Development Bank of the Philippines v Prudential Bank G.R.

No. 143772
Litex could not have subjected the goods under the trust receipt to a chattel mortgage. Thus, the
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

Facts: Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent
Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for
spinning machinery 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. 9 years later, DBP granted a foreign currency loan in the amount of
US$4,807,551 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.” Sometime in June 1982, Prudential Bank learned about DBP’s plan for the overall
rehabilitation of Litex. In a July 14, 1982 letter, 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. During the foreclosure sale held on April 19, 1983, DBP acquired the
foreclosed properties as the highest bidder. Learning of the intended public auction, Prudential Bank
wrote a letter dated September 6, 1984 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.

Issue: Whether or not the chattel mortgage covers the goods under the trust receipt

Held: No. Article 2085 (2) 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 things pledged or mortgaged.
Article 2085 (3) 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. As a consequence of the release of the goods and the
execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the
designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of
them and (2) to turn over to the entruster either the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt, or 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. In the case of goods, they may also be released for other purposes substantially equivalent to (a)
their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose of
ultimate sale, in which case the entruster retains his title over the said goods whether in their original or
processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the
loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or
necessary to their sale. Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his
execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their
ultimate or subsequent sale.
*

Here, Litex was not engaged in the business of selling spinning machinery, its accessories and spare
parts but in manufacturing and producing textile and various kinds of fabric. The articles were not released
to Litex to be sold. Nor was the transfer of possession intended to be a preliminary step for the said goods
to be ultimately or subsequently sold. Instead, the contemporaneous and subsequent acts of both Litex
and Prudential Bank showed that the imported articles were released to Litex to be installed in its textile
mill and used in its business.
Landl Co vs.METROPOLITAN BANK & TRUST COMPANY.
G.R. No. 159622 July 30, 2004
MARCH 16, 2014LEAVE A COMMENT

The possession by the bank of the goods under the trust receipts does not bar collection of the loan. 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.
Facts: Landl Co opened Commercial Letter of Credit No. 4998 with respondent bank, in the amount of
US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the time the transaction was
consummated. The letter of credit was opened to purchase various welding rods and electrodes from Perma
Alloys, Inc., New York, U.S.A., 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 to the
extent of P400,000.00.

Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof.
On the maturity date of the trust receipt, petitioner corporation defaulted in the payment of its obligation to
respondent bank and failed to turn over the goods to the latter. The goods were sold for P30,000.00 to
respondent bank as the highest bidder. 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
instant case to collect the said deficiency.

Issue: Whether possession by the bank of the goods under the trust receipts does bars collection of the loan
deficiency.

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.

*This Court––in Ng v. People⁠2 and Land Bank of the Philippines v. Perez,⁠3 cases which are in all
four corners the same as the instant case––ruled that the fact that the entruster bank knew even
before the execution of the trust receipt agreements that the construction materials covered were
never intended by the entrustee for resale or for the manufacture of items to be sold is sufficient
to prove that the transaction was a simple loan and not a trust receipts transaction.

Trust receipt explained; no estafa; no

misappropriation, deceit, or abuse of confidence.
See -

"x x x.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or 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, or for other purposes substantially
equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust
receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a
manner preliminary or necessary to their sale[.]

There are two obligations in a trust receipt transaction. The first is covered by the
provision that refers to money under the obligation to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision referring to merchandise received
under the obligation to return it (devolvera) to the owner. Thus, under the Trust Receipts
Law,[22] intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of
the sale of goods covered by the trust receipt to the entruster; or (2) when the entrustee fails to
return the goods under trust, if they are not disposed of in accordance with the terms of the trust
receipts.[23]

In all trust receipt transactions, both obligations on the part of the trustee exist in the
alternative – the return of the proceeds of the sale or the return or recovery of the goods,
whether raw or processed.[24] When both parties enter into an agreement knowing that the return
of the goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only
obligation actually agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan,[25]where the borrower is obligated to pay the
bank the amount spent for the purchase of the goods.

Article 1371 of the Civil Code provides that “[i]n order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally considered.”
Under this provision, we can examine the contemporaneous actions of the parties rather than
rely purely on the trust receipts that they signed in order to understand the transaction through
their intent.

We note in this regard that at the onset of these transactions, LBP knew that ACDC was
in the construction business and that the materials that it sought to buy under the letters of credit
were to be used for the following projects: the Metro Rail Transit Project and the Clark
Centennial Exposition Project.[26] LBP had in fact authorized the delivery of the materials on the
construction sites for these projects, as seen in the letters of credit it attached to its
complaint.[27] Clearly, they were aware of the fact that there was no way they could recover the
buildings or constructions for which the materials subject of the alleged trust receipts had been
used. Notably, despite the allegations in the affidavit-complaint wherein LBP sought the return
of the construction materials,[28] its demand letter dated May 4, 1999 sought the payment of the
balance but failed to ask, as an alternative, for the return of the construction materials or the
buildings where these materials had been used.[29]

The fact that LBP had knowingly authorized the delivery of construction materials to a
construction site of two government projects, as well as unspecified construction sites,
repudiates the idea that LBP intended to be the owner of those construction materials. As a
government financial institution, LBP should have been aware that the materials were to be
used for the construction of an immovable property, as well as a property of the public
domain. As an immovable property, the ownership of whatever was constructed with those
materials would presumably belong to the owner of the land, under Article 445 of the Civil
Code which provides:

Article 445. Whatever is built, planted or sown on the land of another and the improvements or repairs
made thereon, belong to the owner of the land, subject to the provisions of the following articles.

Even if we consider the vague possibility that the materials, consisting of cement, bolts and
reinforcing steel bars, would be used for the construction of a movable property, the ownership
of these properties would still pertain to the government and not remain with the bank as they
would be classified as property of the public domain, which is defined by the Civil Code as:
 Article 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some public
service or for the development of the national wealth.

In contrast with the present situation, it is fundamental in a trust receipt transaction that the
person who advanced payment for the merchandise becomes the absolute owner of said
merchandise and continues as owner until he or she is paid in full, or if the goods had already
been sold, the proceeds should be turned over to him or to her.[30]

Thus, in concluding that the transaction was a loan and not a trust receipt, we noted
in Colinaresthat the industry or line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not importers acquiring goods for
resale.[31] Indeed, goods sold in retail are often within the custody or control of the trustee until
they are purchased. In the case of materials used in the manufacture of finished products, these
finished products – if not the raw materials or their components – similarly remain in the
possession of the trustee until they are sold. But the goods and the materials that are used for a
construction project are often placed under the control and custody of the clients employing the
contractor, who can only be compelled to return the materials if they fail to pay the contractor
and often only after the requisite legal proceedings. The contractor’s difficulty and uncertainty
in claiming these materials (or the buildings and structures which they become part of), as soon
as the bank demands them, disqualify them from being covered by trust receipt agreements.

