II.
LETTERS OF CREDIT prompted the private respondent to bring the
1.) FEATI BANK & TRUST COMPANY v. CA
G.R. No. 94209
April 30, 1991
FACTS:
On June 3, 1971, Bernardo E. Villaluz agreed
to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per
cubic meter FOB.After inspecting the logs,
Christiansen issued purchase order No.
76171.On the arrangements made and upon
the instructions of the consignee, Hanmi
Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank
of Los Angeles, California issued Irrevocable
Letter of Credit No. IC-46268 available at
sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the
lauan logs.The letter of credit was mailed to
the Feati Bank and Trust Company (now
Citytrust) with the instruction to the latter
that it "forward the enclosed letter of credit
to the beneficiary. The letter of credit further
provided that the draft to be drawn is
accompanied by the some documents like the
purchase order. The logs were thereafter
loaded on the vessel "Zenlin Glory" which was
chartered by Christiansen. Before its loading,
the logs were inspected by custom inspectors
from the Bureau of Customs and
representatives of the Bureau of Forestry all
of whom certified to the good condition and
exportability of the logs.After the loading of
the logs was completed, the Chief Mate, Shao
Shu Wang issued a mate receipt of the cargo
which stated the same are in good condition.
However, Christiansen refused to issue the
certification as required in paragraph 4 of the
letter of credit, despite several requests made
by the private respondent. Because of the
absence of the certification by Christiansen,
the Feati Bank and Trust Company refused to
advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971,
(extended up to July 31, 1971) without the
private respondent receiving any certification
from Christiansen.The persistent refusal of
Christiansen to issue the certification
matter before the Central Bank where it ruled
that: pursuant to the Monetary Board
Resolution No. 1230 dated August 3, 1971, in
all log exports, the certification of the lumber
inspectors of the Bureau of Forestry shall be
considered final for purposes of negotiating
documents. Meanwhile, the logs arrived at
Inchon, Korea and were received by the
consignee, Hanmi Trade Development
Company, to whom Christiansen sold the logs
for the amount of $37.50 per cubic meter, for
a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other
hand sold the logs to Taisung Lumber
Company at Inchon, Korea. Since the
demands by the private respondent for
Christiansen to execute the certification
proved futile, Villaluz, instituted an action for
mandamus and specific performance against
Christiansen and the Feati Bank and Trust
Company (now Citytrust) before the then
Court of First Instance of Rizal. The petitioner
was impleaded as defendant before the lower
court only to afford complete relief should the
court a quo order Christiansen to execute the
required certification.The complaint prayed
for the following:
1. Christiansen be ordered to issue the
certification required of him under the Letter
of Credit;
2. Upon issuance of such certification, or, if
the court should find it unnecessary, FEATI
BANK be ordered to accept negotiation of the
Letter of Credit and make payment thereon to
Villaluz;
3. Order Christiansen to pay damages to the
plaintiff. While the case was still pending trial,
Christiansen left the Philippines without
informing the Court and his counsel.
Hence, Villaluz, filed an amended complaint
to make the petitioner solidarily liable with
Christiansen. After trial, the lower court
found that the liability of the defendant
CHRISTIANSEN is beyond dispute, and the
plaintiffs right to demand payment is
absolute. The Court believes that the
defendant CHRISTIANSEN acted in bad faith
and deceit and with intent to defraud the
Page 1 of 19
plaintiff, reflected in and aggravated by, not
only his refusal to issue the but his accusing
the plaintiff in his answer of fraud,
intimidation, violence and deceit. The
defendant Feati Bank and Trust Company, on
the other hand, must be held liable together
with his (sic) co-defendant for having, by its
wrongful act, i.e., its refusal to negotiate the
letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement
was illegal), prevented payment to the
plaintiff. The trial court, ruled in favor of the
private respondent, ordering the defendants
to pay the plaintiff. The Court of Appeals
affirmed the decision of the lower court.
Hence, this petition for review.
ISSUE:
WON a correspondent bank is to be held
liable under the letter of credit despite non-
compliance by the beneficiary with the terms
thereof
RULING:
WHEREFORE, the COURT RESOLVED to
GRANT the petition and hereby NULLIFIES
and SETS ASIDE the decision of the Court of
Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is
DISMISSED.
RATIO DECIDENDI:
No. It is a settled rule in commercial
transactions involving letters of credit that
the documents tendered must strictly
conform to the terms of the letter of credit.
The tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated under
the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not
thereafter be able to recover from the buyer
or the issuing bank, as the case may be, the
money thus paid to the beneficiary Thus the
rule of strict compliance. Under the foregoing
provisions of the U.C.P., the bank may only
negotiate, accept or pay, if the documents
tendered to it are on their face in accordance
with the terms and conditions of the
documentary credit. Since a correspondent
bank, like the petitioner, principally deals
only with documents, the absence of any
document required in the documentary credit
justifies the refusal by the correspondent
bank to negotiate, accept or pay the
beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely
on the completeness of the documents
tendered by the beneficiary. The trial court
appears to have overlooked the fact that an
irrevocable credit is not synonymous with a
confirmed credit. An irrevocable credit refers
to the duration of the letter of credit. What is
simply means is that the issuing bank may not
without the consent of the beneficiary (seller)
and the applicant (buyer) revoke his
undertaking under the letter. The issuing
bank does not reserve the right to revoke the
credit. On the other hand, a confirmed letter
of credit pertains to the kind of obligation
assumed by the correspondent bank. In this
case, the correspondent bank gives an
absolute assurance to the beneficiary that it
will undertake the issuing bank's obligation
as its own according to the terms and
conditions of the credit. Hence, the mere fact
that a letter of credit is irrevocable does not
necessarily imply that the correspondent
bank in accepting the instructions of the
issuing bank has also confirmed the letter of
credit. Another error which the lower court
and the Court of Appeals made was to confuse
the obligation assumed by the petitioner.
In commercial transactions involving letters
of credit, the functions assumed by a
correspondent bank are classified according
to the obligations taken up by it. The
correspondent bank may be called a notifying
bank, a negotiating bank, or a confirming
bank. In this case, the letter merely provided
that the petitioner "forward the enclosed
original credit to the beneficiary. Considering
the aforesaid instruction to the petitioner by
the issuing bank, the Security Pacific National
Bank, it is indubitable that the petitioner is
only a notifying bank and not a confirming
bank as ruled by the courts below. Since the
Page 2 of 19
petitioner was only a notifying bank, its
responsibility was solely to notify and/or
transmit the documentary of credit to the
private respondent and its obligation ends
there. The notifying bank may suggest to the
seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank
promises to accept the draft drawn under the
documentary credit. In order that the
petitioner may be held liable under the letter,
there should be proof that the petitioner
confirmed the letter of credit. The records
are, however, bereft of any evidence which
will disclose that the petitioner has confirmed
the letter of credit. The only evidence in this
case, and upon which the private respondent
premised his argument, is the P75,000.00
loan extended by the petitioner to him.
