Quiz No.

2 – Trust Receipts Law (PD 115)

I
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 a loan to pay 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 on the loan, F Bank charged with violation of the Trust
Receipts Law.

a. What is a Trust Receipt? (5%)

Answer: 2007 Bar; Ng v. People G.R. No. 173905, April 23, 2010 citing Samo v. People, G.R.
No. L-17603-04, May 31, 1962; Consolidated Bank and Trust Corporation v. Court of Appeals,
356 SCRA 671

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
PD 115 whereby the bank as entruster releases the goods to the possession of the
entrustee but retain ownership thereof while the entrustee may sell the goods and apply
the proceeds for the full payment of his liability to the bank. [Sec. 3 (j), Trust Receipts
Law]. It is also defined as a document in which is expressed a security transaction, where
the lender, having no prior title in the goods on which the lien is to be given, and not
having possession which remains in the borrower, lends his money to the borrower on
security of the goods, which the borrower is privileged to sell clear of lien on agreement
to pay all or part of the proceeds of sale to the lender. The term is specifically applied to a
written instrument whereby a banker having advanced money for purchase of imported
merchandise and having taken title in his own name, delivers possession to an importer
on agreement in writing to hold the merchandise in trust for the banker until he is paid.
Finally, a document executed between an entrustor and an entrustee, under which the
goods are released to the latter who binds himself to hold the goods in trust, or to sell or
dispose of the goods with the obligation to turn over the proceeds to the entrustor to the
extent of the entrustee’s obligation to him, or if unsold, to return the same.
b. The case of estafa against C will not prosper. PD 115 does not apply in this case because
the proceeds of the loan are used to renovate C’s commercial building. Trust receipts
transactions are 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. The transactions contemplated under the Trust
Receipts Law mainly involved acquisition of goods for the sale thereof. The transaction is
properly called a simple loan with the trust receipt merely as a collateral or security for
the loan. (Ng v. People G.R. No. 173905, April 23, 2010 citing Samo v. People, G.R. No.
L-17603-04, May 31, 1962; Consolidated Bank and Trust Corporation v. Court of
Appeals, 356 SCRA 671)

II
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 non-payment of a debt.” Is he correct? (10%)

Answer: 1997 Bar

III
a. Maine Den, Inc. opened an irrevocable letter of credit with Fair Bank, in connection with
Maine Den Inc.’s importation of spare parts for its textile mills. The imported parts were
released to Maine Den, Inc. after it executed a trust receipt in favor of Fair Bank. When
Maine Den, Inc. was unable to pay its obligation under the trust receipt, Fair Bank sued
Maine Den, Inc. for estafa under the Trust Receipts Law. The court, however, dismissed
the suit. Was the dismissal justified? Why or why not?
b. Does the rule “res perit domino” apply in trust receipt transactions? Explain.

Answer: 2015 Bar; Ng v. People of the Philippines, G.R. No. 173905, April 23, 2010; Land
Bank V. Perez, G.R. No. 166884, June 13, 2012; and Hur Ting Yang v. People of the
Philippines, G.R. No. 195117, August 14, 2013; Section 10 of Pres. Decree No. 115; Rosario
Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 1372323, June 29,
2005, 462 SCRA 88

a. The dismissal of the complaint for estafa is justified. Under recent jurisprudence, the
Supreme Court held that transactions referred to in relation to trust receipts, mainly
involved sales, and if the entruster knew even before the execution of the alleged trust
receipt agreement that the goods subject of the trust receipt were never intended by the
entrustee for resale or for the manufacture of items to be sold, the agreement is not a trust
receipt transaction but a simple loan, notwithstanding the label. In this case, the object of
the trust receipt, spare parts for textile mills, were for the use of the entrustee and never
intended for sale. As such, the transaction is a simple loan. (Ng v. People of the
Philippines, G.R. No. 173905, April 23, 2010; Land Bank V. Perez, G.R. No. 166884,
June 13, 2012; and Hur Ting Yang v. People of the Philippines, G.R. No. 195117, August
14, 2013)
b. No. This is because the loss of the goods, documents or instruments which are the subject
of a trust receipt pending their disposition, irrespective of whether or not it was due to the
fault or negligence of the entrustee, shall not extinguish the entrustee’s obligation to the
entruster for the value thereof.

