I

Ricardo mortgaged his fishpond to AC Bank to secure a P1 Million loan. In a separate

transaction, he opened a letter of credit with the same bank for $500,000.00 in favor of HS
Bank, a foreign bank, to purchase outboard motors. Likewise, Ricardo executed a Surety
Agreement in favor of AC Bank.

The outboard motors arrived and were delivered to Ricardo, but he was not able to pay the
purchase price thereof.
a) Can AC Bank take possession of the outboard motors? Why?

b) Can AC Bank also foreclose the mortgage over the fishpond? Explain.

SUGGESTED ANSWER:
a)  No, for AC Bank has no legal standing, much less a lien, on the outboard motors. Insofar as AC
Bank is concerned, it has privity with the person of Ricardo under the Surety Agreement, and a lien on
the fishpond based on the real estate mortgage constituted therein.

b)  Yes, but only to enforce payment of the principal loan of P1million secured by the real estate
mortgage on the fishpond

II
BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27
per cubic meter FOB. After inspecting the logs, CD issued a purchase order.

On the arrangements made upon instruction of the consignee, H&T Corporation of LA,
California, the SP Bank of LA issued an irrevocable letter of credit available at sight in
favor of BV for the total purchase price of the logs. The letter of credit was mailed to FE
Bank with the instruction “to forward it to the beneficiary.” The letter of credit provided
that the draft to be drawn is on SP Bank and that it be accompanied by, among other
things, a certification from AC, stating that the logs have been approved prior shipment in
accordance with the terms and conditions of the purchase order.

Before loading on the vessel chartered by AC, the logs were inspected by custom
inspectors and representatives of the Bureau of Forestry, who certified to the good
condition and exportability of the logs. After the loading was completed, the Chief Mate of
the vessel issued a mate receipt of the cargo which stated that the logs are in good
condition. However, AC refused to issue the required certification in the letter of credit.
Because of the absence of certification, FE Bank refused to advance payment on the letter
of credit.

1) May Fe Bank be held liable under the letter of credit? Explain.

2) Under the facts above, the seller, BV, argued that FE Bank, by accepting the obligation
to notify him that the irrevocable letter of credit has been transmitted to it on his
behalf, has confirmed the letter of credit. Consequently, FE Bank is liable under the
letter of credit. Is the argument tenable? Explain.

SUGGESTED ANSWER:
1) No. The letter of credit provides as a condition a certification of AC. Without such certification, there
is no obligation on the part of FE Bank to advance payment of the letter of credit. (Feati Bank v CA 196

1
S 576)

2) No. FE Bank may have confirmed the letter of credit when it notified BV, that an irrevocable letter of
credit has been transmitted to it on its behalf. But the conditions in the letter of credit must first be
complied with, namely that the draft be accompanied by a certification from AC. Further, confirmation
of a letter of credit must be expressed. (Feati Bank v CA 196 s 576)

III
In letters of credit in banking transactions, distinguish the liability of a confirming bank
from a notifying bank.

SUGGESTED ANSWER:
In case anything wrong happens to the letter of credit, a confirming bank incurs liability for the amount
of the letter of credit, while a notifying bank does not incur any liability.

IV
Explain the three (3) distinct but intertwined contract relationships that are indispensable
in a letter of credit transaction.

SUGGESTED ANSWER:
The three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit
transaction are:

1) Between the applicant/buyer/importer and the beneficiary/seller/exporter – The

applicant/buyer/importer is the one who procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipt of the documents of title, while the beneficiary/seller/exporter is the one
who in compliance with the contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment for the goods. Their relationship is governed
by the contract of sale.

2)  Between the issuing bank and the beneficiary/seller/exporter – The issuing bank is the one that
issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to the buyer upon reimbursement. Their
relationship is governed by the terms of the letter of credit issued by the bank.

3)  Between the issuing bank and the applicant/buyer/importer – Their relationship is governed by the
terms of the application and agreement for the issuance of the letter of credit by the bank.

V
1. What do you understand by a “bill of lading?”
2. Explain the two-fold character of a “bill of lading.”

SUGGESTED ANSWER:
1. A bill of lading may be defined as a written acknowledgement of the receipt of goods and an
agreement to transport and to deliver them at a specified place to a person named therein or on his
order.

2. A bill of lading has a two-fold character, namely, a) it is a receipt of the goods to be transported; and
b) it constitutes a contract of carriage of the goods.