Based on these premises, we cannot consider the agreements between the parties in this
case to be trust receipt transactions because (1) from the start, the parties were aware that
ACDC could not possibly be obligated to reconvey to LBP the materials or the end product for
which they were used; and (2) from the moment the materials were used for the government
projects, they became public, not LBP’s, property.

Since these transactions are not trust receipts, an action for estafa should not be brought
against the respondents, who are liable only for a loan. In passing, it is useful to note that this is
the threat held against borrowers that Retired Justice Claudio Teehankee emphatically opposed
in his dissent in People v. Cuevo,[32] restated in Ong v. CA, et al.:[33]

The very definition of trust receipt x x x sustains the lower court’s rationale in dismissing the information that
the contract covered by a trust receipt is merely a secured loan. The goods imported by the small importer and
retail dealer through the bank’s financing remain of their own property and risk and the old capitalist orientation
of putting them in jail for estafa for non-payment of the secured loan (granted after they had been fully
investigated by the bank as good credit risks) through the fiction of the trust receipt device should no longer be
permitted in this day and age.

As the law stands today, violations of Trust Receipts Law are criminally punishable, but
no criminal complaint for violation of Article 315, paragraph 1(b) of the Revised Penal Code, in
relation with P.D. 115, should prosper against a borrower who was not part of a genuine trust
receipt transaction.

Misappropriation or abuse of confidence is absent in this case.

Even if we assume that the transactions were trust receipts, the complaint against the
respondents still should have been dismissed. 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 singularly seek to enforce
payment of the loan, as “there can be no violation of [the] right against imprisonment for non-
payment of a debt.”[34]

In order that the respondents “may be validly prosecuted for estafa under Article 315,
paragraph 1(b) of the Revised Penal Code,[35] in relation with Section 13 of the Trust Receipts
Law, the following elements must be established: (a) they received the subject goods in trust or
under the obligation to sell the same and to remit the proceeds thereof to [the trustor], or to
return the goods if not sold; (b) they misappropriated or converted the goods and/or the
proceeds of the sale; (c) they performed such acts with abuse of confidence to the damage and
prejudice of Metrobank; and (d) demand was made on them by [the trustor] for the remittance
of the proceeds or the return of the unsold goods.”[36]

In this case, no dishonesty or abuse of confidence existed in the handling of the

construction materials.

In this case, the misappropriation could be committed should the entrustee fail to turn
over the proceeds of the sale of the goods covered by the trust receipt transaction or fail to
return the goods themselves. The respondents could not have failed to return the proceeds since
their allegations that the clients of ACDC had not paid for the projects it had undertaken with
them at the time the case was filed had never been questioned or denied by LBP. What can
only be attributed to the respondents would be the failure to return the goods subject of the trust
receipts.
 We do not likewise see any allegation in the complaint that ACDC had used the
construction materials in a manner that LBP had not authorized. As earlier pointed out, LBP
had authorized the delivery of these materials to these project sites for which they were
used. When it had done so, LBP should have been aware that it could not possibly recover the
processed materials as they would become part of government projects, two of which (the
Metro Rail Transit Project and the Quezon Power Plant Project) had even become part of the
operations of public utilities vital to public service. It clearly had no intention of getting these
materials back; if it had, as a primary government lending institution, it would be guilty of
extreme negligence and incompetence in not foreseeing the legal complications and public
inconvenience that would arise should it decide to claim the materials. ACDC’s failure to
return these materials or their end product at the time these “trust receipts” expired could not be
attributed to its volition. No bad faith, malice, negligence or breach of contract has been
attributed to ACDC, its officers or representatives. Therefore, absent any abuse of confidence
or misappropriation on the part of the respondents, the criminal proceedings against them for
estafa should not prosper.

In Metropolitan Bank,[37] we affirmed the city prosecutor’s dismissal of a complaint for

violation of the Trust Receipts Law. In dismissing the complaint, we took note of the Court of
Appeals’ finding that the bank was interested only in collecting its money and not in the return
of the goods. Apart from the bare allegation that demand was made for the return of the goods
(raw materials that were manufactured into textiles), the bank had not accompanied its
complaint with a demand letter. In addition, there was no evidence offered that the respondents
therein had misappropriated or misused the goods in question.

x x x."

Republic of the Philippines

SUPREME COURT

THIRD DIVISION
G.R. No. 143772 November 22, 2005

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
PRUDENTIAL BANK, Respondent.

DECISION

CORONA, J.:

Development Bank of the Philippines (DBP) assails in this petition for review on certiorari under Rule 45 of
the Rules of Court the December 14, 1999 decision1 and the June 8, 2000 resolution of the Court of
Appeals in CA-G.R. CV No. 45783. The challenged decision dismissed DBP’s appeal and affirmed the
February 12, 1991 decision of the Regional Trial Court of Makati, Branch 137 in Civil Case No. 88-931 in
toto, while the impugned resolution denied DBP’s motion for reconsideration for being pro forma.

In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent
Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for spinning
machinery with 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.

On October 10, 1980, DBP granted a foreign currency loan in the amount of US$4,807,551 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."

Sometime in June 1982, Prudential Bank learned about DBP’s plan for the overall rehabilitation of Litex. In
a July 14, 1982 letter, 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. During the foreclosure sale held on April 19,
1983, DBP acquired the foreclosed properties as the highest bidder.

Subsequently, DBP caused to be published in the September 2, 1984 issue of the Times Journal an
invitation to bid in the public sale to be held on September 10, 1984. It called on interested parties to
submit bids for the sale of the textile mill formerly owned by Litex, the land on which it was built, as well as
the machineries and equipments therein. Learning of the intended public auction, Prudential Bank wrote a
letter dated September 6, 1984 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.

An exchange of correspondences ensued between Prudential Bank and DBP. In reply to Prudential
Bank’s September 6, 1984 letter, DBP requested documents to enable it to evaluate Prudential Bank’s
claim. On September 28, 1994, Prudential Bank provided DBP the requested documents. Two months
later, Prudential Bank followed up the status of its claim. In a letter dated December 3, 1984, 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 dated July 30, 1985, 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) on June 8, 1987.

Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money with
damages against DBP with the Regional Trial Court of Makati, Branch 137, on May 24, 1988. The
complaint was docketed as Civil Case No. 88-931.

