PRUDENTIAL BANK vs.

INTERMEDIATE APPELLATE COURT

G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment

FACTS:
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-year deferred payment plan. To effect payment
for said machineries, Philippine Rayon Mills opened a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. Against this letter of credit, drafts were
drawn and issued by Nissho, which were all paid by the Prudential Bank through its
correspondent in Japan. Two of these drafts were accepted by Philippine Rayon Mills while the
others were not. Petitioner instituted an action for the recovery of the sum of money it paid to
Nissho as Philippine Rayon Mills was not able to pay its obligations arising from the letter of
credit. Respondent court ruled that with regard to the ten drafts which were not presented and
accepted, no valid demand for payment can be made. Petitioner however claims that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon.

ISSUE:
Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon
liable thereon.

RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. There was in fact no need for acceptance as the issued drafts
are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided
for in Section 143 of the Negotiable Instruments Law (NIL). The said section provides that
presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill
liable. Obviously then, sight drafts do not require presentment for acceptance.

BANK OF AMERICA NT VS CA

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the
bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer upon reimbursement;
and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.

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
Issue: Whether or not Bank of America may recover what it has paid under the letter of credit to
Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft
There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the
bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer upon reimbursement;
and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.
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 16 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. Further, instead of going to the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the
draft discounted.
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.
Furthermore, bringing the letter of credit to the attention of the seller is the primordial obligation
of an advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya, by using advanced mode of business communications,
before dispatching the same to Inter-Resin finds no real support.
MWSS vs. DAWAY AND MAYNILAD
G.R. No. 160732.
June 21, 2004
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 Panel by MWSS. the Appeals Panel ruled
that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the concession fees that had
fallen due.
The award of the Appeals Panel became final. 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.
ISSUE: WON the rehabilitation court sitting as such, act in excess of its authority or jurisdiction
when it enjoined herein petitioner from seeking the payment of the concession fees from the
banks that issued the Irrevocable Standby Letter of Credit in its favor
HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the RTC of Quezon
City 90, is hereby declared null and voidand set aside.
YES
First, the claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties who are
not solidarily liable with the debtor. Respondent Maynilads claim that the banks are not solidarily
liable with the debtor does not find support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documentsand is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter They are in effect absolute
undertakings to pay the money advanced or the amount for which credit is given on the faith of
the instrument. They are primary obligations and not accessory contracts and while they are
security arrangements, they are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts, is the engagement of the issuing
bank to pay the seller once the draft and other required shipping documents are presented to it.
They are definite undertakings to pay at sight once the documents stipulated therein are
presented.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner
as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors
whose obligations are not solidary with the debtor. The participating banks obligation 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.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad in favor of the MWSS as a bond for the full and prompt
performance of the obligations by the concessionaire under the Concession Agreement and
herein MWSS is authorized by the banks to draw on it by the simple act of delivering to the agent
a written certification substantially in the form of the Letter of Credit.
Taking into consideration our own rulings on the nature of letters of credit and the customs and
usage developed over the years in the banking and commercial practice of letters of credit, we
hold that except when a letter of credit specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required therein.
The public respondent, therefore, 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 a solidary obligation, the letter 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 said Standby Letter of Credit, public respondent acted in excess of his
jurisdiction.
Schuback & Sons vs. CA
Facts:
On October 16, 1981, defendant submitted to plaintiff the list of bus spare parts he wanted to
purchase to its counterpart in Hamburg. Plaintiff sent an offer on the items listed. On December
4, 1981, defendant informed plaintiff that he preferred genuine to replacement parts, and
requested a 15% discount. On December 17, plaintiff submitted its formal offer. On December
24, defendant submitted a purchase order, and submitted the quantity on December 29. Plaintiff
immediately ordered the items from Schuback Hamburg, which thereafter ordered the same
from NDK, a supplier in Germany. Plaintiff sent a pro-forma invoice to be used in applying for
letter of credit. On February 16, 1982, plaintiff reminded defendant to open a letter of credit to
avoid delay in shipment. Defendant mentioned the difficulty he was encountering in procuring
the same. Plaintiff continued receiving invoices and partial deliveries from NDK. On October 18,
1982, plaintiff again reminded the defendant to open a letter of credit. Defendant replied that
he did not make a valid purchase order and that there was no definite contract between him and
the plaintiff. Plaintiff sent a rejoinder explaining that there is a valid Purchase Order and
