You are on page 1of 22


R E C E I P T O N G vs. C O U R T O F A P P E A L S


F a c t s : Fernando Ong obtained and received from Tramat Mercantile Inc., several units of machineries, in trust, for the purpose of displaying and selling the machineries for cash under the express obligation on the part of Ong of turning over to said Tramat Mercantile Inc. the proceeds from the sale thereof if sold or of returning to the latter the said goods if not sold. Ong allegedly failed to turn over the proceeds of the sale or to return the goods under the terms of their covenant. Thereafter, a case for Estafa was filed against Fernando Ong. Also, after a few months, Tramat Mercantile Inc. filed a complaint against Ong for collection for sum of money. The parties entered into a compromise agreement to settle the claim in said civil case. The trial court rendered a judgment approving the said compromise agreement. Then Ong, on the basis of the said agreement, moved for the dismissal of the criminal complaint charged against him on the ground of novation of the contract between him and Tramat Mercantile Inc. I s s u e : Whether or not the compromise agreement in the civil case novated the contract embodied in the trust receipts on which the information in the criminal case was based in as much as there was a change of object or principal conditions R u l i n g : The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being against the state, the latter is the only who can renounce it. S P O U S E S V I N T O L A T I R S O I . V I N T O L A a n d L O R E T O D Y v s. I N S U L A R B A N K O F A S I A A N D A M E R I C A

F a c t s : Spouses Vintola applied for and were granted a domestic letter of credit by the Insular Bank of Asia and America (IBAA). 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. VINTOLAS received from Stalin Tan the puka and olive shells and executed a Trust Receipt agreement with IBAA. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's property with liberty to sell the same for its account, " and "in case of sale" to turnover the proceeds. Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS. The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for their own personal use and benefit the aforesaid goods. The trial court acquitted the VINTOLAS of the offense charged. IBAA commenced a civil action to recover the value of the goods. The court dismissed the case holding that the complaint was barred by the judgment of acquittal in the criminal case. I s s u e :

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

T R I N I D A D R A M O S vs. T H E H O N O R A B L E C O U R T A P P E A L S a n d P E O P L E O F T H E P H I L I P P I N E S


F a c t s : The accused filed with Philippine National Cooperative Bank four applications for letters of credit. Among the papers filed for the issuance of the domestic letters of credit were commercial invoices of the different suppliers of the merchandise sought to be purchased. The different suppliers then drew sight drafts against the applicant payable to the order of the PNCB. The PNCB then drew its own drafts against the accused as the buyer of the merchandise and which drafts were accepted by the accused also on the same dates of the respective applications. After such acceptance, the corresponding trust receipts were signed by the accused also on the same dates of the respective applications. No payments were made excepting a partial payment of P3,900.00, inclusive of interests and another partial payment of P2,000.00 made on the same letter of' credit. Trinidad Ramos pleads for acquittal on the proposition that the factual predicate on which her conviction is laid is chiefly comprised of speculations, conjectures and presumptions without substantial and actual support in the evidence. She asserts that it behooved the prosecution, which had charged her with estafa under Article 315 prove the essential elements thereof. She contends, in her case that there is no adequate proof of her receipt of the goods subject of

the trust receipts in question or of her having paid anything on account thereof or in connection therewith. I s s u e : Whether or not commercial invoices are sufficient proof of delivery that is necessary in order for conviction for estafa could lie R u l i n g : The assailed factual findings as to the receipt of the merchandise and the damage sustained by the Bank cannot stand. The proofs are indeed inadequate on these propositions of fact. It is difficult to accept the prosecution's theory that it has furnished sufficient proof of delivery by the introduction in evidence of the commercial invoices attached to the applications for the letters of credit and of the trust receipts. The invoices are actually nothing more than lists of the items sought to be purchased and their prices; and it can scarcely be believed that goods worth no mean sum actually transferred hands without the unpaid vendor requiring the vendee to acknowledge this fact in some way, even by a simple signature on these documents alone if not in fact by the execution of some appropriate document, such as a delivery receipt. The trust receipts do not fare any better as proofs of the delivery to Ramos of the goods. Except for the invoices, an documents relating to each trust receipt agreement, including the trust receipts themselves, appear to be standard Bank forms accomplished by the Bank personnel, and were all signed by Ramos in one sitting, no doubt with a view to facilitating the pending transactions between the parties. If, as she claims, Ramos was made to believe that bank usage or regulations require the signing of the papers in this way, i.e., on a single occasion, there was neither reason nor opportunity for her to question the statement therein of receipt of the goods since it was evidently assumed that delivery to her of the goods would shortly come to pass. A L L I E D B A N K I N G C O R P O R A T I O N vs. OR D O E Z

F a c t s : Philippine Blooming Mills, a manufacturer of steel and steel products, not in the business of selling mag-ar branch dolomites or high fired refractory sliding nozzle bricks applied for the issuance of commercial letters of credit with Allied Banking Corporation to finance the purchase of said items. Allied Banking Corporation, in turn, issued an irrevocable letter of credit in favor of Nikko Industry Co. Ltd. by virtue of which Nikko Industry Co. Ltd drew four (4) drafts which were accepted by Philippine Blooming Mills and duly honored and paid by Allied Banking Corporation .To secure the payment and in consideration of the transfer by Allied Banking Corporation of the possession of the goods to Philippine Blooming Mills, the latter as entrustee executed four (4) trust receipt agreements acknowledging the formers ownership over the goods and its obligation to turn over the proceeds of the sale of the goods if sold, or to return the same if unsold within the period stated. Despite repeated demands, Philippine Blooming Mills failed and refused to either turn over the proceeds of the goods or to return the same. When Allied Banking Corporation filed a criminal Complaint for violation of PD 115, the fiscal found a prima facie case and file the information with the court. On appeal, the DOJ Secretary, Neptali Gonzales, held that the raw materials for manufacture of goods to be ultimately sold are the only proper objects of Trust Receipts and the failure to remit the proceeds of such will constitute a violation of PD 115.In another motion for reconsideration filed by Philippine Blooming Mills , the new DOJ Secretary Seafrey Ordoez, rectified the decision of his predecessor because of Philippine Blooming Mills clarification that the goods subject of the trust receipt agreements were used for patching purposes over the surface of the furnaces and nozzle bricks which are insulating materials in the lower portion of the ladle which do not form part of the steel

