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Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 1

including the articles covered by the trust receipts. During the


DBP v. Prudential Bank foreclosure sale, DBP acquired the foreclosed properties as the
November 22, 2005 highest bidder.
Ponente: Corona, J.
Rheg Peralta Prudential Bank again informed DBP that it was the
absolute and juridical owner of the said items and they were thus
SUMMARY: Entrustee (Litex) mortgaged to DBP various not part of the mortgaged assets that could be legally ceded to
items covered by a prior trust receipt agreement with DBP. Since its demands remained unheeded, Prudential Bank filed
Prudential Bank (entruster). DBP foreclosed on the a complaint for a sum of money with damages against DBP.
mortgaged articles. SC ruled that the mortgage and
subsequent foreclosure are not valid. The entrustee, not ISSUE/HELD: WON the articles covered by the trust receipts can
being the absolute owner, cannot mortgage the articles be validly mortgaged by the entrustee. [NO]
covered by the trust receipts.
RATIO: The various agreements between Prudential Bank and
DOCTRINE: In a trust receipt transaction, the entrustee has Litex commonly denominated as trust receipts were valid.
neither absolute ownership, free disposal nor the authority Hence, the articles were owned by Prudential Bank and they were
to freely dispose of the articles subject of the agreement. only held by Litex in trust. While it was allowed to sell the items,
Since the goods could not have been subjected to a valid Litex had no authority to dispose of them or any part thereof or
mortgage, there can also be no valid foreclosure especially their proceeds through conditional sale, pledge or any other
when the mortgagee who subsequently foreclosed and means.
purchased the said goods were in bad faith, having
knowledge of the inclusion of such articles in a trust receipt Litex had neither absolute ownership, free disposal nor the
agreement. authority to freely dispose of the articles. Litex could not have
subjected them to a chattel mortgage. Their inclusion in the
FACTS: In 1973, Lirag Textile Mills, Inc. (Litex) opened an mortgage was void and had no legal effect. There being no valid
irrevocable commercial letter of credit with Prudential Bank, in mortgage, there could also be no valid foreclosure or valid
connection with its importation of spindles. These were released auction sale especially when the mortgagee who subsequently
to Litex under covering trust receipts it executed in favor of foreclosed and purchased the said goods were in bad faith,
Prudential Bank. having knowledge of the inclusion of such articles in a trust
receipt agreement.
In 1980, DBP granted Litex a foreign currency loan
secured by real estate and chattel mortgages on the latters No one can transfer a right to another greater than what he
machineries including those articles covered by the trust himself has. Nemo dat quod non habet. Hence, Litex could not
receipts. Upon learning this, Prudential Bank notified DBP of its transfer a right that it did not have over the disputed items. DBP
claim over the various items covered by the trust receipts. merely stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return them on
For failure of Litex to pay its obligation, DBP extra- Prudential Banks demand.
judicially foreclosed on the real estate and chattel mortgages,
Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page 2