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1 LETTER OF CREDIT

BANK OF THE PHILIPPINE ISLANDS vs. DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES Facts : De Reny Fabric Industries, Inc. applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods 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. 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. Is s u e : Whether or not De Reny fabrics is liable under the letter of Credit? Ruling: 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. But 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. PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION vs. HON. WALFRIDO DE LOS ANGELES, TIMOTEO A. SEVILLA, PHILIPPINE ASSOCIATED RESOURCES and PRUDENTIAL BANK AND TRUST COMPANY Facts : Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together with two other entities, namely, the Nationwide Agro-Industrial Development Corp. and the Consolidated Agro-Producers Inc. were awarded in a public bidding the right to import Virginia leaf tobacco at a rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported. Subsequently, the other two entities assigned their rights to PVTA and respondent remained the only private entity accorded the privilege. The contract entered into between the petitioner and respondent Sevilla was for the importation of Virginia leaf tobacco and a counterpart exportation.

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In accordance with their contract, Sevilla purchased from petitioner and actually exported 2,101.470 kilos of tobacco. Before Sevilla could import the counterpart blending Virginia tobacco, Republic Act No. 4155 was passed authorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and to dispose of all its tobacco stock at the best price available. Thus the subject contract which was already amended because of the prevailing export or world market price under which respondent will be exporting at a loss, was further amended to grant respondent the privileges under aforesaid law, subject to the following conditions: (1) that those already purchased, and exported, the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance was to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported Virginia blending tobacco and; (3) that respondent Sevilla would open an irrevocable letter of credit with the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of said balance, drawable upon the release from the Bureau of Customs of the imported Virginia blending tobacco. While respondent was trying to negotiate the reduction of the procurement cost of the tobacco already exported which attempt was denied by petitioner and also by the Office of the President, petitioner prepared two drafts to be drawn against said letter of credit for amounts which have already become due and demandable. Respondent then filed a complaint for damages with preliminary injunction against the petitioner. A writ of preliminary injunction was issued by respondent judge enjoining petitioner from drawing against the letter of credit. On motion of respondent, Sevilla, the lower court dismissed the complaint and lifted the writ of preliminary injunction but petitioner's motion for reconsideration was granted. Sevilla filed an urgent motion for reconsideration but pending the resolution of respondent's motion and without notice to the petitioner, respondent judge issued an order directing the Prudential Bank & Trust Co. to make the questioned release of funds from the Letter of Credit. Before petitioner could file a motion for reconsideration of said order, respondent Sevilla was able to secure the releaseof P300,000.00 and the rest of the amount. PVTA contends that respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion because the letter of credit issued by respondent bank is irrevocable Is s u e : Whether or not the judge can order a decision that will modify or cancel an irrevocable letter of credit without the permission of the beneficiary Ruling: Respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of petitioner. An irrevocable letter of credit during its lifetime cannot be cancelled or modified without the express permission of the beneficiary. INSULAR BANK OF ASIA & AMERICA vs. HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA Facts : Spouses Mendoza obtained a from PHILAM Life to finance the construction of their residential house. Phiilam life required that the amortization be guaranteed by an irrevocable LC of a commerciaql bank. The Mendozas contracted Insular Bank of Asia and America (IBAA) for the issuance of LC in favor of Philam life, such LCs in turn, secured by a real mortgage on the property of spouses in favor of IBAA. Mendozas executed promissory notes in favor of IBAA. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments" of many particular obligation or obligations" the Mendozas may have to IBAA. The Mendozas failed to pay Philam Life the amortization and informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a melee guarantor of the Mendozas who are the principal debtors.

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The Real Estate Mortgage, which secured the two (2) standby L/Cs. was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder. Philam Life filed suit against Respondent Spouses and IBAA before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the amount allegedly still owing under the loan. Is s u e : Whether or not IBAA has no more liability to Philam Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund? Ruling: In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated. Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank. The standby L/Cs are, "in effect an absolute undertaking 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. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. That there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance.

FEATI BANK & TRUST COMPANY vs. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ Facts : Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen lauan logs. After inspecting the logs, Christiansen issued a purchase order. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit available at sight in favor of Villaluz 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 on Security Pacific National Bank and that it be accompanied by the following documents: 1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that all terms and conditions of the purchase order have been complied with, etc. 2. Tally sheets 3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid and marked. After the loading of the logs was completed, the Chief Mate 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 the letter of credit, despite several requests made by the private respondent.nBecause of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit which

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lapsed without the private respondent receiving any certification from Christiansen. 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. 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. Is s u e : Whether or not a correspondent bank is to be held liable under the letter of credit despite noncompliance by the beneficiary with the terms thereof Ruling: 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 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. 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. And since a correspondent bank 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. Also 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. Since the 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. In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. Finally, even if the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter because there was a failure on the part of the private respondent to comply with the terms of the letter of credit. PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI Facts : On August 8, 1962, 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. Prudential Bank executed a trust receipt signed by the President of PRMI. PMRI received the machinery and installed the same at its factory. PMRI ceased business sometime in 1967 without paying his obligation arising from the letters of credit and trust receipt. Repeated demands for the payment of the said trust receipt were made and to no avail. Hence, action for collection of money was filed to the trial court. Is s u e : Whether Philippine Rayon is liable on the basis of the trust receipt? Ruling: Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon,

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but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 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 thereon upon petitioner's payment thereof. 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. Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented. A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 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. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. 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).

BANK OF AMERICA, NT & SA vs. COURT OF APPEALS, INTER- RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE Facts : Bank of America received an Irrevocable Letter of Credit issued bu Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files with Bank of America as advising bank and Inter-Resin Industrial Corp. as beneficiary. Upon receipt of the letter advice with letter of credit by Inter- Resin told Bank of America to confirm said letter of credit, but the bank did not confirm such. Bank of America explained that there was no need for confirmation. 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 BA issued a check in favor of IR. BA advice Bank of Ayudhya of IRs availment under the letter of credit and asked for the corresponding reimbursement. IR presented documents for the second availment under the same LC but 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. Is s u e : Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-Resin? Ruling: First, petitioner Bank of America has acted merely as a notifying bank and did not assume the responsibility of a confirming bank; and

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Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. 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 number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, 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. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. The bare statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect of novating the letter of credit and Bank of America's letter of advise, nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller, the issuance of the letter of credit should have obviously been a great concern to it. It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the every least, with General Chemicals. In the ordinary course of business, the perfection of contract precedes the issuance of a letter of credit. RELIANCE COMMODITIES, INC. vs. DAEWOO INDUSTRIAL CO., LTD Facts : On 9 January 1980, petitioner Reliance Commodities, Inc. and Daewoo Industrial Co., Ltd. entered into a contract of sale under the terms of which the latter undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron. Pursuant to this contract, Daewoo shipped the foundry pig iron on board for carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in Manila, the subject cargo was found to be short.

