1

G.R. No. 137232 June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO
YUJUICO, petitioners,
vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, respondent.
D E C I S I O N
SANDOVAL-GUTIERREZ, J.:
For our resolution is the petition for review on certiorari assailing
the Decision
1
of the Court of Appeals dated March 31, 1998 in CA-
G.R. CV No. 48708 and its Resolution dated January 12, 1999.
The facts of the case as found by the Court of Appeals are:
"Sometime in 1989, Rosario Textile Mills Corporation (RTMC)
applied from Home Bankers Savings & Trust Co. for an Omnibus
Credit Line for P10 million. The bank approved RTMCs credit line
but for only P8 million. The bank notified RTMC of the grant of the
said loan thru a letter dated March 2, 1989 which contains terms
and conditions conformed by RTMC thru Edilberto V. Yujuico. On
March 3, 1989, Yujuico signed a Surety Agreement in favor of the
bank, in which he bound himself jointly and severally with RTMC for
the payment of all RTMCs indebtedness to the bank from 1989 to
1990. RTMC availed of the credit line by making numerous
drawdowns, each drawdown being covered by a separate
promissory note and trust receipt. RTMC, represented by Yujuico,
executed in favor of the bank a total of eleven (11) promissory
notes.
Despite the lapse of the respective due dates under the promissory
notes and notwithstanding the banks demand letters, RTMC failed
to pay its loans. Hence, on January 22, 1993, the bank filed a
complaint for sum of money against RTMC and Yujuico before the
Regional Trial Court, Br. 16, Manila.
In their answer (OR, pp. 44-47), RTMC and Yujuico contend that
they should be absolved from liability. They claimed that although
the grant of the credit line and the execution of the suretyship
agreement are admitted, the bank gave assurance that the
suretyship agreement was merely a formality under which Yujuico
will not be personally liable. They argue that the importation of raw
materials under the credit line was with a grant of option to them to
turn-over to the bank the imported raw materials should these fail
to meet their manufacturing requirements. RTMC offered to make
such turn-over since the imported materials did not conform to the
required specifications. However, the bank refused to accept the
same, until the materials were destroyed by a fire which gutted
down RTMCs premises.
For failure of the parties to amicably settle the case, trial on the
merits proceeded. After the trial, the Court a quorendered a
decision in favor of the bank, the decretal part of which reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered
in favor of plaintiff and against defendants who are ordered to pay
jointly and severally in favor of plaintiff, inclusive of stipulated 30%
per annum interest and penalty of 3% per month until fully paid,
under the following promissory notes:
90-1116 6-20-90 P737,088.25 9-18-90

(maturity)

90-1320 7-13-90 P650,000.00 10-11-90
2

90-1334 7-17-90 P422,500.00 10-15-90
90-1335 7-17-90 P422,500.00 10-15-90
90-1347 7-18-90 P795,000.00 10-16-90
90-1373 7-20-90 P715,900.00 10-18-90
90-1397 7-27-90 P773,500.00 10-20-90
90-1429 7-26-90 P425,750.00 10-24-90
90-1540 8-7-90 P720,984.00 11-5-90
90-1569 8-9-90 P209,433.75 11-8-90
90-0922 5-28-90 P747,780.00 8-26-90
The counterclaims of defendants are hereby DISMISSED.
SO ORDERED." (OR, p. 323; Rollo, p. 73)."
2

Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the
Court of Appeals, contending that under the trust receipt contracts
between the parties, they merely held the goods described therein
in trust for respondent Home Bankers Savings and Trust Company
(the bank) which owns the same. Since the ownership of the goods
remains with the bank, then it should bear the loss. With the
destruction of the goods by fire, petitioners should have been
relieved of any obligation to pay.
The Court of Appeals, however, affirmed the trial courts judgment,
holding that the bank is merely the holder of the security for its
advance payments to petitioners; and that the goods they
purchased, through the credit line extended by the bank, belong to
them and hold said goods at their own risk.
Petitioners then filed a motion for reconsideration but this was
denied by the Appellate Court in its Resolution dated January 12,
1999.
Hence, this petition for review on certiorari ascribing to the Court of
Appeals the following errors:
"I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
THE ACTS OF THE PETITIONERS-DEFENDANTS WERE TANTAMOUNT
TO A VALID AND EFFECTIVE TENDER OF THE GOODS TO THE
RESPONDENT-PLAINTIFF.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE
DOCTRINE OF RES PERIT DOMINO IN THE CASE AT BAR
CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE
DEFECTIVE RAW MATERIALS BY THE PETITIONERS-DEFENDANTS TO
THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION IN
THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH
THE RESPONDENT-PLAINTIFF.
III
THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF
THE CIVIL CODE AND THE LONG-STANDING JURISPRUDENCE THAT
INTENTION OF THE PARTIES IS PRIMORDIAL IN ITS FAILURE TO
UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY
AGREEMENT WAS A MERE FORMALITY AND DID NOT INTEND TO
HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.
3

IV
ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS
VALID AND EFFECTIVE, THE HONORABLE COURT OF APPEALS
VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT LIABLE
UNLESS THE DEBTOR IS HIMSELF LIABLE.
V
THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF
TRUST RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE
RESPONDENT."
The above assigned errors boil down to the following issues: (1)
whether the Court of Appeals erred in holding that petitioners are
not relieved of their obligation to pay their loan after they tried to
tender the goods to the bank which refused to accept the same, and
which goods were subsequently lost in a fire; (2) whether the Court
of Appeals erred when it ruled that petitioners are solidarily liable
for the payment of their obligations to the bank; and (3) whether
the Court of Appeals violated the Trust Receipts Law.
On the first issue, petitioners theorize that when petitioner RTMC
imported the raw materials needed for its manufacture, using the
credit line, it was merely acting on behalf of the bank, the true
owner of the goods by virtue of the trust receipts. Hence, under the
doctrine of res perit domino, the bank took the risk of the loss of
said raw materials. RTMCs role in the transaction was that of end
user of the raw materials and when it did not accept those materials
as they did not meet the manufacturing requirements, RTMC made
a valid and effective tender of the goods to the bank. Since the bank
refused to accept the raw materials, RTMC stored them in its
warehouse. When the warehouse and its contents were gutted by
fire, petitioners obligation to the bank was accordingly
extinguished.
Petitioners stance, however, conveniently ignores the true nature
of its transaction with the bank. We recall that RTMC filed with the
bank an application for a credit line in the amount of P10 million,
but only P8 million was approved. RTMC then made withdrawals
from this credit line and issued several promissory notes in favor of
the bank. In banking and commerce, a credit line is "that amount of
money or merchandise which a banker, merchant, or supplier
agrees to supply to a person on credit and generally agreed to in
advance."
3
It is the fixed limit of credit granted by a bank, retailer,
or credit card issuer to a customer, to the full extent of which the
latter may avail himself of his dealings with the former but which he
must not exceed and is usually intended to cover a series of
transactions in which case, when the customers line of credit is
nearly exhausted, he is expected to reduce his indebtedness by
payments before making any further drawings.
4

