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LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0

LOC

Outline

Provision

Sample Bar Q&As/Notes

Latest

Jurisprudence

1.DEFINITION &

NATURE

1.Is a Letter of Credit a commercial transaction? A:Yes, it is a commercial transaction because it is covered by 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 3 rd 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 Similarly, assuming that it has not been superseded by the FRIA, Section 7b of the Supreme Court Rules of Procedure on Corporate Rehabilitation provides that a stay order shall not cover claims against letters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 3 rd 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

LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0

 

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.

2.PARTIES

1.In a LOC in banking transactions, distinguish the liability of a conforming bank from a notifying bank. A:In case anything wrong happens to the LOC, a confirming 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.

a.Rights and

Obligations

3.BASIC PRINCIPLES a.Doctrine of Independence b.Fraud Exception Principle c.Doctrine of Strict Compliance

1.A applies with Prime Bank for a LOC in the amount of 50,000 in favor of Melmart Trading of California, to cover A’s importation of 500 bales of cotton. After shipment, Melmart Trading presented all the pertinent documents to the Prime Bank’s correspondent Bank in San Francisco California, and obtained payment under the LOC. Prime Bank now seeks payment from A who refuses to pay on the ground that 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

LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0

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

LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0

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
company submitted to ABC Bank a certificate of default notwithstanding the fact that X company

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.

provision in the Code of Commerce, commercial transactions shall be governed by generally observed usages and

TRL

       

Latest

Outline

Provision

Sample Bar Q&As/Notes

Jurisprudence

1.DEFINITION & CONCEPT a.Loan/Security Feature b.Ownership of the Goods, Documents and Instruments

Sec4:A Trust receipt is a security transaction intended to aid in financing importers or dealers in merchandise by allowing them to obtain delivery of the goods under certain covenants.

1.C contracted D to renovate his commercial building. D ordered construction materials from E and received delivery thereof. The following day, C went to F Bank to apply for a loan for the construction materials. As security for the loan, C was made to execute a trust receipt. One year later, after C failed to pay the balance of the loan, F Bank charged him with violation of the Trust Receipts Law. a.What is a Trust Receipt? b.Will the case against C prosper? Reason briefly. A:a.The Trust Receipt is a written or printed document signed by the entrustee in favor of the entrustor containing terms and conditions substantially complying with the provisions of the Trust receipts Law, whereby the bank as entruster releases the goods to the possession of the entrustee but retains ownership thereof while the entrustee may sell the goods and apply the proceeds for the full payment of his liability to the bank. b.No, the case against C will not prosper. Since C received the construction materials from E before the Trust receipt transaction was entered into, the transaction was a simple loan,

Prudential Bank

v.NLRC.

A

trust receipt

arrangement does not involve a simple loan transaction

between a creditor and debtor importer. The law warrants the validity

   

of

the entruster’s

security interest as

against the creditors of the trust receipt agreement. Consequently, the goods covered by the trust receipt

LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0

with the trust receipt merely as a collateral or security for the loan. This is inconsistent with a trust receipt transaction where the title to the goods remain with the bank and the goods are released to the entrustee before the loan is granted. 3.X & co., obtained a loan from a local bank in the amount of 500,000, mortgaging as security therefore its real property. Subsequently, the company applied with the same bank for a LOC for 200,000 in favor of a foreign bank to cover the importation of machinery. To guarantee payment of the obligation under the LOC, the company and its President and Treasurer executed a Surety Agreement in the local bank’s favor. The machinery arrived and was received to the company under a trust receipt agreement. As the company defaulted in the payment of its obligation, the bank took possession of the imported machinery. At the same time, it sought to foreclose the mortgaged property and to hold the company, as well as its President and Treasurer, liable under the Surety Agreement. Did the taking of possession of the machinery by the bank result in the 1)full payment of the obligation of the company, and 2)foreclosure of the mortgage? Why? A:The taking of possession of the machinery by the bank did not result in full payment of the obligations owing from the company and its officers. The taking of such possession must be considered merely as a measure in order to protect or further safeguard the bank’s security interest. Dacion en pago can only be considered as having taken place when a creditor accepts and appropriates the ownership of goods n payment of a due obligation. The mere taking of possession of mortgaged assets does not amount to foreclosure. Foreclosure requires a sale at public auction. The foreclosure, therefore, has not yet been affected. 4.X, a dealer in imported textiles, opened with Y Bank an irrevocable LOC in favor of his American supplier, ABC textiles,Inc in the amount of 50,000 covering the full invoice value of 200 bales of suiting materials. He paid Y bank a marginal deposit of 40,000 and the amount of 50,000. The clothing materials were subsequently shipped by ABC Textiles to Manila with Y Bank as consignee. Y Bank took delivery of the shipment and had it stored in its bodega. Thereafter, X executed the corresponding trust receipt, but before X could 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.

cannot be levied upon the creditors of the entrustee.