On February 12, 1991, the trial court decided2 in favor of Prudential Bank. Applying the provisions of PD
115, otherwise known as the "Trust Receipts Law," it ruled:

When PRUDENTIAL BANK released possession of the subject properties, over which it holds absolute
title to LITEX upon the latter’s execution of the trust receipts, the latter was bound to hold said properties
in trust for the former, and (a) to sell or otherwise dispose of the same and to turn over to PRUDENTIAL
BANK the amount still owing; or (b) to return the goods if unsold. Since LITEX was allowed to sell the
properties being claimed by PRUDENTIAL BANK, all the more was it authorized to mortgage the same,
provided of course LITEX turns over to PRUDENTIAL BANK all amounts owing. When DBP, well aware of
the status of the properties, acquired the same in the public auction, it was bound by the terms of the trust
receipts of which LITEX was the entrustee. Simply stated, DBP held no better right than LITEX, and is
thus bound to turn over whatever amount was due PRUDENTIAL BANK. Being a trustee ex maleficio of
PRUDENTIAL BANK, DBP is necessarily liable therefor. In fact, DBP may well be considered as an agent
of LITEX when the former sold the properties being claimed by PRUDENTIAL BANK, with the
corresponding responsibility to turn over the proceeds of the same to PRUDENTIAL BANK. 3 (Citations
omitted)

The dispositive portion of the decision read:

WHEREFORE, judgment is hereby rendered ordering defendant DEVELOPMENT BANK OF THE

PHILIPPINES to pay plaintiff PRUDENTIAL BANK:

a) P3,261,834.00, as actual damages, with interest thereon computed from 10 August 1985 until the
entire amount shall have been fully paid;

b) P50,000.00 as exemplary damages; and

c) 10% of the total amount due as and for attorney’s fees.

SO ORDERED.

Aggrieved, DBP filed an appeal with the Court of Appeals. However, the appellate court dismissed the
appeal and affirmed the decision of the trial court in toto. It applied the provisions of PD 115 and held that
ownership over the contested articles belonged to Prudential Bank as entrustor, 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.

On DBP’s argument that the disputed articles were not proper objects of a trust receipt agreement, the
Court of Appeals ruled that the items were part of the trust agreement entered into by and between
Prudential Bank and Litex. Since the agreement was not contrary to law, morals, public policy, customs
and good order, it was binding on the parties.

Moreover, the appellate court found that DBP was not a mortgagee in good faith. It also upheld the finding
of the trial court that DBP was a trustee ex maleficio of Prudential Bank over the articles covered by the
"trust receipts."
DBP filed a motion for reconsideration but the appellate court denied it for being pro forma. Hence, this
petition.

Trust receipt transactions are governed by the provisions of PD 115 which defines such a transaction as
follows:

Section 4. What constitutes a trust receipt transaction. – A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt or 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, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver them to a
principal; or (c) to effect the consummation of some transactions involving delivery to a depository or
register; or (d) to effect their presentation, collection or renewal.

xxxxxxxxx

In a trust receipt transaction, the goods are released by the entruster (who owns or holds absolute title or
security interests over the said goods) to the entrustee on the latter’s execution and delivery to the
entruster of a trust receipt. The trust receipt evidences the absolute title or security interest of the
entruster over the goods. As a consequence of the release of the goods and the execution of the trust
receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the designated goods,
documents or instruments in trust for the purpose of selling or otherwise disposing of them and (2) to turn
over to the entruster either the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt, or 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. In the
case of goods, they may also be released for other purposes substantially equivalent to (a) their sale or
the procurement of their sale; or (b) their manufacture or processing with the purpose of ultimate sale, in
which case the entruster retains his title over the said goods whether in their original or processed form
until the entrustee has complied fully with his obligation under the trust receipt; or (c) the loading,
unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or
necessary to their sale.4 Thus, in a trust receipt transaction, the release of the goods to the entrustee, on
his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with
their ultimate or subsequent sale.

Here, Litex was not engaged in the business of selling spinning machinery, its accessories and spare
parts but in manufacturing and producing textile and various kinds of fabric. The articles were not released
to Litex to be sold. Nor was the transfer of possession intended to be a preliminary step for the said goods
to be ultimately or subsequently sold. Instead, the contemporaneous and subsequent acts of both Litex
and Prudential Bank showed that the imported articles were released to Litex to be installed in its textile
mill and used in its business. DBP itself was aware of this. To support its assertion that the contested
articles were excluded from goods that could be covered by a trust receipt, it contended:

First. That the chattels in controversy were procured by DBP’s mortgagor Lirag Textile Mills ("LITEX") for
theexclusive use of its textile mills. They were not procured -

(a) to sell or otherwise procure their sale;

(b) to manufacture or process the goods with the

purpose of ultimate sale.5 (emphasis supplied)

Hence, the transactions between Litex and Prudential Bank were allegedly not trust receipt transactions
within the meaning of PD 115. It follows that, contrary to the decisions of the trial court and the appellate
court, the transactions were not governed by the Trust Receipts Law.

We disagree.

The various agreements between Prudential Bank and Litex commonly denominated as "trust receipts"
were valid. As the Court of Appeals correctly ruled, their provisions did not contravene the law, morals,
good customs, public order or public policy.

The agreements uniformly provided:

Received, upon the Trust hereinafter mentioned from the PRUDENTIAL BANK (hereinafter referred to as
BANK) the following goods and merchandise, the property of said BANK specified in the bill of lading as
follows:

Amount of Bill Description of Security Marks & Nos. Vessel

and in consideration thereof, I/We hereby agree to hold said goods in trust for the BANK and as its
propertywith liberty to sell the same for its account but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds thereof) either by way of conditional
sale, pledge, or otherwise.

x x x x x x x x x6 (Emphasis supplied)

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 (2) 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 (3)
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 7 and
had no legal effect.8 There being no valid mortgage, there could also be no valid foreclosure or valid
auction sale.9 Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. 10
No one can transfer a right to another greater than what he himself has. 11 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.12 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.

On the matter of actual damages adjudged by the trial court and affirmed by the Court of Appeals, DBP
wants this Court to review the evidence presented during the trial and to reverse the factual findings of the
trial court. This Court is, however, not a trier of facts and it is not its function to analyze or weigh evidence
anew.13 The rule is that factual findings of the trial court, when adopted and confirmed by the CA, are
binding and conclusive on this Court and generally will not be reviewed on appeal. 14 While there are
recognized exceptions to this rule, none of the established exceptions finds application here.