It is thus clear that the principal transaction between petitioner
RTMC and the bank is a contract of loan. RTMC used the proceeds
of this loan to purchase raw materials from a supplier abroad. In
order to secure the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts were executed by
the parties to evidence this security arrangement. Simply stated, the
trust receipts were mere securities.
In Samo vs. People,
5
we described a trust receipt as "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."
6

4

In Vintola vs. Insular Bank of Asia and America,
7
we elucidated
further that "a trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a security interest in the goods.
It secures an indebtedness andthere can be no such thing as
security interest that secures no obligation."
8
Section 3 (h) of the
Trust Receipts Law (P.D. No. 115) defines a "security interest" as
follows:
"(h) Security Interest means a property interest in goods,
documents, or instruments to secure performance of some
obligation of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only."
Petitioners insistence that the ownership of the raw materials
remained with the bank is untenable. In Sia vs. People,
9
Abad vs.
Court of Appeals,
10
and PNB vs. Pineda,
11
we held that:
"If under the trust receipt, the bank is made to appear as the owner,
it was but an artificial expedient, more of legal fiction than fact, for
if it were really so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency with purpose of
the trust receipt of giving a stronger security for the loan obtained
by the importer. To consider the bank as the true owner from the
inception of the transaction would be to disregard the loan feature
thereof..."
12

Thus, petitioners cannot be relieved of their obligation to pay their
loan in favor of the bank.
Anent the second issue, petitioner Yujuico contends that the
suretyship agreement he signed does not bind him, the same being
a mere formality.
We reject petitioner Yujuicos contentions for two reasons.
First, there is no record to support his allegation that the surety
agreement is a "mere formality;" and
Second, as correctly held by the Court of Appeals, the Suretyship
Agreement signed by petitioner Yujuico binds him. The terms clearly
show that he agreed to pay the bank jointly and severally with
RTMC. The parole evidence rule under Section 9, Rule 130 of the
Revised Rules of Court is in point, thus:
"SEC. 9. Evidence of written agreements. When the terms of an
agreement have been reduced in writing, it is considered as
containing all the terms agreed upon and there can be, between the
parties and their successors in interest, no evidence of such terms
other than the contents of the written agreement.
However, a party may present evidence to modify, explain, or add
to the terms of the written agreement if he puts in issue in his
pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the
written agreement;
(b) The failure of the written agreement to express the true
intent and agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or
their successors in interest after the execution of the
written agreement.
x x x."
5

Under this Rule, the terms of a contract are rendered conclusive
upon the parties and evidence aliunde is not admissible to vary or
contradict a complete and enforceable agreement embodied in a
document.
13
We have carefully examined the Suretyship Agreement
signed by Yujuico and found no ambiguity therein. Documents must
be taken as explaining all the terms of the agreement between the
parties when there appears to be no ambiguity in the language of
said documents nor any failure to express the true intent and
agreement of the parties.
14

As to the third and final issue At the risk of being repetitious, we
stress that the contract between the parties is a loan. What
respondent bank sought to collect as creditor was the loan it
granted to petitioners. Petitioners recourse is to sue their supplier,
if indeed the materials were defective.
WHEREFORE, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are
AFFIRMED IN TOTO. Costs against petitioners.
SO ORDERED.
Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ.,
concur.
BANK OF COMMERCE, petitioner, vs. TERESITA S.
SERRANO, respondent.
D E C I S I O N
QUISUMBING, J.:
For our review on certiorari is the civil aspect of the Court of
Appeals Decision,
[1]
dated September 28, 2001, in CA-G.R. CR No.
24570 as well as its Resolution,
[2]
dated January 17, 2002, denying
petitioners motion for reconsideration. The Court of Appeals set
aside the Decision
[3]
dated May 31, 2000, of the Regional Trial Court
(RTC) Branch 105 of Quezon City.
The facts are as follows:
Petitioner Bank of Commerce (formerly Boston Bank of the
Philippines) is a private domestic banking institution. Respondent
Teresita S. Serrano is the General Manager and Treasurer of Via
Moda International, Inc., a domestic business entity primarily
engaged in the import and export of textile materials and fabrics.
Via Moda International, represented by respondent, obtained
an export packing loan from petitioner, Bank of Commerce (BOC)-
Diliman, Quezon City Branch, in the amount of US$50,000
(P1,382,250), secured by a Deed of Assignment over Irrevocable
Transferable Letter of Credit No. 100072119. Respondent Serrano
executed in favor of BOC Promissory Note No. 94/086 for
US$50,000 dated May 6, 1994 with maturity date on July 14, 1994.
Via Moda then opened a deposit account for the proceeds of the
said loan.
[4]

On March 15, 1994, BOC issued to Via Moda, Irrevocable Letter
of Credit No. BCZ-940051, in the amount of US$56,735, for the
purchase and importation of fabric and textile products from Tiger
Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods
covered, respondent, in representation of Via Moda, executed Trust
Receipt No. 94-22221 dated April 21, 1994 with due date on July 20,
1994 for US$55,944.73 (P1,554,424.32).
[5]

Under the terms of the trust receipt, Via Moda agreed to hold
the goods in trust for petitioner as the latters property and to sell
the same for the latters account. In case of sale, the proceeds are
to be remitted to the bank as soon as it is received, but not later
than the maturity date. Said proceeds are to be applied to the
relative acceptances, with interest at the rate of 26% per annum,
6

with a penalty of 36% per annum of the total amount due until fully
paid in case of non-payment of the trust receipt and relative
acceptance at maturity date or, in the alternative, to return the
goods in case of non-sale.
[6]

The goods covered by the trust receipt were shipped by Via
Moda to its consignee in New Jersey, USA, who sent an Export
Letter of Credit issued by the Bank of New York, in favor of BOC.
The Regional Operations Officer of BOC signed the export
declarations to show consent to the shipment. The total value of
the entrusted goods which were shipped per export declaration was
US$81,987 (P2,246,443.80). The proceeds of the entrusted goods
sold were not credited to the trust receipt but, were applied by the
bank to the principal, penalties and interest of the export packing
loan. The excess P472,114.85 was applied to the trust receipt,
leaving a balance of P1,444,802.28 as of November 15, 1994.
[7]

On November 16, 1994, petitioner sent a demand letter to Via
Moda to pay the said amount plus interest and penalty charges, or
to return the goods covered by Trust Receipt No. 94-22221 within 5
days from receipt. The demand was not heeded. As of December
15, 1998, the outstanding balance of Via Moda
was P4,783,487.15.
[8]

