Trust Receipts Law (Pres. Decree No.

115) Trust Receipts (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of e ecution or authentication shall be necessary to the validity of a trust receipt (PD 115, Section 3(j) ) ! document in w"c is e pressed a security transaction# whereunder the lender# having no prior title in the goods on which the lien is to be given# and not having possession w"c remains in the borrower# lends his money to the borrower on security of goods# which the borrower is privileged to sell clean of the lien on the agreement to pay all or part of the proceeds of the sale to the lender (Blacks law dictionary [1968 edition ,!"1683) Trust Receipts Transaction $t is any transaction between the entruster and entrustee% &. 'hereby the entruster who owns or holds absolute title or security interests over certain specified goods# documents or instrument# releases the same to the possession of entrustee upon the latter(s e ecution of a TR agreement. ). 'herein the entrustee binds himself to hold the designated goods in trust for the entruster and# in case of default# to sell such goods# documents or instrument with the obligation to turn over to the entruster the proceeds to the e tent of the amount owing to it or to turn over the goods# documents or instrument itself if not sold. (Sec" #, P"D" 115) Purpose of the Law &. To safeguard commercial transactions ). To offer additional layer of security to the lending ban* +. To regulate trust receipt transactions in order to assure the protection of the rights and the enforcement of the obligations of the parties involved Parties to a Trust Receipt 1. Entruster , lender"financier , person holding title over the goods# documents or instruments subject of a trust receipt transaction- releases possession of the goods upon e ecution of trust receipt , not the owner of the goods# but merely a holder of security interest , if it is made to appear in the trust receipt as the owner of the goods purchased# it is merely theoretical# an artificial e pedient and more of fiction than fact (.arcia vs. /!- 0intola vs. $1!!- 2N1 vs. 2ineda)- see# however# the contrary view of 2rof. /atindig and the rulings in /olinares vs. /! and 2rudential 1an* vs. $!/ 2. Entrustee , borrower"buyer"importer , person to whom the goods are delivered for sale or processing in trust# with the obligation to return the proceeds of sale of the goods or the goods themselves to the entruster , the owner of the goods purchased- in fact# the law imposes on him the ris* of loss of the goods. $es !erit do%ino" +. Seller of the goo s , not strictly and actually a party to the trust receipt transaction# but a party to the contract of sale with the buyer"importer (entrustee)

!"portance an character of of Trust Receipts (see Nego 1oo* of De 3eon pp.4567 458) &. 9riginally used in importing transactions ). /onvenient aid to commerce and trade +. :ull title vested in entruster 6. Title in entruster ta*en as security only ;. 'ith both loan and security features 4. <ntruster remains a lender and creditor =. 3etter of credit7 trust receipt arrangement Difference of Trust Receipts an Letters #f $re it
Trust Receipts the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of e ecution or authentication shall be necessary to the validity of a trust receipt a document of release of goods to a customer by a ban* Letter of $re it <ngagement by a ban* or other person made at the re>uest of a customer that the issuer will honor drafts and other demands for payment upon compliance with the conditions specified in the credit a document issued by a ban* that guarantees payment to a seller for a specified amount# at a certain period of time.

Definition%concept of a trust receipt transaction &. 3oan"security feature 7 ! trust receipt arrangement is endowed with its own distinctive features and characteristics. ?nder that set7up# a ban* e tends a loan covered by the 3etter of /redit# with the trust receipt as a security for the loan. $n 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. ! trust receipt# therefore# is a security agreement# pursuant to which a ban* ac>uires a "security interest" in the goods. $t secures an indebtedness and there can be no such thing as security interest that secures no obligation. (@ps. 0intola vs. $nsular 1an* of !sia and !merica# ..R. No. =+)=&# Aay )B# &B8=) N9T<% 3oan feature @ecurity feature 7 C usually represented by a 3etter of /redit the trust receipt proper (0intola vs. $1!!)

