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Trust Receipts Law Q & A

Credit Transactions
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Q: What is the loan and security feature of the trust

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

Q: Who is the owner of the articles subject of the TR?

A: The entrustee. A trust receipt has two features, the loan and security features. The loan is
brought about by the fact that the entruster financed the importation or purchase of the goods
under TR. Until and unless this loan is paid, the obligation to pay subsists. If the entrustee is
made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for
if it were really so, it could dispose of the goods in any manner that it wants, which it cannot do.
To consider the entrustee as the true owner from the inception of the transaction would be to
disregard the loan feature thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings and
Trust Company, G.R. No. 137232. June 29, 2005)

Q: What is the penal sanction if offender is a

corporation?
A: The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment
on a corporation. Hence, if the entrustee is a corporation, the law makes the officers or
employees or other persons responsible for the offense liable to suffer the penalty of
imprisonment. The reason is obvious, corporations, partnerships, associations and other juridical
entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for
the violation of the Trust Receipts Law. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

Q: In the event of default by the entrustee on his

obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the trust
and take possession of the goods to be able to enforce
his right thereunder?
A: The law uses the word "may" in granting to the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee has the discretion to avail of such right or
seek any alternative action, such as a third party claim or a separate civil action which it deems
best to protect its right, at any time upon default or failure of the entrustee to comply with any of
the terms and conditions of the trust agreement. (South City Homes, Inc. v. BA Finance
Corporation, G.R. No. 135462, Dec. 7, 2001)

Q. What is the effect of novation of a trust agreement?

A. Where the entruster and entrustee entered into an agreement which provides for conditions
incompatible with the trust receipt agreement, the obligation under the trust receipt is
extinguished. Hence, the breach in the subsequent agreement does not give rise to a criminal

liability under P.D. 115 but only civil liability. (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8,
2002)

Q: Can deposits in a savings account opened by the

buyer subsequent to the TR transaction be applied to
outstanding obligations under the TR account?
A: No, the receipt of the bank of a sum of money without reference to the trust receipt obligation
does not obligate the bank to apply the money received against the trust receipt obligation.
Neither does compensation arise because compensation is not proper when one of the debts
consists in civil liability arising from criminal. (Metropolitan Bank and Trust Co. v. Tonda, G.R. No.
134436, Aug. 16, 2000).