product itself and held that since the goods covered by the trust receipt agreements and subject matter of those proceedings are to be utilized in the operation of the equipment and machineries of the corporation, they could have not been contemplated as being covered by PD 115. In an attempt to escape criminal liability, private respondent claims P.D. 115 covers goods which are ultimately destined for sale and not goods for use in manufacture and that at the time of PBMs application for the issuance of the LCs, it was not represented to the petitioner that the items were intended for sale, hence, there was no deceit resulting in a violation of the trust receipts which would constitute a criminal liability. I s s u e : Whether or not P.D. 115 covers only goods which are ultimately destined for sale and not goods for use in manufacture R u l i n g : The wording of Section 13 covers failure to turnover the proceeds of the sale of the entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts. Private respondent claims that at the time of PBMs application for the issuance of the LCs, it was not represented to the petitioner that the items were intended for sale, hence, there was no deceit resulting in a violation of the trust receipts which would constitute a criminal liability. Again, this contention cannot be upheld. The nonpayment of the amount covered by a trust receipt is an act violative of the entrustees obligation to pay. There is no reason why the law should not apply to all transactions covered by trust receipts, except those expressly excluded. The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries and supplies used in manufacturing operations. We are perplexed by the statements in the assailed DOJ resolution that the goods subject of the instant case are outside the ambit of the provisions of PD 115 albeit covered by trust receipt agreements ( 17 February 1988 resolution) andthat not all transactions covered by trust receipts may be considered as trust receipt transactions defined and penalized under P.D. 115 (11 January1988 resolution). A construction should be avoided when it affords an opportunity to defeat compliance with the terms of a statute. The penal provision of P.D. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold.

P H I L I P P I N E N A T I O N A L B A N K vs. H O N . G R E G O R I O G . P I N E D A a n d T A Y A B A S C E M E N T C O M P A N Y , I N C F a c t s : In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from petitioner bank to purchase 60%of the subscribed capital stock, and thereby acquire the controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land known as theLa Vista property. Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred letter of credit (L/C) for$7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment. Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd.for the account of TCC, the Arroyo spouses executed a Surety Agreement and Covenant.

The imported cement plant machinery and equipment arrived from Japan and were released toTCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings. Thus, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess, as it laterdid, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. In the meantime, the personal accounts of the spouses Arroyo, which included another loan secured by a real estate mortgage over parcels of agricultural land had likewise become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor. At the auction sale, PNB was the highest bidder however, when said property was about to be awarded to PNB, the representative of the mortgagor-spouses objected and demanded from the PNB the difference between the bid price and the indebtedness of spouses on their personal account. To remedy the situation, PNB requested to proceed with the sale of the subject real properties to satisfy not only the amount owed by the spouses Arroyos on their personal account but also the amount owed by said spouses as sureties of TCC. Said petition was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta. Which was granted thru respondent Judge Gregorio Pineda, who issued a restraining order and, granted a writof preliminary injunction. I s s u e : Whether or not TCCs liability has been extinguished by the repossession of PNB of theimported cement plant machinery and equipment R u l i n g : It must be remembered that PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. 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 transmissionof 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. P E O P L E O F T H E P H I L I P P I N E S a n d A L L I E D B A N K I N G C O R P O R A T I O N vs. H O N . J U D G E D A V I D G . N I T A F A N a n d B E T T Y S I A A N G F a c t s : Petitioner Allied banking Corporation (ABC) charged private respondent, Betty Sia Ang, 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 onlyP283,115.78. Betty Sia Ang 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. I s s u e : 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? R u l i n g : 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 P114,884.22balance is what makes the accused-respondent criminally liable for estafa. A trust receipt arrangement does not involve 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 inthe 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). 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 right sand 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 Pambansa Blg. 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 SCRA323 [1986];Rollo, p. 57) It is in the context of upholding public interest that the law nowspecifically designates a breach of a trust receipt agreement to be an act that "shall" make one liable for estafa.

P R U N A T C E C a l . , I N C

D E N T I A L B A N K vs. I O N A L L A B O R R E L A T I O N S C O M M I S S I O N , I L I A O R Q U E L L O , e t a l . , Z E N A I D A U C H I , e t A L U - I N T E R A S I A C O N T A I N E R I N D U S T R I E S , . , a n d R A U L R E M O D O

F a c t s : Interasia Container Industries, Inc. (INTERASIA),was embroiled in three (3) labor cases which were eventually resolved against it. Thus in NLRC Cases monetary awards consisting of 13th-month pay differentials and other benefits were granted to complainants. Subsequently the monetary award was recomputed to include separation pay occasioned by the closure of operations of INTERASIA. With the finality of the three (3)decisions, writs of execution were issued. The Sheriff levied on execution personal properties located in the factory of INTERASIA Petitioner filed an Affidavit of Third-Party Claim asserting ownership over the seized properties on the strength of trust receipts executed by INTERASIA in its favor. As a result, the Sheriff suspended the public auction sale. But the Labor Arbiter denied the claim of petitioner and directed the Sheriff to proceed with the levy of the properties. Petitioner then filed separate appeals to the NLRC. Petitioner raises issue on the extent of its security title over the properties subject of the levy on execution, submitting that while it may not have absolute ownership over the properties, still it has right, interest and ownership consisting of a security title which attaches to the properties. Petitioner differentiates a trust receipt, which is a security for the payment of the obligations of the importer, from a real estate mortgage executed as security for the payment of an obligation of a borrower. Petitioner argues that in the latter the ownership of the mortgagor may not necessarily have any bearing on its acquisition, whereas in the case of a trust receipt the acquisition of the goods by the borrower results from the advances made by the bank. It concludes that the security title of the bank in a trust receipt must necessarily be of thesame or greater extent than the nature of the security arising from a real estate mortgage. Petitioner maintains that it is a preferred claimant to the proceeds from the foreclosure to the extentof its security title in the goods otherwise its security title will become useless. I s s u e : Whether or not the entruster has a better right as against creditors over the proceeds of the foreclosure R u l i n g : We cannot subscribe to NLRC's simplistic interpretation of trust receipt arrangements. In effect, it has reduced the Trust Receipt Agreements to a pure and simple loan transaction .Sec. 12 of P.D. No. 115 assures the entruster of the validity of his claim against all creditors -Sec. 12. Validity of entruster's security interest as against creditors. - The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. From the legal and jurisprudential standpoint it is clear that the security interest of the entruster is not merely an empty or idle title. To a certain extent, such interest, such interest becomes a "lien" on the goods because the entruster's advances will have to be settled first before the entrustee can consolidate his ownership over the goods. A contrary view would be disastrous. For to refuse to recognize the title of the banker under the trust receipt as security for the advance of the purchase price would be to strike down a bona fide and honest transaction of great commercial benefit and advantage founded upon a well-recognized custom by which banking credit is officially mobilized for manufacturers and importers of small means. The NLRC argues that inasmuch as petitioner didnot cancel the Trust Receipt Agreements and took possession of the properties it could

not claim ownership of the properties. We do not agree. Significantly, the law uses the word "may" in granting to the entruster the right to cancel the trust and take possession of the goods. Consequently, petitioner has the discretion to avail of such right or seek any alternative action, such asa third-party claim or a separate civil action which it seems best to protect its right, at anytime upon default or failure of the entrustee to comply with any of the terms and conditions of the trust agreement.