On March 8, 1998, respondent was charged with the crime of
estafa under Article 315 (b) of the Revised Penal Code in relation to
Presidential Decree No. 115.
[9]

On May 31, 2000, the trial court rendered judgment and the
dispositive portion of which reads:
WHEREFORE, in the light of the foregoing, the Court finds accused
Teresita S. Serrano GUILTY beyond reasonable doubt of the crime
charged in the Information filed in this case and sentences her to
serve the indeterminate penalty of imprisonment from EIGHT (8)
YEARS AND ONE (1) DAY OF PRISION MAYOR, AS MINIMUM, TO
TWENTY (20) YEARS OF RECLUSION TEMPORAL, AS MAXIMUM,
including the accessory penalties. She is ordered to pay her civil
liability to Bank of Commerce in the amount of P4,783,487.15, with
interest until fully paid, and the costs of this suit.
SO ORDERED.
[10]

Respondent appealed to the Court of Appeals which rendered
a decision dated September 28, 2001, reversing the trial courts
decision. The Court of Appeals held that the element of
misappropriation or conversion in violation of P.D. No. 115, in
relation to the crime of estafa, was absent in this case, thereby
acquitting the respondent and deleting her civil liability. The
decretal portion of the decision reads as follows:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED, and the accused-appellant ACQUITTED of the crime
charged. The civil liability adjudged by the court a quo is hereby
deleted, there being no showing that accused-appellant bound
herself personally liable with respect to the loan secured by the
trust receipt.
SO ORDERED.
[11]

Petitioner filed a Motion for Reconsideration which was
denied. Petitioner now comes to this Court submitting the
following issues for our resolution:
I. WHETHER RESPONDENT IS JOINTLY AND SEVERALLY
LIABLE WITH VIA MODA UNDER THE GUARANTEE
CLAUSE OF LC NO. [BCZ-940051] (EXHIBIT A) SECURED
BY TRUST RECEIPT NO. [94-22221] (EXHIBIT C).
[12]

II. WHETHER THE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR IN DELETING THE CIVIL LIABILITY OF
7

RESPONDENT SERRANO IN ITS DECISION DATED
SEPTEMBER 28, 2001.
[13]

On the first issue, petitioner contends that the Court of Appeals
made a manifestly mistaken inference from its findings or a
misapprehension of facts and overlooked a vital piece of evidence
on record, particularly, the Guarantee Clause of the Letter of Credit
secured by the Trust Receipt. Petitioner further alleges that the said
Guarantee Clause provides that the liability of respondent is joint
and solidary; hence, she should be held liable on the obligation.
A letter of credit is a separate document from a trust receipt.
While the trust receipt may have been executed as a security on the
letter of credit, still the two documents involve different
undertakings and obligations. A letter of credit is an engagement by
a bank or other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. Through a
letter of credit, the bank merely substitutes its own promise to pay
for the promise to pay of one of its customers who in return
promises to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees mutually agreed
upon.
[14]
By contrast, a trust receipt transaction is one where the
entruster, who holds an absolute title or security interests over
certain goods, documents or instruments, released the same to the
entrustee, who executes a trust receipt binding himself to hold the
goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents and instruments
with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster, or as
appears in the trust receipt, or return the goods, documents or
instruments themselves if they are unsold, or not otherwise
disposed of, in accordance with the terms and conditions specified
in the trust receipt.
[15]

However, the question of the liability of respondent based on
the Guarantee Clause of the Letter of Credit, was not raised either
at the trial court or before the Court of Appeals. A question that
was never raised in the courts below cannot be allowed to be raised
for the first time on appeal without offending basic rules of fair play,
justice and due process. Such an issue was not brought to the fore
either in the trial court or the appellate court, and would have been
disregarded by the latter tribunal for the reasons previously stated.
With more reason, the same does not deserve consideration by this
Court.
[16]

On the second issue, the Court of Appeals held that respondent
Serrano cannot be held civilly liable under the trust receipt since she
was not made personally liable nor was she a guarantor therein.
The parties stipulated during the pre-trial that respondent Serrano
executed the trust receipt in representation of Via Moda, Inc.,
which has a separate personality from Serrano, and petitioner BOC
failed to show sufficient reason to justify the piercing of the veil of
corporate fiction. It thus ruled that this was not Serranos personal
obligation but that of Via Moda and there was no basis of finding
her solidarily liable with Via Moda.
[17]

Worthy of mention at this point is the Court of Appeals finding
that there was no misappropriation or conversion by the
respondent of the proceeds of the sale in the goods, subject of the
trust receipt since the proceeds were actually received by petitioner
but the latter applied the same to Via Modas other obligations
under the export packing loan. It further stated that such
application of payment to another obligation was done by
petitioner on its own and should not create a criminal liability on
the part of respondent who did not take part nor had any
knowledge thereof. It is on this premise that the respondent was
acquitted of the crime charged.
[18]

Incidentally, petitioner urged this Court to review the factual
findings of the case due to contradictory findings of the trial court
8

and the Court of Appeals arising from misappreciation of facts by
the Court of Appeals. Such plea must be rejected. It is a well
established rule that in an appeal via certiorari, only questions of
law may be raised,
[19]
and we find petitioners averments
insufficient to disregard this well-entrenched rule. This Court does
not, of itself, automatically delve into the record of a case to
determine the facts anew where there is disagreement between the
findings of fact by the trial court and by the Court of Appeals. When
the disagreement is merely on the probative value of the evidence,
i.e., which is more credible of two versions, we limit our review to
only ascertaining if the findings of the Court of Appeals are
supported by the records. So long as the findings of the appellate
court are consistent with and not palpably contrary to the evidence
on record, we shall decline to make a review on the probative value
of such evidence. The findings of fact of the Court of Appeals, and
not those of the trial court, will be considered final and conclusive,
even in this Court.
[20]
In this case, we find no cogent reason to
disturb the foregoing factual findings of the Court of Appeals.
At any rate, petitioner BOC is not precluded from filing a
separate civil action against the responsible party where the
abovementioned issues could be properly resolved or determined.
The issues raised by herein petitioner involve a determination of
facts and require the admission and examination of additional
evidence for its resolution. That cannot be done in a petition for
review on certiorari by merely appealing the civil aspect of an
acquittal in a criminal case.
WHEREFORE, the petition is DENIED for lack of merit. The
Decision dated September 28, 2001 and the Resolution dated
January 17, 2002, of the Court of Appeals in CA-G.R. CR No. 24570,
are AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago,
Carpio, and Azcuna, JJ., concur.
METROPOLITAN BANK & TRUST COMPANY v. HON. SECRETARY OF
JUSTICE RAUL M. GONZALES, OLIVER T. YAO and DIANA T. YAO,
CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45
of the Revised Rules of Court filed by petitioner Metropolitan Bank
and Trust Company, seeking to reverse and set aside the Decision[1]
dated 30 March 2007and the Resolution[2] dated 16 October 2007
of the Court of Appeals in CA-G.R. SP No. 91892. In its assailed
Decision and Resolution, the appellate court affirmed the
Resolution[3] of the Secretary of Justice directing the City
Prosecutor of Manila to move for the withdrawal of the
Informations for Estafa filed against private respondents Oliver T.
Yao and Diana T. Yao.

