Trust Receipts Law

Trust Receipts Law (Pres. Decree No. 115) Trust Receipts • (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt (PD 115, Section 3(j) ) • A document in w/c is expressed a security transaction, whereunder the lender, having no prior title in the goods on which the lien is to be given, and not having possession w/c remains in the borrower, lends his money to the borrower on security of goods, which the borrower is privileged to sell clean of the lien on the agreement to pay all or part of the proceeds of the sale to the lender (Black’s law dictionary [1968 edition],p.1683) Trust Receipts Transaction It is any transaction between the entruster and entrustee: 1. Whereby the entruster who owns or holds absolute title or security interests over certain specified goods, documents or instrument, releases the same to the possession of entrustee upon the latter’s execution of a TR agreement. 2. Wherein the entrustee binds himself to hold the designated goods in trust for the entruster and, in case of default, to sell such goods, documents or instrument with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to it or to turn over the goods, documents or instrument itself if not sold. (Sec. 4, P.D. 115) Purpose of the Law 1. To safeguard commercial transactions 2. To offer additional layer of security to the lending bank 3. To regulate trust receipt transactions in order to assure the protection of the rights and the enforcement of the obligations of the parties involved Parties to a Trust Receipt 1. Entruster » lender/financier » person holding title over the goods, documents or instruments subject of a trust receipt transaction; releases possession of the goods upon execution of trust receipt » not the owner of the goods, but merely a holder of security interest » if it is made to appear in the trust receipt as the owner of the goods purchased, it is merely theoretical, an artificial expedient and more of fiction than fact (Garcia vs. CA; Vintola vs. IBAA; PNB vs. Pineda); see, however, the contrary view of Prof. Catindig and the rulings in Colinares vs. CA and Prudential Bank vs. IAC 2. Entrustee » borrower/buyer/importer » person to whom the goods are delivered for sale or processing in trust, with the obligation to return the proceeds of sale of the goods or the goods themselves to the entruster » the owner of the goods purchased; in fact, the law imposes on him the risk of loss of the goods. Res perit domino. 3. Seller of the goods » not strictly and actually a party to the trust receipt transaction, but a party to the contract of sale with the buyer/importer (entrustee)

Importance and character of of Trust Receipts (see Nego Book of De Leon pp.604608) 1. Originally used in importing transactions 2. Convenient aid to commerce and trade 3. Full title vested in entruster 4. Title in entruster taken as security only 5. With both loan and security features 6. Entruster remains a lender and creditor 7. Letter of credit- trust receipt arrangement Difference of Trust Receipts and Letters Of Credit Trust Receipts the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt a document of release of goods to a customer by a bank

Letter of Credit Engagement by a bank or other person made at the request of a customer that the issuer will honor drafts and other demands for payment upon compliance with the conditions specified in the credit a document issued by a bank that guarantees payment to a seller for a specified amount, at a certain period of time.

Definition/concept of a trust receipt transaction 1. Loan/security feature - A trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987) NOTE: Loan feature Security feature -

– usually represented by a Letter of Credit the trust receipt proper (Vintola vs. IBAA)

Loan Feature A trust receipt has two features, the loan and security features. The loan is brought about by the fact that the entruster financed the importation or purchase of the goods under TR. Until and unless this loan is paid, the obligation to pay subsists. Security Feature A trust receipt is a security agreement pursuant to which the entruster acquires a “security interest” in the goods. Security interest, defined. It is property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. (Sec. 3)

The security interest is similar to 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. (Prudential Bank vs. NLRC) The entruster’s security interest is valid against all creditors for the duration of the trust receipt agreement (Sec. 12) “The title of the bank to the security is the one sought to be protected (by the law) and not the loan which is a separate and distinct agreement.” (Prudential