With regard to the imposition of exemplary damages, the appellate court agreed with the trial court that
the requirements for the award thereof had been sufficiently established. Prudential Bank’s entitlement to
compensatory damages was likewise amply proven. It was also shown that DBP was aware of Prudential
Bank’s claim as early as July, 1982. However, it ignored the latter’s demand, included the disputed
articles in the mortgage foreclosure and caused their sale in a public auction held on April 19, 1983 where
it was declared as the highest bidder. Thereafter, in the series of communications between them, DBP
gave Prudential Bank the false impression that its claim was still being evaluated. Without acting on
Prudential Bank’s plea, DBP included the contested articles among the properties it sold to Lyon in June,
1987. The trial court found that this chain of events showed DBP’s fraudulent attempt to prevent
Prudential Bank from asserting its rights. It smacked of bad faith, if not deceit. Thus, the award of
exemplary damages was in order. Due to the award of exemplary damages, the grant of attorney’s fees
was proper.15

DBP’s assertion that both the trial and appellate courts failed to address the issue of prescription is of no
moment. Its claim that, under Article 1146 (1) of the Civil Code, Prudential Bank’s cause of action had
prescribed as it should be reckoned from October 10, 1980, the day the mortgage was registered, is not
correct. The written extra-judicial demand by the creditor interrupted the prescription of action. 16 Hence,
the four-year prescriptive period which DBP insists should be counted from the registration of the
mortgage was interrupted when Prudential Bank wrote the extra-judicial demands for the turn over of the
articles or their value. In particular, the last demand letter sent by Prudential Bank was dated July 30,
1988 and this was received by DBP the following day. Thus, contrary to DBP’s claim, Prudential Bank’s
right to enforce its action had not yet prescribed when it filed the complaint on May 24, 1988.

WHEREFORE, the petition is hereby DENIED. The December 14, 1999 decision and June 8, 2000
resolution of the Court of Appeals in CA-G.R. CV No. 45783 are AFFIRMED.

Costs against the petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 159622 July 30, 2004

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.

DECISION

YNARES-SANTIAGO, J.:

At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction, an entruster
which had taken actual and juridical possession of the goods covered by the trust receipt may
subsequently avail of the right to demand from the entrustee the deficiency of the amount covered by the
trust receipt.

As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as follows:

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 before the Regional Trial Court of Cebu City, Branch 19, docketed as Civil Case No. CEB-4895.

Respondent alleged that petitioner corporation is engaged in the business of selling imported welding rods
and alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 with respondent bank, in
the amount of US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the time the
transaction was consummated. The letter of credit was opened to purchase various welding rods and
electrodes from Perma Alloys, Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated March
10, 1983. 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 to the extent of P400,000.00, excluding
interest, in favor of respondent bank. Petitioner Lucente also executed a Deed of Assignment in the
amount of P35,000.00 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 on or before November 23, 1983.

Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof.

On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted in the
payment of its obligation to respondent bank and failed to turn over the goods to the latter. On July 24,
1984, respondent bank demanded that petitioners, as entrustees, turn over the goods subject of the trust
receipt. On September 24, 1984, petitioners turned over the subject goods to the respondent bank.
On July 31, 1985, in the presence of representatives of the petitioners and respondent bank, the goods
were sold at public auction. The goods were sold for P30,000.00 to respondent bank as the highest
bidder.

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 instant case to collect the said deficiency.

On March 31, 1997, after trial on the merits, the trial court rendered a decision, the dispositive portion of
which reads:

WHEREFORE, foregoing premises considered, Judgment is hereby rendered in favor of the

plaintiff and against the defendant by (1) ordering the defendant to pay jointly and severally to the
plaintiff the sum of P292,172.23 representing the defendant's obligation, as of April 17, 1986; (2) to
pay the interest at the rate of 19% per annum to be reckoned from April 18, 1986 until [the]
obligation is fully paid; (3) to pay service charge at the rate of 2% per annum starting April 18,
1986; (4) to pay the sum equivalent to 10% per annum of the total amount due collectible by way of
Attorney's Fees; (5) to pay Litigation Expenses of P3,000.00 and to pay the cost of the suit; and (6)
to pay penalty charge of 12% per annum.

SO ORDERED.1

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.

On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision of the trial
court.2

Hence, this petition for review on the following assignment of errors:

I.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL

COURT'S RULING THAT 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.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE TRIAL

COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION, INTEREST,
ATTORNEY'S FEES, AND PENALTY AGAINST THE PETITIONERS.3

The instant petition is partly meritorious.

The resolution of the first assigned error hinges on the proper interpretation of Section 7 of Presidential
Decree No. 115, or the Trust Receipts Law, which reads:
 Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the entrustee 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 provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the entrustee of the intention to
sell, and may, not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a public sale, become
a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the
payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness
to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally
served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business
address.

There is no question that petitioners failed to pay their outstanding obligation to respondent bank. They
contend, however, that when the entrustee fails to settle his principal loan, the entruster may choose
between two separate and alternative remedies: (1) the return of the goods covered by the trust receipt, in
which case, the entruster now acquires the ownership of the goods which the entrustee failed to sell; or
(2) cancel the trust and take possession of the goods, for the purpose of selling the same at a private sale
or at public auction. Petitioners assert that, under this second remedy, the entruster does not acquire
ownership of the goods, in which case he is entitled to the deficiency. Petitioners argue that these two
remedies are so distinct that the availment of one necessarily bars the availment of the other. Thus, when
respondent bank availed of the remedy of demanding the return of the goods, the actual return of all the
unsold goods completely extinguished petitioners' liability.4

Petitioners' argument is bereft of merit.

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. Thus, in Abad v. Court of Appeals,5 we ruled:

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the
trust receipt as 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. x x
x.

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.6

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional
layer of security to the lending bank. Trust receipts are indispensable contracts in international and
domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held
in trust for entruster banks, and the need for regulation of trust receipt transactions to safeguard the rights
and enforce the obligations of the parties involved are the main thrusts of the Trust Receipts Law. 7
The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of
default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any
other agreement between the entruster and the entrustee. More specifically, the entruster "may cancel the
trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds
realized therefrom at any time". The law further provides that "the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and
may, not less than five days after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The
proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall
receive any surplus but shall be liable to the entruster for any deficiency."

The trust receipt between respondent bank and petitioner corporation contains the following relevant
clauses:

The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust and take
possession of the goods/documents/instruments subject hereof or of the proceeds realized
therefrom wherever they may then be found, upon default or failure of the ENTRUSTEE to comply
with any of the terms and conditions of this Trust Receipt or of any other agreement between the
BANK/ENTRUSTER and the ENTRUSTEE; and the BANK/ENTRUSTER having taken
repossession of the goods/documents/instruments object hereof may, on or after default, give at
least five (5) days' previous notice to the ENTRUSTEE of its intention to sell the
goods/documents/instruments at public or private sale, at which public sale, it may become a
purchaser; Provided, that the proceeds of any such sale, whether public or private, shall be
applied: (a) to the payment of the expenses thereof; (b) to the payment of the expenses of
retaking, keeping and storing the goods/documents/instruments; (c) to the satisfaction of all of the
ENTRUSTEE's indebtedness to the BANK/ENTRUSTER; and Provided, further, that the
ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency. x x x

No act or omission on the part of the BANK/ENTRUSTER shall be deemed and considered a
waiver of any of its rights hereunder or under any related letters of credit, drafts or other
documents unless such waiver is expressly made in writing over the signature of the
BANK/ENTRUSTER.8

The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second paragraph of
Section 7 of the Trust Receipts Law. The right of repossession and subsequent sale at public auction
which were availed of by respondent bank were rights available upon default, and which were conferred
by statute and reinforced by the contract between the parties.