The factual and procedural antecedents of this present petition are
as follows:

Petitioner is a banking institution duly authorized to engage in the
banking business under Philippine laws.

9

Private respondents were the duly authorized representatives of
Visaland Inc. (Visaland), likewise a domestic corporation engaged in
the real estate development business.

In order to finance the importation of materials necessary for the
operations of its sister company, Titan Ikeda Construction and
Development Corporation (TICDC), private respondents, on behalf
of Visaland, applied with petitioner for 24 letters of credit, the
aggregate amount of which reached the sum of P68,749,487.96.
Simultaneous with the issuance of the letters of credit, private
respondents signed trust receipts[4] in favor of petitioner. Private
respondents bound themselves to sell the goods covered by the
letters of credit and to remit the proceeds to petitioner, if sold, or
to return the goods, if not sold, on or before their agreed maturity
dates.

When the trust receipts matured, private respondents failed to
return the goods to petitioner, or to return their value amounting to
P68,749,487.96 despite demand. Thus, petitioner filed a criminal
complaint[5] for estafa[6] against Visaland and private respondents
with the Office of the City Prosecutor of Manila (City Prosecutor).[7]

In their Counter-Affidavit,[8] private respondents denied having
entered into trust receipt transactions with petitioner. Instead,
private respondents claimed that the contract entered into by the
parties was a Contract of Loan secured by a Real Estate Mortgage
over two parcels of land situated at Tagaytay City and registered
under the name of the spouses Wilbert and Isabelita King (the
spouses King).[9] According to private respondents, petitioner
made them sign documents bearing fine prints without apprising
them of the real nature of the transaction involved. Private
respondents came to know of the trust receipt transaction only
after they were served a copy of the Affidavit-Complaint of the
petitioner.

After the requisite preliminary investigation, the City Prosecutor
found that no probable cause existed and dismissed Information
Sheet (I.S.) No. 02G-30918 in a Resolution[10] dated 23 January
2003. While the City Prosecutor was not persuaded by the defense
proffered by private respondents that no trust receipt transaction
existed, it nonetheless, dismissed the case for lack of evidence that
prior demand was made by petitioner. The City Prosecutor
underscored that for a charge of estafa with grave abuse of
confidence to prosper, previous demand is an indispensable
requisite.

To prove that a demand was made prior to the institution of the
criminal complaint, petitioner attached to its Motion for
Reconsideration a copy of a letter-demand[11] dated 27 February
2001, addressed to private respondents.

10

After the element of prior demand was satisfied, the City Prosecutor
issued a Resolution[12] dated 11 October 2004 finding probable
cause for estafa under Article 315, paragraph 1(b)[13] of the
Revised Penal Code, in relation to Presidential Decree No. 115.[14]
Accordingly, 23 separate Informations[15] for estafa were filed
before the Regional Trial Court (RTC) of Manila against private
respondents. The cases were docketed as Criminal Cases No.
04231721-44 and raffled to Branch 17 of the said court.

In the interim, private respondents appealed the investigating
prosecutors Resolution to the Secretary of Justice. In a
Resolution[16] dated 31 March 2005, the Secretary of Justice ruled
that there was no probable cause to prosecute private respondents
for estafa in relation to Presidential Decree No. 115. The Secretary
of Justice declared that the legitimate transactional relationship
between the parties being merely a contract of loan, violations of
the terms thereunder were not covered by Presidential Decree No.
115. Thus, the Secretary of Justice directed the City Prosecutor of
Manila to move for the withdrawal of the Informations. In a
subsequent Resolution[17] dated 30 August 2005, the Secretary of
Justice denied petitioners Motion for Reconsideration, for the
matters raised therein had already been passed upon in his prior
resolution.

Acting on the directive of the Secretary of Justice, the City
Prosecutor moved for the withdrawal of the Informations which
was granted by the RTC in an Order[18] dated 29 July 2005.
Consequently, Criminal Cases No. 04-231721 to No. 04231744 were
withdrawn. The RTC refused to reconsider its earlier resolution in
an Order[19] dated 3 February 2006, thereby denying petitioners
Motion for Reconsideration.

From the adverse Resolutions of the Secretary of Justice, petitioner
elevated its case before the Court of Appeals by filing a Petition for
Certiorari,[20] which was docketed as CA-G.R. SP No. 91892.
Petitioner averred in its Petition that the Secretary of Justice abused
his discretion in ignoring the established facts and legal principles
when he ruled that probable cause for the crime of estafa was
absent.

The Court of Appeals, however, in its Decision[21] dated 30 March
2007, dismissed petitioners Petition for Certiorari after finding that
the Secretary of Justice committed no grave abuse of discretion in
ruling against the existence of probable cause to prosecute private
respondents. In arriving at its assailed decision, the appellate court
recognized the authority of the Secretary of Justice to control and
supervise the prosecutors, which includes the power to reverse or
modify their decisions without committing grave abuse of
discretion.
Similarly ill-fated was Petitioners Motion for Reconsideration in a
Resolution[22] dated 16 October 2007.

11

Unfazed by the turn of events, petitioner now comes before this
Court urging us to reverse the Court of Appeals Decision and
Resolution and to direct the filing of Informations against private
respondents. For the disposition of this Court is the sole issue of:

WHETHER OR NOT PROBABLE CAUSE EXISTS FOR THE PROSECUTION
OF PRIVATE RESPONDENTS FOR THE CRIME OF ESTAFA IN RELATION
TO P.D. NO. 115.


Petitioner impugns the findings of the appellate court sustaining the
non-existence of probable cause as found by the Secretary of
Justice. Petitioner insists that the allegations in its complaint,
together with the pieces of evidence appended thereon, are
sufficient to sustain a finding of probable cause in preliminary
investigation.

Asserting their innocence, private respondents continue to argue
that the agreement contracted by parties is one of loan, and not of
trust receipt. To buttress their contention, private respondents aver
that a contract of mortgage was executed by the spouses King to
secure private respondents loan obligation with petitioner, the
proceeds of which were the ones utilized to finance the importation
of materials.[23] Private respondents likewise defend the assailed
Court of Appeals Decision and assert that the Secretary of Justice
was justified in overruling the investigating prosecutors findings, as
sanctioned by Section 12 of DOJ Department Order No. 70.[24]

The present petition bears impressive merits.

