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
bank’s advances
 Policy Objectives/Purpose

1.To encourage and promote the use of

trust receipts.
2.To provide for the regulation of trust
receipt transactions
3.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 Ruth’s purchases of supplies.
• Ruth receives the ingredients.
• Ruth executes a Trust receipt in favor of the
bank.
How does it work?
 Trust Receipts Letters of Credit

bank releases the bank substitutes its

goods to the entrustee, promise to pay for the
who promises to promise of a customer
deliver the proceeds or who in turn promises
return the goods to the to pay the bank.
bank.
 South City Homes v. BA Finance
• A 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 or purchased.
 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:
(1) a description
(2) the total invoice value of the goods and the amount
of the draft to be paid by the entrustee
(3) an undertaking or a commitment of the entrustee
to:
- hold in trust for the entruster
- 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
Entruster – person holding title over the
goods, documents or instruments
Entrustee – person having or taking
possession of goods, documents or
instruments (Sec. 3)
 Concept of Trust Receipt Transaction

• a 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)
 Two Features of a Trust Receipt
Transaction
1. Loan Feature
- Entruster financed the importation or
purchase.
2. Security Feature
- Secure the performance of an
obligation of the entrustee or of some
other third persons in favor of the
entruster.
 Nacu v. CA
• 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 involved
a loan feature represented by the letter of
credit, and security feature which is in the
covering trust receipt. .
 Ownership of the Goods, Documents and
Instruments under a Trust Receipt
• Who holds title?
• The entruster takes the full title to the goods at the very
beginning—as soon as goods are bought and paid by
him.
• Who holds the goods?
• Entrustee is factual owner.
• Entruster’s ownership is merely legal fiction. (Abad vs.
CA)
• Who has better right?
• Entruster v. Creditor of Entrustee /Innocent Purchasers
for Value
 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 trust receipts, there is an obligation to repay
the entruster. Their terms are to be interpreted
in accordance with the general rules on
contracts, the law being alert in all cases to
prevent fraud on the part of either party to the
transaction. The entrustee binds himself to sell or
otherwise dispose of the entrusted goods with
the obligation to turn over to the entruster the
proceeds if sold, or return the goods if unsold or
not otherwise disposed of, in accordance with the
terms and conditions specified in the trust
receipt. A violation of this undertaking
constitutes estafa under Sec. 13, PD 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.
• The true nature of a trust receipt transaction can be found in
the "whereas" clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient business device to
assist importers and merchants solve their financing
problems." Obviously, the State, in enacting the law, sought to
find a way to assist importers and merchants in their financing
in order to encourage commerce in the Philippines.
 Rights of the Entruster
• The entruster shall be entitled:
–Proceeds
–Return
–Enforce all other rights, sell the goods
with at least 5 days notice
–Cancel and take possession upon
default
 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 or upon demand
• observe all other terms and conditions of the TR
 Disposition of the Proceeds
1. Expenses of the sale,
2. Expenses derived from re-taking,
keeping and storing the goods,
documents and instruments, and
3. 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 of Entrustee
• Entrustor may File Estafa Charges Against Entrustee
• Art. 315 Revised Penal Code
1. 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.
• 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.
• 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.
• 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: Res Perit Domino
– 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.
 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.
 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 non-payment 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.
 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.
 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.
 TR vs. Chattel Mortgage
• It is not a chattel mortgage because:
- it does not require the formalities set forth in
the Chattel Mortgage Law, such as the
affidavit and oath (Secs. 3(j) and 5, cf. Sec. 5,
Act 1508)
- it does not have to be registered with the
Register of Deeds (Sec. 3(j), cf. Sec. 198,
Admin. Code)
 TR vs. Conditional Sale
• It is not a conditional sale per se because:
• - the entruster is not a seller as contemplated
by law. He does not take on the obligations
and warranties of a seller (Sec. 8, cf. Arts.
1495-1581, Civil Code)
• - the transaction between the entruster and
the entrustee is more akin to a credit
transaction than a sale.
 TR vs. Pledge
• It is not a pledge because:
- the entrustee/debtor is not the absolute
owner of the goods (cf. Art. 2085)
- the entrustee/debtor does not deliver the
possession of the goods to the
entruster/creditor (cf. Art. 2093)
 TR vs. Consignment
• It is different from consignment because
the entrustee is the real owner of the
goods and not a mere dealer/agent

• Note: But if the consignment is evidenced by a

delivery trust receipt, it will fall under the Trust
Receipts Law (Robles vs. CA)