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Another contract was entered into between the same parties for the purchase of another 2,000 metric tons of foundry pig iron. Daewoo acknowledged the short shipment and, to compensate Reliance therefor, bound itself to reduce the price for succeeding orders. However, that contract was not consummated and was later superseded by still another contract. Reliance filed with the China Banking Corporation, an application for a Letter of Credit (L/C) in favor of Daewoo. The application was endorsed to the Iron and Steel Authority (ISA) or approval but the application was denied. Reliance was instead asked to submit purchase orders from end-users to support its application for a Letter of Credit. However, Reliance was not able to raise purchase orders for 2,000 metric tons. Whatever the exact amount of the purchase orders was, Daewoo rejected the proposed L/C for the reason that the covered quantity fell short of the contracted tonnage. Thus, Reliance withdrew the application for the L/C. Subsequently, Daewoo learned that the failure of Reliance to open the L/C was due to the fact that Reliance has already exceeded its foreign exchange allocation for 1980. Because of the failure of Reliance to comply with its undertaking Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur due to its inability to ship the 2000 metric tons to Reliance under their contract. Reliance wrote Daewoo requesting payment representing the value of the short delivery. Not being heeded, Reliance filed an action for damages against Daewoo with the trial court. Daewoo responded, inter alia, with a counterclaim for damages, contending that Reliance was guilty of breach of contract when it failed to open an L/C as required in the contract. Is s u e : Whether or not the failure of an importer to open a letter of credit on the date agreed upon makes him liable to the exporter for damages. Ruling: A letter of credit transaction is composed of at least three (3) distinct but intertwined relationships being concretized in a contract: (a) One contract relationship links the party applying for the L/C (the account party or buyer or importer) and the party for whose benefit the L/C is issued (the beneficiary or seller or exporter). In this contract, the account party, here Reliance, agrees, among other things and subject to the terms and conditions of the contract, to pay money to the beneficiary, here Daewoo. (b) A second contract relationship is between the account party and the issuing bank. Under this contract, (sometimes called the "Application and Agreement" or the "Reimbursement Agreement"), the account party among other things, applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C. (c) The third contract relationship is established between the issuing bank and the beneficiary, in order to support the contract, under (a) above, of the account party and the beneficiary to, inter alia, pay certain monies to the latter. In the case at bar, the opening of an L/C upon application of Reliance was not a condition precedent for the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. Reliance and Daewoo, having reached "a meeting of minds" in respect of the subject matter of the contract, the price thereof, and other principal provisions, "they had a perfected contract." The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and neither did such failure extinguish that contract. The opening of the L/C in favor of Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a condition of enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the contract to Reliance. But the contract itself between Reliance and Daewoo had already sprung into legal existence and was enforceable. The L/C provided for in that contract was the mode or mechanism by which payment was to be effected. In undertaking to accept or pay the drafts presented to it by the beneficiary according to the tenor of an L/C, and only later on being reimbursed by the account party, the issuing bank in effect

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extends a loan to the account party. This loan feature, combined with the bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes the L/C as a mode of payment. The failure of a buyer seasonably to furnish an agreed letter of credit is a breach of contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had the transaction been carried out. RODZSSEN SUPPLY CO. vs. FAR EAST BANK AND TRUST COMPANY Facts : Petitioner Rodzssen, on January 15, 1979, opened with respondent Far East Bank and Trust Company (FEBTC) a letter of credit (LC) in the amount of P190,000 in favor of Ekman and Company for the purchase from the latter of 5 units of hydraulic loaders, to expire on February 15, 1979, and whose validity was extended to October 16, 1979. three (3) units of hydraulic loaders were delivered to petitioner on March 16, 1979 for which FEBTC paid Ekman P114,000, and which amount Rodzssen paid FEBTC before the expiry date of the LC. The remaining 2 units valued at P76,000 were readily received by Rodzssen before the expiry date of LC, FEBTC paid Ekman the amount of P76,000. But upon demand by FEBTC, Rodzssen refused to pay without any valid reason. FEBTC then filed an action for the payment by Rodzssen plus interest. Rodzssen defended that FEBTC had no cause of action since there was a breach of contract on the part of FEBTC who in bad faith paid Ekman, knowing that the 2 units of hydraulic loaders had been delivered to Rodzssen after the expiry date of the LC. Rodzssen offered to return to FEBTC the 2 units of hydraulic loaders which FEBTC refused. The RTC rendered judgment in favor of herein respondent, stating that upon delivery by Ekman of the loaders, Rodzssen became liable for the payment of the units. In the honest belief that it was still under obligation to, and upon presentation of necessary documents by Ekman, FEBTC was in good faith in paying Ekman. The RTC further noted that Rodzssens offer to return the 2 units to FEBTC was made only 3 years after it received the goods and when FEBTC pressed for the payments. Is s u e s : Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled Whether or not the petitioner was liable to respondent. Ruling: Clearly the bank paid Ekman when the former was no longer bound to do so under the subject LC. Records show that respondent paid Ekman for the last 2 loaders, five months after the expiration of the LC and even informed petitioner of the cancellation of the LC and credited P22800 to the account of petitioner, which represented the marginal deposit which petitioner had been required to put up for the unnegotiated portion of the LC. The subject LC had become invalid upon the lapse of the period fixed therein. Thus, respondent should not have paid Ekman since it was not obliged to do so. Of no moment was Ekmans presentation of all the documents necessary for collection as the LC had already expired and had in fact been cancelled. FEBTCs right to seek recovery from petitioner is anchored not upon the inefficacious LC, but on Article 2142 of the Civil Code, which reads, Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other, as in this case, and their rights and obligations may be determined equitably under the law proscribing unjust enrichment. RAMON L. ABAD vs. HON. COURT OF APPEALS & THE PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK

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Facts : On October 31, 1963, TOMCO, Inc., applied for and was granted by the Philippine Commercial and Industrial Bank a domestic letter of credit for in favor of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the machinery. After making the required marginal deposit, TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank, with the obligation "to hold the same in storage" as property of PCIB, with a right to sell the same for cash provided that the entire proceeds thereof are turned over to the bank, to be applied against acceptance(s) and any other indebtedness of TOMCO, Inc. In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, petitioner Ramon Abad signed an undertaking entitled, "Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby he promised to pay the obligation jointly and severally with TOMCO, Inc. Except for TOMCO's P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the letter of credit. Consequently, the bank sued TOMCO, Inc. and Abad. TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this amount should have been deducted from its principal obligation, leaving a balance of P52,000 only, on which the bank should have computed the interest, bank charges, and attorney's fees. Is s u e : Whether or not the marginal deposit in the possession of the bank should first be deducted from its principal indebtness before computing interest and other charges Ruling: The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It is a collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit which the importer paid to the bank. METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM vs. HON. REYNALDO B. DAWAY AND MAYNILAD WATER SERVICES INC. Facts : On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services. Maynilad undertook to pay consession fees, consisting mostly of paying loans of petitioner. In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000. In 2000, Maynilad wanted to recover its foreign currency losses due to the depreciation of the Philippine Peso. It was unheeded by MWSS, thus, Maynilad issued a Force Majeure Notice in 2001, which effectively stopped the concession payments. This led to arbitration between MWSS and Maynilad. They agreed to new terms. However, in 2002, Maynilad served a notice of Event of Termination, citing failure of MWSS to comply with the agreed arbitration terms. MWSS contested such Notice of Termination and was awarded by the Appeals panel. Thus, MWSS sent a written notice that it was it was drawing on the Irrevocable Standby Letter of Credit (IRLC) and thereby demanded payment in the amount of US$98,923,640.15.

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Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation. The rehabilitation court (Respondent RTC) ten issued an order staying the enforcement of claims (including the IRLC) and stopping payment of liabilities, kasi nga under rehabilitation. It effectively stopped the commencing process of payment by the bank to MWSS. Thus the petition. MWSS argues that IRLC is an asset of the bank and not of Maynilads, thus should not be under corporate rehabilitation. It cannot be considered a claim under the purview of the stop order by the RTC. Maynilad on the other hand argues that the order of the RTC is correct; that it never claimed that the IRLC is part of its property; the more important issue is not whether the IRLC is part of it assets, but whether MWSS violated stop order; that the publication of the order covers not only the assets of MWSS but also all affected by the proceedings, such order being an in rem proceeding. Is s u e : Whether or not Daways order is GADALEJ in issuing the stop order and considering the IRLC as part or property of the estate of Maynilad subject to rehabilitation. Ruling: Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilads own admission it is not. Further, 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. 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. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case. As held in Feati Bank & Trust Company v. Court of Appeals, the concept of guarantee vis--vis the concept of an irrevocable letter of credit is inconsistent with each other. The guarantee theory destroys the independence of the banks 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 guarantors 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. 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. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and 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. TRANSFIELD PHILIPPINES Vs. LUZON HYDRO ELECTRIC CORP. Facts :

11
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. 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 fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee. In the meanwhile, 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. LHC invoked the independence principle. On the other hand, Transfield claims fraud on the part of LHC on calling the stand-by letters of credit. Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be affected by the main contract upon which it rests. affect the obligation of the bank to pay the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract which states that all issues between the parties must be resolved first before LHC can call on the stand-by LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.

