Goods

1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand
Synthetic Graphite Electrode
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)
Calorized Lance Pipes
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
Refractory Tundish Bricks
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for CCM
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
 66

2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory Nozzle

Bricks
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite Electrode
[with] tapered pitch filed
nipples
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles
calorized lance pipes [)]
1895 12-17-80 03-17-81 P67,652.04 Spare parts for
Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory Equipment5

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.

After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise known
as the Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner before the Regional Trial
Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to
Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was
dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its reconsideration. On December
23, 1987, the Minister of Justice granted the motion, thus reversing the previous resolution finding probable
cause against petitioner.8 The City Prosecutor was ordered to move for the withdrawal of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was denied on February 24,
1988.9 The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground
that the material allegations therein did not amount to estafa.10
 67

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez,11 holding that the
penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt; it is
not limited to transactions involving goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold. The Court also ruled that "the non-payment of the amount covered by a
trust receipt is an act violative of the obligation of the entrustee to pay."12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before the
Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no probable
cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability was only civil, not criminal,
having signed the trust receipts as surety.13 Respondent bank appealed the resolution to the Department of
Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the misappropriation of the goods
subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition and reversing the
assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior Vice-
President of PBMI, executed the 13 trust receipts and as such, was the one responsible for the offense. Thus, the
execution of said receipts is enough to indict the petitioner as the official responsible for violation of P.D. No.
115. The Justice Secretary also declared that petitioner could not contend that P.D. No. 115 covers only goods
ultimately destined for sale, as this issue had already been settled in Allied Banking Corporation v.
Ordoñez,16 where the Court ruled that P.D. No. 115 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 but covers failure to turn
over the proceeds of the sale of entrusted goods, or to return said goods if unsold or not otherwise disposed of in
accordance with the terms of the trust receipts."

The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts not
only as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two (2)
ways: first, as surety as determined by the Supreme Court in its decision in Rizal Commercial Banking
Corporation v. Court of Appeals;17 and second, as the corporate official responsible for the offense under P.D.
No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate
officers "without prejudice to the civil liabilities arising from the criminal offense." Thus, according to the
Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed is clearly
separate and distinct from the criminal liability of the accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations against
petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as Criminal Cases
No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court. Petitioner filed a motion
for reconsideration, which the Secretary of Justice denied in a Resolution18 dated January 17, 2000.
 68

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of
the Secretary of Justice on the following grounds:

1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION
DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF

DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR

ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION
WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF
SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no action
or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or
agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or
is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal
or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.

THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER

ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT
THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN
RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS

MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS
IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT
OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED. 21
 69

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural
grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by petitioner
and incorporated in the petition was defective for failure to comply with the first two of the three-fold
undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for
certiorari, prohibition and mandamus was not the proper remedy of the petitioner.

On the merits of the petition, 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.

Thus, petitioner filed the instant petition, alleging that:

THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND
THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS
DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY
THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS. 23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the rules
of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of Court
should be construed liberally especially when, as in this case, his substantial rights are adversely affected;
hence, the deficiency in his certification of non-forum shopping should not result in the dismissal of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the certificate
of non-forum shopping incorporated in the petition before the CA is defective because it failed to disclose
essential facts about pending actions concerning similar issues and parties. It asserts that petitioner’s failure to
comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling
of this Court in Melo v. Court of Appeals.24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his
petition before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme Court, the
Court of Appeals or different divisions thereof, or any tribunal or agency.
 70

It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or
agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice.25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of Section 3,
Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The petition shall
contain the full names and actual addresses of all the petitioners and respondents, a concise statement of the
matters involved, the factual background of the case and the grounds relied upon for the relief prayed for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has not theretofore
commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or different
divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the
status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or
agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five
(5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and independent of the avoidance of
forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply with the foregoing
requirement shall be sufficient ground for the dismissal of the petition without prejudice, unless otherwise
provided.26

Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. Petitioner failed to
certify that he "had not heretofore commenced any other action involving the same issues in the Supreme Court,
the Court of Appeals or the different divisions thereof or any other tribunal or agency" as required by paragraph
4, Section 3, Rule 46 of the Revised Rules of Court.