2
 VI
Luzon Warehousing Co received from Pedro 200 cavans of rice for deposit in its warehouse
for which a negotiable receipt was issued. While the goods were stored in said warehouse,
Cicero obtained a judgment against Pedro for the recover of a sum of money. The sheriff
proceeded to levy upon the goods on a writ of execution and directed the warehouseman
to deliver the goods. Is the warehouseman under obligation to comply with the sheriffs
order?

SUGGESTED ANSWER:
No. There was a valid negotiable receipt as there was a valid delivery of 200 cavans of rice for deposit.
In such case, the warehouseman (LWC) is not obliged to deliver the 200 cavans of rice deposited to
any person, except to the one who can comply with sec 8 of the Warehouse Receipts Law, namely:

1. surrender the receipt of which he is a holder;

2. willing to sign a receipt for the delivery of the goods; and

3. pays the warehouseman’s liens that is, his fees and advances, if any.

The sheriff cannot comply with these requisites especially the first, as he is not the holder of the
receipt.

VII
When is a warehouseman bound to deliver the goods, upon a demand made either by the
holder of a receipt for the goods or by the depositor?

SUGGESTED ANSWER:
The warehouseman is bound to deliver the goods upon demand made either by the holder of the
receipt for the goods or by the depositor if the demand is accompanied by

1. an offer to satisfy the warehouseman’s lien,

2. an offer to surrender the receipt, if negotiable, with such indorsements as would be necessary
for the negotiation thereof, and

3. readiness and willingness to sign when the goods are delivered if so requested by the
warehouseman (Sec 8 Warehouse Receipts Law).

VIII
A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To
evidence the transaction, the Warehouse Company issued a receipt expressly providing
that the goods be delivered to the order of said merchant.

A month after, a creditor obtained judgment against the said merchant for a sum of money.
The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver
to him the deposited rice.

a. What advice will you give the Warehouse Company? Explain

b. Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of
which it filed a claim with the sheriff. Would the rice mill have better rights to the rice than
the creditor? Explain your answer.

3
SUGGESTED ANSWER:
a. The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a negotiable
receipt was issued therefor. The rice cannot thereafter, while in the possession of the Warehouse
Company, be attached by garnishment or otherwise, or be levied upon under an execution unless the
receipt be first surrendered to the warehouseman, or its negotiation enjoined. The Warehouse
Company cannot be compelled to deliver the actual possession of the rice until the receipt is
surrendered to it or impounded by the court.

b. Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than the creditor.
It is the rice mill that can surrender the receipt which is in its possession and can comply with the other
requirements which will oblige the warehouseman to deliver the rice, namely, to sign a receipt for the
delivery of the rice, and to pay the warehouseman’s liens and fees and other charges.

IX
For a cargo of machinery shipped from abroad to a sugar central in Dumaguete, Negros
Oriental, the Bill of Lading (B/L) stipulated “to shipper’s order,” with notice of arrival to be
addressed to the Central. The cargo arrived at its destination and was released to the
Central without surrender of the B/L on the basis of the latter’s undertaking to hold the
carrier free and harmless from any liability.

Subsequently, a Bank to whom the central was indebted, claimed the cargo and presented
the original of the B/L stating that the Central had failed to settle its obligations with the
Bank.

Was there misdelivery by the carrier to the sugar central considering the non-surrender of
the B/L? Why?

SUGGESTED ANSWER:
There was no misdelivery by the carrier since the cargo was considered consigned to the Sugar central
per the “Shipper’s Order” (Eastern Shipping Lines v CA 190 s 512)

ALTERNATIVE ANSWER:
There was misdelivery. The B/L was a negotiable document of title because it was to the “Shipper’s
Order.” Hence, the common carrier should have delivered the cargo to the Central only upon surrender
of the B/L. The non-surrender of the B/L will make it liable to holders in due course.

X
To guarantee the payment of a loan obtained from a bank, Raul pledged 500 bales of
tobacco deposited in a warehouse to said bank and endorsed in blank the warehouse
receipt. Before Raul could pay for the loan, the tobacco disappeared from the warehouse.

Who should bear the loss – the pledgor or the bank? Why?

SUGGESTED ANSWER:
The pledgor should bear the loss. In the pledge of a warehouse receipt the ownership of the goods
remain with depositor or his transferee. Any contract or real security, among them a pledge, does not
amount to or result in an assumption of risk of loss by the creditor. The Warehouse Receipts Law did
not deviate from this rule.