suggesting that defendant either proceed with the order and open a letter of credit or cancel the
order and pay the cancellation fee of 30% of F.O.B. value, or plaintiff will endorse the case to its
lawyers. Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983 and June
9, 1983 were to no avail. Consequently, petitioner filed a complaint for recovery of actual or
compensatory damages, unearned profits, interest, attorney's fees and costs against private
respondent.
Issue:
Whether or not a contract of sale has been perfected between the parties
Held:
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and
acceptance upon the thing and the cause which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified acceptance constitutes a counter offer." The
facts presented to us indicate that consent on both sides has been manifested. The offer by
petitioner was manifested on December 17, 1981 when petitioner submitted its proposal
containing the item number, quantity, part number, description, the unit price and total to
private respondent. On December 24, 1981, private respondent informed petitioner of his desire
to avail of the prices of the parts at that time and simultaneously enclosed its Purchase Order. At
this stage, a meeting of the minds between vendor and vendee has occurred, the object of the
contract: being the spare parts and the consideration, the price stated in petitioner's offer dated
December 17, 1981 and accepted by the respondent on December 24, 1981.
Keng Hua Products v. CA
G.R No. 116863, 12 February 1998
FACTS:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do
business in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed
container, containing seventy-six bales of unsorted waste paper for shipment to defendant
(herein petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading to cover the shipment
was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices
of arrival were transmitted to the defendant but the latter failed to discharge the shipment from
the container during the free time period or grace period. The said shipment remained inside the
plaintiffs container from the moment the free time period expired on July 29, 1982 until the time
when the shipment was unloaded from the container on November 22, 1983, or a total of four
hundred eighty-one (481) days. During the 481-day period, demurrage charges accrued. Within
the same period, letters demanding payment were sent by the plaintiff to the defendant who,
however, refused to settle its obligation which eventually amounted to P67,340.00. Numerous
demands were made on the defendant but the obligation remained unpaid. Plaintiff thereafter
commenced this civil action for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty
(50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in
Letter of Credit issued by Equitable Banking Corporation, with partial shipment permitted; that
under the letter of credit, the remaining balance of the shipment was only ten (10) metric tons
as shown in Invoice that the shipment plaintiff was asking defendant to accept was twenty (20)
metric tons which is ten (10) metric tons more than the remaining balance; that if defendant
were to accept the shipment, it would be violating Central Bank rules and regulations and custom
and tariff laws; that plaintiff had no cause of action against the defendant because the latter did
not hire the former to carry the merchandise; that the cause of action should be against the
shipper which contracted the plaintiffs services and not against defendant; and that the
defendant duly notified the plaintiff about the wrong shipment through a letter dated January
24, 1983.
ISSUE:
1. Whether or not the petitioner was bound by the bill of lading.
2. Whether or not interest may not be allowed to run from the date of private respondents
extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983 for P37,800, considering
that, in both cases, there was no demand for interest.
RULING:
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations.
Petitioner admits that it received the bill of lading immediately after the arrival of the shipment
on July 8, 1982. Having been afforded an opportunity to examine the said document, petitioner
did not immediately object to or dissent from any term or stipulation therein. It was only six
months later, on January 24, 1983, that petitioner sent a letter to private respondent saying that
it could not accept the shipment. Petitioners inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter
spoke only of petitioner’s inability to use the delivery permit, i.e. to pick up the cargo, due to the
shippers failure to comply with the terms and conditions of the letter of credit, for which reason
the bill of lading and other shipping documents were returned by the banks to the shipper. The
letter merely proved petitioners refusal to pick up the cargo, not its rejection of the bill of lading.
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the
private respondent’s vessel constitutes a violation of the terms of the bill of lading. It should thus
be liable for demurrage to the former.
On behalf of the interest jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
The case before us involves an obligation not arising from a loan or forbearance of money; thus,
pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum.
Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private
respondent increased as the days went by, the total amount demanded cannot be deemed to
have been established with reasonable certainty until the trial court rendered its judgment.
Indeed, (u)nliquidated damages or claims, it is said, are those which are not or cannot be known
until definitely ascertained, assessed and determined by the courts after presentation of proof.
Consequently, the legal interest rate is six percent, to be computed from September 28, 1990,
the date of the trial court’s decision. And in accordance with Philippine Natonal Bank and Eastern
Shipping, the rate of twelve percent per annum shall be charged on the total then outstanding,
from the time the judgment becomes final and executory until its satisfaction.
Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717, Nov 22, 2004
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and
Ilocos. Transfield was given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project. The contract provides for a period for which the project is
to be completed and also allows for the extension of the period provided that the extension is
based on justifiable grounds such as fortuitous event. In order to guarantee performance by
