1
LETTER OF CREDIT
BANK OF THE PHILIPPINE ISLANDS
vs.
DE RENY FABRIC INDUSTRIES, INC.,
AURORA T. TUYO and AURORA CARCERENY
alias AURORA C. GONZALES
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?
Ruling:
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.
PHILIPPINE VIRGINIA TOBACCO
ADMINISTRATION
vs.
HON. WALFRIDO DE LOS ANGELES, TIMOTEO
A. SEVILLA, PHILIPPINE ASSOCIATED
RESOURCES and PRUDENTIAL BANK AND
TRUST COMPANY
Facts :
Timoteo Sevilla, proprietor and General Manager of
the Philippine Associated Resources (PAR) together
with two other entities, namely, the Nationwide
Agro-Industrial Development Corp. and the
Consolidated Agro-Producers Inc. were awarded in
a public bidding the right to import Virginia leaf
tobacco at a rate of one (1) kilo of imported
tobacco for every nine (9) kilos of leaf tobacco
actually exported. Subsequently, the other two
entities assigned their rights to PVTA and
respondent remained the only private entity
accorded the privilege.
The contract entered into between the petitioner
and respondent Sevilla was for the importation of
Virginia leaf tobacco and a counterpart exportation.
2
In accordance with their contract, Sevilla purchased
from petitioner and actually exported 2,101.470
kilos of tobacco. Before Sevilla could import the
counterpart blending Virginia tobacco, Republic Act
No. 4155 was passed authorizing the PVTA to grant
import privileges at the ratio of 4 to 1 instead of 9
to 1 and to dispose of all its tobacco stock at the
best price available.
Thus the subject contract which was already
amended because of the prevailing export or world
market price under which respondent will be
exporting at a loss, was further amended to grant
respondent the privileges under aforesaid law,
subject to the following conditions: (1) that those
already purchased, and exported, the purchase
price of about P3.00 a kilo was maintained; (2) that
the unpaid balance was to be liquidated by paying
PVTA the sum of P4.00 for every kilo of imported
Virginia blending tobacco and; (3) that respondent
Sevilla would open an irrevocable letter of credit
with the Prudential Bank and Trust Co. in favor of
the PVTA to secure the payment of said balance,
drawable upon the release from the Bureau of
Customs of the imported Virginia blending tobacco.
While respondent was trying to negotiate the
reduction of the procurement cost of the tobacco
already exported which attempt was denied by
petitioner and also by the Office of the President,
petitioner prepared two drafts to be drawn against
said letter of credit for amounts which have already
become due and demandable. Respondent then
filed a complaint for damages with preliminary
injunction against the petitioner. A writ of
preliminary injunction was issued by respondent
judge enjoining petitioner from drawing against the
letter of credit. On motion of respondent, Sevilla,
the lower court dismissed the complaint and lifted
the writ of preliminary injunction but petitioner's
motion for reconsideration was granted. Sevilla filed
an urgent motion for reconsideration but pending
the resolution of respondent's motion and without
notice to the petitioner, respondent judge issued an
order directing the Prudential Bank & Trust Co. to
make the questioned release of funds from the
Letter of Credit. Before petitioner could file a
motion for reconsideration of said order,
respondent Sevilla was able to secure the releaseof
P300,000.00 and the rest of the amount.
PVTA contends that respondent Judge acted
without or in excess of jurisdiction or with grave
abuse of discretion because the letter of credit
issued by respondent bank is irrevocable
Issue:
Whether or not the judge can order a decision that
will modify or cancel an irrevocable letter of credit
without the permission of the beneficiary
Ruling:
Respondent Judge violated the irrevocability of the
letter of credit issued by respondent Bank in favor
of petitioner. An irrevocable letter of credit during
its lifetime cannot be cancelled or modified without
the express permission of the beneficiary.
INSULAR BANK OF ASIA & AMERICA
vs.
HON. INTERMEDIATE APPELLATE COURT,
THE PHILIPPINE AMERICAN LIFE
INSURANCE CO., SPS. BEN MENDOZA &
JUANITA M. MENDOZA
Facts :
Spouses Mendoza obtained a from PHILAM Life to
finance the construction of their residential house.
Phiilam life required that the amortization be
guaranteed by an irrevocable LC of a commerciaql
bank. The Mendoza’s contracted Insular Bank of
Asia and America (IBAA) for the issuance of LC in
favor of Philam life, such LC’s in turn, secured by a
real mortgage on the property of spouses in favor
of IBAA.
Mendoza’s executed promissory notes in favor of
IBAA. Both Notes authorized IBAA "to sell at public
or private sale such securities or things for the
purpose of applying their proceeds to such
payments" of many particular obligation or
obligations" the Mendozas may have to IBAA.
The Mendozas failed to pay Philam Life the
amortization and informed IBAA that it was
declaring the entire balance outstanding on both
loans, including liquidated damages, "immediately
due and payable." Philam Life then demanded the
payment of P274,779.56 from IBAA but the latter
took the position that, as a melee guarantor of the
Mendozas who are the principal debtors.
3
The Real Estate Mortgage, which secured the two
(2) standby L/Cs. was extrajudicially foreclosed by,
and sold at public auction for P775,000.00, to
petitioner IBAA as the lone and highest bidder.
Philam Life filed suit against Respondent Spouses
and IBAA before the Regional Trial Court of Manila,
Branch XXXXI, for the recovery of the sum of
P274,779.56, the amount allegedly still owing under
the loan.
Issue:
Whether or not IBAA has no more liability to Philam
Life under the two (2) standby Letters of Credit
and, instead, is entitled to a refund?
Ruling:
In construing the terms of a Letter of Credit, as in
other contracts, it is the intention of the parties that
must govern.
Letters of credit and contracts for the issuance of
such letters are subject to the same rules of
construction as are ordinary commercial contracts.
They are to receive a reasonable and not a
technical construction and although usage and
custom cannot control express terms in letters of
credit, they are to be construed with reference to
all the surrounding facts and circumstances, to the
particular and often varying terms in which they
may be expressed, the circumstances and intention
of the parties to them, and the usages of the
particular trade of business contemplated.
Unequivocally, the subject standby Letters of Credit
secure the payment of any obligation of the
Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed
P600,000.00. But while they are a security
arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra
vires rather than a letter of credit, which is within
the powers of a bank. The standby L/Cs are, "in
effect an absolute undertaking to pay the money
advanced or the amount for which credit is given
on the faith of the instrument. They are primary
obligations and not accessory contracts. Being
separate and independent agreements, the
payments made by the Mendozas cannot be added
in computing IBAA's liability under its own standby
letters of credit. Payments made by the Mendozas
directly to Philam Life are in compliance with their
own prestation under the loan agreements. And
although these payments could result in the
reduction of the actual amount which could
ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains. That
there still remains a balance on the loan, Pursuant
to its absolute undertaking under the L/Cs,
therefore, IBAA cannot escape the obligation to pay
Philam Life for this unexpended balance.
FEATI BANK & TRUST COMPANY
vs.
THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ
Facts :
Bernardo E. Villaluz agreed to sell to the then
defendant Axel Christiansen lauan logs. After
inspecting the logs, Christiansen issued a purchase
order. On the arrangements made and upon the
instructions of the consignee, Hanmi Trade
Development, Ltd, the Security Pacific National
Bank of Los Angeles, California issued Irrevocable
Letter of Credit available at sight in favor of Villaluz
the total purchase price of the lauan logs. The letter
of credit was mailed to the Feati Bank and Trust
Company (now Citytrust) with the instruction to the
latter that it "forward the enclosed letter of credit to
the beneficiary."
The letter of credit further provided that the draft
to be drawn is on Security Pacific National Bank and
that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies
showing the number of the purchase order and
certifying that all terms and conditions of the
purchase order have been complied with, etc. 2.
Tally sheets 3. 2/3 Original Clean on Board Ocean
Bills of Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing Freight
Prepaid and marked.
After the loading of the logs was completed, the
Chief Mate issued a mate receipt of the cargo which
stated the same are in good condition. However,
Christiansen refused to issue the certification as
required in the letter of credit, despite several
requests made by the private respondent.nBecause
of the absence of the certification by Christiansen,
the Feati Bank and Trust Company refused to
advance the payment on the letter of credit which
4
lapsed without the private respondent receiving any
certification from Christiansen.