The initial repossession by the bank of the goods subject of the trust receipt did not result in the full
satisfaction of the petitioners' loan obligation. Petitioners are apparently laboring under the mistaken
impression that the full turn-over of the goods suffices to divest them of their obligation to repay the
principal amount of their loan obligation. This is definitely not the case. In Philippine National Bank v. Hon.
Gregorio G. Pineda and Tayabas Cement Company, Inc.,9 we had occasion to rule:

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. 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. (Citations omitted,
underscoring supplied)10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down the position of
the petitioner-spouses that their obligation to the entruster bank had been extinguished when they
relinquished possession of the goods in question. Thus:

A trust receipt… 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. As defined in our laws:

(h) Security Interest means a 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.

xxx xxx xxx

Contrary to the allegations of the VINTOLAS, 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.

"x x x for the bank has previously extended a loan which the L/C represents to the importer,
and by that loan, the importer should be the real owner of the goods. If under the trust
receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of
a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency with the 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. x x x"

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the
custody of the court, they are absolutely relieved of their obligation to pay their loan because of
their inability to dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it had made under the Letter of
Credit. (Citations omitted.)12

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.

We find, however, that there has been an error in the computation of the total amount of petitioners'
indebtedness to respondent bank.

Although respondent bank contends that the error of computation is a question of fact which is beyond the
power of this Court to review,13 the total amount of petitioners' indebtedness in this case is not a question
of fact. Rather, it is a question of law, i.e., the application of legal principles for the computation of the
amount owed to respondent bank, and is thus a matter properly brought for our determination.

The first issue involves the amount of indebtedness prior to the imposition of interest and penalty charges.
The initial amount of the trust receipt of P218,733.92, was reduced to P192,265.92 as of June 14, 1984,
as per respondent's Statement of Past Due Trust Receipt dated December 1, 1993. 14 This amount
presumably includes the application of P35,000.00, the amount of petitioner Lucente's Deed of
Assignment, which amount was applied by respondent bank to petitioners' obligation. No showing was
made, however, that the P30,000.00 proceeds of the auction sale on July 31, 1985 was ever applied to
the loan. Neither was the amount of P50,414.00, representing the marginal deposit made by petitioner
corporation, deducted from the loan. Although respondent bank contends that the marginal deposit should
not be deducted from the principal obligation, this is completely contrary to prevailing jurisprudence
allowing the deduction of the marginal deposit, thus:

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. As a matter of fact, the marginal deposit requirement for letters of credit has
been discontinued, except in those cases where the applicant for a letter of credit is not known to
the bank or does not maintain a good credit standing therein.

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. Compensation is proper and should take place by
operation of law because the requisites in Article 1279 of the Civil Code are present and should
extinguish both debts to the concurrent amount (Art. 1290, Civil Code). Although Abad is only a
surety, he may set up compensation as regards what the creditor owes the principal debtor,
TOMCO (Art. 1280, Civil Code).15

The net amount of the obligation, represented by respondent bank to be P292,172.23 as of April 17, 1986,
would thus be P211,758.23.

To this principal amount must be imposed the following charges: (1) 19% interest per annum, in keeping
with the terms of the trust receipt;16 and (2) 12% penalty per annum, collected based on the outstanding
principal obligation plus unpaid interest, again in keeping with the wording of the trust receipt. 17 It
appearing that petitioners have paid the interest and penalty charges until April 17, 1986, the reckoning
date for the computation of the foregoing charges must be April 18, 1986.

A perusal of the records reveals that the trial court and the Court of Appeals erred in imposing service
charges upon the petitioners. No such stipulation is found in the trust receipt. Moreover, the trial court and
the Court of Appeals erred in computing attorney's fees equivalent to 10% per annum, rather than 10% of
the total amount due. There is no basis for compounding the interest annually, as the trial court and Court
of Appeals have done. This amount would be unconscionable.

Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner corporation is
untenable. As co-signatories of the Continuing Suretyship Agreement, they bound themselves, inter alia,
to pay the principal sum in the amount of not more than P400,000.00; interest due on the principal
obligation; attorney's fees; and expenses that may be incurred in collecting the credit. The amount owed
to respondent bank is the amount of the principal, interest, attorney's fees, and expenses in collecting the
principal amount. The Continuing Suretyship Agreement expressly states the nature of the liability of
Lucente and Llaban:

The liability of the SURETY shall be solidary, direct and immediate and not contingent upon the
bank's pursuit of whatever remedies the BANK have [sic] against the Borrower or the securities or
liens the BANK may possess and the SURETY will at any time, whether due or not due, pay to the
BANK with or withour demand upon the Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.18

Solidary liability is one of the primary characteristics of a surety contract, 19 and the Continuing Suretyship
Agreement expressly stipulates the solidary nature of Lucente and Llaban's liability. All three petitioners
thus share the solidary obligation in favor of respondent bank, which is given the right, under the Civil
Code, to proceed against any one of the solidary debtors or some or all of them simultaneously. 20

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The decision of the
Court of Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is AFFIRMED with
MODIFICATIONS. Accordingly, petitioners are ordered to pay respondent bank the following: (1)
P211,758.23 representing petitioners' net obligation as of April 17, 1986; (2) interest at the rate of 19% per
annum and penalty at the rate of 12% per annum reckoned from April 18, 1986; (3) attorney's fees
equivalent to 10% of the total amount due and collectible; and (4) litigation expenses in the amount of
P3,000.00. The service charge at the rate of 2% per annum beginning April 18, 1986 is deleted. Costs
against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 173905 April 23, 2010

ANTHONY L. NG, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

VELASCO, JR.
 The Case

This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set aside the August 29,
2003 Decision1 and July 25, 2006 Resolution of the Court of Appeals (CA) in CA-G.R. CR No. 25525,
which affirmed the Decision2 of the Regional Trial Court (RTC), Branch 95 in Quezon City, in Criminal
Case No. Q-99-85133 forEstafa under Article 315, paragraph 1(b) of the Revised Penal Code (RPC) in
relation to Section 3 of Presidential Decree No. (PD) 115 or the Trust Receipts Law.