Colinares v. CA In a pure trust receipt transaction, the 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 has made to the entrustee. Where the execution of a trust receipt agreement was made after the goods covered by it had been purchased by and delivered to the entrustee and the later as a consequence acquired ownership to the goods, the transaction does not involve a trust receipt but a simple loan even though the parties denominated it as one of trust receipt.

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2.RIGHTS OF THE ENTRUSTER a.Validity of the Security Interest as against the Creditors of the Entrustee/Innocent Purchasers for Value.

 

1.Upon execution of a trust receipt over the goods, the party who is obliged to release such goods and who retains security interest on those goods is called:

A: Entruster

Colinares v. CA The entruster bank

acquires security interest in the goods as holder of a security title for the advances it had made to the 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 & LIABILITIES OF THE ENTRUSTEE a.Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or Instruments b.Return of Goods, Documents or

Entruster- releases the possession f the goods to the entrustee upon the latter’s execution of the trust receipt Entrustee- is the person to whom the goods are delivered for sale and who

1.H opens a LOC with ABC Banking Corporation for the importation of 500 cases of Black Label Whisky with an invoice value of 50,000. The goods and the covering documents arrive and H would like to take possession of the 500 cases of whisky under a trust receipt. The bank agrees to release the goods to him under the trust receipt subject to the condition that H holds the 500 cases in trust for the bank and for him to turn over the proceeds of the sale of said whisky, or to return the goods in the event of their non sale within 90 days from the date thereof. H sells the 500 cases to various customers but falls to turn over

Security Bank v. Great Wall In a civil case involving a trust receipt, the entrustee’s failure to comply with its obligation under the trust receipt constitute as civil

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Instruments in case of Sale c.Liability for Loss of Goods, Documents or Instruments d.Penal Sanction if Offender is a Corporation

bears the risk of the loss.

the proceeds within the period stipulated, despite the repeated demands from ABC Banking Corporation. The bank files an estafa case against H with the City Fiscal of Manila. In his defense, H contends that he should not be held liable because the transaction emanates from a letter of credit, which he claims, is civil in nature. He invokes the constitutional provision the no one should be imprisoned for non-payment of indebtedness. If you were the City Fiscal, would you file the 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,

fraud provided that it is alleged and substantiated with specificity, in the complaint, its attachments and supporting evidence.

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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.

Sec10:Liability of Entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of 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 his obligation to the entruster for the value thereof.

A:a.No, it is the obligation of CCC, as entrustee, to receive the proceed of the sale of the Benz in trust for BBB Bank, as entruster, and turn over the same to BBB Bank to the extent of the amount owing to the latter or as appears in the trust receipt. b.Yes, particularly the President and the Treasurer of CCC Car who both signed the trust receipts in the problem. Section 13

of the TRL (PD115) provides that if the violation or offense is committed by a corporation, partnership, association or other judicial entity, the penalty provided for in the law 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. 5.Tom Cruz obtained a loan of 1M from XYZ Bank to finance his purchase of 5,000 bags of fertilizer. He executed a trust receipt

in

favor of XYZ Bank over the 5,000 bags of fertilizer. Tom

withdrew the 5,000 bags from the warehouse to be transported to Lucena City where his store was located. On the way, armed robbers took from Tom 5,000 bags of fertilizers. Tom now claims that his obligation to pay the loan to XYZ Bank is extinguished because the loss was not due to his fault. Is Tom 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 loan. In a separate transaction, he opened a LOC with the same bank for 500,000 in favor of HS Bank, a foreign Bank to purchase outboard motors. Likewise, Ricardo executed a Surety Agreement in favor of AC Bank. The outboard motors arrived

AVAILABLE

1-if the goods are sold or disposed by the entrustee and the latter did not remit the proceeds:

and

were delivered to Ricardo, but he was not able to pay the

a.file estafa case against the entrustee; or b.file a separate case to collect the proceeds or the money obligation secured by the trust receipt. The obligation of the entrustee is not extinguished in case of repossession and

purchase price thereof. a.can AC Bank take possession of the outboard motors? Why? b.can AC Bank also foreclose the mortgage over the fishpond? A:a.if what Ricardo executed is a trust receipt, AC Bank can take possession of the outboard motors so that it can exercise its lien and sell them. If what Ricardo executed is a Surety Agreement, AC Bank cannot take possession of the outboard motors, because it has no lien on them. b.AC Bank can foreclose the mortgage over the fishpond if ricardo fails to pay the loan of 1M.

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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 13
LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0 13
LETTERS OF CREDIT/TRUST RECEIPTS LAW Puruple Notes 3.0 13