Probable cause has been defined as the existence of such facts and
circumstances as would excite the belief in a reasonable mind,
acting on the facts within the knowledge of the prosecutor, that the
person charged was guilty of the crime for which he was
prosecuted. Probable cause is a reasonable ground of presumption
that a matter is, or may be, well founded on such a state of facts in
the mind of the prosecutor as would lead a person of ordinary
caution and prudence to believe, or entertain an honest or strong
suspicion, that a thing is so.[25] The term does not mean actual or
positive cause nor does it import absolute certainty. It is merely
based on opinion and reasonable belief. Thus, a finding of probable
cause does not require an inquiry into whether there is sufficient
evidence to procure a conviction. It is enough that it is believed that
the act or omission complained of constitutes the offense charged.
Precisely, there is a trial for the reception of evidence of the
prosecution in support of the charge.[26]

To determine the existence of probable cause, there is need to
conduct preliminary investigation. A preliminary investigation
constitutes a realistic judicial appraisal of the merits of a case.[27]
Its purpose is to determine whether (a) a crime has been
12

committed; and (b) whether there is a probable cause to believe
that the accused is guilty thereof.[28] It is a means of discovering
which person or persons may be reasonably charged with a crime.

The conduct of preliminary investigation is executive in nature. The
Court may not be compelled to pass upon the correctness of the
exercise of the public prosecutors function unless there is a
showing of grave abuse of discretion or manifest error in his
findings.[29] Grave abuse of discretion implies a capricious and
whimsical exercise of judgment tantamount to lack or excess of
jurisdiction.[30] The exercise of power must have been done in an
arbitrary or a despotic manner by reason of passion or personal
hostility. It must have been so patent and gross as to amount to an
evasion of positive duty or a virtual refusal to perform the duty
enjoined or to act at all in contemplation of law.[31]

In the present case, the abuse of discretion is patent in the act of
the Secretary of Justice holding that the contractual relationship
forged by the parties was a simple loan, for in so doing, the
Secretary of Justice assumed the function of the trial judge of
calibrating the evidence on record, done only after a full-blown trial
on the merits. The fact of existence or non-existence of a trust
receipt transaction is evidentiary in nature, the veracity of which
can best be passed upon after trial on the merits, for it is virtually
impossible to ascertain the real nature of the transaction involved
based solely on the self-serving allegations contained in the
opposing parties pleadings. Clearly, the Secretary of Justice is not
in a competent position to pass judgment on substantive matters.
The bases of a partys accusation and defenses are better ventilated
at the trial proper than at the preliminary investigation.

We need not overemphasize that in a preliminary investigation, the
public prosecutor merely determines whether there is probable
cause or sufficient ground to engender a well-founded belief that a
crime has been committed, and that the respondent is probably
guilty thereof and should be held for trial. It does not call for the
application of rules and standards of proof that a judgment of
conviction requires after trial on the merits. The complainant need
not present at this stage proof beyond reasonable doubt. A
preliminary investigation does not require a full and exhaustive
presentation of the parties evidence.[32] Precisely, there is a trial
to allow the reception of evidence for both parties to substantiate
their respective claims.

Having said the foregoing, this Court now proceeds to determine
whether probable cause exists for holding private respondents
liable for estafa in relation to Presidential Decree No. 115.

Trust receipt transactions are governed by the provisions of
Presidential Decree No. 115 which defines such a transaction as
follows:

13

Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as the
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latters execution and delivery to the entruster of a signed
document called a trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing
to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially
equivalent to any one of the following:

1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or transship or otherwise deal
with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments, a) to sell or procure their sale or
exchange; or b) to deliver them to a principal; or c) to effect the
consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection
or renewal.

The sale of goods, documents or instruments by a person in the
business of selling goods, documents or instruments for profit who,
at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or other interest
as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.


An entrustee is one having or taking possession of goods,
documents or instruments under a trust receipt transaction, and
any successor in interest of such person for the purpose of payment
specified in the trust receipt agreement. The entrustee is obliged to
(1) hold the goods, documents or instruments in trust for the
entruster and shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt; (2) receive the proceeds in
trust for the entruster and turn over the same to the entruster to
the extent of the amount owed to the entruster or as appears on
14

the trust receipt; (3) insure the goods for their total value against
loss from fire, theft, pilferage or other casualties; (4) keep said
goods or the proceeds therefrom whether in money or whatever
form, separate and capable of identification as property of the
entruster; (5) return the goods, documents or instruments in the
event of non-sale or upon demand of the entruster; and (6) observe
all other terms and conditions of the trust receipt not contrary to
the provisions of the decree.[33]

The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to
the entrustee to the extent of the amount owed to the entruster or
as appears in the trust receipt; or to the return of the goods,
documents or instruments in case of non-sale; and to the
enforcement of all other rights conferred on him in the trust
receipt, provided these are not contrary to the provisions of the
document.[34] A violation of any of these undertakings constitutes
estafa defined under Article 315(1)(b) of the Revised Renal Code, as
provided by Section 13 of Presidential Decree No. 115 viz:

Section 13. Penalty Clause. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree 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.


Apropos thereto, Article 315(1)(b) of the Revised Renal Code
punishes estafa committed as follows:

ARTICLE 315. Swindling (estafa). Any person who shall defraud
another by any of the means mentioned hereinbelow shall be
punished by:

1st. The penalty of prision correccional in its maximum period to
prision mayor in its minimum period, if the amount of the fraud is
over 12,000 pesos but does not exceed 22,000 pesos, and if such
amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year
for each additional 10,000 pesos; but the total penalty which may
be imposed shall not exceed twenty years. In such case, and in
connection with the accessory penalties which may be imposed and
15

for the purpose of the other provisions of this Code, the penalty
shall be termed prision mayor to reclusion temporal, as the case
may be.

2nd. The penalty of prision correccional in its minimum and
medium periods, if the amount of the fraud is over 6,000 pesos but
does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision
correccional in its minimum period, if such amount is over 200
pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such
amount does not exceed 200 pesos, provided that in the four cases
mentioned, the fraud be committed by any of the following means;
x x x.


As found in the Complaint-Affidavit of petitioner, private
respondents were charged with failing to account for or turn over to
petitioner the merchandise or goods covered by the trust receipts
or the proceeds of the sale thereof in payment of their obligations
thereunder. The following pieces of evidence adduced from the
affidavits and documents submitted before the City Prosecutor are
sufficient to establish the existence of probable cause, to wit:

First, the trust receipts[35] bearing the genuine signatures of private
respondents; second, the demand letter[36] of petitioner addressed
to respondents; and third, the initial admission by private
respondents of the receipt of the imported goods from
petitioner.[37]

Prescinding from the foregoing, we conclude that there is ample
evidence on record to warrant a finding that there is a probable
cause to warrant the prosecution of private respondents for estafa.
It must be once again stressed that probable cause does not require
an inquiry into whether there is sufficient evidence to procure a
conviction. It is enough that it is believed that the act or omission
complained of constitutes the offense charged.