M E T R O P O L I T A N vs. T O N D A




F a c t s : Spouses Joaquin G. Tonda and Ma. Cristina Tonda applied for and were granted commercial letters of credit by Metrobank for a period of 8months in connection with the importation of raw textile materials to be used in the manufacturing of garments. The Tondas acting both in their capacity as officers of Honey Tree Apparel Corporation and in their personal capacities, executed eleven trust receipts to secure the release of the raw materials to HTAC. The Tondas failed to comply with their obligations stated in the trust receipts agreements despite repeated demands thereof (to account to Metrobank the goods and/or proceeds of saleof the merchandise, subject of the trust receipts. Consequently, private respondents were charged with violation of PD 115 (Trust Receipts Law)and estafa. Respondent Joaquin together with a certain Wang Tien En subsequently entered intoa loan restructuring agreement with Metrobank, however the parties were unable to arrive at a mutually agreeable loan restructured agreement. Subsequently, respondent Joaquin and wang deposited 2.8M to an account to pay the entire principal of the outstanding trust receipts account to be applied anytime to the payment of the TR/LC Account upon the implementation by the parties of the terms of the restructuring. I s s u e : Whether or not Metrobank can validly apply the amount deposited by the petitioners as payment of the principal obligation under the trust receipts agreement inspite of the failure of the parties to agree upon a restructurin agreement. R u l i n g : The acts of the respondents constitute the crime of estafa as contemplated in PD 115 and the RPCbecause they failed to return the goods covere dby the trust receipts or return the proceeds o f t h e s a l e o f t h e s a i d g o o d s . The handwr it te n note by the Met robank office r acknowl e dgin g re ce ipt of the checks made no refer ence t o t he Tondas tr ust re ce ipt obl igat ions, and it cannot be presumed that it was anything mor e than an or dinar y bank de posit . The CA r ul ed that in making t he de posit, the Tondas ar e e nt it le d t o se t off by way of compe nsat i on the ir obl igat ions to

Met roBank. Howe ve r, Art 1288 of the Civil Code pr ovide s that compe nsat i on shall not be proper when one of the de bt s consist s in civil liabil it y arising fro m a penal offe nse as in the case at bar . If one of the debts consist s in civil l iabil it y ar ising fro m a penal offe nse, compe nsat i on woul d beimpr ope r and inadvisabl e because the satisfact ion of such obl igat ion is impe r at ive .

M E L V I N C O L I N A R E S a n d L O R D I N O V E L O S O vs. H O N O R A B L E C O U R T O F A P P E A L S , a n d T H E P E O P L E O F T H E P H I L I P P I N E S F a c t s :

21 Petitioners applied for a commercial letter of credit with the Philippine Banking Corporation (PBC) in favor of CM builders for the purchased of various construction supplies. PBC approved the letter of credit to cover the full invoice value of the goods and subsequently signed a prom-forma trustreceip0t as security.PBC wrote a demand letter to petitioner demandingthe amount be paid within seven days but instance of complying they confessed that they cant pay and requested a grace period to settle the account. Petitioners proposed to modify the payment of theloan. Petitioners were charged with estafa. During trial,petitioner Veloso insisted that the transaction was a clean loan. He and petitioner Colinares signed the documents without reading the fine print, and learning that the trust receipt was merely aformality.The trial court render a decision convicting the petitioner estafa. The trial court considered the transaction between PBC and Petitioners as a trust receipt transaction under Section 4, P.D. No. 115.Petitioners appealed from the judgment to theCourt of Appeals and the CA modified the judgment of the trial court by increasing the penalty. I s s u e : Whether of not the petitioner were properly charged, tried and convicted for violation of PD 115in relation to article 315 of the RPC? R u l i n g : A thorough examination of the facts obtaining in the case at bar reveals that the transactionintended by the parties was a simple loan, not a trust receipt agreement. The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. There are two possible situations in a trustreceipt transaction. The first is covered by theprovision 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 refersto merchandise received under the obligation to return it (devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised PenalCode, without need of proving intent to defraud. Petitioners received the merchandise from CMBuilders Centre on 30 October 1979. On that day ,ownership over the merchandise was already transferred to Petitioners who were to

use thematerials for their construction project. It was only a day later, 31 October 1979, that they went to thebank 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 advancesit had made to the entrustee. The ownership of the merchandise continues to be vested in the personwho had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank shallbe 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 notable to deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price.

P H I L I P P I N E S B A N K O F C O M M U N I C A T I O N S H O N . C O U R T O F A P P E A L S a n d F I L I P I N A S T E X T I L E M I L L S , I N C .


F a c t s : Petitioner sought the payment representing the proceeds or value of various textile goods, the purchase of which was covered by irrevocable letters of credit and trust receipts executed by petitioner with private respondent Filipinas Textile Mills as obligor; which, in turn, were covered by surety agreements executed by private respondent Bernardino Villanueva and Sochi Villanueva. In their Answer, private respondents admitted the existence of the surety agreements and trust receipts butcountered that they had already made payments onthe amount demanded and that the interest andother charges imposed by petitioner were onerous.Petitioner filed a Motion for Attachment contendingthat violation of the trust receipts law constitutesestafa, thus providing ground for the issuance of awrit of preliminary attachment and further claimedthat attachment was necessary since privaterespondents were disposing of their properties toi ts detriment as a creditor. I s s u e : Whether or not the allegations for must be embezzlement, misappropriation nor incipient fraud may be presumed to establish an order for a writ of preliminary attachment to be issued. R u l i n g : The Motion for Attachment filed by petitioner andits supporting affidavit did not sufficiently establish the grounds relied upon in applying for the writ of preliminary attachment.Petitioner cannot insist that its allegation that private respondents failed to remit the proceeds of the sale of the entrusted goods nor to return thesame is sufficient for attachment to issue. There is absence of factual allegations as to how the fraud alleged by petitioner was committed. Such fraudulent intent not to honor the admitted obligation cannot be inferred from the debtor's inability to pay or to comply with the obligations. On the other hand, as stressed, above, fraud maybe gleaned from a preconceived plan or intentionnot to pay. This does not appear to be so in thecase at bar. In fact, it is alleged by privaterespondents that out of the total P419,613.96 covered by the subject trust receipts, the amount of P400,000.00 had already been paid, leaving only P19,613.96 as balance.