Whether therefore the petitioner is a
notifying bank or a negotiating bank, it cannot
be held liable. Absent any definitive proof
that it has confirmed the letter of credit or
has actually negotiated with the private
respondent, the refusal by the petitioner to
accept the tender of the private respondent is
justified.
In fact the notifying bank, even if the seller
tenders all the documents required under the
letter of credit, may refuse to negotiate or
accept the drafts drawn thereunder and it
will still not be held liable for its only
engagement is to notify and/or transmit to
the seller the letter of credit. Finally, even if
we assume that the petitioner is a confirming
bank, the petitioner cannot be forced to pay
the amount under the letter. As we have
previously explained, there was a failure on
the part of the private respondent to comply
with the terms of the letter of credit. The
failure by him to submit the certification was
fatal to his case. The U.C.P. which is
incorporated in the letter of credit ordains
that the bank may only pay the amount
specified under the letter if all the documents
tendered are on their face in compliance with
the credit. It is not tasked with the duty of
ascertaining the reason or reasons why
certain documents have not been submitted,
as it is only concerned with the documents.
Thus, whether or not the buyer has
performed his responsibility towards the
seller is not the bank's problem.
2. BANK OF AMERICA V. CA
GR. No.105395
December 10, 1993
FACTS:
Bank of America received an Irrevocable
Letter of Credit issued by Bank of Ayudhya
for the Account of General Chemicals Ltd., Inc.
for the sale of plastic ropes and agricultural
files. Under the letter of credit, Bank of
America acted as an advising bank and Inter-
Resin Industrial Corp. (IR) acted as the
beneficiary. Upon receipt of the letter advice,
Inter- Resin told Bank of America to confirm
the letter of credit.
Notwithstanding such instruction, Bank of
America failed to confirm the letter of credit.
Inter-Resin made a partial availment of the
Letter of Credit after presentment of the
required documents to Bank of America. After
confirmation of all the documents Bank of
America issued a check in favor of IR. BA
advised Bank of Ayudhya of IR’s availment
under the letter of credit and asked for the
corresponding reimbursement. IR presented
documents for the second availment under
the same letter of credit. However, BA
stopped the processing of such after they
received a telex from Bank of Ayudhya
delaring that the LC fraudulent. BA sued IR
for the recovery of the first LC payment.
The IR contended that Bank of America
should have first checked the authenticity of
the letter of credit with bank of Ayudhya.
ISSUES:
1. WON Bank of America is an advising bank
or notifying bank.
2. WON Bank of America may recover what it
has paid under the letter of credit to Inter-
Resin
RULING:
Page 3 of 19
WHEREFORE, the assailed decision is SET
ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner
Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the
filing of the complaint until fully paid.
RATIO:
BA is merely an advising bank. The services of
an advising (notifying) bank may be utilized
to convey to the seller the existence of the
credit; or, of a confirming bank which will
lend credence to the letter of credit issued by
a lesser known issuing bank; or, of a paying
bank, which undertakes to encash the drafts
drawn by the exporter.
Bank of America has acted independently as a
negotiating bank, thus saving Inter-Resin
from the hardship of presenting the
documents directly to Bank of Ayudhya to
recover payment. As a negotiating bank, Bank
of America has a right to recourse against the
issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent
liability thereon.
May Bank of America then recover what it has
paid under the letter of credit when the
corresponding draft for partial availment
thereunder and the required documents were
later negotiated with it by Inter-Resin? The
answer is yes. This kind of transaction is what
is commonly referred to as a discounting
arrangement. This time, Bank of America has
acted independently as a negotiating bank,
thus saving Inter-Resin from the hardship of
presenting the documents directly to Bank of
Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with
which to negotiate the draft and the
documents.) As a negotiating bank, Bank of
America has a right to recourse against the
issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent
liability thereon.
3. BPI V. DE RENY FABRICS INDUSTRIES
G.R. No. L-24821
October 16, 1970
FACTS:
In 1961, De Reny Fabric Industries, Inc.,
through Aurora Carcereny alias Aurora C.
Gonzales, and Aurora T. Tuyo, the president
and secretary respectively of the corporation,
applied to BPI for 4 irrevocable commercial
letters of credit to cover the purchase of
goods described as "dyestuffs of various
colors" from its American supplier, J.B.
Distributing Company. All the applications of
the corporation were approved, and the
corresponding Commercial L/C Agreements
were executed pursuant to banking
procedures. Under these agreements, the
officers of the corporation bound themselves
personally as joint and solidary debtors with
the corporation. Pursuant to banking
regulations then in force, the corporation
delivered to the Bank peso marginal deposits
as each letter of credit was opened. The Bank
then issued irrevocable commercial letters of
credit addressed to its correspondent banks
in the United States, with uniform
instructions for them to notify the
beneficiary, J.B. Distributing Company, that
they have been authorized to negotiate the
latter's sight drafts up to the amounts
mentioned.
Consequently, J.B. Distributing Company
drew upon, presented to and negotiated with
these banks, its sight drafts covering the
amounts of the merchandise being exported
by it, together with clean bills of lading, and
collected the full value of the drafts up to the
amounts appearing in the L/Cs. These
correspondent banks then debited the
account of BPI with them up to the full value
of the drafts presented by beneficiary and
endorsed and forwarded all documents to
BPI. As each shipment arrived in the
Philippines, De Reny Fabric Industries, Inc.
made partial payments to the Bank
amounting to P90,000.
Page 4 of 19
The corporation subsequently discontinued
further payments when it was established, as
a result of a chemical test conducted by the
National Science Development Board, that the
goods that arrived in Manila were colored
chalks instead of dyestuffs. The corporation
also refused to take possession of the goods,
thus the Bank caused them to be deposited
with a bonded warehouse paying the amount
of P12,609.64 up to the filing of its complaint.
Lower Court: Ordered the corporation and
its co-defendants to pay to BPI the amount of
P291,807.46, with interest thereon, as
provided for in the L/C Agreements, at the
rate of 7% per annum from October 31, 1962
until fully paid, plus costs.
