LETTERS OF CREDIT/TRUST RECEIPTS LAW

Puruple Notes 3.0

LOC
Latest
Outline Provision Sample Bar Q&As/Notes Jurisprudence
1.Is a Letter of Credit a commercial transaction?
1.DEFINITION & A:Yes, it is a commercial transaction because it is covered by
NATURE the Code of Commerce, and accompanies a commercial
transaction. It is not a negotiable instrument because it is not
for a sum certain in money and is not payable to order or to
bearer but is issued in the name of a specified person.
2.ABC company filed a petition for rehabilitation with the
court. An order was issued by the court, 1)staying
enforcement of all claims, whether money or otherwise against
ABC Company, its guarantors and sureties not solidarily liable
with the company; and 2)prohibiting ABC company from
making payments of its liabilities, outstanding as of the date
of the filing of the petition. XYC company is a holder of an
irrevocable standby letter of credit which was previously
procured by ABC Company in favor of XYZ Company to
secure performance of certain obligations. In light of the order
issued by the court,
a.can XYZ still be able to draw on their irrevocable standby
letter of credit when due?
b.Explain the nature of Letter of Credit as a financial devise.
A:a.Yes, as an exception to a Stay or Suspension Order
included in a Commencement Order issued pursuant to
Section16q o the FRIA, Section 18c of the said law provides
that a stay or suspension order shall not apply to the
enforcement of claims against sureties and other persons
solidarily liable with the debtor, and 3rd party or
accommodation mortgagors as well as issuers of letters of
credit. Similarly, assuming that it has not been superseded by
the FRIA, Section 7b of the Supreme Court Rules of Procedure
on Corporate Rehabilitation provides that a stay order shall
not cover claims against letters of credit and similar security
arrangements issued by a 3rd party to secure the payment of
the debtor’s obligations.
b.A Letter of Credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing
with sale of goods to satisfy the seemingly irreconcilable
interest of the seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to have control of
the goods before paying. To break the impasse, the buyer
may be required to contract a bank to issue a letter of credit in
favor of the seller so that, by virtue of the letter of credit, the
issuing bank can authorize the seller to draw drafts and
engage to pay them upon presentment simultaneously with
the tender of documents required by the letter of credit. The
buyer and the seller agree on what documents are to be
presented for the payment, but ordinarily, they are documents
of title evidencing or attesting to the shipment of the goods
to the buyer. Once the credit is established, the seller ships
the goods to the buyer and in the process, secures the
required shipping documents or documents of title. To get
paid, the seller executes a draft and presents it together with

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the required documents to the issuing bank. The issuing bank

redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the
letter of credit requires. The bank then obtains possession of
the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods, while the
buyer acquired the said documents and control over the
goods only after reimbursing the bank.
However, LOC are also used in non-sale settings where they
serve to reduce the risk of non-performance. Generally, LOC
in non-sale settings have come to be known as standby letters
of credit.

1.In a LOC in banking transactions, distinguish the liability of a

2.PARTIES conforming bank from a notifying bank.
a.Rights and A:In case anything wrong happens to the LOC, a confirming
Obligations bank incurs liability for the amount of the LOC, while a
notifying bank does not incur any liability.
2.Explain the 3 distinct but intertwined contract relationship
that are indispensable in a LOC transaction.
A:The 3 distinct but intertwined contract relationships that are
indispensable in a LOC transaction are:
1-BETWEEN THE APPLICANT/BUYER/IMPORTER (abi) & THE
BENEFICIARY/SELLER/EXPORTER (bse)-the abi is the one who
procures the LOC and obliges himself to reimburse the issuing
bank upon receipt of the documents of title, while the bse is
the one who in compliance with the contract of sale, ships the
goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment of the goods.
Their relationship is governed by the contract of sale.
2-BETWEEN THE ISSUING BANK & THE BSE- the issuing
bank is the one that issues the LOC and undertakes to pay the
seller upon receipt of the draft and proper documents of title
and to surrender the documents to the buyer upon
reimbursement. Their relationship is governed by the terms of
the LOC issued by the bank.
3-BETWEEN THE ISSUING BANK & THE ABI-their relationship
is governed by the terms of the application and agreement for
the issuance of the LOC by the bank.
1.A applies with Prime Bank for a LOC in the amount of
3.BASIC PRINCIPLES 50,000 in favor of Melmart Trading of California, to cover A’s
a.Doctrine of importation of 500 bales of cotton. After shipment, Melmart
Independence Trading presented all the pertinent documents to the Prime
b.Fraud Exception Bank’s correspondent Bank in San Francisco California, and
Principle obtained payment under the LOC. Prime Bank now seeks
c.Doctrine of Strict payment from A who refuses to pay on the ground that
Compliance Melmart Trading violated certain conditions in their contract
of sale and therefore, should not have been paid under the
LOC Can the bank recover from A?
A:Yes, Prime Bank can recover from A. Banks, in providing
financing in international business transactions do not deal
with the property to be exported or shipped to the importer
but deal only with documents. The custom in international