Transfield, two stand-by letters of credit were required to be opened. During the construction of
the plant, Transfield requested for extension of time citing typhoon and various disputes delaying
the construction. LHC did not give due course to the extension of the period prayed for but
referred the matter to arbitration committee. Because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default. However, the demand was
objected by Transfield on the ground that there is still pending arbitration on their request for
extension of time.
Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration
case
Held: Transfield’s argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit
in essence would convert the letter of credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is incompatible with the very nature of the
letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract
entered into by the applicant and the beneficiary, there would be no practical and beneficial use
for letters of credit in commercial transactions.
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. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor
do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person whomsoever.
Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz
agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
On the arrangements made and upon the instructions of consignee, Hanmi Trade Development,
Ltd., the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of
credit 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 with the instruction to the
latter that it “forward the enclosed letter of credit to the beneficiary.” The letter of credit also
provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by certain documents. The logs were thereafter loaded on a vessel but Christiansen
refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated
requests by the private respondent. The logs however were still shipped and received by
consignee, to whom Christiansen sold the logs. 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 until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the
certification proved futile, he filed an action for mandamus and specific performance against
Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal.
Christiansen however left the Philippines and Villaluz filed an amended complaint making Feati
Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen
Held: 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 case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
In this case, the letter merely provided that the petitioner “forward the enclosed original credit
to the beneficiary.” (Records, Vol. I, p. 11) 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.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement
of his rights under the letter.
Since the Feati 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.
At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual relationship with the seller. 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 Feati, the refusal
by the petitioner to accept the tender of the private respondent is justified.
Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-24821 October 16, 1970
Doctrine: 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. Having been positively proven as a fact, the appellants are
bound by this established usage.
Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable
commercial letters of credit with the Bank of Philippine Islands (BPI). The letter of credits was
used to cover the purchase of goods by De Reny from its American supplier, the J.B. Distributing
Company. As each shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made
partial payments to the Bank amounting to 12,000. Further payments were, however,
subsequently discontinued by the corporation when it became 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 these goods, and for this reason, the Bank caused them to be deposited with a
bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint
with the court.
Issue : Whether or not De Reny fabrics is liable under the letter of Credit
Held : Even without the stipulation recited above, 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 during the trial below 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 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 usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in international business.
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 have, therefore, no recourse but to comply with their covenant.
PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION v. HON. WALFRIDO DE LOS ANGELES, Judge of
the Court of First Instance of Rizal, Branch IV (Quezon City) and TIMOTEO A. SEVILLA, doing
business under the name and style of PHILIPPINE ASSOCIATED RESOURCES and PRUDENTIAL
BANK AND TRUST COMPANY G.R. No.L-27829, August 19, 1988, Paras, J.
An irrevocable letter of credit cannot, during its lifetime, be cancelled or modified without the
express permission of the beneficiary.
Facts: Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources
(PAR) entered into a contract for the importation of kilos of Virginia leaf tobacco and Farmer’s
tobacco. Due to prevailing export or world market price under which Sevilla will be exporting at
a loss, the parties agreed that Sevilla shall open an irrevocable letter of credit with the Prudential
Bank and Trust Co. (Prudential Bank) in favor of Philippine Virginia Tobacco Administration (PVTA)
While Sevilla was trying to negotiate the reduction of the procurement cost of the PVTA tobacco
already exported, PVTA prepared two (2) drafts to be drawn against the said letter of credit for
the amounts which have become due and payable. Sevilla filed an injunction against the release
of funds with Prudential Bank which was not granted byJudge Delos Angeles. Consequently,
Judge Delos Angeles issued an order directing Prudential Bank to make the questioned release of
funds from the letters of credit.
Issue: Whether the respondent judgeacted with grave abuse of discretion in releasing the funds
from the letters of credit.
Ruling: YES. Respondent Judge violated the irrevocability of the letter of credit issued by
respondent Bank in favor of petitioner. An irrevocable letter of credit cannot during its lifetime
be cancelled or modified Without the express permission of the beneficiary (Miranda and
Garrovilla, Principles of Money Credit and Banking, Revised Edition, p. 291). Consequently, if the
finding the trial on the merits is that respondent Sevilla has alleged unpaid balance due the
petitioner, such unpaid obligation would be unsecured
G.R. No. 135462 December 7, 2001