Bank vs. NLRC) 2. Ownership of the goods, documents and instruments under a trust receipt o The goods remain the importer’s property. Entrustee is factual owner. The bank does not become the real owner of the goods. It remains a lender and creditor. Entruster’s ownership is merely legal fiction (Abad vs CA) 3. Holder of the title o The Entruster takes full title to the goods at the very beginning – as soon as goods are brought and paid by him Rights of the entruster Sec.7. The entruster shall be entitled to:  the proceeds from the sale of the goods, documents or instruments to the extent of the amount owing to the entruster or as appears in the trust receipt, or  to the return of the goods, documents or instruments in case of non-sale, and  to the enforcement of all other rights conferred on him in the trust receipt to cancel the trust and take possession of the goods etc. in case of default or breach of the terms of the TR and to have these sold in a private or public auction Innocent purchasers for value •

The only exception to the entruster’s security interest is when the goods are in the hands of an innocent purchaser for value and in good faith Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.

Validity of the security interest as against the creditors of the entrustee Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

1. Nature of security interest of entruster – the security interest of the entruster 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 2. Right of the entruster to cancel trust optional – Section 2 (2nd par) provides statutory remedy available to an entruster in the event of default or failure of the entrustee to comply with terms and conditions of the TR 3. Right of the entruster to goods as against entrustee and 3rd persons – the law warrants the validity of the entruster’s security interest in the goods pursuant to the written terms of the TR as against all creditors and entrustee for the duration of the TR agreement. Obligations of the entrustee Sec. 9. » hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; » receive the proceeds in trust for the entruster and turn over the same to the extent of the amount owing to the entruster or as appears on the trust receipt; » insure the goods for their total value against loss from fire, theft, pilferage or other casualties; » keep said goods or proceeds separate and capable of identification;

» return the goods, documents or instruments in the event of non-sale or upon demand; » observe all other terms and conditions of the trust receipt Risk of Loss borne by entrustee – in any event , the entrustee bears risk of loss (sec.10) Sec. 10. The risk of loss shall be borne by the entrustee ; irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof Penal sanction if offender is a corporation -

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious, corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law. (Ong vs. CA, G.R. No. 119858, April 29, 2003) Section 13 …… constitute the crime of estafa, punishable under the provisions of Article Three 315 paragraph 1 (b) of Act Numbered 3815 , as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

Remedies available • Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by the imposition of penal sanctions (Tiomico vs. Court of Appeals,1999). • The offense is malum prohibitum. There is no need to prove damage to the entrustor. (Metropolitan Bank vs. Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981) • Offense: estafa under Art 315 of the Revised Penal Code. • Also, liable for damages under Art. 33, CC (Prudential vs. IAC, PP vs. Cuervo, MBTC vs. Tonda) • Effect of compliance: » before criminal charge – no criminal liability » after charge, before conviction – extinguishments of criminal liability • Liability of entrustee accrues on his failure to comply with his obligation to return. It is not absolutely necessary that the entruster cancels the trust and take possession of the goods to be able to enforce his rights under this law. • PD 115 allows the bank to take possession of the goods covered by the trust receipts. Thus, even though the bank took possession of the goods covered by the trust receipts, the entrustees remained liable for the entire amount of the loans covered by the trust receipts (Phil. Blooming vs. CA) Cases: Development Bank of the Philippines v. Prudential Bank, G.R. No. 143772, Nov. 22, 2005