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banking negates any duty on the part of the banks to verify

whether what has been described in the LOC or drafts or
shipping documents actually tallies with what is loaded aboard
ship.
2.X Corporation entered into a contract with PT Construction
Corp. for the latter to construct and build sugar mill within 6
months. They agreed that in case of delay, PT Construction
will pay X 100,000 for every day of delay. To ensure payment
of the agreed amount of damages, PT secured from Atlantic
Bank a confirmed and irrevocable LOC which was accepted by
X Corporation in du time. 1 week before the expiration of the
6 month period, PT requested for an extension of time to
deliver claiming that the delay was due to the fault of X corpo.
A controversy as to the cause of the delay which involved the
workmanship of the building ensued. The controversy
remained unresolved. Despite the controversy, X corporation
presented a claim against Atlantic Bank by executing a draft
against the LOC.
a.Can Atlantic Bank refuse payment sue to the unresolved
controversy?
b.Can X corporation claim directly from PT Construction
Company?
A:a.Atlantic bank cannot refuse to pay because in a LOC,
where the credit is stipulated as irrevocable, there is a definite
undertaking by the issuing bank to pay the beneficiary,
provided that the stipulated documents are presented and the
conditions of the credit are complied with. Under the
independence principle, the issuing bank is not obliged to
ascertain compliance by the parties in the main contract, In
other words, where the legal relation arises from the LOC,
such LOC contains the entire contract of the parties and the
resulting obligations should be measured by its provisions. It
is unaffected by any breach on the part of one of the parties
or by any controversy which may arise between them.
b.Yes, X corporation can claim directly from PT
Construction the call upon the LOC is not exclusive, it is
merely an alternative remedy in case of delay due to the fault
of PT.
3.AAA Carmakers opened an irrevocable LOC with BBB
Banking Corporation with CCC Cars Corporation as
beneficiary. The irrevocable LOC was opened to pay for the
importation of 10 units of Mercedes Benz S class. Upon arrival
of the cars, AAA carmakers found out that the cars were all
not in running condition and some parts were missing. As a
consequence, AAA carmakers instructed BBB Banking
Corporation not to allow drawdown on the LOC. Is this legally
possible?
A:No, because under the Independence Principle, conditions
for the drawdown on the LOC are based only on documents,
like shipping documents, and not with the conditions of the
goods subject of the importation.
4.Muebles Clasico Inc, a Manila based furniture shop,
purchased hardwood lumber from Surigao Timber, a
Mindanao based logging company. MC was to pay STI the

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amount of 5M for 50 tons of lumber. To pay STI, MC opened

