LETTERS OF CREDIT

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

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

FACTS : De Reny Fabric Industries, Inc. applied to the Bank for four (4) irrevocable commercial letters of credit to
cover the purchase by the corporation of goods from its American supplier, the J.B. Distributing Company.

As each shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the
Bank amounting. Further payments were, however, subsequently discontinued by the corporation when it
became established, as a result of a chemical test conducted by the National Science Development Board, that
the goods that arrived in Manila were colored chalks instead of dyestuffs.

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

ISSUE : Whether or not De Reny fabrics is liable under the letter of Credit?

HLED : Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing, value,
or delivery of the property purporting to be represented by documents; for any difference in character, quality,
quantity, condition, or value of the property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the Credit," as well as "for any
deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the
appellants have, therefore, no recourse but to comply with their covenant.

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on
account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in
international business transactions such as those entered into by the appellants, do not deal with the property
to be exported or shipped to the importer, but deal only with documents.

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

G.R. No. 94209. 30 April 1991

Gutierrez, Jr., J.

FACTS: Bernardo Villaluz (BV) agreed to sell to Axel Christiansen (AC), a ship and merchandise broker, 2,000
cubic meters of lauan logs. After inspecting the logs, AC issued a purchase order for the said logs.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd.
(HTDL), Santa Ana, California, the Security Pacific National Bank (SPNB), California issued an Irrevocable Letter of
Credit (L/C) available at sight in favor of BV for the total purchase price of the logs. The L/C was mailed to FEATI
Bank and Trust Company (FBTC) with instruction that the draft to be drawn is on SPNB and that it be
accompanied by the following documents, among others: a Certification from AC stating that the logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase order.

Consequently, the logs were thereafter loaded to the vessel chartered by AC. After the loading of the
logs was completed, the Chief Mate of the vessel issued a mate receipt of the cargo which stated the same are
in good condition. However, AC refused to issue the certification as required in the L/C – despite several
requests made by BV. Because of the absence of the certification by AC, FBTC refused to advance the payment
on the L/C. It eventually lapsed without BV receiving any certification from AC.

Since BV’s demands for AC to execute the certification proved futile, he (BV) instituted an action for
mandamus and specific performance against AC and FBTC before the then Court of First Instance (CFI) of Rizal.
Unfortunately, while the case was pending, AC left the Philippines without informing the CFI and his counsel;
hence, BV filed an amended complaint to make FBTC solidarily liable with AC.

ISSUE: Whether or not FBTC, as correspondent bank, is to be held liable under the L/C despite non-compliance
by the beneficiary, BV, with the terms thereof?

HELD: No. It is a settled rule in commercial transactions involving L/Cs that the documents tendered must strictly
conform to its terms. The tender of documents by the beneficiary (seller) must include all documents required
by the L/C. A correspondent bank which departs from what has been stipulated under the L/C, 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.

Moreover, under the Uniform Customs and Practices for Documentary Credit, 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 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.
 An irrevocable credit refers to the duration of the L/C. What it 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 L/C
pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank
gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit. Hence, the mere fact that a L/C is irrevocable does not
necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also
confirmed the L/C.

Transfield Philippines vs Luzon Hydro Electric Corp.

(GR No 146717, Nov 22, 2004, Tinga)Transfield entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct hydro-electric plants inBenguet and Ilocos. The contract
provides for a period for which the projectis to be completed and also allows for the extension of the period
providedthat the extension is based on justifiable grounds such as fortuitous event.In order to guarantee
performance by Transfield, two stand-by letters of credit were required to be opened. During the construction
of the plant,Transfield requested for extension of time citing fortuitous events broughtabout by typhoon,
barricades and demonstration. LHC did not give duecourse to the extension of the period prayed for but
referred the matter to arbitration committee.In the meanwhile, because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default. However, the demand was objected by
Transfield on the ground that there is still pending arbitration on their request for extension of time. LHC
invoked the “independence principle”. On the other hand, Transfield claims fraud on the part of LHC on calling
the stand-by letters of credit.Under the independence principle, a LC accommodation is entirely distinctand
separate, independent agreement. It is not supposed to be affected bythe main contract upon which it rests.The
court held for the LHC. Following the independence principle, even granting that there is still issue to be
resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay
the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the
beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-
key contract which states that all issues between the parties must be resolved first before LHC can call on the
stand-by LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.

MWSS v Daway

MWSS granted Maynilad a 20-year concession to manage, repair, refurbish, and upgrade existing MWSS water
delivery and sewerage. To secure its obligations, Maynilad for a three-year facility with a number of foreign
banks led by Citicorp Intl for the issuance of an irrevocable standby letter of credit (SLC) in the amount of $ 120
million in favor of MWSS for the full and prompt payment of Maynilad’s obligations to MWSS. Although the
concession contract was amended to incorporate a mechanism that would protect Maynilad from foreign
exchange losses, the depreciation of the peso, still took its toll on Maynilad, forcing the latter to file a notice of
early termination of the concession contract citing MWSS’ failure to protect the company from foreign exchange
losses under the amended concession accord. MWSS then filed a notice with Citicorp that it would draw $98
million on the SLC of Maynilad, prior to which Maynilad’s petitition had been granted so a stay order was issued
that prohibit claims against the concerned corporation, its guarantors, and sureties not solidarily liable with
Maynilad.

ISSUE:

Whether or not the rules on corporate rehabilitation bar recovery on an Standby Letter of Credit

HELD:

NO. MWSS can properly draw on Maynilad’s SLC with Citicorp. The rules on corporate rehabilitation do not apply
to SLCs. The rules on corporate rehabilitation (particularly Section 6b of Rule 4) do not apply to MWSS as the
prohibition is against the enforcement of claims against guarantors, or sureties of debtors whose obligations are
NOT solidary with the debtor. Being a solidary obligation, a Standby Letter of Credit is excluded.
TRUST RECEIPTS

G.R. No. 81559-60 April 6, 1992

PEOPLE OF THE PHILIPPINES, (public petitioner) and ALLIED BANKING CORPORATION (private
petitioner),
vs.
HON. JUDGE DAVID G. NITAFAN (public respondent) and BETTY SIA ANG (private respondent).

FACTS : Petitioner Allied banking Corporation (ABC) charged private respondent, Betty SiaAng, for estafa
for willfully, unlawfully and feloniously defraud ABC. Private respondent received a trust from ABC
amounting to P398,000.00 covered by a domestic letter of credit, under the express obligation to sell
the same and account for the proceeds of the sale, if sold, or to return the merchandise , if not sold.
Upon demand, private respondent paid only P283,115.78.

Betty SiaAng filed a motion to quash the information on the grounds that the facts charged do not
constitute an offense. Respondent judge granted the motion to quash.

ISSUE : Whether or not an entrustee in a trust receipt agreement who fails to deliver the proceeds of the
sale or to return the goods if not sold to the entruster-bank is liable for the crime of estafa?

RULINGS : The factual circumstances in the present case show that the alleged violation was committed
sometime in 1980 or during the effectivity of P.D. 115. The failure, therefore, to account for the
P114,884.22 balance is what makes the accused-respondent criminally liable for estafa.

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

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another regardless of whether the latter is the owner or not. The law does not
seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for
non-payment of a debt.

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

Rosario Textile Mills vs Home Bankers Savings and Trust Company

Date: June 29, 2005

Petitioners: Rosario Textile Mills Corporation

Respondent: Home Bankers Savings and Trust Company

Ponente: Sandoval Gutierrez

Facts: Rosario Textile Mills Corporation applied from Home Bankers Savings & Trust Co. for an Omnibus
Credit Line for P10 million. The bank approved RTMC’s credit line but for only P8 million. The bank
notified RTMC of the grant of the said loan which contains terms and conditions conformed by RTMC
thru Edilberto V. Yujuico. Yujuico signed a Surety Agreement in favor of the bank, in which he bound
himself jointly and severally with RTMC for the payment of all RTMC’s indebtedness to the bank from
1989 to 1990. RTMC availed of the credit line by making numerous drawdowns, each drawdown being
covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico, executed in
favor of the bank a total of eleven (11) promissory notes.

Despite the lapse of the respective due dates under the promissory notes and notwithstanding the
bank’s demand letters, RTMC failed to pay its loans. Hence, the bank filed a complaint for sum of money
against RTMC and Yujuico. RTMC and Yujuico claimed that the bank gave assurance that the suretyship
agreement was merely a formality under which Yujuico will not be personally liable. They argue that the
importation of raw materials under the credit line was with a grant of option to them to turn-over to the
bank the imported raw materials should these fail to meet their manufacturing requirements. RTMC
offered to make such turn-over since the imported materials did not conform to the required
specifications. However, the bank refused to accept the same, until the materials were destroyed by a
fire which gutted down RTMC’s premises. The trial court ruled in favor of respondent. The CA affirmed,
holding that the bank is merely the holder of the security for its advance payments to petitioners; and
that the goods they purchased, through the credit line extended by the bank, belong to them and hold
said goods at their own risk.

Issue: WON the petitioners are relived from their obligation after they tried to tender the goods to the
bank which refused to accept the same
Held: No

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

Petitioners’ stance, however, conveniently ignores the true nature of its transaction with the bank. We
recall that RTMC filed with the bank an application for a credit line in the amount of P10 million, but
only P8 million was approved. RTMC then made withdrawals from this credit line and issued several
promissory notes in favor of the bank. In banking and commerce, a credit line is “that amount of money
or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and
generally agreed to in advance.” It is the fixed limit of credit granted by a bank, retailer, or credit card
issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the
former but which he must not exceed and is usually intended to cover a series of transactions in which
case, when the customer’s line of credit is nearly exhausted, he is expected to reduce his indebtedness
by payments before making any further drawings.

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

In Vintola vs. IBAA, we elucidated further that “a trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a ‘security interest’ in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation.” Section 3 (h) of the Trust
Receipts Law (P.D. No. 115) defines a “security interest” as follows: “(h) Security Interest means a
property interest in goods, documents, or instruments to secure performance of some obligation of the
entrustee or of some third persons to the entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for security only.”

Petitioners’ insistence that the ownership of the raw materials remained with the bank is untenable. If
under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more
of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security
for the loan obtained by the importer. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof...” Thus, petitioners cannot be relieved of
their obligation to pay their loan in favor of the bank.

Issue: WON petitioners are solidarily liable for the payment of their obligations to the bank

Held: Yes

Ratio: We reject petitioner Yujuico’s contentions for two reasons. First, there is no record to support his
allegation that the surety agreement is a “mere formality;” and Second, as correctly held by the Court of
Appeals, the Suretyship Agreement signed by petitioner Yujuico binds him. The terms clearly show that
he agreed to pay the bank jointly and severally with RTMC. The parole evidence rule under Section 9,
Rule 130 of the Revised Rules of Court is in point.

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

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

Landl& Company v. Metropolitan Bank, 435 SCRA 639 (2004)

Landl and Company is engaged in the business of selling imported welding rods and alloys. It opened a
commercial letter of credit with Metrobank for the purchase of various welding rods and electrons from
PERMA ALLOYS Inc., New York, USA. Landl put up a marginal deposit of P50, 000.00 from the proceeds
of a separate clean loan.

As an additional security, and as a condition for the approval of the application, MBTC required Percival
Llaban and Manuel Lucente to execute a continuing surety agreement. Lucente also executed a Deed of
assignment in favor of Metrobank. Upon compliance with these requisites, MBTC opened an irrevocable
Letter of Credit for Landl. Trust Receipt was also executed to secure indebtedness of Landl.

Upon Maturity, Landl defaulted payment of its obligation or to return the goods to MBTC. The goods
were sold at public auction to MBTC as the highest bidder.
However, the proceeds of the auction sale were insufficient to completely satisfy the outstanding
obligation of Landl notwithstanding the application of the time deposit account of its director Lucente.
Accordingly, MBTC demanded that Landl pay the remaining balance of their obligation. Landl failed to
do so.

MBTC filed a complaint for sum of money against Landl and its directors for the amount of the
deficiency.

ISSUE:

Whether in a trust receipt transaction, an entruster which had taken actual and juridical possession of
the goods covered by trust receipt may not subsequently avail of the right to demand from the
entrustee the deficiency of the amount covered by the trust receipt.

HELD:

Petition DENIED.

A trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security
for a loan.

In the event of default or failure of the entrustee to comply with the terms of the trust receipt
agreement, the cause the sale of the goods after at least five (5) day notice to the entrustee, in a private
or public sale. The entruster may at public sale become a purchaser. If the proceeds of the sale were
insufficient to satisfy entirely entrustee’s indebtedness, the entruster is well within its rights to file an
action to collect the deficiency.

Vintola v. Insular Bank of Asia and America, 150 SCRA 140 (1987)

Spouses Vintola, doing business under the name and style Dax Kin International was engaged in the
manufacture of raw sea shells into finished products.

They applied for and were granted a domestic letter of credit by applied for and were granted a
domestic letter of credit by the Insular Bank of Asia and America (IBAA), Cebu City. The Letter of Credit
authorized the bank to negotiate for their account drafts drawn by their supplier, one Stalin Tan, on Dax
Kin International for the purchase of puka and olive seashells.

Spouses Vintola received from Stalin Tan the puka and olive shells and executed a Trust Receipt
agreement with IBAA.
Having defaulted on their obligation, IBAA demanded payment from Spouses Vintola. Spouses Vintola,
who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to
accept the merchandise, and due to the continued refusal of Spouses Vintola to make good their
undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for
their own personal use and benefit the aforesaid goods.

ISSUE:

Whether the obligation of the Vintolas to IBAA has been extinguished inasmuch as through no fault of
their own, they were unable to dispose of the seashells and that they have relinquished the possession
thereof o IBAA as owner of the goods, by depositing them with the court.

HELD:

Petition DENIED.

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

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."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 Spouses VintolaThe goods the Spouses Vintola 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.

The foregoing premises considered, it follows that the acquittal of Spouses Vintola in the Estafa case is
no bar to the institution of a civil action for collection. It is inaccurate for Spouses Vintola to claim that
the judgment in the estafa case had declared that the facts from which the civil action might arise, did
not exist, for, it will be recalled that the decision of acquittal expressly declared that "the remedy of the
Bank is civil and not criminal in nature." Spouses Vintola are liable ex contractu for breach of the Letter
of Credit — Trust Receipt, whether they did or they did not "misappropriate, misapply or convert" the
merchandise as charged in the criminal case. Their civil liability does not arise ex delicto, the action for
the recovery of which would have been deemed instituted with the criminal-action (unless waived or
reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist
would have extinguished the civil action. Rather, the civil suit instituted by IBAA is based ex contractu
and as such is distinct and independent from any criminal proceedings and may proceed regardless of
the result of the latter.

Pilipinas Bank v Ong August 8, 2002

Mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes violation of PD
115. 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.

FACTS: Baliwag Mahogany Corporation (BMC), through its president, Alfredo T. Ong, applied for a
domestic commercial letter credit with petitioner Pilipinas Bank (the bank) to finance the purchase of
“Air Dried, Dark Lauan” sawn lumber. The bank approved the application and issued a Letter of Credit.
To secure payment of the amount, BMC, through respondent Ong, executed two (2) trust receipts
providing 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, 1981. 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. On January
8, 1992, the SEC issued an order creating a Management Committee wherein the bank is represented.

On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a Memorandum of
Agreement (MOA) rescheduling the payment of BMC’s existing debts. On November 27, 1992, the SEC
rendered a Decision approving the Rehabilitation Plan of BMC as contained in the MOA and declaring it
in a state of suspension of payments. However, BMC and respondent Ong defaulted in the payment of
the obligations under the rescheduled payment scheme provided in the MOA. On April 1994, the bank
filed a complaint charging respondents Ong and Leoncia Lim (as president and treasurer of BMC) with
violation of the Trust Receipts Law (PD 115). The bank alleged that both respondents failed to pay their
obligation under the trust receipt despite demand.

ISSUE: Whether or not the MOA was a novation of the trust agreement between the parties.
HELD: Mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes violation of
PD 115. 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. It bears
emphasis that when the petitioner bank made a demand upon a 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 SEC. The Management Committee took custody of all BMC’s assets and liabilities,
including the red lauan lumber subject of 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.

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. The
incompatibility must take place in any of the essential elements of the obligation, such as its object,
cause or principal conditions. 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 execution of the MOA extinguished respondent’s obligation under the trust
receipts. Respondent’s 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.

Land Bank vs Perez

Facts –

On June 7, 1999, Land Bank of the Philippines filed a complaint for Estafa or violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. 115, against the officers and
representatives of Asian Construction and Development Corporation (ACDC), a corporation
incorporated under Philippine law and engaged in the construction business, before the City
prosecutor’s Office in Makati City.

The petitioner alleged that they extended a credit accommodation to ACDC through the execution of an
Omnibus Credit Line Agreement on October 29, 1996. In various instances, ACDC used the Letters of
Credit/Trust Receipts Facility of the Agreement to buy construction materials. The respondents, as
officers and representatives of ACDC, executed trust receipts in connection with the construction
materials, with a total principal amount of P52,344,096.32. The trust receipts matured, but ACDC failed
to return to LBP the proceeds of the construction projects or the construction materials subject of the
trust receipts.