BANK OF COMMERCE vs. TERESITA S. SERRANO Facts : Bank of Commerce is a private domestic banking institution. Teresita S. Serrano is the General Manager and Treasurer of Via Moda International, Inc., a domestic business entity primarily engaged in the import and export of textile materials and fabrics. Via Moda International obtained an export packing loan from Bank of Commerce secured by a Deed of Assignment over Irrevocable Transferable Letter of Credit. Serrano executed in favor of BOC a promissory note and then opened a deposit account for the proceeds of the said loan. BOC issued to Via Moda an irrevocable letter of credit for the purchase and importation of fabric and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, respondent executed Trust Receipt. Under the terms of the trust receipt, Via Moda agreed to hold the goods in trust for petitioner as the latters property and to sell the same for the latters account. In case of sale, the proceeds are to be remitted to the bank as soon as it is received. Said proceeds are to be applied to the relative acceptances or in the alternative, to return the goods in case of non-sale. The goods covered by the trust receipt were shipped by Via Moda to its consignee who sent an Export Letter of Credit issued by the Bank of New York, in favor of BOC. The proceeds of the entrusted goods sold were not credited to the trust receipt but, were applied by the bank to the

Is s u e : Whether or not it is only the issuing bank that may invoke the independence principle Whether or not there is a necessity of resolving first any dispute by the parties before the beneficiary is entitled to call on the letter of credit

Ruling: Following the independence principle, even granting that there is still issue to be resolved arising from the turn-key project. This issue is not supposed to

12
principal, penalties and interest of the export packing loan. Petitioner then sent a demand letter to Via Moda to pay the amount plus interest and penalty charges, or to return the goods covered by Trust Receipt. Since the demand was not heeded, respondent was charged with the crime of estafa under Article 315 (b) of the Revised Penal Code in relation to Presidential Decree No. 115. Is s u e : Whether or not the respondent can be held criminally liable if there was actual payment but such was applied to the principal and not to the trust receipt Ruling: A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. There was no misappropriation or conversion by the respondent of the proceeds of the sale in the goods, subject of the trust receipt since the proceeds were actually received by petitioner but the latter applied the same to Via Modas other LAND BANK OF THE PHILIPPINES vs. MONET'S EXPORT AND MANUFACTURING CORP., VICENTE V. TAGLE, SR. and MA. CONSUELO G. TAGLE Facts : On June 25, 1981 petitioner Land Bank of the Philippines and respondent Monet's Export and Manufacturing Corporation executed an Export Packing Credit Line Agreement under which the bank gave Monet a credit line, secured by the proceeds of its export letters of credit, promissory notes, a continuing guaranty executed by respondent spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle and a third-party mortgage executed by one Pepita C. Mendigoria. Land Bank renewed and amended this credit line agreement several times until it reached a ceiling of P5 million. Monet's obligation under the Agreement had swelled to P11,464,246.19. Since Monet failed to pay despite demands, the bank filed a collection suit against Monet and the Tagles. In their answer, Monet and the Tagles claimed that Land Bank had refused to collect the receivables on Monet's export letter of credit against Wishbone Trading Company of Hong Kong while making an unauthorized payment on its import letter of credit. This damaged Monet's business interests since it ran short of funds to carry on with its usual business. In other words, Land Bank mismanaged its client's affairs under the Agreement. Is s u e : Whether or not Land Bank's motion to reopen the hearing to allow it to present the bank's updated Consolidated Billing Statement that reflects respondents Monet and the Tagles' remaining indebtedness to it should be allowed. Ruling: obligations under the export packing loan. It further stated that such application of payment to another obligation was done by petitioner on its own and should not create a criminal liability on the part of respondent who did not take part nor had any knowledge thereof. It is on this premise that the respondent was acquitted of the crime charged.

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The bank shloud present the promissory note to establish the scope of the debtor's primary obligations and a computation of interests, charges, and penalties based on its terms. It must then show by the entries in its record how much it had actually been paid. This will in turn establish how much the borrower still owes it. The bank does not have to present all the receipts of payment it issued to all its clients during the entire year, thousands of them, merely to establish the fact that only five of them, rather than ten, pertains to the borrower. The original documents need not be presented in evidence when it is numerous, cannot be examined in court without great loss of time, and the fact sought to be established from them is only the general result. Monet and the Tagles can of course dispute the bank's billing statements by proof that the bank had exaggerated what was owed it and that Monet had made more payments than were reflected in those statements. They can do this by presenting evidence of those greater payments. Notably, Monet and the Tagles have consistently avoided stating in their letters to the bank how much they still owed it. But, ultimately, it is as much their obligation to prove this disputed point if they deny the bank's statements of their loan accounts. The bank's motion for reconsideration, asking for an opportunity to present evidence of the status of the loans, opened up a chance for the RTC to abide by what the Court required of it. Therefore it should be remanded for reception of such evidence as may be needed to determine the actual amount of indebtedness of respondents Monet's Export and Manufacturing Corp. and the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle and adjudicate petitioner Land Bank of the Philippines' claims as such evidence may warrant.

14 TRUST RECEIPT
FERNANDO ONG vs. COURT OF APPEALS Facts : Fernando Ong obtained and received from Tramat Mercantile Inc., several units of machineries, in trust, for the purpose of displaying and selling the machineries for cash under the express obligation on the part of Ong of turning over to said Tramat Mercantile Inc. the proceeds from the sale thereof if sold or of returning to the latter the said goods if not sold. Ong allegedly failed to turn over the proceeds of the sale or to return the goods under the terms of their covenant. Thereafter, a case for Estafa was filed against Fernando Ong. Also, after a few months, Tramat Mercantile Inc. filed a complaint against Ong for collection for sum of money. The parties entered into a compromise agreement to settle the claim in said civil case. The trial court rendered a judgment approving the said compromise agreement. Then Ong, on the basis of the said agreement, moved for the dismissal of the criminal complaint charged against him on the ground of novation of the contract between him and Tramat Mercantile Inc. Is s u e : Whether or not the compromise agreement in the civil case novated the contract embodied in the trust receipts on which the information in the criminal case was based in as much as there was a change of object or principal conditions Ruling: The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it. SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA vs. INSULAR BANK OF ASIA AND AMERICA Facts : Spouses Vintola applied for and were granted a domestic letter of credit by the Insular Bank of Asia and America (IBAA). The Letter of Credit authorized the bank to negotiate for their account drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. VINTOLAS received from Stalin Tan the puka and olive shells and executed a Trust Receipt agreement with IBAA. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's property with liberty to sell the same for its account, " and "in case of sale" to turn over the proceeds. Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS. The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for their own personal use and benefit the aforesaid goods. The trial court acquitted the VINTOLAS of the offense charged. IBAA commenced a civil action to recover the value of the goods. The court dismissed the case holding that the complaint was barred by the judgment of acquittal in the criminal case. Is s u e : Whether or not acquittal from criminal offense extinguish civil liability? Ruling: A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a