The Facts

Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of building and
fabricating telecommunication towers under the trade name "Capitol Blacksmith and Builders," applied for
a credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrust’s
credit investigation, petitioner voluntarily submitted the following documents: (1) the contracts he had with
Islacom, Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said
telecommunication companies to build several steel towers; and (3) the collectible amounts he has with
the said companies.3

On May 30, 1997, Asiatrust approved petitioner’s loan application. Petitioner was then required to sign
several documents, among which are the Credit Line Agreement, Application and Agreement for
Irrevocable L/C, Trust Receipt Agreements,4 and Promissory Notes. Though the Promissory Notes
matured on September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not bear any
maturity dates as they were left unfilled or in blank by Asiatrust. 5

After petitioner received the goods, consisting of chemicals and metal plates from his suppliers, he utilized
them to fabricate the communication towers ordered from him by his clients which were installed in three
project sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan.

As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust.
Asiatrust then conducted a surprise ocular inspection of petitioner’s business through Villarva S. Linga,
Asiatrust’s representative appraiser. Linga thereafter reported to Asiatrust that he found that
approximately 97% of the subject goods of the Trust Receipts were "sold-out and that only 3 % of the
goods pertaining to PN No. 1963 remained." Asiatrust then endorsed petitioner’s account to its Account
Management Division for the possible restructuring of his loan. The parties thereafter held a series of
conferences to work out the problem and to determine a way for petitioner to pay his debts. However,
efforts towards a settlement failed to be reached.

On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-Affidavit before
the Office of the City Prosecutor of Quezon City. Consequently, on September 12, 1999, an Information
for Estafa, as defined and penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or
the Trust Receipts Law, was filed with the RTC. The said Information reads:

That on or about the 30th day of May 1997, in Quezon City, Philippines, the above-named petitioner, did
then and there willfully, unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering into a
Trust Receipt Agreement with said complainant whereby said petitioner as entrustee received in trust from
the said complainant various chemicals in the total sum of P4.5 million with the obligation to hold the said
chemicals in trust as property of the entruster with the right to sell the same for cash and to remit the
proceeds thereof to the entruster, or to return the said chemicals if unsold; but said petitioner once in
possession of the same, contrary to his aforesaid obligation under the trust receipt agreement with intent
to defraud did then and there misappropriated, misapplied and converted the said amount to his own
personal use and benefit and despite repeated demands made upon him, said petitioner refused and
failed and still refuses and fails to make good of his obligation, to the damage and prejudice of the said
Ma. Girlie C. Bernardez in the amount of P2,971,650.00, Philippine Currency.
CONTRARY TO LAW.

Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown trial ensued.

During the pendency of the abovementioned case, conferences between petitioner and Asiatrust’s
Remedial Account Officer, Daniel Yap, were held. Afterward, a Compromise Agreement was drafted by
Asiatrust. One of the requirements of the Compromise Agreement was for petitioner to issue six (6)
postdated checks. Petitioner, in good faith, tried to comply by issuing two or three checks, which were
deposited and made good. The remaining checks, however, were not deposited as the Compromise
Agreement did not push through.

For his defense, petitioner argued that: (1) the loan was granted as his working capital and that the Trust
Receipt Agreements he signed with Asiatrust were merely preconditions for the grant and approval of his
loan; (2) the Trust Receipt Agreement corresponding to Letter of Credit No. 1963 and the Trust Receipt
Agreement corresponding to Letter of Credit No. 1964 were both contracts of adhesion, since the
stipulations found in the documents were prepared by Asiatrust in fine print; (3) unfortunately for
petitioner, his contract worth PhP 18,000,000 with Islacom was not yet paid since there was a squabble
as to the real ownership of the latter’s company, but Asiatrust was aware of petitioner’s receivables which
were more than sufficient to cover the obligation as shown in the various Project Listings with Islacom,
Smart Communications, and Infocom; (4) prior to the Islacom problem, he had been faithfully paying his
obligation to Asiatrust as shown in Official Receipt Nos. 549001, 549002, 565558, 577198, 577199, and
594986,6 thus debunking Asiatrust’s claim of fraud and bad faith against him; (5) during the pendency of
this case, petitioner even attempted to settle his obligations as evidenced by the two United Coconut
Planters Bank Checks7 he issued in favor of Asiatrust; and (6) he had already paid PhP 1.8 million out of
the PhP 2.971 million he owed as per Statement of Account dated January 26, 2000.

Ruling of the Trial Court

After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding petitioner guilty of the
crime of Estafa. The fallo of the Decision reads as follows:

WHEREFORE, judgment is hereby rendered finding the petitioner, Anthony L. Ng GUILTY beyond
reasonable doubt for the crime of Estafa defined in and penalized by Article 315, paragraph 1(b) of the
Revised Penal Code in relation to Section 3 of Presidential Decree 115, otherwise known as the Trust
Receipts Law, and is hereby sentenced to suffer the indeterminate penalty of from six (6) years, eight (8)
months, and twenty one (21) days ofprision mayor, minimum, as the minimum penalty, to twenty (20)
years of reclusion temporal maximum, as the maximum penalty.

The petitioner is further ordered to return to the Asiatrust Development Bank Inc. the amount of Two
Million, Nine Hundred Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate of
interest computed from the filing of the information on September 21,1999 until the amount is fully paid.

IT IS SO ORDERED.

In rendering its Decision, the trial court held that petitioner could not simply argue that the contracts he
had entered into with Asiatrust were void as they were contracts of adhesion. It reasoned that petitioner is
presumed to have read and understood and is, therefore, bound by the provisions of the Letters of Credit
and Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with a Statement of
Account enumerating therein the precise figures of the outstanding balance, which he failed to pay along
with the computation of other fees and charges; thus, Asiatrust did not violate Republic Act No. 3765
(Truth in Lending Act). Finally, the trial court declared that petitioner, being the entrustee stated in the
Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions of the trust receipts; otherwise, he is
obliged to return the goods in the event of non-sale or upon demand of the entruster, failing thus, he
evidently violated the Trust Receipts Law.

Ruling of the Appellate Court

Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6, 2001. In his
Appellant’s Brief dated March 25, 2002, petitioner argued that the court a quo erred: (1) in changing the
name of the offended party without the benefit of an amendment of the Information which violates his right
to be informed of the nature and cause of accusation against him; (2) in making a finding of facts not in
accord with that actually proved in the trial and/or by the evidence provided; (3) in not considering the
material facts which if taken into account would have resulted in his acquittal; (4) in being biased, hostile,
and prejudiced against him; and (5) in considering the prosecution’s evidence which did not prove the guilt
of petitioner beyond reasonable doubt. 1avv phi1

On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the fallo of which reads:

WHEREFORE, the foregoing considered, the instant appeal is DENIED. The decision of the Regional
Trial Court of Quezon City, Branch 95 dated May 29, 2001 is AFFIRMED.