&oan 'eat(re ! trust receipt has two features# the loan and security features. The loan is brought about by the fact that the entruster financed the importation or purchase of the goods under TR. ?ntil and unless this loan is paid# the obligation to pay subsists. Sec(rity 'eat(re ! trust receipt is a security agreement pursuant to which the entruster ac>uires a Dsecurity interestE in the goods.
@ecurity interest# defined. $t is property interest in goods# documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title# whether or not e pressed to be absolute# whenever such title is in substance ta*en or retained for security only. (@ec. +)

The security interest is similar to a DlienE on the goods because the entruster(s advances will have to be settled first before the entrustee can consolidate his ownership over the goods. (2rudential 1an* vs. N3R/) The entruster(s security interest is valid against all creditors for the duration of the trust receipt agreement (@ec. &)) DThe title of the ban* to the security is the one sought to be protected (by the law) and not the loan which is a separate and distinct agreement.E (2rudential

1an* vs. N3R/) ). 9wnership of the goods# documents and instruments under a trust receipt o The goods remain the importer(s property. <ntrustee is factual owner. The ban* does not become the real owner of the goods. $t remains a lender and creditor. <ntruster(s ownership is merely legal fiction (!bad vs /!) +. Folder of the title o The <ntruster ta*es full title to the goods at the very beginning C as soon as goods are brought and paid by him Rights of the entruster @ec.=. The entruster shall be entitled to% the proceeds from the sale of the goods# documents or instruments to the e tent of the amount owing to the entruster or as appears in the trust receipt# or to the return of the goods# documents or instruments in case of non7sale# and to the enforcement of all other rights conferred on him in the trust receipt to cancel the trust and ta*e possession of the goods etc. in case of default or breach of the terms of the TR and to have these sold in a private or public auction !nnocent purchasers for &alue The only e ception to the entruster(s security interest is when the goods are in the hands of an innocent purchaser for value and in good faith
@ection &&. Rights of purchaser for value and in good faith. !ny purchaser of goods from an entrustee with right to sell# or of documents or instruments through their customary form of transfer# who buys the goods# documents# or instruments for value and in good faith from the entrustee# ac>uires said goods# documents or instruments free from the entrusterGs security interest.

'ali it( of the securit( interest as against the cre itors of the entrustee
@ection &). 0alidity of entrusterGs security interest as against creditors. The entrusterGs 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.

&. Nature of security interest of entruster C the security interest of the entruster becomes a DlienE on the goods because the entruster(s advances will have to be settled first before the entrustee can consolidate his ownership over the goods ). Right of the entruster to cancel trust optional C @ection ) ()nd par) provides statutory remedy available to an entruster in the event of default or failure of the entrustee to comply with terms and conditions of the TR +. Right of the entruster to goods as against entrustee and +rd persons C the law warrants the validity of the entruster(s security interest in the goods pursuant to the written terms of the TR as against all creditors and entrustee for the duration of the TR agreement. #)ligations of the entrustee Sec. *. , hold the goods# documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt, receive the proceeds in trust for the entruster and turn over the same to the e tent of the amount owing to the entruster or as appears on the trust receipt, insure the goods for their total value against loss from fire# theft# pilferage or other casualties, *eep said goods or proceeds separate and capable of identification-