That private respondents did not sell the goods under the trust
receipt but allowed it to be used by their sister company is of no
moment. The offense punished under Presidential Decree No. 115
is in the nature of malum prohibitum. A mere failure to deliver the
proceeds of the sale or the goods, if not sold, constitutes a criminal
offense that causes prejudice not only to another, but more to the
public interest.[38] Even more incredible is the contention of
private respondents that they did not give much significance to the
documents they signed, considering the enormous value of the
16

transaction involved. Thus, it is highly improbable to mistake trust
receipt documents for a contract of loan when the heading thereon
printed in bold and legible letters reads: Trust Receipts. We are
not prejudging this case on the merits. However, by merely
glancing at the documents submitted by petitioner entitled Trust
Receipts and the arguments advanced by private respondents, we
are convinced that there is probable cause to file the case and to
hold them for trial.

All told, the evidentiary measure for the propriety of filing criminal
charges has been reduced and liberalized to a mere probable cause.
As implied by the words themselves, probable cause is concerned
with probability, not absolute or moral certainty.[39]

WHEREFORE, premises considered, the instant Petition is GRANTED.
The Decision dated 30 March 2007 and the Resolution dated 16
October 2007 of the Court of Appeals in CA-G.R. SP No. 91892 are
REVERSED and SET ASIDE. The Secretary of Justice is hereby
ORDERED to direct the Office of the City Prosecutor of Manila to
forthwith FILE Informations for estafa against private respondents
Oliver T. Yao and Diana T. Yao before the appropriate court.

SO ORDERED.
G.R. No. 159622 July 30, 2004
LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and
MANUEL P. LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.


D E C I S I O N


YNARES-SANTIAGO, J.:
At issue in this petition for review on certiorari is whether or not, in
a trust receipt transaction, an entruster which had taken actual and
juridical possession of the goods covered by the trust receipt may
subsequently avail of the right to demand from the entrustee the
deficiency of the amount covered by the trust receipt.
As correctly appreciated by the Court of Appeals, the undisputed
facts of this case are as follows:
Respondent Metropolitan Bank and Trust Company (Metrobank)
filed a complaint for sum of money against Landl and Company
(Phil.) Inc. (Landl) and its directors, Percival G. Llaban and Manuel P.
Lucente before the Regional Trial Court of Cebu City, Branch 19,
docketed as Civil Case No. CEB-4895.
Respondent alleged that petitioner corporation is engaged in the
business of selling imported welding rods and alloys. On June 17,
1983, it opened Commercial Letter of Credit No. 4998 with
respondent bank, in the amount of US$19,606.77, which was
17

equivalent to P218,733.92 in Philippine currency at the time the
transaction was consummated. The letter of credit was opened to
purchase various welding rods and electrodes from Perma Alloys,
Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated
March 10, 1983. Petitioner corporation put up a marginal deposit of
P50,414.00 from the proceeds of a separate clean loan.
As an additional security, and as a condition for the approval of
petitioner corporation's application for the opening of the
commercial letter of credit, respondent bank required petitioners
Percival G. Llaban and Manuel P. Lucente to execute a Continuing
Suretyship Agreement to the extent of P400,000.00, excluding
interest, in favor of respondent bank. Petitioner Lucente also
executed a Deed of Assignment in the amount of P35,000.00 in
favor of respondent bank to cover the amount of petitioner
corporation's obligation to the bank. Upon compliance with these
requisites, respondent bank opened an irrevocable letter of credit
for the petitioner corporation.
To secure the indebtedness of petitioner corporation, respondent
bank required the execution of a Trust Receipt in an amount
equivalent to the letter of credit, on the condition that petitioner
corporation would hold the goods in trust for respondent bank, with
the right to sell the goods and the obligation to turn over to
respondent bank the proceeds of the sale, if any. If the goods
remained unsold, petitioner corporation had the further obligation
to return them to respondent bank on or before November 23,
1983.
Upon arrival of the goods in the Philippines, petitioner corporation
took possession and custody thereof.
On November 23, 1983, the maturity date of the trust receipt,
petitioner corporation defaulted in the payment of its obligation to
respondent bank and failed to turn over the goods to the latter. On
July 24, 1984, respondent bank demanded that petitioners, as
entrustees, turn over the goods subject of the trust receipt. On
September 24, 1984, petitioners turned over the subject goods to
the respondent bank.
On July 31, 1985, in the presence of representatives of the
petitioners and respondent bank, the goods were sold at public
auction. The goods were sold for P30,000.00 to respondent bank as
the highest bidder.
The proceeds of the auction sale were insufficient to completely
satisfy petitioners' outstanding obligation to respondent bank,
notwithstanding the application of the time deposit account of
petitioner Lucente. Accordingly, respondent bank demanded that
petitioners pay the remaining balance of their obligation. After
petitioners failed to do so, respondent bank instituted the instant
case to collect the said deficiency.
On March 31, 1997, after trial on the merits, the trial court
rendered a decision, the dispositive portion of which reads:
WHEREFORE, foregoing premises considered, Judgment is
hereby rendered in favor of the plaintiff and against the
defendant by (1) ordering the defendant to pay jointly and
severally to the plaintiff the sum of P292,172.23
representing the defendant's obligation, as of April 17,
1986; (2) to pay the interest at the rate of 19% per annum
to be reckoned from April 18, 1986 until [the] obligation is
fully paid; (3) to pay service charge at the rate of 2% per
annum starting April 18, 1986; (4) to pay the sum equivalent
to 10% per annum of the total amount due collectible by
way of Attorney's Fees; (5) to pay Litigation Expenses of
18

P3,000.00 and to pay the cost of the suit; and (6) to pay
penalty charge of 12% per annum.
SO ORDERED.
1

Petitioners appealed to the Court of Appeals, raising the issues of:
(1) whether or not respondent bank has the right to recover any
deficiency after it has retained possession of and subsequently
effected a public auction sale of the goods covered by the trust
receipt; (2) whether or not respondent bank is entitled to the
amount of P3,000.00 as and for litigation expenses and costs of the
suit; and (3) whether or not respondent bank is entitled to the
award of attorney's fees.
On February 13, 2003, the Court of Appeals rendered a decision
affirming in toto the decision of the trial court.
2