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners,
vs.
BA FINANCE CORPORATION, respondent.

Facts:
On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors Corporation, executed in
favor of plaintiff-appellant a Continuing Suretyship Agreement, in which he "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA Finance Corporation. On February 3, 1983,
Palawan Lumber Manufacturing Corporation represented by Joseph L.G. Chua, George D. Tan,
Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation (Folder of Exhibits, pp. 19-20). On the
same date, South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F. Tablante,
likewise executed a Continuing Suretyship Agreement in which said corporation "jointly and
severally unconditionally" guaranteed the "full, faithful and prompt payment and discharge of
any and all indebtedness" of Fortune Motors Corporation to BA Finance Corporation.

Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles
delivered to it by CARCO under which it agreed to remit to the Entruster (CARCO) the proceeds
of any sale and immediately surrender the remaining unsold vehicles. ). The drafts and trust
receipts were assigned to plaintiff-appellant, under Deeds of Assignment executed by CARCO.
Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due
under the drafts and to remit the proceeds of motor vehicles sold or to return those remaining
unsold in accordance with the terms of the trust receipt agreements, BA Finance Corporation
sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar
(Folder of Exhibits, pp. 29-37). Since the defendants-appellants failed to settle their outstanding
account with plaintiff-appellant, the latter filed on December 22, 1983 a complaint for a sum of
money with prayer for preliminary attachment, with the Regional Trial Court of Manila.

Issue: WON respondent BAFC has a valid cause of action for a sum of money following the drafts
and trust receipts transactions.

Held: As an entruster, respondent BAFC must first demand the return of the unsold vehicles from
Fortune Motors Corporation, pursuant to the terms of the trust receipts. Having failed to do so,
petitioners had no cause of action whatsoever against Fortune Motors Corporation and the
action for collection of sum of money was, therefore, premature.
A trust receipt is a security transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased.9 In the event of default by the entrustee on his
obligations under the trust receipt agreement, it is not absolutely necessary that the entruster
cancel the trust and take possession of the goods to be able to enforce his rights thereunder.
Ching v. CA, 423 SCRA 356, February 23, 2004
FACTS: Philippine Blooming Mills Company, Inc. (PBMCI) obtained two loans from the Allied
Banking Corporation (ABC). (PBMCI) Executive Vice-President Alfredo Ching executed a
continuing guaranty with the ABC for the payment of the said loan. The PBMCI defaulted in the
payment of all its loans so ABC filed a complaint for sum of money against the PBMCI. Trial court
issued a writ of preliminary attachment against Alfredo Ching requiring the sheriff of to attach all
the properties of said Alfredo Ching to answer for the payment of the loans. Encarnacion T. Ching,
wife of Alfredo Ching, filed a Motion to Set Aside the levy on attachment allegeing inter alia that
the 100,000 shares of stocks levied on by the sheriff were acquired by her and her husband during
their marriage out of conjugal funds. Petitioner spouses aver that the source of funds in the
acquisition of the levied shares of stocks is not the controlling factor when invoking the
presumption of the conjugal nature of stocks under Art. !21 and that such presumption subsists
even if the property is registered only in the name of one of the spouses, in this case, petitioner
Alfredo Ching. According to the petitioners, the suretyship obligation was not contracted in the
pursuit of the petitioner-husband’s profession or business.44

ISSUE: WON 100,000 shares of stocks may be levied on by the sheriff to answer for the loans
guaranteed by petitioner Alfredo Ching

HELD: No.
RATIO: The CA erred in holding that by executing a continuing guaranty and suretyship agreement
with the private respondent for the payment of the PBMCI loans, the petitioner-husband was in
the exercise of his profession, pursuing a legitimate business.

The shares of stocks are, thus, presumed to be the conjugal partnership property of the
petitioners. The private respondent failed to adduce evidence that the petitioner-husband
acquired the stocks with his exclusive money.

