PD 115 “Trust Receipts Law”

Trust Receipt Transaction (TR for brevity)– form of security transaction whereby
it involves:

Entruster – someone who either owns the goods, documents and

instruments, holds title to the goods or holds security interest. He releases
possession of these goods, documents and instruments to the Entrustee
and in exchange

Entrustee – executes document called Trust Receipt; it undertakes the

following obligations;

Section 9. Obligations of the entrustee. The entrustee shall:

(1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt;

(2) receive the proceeds in trust for the entruster and turn over the
same to the entruster to the extent of the amount owing to the entruster
or as appears on the trust receipt;

(3) insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;

(4) keep said goods or proceeds thereof whether in money or whatever

form, separate and capable of identification as property of the
entruster;

(5) return the goods, documents or instruments in the event of non-sale

or upon demand of the entruster; and

(6) observe all other terms and conditions of the trust receipt not
contrary to the provisions of this Decree.

Liability in case of loss

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

Why do they enter into this transaction?

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 • To aid importers or merchants who do not have enough or necessary
funds to finance importation of goods and cannot likewise apply for a
letters of credit (ex. No credit line etc). They can use their goods as
collateral.
• It is a security device.

SAMPLE SCENARIO: In a Letters of Credit (LC for brevity) the bank holds title
to or documents of the goods, but what if you cannot reimburse the bank, you
cannot get hold of documents or the goods. To solve this problem we have the
TR. The buyer will issue a TR to the bank and the bank becomes an entruster,
so possession of goods will be released to him. Subsequently the entrustee
(buyer/importer) will sell or dispose off goods and realize proceeds and pay the
bank/entruster. (In this transaction bank holds SECURITY INTEREST)

NOTE: It is not required, or it does not happen all the time that there
should be a prior LC transaction before a TR transaction takes place.

Section 5. Form of trust receipts; contents. A trust

receipt need not be in any particular form, but every
such receipt must substantially contain (a) a
description of the goods, documents or instruments
subject of the trust receipt; (2) the total invoice value
of the goods and the amount of the draft to be paid by
the entrustee; (3) an undertaking or a commitment of
the entrustee (a) to hold in trust for the entruster the
goods, documents or instruments therein described;
(b) to dispose of them in the manner provided for in
the trust receipt; and (c) to turn over the proceeds of
the sale of the goods, documents or instruments to the
entruster to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return
the goods, documents or instruments in the event of
their non-sale within the period specified therein.

The trust receipt may contain other terms and

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

FORM: Does the law require a specific form as to a TR?

NO. But it should comply or substantially contain the following

information:

1. DESCRIBE goods, documents or instruments released under the TR.

2. Invoice or VALUE of such goods, documents or instruments.
3. UNDERTAKING OF ENTRUSTEE:

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 a) HOLD goods, docs or instrument in TRUST.
b) Undertaking of entrustee to SELL or DISPOSE off goods. (“Dispose”
– also contemplates processing or manufacturing of raw materials;
not necessarily sale.)
c) RETURN GOODS if unsold or undisposed; TURN-OVER PROCEEDS
in case of sale or disposal.

• May additional stipulations be supplied? YES. It depends on agreement

of parties, as long as it is not contrary to law, good customs and public
morals.

RAW MATERIALS: What if raw materials were already processed and

manufactured BUT was not subsequently sold, what happens to the security
interest of the entruster?

• Turn-over finished goods. Law states that entruster should retain his
title to the goods whether it is in original or processed form until the
entrustee has complied with its obligation. So even if raw material has
been converted to a processed product, security interest of entruster
still subsists. But the interest of the entruster there is only to the extent
of the value of the raw materials.

CASE: SOUTH CITY HOMES vs BA FINANCE

• Rights of BA Finance under the TR is only

alternative. It depends on the discretion
of an entruster, either the cancellation
of the trust and possession of the goods
or if he does not want that, he can file
for collection of sum of money. Option
is with BA Finance or entruster.

How does TR transaction differ from CONSIGNMENT?

• Consignment – release possession of goods and consignee undertakes

to sell, turn-over proceeds or if unsold return goods. If he doesn’t return
liability is under the RPC.
• TR transaction – distinction is issuance of a TR; violation can be under
RPC or under PD 115.
•

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Questions:

Is there a pro forma TR?

NO. As discussed, law does not require a specific form so long as it contains the
3 basic info: DESCRIPTION, VALUE and UNDERTAKING. Normally in printed form
but can also be handwritten (no prescribed form).

Why would people opt for a TR rather than Consignment? is penalty under PD 115
heavier?

