Trust Receipts

Law
(P.D. No. 115)
Origin of Trust
Receipts

The device first came

into general use in
importing
transactions, where
goods were consigned
directly to a bank
which paid a draft for
the price on the credit
of the intended buyer
who engaged to repay
the banks advances

Policy
Objectives/Purpose

To encourage and
promote the use
of trust receipts.
To provide for the
regulation of trust
receipt transactions
To
penalize
violations
as
a
criminal
offense
(Sec. 2)

Definition
What is a Trust
Receipt?

It is a written or
printed
document
signed
by
the
entrustee in favor
of the entruster
containing
terms
and
conditions
substantially
complying with the
provisions of the
Trust Receipts Law.
(Sec. 3, cf. Sec. 4)

 Ruth

wants
to buy
ingredients and supplies
for her new restaurant.

But

she doesn't have

enough money as she is
only starting.

Her friend Trina tells her:

"You can borrow money

from the bank!

Ruth applies for a letter

of credit the bank.

The bank finance Ruths

purchases of supplies.

 Ruth

receives
ingredients.

the

Ruth

executes a Trust
receipt in favor of the
bank.

How does it work?

South City Homes
v. BA Finance

trust receipt is 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
purchased.

or

South City Homes

v. BA Finance
In the event of default by

the entrustee on his

obligations under the trust
receipt agreement, it is
not absolutely necessary
that the entruster cancel
the
trust
and
take
possession of the goods to
be able to enforce his
rights thereunder.

 Entruster

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.

Ching v. CA

A trust receipt is a
document in which is
expressed a security
transaction
where
under the lender,
having no prior title
in the goods on
which the lien is to
be given and not
having
possession
which remains in the
borrower, lends his
money
to
the
borrower on security
of the goods which
the
borrower
is

privileged
to
sell
clear of the lien with
an agreement to pay
all or part of the
proceeds of the sale
to the lender.

Ching v. CA

It
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.

 It could never be a mere

additional
or
side
document as alleged by
petitioner. Otherwise, a
party to a trust receipt
agreement could easily
renege on its obligations
thereunder,
thus
undermining
the
importance
and
defeating
with
impunity the purpose
of
such
an
indispensable tool in
commercial
transactions.

 Form and Content

No particular form required
but it must substantially
contain:
a description
the total invoice value of
the goods and the amount
of the draft to be paid by
the entrustee
an
undertaking
or
a
commitment
of
the
entrustee to:

hold in trust
entruster

for

the

dispose of them in the

manner provided for in
the TR and

to turn over the proceeds

(Sec. 5)

Subjects of a Trust
Receipt Transaction
Goods, Documents or
Instruments

Parties

Concept of Trust
Receipt Transaction

real
security
transaction where a
person who owns or
holds absolute title or
security interests over
certain specified goods,
documents
or
instruments releases the
same to the possession
of another person who
binds himself to hold the
goods etc in trust and to
sell or otherwise dispose
of the same with the
obligation to turn over
the proceeds thereof
(Sec 4)

Nature of Trust
Receipts

In a certain manner, a
trust receipt partakes
of the nature of a
conditional sale as
provided
in
the
Chattel
Mortgage
Law, i.e., the importer
becomes
absolute
owner of the imported
merchandise as soon
as he has paid its
price.

Two Features of a
Letter of CreditTrust Receipt
Transaction

Loan Feature
- Entruster financed
the importation or
purchase.
Security Feature

Secure
the
performance of an
obligation of the
entrustee
or
of
some other third
persons in favor of
the entruster.

Ownership of the
Goods, Documents
and Instruments
under a Trust Receipt
Who owns the goods?

 The

goods remain the

importers
property.
Entrustee
is
factual
owner.

The

bank does not

become real owner of
the goods. It remains a
lender
and
creditor.
Entrusters ownership is
merely
legal
fiction.
(Abad vs. CA)

Who has better right?

Entruster v. Creditor of

Entrustee
/Innocent
Purchasers for Value

Prudential Bank v.
NLRC
Entrustee is the factual
owner of
the
goods,
documents and instruments.
Entruster
is
the
real
owner of
the
goods,
documents
and
instruments . He owns or
holds absolute title or
security interests.

 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.

Exception to: Nemo

Dat Quod Non Habet

Although
the
entrustee is not the
owner of the goods,
anyone who acquires
the goods from the
entrustee
acquires
good title over the
goods.

Exception to:
Perit Domino

Res

Although
the
entrustee is not the
owner of the goods
covered by a trust
receipt, should the
goods be lost while in
his
possession,
entrustee will bear
the loss.

Nacu v. CA

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.

Principles

of fair play
demand that the bank
should not resort to the
expedience of enforcing
a real estate mortgage
when there is none duly
constituted.

Coverage of Trust
Receipt
Transactions
Robles v. CA
In the case at bar, the

acts of petitioner which

were complained of were
committed between 19
November 1976 and 9
March 1977, that is, long
after the beginning date
of
effectivity
of
Presidential Decree No.
115.

Does
the
penal
provision of PD 115
(Trust Receipts Law)
apply when the goods
covered by a Trust
Receipt do not form
part of the finished
products which are
ultimately sold but
are
instead,
utilized/used up in the
operation
of
the
equipment
and
machineries of the
entrustee-

manufacturer or use
in the construction of
communication
towers?

Allied v. Ordonez

 The crime of estafa for

violation of the Trust

Receipts
Law
is
a
special
offense
or
mala prohibita. It is a
fundamental
rule
in
criminal law that when
the crime is punished by
a special law, the act
alone, irrespective of its
motives, constitutes the
offense. In the instant
case the failure of the
entrustee
to
pay
complainant
the
remaining balance of the
value of the goods

covered by the trust

receipt when the same
became
due
constitutes
the
offense
penalized
under Section 13 of
P.D. No. 115.