The appellate court erred in concluding that the conjugal partnership is liable for the said account
of PBMCI.
Article 121 provides: The conjugal partnership shall be liable for: (1) All debts and obligations
contracted by the husband for the benefit of the conjugal partnership, and those contracted by
the wife, also for the same purpose, in the cases where she may legally bind the partnership.
For the conjugal partnership to be liable for a liability that should appertain to the husband alone,
there must be a showing that some advantages accrued to the spouses.

In this case, the private respondent failed to prove that the conjugal partnership of the
petitioners was benefited by the petitioner-husband’s act of executing a continuing guaranty and
suretyship agreement with the private respondent for and in behalf of PBMCI. The contract of
loan was between the private respondent and the PBMCI, solely for the benefit of the latter. No
presumption can be inferred from the fact that when the petitioner-husband entered into an
accommodation agreement or a contract of surety, the conjugal partnership would thereby be
benefited. The private respondent was burdened to establish that such benefit redounded to the
conjugal partnership.

[G.R. No. 122502. December 27, 2002]

LORENZO M. SARMIENTO, JR. and GREGORIO LIMPIN, JR., petitioners, vs. COURT OF APPEALS
and ASSOCIATED BANKING CORP., respondents.

Facts:

On September 6, 1978, defendant Gregorio Limpin, Jr. and Antonio Apostol, doing business under
the name and style of ‘Davao Libra Industrial Sales,’ filed an application for an Irrevocable
Domestic Letter of Credit with the plaintiff Bank for the amount of P495,000.00 in favor of LS
Parts Hardware and Machine Shop (herein after referred to as LS Parts) for the purchase of
assorted scrap irons. Said application was signed by defendant Limpin and Apostol (Exh. ‘A’). The
aforesaid application was approved, and plaintiff Bank issued Domestic Letter of Credit No. DLC
No. DVO-78-006 in favor of LS Parts for P495,000.00 (Exh. ‘B’). Thereafter, a Trust Receipt dated
September 6, 1978, was executed by defendant Limpin and Antonio Apostol (Exh. ‘C’). The
defendants acknowledged to have received in trust from the plaintiff Bank the merchandise
covered by the documents and agreed to hold said merchandise in storage as the property of the
Bank.
The defendants failed to comply with their undertaking under the Trust Receipt. Hence as early
as March, 1980, demands were made for them to comply with their undertaking. The defendants
claim that they cannot be held liable as the 825 tons of assorted scrap iron, subject of the trust
receipt agreement, were lost when the vessel transporting them sunk, and that said scrap iron
were delivered to ‘Davao Libra Industrial Sales’, a business concern over which they had no
interest whatsoever.

Thereafter, the corresponding Information was filed against the defendants. Defendant Lorenzo
Sarmiento, Jr. was, however, dropped from the Information while defendant Gregorio Limpin, Jr.
was convicted.

Issue: WON private respondents have the right to institute a separate civil action against
Sarmiento for civil liability?

Held: Article 31 of the Civil Code provides that “When the civil action is based on an obligation
not arising from the act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the latter.”

In the present case, private respondent’s complaint against petitioners was based on the failure
of the latter to comply with their obligation as spelled out in the Trust Receipt executed by
them.[20] This breach of obligation is separate and distinct from any criminal liability for “misuse
and/or misappropriation of goods or proceeds realized from the sale of goods, documents or
instruments released under trust receipts”, punishable under Section 13 of the Trust Receipts
Law (P.D. 115) in relation to Article 315(1), (b) of the Revised Penal Code.

Being based on an obligation ex contractu and not ex delicto, the civil action may proceed
independently of the criminal proceedings instituted against petitioners regardless of the result
of the latter.

Allied Banking Corporation v Ordonez GR No. 82495 : December 10, 1990.