We agree with petitioner’s contention that the certification is designed to promote and facilitate the orderly
administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on the
Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with respect to
the contents of the certification which the pleader may prepare, the rule of substantial compliance may be
availed of.27 However, there must be a special circumstance or compelling reason which makes the strict
application of the requirement clearly unjustified. The instant petition has not alleged any such extraneous
circumstance. Moreover, as worded, the certification cannot even be regarded as substantial compliance with
the procedural requirement. Thus, the CA was not informed whether, aside from the petition before it, petitioner
had commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice
committed grave abuse of discretion in finding probable cause against the petitioner for violation of estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court
ratiocinated:
 71

Be that as it may, even on the merits, the arguments advanced in support of the petition are not persuasive
enough to justify the desired conclusion that respondent Secretary of Justice gravely abused its discretion in
coming out with his assailed Resolutions. Petitioner posits that, except for his being the Senior Vice-President
of the PBMI, there is no iota of evidence that he was a participes crimines in violating the trust receipts sued
upon; and that his liability, if at all, is purely civil because he signed the said trust receipts merely as a xxx
surety and not as the entrustee. These assertions are, however, too dull that they cannot even just dent the
findings of the respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association or other judicial entities,
the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen (13)
trust receipts. As such, the law points to him as the official responsible for the offense. Since a corporation
cannot be proceeded against criminally because it cannot commit crime in which personal violence or malicious
intent is required, criminal action is limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39
SCRA 303). Thus, the execution by respondent of said receipts is enough to indict him as the official
responsible for violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are ultimately
destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue has already
been settled in the Allied Banking Corporation case, supra, where he was also a party, when the Supreme Court
ruled that PD 115 is ‘not limited to transactions in goods which are to be sold (retailed), reshipped, stored or
processed as a component or a product ultimately sold’ but ‘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.’

"In regard to the other assigned errors, we note that the respondent bound himself under the terms of the trust
receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two (2)
capacities which do not exclude the other. Logically, he can be proceeded against in two (2) ways: first, as
surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and,
secondly, as the corporate official responsible for the offense under PD 115, the present case is an appropriate
remedy under our penal law.

"Moreover, 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.’"28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction between PBMI and
respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in his capacity
as PBMI Senior Vice-President; (c) he never received the goods as an entrustee for PBMI, hence, could not
have committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods
and used the same in operating its machineries and equipment and not for resale.
 72

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing
charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held criminally
liable as the transactions sued upon were clearly entered into in his capacity as an officer of the corporation"
and that [h]e never received the goods as an entrustee for PBM as he never had or took possession of the goods
nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of
merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from
any liability. Petitioner’s responsibility as the corporate official of PBM who received the goods in trust is
premised on Section 13 of P.D. No. 115, which provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed
of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied)

36. Petitioner having participated in the negotiations for the trust receipts and having received the goods for
PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against by virtue of the
PBM’s violation of P.D. No. 115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a quasi-judicial
officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when necessary to
afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly
administration of justice; (c) when the acts of the officer are without or in excess of authority; (d) where the
charges are manifestly false and motivated by the lust for vengeance; and (e) when there is clearly no prima
facie case against the accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess of his authority and resolves
to file an Information despite the absence of probable cause, such act may be nullified by a writ of certiorari.32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information shall be prepared
by the Investigating Prosecutor against the respondent only if he or she finds probable cause to hold such
respondent for trial. The Investigating Prosecutor acts without or in excess of his authority under the Rule if the
Information is filed against the respondent despite absence of evidence showing probable cause therefor.34 If the
Secretary of Justice reverses the Resolution of the Investigating Prosecutor who found no probable cause to
hold the respondent for trial, and orders such prosecutor to file the Information despite the absence of probable
cause, the Secretary of Justice acts contrary to law, without authority and/or in excess of authority. Such
resolution may likewise be nullified in a petition for certiorari under Rule 65 of the Revised Rules of Civil
Procedure.35
 73