Ng v. People of the
Philippines

 It must be remembered

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

steel communication
towers, not to sell
them.

Rights of the
Entruster

The entruster shall be

entitled to:
Proceeds or Return
Enforcement
all
other rights, sell the
goods with at least
5 days notice

Cancel and take

possession
Sell with prior notice
Purchase
Recover deficiency

Obligations of the
Entrustee
hold the goods in trust
dispose of them strictly

in accordance with TR's

terms and conditions

 receive the proceeds

in trust
turn over the proceeds

to enstruster
insure the goods for

their total value against

fire, theft, pilferage or
other casualties
keep

the goods or
proceeds
separate
and
capable
of
identification
as
property of entruster

return in the event of

non-sale
demand

or

upon

 observe

all
other
terms and conditions
of the TR

Disposition of the
Proceeds

Expenses of the sale,

Expenses
derived
from
re-taking,
keeping and storing
the
goods,
documents
and
instruments, and
Principal obligation

What
if
there
is
deficiency? Excess?

Remedies Available

Entrustee
always
bound to pay loan.

Sec.
7,
PD
115
expressly
provides
that entrustee shall
be liable to entruster
for any deficiency.

No Option to Abandon
Goods to Set-off Loan

Entrustee-borrower
cannot be relieved of
his obligation to pay
the loan simply by
abandoning property
with bank.

Penalty for Breach

 Entrustor

may
File
Estafa Charges Against
Entrustee

Art. 315 Revised Penal

Code

With

unfaithfulness or
abuse of confidence,
namely:

(b)
By
misappropriating
or
converting,
to
the
prejudice of another,
money, goods, or any
other personal property
received by the offender
in
trust
or
on
commission,
or
for
administration, or under
any other obligation
involving the duty to
make delivery of or to
return the same, even
though such obligation
be totally or partially
guaranteed by a bond;

or by denying having
received such money,
goods,
or
other
property.

Prudential v. IAC
Although it is true that the
petitioner commenced a
criminal action for the
violation
of
the
Trust
Receipts Law, no legal
obstacle
prevented
it
from enforcing the civil
liability arising out of the
trust
receipt
in
a
separate civil action.

 Under Article 33 of the Civil

Code, a civil action for
damages,
entirely
separate
and
distinct
from the criminal action,
may be brought by the
injured party in cases of
defamation, fraud and
physical injuries. Estafa
falls under fraud.

Colinares v. CA and
People

 A thorough examination

of the facts obtaining in

the case at bar reveals
that the transaction
intended
by
the
parties was a simple
loan,
not
a
trust
receipt agreement .

 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.

Constitutionality of
PD 115

 Tiomico v. CA
The Court has repeatedly
upheld the validity of the
Trust Receipts Law and
consistently declared that
the said law does not
violate the constitutional
proscription
against
imprisonment for nonpayment of debts.

 PD 115 is a declaration by
the
legislative
authority
that, as a matter of public
policy, the failure of a
person to turn over the
proceeds of the sale of
goods covered by a trust
receipt or to return said
goods if not sold is a public
nuisance to be abated by
the imposition of penal
sanctions.

Phil. Blooming v.
CA

The entruster may

cancel the trust
and
take
possession of the
goods, documents
or
instruments
subject
of
the
trust or of the
proceeds realized
therefrom at any
time upon default or
failure
of
the
entrustee to comply
with any of the

terms and conditions

of the trust receipt
or
any
other
agreement between
the entruster and
the
entrustee,
XXXXXXXX.

Thus, even though

TRB took possession
of the goods covered
by the trust receipts,
PBM
and
Ching
remained
liable
for
the
entire
amount
of
the
loans covered by
the trust receipts.

Sarmiento Jr. v. CA

 This breach of obligation

is
separate
and
distinct
from
any
criminal
liability
for
misuse
and/or
misappropriation
of
goods
or
proceeds
realized from the sale of
goods,
documents
or
instruments
released
under trust receipts,
punishable under Section
13 of the Trust Receipts
Law(P.D. 115) in relation
to Article 315(1), (b) of
the Revised Penal Code.

 Being

based
on
an
obligation
ex contractu and not
ex delicto , the civil
action may proceed
independently of the
criminal
proceedings
instituted
against
petitioners regardless of
the result of the latter.

Penalty for Breach

Sec. 13, PD 115

imposes
penalty
upon
directors,
officers, employees
or other officials or
persons
therein
responsible for the
offense
, without
prejudice to the civil
liabilities arising from
the criminal offense.

Damage to entruster
need not be proven
because the damage
is caused to trade
circles
and
the
banking
community.

 Pilipinas Bank v. Ong:

when no dishonor or
abuse of confidence
can be attributed to the
corporate
officers
charged
because
evidence showed that the
corporate-entrustee
failed to comply with its
obligations upon maturity
of the trust receipts due
to
serious
liquidity
problems
that
necessitated the filing
of the petition for
rehabilitation,
especially when demands

made by the entrustor

were made in the time
corporate-entrustee was
already
under
a
management committee,
which took custody of the
covered
goods,
the
corporate officers cannot
be
held
criminally
liable.

L/C - TR

 Rizal Commercial Banking

Corporation v. Alfa RTW
Manufacturing Corp.
A

trust
receipt
transaction
is
one
wherein a bank extends
to a borrower a loan
covered by the letter of
credit, with the trust
receipt as security of
the loan.

 In contracts contracted in

trust
receipts,
the
contracting parties may
establish
agreements,
terms and conditions they
may
deem
advisable,
provided they are not
contrary to law, morals
or public order.