, return the goods# documents or instruments in the event of non7sale or upon demand, observe all other terms and conditions of the trust receipt Ris+ of Loss )orne )( entrustee , in any event # the entrustee bears ris* of loss (sec.&5) @ec. &5. The ris* of loss shall be borne by the entrustee - irrespective of whether or not it was due to the fault or negligence of the entrustee# shall not e tinguish his obligation to the entruster for the value thereof Penal sanction if offen er is a corporation 7 The Trust Receipts 3aw recogniHes the impossibility of imposing the penalty of imprisonment on a corporation. Fence# if the entrustee is a corporation# the law ma*es the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious# corporations# partnerships# associations and other juridical entities cannot be put to jail. Fence# the criminal liability falls on the human agent responsible for the violation of the Trust Receipts 3aw. (9ng vs. /!# ..R. No. &&B8;8# !pril )B# )55+) Section 1- II constitute the crime of estafa# punishable under the provisions of !rticle Three +&; paragraph & (b) of !ct Numbered +8&; # as amended# otherwise *nown as the Revised 2enal /ode. $f the &iolation or offense is co""itte )( a corporation. partnership. association or other /uri ical entities. the penalt( pro&i e for in this Decree shall )e i"pose upon the irectors. officers. e"plo(ees or other officials or persons therein responsi)le for the offense. without pre/u ice to the ci&il lia)ilities arising fro" the cri"inal offense. Re"e ies a&aila)le :ailure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by the imposition of penal sanctions (Tiomico vs. /ourt of !ppeals#&BBB). The offense is malum prohibitum. There is no need to prove damage to the entrustor. (Aetropolitan 1an* vs. Tonda# )555)# or intent to defraud (2eople vs. /uervo# &B8&) 9ffense% estafa under !rt +&; of the Revised 2enal /ode. !lso# liable for damages under !rt. ++# // (2rudential vs. $!/# 22 vs. /uervo# A1T/ vs. Tonda) <ffect of compliance% , before criminal charge C no criminal liability , after charge# before conviction C e tinguishments of criminal liability 3iability of entrustee accrues on his failure to comply with his obligation to return. $t is not absolutely necessary that the entruster cancels the trust and ta*e possession of the goods to be able to enforce his rights under this law. 2D &&; allows the ban* to ta*e possession of the goods covered by the trust receipts. Thus# even though the ban* too* possession of the goods covered by the trust receipts# the entrustees remained liable for the entire amount of the loans covered by the trust receipts (2hil. 1looming vs. /!) $ases0 De&elop"ent 1an+ of the Philippines &. Pru ential 1an+. 2.R. No. 13-442. No&. 22. 2555

6acts0 3irag te tile Aills# $nc. opened an irrevocable commercial letter of credit with 2rudential 1an* for ?@ J6B8#555.55 in connection with its importation of ;#555 spindles for spinning machinery. These were released to 3ite under covering Dtrust receipts (TR)E it e ecuted in favor of 2rudential 1an*. 3ite installed and used the items in its te tile mill located in Aontalban# RiHal. D12 granted a foreign currency loan in the amount of ?@ J6#85=#;;& to 3ite . To secure the loan # 3ite e ecuted real state and chattel mortgage on its plant site in Aontalban# RiHal. !mong the machineries and e>uipments mortgaged in favor of D12 were the articles covered by the TR. During the rehabilitation of 3ite # 2rudential 1an* notified D12 of its claim over the items covered by the TR. $t informed D12 that it was the absolute and juridical owner on the said items and they were thus not part of the mortgaged assets that could be legally ceded to D12. :or the failure of the 3ite to pay its obligation# D12 e tra7judicially foreclosed on the real state and chattel mortgages including the articles claimed by the 2rudential 1an*. During the foreclosure sale# D12 ac>uired foreclosed properties as the highest bidder. Despite negotiations between D12 and 2rudential 1an*# D12 sold the 3ite te tile mill to 3yon Te tile Aill $nc. 2rudential 1an* filed a complaint for a sum of money with damages against D12. The T/ decided in favor of 2rudential 1an*. $t ruled that D12 held no better right than 3ite and is thus bound to turn over whatever amount was due to 2rudential 1an*. D12 is a mere trustee of 2rudential 1an* and an agent of 3ite . The /! affirmed. $t applied the provisions of 2D &&; and held that ownership over the contested articles belonged to 2rudential 1an* as entruster not to 3ite . /onse>uently# even if 3ite mortgaged the items to D12 and the latter foreclosed on such mortgage# D12 was duty7bound to turn7over the proceeds to 2rudential 1an*# being the party that advanced the payment for them. !ssue0 &. '9N the transaction was a TRK ). '9N entrustee has authority to dispose goods covered by TRK 7el 0 Les. The various agreements between 2rudential 1an* and 3ite commonly denominated as TR were valid. !s the /! ruled # their provision didn(t contravene to law# morals# good custom# public order or public policy. The articles were owned by the 2rudential ban* and they were only held by 3ite in trust. 'hile it was allowed to sell the items# 3ite had no authority to dispose of them or any part thereof or their proceeds through conditional sale# pledge or any other means. The entrustee has N9 authority to mortgage goods covered by trust receipt. !rt.)58;()) // re>uires 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. :urther !rt. )58;(+) 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 authoriHed for the purpose. 3ite had neither absolute ownership# free disposal nor the authority to freely dispose of the articles. 3ite could not have subjected them to chattel mortgage. Their inclusion in the mortgage was void and of no legal effect. There being no valid mortgage# there could also be no valid foreclosure or valid auction sale. Thus# D12 couldn(t not be considered 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 >uod non habet). Fence# 3ite couldn(t transfer a right that it didn(t have over the disputed items. D12 could not ac>uire a right greater than what its predessor Cin Cinterest had. The spring cannot rise higher than its source. D12 merely stepped into the shoes of 3ite as trustee of the imported articles with an obligation to pay their value or to return them on 2rudential 1an*(s demand. 1y its failure *nowledge and conformity# D12 became trustee e maleficio.