Since the demands by the private respondent for
Christiansen to execute the certification proved
futile, Villaluz, instituted an action for mandamus
and specific performance against Christiansen and
the Feati Bank and Trust Company. While the case
was still pending trial, Christiansen left the
Philippines without informing the Court and his
counsel. Hence, Villaluz, filed an amended
complaint to make the petitioner solidarily liable
with Christiansen.
Issue:
Whether or not a correspondent bank is to be held
liable under the letter of credit despite non-
compliance by the beneficiary with the terms
thereof
Ruling:
It is a settled rule in commercial transactions
involving letters of credit that the documents
tendered must strictly conform to the terms of the
letter of credit. The tender of documents by the
beneficiary must include all documents required by
the letter. A correspondent bank which departs
from what has been stipulated under the letter of
credit, 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 Thus the rule of strict compliance.
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.
Also in this case, the letter merely provided that the
petitioner "forward the enclosed original credit to
the beneficiary." Considering the aforesaid
instruction to the petitioner by the issuing bank, the
Security Pacific National Bank, it is indubitable that
the petitioner is only a notifying bank and not a
confirming bank.
Since the petitioner was only a notifying bank, its
responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent
and its obligation ends there. In order that the
petitioner may be held liable under the letter, there
should be proof that the petitioner confirmed the
letter of credit.
Finally, even if the petitioner is a confirming bank,
the petitioner cannot be forced to pay the amount
under the letter because there was a failure on the
part of the private respondent to comply with the
terms of the letter of credit.
PRUDENTIAL BANK
vs.
INTERMEDIATE APPELLATE COURT,
PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI
Facts :
On August 8, 1962, Philippine Rayon Mills, Inc.
entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries
under a five-year deferred payment plan. Prudential
Bank executed a trust receipt signed by the
President of PRMI.
PMRI received the machinery and installed the
same at its factory. PMRI ceased business
sometime in 1967 without paying his obligation
arising from the letters of credit and trust receipt.
Repeated demands for the payment of the said
trust receipt were made and to no avail. Hence,
action for collection of money was filed to the trial
court.
Issue:
Whether Philippine Rayon is liable on the basis of
the trust receipt?
Ruling:
Paragraph 8 of the Trust Receipt which reads:
"My/our liability for payment at maturity of any
accepted draft, bill of exchange or indebtedness
shall not be extinguished or modified" 17 does not,
contrary to the holding of the public respondent,
contemplate prior acceptance by Philippine Rayon,
5
but by the petitioner. Acceptance, however, was
not even necessary in the first place because the
drafts which were eventually issued were sight
drafts And even if these were not sight drafts,
thereby necessitating acceptance, it would be the
petitioner — and not Philippine Rayon — which had
to accept the same for the latter was not the
drawee. Presentment for acceptance is defined an
the production of a bill of exchange to a drawee for
acceptance. 18 The trial court and the public
respondent, therefore, erred in ruling that
presentment for acceptance was an indispensable
requisite for Philippine Rayon's liability on the drafts
to attach. Contrary to both courts' pronouncements,
Philippine Rayon immediately became liable thereon
upon petitioner's payment thereof. Such is the
essence of the letter of credit issued by the
petitioner. A different conclusion would violate the
principle upon which commercial letters of credit
are founded because in such a case, both the
beneficiary and the issuer, Nissho Company Ltd.
and the petitioner, respectively, would be placed at
the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the
petitioner had fully paid for it.
Commercial letters of credit have come into general
use in international sales transactions where much
time necessarily elapses between the sale and the
receipt by a purchaser of the merchandise, during
which interval great price changes may occur. Their
purpose is to insure to a seller payment of a
definite amount upon presentation of documents.
The bank deals only with documents. It has nothing
to do with the quality of the merchandise. Disputes
as to the merchandise shipped may arise and be
litigated later between vendor and vendee, but they
may not impede acceptance of drafts and payment
by the issuing bank when the proper documents
are presented.
A letter of credit is defined as an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. 11 Through a letter
of credit, the bank merely substitutes its own
promise to pay for one of its customers who in
return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. 12 In the
instant case then, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts
were presented for payment. In fact, there was no
need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary
only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL).
BANK OF AMERICA, NT & SA
vs.
COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION, FRANCISCO
TRAJANO, JOHN DOE AND JANE DOE
Facts :
Bank of America received an Irrevocable Letter of
Credit issued bu Bank of Ayudhya for the Account
of General Chemicals Ltd., Inc. for the sale of
plastic ropes and agricultural files with Bank of
America as advising bank and Inter-Resin Industrial
Corp. as beneficiary.
Upon receipt of the letter advice with letter of credit
by Inter- Resin told Bank of America to confirm said
letter of credit, but the bank did not confirm such.
Bank of America explained that there was no need
for confirmation.
Inter-Resin made a partial availment of the Letter
of Credit after presentment of the required
documents to Bank of America. After confirmation
of all the documents BA issued a check in favor of
IR. BA advice Bank of Ayudhya of IR’s availment
under the letter of credit and asked for the
corresponding reimbursement.
IR presented documents for the second availment
under the same LC but BA stopped the processing
of such after they received a telex from Bank of
Ayudhya delaring that the LC fraudulent. BA sued
IR for the recovery of the first LC payment.
Issue:
Whether or not Bank of America may recover what
it has paid under the letter of credit to Inter-Resin?
Ruling:
First, petitioner Bank of America has acted merely
as a notifying bank and did not assume the
responsibility of a confirming bank; and
6
Second, petitioner bank, as a negotiating bank, is
entitled to recover on Inter-Resin's partial availment
as beneficiary of the letter of credit which has been
disowned by the alleged issuer bank.
A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode
of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying. To break the impasse, the
buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by
virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to
pay them upon their presentment simultaneously
with the tender of documents required by the letter
of credit. The buyer and the seller agree on what
documents are to be presented for payment, but
ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
There would at least be three (3) parties: (a) the
buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts
of the documents of title; (b) the bank issuing the
letter of credit, which undertakes to pay the seller
upon receipt of the draft and proper document of
titles and to surrender the documents to the buyer
upon reimbursement; and, (c) the seller, who in
compliance with the contract of sale ships the
goods to the buyer and delivers the documents of
title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and
almost invariably in international trade practice,
may be increased. Thus, the services of an advising
(notifying) bank may be utilized to convey to the
seller the existence of the credit; or, of a
confirming bank which will lend credence to the
letter of credit issued by a lesser known issuing
bank; or, of a paying bank, which undertakes to
encash the drafts drawn by the exporter. Further,
instead of going to the place of the issuing bank to
claim payment, the buyer may approach another
bank, termed the negotiating bank, to have the
draft discounted.
It cannot seriously be disputed, looking at this case,
that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is
clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner
bank's letter of advice, its request for payment of
advising fee, and the admission of Inter-Resin that
it has paid the same. That Bank of America has
asked Inter-Resin to submit documents required by
the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a
confirming bank. The fact, too, that the draft
required by the letter of credit is to be drawn under
the account of General Chemicals (buyer) only
means the same had to be presented to Bank of
Ayudhya (issuing bank) for payment. It may be
significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising
bank, to pay the draft.
As an advising or notifying bank, Bank of America
did not incur any obligation more than just notifying
Inter-Resin of the letter of credit issued in its favor,
let alone to confirm the letter of credit. The bare
statement of the bank employees, aforementioned,
in responding to the inquiry made by Atty. Tanay,
Inter-Resin's representative, on the authenticity of
the letter of credit certainly did not have the effect
of novating the letter of credit and Bank of
America's letter of advise, nor can it justify the
conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that free from
fault. As the seller, the issuance of the letter of
credit should have obviously been a great concern
to it. It would have, in fact, been strange if it did
not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with
General Chemicals. In the ordinary course of
business, the perfection of contract precedes the
issuance of a letter of credit.
RELIANCE COMMODITIES, INC.
vs.
