LETTERS OF CREDIT/TRUST RECEIPTS LAW

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LOC
Latest Jurisprudence
Outline Provision Sample Bar Q&As/Notes
1.Is a Letter of Credit a commercial transaction?
1.DEFINITION & A:Yes, it is a commercial transaction because it is covered by the
NATURE 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Similarly, assuming that it has not been superseded by the FRIA,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 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.
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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 bank
Obligations 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 50,000 in
3.BASIC PRINCIPLES favor of Melmart Trading of California, to cover A’s importation of
a.Doctrine of 500 bales of cotton. After shipment, Melmart Trading presented all
Independence the pertinent documents to the Prime Bank’s correspondent Bank
b.Fraud Exception in San Francisco California, and obtained payment under the LOC.
Principle Prime Bank now seeks payment from A who refuses to pay on the
c.Doctrine of Strict ground that Melmart Trading violated certain conditions in their
Compliance 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 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
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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 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
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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 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
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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 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 Jurisprudence
Outline Provision Sample Bar Q&As/Notes
1.DEFINITION & Sec4:A Trust receipt is 1.C contracted D to renovate his commercial building. D ordered Prudential Bank
CONCEPT a security transaction construction materials from E and received delivery thereof. The v.NLRC.
a.Loan/Security intended to aid in following day, C went to F Bank to apply for a loan for the A trust receipt
Feature financing importers or construction materials. As security for the loan, C was made to arrangement does
b.Ownership of the dealers in merchandise execute a trust receipt. One year later, after C failed to pay the not involve a simple
Goods, Documents by allowing them to balance of the loan, F Bank charged him with violation of the Trust loan transaction
and Instruments obtain delivery of the Receipts Law. between a creditor
goods under certain a.What is a Trust Receipt? and debtor importer.
covenants. b.Will the case against C prosper? Reason briefly. The law warrants the
A:a.The Trust Receipt is a written or printed document signed by the validity of the
entrustee in favor of the entrustor containing terms and conditions entruster’s security
substantially complying with the provisions of the Trust receipts Law, interest as against
whereby the bank as entruster releases the goods to the possession the creditors of the
of the entrustee but retains ownership thereof while the entrustee trust receipt
may sell the goods and apply the proceeds for the full payment of his agreement.
liability to the bank. Consequently, the
b.No, the case against C will not prosper. Since C received the goods covered by the
construction materials from E before the Trust receipt transaction trust receipt cannot
was entered into, the transaction was a simple loan, with the trust be levied upon the
receipt merely as a collateral or security for the loan. This is creditors of the
inconsistent with a trust receipt transaction where the title to the entrustee.
goods remain with the bank and the goods are released to the
entrustee before the loan is granted. Colinares v. CA
3.X & co., obtained a loan from a local bank in the amount of 500,000, In a pure trust receipt
mortgaging as security therefore its real property. Subsequently, the transaction, the
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company applied with the same bank for a LOC for 200,000 in favor goods are owned by
of a foreign bank to cover the importation of machinery. To the bank and only
guarantee payment of the obligation under the LOC, the company released to the
and its President and Treasurer executed a Surety Agreement in the importer in trust
local bank’s favor. subsequent to the
The machinery arrived and was received to the company under a trust grant of the loan- the
receipt agreement. As the company defaulted in the payment of its bank acquires a
obligation, the bank took possession of the imported machinery. At security interest in
the same time, it sought to foreclose the mortgaged property and to the goods as holder
hold the company, as well as its President and Treasurer, liable under of a security title for
the Surety Agreement. the advances it has
Did the taking of possession of the machinery by the bank result in made to the
the 1)full payment of the obligation of the company, and entrustee.
2)foreclosure of the mortgage? Why? Where the execution
A:The taking of possession of the machinery by the bank did not of a trust receipt
result in full payment of the obligations owing from the company and agreement was made
its officers. The taking of such possession must be considered merely after the goods
as a measure in order to protect or further safeguard the bank’s covered by it had
security interest. Dacion en pago can only be considered as having been purchased by
taken place when a creditor accepts and appropriates the ownership and delivered to the
of goods n payment of a due obligation. entrustee and the
The mere taking of possession of mortgaged assets does not amount later as a
to foreclosure. Foreclosure requires a sale at public auction. The consequence
foreclosure, therefore, has not yet been affected. acquired ownership
4.X, a dealer in imported textiles, opened with Y Bank an irrevocable to the goods, the
LOC in favor of his American supplier, ABC textiles,Inc in the amount transaction does not
of 50,000 covering the full invoice value of 200 bales of suiting involve a trust receipt
materials. He paid Y bank a marginal deposit of 40,000 and the but a simple loan
amount of 50,000. The clothing materials were subsequently shipped even though the
by ABC Textiles to Manila with Y Bank as consignee. Y Bank took parties denominated
delivery of the shipment and had it stored in its bodega. Thereafter, X it as one of trust
executed the corresponding trust receipt, but before X could take receipt.
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.