A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive
prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there is
probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or persons
who may be reasonably charged with a crime. Probable cause need not be based on clear and convincing
evidence of guilt, as the investigating officer acts upon probable cause of reasonable belief. Probable cause
implies probability of guilt and requires more than bare suspicion but less than evidence which would justify a
conviction. A finding of probable cause needs only to rest on evidence showing that more likely than not, a
crime has been committed by the suspect.36

However, while probable cause should be determined in a summary manner, there is a need to examine the
evidence with care to prevent material damage to a potential accused’s constitutional right to liberty and the
guarantees of freedom and fair play37 and to protect the State from the burden of unnecessary expenses in
prosecuting alleged offenses and holding trials arising from false, fraudulent or groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in
issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

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

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal with them
in a manner preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a depository or
register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is
outside the purview and coverage of this Decree.
 74

An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt
agreement.39 The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the
proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire,
theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return the goods, documents or
instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of the decree.40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released
under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all
other rights conferred on him in the trust receipt; provided, such are not contrary to the provisions of the
document.41

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. The agreement was as
follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its property
with liberty to sell the same within ____days from the date of the execution of this Trust Receipt and for the
Bank’s account, but without authority to make any other disposition whatsoever of the said goods or any part
thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other
casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the
understanding that the BANK is, not to be chargeable with the storage premium or insurance or any other
expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to apply
against the relative acceptances (as described above) and for the payment of any other indebtedness of
mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree to return the goods
under this Trust Receipt to the BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification as property of the BANK.42

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.43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods
procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking
Corporation v. Ordoñez.44 The law applies to goods used by the entrustee in the operation of its machineries and
 75

equipment. The non-payment of the amount covered by the trust receipts or the non-return of the goods covered
by the receipts, if not sold or otherwise not disposed of, violate the entrustee’s obligation to pay the amount or
to return the goods to the entruster.

In Colinares v. Court of Appeals,45 the Court declared that 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.46 Thus, failure
of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or
to return said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime
under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of the entruster, regardless of whether the latter is
the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a
criminal offense that causes prejudice, not only to another, but more to the public interest.47

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 penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed
of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code.1âwphi1 If the violation or
offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided
for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

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, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period,
if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such cases, and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be;
 76

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud
is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period,
if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos,
provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other
officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation
and/or board of directors, officers, or other officials or employees responsible for the offense. The rationale is
that such officers or employees are vested with the authority and responsibility to devise means necessary to
ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law.48

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot
be penalized for a crime punishable by imprisonment.49 However, a corporation may be charged and prosecuted
for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty,
a corporation may be prosecuted and, if found guilty, may be fined.50

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A
necessary part of the definition of every crime is the designation of the author of the crime upon whom the
penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes
punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed
only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that
may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors,
or employees of such corporation or other persons responsible for the offense, only such individuals will suffer
such penalty.51 Corporate officers or employees, through whose act, default or omission the corporation
commits a crime, are themselves individually guilty of the crime.52

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those
corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or
other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the act.53 Moreover, all parties active in promoting
a crime, whether agents or not, are principals.54 Whether such officers or employees are benefited by their
delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact.

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.55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner.
 77

SO ORDERED.

G.R. No. 90828               September 5, 2000

MELVIN COLINARES and LORDINO VELOSO, petitioners,

vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration of ₱40,000 by
the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s convent at Camaman-an, Cagayan de Oro City.