DAEWOO INDUSTRIAL CO., LTD
Facts :
On 9 January 1980, petitioner Reliance
Commodities, Inc. and Daewoo Industrial Co., Ltd.
entered into a contract of sale under the terms of
which the latter undertook to ship and deliver to
the former 2,000 metric tons of foundry pig iron.
Pursuant to this contract, Daewoo shipped the
foundry pig iron on board for carriage to and
delivery in Manila to its consignee, Reliance. The
shipment was fully paid for. Upon arrival in Manila,
the subject cargo was found to be short.
7
Another contract was entered into between the
same parties for the purchase of another 2,000
metric tons of foundry pig iron. Daewoo
acknowledged the short shipment and, to
compensate Reliance therefor, bound itself to
reduce the price for succeeding orders. However,
that contract was not consummated and was later
superseded by still another contract.
Reliance filed with the China Banking Corporation,
an application for a Letter of Credit (L/C) in favor of
Daewoo. The application was endorsed to the Iron
and Steel Authority (ISA) or approval but the
application was denied. Reliance was instead asked
to submit purchase orders from end-users to
support its application for a Letter of Credit.
However, Reliance was not able to raise purchase
orders for 2,000 metric tons. Whatever the exact
amount of the purchase orders was, Daewoo
rejected the proposed L/C for the reason that the
covered quantity fell short of the contracted
tonnage. Thus, Reliance withdrew the application
for the L/C.
Subsequently, Daewoo learned that the failure of
Reliance to open the L/C was due to the fact that
Reliance has already exceeded its foreign exchange
allocation for 1980. Because of the failure of
Reliance to comply with its undertaking Daewoo
was compelled to sell the 2,000 metric tons to
another buyer at a lower price, to cut losses and
expenses Daewoo had begun to incur due to its
inability to ship the 2000 metric tons to Reliance
under their contract.
Reliance wrote Daewoo requesting payment
representing the value of the short delivery. Not
being heeded, Reliance filed an action for damages
against Daewoo with the trial court. Daewoo
responded, inter alia, with a counterclaim for
damages, contending that Reliance was guilty of
breach of contract when it failed to open an L/C as
required in the contract.
Issue:
Whether or not the failure of an importer to open a
letter of credit on the date agreed upon makes him
liable to the exporter for damages.
Ruling:
A letter of credit transaction is composed of at least
three (3) distinct but intertwined relationships being
concretized in a contract:
(a) One contract relationship links the party
applying for the L/C (the account party or buyer or
importer) and the party for whose benefit the L/C is
issued (the beneficiary or seller or exporter). In this
contract, the account party, here Reliance, agrees,
among other things and subject to the terms and
conditions of the contract, to pay money to the
beneficiary, here Daewoo.
(b) A second contract relationship is between the
account party and the issuing bank. Under this
contract, (sometimes called the "Application and
Agreement" or the "Reimbursement Agreement"),
the account party among other things, applies to
the issuing bank for a specified L/C and agrees to
reimburse the bank for amounts paid by that bank
pursuant to the L/C.
(c) The third contract relationship is established
between the issuing bank and the beneficiary, in
order to support the contract, under (a) above, of
the account party and the beneficiary to, inter alia,
pay certain monies to the latter.
In the case at bar, the opening of an L/C upon
application of Reliance was not a condition
precedent for the birth of the obligation of Reliance
to purchase foundry pig iron from Daewoo.
Reliance and Daewoo, having reached "a meeting
of minds" in respect of the subject matter of the
contract, the price thereof, and other principal
provisions, "they had a perfected contract." The
failure of Reliance to open, the appropriate L/C did
not prevent the birth of that contract, and neither
did such failure extinguish that contract. The
opening of the L/C in favor of Daewoo was an
obligation of Reliance and the performance of that
obligation by Reliance was a condition of
enforcement of the reciprocal obligation of Daewoo
to ship the subject matter of the contract to
Reliance. But the contract itself between Reliance
and Daewoo had already sprung into legal
existence and was enforceable.
The L/C provided for in that contract was the mode
or mechanism by which payment was to be
effected. In undertaking to accept or pay the drafts
presented to it by the beneficiary according to the
tenor of an L/C, and only later on being reimbursed
by the account party, the issuing bank in effect
8

extends a loan to the account party. This loan
feature, combined with the bank's undertaking to
accept the beneficiary's drafts drawn on the bank,
constitutes the L/C as a mode of payment.
The failure of a buyer seasonably to furnish an
agreed letter of credit is a breach of contract
between buyer and seller. Where the buyer fails to
open a letter of credit as stipulated, the seller or
exporter is entitled to claim damages for such
breach. Damages for failure to open a commercial
credit may, in appropriate cases, include the loss of
profit which the seller would reasonably have made
had the transaction been carried out.
that Rodzssen’s offer to return the 2 units to
FEBTC was made only 3 years after it received the
goods and when FEBTC pressed for the payments.
Issues:
Whether or not it is proper for a banking institution
to pay a letter of credit which has long expired or
been cancelled
Whether or not the petitioner was liable to
respondent.
Ruling:

RODZSSEN SUPPLY CO.

vs.
FAR EAST BANK AND TRUST COMPANY
Facts :
Petitioner Rodzssen, on January 15, 1979, opened
with respondent Far East Bank and Trust Company
(FEBTC) a letter of credit (LC) in the amount of
P190,000 in favor of Ekman and Company for the
purchase from the latter of 5 units of hydraulic
loaders, to expire on February 15, 1979, and whose
validity was extended to October 16, 1979. three
(3) units of hydraulic loaders were delivered to
petitioner on March 16, 1979 for which FEBTC paid
Ekman P114,000, and which amount Rodzssen paid
FEBTC before the expiry date of the LC. The
remaining 2 units valued at P76,000 were readily
received by Rodzssen before the expiry date of LC,
FEBTC paid Ekman the amount of P76,000. But
upon demand by FEBTC, Rodzssen refused to pay
without any valid reason. FEBTC then filed an
action for the payment by Rodzssen plus interest.
Rodzssen defended that FEBTC had no cause of
action since there was a breach of contract on the
part of FEBTC who in bad faith paid Ekman,
knowing that the 2 units of hydraulic loaders had
been delivered to Rodzssen after the expiry date of
the LC. Rodzssen offered to return to FEBTC the 2
units of hydraulic loaders which FEBTC refused.
The RTC rendered judgment in favor of herein
respondent, stating that upon delivery by Ekman of
the loaders, Rodzssen became liable for the
payment of the units. In the honest belief that it
was still under obligation to, and upon presentation
of necessary documents by Ekman, FEBTC was in
good faith in paying Ekman. The RTC further noted
Clearly the bank paid Ekman when the former was
no longer bound to do so under the subject LC.
Records show that respondent paid Ekman for the
last 2 loaders, five months after the expiration of
the LC and even informed petitioner of the
cancellation of the LC and credited P22800 to the
account of petitioner, which represented the
marginal deposit which petitioner had been
required to put up for the unnegotiated portion of
the LC. The subject LC had become invalid upon
the lapse of the period fixed therein. Thus,
respondent should not have paid Ekman since it
was not obliged to do so.
Of no moment was Ekman’s presentation of all the
documents necessary for collection as the LC had
already expired and had in fact been cancelled.
FEBTC’s right to seek recovery from petitioner is
anchored not upon the inefficacious LC, but on
Article 2142 of the Civil Code, which reads, “Certain
lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that
no one shall be unjustly enriched or benefited at
the expense of another.”
When both parties to a transaction are mutually
negligent in the performance of their obligations,
the fault of one cancels the negligence of the other,
as in this case, and their rights and obligations may
be determined equitably under the law proscribing
unjust enrichment.
RAMON L. ABAD
vs.
HON. COURT OF APPEALS & THE PHILIPPINE
COMMERCIAL AND INDUSTRIAL BANK
9
Facts :
On October 31, 1963, TOMCO, Inc., applied for and
was granted by the Philippine Commercial and
Industrial Bank a domestic letter of credit for in
favor of its supplier, Oregon Industries, Inc., to pay
for one Skagit Yarder with accessories. PCIB paid to
Oregon Industries the cost of the machinery. After
making the required marginal deposit, TOMCO, Inc.
signed and delivered to the bank a trust receipt
acknowledging receipt of the merchandise in trust
for the bank, with the obligation "to hold the same
in storage" as property of PCIB, with a right to sell
the same for cash provided that the entire proceeds
thereof are turned over to the bank, to be applied
against acceptance(s) and any other indebtedness
of TOMCO, Inc.
