Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page
including the articles covered by the trust receipts. During the
DBP v. Prudential Bank
November 22, 2005
Ponente: Corona, J.
Rheg Peralta
SUMMARY: Entrustee (Litex) mortgaged to DBP various
items covered by a prior trust receipt agreement with
Prudential Bank (entruster). DBP foreclosed on the
mortgaged articles. SC ruled that the mortgage and
subsequent foreclosure are not valid. The entrustee, not
being the absolute owner, cannot mortgage the articles
covered by the trust receipts.
DOCTRINE: In a trust receipt transaction, the entrustee has
neither absolute ownership, free disposal nor the authority
to freely dispose of the articles subject of the agreement.
Since the goods could not have been subjected to a valid
mortgage, there can also be no valid foreclosure especially
when the mortgagee who subsequently foreclosed and
purchased the said goods were in bad faith, having
knowledge of the inclusion of such articles in a trust receipt
agreement.
FACTS: In 1973, Lirag Textile Mills, Inc. (Litex) opened an
irrevocable commercial letter of credit with Prudential Bank, in
connection with its importation of spindles. These were released
to Litex under covering trust receipts it executed in favor of
Prudential Bank.
In 1980, DBP granted Litex a foreign currency loan
secured by real estate and chattel mortgages on the latters
machineries including those articles covered by the trust
receipts. Upon learning this, Prudential Bank notified DBP of its
claim over the various items covered by the trust receipts.
For failure of Litex to pay its obligation, DBP extra-
judicially foreclosed on the real estate and chattel mortgages,
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foreclosure sale, DBP acquired the foreclosed properties as the
highest bidder.
Prudential Bank again informed DBP that it was the
absolute and juridical owner of the said items and they were thus
not part of the mortgaged assets that could be legally ceded to
DBP. Since its demands remained unheeded, Prudential Bank filed
a complaint for a sum of money with damages against DBP.
ISSUE/HELD: WON the articles covered by the trust receipts can
be validly mortgaged by the entrustee. [NO]
RATIO: The various agreements between Prudential Bank and
Litex commonly denominated as trust receipts were valid.
Hence, the articles were owned by Prudential Bank and they were
only held by Litex in trust. While it was allowed to sell the items,
Litex had no authority to dispose of them or any part thereof or
their proceeds through conditional sale, pledge or any other
means.
Litex had neither absolute ownership, free disposal nor the
authority to freely dispose of the articles. Litex could not have
subjected them to a chattel mortgage. Their inclusion in the
mortgage was void and had no legal effect. There being no valid
mortgage, there could also be no valid foreclosure or valid
auction sale especially when the mortgagee who subsequently
foreclosed and purchased the said goods were in bad faith,
having knowledge of the inclusion of such articles in a trust
receipt agreement.
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 did not have over the disputed items. DBP
merely stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return them on
Prudential Banks demand.
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