The crime of estafa for violation of the Trust Receipts Law is a special offense or mala prohibita.
It is a fundamental rule in criminal law that when the crime is punished by a special law, the act
alone, irrespective of its motives, constitutes the offense. In the instant case the failure of the
entrustee to pay complainant the remaining balance of the value of the goods covered by the
trust receipt when the same became due constitutes the offense penalized under Section 13 of
P.D. No. 115
Facts: Philippine Blooming Mills (PBM, for short) thru its duly authorized officer, private
respondent Alfredo Ching, applied for the issuance of commercial letters of credit with
petitioner’s Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and one
(1) Lot High Fired Refractory Sliding Nozzle Bricks. Allied Bank issued an irrevocable letter of credit
in favor of Nikko Industry Co., Ltd. (Nikko) by virtue of which the latter drew four (4) drafts which
were accepted by PBM and duly honored and paid by the petitioner bank. To secure payment of
the amount covered by the drafts, and in consideration of the transfer by petitioner of the
possession of the goods to PBM, the latter as entrustee, thru private respondent, executed four
(4) Trust Receipt Agreements with maturity dates on acknowledging petitioner’s ownership of
the goods and its (PBM’S) obligation to turn over the proceeds of the sale of the goods, if sold,
or to return the same, if unsold within the stated period.
PBM defaulted on the payment of the trust receipts.. Despite repeated demands, PBM failed and
refused to either turn over the proceeds of the sale of the goods or to return the same. Allied
Bank filed a criminal complaint against private respondent for violation of PD 115 before the
office of the Provincial Fiscal of Rizal. The Fiscal found a prima facie case for violation of PD 115
on four (4) counts and filed the corresponding information in court. PBM contended that since it
was under rehabilitation receivership, no criminal liability can be imputed to Ching.
Issue: Whether or not rehabilitation bars the filing of the estafa case against Ching
Held: It cannot be denied that the offense was consummated long before the appointment of
rehabilitation receivers. The filing of a criminal case against respondent Ching is not only for the
purpose of effectuating a collection of a debt but primarily for the purpose of punishing an
offender for a crime committed not only against the complaining witness but also against the
state. The crime of estafa for violation of the Trust Receipts Law is a special offense or mala
prohibita. It is a fundamental rule in criminal law that when the crime is punished by a special
law, the act alone, irrespective of its motives, constitutes the offense. In the instant case the
failure of the entrustee to pay complainant the remaining balance of the value of the goods
covered by the trust receipt when the same became due constitutes the offense penalized under
Section 13 of P.D. No. 115; and on the basis of this failure alone, the prosecution has sufficient
evidence to establish a prima facie case (Res. No. 671, s. 1981; Allied Banking Corporation
vs. Reinhard Sagemuller, et al., Provincial Fiscal of Rizal, September 18, 1981).
In examination of P.D. 115 shows the growing importance of trust receipts in Philippine business,
the need to provide for the rights and obligations of parties to a trust receipt transaction, the
study of the problems involved and the action by monetary authorities, and the necessity of
regulating the enforcement of rights arising from default or violations of trust receipt
agreements. The legislative intent to meet a pressing need is clearly expressed .
Ng vs People
Facts:
Anthony Ng was engaged in the business of building and fabricating telecommunication towers
under the trade name Capitol Blacksmith and Builders. Petitioner applied for a credit line of Php
3,000,000 with Asia trust. In support of Asia trusts credit investigation, petitioner voluntarily
submitted the following documents: (1) the contracts he had with Islacom, Smart, and Infocom;
(2) the list of projects wherein he was commissioned by the said telecommunication companies
to build several steel towers; and (3) the collectible amounts he has with the said companies.
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,[4] and Promissory Notes. Though the Promissory
Notes had maturity dates, the two Trust Receipt Agreements did not bear any maturity dates.
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. Asiatrusts representative appraiser, reported that approximately 97% of the subject
goods of the Trust Receipts were sold-out and that only 3 % of the goods remained. Efforts
towards a settlement failed to be reached.
Asiatrust Account Officer filed a Complaint-Affidavit 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.
Issue:
Whether the petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD
115.
Ruling:
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.
A trust receipt is considered 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. The principle is of course not limited in
its application to financing importations, since the principle is equally applicable to domestic
transactions. Regardless of whether the transaction is foreign or domestic, it is important to note
that the transactions discussed in relation to trust receipts mainly involved sales.
The release of such goods to the entrustee is conditioned upon his execution and delivery to the
entruster of a trust receipt wherein the former binds himself to hold the specific goods in trust
for the entruster and to sell or otherwise dispose of the goods with the obligation to turn over to
the entruster the proceeds to the extent of the amount owing to the entruster or the goods
themselves if they are unsold.
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.
Petitioner is correct that there was no misappropriation or conversion on his part, because his
liability for the amount of the goods subject of the trust receipts arises and becomes due only
upon receipt of the proceeds of the sale and not prior to the receipt of the full price of the goods.
PD 115 provides that an entrustee is only liable for Estafa when he fails to turn over the proceeds
of the sale of the goods covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt in accordance with the terms of the trust receipt.
Prudential Bank v Intermediate Appellate Court and Anacleto Chi G.R. No. 74886 December
8, 1992
Through a letter of credit, the bank merely substitutes its own promise to pay for 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.
Facts: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for
the importation of textile machineries under a 5-year deferred payment plan. To effect the
payment, PRMI applied for a commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 Against this letter of credit, drafts were drawn and issued by Nissho, which were all
paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. Two of
the original drafts were accepted by PRMI through its president, Anacleto R. Chi, while the others
were not. Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the PRMI which accepted delivery of the same. To enable PRMI to take delivery of
the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as President of PRMI company
At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the
very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank
should the PRMI fail to pay the total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. . PRMI was able to take delivery of the textile machineries and
installed the same at its factory site. Chi argued that presentment for acceptance was necessary
to make PRMI liable. The trial court ruled that that presentment for acceptance was an
indispensable requisite for Philippine Rayon’s liability on the drafts to attach.
Issue : Whether or not presentment for acceptance was needed in order for PRMI to be liable
under the draft.
HELD : Presentment for acceptance is defined an the production of a bill of exchange to a drawee
for acceptance. Acceptance, however, was not even necessary in the first place because the
drafts which were eventually issued were sight drafts. Even if these were not sight drafts, thereby
necessitating acceptance, it would be the Bank (Bank of America) — and not Philippine Rayon —
which had to accept the same for the latter was not the drawee.
The trial court and the public respondent, therefore, erred in ruling that presentment for
acceptance was an indispensable requisite for Philippine Rayon’s liability on the drafts to attach.
Contrary to both courts’ pronouncements, Philippine Rayon immediately became liable upon
Bank of America’s payment on the letter of credit. Such is the essence of the letter of credit issued
by the petitioner. A different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon
even if the latter had already received the imported machinery and the petitioner had fully paid
for it.
In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL).
In the instant case then, the drawee was necessarily the herein the Bank of America. It was to
the latter that the drafts were presented for payment.