a LOC with Banco de Plata. BDP duly informed STI of the
opening of a LOC in its favor. In the meantime, MC-which had
been undergoing financial reverses- filed a petition for
corporate rehabilitation. The rehabilitation court issued a stay
order to stay the enforcement of all claims against MC. After
shipping the lumber, STI went to DBP, presented the shipping
documents, and demanded payment of the LOC opened in its
favor. MC, on the other hand, informed the bank of the stay
order and instructed it to deny payment to STI because of the
Stay Order.Your advice is to
A:Grant STI’s claim. The LOC is not a claim against the debtor
under rehabilitation, but against the bank which has assumed
a solidary obligation.
5.The SC has held that fraud is an exception to the
independence principle governing LOC. Explain this principle
and give an example of how fraud can be an exception.
A:The independence principle posits that the obligations of
the parties to a LOC are independent of the obligations of the
parties underlying the transaction. Thus, the beneficiary of the
LOC. Which is able to comply with the documentary
requirements under the LOC, must be paid by the issuing or
confirming bank, notwithstanding the existence of a dispute
between the parties to the underlying transaction, say a
contract of sale of goods where the buyer is not satisfied with
the quality of the goods delivered by the seller. The SC has
held that fraud is an exception to the independence principle.
For instance, if the beneficiary fraudulently presents to the
issuing or confirming bank documents that contain material
facts that to his knowledge, are untrue, then, payment under
the LOC may be prevented through court injunction.
6.BV agreed to sell to AC, a ship and Merchandise broker,
2,500 cubic meters of logs. After inspecting the logs, CD
issued a purchase order. On the arrangement made upon
instruction of the consignee, H&T Corporation of Los Angeles,
California, the SP Bank of Los Angeles issued an irrevocable
LOC available at sight in favor of BV for the total purchase
price of the logs. The LOC provided that the draft to be drawn
in on SP Bank and that it be accompanied by, among other
things, a certification from AC, stating that the logs have been
approved prior to shipment in accordance with the terms and
conditions of the purchase order.
Before loading on the vessel chartered by AC, the logs were
inspected by custom inspectors and representatives of the
Bureau of Forestry, who certified to the good condition and
exportability of the logs. After the loading was completed, the
chief mat of the vessel issued a mate receipt of the cargo
which stated that the logs are in good condition. However, AC
refused to issue the required certification in the LOC. Because
of the absence of the certification, FE Bank refused to
advance payment on the LOC.
1.May FE Bank be held liable under the LOC?
2.Under the facts stated above, the seller, BV argued that FE
Bank by accepting the obligation to notify him that the

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irrevocable LOC. Consequently, FE Bank is liable under the

LOC. Is the argument tenable?
A:1.No, the LOC provide as a condition a certification from
AC. Without such certification, there is no obligation on the
part of FE Bank to advance payment of the LOC.
2.No, FE Bank may have confirmed the LOC when it
notified BV, that an irrevocable LOC has been transmitted to it
on its behalf. But the conditions in the LOC must first be
complied with, namely, that the draft be accompanied by a
certification from AC. Further, confirmation of a LOC must be
expressed.
7.PJ Corporation obtained a loan from ABC Bank in the
amount of 10M for the purchase of 100 pieces of ecodoors.
Thereafter, a LOC was obtained by PJ against such loan. The
beneficiary of the LOC is Scrap Metal Corp in Beijing, China.
Upon arrival of 100 pieces of ecodoors, PJ executed a Trust
receipt in favor of ABC to cover for the value of the ecodoors
for its release to PJ. The terms of the Trust Receipt is that any
proceeds from the sale of the ecodoors, will be delivered to
ABC as payment. After the ecodoors were sold, PJ instead of
paying ABC, used the proceeds of the sale to order from
Scrap Metal another 100 pieces of ecodoors but using another
bank to issue a new LOC fully covered by such proceeds.
PJ refused to pay the proceeds of the sale of the first set of
ecodoors to ABC, claiming that the ecodoors that were
delivered were defective. It then instructed ABC not to
negotiate the LOC that was issued in favor of Scrap Metal.
a.Explain what is a Letter of Credit as a financial device and a
Trust Receipt as a security to the Letter of Credit.
b.As counsel of ABC, you are asked for advice on whether or
not to grant the instruction of PJ. What will be your advice?
A:a.A Letter of credit is any arrangement however named or
described whereby a bank acting upon the request of its client
or on its behalf agrees to pay another against stipulated
documents provided that the terms of the credit are complied
with.
A Trust receipt is an arrangement whereby the issuing bank,
(referred to as the entruster under the trust receipt), releases
the imported goods to the importer(referred to as the
entrustee) but that the latter in case of sale must deliver the
proceeds thereof to the entruster up to the extent of the
amount owning to the entruster or to return the goods in case
of non-sale.
b.I will not grant the instruction of PJ, Under the
independence principle, the obligation of the bank to pay the
Scrap Metal Corporation is not dependent upon the fulfillment
of the main contract underlying the LOC but conditioned inly
upon submission of the stipulated documents of ABC Bank.
8.a.A standby letter of credit was issued by ABC Bank to
secure the obligation of X company to Y company. Under the
standby letter of credit, if there is a failure on the part of X
Company to perform its obligation, then Y company will
submit to ABC Bank a certificate of default and ABC will have
to pay Y company the defaulted amount. Subsequently, Y