In consideration of the release to TOMCO, Inc. by
PCIB of the machinery covered by the trust receipt,
petitioner Ramon Abad signed an undertaking
entitled, "Deed of Continuing Guaranty" appearing
on the back of the trust receipt, whereby he
promised to pay the obligation jointly and severally
with TOMCO, Inc. Except for TOMCO's P28,000
marginal deposit in the bank, no payment has been
made to PCIB by either TOMCO, Inc. or its surety,
Abad, on the letter of credit.
Consequently, the bank sued TOMCO, Inc. and
Abad. TOMCO did not deny its liability to PCIB
under the letter of credit but it alleged that
inasmuch as it made a marginal deposit of P28,000,
this amount should have been deducted from its
principal obligation, leaving a balance of P52,000
only, on which the bank should have computed the
interest, bank charges, and attorney's fees.
Issue:
Whether or not the marginal deposit in the
possession of the bank should first be deducted
from its principal indebtness before computing
interest and other charges
Ruling:
The marginal deposit requirement is a Central Bank
measure to cut off excess currency liquidity which
would create inflationary pressure. It is a collateral
security given by the debtor, and is supposed to be
returned to him upon his compliance with his
secured obligation. Consequently, the bank pays no
interest on the marginal deposit, unlike an ordinary
bank deposit which earns interest in the bank. It is
only fair then that the importer's marginal deposit
(if one was made, as in this case), should be set off
against his debt, for while the importer earns no
interest on his marginal deposit, the bank, apart
from being able to use said deposit for its own
purposes, also earns interest on the money it
loaned to the importer. It would be onerous to
compute interest and other charges on the face
value of the letter of credit which the bank issued,
without first crediting or setting off the marginal
deposit which the importer paid to the bank.
METROPOLITAN WATERWORKS AND
SEWERAGE SYSTEM
vs.
HON. REYNALDO B. DAWAY AND MAYNILAD
WATER SERVICES INC.
Facts :
On February 21, 1997, MWSS granted Maynilad
under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and
sewerage services. Maynilad undertook to pay
consession fees, consisting mostly of paying loans
of petitioner.
In compliance with this requirement, Maynilad
arranged on July 14, 2000 for a three-year facility
with a number of foreign banks, led by Citicorp
International Limited, for the issuance of an
Irrevocable Standby Letter of Credit in the amount
of US$120,000,000.
In 2000, Maynilad wanted to recover its foreign
currency losses due to the depreciation of the
Philippine Peso. It was unheeded by MWSS, thus,
Maynilad issued a Force Majeure Notice in 2001,
which effectively stopped the concession payments.
This led to arbitration between MWSS and
Maynilad. They agreed to new terms. However, in
2002, Maynilad served a notice of Event of
Termination, citing failure of MWSS to comply with
the agreed arbitration terms. MWSS contested such
Notice of Termination and was awarded by the
Appeals panel. Thus, MWSS sent a written notice
that it was it was drawing on the Irrevocable
Standby Letter of Credit (IRLC) and thereby
demanded payment in the amount of
US$98,923,640.15.
10
Prior to this, however, Maynilad had filed on
November 13, 2003, a petition for rehabilitation.
The rehabilitation court (Respondent RTC) ten
issued an order staying the enforcement of claims
(including the IRLC) and stopping payment of
liabilities, kasi nga under rehabilitation. It effectively
stopped the commencing process of payment by
the bank to MWSS. Thus the petition.
MWSS argues that IRLC is an asset of the bank and
not of Maynilad’s, thus should not be under
corporate rehabilitation. It cannot be considered a
“claim” under the purview of the stop order by the
RTC. Maynilad on the other hand argues that the
order of the RTC is correct; that it never claimed
that the IRLC is part of its property; the more
important issue is not whether the IRLC is part of it
assets, but whether MWSS violated stop order; that
the publication of the order covers not only the
assets of MWSS but also “all affected by the
proceedings”, such order being an in rem
proceeding.
Issue:
Whether or not Daway’s order is GADALEJ in
issuing the stop order and considering the IRLC as
part or property of the estate of Maynilad subject to
rehabilitation.
Ruling:
Respondent Maynilad’s Financial Statement as of
December 31, 2001 and 2002 do not show the
Irrevocable Standby Letter of Credit as part of its
assets or liabilities, and by respondent Maynilad’s
own admission it is not.
Further, the claim is not one against the debtor but
against an entity that respondent Maynilad has
procured to answer for its non-performance of
certain terms and conditions of the Concession
Agreement, particularly the payment of concession
fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules
does not enjoin the enforcement of all claims
against guarantors and sureties, but only those
claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent
Maynilad’s claim that the banks are not solidarily
liable with the debtor does not find support in
jurisprudence.
The participating banks’ obligation are solidary with
respondent Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay and is
not conditioned on the prior exhaustion of the
debtor’s assets. These are the same characteristics
of a surety or solidary obligor. Being solidary, the
claims against them can be pursued separately
from and independently of the rehabilitation case.
As held in Feati Bank & Trust Company v. Court of
Appeals, the concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit is
inconsistent with each other. The guarantee theory
destroys the independence of the bank’s
responsibility from the contract upon which it was
opened and the nature of both contracts is mutually
in conflict with each other. In contracts of
guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a
primary obligation.
A letter of credit as an engagement by a bank or
other person made at the request of a customer
that the issuer shall honor drafts or other demands
of payment upon compliance with the conditions
specified in the credit.
Letters of credit were developed for the purpose of
insuring to a seller payment of a definite amount
upon the presentation of documents and is thus a
commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will
have his credit against the applicant of the letter,
duly paid in the amount specified in the letter. They
are in effect absolute undertakings to pay the
money advanced or the amount for which credit is
given on the faith of the instrument. They are
primary obligations and not accessory contracts and
while they are security arrangements, they are not
converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to
pay the seller once the draft and other required
shipping documents are presented to it. They are
definite undertakings to pay at sight once the
documents stipulated therein are presented.
TRANSFIELD PHILIPPINES
Vs.
LUZON HYDRO ELECTRIC CORP.
Facts :
11
Transfield entered into a turn-key contract with
Luzon Hydro Corp. (LHC). Under the contract,
Transfield were to construct a hydro-electric plants
in Benguet and Ilocos. The contract provides for a
period for which the project
is to be completed and also allows for the extension
of the period provided
that 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 brought
about by typhoon, barricades and demonstration.
LHC did not give due
course 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 distinct and separate,
independent agreement. It is not supposed to be
affected by the main contract upon which it rests.
Issue:
Whether or not it is only the issuing bank that may
invoke the independence principle
Whether or not there is a necessity of
resolving first any dispute by the parties before the
beneficiary is entitled to call on the letter of credit
Ruling:
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.
BANK OF COMMERCE
vs.
TERESITA S. SERRANO
Facts :
Bank of Commerce is a private domestic banking
institution. Teresita S. Serrano is the General
Manager and Treasurer of Via Moda International,
Inc., a domestic business entity primarily engaged
in the import and export of textile materials and
fabrics. Via Moda International obtained an export
packing loan from Bank of Commerce secured by a
Deed of Assignment over Irrevocable Transferable
Letter of Credit. Serrano executed in favor of BOC a
promissory note and then opened a deposit account
for the proceeds of the said loan.
BOC issued to Via Moda an irrevocable letter of
credit for the purchase and importation of fabric
and textile products from Tiger Ear Fabric Co. Ltd.
of Taiwan. To secure the release of the goods
covered, respondent executed Trust Receipt.
Under the terms of the trust receipt, Via Moda
agreed to hold the goods in trust for petitioner as
the latter’s property and to sell the same for the
latter’s account. In case of sale, the proceeds are
to be remitted to the bank as soon as it is
received. Said proceeds are to be applied to the
relative acceptances or in the alternative, to return
the goods in case of non-sale.