XI

4
Jojo deposited several cartons of goods with SN Warehouse Corporation. The corresponding
warehouse receipt was issued to the order of Jojo. He endorsed the warehouse receipt to EJ
who paid the value of the goods deposited. Before EJ could withdraw the goods, Melchor
informed SN Warehouse Corporation that the goods belonged to him and were taken by
Jojo without his consent. Melchor wants to get the goods, but EJ also wants to withdraw the
same.

A. Who has a better right to the goods? Why?

B. If SN Warehouse Corporation is uncertain as to who is entitled to the property, what

is the proper recourse of the corporation? Explain.

SUGGESTED ANSWER:
A. EJ has a better right to the goods, being covered by a negotiable document of title, namely the
warehouse receipts issued to the "order of Jojo." Under the Sales provisions of the Civil Code on
negotiable documents of title, and under the provisions of the Warehouse Receipts Law, when
goods deposited with the bailee are covered by a negotiable document of title, the endorsement
and delivery of the document transfers ownership of the goods to the transferee. By operation of
law, the transferee obtains the direct obligation of the bailee to hold the goods in his name." (Art.
1513, Civil Code; Section 41, Warehouse Receipts Law) Since EJ is the holder of the warehouse
receipt, he has the better right to the goods. SN Warehouse is obliged to hold the goods in his
name.

B. SN Warehouse can file an INTERPLEADER to compel EJ and Melchor to litigate against each other
for the ownership of the goods. Sec. 17 of the Warehouse Receipts Law states, "If more than one
person claims the title or possession of the goods, the warehouse may, either as a defense to an
action brought against him for non-delivery of the goods or as an original suit, whichever is
appropriate, require all known claimants to interplead."

XII
A purchased from S 150 cavans of palay on credit. A deposited the palay in W’s warehouse.
W issued to A a negotiable warehouse receipt in the name of A. Thereafter, A negotiated
the receipt to B who purchased the said receipt for value and in good faith.

1) Who has a better right to the deposit, S, the unpaid vendor or b, the purchaser of the
receipt for value and in good faith? Why?
2) When can the warehouseman be obliged to deliver the palay to A?

SUGGESTED ANSWER:
1) B has a better right than S. The right of the unpaid seller, S, to the goods was defeated by the act of
A in endorsing the receipt to B.

2) The warehouseman can be obliged to deliver the palay to A if B negotiates back the receipt to A. In
that case, A becomes a holder again of the receipt, and A can comply with Sec 8 of the Warehouse
Receipts Law.

XIII
S stored hardware materials in the bonded warehouse of W, a licensed warehouseman
under the General Bonded Warehouse Law (Act 3893 as amended). W issued the
corresponding warehouse receipt in the form he ordinarily uses for such purpose in the
course of his business. All the essential terms required under Section 2 of the Warehouse

5
Receipts Law (Act 2137 as amended) are embodied in the form. In addition, the receipt
issued to S contains a stipulation that W would not be responsible for the loss of all or any
portion of the hardware materials covered by the receipt even if such loss is caused by the
negligence of W or his representatives or employees. S endorsed and negotiated the
warehouse receipt to B, who demanded delivery of the goods. W could not deliver because
the goods were nowhere to be found in his warehouse. He claims he is not liable because
of the free-from-liability clause stipulated in the receipt. Do you agree with W’s
contention? Explain.

SUGGESTED ANSWER:
No. I do not agree with the contention of W. The stipulation that W would not be responsible for the
loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused
by the negligence of W or his representative or employees is void. The law requires that a
warehouseman should exercise due diligence in the care and custody of the things deposited in his
warehouse.

XIV
What acts or omissions are penalized under the Trust Receipts Law?

Is lack of intent to defraud a bar to the prosecution of these acts or omissions?

SUGGESTED ANSWER:
The Trust Receipts Law (P.D. No. 115) declares the fail- ure to turn over goods or proceeds realized
from sale thereof, as a criminal offense under Art. 315(l)(b) of Revised Penal Code. The law is violated
whenever the entrustee or person to whom trust receipts were issued fails to: (a) return the goods
covered by the trust receipts; or (b) return the proceeds of the sale of said goods (Metropolitan Bank v.
Tonda, G.R. No. 134436, August 16, 2000).

No. The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of
the sale of the goods, or (2) return the goods covered by the trust receipts if the goods are not sold.
The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no
requirement to prove intent to defraud (Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006;
Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000; Ong v. Court of Appeals, G.R. No. 119858, April
29, 2003).

XV
Mr. Noble, as the President of ABC Trading Inc executed a trust receipt in favor of BPI Bank
to secure the importation by his company of certain goods. After release and sale of the
imported goods, the proceeds from the sale were not turned over to BPI. Would BPI be
justified in filing a case for estafa against Noble?