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company submitted to ABC Bank a certificate of default

notwithstanding the fact that X company was not in default.
Can ABC Bank refuse to honor the certificate of default?
b.Is the uniform customs and practice for documentary
credits of the International Chamber of Commerce applicable
to commercial letters of credit issued by a domestic bank even
if not expressly mentioned in such LOC? What is the basis of
your answer?
A:a.No, under the doctrine of independence in a letter of
credit, the obligation of the issuing bank to pay the
beneficiary is distinct and independent from the main and
originating contract underlying the LOC. Such obligation to
pay does not depend on the fulfillment or non-fulfillment of
the originating contract. It arises upon tender of the stipulated
documents under the LOC. In the present case, the tender of
the certificate of default entitles Y to payment under the
standby LOC, notwithstanding the fact that X company was
not in default. This is without prejudice to the right of X
company to proceed against Y company under the law on
contracts and damages.
b. Yes, the SC has held that the observance of the uniform
Customs Practice in the Phils. is justified by Article 2 of the
Code of Commerce, which enunciates that in the absence of
any particular provision in the Code of Commerce,
commercial transactions shall be governed by generally
observed usages and customs.

TRL
Latest
Outline Provision Sample Bar Q&As/Notes Jurisprudence
1.DEFINITION & Sec4:A Trust receipt 1.C contracted D to renovate his commercial building. D Prudential Bank
CONCEPT is a security ordered construction materials from E and received delivery v.NLRC.
a.Loan/Security transaction intended thereof. The following day, C went to F Bank to apply for a loan A trust receipt
Feature to aid in financing for the construction materials. As security for the loan, C was arrangement does
b.Ownership of the importers or dealers made to execute a trust receipt. One year later, after C failed to not involve a simple
Goods, Documents in merchandise by pay the balance of the loan, F Bank charged him with violation loan transaction
and Instruments allowing them to of the Trust Receipts Law. between a creditor
obtain delivery of the a.What is a Trust Receipt? and debtor
goods under certain b.Will the case against C prosper? Reason briefly. importer. The law
covenants. A:a.The Trust Receipt is a written or printed document signed warrants the validity
by the entrustee in favor of the entrustor containing terms and of the entruster’s
conditions substantially complying with the provisions of the security interest as
Trust receipts Law, whereby the bank as entruster releases the against the
goods to the possession of the entrustee but retains ownership creditors of the
thereof while the entrustee may sell the goods and apply the trust receipt
proceeds for the full payment of his liability to the bank. agreement.
b.No, the case against C will not prosper. Since C received Consequently, the
the construction materials from E before the Trust receipt goods covered by
transaction was entered into, the transaction was a simple loan, the trust receipt