The goods covered by the trust receipt were
shipped by Via Moda to its consignee who sent an
Export Letter of Credit issued by the Bank of New
York, in favor of BOC. The proceeds of the
entrusted goods sold were not credited to the trust
receipt but, were applied by the bank to the
12
principal, penalties and interest of the export
packing loan. Petitioner then sent a demand letter
to Via Moda to pay the amount plus interest and
penalty charges, or to return the goods covered by
Trust Receipt. Since the demand was not heeded,
respondent was charged with the crime of estafa
under Article 315 (b) of the Revised Penal Code in
relation to Presidential Decree No. 115.
Issue:
Whether or not the respondent can be held
criminally liable if there was actual payment but
such was applied to the principal and not to the
trust receipt
Ruling:
A letter of credit is a separate document from a
trust receipt. While the trust receipt may have
been executed as a security on the letter of credit,
still the two documents involve different
undertakings and obligations. A letter of credit is
an engagement by a bank or other person made at
the request of a customer that the issuer will honor
drafts or other demands for payment upon
compliance with the conditions specified in the
credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise
to pay of one of its customers who in return
promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. By
contrast, a trust receipt transaction is one where
the entruster, who holds an absolute title or
security interests over certain goods, documents or
instruments, released the same to the entrustee,
who executes a trust receipt binding himself to hold
the goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the
goods, documents and instruments with the
obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing
to the entruster, or as appears in the trust receipt,
or return the goods, documents or instruments
themselves if they are unsold, or not otherwise
disposed of, in accordance with the terms and
conditions specified in the trust receipt.
There was no misappropriation or conversion by the
respondent of the proceeds of the sale in the
goods, subject of the trust receipt since the
proceeds were actually received by petitioner but
the latter applied the same to Via Moda’s other
obligations under the export packing loan. It
further stated that such application of payment to
another obligation was done by petitioner on its
own and should not create a criminal liability on the
part of respondent who did not take part nor had
any knowledge thereof. It is on this premise that
the respondent was acquitted of the crime charged.
LAND BANK OF THE PHILIPPINES
vs.
MONET'S EXPORT AND MANUFACTURING
CORP., VICENTE V. TAGLE, SR. and MA.
CONSUELO G. TAGLE
Facts :
On June 25, 1981 petitioner Land Bank of the
Philippines and respondent Monet's Export and
Manufacturing Corporation executed an Export
Packing Credit Line Agreement under which the
bank gave Monet a credit line, secured by the
proceeds of its export letters of credit, promissory
notes, a continuing guaranty executed by
respondent spouses Vicente V. Tagle, Sr. and Ma.
Consuelo G. Tagle and a third-party mortgage
executed by one Pepita C. Mendigoria. Land Bank
renewed and amended this credit line agreement
several times until it reached a ceiling of P5 million.
Monet's obligation under the Agreement had
swelled to P11,464,246.19. Since Monet failed to
pay despite demands, the bank filed a collection
suit against Monet and the Tagles. In their answer,
Monet and the Tagles claimed that Land Bank had
refused to collect the receivables on Monet's export
letter of credit against Wishbone Trading Company
of Hong Kong while making an unauthorized
payment on its import letter of credit. This
damaged Monet's business interests since it ran
short of funds to carry on with its usual business. In
other words, Land Bank mismanaged its client's
affairs under the Agreement.
Issue:
Whether or not Land Bank's motion to reopen the
hearing to allow it to present the bank's updated
Consolidated Billing Statement that reflects
respondents Monet and the Tagles' remaining
indebtedness to it should be allowed.
Ruling:
13

The bank shloud present the promissory note to

establish the scope of the debtor's primary
obligations and a computation of interests, charges,
and penalties based on its terms. It must then
show by the entries in its record how much it had
actually been paid. This will in turn establish how
much the borrower still owes it. The bank does not
have to present all the receipts of payment it issued
to all its clients during the entire year, thousands of
them, merely to establish the fact that only five of
them, rather than ten, pertains to the borrower.
The original documents need not be presented in
evidence when it is numerous, cannot be examined
in court without great loss of time, and the fact
sought to be established from them is only the
general result.

Monet and the Tagles can of course dispute the

bank's billing statements by proof that the bank
had exaggerated what was owed it and that Monet
had made more payments than were reflected in
those statements. They can do this by presenting
evidence of those greater payments. Notably,
Monet and the Tagles have consistently avoided
stating in their letters to the bank how much they
still owed it. But, ultimately, it is as much their
obligation to prove this disputed point if they deny
the bank's statements of their loan accounts.

The bank's motion for reconsideration, asking for

an opportunity to present evidence of the status of
the loans, opened up a chance for the RTC to abide
by what the Court required of it. Therefore it should
be remanded for reception of such evidence as may
be needed to determine the actual amount of
indebtedness of respondents Monet's Export and
Manufacturing Corp. and the spouses Vicente V.
Tagle, Sr. and Ma. Consuelo G. Tagle and
adjudicate petitioner Land Bank of the Philippines'
claims as such evidence may warrant.
14
TRUST RECEIPT
FERNANDO ONG vs. COURT OF APPEALS
Facts :
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.
Issue:
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
Ruling:
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 an offense against the state, only the
latter can renounce it.
SPOUSES TIRSO I. VINTOLA and LORETO DY
VINTOLA
vs.
INSULAR BANK OF ASIA AND AMERICA
Facts :
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 turn
over 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.
Issue:
Whether or not acquittal from criminal offense
extinguish civil liability?
Ruling:
A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a
15
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.
TRINIDAD RAMOS
vs.
THE HONORABLE COURT OF APPEALS and
PEOPLE OF THE PHILIPPINES
Facts :
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 merchadise 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.
Issue:
Whether or not commercial invoices are sufficient
proof of delivery that is necessary in order for
conviction for estafa could lie
Ruling:
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
16
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.
ALLIED BANKING CORPORATION
vs.
ORDOÑEZ
Facts :
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 former’s
ownershiop 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 Ordoñez, 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.
Issue:
Whether or not P.D. 115 covers only goods which
are ultimately destined for sale and not goods for
use in manufacture
Ruling:
the wording of Section 13 covers failure to turn
over 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
17
resulting in a violation of the trust receipts which
would constitute a criminal liability. Again, this
contention cannot be upheld. The non-payment 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) and that
not all transactions covered by trust receipts may
be considered as trust receipt transactions defined
and penalized under P.D. 115 (11 January 1988
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.
PHILIPPINE NATIONAL BANK
vs.
HON. GREGORIO G. PINEDA and TAYABAS
CEMENT COMPANY, INC
Facts :
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 the
La 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 to
TCC 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 later
did, 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 writ
of preliminary injunction.
Issue:
Whether or not TCC’s liability has been
extinguished by the repossession of PNB of the
imported cement plant machinery and equipment
Ruling:
18
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 transmission
of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the
performance of the obligation. 20 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.
PEOPLE OF THE PHILIPPINES and ALLIED
BANKING CORPORATION
vs.
HON. JUDGE DAVID G. NITAFAN and BETTY
SIA ANG
Facts :
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 only
P283,115.78.
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.
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?
Ruling:
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
19
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 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 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.
PRUDENTIAL BANK
vs.
NATIONAL LABOR RELATIONS COMMISSION,
CECILIA ORQUELLO, et al., ZENAIDA UCHI, et
al., ALU-INTERASIA CONTAINER
INDUSTRIES, INC., and RAUL REMODO
Facts :
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 the
same 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 extent
of its security title in the goods otherwise its
security title will become useless.
Issue:
Whether or not the entruster has a better right as
against creditors over the proceeds of the
foreclosure
Ruling:
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
20
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 did
not 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 as
a third-party claim or a separate civil action which it
deems 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.
METROPOLITAN BANK AND TRUST COMPANY
vs.
TONDA
Facts :
Spouses Joaquin G. Tonda and Ma. Cristina
Tonda applied for and were granted commercial
letters of credit by Metrobank for a period of 8
months 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 sale
of 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 into
a 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.”
Issue:
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.
Ruling:
The acts of the respondents constitute the crime
of estafa as contemplated in PD 115 and the RPC
because they failed to return the goods covered
by the trust receipts or return the proceeds of
the sale of the said goods.