15
loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. "It secures an indebtedness and there can be no such thing as security interest that secures no obligation." IBAA did not become the real owner of the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor. The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared that the facts from which the civil action might arise, did not exist, for, it will be recalled that the decision of acquittal expressly declared that "the remedy of the Bank is civil and not criminal in nature." The VINTOLAS are liable ex contractu for breach of the Letter of Credit Trust Receipt, whether they did or they did not "misappropriate, misapply or convert" the merchandise as charged in the criminal case. Their civil liability does not arise ex delicto, the action for the recovery of which would have been deemed instituted with the criminal-action (unless waived or reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist would have extinguished the civil action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed regardless of the result of the latter. TRINIDAD RAMOS vs. THE HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES Facts : The accused filed with Philippine National Cooperative Bank four applications for letters of credit. Among the papers filed for the issuance of the domestic letters of credit were commercial invoices of the different suppliers of the merchandise sought to be purchased. The different suppliers then drew sight drafts against the applicant payable to the order of the PNCB. The PNCB then drew its own drafts against the accused as the buyer of the merchadise and which drafts were accepted by the accused also on the same dates of the respective applications. After such acceptance, the corresponding trust receipts were signed by the accused also on the same dates of the respective applications. No payments were made excepting a partial payment of P3,900.00, inclusive of interests and another partial payment of P2,000.00 made on the same letter of' credit. Trinidad Ramos pleads for acquittal on the proposition that the factual predicate on which her conviction is laid is chiefly comprised of speculations, conjectures and presumptions without substantial and actual support in the evidence. She asserts that it behooved the prosecution, which had charged her with estafa under Article 315 prove the essential elements thereof. She contends, in her case that there is no adequate proof of her receipt of the goods subject of the trust receipts in question or of her having paid anything on account thereof or in connection therewith. Is s u e : Whether or not commercial invoices are sufficient proof of delivery that is necessary in order for conviction for estafa could lie Ruling: The assailed factual findings as to the receipt of the merchandise and the damage sustained by the Bank cannot stand. The proofs are indeed inadequate on these propositions of fact. It is difficult to accept the prosecution's theory that it has furnished sufficient proof of delivery by the introduction in evidence of the commercial invoices attached to the applications for the letters of credit and of the trust receipts. The invoices are actually nothing more than lists of the items sought to be purchased and their prices; and it can scarcely be believed that goods worth no mean sum actually

16
transferred hands without the unpaid vendor requiring the vendee to acknowledge this fact in some way, even by a simple signature on these documents alone if not in fact by the execution of some appropriate document, such as a delivery receipt. The trust receipts do not fare any better as proofs of the delivery to Ramos of the goods. Except for the invoices, an documents relating to each trust receipt agreement, including the trust receipts themselves, appear to be standard Bank forms accomplished by the Bank personnel, and were all signed by Ramos in one sitting, no doubt with a view to facilitating the pending transactions between the parties. If, as she claims, Ramos was made to believe that bank usage or regulations require the signing of the papers in this way, i.e., on a single occasion, there was neither reason nor opportunity for her to question the statement therein of receipt of the goods since it was evidently assumed that delivery to her of the goods would shortly come to pass. ALLIED BANKING CORPORATION vs. ORDOEZ Facts : Philippine Blooming Mills, a manufacturer of steel and steel products, not in the business of selling mag-ar branch dolomites or high fired refractory sliding nozzle bricks applied for the issuance of commercial letters of credit with Allied Banking Corporation to finance the purchase of said items. Allied Banking Corporation, in turn, issued an irrevocable letter of credit in favor of Nikko Industry Co. Ltd. by virtue of which Nikko Industry Co. Ltd drew four (4) drafts which were accepted by Philippine Blooming Mills and duly honored and paid by Allied Banking Corporation . To secure the payment and in consideration of the transfer by Allied Banking Corporation of the possession of the goods to Philippine Blooming Mills , the latter as entrustee executed four (4) trust receipt agreements acknowledging the formers ownershiop over the goods and its obligation to turn over the proceeds of the sale of the goods if sold, or to return the same if unsold within the period stated. Despite repeated demands, Philippine Blooming Mills failed and refused to either turn over the proceeds of the goods or to return the same. When Allied Banking Corporation filed a criminal complaint for violation of PD 115, the fiscal found a prima facie case and file the information with the court. On appeal, the DOJ Secretary, Neptali Gonzales, held that the raw materials for manufacture of goods to be ultimately sold are the only proper objects of Trust Receipts and the failure to remit the proceeds of such will constitute a violation of PD 115. In another motion for reconsideration filed by Philippine Blooming Mills , the new DOJ Secretary Seafrey Ordoez, rectified the decision of his predecessor because of Philippine Blooming Mills clarification that the goods subject of the trust receipt agreements were used for patching purposes over the surface of the furnaces and nozzle bricks which are insulating materials in the lower portion of the ladle which do not form part of the steel product itself and held that since the goods covered by the trust receipt agreements and subject matter of those proceedings are to be utilized in the operation of the equipment and machineries of the corporation, they could have not been contemplated as being covered by PD 115. In an attempt to escape criminal liability, private respondent claims P.D. 115 covers goods which are ultimately destined for sale and not goods for use in manufacture and that at the time of PBMs application for the issuance of the LCs, it was not represented to the petitioner that the items were intended for sale, hence, there was no deceit resulting in a violation of the trust receipts which would constitute a criminal liability. Is s u e : Whether or not P.D. 115 covers only goods which are ultimately destined for sale and not goods for use in manufacture Ruling: the wording of Section 13 covers failure to turn over the proceeds of the sale of the entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts. Private respondent claims that at the time of PBMs application for the issuance of the LCs, it was not represented to the petitioner that the items were intended for sale, hence, there was no deceit

17
resulting in a violation of the trust receipts which would constitute a criminal liability. Again, this contention cannot be upheld. The non-payment of the amount covered by a trust receipt is an act violative of the entrustees obligation to pay. There is no reason why the law should not apply to all transactions covered by trust receipts, except those expressly excluded. The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries and supplies used in manufacturing operations. We are perplexed by the statements in the assailed DOJ resolution that the goods subject of the instant case are outside the ambit of the provisions of PD 115 albeit covered by trust receipt agreements ( 17 February 1988 resolution) and that not all transactions covered by trust receipts may be considered as trust receipt transactions defined and penalized under P.D. 115 (11 January 1988 resolution). A construction should be avoided when it affords an opportunity to defeat compliance with the terms of a statute. The penal provision of P.D. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold. PHILIPPINE NATIONAL BANK vs. HON. GREGORIO G. PINEDA and TAYABAS CEMENT COMPANY, INC Facts : In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land known as the La Vista property. Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment. Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed a Surety Agreement and Covenant. The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings. Thus, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. In the meantime, the personal accounts of the spouses Arroyo, which included another loan secured by a real estate mortgage over parcels of agricultural land had likewise become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor. At the auction sale, PNB was the highest bidder however, when said property was about to be awarded to PNB, the representative of the mortgagor-spouses objected and demanded from the PNB the difference between the bid price and the indebtedness of spouses on their personal account. To remedy the situation, PNB requested to proceed with the sale of the subject real properties to satisfy not only the amount owed by the spouses Arroyos on their personal account but also the amount owed by said spouses as sureties of TCC. Said petition was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta. Which was granted thru respondent Judge Gregorio Pineda, who issued a restraining order and, granted a writ of preliminary injunction. Is s u e : Whether or not TCCs liability has been extinguished by the repossession of PNB of the imported cement plant machinery and equipment Ruling:

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It must be remembered that PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. 20 As aforesaid, the repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished. PEOPLE OF THE PHILIPPINES and ALLIED BANKING CORPORATION vs. HON. JUDGE DAVID G. NITAFAN and BETTY SIA ANG Facts : Petitioner Allied banking Corporation (ABC) charged private respondent, Betty Sia Ang, for estafa for willfully, unlawfully and feloniously defraud ABC. Private respondent received a trust from ABC amounting to P398,000.00 covered by a domestic letter of credit, under the express obligation to sell the same and account for the proceeds of the sale, if sold, or to return the merchandise , if not sold. Upon demand, private respondent paid only P283,115.78. Betty Sia Ang filed a motion to quash the information on the grounds that the facts charged do not constitute an offense. Respondent judge granted the motion to quash. Is s u e : Whether or not an entrustee in a trust receipt agreement who fails to deliver the proceeds of the sale or to return the goods if not sold to the entruster-bank is liable for the crime of estafa? Ruling: The factual circumstances in the present case show that the alleged violation was committed sometime in 1980 or during the effectivity of P.D. 115. The failure, therefore, to account for the P114,884.22 balance is what makes the accused-respondent criminally liable for estafa. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the trust receipt itself. (Vintola v. Insular Bank of Asia and America, 151 SCRA 578 [1987]) That second feature is what provides the much needed financial assistance to our traders in the importation or purchase of goods or merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank. (Samo v. People, supra). The title of the bank to the security is the one sought to be protected and not the loan which is a separate and distinct agreement. The Trust Receipts Law 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 or not. The law does not seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt. Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held in trust for

19
entruster-banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties involved are the main thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like Batas Pambansa Blg. 22, punishes the act "not as an offense against property, but as an offense against public order. . . ." The misuse of trust receipts therefore should be deterred to prevent any possible havoc in trade circles and the banking community (citing Lozano v. Martinez, 146 SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public interest that the law now specifically designates a breach of a trust receipt agreement to be an act that "shall" make one liable for estafa. execution, submitting that while it may not have absolute ownership over the properties, still it has right, interest and ownership consisting of a security title which attaches to the properties. Petitioner differentiates a trust receipt, which is a security for the payment of the obligations of the importer, from a real estate mortgage executed as security for the payment of an obligation of a borrower. Petitioner argues that in the latter the ownership of the mortgagor may not necessarily have any bearing on its acquisition, whereas in the case of a trust receipt the acquisition of the goods by the borrower results from the advances made by the bank. It concludes that the security title of the bank in a trust receipt must necessarily be of the same or greater extent than the nature of the security arising from a real estate mortgage. Petitioner maintains that it is a preferred claimant to the proceeds from the foreclosure to the extent of its security title in the goods otherwise its security title will become useless. Is s u e : Whether or not the entruster has a better right as against creditors over the proceeds of the foreclosure Ruling: Interasia Container Industries, Inc. (INTERASIA), was embroiled in three (3) labor cases which were eventually resolved against it. Thus in NLRC Cases monetary awards consisting of 13th-month pay differentials and other benefits were granted to complainants. Subsequently the monetary award was recomputed to include separation pay occasioned by the closure of operations of INTERASIA. With the finality of the three (3) decisions, writs of execution were issued. The Sheriff levied on execution personal properties located in the factory of INTERASIA Petitioner filed an Affidavit of Third-Party Claim asserting ownership over the seized properties on the strength of trust receipts executed by INTERASIA in its favor. As a result, the Sheriff suspended the public auction sale. But the Labor Arbiter denied the claim of petitioner and directed the Sheriff to proceed with the levy of the properties. Petitioner then filed separate appeals to the NLRC. Petitioner raises issue on the extent of its security title over the properties subject of the levy on We cannot subscribe to NLRC's simplistic interpretation of trust receipt arrangements. In effect, it has reduced the Trust Receipt Agreements to a pure and simple loan transaction. Sec. 12 of P.D. No. 115 assures the entruster of the validity of his claim against all creditors Sec. 12. Validity of entruster's security interest as against creditors. - The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. From the legal and jurisprudential standpoint it is clear that the security interest of the entruster is not merely an empty or idle title. To a certain extent, such interest, such interest becomes a "lien" on the goods because the entruster's advances will have to be settled first before the entrustee can

PRUDENTIAL BANK vs. NATIONAL LABOR RELATIONS COMMISSION, CECILIA ORQUELLO, et al., ZENAIDA UCHI, et al., ALU- INTERASIA CONTAINER INDUSTRIES, INC., and RAUL REMODO Facts :

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consolidate his ownership over the goods. A contrary view would be disastrous. For to refuse to recognize the title of the banker under the trust receipt as security for the advance of the purchase price would be to strike down a bona fide and honest transaction of great commercial benefit and advantage founded upon a well-recognized custom by which banking credit is officially mobilized for manufacturers and importers of small means. The NLRC argues that inasmuch as petitioner did not cancel the Trust Receipt Agreements and took possession of the properties it could not claim ownership of the properties. We do not agree. Significantly, the law uses the word "may" in granting to the entruster the right to cancel the trust and take possession of the goods. Consequently, petitioner has the discretion to avail of such right or seek any alternative action, such as a third-party claim or a separate civil action which it deems best to protect its right, at anytime upon default or failure of the entrustee to comply with any of the terms and conditions of the trust agreement. METROPOLITAN BANK AND TRUST COMPANY vs. TONDA Facts : Spouses Joaquin G. Tonda and Ma. Cristina Tonda applied for and were granted commercial letters of credit by Metrobank for a period of 8 months in connection with the importation of raw textile materials to be used in the manufacturing of garments. The Tondas acting both in their capacity as officers of Honey Tree Apparel Corporation and in their personal capacities, executed eleven trust receipts to secure the release of the raw materials to HTAC. The Tondas failed to comply with their obligations stated in the trust receipts agreements despite repeated demands thereof (to account to Metrobank the goods and/or proceeds of sale of the merchandise, subject of the trust receipts. Consequently, private respondents were charged with violation of PD 115 (Trust Receipts Law) and estafa. Respondent Joaquin together with a certain Wang Tien En subsequently entered into a loan restructuring agreement with Metrobank, however the parties were unable to arrive at a mutually agreeable loan restructured agreement. Subsequently, respondent Joaquin and wang deposited 2.8M to an account to pay the entire principal of the outstanding trust receipts account to be applied anytime to the payment of the TR/LC Account upon the implementation by the parties of the terms of the restructuring.

Is s u e : Whether or not Metrobank can validly apply the amount deposited by the petitioners as payment of the principal obligation under the trust receipts agreement inspite of the failure of the parties to agree upon a restructurin agreement.

Ruling: The acts of the respondents constitute the crime of estafa as contemplated in PD 115 and the RPC because they failed to return the goods covered by the trust receipts or return the proceeds of the sale of the said goods. The handwritten note by the Metrobank officer acknowledging receipt of the checks made no reference to the Tondas trust receipt obligations, and it cannot be presumed that it was anything more than an ordinary bank deposit. The CA ruled that in making the deposit, the Tondas are entitled to set off by way of compensatin their obligations to MetroBank. However, Art 1288 of the Civil Code provides that compensation shall not be proper when one of the debts consists in civil liability arising from a penal offense as in the case at bar. If one of the debts consists in civil liability arising from a penal offense, compensation would be improper and inadvisable because the satisfaction of such obligation is imperative MELVIN COLINARES and LORDINO VELOSO vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES Facts :

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Petitioners applied for a commercial letter of credit with the Philippine Banking Corporation (PBC) in favor of CM builders for the purchased of various construction supplies. PBC approved the letter of credit to cover the full invoice value of the goods and subsequently signed a prom-forma trust receip0t as security. PBC wrote a demand letter to petitioner demanding the amount be paid within seven days but instance of complying they confessed that they cant pay and requested a grace period to settle the account. Petitioners proposed to modify the payment of the loan. Petitioners were charged with estafa. During trial, petitioner Veloso insisted that the transaction was a clean loan. He and petitioner Colinares signed the documents without reading the fine print, and learning that the trust receipt was merely a formality. The trial court render a decision convicting the petitioner estafa. The trial court considered the transaction between PBC and Petitioners as a trust receipt transaction under Section 4, P.D. No. 115. Petitioners appealed from the judgment to the Court of Appeals and the CA modified the judgment of the trial court by increasing the penalty. Is s u e : Whether of not the petitioner were properly charged, tried and convicted for violation of PD 115 in relation to article 315 of the RPC? Ruling: A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was a simple loan, not a trust receipt agreement. 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. 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. Petitioners 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.