Colinares v CA G.R. No. 90828. September 5, 2000

The ownership of the merchandise continues to be vested in the person who had advanced
payment until he has been paid in full, or if the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the importer or by his representative or successor in
interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s
convent at Camaman-an, Cagayan de Oro City. Colinares applied for a commercial letter of
credit with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in
favor of CM Builders Centre. PBC approved the letter of credit for P22,389.80 to cover the full
invoice value of the goods. Petitioners signed a pro-forma trust receipt as security.
PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of the loan. After the
initial payment, the spouses defaulted. PBC wrote to Petitioners demanding that the amount be
paid within seven days from notice. Instead of complying with PBC’s demand, Veloso confessed
that they lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of
until 15 June 1980 to settle the account. Colinares proposed that the terms of payment of the
loan be modified P2,000 on or before 3 December 1980, and P1,000 per month . Pending
approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980, and thereafter
P500 on 11 February 1981, 16 March 1981, and 20 April 1981. Concurrently with the separate
demand for attorney’s fees by PBC’s legal counsel, PBC continued to demand payment of the
balance. On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust
Receipts Law) in relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a “clean loan” as per verbal
guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed the
documents without reading the fine print, only learning of the trust receipt implication much
later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt
was a mere formality. The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to
the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear
that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the
handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC acknowledging payment of the loan.
Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust
Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979. On that
day, ownership over the merchandise was already transferred to Petitioners who were to use the
materials for their construction project. It was only a day later, 31 October 1979, that they went
to the bank to apply for a loan to pay for the merchandise. This situation belies what normally
obtains in a pure trust receipt transaction where goods are owned by the bank and only released
to the importer in trust subsequent to the grant of the loan.
The bank acquires a “security interest” in the goods as holder of a security title for the advances
it had made to the entrustee. The ownership of the merchandise continues to be vested in the
person who had advanced payment until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest. To secure that the bank shall be paid, it takes full title
to the goods at the very beginning and continues to hold that title as his indispensable security
until the goods are sold and the vendee is called upon to pay for them; hence, the importer has
never owned the goods and is not able to deliver possession. In a certain manner, trust receipts
partake of the nature of a conditional sale where the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price. There are two possible situations in a trust
receipt transaction. The first is covered by the provision which refers to money received under
the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold.
The second is covered by the provision which refers to merchandise received under the obligation
to “return” it (devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the
sale of the goods, covered by the trust receipt to the entruster or to return said goods if they
were not disposed of in accordance with the terms of the trust receipt shall be punishable as
estafa under Article 315 (1) of the Revised Penal Code, without need of proving intent to defraud.
G.R. No. 133877 November 14, 2001
Rizal Commercial Banking Corporation, petitioner,
vs.
Alfa RTW Manufacturing Corporation, BA Finance Corporation, North American Garments
Corporations, Johnny Teng, Ramon Lee, Antonio Lacdao, Ramon LUY and ALFA Integrated Textile
Mills, respondents,