The handwritten note by the Metrobank officer
acknowledging receipt of the checks made no
reference to the Tondas’ trust receipt obligations,
and it cannot be presumed that it was anything
more than an ordinary bank deposit. The CA ruled
that in making the deposit, the Tondas are entitled
to set off by way of compensatin their obligations
to MetroBank. However, Art 1288 of the Civil Code
provides that compensation shall not be proper
when one of the debts consists in civil liability
arising from a penal offense as in the case at bar.
If one of the debts consists in civil liability arising
from a penal offense, compensation would be
improper and inadvisable because the satisfaction
of such obligation is imperative
MELVIN COLINARES and LORDINO VELOSO
vs.
HONORABLE COURT OF APPEALS, and THE
PEOPLE OF THE PHILIPPINES
Facts :
Petitioners applied for a commercial letter of credit
with the Philippine Banking Corporation (PBC) in
21
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 trust
receip0t as security.
PBC wrote a demand letter to petitioner demanding
the amount be paid within seven days but instance
of complying they confessed that they can’t pay
and requested a grace period to settle the account.
Petitioners proposed to modify the payment of the
loan.
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 a
formality.
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 the
Court of Appeals and the CA modified the judgment
of the trial court by increasing the penalty.
Issue:
Whether of not the petitioner were properly
charged, tried and convicted for violation of PD 115
in relation to article 315 of the RPC?
Ruling:
A thorough examination of the facts obtaining in
the case at bar reveals that the transaction
intended 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 trust
receipt transaction. The first is covered by the
provision 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 refers
to 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 Penal
Code, without need of proving intent to defraud.
Petitioners received the merchandise from CM
Builders Centre on 30 October 1979. On that day,
ownership over the merchandise was already
transferred to Petitioners who were to use the
materials for their construction project. It was only
a day later, 31 October 1979, that they went to the
bank 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 advances
it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person
who 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 shall
be 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 not
able 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.
PHILIPPINES BANK OF COMMUNICATIONS
vs.
HON. COURT OF APPEALS and FILIPINAS
TEXTILE MILLS, INC.
Facts :
22
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 but
countered that they had already made payments on
the amount demanded and that the interest and
other charges imposed by petitioner were onerous.
Petitioner filed a Motion for Attachment contending
that violation of the trust receipts law constitutes
estafa, thus providing ground for the issuance of a
writ of preliminary attachment and further claimed
that attachment was necessary since private
respondents were disposing of their properties to
its detriment as a creditor.
Issue:
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.
Ruling:
The Motion for Attachment filed by petitioner and
its 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 the
same 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 may
be gleaned from a preconceived plan or intention
not to pay. This does not appear to be so in the
case at bar. In fact, it is alleged by private
respondents 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.
SOUTH CITY HOMES, INC., FORTUNE
MOTORS (PHILS.), PALAWAN LUMBER
MANUFACTURING CORPORATION
vs.
BA FINANCE CORPORATION
Facts :
Prior to the transactions covered by the subject
drafts and trust receipts, defendant-appellant
Fortune 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 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.
Subsequently, Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its own
favor, 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 delivered
to 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 under
the drafts and to remit the proceeds of motor
23
vehicles sold or to return those remaining unsold in
accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand
letter 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 their
outstanding account with plaintiff-appellant, the
latter filed a complaint for a sum of money with
prayer for preliminary attachment. Defendants filed
a Motion to Dismiss. Therein, they alleged that
conventional subrogation effected a novation
without the consent of the debtor (Fortune Motors
Corporation) and thereby extinguished the latters
liability; that pursuant to the trust receipt
transaction, it was premature under P. D. No. 115
to immediately file a complaint for a sum of money
as the remedy of the entruster is an action for
specific performance; that the suretyship
agreements are null and void for having been
entered into without an existing principal obligation;
and that being such sureties does not make them
solidary debtors.
Issue:
Whether or not there was a novation of the
obligation so as to extinguish the liability of the
sureties
Ruling:
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 (Fortune
Motors), extinguished their liabilities.
An assignment of credit is an agreement by virtue
of 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 essential
for the validity of the assignment (Art. 1624 in
relation to Art. 1475, Civil Code), his knowledge
thereof affecting only the validity of the payment he
might make (Article 1626, Civil Code). Article 1626
also 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 be
made to the new creditor from the time the debtor
acquires knowledge of the assignment of the
obligation.
LEE
vs.
COURT OF APPEALS
Facts :
On 15 November 1985, a complainant for sum of
money was filed by the International Corporate
Bank, Inc. against Sacoba Manufacturing Corp.,
Pablo Gonzales Jr., and Tomas Gonzales who, in
turn, filed a third party complaint against Alfa
Integrated Textile Mills (ALFA), Ramon C. Lee
(ALFA's president) and Antonio DM. Lacdao (ALFA's
vice president) on 17 March 1986. On 17
September 1987, Lee and Lacdao filed a motion to
dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in
an Order dated 27 June 1988. On 18 July 1988, Lee
and 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 the
management of ALFA had been transferred to the
DBP. In a manifestation dated 22 July 1988, the
DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not
taken over the company which has a separate and
distinct corporate personality and existence. On 4
August 1988, the trial court issued an order
advising Sacoba Manufacturing, et. al. to take the
appropriate 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 court
granted on 17 August 1988. On 12 September
1988, Lee and Lacdao filed a motion for
reconsideration submitting that the Rule 14, section
13 of the Revised Rules of Court is not applicable
since they were no longer officers of ALFA and
Sacoba Manufacturing, et. al. should have availed
24
of another mode of service under Rule 14, Section
16 of the said Rules, i.e., through publication to
effect proper service upon ALFA. On 2 January
1989, the trial court upheld the validity of the
service of summons on ALFA through Lee and
Lacdao, thus, denying the latter's motion for
reconsideration and requiring ALFA to file its
answer through Lee and Lacdao as its corporate
officers. On 19 January 1989, a second motion for
reconsideration was filed by Lee and Lacdao
reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and
directors of ALFA, hence, they could no longer
receive summons or any court processes for or on
behalf of ALFA. In support of their second motion
for reconsideration, Lee and Lacdao attached
thereto a copy of the voting trust agreement
between all the stockholders of ALFA (Lee and
Lacdao included), on the one hand, and the DBP,
on the other hand, whereby the management and
control of ALFA became vested upon the DBP. On
25 April 1989, the trial court reversed itself by
setting aside its previous Order dated 2 January
1989 and declared that service upon Lee and
Lacdao who were no longer corporate officers of
ALFA cannot be considered as proper service of
summons on ALFA. On 15 May 1989, Sacoba
Manufacturing, et. al. moved for a reconsideration
of the Order which was affirmed by the court in is
Order dated 14 August 1989 denying Sacoba
Manufacturing, et. al.'s motion for reconsideration.
On 18 September 1989, a petition for certiorari was
belatedly submitted by Sacoba Manufacturing, et.
al. before the Court of Appeals which, nonetheless,
resolved to give due course thereto on 21
September 1989. On 17 October 1989, the trial
court, not having been notified of the pending
petition for certiorari with the appellate court issued
an Order declaring as final the Order dated 25 April
1989. Sacoba Manufacturing, et. al. in the said
Order were required to take positive steps in
prosecuting the third party complaint in order that
the court would not be constrained to dismiss the
same for failure to prosecute. Subsequently, on 25
October 1989 Sacoba Manufacturing, et. al. filed a
motion for reconsideration on which the trial court
took no further action. On 19 March 1990, after Lee
and Lacdao filed their answer to Sacoba
Manufacturing, et. al.'s petition for certiorari, the
appellate court rendered its decision, setting aside
the orders of trial court judge dated 25 April 1989
and 14 August 1989. On 11 April 1990, Lee and
Lacdao moved for a reconsideration of the decision
of the appellate court which resolved to deny the
same on 10 May 1990. Lee and Lacdao filed the
petition for certiorari. In the meantime, the
appellate court inadvertently made an entry of
judgment on 16 July 1990 erroneously applying the
rule that the period during which a motion for
reconsideration has been pending must be
deducted from the 15-day period to appeal.