PHILIPPINES BANK OF COMMUNICATIONS vs. HON. COURT OF APPEALS and FILIPINAS TEXTILE MILLS, INC.

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Facts : Petitioner sought the payment representing the proceeds or value of various textile goods, the purchase of which was covered by irrevocable letters of credit and trust receipts executed by petitioner with private respondent Filipinas Textile Mills as obligor; which, in turn, were covered by surety agreements executed by private respondent Bernardino Villanueva and Sochi Villanueva. In their Answer, private respondents admitted the existence of the surety agreements and trust receipts but countered that they had already made payments on the amount demanded and that the interest and other charges imposed by petitioner were onerous. Petitioner filed a Motion for Attachment contending that violation of the trust receipts law constitutes estafa, thus providing ground for the issuance of a writ of preliminary attachment and further claimed that attachment was necessary since private respondents were disposing of their properties to its detriment as a creditor. Is s u e : Whether or not the allegations for must be embezzlement, misappropriation nor incipient fraud may be presumed to establish an order for a writ of preliminary attachment to be issued. Ruling: The Motion for Attachment filed by petitioner and its supporting affidavit did not sufficiently establish the grounds relied upon in applying for the writ of preliminary attachment. Petitioner cannot insist that its allegation that private respondents failed to remit the proceeds of the sale of the entrusted goods nor to return the same is sufficient for attachment to issue. There is absence of factual allegations as to how the fraud alleged by petitioner was committed. Such fraudulent intent not to honor the admitted obligation cannot be inferred from the debtor's inability to pay or to comply with the obligations. On the other hand, as stressed, above, fraud may be gleaned from a preconceived plan or intention not to pay. This does not appear to be so in the case at bar. In fact, it is alleged by private respondents that out of the total P419,613.96 covered by the subject trust receipts, the amount of P400,000.00 had already been paid, leaving only Palawan Lumber Manufacturing Corporation, 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. On the same date, South City Homes, Inc. 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. Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six (6) Drafts in its own favor, payable thirty (30) days after sight, charged to the account of Fortune Motors 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. P19,613.96 as balance. Hence, regardless of the arguments regarding penalty and interest, it can hardly be said that private respondents harbored a preconceived plan or intention not to pay petitioner. SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING CORPORATION vs. BA FINANCE CORPORATION Facts : Prior to the transactions covered by the subject drafts and trust receipts, defendant-appellant Fortune Motors Corporation (Phils.) has been availing of the credit facilities of plaintiff-appellant BA Finance Corporation. 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.

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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. Since the defendants-appellants failed to settle their outstanding account with plaintiff-appellant, the latter filed a complaint for a sum of money with prayer for preliminary attachment. Defendants filed a Motion to Dismiss. Therein, they alleged that conventional subrogation effected a novation without the consent of the debtor (Fortune Motors Corporation) and thereby extinguished the latters liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to immediately file a complaint for a sum of money as the remedy of the entruster is an action for specific performance; that the suretyship agreements are null and void for having been entered into without an existing principal obligation; and that being such sureties does not make them solidary debtors. Is s u e : Whether or not there was a novation of the obligation so as to extinguish the liability of the sureties Ruling: Petitioners next posit that a novation, as a result of the assignment of the drafts and trust receipts by the creditor (CARCO) in favor of respondent BAFC without the consent of the principal debtor (Fortune Motors), extinguished their liabilities. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. As a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. Petitioners obligations were not extinguished. In assignment, the debtors consent is not essential for the validity of the assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make (Article 1626, Civil Code). Article 1626 also shows that payment of an obligation which is already existing does not depend on the consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall already be made to the new creditor from the time the debtor acquires knowledge of the assignment of the obligation. LEE vs. COURT OF APPEALS Facts : On 15 November 1985, a complainant for sum of money was filed by the International Corporate Bank, Inc. against Sacoba Manufacturing Corp., Pablo Gonzales Jr., and Tomas Gonzales who, in turn, filed a third party complaint against Alfa Integrated Textile Mills (ALFA), Ramon C. Lee (ALFA's president) and Antonio DM. Lacdao (ALFA's vice president) on 17 March 1986. On 17 September 1987, Lee and Lacdao filed a motion to dismiss the third party complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order dated 27 June 1988. On 18 July 1988, Lee and Lacdao filed their answer to the third party complaint. Meanwhile, on 12 July 1988, the trial issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of Lee and Lacdao's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. In a manifestation dated 22 July 1988, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. On 4 August 1988, the trial court issued an order advising Sacoba Manufacturing, et. al. to take the appropriate steps to serve the summons to ALFA. On 16 August 1988, Sacoba Manufacturing, et. al. filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted on 17 August 1988. On 12 September 1988, Lee and Lacdao filed a motion for reconsideration submitting that the Rule 14, section 13 of the Revised Rules of Court is not applicable

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since they were no longer officers of ALFA and Sacoba Manufacturing, et. al. should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA. On 2 January 1989, the trial court upheld the validity of the service of summons on ALFA through Lee and Lacdao, thus, denying the latter's motion for reconsideration and requiring ALFA to file its answer through Lee and Lacdao as its corporate officers. On 19 January 1989, a second motion for reconsideration was filed by Lee and Lacdao reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their second motion for reconsideration, Lee and Lacdao attached thereto a copy of the voting trust agreement between all the stockholders of ALFA (Lee and Lacdao included), on the one hand, and the DBP, on the other hand, whereby the management and control of ALFA became vested upon the DBP. On 25 April 1989, the trial court reversed itself by setting aside its previous Order dated 2 January 1989 and declared that service upon Lee and Lacdao who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. On 15 May 1989, Sacoba Manufacturing, et. al. moved for a reconsideration of the Order which was affirmed by the court in is Order dated 14 August 1989 denying Sacoba Manufacturing, et. al.'s motion for reconsideration. On 18 September 1989, a petition for certiorari was belatedly submitted by Sacoba Manufacturing, et. al. before the Court of Appeals which, nonetheless, resolved to give due course thereto on 21 September 1989. On 17 October 1989, the trial court, not having been notified of the pending petition for certiorari with the appellate court issued an Order declaring as final the Order dated 25 April 1989. Sacoba Manufacturing, et. al. in the said Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the same for failure to prosecute. Subsequently, on 25 October 1989 Sacoba Manufacturing, et. al. filed a motion for reconsideration on which the trial court took no further action. On 19 March 1990, after Lee and Lacdao filed their answer to Sacoba Manufacturing, et. al.'s petition for certiorari, the appellate court rendered its decision, setting aside the orders of trial court judge dated 25 April 1989 and 14 August 1989. On 11 April 1990, Lee and Lacdao moved for a reconsideration of the decision of the appellate court which resolved to deny the same on 10 May 1990. Lee and Lacdao filed the petition for certiorari. In the meantime, the appellate court inadvertently made an entry of judgment on 16 July 1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be deducted from the 15-day period to appeal. However, in its Resolution dated 3 January 1991, the appellate court set aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to the Supreme Court pursuant to the Supreme Court's ruling in the case of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. Is s u e : Whether the execution of the voting trust agreement by Lee and Lacdao whereby all their shares to the corporation have been transferred to the trustee deprives the stockholder of their positions as directors of the corporation. Ruling: Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, Lee and Lacdao ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. Lee and Lacdao ceased to be directors. Hence, the transfer of their shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholders of ALFA to the DBP is the essence of the subject voting trust agreement. Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stocks covered by the agreement to the DBP as trustee, the latter because the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, Lee and Lacdao can no longer be deemed to have retained their status as officers of ALFA which was the case