Facts: Lirag textile Mills, Inc. opened an irrevocable commercial letter of credit with Prudential Bank for US $498,000.00 in connection with its importation of 5,000 spindles for spinning machinery. These were released to Litex under covering “trust receipts (TR)” it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. DBP granted a foreign currency loan in the amount of US $4,807,551 to Litex. To secure the loan , Litex executed real state and chattel mortgage on its plant site in Montalban, Rizal. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the TR. During the rehabilitation of Litex, Prudential Bank notified DBP of its claim over the items covered by the TR. It informed DBP that it was the absolute and juridical owner on the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP. For the failure of the Litex to pay its obligation, DBP extra-judicially foreclosed on the real state and chattel mortgages including the articles claimed by the Prudential Bank. During the foreclosure sale, DBP acquired foreclosed properties as the highest bidder. Despite negotiations between DBP and Prudential Bank, DBP sold the Litex textile mill to Lyon Textile Mill Inc. Prudential Bank filed a complaint for a sum of money with damages against DBP. The TC decided in favor of Prudential Bank. It ruled that DBP held no better right than Litex and is thus bound to turn over whatever amount was due to Prudential Bank. DBP is a mere trustee of Prudential Bank and an agent of Litex. The CA affirmed. It applied the provisions of PD 115 and held that ownership over the contested articles belonged to Prudential Bank as entruster not to Litex. Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn-over the proceeds to Prudential Bank, being the party that advanced the payment for them. Issue: 1. WON the transaction was a TR? 2. WON entrustee has authority to dispose goods covered by TR? Held: Yes. The various agreements between Prudential Bank and Litex commonly denominated as TR were valid. As the CA ruled , their provision didn’t contravene to law, morals, good custom, public order or public policy. The articles were owned by the 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. The entrustee has NO authority to mortgage goods covered by trust receipt. Art.2085(2) CC 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. Further Art. 2085(3) 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 chattel mortgage. Their inclusion in the mortgage was void and of no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP couldn’t not be considered 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 couldn’t transfer a right that it didn’t have over the disputed items. DBP could not acquire a right greater than what its predessor –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 knowledge and conformity, DBP became trustee ex maleficio.

Landl & Company (Phil.) Inc., et al v. Metropolitan Bank, G.R. No. 159622, July 30, 2004 Facts: The business of the petitioner is importation of welding rods. Landl opened a LC with Metropolitan bank and as security, a trust receipt was executed by Landl in favor of the Metropolitan bank. The TR matured but Landl was unable to pay Metropolitan Bank so the former returned the goods to Metropolitan bank to avoid criminal liability (estafa). Metropolitan bank sold the goods in an auction but the proceeds were not sufficient to

satisfy the entire obligation of the petitioner. Issue: 1. Can the Metropolitan Bank claim the deficiency? 2. Can we not consider the return of the goods in the full satisfaction of the Metropolitan’s claim against the petitioner? Ruling: 1. Yes. Sec.7 of the TR Law provides that in case of sale by the entruster of the possessed goods, the entrustee shall receive any surplus but shall be liable to the entruster for any deficieny 2. No. Repossession of the goods is not intended to transfer ownership of the goods (dacion en pago does not lie) but as a security for the loan obligation of the debtor that arose from the TR agreement Anthony L. Ng v. People of the Philippines, G.R. NO. 173905, April 23, 2010 In the case of Anthony L. Ng vs. People of the Philippines, GR NO. 173905, April 23, 2010, Anthony was engaged in the business of building and fabricating telecommunications towers. He applied for a credit line with Asiatrust wherein Asiatrust will provide Anthony with goods to be used for his business. To approve his loan application, Anthony was asked by Asiatrust to sign several documents including a Trust Receipt Agreement. Petitioner received the goods; however, he failed to pay his loan to Asiatrust. Thus, Asiatrust filed a case for Estafa against Anthony for violating their Trust Receipt Agreement, which is to sell the goods and return the profits of the sale, or to return the goods should he fail to sell them. In this case, the Supreme Court decided that Anthony Ng DID NOT commit Estafa. First of all, it should be determined whether or not the agreement is a Trust Receipt Agreement. If it is, then Anthony has the obligation to deliver the price of the sale if he has sold the goods, and if he was not able to do so, then he should return the goods to Asiatrust. However, if their Agreement was not a Trust Receipt Agreement, then Anthony is not under any obligation to return anything to Asiatrust, his only obligation is to pay the loan. The Supreme Court said that the agreement was not a Trust Receipt. The goods received by Anthony were never intended for sale, it was intended to be used for his business. Therefore, Anthony was not under any obligation to return the goods or the price of their sale – so, there was no abuse of confidence to speak of.