However, in its Resolution dated 3 January 1991,
the appellate court set aside the aforestated entry
of judgment after further considering that the rule
it relied on applies to appeals from decisions of the
Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to the Supreme Court
pursuant to the Supreme Court's ruling in the case
of Refractories Corporation of the Philippines v.
Intermediate Appellate Court, 176 SCRA 539
[1989].
Issue:
Whether the execution of the voting trust
agreement by Lee and Lacdao whereby all their
shares to the corporation have been transferred to
the trustee deprives the stockholder of their
positions as directors of the corporation.
Ruling:
Lee and Lacdao, by virtue of the voting trust
agreement executed in 1981 disposed of all their
shares through assignment and delivery in favor of
the DBP, as trustee. Consequently, Lee and Lacdao
ceased to own at least one share standing in their
names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also
ceased to have anything to do with the
management of the enterprise. Lee and Lacdao
ceased to be directors. Hence, the transfer of their
shares to the DBP created vacancies in their
respective positions as directors of ALFA. The
transfer of shares from the stockholders of ALFA to
the DBP is the essence of the subject voting trust
agreement. Considering that the voting trust
agreement between ALFA and the DBP transferred
legal ownership of the stocks covered by the
agreement to the DBP as trustee, the latter
because the stockholder of record with respect to
the said shares of stocks. In the absence of a
showing that the DBP had caused to be transferred
in their names one share of stock for the purpose
of qualifying as directors of ALFA, Lee and Lacdao
can no longer be deemed to have retained their
status as officers of ALFA which was the case
before the execution of the subject voting trust
agreement. There is no dispute from the records
25
that DBP has taken over full control and
management of the firm.
PILIPINAS BANK
vs.
ONG
Facts :
On April 1991, Baliwag Mahogany Corporation
(BMC), through its president, respondent 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.
The Court of Appeals renders its decision holding
that the execution of the MOA constitutes novation
which places petitioner bank in estoppel to insist on
the original trust relation and constitutes a bar to
the filing of any criminal information for violation of
the trust receipts law. The Motion for
Reconsideration was denied.
Hence this Petition.
Issue:
Whether or not the MOA was a novation of the
trust agreement between the parties.
Ruling:
Petition is DENIED, MOA novates the trust
agreement.
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. 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.
In Quinto vs. People, this Court held that 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.
26
LORENZO M. SARMIENTO, JR. and GREGORIO
LIMPIN, JR
Vs
COURT OF APPEALS and ASSOCIATED
BANKING CORP.
Facts : On September 6, 1978, defendant Gregorio
Limpin, Jr. and Antonio Apostol, doing business
under the name and style of ‘Davao Libra Industrial
Sales,’ filed an application for an Irrevocable
Domestic Letter of Credit with the plaintiff Bank in
favor of LS Parts Hardware and Machine Shop for
the 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 pay
their account. A complaint for Violation of the Trust
Receipt 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 held
liable as the 825 tons of assorted scrap iron,
subject of the trust receipt agreement, were lost
when the vessel transporting them sunk, and that
said scrap iron were delivered to ‘Davao Libra
Industrial Sales’, a business concern over which
they had no interest whatsoever.
Issue:
Whether or not the offended party’s (associated
bank) claim for the civil liability, not having been
expressly reserved by it, has been not only
impliedly, but in fact expressly instituted already in
criminal case, the information for which had been
filed ahead and the proceedings conducted prior to
the present civil case is procedurally barred.
Ruling:
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 those
of the latter.
In the present case, private respondent’s complaint
against petitioners was based on the failure of the
latter to comply with their obligation as spelled out
in 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 under
trust receipts", punishable under Section 13 of the
Trust Receipts Law (P.D. 115) in relation to Article
315(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 petitioners
regardless of the result of the latter.
EDWARD ONG
vs.
COURT OF APPEALS
Facts :
Petitioner Edward Ong, representing ARMAGRI
International Corporation (ARMAGRI), executed two
trust receipts acknowledging receipt from the Solid
Bank 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 Central
Bank 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.
Issue:
Whether the appellant is guilty of two counts estafa
for violation of the Trust Receipts Law.
Ruling:
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. The
mere 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
27
loan transactions of ARMAGRI. The Bank had a
right 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 the
Bank.
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 in
trust constitutes estafa. The Trust Receipts Law
punishes dishonesty and abuse of confidence in the
handling of money or goods to prejudice the public
order. The mere failure to deliver proceeds of the
sale or the goods if not sold constitutes a criminal
offense that causes prejudice not only to the
creditor, but also to the public interest. Evidently,
the Bank suffered prejudice for neither money nor
the goods were turned over the Bank.
LANDL & COMPANY (PHIL.) INC., PERCIVAL
G. LLABAN and MANUEL P. LUCENTE
vs.
METROPOLITAN BANK & TRUST COMPANY
Facts :
Respondent Metropolitan Bank and Trust Company
(Metrobank) filed a complaint for sum of money
against Landl and Company (Phil.) Inc. (Landl) and
its directors, Percival G. Llaban and Manuel P.
Lucente. Respondent alleged that petitioner
corporation is engaged in the business of selling
imported 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 the
approval of petitioner corporation's application for
the 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 executed
a Deed of Assignment in favor of respondent bank
to cover the amount of petitioner corporation's
obligation to the bank. Upon compliance with these
requisites, respondent bank opened an irrevocable
letter of credit for the petitioner corporation.
To secure the indebtedness of petitioner
corporation, respondent bank required the
execution of a Trust Receipt in an amount
equivalent to the letter of credit, on the condition
that petitioner corporation would hold the goods in
trust for respondent bank, with the right to sell the
goods and the obligation to turn over to respondent
bank the proceeds of the sale, if any. If the goods
remained unsold petitioner corporation had the
further obligation to return them to respondent
bank. Upon arrival of the goods in the Philippines,
petitioner corporation took possession and custody
thereof.
Petitioner corporation defaulted in the payment of
its obligation to respondent bank and failed to turn
over the goods to the latter. Respondent bank
demanded that petitioners, as entrustees, turn over
the goods subject of the trust receipt which was
turned over by the petitioners.
The goods were sold at a public auction with
respondent bank as the highest bidde 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 their
obligation. After petitioners failed to do so,
respondent bank instituted the case to collect the
said deficiency.
Petitioners appealed to the Court of Appeals, raising
the issues of: (1) whether or not respondent bank
has the right to recover any deficiency after it has
retained possession of and subsequently effected a
public auction sale of the goods covered by the
trust receipt; (2) whether or not respondent bank is
entitled to the amount of P3,000.00 as and for
litigation expenses and costs of the suit; and (3)
whether or not respondent bank is entitled to the
award of attorney's fees.
Issue:
Whether or not the respondent had the right to
claim the deficiency from petitioners
notwithstanding the fact that the goods covered by
the trust receipt were fully turned over to
respondent.
Ruling:
28
A trust receipt is inextricably linked with the primary
agreement between the parties. Time and again,
we have emphasized that a trust receipt agreement
is merely a collateral agreement, the purpose of
which is to serve as security for a loan.
Respondent bank's repossession of the properties
and subsequent sale of the goods were completely
in accordance with its statutory and contractual
rights upon default of petitioner corporation.
The second paragraph of Section 7 expressly
provides that the entrustee shall be liable to the
entruster for any deficiency after the proceeds of
the sale have been applied to the payment of the
expenses of the sale, the payment of the expenses
of 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 sale
were insufficient to satisfy entirely petitioner
corporation's indebtedness to the respondent bank.
Respondent bank was thus well within its rights to
institute the instant case to collect the deficiency.
ROSARIO TEXTILE MILLS CORPORATION and
EDILBERTO YUJUICO
vs.
HOME BANKERS SAVINGS AND TRUST
COMPANY
Facts :
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 RTMC’s
indebtedness to the bank. 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 contend that they should be
absolved from liability. They claimed that although
the grant of the credit line and the execution of the
suretyship agreement are admitted, 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.
Issue:
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
Ruling:
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 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.
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.
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ
vs.