SUGGESTED ANSWER:
BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that the trust
receipt was issued in favor of a bank, instead of a seller, to secure the importation of the goods did not
preclude the application of the Trust Receipt Law. (PD 115) Under the law, any officer or employee of a
corporation responsible for the violation of a trust receipt is subject to the penal liability thereunder
(Sia v People 166s655)

ALTERNATIVE ANSWER:
The filing of a case for estafa under the penal provisions of the RPC would not be justified. It has been
held in Sia v People (161 s 655) that corporate officers and directors are not criminally liable for a
violation of said Code. 2 conditions are required before a corporate officer may be criminally liable for

6
an offense committed by the corporation; viz:

1. There must be a specific provision of law mandating a corporation to act or not to act; and

2. There must be an explicit statement in the law itself that, in case of such violation by a corporation,
the officers and directors thereof are to be personally and criminally liable therefore.

These conditions are not met in the penal provisions of the RPC on trust receipts.

XVI
A buys goods from a foreign supplier using his credit line with a bank to pay for the goods.
Upon arrival of the goods at the pier, the bank requires A to sign a trust receipt before A is
allowed to take delivery of the goods. The trust receipt contains the usual language. A
disposes of the goods and receives payment but does not pay the bank. The bank files a
criminal action against A for violation of the Trust Receipts Law. A asserts that the trust
receipt is only to secure his debt and that a criminal action cannot lie against him because
that would be violative of his constitutional right against “imprisonment for nonpayment of
a debt.” Is he correct?

SUGGESTED ANSWER:
No. Violation of a trust receipt is criminal as it is punished as estafa under Art 315 of the RPC. There is
a public policy involved which is to assure the entruster the reimbursement of the amount advanced or
the balance thereof for the goods subject of the trust receipt. The execution of the trust receipt or the
use thereof promotes the smooth flow of commerce as it helps the importer or buyer of the goods
covered thereby.

XVII
PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw materials
for use by it in the manufacture of its products. The importation was effected through a
trust receipt arrangement with AB Banking corporation. When it applied for the issuance
by AB Banking Corporation of a letter of credit, PB & Co., Inc., did not make any
representation to the bank that it would be selling what it had imported. It failed to pay
the bank. When demand was made upon it to account for the importation, to return the
articles, or to turn-over the proceeds of the sale thereof to the bank, PB & Co., Inc., also
failed. The bank sued PB & Co.’s President who was the signatory of the trust receipt for
estafa. The President put up the defense that he could not be made liable because there
was no deceit resulting in the violation of the trust receipt. He also submitted that there
was no violation of the trust receipt because the raw materials were not sold but used by
the corporation in the manufacture of its products. Would those defenses be sustainable?
Why?

SUGGESTED ANSWER:
No, the defenses are not sustainable. The lack of deceit should not be sustained because the mere
failure to account for the importation, or return the articles constitutes the abuse of confidence in the
crime of estafa. The fact that the goods aren’t sold but are used in the manufacture of its products is
immaterial because a violation of the trust receipts law happened when it failed to account for the
goods or return them to the Bank upon demand.

XVIII
To secure the payment of an earlier loan of P20,000 as well as subsequent loans which her
friend Noreen, would extend to her, Karen executed in favor of Noreen a chattel mortgage

7
over her (Karen) car.

Is the mortgage valid?

SUGGESTED ANSWER:
A chattel mortgage cannot effectively secure after- incurred obligations. While a stipulation to include
after- incurred obligations in a chattel mortgage is itself not invalid, the obligation cannot, however, be
deemed automatically secured by that mortgage until after a new chattel mortgage or an addendum
to the original chattel mortgage is executed to cover the obligation after it has been actually incurred.
Accordingly, unless such supplements are made, the chattel mortgage in the problem given would be
deemed to secure only the loan of P20,000 (Sec 5 Act 1505; Belgian Catholic Missionaries v
Magallanes Press 49p647)

XIX
On December 1, 1996, Borrower executed a chattel mortgage in favor of the Bank to secure
a loan of P3M. In due time the loan was paid.On December 1, 1997, Borrower obtained
another loan for P2M which the Bank granted under the same security as that which
secured the first loan.

For the second loan, Borrower merely delivered a promissory note; no new chattel
mortgage agreement was executed as the parties relied on a provision in the 1996 chattel
mortgage agreement which included future debts as among the obligations secured by the
mortgage. The provision reads:

“In case the Mortgagor executes subsequent promissory note or notes either as a renewal,
as an extension, or as a new loan, this mortgage shall also stand as security for the
payment of said promissory note or notes without necessity of executing a new contract
and this mortgage shall have the same force and effect as if the said promissory note or
notes were existing on date hereof.”