On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2’x4’x½", 300 SF tanguile wood tiles
12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders Centre for the
construction project.1 The following day, 31 October 1979, Petitioners applied for a commercial letter of credit2 with the
Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC
approved the letter of credit3 for ₱22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma
trust receipt4 as security. The loan was due on 29 January 1980.X

On 31 October 1979, PBC debited ₱6,720 from Petitioners’ marginal deposit as partial payment of the loan.5X

On 7 May 1980, PBC wrote6 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 ₱19,195.83 in the Carmelite Monastery Project and
requested for a grace period of until 15 June 1980 to settle the account.7X

PBC sent a new demand letter8 to Petitioners on 16 October 1980 and informed them that their outstanding balance as
of 17 November 1979 was ₱20,824.40 exclusive of attorney’s fees of 25%.9X

On 2 December 1980, Petitioners proposed10 that the terms of payment of the loan be modified as follows: ₱2,000 on or
before 3 December 1980, and ₱1,000 per month starting 31 January 1980 until the account is fully paid. Pending
approval of the proposal, Petitioners paid ₱1,000 to PBC on 4 December 1980,11 and thereafter ₱500 on 11 February
1981,12 16 March 1981,13 and 20 April 1981.14 Concurrently with the separate demand for attorney’s fees by PBC’s legal
counsel, PBC continued to demand payment of the balance.15X

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 in an Information which was filed with Branch 18, Regional Trial Court of Cagayan
de Oro City. The accusatory portion of the Information reads:

That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused entered into a trust receipt agreement with the Philippine Banking
Corporation at Cagayan de Oro City wherein the accused, as entrustee, received from the entruster the following goods
to wit:

Solatone Acoustical board

Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive

with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to hold the aforesaid items in
trust for the entruster and/or to sell on cash basis or otherwise dispose of the said items and to turn over to the
 78

entruster the proceeds of the sale of said goods or if there be no sale to return said items to the entruster on or before
January 29, 1980 but that the said accused after receipt of the goods, with intent to defraud and cause damage to the
entruster, conspiring, confederating together and mutually helping one another, did then and there wilfully, unlawfully
and feloniously fail and refuse to remit the proceeds of the sale of the goods to the entruster despite repeated demands
but instead converted, misappropriated and misapplied the proceeds to their own personal use, benefit and gain, to the
damage and prejudice of the Philippine Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.16X

The case was docketed as Criminal Case No. 1390.

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.17X

On 7 July 1986, the trial court promulgated its decision18 convicting Petitioners of estafa for violating P.D. No. 115 in
relation to Article 315 of the Revised Penal Code and sentencing each of them to suffer imprisonment of two years and
one day of prision correccional as minimum to six years and one day of prision mayor as maximum, and to solidarily
indemnify PBC the amount of ₱20,824.44, with legal interest from 29 January 1980, 12 % penalty charge per annum,
25% of the sums due as attorney’s fees, and costs.X

The trial court considered the transaction between PBC and Petitioners as a trust receipt transaction under Section 4,
P.D. No. 115. It considered Petitioners’ use of the goods in their Carmelite monastery project an act of "disposing" as
contemplated under Section 13, P.D. No. 115, and treated the charge invoice19 for goods issued by CM Builders Centre as
a "document" within the meaning of Section 3 thereof. It concluded that the failure of Petitioners to turn over the
amount they owed to PBC constituted estafa.X

Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-G.R. CR No. 05408.
Petitioners asserted therein that the trial court erred in ruling that they violated the Trust Receipt Law, and in holding
them criminally liable therefor. In the alternative, they contend that at most they can only be made civilly liable for
payment of the loan.

In its decision20 6 March 1989, the Court of Appeals modified the judgment of the trial court by increasing the penalty to
six years and one day of prision mayor as minimum to fourteen years eight months and one day of reclusion temporal as
maximum. It held that the documentary evidence of the prosecution prevails over Veloso’s testimony, discredited
Petitioners’ claim that the documents they signed were in blank, and disbelieved that they were coerced into signing
them.X

On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration21 alleging that the "Disclosure Statement on
Loan/Credit Transaction"22 (hereafter Disclosure Statement) signed by them and Tuiza was suppressed by PBC during the
trial. That document would have proved that the transaction was indeed a loan as it bears a 14% interest as opposed to
the trust receipt which does not at all bear any interest. Petitioners further maintained that when PBC allowed them to
pay in installment, the agreement was novated and a creditor-debtor relationship was created.X

In its resolution23 of 16 October 1989 the Court of Appeals denied the Motion for New Trial/Reconsideration because the
alleged newly discovered evidence was actually forgotten evidence already in existence during the trial, and would not
alter the result of the case.X
 79

Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised the following issues:

1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE GROUND OF NEWLY DISCOVERED EVIDENCE,
NAMELY, "DISCLOSURE ON LOAN/CREDIT TRANSACTION," WHICH IF INTRODUCED AND ADMITTED, WOULD CHANGE
THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS.