Definition of Terms:
Trust Receipt - is a security transaction intended to aid in financing importers and retail detailers
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 thru utilization, as collateral, of
the merchandise imported or purchased [Ching vs Court of Appeals, 331 SCRA 16 (2000), citing
Samo vs People, 5 SCRA 354 (1962)]

Facts:
On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the Regional Trial Court of
Makati, a civil case, for a sum of money against Alfa RTW Manufacturing Corporation, Johnny
Teng, Ramon Lee, Antonio Lacdao, Ramon Luy and Alfa Integrated Textile Mills.

The trial court rendered judgment on August 19, 1991, the dispositive portion, which reads:
Order the defendants to pay, jointly and severally, to plaintiff the amount of Eighteen Million
Nine Hundred Sixty-one Thousand Three Hundred Seventy-two Pesos and Forty-three Centavos
(P18,961,372.43), Philippine Currency, (inclusive of interest, service charges, litigation expenses
and attorney’s fees), with interest thereon at the legal rate from February 15, 1988 until fully
paid.

On appeal, the Court of Appeals affirmed with modification of the RTC decision, thus:
“WHEREFORE, with the modification that instead of P18,961,372.43, all the defendants are
hereby ordered to pay, jointly and severally to plaintiff the amount of P3,060,406.25, Philippine
Currency, inclusive of stipulated interest, service charges, litigation expenses and attorney’s fees,
with interest thereon at the legal rate from February 15, 1988, until fully paid.”

Issue:
Whether or not the Court of Appeals can deviate from the provisions of the contract, which itself
is the law between the parties?

Held:
1. The rule is well settled that the jurisdiction of the Court of Appeals via Rule 45 of the 1997
Rules of Civil Procedure, as amended, is limited to reviewing errors of law. Findings of fact of the
said Court are conclusive, except in a number of instances. Where in the case at bar, exception
n0. 6 stated in Siguan vs Lim (318 SCRA 725) is present to wit:

(6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the
same is to the admissions of both the appellant and appelle

Herein lies the reversible error on the part of the Court of Appeals. When it ruled that only
P3,060,406.25 should be awarded to petitioner RCBC, the Appellate Court disregarded the
parties’ stipulations in their contracts of loan, more specifically, those pertaining to the agreed
(1) Interest rates, (2) service charge and (3) penalties in case of any breach thereof. The CA failed
to apply the honoured doctrine”

“That which is agreed to in a contract is the law between the parties. Thus, obligations arising
from contracts have the force of law between the contracting parties and should be complied
with in good faith.”

“The court cannot vary the terms and conditions therein stipulated unless such stipulation is
contrary to law, morals, good customs, public order or public policy.”

2. In the determination and computation of interest of payment, this court, in Eastern

Shipping Lines, Inc. (234 SCRA 18, 1994) vs Court of Appeals, through Justice Jose C. Vitug, held:

2.1. When the obligation is breached and it consist in the payment of a sum of money (i.e., loan
or forbearance of money, the interest due should be that which may be have stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 169 of the Civil Code

2.2. When the obligation, not constituting a loan or forbearance of money, is breached, and
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.

WHEREFORE; the petition is hereby GRANTED. The assailed decision of the court of Appeals in
MODIFIED in the sense that the award to petitioner RCBC of P3,0606,406.25 is SET ASIDE and
substituted with an amount to be computed by the trial court, upon finality of this Decision.