De Reny Fabrics Industries’ contention: It
was the duty of the foreign correspondent
banks of BPI to take the necessary precaution
to insure that the goods shipped under the
covering L/Cs conformed with the item
appearing therein, and, that the foregoing
banks having failed to perform this duty, no
claim for recoupment against the defendants-
appellants, arising from the losses incurred
for the non-delivery or defective delivery of
the articles ordered, could accrue.
ISSUE:
WON De Reny fabrics is liable under the letter
of Credit.
RULING:
ACCORDINGLY, the judgment a quo is
affirmed, at defendants-appellants' cost. This
is without prejudice to the Bank, in proper
proceedings in the court below in this same
case proving and being reimbursed additional
expenses, if any, it has incurred by virtue of
the continued storage of the goods in
question up to the time this decision becomes
final and executory.
RATIO:
Yes. Under the terms of their Commercial
Letter of Credit Agreements with the Bank,
the appellants agreed that the Bank shall not
be responsible for the "existence, character,
quality, quantity, conditions, packing, value,
or delivery of the property purporting to be
represented by documents; for any difference
in character, quality, quantity, condition, or
value of the property from that expressed in
documents," or for "partial or incomplete
shipment, or failure or omission to ship any
or all of the property referred to in the
Credit," as well as "for any deviation from
instructions, delay, default or fraud by the
shipper or anyone else in connection with the
property the shippers or vendors and
ourselves [purchasers] or any of us." Having
agreed to these terms, the appellants
therefore have no recourse but to comply
with their covenant.
But even without the stipulation, the
appellants cannot shift the burden of loss to
the Bank on account of the violation by their
vendor of its prestation. It was
uncontrovertibly proven by the Bank that
banks, in providing financing in
international business transactions such
as those entered into by the appellants, do
not deal with the property to be exported
or shipped to the importer, but deal only
with documents. The Bank introduced in
evidence Article 10 of "Uniform Customs and
Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce," which
provides: In documentary credit operations,
all parties concerned deal in documents and
not in goods. — Payment, negotiation or
acceptance against documents in accordance
with the terms and conditions of a credit by a
Bank authorized to do so binds the party
giving the authorization to take up the
documents and reimburse the Bank making
the payment, negotiation or acceptance.
The existence of a custom in international
banking and financing circles negating any
duty on the part of a bank to verify whether
what has been described in letters of credits
or drafts or shipping documents actually
tallies with what was loaded aboard ship,
having been positively proven as a fact, the
appellants are bound by this established
Page 5 of 19
usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in
order to engage in international business.
4. TRANSFIELD V. LUZON HYDRO
G.R. No. 146717
November 22, 2004
Note: A turnkey project is a type of project that
is constructed so that it can be sold to any
buyer as a completed product.
FACTS:
Transfield and Luzon entered into a Turnkey
Contract whereby Transfield undertook, as a
contractor, to construct a 70- Megawatt
hydro-electric power station at the Bakun
River i n Benguet and Ilocos Sur.
The contract provides that:
(1) the target completion date of the project
is on June 1, 2000, or such date as may be
agreed upon; and
(2) petitioner is entitled to claim extensions
of time ( EOT) for reasons enumerated in the
contract e.g. variations, force majeure, and
delays caused by Luzon itself.
It was also agreed upon that in case of
dispute, the parties are bound to settle their
differences through mediation, conciliation
and such other means enumerated in the
contract.
To secure the performance of the obligation,
Transfield opened in favor of Luzon, 2
standby letters of credits with ANZ and SBC,
each in the amount of US$8.99M. Nonetheless,
in the course of construction, Transfield
sought va rious EOT to complete the project.
The request for extensions were allegedly due
to force majeure occasioned by typhoon Zeb,
barricades, and demonstrations, which
prevented the on -time completion of the
project.
Luzon denied Transfield’s requests for EOT.
Luzon filed a Request for Arbitration before
the Construction Industry Arbitration
Commission (CIAC), while Transfield filed a
Request for Arbitration before the
International Chamber of Commerce (ICC).
Meanwhile, Transfield wrote letters to ANZ
and SBC advising them of the arbitration
proceedings. Transfield asserted that Luzon
had no right to call on the securities until the
resolution of the issued before CIAC and ICC .
Transfield also warned the ban ks that any
transfer, release, or disposition of the s
ecurities in favor of Luzon would constrain it
to hold respondent banks liable for liquidated
damages.
Despite the Transfield’s letters, the banks
informed Transfield that they would pay on
the Securities if and when Luzon calls on
them.
Transfield filed a complaint f or injunction
with prayer for TRO and writ of preliminary
injunction before the RTC. Transfield sought
to restraint banks from calling on the
securities and the respondent banks from
paying on the securities.
RTC –denied the application for writ of pre
liminary injunction. Applying the
“Independent Contract” principle, Luzon
should be allowed to draw on the securities
for liquidated damages. Banks were mere
custodians of the funds and were obligated to
transfer the same to the beneficiary for as
long as the latter could submit the required
certification of its claims. Luzon, as the
ultimate beneficiary, may also invoke the
“independent contract” principle.
CA issued a TRO but failed to act on the
application for preliminary injunction until
the TRO expired. N.B. As soon as the TRO
expired, Luzon went to ANZ bank and
withdrew US$ 4.9M. CA affirmed RTC
decisions; Luzon could call on the securities
pursuant to the first principle in credit law
that the credit itself is independent of the
underlying transaction and that a s long as
the beneficiary complied with the credit.
ISSUE:
Page 6 of 19
WON the “Independence Principle” on Letter
of Credit may be invoked by a beneficiary
(YES)
RULING:
WHEREFORE, the instant petition is DENIED,
with costs against petitioner. Petitioner is
hereby required to answer the charge of
forum-shopping within fifteen (15) days from
notice.
RATIO:
Yes, the beneficiary can invoke the
independence principle. In a letter of credit
transaction where the credit is stipulated as
irrevocable, there is a definite undertaking by
the issuing bank to pay the beneficiary
provided that the stipulated documents are
presented and the conditions of the credit are
complied with, and particularly, the
independence principle liberates the issuing
bank from the duty of ascertaining
compliance by the parties of the main
contract. As it is, the independence doctrine
works for the benefit of both issuing bank and
the beneficiary.
To say that the independence principle may
only be invoked by the issuing banks would
render nugatory the purpose for which the
letters of credit are used in commercial
transactions. Letters of c redit are employed
by the parties desiring to enter into
commercial transactions, not for the benefit
of the issuing bank but mainly for the benefit
of the parties of the original transaction. With
the letter of credit, the party who obtained
the letter of credit may present it to the
beneficiary as a security to convince the latter
to enter into the business transaction. On the
other hand, the beneficiary can be rest
assured of being empowered to call on the
letter of credit as a security in cas e the
employer may deduct the amount of such
damages by drawing on the security.