THE COURT OF APPEALS and
BANK OF THE PHILIPPINE ISLANDS
29
Facts :
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz
(petitioners') were Vice-President for Operations
and Vice-President/Treasurer, respectively, of El
Oro Engraver Corporation (El Oro Corporation'). El
Oro Corporation had a contract with the Philippine
Army to supply the latter with 'survival bolos.
To finance the purchase of the raw materials for
the 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 the
letters of credit, petitioners signed trust receipts in
favor of respondent bank. Petitioner Jose C. Tupaz
IV 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 and
to remit the proceeds to respondent bank, if sold,
or to return the goods, if not sold.
In another letter of credit, petitioners signed in
their capacities as officers of El Oro Corporation, a
trust receipt corresponding to such Letter of Credit.
Petitioners bound themselves to sell the goods
covered by that letter of credit and to remit the
proceeds to respondent bank, if sold, or to return
the goods, if not sold.
After Tanchaoco Incorporated and Maresco
Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former.
Petitioners did not comply with their undertaking
under the trust receipts. Respondent bank made
several demands for payments but El Oro
Corporation made partial payments only. El Oro
Corporation replied to the demand for payment that
it could not fully pay its debt because the Armed
Forces of the Philippines had delayed paying for the
survival bolos. Respondent bank charged
petitioners with estafa under Section 13,
Presidential Decree No. 115 or Trust Receipts Law
(PD 115).
Issue:
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.
Ruling:
A corporation, being a juridical entity, may act only
through its directors, officers, and employees.
Debts incurred by these individuals, acting as such
corporate agents, are not theirs but the direct
liability of the corporation they represent. As an
exception, directors or officers are personally liable
for the corporation's debts only if they so
contractually agree or stipulate.
Petitioners signed below this clause as officers of El
Oro Corporation. Thus, under petitioner Petronila
Tupaz's signature are the words Vice-PresTreasurer
and under petitioner Jose Tupaz's signature are the
words Vice-PresOperations. By so signing that trust
receipt, 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 criminal
action, 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 recover
payment in Criminal Case. Although the trial court
acquitted petitioner Jose Tupaz, his acquittal did
not extinguish his civil liability. His liability arose not
from the criminal act of which he was acquitted (ex
delito) but from the trust receipt contract (ex
contractu).
DEVELOPMENT BANK OF THE PHILIPPINES
vs.
PRUDENTIAL BANK
Facts :
In 1973, Lirag Textile Mills, Inc. (Litex) opened an
irrevocable commercial letter of credit with
respondent Prudential Bank in connection with its
importation of 5,000 spindles for spinning
machinery with drawing frame, simplex fly frame,
ring spinning frame and various accessories, spare
parts and tool gauge. These were released to Litex
under covering 'trust receipts' it executed in favor
of Prudential Bank. Litex installed and used the
items in its textile mill located in Montalban, Rizal.
30
DBP granted a foreign currency loan to Litex. To
secure the loan, Litex executed real estate and
chattel mortgages on its plant site in Montalban,
Rizal, including the buildings and other
improvements, machineries and equipments there.
Among the machineries and equipments mortgaged
in favor of DBP were the articles covered by the
'trust receipts.
Prudential Bank learned about DBP's plan for the
overall rehabilitation of Litex. Prudential Bank
notified DBP of its claim over the various items
covered by the 'trust receipts' which had been
installed and used by Litex in the textile mill.
Prudential Bank 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.
For the failure of Litex to pay its obligation, DBP
extra-judicially foreclosed on the real estate and
chattel mortgages, including the articles claimed by
Prudential Bank and DBP acquired the foreclosed
properties as the highest bidder.
Prudential Bank wrote a letter to DBP reasserting its
claim over the items covered by 'trust receipts' in its
name and advising DBP not to include them in the
auction. It also demanded the turn-over of the
articles or alternatively, the payment of their value.
DBP requested documents to enable it to evaluate
Prudential Bank's claim which was provided by the
latter. DBP informed Prudential Bank that its claim
had been referred to DBP's legal department and
instructed Prudential Bank to get in touch with its
chief legal counsel. There being no concrete action
on DBP's part, Prudential Bank, in a letter made a
final demand on DBP for the turn-over of the
contested articles or the payment of their value.
Without the knowledge of Prudential Bank,
however, DBP sold the Litex textile mill, as well as
the machineries and equipments therein, to Lyon
Textile Mills, Inc. (Lyon). Since its demands
remained unheeded, Prudential Bank filed a
complaint for a sum of money with damages
against DBP.
Issue:
Whether or not the mortgagee has a right over the
goods subject of the trust receipt agreement which
was mortgaged by the entrustee
Ruling:
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.
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. Article
2085 further mandates that the person constituting
the pledge or mortgage must have the free disposal
of his property, and in the absence thereof, that he
be legally authorized for the purpose.
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. Thus, DBP could not be
considered either as a mortgagee or as a purchaser
in 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 did
not have over the disputed items. Corollarily, DBP
could not acquire a right greater than what its
predecessor-in-interest had. The spring cannot rise
higher than its source. 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 Bank's demand. By its failure to
pay or return them despite Prudential Bank's
repeated demands and by selling them to Lyon
without Prudential Bank's knowledge and
conformity, DBP became a trustee ex maleficio.
ALFREDO CHING
vs.
THE SECRETARY OF JUSTICE, ASST. CITY
PROSECUTOR ECILYN BURGOS-VILLAVERT,
JUDGE EDGARDO SUDIAM; RIZAL
COMMERCIAL BANKING CORP. and THE
PEOPLE OF THE PHILIPPINES
Facts :
31
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 to
finance its importation of assorted goods.
Respondent bank approved the application, and
irrevocable letters of credit were issued in favor of
petitioner. The goods were purchased and delivered
in trust to PBMI. Petitioner signed 13 trust receipts
as surety, acknowledging delivery of the goods.
Under the receipts, petitioner agreed to hold the
goods in trust for the said bank, with authority to
sell but not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as received,
to apply against the relative acceptances and
payment of other indebtedness to respondent bank.
In case the goods remained unsold within the
specified period, the goods were to be returned to
respondent bank without any need of demand.
Thus, said "goods, manufactured products or
proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable
of identification" were respondent bank’s property.
When the trust receipts matured, petitioner failed
to return the goods to respondent bank, or to
return their value despite demands. Thus, the bank
filed a criminal complaint for estafa against
petitioner.
Issue:
Whether or not the officers of the corporation can
be held civilly and criminally liable of estafa for
violation of the trust receipts law
Ruling:
Though the entrustee is a corporation,
nevertheless, the law specifically makes the
officers, employees or other officers or persons
responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of
directors, officers, or other officials or employees
responsible for the offense. The rationale is that
such officers or employees are vested with the
authority and responsibility to devise means
necessary 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 violations
of the law.
If the crime is committed by a corporation or other
juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense
shall be charged and penalized for the crime,
precisely because of the nature of the crime and
the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment.
However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined.
A crime is the doing of that which the penal code
forbids to be done, or omitting to do what it
commands. A necessary part of the definition of
every crime is the designation of the author of the
crime upon whom the penalty is to be inflicted.
When a criminal statute designates an act of a
corporation or a crime and prescribes punishment
therefor, it creates a criminal offense which,
otherwise, would not exist and such can be
committed only by the corporation. But when a
penal statute does not expressly apply to
corporations, it does not create an offense for
which a corporation may be punished. On the other
hand, if the State, by statute, defines a crime that
may be committed by a corporation but prescribes
the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other
persons responsible for the offense, only such
individuals will suffer such penalty. Corporate
officers or employees, through whose act, default
or omission the corporation commits a crime, are
themselves individually guilty of the crime.
The principle applies whether or not the crime
requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves
commit the crime and to those, who, by virtue of
their managerial positions or other similar relation
to the corporation, could be deemed responsible for
its commission, if by virtue of their relationship to
the corporation, they had the power to prevent the
act. Moreover, all parties active in promoting a
crime, whether agents or not, are principals.
Whether such officers or employees are benefited
by their delictual acts is not a touchstone of their
criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in
question. He cannot, thus, hide behind the cloak of
the separate corporate personality of PBMI. In the
32

words of Chief Justice Earl Warren, a corporate

officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.