As Borrower failed to pay the second loan, the Bank proceeded to foreclose the Chattel
Mortgage. Borrower sued the Bank claiming that the mortgage was no longer in force.
Borrower claimed that a fresh chattel mortgage should have been executed when the
second loan was granted.

a) Decide the case and ratiocinate.

b) Suppose the chattel mortgage was not registered, would its validity and
effectiveness be impaired?

Explain.

SUGGESTED ANSWER:
a. The foreclosure of the chattel mortgage regarding the second loan is not valid. A chattel mortgage
cannot validly secure after incurred obligations. The affidavit of good faith required under the chattel
mortgage law expressly provides that “the foregoing mortgage is made for securing the obligation
specified in the conditions hereof, and for no other purpose.” The after-incurred obligation not being
specified in the affidavit, is not secured by mortgage.

b. Yes. The chattel mortgage is not valid as against any person, except the mortgagor, his executors
and administrators.

8
 XX
Ritz bought a new car on installments which provided for an acceleration clause in the
event of default. To secure payment of the unpaid installments, as and when due, he
constituted two chattel mortgages, i.e., one over his very old car and the other covering
the new car that he had just bought as aforesaid, on installments. After Ritz defaulted on
three installments, the seller-mortgagee foreclosed on the old car. The proceeds of the
foreclosure were not enough to satisfy the due obligation; hence, he similarly sought to
foreclose on the new car.

Would the seller-mortgagee be legally justified in foreclosing on this second chattel

mortgage?

SUGGESTED ANSWER:
No. The two mortgages were executed to secure the payment of the unpaid installments for the
purchase of a new car. When the mortgage on the old car was foreclosed, the seller-mortgagee is
deemed to have renounced all other rights. A foreclosure of additional property, that is, the new car
covered by the second mortgage would be a nullity.

XXI
Zonee, who lives in Bulacan, bought a 1988 model Toyota Corolla sedan on July 1, 1989
from Anadelaida, who lives in Quezon City, for P300th, paying P150th as downpayment and
promising to pay the balance in 3 equal quarterly installments beginning October 1, 1989.
Anadelaida executed a deed of sale of the vehicle in favor of Zonee and, to secure the
unpaid balance of the purchase price, had Zonee execute a deed of chattel mortgage on
the vehicle in Anadelaida’s favor.

Ten days after the execution of the abovementioned documents, Zonee had the car
transferred and registered in her name. Contemporaneously, Anadelaida had the chattel
mortgage on the car registered in the Chattel Mortgage Registry of the Office of the
Register of Deeds of Quezon City.

In Sep 1989, Zonee sold the sedan to Jimbo without telling the latter that the car was
mortgaged to Anadelaida. When Zonee failed to pay the first installment on October 1,
1989, Anadelaida went to see Zonee and discovered that the latter had sold the car to
Jimbo.

a) Jimbo refused to give up the car on the ground that the chattel mortgage executed by
Zonee in favor of Anadelaida is not valid because it was executed before the car was
registered in Zonee’s name, i.e., before Zonee became the registered owner of the car. Is
the said argument meritorious? Explain your answer.

b) Jimbo also argued that even if the chattel mortgage is valid, it cannot affect him because
it was not properly registered with the government offices where it should be registered.
What government office is Jimbo referring to?

SUGGESTED ANSWER:
a) Jimbo’s argument is not meritorious. Zonee became the owner of the property upon delivery;
registration is not essential to vest that ownership in the buyer. The execution of the chattel mortgage
by the buyer in favor of the seller, in fact, can demonstrate the vesting of such ownership to the
mortgagor.

b) Jimbo was referring to the Register of Deeds of Bulacan where Zonee was a resident. The Chattel
Mortgage Law requires the registration to be made in the Office of the Register of Deeds of the

9
province where the mortgagor resides and also in which the property is situated as well as the LTO
where the vehicle is registered. (Sec 4 Chattel Mortgage Law)

XXII
Armando, a resident of Manila, borrowed P3-million from Bernardo, offering as security his
500 shares of stock worth P1.5-million in Xerxes Corporation, and his 2007BMW sedan,
valued at P2- million. The mortgage on the shares of stock was registered in the Office of
the Register of Deeds of Makati City where Xerxes Corporation has its principal office. The
mortgage on the car was registered in the Office of the Register of Deeds of Manila.
Armando executed a single Affidavit of Good Faith, covering both mortgages.