Issue –
1. Whether or not the disputed transaction is covered by Trust Receipts Law.

Ruling – NO

In all trust receipt transactions, both obligations on the part of thetrustee 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.We note in this regard that at the onset of these transactions, LBP knew that ACDC was in the
construction business and that the materials that it sought to buy under the letters of credit were to be
used for the construction site of two government projects. LBP had in fact authorized the delivery of
the materials on the construction sites for these projects, as seen in the letters of credit it attached to its
complaint. Clearly, they were aware of the fact that there was no way they could recover the buildings
or constructions for which the materials subject of the alleged trust receipts had been used. Thus, in
concluding that the transaction was a loan and not a trust receipt, we noted in Colinares v. CA that the
industry or line of work that the borrowers were engaged in was construction. We pointed out that the
borrowers were not importers acquiring goods for resale. Indeed, goods sold in retail are often within
the custody or control of the trustee until they are purchased. In the case of materials used in the
manufacture of finished products, these finished products – if not the raw materials or their
components – similarly remain in the possession of the trustee until they are sold. But the goods and
the materials that are used for a construction project are often placed under the control and custody of
the clients employing the contractor, who can only be compelled to return the materials if they fail to
pay the contractor and often only after the requisite legal proceedings. The contractor’s difficulty and
uncertainty in claiming these materials (or the buildings and structures which they become part of), as
soon as the bank demands them, disqualify them from being covered by trust receipt agreements
HUR TIN YANG vs.PEOPLE OF THE PHILIPPINES

G.R. No. 195117; August 14, 2013; Velasco Jr., J.

A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are,
therefore, two obligations in a trust receipt transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, //while
the second refers to the merchandise received under the obligation to "return" it (devolvera) to the
owner//

When both parties enter into an agreement knowing fully well that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only
obligation actually agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.

MWSS

FACTS:

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

business. On various occasions, Metropolitan Bank and Trust Company (Metrobank), extended
several commercial letters of credit (LCs) to Supermax. These commercial LCs were used by
Supermax to pay for the delivery of several construction materials which will be used in their
construction business. Thereafter, Metrobank required petitioner, as representative of
Supermax, to sign trust receipts as security for the construction materials and to hold those
materials or the proceeds of the sales in trust for Metrobank to the extent of the amount stated
in the trust receipts.

When the trust receipts fell due and despite the receipt of a demand letter, Supermax failed to
pay or deliver the goods or proceeds to Metrobank. Instead, Supermaxrequested the
restructuring of the loan. When the intended restructuring of the loan did not materialize,
Metrobank sent another demand letter. As the demands fell on deaf ears, Metrobank, filed the
instant criminal complaints against petitioner.
 For his defense, while admitting signing the trust receipts, petitioner argued that said trust
receipts were demanded by Metrobank as additional security for the loans extended to
Supermax for the purchase of construction equipment and materials.

In support of this argument, petitioner presented a witness who testified that the construction
materials covered by the trust receipts were delivered way before petitioner signed the
corresponding trust receipts. Further, petitioner argued that Metrobank knew all along that the
construction materials subject of the trust receipts were not intended for resale but for personal
use of Supermax relating to its construction business.

The trial court rendered judgment convicting accused Hur Tin Yang of the crime of estafa under
Article 315 paragraph 1 (a) of the Revised Penal Code.

Petitioner appealed to the CA. CA rendered a Decision, upholding the findings of the RTC. The
CA ruled that since the offense punished under PD 115 is in the nature of malum prohibitum, a
mere failure to deliver the proceeds of the sale or goods, if not sold, is sufficient to justify a
conviction under PD 115.

Petitioner filed a MR, but it was denied. Not satisfied, petitioner filed a petition for review under
Rule 45 of the Rules of Court.

SC dismissed the Petition on the ground that the CA committed no reversible error in the
assailed decision. Hence, petitioner filed the present MR contending that the transactions
between the parties do not constitute trust receipt agreements but rather of simple loans.