5. METROPOLITAN WATERWORKS AND
SEWARAGE SYSTEM (MWSS) VS DAWAY
FACTS:
MWSS granted Maynilad under a Concession
Agreement to manage, operate, repair,
decommission and refurbish the existing
MWSS water delivery and sewerage services
in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding
concession fees which, among other things,
consisted of payments of petitioners mostly
foreign loans.
To secure the concessionaires performance of
its obligations, Maynilad was required under
Section 6.9 of said contract to put up a bond,
bank guarantee or other security acceptable
to MWSS.In compliance with this
requirement, Maynilad arranged for a three-
year facility with a number of foreign banks,
led by Citicorp Int’l Ltd., for the issuance of an
Irrevocable Standby Letter of Credit in favor
of MWSS for the full and prompt performance
of Maynilads obligations to MWSS as
aforestated.
Later, the parties agreed to resolve the issues
between them [Maynilad is asking for a
mechanism by which it hoped to recover the
losses it had allegedly incurred and would be
incurring as a result of the depreciation of the
Philippine Peso against the US Dollar and in
filing to get what it desired, Maynilad
unilaterally suspended the payment of the
concession fees] through an amendment of
the Concession Agreement which was based
on the terms set down in MWSS Board of
Trustees Resolution which provided inter alia
for a formula that would allow Maynilad to
recover foreign exchange losses it had
incurred or would incur under the terms of
the Concession Agreement.
However Maynilad served upon MWSS a
Notice of Event of Termination, claiming that
MWSS failed to comply with its obligations
under the Concession Agreement and its
Amendment regarding the adjustment
mechanism that would cover Maynilads
foreign exchange losses. Maynilad filed a
Notice of Early Termination of the concession,
which was challenged by MWSS. This matter
was eventually brought before the Appeals
Page 7 of 19
Panel by MWSS. the Appeals Panel ruled that
there was no Event of Termination.
The award of the Appeals Panel became final
on November 22, 2003. MWSS, thereafter,
submitted a written notice to Citicorp Int’l
Ltd, as agent for the participating banks, that
by virtue of Maynilads failure to perform its
obligations under the Concession Agreement,
it was drawing on the Irrevocable Standby
Letter of Credit and thereby demanded
payment. Prior to this, however, Maynilad
had filed on a petition for rehabilitation
before the RTC of Quezon City which resulted
in the issuance of the Stay Order and the
disputed Order of November 27, 2003.
ISSUES:
1. WON the payment of the standby of letter
of credit can be stayed by filing of a petition
for rehabilitation
2. WON the court acted in excess of its
authority when it enjoined the petitioner
form seeking the payment of concession fees
from the banks that issued the Irrevocable
Standby Letter of Credit in its favor in the
account of Maynilad
RULING:
WHEREFORE, the petition for certiorari is
granted. The Order of November 27, 2003 of
the Regional Trial Court of Quezon City,
Branch 90, is hereby declared NULL AND
VOID and SET ASIDE. The status quo Order
herein previously issued is hereby LIFTED. In
view of the urgency attending this case, this
decision is immediately executory.
RATIO:
1. NO.
The prohibition under Sec 6 (b) of Rule 4 of
the Interim Rules does not apply to the the
standby letter of credit issued by the bank as
the former prohibition is on the enforcement
of claims against guarantors or sureties of the
debtors whose obligations are not solidary
with the debtor.
The participating bank’s obligation under the
letter of credit are solidary with respondent
Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay
and is not conditioned on the prior
exhaustion of the debtors assets. These are
the same characteristics of a surety or
solidary obligor. And being solidary, the
claims against them can be pursued
separately from and independently of the
rehabilitation case.
Issuing banks under the letters of credit
are not equivalent to guarantors.
The concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee
theory destroys the independence of the
bank’s responsibility from the contract upon
which it was opened and the nature of both
contracts is mutually in conflict with each
other.
In contracts of guarantee, the guarantor’s
obligation is merely collateral and it arises
only upon the default of the person primarily
liable. On the other hand, in an irrevocable
letter of credit, the bank undertakes a
primary obligation. We have also defined a
letter of credit as an engagement by a bank or
other person made at the request of a
customer that the issuer shall honor drafts or
other demands of payment upon compliance
with the conditions specified in the credit.
A Standby Letter of Credit is not a guaranty
because under a Standby Letter of Credit, the
bank undertakes a primary obligation. On the
other hand, a guarantor undertakes a
collateral obligation which arises only upon
the debtor’s default. A Standby Letter of
Credit is a primary obligation and not an
accessory contract.
Taking into consideration our own rulings on
the nature of letters of credit and customs
and usage developed over the years, we hold
that except when a letter of credit
specifically stipulates otherwise, obligation
of the banks issuing letters of credits are
solidary with that person or entity requesting
for its issuance, the same being a direct,
primary, absolute and definite undertaking to
Page 8 of 19
pay the beneficiary upon the presentation of
the set of documents required therein.
2. YES.
The respondent Judge, Daway exceeded his
jurisdiction in holding that he was competent
to act on the obligation of the banks under the
letter of credit under the argument that this
was not a solidary obligation with that of the
debtor. Being solidary, the letters of credit is
excluded from the jurisdiction of the
rehabilitation court and therefore in
enjoining petitioner from proceeding against
the Standby letters of Credit to which it had a
clear right under the law and the terms of the
said standby letters of credit, public
respondent acted in excess of his jurisdiction.
6. PNB v. SAN MIGUEL CORP.
G. R No. 186063
January 15, 2014
FACTS:
San Miguel Corp. (SMC) entered into an
Exclusive Dealership Agreement with Rodolfo
Gorozo (Goroza) wherein the latter was by
SMC the right to trade, deal, market or
otherwise sell its various beer products.
Goroza applied for a credit line with SMC but
was told that a letter of credit is required to
apply for such. Thus, Goroza applied for and
was granted a letter of credit by PNB in the
amount of P2,000,000. Under the credit
agreement, the PNB has the obligation to
release the proceeds of Goroza's credit line to
SMC upon presentation of the invoices and
official receipts of Goroza's purchases of SMC
beer products to the PNB, Butuan Branch. He
then started to sell the beer products.
Goroza applied for an additional credit line
and was granted by PNB a one year revolving
credit line in the amount of P2,400,000. All in
all, Goroza’s credit line reached P4,400,000.
