P. D. NO.

115
29 JANUARY 1973
TRUST RECEIPTS LAW

Policy Objectives
1. To encourage and promote the use of trust receipts
2. To provide for the regulation of trust receipt transactions
3. To penalize violations as a criminal offense (Sec. 2)
What is a Trust Receipt?
It is a written or printed document signed by the entrustee in
favor of the entruster containing terms and conditions
substantially complying with the provisions of this Decree.
(Sec. 3, cf. Sec. 4)
Parties to a Trust Receipt
Entruster person holding title over the goods, documents or
instruments

Entrustee person having or taking possession of goods,
documents or instruments (Sec. 3)
What is a Trust Receipt Transaction?
Any transaction by and between the entruster and 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 trust receipt, or for other
purposes substantially equivalent to those specified in Sec. 4
Form of Trust Receipts
A trust receipt need not be in any particular form but it must
substantially contain:
(1) a description of the goods, documents or instruments
subject of the trust receipt
(2) the total invoice value of the goods and the amount of the
draft to be paid by the entrustee
(3) an undertaking or a commitment of the entrustee to:
- hold in trust for the entruster the goods, documents or instruments
therein described;
- dispose of them in the manner provided for in the trust receipt; and
- to turn over the proceeds of the sale of the goods, documents or
instruments to the entruster to the extent of the amount owing to
the entruster or as appears in the trust receipt or to return the
goods, documents or instruments in the event of their non-sale
within the period specified therein. (Sec. 5)
Origin of Trust Receipts
The device first came into general use in importing
transactions, where goods were consigned directly to a bank
which paid a draft for the price on the credit of the intended
buyer who engaged to repay the banks advances

Use of Trust Receipts
It is a convenient aid to commerce and trade

Over time, trust receipts have become indispensable contracts
in international and domestic business transactions (People
vs. Nitafan)

How does it work?
Importer Bank
Foreign
Seller
Contract of Sale
Reimbursement
Agreement
Letter of Credit Proper
Trust Receipt Agreement
How does it work?

Antecedent acts in a trust receipt transaction:
1. Application and approval of letter of credit
(Reimbursement Agreement)
2. Making of marginal deposit
3. Effective importation of goods through the efforts of the
importer (Colinares vs. CA)
How does it work?

Traditionally, there are 3 parties to a trust receipt transaction:
1. The importer/entrustee
2. The bank/entruster
3. The foreign seller

However, the Supreme Court has held that even a bipartite
contract is covered by PD 115 (Robles vs. CA)
Basic Features of Trust Receipt Agreements
1. Loan feature usually represented by a Letter of Credit
2. Security feature the trust receipt proper (Vintola vs.
IBAA)
Security Feature
A trust receipt is a security agreement pursuant to which the
entruster acquires a security interest in the goods.

Security interest, defined. It is 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. (Sec. 3)
Security Feature
The security interest is similar to a lien on the goods because
the entrusters advances will have to be settled first before
the entrustee can consolidate his ownership over the goods.
(Prudential Bank vs. NLRC)

The entrusters security interest is valid against all creditors for
the duration of the trust receipt agreement (Sec. 12)
Security Feature
The title of the bank to the security is the one sought to be
protected (by the law) and not the loan which is a separate
and distinct agreement. (Prudential Bank vs. NLRC)
Who holds title?
The entruster takes the full title to the goods at the very
beginningas soon as goods are bought and paid by him.
(Ibid.)


Who owns the goods?
- The goods remain the importers property. Entrustee is
factual owner.
- The bank does not become real owner of the goods. It
remains a lender and creditor. Entrusters ownership is
merely legal fiction. (Abad vs. CA)



Nature of Trust Receipts
In a certain manner, a trust receipt partakes of the nature of a
conditional sale as provided in the Chattel Mortgage Law,
i.e., the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. (Ibid.)
TR vs. Chattel Mortgage
It is not a chattel mortgage because:
- it does not require the formalities set forth in the Chattel
Mortgage Law, such as the affidavit and oath (Secs. 3(j) and
5, cf. Sec. 5, Act 1508)
- it does not have to be registered with the Register of Deeds
(Sec. 3(j), cf. Sec. 198, Admin. Code)
TR vs. Conditional Sale
It is not a conditional sale per se because:
- the entruster is not a seller as contemplated by law. He does
not take on the obligations and warranties of a seller (Sec. 8,
cf. Arts. 1495-1581, Civil Code)
- the transaction between the entruster and the entrustee is
more akin to a credit transaction than a sale.
TR vs. Pledge
It is not a pledge because:
- the entrustee/debtor is not the absolute owner of the goods
(cf. Art. 2085)
- the entrustee/debtor does not deliver the possession of the
goods to the entruster/creditor (cf. Art. 2093)
TR vs. Consignment
It is different from consignment because the entrustee is the
real owner of the goods and not a mere dealer/agent


Note: But if the consignment is evidenced by a delivery trust receipt, it will
fall under the Trust Receipts Law (Robles vs. CA)
Rights of the Entruster
The entruster shall be entitled:
- (a) to the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the
amount owed to him; OR (b) to the return of such goods,
docs, or instruments in case of non-sale
- to enforce all other rights conferred to him in the trust
receipt
- to cancel the trust and take possession of the goods, etc. in
case of default or breach of the terms of the trust receipt and
to have these sold in a private or public auction (Sec. 7)
Obligations of the Entrustee
(1) To 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) To 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) To insure the goods for their total value against loss from
fire, theft, pilferage or other casualties;
(4) To keep said goods or proceeds thereof whether in money
or whatever form, separate and capable of identification as
property of the entruster;
Obligations of the Entrustee

(5) To return the goods, documents or instruments in the event
of non-sale or upon demand of the entruster; and
(6) To observe all other terms and conditions of the trust
receipt not contrary to the provisions of the law. (Sec. 9)


In any event, entrustee bears risk of loss (Sec. 10)
Criminal Liability
Art. 315 Revised Penal Code
1. With unfaithfulness or abuse of confidence, namely:

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