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applicant has not performed. The

LETTERS OF CREDIT
beneficiary of a commercial credit must
demonstrate by documents that he has
A. GOVERNING LAWS performed his contract. The beneficiary
of the standby credit must certify that his
obligor has not performed the contract.
1. TRANSFIELD PHILIPPINES, INC. V.
 By definition, a letter of credit is a written
LUZON HYDRO CORPORATION, ET AL.
instrument whereby the writer requests or
authorizes the addressee to pay money or
 In commercial transactions, a letter of deliver goods to a third person and
credit is a financial device developed by assumes responsibility for payment of
merchants as a convenient and relatively debt therefor to the addressee. A letter of
safe mode of dealing with sales of goods credit, however, changes its nature as
to satisfy the seemingly irreconcilable different transactions occur and if carried
interests of a seller, who refuses to part through to completion ends up as a
with his goods before he is paid, and a binding contract between the issuing and
buyer, who wants to have control of the honoring banks without any regard or
goods before paying. The use of credits in relation to the underlying contract or
commercial transactions serves to reduce disputes between the parties thereto
the risk of nonpayment of the purchase
price under the contract for the sale of 2. METROPOLITAN WATERWORKS AND
goods. However, credits are also used in SEWERAGE SYSTEM V. DAWAY, ET. AL
non-sale settings where they serve to
reduce the risk of nonperformance.
 Letters of Credits have long been and are
Generally, credits in the non-sale settings
still governed by the provisions of the
have come to be known as standby
Uniform Customs and Practice for
credits.
Documentary Credits of the International
 There are three significant differences
Chamber of Commerce. In the 1993
between commercial and standby credits.
Revision it provides in Art. 2 that "the
First, commercial credits involve the
expressions Documentary Credit(s) and
payment of money under a contract of
Standby Letter(s) of Credit mean any
sale. Such credits become payable upon
arrangement, however made or
the presentation by the seller-beneficiary
described, whereby a bank acting at the
of documents that show he has taken
request and on instructions of a customer
affirmative steps to comply with the sales
or on its own behalf is to make payment
agreement. In the standby type, the credit
against stipulated document(s)" and Art.
is payable upon certification of a party's
9 thereof defines the liability of the
nonperformance of the agreement. The
issuing banks on an irrevocable letter of
documents that accompany the
credit as a "definite undertaking of the
beneficiary's draft tend to show that the

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issuing bank, provided that the stipulated assumes no liability except to notify
documents are presented to the and/or transmit to the beneficiary the
nominated bank or the issuing bank and existence of the letter of credit.
the terms and conditions of the Credit are  In transactions where the letter of credit
complied with, to pay at sight if the Credit is payable on sight, the issuer must pay
provides for sight payment." upon due presentment. This obligation is
imbued with the character of definiteness
in that not even the defect or breach in the
 An irrevocable letter of credit is not a underlying transaction will affect the
guaranty--that is, not an accessory issuing bank's liability. This is the
contract, but a primary obligation by a Independence Principle in the law on
bank or other person made at the request letters of credit. Under such principle, the
of a customer that the issuer shall honor issuing bank's obligation to pay under the
drafts or other demands of payment upon letter of credit is separate from the
compliance with conditions specified in compliance of the parties in the main
the credit. What distinguishes a letter of contract. Thus, as long as the proper
credit from other accessory contracts is documents are presented, the issuing
that an issuing bank is to pay the seller bank has an obligation to pay even if the
upon presentment of the draft and buyer should later on refuse payment.
required shipping documents. In effect,
an undertaking to pay at sight conditioned
upon delivery of the required documents. B. DEFINITION AND NATURE OF LETTER
OF CREDIT
 Except when a letter of credit specifically
stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary 1. PRUDENTIAL BANK AND TRUST
with that of the person or entity COMPANY V. INTERMEDIATE
requesting for its issuance, since a letter APPELLATE COURT
of credit constitutes a direct, primary,
absolute and definite undertaking to pay
the beneficiary upon the presentation of  Letters of credit are strictly construed to
the set of documents required therein. the end that the rights of those directly
parties to them may be preserved and
3. HSBC v. National Steel Corp. their interest safeguarded. Like any other
writing, it will be construed most strongly
 Owing to the complexity of the contracts against the writer and so as to be
involving letters of credit, there may be a reasonable and consistent with honest
correspondent bank which facilitates the intentions.
ease of completing transactions. A  Liability on a letter of credit is created
correspondent bank may be a notifying through the honouring of drafts or other
bank, a negotiating bank or a confirming demands for payment upon compliance
with the conditions specified in the credit.
bank depending on the nature of
When this occurs, a bank substitutes its
obligations assumed. In case of a own promise to pay (and would later pay
notifying bank, the correspondent bank

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a certain seller) in place of a customer  Bringing the letter of credit to the

(who would ‘reimburse’ the bank). attention of the seller is the primordial
obligation of an advising bank.
2. TRANSFIELD PHILIPPINES, INC. V.
LUZON HYDRO CORPORATION, ET AL.
4. KENG HUA PAPER PRODUCTS V.
 The independent nature of the letter of
COURT OF APPEALS
credit may be: (a) independence in toto
where the credit is independent from the
justification aspect and is a separate  A transaction involving the purchase of
obligation from the underlying agreement goods may also require, apart from a
like for instance a typical standby; or (b) letter of credit, a contract of
independence may be only as to the transportation specially when the seller
justification aspect like in a commercial and the buyer are not in the same locale
letter of credit or repayment standby, or country, and the goods purchased have
which is identical with the same to be transported to the latter. Hence, the
obligations under the underlying contract of carriage, as stipulated in the
agreement. In both cases the payment bill of lading in the present case, must be
may be enjoined if in the light of the treated independently of the contract of
purpose of the credit the payment of the sale between the seller and the buyer, and
credit would constitute fraudulent abuse the contract for the issuance of a letter of
of the credit. credit between the buyer and the issuing
bank. Any discrepancy between the
amount of the goods described in the
3. BANK OF AMERICA V. COURT OF
commercial invoice in the contract of sale
APPEALS
and the amount allowed in the letter of
credit will not affect the validity and
 Between the seller and the negotiating enforceability of the contract of carriage
bank there is the usual relationship as embodied in the bill of lading.
existing between a drawer and purchaser
of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be
without recourse therefore, the 5. FEATI BANK & TRUST COMPANY V.
negotiating bank has the ordinary right of COURT OF APPEALS
recourse against the seller in the event of
dishonor by the issuing bank. The fact
that the correspondent and the negotiating  The correspondent bank may be called a
bank may be one and the same does not notifying bank, a negotiating bank, or a
affect its rights and obligations in either confirming bank. In case of a notifying
capacity, although a special agreement is bank, the correspondent bank assumes no
always a possibility. liability except to notify and/or transmit
to the beneficiary the existence of the
letter of credit. A negotiating bank, on the

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other hand, is a correspondent bank correspondent bank of the bank in the

which buys or discounts a draft under the country of the debtor that turns from
letter of credit. In the case of a confirming executory to executed or consummated
bank, the correspondent bank assumes a
contract. It is not the date of payment by
direct obligation to the seller and its
liability is a primary one as if the the debtor to the bank in his country of the
correspondent bank itself had issued the amount of foreign exchange sold that
letter of credit makes the contract executed or
 The notifying bank may suggest to the consummated, because the bank may
seller its willingness to negotiate, but this grant the debtor extension of time to pay
fact alone does not imply that the such debt.
notifying bank promises to accept the
 Until payment be made in foreign
draft drawn under the documentary
credit. currency of the amount applied for in the
 A notifying bank is not a privy to the letter of credit and approved and granted
contract of sale between the buyer and the by the bank, the same is not an executed
seller, its relationship is only with that of or consummated contract.
the issuing bank and not with the  The payment of the amount in foreign
beneficiary to whom he assumes no currency to the creditor by the bank or its
liability.
agent or correspondent is necessary to
consummate the contract. Hence the date
B. PERFECTION of such payment or delivery of the
amount in foreign currency to the creditor
1. BELMAN COMPANIA INCORPORADA V. determines whether such amount of
CENTRAL BANK OF THE PHILIPPINES foreign currency is subject to the tax
imposed by the Government of the
 An irrevocable letter of credit granted by country where such letter of credit was
a bank, which authorizes a creditor in a granted.
foreign country to draw upon a debtor of
another and to negotiate the draft through
the agent or correspondent bank or any
bank in the country of the creditor, is a
consummated contract, when the agent or
correspondent bank or any bank in the
country of the creditor pays or delivers to
the latter the amount in foreign currency,
as authorized by the bank in the country
of the debtor in compliance with the letter
of credit granted by it.
 It is the date of the payment of the
amount in foreign currency to the creditor
in his country by the agent or

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perfection of the contract from taking