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with the trust receipt merely as a collateral or security for the cannot be levied
loan. This is inconsistent with a trust receipt transaction where upon the creditors
the title to the goods remain with the bank and the goods are of the entrustee.
released to the entrustee before the loan is granted.
3.X & co., obtained a loan from a local bank in the amount of Colinares v. CA
500,000, mortgaging as security therefore its real property. In a pure trust
Subsequently, the company applied with the same bank for a receipt transaction,
LOC for 200,000 in favor of a foreign bank to cover the the goods are
importation of machinery. To guarantee payment of the owned by the bank
obligation under the LOC, the company and its President and and only released
Treasurer executed a Surety Agreement in the local bank’s to the importer in
favor. trust subsequent to
The machinery arrived and was received to the company under the grant of the
a trust receipt agreement. As the company defaulted in the loan- the bank
payment of its obligation, the bank took possession of the acquires a security
imported machinery. At the same time, it sought to foreclose interest in the
the mortgaged property and to hold the company, as well as its goods as holder of
President and Treasurer, liable under the Surety Agreement. a security title for
Did the taking of possession of the machinery by the bank result the advances it has
in the 1)full payment of the obligation of the company, and made to the
2)foreclosure of the mortgage? Why? entrustee.
A:The taking of possession of the machinery by the bank did Where the
not result in full payment of the obligations owing from the execution of a trust
company and its officers. The taking of such possession must be receipt agreement
considered merely as a measure in order to protect or further was made after the
safeguard the bank’s security interest. Dacion en pago can only goods covered by it
be considered as having taken place when a creditor accepts had been
and appropriates the ownership of goods n payment of a due purchased by and
obligation. delivered to the
The mere taking of possession of mortgaged assets does not entrustee and the
amount to foreclosure. Foreclosure requires a sale at public later as a
auction. The foreclosure, therefore, has not yet been affected. consequence
4.X, a dealer in imported textiles, opened with Y Bank an acquired ownership
irrevocable LOC in favor of his American supplier, ABC to the goods, the
textiles,Inc in the amount of 50,000 covering the full invoice transaction does
value of 200 bales of suiting materials. He paid Y bank a not involve a trust
marginal deposit of 40,000 and the amount of 50,000. The receipt but a simple
clothing materials were subsequently shipped by ABC Textiles loan even though
to Manila with Y Bank as consignee. Y Bank took delivery of the the parties
shipment and had it stored in its bodega. Thereafter, X denominated it as
executed the corresponding trust receipt, but before X could one of trust receipt.
take possession of the goods, a fire of unknown origin gutted
the bodega of Y Bank resulting in the total loss of the goods.
When sued for the balance of 10,000, X denied liability,
contending that Y Bank as consignee and owner of the goods
should bear the loss. Is the contention of X tenable? Reasons.
A: Yes, the contention of X is tenable. Y Bank, in said trust, is
the entruster, who according to law, owns or holds absolute title
on said goods, and the goods were still in the bodega and not
yet actually delivered to the entrustee, X when the goods were
totally burned. Hence, the goods are deemed to be lost for the
account of Y Bank.

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2.RIGHTS OF THE 1.Upon execution of a trust receipt over the goods, the party Colinares v. CA
ENTRUSTER who is obliged to release such goods and who retains security The entruster bank
a.Validity of the interest on those goods is called: acquires security
Security Interest as A: Entruster interest in the
against the goods as holder of
Creditors of the a security title for
Entrustee/Innocent the advances it had
Purchasers for made to the
Value. entrustee. By fiction
of law, 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
been already 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.
3.OBLIGATIONS & Entruster- releases 1.H opens a LOC with ABC Banking Corporation for the Security Bank v.
LIABILITIES OF the possession f the importation of 500 cases of Black Label Whisky with an invoice Great Wall
THE ENTRUSTEE goods to the value of 50,000. The goods and the covering documents arrive In a civil case
a.Payment/Delivery entrustee upon the and H would like to take possession of the 500 cases of whisky involving a trust
of Proceeds of Sale latter’s execution of under a trust receipt. The bank agrees to release the goods to receipt, the
or Disposition of the trust receipt him under the trust receipt subject to the condition that H holds entrustee’s failure
Goods, Documents Entrustee- is the the 500 cases in trust for the bank and for him to turn over the to comply with its
or Instruments person to whom the proceeds of the sale of said whisky, or to return the goods in obligation under
b.Return of Goods, goods are delivered the event of their non sale within 90 days from the date thereof. the trust receipt
Documents or for sale and who H sells the 500 cases to various customers but falls to turn over constitute as civil