At first, Goroza was able to pay his credit
purchases with SMC but later on became
delinquent with his accounts. Demands to pay
the amount of P3,722,440.88 were made by
SMC against Goroza and PNB, but neither of
them paid. SMC filed a complaint for
collection of money against PNB and Gorza in
the RTC. PNB filed an answer but Goroza did
not and was declared in default. In the said
ex-parte proceeding, decision was rendered
in favor of SMC with costs against Goroza.
Goroza then filed a notice of appeal for the
RTC decision but was denied. Trial continued
with respects to PNB. PNB filed an Urgent
Motion to Terminate Proceedings on the
ground that a decision was already made
finding Goroza solely liable. The RTC issued a
supplemental judgment with a decision to
insert "without prejudice to the decision that
will be made against the other co-defendant,
PNB, which was not declared in default" in
the RTC decision.
PNB’s contention- Decision of the RTC,
finding Goroza solely liable to pay the entire
amount sought to be recovered by SMC, has
settled the obligation of both Goroza and PNB
and that there is no longer any ground to hold
PNB for trial and make a separate judgment
against it; otherwise, SMC will recover twice
for the same cause of action.
ISSUE:
Whether or not the RTC decision finding
Goroza solely liable to pay the entire amount
sought to be recovered by SMC, has settled
the obligation of both Goroza and PNB
RULING:
No. The instant petition is DENIED. The
Decision of the Court of Appeals, dated June
17, 2008, and its Resolution dated December
15, 2008, both in CA-G.R. SP No. 01249-MIN,
are AFFIRMED.
SO ORDERED.
RATIO:
1. The letter of credit is separate and
distinct from the underlying
transaction.
A letter of credit is a written instrument
whereby the writer requests or authorizes
the addressee to pay money or deliver goods
to a third person and assumes responsibility
for payment of debt therefore to the
Page 9 of 19
addressee. A letter of credit, however,
changes its nature as different transactions
occur and if carried through to completion
ends up as a binding contract between the
issuing and honoring banks without any
regard or relation to the underlying contract
or disputes between the parties thereto.
Thus, the engagement of the issuing bank is to
pay the seller or beneficiary of the credit once
the draft and the required documents are
presented to it. The so-called "independence
principle" assures the seller or the beneficiary
of prompt payment independent of any
breach of the main contract and precludes the
issuing bank from determining whether the
main contract is actually accomplished or not.
2. PNB cannot evade liability on the
sole ground of the RTC finding
Goroza liable.
PNB's liability, if any, under the letter of
credit is yet to be determined.
7. THE HONGKONG AND SHANGHAI
BANKING CORP. V. NATIONAL STEEL CORP.
G.r. No. 183486
February 24, 2016
FACTS:
Respondent National Steel Corporation (NSC)
entered into an Export Sales Contract with
Klockner East Asia Limited (Klockner) on
October 12, 1993. NSC sold 1,200 metric tons
of prime cold rolled coils to Klockner. In
accordance with the requirements in the
Contract, Klockner applied for an irrevocable
letter of credit with The Hongkong &
Shanghai Banking Corporation (HSBC) in
favor of NSC as the beneficiary in the amount
of US$468,000. On October 22, 1993, HSBC
issued an irrevocable and onsight letter of
credit in favor of NSC. The Letter of Credit
stated that it is governed by the International
Chamber of Commerce Uniform Customs and
Practice for Documentary Credits. Under the
said international chamber, HSBC as the
issuing bank, has the obligation to
immediately pay NSC upon presentment of
the documents listed in the Letter of Credit.
The cargo of prime cold rolled coils arrived in
Hongkong on November 25, 1993.NSC
coursed the collection of its payment from
Klockner through City Trust Banking
Corporation (CityTrust). NSC had earlier
obtained a loan from City Trust secured by
the proceeds of the Letter of Credit issued by
HSBC. On November 29, 1993, City Trust sent
a collection order to HSBC respecting the
collection of payment from Klockner.On
December 2, 1993, HSBC sent a cablegram to
City Trust acknowledging receipt of the
Collection Order. It also stated that the
documents will be presented to "the drawee
against payment subject to UCP 322 [Uniform
Rules for Collection (URC) 322] as instructed
by the collecting bank" Neither CityTrust nor
Standard Chartered Bank of Australia, Ltd.,
Offshore Branch Manila (SCB-M) objected to
HSBC's statement that the collection will be
handled under the Uniform Rules for
Collection On December 7, 1993, HSBC
informed SCB-M that it has referred the
matter to Klockner for payment and that it
will revert upon the receipt of the amount. On
December 8, 1993, the Letter of Credit
expired.On December 10, 1993, HSBC sent
another cablegram to SCB-M advising it that
Klockner had refused payment. It then
informed SCB-M that it intends to return the
documents to NSC with all the banking
charges for its account. In a cablegram dated
December 14, 1993, CityTrust requested
HSBC to inform it of Klockner's reason for
refusing payment so that it may refer the
matter to NSC. HSBC did not respond and
CityTrust thus sent a follow-up cablegram to
HSBC on December 17, 1993. HSBC treated
the transaction as a matter under URC 322.
Thus, it demanded payment from Klockner
which unfortunately refused payment for
unspecified reasons. It then noted that under
URC 322, Klockner has no duty to provide a
reason for the refusal. However, Klockner
persisted in its refusal to pay. Thus, on
February 17, 1994, HSBC returned the
documents to CityTrust. In a letter
accompanying the returned documents, HSBC
Page 10 of 19
stated that it considered itself discharged of effect whatsoever on HSBC's obligation to pay
its duty under the transaction. It also asked under the Letter of Credit. To allow HSBC to
for payment of handling charges. refuse to honor the Letter of Credit simply
because it could not collect first from
ISSUE: Klockner is to countenance a breach of the
WON who among the parties bears the Independence Principle.Having been remiss
liability to pay the amount stated in the Letter in its obligations under the applicable law,
of Credit. rules and jurisprudence, HSBC only has itself
to blame for its consequent liability to NSC.
RULING:
WHEREFORE, in view of the foregoing, the
Assailed Decision dated November 19, 2007
is AFFIRMED to the extent that it orders HSBC
to pay NSC the amount of US$485,767.93.
HSBC is also liable to pay legal interest of six
percent (6%) per annum from the time of
extrajudicial demand. An interest of six
percent (6%) is also awarded from the time
of the finality of this decision until the
amount is fully paid. We delete the award of
attorney's fees. No pronouncement as to cost.

RATIO:
A letter of credit is a commercial instrument
developed to address the unique needs of
certain commercial transactions.
Through a letter of credit, a buyer obtains the
credit of a third party, usually a bank, to
provide assurance of payment. This, in turn,
convinces a seller to part with his or her
goods even before he or she is paid, as he or
she is insured by the third party that he or
she will be paid as soon as he or she presents
the documents agreed upon.When a party
knowingly and freely binds himself or herself
to perform an act, a juridical tie is created and
he or she becomes bound to fulfill his or her
obligation. In this case, HSBC's obligation
arose from two sources. First, it has a
contractual duty to Klockner whereby it
agreed to pay NSC upon due presentment of
the Letter of Credit and the attached
documents. Second, it has an obligation to
NSC to honor the Letter of Credit. In
complying with its obligation, HSBC had the
duty to perform all acts necessary. Thus, as
long as the proper documents are presented,
the issuing bank has an obligation to pay even
if the buyer should later on refuse payment.
Hence, Klockner's refusal to pay carries no

Page 11 of 19

III. TRUST RECEIPTS (P.D. 115)
1. NG V. PEOPLE
G.R. No. 173905
April 23, 2010
FACTS:
Petitioner Anthony Ng, then engaged in the
business of building and fabricating
telecommunication towers under the trade
name "Capitol Blacksmith and Builders,"
applied for a credit line of PhP 3,000,000 with
Asiatrust Development Bank, Inc. (Asiatrust).
Asiatrust approved petitioner’s loan
application. Petitioner was then required to
sign several documents, among which are the
Credit Line Agreement, Application and
Agreement for Irrevocable L/C, Trust Receipt
Agreements, and Promissory Notes. Though
the Promissory Notes matured, the two (2)
aforementioned Trust Receipt Agreements
did not bear any maturity dates as they were
left unfilled or in blank by Asiatrust.
After petitioner received the goods,
consisting of chemicals and metal plates from
his suppliers, he utilized them to fabricate the
communication towers ordered from him by
his clients.
As petitioner realized difficulty in collecting
from his client Islacom, he failed to pay his
loan to Asiatrust. Asiatrust then conducted a
surprise ocular inspection of petitioner’s
business through Villarva S. Linga, Asiatrust’s
representative appraiser. Linga thereafter
reported to Asiatrust that he found that
approximately 97% of the subject goods of
the Trust Receipts were "sold-out and that
only 3 % of the goods pertaining to PN No.
1963 remained." Efforts towards a settlement
failed to be reached.
Remedial Account Officer Ma. Girlie C.
Bernardez filed a Complaint-Affidavit before
the Office of the City Prosecutor of Quezon
City. Consequently, an Information for Estafa,
as defined and penalized under Art. 315, par.
1(b) of the RPC in relation to Sec. 3, PD 115 or
the Trust Receipts Law, was filed with the
RTC.
Upon arraignment, petitioner pleaded not
guilty to the charges. Thereafter, a full-blown
trial ensued. After trial on the merits, the RTC
rendered a Decision, finding petitioner guilty
of the crime of Estafa.
CA rendered a Decision affirming that of the
RTC, hence this petition.
ISSUE:
WON the petitioner is liable for Estafa under
Art. 315, par. 1(b) of the RPC in relation to the
pertinent provision of PD 115.
RULING:
WHEREFORE, the CA Decision dated August
29, 2003 affirming the RTC Decision dated
May 29, 2001 is SET ASIDE. Petitioner
ANTHONY L. NG is hereby ACQUITTED of the
charge of violation of Art. 315, par. 1(b) of the
RPC in relation to the pertinent provision of
PD 115.
RATIO:
We find the petition to be meritorious.
The essential elements of Estafa are:
(1) that money, goods or other personal
property is received by the offender in trust
or on commission, or for administration, or
under any obligation involving the duty to
make delivery of or to return it;
(2) that there be misappropriation or
conversion of such money or property by the
offender, or denial on his part of such receipt;
(3) that such misappropriation or conversion
or denial is to the prejudice of another; and
(4) there is demand by the offended party to
the offender.
Page 12 of 19
Likewise, Estafa can also be committed in
what is called a "trust receipt transaction"
under PD 115. A trust receipt transaction is
one where the entrustee has the obligation to
deliver to the entruster the price of the sale,
or if the merchandise is not sold, to return the
merchandise to the entruster.
There are, therefore, two obligations in a
trust receipt transaction: the first refers to
money received under the obligation
involving the duty to turn it over (entregarla)
to the owner of the merchandise sold, while
the second refers to the merchandise
received under the obligation to "return" it
(devolvera) to the owner. A violation of any of
these undertakings constitutes Estafa defined
under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 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 fifteen, paragraph one
(b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise
known as the Revised Penal Code. x x x
(Emphasis supplied.)
A thorough examination of the facts obtaining
in the instant case, however, reveals that the
transaction between petitioner and Asiatrust
is not a trust receipt transaction but one of
simple loan.
PD 115 does not apply.
It must be remembered that petitioner was
transparent to Asiatrust from the very
beginning that the subject goods were not
being held for sale but were to be used for the
fabrication of steel communication towers in
accordance with his contracts with Islacom,
Smart, and Infocom. In these contracts, he
was commissioned to build, out of the
materials received, steel communication
towers, not to sell them.
Considering that the goods in this case were
never intended for sale but for use in the
fabrication of steel communication towers,
the trial court erred in ruling that the
agreement is a trust receipt transaction.
Undoubtedly, in his testimony, Linga showed
that he had no real personal knowledge or
proof of the fact that the goods were indeed
sold. At the very least, it could only show that
the goods were not in the warehouse.
Having established the inapplicability of PD
115, this Court finds that petitioner’s liability
is only limited to the satisfaction of his
obligation from the loan. The real intent of
the parties was simply to enter into a simple
loan agreement.
To emphasize, the Trust Receipts Law was
created to "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." Since Asiatrust knew
that petitioner was neither an importer nor
retail dealer, it should have known that the
said agreement could not possibly apply to
petitioner.
Moreover, this Court finds that petitioner is
not liable for Estafa both under the RPC and
PD 115.
2. lBP V. PEREZ
G.R. No. 166884
June 13, 2012
FACTS:
Petitioner Land Bank of the Philippines (LBP)
is a government financial institution and the
official depository of the Philippines.
Respondents were officers of Asian
Construction and Development Corporation
Page 13 of 19
(ACDC), a corporation engaged in the
construction business.
However, on several occasions, respondents
executed in favor of Land Bank of the
Philippines (LBP) trust receipts to secure the
purchase of construction materials that they
will need in their construction projects. When
the trust receipts matured, ACDC failed to
return to LBP the proceeds of the
construction projects or the construction
materials subject of the trust receipts. After
several demands went unheeded, LBP filed a
complaint for Estafa or violation of Art. 315,
par. 1(b) of the RPC, in relation to PD 115,
against the respondent officers of ACDC.