Also, while the entruster is made to appear as owner of the goods covered by the trust
receipt, such ownership is only a legal fiction to enhance the entruster’s security interest
over the goods. (Section 10 of Pres. Decree No. 115; Rosario Textile Mills Corp. v.
Home Bankers Savings and Trust Company, G.R. No. 1372323, June 29, 2005, 462
SCRA 88)

IV
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 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 extended 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 to on how
to proceed against Delano. The bank is contemplating the filing of estafa pursuant to the
provisions of PD 115 (Trust Receipts Law) to force Delano to turn in at least the proceeds of the
sale of the iron pellets. Would you, as bank counsel and as officer of the court, advise the bank to
proceed with its contemplated action?
Answer: 2013 Bar; Colinares v. Court of Appeals, 339 SCRA 609, 2000; Consolidated Bank and
Trust Corporation v. CA, 356 SCRA 671, 2001

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 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 v. Court of
Appeals, 339 SCRA 609, 2000; Consolidated Bank and Trust Corporation v. CA, 356 SCRA
671, 2001)

V
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 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. (10%)

Answer: Dimaampao, p. 404-405

No. Tom Cruz is not correct. Under the Trust Receipts Law, the entrustee is liable for the loss of
the goods whether or not he is negligent. Moreover, in a trust receipt transaction where a loan
feature is involved, the obligation for the loan is not extinguished until such loan is paid.

In the present case, the fact that the goods were stolen without the fault of Tom Cruz will not
exculpate him from liability. This is especially true since the goods subject of the trust receipt
transaction serves only as security for the payment of the loan. The loss of the security did not
impair XYZ Bank’s title to the goods which can only be extinguished once Tom Cruz pays the
advancement made.

Hence, it is not correct for Tom Cruz to avoid liability under the trust receipt on the premise that
the goods were lost without his fault.

VI
Anton imported perfumes from Taiwan and these were released to him by the bank under a trust
receipt. While the perfumes were in Anton’s warehouse, thieves broke in and stole all of them.
Who will shoulder the loss of the stolen perfumes? Why? (10%)

Answer: Dimaampao, p. 406-407

Anton must bear the loss. The true nature of Anton’s transaction with the bank is that of a
contract of loan. He procured a loan and the perfumes were used as collateral. The trust receipt
was executed by the parties to evidence this security arrangement. Simply stated, the trust receipt
was a mere security to the obligation.

A trust receipt is a security agreement, pursuant to which a bank acquires a ‘security interest’ in
the goods. It secures indebtedness and there can be no such thing as security interest that secures
no obligation. If under the trust receipt the bank is made to appear as the owner, it was but an
artificial expedient, more of legal fiction than a fact, for if it were really so, it could dispose of
the goods in any manner it wants, which it cannot do, just to give consistency with 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. Thus, Anton cannot be relieved of his obligation to pay his loan in favor of the
bank notwithstanding the loss of the goods.
 VII
Ian, a lawyer, received a lot of diving and other water sports equipment as payment of his
professional fees by Cesar, his client in a child custody case. Cesar owned a diving and water
sports dealership in Cagayan de Oro. Ian decided to name Cesar as entrustee because he did not
have any experience in selling such specialized sports equipment. They executed a trust receipt
agreement with Ian as entrustor and Cesar as entrustee.

Before the sports equipment could be sold, a strong typhoon hit Cagayan de Oro which damaged
power lines causing power outage in the city and nearby places. Taking advantage of the total
darkness, unidentified thieves destroyed the padlocks of Cesar’s establishment and carted off the
equipment inside.

Ian demanded that Cesar pay the value of the stolen equipment, but the latter refused on the
ground that he also had suffered from the effects of the typhoon and insisted that the root cause
of the loss was fortuitous event or force majeure. Is the justification of Cesar warranted? Explain
your answer. (10%)

Answer: Dimaampao, p. 408; Rosario Textile Mills Corporation vs. Home Bankers Savings and
Trust Company, Inc., 462 SCRA 88

Cesar’s justification is not warranted. The risk of loss is borne by the entrustee. His liability is
not extinguished even if the loss was due to fortuitous event. (See Rosario Textile Mills
Corporation vs. Home Bankers Savings and Trust Company, Inc., 462 SCRA 88).