PD 115 is malum prohibitum, no need to prove deceit whereas estafa you need to
establish deceit. But violation of PD 115 is also one mode of committing estafa but
it is easier to prove.

CASE: CHING vs CA

• A trust receipt is a principal contract and

not an accessory contract even if it is a
security device. Nature of a TR is a
security transaction it is not a side
contract hence the consequences or
obligations under this transaction cannot
be brushed aside. By executing a TR one
undertakes certain obligations failure to
comply will result to liabilities.
• Violation of PD 115 is only a mode of
committing estafa, it is not a prejudicial
question to the criminal case. Estafa, even
without the resolution of the nature of
the document, can still be established by
other evidence.

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TR can also cover machineries and equipment used in operation of business or
even supply used in manufacture business (not necessarily only goods for sale).

NACU V. CA

THE FACT THAT THERE WAS ALREADY A TRUST RECEIT

MEANS THAT THE 1ST REAL ESTATE MORTGAGE WAS
NO LONGER EXISTING BECAUSE IF IT IS STILL EXISTING
THERE IS NO NEED FOR THE PARTIES TO HAVE
ANOTHER SECURITY DEVICE (THE TRUST RECEIT). SO
CLEARLY THE FIRST REM WAS ALREADY CANCELLED
AS PAYMENT FOR THE PREVIOUS LOAN.

FACTS

There was a first loan obtained which was secured by

a real estate mortgage. After the loan was paid,
another set of parties (Nacu spouses remained parties
to both first and second loans) obtained a loan. The
second loan was made thru a LC to pay for the
purchase of machineries, and this time, the second
loan was secured by TR. Now, the bank is saying that
the 2nd loan is as well secured by the real mortgage
owned by Nacu spouses.

Held: NO. The second loan is not secured by the real

estate mortgage, but only by the TR.

Not only because the loan consisted of different

parties but also because the nature of a TR is that it
is a security transaction already. Thus, real estate
mortgage is not anymore necessary. By virtue of
the TR, since it is already a security in itself, you go
after the TR, don't go after the real mortgage. The
bank should go after the goods which were the
machineries.

» TR covers only the goods that were released

under the TR. So, it cannot happen that a TR
agreement would include another security
other than those goods released under the
TR.

Note: In TR, there has to be goods, documents or

instruments involved. TRs do not just cover money.
Otherwise, it would amount to a simple loan.

COVERAGE OF TR TRANSACTION

» Goods, documents, instruments which may or may not be obtained for the
purpose of sale.
» Goods- intended for sale and those necessary for production

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 » Instruments- negotiable instrument
» Documents- warehouse receipts
» It could also include machineries and equipment used in the processing or
manufacturing of raw materials.

TRUST RECEIPT VS CONSIGNMENT

In consignment if the consignee fails to sell the goods he simply returns. No more
liability after that.

In TR mere turnover of goods is not enough, does not extinguish CIVIL liability
only CRIMINAL liability. Only when the goods are sold in a public/private and
the proceeds are applied. In fact, if there is a deficiency the enturster can still
recover. If there is surplus it goes to the entrustee.

ROBLES V. CA

WHAT DISTINGUISHED THE TRANSACTION OF MR.

ROBLES FROM A MERE SALE ON CREDIT IS THE
EXECUTION OF A DOCUMENT. IT WAS VERY CLEAR FROM
SUCH DOCUMENT THAT IT WAS REALLY A TRUST RECEIPT
TRANSACTION BECAUSE IT WAS STATED THERE THAT IT
WAS HELD IN TRUST. SINCE IT WAS A TRUST RECEIT
TRANSACTION HE CAN’T SAY THAT HE IS ONLY IS JUST
CIVIL BECAUSE THE FAILUTRE TO TURN OVER THE
PROCEEDS OR RETURN THE GOODS WILL HOLD HIM
LIABLE FOR PD 115.

Robles received goods (office equipment) under the TR. It

was stated in the TR: "goods are released under the TR
executed in favor of Paramount Business Machines.”

Robles contended that what he executed was not a TR

agreement. He said that what he signed was not a TR but
a mere formality to evidence that he received the goods.
Further, he said that the transaction was only a sale on
trial basis for 2 days. Such that if it is not sold, he only has
to return the goods. Also if he cannot return the same, his
obligation is only a civil one, and not estafa.

DECISION: Court said that by virtue of the document he

executed, it was very clear that it was a TR transaction. In
the document, the wordings state "in trust for" PBM xxx.
So it is clear that it was a TR and not just a mere formality.
Therefore, Robles is liable under PD 115. Moreover, he
must have fully understood the contents of the
stipulations appearing on the face of the delivery trust
receipts which he actually signed as he is "an intelligent
man, a college professor,” and thus, he should have
known what it is that he has entered into.