SO ORDERED.

The CA held that during the course of the trial, petitioner knew that the complainant Bernardez and the
other co-witnesses are all employees of Asiatrust and that she is suing in behalf of the bank. Since
petitioner transacted with the same employees for the issuance of the subject Trust Receipts, he cannot
feign ignorance that Asiatrust is not the offended party in the instant case. The CA further stated that the
change in the name of the complainant will not prejudice and alter the fact that petitioner was being
charged with the crime of Estafa in relation to the Trust Receipts Law, since the information clearly set
forth the essential elements of the crime charged, and the constitutional right of petitioner to be informed
of the nature and cause of his accusations is not violated. 8

As to the alleged error in the appreciation of facts by the trial court, the CA stated that it was undisputed
that petitioner entered into a trust receipt agreement with Asiatrust and he failed to pay the bank his
obligation when it became due. According to the CA, the fact that petitioner acted without malice or fraud
in entering into the transactions has no bearing, since the offense is punished as malum
prohibitum regardless of the existence of intent or malice; the mere failure to deliver the proceeds of the
sale or the goods if not sold constitutes the criminal offense.

With regard to the failure of the RTC to consider the fact that petitioner’s outstanding receivables are
sufficient to cover his indebtedness and that no written demand was made upon him hence his obligation
has not yet become due and demandable, the CA stated that the mere query as to the whereabouts of the
goods and/or money is tantamount to a demand.9

Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA said that
petitioner failed to present any substantial proof to support the aforementioned allegations against the
RTC.

After the receipt of the CA Decision, petitioner moved for its reconsideration, which was denied by the CA
in its Resolution dated July 25, 2006. Thereafter, petitioner filed this Petition for Review on Certiorari. In
his Memorandum, he raised the following issues:

Issues:
 1. The prosecution failed to adduce evidence beyond a reasonable doubt to satisfy the 2nd
essential element that there was misappropriation or conversion of subject money or property by
petitioner.

2. The state was unable to prove the 3rd essential element of the crime that the alleged
misappropriation or conversion is to the prejudice of the real offended property.

3. The absence of a demand (4th essential element) on petitioner necessarily results to the
dismissal of the criminal case.

The Court’s Ruling

We find the petition to be meritorious.

Essentially, the issues raised by petitioner can be summed up into one—whether or not petitioner is liable
for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115.

It is a well-recognized principle that factual findings of the trial court are entitled to great weight and
respect by this Court, more so when they are affirmed by the appellate court. However, the rule is not
without exceptions, such as: (1) when the conclusion is a finding grounded entirely on speculations,
surmises, and conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave abuse of
discretion; and (4) the judgment is based on misapprehension of facts or premised on the absence of
evidence on record.10 Especially in criminal cases where the accused stands to lose his liberty by virtue of
his conviction, the Court must be satisfied that the factual findings and conclusions of the lower courts
leading to his conviction must satisfy the standard of proof beyond reasonable doubt.

In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the RPC in relation to
PD 115. The RPC defines Estafa as:

ART. 315. Swindling (estafa).—Any person who shall defraud another by any of the means mentioned
hereinbelow x x x

1. With unfaithfulness or abuse of confidence, namely:

a. x x x

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other

personal property received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of or to return the same, even
though such obligation be totally or partially guaranteed by a bond; or by denying having received
such money, goods, or other property x x x.11

Based on the definition above, the essential elements of Estafa are: (1) that money, goods or other
personal property is received by the offender in trust or on commission, or for administration, or under any
obligation involving the duty to make delivery of or to return it; (2) that there be misappropriation or
conversion of such money or property by the offender, or denial on his part of such receipt; (3) that such
misappropriation or conversion or denial is to the prejudice of another; and (4) there is demand by the
offended party to the offender.12

Likewise, Estafa can also be committed in what is called a "trust receipt transaction" under PD 115, which
is defined as:
Section 4. What constitutes a trust receipts transaction.—A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt or 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, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents: (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied full with his obligation under the trust receipt; or (c) to load,
unload, ship or transship or otherwise deal with them in a manner preliminary or necessary to their
sale; or

2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to deliver them to
a principal; or (c) to effect the consummation of some transactions involving delivery to a
depository or register; or (d) to effect their presentation, collection or renewal.

The sale of good, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or
other interest as security for the payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree.

In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster.
There are, therefore, two obligations in a trust receipt transaction: the first refers to money received under
the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the
second refers to the merchandise received under the obligation to "return" it (devolvera) to the owner.13 A
violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115, viz:

Section 13. Penalty Clause.—The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article Three hundred fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code. x x x (Emphasis supplied.)

A thorough examination of the facts obtaining in the instant case, however, reveals that the transaction
between petitioner and Asiatrust is not a trust receipt transaction but one of simple loan.

PD 115 Does Not Apply

It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the
subject goods were not being held for sale but were to be used for the fabrication of steel communication
towers in accordance with his contracts with Islacom, Smart, and Infocom. In these contracts, he was
commissioned to build, out of the materials received, steel communication towers, not to sell them.

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

As stressed in Samo v. People,14 a trust receipt is considered a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of "financing importations or
financing sales."15 The principle is of course not limited in its application to financing importations, since
the principle is equally applicable to domestic transactions.16 Regardless of whether the transaction is
foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts
mainly involved sales.

Following the precept of the law, such transactions affect situations wherein the entruster, who owns or
holds absolute title or security interests over specified goods, documents or instruments, releases the
subject goods to the possession of the entrustee. The release of such goods to the entrustee is
conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds
himself to hold the specific goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster
the proceeds to the extent of the amount owing to the entruster or the goods, documents or instruments
themselves if they are unsold.

. Similarly, we held in State Investment House v. CA, et al. that the entruster is entitled "only to the
proceeds derived from the sale of goods released under a trust receipt to the entrustee."17

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

In applying the provisions of PD 115, the trial court relied on the Memorandum of Asiatrust’s appraiser,
Linga, who stated that the goods have been sold by petitioner and that only 3% of the goods remained in
the warehouse where it was previously stored. But for reasons known only to the trial court, the latter did
not give weight to the testimony of Linga when he testified that he merely presumed that the goods were
sold, viz:

COURT (to the witness)

Q So, in other words, when the goods were not there anymore. You presumed that, that is already
sold?

A Yes, your Honor.

Undoubtedly, in his testimony, Linga showed that he had no real personal knowledge or proof of the fact
that the goods were indeed sold. He did not notify petitioner about the inspection nor did he talk to or
inquire with petitioner regarding the whereabouts of the subject goods. Neither did he confirm with
petitioner if the subject goods were in fact sold. Therefore, the Memorandum of Linga, which was based
only on his presumption and not any actual personal knowledge, should not have been used by the trial
court to prove that the goods have in fact been sold. At the very least, it could only show that the goods
were not in the warehouse.
Having established the inapplicability of PD 115, this Court finds that petitioner’s liability is only limited to
the satisfaction of his obligation from the loan. The real intent of the parties was simply to enter into a
simple loan agreement.