2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE ACCUSED WERE PROPERLY CHARGED, TRIED
AND CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315 PARAGRAPH (I) (B)
NOTWITHSTANDING THE NOVATION OF THE SO-CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE
RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.

In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the petition for lack of merit.

On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they had already fully paid PBC on
2 February 1990 the amount of ₱70,000 for the balance of the loan, including interest and other charges, as evidenced
by the different receipts issued by PBC,24 and that the PBC executed an Affidavit of desistance.25X

We required the Solicitor General to comment on the Motion to Dismiss.

In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was akin to a voluntary surrender
or plea of guilty which merely serves to mitigate Petitioners’ culpability, but does not in any way extinguish their criminal
liability.

In the Resolution of 13 August 1990, we gave due course to the Petition and required the parties to file their respective
memoranda.

The parties subsequently filed their respective memoranda.

It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we required the parties to move in
the premises and for Petitioners to manifest if they are still interested in the further prosecution of this case and inform
us of their present whereabouts and whether their bail bonds are still valid.

Petitioners submitted their Compliance.

The core issues raised in the petition are the denial by the Court of Appeals of Petitioners’ Motion for New Trial and the
true nature of the contract between Petitioners and the PBC. As to the latter, Petitioners assert that it was an ordinary
loan, not a trust receipt agreement under the Trust Receipts Law.

The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial may be granted if: (1)
errors of law or irregularities have been committed during the trial prejudicial to the substantial rights of the accused; or
(2) new and material evidence has been discovered which the accused could not with reasonable diligence have
discovered and produced at the trial, and which, if introduced and admitted, would probably change the judgment.26X

For newly discovered evidence to be a ground for new trial, such evidence must be (1) discovered after trial; (2) could
not have been discovered and produced at the trial even with the exercise of reasonable diligence; and (3) material, not
merely cumulative, corroborative, or impeaching, and of such weight that, if admitted, would probably change the
judgment.27 It is essential that the offering party exercised reasonable diligence in seeking to locate the evidence before
or during trial but nonetheless failed to secure it.28X

We find no indication in the pleadings that the Disclosure Statement is a newly discovered evidence.
 80

Petitioners could not have been unaware that the two-page document exists. The Disclosure Statement itself states,
"NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL SIGN."29 Assuming
Petitioners’ copy was then unavailable, they could have compelled its production in court,30 which they never did.
Petitioners have miserably failed to establish the second requisite of the rule on newly discovered evidence.X

Petitioners themselves admitted that "they searched again their voluminous records, meticulously and patiently, until
they discovered this new and material evidence" only upon learning of the Court of Appeals’ decision and after they
were "shocked by the penalty imposed."31 Clearly, the alleged newly discovered evidence is mere forgotten evidence
that jurisprudence excludes as a ground for new trial.32X

However, the second issue should be resolved in favor of Petitioners.

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.

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.33X

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,34 without need of proving intent to defraud.X

A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was
a simple loan, not a trust receipt agreement.

Petitioners 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.35 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.36 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.37 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.38X
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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.39X

The antecedent acts in a trust receipt transaction consist of the application and approval of the letter of credit, the
making of the marginal deposit and the effective importation of goods through the efforts of the importer.40X

PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took notice even though it
failed to attach any significance to such fact in the judgment. Despite the Court of Appeals’ contrary view that the goods
were delivered to Petitioners previous to the execution of the letter of credit and trust receipt, we find that the records
of the case speak volubly and this fact remains uncontroverted. It is not uncommon for us to peruse through the
transcript of the stenographic notes of the proceedings to be satisfied that the records of the case do support the
conclusions of the trial court.41 After such perusal Grego Mutia, PBC’s credit investigator, admitted thus:X

ATTY. CABANLET: (continuing)

Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement were received by the
accused?