 Is a TR a contract of adhesion?
- YES, but you only apply the contract of adhesion
rule if there are ambiguities. But, if the
language of the law is clear, whatever is written
should govern the parties.
- In one case it was considered as a contract of
adhesion since the TR was already prepared for
by the bank. And the customer merely signs it if
he wants for the loan to be approved.

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 But, in this case contract of adhesion rule was not
applied since, Robles was considered as a
knowledgeable man (a college professor)
contracting a TR with PBM. Thus, the court said that
he must have known what he was entering into.

 What if in the same situation there was no TR

executed?
- It could just be a mere consignment.
Then, he would not be liable under PD
115. But, he can still be sued for estafa as
long as there is FRAUD. Again, PD 115 is
only one of the ways to commit estafa.

PARTIES

» Entruster - seller, lender, the financier. He is the one who holds either title
of goods, documents, or instruments or has security interest over the same.

» Entrustee - buyer, borrower, or it could be the importer. He is the one having

or taking possession of the goods, documents or instruments released under
the TR transaction.

RIGHTS AND OBLIGATIONS OF THE PARTIES

ENTRUSTER

RIGHTS
1. He is 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,
2. He has the right 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
PD115.
3. He may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom. Once
in possession of the goods, he may sell them under a public or private
sale after giving notice to the entrustee,.
4. The proceeds of any such sale 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.

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 Questions:

 Can the entruster become the purchaser?

- Yes. So, this only shows that the entruster is really not the owner of the
goods but he only has security interest over the goods.

 If the entruster has already opted the trust and take possession of the
goods. Can he still file a civil case against the entrustee for recovery of sum
of money?
- Yes. The civil liability still subsists unless there is a sale and the proceeds
are applied.

SURPLUS

» The entrustee shall receive the surplus.

DEFICIENCY

» The entrustee shall be liable to the entruster for any deficiency.

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;
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 PD 115

» Basically, the entrustee has 2 alternative obligations:

1. Turn over the proceeds; or
2. Turn over the goods

» Take note that these two alternatives refer to the obligation of the entrustee
under the TR.
» So, if you choose to turn over, can you do that? Yes, but it does not
extinguish your civil liability. Only the criminal liability is extinguished.

RIGHTS OF AN INNOCENT PURCHASER FOR VALUE AS AGAINST THE

ENTRUSTER

 Example: We have entruster and entrustee. But, the entrustee sold the
goods released by virtue of the TR, to a third party buyer - an innocent
purchaser for value. And, assuming that after the sale the entrustee failed
to remit the proceeds to the entruster, can the entruster go after the buyer
to enforce his lien over the goods?

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 - No. Section 11 of PD 115 provides:

Section 11. Rights of purchaser for value and in good

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

- So, even if the entrustee failed to remit the proceeds, the entruster could
no longer go after the buyer. Why? Because when the entrustee enters
into a contract with the innocent purchaser for value, the one who is now
considered as the vendor is the entrustee. Such that, if there is now a
break in the sale (i.e. Warranty of hidden defects), the third person-buyer
could no longer go after the entruster because the entruster is not the
vendor.
- As far as the contract of sale is concerned, it is only between the
entrustee (as vendor), and the buyer.
- So, the buyer cannot go after the entruster in the same way that the
entruster cannot go after the buyer.

Question
 What if there is a defect in the goods, can the buyer hold the entruster for
violation warranty of hidden defects or breach of contract of sale?

-No because if an entrustee enters into a contract with a buyer the vendor
is the entrustee even if the real owner of the goods is the entruster. The
entruster is out of the picture.

RIGHTS OF AN ENTRUSTER AS AGAINST THE CREDITORS OF THE

ENTRUSTEE

» The entruster is preferred over the creditors of the entrustee based on

Section 12 of PD 115, viz:

Section 12. Validity of entruster's security interest as

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

There was one case wherein X was an importer of gasoline from a foreign
supplier. PNB opened a LC in favor of X’s foreign supplier. The gasoline was
released to X by virtue of a TR. Now, under the TR, X entered into a contract with
T for the sale of the gasoline with an agreement that whatever proceeds, T shall
pay to PNB to comply with the TR agreement.

Now, a judgment creditor of X, filed a writ of attachment and execution. As a

result, the proceeds of the gasoline in the hands of T was garnished by the sheriff.
Now, PNB filed a case to recover the money garnished.