Hence, regardless of the arguments regarding penalty and interest, it can hardly be said that private respondents harbored a preconceived plan or intention not to pay petitioner.

S O U T H C I T Y H O M E S , I N C . , F O R T U N E M O T O R S ( P H I L S . ) , P A L A W A N L U M B E R M A N U F A C T U R I N G C O R P O R A T I O N vs. B A F I N A N C E C O R P O R A T I O N F a c t s : Prior to the transactions covered by the subject drafts and trust receipts, defendantappellantFortune Motors Corporation (Phils.) has been availing of the credit facilities of plaintiff-appellant BA Finance Corporation. Fortune Motors Corporation executed in favor of plaintiff-appellant a Continuing Suretyship Agreement, in which he jointly and severally unconditionally guaranteed the full, faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation. Palawan Lumber Manufacturing Corporation, executed in favor of plaintiff-appellant a Continuing Suretyship Agreement in which, said corporation jointly and severally unconditionally guaranteed the full, faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation. On the same date, South City Homes, Inc. likewise executed a Continuing Suretyship Agreement inwhich said corporation jointly and severally unconditionally guaranteed the full, faithful andprompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BAFinance Corporation. Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six (6) Drafts in its ownfavor, payable thirty (30) days after sight, charged to the account of Fortune Motors Corporation.Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles deliveredto it by CARCO under which it agreed to remit to the Entruster (CARCO) the proceeds of any sale and immediately surrender the remaining unsold vehicles. The drafts and trust receipts were assigned to plaintiff-appellant, under Deeds of Assignment executed by CARCO. Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due underthe drafts and to remit the proceeds of motor vehicles sold or to return those remaining unsold inaccordance with the terms of the trust receipt agreements, BA Finance Corporation sent demandletter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar. Since the defendants-appellants failed to settle theiroutstanding account with plaintiff-appellant, thelatter filed a complaint for a sum of money withprayer for preliminary attachment. Defendants filed a Motion to Dismiss. Therein, they alleged thatconventional subrogation effected a novation without the consent of the debtor (Fortune MotorsCorporation) and thereby extinguished the latters liability; that pursuant to the trust receipt ttransaction, it was premature under P. D. No. 115to immediately file a complaint for a sum of moneyas the remedy of the entruster is an action for specific performance; that the suretyship agreements are null and void for having beenentered into without an existing principal obligation;and that being such sureties does not make themsolidary debtors. I s s u e : Whether or not there was a novation of the obligation so as to extinguish the liability of thesureties

R u l i n g : Petitioners next posit that a novation, as a result of the assignment of the drafts and trust receipts by the creditor (CARCO) in favor of respondent BAFC without the consent of the principal debtor (FortuneMotors), extinguished their liabilities. An assignment of credit is an agreement by virtueof which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago , exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee,who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. As a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. Petitioners obligations were not extinguished. In assignment, the debtors consent is not essentialfor the validity of the assignment (Art. 1624 inrelation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment hemight make (Article 1626, Civil Code). Article 1626also shows that payment of an obligation which is already existing does not depend on the consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall already bemade to the new creditor from the time the debtor acquires knowledge of the assignment of the obligation. LEE vs. C O U R T O F A P P E A L S

F a c t s : On 15 November 1985, a complainant for sum of money was filed by the International CorporateBank, Inc. against Sacoba Manufacturing Corp.,Pablo Gonzales Jr., and Tomas Gonzales who, inturn, filed a third party complaint against Alfa Integrated Textile Mills (ALFA), Ramon C. Lee(ALFA's president) and Antonio DM. Lacdao (ALFA'svice president) on 17 March 1986. On 17September 1987, Lee and Lacdao filed a motion to dismiss the third party complaint which the Regional Trial Court of Makati, Branch 58 denied inan Order dated 27 June 1988. On 18 July 1988, Leea nd Lacdao filed their answer to the third party complaint. Meanwhile, on 12 July 1988, the trial issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of Lee and Lacdao's letter informing the court that the summons for ALFA was erroneously served upon them considering that themanagement of ALFA had been transferred to theDBP. In a manifestation dated 22 July 1988, theDBP claimed that it was not authorized to receivesummons on behalf of ALFA since the DBP had nottaken over the company which has a separate anddistinct corporate personality and existence. On 4 August 1988, the trial court issued an order advising Sacoba Manufacturing, et. al. to take theappropriate steps to serve the summons to ALFA. On 16 August 1988, Sacoba Manufacturing, et. al.filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial courtgranted on 17 August 1988. On 12 September1988, Lee and Lacdao filed a motion forreconsideration submitting that the Rule 14, section13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA andSacoba Manufacturing, et. al. should have availedof another mode of service under Rule 14, Section16 of the said Rules, i.e., through publication toeffect proper service upon ALFA. On 2 January1989, the trial court upheld the validity of theservice of summons on ALFA through Lee andLacdao, thus, denying the latter's motion forreconsideration and requiring ALFA to file itsanswer through Lee and Lacdao as its corporateofficers. On 19 January 1989, a second motion forreconsideration was filed by Lee and Lacdaoreiterating their stand that by virtue of the