A Yes, sir

Q Do you have evidence to show that these goods subject matter of this letter of credit and trust receipt were delivered
to the accused?

A Yes, sir.

Q I am showing to you this charge invoice, are you referring to this document?

A Yes, sir.

xxx

Q What is the date of the charge invoice?

A October 31, 1979.

COURT:

Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with numeral 1.42X

During the cross and re-direct examinations he also impliedly admitted that the transaction was indeed a loan. Thus:

Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused you admit that?

A Because in the bank the loan is considered part of the loan.

xxx

RE-DIRECT BY ATTY. CABANLET:

ATTY. CABANLET (to the witness)

Q What do you understand by loan when you were asked?

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A Loan is a promise of a borrower from the value received. The borrower will pay the bank on a certain specified date
with interest43X

Such statement is akin to an admission against interest binding upon PBC.

Petitioner Veloso’s claim that they were made to believe that the transaction was a loan was also not denied by PBC. He
declared:

Q Testimony was given here that that was covered by trust receipt. In short it was a special kind of loan.1âwphi1 What
can you say as to that?

A I don’t think that would be a trust receipt because we were made to understand by the manager who encouraged us
to avail of their facilities that they will be granting us a loan44X

PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with Petitioners, to refute
Veloso’s testimony, yet it only presented credit investigator Grego Mutia. Nowhere from Mutia’s testimony can it be
gleaned that PBC represented to Petitioners that the transaction they were entering into was not a pure loan but had
trust receipt implications.

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.45 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.X

The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use.
The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be
present in Petitioners’ situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment
of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their
obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express
provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction
project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM
Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the
basis for criminal prosecution in the event of violation of its provisions.46X

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, as
had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the
money, as manifested by its Affidavit of Desistance.

WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October 1989 of the Court of Appeals in
CA-GR. No. 05408 are REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the crime charged, i.e., for
violation of P.D. No. 115 in relation to Article 315 of the Revised Penal Code.

No costs.
 83

SO ORDERED.

G.R. No. 133176               August 8, 2002

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

Petition for review on certiorari1 of the Resolutions2 dated January 9, 1998 and March 25, 1998 of the Court of Appeals in
CA-G.R. SP No. 42005, "Pilipinas Bank vs. The Honorable Secretary of Justice, the City Prosecutor of Makati City, Alfredo
T. Ong and Leoncia Lim," reversing its Decision dated August 29, 1997.X

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

The bank approved the application and issued Letter of Credit No. 91/725-HO in the amount of P3,500,000.00. To secure
payment of the amount, BMC, through respondent Ong, executed two (2) trust receipts3 providing inter alia  that it shall
turn over the proceeds of the goods to the bank, if sold, or return the goods, if unsold, upon maturity on July 28, 1991
and August 4, 1991.X

On due dates, BMC failed to comply with the trust receipt agreement. On November 22, 1991, it filed with the Securities
and Exchange Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of Suspension of Payments
under Section 6 (c) of P.D. No. 902-A,4 as amended, docketed as SEC Case No. 4109. After BMC informed its creditors
(including the bank) of the filing of the petition, a Creditors' Meeting was held to:X

(a) inform all creditor banks of the present status of BMC to avert any action which would affect the company's
operations, and (b) reach an accord on a common course of action to restore the company to sound financial footing.

On January 8, 1992, the SEC issued an order5 creating a Management Committee wherein the bank is represented. The
Committee shall, among others, undertake the management of BMC, take custody and control of all its existing assets
and liabilities, study, review and evaluate its operation and/or the feasibility of its being restructured.X

On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a Memorandum of
Agreement6 (MOA) rescheduling the payment of BMC’s existing debts.X

On November 27, 1992, the SEC rendered a Decision7 approving the Rehabilitation Plan of BMC as contained in the MOA
and declaring it in a state of suspension of payments.X