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Issue: Who has the better rights ot the proceeds of the garnished money?
PNB - based on section 12, the rights of the entruster is preferred against all
other creditors. Based also on the preference on credits rule under the Civil Code,
the right of the entruster is preferred against a judgment creditor since the
entruster's claim is specific, whereas the judgment creditor’s claim is general,
which is directed to all the properties of the debtor.

In sum:
 interest of the entruster as against an innocent purchaser for value= not
preferred
 interest of the entruster as against other creditors = preferred

WHO SHALL BEAR THE RISK OF LOSS?

» The risk of loss shall be borne by the entrustee.

 So, if the goods were lost, does it extinguish the liability of the entrustee?
-No, he bears the loss and at the same time his obligation shall not be
extinguished.

 So, this is an exception to the “Res Perit Domino” Rule

 Effect on civil obligation: it still subsist

 Ex: goods were lost due to fortuitous event; will there still be a
CRIMINAL liability?
-it still subsist unless he gives an amount equal to the supposed
proceeds. PD 115 is a special law so malum prohibitum, regardless of
the cause of the loss you will still be liable.

VIOLATION OF PD 115

 So, when is an entrustee considered to have committed a breach under PD

115?
1. If he fails to comply with the terms and conditions of the trust
receipt. (like payment of interest, etc)
2. If he fails to return the goods covered by the trust receipt if unsold.
3. If sold, he was not able to return the proceeds

- Note: the mere failure of the entrustee to turn over the proceeds of the
sale or to turn over the goods themselves constitute a violation of PD 115.
- Thus, it is not necessary to prove that the entruster suffered damage
because it is malum prohibitum: an offense against public order or
public policy.

LIABILITIES OF THE ENTRUSTEE

1. CRIMINAL LIABILTY (ESTAFA)

2. CIVIL LIABILITY- under art. 33 anyone who causes injury by reason of
defamation, fraud or physical injury shall be liable.

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 EXTINGUISHMENT OF ENTRUSTEE’S CIVIL LIABILITY

» The civil liability of the entrustee is extinguished only when the goods are
returned, and the entruster disposes the goods in a public or private sale,
and the proceeds thereof are applied in payment of the debt.
- Hence, the entrustee cannot extinguish his civil obligation by just
surrendering the goods to the entruster. The mere return of the goods
does not by itself relieve entrustee of his civil liability.

 What if the entrustee is subsequently acquitted of his criminal liability?

- the extinguishment of his criminal liability does not dissolve his
civil liability. It is separate form the criminal liability.

 If it is committed by a corporation who will be liable?

-BOD and officers will be held criminally and civilly liable.

EXTINGUISHMENT OF ENTRUSTEE’S CRIMINAL LIABILITY

» If entrustee returns the goods, his criminal liability is extinguished.

- Note that only his criminal liability is extinguished, not his civil liability.
The civil liability is separate from the criminal liability.

COLINARES V. CA TIOMICO V. CA

SO THE NATURE OF TRANSACTION ENTERED INTO BY WON PD 115 IS UNCONSTITUTIONAL

COLINARES WITH THE BANK IT WAS ONLY A SIMLE LOAN
BECAUSE EVEN IF THERE WAS A TRUST RECEIPT ISSUED, What is being punished by the law is the public order,
THERE WAS ALREADY TRANSFER OF OWNERSHIP/GOODS dishonesty and abuse of confidence in the handling of
BEFORE THE DOCUMENT WAS ISSUED (A DAY BEFORE) money or goods to the prejudice to another.
WHICH IS CONTRARY TO THE NATURE OF A TRUST RECEIPT
TRANSACTION. » So it does not violate the constitutional provision that
no person shall be imprisoned for non-payment of
» Where the debtor received the goods subject of the debt.
trust receipt before the trust receipt itself was
entered into, the transaction in question is a simple
loan and not a trust receipt agreement.

Colinares acquired construction materials from the seller.

So, the materials are already in the possession of
Colinares. To pay off his debts to the supplier, he availed
of a loan from the bank. But, the bank was of course very
shrewd. Thinking that it was only an ordinary loan, it
required Colinares to execute a TR in order to secure the
loan.

Ruling:

It is no longer a TR transaction. Take note that the

possession of the goods was already with Colinares when
he acquired a loan from the bank. So, when the bank
required him to execute a TR to secure the loan, it already
contradicted the nature of a TR transaction because in a
TR transaction, possession of the goods is with the
seller/entruster. It is only upon execution of the TR that
those goods are released to the entrustee. In here, the
entrustee is already in possession of the goods. So, the
possession of the goods never came to the possession of
the entruster.

This is just a simple loan.

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

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