ISSUE:
WON the disputed transactions is a trust
receipt or a loan
RULING:
WHEREFORE, we DENY the petition and
AFFIRM the January 20, 2005 decision of the
Court of Appeals in CA-G.R. SP No. 76588. No
costs.
RATIO:
It is a Trust Receipt.
There are two obligations in a trust receipt
transaction. The first is covered by the
provision that refers to money under the
obligation to deliver it to the owner of the
merchandise sold. The second is covered by
the provision referring to merchandise
received under the obligation to return it to
the owner.
Thus, under the Trust Receipts Law, intent to
defraud is presumed when:
(1) the entrustee fails to turn over the
proceeds of the sale of goods covered by the
trust receipt to the entruster; or
(2) when the entrustee fails to return the
goods under trust, if they are not disposed of
in accordance with the terms of the trust
receipts.
In all trust receipt transactions, both
obligations on the part of the trustee exist in
the alternative the return of the proceeds of
the sale or the return or recovery of the
goods, whether raw or processed. When both
parties enter into an agreement knowing that
the return of the goods subject of the trust
receipt is not possible even without any fault
on the part of the trustee, it is not a trust
receipt transaction penalized under Section
13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the
return of the proceeds of the sale transaction.
This transaction becomes a mere loan, where
the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.
We note in this regard that at the onset of
these transactions, LBP knew that ACDC was
in the construction business and that the
materials that it sought to buy under the
letters of credit were to be used for the
following projects: the Metro Rail Transit
Project and the Clark Centennial Exposition
Project. LBP had in fact authorized the
delivery of the materials on the construction
sites for these projects, as seen in the letters
of credit it attached to its complaint. Clearly,
they were aware of the fact that there was no
way they could recover the buildings or
constructions for which the materials subject
of the alleged trust receipts had been used.
Notably, despite the allegations in the
affidavit-complaint wherein LBP sought the
return of the construction materials, its
demand letter dated May 4, 1999 sought the
payment of the balance but failed to ask, as an
alternative, for the return of the construction
materials or the buildings where these
materials had been used.
The fact that LBP had knowingly authorized
the delivery of construction materials to a
construction site of two government projects,
as well as unspecified construction sites,
repudiates the idea that LBP intended to be
the owner of those construction materials. As
a government financial institution, LBP
should have been aware that the materials
were to be used for the construction of an
immovable property, as well as a property of
the public domain. As an immovable
property, the ownership of whatever was
constructed with those materials would
Page 14 of 19
presumably belong to the owner of the land,
under Article 445 of the Civil Code.
(Art. 445. Whatever is built, planted or sown on
the land of another and the improvements or
repairs made thereon, belong to the owner of
the land, subject to the provisions of the
following articles.)
3.) HUR TIN YANG vs. PEOPLE
G.R. No. 195117
August 14, 2013
FACTS:
Supermax Philippines, Inc. (Supermax) is a
domestic corporation engaged in the
construction business. On various occasions
in the month of April, May, July, August,
September, October and November 1998,
Metropolitan Bank and Trust Company
(Metrobank), Magdalena Branch, Manila,
extended several commercial letters of credit
(LCs) to Supermax. These commercial LCs
were used by Supermax to pay for the
delivery of several construction materials
which will be used in their construction
business. Thereafter, Metrobank required
petitioner, as representative and Vice-
President for Internal Affairs of Supermax, to
sign twenty-four (24) trust receipts as
security for the construction materials and to
hold those materials or the proceeds of the
sales in trust for Metrobank to the extent of
the amount stated in the trust receipts. When
the 24 trust receipts fell due and despite the
receipt of a demand letter, Supermax failed to
pay or deliver the goods or proceeds to
Metrobank. Instead, Supermax, through
petitioner, requested the restructuring of the
loan. When the intended restructuring of the
loan did not materialize, Metrobank sent
another demand letter. As the demands fell
on deaf ears, Metrobank, through its
representative, Winnie M. Villanueva, filed
the instant criminal complaints against
petitioner. For his defense, while admitting
signing the trust receipts, petitioner argued
that said trust receipts were demanded by
Metrobank as additional security for the loans
extended to Supermax for the purchase of
construction equipment and materials.
Further, petitioner argued that Metrobank
knew all along that the construction materials
subject of the trust receipts were not
intended for resale but for personal use of
Supermax relating to its construction
business. In twenty-four (24) consolidated
Informations, petitioner Hur Tin Yang was
charged at the instance of the same
complainant with the crime of Estafa under
Article 315, par. 1(b) of the RPC,4 in relation
to PD 115. The trial court found petitioner
guilty as charged. Petitioner appealed to the
CA which upholding the findings of the RTC
that the prosecution has satisfactorily
established the guilt of petitioner beyond
reasonable doubt. The CA ruled that since the
offense punished under PD 115 is in the
nature of malum prohibitum, a mere failure
to deliver the proceeds of the sale or goods, if
not sold, is sufficient to justify a conviction
under PD 115. Hence, this petition.
ISSUE:
WON petitioner is liable for Estafa under Art.
315, par. 1(b) of the RPC in relation to PD
115, even if it was sufficiently proved that the
entruster (Metrobank) knew beforehand that
the goods (construction materials) subject of
the trust receipts were never intended to be
sold but only for use in the entrustee’s
construction business.
RULING:
No. WHEREFORE, the Resolution dated
February 1, 2012, upholding theCA's Decision
dated July 28, 2010 and Resolution dated
December 20, 2010 in CA-G.R. CR No. 30426,
is hereby RECONSIDERED. Petitioner Hur Tin
Yang is ACQUITTED of the charge of violating
Art. 315, par. 1 (b) of the RPC, in relation to
the pertinent provision of PD 115 in Criminal
Case Nos. 04-223911 to 34.
RATIO:
In determining the nature of a contract,
courts are not bound by the title or name
given by the parties. The decisive factor in
evaluating such agreement is the intention of
the parties.In the instant case, the factual
findings of the trial and appellate courts
Page 15 of 19
reveal that the dealing between petitioner
and Metrobank was not a trust receipt
transaction but one of simple loan.
Petitioner’s admission––that he signed the
trust receipts on behalf of Supermax, which
failed to pay the loan or turn over the
proceeds of the sale or the goods to
Metrobank upon demand––does not
conclusively prove that the transaction was,
indeed, a trust receipts transaction. In
contrast to the nomenclature of the
transaction, the parties really intended a
contract of loan. Simply stated, a trust receipt
transaction is one where the entrustee has
the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not
sold, to return the merchandise to the
entruster. There are, therefore, two
obligations in a trust receipt transaction: the
first refers to money received under the
obligation involving the duty to turn it over
(entregarla) to the owner of the merchandise
sold, while the second refers to the
merchandise received under the obligation to
"return" it (devolvera) to the owner. A
violation of any of these undertakings
constitutes Estafa defined under Art. 315, par.