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Instruments in case bears the risk of the the proceeds within the period stipulated, despite the repeated fraud provided that
of Sale loss. demands from ABC Banking Corporation. it is alleged and
c.Liability for Loss The bank files an estafa case against H with the City Fiscal of substantiated with
of Goods, Manila. In his defense, H contends that he should not be held specificity, in the
Documents or liable because the transaction emanates from a letter of credit, complaint, its
Instruments which he claims, is civil in nature. He invokes the constitutional attachments and
d.Penal Sanction if provision the no one should be imprisoned for non-payment of supporting
Offender is a indebtedness. If you were the City Fiscal, would you file the evidence.
Corporation case?
A:Yes, I would file a case against H, If I were the city Fiscal. The
failure of H, the entrustee to turn over the proceeds of 500
cases, covered by a Trust Receipt, to the extent of the amount
owing to the entruster, within the period stipulated to the ABC
Banking, entruster, shall constitute the crime of estafa, by
express statutory provision. The defense of H is therefore
untenable.
2.Mr. Noble, as the President of ABC Trading, executed a trust
receipt in favor of BPI Bank to secure the importation by his
company of certain goods. After the release and sale of the
imported goods, the proceeds from the sale were not turned
over to BPI. Would BPI be justified in filing a case for estafa
against Noble?
A:BPI would be justified in filing a case for estafa against Noble.
The fact that the trust receipt issued in favor of a bank, instead
of a seller, to secure the importation of the goods did not
preclude the application of trust receipts law. Under the law,
any officer or employee of a corporation responsible for the
violation of a trust receipt is subject to the personal liability
thereunder.
3. A buys goods from a foreign supplier using his credit line with
a bank to pay for the goods. Upon arrival of the goods at the
pier, the bank requires A to sign a trust receipt before A is
allowed to take delivery of the goods. The trust receipt contains
the usual language. A disposes of the goods and receives
payment but does not pay the bank. The bank files a criminal
action against A for violation of the TRL. A asserts that the trust
receipt is only to secure his debt and that a criminal action
cannot lie against him because that would be violative of his
constitutional right against imprisonment for non-payment of
debt. Is he correct?
A: No, violation of a trust receipt is a criminal act as it is
punished as estafa under Article 315 of the RPC. There is a
public policy involved which is to assure the entruster with the
reimbursement of the amount advanced or the balance thereof
for the goods subject to the trust receipt. The execution of the
trust receipt or the use thereof promotes the smooth flow of
commerce as it helps the importer or buyer of the goods
covered thereby.
4.CCC Car Inc obtained a loan from BBB Bank which fund was
used to import 10 units of Benz. Upon arrival of the vehicles and
before the release of said vehicles to CCC Car, X and Y, the
President and Treasurer of CCC signed the TR to cover the
value of the 10 units, after which, the vehicles were all delivered
to the car display room of CCC. Sales of the vehicles were slow,

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and it took a month to dispose the 10 units. CC wanted to be in

business and to save on various documentations requires by the
bank, decided that instead of turning over the proceeds of the
sales, CCC used the proceeds to buy another 10 units of BMW
cars.
a.Is the action of CCC legally justified?
b.will the corporate officers of CCC Car be held liable under the
circumstances?
*note:The problem does not state that BBB Bank issued a LOC
upon application of CCC Car to enable the latter to pay for its
importation. Assume this to be the case because the trust
receipt, being an accessory contract, cannot validly exist without
a principal contract, i.e., the application for the LOC.
A:a.No, it is the obligation of CCC, as entrustee, to receive the
Sec10:Liability of proceed of the sale of the Benz in trust for BBB Bank, as
Entrustee for loss. entruster, and turn over the same to BBB Bank to the extent of
The risk of loss shall the amount owing to the latter or as appears in the trust receipt.
be borne by the b.Yes, particularly the President and the Treasurer of CCC Car
entrustee. Loss of who both signed the trust receipts in the problem. Section 13
goods, documents or of the TRL (PD115) provides that if the violation or offense is
instruments which are committed by a corporation, partnership, association or other
the subject of a trust judicial entity, the penalty provided for in the law shall be
receipt, pending their imposed upon the directors, officers, employees or other
disposition, officials or persons therein responsible for the offense without
irrespective of prejudice to the civil liabilities arising from the criminal offense.
whether or not it was 5.Tom Cruz obtained a loan of 1M from XYZ Bank to finance his
due to the fault or purchase of 5,000 bags of fertilizer. He executed a trust receipt
negligence of the in favor of XYZ Bank over the 5,000 bags of fertilizer. Tom
entrustee, shall not withdrew the 5,000 bags from the warehouse to be transported
extinguish his to Lucena City where his store was located. On the way, armed
obligation to the robbers took from Tom 5,000 bags of fertilizers. Tom now
entruster for the claims that his obligation to pay the loan to XYZ Bank is
value thereof. extinguished because the loss was not due to his fault. Is Tom
correct? Explain.
A: Being the entrustee, the obligation of Tom to Pay XYZ bank
is not extinguished by the loss of the goods.
6.What acts or omissions are penalized under the TRL?
A:Failure of the entrustee to turn over the proceeds of the sale
of the goods, documents or instrument covered by a trust
receipt to the extent of the amount owing to the entruster or to
return the goods, documents, instruments if they were not sold
or disposed of in accordance with the terms of the trust receipt
is penalized as estafa under Article 315 of the RPC.
7.Is lack of intent to defraud a bar to the prosecution of these
acts or omissions?
A:No, there is no requirement to prove intent to defraud. The
mere failure to account for or return the goods, documents or
instruments in question gives rise to the crime, which is malum
prohibitum.
8.E received goods from T for display and sale in E’s store. E
was to turn over to T the proceeds of any sale and return the
ones unsold. To document their agreement, E executed a trust
receipt in T’s favor covering the goods. When E failed to turn
over the proceeds from the sale of the goods or return the ones