ISSUE:

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

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

In the instant case, the factual findings of the trial and appellate courts reveal that the dealing between
petitioner and Metrobank was not a trust receipt transaction but one of simple loan. Petitioner’s
admission––that he signed the trust receipts on behalf of Supermax, which failed to pay the loan or turn
over the proceeds of the sale or the goods to Metrobank upon demand––does not conclusively prove
that the transaction was, indeed, a trust receipts transaction. In contrast to the nomenclature of the
transaction, the parties really intended a contract of loan.

In Ng v. People and Land Bank of the Philippines v. Perez, cases which are in all four corners the same as
the instant case––ruled that the fact that the entruster bank knew even before the execution of the
trust receipt agreements that the construction materials covered were never intended by the entrustee
for resale or for the manufacture of items to be sold is sufficient to prove that the transaction was a
simple loan and not a trust receipts transaction.

The petitioner was charged with Estafa committed in what is called, under PD 115, a "trust receipt
transaction.

A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are,
therefore, two obligations in a trust receipt transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the
second refers to the merchandise received under the obligation to "return" it (devolvera) to the
owner. A violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of
the RPC, as provided in Sec. 13 of PD 115.
Nonetheless, when both parties enter into an agreement knowing fully well that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a
trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.

In Ng v. People, Anthony Ng, then engaged in the business of building and fabricating
telecommunication towers, applied for a credit line of PhP 3,000,000 with Asiatrust Development Bank,
Inc. Prior to the approval of the loan, Anthony Ng informed Asiatrust that the proceeds would be used
for purchasing construction materials necessary for the completion of several steel towers he was
commissioned to build by several telecommunication companies. Asiatrust approved the loan but
required Anthony Ng to sign a trust receipt agreement. When Anthony Ng failed to pay the loan,
Asiatrust filed a criminal case for Estafa in relation to PD 115 or the Trust Receipts Law. This Court
acquitted Anthony Ng and ruled that the Trust Receipts Law was created to "to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased." Since Asiatrust knew that Anthony Ng was
neither an importer nor retail dealer, it should have known that the said agreement could not possibly
apply to petitioner, viz:

The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115 which
states that a trust receipt is to be utilized "as a convenient business device to assist importers and
merchants solve their financing problems." Obviously, the State, in enacting the law, sought to find a
way to assist importers and merchants in their financing in order to encourage commerce in the
Philippines.

[A] trust receipt is considered a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. Similarly, American Jurisprudence demonstrates that trust receipt
transactions always refer to a method of "financing importations or financing sales." The principle is of
course not limited in its application to financing importations, since the principle is equally applicable to
domestic transactions. Regardless of whether the transaction is foreign or domestic, it is important to
note that the transactions discussed in relation to trust receipts mainly involved sales.
Following the precept of the law, such transactions affect situations wherein the entruster, who owns or
holds absolute title or security interests over specified goods, documents or instruments, releases the
subject goods to the possession of the entrustee. The release of such goods to the entrustee is
conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds
himself to hold the specific goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over to the
entruster the proceeds to the extent of the amount owing to the entruster or the goods, documents or
instruments themselves if they are unsold. x xx [T]he entruster is entitled "only to the proceeds derived
from the sale of goods released under a trust receipt to the entrustee."

Considering that the goods in this case were never intended for sale but for use in the fabrication of
steel communication towers, the trial court erred in ruling that the agreement is a trust receipt
transaction.

To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral, of the merchandise
imported or purchased." Since Asiatrust knew that petitioner was neither an importer nor retail dealer,
it should have known that the said agreement could not possibly apply to petitioner.

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

When both parties enter into an agreement knowing that the return of the goods subject of the trust
receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
x xxx

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

Since the factual milieu of Ng and Land Bank of the Philippines are in all four corners similar to the
instant case, it behooves this Court, following the principle of stare decisis, to rule that the transactions
in the instant case are not trust receipts transactions but contracts of simple loan. The fact that the
entruster bank, Metrobank in this case, knew even before the execution of the alleged trust receipt
agreements that the covered construction materials were never intended by the entrustee (petitioner)
for resale or for the manufacture of items to be sold would take the transaction between petitioner and
Metrobank outside the ambit of the Trust Receipts Law.

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

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

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

WHEREFORE, the Resolution upholding the CA's is hereby RECONSIDERED. Petitioner Hur Tin Yang is
ACQUITTED of the charge of violating Art. 315, par. 1 (b) of the RPC, in relation to the pertinent
provision of PD 115 in Criminal Case Nos. 04-223911 to 34.

SO ORDERED.