votingtrust agreement they ceased to be officers anddirectors of ALFA, hence, they could no longerreceive summons or any court processes for or onbehalf of ALFA. In support of their second motionfor reconsideration, Lee and Lacdao attachedthereto a copy of the voting trust agreementbetween all the stockholders of ALFA (Lee andLacdao included), on the one hand, and the DBP,on the other hand, whereby the management andcontrol of ALFA became vested upon the DBP. On25 April 1989, the trial court reversed itself bysetting aside its previous Order dated 2 January1989 and declared that service upon Lee andLacdao who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. On 15 May 1989, SacobaManufacturing, et. al. moved for a reconsiderationof the Order which was affirmed by the court in isOrder dated 14 August 1989 denying SacobaManufacturing, et. al.'s motion for reconsideration.On 18 September 1989, a petition for certiorari wasbelatedly submitted by Sacoba Manufacturing, before the Court of Appeals which, nonetheless,resolved to give due course thereto on 21September 1989. On 17 October 1989, the trialcourt, not having been notified of the pendingpetition for certiorari with the appellate court issuedan Order declaring as final the Order dated 25 April1989. Sacoba Manufacturing, et. al. in the saidOrder were required to take positive steps inprosecuting the third party complaint in order thatthe court would not be constrained to dismiss thesame for failure to prosecute. Subsequently, on 25October 1989 Sacoba Manufacturing, et. al. filed amotion for reconsideration on which the trial courttook no further action. On 19 March 1990, after Leeand Lacdao filed their answer to SacobaManufacturing, et. al.'s petition for certiorari, theappellate court rendered its decision, setting asidethe orders of trial court judge dated 25 April 1989and 14 August 1989. On 11 April 1990, Lee andLacdao moved for a reconsideration of the decision of the appellate court which resolved to deny thesame on 10 May 1990. Lee and Lacdao filed thepetition for certiorari. In the meantime, theappellate court inadvertently made an entry of judgment on 16 July 1990 erroneously applying therule that the period during which a motion forreconsideration has been pending must bededucted from the 15-day period to appeal.However, in its Resolution dated 3 January 1991,the appellate court set aside the aforestated entryof judgment after further considering that the ruleit relied on applies to appeals from decisions of theRegional Trial Courts to the Court of Appeals, not toappeals from its decision to the Supreme Courtpursuant to the Supreme Court's ruling in the caseof Refractories Corporation of the Philippines v.Intermediate Appellate Court, 176 SCRA 539[1989]. I s s u e : Whether the execution of the voting trustagreement by Lee and Lacdao whereby all theirshares to the corporation have been transferred tothe trustee deprives the stockholder of theirpositions as directors of the corporation. R u l i n g : Lee and Lacdao, by virtue of the voting trustagreement executed in 1981 disposed of all theirshares through assignment and delivery in favor of the DBP, as trustee. Consequently, Lee and Lacdaoceased to own at least one share standing in theirnames on the books of ALFA as required underSection 23 of the new Corporation Code. They alsoceased to have anything to do with themanagement of the enterprise. Lee and Lacdaoceased to be directors. Hence, the transfer of theirshares to the DBP created vacancies in theirrespective positions as directors of ALFA. Thetransfer of shares from the stockholders of ALFA tothe DBP is the essence of the subject voting trustagreement. Considering that the voting

trustagreement between ALFA and the DBP transferredlegal ownership of the stocks covered by theagreement to the DBP as trustee, the latterbecause the stockholder of record with respect tothe said shares of stocks. In the absence of ashowing that the DBP had caused to be transferredin their names one share of stock for the purposeof qualifying as directors of ALFA, Lee and Lacdaocan no longer be deemed to have retained theirstatus as officers of ALFA which was the case before the execution of the subject voting trustagreement. There is no dispute from the recordsthat DBP has taken over full control and management of the firm.



vs. ONG

F a c t s : On April 1991, Baliwag Mahogany Corporation(BMC), through its president, respondent Alfredo T.Ong, applied for a domestic commercial letter creditwith petitioner Pilipinas Bank (the bank) to financethe purchase of Air Dried, Dark Lauan sawn lumber.The bank approved the application and issued aLetter of Credit. To secure payment of the amount,BMC, through respondent Ong, executed two (2)trust receipts providing that it shall turn over theproceeds of the goods to the bank, if sold, or returnthe goods, if unsold, upon maturity on July 28,1991 and August 4, 1981.On due dates, BMC failed to comply with the trustreceipt agreement. On November 22, 1991, it filedwith the Securities and Exchange Commission (SEC)a Petition for Rehabilitation and for a Declaration ina State of Suspension of Payments. On January 8,1992, the SEC issued an order creating aManagement Committee wherein the bank is represented.On October 13, 1992, BMC and a consortium of 14of its creditor banks entered into a Memorandum of Agreement (MOA) rescheduling the payment of BMCs existing debts.On November 27, 1992, the SEC rendered aDecision approving the Rehabilitation Plan of BMCas contained in the MOA and declaring it in a stateof suspension of payments. However, BMC and respondent Ong defaulted inthe 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 thetrust receipt despite demand.The Court of Appeals renders its decision holdingthat the execution of the MOA constitutes novationwhich places petitioner bank in estoppel to insist onthe original trust relation and constitutes a bar to the filing of any criminal information for violation of the trust receipts law. The Motion forReconsideration was denied.Hence this Petition. I s s u e : Whether or not the MOA was a novation of thetrust agreement between the parties. R u l i n g : Petition is DENIED, MOA novates the trustagreement.Mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes violation of PD115. However, what is being punished by the law isthe dishonesty and abuse of confidence in thehandling of money or goods to the prejudice of another regardless of whether the latter is theowner. It bears emphasis that when the petitionerbank made a demand upon a BMC on February 11,1994 to comply with its obligations under the trustreceipts, the latter was already under the control of the Management Committee created by SEC. TheManagement Committee took

custody of all BMCsassets and liabilities, including the red lauan lumbersubject of trust receipts, and authorized their use inthe ordinary course of business operations. Clearly,it was the Management Committee which couldsettle BMCs obligations.In Quinto vs. People, this Court held that there aretwo ways which could indicate the presence of novation, thereby producing the effect of extinguishing an obligation by another whichsubstitutes the same. The first is when novationhas been stated and declared in unequivocal terms.The second is when the old and the new obligationsare incompatible on every point. The test of incompatibility is whether or not the two obligationscan stand together. If they cannot, they areincompatible and the latter obligation novates thefirst. The incompatibility must take place in any of the essential elements of the obligation, such as itsobject, cause or principal conditions.Contrary to petitioners contention, the MOA did notonly reschedule BMCs debts, but more importantly,it provided principal conditions, which areincompatible with the trust agreement. Theexecution of the MOA extinguished respondentsobligation under the trust receipts. Respondentsliability, if any, would only be civil in nature sincethe trust receipts were transformed into mere loandocuments after the execution of the MOA.

L O R E N Z O M . S A R M I E N T O , J R . a n d G R E G O R I O L I M P I N , J R Vs. C O U R T O F A P P E A L S a n d A S S O C I A T E D B A N K I N G C O R P . F a c t s : On September 6, 1978, defendant Gregorio Limpin, Jr. and Antonio Apostol, doing businessunder the name and style of Davao Libra Industrial Sales, filed an application for an Irrevocable Domestic Letter of Credit with the plaintiff Bank infavor of LS Parts Hardware and Machine Shop forthe purchase of assorted scrap irons. The aforesaid application was approved, and plaintiff Bank issued Domestic Letter of Credit. Thereafter, a Trust Receipt was executed by defendant Limpin and Antonio Apostol. The defendants failed to comply with their undertaking under the Trust Receipt. Hence demands were made for them to comply with their undertaking. However, defendants failed to paytheir account. A complaint for Violation of the TrustReceipt Law was filed against the defendants. Defendant Lorenzo Sarmiento, Jr. was, however, dropped from the Information while defendant Gregorio Limpin, Jr. was convicted.The defendants claim that they cannot be heldliable as the 825 tons of assorted scrap iron,subject of the trust receipt agreement, were lostwhen the vessel transporting them sunk, and thatsaid scrap iron were delivered to Davao LibraIndustrial Sales, a business concern over whichthey had no interest whatsoever. I s s u e : Whether or not the offended partys (associatedbank) claim for the civil liability, not having beenexpressly reserved by it, has been not only impliedly, but in fact expressly instituted already incriminal case, the information for which had been filed ahead and the proceedings conducted prior tothe present civil case is procedurally barred. R u l i n g : Jurisprudence instructs that such reservation may not necessarily be express but may be implied which may be inferred not only from the acts of the offended party but also from acts other than thoseof the latter.In the present case, private respondents complaint against petitioners was based on the failure of the latter to comply with their obligation as spelled outin the Trust Receipt executed by them. This breach of obligation is separate and distinct from any criminal liability for "misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released undertrust receipts",

punishable under Section 13 of theTrust Receipts Law (P.D. 115) in relation to Article315(1), (b) of the Revised Penal Code. Being based on an obligation ex contractu and not ex delicto,the civil action may proceed independently of the criminal proceedings instituted against petitionersregardless of the result of the latter.



vs. C O U R T



F a c t s : Petitioner Edward Ong, representing ARMAGRI International Corporation (ARMAGRI), executed two trust receipts acknowledging receipt from the SolidBank Corp. of goods valued at P 2,532,500 and P 2,050,000. In addition, he bounded himself to any increase or decrease of interest rate in case CentralBank floated rates and to pay any additional penalty until the trust receipts are fully paid.When the trust receipts became due and demandable, ARMAGRI failed to pay or deliver the goods to the Bank despite several demand letters. The trial court convicted Ong of two counts of estafa for violation of the Trust Receipts Law. I s s u e : Whether the appellant is guilty of two counts estafafor violation of the Trust Receipts Law. R u l i n g : Yes, he is guilty for failure by the entrustee to account for the goods received in trust constitutes estafa. The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of goods, or (2) return the goods covered by the trust receipts if the good are not sold. Themere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud. The Bank released the goods to ARMAGRI upon execution of the trust receipts and as part of the loan transactions of ARMAGRI. The Bank had aright to demand from ARMAGRI payment or at least a return of the goods. ARMAGRI failed tom pay or return the goods despite repeated demands by theBank. It is well-settled doctrine long before the enactment of the Trust Receipts Law, that the failure to account, upon demand, for funds or property held in trust is evidence of conversion or misappropriation. Under the law, mere failure by the entrustee to account for the goods received intrust constitutes estafa. The Trust Receipts Law punishes dishonesty and abuse of confidence in the handling of money or goods to prejudice the publicorder. The mere failure to deliver proceeds of thesale or the goods if not sold constitutes a criminaloffense that causes prejudice not only to the creditor, but also to the public interest. Evidently, the Bank suffered prejudice for neither money northe goods were turned over the Bank. L A N D L & C O M P A N Y ( P H I L . ) I N C . , P E R C I V A L G . L L A B A N a n d M A N U E L P . L U C E N T E vs. M E T R O P O L I T A N B A N K & T R U S T C O M P A N Y F a c t s : Respondent Metropolitan Bank and Trust Company(Metrobank) filed a complaint for sum of moneyagainst Landl and Company (Phil.) Inc. (Landl) andits directors, Percival G. Llaban and Manuel P.Lucente. Respondent alleged that petitionercorporation is engaged in the business of sellingimported welding rods and alloys. It opened Commercial Letter of Credit with respondent bank to purchase various welding rods and electrodes from Perma

Alloys, Inc., New York, U.S.A. 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 theapproval of petitioner corporation's application forthe opening of the commercial letter of credit,respondent bank required petitioners Percival G.Llaban and Manuel P. Lucente to execute a Continuing Suretyship Agreement in favor of respondent bank. Petitioner Lucente also executeda Deed of Assignment in favor of respondent bank to cover the amount of petitioner corporation's obligation to the bank. Upon compliance with theserequisites, respondent bank opened an irrevocableletter of credit for the petitioner corporation.To secure the indebtedness of petitionercorporation, respondent bank required theexecution of a Trust Receipt in an amountequivalent to the letter of credit, on the conditionthat petitioner corporation would hold the goods intrust for respondent bank, with the right to sell thegoods and the obligation to turn over to respondentbank the proceeds of the sale, if any. If the goodsremained unsold petitioner corporation had thefurther obligation to return them to respondentbank. Upon arrival of the goods in the Philippines,petitioner corporation took possession and custodythereof.Petitioner corporation defaulted in the payment of its obligation to respondent bank and failed to turnover the goods to the latter. Respondent bank demanded that petitioners, as entrustees, turn overthe goods subject of the trust receipt which wasturned over by the petitioners.The goods were sold at a public auction withrespondent bank as the highest biddee but 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 theirobligation. After petitioners failed to do so,respondent bank instituted the case to collect thesaid deficiency.Petitioners appealed to the Court of Appeals, raisingthe issues of: (1) whether or not respondent bank has the right to recover any deficiency after it hasretained possession of and subsequently effected apublic auction sale of the goods covered by thetrust receipt; (2) whether or not respondent bank isentitled to the amount of P3,000.00 as and forlitigation expenses and costs of the suit; and (3)whether or not respondent bank is entitled to theaward of attorney's fees. I s s u e : Whether or not the respondent had the right toclaim the deficiency from petitioners notwithstanding the fact that the goods covered by te trust receipt were fully turned over to respondent. R u l i n g : A trust receipt is inextricably linked with the primaryagreement between the parties. Time and again,we have emphasized that a trust receipt agreementis merely a collateral agreement, the purpose of which is to serve as security for a loan. Respondent bank's repossession of the propertiesand subsequent sale of the goods were completely in accordance with its statutory and contractualrights upon default of petitioner corporation.The second paragraph of Section 7 expressly provides that the entrustee shall be liable to theentruster for any deficiency after the proceeds of the sale have been applied to the payment of theexpenses of the sale, the payment of the expensesof 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 salewere insufficient to satisfy entirely petitioner corporation's indebtedness to the respondent bank.Respondent bank was thus well within its rights toinstitute the instant case to collect the deficiency.