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unsold despite demand, he was charged in court for estafa. E

moved to dismiss on the ground that his liability is only civil. Is
he correct?
A:No, since his breach of the trust receipt agreement subjects
him to both civil and criminal liability for estafa.
9.a.Maine Den Inc. opened an irrevocable LOC with Fair Bank,
in connection with Maine Den’s importation of spare parts for its
textile mills. The imported parts were released to Maine Den
after it executed a trust receipt in favor of Fair Bank. When MD
was unable to pay its obligation under the trust receipt, FB sued
MD for estafa under the TRL. The court however, dismissed the
suit. Was the dismissal justified? Why or why not?
b.Does the rule res perit domino apply in trust receipt
transactions?
A:a. The dismissal of the complaint for estafa is justified. Under
recent jurisprudence, the SC held that transactions referred to in
relation to trust receipts, mainly involved sales, and if the
entruster knew even before the execution of the alleged Trust
receipt agreement that the goods subject of the trust receipt
were never intended by the entrustee for resale or for the
manufacture of items to be sold, the agreement is not a trust
receipt transaction but a simple loan, notwithstanding the label.
In this case, the object of the trust receipt, spare parts for textile
mills were for the use of the entrustee and never intended for
sale. As such, the transaction is a simple loan.
b.No, this is because the loss of the goods, documents or
instruments which are the subject of a trust receipt pending
their disposition, irrespective of whether or not it was due to the
fault or negligence of the entrustee shall not extinguish the
entrustee’s obligation to the entruster for the value thereof.
Also, while the entruster is made to appear as owner of the
goods covered by the trust receipt, such ownership is only a
legal fiction to enhance the entruster’s security interest over the
goods.

4.REMEDIES *notes: 1.Ricardo mortgaged his fishpond to AC Bank to secure a 1M

AVAILABLE 1-if the goods are loan. In a separate transaction, he opened a LOC with the same
sold or disposed by bank for 500,000 in favor of HS Bank, a foreign Bank to
the entrustee and the purchase outboard motors. Likewise, Ricardo executed a Surety
latter did not remit Agreement in favor of AC Bank. The outboard motors arrived
the proceeds: and were delivered to Ricardo, but he was not able to pay the
a.file estafa case purchase price thereof.
against the entrustee; a.can AC Bank take possession of the outboard motors? Why?
or b.can AC Bank also foreclose the mortgage over the fishpond?
b.file a separate case A:a.if what Ricardo executed is a trust receipt, AC Bank can take
to collect the possession of the outboard motors so that it can exercise its lien
proceeds or the and sell them. If what Ricardo executed is a Surety Agreement,
money obligation AC Bank cannot take possession of the outboard motors,
secured by the trust because it has no lien on them.
receipt. b.AC Bank can foreclose the mortgage over the fishpond if
The obligation of the ricardo fails to pay the loan of 1M.
entrustee is not
extinguished in case
of repossession and

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LETTERS OF CREDIT/TRUST RECEIPTS LAW
Puruple Notes 3.0

sale of the goods, the

entrustee is entitled
to any surplus while
the entruster can still
recover the balance
of the indebtedness
in case there is
deficiency.
NOVATION OF
AGREEMENT-a
memorandum of
agreement entered
into between the
bank and the
entrustee
extinguished the
obligation under the
existing trust receipt
because the
agreement did not
only reschedule the
debt of the entrustee
but it provided
principal conditions
which are
incompatible with the
trust agreement. For
instance, the
agreement provides
for a term of 7 years;
it is secured by
mortgage, and it
provides for different
rates of interest and
charges. Hence, the
liability for breach of
Memorandum of
Agreement would be
purely civil in nature
and no criminal
liability under the TRL
can be imposed.

5.WAREHOUSE
LIEN

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LETTERS OF CREDIT/TRUST RECEIPTS LAW
Puruple Notes 3.0

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