Hence, this petition for review on the following assignment of
errors:
I.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN
AFFIRMING THE TRIAL COURT'S RULING THAT RESPONDENT
HAD THE RIGHT TO CLAIM THE DEFICIENCY FROM
PETITIONERS NOTWITHSTANDING THE FACT THAT THE
GOODS COVERED BY THE TRUST RECEIPT WERE FULLY
TURNED OVER TO RESPONDENT.
II.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN
AFFIRMING THE TRIAL COURT'S PATENTLY ERRONEOUS
AWARD OF PRINCIPAL OBLIGATION, INTEREST, ATTORNEY'S
FEES, AND PENALTY AGAINST THE PETITIONERS.
3

The instant petition is partly meritorious.
The resolution of the first assigned error hinges on the proper
interpretation of Section 7 of Presidential Decree No. 115, or the
Trust Receipts Law, which reads:
Sec. 7. Rights of the entruster. - The entruster shall be
entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to
the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the return
of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him
in the trust receipt provided such are not contrary to the
provisions of this Decree.
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, and the entruster
in possession of the goods, documents or instruments may,
on or after default, give notice to the entrustee of the
intention to sell, and may, not less than five days after
serving or sending of such notice, sell the goods, documents
or instruments at public or private sale, and the entruster
may, at a public sale, become a purchaser. The proceeds of
any such sale, whether public or private, shall be applied (a)
to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods,
19

documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster
for any deficiency. Notice of sale shall be deemed
sufficiently given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary mail to the
entrustee's last known business address.
There is no question that petitioners failed to pay their outstanding
obligation to respondent bank. They contend, however, that when
the entrustee fails to settle his principal loan, the entruster may
choose between two separate and alternative remedies: (1) the
return of the goods covered by the trust receipt, in which case, the
entruster now acquires the ownership of the goods which the
entrustee failed to sell; or (2) cancel the trust and take possession of
the goods, for the purpose of selling the same at a private sale or at
public auction. Petitioners assert that, under this second remedy,
the entruster does not acquire ownership of the goods, in which
case he is entitled to the deficiency. Petitioners argue that these
two remedies are so distinct that the availment of one necessarily
bars the availment of the other. Thus, when respondent bank
availed of the remedy of demanding the return of the goods, the
actual return of all the unsold goods completely extinguished
petitioners' liability.
4

Petitioners' argument is bereft of merit.
A trust receipt is inextricably linked with the primary agreement
between the parties. Time and again, we have emphasized that a
trust receipt agreement is merely a collateral agreement, the
purpose of which is to serve as security for a loan. Thus, in Abad v.
Court of Appeals,
5
we ruled:
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 security for the loan. In other
words, the transaction involves a loan feature represented
by the letter of credit, and a security feature which is in the
covering trust receipt. x x x.
A trust receipt, therefore, 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.
6

The Trust Receipts Law was enacted to safeguard commercial
transactions and to offer an additional layer of security to the
lending bank. Trust receipts are indispensable contracts in
international and domestic business transactions. The prevalent use
of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of
goods, documents or instruments held in trust for entruster banks,
and the need for regulation of trust receipt transactions to
safeguard the rights and enforce the obligations of the parties
involved are the main thrusts of the Trust Receipts Law.
7

The second paragraph of Section 7 provides a statutory remedy
available to an entruster in the event of 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. More specifically, 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". The law further provides that "the entruster in possession of
the goods, documents or instruments may, on or after default, give
notice to the entrustee of the intention to sell, and may, not less
20

than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds
of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness
to the entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency."
The trust receipt between respondent bank and petitioner
corporation contains the following relevant clauses:
The BANK/ENTRUSTER may, at any time, and only at its
option, cancel this trust and take possession of the
goods/documents/instruments subject hereof or of the
proceeds realized therefrom wherever they may then be
found, upon default or failure of the ENTRUSTEE to comply
with any of the terms and conditions of this Trust Receipt or
of any other agreement between the BANK/ENTRUSTER and
the ENTRUSTEE; and the BANK/ENTRUSTER having taken
repossession of the goods/documents/instruments object
hereof may, on or after default, give at least five (5) days'
previous notice to the ENTRUSTEE of its intention to sell the
goods/documents/instruments at public or private sale, at
which public sale, it may become a purchaser; Provided,
that the proceeds of any such sale, whether public or
private, shall be applied: (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of retaking,
keeping and storing the goods/documents/instruments; (c)
to the satisfaction of all of the ENTRUSTEE's indebtedness to
the BANK/ENTRUSTER; and Provided, further, that the
ENTRUSTEE shall receive any surplus thereof but shall, in
any case, be liable to the BANK/ENTRUSTER for any
deficiency. x x x
No act or omission on the part of the BANK/ENTRUSTER
shall be deemed and considered a waiver of any of its rights
hereunder or under any related letters of credit, drafts or
other documents unless such waiver is expressly made in
writing over the signature of the BANK/ENTRUSTER.
8

The afore-cited stipulations in the trust receipt are a near-exact
reproduction of the second paragraph of Section 7 of the Trust
Receipts Law. The right of repossession and subsequent sale at
public auction which were availed of by respondent bank were
rights available upon default, and which were conferred by statute
and reinforced by the contract between the parties.
The initial repossession by the bank of the goods subject of the trust
receipt did not result in the full satisfaction of the petitioners' loan
obligation. Petitioners are apparently laboring under the mistaken
impression that the full turn-over of the goods suffices to divest
them of their obligation to repay the principal amount of their loan
obligation. This is definitely not the case. In Philippine National Bank
v. Hon. Gregorio G. Pineda and Tayabas Cement Company, Inc.,
9
we
had occasion to rule:
PNB's possession of the subject machinery and equipment
being precisely as a form of security for the advances given
to TCC under the Letter of Credit, said possession by itself
cannot be considered payment of the loan secured thereby.
Payment would legally result only after PNB had foreclosed
on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not
amount to foreclosure for foreclosure denotes the
procedure adopted by the mortgagee to terminate the
21

rights of the mortgagor on the property and includes the
sale itself.
Neither can said repossession amount to dacion en pago.
Dation in payment takes place when property is alienated to
the creditor in satisfaction of a debt in money and the same
is governed by sales. Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of
the obligation. As aforesaid, the repossession of the
machinery and equipment in question was merely to secure
the payment of TCC's loan obligation and not for the
purpose of transferring ownership thereof to PNB in
satisfaction of said loan. Thus, no dacion en pago was ever
accomplished. (Citations omitted, underscoring supplied)
10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and
America,
11
we struck down the position of the petitioner-spouses
that their obligation to the entruster bank had been extinguished
when they relinquished possession of the goods in question. Thus:
A trust receipt 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. As defined in our laws:
(h) Security Interest means a property interest in
goods, documents or instruments to secure
performance of some obligations of the entrustee
or of some third persons to the entruster and
includes title, whether or not expressed to be
absolute, whenever such title is in substance taken
or retained for security only.
x x x x x x x x x
Contrary to the allegations of the VINTOLAS, IBAA did not
become the real owner of the goods. It was merely the
holder of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through
IBAA financing remain their own property and they hold it
at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a
lender and creditor.
"x x x for the bank has previously extended a loan
which the L/C represents to the importer, and by
that loan, the importer should be the real owner of
the goods. If under the trust receipt, the bank is
made to appear as the owner, it was but an artificial
expedient, more of a legal fiction than fact, for if it
were so, it could dispose of the goods in any
manner it wants, which it cannot do, just to give
consistency with the purpose of the trust receipt of
giving a stronger security for the loan obtained by
the importer. To consider the bank as the true
owner from the inception of the transaction would
be to disregard the loan feature thereof. x x x"
Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely
relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were
unable to sell the seashells in question does not affect
IBAA's right to recover the advances it had made under the
Letter of Credit. (Citations omitted.)
12