R O S A R I O T E X T I L E M I L L S C O R P O R A T I O N a n d E D I L B E R T O Y U J U I C O vs. H O M E B A N K E R S S A V I N G S A N D T R U S T C O M P A N Y F a c t s : Sometime in 1989, Rosario Textile Mills Corporation(RTMC) applied from Home Bankers Savings & Trust Co. for an Omnibus Credit Line. The bank notified RTMC of the grant of the said. On March 3,1989, 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 RTMCs indebtedness to the bank. RTMC availed of the credit line by making numerous drawdowns, eachdrawdown 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 underthe promissory notes and notwithstanding thebanks demand letters, RTMC failed to pay its loans.Hence, the bank filed a complaint for sum of moneyagainst RTMC and Yujuico.RTMC and Yujuico contend that they should beabsolved from liability. They claimed that althoughthe grant of the credit line and the execution of thesuretyship agreement are admitted, the bank gaveassurance that the suretyship agreement wasmerely a formality under which Yujuico will not bepersonally liable. They argue that the importation of raw materials under the credit line was with a grantof option to them to turn-over to the bank theimported raw materials should these fail to meettheir manufacturing requirements. RTMC offered tomake such turn-over since the imported materialsdid not conform to the required specifications.However, the bank refused to accept the same,until the materials were destroyed by a fire whichgutted down RTMCs premises. I s s u e : Whether or not the petitioners are not relieved of their obligation to pay their loan after they tried to tender the goods to the bank which refused to accept the same, and which goods were subsequently lost in a fire R u l i n g : It is clear that the principal transaction between petitioner RTMC and the bank is a contract of loan.RTMC used the proceeds of this loan to purchaseraw materials from a supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as collateral. Trustreceipts were executed by the parties to evidence this security arrangement. Simply stated, the trustreceipts were mere securities.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 bythe importer. To consider the bank as the trueowner from the inception of the transaction wouldbe to disregard the loan feature thereof. Thus, petitioners cannot be relieved of their obligation topay their loan in favor of the bank.


C .



a n d


C . T U P A Z

vs. T H E C O U R T O F A P P E A L S P H I L I P P I N E I S L A N D S

a n d B A N K



F a c t s : Petitioners Jose C. Tupaz IV and Petronila C. Tupaz(petitioners') were Vice-President for Operationsand Vice-President/Treasurer, respectively, of ElOro Engraver Corporation (El Oro Corporation'). ElOro Corporation had a contract with the Philippine Army to supply the latter with 'survival bolos. To finance the purchase of the raw materials forthe survival bolos, petitioners, on behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands (respondent bank') for two commercial letters of credit. Respondent bank granted petitioners' application and issued Letters of Credit. Simultaneous with the issuance of theletters of credit, petitioners signed trust receipts infavor of respondent bank. Petitioner Jose C. TupazIV signed, in his personal capacity, a trust receipt corresponding to Letter of Credit and bound himself to sell the goods covered by the letter of credit andto remit the proceeds to respondent bank, if sold,or to return the goods, if not sold.In another letter of credit, petitioners signed intheir capacities as officers of El Oro Corporation, atrust receipt corresponding to such Letter of Credit. Petitioners bound themselves to sell the goods covered by that letter of credit and to remit theproceeds to respondent bank, if sold, or to returnthe goods, if not sold. After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El OroCorporation, respondent bank paid the former.Petitioners did not comply with their undertakingunder the trust receipts. Respondent bank made several demands for payments but El OroCorporation made partial payments only. El Oro Corporation replied to the demand for payment thatit could not fully pay its debt because the Armed Forces of the Philippines had delayed paying for thesurvival bolos. Respondent bank charged petitioners with estafa under Section 13,Presidential Decree No. 115 or Trust Receipts Law(PD 115). I s s u e : Whether or not petitioners bound themselves personally liable for El Oro Corporation's debts under the trust receipts Whether or not petitioners' acquittal of estafa under Section 13, PD 115 extinguished their civil liability. R u l i n g : A corporation, being a juridical entity, may act only through its directors, officers, and employees.Debts incurred by these individuals, acting as suchcorporate agents, are not theirs but the directliability of the corporation they represent. As an exception, directors or officers are personally liablefor the corporation's debts only if they so contractually agree or stipulate.Petitioners signed below this clause as officers of ElOro Corporation. Thus, under petitioner Petronila Tupaz's signature are the words Vice-Pres Treasurer and under petitioner Jose Tupaz's signature are the words Vice-Pres Operations. By so signing that trustreceipt, petitioners did not bind themselves personally liable for El Oro Corporation's obligation. As to the second issue, the rule is that where the civil action is impliedly instituted with the criminalaction, the civil liability is not extinguished by acquittal. Respondent bank chose not to file a separate civil action to recover payment under the trust receipts.Instead, respondent bank sought to recove rpayment in Criminal Case. Although the trial courtacquitted petitioner Jose Tupaz, his acquittal didnot extinguish his civil liability. His liability arose notfrom the criminal act of which he was acquitted ( ex delito) but from the trust receipt contract ( ex contractu ). D E V E L O P M E N T B A N K P R U D E N T I A L B A N K O F T H E P H I L I P P I N E S vs.