VIII
On June 17, 1983, X Corporation opened a Commercial Letter of Credit No. 4998 with Pilipinas
Bank in the amount of US$19,606.77. To secure the indebtedness, Pilipinas Bank required the
execution of a Trust Receipt in an amount equivalent to the letter of credit. Upon arrival of the
goods in the Philippines, X Corporation took possession and custody thereof. On November 23,
1983, the maturity date of the trust receipt, X Corporation defaulted in the payment of its
obligation to the bank and failed to turn over the goods to the latter. On July 24, 1984, Pilipinas
Bank demanded that X Corporation, as entrustees, turn over the goods subject of the trust
receipt. On September 24, 1984, X Corporation turned over the subject goods to the bank. On
July 31, 1985, the goods were sold at public auction. The goods were sold for P30,000.00 to
Pilipinas Bank as the highest bidder. The proceeds of the auction sale were insufficient to
completely satisfy the outstanding obligation of X Corporation to the bank. It demanded that X
Corporation pay the remaining balance of their obligation. X Corporation argued that Pilipinas
Bank has no right to recover any deficiency after it has retained possession of and subsequently
effected a public auction of the goods covered by the trust receipt. Is X Corporation correct?
(10%)

Answer: Landl & Company (Phil.) Inc., Percival G. Llaban and Manuel P. Lucente vs.
Metropolitan Bank & Trust Company, G.R. No. 159622, July 30, 2004; Commercial Law
Reviewer by Cesar Villanueva & Gabriel Villanueva

No. Trust Receipts Agreement being only a security for the loan agreement, the full turn-over of
the goods subject of the trust receipts does not suffice to divest debtors of their obligations to
repay principal amount of their loan. Sec. 7 of P.D. 115 expressly provides that entrustee shall be
liable to entruster for any deficiency.

IX
ABC Corporation was embroiled in three (3) labor cases which were eventually resolved against
it. With the finality of the three (3) decisions, writs of execution were issued. The Sheriff levied
on execution personal properties located in the factory. XYZ Bank filed an Affidavit of Third-
Party Claim asserting ownership over the seized properties on the strength of trust receipts
executed by ABC Corporation in its favor. The NLRC justifies the dismissal of petitioner's third-
party claim on the ground that trust receipts are mere security transactions which do not vest
upon XYZ Bank any title of ownership, and that although the Trust Receipt Agreements
described XYZ Bank as owner of the goods, there was no showing that it canceled the trust
receipts and took possession of the goods. Is the decision of NLRC correct? (10%)

Answer: Prudential Bank vs. NLRC, G.R. No. 112592, December 19, 1995; Commercial Law
Review by Cesar Vilanueva and Gabriel Villanueva

No. A trust receipt arrangement is more than a simple loan between creditor-entruster and
debtor-importer-entrustee. The law warrants the validity of entruster’s security interest in the
goods covered by the trust receipt against all other creditors of the entrustee – the goods cannot
be levied upon by the entrustee’s creditors, since the goods in the custody of entrustee are owned
by the entruster.

The NLRC argues that inasmuch as petitioner did not cancel the Trust Receipt Agreements and
took possession of the properties it could not claim ownership of the properties.

We do not agree. Significantly, the law uses the word "may" in granting to the entruster the right
to cancel the trust and take possession of the goods. Consequently, petitioner has the discretion
to avail of such right or seek any alternative action, such as a third-party claim or a separate civil
action which it deems best to protect its right, at anytime upon default or failure of the entrustee
to comply with any of the terms and conditions of the trust agreement.

X
Luzon Warehouse Corporation (LWC) received from Pedro 200 cavans of rice for deposit in its
warehouse for which a negotiable warehouse receipt was issued. While the goods were stored in
the said warehouse, Cicero obtained a judgment against Pedro for the recovery 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
sheriff’s order? (10%)

Answer: 1998 Bar

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 one who can comply with Section 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.