Armando defaulted on the payment of his obligation; thus, Bernardo foreclosed on the two
chattel mortgages. Armando filed suit to nullify the foreclosure and the mortgages, raising
the following issues:

(A) The execution of only one Affidavit of Good Faith for both mortgages invalidated the
two mortgages;

(B) The mortgage on the shares of stocks should have been registered in the office of the
Register of Deeds of Manila where he resides, as well as in the stock and transfer book of
Xerxes Corporation.

Rule on the foregoing issues with reasons.

(C) Assume that Bernardo extrajudicially foreclosed on the mortgages, and both the car
and the shares of stocks were sold at public auction. If the proceeds from such public sale
should be 1-million short of Armando’s total obligation, can Bernardo recover the
deficiency? Why or why not?

SUGGESTED ANSWER:
A. The execution of only one Affidavit of Good Faith for both mortgages is not a ground to nullify the
said mortgages and the foreclosure thereof. Said mortgages are valid as between immediate parties
(Lilius v. Manila Railroad Company, 62 Phil. 56 (1935)), although they cannot bind third parties
(Philippine Refining v. Jarque, 61 Phil. 229 (1935)).

B. The mortgage on the shares of stock should be registered in the chattel mortgage registry in the
Register of Deeds of Makati City where the corporation has its principal office and also in the Register
of Deeds of Manila where the mortgagor resides (Chua Guan v. Samahang Magsasaka, Inc., 62 Phil.
472 (1935)). Registration of chattel mortgage in the stock and transfer book is not required to make
the chattel mortgage valid. Registration of dealings in the stock and transfer book under Section 63 of
the Corporation Code applies only to sale or disposition of shares, and has no application to mortgages
and other forms of encumbrances (Monserrat v. Ceron, 58 Phil. 469 (1933)).

C. Yes. Bernardo can recover the deficiency. Chattels are given as mere security, and not as payment
or pledge (CuH ada v. Drilon, 432 SCRA 618 (2004)).

XXIII
On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30, 2008,
secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained
another loan of P10,000 from Bob to be paid on February 15, 2008. He secured this by
executing a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al

10
failed to pay. Bob foreclosed the chattel mortgage but the car was bidded for P6,000 only.
Al also failed to pay the second loan due on February 15, 2008. Bob filed an action for
collection of sum of money. Al filed a motion to dismiss claiming that Bob should first
foreclose the mortgage on The Honda motorcycle before he can file the action for sum of
money. Decide with reasons.

SUGGESTED ANSWER:
Bob has the legal right to file a collection suit for a sum of money in lieu of foreclosing on the chattel
mortgage. It has been ruled that a c chattel mortgage is a security arrangement to support a primary
contract (Serra v. Rodriguez, G.R. no. L-25546, 22 April 1974). Since the chattel mortgage is only a
collateral contract prerogative to choose which of the remedies available to pursue. However, the filing
of the collection suit constitutes a waiver of the chattel mortgage (Land Settlement and Dev. Corp. v.
Carlos, 22 SCRA 202, 1968). And even if the collection suit included the recovery of the P6,000
deficiency on the first loan, the same is valid because unlike in a pledge the lender has the legal right
to recover the deficiency incurred on the foreclosure of a chattel mortgage (PAMECA Wood Treatment
v. CA, G.R. No. 106435, 14 July 1999).

XXIV
The Supreme Court has held that fraud is an exception to the ―independence principle‖
governing letters of credit. Explain this principle and give an example of how fraud can be
an exception.

SUGGESTED ANSWER:
The “independence principle” posits that the obligations of the parties to a letter of credit are
independent of the obligations of the parties to the underlying transaction. Thus, the beneficiary of the
letter of credit, which is able to comply with the documentary requirements under the letter of credit,
must be paid by the issuing or confirming bank, notwithstanding the existence of a dispute between
the parties to the underlying transaction, say a contract of sale of goods where the buyer is not
satisfied with the quality of the goods delivered by the seller. The Supreme Court in Transfield
Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 (2004) for the first time declared that fraud
is an exception to the independence principle. For instance, if the beneficiary fraudulently presents to
the issuing or confirming bank documents that contain material facts that, to his knowledge, are
untrue, then payment under the letter of credit may be prevented through a court injunction.