Lan l 8 $o"pan( (Phil.) !nc.. et al &. 9etropolitan 1an+. 2.R. No. 15*:22. ;ul( -5. 2553 6acts0 The business of the petitioner is importation of welding rods. 3andl opened a 3/ with Aetropolitan ban* and as security# a trust receipt was e ecuted by 3andl in favor of the Aetropolitan ban*. The TR matured but 3andl was unable to pay Aetropolitan 1an* so the former returned the goods to Aetropolitan ban* to avoid criminal liability (estafa). Aetropolitan ban* sold the goods in an auction but the proceeds were not sufficient to

satisfy the entire obligation of the petitioner. !ssue0 &. /an the Aetropolitan 1an* claim the deficiencyK ). /an we not consider the return of the goods in the full satisfaction of the Aetropolitan(s claim against the petitionerK Ruling0 &. Les. @ec.= of the TR 3aw provides that in case of sale by the entruster of the possessed goods# the entrustee shall receive any surplus but shall be liable to the entruster for any deficieny ). No. Repossession of the goods is not intended to transfer ownership of the goods (dacion en pago does not lie) but as a security for the loan obligation of the debtor that arose from the TR agreement <nthon( L. Ng &. People of the Philippines. 2.R. N#. 14-*55. <pril 2-. 2515 $n the case of !nthony 3. Ng vs. 2eople of the 2hilippines# .R N9. &=+B5;# !pril )+# )5&5# !nthony was engaged in the business of building and fabricating telecommunications towers. Fe applied for a credit line with !siatrust wherein !siatrust will provide !nthony with goods to be used for his business. To approve his loan application# !nthony was as*ed by !siatrust to sign several documents including a Trust Receipt !greement. 2etitioner received the goods- however# he failed to pay his loan to !siatrust. Thus# !siatrust filed a case for <stafa against !nthony for violating their Trust Receipt !greement# which is to sell the goods and return the profits of the sale# or to return the goods should he fail to sell them. $n this case# the @upreme /ourt decided that !nthony Ng D$D N9T commit <stafa. :irst of all# it should be determined whether or not the agreement is a Trust Receipt !greement. $f it is# then !nthony has the obligation to deliver the price of the sale if he has sold the goods# and if he was not able to do so# then he should return the goods to !siatrust. Fowever# if their !greement was not a Trust Receipt !greement# then !nthony is not under any obligation to return anything to !siatrust# his only obligation is to pay the loan. The @upreme /ourt said that the agreement was not a Trust Receipt. The goods received by !nthony were never intended for sale# it was intended to be used for his business. Therefore# !nthony was not under any obligation to return the goods or the price of their sale C so# there was no abuse of confidence to spea* of.