However, BMC and respondent Ong defaulted in the payment of their obligations under the rescheduled payment
scheme provided in the MOA. Thus, on April 1994, the bank filed with the Makati City Prosecutor’s Office a
complaint8 charging respondents Ong and Leoncia Lim (as president and treasurer of BMC, respectively) with violation of
the Trust Receipts Law (PD No. 115), docketed as I.S. No. 94-3324. The bank alleged that both respondents failed to pay
their obligations under the trust receipts despite demand.9X

On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a Resolution10 recommending the dismissal of the
complaint. On July 11, 1994, the Resolution was approved by Provincial Prosecutor of Rizal Herminio T. Ubana, Sr.11 The
bank filed a motion for reconsideration but was denied.X
 84

Upon appeal by the bank, the Department of Justice (DOJ) rendered judgment12 denying the same for lack of merit. Its
motion for reconsideration was likewise denied.13X

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

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

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

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

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

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

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

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

Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any transaction by and between a person
referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds
absolute title or security interest over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a
"trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt, or the goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust receipt.18X

Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust receipt to the entruster or
to return the goods, if they were not disposed of, shall constitute the crime of estafa under Article 315, par. 1(b) of the
Revised Penal Code.19 If the violation or offense is committed by a corporation, the penalty shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the
civil liabilities arising from the criminal offense.20 It is on this premise that petitioner bank charged respondents with
violation of the Trust Receipts Law.1âwphi1X
 85

Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD No. 115.21 However,
what is being punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. 22X

In this case, no dishonesty nor abuse of confidence can be attributed to respondents. Record shows that BMC failed to
comply with its obligations upon maturity of the trust receipts due to serious liquidity problems, prompting it to file a
Petition for Rehabilitation and Declaration in a State of Suspension of Payments. It bears emphasis that when petitioner
bank made a demand upon BMC on February 11, 1994 to comply with its obligations under the trust receipts, the latter
was already under the control of the Management Committee created by the SEC in its Order dated January 8,
1992.23 The Management Committee took custody of all BMC’s assets and liabilities, including the red lauan lumber
subject of the trust receipts, and authorized their use in the ordinary course of business operations. Clearly, it was the
Management Committee which could settle BMC’s obligations. Moreover, it has not escaped this Court’s observation
that respondent Ong paid P21,000,000.00 in compliance with the equity infusion required by the MOA. The mala
prohibita nature of the offense notwithstanding, respondents’ intent to misuse or misappropriate the goods or their
proceeds has not been established by the records.24X

Did the MOA novate the trust agreement between the parties?

In Quinto vs. People,25 this Court held that there are two ways which could indicate the presence of novation, thereby
producing the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has
been stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on
every point. The test of incompatibility is whether or not the two obligations can stand together. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be essential
in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions, otherwise, the change is merely modificatory in nature and
insufficient to extinguish the original obligation.X

Contrary to petitioner's contention, the MOA did not only reschedule BMC’s debts, but more importantly, it provided
principal conditions which are incompatible with the trust agreement. The undisputed points of incompatibility between
the two agreements are:

Points of incompatibility Trust Receipt MOA

1) Nature of contract Trust Receipt Loan26X

2) Juridical relationship Trustor-Trustee Lender-Borrower

3) Status of obligation Matured Payable within 7 years27X

4) Governing law Criminal Civil & Commercial28X

5) Security offered Trust Receipts Real estate/chattel mortgages29X

6) Interest rate per annum (Unspecified) 14%30X

7) Default charges 24% 14%31X

8) No. of parties 3 16

Hence, applying the pronouncement in Quinto, we can safely conclude that the MOA novated and effectively
extinguished BMC's obligations under the trust receipt agreement.
 86

Petitioner bank's argument that BMC's non-compliance with the MOA revived respondents’ original liabilities under the
trust receipt agreement is completely misplaced. Section 8.4 of the MOA on termination reads:

"8.4 Termination. Any provision of this Agreement to the contrary notwithstanding, if the conditions for rescheduling
specified in Section 7 shall not be complied with on such later date as the Qualified Majority Lenders in their sole and
absolute discretion may agree in writing, then

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

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

(iii) all the rights of the lenders against the borrower and Spouses Ong prior to the agreement shall revest to the
lenders."

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

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

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

SO ORDERED