2.RIGHTS OF THE 1.Upon execution of a trust receipt over the goods, the party who is Colinares v. CA
ENTRUSTER obliged to release such goods and who retains security interest on The entruster bank
a.Validity of the those goods is called: acquires security
Security Interest as A: Entruster interest in the goods
against the Creditors as holder of a security
of the title for the advances
Entrustee/Innocent it had made to the
Purchasers for 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,
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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 the 1.H opens a LOC with ABC Banking Corporation for the importation Security Bank v. Great
LIABILITIES OF THE possession f the goods of 500 cases of Black Label Whisky with an invoice value of 50,000. Wall
ENTRUSTEE to the entrustee upon The goods and the covering documents arrive and H would like to In a civil case
a.Payment/Delivery the latter’s execution of take possession of the 500 cases of whisky under a trust receipt. The involving a trust
of Proceeds of Sale the trust receipt bank agrees to release the goods to him under the trust receipt receipt, the
or Disposition of Entrustee- is the person subject to the condition that H holds the 500 cases in trust for the entrustee’s failure to
Goods, Documents to whom the goods are bank and for him to turn over the proceeds of the sale of said whisky, comply with its
or Instruments delivered for sale and or to return the goods in the event of their non sale within 90 days obligation under the
b.Return of Goods, who bears the risk of from the date thereof. trust receipt
Documents or the loss. H sells the 500 cases to various customers but falls to turn over the constitute as civil
Instruments in case proceeds within the period stipulated, despite the repeated demands fraud provided that it
of Sale from ABC Banking Corporation. is alleged and
c.Liability for Loss of The bank files an estafa case against H with the City Fiscal of Manila. substantiated with
Goods, Documents In his defense, H contends that he should not be held liable because specificity, in the
or Instruments the transaction emanates from a letter of credit, which he claims, is complaint, its
d.Penal Sanction if civil in nature. He invokes the constitutional provision the no one attachments and
Offender is a should be imprisoned for non-payment of indebtedness. If you were supporting evidence.
Corporation 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
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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, 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
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
Sec10:Liability of (PD115) provides that if the violation or offense is committed by a
Entrustee for loss. The corporation, partnership, association or other judicial entity, the
risk of loss shall be penalty provided for in the law shall be imposed upon the directors,
borne by the entrustee. officers, employees or other officials or persons therein responsible
Loss of goods, for the offense without prejudice to the civil liabilities arising from the
documents or criminal offense.
instruments which are 5.Tom Cruz obtained a loan of 1M from XYZ Bank to finance his
the subject of a trust purchase of 5,000 bags of fertilizer. He executed a trust receipt in
receipt, pending their favor of XYZ Bank over the 5,000 bags of fertilizer. Tom withdrew the
disposition, irrespective 5,000 bags from the warehouse to be transported to Lucena City
of whether or not it was where his store was located. On the way, armed robbers took from
due to the fault or Tom 5,000 bags of fertilizers. Tom now claims that his obligation to
negligence of the pay the loan to XYZ Bank is extinguished because the loss was not
entrustee, shall not due to his fault. Is Tom correct? Explain.
extinguish his A: Being the entrustee, the obligation of Tom to Pay XYZ bank is not
obligation to the extinguished by the loss of the goods.
entruster for the value 6.What acts or omissions are penalized under the TRL?
thereof. 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
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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 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

AVAILABLE 1-if the goods are sold a separate transaction, he opened a LOC with the same bank for
or disposed by the 500,000 in favor of HS Bank, a foreign Bank to purchase outboard
entrustee and the latter motors. Likewise, Ricardo executed a Surety Agreement in favor of
did not remit the AC Bank. The outboard motors arrived and were delivered to Ricardo,
proceeds: but he was not able to pay the purchase price thereof.
a.file estafa case a.can AC Bank take possession of the outboard motors? Why?
against the entrustee; b.can AC Bank also foreclose the mortgage over the fishpond?
or A:a.if what Ricardo executed is a trust receipt, AC Bank can take
b.file a separate case to possession of the outboard motors so that it can exercise its lien and
collect the proceeds or sell them. If what Ricardo executed is a Surety Agreement, AC Bank
the money obligation cannot take possession of the outboard motors, because it has no lien
secured by the trust on them.
receipt. b.AC Bank can foreclose the mortgage over the fishpond if ricardo
The obligation of the fails to pay the loan of 1M.
entrustee is not
extinguished in case of
repossession and sale
of the goods, the
entrustee is entitled to
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LETTERS OF CREDIT/TRUST RECEIPTS LAW
Puruple Notes 3.0

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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