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

Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC and PD 115.

Goods Were Not Received in Trust

The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the money, goods or other
personal property must be received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of, or to return it. But as we already
discussed, the goods received by petitioner were not held in trust. They were also not intended for sale
and neither did petitioner have the duty to return them. They were only intended for use in the fabrication
of steel communication towers.

No Misappropriation of Goods or Proceeds

The second element of Estafa requires that there be misappropriation or conversion of such money or
property by the offender, or denial on his part of such receipt.

This is the very essence of Estafa under Art. 315, par. 1(b). The words "convert" and "misappropriated"
connote an act of using or disposing of another’s property as if it were one’s own, or of devoting it to a
purpose or use different from that agreed upon. To misappropriate for one’s own use includes not only
conversion to one’s personal advantage, but also every attempt to dispose of the property of another
without a right.18

Petitioner argues that there was no misappropriation or conversion on his part, because his liability for the
amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the
proceeds of the sale and not prior to the receipt of the full price of the goods.

Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply, petitioner is not liable
for Estafa because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to
turn over the proceeds of the sale of the goods x x x covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt x x x in accordance with the terms of the trust
receipt."

The trust receipt entered into between Asiatrust and petitioner states:

In case of sale I/we agree to hand the proceeds as soon as received to the BANK to apply against the
relative acceptance (as described above) and for the payment of any other indebtedness of mine/ours to
ASIATRUST DEVELOPMENT BANK.19 (Emphasis supplied.)

Clearly, petitioner was only obligated to turn over the proceeds as soon as he received payment.
However, the evidence reveals that petitioner experienced difficulties in collecting payments from his
clients for the communication towers. Despite this fact, petitioner endeavored to pay his indebtedness to
Asiatrust, which payments during the period from September 1997 to July 1998 total approximately PhP
1,500,000. Thus, absent proof that the proceeds have been actually and fully received by petitioner, his
obligation to turn over the same to Asiatrust never arose.

What is more, under the Trust Receipt Agreement itself, no date of maturity was stipulated. The provision
left blank by Asiatrust is as follows:

x x x and in consideration thereof, I/we hereby agree to hold said goods in Trust for the said Bank and as
its property with liberty to sell the same for its account within ________ days from the date of execution of
the Trust Receipt x x x20

In fact, Asiatrust purposely left the space designated for the date blank, an action which in ordinary
banking transactions would be noted as highly irregular. Hence, the only way for the obligation to mature
was for Asiatrust to demand from petitioner to pay the obligation, which it never did.

Again, it also makes the Court wonder as to why Asiatrust decided to leave the provisions for the maturity
dates in the Trust Receipt agreements in blank, since those dates are elemental part of the loan. But then,
as can be gleaned from the records of this case, Asiatrust also knew that the capacity of petitioner to pay
for his loan also hinges upon the latter’s receivables from Islacom, Smart, and Infocom where he had
ongoing and future projects for fabrication and installation of steel communication towers and not from the
sale of said goods. Being a bank, Asiatrust acted inappropriately when it left such a sensitive bank
instrument with a void circumstance on an elementary but vital feature of each and every loan transaction,
that is, the maturity dates. Without stating the maturity dates, it was impossible for petitioner to determine
when the loan will be due.

Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject goods and that
petitioner will use them for the fabrication and installation of communication towers. Before granting
petitioner the credit line, as aforementioned, Asiatrust conducted an investigation, which showed that
petitioner fabricated and installed communication towers for well-known communication companies to be
installed at designated project sites. In fine, there was no abuse of confidence to speak of nor was there
any intention to convert the subject goods for another purpose, since petitioner did not withhold the fact
that they were to be used to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse
of confidence and misappropriation occurred in this instance due to Asiatrust’s knowledge of the facts.

Furthermore, Asiatrust was informed at the time of petitioner’s application for the loan that the payment for
the loan would be derived from the collectibles of his clients. Petitioner informed Asiatrust that he was
having extreme difficulties in collecting from Islacom the full contracted price of the towers. Thus, the duty
of petitioner to remit the proceeds of the goods has not yet arisen since he has yet to receive proceeds of
the goods. Again, petitioner could not be said to have misappropriated or converted the proceeds of the
transaction since he has not yet received the proceeds from his client, Islacom.

This Court also takes judicial notice of the fact that petitioner has fully paid his obligation to Asiatrust,
making the claim for damage and prejudice of Asiatrust baseless and unfounded. Given that the
acceptance of payment by Asiatrust necessarily extinguished petitioner’s obligation, then there is no
longer any obligation on petitioner’s part to speak of, thus precluding Asiatrust from claiming any damage.
This is evidenced by Asiatrust’s Affidavit of Desistance21 acknowledging full payment of the loan.

Reasonable Doubt Exists

In the final analysis, the prosecution failed to prove beyond reasonable doubt that petitioner was guilty of
Estafa under Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115 or the Trust
Receipts Law; thus, his liability should only be civil in nature.
While petitioner admits to his civil liability to Asiatrust, he nevertheless does not have criminal liability. It is
a well-established principle that person is presumed innocent until proved guilty. To overcome the
presumption, his guilt must be shown by proof beyond reasonable doubt. Thus, we held in People v.
Mariano22 that while the principle does not connote absolute certainty, it means the degree of proof which
produces moral certainty in an unprejudiced mind of the culpability of the accused. Such proof should
convince and satisfy the reason and conscience of those who are to act upon it that the accused is in fact
guilty. The prosecution, in this instant case, failed to rebut the constitutional innocence of petitioner and
thus the latter should be acquitted.

At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt, thus:

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no
option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation x x x.23

Such is the situation in this case.

Asiatrust’s intention became more evident when, on March 30, 2009, it, along with petitioner, filed their
Joint Motion for Leave to File and Admit Attached Affidavit of Desistance to qualify the Affidavit of
Desistance executed by Felino H. Esquivas, Jr., attorney-in-fact of the Board of Asiatrust, which
acknowledged the full payment of the obligation of the petitioner and the successful mediation between
the parties.

From the foregoing considerations, we deem it unnecessary to discuss and rule upon the other issues
raised in the appeal.

WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision dated May 29, 2001 is
SET ASIDE. Petitioner ANTHONY L. NG is hereby ACQUITTED of the charge of violation of Art. 315, par.
1(b) of the RPC in relation to the pertinent provision of PD 115.

SO ORDERED.