F a c t s : In 1973, Lirag Textile Mills, Inc. (Litex) opened anirrevocable commercial letter of credit withrespondent Prudential Bank in connection with itsimportation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame,ring spinning frame and various accessories, spareparts and tool gauge. These were released to Litexunder covering 'trust receipts' it executed in favorof Prudential Bank. Litex installed and used theitems in its textile mill located in Montalban, Rizal.DBP granted a foreign currency loan to Litex. Tosecure the loan, Litex executed real estate andchattel mortgages on its plant site in Montalban,Rizal, including the buildings and otherimprovements, machineries and equipments there. Among the machineries and equipments mortgagedin favor of DBP were the articles covered by the'trust receipts.Prudential Bank learned about DBP's plan for theoverall rehabilitation of Litex. Prudential Bank notified DBP of its claim over the various itemscovered by the 'trust receipts' which had beeninstalled and used by Litex in the textile mill.Prudential Bank informed DBP that it was theabsolute and juridical owner of the said items andthey were thus not part of the mortgaged assetsthat could be legally ceded to DBP.For the failure of Litex to pay its obligation, DBPextra-judicially foreclosed on the real estate andchattel mortgages, including the articles claimed byPrudential Bank and DBP acquired the foreclosedproperties as the highest bidder.Prudential Bank wrote a letter to DBP reasserting itsclaim over the items covered by 'trust receipts' in itsname and advising DBP not to include them in theauction. It also demanded the turn-over of thearticles or alternatively, the payment of their value.DBP requested documents to enable it to evaluatePrudential Bank's claim which was provided by thelatter. DBP informed Prudential Bank that its claimhad been referred to DBP's legal department andinstructed Prudential Bank to get in touch with itschief legal counsel. There being no concrete actionon DBP's part, Prudential Bank, in a letter made afinal demand on DBP for the turn-over of thecontested articles or the payment of their value.Without the knowledge of Prudential Bank,however, DBP sold the Litex textile mill, as well asthe machineries and equipments therein, to LyonTextile Mills, Inc. (Lyon). Since its demandsremained unheeded, Prudential Bank filed acomplaint for a sum of money with damages against DBP. I s s u e : Whether or not the mortgagee has a right over thegoods subject of the trust receipt agreement whichwas mortgaged by the entrustee R u l i n g : The articles were owned by Prudential Bank were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority todispose of them or any part thereof or theirproceeds through conditional sale, pledge or any other means. Article 2085 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. Article2085 further mandates that the person constituting the pledge or mortgage must have the free disposalof his property, and in the absence thereof, that hebe legally authorized for the purpose. Litex had neither absolute ownership, free disposalnor the authority to freely dispose of the articles.Litex could not have subjected them to a chattelmortgage. Their inclusion in the mortgage was voidand had no legal effect. There being no validmortgage, there could also be no valid foreclosureor valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaserin good faith. No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet .Hence, Litex could not

transfer a right that it didnot have over the disputed items. Corollarily, DBP could not acquire a right greater than what itspredecessor-in-interest had. The spring cannot risehigher than its source. DBP merely stepped into theshoes of Litex as trustee of the imported articleswith an obligation to pay their value or to returnthem on Prudential Bank's demand. By its failure topay or return them despite Prudential Bank'srepeated demands and by selling them to Lyonwithout Prudential Bank's knowledge andconformity, DBP became a trustee ex maleficio. A J B R T L F R E D O C H I N G vs. T H E S E C R E T A R Y O F U S T I C E , A S S T . C I T Y P R O S E C U T O R E C I L Y N U R G O S - V I L L A V E R T , J U D G E E D G A R D O S U D I A M ; I Z A L C O M M E R C I A L B A N K I N G C O R P . a n d H E P E O P L E O F T H E P H I L I P P I N E S

F a c t s : Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). PBMI,through petitioner, applied with the Rizal Commercial Banking Corporation (respondent bank)for the issuance of commercial letters of credit tofinance its importation of assorted goods.Respondent bank approved the application, andirrevocable letters of credit were issued in favor of petitioner. The goods were purchased and deliveredin trust to PBMI. Petitioner signed 13 trust receiptsas surety, acknowledging delivery of the goods.Under the receipts, petitioner agreed to hold thegoods in trust for the said bank, with authority tosell but not by way of conditional sale, pledge orotherwise; and in case such goods were sold, toturn over the proceeds thereof as soon as received,to apply against the relative acceptances andpayment of other indebtedness to respondent bank.In case the goods remained unsold within thespecified period, the goods were to be returned torespondent bank without any need of demand.Thus, said "goods, manufactured products orproceeds thereof, whether in the form of money orbills, receivables, or accounts separate and capableof identification" were respondent banks property.When the trust receipts matured, petitioner failedto return the goods to respondent bank, or toreturn their value despite demands. Thus, the bank filed a criminal complaint for estafa againstpetitioner. I s s u e : Whether or not the officers of the corporation canbe held civilly and criminally liable of estafa forviolation of the trust receipts law R u l i n g : Though the entrustee is a corporation, nevertheless, the law specifically makes theofficers, employees or other officers or persons responsible for the offense, without prejudice to thecivil liabilities of such corporation and/or board of directors, officers, or other officials or employeesresponsible for the offense. The rationale is that such officers or employees are vested with theauthority and responsibility to devise meansnecessary 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 violationsof the law.If the crime is committed by a corporation or other juridical entity, the directors, officers, employees orother officers thereof responsible for the offenseshall be charged and penalized for the crime,precisely because of the nature of the crime andthe penalty therefor. A corporation cannot bearrested and imprisoned; hence, cannot bepenalized for a crime punishable by imprisonment.However, a corporation may be charged andprosecuted for a crime if the imposable penalty isfine. Even if the

statute prescribes both fine andimprisonment as penalty, a corporation may beprosecuted and, if found guilty, may be fined. A crime is the doing of that which the penal codeforbids to be done, or omitting to do what itcommands. A necessary part of the definition of every crime is the designation of the author of thecrime upon whom the penalty is to be inflicted.When a criminal statute designates an act of acorporation or a crime and prescribes punishmenttherefor, it creates a criminal offense which,otherwise, would not exist and such can becommitted only by the corporation. But when apenal statute does not expressly apply tocorporations, it does not create an offense forwhich a corporation may be punished. On the otherhand, if the State, by statute, defines a crime thatmay be committed by a corporation but prescribesthe penalty therefor to be suffered by the officers,directors, or employees of such corporation or otherpersons responsible for the offense, only suchindividuals will suffer such penalty. Corporateofficers or employees, through whose act, defaultor omission the corporation commits a crime, arethemselves individually guilty of the crime.The principle applies whether or not the crimerequires the consciousness of wrongdoing. Itapplies to those corporate agents who themselvescommit the crime and to those, who, by virtue of their managerial positions or other similar relationto the corporation, could be deemed responsible forits commission, if by virtue of their relationship tothe corporation, they had the power to prevent theact. Moreover, all parties active in promoting acrime, whether agents or not, are principals. Whether such officers or employees are benefitedby their delictual acts is not a touchstone of theircriminal liability. Benefit is not an operative fact.In this case, petitioner signed the trust receipts inquestion. He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In thewords of Chief Justice Earl Warren, a corporateofficer cannot protect himself behind a corporationwhere he is the actual, present and efficient actor.