XXV
ABC Company filed a Petition for Rehabilitation with the Court. An Order was issued by the
Court, (1) staying enforcement of all claims, whether money or otherwise against ABC
Company, its guarantors and sureties not solidarily liable with the company; and (2)
prohibiting ABC Company from making payments of its liabilities, outstanding as of the
date of the filing of the Petition. XYC Company is a holder of an irrevocable Standby Letter
of Credit which was previously procured by ABC Company in favor of XYC Company to
secure performance of certain obligations. In the light of the Order issued by the Court.

Explain the nature of Letters of Credit as a financial devise

SUGGESTED ANSWER:
A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods
before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of
credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender
of documents required by the letter of credit. The buyer and the seller agree on what documents are to
be presented for payment, but ordinarily they are documents of title evidencing or attesting to the

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shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents or documents of title. To get paid,
the seller executes a draft and present it together with the required documents to the issuing bank.
The issuing bank redeems draft and pays cast to the seller if it finds that the documents submitted by
the seller conform with what the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when the buyer reimburses the
issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the
seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the
said documents and control over the goods only after reimbursing the bank. (Bank of America NT & SA
v. CA, et al., G.R. No. 105395, December 10,1993) However, letters of credit are also used in non-sale
settings where they serve to reduce the risk of non- performance. Generally, letters of credit in non-
sale settings have come to be known as standby letters of credit. (Transfield Philippines, Inc. v. Luzon
Hydro Corporation, et al., G.R. No. 146717, November 22,2004)

XXVI
X Corporation entered into a contract with PT Construction Corp. for the latter to construct
and build a sugar mill with six (6) months. They agreed that in case of delay, PT
Construction Corp. will pay X Corporation P100,000 for every day of delay. To ensure
payment of the agreed amount of damages, PT Construction Corp. secured from Atlantic
Bank a confirmed and irrevocable letter of credit which was accepted by X Corporation in
due time. One week before the expiration of the six (6) month period, PT Construction
Corp. requested for an extension of time to deliver claiming that the delay was due to the
fault of X Corporation. A controversy as to the cause of the delay which involved the
workmanship of the building ensued. The controversy remained unresolved. Despite the
controversy, X Corporation presented a claim against Atlantic Bank by executing a draft
against the letter of credit.

A. Can Atlantic Bank refuse payment due to the unresolved controversy? Explain.

B. Can X Corporation claim directly from PT Construction Corp.? Explain.

SUGGESTED ANSWER:
A. No, Atlantic Bank cannot refuse payment to the unresolved controversy between the two
companies. The Bank is solidarily liable to pay based on the terms and conditions of the Letter
of Credit. In FEATI Bank v. Court of Appeals, G.R. No.94209, 30 April 1991, the Court held that
an irrevocable letter of credit is independent of the contract between the buyer-applicant and
the seller-beneficiary.

B. Yes, X Corporation can claim directly from PT Construction Corp. The irrevocable letter of credit
was merely a security arrangement that did not replace the main contract between the two
companies. In FEATI Bank c. CA, G.R. No. 94209, 30 April 1991, opening a letter of credit does
not involve a specific appropriation of money in favor of the beneficiary. It only signifies that the
beneficiary may draw funds up to the designated amount. It does not mean that a particular
sum of money has been specifically reserved of held in trust.

XXVII
C contracted D to renovate his commercial building. D ordered construction materials from
E and received delivery thereof. The following day, C went to F Bank to apply for loan to
pay for the construction materials. As security for the loan, C was made to execute a trust
receipt. One year later, after C failed to pay the balance of the loan, F Bank charged him

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with violation of the Trust Receipts Law.

(A) What is a Trust Receipt?

(B) Will the case against C prosper? Reason briefly.

SUGGESTED ANSWER:
A. A Trust Receipt is a written or printed document signed by the entrustee in favor of the
entruster containing terms and conditions substantially complying with the provision of the
Trust Receipts Law, whereby the bank as entruster releases the goods to the possession of the
entrustee but retains ownership thereof while the entrustee may sell the goods and apply the
proceeds for the full payment of his liability to the bank (Section 3(j), Trust Receipts Law).

B. No, the case against C will not prosper, Since C received the Construction material from E
Before the trust receipt transaction was a simple loan, with the trust receipt merely as a
collateral or security for the loan. This is inconsistent with a trust receipt transaction where the
title to the goods remains with the bank and the goods are released to the entrustee before the
loan is granted (Consolidated Bank and Trust Corporation v. Court of Appeals, 356 SCRA 671
[2001].