1(b) of the RPC, as provided in Sec. 13 of PD
115. Nonetheless, when both parties enter
into an agreement knowing fully well that the
return of the goods subject of the trust receipt
is not possible even without any fault on the
part of the trustee, it is not a trust receipt
transaction penalized as the only obligation
actually agreed upon by the parties would be
the return of the proceeds of the sale
transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay
the bank the amount spent for the purchase
of the goods. To emphasize, the Trust
Receipts Law was created to "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." Thus, in concluding that the
transaction was a loan and not a trust receipt,
we noted in Colinares that the industry or line
of work that the borrowers were engaged in
was construction. We pointed out that the
borrowers were not importers acquiring
goods for resale. Indeed, goods sold in retail
are often within the custody or control of the
trustee until they are purchased. In the case
of materials used in the manufacture of
finished products, these finished products – if
not the raw materials or their components –
similarly remain in the possession of the
trustee until they are sold. But the goods and
the materials that are used for a construction
project are often placed under the control and
custody of the clients employing the
contractor, who can only be compelled to
return the materials if they fail to pay the
contractor and often only after the requisite
legal proceedings. The contractor’s difficulty
and uncertainty in claiming these materials
(or the buildings and structures which they
become part of), as soon as the bank demands
them, disqualify them from being covered by
trust receipt agreements. Since the factual
milieu of Ng and Land Bank of the Philippines
are in all four corners similar to the instant
case, following the principle of stare decisis,
to rule that the transactions in the instant
case are not trust receipts transactions but
contracts of simple loan. The fact that the
entruster bank, Metrobank in this case, knew
even before the execution of the alleged trust
receipt agreements that the covered
construction materials were never intended
by the entrustee (petitioner) for resale or for
the manufacture of items to be sold would
take the transaction between petitioner and
Metrobank outside the ambit of the Trust
Receipts Law.
4.SPS. DELA CRUZ V. PLANTERS PRODUCTS
GR No. 158649
February 18, 2013
FACTS:
loria applied for and was granted by Planters
Products, Inc. (PPI) a regular credit line with
trust receipts (TR) as collaterals with it the
spouses submitted a list of their assets in
support of her credit application for
participation in the Special Credit Scheme
Page 16 of 19
(SCS) of PPI. Gloria signed two documents
labelled "TR/SCS," indicating the agricultural
inputs she received "upon the trust" of PPI
subscribing to these specific undertakings: -
that she would hold said goods in trust for
PPI, as its
property, with liberty to deliver and sell the
same for PPI’s account, in favor of farmers
accepted to participate in PPI’s
SCS; - that in case of such delivery and sale,
Gloria would agree to require the execution of
a Trust Agreement by the farmer-participants
in her favor, which Agreement will in turn be
Assigned by Gloria in favor of PPI with
Recourse; - that in the event, Gloria cannot
deliver/serve to the farmer-participants all
the inputs, then Gloria will agree that the
undelivered inputs will be charged to her
credit line. The products were released to
Gloria, the 60-day credit term lapsed without
Gloria paying her obligation under the
TR/SCS. Hence, PPI brought against Quirino
and Gloria a complaint.
ISSUE:
WON the Spouses liable to PPI for the value of
the agricultural inputs delivered to Gloria?
RULING:
WHEREFORE, the Court AFFIRMS the
Decision promulgated on April 11, 2003 by
the Court of Appeals, subject to the
MODIFICATIONS that: (a) the rate of interest
is 12% per annum reckoned from the filing of
the complaint until full payment; and (b) the
award of attorney’s fees is deleted. The
petitioners shall pay the costs of suit.
RATIO:
When Gloria signed the application for credit
facilities indicating that a TR would serve as
collateral for her credit line; submitted a list
of their (spouses) assets "to support our
credit application; and the signing of Gloria
TR/SCS documents defining her obligations
and the invoices indicating her having
received PPI, established the intention of the
spouses to enter into a creditor-debtor
relationship with PPI and thus are fully liable
to PPI. Moreover to say that the farmers-
participants were obligated to pay for the
goods delivered to them by Gloria has no
basis because TR/SCS indicates that Gloria
personally assumed to undertake holding the
goods "in trust for PPI," and under the notion
of relativity of contracts, contracts take effect
only between the parties. Hence, the farmer-
participants, not being themselves parties to
the documents signed by Gloria, were not to
be thereby liable. At this juncture, the
contract, its label notwithstanding, was not a
trust receipt transaction in legal
contemplation or within the purview of the
Trust Receipts Law such that its breach
would render Gloria criminally liable for
estafa.
5. ROSARIO TEXTILE V. HOME BANKERS
G.R. NO. 137232
June 29, 2005
Facts:
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 RTMC's
credit line but for only P8 million. The bank
notified RTMC of the grant of the said loan
thru a letter dated which contains terms and
conditions conformed by RTMC thru
Edilberto V. Yujuico, who signed a Surety
Agreement in favor of the bank, binding
himself jointly and severally with RTMC for
the payment of all RTMC's 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 due dates under the promissory notes and
notwithstanding the bank's demand letters,
RTMC failed to pay its loans. Hence, on 1993,
the bank filed a complaint for sum of money
against RTMC and Yujuico before the RTC
Manila.
Page 17 of 19
Petitioners’ contention: 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 but the bank refused to accept the
same, until the materials were destroyed by a
fire which gutted down RTMC's premises.
TC: rendered decision in favor of the bank,
RTMC and Yujuico appealed and
contended: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.
CA:affirmed the TC’s 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.
Issue: WON Yujuico is absolved from liability
by the grant of the credit line and the
execution of the suretyship agreement, the
same being a mere formality.
Ruling: 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.
Ratio:
No. There is no record to support his
allegation that the surety agreement is a
"mere formality;" andas held by the CA, the
Suretyship Agreement signed by Yujuico
binds him. The terms clearly show that he
agreed to pay the bank jointly and severally
with RTMC. Yujuico conveniently ignores the
true nature of its transaction with the bank.
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.” 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
customer's line of credit is nearly exhausted,
he is expected to reduce his indebtedness by
payments before making any further
drawings.
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. Hence, the trust
receipts were mere securities."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..."Thus, petitioners
Page 18 of 19
cannot be relieved of their obligation to pay
their loan in favor of the bank.

Page 19 of 19