22

Respondent bank's repossession of the properties and subsequent
sale of the goods were completely in accordance with its statutory
and contractual rights upon default of petitioner corporation.
The second paragraph of Section 7 expressly provides that the
entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the
expenses of the sale, the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments, and the
satisfaction of the entrustee's indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient
to satisfy entirely petitioner corporation's indebtedness to the
respondent bank. Respondent bank was thus well within its rights to
institute the instant case to collect the deficiency.
We find, however, that there has been an error in the computation
of the total amount of petitioners' indebtedness to respondent
bank.
Although respondent bank contends that the error of computation
is a question of fact which is beyond the power of this Court to
review,
13
the total amount of petitioners' indebtedness in this case
is not a question of fact. Rather, it is a question of law, i.e., the
application of legal principles for the computation of the amount
owed to respondent bank, and is thus a matter properly brought for
our determination.
The first issue involves the amount of indebtedness prior to the
imposition of interest and penalty charges. The initial amount of the
trust receipt of P218,733.92, was reduced to P192,265.92 as of June
14, 1984, as per respondent's Statement of Past Due Trust Receipt
dated December 1, 1993.
14
This amount presumably includes the
application of P35,000.00, the amount of petitioner Lucente's Deed
of Assignment, which amount was applied by respondent bank to
petitioners' obligation. No showing was made, however, that the
P30,000.00 proceeds of the auction sale on July 31, 1985 was ever
applied to the loan. Neither was the amount of P50,414.00,
representing the marginal deposit made by petitioner corporation,
deducted from the loan. Although respondent bank contends that
the marginal deposit should not be deducted from the principal
obligation, this is completely contrary to prevailing jurisprudence
allowing the deduction of the marginal deposit, thus:
The marginal deposit requirement is a Central Bank
measure to cut off excess currency liquidity which would
create inflationary pressure. It is a collateral security given
by the debtor, and is supposed to be returned to him upon
his compliance with his secured obligation. Consequently,
the bank pays no interest on the marginal deposit, unlike an
ordinary bank deposit which earns interest in the bank. As a
matter of fact, the marginal deposit requirement for letters
of credit has been discontinued, except in those cases
where the applicant for a letter of credit is not known to the
bank or does not maintain a good credit standing therein.
It is only fair then that the importer's marginal deposit (if
one was made, as in this case), should be set off against his
debt, for while the importer earns no interest on his
marginal deposit, the bank, apart from being able to use
said deposit for its own purposes, also earns interest on the
money it loaned to the importer. It would be onerous to
compute interest and other charges on the face value of the
letter of credit which the bank issued, without first crediting
or setting off the marginal deposit which the importer paid
to the bank. Compensation is proper and should take place
by operation of law because the requisites in Article 1279 of
the Civil Code are present and should extinguish both debts
23

to the concurrent amount (Art. 1290, Civil Code). Although
Abad is only a surety, he may set up compensation as
regards what the creditor owes the principal debtor,
TOMCO (Art. 1280, Civil Code).
15

The net amount of the obligation, represented by respondent bank
to be P292,172.23 as of April 17, 1986, would thus be P211,758.23.
To this principal amount must be imposed the following charges: (1)
19% interest per annum, in keeping with the terms of the trust
receipt;
16
and (2) 12% penalty per annum, collected based on the
outstanding principal obligation plus unpaid interest, again in
keeping with the wording of the trust receipt.
17
It appearing that
petitioners have paid the interest and penalty charges until April 17,
1986, the reckoning date for the computation of the foregoing
charges must be April 18, 1986.
A perusal of the records reveals that the trial court and the Court of
Appeals erred in imposing service charges upon the petitioners. No
such stipulation is found in the trust receipt. Moreover, the trial
court and the Court of Appeals erred in computing attorney's fees
equivalent to 10% per annum, rather than 10% of the total amount
due. There is no basis for compounding the interest annually, as the
trial court and Court of Appeals have done. This amount would be
unconscionable.
Finally, Lucente and Llaban's contention that they are not solidarily
liable with petitioner corporation is untenable. As co-signatories of
the Continuing Suretyship Agreement, they bound themselves, inter
alia, to pay the principal sum in the amount of not more than
P400,000.00; interest due on the principal obligation; attorney's
fees; and expenses that may be incurred in collecting the credit. The
amount owed to respondent bank is the amount of the principal,
interest, attorney's fees, and expenses in collecting the principal
amount. The Continuing Suretyship Agreement expressly states the
nature of the liability of Lucente and Llaban:
The liability of the SURETY shall be solidary, direct and
immediate and not contingent upon the bank's pursuit of
whatever remedies the BANK have [sic] against the
Borrower or the securities or liens the BANK may possess
and the SURETY will at any time, whether due or not due,
pay to the BANK with or withour demand upon the
Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.
18

Solidary liability is one of the primary characteristics of a surety
contract,
19
and the Continuing Suretyship Agreement expressly
stipulates the solidary nature of Lucente and Llaban's liability. All
three petitioners thus share the solidary obligation in favor of
respondent bank, which is given the right, under the Civil Code, to
proceed against any one of the solidary debtors or some or all of
them simultaneously.
20

WHEREFORE, premises considered, the instant petition is PARTIALLY
GRANTED. The decision of the Court of Appeals in CA-G.R. CV No.
58193 dated February 13, 2003 is AFFIRMED with MODIFICATIONS.
Accordingly, petitioners are ordered to pay respondent bank the
following: (1) P211,758.23 representing petitioners' net obligation
as of April 17, 1986; (2) interest at the rate of 19% per annum and
penalty at the rate of 12% per annum reckoned from April 18, 1986;
(3) attorney's fees equivalent to 10% of the total amount due and
collectible; and (4) litigation expenses in the amount of P3,000.00.
The service charge at the rate of 2% per annum beginning April 18,
1986 is deleted. Costs against petitioners.
SO ORDERED.Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and
Azcuna, JJ., concur.