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before the execution of the subject voting trust agreement. There is no dispute from the records that DBP has taken over full control and management of the firm. PILIPINAS BANK vs. ONG Facts : On April 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent Alfredo T. Ong, applied for a domestic commercial letter credit with petitioner Pilipinas Bank (the bank) to finance the purchase of Air Dried, Dark Lauan sawn lumber. The bank approved the application and issued a Letter of Credit. To secure payment of the amount, BMC, through respondent Ong, executed two (2) trust receipts providing that it shall turn over the proceeds of the goods to the bank, if sold, or return the goods, if unsold, upon maturity on July 28, 1991 and August 4, 1981. On due dates, BMC failed to comply with the trust receipt agreement. On November 22, 1991, it filed with the Securities and Exchange Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of Suspension of Payments. On January 8, 1992, the SEC issued an order creating a Management Committee wherein the bank is represented. On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a Memorandum of Agreement (MOA) rescheduling the payment of BMCs existing debts. On November 27, 1992, the SEC rendered a Decision approving the Rehabilitation Plan of BMC as contained in the MOA and declaring it in a state of suspension of payments. However, BMC and respondent Ong defaulted in the payment of the obligations under the rescheduled payment scheme provided in the MOA. On April 1994, the bank filed a complaint charging respondents Ong and Leoncia Lim (as president and treasurer of BMC) with violation of the Trust Receipts Law (PD 115). The bank alleged that both respondents failed to pay their obligation under the trust receipt despite demand. The Court of Appeals renders its decision holding that the execution of the MOA constitutes novation which places petitioner bank in estoppel to insist on the original trust relation and constitutes a bar to the filing of any criminal information for violation of the trust receipts law. The Motion for Reconsideration was denied. Hence this Petition. Is s u e : Whether or not the MOA was a novation of the trust agreement between the parties. Ruling: Petition is DENIED, MOA novates the trust agreement. Mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes violation of PD 115. However, what is being punished by the law is 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. It bears emphasis that when the petitioner bank made a demand upon a BMC on February 11, 1994 to comply with its obligations under the trust receipts, the latter was already under the control of the Management Committee created by SEC. The Management Committee took custody of all BMCs assets and liabilities, including the red lauan lumber subject of trust receipts, and authorized their use in the ordinary course of business operations. Clearly, it was the Management Committee which could settle BMCs obligations. In Quinto vs. People, this Court held that there are two ways which could indicate the presence of novation, thereby producing the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together. If they cannot, they are incompatible and the latter obligation novates the first. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions. Contrary to petitioners contention, the MOA did not only reschedule BMCs debts, but more importantly, it provided principal conditions, which are incompatible with the trust agreement. The execution of the MOA extinguished respondents obligation under the trust receipts. Respondents liability, if any, would only be civil in nature since the trust receipts were transformed into mere loan documents after the execution of the MOA.

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offended party but also from acts other than those of the latter. LORENZO M. SARMIENTO, JR. and GREGORIO LIMPIN, JR Vs COURT OF APPEALS and ASSOCIATED BANKING CORP. 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 in favor of LS Parts Hardware and Machine Shop for the purchase of assorted scrap irons. The aforesaid application was approved, and plaintiff Bank issued Domestic Letter of Credit. Thereafter, a Trust Receipt was executed by defendant Limpin and Antonio Apostol. The defendants failed to comply with their undertaking under the Trust Receipt. Hence demands were made for them to comply with their undertaking. However, defendants failed to pay their account. A complaint for Violation of the Trust Receipt Law was filed against the defendants. Defendant Lorenzo Sarmiento, Jr. was, however, dropped from the Information while defendant Gregorio Limpin, Jr. was convicted. 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. Is s u e : Whether or not the offended partys (associated bank) claim for the civil liability, not having been expressly reserved by it, has been not only impliedly, but in fact expressly instituted already in criminal case, the information for which had been filed ahead and the proceedings conducted prior to the present civil case is procedurally barred. Ruling: Jurisprudence instructs that such reservation may not necessarily be express but may be implied which may be inferred not only from the acts of the In the present case, private respondents 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. 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. EDWARD ONG vs. COURT OF APPEALS Facts : Petitioner Edward Ong, representing ARMAGRI International Corporation (ARMAGRI), executed two trust receipts acknowledging receipt from the Solid Bank Corp. of goods valued at P 2,532,500 and P 2, 050,000. In addition, he bounded himself to any increase or decrease of interest rate in case Central Bank floated rates and to pay any additional penalty until the trust receipts are fully paid. When the trust receipts became due and demandable, ARMAGRI failed to pay or deliver the goods to the Bank despite several demand letters. The trial court convicted Ong of two counts of estafa for violation of the Trust Receipts Law. Is s u e : Whether the appellant is guilty of two counts estafa for violation of the Trust Receipts Law. Ruling: Yes, he is guilty for failure by the entrustee to account for the goods received in trust constitutes estafa. The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of goods, or (2) return the goods covered by the trust receipts if the good are not sold. The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no

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requirement to prove intent to defraud. The Bank released the goods to ARMAGRI upon execution of the trust receipts and as part of the loan transactions of ARMAGRI. The Bank had a right to demand from ARMAGRI payment or at least a return of the goods. ARMAGRI failed tom pay or return the goods despite repeated demands by the Bank. It is well-settled doctrine long before the enactment of the Trust Receipts Law, that the failure to account, upon demand, for funds or property held in trust is evidence of conversion or misappropriation. Under the law, mere failure by the entrustee to account for the goods received in trust constitutes estafa. The Trust Receipts Law punishes dishonesty and abuse of confidence in the handling of money or goods to prejudice the public order. The mere failure to deliver proceeds of the sale or the goods if not sold constitutes a criminal offense that causes prejudice not only to the creditor, but also to the public interest. Evidently, the Bank suffered prejudice for neither money nor the goods were turned over the Bank. LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE vs. METROPOLITAN BANK & TRUST COMPANY Facts : Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of money against Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban and Manuel P. Lucente. Respondent alleged that petitioner corporation is engaged in the business of selling imported welding rods and alloys. It opened Commercial Letter of Credit with respondent bank to purchase various welding rods and electrodes from Perma Alloys, Inc., New York, U.S.A. Petitioner corporation put up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan. As an additional security, and as a condition for the approval of petitioner corporation's application for the opening of the commercial letter of credit, respondent bank required petitioners Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship Agreement in favor of respondent bank. Petitioner Lucente also executed a Deed of Assignment in favor of respondent bank to cover the amount of petitioner corporation's obligation to the bank. Upon compliance with these requisites, respondent bank opened an irrevocable letter of credit for the petitioner corporation. To secure the indebtedness of petitioner corporation, respondent bank required the execution of a Trust Receipt in an amount equivalent to the letter of credit, on the condition that petitioner corporation would hold the goods in trust for respondent bank, with the right to sell the goods and the obligation to turn over to respondent bank the proceeds of the sale, if any. If the goods remained unsold petitioner corporation had the further obligation to return them to respondent bank. Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof. Petitioner corporation defaulted in the payment of its obligation to respondent bank and failed to turn over the goods to the latter. Respondent bank demanded that petitioners, as entrustees, turn over the goods subject of the trust receipt which was turned over by the petitioners. The goods were sold at a public auction with respondent bank as the highest bidde but the proceeds of the auction sale were insufficient to completely satisfy petitioners' outstanding obligation to respondent bank, notwithstanding the application of the time deposit account of petitioner Lucente. Accordingly, respondent bank demanded that petitioners pay the remaining balance of their obligation. After petitioners failed to do so, respondent bank instituted the case to collect the said deficiency. Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not respondent bank has the right to recover any deficiency after it has retained possession of and subsequently effected a public auction sale of the goods covered by the trust receipt; (2) whether or not respondent bank is entitled to the amount of P3,000.00 as and for litigation expenses and costs of the suit; and (3) whether or not respondent bank is entitled to the award of attorney's fees. Is s u e : Whether or not the respondent had the right to claim the deficiency from petitioners notwithstanding the fact that the goods covered by