I. LETTERS OF CREDIT
place.

C. PERFECTION D. RIGHTS AND OBLIGATIONS OF

PARTIES
2. JOHANNES SCHUBACK & SONS VS. CA
1. BPI VS DE RENY FABRIC INDUSTRIES
• The opening of a letter of credit in
favor of a vendor is only a mode of • In the absence of provision in our local
payment; It is not among the essential laws, letters of credit are governed by
requirements of a contract of sale established usage and customs in
enumerated in Arts. 1305 and 1474 of commerce (e.g. Uniform Customs and
Practices for Commercial Documentary
the Civil Code and therefore does not
Credits Fixed for the Thirteenth Congress
prevent the perfection of the contract of International Chamber of Commerce).
between the parties.—On the part of the
buyer, the situation reveals that private • Under the terms of their Commercial
respondent failed to open an irrevocable Letter of Credit Agreements with the
letter of credit without recourse in favor Bank, the appellants agreed that the Bank
of Johannes Schuback of Hamburg, shall not be responsible for the
"existence, character, quality, quantity,
Germany. This omission, however, does
conditions, packing, value, or delivery of
not prevent the perfection of the contract the property purporting to be represented
between the parties, for the opening of a by documents; for any difference in
letter of credit is not to be deemed a character, quality, quantity, condition, or
suspensive condition. The facts herein do value of the property from that expressed
not show that petitioner reserved title to in documents," or for "partial or
the goods until private respondent had incomplete shipment, or failure or
omission to ship any or all of the property
opened a letter of credit. Petitioner, in the
referred to in the Credit," as well as "for
course of its dealings with private any deviation from instructions, delay,
respondent, did not incorporate any default or fraud by the shipper or anyone
provision declaring their contract of sale else in connection with the property the
without effect until after the fulfillment of shippers or vendors and ourselves
the act of opening a letter of credit. The [purchasers] or any of us." Having agreed
opening of a letter of credit in favor of a to these terms, the appellants have,
therefore, no recourse but to comply with
vendor is only a mode of payment. It is their covenant.
not among the essential requirements of a
contract of sale enumerated in Articles • But even without the stipulation recited
1305 and 1474 of the Civil Code, the above, the appellants cannot shift the
absence of any of which will prevent the burden of loss to the Bank on account of
the violation by their vendor of its

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prestation. It was uncontrovertibly • In this case, the Letter of Credit had

proven by the Bank during the trial below become invalid upon the lapse of the
that banks, in providing financing in period fixed therein.
international business transactions such • Clearly, the bank paid Ekman when the
as those entered into by the appellants, do former was no longer bound to do so
not deal with the property to be exported under the LC. The records show that
or shipped to the importer, but deal only respondent paid the latter P76,000 for the
last two hydraulic loaders on March 14,
with documents. The Bank introduced in
1980,10 five months after the expiration
evidence a provision contained in the of the Letter of Credit on October 16,
"Uniform Customs and Practices for 1979.
Commercial Documentary Credits Fixed
for the Thirteenth Congress of • Thus, respondent should not have paid
International Chamber of Commerce," to Ekman; it was not obliged to do so. In the
which the Philippines is a signatory same vein, of no moment was Ekman’s
presentation, within the prescribed
nation. Article 10 thereof provides: . “In
period, of all the documents necessary for
documentary credit operations, all parties
collection, as the Letter of Credit had
concerned deal in documents and not in goods. —
Payment, negotiation or acceptance against
already expired and had in fact been
documents in accordance with the terms and cancelled.
conditions of a credit by a Bank authorized to do
so binds the party giving the authorization to take • Be that as it may, petitioner should still
up the documents and reimburse the Bank making pay respondent bank the disputed
the payment, negotiation or acceptance”. amount. The latter’s right to seek
recovery from petitioner is anchored, not
upon the inefficacious Letter of Credit,
• The existence of a custom in international
but on the principle of unjust enrichment
banking and financing circles negating under quasi contracts as enunciated in
any duty on the part of a bank to verify Article 2142 of the Civil Code.
whether what has been described in
letters of credits or drafts or shipping 3. ABAD VS. COURT OF APPEALS
documents actually tallies with what was
loaded aboard ship, having been
• A marginal deposit requirement is a
positively proven as a fact, the appellants
collateral security given by the debtor
are bound by this established usage. They
and is supposed to be returned to him
were, after all, the ones who tapped the
upon his compliance with his secured
facilities afforded by the Bank in order to
obligation.—The marginal deposit
engage in international business.
requirement is a Central Bank measure to
cut off excess currency liquidity which
2. RODZSSEN SUPPLY CO., INC. VS. FAR would create inflationary pressure. It is a
EAST BANK & TRUST CO. collateral security given by the debtor,
and is supposed to be returned to him
upon his compliance with his secured

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obligation. Consequently, the bank pays converted thereby into contracts of

no interest on the marginal deposit, unlike guaranty. That would make them ultra
an ordinary bank deposit which earns vires rather than a letter of credit, which
interest in the bank. As a matter of fact, is within the powers of a bank. The
the marginal deposit requirement for standby L/Cs are, "in effect an absolute
letters of credit has been discontinued, undertaking to pay the money advanced
except in those cases where the applicant or the amount for which credit is given on
for a letter of credit is not known to the the faith of the instrument."
bank or does not maintain a good credit
standing therein. • They are primary obligations and not
accessory contracts. Being separate and
• Requiring the importer to pay interest independent agreements, the payments
on the entire letter of credit without made by the Mendoza’s cannot be added
deducting first his marginal deposit in computing IBAA's liability under its
would be a clear case of unjust own standby letters of credit. Payments
enrichment by the bank.—It is not made by the Mendoza’s directly to
farfetched to assume that the bank used Philam Life are in compliance with their
TOMCO’s marginal deposit to partially own prestation under the loan
fund the P80,000 letter of credit it issued agreements. And although these
to TOMCO, hence, the interests and other payments could result in the reduction of
charges on said letter of credit should be the actual amount which could ultimately
levied only on the balance of P52,000 be collected from IBAA, the latter's
which was the portion that was actually separate undertaking under its L/Cs
funded or loaned by the bank from its remains.
own funds. Requiring the importer to pay
interest on the entire letter of credit 5. PHILIPPINE VIRGINIA TOBACCO
without deducting first his marginal ADMINISTRATION VS. DE LOS ANGELES
deposit, would be a clear case of unjust
enrichment by the bank.
• The Judge violated the irrevocability of
the letter of credit. An irrevocable letter
4. INSULAR BANK OF ASIA AND AMERICA VS. of credit cannot be cancelled or modified
INTERMEDIATE APPELLATE COURT without the express permission of the
beneficiary. Hence, if the findings during
• Unequivocally, the subject standby the trial show that Sevilla has an alleged
Letters of Credit secure the payment of unpaid balance due the petitioner, such
any obligation of the Mendozas to Philam unpaid obligation would be unsecured.
Life including all interests, surcharges
and expenses thereon but not to exceed • In this case, there appears no urgency for
P600,000.00. But while they are a the issuance of the Order and much less
security arrangement, they are not was there a clear legal right of Sevilla that

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has been violated by PVTA (Petitioner). Transfield Philippines, Inc. v. Luzon

Therefore, Judge De Los Angeles acted Hydro Corporation, et al., we held that
with abuse of discretion in ordering the the engagement of the issuing bank is to
dissolution of the letter of credit on the pay the seller or beneficiary of the credit
basis of assumptions for there was no once the draft and the required documents
showing that RA 4155 applies are presented to it. The so-called
retroactively to Sevilla in this case, “independence principle” assures the
modifying his contract with PVTA. seller or the beneficiary of prompt
payment independent of any breach of the
6. LAND BANK OF THE PHILIPPINES VS. main contract and precludes the issuing
MONET’S EXPORT AND MANUFACTURING bank from determining whether the main
CORPORATION contract is actually accomplished or not.

• The relationship between the

• The undertaking of a bank to pay,
beneficiary and the issuer of a letter of
accept and pay draft(s) or negotiate
credit is not strictly contractual,
and/or fulfill any other obligation
because both privity and a meeting of
under the credit is not subject to claims
the minds are lacking.—We find merit
or defenses by the applicant resulting
in the contention of Land Bank that, as
from his relationships with the issuing
the issuing bank in the documents and it
bank or the beneficiary.—Article 3 of
is not involved in the contract between
the Uniform Customs and Practice (UCP)
the parties. The relationship between the
for Documentary Credits provides that
beneficiary and the issuer of a letter of
credits, by their nature, are separate
credit is not strictly contractual, because
transactions from the sales or other
both privity and a meeting of the minds
contract(s) on which they may be base
are lacking. Thus, upon receipt by Land
and banks are in no way concerned with
Bank of the documents of title which
or bound by such contract(s), even if any
conform with what the letter of credit
reference whatsoever to such contract(s)
requires, it is duty bound to pay the seller,
is included in the credit. Consequently,
as it did in this case.
the undertaking of a bank to pay, accept
and pay draft(s) or negotiate and/or fulfill
any other obligation under the credit is E. INDEPENDENCE DOCTRINE
not subject to claims or defenses by the
applicant resulting from his relationships 1. BPI VS DE RENY FABRIC INDUSTRIES
with the issuing bank or the beneficiary.

• Goods shipped does not conform to the

• The engagement of the issuing bank is
LC. First, the letter of credit agreements
to pay the seller or beneficiary of the
show that the parties agreed that BPI shall
credit once the draft and the required
not be responsible for differences in
documents are presented to it.—In

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character, quality, quantity, condition or and therefore support, the agreement of

value of the property from that expressed the buyer/ importer to pay money under a
in their documents (here, the dyestuff). contract or other arrangement. It creates
Second, absent such provision, Art. 10 of in the seller/exporter a secure expectation
the Uniform Customs and Practices for of payment.
Commercial Documentary Credits Fixed
for the Thirteenth Congress of • Failure of Reliance to open the
International Chamber of Commerce, of appropriate L/ C did not prevent the
which the Philipines is a signatory, states birth of the contract and neither did
that in documentary credit operations, all such failure extinguish that contract.—
parties concerned deal in documents and We agree with the Court of Appeals that
not in goods. The bank is not required to Reliance and Daewoo, having reached “a
verify the goods themselves-- the bank meeting of minds” in respect of the
was only tapped in order to allow subject matter of the contract (2000
engagement in international business. metric tons of foundry pig iron with a
Such is a custom applicable to specified chemical composition), the
commercial transactions that will apply price thereof (US $380,600.00), and other
regardless of the lack of provision in the principal provisions, “they had a
contract and in our laws. BPI cannot be perfected contract. The failure of
liable on the agreement due to both Reliance to open, the appropriate L/C did
contract provisions and a custom taken as not prevent the birth of that contract and
part of our law. neither did such failure extinguish that
contract. The opening of the L/C in favor
2. RELIANCE COMMODITIES, INC. VS. of Daewoo was anobligation of Reliance
DAEWOO INDUSTRIAL CO., LTD. and the performance of that obligation by
Reliance was a condition for enforcement
of the reciprocal obligation of Daewoo to
• The primary purpose of the letter of
ship the subject matter of the contract the
credit is to substitute for, and therefore
foundry pig iron—to Reliance. But the
support, the agreement of the buyer/
contract itself between Reliance and
importer to pay money under a
Daewoo had already sprung into legal
contract or other arrangement.—A
existence and was enforceable.
letter of credit is one of the modes of
payment, set out in Sec. 8, Central Bank
• In undertaking to accept or pay the
Circular No. 1389, “Consolidated
drafts presented to it by the beneficiary
Foreign Exchange Rules and
according to the tenor of an L/ C, the
Regulations”, dated 13 April 1993, by
issuing bank in effect extends a loan to
which commercial banks sell foreign
the account party.—The L/C provided
exchange to service payments for, e.g.,
for in that contract was the mode or
commodity imports. The primary purpose
mechanism by which payment was to be
of the letter of credit is to substitute for,

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effected by Reliance of the price of the

pig iron. In undertaking to accept or pay
the drafts presented to it by the
beneficiary according to the tenor of an
L/C, and only later on being reimbursed
by the account party, the issuing bank in
effect extends a loan to the account party.
This loan feature, combined with the
bank’s undertaking to accept the
beneficiary’s drafts drawn on the bank,
constitutes the L/C as a mode of payment.
Logically, before the issuing bank opens
an L/C, it will take steps to ensure that it
would indeed be reimbursed when the
time comes. Before an L/C can be
opened, specific legal requirements must
be complied with.

• Court holds that failure of a buyer

seasonably to furnish an agreed letter
of credit is a breach of the contract
between buyer and seller.—We believe
and so hold that failure of a buyer
seasonably to furnish an agreed letter of
credit is a breach of the contract between
buyer and seller. Where the buyer fails to
open a letter of credit as stipulated, the
seller or exporter is entitled to claim
damages for such breach. Damages for
failure to open a commercial credit may,
in appropriate cases, include the loss of
profit which the seller would reasonably
have made had the transaction been
carried out.

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is given on the faith of the instrument."

LETTERS OF CREDIT
(Scribner v. Rutherford, 22 N.W. 670, 65
Iowa 551; Duval v. Trask,, 12 Mass. 154,
E. INDEPENDENCE DOCTRINE cited in 38 CJS, Sec. 7, p. 1142). They are
primary obligations and not accessory
contracts. Being separate and
3. INSULAR BANK OF ASIA AND AMERICA V.
independent agreements, the payments
INTERMEDIATE APPELLATE COURT, ET AL.
made by the Mendozas cannot be added
in computing IBAA's liability under its
• Letters of credit and contracts for the own standby letters of credit. Payments
issuance of such letters are subject to the made by the Mendozas directly to Philam
same rules of construction as are ordinary Life are in compliance with their own
commercial contracts. They are to receive prestation under the loan agreements.
a reasonable and not a technical And although these payments could result
construction and although usage and in the reduction of the actual amount
custom cannot control express terms in which could ultimately be collected from
letters of credit, they are to be construed IBAA, the latter's separate undertaking
with reference to all the surrounding facts under its L/Cs remains.
and circumstances, to the particular and
often varying terms in which they may be
F. FRAUD EXCEPTION PRINCIPLE
expressed, the circumstances and
intention of the parties to them, and the
usages of the particular trade of business 1. TRANSFIELD PHILIPPINES, INC. V. LUZON
contemplated. HYDRO CORPORATION, ET AL.

• Unequivocally, the subject standby • In commercial transactions, a letter of

Letters of Credit secure the payment of credit is a financial device developed by
any obligation of the Mendozas to Philam merchants as a convenient and relatively
Life including all interests, surcharges sa fe mode of dea ling with sa les of goods
and expenses thereon but not to exceed to sa tisfy the seemingly irreconcilable
P600,000.00. But while they are a interests of a seller, who refuses to part
security arrangement, they are not with his goods before he is paid, and a
converted thereby into contracts of buyer, who wants to have control of the
guaranty. That would make them ultra goods before paying; Generally, credits
vires rather than a letter of credit, which in non-sale settings have come to be
is within the powers of a bank (Section known as standby credits. — The letter of
74[e], RA 337, General Banking Act). 1 credit evolved as a mercantile specialty,
The standby L/Cs are, "in effect an and the only way to understand all its
absolute undertaking to pay the money facets is to recognize that it is an entity
advanced or the amount for which credit unto itself. The relationship between the

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beneficiary and the issuer of a letter of • Commercial Credits and Standby Credits,
credit is not strictly contractual, because Distinguished. — There are three
both privity and a meeting of the minds significant differences between
are lacking, yet strict compliance with its commercial and standby credits. First,
terms is an enforceable right. Nor is it a commercial credits involve the payment
third-party beneficiary contract, because of money under a contract of sale. Such
the issuer must honor drafts drawn credits become payable upon the
against a letter regardless of problems presentation by the seller-beneficiary of
subsequently arising in the underlying documents that show he has taken
contract. Since the bank’s customer affirmative steps to comply with the sales
cannot draw on the letter, it does not agreement. In the standby type, the credit
function as an assignment by the is payable upon certification of a party’s
customer to the beneficiary. Nor, if nonperformance of the agreement. The
properly used, is it a contract of documents that accompany the
suretyship or guarantee, because it entails beneficiary’s draft tend to show that the
a primary liability following a default. applicant has not performed. The
Finally, it is not in itself a negotiable beneficiary of a commercial credit must
instrument, because it is not payable to demonstrate by documents that he has
order or bearer and is generally performed his contract. The beneficiary
conditional, yet the draft presented under of the standby credit must certify that his
it is often negotiable. In commercial obligor has not performed the contract.
transactions, a letter of credit is a
financial device developed by merchants • A letter of credit changes its nature as
as a convenient and relatively safe mode different transactions occur and if carried
of dealing with sales of goods to satisfy through to completion ends up as a
the seemingly irreconcilable interests of a binding contract between the issuing and
seller, who refuses to part with his goods honoring banks without any regard or
before he is paid, and a buyer, who wants relation to the underlying contract or
to have control of the goods before disputes between the parties thereto. —
paying. The use of credits in commercial By definition, a letter of credit is a written
transactions serves to reduce the risk of instrument whereby the writer requests or
nonpayment of the purchase price under authorizes the addressee to pay money or
the contract for the sale of goods. deliver goods to a third person and
However, credits are also used in non- assumes responsibility for payment of
sale settings where they serve to reduce debt therefor to the addressee. A letter of
the risk of nonperfor mance. Generally, credit, however, changes its nature as
credits in the non-sale settings have come different transactions occur and if carried
to be known as standby credits. through to completion ends up as a
binding contract between the issuing and
honoring banks without any regard or

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relation to the underlying contract or the draft and the required documents are
disputes between the parties thereto. presented to it. The so-called
“independence principle” assures the
• Under the “independence principle,” seller or the beneficiary of prompt
banks assume no liability or payment independent of any breach of the
responsibility for the form, sufficiency, main contract and precludes the issuing
accuracy, genuineness, falsification or bank from determining whether the main
legal effect of any documents, or for the contract is actually accomplished or not.
general and/or particular conditions Under this principle, banks assume no
stipulated in the documents or liability or responsibility for the form,
superimposed thereon, nor do they sufficiency, accuracy, genuineness,
assume any liability or responsibility for falsification or legal effect of any
the description, quantity, weight, quality, documents, or for the general and/or
condition, packing, delivery, value or particular conditions stipulated in the
existence of the goods represented by any documents or superimposed thereon, nor
documents, or for the good faith or acts do they assume any liability or
and/or omissions, solvency, performance responsibility for the description,
or standing of the consignor, the carriers, quantity, weight, quality, condition,
or the insurers of the goods, or any other packing, delivery, value or existence of
person whomsoever.—Article 3 of the the goods represented by any documents,
UCP provides that credits, by their or for the good faith or acts and/or
nature, are separate transactions from the omissions, solvency, performance or
sales or other contract(s) on which they standing of the consignor, the carriers, or
may be based and banks are in no way the insurers of the goods, or any other
concerned with or bound by such person whomsoever.
contract(s), even if any reference
whatsoever to such contract(s) is included • The independent nature of the letter of
in the credit. Consequently, the credit may be: (a) independence in toto
undertaking of a bank to pay, accept and where the credit is independent from the
pay draft(s) or negotiate and/or fulfill any justification aspect and is a separate
other obligation under the credit is not obligation from the underlying
subject to claims or defenses by the agreement; or (b) independence may be
applicant resulting from his relationships only as to the justification aspect, though
with the issuing bank or the beneficiary. in both cases the payment may be
A beneficiary can in no case avail himself enjoined if in the light of the purpose of
of the contractual relationships existing the credit the payment of the credit would
between the banks or between the constitute fraudulent abuse of the
applicant and the issuing bank. Thus, the credit.—The independent nature of the
engagement of the issuing bank is to pay letter of credit may be: (a) independence
the seller or beneficiary of the credit once in toto where the credit is independent

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from the justification aspect and is a that may invoke the independence
separate obligation from the underlying principle on letters of credit—does not
agreement like for instance a typical impress this Court. To say that the
standby; or (b) independence may be only independence principle may only be
as to the justification aspect like in a invoked by the issuing banks would
commercial letter of credit or repayment render nugatory the purpose for which the
standby, which is identical with the same letters of credit are used in commercial
obligations under the underlying transactions. As it is, the independence
agreement. In both cases the payment doctrine works to the benefit of both the
may be enjoined if in the light of the issuing bank and the beneficiary.
purpose of the credit the payment of the
credit would constitute fraudulent abuse G. DOCTRINE OF STRICT COMPLIANCE
of the credit.

• The independence principle liberates the 1. FEATI BANK & TRUST COMPANY V.
issuing bank from the duty of COURT OF APPEALS, ET AL.
ascertaining compliance by the parties in
the main contract; As it is, the • Commercial transactions involving
independence doctrine works to the letters of credit are governed by the rule
benefit of both the issuing bank and the of strict compliance. — It is settled rule
beneficiary.—As discussed above, in a in commercial transactions involving
letter of credit transaction, such as in this letters of credit that the documents
case, where the credit is stipulated as tendered must strictly conform to the
irrevocable, there is a definite terms of the letter of credit. The tender of
undertaking by the issuing bank to pay documents by the beneficiary (seller)
the beneficiary provided that the must include all documents required by
stipulated documents are presented and the letter. A correspondent bank which
the conditions of the credit are complied departs from what has been stipulated
with. Precisely, the independence under the letter of credit, as when it
principle liberates the issuing bank from accepts a faulty tender, acts on its own
the duty of ascertaining compliance by risks and it may not thereafter be able to
the parties in the main contract. As the recover from the buyer or the issuing
principle’s nomenclature clearly bank, as the case may be, the money thus
suggests, the obligation under the letter of paid to the beneficiary. Thus the rule of
credit is independent of the related and strict compliance. In the United States,
originating contract. In brief, the letter of commercial transactions involving letters
credit is separate and distinct from the of credit are governed by the rule of strict
underlying transaction. Given the nature compliance. In the Philippines, the same
of letters of credit, petitioner’s holds true. The same rule must also be
argument—that it is only the issuing bank followed. The case of Anglo-South

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American Trust Co. v. Uhe et al. (184 the credit. On the other hand, a confirmed
N.E. 741 [1933]) expounded clearly on letter of credit pertains to the kind of
the rule of strict compliance. “We have obligation assumed by the correspondent
heretofore held that these letters of credit bank. In this case, the correspondent bank
are to be strictly complied with, which gives an absolute assurance to the
documents, and shipping documents must beneficiary that it will undertake the
be followed as stated in the letter. There issuing bank’s obligation as its own
is no discretion in the bank or trust according to the terms and conditions of
company to waive any requirements. The the credit.
terms of the letter constitutes an
agreement between the purchaser and the • Mere opening of a letter of credit does not
bank.” involve a specific appropriation of a sum
of money in favor of the beneficiary. —
• An irrevocable letter of credit is not The mere opening of a letter of credit, it
synonymous with a confirmed letter of is to be noted, does not involve a specific
credit; in an irrevocable letter of credit, appropriation of a sum of money in favor
the issuing bank may not, without the of the beneficiary. It only signifies that
consent of the beneficiary and the the beneficiary may be able to draw funds
applicant revoke his undertaking under upon the letter of credit up to the
the letter; whereas, in a confirmed letter designated amount specified in the letter.
of credit, the correspondent bank gives It does not convey the notion that a
and absolute assurance to the beneficiary particular sum of money has been
that it will undertake the issuing bank’s specifically reserved or has been held in
obligation as its own according to the trust. What actually transpires in an
terms and conditions of the credit. — The irrevocable credit is that the
trial court appears to have overlooked the correspondent bank does not receive in
fact that an irrevocable credit is not advance the sum of money from the buyer
synonymous with a confirmed credit. or the issuing bank. On the contrary,
These types of letters have different when the correspondent bank accepts the
meanings and the legal relations arising tender and pays the amount stated in the
from there varies. A credit may be an letter, the money that it doles out comes
irrevocable credit and at the same time a not from any particular fund that has been
confirmed credit or vice-versa. An advanced by the issuing bank, rather it
irrevocable credit refers to the duration of gets the money from its own funds and
the letter of credit. What it simply means then later seeks reimbursement from the
is that the issuing bank may not without issuing bank.
the consent of the beneficiary (seller) and The concept of guarantee vis-a-vis the
the applicant (buyer) revoke his concept of an irrevocable credit are
undertaking under the letter. The issuing inconsistent with each other.—The theory of
guarantee relied upon by the Court of
bank does not reserve the right to revoke
Appeals has to necessarily fail. The concept

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of guarantee vis-a-vis the concept of an specified in the trust receipt. — A letter

irrevocable credit are inconsistent with each of credit is a separate document from a
other. In the first place, the guarantee theory trust receipt. While the trust receipt may
destroys the independence of the bank’s
have been executed as a security on the
responsibility from the contract upon which
it was opened. In the second place, the nature letter of credit, still the two documents
of both contracts is mutually in conflict with involve different undertakings and
each other. In contracts of guarantee, the obligations. A letter of credit is an
guarantor’s obligation is merely collateral engagement by a bank or other person
and it arises only upon the default of the made at the request of a customer that the
person primarily liable. On the other hand, in issuer will honor drafts or other demands
an irrevocable credit the bank undertakes a
for payment upon compliance with the
primary obligation.
conditions specified in the credit.
Through a letter of credit, the bank
H. LETTER OF CREDIT VIS-À-VIS TRUST
merely substitutes its own promise to pay
RECEIPT TRANSACTION
for the promise to pay of one of its
customers who in return promises to pay
1. BANK OF COMMERCE V. SERRANO the bank the amount of funds mentioned
in the letter of credit plus credit or
• A letter of credit is an engagement by a commitment fees mutually agreed upon.
bank or other persons made at the request By contrast, a trust receipt transaction is
of a customer that the issuer will honor one where the entruster, who holds an
drafts or other demands for payment upon absolute title or security interests over
compliance with the conditions specified certain goods, documents or instruments,
in the credit; A trust receipt is one where released the same to the entrustee, who
the entruster, who holds an absolute title executes a trust receipt binding himself to
or security interests over certain goods, hold the goods, documents or instruments
documents or instruments, released the in trust for the entruster and to sell or
same to the entrustee, who executes a otherwise dispose of the goods,
trust receipt binding himself to hold the documents and instruments with the
goods, documents or instruments in trust obligation to turn over to the entruster the
for the entruster and to sell or otherwise proceeds thereof to the extent of the
dispose of the goods, documents and amount owing to the entruster, or as
instruments with the obligation to turn appears in the trust receipt, or return the
over to the entruster the proceeds thereof goods, documents or instruments
to the extent of the amount owing to the themselves if they are unsold, or not
entruster, or as appears in the trust otherwise disposed of, in accordance with
receipt, or return the goods, documents or the terms and conditions specified in the
instruments themselves if they are trust receipt.
unsold, or not otherwise disposed of, in
accordance with the terms and conditions TRUST RECEIPTS

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assist importers and merchants in their

1. NG V. PEOPLE OF THE PHILIPPINES financing in order to encourage
commerce in the Philippines.

• The sale of good, documents or • Following the precept of the law, such
instruments by a person in the business of transactions affect situations wherein the
selling goods, documents or instruments entruster, who owns or holds absolute
for profit who, at the outset of transaction, title or security interests over specified
has, as against the buyer, general property goods, documents or instruments,
rights in such goods, documents or releases the subject goods to the
instruments, or who sells the same to the possession of the entrustee. The release of
buyer on credit, retaining title or other such goods to the entrustee is conditioned
interest as security for the payment of the upon his execution and delivery to the
purchase price, does not constitute a trust entruster of a trust receipt wherein the
receipt transaction and is outside the former binds himself to hold the specific
purview and coverage of this Decree. goods, documents or instruments in trust
for the entruster and to sell or otherwise
• In other words, a trust receipt transaction dispose of the goods, documents or
is one where the entrustee has the instruments with the obligation to turn
obligation to deliver to the entruster the over to the entruster the proceeds to the
price of the sale, or if the merchandise is extent of the amount owing to the
not sold, to return the merchandise to the entruster or the goods, documents or
entruster. There are, therefore, two instruments themselves if they
obligations in a trust receipt transaction: are unsold. Similarly, we held in State
the first refers to money received under Investment House v. CA, et al. that the
the obligation involving the duty to turn entruster is entitled "only to the proceeds
it over (entregarla) to the owner of the derived from the sale of goods released
merchandise sold, while the second refers under a trust receipt to the entrustee."
to the merchandise received under the Considering that the goods in this case
obligation to "return" it (devolvera) to the were never intended for sale but for use
owner. in the fabrication of steel communication
towers, the trial court erred in ruling that
• The true nature of a trust receipt the agreement is a trust receipt
transaction can be found in the "whereas" transaction.
clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient
2. GONZALEZ V. HONGKONG & SHANGHAI
business device to assist importers and
BANKING CORPORATION
merchants solve their financing
problems." Obviously, the State, in
enacting the law, sought to find a way to • A trust receipt transaction imposes upon
the entrustee the obligation to deliver to

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the entruster the price of the sale, or if the or the goods if not sold, constitutes a
merchandise is not sold, to return the criminal offense that causes prejudice not
same to the entruster, and a violation of only to another, but more to the public
any of these undertakings constitutes interest. This is a matter of public policy
estafa defined under Art. 315(1)(b) of the as declared by the legislative authority.
Revised Penal Code, as provided by Moreover, this Court already held
Section 13 of Presidential Decree 115. — previously that failure of the entrustee to
In general, a trust receipt transaction turn over the proceeds of the sale of the
imposes upon the entrustee the obligation goods, covered by the trust receipt, to the
to deliver to the entruster the price of the entruster or to return said goods if they
sale, or if the merchandise is not sold, to were not disposed of in accordance with
return the same to the entruster. There are the terms of the trust receipt shall be
thus two obligations in a trust receipt punishable as estafa under Art. 315(1)(b)
transaction: the first, refers to money of the Revised Penal Code without need
received under the obligation involving of proving intent to defraud.
the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the • The last sentence of Section 13 of the
second refers to merchandise received Trust Receipts Law, explicitly imposes
under the obligation to “return” it the penalty provided therein upon
(devolvera) to the owner. A violation of “directors, officers, employees or other
any of these undertakings constitutes officials or persons therein responsible
estafa defined under Art. 315(1)(b) of the for the offense, without prejudice to the
Revised Penal Code, as provided by Sec. civil liabilities arising from the criminal
13 of Presidential Decree 115. offense,” of a corporation, partnership,
association or other juridical entities
• The offense punished under Presidential found to have violated the obligation
Decree No. 115 is in the nature of malum imposed under the law, the rationale
prohibitum—a mere failure to deliver the being that these officers and employees
proceeds of the sale or the goods if not are vested with the authority and
sold, constitutes a criminal offense that responsibility to devise means necessary
causes prejudice not only to another, but to ensure compliance with the law, and if
more to the public interest. — That they fail to do so, are held criminally
petitioner Gonzalez neither had the intent accountable.—As a last ditch effort to
to defraud respondent HSBC nor exculpate himself from the offense
personally misused/misappropriated the charged, petitioner Gonzalez posits that,
goods subject of the trust receipts is of no “the fact that (he) held a high position in
moment. The offense punished under MLRC was not sufficient reason to
Presidential Decree No. 115 is in the charge him for alleged violation of trust
nature of malum prohibitum. A mere receipts.” Unfortunately, it is but a futile
failure to deliver the proceeds of the sale attempt. Though petitioner Gonzalez

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signed the Trust Receipts merely as a not be able to acquire credit except
corporate officer of MLRC and had no through utilization, as collateral, of the
physical possession of the goods subject merchandise imported or purchased. — A
of such receipts, he cannot avoid trust receipt is considered a security
responsibility for violation of Presidential transaction designed to provide financial
Decree No. 115 for two unpretentious assistance to importers and retail dealers
reasons: first, that the last sentence of who do not have sufficient funds or
Section 13 of the “Trust Receipts Law,” resources to finance the importation or
explicitly imposes the penalty provided purchase of merchandise, and who may
therein upon “directors, officers, not be able to acquire credit except
employees or other officials or persons through utilization, as collateral, of the
therein responsible for the offense, merchandise imported or purchased. It is
without prejudice to the civil liabilities a document in which is expressed a
arising from the criminal offense,” of a security transaction where the lender,
corporation, partnership, association or having no prior title to the goods on
other juridical entities found to have which the lien is to be constituted, and not
violated the obligation imposed under the having possession over the same since
law. The rationale for making such possession thereof remains in the
officers and employees responsible for borrower, lends his money to the
the offense is that they are vested with the borrower on security of the goods which
authority and responsibility to devise the borrower is privileged to sell, clear of
means necessary to ensure compliance the lien, with an agreement to pay all or
with the law and, if they fail to do so, are part of the proceeds of the sale to the
held criminally accountable; thus, they lender. It is a security agreement pursuant
have a responsible share in the violations to which a bank acquires a “security
of the law. And second, a corporation or interest” in the goods. It secures a debt,
other juridical entity cannot be arrested and there can be no such thing as security
and imprisoned; hence, cannot be interest that secures no obligation.
penalized for a crime punishable by
imprisonment. • The subject trust receipts, being contracts
of adhesion, are not per se invalid and
3. METROPOLITAN BANK & TRUST COMPANY inefficacious. — The subject trust
V . GO receipts, being contracts of adhesion, are
not per se invalid and inefficacious. But
should there be ambiguities therein, such
• A trust receipt is considered a security
ambiguities are to be strictly construed
transaction designed to provide financial
against Metrobank, the party that
assistance to importers and retail dealers
prepared them.
who do not have sufficient funds or
resources to finance the importation or
purchase of merchandise, and who may

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4. DEVELOPMENT BANK OF THE PHILIPPINES processed form until the entrustee has
V. PRUDENTIAL BANK complied fully with his obligation under
the trust receipt; or (c) the loading,
unloading, shipment or transshipment or
• In a trust receipt transaction, the goods
otherwise dealing with them in a manner
are released by the entruster (who owns
preliminary or necessary to their sale.
or holds absolute title or security interests
Thus, in a trust receipt transaction, the
over the said goods) to the entrustee on
release of the goods to the entrustee, on
the latter’s execution and delivery to the
his execution of a trust receipt, is
entruster of a trust receipt.—In a trust
essentially for the purpose of their sale or
receipt transaction, the goods are released
is necessarily connected with their
by the entruster (who owns or holds
ultimate or subsequent sale.
absolute title or security interests over the
said goods) to the entrustee on the latter’s
execution and delivery to the entruster of 5. PILIPINAS BANK V. ONG
a trust receipt. The trust receipt evidences
the absolute title or security interest of the • Section 4 of PD No. 115 (The Trust
entruster over the goods. As a Receipts Law) defines a trust receipt as
consequence of the release of the goods any transaction by and between a person
and the execution of the trust receipt, a referred to as the entruster, and another
two-fold obligation is imposed on the person referred to as the entrustee,
entrustee, namely: (1) to hold the whereby the entruster who owns or holds
designated goods, documents or absolute title or security interest over
instruments in trust for the purpose of certain specified goods, documents or
selling or otherwise disposing of them instruments, releases the same to the
and (2) to turn over to the entruster either possession of the entrustee upon the
the proceeds thereof to the extent of the latter’s execution and delivery to the
amount owing to the entruster or as entruster of a signed document called a
appears in the trust receipt, or the goods, “trust receipt” wherein the entrustee
documents or instruments themselves if binds himself to hold the designated
they are unsold or not otherwise disposed goods, documents or instruments with the
of, in accordance with the terms and obligation to turn over to the entruster the
conditions specified in the trust receipt. In proceeds thereof to the extent of the
the case of goods, they may also be amount owing to the entruster or as
released for other purposes substantially appears in the trust receipt, or the goods,
equivalent to (a) their sale or the documents or instruments themselves if
procurement of their sale; or (b) their they are unsold or not otherwise disposed
manufacture or processing with the of, in accordance with the terms and
purpose of ultimate sale, in which case conditions specified in the trust receipt.
the entruster retains his title over the said
goods whether in their original or

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• Failure of the entrustee to turn over the

proceeds of the sale of the goods covered
by a trust receipt to the entruster or to
return the goods, if they were not
disposed of, shall constitute the crime of
estafa.— Failure of the entrustee to turn
over the proceeds of the sale of the goods
covered by a trust receipt to the entruster
or to return the goods, if they were not
disposed of, shall constitute the crime of
estafa under Article 315, par. 1(b) of the
Revised Penal Code. If the violation or
offense is committed by a corporation,
the penalty 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.

• Mere failure to deliver the proceeds of the

sale or the goods, if not sold, constitutes
violation of PD No. 115.—Mere failure
to deliver the proceeds of the sale or the
goods, if not sold, constitutes violation of
PD No. 115. However, what is being
punished by the law is the dishonesty and
abuse of confidence in the handling of
money or goods to the prejudice of
another regardless of whether the latter is
the owner.

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6. Nacu vs Court of Appeals
 Under pertinent laws, the trust receipt is a separate and independent security transaction intended to aid
in financing importers whereby the imported goods are held as security by the lending institution for
the loan obligation. In the case of Vintola v. Insular Bank of Asia and America this Court explained the
nature and usage of trust receipts as follows: “ ‘x x x. 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 a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security feature which is in
the covering trust receipt. 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. “ ‘x x x. A trust receipt is considered as 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. x x x.’ ”
 Finally, if the parties intended the 1982 real estate mortgage to apply to the 1983 loan transaction,
respondent Bank should have required petitioners spouses to execute the proper loan documents clearly
and categorically constituting upon the same property a real estate mortgage. The respondent Bank
failed in this regard and must therefore suffer the consequences.
7. Lee vs Court of Appeals

 A trust receipt is considered as 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. A trust receipt, therefor, is a document of security pursuant to
which a bank acquires a "security interest" in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a
security for the loan. The transaction involves a loan feature represented by a letter of credit, and a
security feature which is in the covering trust receipt which secures an indebtedness.
 Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety
agreements, we need only point out that the consideration for the sureties is the very consideration for
the principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries
Corporation vs. Court of Appeals, we ruled that the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that makes the contract effective
between the parties thereto. It is not necessary that a guarantor or surety should receive any part or
benefit, if such there be, accruing to his principal.
9. Vintola vs Insular Bank of Asia and America
 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." 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."
 Contrary to the allegation 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. 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.
11. Ching vs Secretary of Justice

 Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees
or other officers or persons responsible for the offense, without prejudice to the civil liabilities of
such corporation and/or board of directors, officers, or other officials or employees responsible for
the offense. The rationale is that such officers or employees are vested with the authority and
responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so,
are held criminally accountable; thus, they have a responsible share in the violations of the law. If the
crime is committed by a corporation or other juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a
corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the
statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.
 When a penal statute does not expressly apply to corporations, it does not create an offense for which
a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may
be committed by a corporation but prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty of the crime. The
principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to
those corporate agents who themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation, could be deemed responsible for its
commission, if by virtue of their relationship to the corporation, they had the power to prevent the
act. Moreover, all parties active in promoting a crime, whether agents or not, are principals. Whether
such officers or employees are benefited by their delictual acts is not a touchstone of their criminal
liability. Benefit is not an operative fact. In this case, petitioner signed the trust receipts in question.
He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In the words
of Chief Justice Earl Warren, a corporate officer cannot protect himself behind a corporation where
he is the actual, present and efficient actor.
12. Colinares vs Court of Appeals
 Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction
by and between a person referred to as the entruster, and another person referred to as the entrustee,
whereby the entruster who owns or holds absolute title or security interest 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 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.
 There are two possible situations in a trust receipt transaction. The first is covered by the provision
which refers to money received under the obligation involving the duty to deliver it (entregarla) to
 the owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to "return" it (devolvera) to the owner.
 Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt
to the entruster or to return said goods if they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code, without
need of proving intent to defraud.
 This situation belies what normally obtains in a pure trust receipt transaction where goods are owned
by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank
acquires a "security interest" in the goods as holder of a security title for the advances it had made to
the entrustee. The ownership of the merchandise continues to be vested in the person who had
advanced payment until he has been paid in full, or if the merchandise has already been sold, the
proceeds of the sale should be turned over to him by the importer or by his representative or successor
in interest. To secure that the bank shall be paid, it takes full title to the goods at the very beginning
and continues to hold that title as his indispensable security until the goods are sold and the vendee
is called upon to pay for them; hence, the importer has never owned the goods and is not able to
deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where
the importer becomes absolute owner of the imported merchandise as soon as he has paid its price.
 The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners
there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
 Petitioners Veloso's claim that they were made to believe that the transaction was a loan was also not
denied by PBC. PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
contracted with Petitioners, to refute Veloso's testimony, yet it only presented credit investigator
Grego Mutia. Nowhere from Mutia's testimony can it be gleaned that PBC represented to Petitioners
that the transaction they were entering into was not a pure loan but had trust receipt implications.
 The Information charges Petitioners with intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners' situation. Petitioners employed no artifice in dealing
with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead,
Petitioners sought favorable terms precisely to meet their obligation.
13 Rosario Textile Mills Corporation vs Home Bankers Savings and Trust Company
 In Samo vs. People, we described a trust receipt as “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.”
 In Vintola vs. Insular Bank of Asia and America, we elucidated further that “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.
 Under the Parol Evidence Rule, the terms of a contract are rendered conclusive upon the parties and
evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement
embodied in a document. We have carefully examined the Suretyship Agreement signed by Yujuico
and found no ambiguity therein.
14 Metropolitan Bank and Trust Company vs Tonda
 The Trust Receipts Law declares the failure to turn over the goods or the proceeds realized from the
sale thereof, as a criminal offense punishable under Article 315 (1) (b) of the Revised Penal Code. The
 law is violated whenever the entrustee or the person to whom the trust receipts were issued in favor of
fails to: (1) return the goods covered by the trust receipts; or (2) return the proceeds of the sale of the
said goods. The foregoing acts constitute estafa punishable under Article 315 (1) (b) of the Revised
Penal Code. Given that various trust receipts were executed by the TONDAS and that as entrustees,
they did not return the proceeds from the goods sold nor the goods themselves to METROBANK, there
is no dispute that that the TONDAS failed to comply with the obligations under the trust receipts despite
several demands from METROBANK.
 Reliance on the negotiations for the settlement of the trust receipts obligations between the TONDAS
and METROBANK is simply misplaced. The negotiations pertain and affect only the civil aspect of
the case but does not preclude prosecution for the offense already committed. It has been held that
"[a]ny compromise relating to the civil liability arising from an offense does not automatically
terminate the criminal proceeding against or extinguish the criminal liability of the malefactor." All
told, the P2.8 Million deposit could not be considered as having settled the trust receipts obligations of
the TONDAS to the end of extinguishing any incipient criminal culpability arising therefrom.
 Article 1288 of the Civil Code provides that "compensation shall not be proper when one of the debts
consists in civil liability arising from a penal offense" as in the case at bar. The raison d'etre for this is
that, "if one of the debts consists in civil liability arising from a penal offense, compensation would be
improper and inadvisable because the satisfaction of such obligation is imperative."
14. People vs Nitafan
 Acts involving the violation of trust receipt agreements occurring after 29 January 1973 (date of
enactment of P.D. 115) would make the accused criminally liable for estafa under paragraph 1 (b),
Article 315 of the RPC pursuant to the explicit provision in Section 13 of P.D. 115.
 Contrary to the reasoning of the respondent court and the accused, a trust receipt arrangement does not
involve a simple loan transaction between a creditor and a debtor-importer. Apart from a loan feature,
the trust receipt arrangement has a security feature that is covered by the trust receipt itself. (Vintola v.
Insular Bank of Asia and America, 151 SCRA 578 [1987]) That second feature is what provides the
much needed financial assistance to our traders in the importation or purchase of goods or merchandise
through the use of those goods or merchandise as collateral for the advancements made a bank. (Samo v.
People, supra). The title of the bank to the security is the one sought to be protected and not the loan
which is a separate and distinct agreement.
 The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another regardless of whether the latter is the owner or not. The law does not
seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for
non-payment of a debt. As correctly observed by the Solicitor General, P.D. 115, like Batas Pambansa
Blg. 22, punishes the act "not as an offense against property, but as an offense against public order. The
misuse of trust receipts therefore should be deterred to prevent any possible havoc in trade circles and
the banking community. It is in the context of upholding public interest that the law now specifically
designates a breach of a trust receipt agreement to be an act that "shall" make one liable for estafa.
 The offense is punished as a malum prohibitum regardless of the existence of intent or malice. A mere
failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that
causes prejudice not only to another, but more to the public interest.
15 Landl & Company Inc. vs Metropolitan Bank and Trust Co.
 As ruled in a previous case, 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.
 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.
 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.
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TRUST RECEIPTS
 The Court reiterates that the enactment of
P.D. 115 is a valid exercise of the police
A. TITLE OF SUBTOPIC power of the State and is, thus,
constitutional. (Lee v. Rodil, supra;
Lozano v. Martinez, supra) The
15. PEOPLE OF THE PHILIPPINES AND
arguments of the respondent are
ALLIED BANKING CORP. V. JUDGE NITAFAN
appropriate for a repeal or modification
AND SIA
of the law and should be directed to
Congress. But until the law is repealed,
 Acts involving the violation of trust we are constrained to apply it.
receipt agreements occurring after 29
January 1973 (date of enactment of P.D.
16. ONG V. COURT OF APPEALS
115) would make the accused criminally
liable for estafa under paragraph 1 (b),
Article 315 of the Revised Penal Code  The Trust Receipts Law is violated
pursuant to the explicit provision in whenever the entrustee fails to: (1) turn
Section 13 of P.D. 115. over the proceeds of the sale of the goods,
or (2) return the goods covered by the
 The Trust Receipts Law punishes the trust receipts if the goods are not sold.
The mere failure to account or return
dishonesty and abuse of confidence in the
gives rise to the crime which is malum
handling of money or goods to the
prohibitum. There is no requirement to
prejudice of another regardless of prove intent to defraud.
whether the latter is the owner or not. The
law does not seek to enforce payment of  The Trust Receipts Law recognizes the
the loan. Thus, there can be no violation impossibility of imposing the penalty of
of a right against imprisonment for non- imprisonment on a corporation, hence, if
payment of a debt. the entrustee is a corporation, the law
makes the officers or employees or other
 P.D. 115 punishes the act “not as an persons responsible for the offense liable
offense against property, but as an to suffer the penalty of imprisonment.
The reason is obvious: corporations,
offense against public order.” The
partnerships, associations and other
prevalent use of trust receipts, the danger juridical entities cannot be put to jail.
of their misuse and/or misappropriation Hence, the criminal liability falls on the
of the goods or proceeds realized from the human agent responsible for the violation
sale of goods, documents or instruments of the Trust Receipts Law. In the instant
held in trust for entruster-banks, and the case, the Bank was the entruster while
need for regulation of trust receipt ARMAGRI was the entrustee. Being the
entrustee, ARMAGRI was the one
transactions to safeguard the rights and responsible to account for the goods or its
enforce the obligations of the parties proceeds in case of sale. However, the
involved are the main thrusts of P.D. 115. criminal liability for violation of the Trust

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Receipts Law falls on the human agent  Petitioner could have raised the defense
responsible for the violation. Petitioner, that he had nothing to do with the failure
who admits being the agent of to account for the proceeds or to return
ARMAGRI, is the person responsible for the goods. Petitioner could have shown
the offense for two reasons. First, that he had severed his relationship with
petitioner is the signatory to the trust ARMAGRI prior to the loss of the
receipts, the loan applications and the proceeds or the disappearance of the
letters of credit. Second, despite being the goods. Petitioner, however, waived his
signatory to the trust receipts and the right to present any evidence, and thus
other documents, petitioner did not failed to show that he is not responsible
explain or show why he is not responsible for the violation of the Trust Receipts
for the failure to turn over the proceeds of Law.
the sale or account for the goods covered
by the trust receipts.  Under the Trust Receipts Law, it is
sufficient to allege and establish the
 Under the law, mere failure by the failure of ARMAGRI, whom petitioner
entrustee to account for the goods
represented, to remit the proceeds or to
received in trust constitutes estafa. The
Trust Receipts Law punishes dishonesty return the goods to the Bank. When
and abuse of confidence in the handling petitioner signed the trust receipts, he
of money or goods to the prejudice of claimed he was representing ARMAGRI.
public order. The mere failure to deliver The corporation obviously acts only
the proceeds of the sale or the goods if not through its human agents and it is the
sold constitutes a criminal offense that conduct of such agents which the law
causes prejudice not only to the creditor,
but also to the public interest. Evidently, must deter. The existence of the corporate
the Bank suffered prejudice for neither entity does not shield from prosecution
money nor the goods were turned over to the agent who knowingly and
the Bank. intentionally commits a crime at the
instance of a corporation.
 Petitioner acted on behalf of ARMAGRI.
However, it is a well-settled rule that the  As for the civil liability arising from the
law of agency governing civil cases has
criminal offense, the question is whether
no application in criminal cases. When a
person participates in the commission of as the signatory for ARMAGRI,
a crime, he cannot escape punishment on petitioner is personally liable pursuant to
the ground that he simply acted as an the provision of Section 13 of the Trust
agent of another party. In the instant case, Receipts Law. : It is clear that if the
the Bank accepted the trust receipts violation or offense is committed by a
signed by petitioner based on petitioner’s corporation, partnership, association or
representations. It is the fact of being the
other juridical entities, the penalty shall
signatory to the two trust receipts, and
thus a direct participant to the crime, be imposed upon the directors, officers,
which makes petitioner a person employees or other officials or persons
responsible for the offense. responsible for the offense. The penalty
referred to is imprisonment, the duration

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of which would depend on the amount of vendor requiring the vendee to

the fraud as provided for in Article 315 of acknowledge this fact in some way, even
the Revised Penal Code. The reason for by a simple signature on these documents
this is obvious: corporation, partnership, alone if not in fact by the execution of
association or other juridical entities some appropriate document, such as a
cannot be put in jail. However, it is these delivery receipt.
entities which are made liable for the civil
liabilities arising from the criminal  At any rate, Ramos has categorically and
offense. This is the import of the clause consistently denied ever having received
‘without prejudice to the civil liabilities the goods either from the Bank or the
arising from the criminal offense’. In suppliers. And this was because,
according to her, the suppliers simply
Prudential Bank, the Court ruled that the
refused to part with the goods as no
person signing the trust receipt for the payment had been made therefor by the
corporation is not solidarily liable with Bank. Now, the issue could quite easily
the entrustee-corporation for the civil have been resolved by the production of
liability arising from the criminal offense. the delivery receipts or the testimony of
He may, however, be personally liable if the employees who made the supposed
deliveries. And the prosecution could not
he bound himself to pay the debt of the
have been unaware of such evidence, its
corporation under a separate contract of ready accessibility, and its importance,
surety or guaranty. specially after the appellant had
disclaimed receipt of the goods in
17. RAMOS V. COURT OF APPEALS question. Yet the existence of that
evidence is placed in serious doubt by the
fact that the prosecution made no effort to
 Examined against the evidence of record, bring it before the Court, although it
the assailed factual findings as to the could have done so routinely and without
receipt of the merchandise and the any difficulty whatever. Certainly, this
damage sustained by the Bank cannot omission cannot be taken against the
accused, who is presumed innocent until
stand. The proofs are indeed inadequate
the contrary is proved beyond reasonable
on these propositions of fact. It is difficult doubt. It is after all the duty of the
to accept the prosecution's theory that it prosecution to establish the existence of
has furnished sufficient proof of delivery all the elements of the crime charged.
by the introduction in evidence of the
commercial invoices attached to the  The omission to present obvious and
applications for the letters of credit and of available primary items of proof is also
perceived in' the attempted substantiation
the trust receipts. The invoices are
of the claim that the Bank paid the
actually nothing more than lists of the suppliers for the goods, and thereby
items sought to be purchased and their suffered damage. Under its standard
prices; and it can scarcely be believed that procedures, the Bank effects payment on
goods worth no mean sum actually a negotiated letter of credit by the
transferred hands without the unpaid issuance of a check, the cancelled check

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being the invariable proof that shoes of the original creditor as subrogee
negotiation has been consummated. of the latter. Petitioners’ obligations were
Again, not one such check issued by the not extinguished.
Bank to the suppliers was ever submitted,
or any receipt signed by any supplier, or  Petitioners finally posit (third issue) that
any of the Bank's books, ledgers, or as an entruster, respondent BAFC must
journals reflecting any of the first demand the return of the unsold
disbursements, in settlement of Ramos' vehicles from Fortune Motors
accounts with her suppliers. This rather Corporation, pursuant to the terms of the
sorry state of the evidence against the trust receipts. Having failed to do so,
accused, who is to be presumed innocent petitioners had no cause of action
until the contrary is proved beyond whatsoever against Fortune Motors
reasonable doubt, compels a reversal of Corporation and the action for collection
her convictions in all four cases. of sum of money was, therefore,
premature. A trust receipt is a security
18. SOUTH CITY HOMES V. BA FINANCE transaction intended to aid in financing
importers and retail dealers who do not
CORP.
have sufficient funds or resources to
finance the importation or purchase of
 On the first issue, petitioners assert that merchandise, and who may not be able to
the suretyship agreement they signed is acquire credit except through utilization,
void because there was no principal as collateral, of the merchandise imported
or purchased. In the event of default by
obligation at the time of signing as the the entrustee on his obligations under the
principal obligation was signed six (6) trust receipt agreement, it is not
months later. The Civil Code, however, absolutely necessary that the entruster
allows a suretyship agreement to secure cancel the trust and take possession of the
future loans even if the amount is not yet goods to be able to enforce his rights
known. Article 2053 of the Civil Code thereunder. We ruled: “x x x
Significantly, the law uses the word
provides that: “Art. 2053—A guaranty
“may” in granting to the entruster the
may also be given as security for future right to cancel the trust and take
debts, the amount of which is not yet possession of the goods. Consequently,
known. x x x” petitioner has the discretion to avail of
such right or seek any alternative action,
 An assignment of credit is an agreement such as a third party claim or a separate
by virtue of which the owner of a credit, civil action which it deems best to protect
known as the assignor, by a legal cause, its right, at any time upon default or
such as sale, dacion en pago, exchange or failure of the entrustee to comply with
donation, and without the consent of the any of the terms and conditions of the
debtor, transfers his credit and accessory trust agreement.”
rights to another, known as the assignee,
who acquires the power to enforce it to
the same extent as the assignor could
enforce it against the debtor. As a
consequence, the third party steps into the

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19. PHILIPPINE NATIONAL BANK V. JUDGE obligation. As defined in our laws: (h)
PINEDA ‘Security interest’ means a property
interest in goods, documents or
instruments to secure performance of
 We rule for the petitioner PNB. It must be some obligations of the entrustee or of
remembered that PNB took possession of some third persons to the entruster and
the imported cement plant machinery and includes title, whether or not expressed to
equipment pursuant to the trust receipt be absolute, whenever such title is in
agreement executed by and between PNB substance taken or retained for security
and TCC giving the former the only.’ x x x x x x x x x Contrary to the
unqualified right to the possession and allegation of the VINTOLAS, IBAA did
disposal of all property shipped under the not become the real owner of the goods.
Letter of Credit until such time as all the It was merely the holder of a security title
liabilities and obligations under said for the advances it had made to the
Letter had been discharged. In the case of VINTOLAS. The goods the VINTOLAS
Vintola vs. Insular Bank of Asia and had purchased through IBAA financing
America wherein the same argument was remain their own property and they hold
advanced by the Vintolas as entrustees of it at their own risk. The trust receipt
imported seashells under a trust receipt arrangement did not convert the IBAA
transaction, we said: “Further, the into an investor; the latter remained a
VINTOLAS take the position that their lender and creditor. x x x x x x x x x Since
obligation to IBAA has been the IBAA is not the factual owner of the
extinguished inasmuch as, through no goods, the VINTOLAS cannot justifiably
fault of their own, they were unable to claim that because they have surrendered
dispose of the seashells, and that they the goods to IBAA and subsequently
have relinquished possession thereof to deposited them in the custody of the
the IBAA, as owner of the goods, by court, they are absolutely relieved of their
depositing them with the Court. The obligation to pay their loan because of
foregoing submission overlooks the their inability to dispose of the goods.
nature and mercantile usage of the The fact that they were unable to sell the
transaction involved. A letter of credit- seashells in question does not affect
trust receipt arrangement is endowed with IBAA’s right to recover the advances it
its own distinctive features and had made under the Letter of Credit.”
characteristics. Under that set-up, a bank PNB’s possession of the subject
extends a loan covered by the Letter of machinery and equipment being precisely
Credit, with the trust receipt as a security as a form of security for the advances
for the loan. In other words, the given to TCC under the Letter of Credit,
transaction involves a loan feature said possession by itself cannot be
represented by the letter of credit, and a considered payment of the loan secured
security feature which is in the covering thereby. Payment would legally result
trust receipt. x x x x x x x x x A trust only after PNB had foreclosed on said
receipt, therefore, is a security agreement, securities, sold the same and applied the
pursuant to which a bank acquires a proceeds thereof to TCC’s loan
‘security interest’ in the goods. It secures obligation. Mere possession does not
an indebtedness and there can be no such amount to foreclosure for foreclosure
thing as security interest that secures no denotes the procedure adopted by the

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mortgagee to terminate the rights of the of the total outstanding obligations,

mortgagor on the property and includes including interests and charges, as
the sale itself. appearing in the books of account of the
financial institution concerned.
 Dation in payment takes place when
property is alienated to the creditor in
satisfaction of a debt in money and the 20. SARMIENTO V. COURT OF APPEALS
same is governed by sales. Dation in
payment is the delivery and transmission  Failure of the trial court to make any
of ownership of a thing by the debtor to pronouncement, favorable or
the creditor as an accepted equivalent of unfavorable, as to the civil liability of the
accused amounts to a reservation of the
the performance of the obligation. As
right to have the civil liability litigated
aforesaid, the repossession of the and determined in a separate action, for
machinery and equipment in question nowhere in the Rules of Court is it
was merely to secure the payment of provided that if the court fails to
TCC’s loan obligation and not for the determine the civil liability, it becomes
purpose of transferring ownership thereof no longer enforceable.
to PNB in satisfaction of said loan. Thus,
 The appearance of the offended party in
no dacion en pago was ever
the criminal case through a private
accomplished. prosecutor may not per se be considered
either as an implied election to have his
 PNB has the right to foreclose the claim for damages determined in said
mortgages executed by the spouses proceedings or a waiver of his right to
Arroyo as sureties of TCC. A surety is have it determined separately. He must
considered in law as being the same party actually or actively intervene in the
as the debtor in relation to whatever is criminal proceedings as to leave no doubt
adjudged touching the obligation of the with respect to his intention to press a
latter, and their liabilities are interwoven claim for damages in the same action. In
as to be inseparable. As sureties, the the present case, it can be said with
Arroyo spouses are primarily liable as reasonable certainty that by withdrawal
original promissors and are bound of appearance of its counsel in the early
immediately to pay the creditor the stage of the criminal proceedings, the
amount outstanding. private respondent, indeed, had no
intention of submitting its claim for civil
 Respondent judge acted in excess of liability against petitioners in the criminal
jurisdiction in issuing the writ to enjoin action filed against the latter.
the foreclosure proceedings instituted by
PNB, a government financial institution,  In the present case, private respondent’s
complaint against petitioners was based
pursuant to the provisions of Pres. Decree
on the failure of the latter to comply with
No. 385 on mandatory foreclosure their obligation as spelled out in the Trust
whenever the arrearages on such account Receipt executed by them. This breach of
amount to at least twenty percent (20%) obligation is separate and distinct from

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any criminal liability for “misuse and/or  A stipulation for a floating rate of interest
misappropriation of goods or proceeds in a letter of credit in which there is no
realized from the sale of goods, reference rate set either by it or by the
documents or instruments released under
Central Bank, leaving the determination
trust receipts”, punishable under Section
13 of the Trust Receipts Law (P.D. 115) thereof to the sole will and control of the
in relation to Article 315(1), (b) of the lender bank is invalid; While it may be
Revised Penal Code. Being based on an acceptable, for practical reasons given the
obligation ex contractu and not ex fluctuating economic conditions, for
delicto, the civil action may proceed banks to stipulate that interest rates on a
independently of the criminal loan not be fixed and instead be made
proceedings instituted against petitioners
regardless of the result of the latter. dependent upon prevailing market
conditions, there should always be a
reference rate upon which to peg such
21. CONSOLIDATED BANK AND TRUST
variable interest rates
CORPORATION V. COURT OF APPEALS

 The recent case of Colinares v. Court of

 Petitioner’s contention that the marginal Appeals appears to be foursquare with the
deposit made by respondent Corporation facts obtaining in the case at bar. There,
should not be deducted outright from the we found that inasmuch as the debtor
amount of the letter of credit is untenable. received the goods subject of the trust
Petitioner argues that the marginal receipt before the trust receipt itself was
deposit should be considered only after entered into, the transaction in question
computing the principal plus accrued was a simple loan and not a trust receipt
interests and other charges. However, to agreement. Prior to the date of execution
sustain petitioner on this score would be of the trust receipt, ownership over the
to countenance a clear case of unjust goods was already transferred to the
enrichment, for while a marginal deposit debtor. This situation is inconsistent with
earns no interest in favor of the debtor- what normally obtains in a pure trust
depositor, the bank is not only able to use receipt transaction, wherein the goods
the same for its own purposes, interest- belong in ownership to the bank and are
free, but is also able to earn interest on the only released to the importer in trust after
money loaned to respondent Corporation. the loan is granted. In the case at bar, as
Indeed, it would be onerous to compute in Colinares, the delivery to respondent
interest and other charges on the face Corporation of the goods subject of the
value of the letter of credit which the trust receipt occurred long before the trust
petitioner issued, without first crediting receipt itself was executed. More
or setting off the marginal deposit which specifically, delivery of the bunker fuel
the respondent Corporation paid to it. oil to respondent Corporation’s Bulacan
Compensation is proper and should take plant commenced on July 7, 1982 and
effect by operation of law because the was completed by July 19, 1982. Further,
requisites in Article 1279 of the Civil the oil was used up by respondent
Code are present and should extinguish Corporation in its normal operations by
both debts to the concurrent amount. August, 1982. On the other hand, the
subject trust receipt was only executed

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nearly two months after full delivery of and distinct from the persons composing
the oil was made to respondent it.
Corporation, or on September 2, 1982.
22. SPOUSES VINTOLA V. INSULAR BANK OF
 Respondent Corporation cannot be said to
ASIA AND AMERICA
have been dishonest in its dealings with
petitioner. Neither has it been shown that
it has evaded payment of its obligations.  As stated at the outset, this issue has been
Indeed, it continually endeavored to meet squarely met in the case of Vintola v,
the same, as shown by the various Insular Bank of Asia and America [G.R.
receipts issued by petitioner No. 73271, May 29, 1987,150 SCRA
acknowledging payment on the loan. 578]. In that case, involving the same
Certainly, the payment of the sum of parties and essentially the same set of
P1,832,158.38 on a loan with a principal facts, the Supreme Court affirmed the
amount of only P681,075.93 negates any judgment of the lower court ordering the
badge of dishonesty, abuse of confidence VINTOLAS to make payment to IBAA.
or mishandling of funds on the part of
respondent Corporation, which are the  A trust receipt, therefore, is a security
gravamen of a trust receipt violation. agreement, pursuant to which a bank
Furthermore, respondent Corporation is acquires a “security interest” in the
not an importer which acquired the goods. “It secures an indebtedness and
bunker fuel oil for re-sale; it needed the there can be no such thing as security
oil for its own operations. More interest that secures no obligation.” . . .
importantly, at no time did title over the As elucidated in Samo vs. People “a trust
oil pass to petitioner, but directly to receipt is considered as a security
respondent Corporation to which the oil transaction intended to aid in financing
was directly delivered long before the importers and retail dealers who do not
trust receipt was executed. have sufficient funds or resources to
finance the importation or purchase of
 The transactions sued upon were clearly merchandise, and who may not be able to
entered into by respondent Lim in his acquire credit except through utilization,
capacity as Executive Vice President of as collateral, of the merchandise imported
respondent Corporation. We stress the or purchased.” Contrary to the allegation
hornbook law that corporate personality of the VlNTOLAS, IBAA did not become
is a shield against personal liability of its the real owner of the goods. It was merely
officers. Thus, we agree that respondents
the holder of a security title for the
Gregory T. Lim and his spouse cannot be
made personally liable since respondent advances it had made to the VINTOLAS
Lim entered into and signed the contract The goods the VINTOLAS had
clearly in his official capacity as purchased through IBAA financing
Executive Vice President. The remain their own property and they hold
personality of the corporation is separate it at their own risk. The trust receipt

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arrangement did not convert the IBAA

into an investor, the latter remained a
lender and creditor.

 The VINTOLAS' reliance on said

provision of law is erroneous. As
correctly argued by IBAA. there is no
double recovery since the bank has not
yet recovered from them. The
VINTOLAS' deposit in court of the puka
and olive shells does not amount to
recovery by IBAA.

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