XXVIII
Tom Cruz obtained a loan of P1 Million from XYZ Bank to finance his purchase of 5,000 bags
of fertilizer. He executed a trust receipt in favor of XYZ Bank over the 5,000 bags of
fertilizer. Tom Cruz withdrew the 5,000 bags from the warehouse to be transported to
Lucena City where his store was located. On the way, armed robbers took from Tom Cruz
the 5,000 bags of fertilizer. Tom Cruz now claims that his obligation to pay the loan to XYZ
Bank is extinguished because the loss was not due to his fault. Is Tom Cruz correct?
Explain.

SUGGESTED ANSWER:
No, Tom Cruz’s obligation to pay the loan covered by the trust receipts to XYZ Bank remains, A “Trust
receipt” is merely a collateral agreement which serves as security for a loan, with the Bank appearing
as the owner of the goods. The Bank cannot dispose of the goods in any manner it chooses, because it
is not the true owner thereof (Rosario Textile Miss v. Home Bankers, G.R. No. 137232, 29 June 2005,
citing Sia v. People, G.R. No. 30896, 28 April 1983, Abad v. CA, G.R. No. 42735, 22 January 1990, and
PNB v. Pineda, G.R. No. 46658, 13 May 1991). The loss of the goods covered by the trust receipts
cannot extinguish the principal obligation of the borrower to pay the bank (Landl & Company [Phil.] v.
Metropolitan Bank, G.R. 159622, 30 July 2004).

XXIX
Delano Cruz is in default in the payment of his existing loan from BDP Bank. To extend and
restructure this loan, Delano agreed to execute a trust receipt in the bank’s favor covering
the iron pellets Delano agreed to execute a trust receipt in the bank’s favor covering the
iron pellets Delano imported from China one year earlier. Delano subsequently succeeded
in selling the iron pellets to a smelting plant, but the proceeds went to the payment of the
separation benefits of his employees who were laid off as he reduced his operations.

When the extend loan period expired without any significant payment from Delano (not
even to the extent of the proceeds of the sale of the iron pellets), BDP Bank consulted you
on how to proceed against Delano. The bank is contemplating the filing of estafa pursuant

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to the provisions of Pres. Decree No. 115 (Trust Receipts Law) to force Delano to tum in at
least the proceeds of the sale of the iron pellets.

Would you, as bank counsel and as an officer of the court, advise the bank to proceed with
its contemplated action?

SUGGESTED ANSWER:
I will not advise BDP Bank to file a criminal case for estafa against Delano. Delano received the iron
pellets he imported one year before the trust receipt was executed. As held by the Supreme Court,
where the execution of a trust of a trust receipt agreement was made after the goods covered by it
had been purchased by and delivered to the entrustee and the latter as a consequence acquired
ownership to the goods, the transaction does not involve a trust receipt but a simple loan even though
the parties denominated the transaction as one of trust receipt (Colinares vs. Court of Appels, 339
SCRA 609, 2000; Consolidated Bank and Trust Corporation v. CA, SCRA 671, 2001).

XXX
CCC Car, Inc. obtained a loan from BBB Bank, which fund was used to import ten (10) units
of Mercedes Benz S class vehicles. Upon arrival of the vehicles and before release of said
vehicles to CCC Car, Inc., X and Y, the President and Treasurer, respectively, of CCC Car,
Inc. signed the Trust Receipt to cover the value of the ten (10) units of Mercedes Benz S
class vehicles after which, the vehicles were all delivered to the Car display room of CCC
Car, Inc. Sale of the vehicles were slow, and it took a month to dispose of the ten (10)
units. CCC Car, Inc. wanted to be in business and to save on various documentations
required by the bank, decided that instead of turning over the proceeds of the sales, CCC
Car, Inc. used the proceeds to buy another ten (10) units of BMW 3 series.

(A) Is the action of CCC Car, Inc. legally justified? Explain your answer.

(B) Will the corporate officers of CCC Car, Inc. be held liable under the circumstances?
Explain your answer.

SUGGESTED ANSWER:
A. No. It is the obligation of CCC Car, Inc., as entrustee, to receive the proceeds of the sale of the
Mercedes Benz S class vehicles intrust for BBB Bank, as entruster, and turn over the same to BBB
Bank to the extent of the amount owing to the latter or as appears in the trust receipt (Sec. 9(2),
Trust Receipt Law).

B. Yes, particularly the President and the Treasurer of CCC Car, Inc. who both signed the trust receipts
in the problem. Section 13 of the Trust Receipt Law(PD 115) provides that if the violation or offense
is committed by a corporation, partnership, association, or other juridical entity, the penalty
provided for in the law shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

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