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the trust receipt were fully turned over to respondent. Ruling: A trust receipt is inextricably linked with the primary agreement between the parties. Time and again, we have emphasized that a trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a loan. Respondent bank's repossession of the properties and subsequent sale of the goods were completely in accordance with its statutory and contractual rights upon default of petitioner corporation. The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency after the proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments, and the satisfaction of the entrustee's indebtedness to the entruster. In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation's indebtedness to the respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect the deficiency. ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO vs. HOME BANKERS SAVINGS AND TRUST COMPANY Facts : Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust Co. for an Omnibus Credit Line. The bank notified RTMC of the grant of the said. On March 3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly and severally with RTMC for the payment of all RTMCs indebtedness to the bank. RTMC availed of the credit line by making numerous drawdowns, each drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of eleven (11) promissory notes. Despite the lapse of the respective due dates under the promissory notes and notwithstanding the banks demand letters, RTMC failed to pay its loans. Hence, the bank filed a complaint for sum of money against RTMC and Yujuico. RTMC and Yujuico contend that they should be absolved from liability. They claimed that although the grant of the credit line and the execution of the suretyship agreement are admitted, the bank gave assurance that the suretyship agreement was merely a formality under which Yujuico will not be personally liable. They argue that the importation of raw materials under the credit line was with a grant of option to them to turn-over to the bank the imported raw materials should these fail to meet their manufacturing requirements. RTMC offered to make such turn-over since the imported materials did not conform to the required specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which gutted down RTMCs premises. Is s u e : Whether or not the petitioners are not relieved of their obligation to pay their loan after they tried to tender the goods to the bank which refused to accept the same, and which goods were subsequently lost in a fire Ruling: It is clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as collateral. Trust receipts were executed by the parties to evidence this security arrangement. Simply stated, the trust receipts were mere securities. 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,

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petitioners cannot be relieved of their obligation to pay their loan in favor of the bank. JOSE C. TUPAZ IV and PETRONILA C. TUPAZ vs. THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS Facts : Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners') were Vice-President for Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El Oro Corporation'). El Oro Corporation had a contract with the Philippine Army to supply the latter with 'survival bolos. To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands (respondent bank') for two commercial letters of credit. Respondent bank granted petitioners' application and issued Letters of Credit. Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of respondent bank. Petitioner Jose C. Tupaz IV signed, in his personal capacity, a trust receipt corresponding to Letter of Credit and bound himself to sell the goods covered by the letter of credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold. In another letter of credit, petitioners signed in their capacities as officers of El Oro Corporation, a trust receipt corresponding to such Letter of Credit. Petitioners bound themselves to sell the goods covered by that letter of credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold. After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro Corporation, respondent bank paid the former. Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made several demands for payments but El Oro Corporation made partial payments only. El Oro Corporation replied to the demand for payment that it could not fully pay its debt because the Armed Forces of the Philippines had delayed paying for the survival bolos. Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115 or Trust Receipts Law (PD 115). Ruling: A corporation, being a juridical entity, may act only through its directors, officers, and employees. Debts incurred by these individuals, acting as such corporate agents, are not theirs but the direct liability of the corporation they represent. As an exception, directors or officers are personally liable for the corporation's debts only if they so contractually agree or stipulate. Petitioners signed below this clause as officers of El Oro Corporation. Thus, under petitioner Petronila Tupaz's signature are the words Vice-PresTreasurer and under petitioner Jose Tupaz's signature are the words Vice-PresOperations. By so signing that trust receipt, petitioners did not bind themselves personally liable for El Oro Corporation's obligation. As to the second issue, the rule is that where the civil action is impliedly instituted with the criminal action, the civil liability is not extinguished by acquittal. Respondent bank chose not to file a separate civil action to recover payment under the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil liability. His liability arose not from the criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex contractu). DEVELOPMENT BANK OF THE PHILIPPINES vs. PRUDENTIAL BANK Facts : In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent Prudential Bank in connection with its importation of 5,000 spindles for spinning Is s u e : Whether or not petitioners bound themselves personally liable for El Oro Corporation's debts under the trust receipts Whether or not petitioners' acquittal of estafa under Section 13, PD 115 extinguished their civil liability.

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machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering 'trust receipts' it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. DBP granted a foreign currency loan to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the 'trust receipts. Prudential Bank learned about DBP's plan for the overall rehabilitation of Litex. Prudential Bank notified DBP of its claim over the various items covered by the 'trust receipts' which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank and DBP acquired the foreclosed properties as the highest bidder. Prudential Bank wrote a letter to DBP reasserting its claim over the items covered by 'trust receipts' in its name and advising DBP not to include them in the auction. It also demanded the turn-over of the articles or alternatively, the payment of their value. DBP requested documents to enable it to evaluate Prudential Bank's claim which was provided by the latter. DBP informed Prudential Bank that its claim had been referred to DBP's legal department and instructed Prudential Bank to get in touch with its chief legal counsel. There being no concrete action on DBP's part, Prudential Bank, in a letter made a final demand on DBP for the turn-over of the contested articles or the payment of their value. Without the knowledge of Prudential Bank, however, DBP sold the Litex textile mill, as well as the machineries and equipments therein, to Lyon Textile Mills, Inc. (Lyon). Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money with damages against DBP. Is s u e : Whether or not the mortgagee has a right over the goods subject of the trust receipt agreement which was mortgaged by the entrustee

Ruling: The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085 of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article 2085 further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential Bank's demand. By its failure to pay or return them despite Prudential Bank's repeated demands and by selling them to Lyon without Prudential Bank's knowledge and conformity, DBP became a trustee ex maleficio. ALFREDO CHING vs. THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS- VILLAVERT,

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JUDGE EDGARDO SUDIAM; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES Facts : Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). PBMI, through petitioner, applied with the Rizal Commercial Banking Corporation (respondent bank) for the issuance of commercial letters of credit to finance its importation of assorted goods. Respondent bank approved the application, and irrevocable letters of credit were issued in favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust receipts as surety, acknowledging delivery of the goods. Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the proceeds thereof as soon as received, to apply against the relative acceptances and payment of other indebtedness to respondent bank. In case the goods remained unsold within the specified period, the goods were to be returned to respondent bank without any need of demand. Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and capable of identification" were respondent banks property. When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their value despite demands. Thus, the bank filed a criminal complaint for estafa against petitioner. Is s u e : Whether or not the officers of the corporation can be held civilly and criminally liable of estafa for violation of the trust receipts law Ruling: Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law. If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A necessary part of the definition of every crime is the designation of the author of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty. Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime. The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act. Moreover, all parties active in promoting a crime, whether agents or not, are principals.

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Whether such officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact. In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor.