NEGO Letters of Credit & Trust Receipts

NEGO DIGESTS- Letters of Credit & Trust Receipts Law CADIZ. DELOS SANTOS. DYSANGCO. LENCIO. MANONGSONG. MONZON.
. LENCIO. MANONGSONG. MONZON. PEDAYO. VERACRUZ
Letters of Credit ropes but plastic strips, wrappers, rags and waste materials. Here
at home, the NBI also investigated Inter-Resin's President and
BANK OF AMERICA, NT & SA V. CA Executive Vice President who were criminally charged for estafa
Advising bank and later on negotiating bank Bank of America through falsification of commercial documents. The case was
Issuing bank Bank of Ayudhya eventually dismissed by the Rizal Provincial Fiscal who found
Beneficiary/Seller Inter-Resin Industrial Corp. no prima facie evidence to warrant prosecution.
Buyer General Chemicals Ltd. of Thailand Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
Facts: US$1,320,600.00 on the partial availment of the disowned letter of
Bank of America, NT & SA received by registered mail an credit. Inter-Resin claimed that not only was it entitled to retain
Irrevocable Letter of Credit purportedly issued by the Bank of P10,219,093.20 on its first shipment but also to the balance
Ayudhya for the account of General Chemicals Ltd. in the amount US$1,461,400.00 covering the second shipment. The trial court
of US$2.7M for the sale of plastic ropes and agricultural files, ruled in favour of Inter-Resin, ruling that:
with Bank of America as advising bank and Inter-Resin Industrial (a) Bank of America made assurances that enticed Inter-
Corp. as beneficiary. Resin to send the merchandise to Thailand;
Bank of America wrote to Inter-Resin informing Inter-Resin of the (b) the telex declaring the letter of credit fraudulent was
foregoing and transmitting to it the letter of credit. Inter-Resin hearsay, but even assuming that the letter of credit was
sent Atty. Tanay to Bank of America to have the letter of credit fake, "the fault should be borne by the Bank of America
confirmed. The bank did not. Reynaldo Dueas, bank employee in which was careless and negligent" for failing to utilize its
charge of letters of credit, however, explained to Atty. Tanay that modern means of communication to verify with Bank of
there was no need for confirmation because the letter of credit Ayudhya in Thailand the authenticity of the letter of credit
would not have been transmitted if it were not genuine. before sending the same to Inter-Resin;
Inter-Resin sought to make a partial availment under the letter of (c) the loading of plastic products into the vans were under
credit by submitting to Bank of America invoices, the strict supervision, inspection and verification of
corresponding packing list, export declaration and bill of lading. government officers who have in their favor the
After being satisfied that Inter-Resin's documents conformed with presumption of regularity in the performance of official
the conditions expressed in the letter of credit, Bank of America functions; and
issued in favor of Inter-Resin a Cashier's Check for (d) Bank of America failed to prove the participation of
P10,219,093.20, "the Peso equivalent of the draft (for) Inter-Resin or its employees in the alleged fraud
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs The crucial point of dispute in this case is whether under the
for documentary stamps, postage and mail issuance." The check "letter of credit," Bank of America has incurred any liability to
was picked up by Inter-Resin's Executive Vice-President. Bank of the "beneficiary" thereof, an issue that largely is dependent on
America wrote Bank of Ayudhya advising the latter of the the bank's participation in that transaction; as a mere advising
availment under the letter of credit and sought the corresponding or notifying bank, it would not be liable, but as a confirming
reimbursement. bank, had this been the case, it could be considered as having
Inter-Resin presented to Bank of America the documents for the incurred that liability.
second availment under the same letter of credit consisting of a
packing list, bill of lading, invoices, export declaration and bills in Issue:
set, evidencing the second shipment of goods. Immediately upon 1. WON Bank of America acted merely as an advising bank or a
receipt of a telex from the Bank of Ayudhya declaring the letter of confirming bank
credit fraudulent, Bank of America stopped the processing of Inter- 2. WON Bank of America can recover what it has paid under the
Resin's documents and sent a telex to its branch office in Bangkok, letter of credit when the corresponding draft for partial availment
Thailand, requesting assistance in determining the authenticity of and the required documents were later negotiated with it by Inter-
the letter of credit. Bank of America kept Inter-Resin informed of Resin.
the developments. Sensing a fraud, Bank of America sought the Held:
assistance of the NBI. The NBI agents who were sent to Thailand 1. Bank of America acted as an advising bank and is therefore not
discovered that the vans exported by Inter-Resin did not contain liable to the beneficiary Inter-Resin
NEGO DIGESTS- Letters of Credit & Trust Receipts Law CADIZ. DELOS SANTOS. DYSANGCO. LENCIO. MANONGSONG. MONZON. PEDAYO. VERACRUZ
2. YES. Other parties:

advising (notifying) bank - conveys to the seller the existence of
Ratio: the credit;
1. Nature and parties to a letter of credit confirming bank lends credence to the letter of credit issued by a
letter of credit - financial device developed by merchants as a lesser known issuing bank
convenient and relatively safe mode of dealing with sales of goods paying bank - undertakes to encash the drafts drawn by the
to satisfy the seemingly irreconcilable interests of a seller, who exporter
refuses to part with his goods before he is paid, and a buyer, who negotiating bank bank which discounts the draft for the buyer
wants to have control of the goods before paying. To break the instead of going to the place of the issuing bank to claim payment
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 Case at bar:
of credit, the issuing bank can authorize the seller to draw drafts FIRST ISSUE:
and engage to pay them upon their presentment simultaneously 1. Bank of America has only been an advising bank. This is
with the tender of documents required by the letter of credit. evident:
by the provisions of the letter of credit itself, the petitioner
Once the credit is established, the seller ships the goods to the bank's letter of advice, its request for payment of advising
buyer and in the process secures the required shipping documents fee, and the admission of Inter-Resin that it has paid the
or documents of title. To get paid, the seller executes a draft and same.
presents it together with the required documents to the issuing That Bank of America has asked Inter-Resin to submit
bank. The issuing bank redeems the draft and pays cash to the documents required by the letter of credit and eventually
seller if it finds that the documents submitted by the seller has paid the proceeds thereof, did not obviously make it a
conform with what the letter of credit requires. The bank then confirming bank.
obtains possession of the documents upon paying the seller. The The fact that the draft required by the letter of credit is to
transaction is completed when the buyer reimburses the issuing be drawn under the account of General Chemicals (buyer)
bank and acquires the documents entitling him to the goods. only means the same had to be presented to Bank of
Under this arrangement, the seller gets paid only if he delivers the Ayudhya (issuing bank) for payment. It may be significant
documents of title over the goods, while the buyer acquires said to recall that the letter of credit is an engagement of the
documents and control over the goods only after reimbursing the issuing bank, not the advising bank, to pay the draft.
bank. No less important is that Bank of America's letter has
2. What characterizes letters of credit, as distinguished from other expressly stated that "[t]he enclosure is solely an advise of
accessory contracts is the independency principle - the bank credit opened by the abovementioned correspondent
determines compliance with the letter of credit only by examining and conveys no engagement by us." This written
the shipping documents presented; it is precluded from reservation by Bank of America in limiting its obligation
determining whether the main contract is actually accomplished or only to being an advising bank is in consonance with the
not. provisions of U.C.P.
3. There would be at least three (3) parties: 2. As an advising or notifying bank, Bank of America did not incur
(a) buyer, who procures the letter of credit and obliges any obligation more than just notifying Inter-Resin of the letter of
himself to reimburse the issuing bank upon receipts of the credit issued in its favor, let alone to confirm the letter of credit.
documents of title; Bringing the letter of credit to the attention of the seller is
(b) bank issuing the letter of credit, which undertakes to the primordial obligation of an advising bank. The view that
pay the seller upon receipt of the draft and proper Bank of America should have first checked the authenticity of the
document of titles and to surrender the documents to the letter of credit with bank of Ayudhya before dispatching the same
buyer upon reimbursement; and, to Inter-Resin finds no real support in U.C.P. Article 18 of the
(c) seller, who in compliance with the contract of sale ships U.C.P. states that: "Banks assume no liability or responsibility for
the goods to the buyer and delivers the documents of title the consequences arising out of the delay and/or loss in transit of
and draft to the issuing bank to recover payment. any messages, letters or documents, or for delay, mutilation or
other errors arising in the transmission of any telecommunication .
. ." As advising bank, Bank of America is bound only to

check the "apparent authenticity" of the letter of credit, FEATI BANK & TRUST COMPANY V CA
which it did. Clarifying its meaning, Webster's Ninth New
Collegiate Dictionary explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out
OPENING BANK-Security Pacific
by more rigorous examination or greater knowledge."
3. Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should CORRESPONDENT/NOTIFYING BANK-Feati
have obviously been a great concern to it. It would have been
strange if it did no prior to the letter of credit, enter into a Private Respondent-Villaluz
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. Beneficiary-Christianson
SECOND ISSUE: Petitioner-Feati

1. Bank of America can recover what it has paid under the letter of
credit when the corresponding draft for partial availment and the
Facts:
required documents were later negotiated with it by Inter-Resin.
What happened between Bank of America and Inter-Resin
was a discounting arrangement. Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
Bank of America has acted independently as a negotiating lauan logs.
bank, thus saving Inter-Resin from the hardship of
presenting the documents directly to Bank of Ayudhya to
recover payment. After inspecting the logs, Christiansen issued purchase order.
As a negotiating bank, Bank of America has a right to
recourse against the issuer bank and until reimbursement On the arrangements made and upon the instructions of the consignee,
is obtained, Inter-Resin, as the drawer of the draft, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
continues to assume a contingent liability thereon. Pacific National Bank of Los Angeles, California issued Irrevocable Letter of
The payment to Inter-Resin has given Bank of America the
Credit No. available at sight in favor of Villaluz for the sum of $54,000.00,
right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification the total purchase price of the lauan logs.
from the buyer (the General Chemicals of Thailand). Since
Bank of Ayudhya disowned the letter of credit, however, The letter of credit was mailed to the Feati Bank and Trust Company (now
Bank of America may now turn to Inter-Resin for Citytrust) with the instruction to the latter that it "forward the enclosed
restitution. letter of credit to the beneficiary."
o Between the seller and the negotiating bank there
is the usual relationship existing between a drawer
and purchaser of drafts. Unless drafts drawn in The letter of credit further provided that the draft to be drawn is on
pursuance of the credit are indicated to be without Security Pacific National Bank and that it be accompanied by certain
recourse therefore, the negotiating bank has the documents. Also incorporated by reference in the letter of credit is the
ordinary right of recourse against the seller in the Uniform Customs and Practice for Documentary Credits.
event of dishonor by the issuing bank
2. The additional ground raised by the petitioner, i.e., that
Inter-Resin sent waste instead of its products, is really of The logs were thereafter loaded on the vessel "Zenlin Glory" which was
no consequence. In the operation of a letter of credit, the chartered by Christiansen.
involved banks deal only with documents and not on goods
described in those documents Christiansen refused to issue the certification and submit the needed
documents as required in the letter of credit, despite several requests terms and conditions of the credit.
made by the private respondent.
Hence, the mere fact that a letter of credit is irrevocable does not
Because of the absence of the certification by Christiansen, the Feati Bank necessarily imply that the correspondent bank in accepting the instructions
and Trust Company refused to advance the payment on the letter of of the issuing bank has also confirmed the letter of credit.
credit.
b. In commercial transactions involving letters of credit, the
The letter of credit lapsed on June 30, 1971, without the private functions assumed by a correspondent bank are classified
respondent receiving any certification from Christiansen. according to the obligations taken up by it. The correspondent
bank may be called/types a notifying bank, a negotiating bank, or
a confirming bank.
Issue:
In case of a notifying bank, the correspondent bank assumes no liability
1. W/N feati is a correspondent/notifying bank or confirming bank? except to notify and/or transmit to the beneficiary the existence of the
2. W/N a correspondent bank-feati is liable under the letter of credit letter of credit.
despite non compliance by the beneficiary-christianson?
3. W/N there was a trust?
4. W/N feati-correspondent bank is a guarantor for christianson? A negotiating bank, on the other hand, is a correspondent bank which
5. Effect of non compliance of christianson? buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has
Held: no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
1. CORRESPONDENT/NOTIFYING
2. NO In the case of a confirming bank, the correspondent bank assumes a direct
3. NO obligation to the seller and its liability is a primary one as if the
4. NO
correspondent bank itself had issued the letter of credit.
5. Feati is not liable even assuming it is a confirming bank.
Ratio: 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,
1. To determine if Feati is a correspondent or a confirming:
the Security Pacific National Bank, it is indubitable that the petitioner
a. A credit may be an irrevocable credit and at the same time a is only a notifying bank and not a confirming bank.
confirmed credit or vice-versa. Both have different effects.
its responsibility was solely to notify and/or transmit the documentary of
An irrevocable credit refers to the duration of the letter of credit. What is credit to the private respondent and its obligation ends there.
simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under A notifying bank is not a privy to the contract of sale between the buyer
the letter. The issuing bank does not reserve the right to revoke the credit. and the seller, its relationship is only with that of the issuing bank and not
On the other hand, a confirmed letter of credit pertains to the kind of with the beneficiary to whom he assumes no liability. It follows
obligation assumed by the correspondent bank. In this case, the therefore that when the petitioner refused to negotiate with the
correspondent bank gives an absolute assurance to the beneficiary that it private respondent, the latter has no cause of action against the
will undertake the issuing bank's obligation as its own according to the petitioner for the enforcement of his rights under the letter.
c. In order that the petitioner may be held liable under the to jurisprudence.
letter, there should be proof that the petitioner confirmed
the letter of credit. Under U.C.P., the bank may only negotiate, accept or pay, if the
documents tendered to it are on their face in accordance with the
The records are, however, bereft of any evidence which will disclose that terms and conditions of the documentary credit. And since a
the petitioner has confirmed the letter of credit. correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the
there must have been an absolute assurance on the part of the petitioner documentary credit justifies the refusal by the correspondent
that it will undertake the issuing bank's obligation as its own. Verily, the bank to negotiate, accept or pay the beneficiary, as it is not
loan agreement it entered into cannot be categorized as an emphatic its obligation to look beyond the documents. It merely has
assurance that it will carry out the issuing bank's obligation as its own. to rely on the completeness of the documents tendered by
the beneficiary.
The private respondent no doubt was in need of money in loading the logs
on the ship "Zenlin Glory" and the only way to satisfy this need was to
borrow money from the petitioner which the latter granted. From these 3. To determine if there was a trust:
circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral. The concept of a trust presupposes the existence of a specific
property which has been conferred upon the person for the benefit
At the most, when the petitioner extended the loan to the private of another. In order therefore for the trust theory of the private
respondent, it assumed the character of a negotiating bank. respondent to be sustained, the petitioner should have had in its
possession a sum of money as specific fund advanced to it by the
Even then, the petitioner will still not be liable, for a negotiating bank issuing bank and to be held in trust by it in favor of the private
before negotiation has no contractual relationship with the seller. respondent. This does not obtain in this case.
2. To determine if Feati is Liable: The mere opening of a letter of credit, it is to be noted, does not
involve a specific appropriation of a sum of money in favor of the
a. Rule of Strict Compliance: documents tendered must strictly beneficiary. It only signifies that the beneficiary may be able to draw
conform to the terms of the letter of credit. The tender of funds upon the letter of credit up to the designated amount specified in
documents by the beneficiary (seller) must include all documents the letter. It does not convey the notion that a particular sum of money
required by the letter. has been specifically reserved or has been held in trust.
A correspondent bank which departs from what has been Granting that a trust has been created, still, the petitioner may not be
stipulated under the letter of credit, as when it accepts a faulty considered a trustee. As the petitioner is only a notifying bank, its
tender, acts on its own risks and it may not thereafter be able to acceptance of the instructions of the issuing bank will not create estoppel
recover from the buyer or the issuing bank, as the case may be, on its part resulting in the acceptance of the trust. Precisely, as a notifying
the money thus paid to the beneficiary bank, its only obligation is to notify the private respondent of the existence
of the letter of credit. How then can such create estoppel when that is its
b. incorporation of the Uniform Customs and Practice for only duty under the law?
Documentary Credit (U.C.P. for short) in the letter of credit
resulted in the applicability of the said rule. And even if the U.C.P.
4.To determine if Feati is a guarantor of Christianson:
was not incorporated in the letter of credit, it is still applicable due
It is a fundamental rule that an irrevocable credit is independent

not only of the contract between the buyer and the seller but also KENG HUA PAPER PRODUCTS V CA
of the credit agreement between the issuing bank and the buyer. FACTS:
The relationship between the buyer (Christiansen) and the issuing
bank (Security Pacific National Bank) is entirely independent from
the letter of credit issued by the latter. Sealand Service, Inc. (shipping company) received at its Hong Kong
terminal a sealed container containing 76 bales of unsorted waste paper
The concept of guarantee vis-a-vis the concept of an irrevocable credit are for shipment to Keng Hua in Manila. A bill of lading covering this shipment
inconsistent with each other. is issued by Sealand. The shipment was discharged at the Manila
International Container Port. Notices of arrival were transmitted to Keng
In the first place, the guarantee theory destroys the independence of the Hua but it failed to discharge shipment from the container during the grace
bank's responsibility from the contract upon which it was opened. In the period. Shipment remained inside Sealands container for 481 days and
second place, the nature of both contracts is mutually in conflict with each during this period, demurrage charges accrued amounting to P67,340.
other. In contracts of guarantee, the guarantor's obligation is merely Sealand demanded payment but Keng Hua refused to comply. Sealand
collateral and it arises only upon the default of the person primarily liable. filed a civil action for collection and damages.
On the other hand, in an irrevocable credit the bank undertakes a primary
obligation. Keng Hua alleged that it purchased 50 tons of waste paper from the
shipper in HK, Ho Kee Waste Paper as manifested in a letter of credit
The relationship between the issuing bank and the notifying bank, on the issued by Equitable Banking, with partial shipment permitted. The
contrary, is more similar to that of an agency and not that of a guarantee. remaining balance was only 10 metric tons as shown by invoice but the
It may be observed that the notifying bank is merely to follow the shipment Sealand was asking Keng Hua to accept was 20 metric tons and
instructions of the issuing bank which is to notify or to transmit the letter to accept this would be a violation of the Central Bank regulations and
of credit to the beneficiary. custom and tariff laws. Keng Hua also said that Sealand has no cause of
action against it because it did not hire Sealand to carry the merchandise
5.Effects of failure of Christianson to follow the letter of credit: and that the cause of action must be for the shipper. Keng Hua also
alleged that it notified Sealand about the wrong shipment through a letter.
Finally, even if we assume that the petitioner is a confirming bank, the RTC found Keng Hua liable for demurrage, attorneys fees and expenses of
petitioner cannot be forced to pay the amount under the letter. As we litigation. CA affirmed RTC.
have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit. ISSUE: W/N Keng Hua was bound by the bill of lading.
The U.C.P. which is incorporated in the letter of credit ordains that the HELD: Yes, Keng Hua is bound by the bill of lading and liable for
bank may only pay the amount specified under the letter if all the demurrage but the interest rate is modified.
documents tendered are on their face in compliance with the credit.
RATIO:
Thus, whether or not the buyer has performed his responsibility towards A bill of lading is a 1) receipt of goods shipped and 2) a contract by which
the seller is not the bank's problem. 3 parties (shipper, carrier and consigner) undertake specific
responsibilities and assume stipulated obligations. The acceptance of the
bill of lading constitutes an acceptance of the terms and conditions of
which the acceptor has actual or constructive notice. In short, it gives rise In this case, the contract of carriage must be treated independently of the
to the presumption that there was a perfected and binding contract. contract of sale and the contract for the issuance of a letter of credit. Any
discrepancy in the amount of goods in the commercial invoice in the
In the case at bar, the bill of lading was a valid and perfected contract contract of sale and the amount allowed in a letter of credit will not affect
between the shipper (Ho Kee), the consignee (Keng Hua) and the carrier the validity and enforceability of the contract of carriage in the bill of
(Sealand). Section 17 of the bill of lading provided that the shipper and lading. The carrier cannot be expected to go beyond the representations of
the consignee were liable for payment of demurrage charges for failure to the shipper in the bill of lading. The discrepancy between the amount of
discharge the containerized shipment beyond the grace period allowed by goods in the invoice and in the bill of lading cannot negate Keng Huas
tariff rules. obligation to Sealand arising from the contract of transportation. In fact,
Sealand has no knowledge of the contents of the container. If theres
Keng Hua contends that it only physically accepted the bill of lading but
anyone Keng Hua can go after, it should be Ho Kee, the shipper.
never gave its consent. It cited the Notice of Refused or On Hand Freight
it received from Sealand which acknowledged that Keng Hua declined to
accept the shipment. Keng Hua added that it sent a copy of said notice to INSULAR BANK OF ASIA & AMERICA V IAC
shipper saying that its acceptance of the bill of lading would be
tantamount to smuggling as the amount transported was only for 10 Facts:
metric tons and not for 20 metric tons. It also argues that the demurrage
was a consequence of the shippers mistake of shipping more than what Spouses Mendoza obtained 2 loans from Philippine American Life
was bought. Insurance Co. (Philam Life) amounting to P600K to finance the
construction of their residential house at Mandaue City. The said loans
The Court is not persuaded because Keng Hua did not immediately object were to be liquidated in equal amortizations over a period of 5 year.
to any term in the bill of lading. It was only 6 months later when Keng Hua
sent a letter to Sealand refusing the shipment. Inaction for a long time
To secure payment, Philam Life required that amortizations be
implies that it accepted the terms and conditions of the bill of lading. Also,
guaranteed by an irrevocable standby letter of credit of a
the letter only spoke of Keng Huas inability to use the delivery permit and
commercial bank. Thus, Spouse Mendoza contracted with Insular Bank
not its rejection of the bill of lading. The Notice of Refused or On Hand
of Asia and America (IBAA) for the issuance of 2 irrevocable standby
Freight was not even written by Keng Hua but by Sealand which
Letters of Credit (L/C) in favor of Philam Life for the total amount of
highlighted the fact of prolonged failure to object to the bill of lading.
P600K. An REM in turn, secured these 2 irrevocable standby L/Cs.
The prolonged failure to receive and discharge the cargo constituted a
violation of the terms of the bill of lading, therefore, Keng Hua is liable for On 11 May 1977, the Mendozas executed 2 promissory notes in favor of
the demurrage charges. The amount fixed by the RTC which is P67,340 is IBAA promising to pay a sum of money. Both Notes authorized IBAA "to
conclusive to the SC. 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
The bill of lading is separate from other letter of credit arrangements. A obligations" the Mendozas may have to IBAA.
letter of credit has 3 distinct and independent contracts: 1) contract of
sale between buyer and seller, 2) contract of buyer with the issuing bank, Spouses Mendoza failed to pay Philam Life the amortization that fell due
and 3) letter of credit proper in which the bank promises to pay the seller on 1 June 1978 so that Philam Life informed IBAA that it was declaring
pursuant to terms and conditions. These 3 contracts are in a state of both loans as "entirely due and demandable" and demanded payment of
perpetual separation. P492,996.30. However, because IBAA contested the propriety of calling ill
the entire loan, Philam Life desisted and resumed availing of the L/Cs by
drawing on them for five (5) more amortizations.
Spouses defaulted on their amortization again, thus, Philam Life informed This credit secures the payment of any obligation of the
IBAA that it was declaring the entire balance outstanding on both loans, accountee to you under that Loan Agreement hereto attached xxx
including liquidated damages, "immediately due and payable." Philam Life
then demanded the payment of P274,779.56 from IBAA but the latter took Unequivocally, the subject standby Letters of Credit secure the payment of
the position that, as a meer guarantor of the Mendozas who are the any obligation of the Mendozas to Philam Life including all interests,
principal debtors, its remaining outstanding obligation under the two (2) surcharges and expenses thereon but not to exceed P600,000.00. But
standby L/Cs was only P30,100.60 while they are a security arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra vires rather than a
The REM, which secured the 2 standby L/Cs. was extrajudicially foreclosed letter of credit, which is within the powers of a bank. The standby L/Cs
by, and sold at public auction for P775,000.00, to petitioner IBAA as the are, "in effect an absolute undertaking to pay the money advanced
lone and highest bidder or the amount for which credit is given on the faith of the
instrument.". They are primary obligations and not accessory contracts.
Philam Life filed suit against Respondent Spouses and IBAA before the RTC Being separate and independent agreements, the payments made by
for the recovery of the sum of P274,779.56, the amount allegedly still the Mendozas cannot be added in computing IBAA's liability under
owing under the loan. its own standby letters of credit. Payments made by the Mendozas
directly to Philam Life are in compliance with their own prestation
TC took the position that IBAA, "as surety" was discharged of its liability to under the loan agreements. And although these payments could
the extent of the payment made by the Mendozas, as the principal result in the reduction of the actual amount which could ultimately
debtors, to the creditor, Philam Life. be collected from IBAA, the latter's separate undertaking under its
L/Cs remains.
CA: IBAA's liability was not reduced by virtue of the payments made by
the Mendozas. Accordingly, the Appellate Court decreed: Both the TC and CA found, as a fact, that there still remains a balance on
the loan, Pursuant to its absolute undertaking under the L/Cs, therefore,
IBAA stresses that it has no more liability to Philam Life under the 2 IBAA cannot escape the obligation to pay Philam Life for this unexpended
standby Letters of Credit and, instead, is entitled to a refund. balance.
Philam Life and the Mendoza spouses separately maintain that IBAA's The amount of P222,000.00, therefore, considered as "any obligation of
obligation under said 2 L/Cs is original and primary and is not reduced by the accountee" under the L/Cs will still have to be paid by IBAA under the
the direct payments made by the Mendozas to Philam Life. explicit terms thereof, which IBAA had itself supplied. Letters of credit are
strictly construed to the end that the rights of those directly parties to
Issue: W/N IBAA is still liable them may be preserved and their interest safeguarded. Like any other
writing, it will be construed most strongly against the writer and so as to
be reasonable and consistent with honest intentions.
Held: YES
Ratio:
TRANSFIELD PHIL V LUZON HYDRO CORP
In construing the terms of a Letter of Credit, as in other contracts, it is the Transfield Philippines v Luzon Hydro Corporation
intention of the parties that must govern. The terms of the subject
Irrevocable Standby Letters of Credit read, in part, as follows:
Facts: Respondent SBC in its Memorandum contends that it was under no

obligation to look into the validity or accuracy of the certification
Transfield and Luzon Hydro Corp. (LHC) entered into a Turnkey submitted by respondent LHC or into the latters capacity or
Contract where Transfield undertook to construct, on a turnkey entitlement to so certify.
basis a hydro-electric power station at the Bakun River. Transfield Respondent ANZ Bank in its Memorandum posits that its actions
was given the sole responsibility for the design, construction, could not be regarded as unjustified in view of the prevailing
commissioning, testing and completion of the Project. independence principle under which it had no obligation to
To secure performance of Transfields obligation on or before the ascertain the truth of LHCs allegations that petitioner defaulted
target completion date, it opened in favor of LHC two (2) in its obligations.
standby letters of credit with the local branch of respondent Issues:
Australia and New Zealand Banking Group Limited (ANZ Bank) and
Standby Letter of Credit Security Bank Corporation (SBC). 1. Whether the independence principle on letters of credit may be
In the course of the construction of the project, petitioner sought invoked in this case.
various EOT (extension of time) to complete the Project. The 2. Whether LHC has the right to call and draw on the securities
extensions were requested allegedly due to several factors which before the resolution of Transfields and LHCs disputes by the
prevented the completion of the Project on target date, such as appropriate tribunal.
force majeure. LHC denied the requests, however. This gave Held:
rise to a series of legal actions between the parties which
culminated in the instant petition. 1. YES.
Transfield foresaw that LHC would call on the Securities pursuant 2. YES.
to the pertinent provisions of the Turnkey Contract so it advised
respondent banks of the arbitration proceedings already pending in
connection with its alleged default in the performance of its Ratio:
obligations. Asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral At the core of the present controversy is the applicability of the
tribunals, Transfield warned respondent banks that any transfer, independence principle in letters of credit. Thus, a discussion of the
release, or disposition of the Securities in favor of LHC would
nature and use of letters of credit, also referred to simply as credits,
constrain it to hold banks liable for liquidated damages.
Inspite of this, both banks informed petitioner that they would would provide a better perspective of the case.
pay on the Securities if and when LHC calls on them.
LHC asserted that additional extension of time would not be
warranted and at the same time, LHC served notice that it
would call on the securities for the payment of liquidated The letter of credit evolved as a mercantile specialty, and the only way
damages for the delay. to understand all its facets is to recognize that it is an entity unto
Transfield sought to restrain respondent LHC from calling on the itself. In commercial transactions, a letter of credit is a financial device
Securities and respondent banks from transferring, paying on, or developed by merchants as a convenient and relatively safe mode
in any manner disposing of the Securities or any renewals or of dealing with sales of goods to satisfy the seemingly irreconcilable
substitutes thereof.
interests of a seller, who refuses to part with his goods before he is paid,
Decision of the RTC:
o Employing the principle of independent contract in letters and a buyer, who wants to have control of the goods before paying.
of credit, the trial court ruled that LHC should be
allowed to draw on the Securities for liquidated
damages.
o The trial court further ruled that the banks were mere Article 3 of the UCP (Uniform Customs Practice) provides that credits, by
custodians of the funds and as such they were obligated their nature, are separate transactions from the sales or other
to transfer the same to the beneficiary for as long as the contract(s) on which they may be based and banks are in no way
latter could submit the required certification of its claims.
concerned with or bound by such contract(s), even if any reference Letters of credit are employed by the parties desiring to enter into
whatsoever to such contract(s) is included in the credit. commercial transactions, not for the benefit of the issuing bank but mainly
for the benefit of the parties to the original transactions.
Thus, the engagement of the issuing bank is to pay the seller or

beneficiary of the credit once the draft and the required documents Transfields argument that any dispute must first be resolved by the
are presented to it. The so-called independence principle assures the parties, whether through negotiations or arbitration, before the beneficiary
seller or the beneficiary of prompt payment independent of any breach of is entitled to call on the letter of credit in essence would convert the letter
the main contract and precludes the issuing bank from determining of credit into a mere guarantee. Jurisprudence has laid down a clear
whether the main contract is actually accomplished or not. Under this distinction between a letter of credit and a guarantee in that the
principle, banks assume no liability or responsibility for the form, settlement of a dispute between the parties is not a pre-requisite
sufficiency, accuracy, genuineness, falsification or legal effect of for the release of funds under a letter of credit. In other words, the
any documents, or for the general and/or particular conditions stipulated argument is incompatible with the very nature of the letter of credit. If a
in the documents or superimposed thereon, nor do they assume any letter of credit is drawable only after settlement of the dispute on the
liability or responsibility for the description, quantity, weight, quality, contract entered into by the applicant and the beneficiary, there would be
condition, packing, delivery, value or existence of the goods represented no practical and beneficial use for letters of credit in commercial
by any documents, or for the good faith or acts and/or omissions, transactions.
solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever.
The pendency of the arbitration proceedings would not per se make LHCs
draws on the Securities wrongful or fraudulent for there was nothing in the
Can the beneficiary invoke the independence principle? Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC
Transfield insists that the independence principle does not apply to the would be allowed to call upon the Securities.
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract
to the very party for whom the benefit is intended. As beneficiary of the Of course, prudence should have impelled LHC to await resolution of the
letter of credit, LHC asserts it is entitled to invoke the principle. pending issues before the arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey Contract did not
require LHC to do so and, therefore, it was merely enforcing its rights in
accordance with the tenor thereof.
Given the nature of letters of credit, Transfields argumentthat it is only
the issuing bank that may invoke the independence principle on letters of
creditdoes not impress this Court. To say that the independence
principle may only be invoked by the issuing banks would render With respect to the issue of whether the respondent banks were
nugatory the purpose for which the letters of credit are used in justified in releasing the amounts due under the Securities, this Court
commercial transactions. As it is, the independence doctrine works reiterates that pursuant to the independence principle the banks were
to the benefit of both the issuing bank and the beneficiary. under no obligation to determine the veracity of LHCs
certification.
contract and precludes the issuing bank from determining whether the main
LAND BANK V MONETS EXPORT contract is actually accomplished or not. For, if the letter of credit is drawable
Facts: only after the settlement of any dispute on the main contract entered into by
the applicant of the said letter of credit and the beneficiary, then there would
Land Bank of the Philippines, and Monets Export and Manufacturing be no practical and beneficial use for letters of credit in commercial
Corporation executed an Export Packing Credit Line Agreement under which transactions.
Monet was given a credit line in the amount of P250,000.00, secured by the
proceeds of its export letters of credit, the continuing guaranty of the spouses 2. Liable for uncollected receivables from Wishbone Trading as Monets
Tagles and the third party mortgage executed by Pepita Mendigoria. The credit agent
line agreement was renewed and amended several times until it was increased A careful review of the records reveal that the trial court correctly considered
to P5,000,000.00. Land Bank as the attorney-in-fact of Monet with regard to its export
Owing to the continued failure and refusal of Monet, notwithstanding repeated transactions with Wishbone Trading Company. It was stipulated in the Deed of
demands, to pay its indebtedness to Land Bank, which have ballooned to Assignment[24] executed between Monet and Land Bank on June 26, 1981:
P11,464,246.19, a complaint for collection of sum of money with prayer for That the ASSIGNOR/s (Monet) by these presents, does/do hereby
preliminary attachment was filed by Land Bank with the RTC. appoint/s the ASSIGNEE (Land Bank) their/his/her true and lawful
In their defense, Monet and the Tagle spouses alleged that Land Bank failed attorney-in-fact and in their/his/her place and stead, to demand, collect
and refused to collect the receivables on their export letter of credit against and receive the proceeds of the export letters of credit at a loan value of
Wishbone Trading Company of Hong Kong in the sum of US$33,434.00, while it 80% to be applied to the payment of the credit accommodation herein
made unauthorized payments on their import letter of credit to Beautilike (H.K.) secured.
Ltd. in the amount of US$38,768.40, which seriously damaged the business As the attorney-in-fact of Monet in transactions involving its export letters of
interests of Monet. credit, such as the Wishbone account, Land Bank should have exercised the
RTC ruled that defendant is indeed liable for the debt but is entitled to damages requisite degree of diligence in collecting the amount due to the former. The
for Opportunity Cost of $30,000 due to the loss of business caused by the records of this case are bereft of evidence showing that Land Bank exercised
action/inaction of LB. CA affirmed the decision. the prudence mandated by its contractual obligations to Monet.
In fine, because of the non-collection defendants-appellees suffered from a
Issue: WON LB is liable for opportunity cost? lack of financial resources sufficient to buy new materials. And since they also
could no longer draw on their existing credit line with Landbank, they could not
Held: NO and YES. Petition is partly meritorious. Case remanded back to RTC for purchase materials to fill up the orders of their customers. Because of this the
determination of actual amount defendants owed LB. business reputation of Monets suffered which hastened its decline
1. No liability on the payment of import letter of credit to Beautilike Ltd. 3. Tempering of damages to be awarded
RTC and CA awarded US$30,000 for opportunity cost damages. In view of our
What characterizes letters of credit, as distinguished from other accessory findings that Land Bank is not guilty of mismanagement in its handling of
contracts, is the engagement of the issuing bank to pay the seller once the Monets import letter of credit relative to the Beautilike transaction, we hold
draft and the required shipping documents are presented to it. In turn, this that a reduction of the amount of the grant is in order. It is not possible for us
arrangement assures the seller of prompt payment, independent of any breach to totally do away with the award of opportunity losses having affirmed the
of the main sales contract. By this so-called independence principle, the findings of the trial court and the Court of Appeals that Land Bank, as the
bank determines compliance with the letter of credit only by examining the attorney-in-fact of Monet in its transaction with Wishbone Trading Company,
shipping documents presented; it is precluded from determining whether the committed acts of mismanagement. On account of the foregoing reasons, we
main contract is actually accomplished or not. reduce the amount of opportunity losses granted to Monet to US$15,000.00
Moreover, Article 3 of the Uniform Customs and Practice (UCP) for payable in Philippine pesos at the official exchange rate when payment is to be
Documentary Credits provides that credits, by their nature, are separate made.
transactions from the sales or other contract(s) on which they may be based On account of the actual damages owed by defendant to respondent:
and banks are in no way concerned with or bound by such contract(s), even if Unfortunately, despite the pieces of evidence submitted by the parties, our
any reference whatsoever to such contract(s) is included in the review of the same is inconclusive in determining the total amount due to the
credit. Consequently, the undertaking of a bank to pay, accept and pay petitioner. The petitioner had failed to establish the effect of Monets Exhibit
draft(s) or negotiate and/or fulfill any other obligation under the credit is not 39 to its own Consolidated Statement of Account as of August 31, 1992, nor
subject to claims or defenses by the applicant resulting from his relationships did the respondents categorically refute the said statement of account vis--vis
with the issuing bank or the beneficiary. its Exhibit 39. The interest of justice will best be served if this case be
We held that the engagement of the issuing bank is to pay the seller or remanded to the court of origin for the purpose of determining the amount due
beneficiary of the credit once the draft and the required documents are to petitioner.
presented to it. The so-called independence principle assures the seller or
the beneficiary of prompt payment independent of any breach of the main
misappropriated, misapplied and converted for their own personal

use and benefit the aforesaid goods.
During the trial of the criminal case Sps. Vintola turned over the
seashells to the custody of the Trial Court.
Trust Receipts Law
CFI: acquitted Sps. Vintola of Estafa. The element of
VINTOLA V. IBAA misappropriation or conversion was inexistent.
IBAA filed the present civil action to recover the value of the
goods. Sps. Vintola contends that their acquittal in the Estafa case
Facts
bars IBAAs filing of the civil action because the latter did not
Spouses Vintola, under the business name Dax Kin reserve their right to enforce civil action separately. Further, they
International, were engaged in the manufacture of raw sea shells take the position that their obligation to IBAA has been
into finished products. They applied for and were subsequently extinguished inasmuch as, through no fault of their own, they were
granted a domestic letter of credit by IBAA amounting to unable to dispose of the seashells, and that they have relinquished
PhP40,000.00 to be used for their purchase of puka and olive
possession thereof to the IBAA, as owner of the goods, by
seashells from Stalin Tan.
depositing them with the Court.
In consideration thereof, Sps. Vintola, jointly and severally,
agreed to pay the bank "at maturity, in Philippine currency, the Issue
equivalent, of the aforementioned amount or such portion thereof
Whether or not the acquittal of the Vintolas in the Estafa case bars the civil
as may be drawn or paid, upon the faith of the said credit together action for collection
with the usual charges."
Ruling
Having received from Stalin Tan the puka and olive shells, Sps.
Vintola executed a Trust Receipt agreement with IBAA. NO, it is not a bar to the institution of a civil action for collection
Under that agreement, the Vintolas agreed to hold the goods in Doctrine
trust for IBAA as the "latter's property with liberty to sell the same - A trust receipt is a security agreement, pursuant to which a bank
for its account, " and "in case of sale" to turn over the proceeds as acquires a "security interest" in the goods. It secures an
soon as received to IBAA. indebtedness and there can be no such thing as security interest
that secures no obligation.
When they defaulted in their obligation, IBAA demanded
payment from Sps. Vintola. - (Samo vs. People) "a trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers
Sps. Vintola were unable to dispose of the shells. Thus, they
who do not have sufficient funds or resources to finance the
responded to the demand by offering to return the goods.
importation or purchase of merchandise, and who may not be able
IBAA refused to accept the merchandise. to acquire credit except through utilization, as collateral of the
merchandise imported or purchased."
Due to the continued refusal of Sps. Vintola to make good their
undertaking, IBAA charged them with estafa for having - Contrary to the allegation of Vintolas, IBAA did not become the
real owner of the goods. The trust receipt arrangement did not
convert the IBAA into an investor. IBAA remained a lender and The obligation of the defendant-appellant arising from the letter of credit
creditor. Since the IBAA is not the factual owner of the goods, the and the trust receipt remained unpaid and unliquidated. Repeated formal
Vintolas cannot justifiably claim that because they have demands for the payment of the said trust receipt yielded no result.
surrendered the goods to IBAA and subsequently deposited them
in the custody of the court, they are absolutely relieved of their TC and CA ruled that the accepted drafts should be paid while those
unaccepted drafts by Philippine Rayon should not be paid hence Prudential
obligation to pay their loan because of their inability to dispose of
Bank appealed to modify the decision.
the goods.
Issues:
- 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. The decision of acquittal expressly 1. Whether Philippine Rayon is liable on the basis of the trust receipt;
declared that "the remedy of the Bank is civil and not criminal in
nature." This amounts to a reservation of the civil action in IBAA's Held: Yes
favor. The Vintolas are liable ex contractu for breach of the Letter
of Credit - Trust Receipt.
Ratio:
PRUDENTIAL BANK V. IAC

Philippine Rayon immediately became liable thereon upon petitioner's
payment thereof. Such is the essence of the letter of credit issued by the
Facts: petitioner. A different conclusion would violate the principle upon which
commercial letters of credit are founded because in such a case, both the
Philippine Rayon Mills entered into a contract with Nissho Co., Ltd. of beneficiary and the issuer, Nissho Company Ltd. and the petitioner,
Japan for the importation of textile machineries under a five-year deferred respectively, would be placed at the mercy of Philippine Rayon even if the
payment plan. To effect payment for said machineries, Philippine Rayon latter had already received the imported machinery and the petitioner had
applied for a commercial letter of credit with the Prudential Bank and Trust fully paid for it.
Company in favor of Nissho. By virtue of said application, the Prudential
Bank opened Letter of Credit No. DPP-63762 for $128,548.78. Against this Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc.:
letter of credit, drafts were drawn and issued by Nissho, which were
all paid by the Prudential Bank. As indicated on their faces, two of
Their purpose is to insure to a seller payment of a definite amount
these drafts were accepted by the Philippine Rayon through its president,
upon presentation of documents.
Anacleto R. Chi, while the others were not.
The trial court and the public respondent likewise erred in

Upon the arrival of the machineries, the Prudential Bank indorsed the
disregarding the trust receipt and in not holding that Philippine
shipping documents to Philippine Rayon which accepted delivery of the
Rayon was liable thereon.
same. To enable Philippine Rayon to take delivery of the machineries, it
executed, by prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as President of People vs. Yu Chai Ho
Philippine Rayon.
The security is the complete title vested originally in the bankers, and
Philippine Rayon was able to take delivery of the textile machineries and this characteristic of the transaction has again and again been
installed the same at its factory site at 69 Obudan Street, Quezon City. recognized and protected by the courts.
Sometime in 1967, Philippine ceased business operation. On December 29, The title is at bottom a security title, as it has sometimes been called,
its factory was leased by Yupangco Cotton Mills for an annual rental of and the banker is always under the obligation to reconvey; but only
P200, 000. The lease was renewed on January 3, 1973. On January 5, after his advances have been fully repaid and after the importer has
1974, all the textile machineries in the defendant-appellant's factory were fulfilled the other terms of the contract.
sold to AIC Development Corporation for P300,000.
National Bank vs. Viuda e Hijos de Angel Jose the trust receipt, such relief is covered by the general prayer for "such
further and other relief as may be just and equitable on the premises."
Trust receipts partake of the nature of a conditional sale: The
ownership of the merchandise continues to be vested in the owner And although it is true that the petitioner commenced a criminal action for
thereof or in the person who has advanced payment, until he has been the violation of the Trust Receipts Law, no legal obstacle prevented it from
paid in full, or if the merchandise has already been sold, the proceeds enforcing the civil liability arising out of the trust, receipt in a separate civil
of the sale should be turned over to him by the importer or by his action. Under Section 13 of the Trust Receipts Law, the failure of an
representative or successor in interest. entrustee to turn over the proceeds of the sale of goods, documents or
instruments covered by a trust receipt to the extent of the amount owing
P.D. No. 115 to the entruster or as appear in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of
A trust receipt transaction is defined as "any transaction by and
estafa. Under Article 33 of the Civil Code, a civil action for damages,
between a person referred to in this Decree as the entruster, and
entirely separate and distinct from the criminal action, may be brought by
another person referred to in this Decree as the entrustee, whereby
the injured party in cases of defamation, fraud and physical injuries. Estafa
the entruster, who owns or holds absolute title or security interests'
falls underfraud.
over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution
and delivery to the entruster of a signed document called the "trust GONZALES V HSBC
receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster and to sell Facts:
or otherwise dispose of the goods, documents or instruments with the Petitioner Antonio Gonzalez was the Chairman and Chief Executive
obligation to turn over to the entruster the proceeds thereof to the Officer of Mondragon Leisure and Resorts Corporation (MLRC). On
extent of the amount owing to the entruster or as appears in the trust 1997, petitioner Gonzalez, for and in behalf of MLRC, acknowledged
receipt or the goods, instruments themselves if they are unsold or not receipt of various golfing equipments and assorted Walt Disney Items
otherwise disposed of, in accordance with the terms and conditions and signed two Trust Receipt Agreements both in favor of HSBC.
specified in the trusts receipt, or for other purposes substantially Under this trust receipt, Gonzalez bound himself to turn over to the
equivalent to any one of the following: . . ." Bank the proceeds of the sale of the goods or to return them in case of
non-sale.
When the due dates of the two Trust Receipts came and went without
It is alleged in the complaint that private respondents "not only have
word from MLRC, HSBC through its Vice President wrote a letter and
presumably put said machinery to good use and have profited by its
demanded from MLRC the turnover of the proceeds of the sale of the
operation and/or disposition but very recent information that (sic) reached
assorted goods covered by the Trust Receipts or the return of the
plaintiff bank that defendants already sold the machinery covered by the
goods. MLRC failed to return the assorted goods or their value. HSBC
trust receipt to Yupangco Cotton Mills," and that "as trustees of the
filed a complaint for estafa for violation of the Trust Receipts Law in
property covered by the trust receipt, . . . and therefore acting in
relation to Art. 315 (b) of the RPC against Gonzalez before the Office
fiduciary capacity, defendants have willfully violated their duty to
of the City Prosecutor.
account for the whereabouts of the machinery covered by the trust
Following the requisite preliminary investigation, the City Prosecutor
receipt or for the proceeds of any lease, sale or other disposition of
found probable cause to hold Gonzalez liable for two counts of estafa
the same that they may have made, notwithstanding demands
in violation of the Trust Receipts Law.
therefor; defendants have fraudulently misapplied or converted to their
Gonzalez contends - the CA committed manifest error in ruling, that,
own use any money realized from the lease, sale, and other disposition of
probable cause existed to hold him liable to stand trial merely on the
said machinery."
basis of his admission that he executed the trust receipts subject
matter of the case below and his failure to account for the goods
While there is no specific prayer for the delivery to the petitioner by covered by the same. He contends that DOJ failed to appreciate two
Philippine Rayon of the proceeds of the sale of the machinery covered by important facts: 1) that the real transaction that was in fact a loan
agreement; and 2) that MLRC simply extended to Best Price PX, Inc.,
the owner and operator of Mimosa Mart at the CESZ, its credit line A violation of any of these undertakings
with respondent HSBC, such that Best Price was the actual debtor of constitutes estafa defined under Art. 315(1)(b) of the
respondent bank. Paradoxically, he maintains that the fact that (he) Revised Penal Code, as provided by Sec. 13 of
held a high position in MLRC was not sufficient reason to charge him Presidential Decree 115.
for alleged violation of trust receipts. He insists further that he is not
the person responsible for the offense allegedly committed because of Article 315(1)(b) of the Revised Penal Code
the absence of a clear showing of fault or negligence on his part. punishes estafa committed as follows:
According to petitioner Gonzalez, P.D. No. 115 must be read in
conjunction with Article 315, paragraph 1(b) of the RPC x x x under 1. With unfaithfulness or abuse of confidence,
both x x x it is required that the person charged with estafa pursuant namely:
to a trust receipt transaction must be proved to have misappropriated, (b) By misappropriating or converting, to the
misused or converted to his own personal use the proceeds of the prejudice of another, money, goods, or any
goods covered by the trust receipts to the damage of other personal property received by the
the entruster. Thus, petitioner concludes that mere failure to pay offender in trust or on commission, or for
the amounts covered by the trust receipts does not conclusively administration, or under any other
constitute estafa as defined under Presidential Decree No. 115 and obligation involving the duty to make
Article 315, paragraph 1(b) delivery of or to return the same, even
HSBC contends - Gonzalez is criminally liable since he signed the though such obligation be totally or
trust receipts x x x;and, that, fraud is not necessary for conviction partially guaranteed by a bond; or by
for violation of the Trust Receipts Law, the latter being in the nature denying having received such money,
of a malum prohibitum decree. goods, or other property.
Issue: 3. From the evidence adduced before the City Prosecutor of Makati:
WON there is probable cause to hold Gonzalez liable to stand trial for 1) the two Trust Receipts bearing the acknowledgment signature
violation of P.D. 115 or the Trust Receipts Law in relation to Art. 315 (1) of petitioner Gonzalez;
(b) of the RPC. 2) the official documents concerning the transaction between
MLRC and respondent HSBC;
Held: 3) the demand letter of respondent HSBC; and,
YES. 4) the counter-affidavit of petitioner Gonzalez containing his initial
admission that on behalf of MLRC, he entered into a trust receipt
Ratio: transaction with respondent HSBC
1. Probable cause - existence of such facts and circumstances as would
excite the belief in a reasonable mind, acting on the facts within the The investigating officer determined that there existed probable
knowledge of the prosecutor, that the person charged was guilty of the cause to hold petitioner Gonzalez for trial for the crime charged. In
crime for which he was prosecuted. A finding of probable cause the present case, there being sufficient evidence to support the
merely binds over the suspect to stand trial. It is not a finding of probable cause by the City Prosecutor of Makati, the
pronouncement of guilt. same cannot be said to have resulted from bare suspicion,
2. In general, a trust receipt transaction imposes upon the entrustee the presupposition, conjecture or logical deduction.
obligation to deliver to the entruster the price of the sale, or if the 4. That petitioner Gonzalez neither had the intent to defraud respondent
merchandise is not sold, to return the same to the entruster. HSBC nor personally misused/misappropriated the goods subject of
There are thus two obligations in a trust receipt the trust receipts is of no moment. The offense punished under
transaction: Presidential Decree No. 115 is in the nature
o First - money received under the obligation of malum prohibitum.
involving the duty to turn it over (entregarla) to A mere failure to deliver the proceeds of the sale or the
the owner of the merchandise sold, goods if not sold, constitutes a criminal offense that causes
o Second - merchandise received under the prejudice not only to another, but more to the public
obligation to return it (devolvera) to the owner. interest. This is a matter of public policy as declared by
the legislative authority. The failure of the entrustee to
turn over the proceeds of the sale of the goods, covered by plates from his suppliers, he utilized them to fabricate the communication
the trust receipt, to the entruster or to return said goods if towers of his clients.
they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Art.
NG he failed to pay his loan to Asiatrust. Asiatrust then conducted a
315(1)(b) of the Revised Penal Code without need of
proving intent to defraud. surprise ocular inspection and found out that approximately 97% of the
5. Though petitioner Gonzalez signed the Trust Receipts merely as a subject goods of the Trust Receipts were "sold-out and that only 3 % of
corporate officer of MLRC and had no physical possession of the goods the goods remained."
subject of such receipts, he cannot avoid responsibility for violation of
Presidential Decree No. 115 for two unpretentious reasons:
Account Officer of Asiatrust filed Information for Estafa. as
First the last sentence of Section 13 of the Trust
Receipts Law, explicitly imposes the penalty provided
therein upon directors, officers, employees or other petitioner argued that: the Trust Receipt Agreements he signed with
officials or persons therein responsible for the offense, Asiatrust were merely preconditions for the grant and approval of his loan.
without prejudice to the civil liabilities arising from the
criminal offense, of a corporation, partnership, association
Issue:
or other juridical entities found to have violated the
obligation imposed under the law. The rationale for
making such officers and employees responsible for the whether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of
offense is that they are vested with the authority and the RPC in relation to PD 115?
responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held
Held:
criminally accountable; thus, they have a responsible
share in the violations of the law.
Second a corporation or other juridical entity cannot be NO
arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. Ratio:
NG V PEOPLE essential elements of Estafa are: (1) that money, goods or other personal
property is received by the offender in trust or on commission, or for
Facts: administration, or under any obligation involving the duty to make delivery
of or to return it; (2) that there be misappropriation or conversion of such
Anthony Ng, then engaged in the business of building and fabricating money or property by the offender, or denial on his part of such receipt;
telecommunication towers applied for a credit line of PhP 3,000,000 with (3) that such misappropriation or conversion or denial is to the prejudice
Asiatrust Development Bank, Inc. NG voluntarily submitted the following of another; and (4) there is demand by the offended party to the
documents: offender.12
Asiatrust approved the application. NG was then required to sign several Likewise, Estafa can also be committed in what is called a "trust
documents, among which is Trust Receipt Agreements, Trust Receipt receipt transaction" under PD 115, which is defined as:
Agreements did not bear any maturity dates as they were left unfilled or in
blank by Asiatrust. a trust receipt transaction is one where the entrustee has the obligation to
deliver to the entruster the price of the sale, or if the merchandise is not
After petitioner received the goods, consisting of chemicals and metal sold, to return the merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers to money received
under the obligation involving the duty to turn it over (entregarla) to the erred in ruling that the agreement is a trust receipt transaction.
owner of the merchandise sold, while the second refers to the merchandise
received under the obligation to "return" it (devolvera) to the owner. Trust Receipts Law was created to "to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the
transaction between petitioner and Asiatrust is not a trust receipt importation or purchase of merchandise, and who may not be able to
transaction but one of simple loan. acquire credit except through utilization, as collateral, of the merchandise
imported or purchased." Since Asiatrust knew that petitioner was neither
PD 115 Does Not Apply an importer nor retail dealer, it should have known that the said
agreement could not possibly apply to petitioner.
It must be remembered that petitioner was transparent to Asiatrust from
the very beginning that the subject goods were not being held for sale but
were to be used for the fabrication of steel communication towers in
accordance with his contracts with Islacom, Smart, and Infocom. he was
commissioned to build, out of the materials received, steel communication
CRISOLOGO V PEOPLE
towers, not to sell them.
FACTS:
trust receipt is to be utilized "as a convenient business device to assist
importers and merchants solve their financing problems." Obviously, the Ildefonso Crisologo, as president of Novachemical Industries, Inc., applied
State, in enacting the law, sought to find a way to assist importers and for commercial letters of credit (L/Cs) from Chinabank to finance the
merchants in their financing in order to encourage commerce in the purchase of 1,600 kgs amoxicillin trihydrate micronized from Hyundai
Philippines. Chemical Company in Seoul, SoKor and glass containers from San Miguel
Corporation (SMC). Chinabank issued Letters of Credit in US$114,400
Regardless of whether the transaction is foreign or domestic, it is (P2,139,199.80 and P1,712,289.90). After receiving the goods, Crisologo
important to note that the transactions discussed in relation to trust executed for and in behalf of Novachem the corresponding trust receipts
receipts mainly involved sales. agreements in favor of Chinabank.
Chinabank, through Ms. Maria Rosario De Mesa, Staff Assistant, filed

Following the precept of the law, such transactions affect situations
before City Prosecutor of Manila a complaint-affidavit charging Crisologo of
wherein the entruster, who owns or holds absolute title or security
violation of PD 115 in relation to Article 315 (b) of the RPC for failure to
interests over specified goods, documents or instruments, releases the
turn over goods or the proceeds from the sale despite repeated demands.
subject goods to the possession of the entrustee. The release of such
It is averred that Crisologo misapplied, misappropriated and converted the
goods to the entrustee is conditioned upon his execution and delivery to
goods subject of the trust agreements, to its damage and prejudice.
the entruster of a trust receipt wherein the former binds himself to hold
the specific goods, documents or instruments in trust for the entruster and In defense, Ildefonso claimed that as a regular client of Chinabank,
to sell or otherwise dispose of the goods, documents or instruments with Novachem has a credit line and L/Cs secured by trust receipts agreements.
the obligation to turn over to the entruster the proceeds to the extent of The subject L/Cs were included in the special term-payment arrangement
the amount owing to the entruster or the goods, documents or mutually agreed upon by the parties and payable in installments.
instruments themselves if they are unsold. Novachem would normally give instructions to Chinabank as to what L/C or
trust receipt obligation its payments would be applied. However,
Considering that the goods in this case were never intended for sale but Chinabank deviated from the special arrangement and misapplied
for use in the fabrication of steel communication towers, the trial court payments intended for the subject L/Cs.
Crisologo was indicted as charged and City Prosecutor filed the was liable for the obligation secured by the trust receipt. It was not
corresponding informations in the RTC of Manila. sufficient evidence to prove that he acted in bad faith or with gross
negligence as regards the transaction that would have held him civilly
RTC: Acquitted Crisologo of the criminal charges but adjudged him civilly liable for his actions as President of Novachem.
liable without need for separate civil action for the amounts of the L/Cs.
LAND BANK V PEREZ
CA; Affirmed RTC holding Crisologo liable. It noted that he signed the
Guarantee Clause of the trust receipts arrangements in his personal Respondents [Perez, Panlilo & Garcia] are the officers and representatives
capacity and even waived the benefit of excussion against Novachem. As of Asian Construction and Development Corporation (ACDC)
such he is personally and solidarily liable with Novachem.
Facts:
ISSUE: W/N Crisologo is civilly liable under the subject L/Cs which are the
LBP filed a complaint for estafa in relation to P.D. 115, against the
corporate obligations of Novachem.
respondents. The complaint states that LBP extended a credit
accommodation to ACDC through the execution of an Omnibus Credit Line
HELD: No, Crisologo is relieved of the corporate criminal liability as well as
Agreement between LBP and ACDC. In various instances, ACDC used
the corresponding civil liability arising therefrom. However, he may still be the Letters of Credit/Trust Receipts Facility of the Agreement to
held liable for the trust receipts and L/C transactions he had entered into buy construction materials.
in behalf of Novachem.
The respondents, as officers and representatives of ACDC, executed trust
RATIO: receipts in connection with the construction materials, with a total principal
amount of P52,344,096.32. The trust receipts matured, but ACDC
Sec. 13 of the Trust Receipts Law provides that if the violation or offense is failed to return to LBP the proceeds of the construction projects or
committed by a corporation, as in this case, the penalty provided for under the construction materials subject of the trust receipts. LBP sent ACDC a
demand letter for the payment of its debts, including those under the Trust
the law shall be imposed upon the directors, officers, employees or other
Receipts Facility. When ACDC failed to comply with the demand letter, LBP
official or person responsible for the offense, without prejudice to the civil filed the affidavit-complaint.
liabilities arising from the criminal offense.
Respondents/ACDCs officers argument:
Debts incurred by directors, officers and employees acting as corporate They stated that they signed the trust receipt documents on or about the
agents are not their direct liability but of the corporation they represent, same time LBP and ACDC executed the loan documents; their signatures
except if they contractually agree/stipulate or assume to be personally were required by LBP for the release of the loans. The trust receipts in
liable for the corporations debts, just like in this case. this case do not contain
(1) A description of the goods placed in trust,
The RTC and CA found that Crisologo signed the guarantee clauses in his (2) Their invoice values, and
(3) Their maturity dates, in violation of Section 5(a) of P.D.
personal capacity and even waived the benefit of excussion. However, the
115.
record shows that with respect to one Trust Receipt and Irrevocable Letter Moreover, they alleged that ACDC acted as a subcontractor for
of Credit issued to SMC for the glass containers, the second pages of these government projects such as the MRT, the Clark Centennial Exposition and
documents that would have reflected the guarantee clauses were missing the Quezon Power Plant in Mauban, Quezon. Its clients for the
and did not form part of the prosecutions formal offer of evidence. construction projects, which were the general contractors of these
Chinabank stipulated before the CA that the second page of the Trust projects, have not yet paid them; thus, ACDC had yet to receive the
Receipt aforementioned attached to the complaint would serve as the proceeds of the materials that were the subject of the trust receipts and
were allegedly used for these constructions. As there were no proceeds
missing page. Upon perusal, the same does not bear the signature of the
received from these clients, no misappropriation thereof could have taken
petitioner in the guarantee clause. Thus, Ca erred in holding that Crisologo place.
these projects, as seen in the letters of credit it attached to its complaint.

CA: This case did not involve a trust receipt transaction, but a mere Clearly, they were aware of the fact that there was no way they could
loan. It emphasized that construction materials, the subject of the trust recover the buildings or constructions for which the materials subject of
receipt transaction, were delivered to ACDC even before the trust receipts the alleged trust receipts had been used. Notably, despite the allegations
were executed. It noted that LBP did not offer proof that the goods were in the affidavit-complaint wherein LBP sought the return of the
received by ACDC, and that the trust receipts did not contain a description construction materials, its demand letter dated May 4, 1999 sought the
of the goods, their invoice value, the amount of the draft to be paid, and payment of the balance but failed to ask, as an alternative, for the return
their maturity dates. of the construction materials or the buildings where these materials had
been used.
NOTE: When the case was pending in the SC, respondents filed a motion
to dismiss saying that the obligation has already been satisfied. Court The fact that LBP had knowingly authorized the delivery of construction
denied the motion. materials to a construction site of two government projects, as well as
unspecified construction sites, repudiates the idea that LBP intended to be
Issue: W/N this case involves trust receipts the owner of those construction materials. As a government financial
institution, LBP should have been aware that the materials were to be used
Held: NO, it involves a LOAN for the construction of an immovable property, as well as a property of the
public domain. As an immovable property, the ownership of whatever was
Ratio: constructed with those materials would presumably belong to the owner of
the land, under Article 445 of the Civil Code
There are two obligations in a trust receipt transaction. The first is
covered by the provision that refers to money under the obligation to Based on these premises, it cannot be considered the agreements
deliver it (entregarla) to the owner of the merchandise sold. The second is between the parties to be trust receipt transactions because (1)
covered by the provision referring to merchandise received under the from the start, the parties were aware that ACDC could not
obligation to return it (devolvera) to the owner. Thus, under the Trust possibly be obligated to reconvey to LBP the materials or the end
Receipts Law, intent to defraud is presumed when (1) the entrustee fails product for which they were used; and (2) from the moment the
to turn over the proceeds of the sale of goods covered by the trust receipt materials were used for the government projects, they became
to the entruster; or (2) when the entrustee fails to return the goods under public, not LBPs, property.
trust, if they are not disposed of in accordance with the terms of the trust
receipts. Since these transactions are not trust receipts, an action for estafa should
not be brought against the respondents, who are liable only for a loan.
In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative the return of the proceeds of the sale or the EXTRA: (In case sir asks)
return or recovery of the goods, whether raw or processed. When both Even if we assume that the transactions were trust receipts, the complaint against
parties enter into an agreement knowing that the return of the the respondents still should have been dismissed. The Trust Receipts Law punishes
goods subject of the trust receipt is not possible even without any 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
fault on the part of the trustee, it is not a trust receipt transaction
does not singularly seek to enforce payment of the loan, as there can be no
penalized under Section 13 of P.D. 115; the only obligation actually violation of [the] right against imprisonment for non-payment of a debt.
agreed upon by the parties would be the return of the proceeds of
the sale transaction. This transaction becomes a mere loan, where In order that the respondents may be validly prosecuted for estafa under Article
the borrower is obligated to pay the bank the amount spent for the 315, paragraph 1(b) of the Revised Penal Code, in relation with Section 13 of
purchase of the goods. the Trust Receipts Law, the following elements must be established: (a) they
received the subject goods in trust or under the obligation to sell the same and to
At the onset of these transactions, LBP knew that ACDC was in the remit the proceeds thereof to [the trustor], or to return the goods if not sold; (b)
they misappropriated or converted the goods and/or the proceeds of the sale; (c)
construction business and that the materials that it sought to buy under
they performed such acts with abuse of confidence to the damage and prejudice of
the letters of credit were to be used for the following projects: the Metro Metrobank; and (d) demand was made on them by [the trustor] for the remittance
Rail Transit Project and the Clark Centennial Exposition Project. LBP had in of the proceeds or the return of the unsold goods.
fact authorized the delivery of the materials on the construction sites for
In this case, no dishonesty or abuse of confidence existed in the handling of the

construction materials.
In this case, the misappropriation could be committed should the entrustee fail to
turn over the proceeds of the sale of the goods covered by the trust receipt
transaction or fail to return the goods themselves. The respondents could not have
failed to return the proceeds since their allegations that the clients of ACDC had not
paid for the projects it had undertaken with them at the time the case was filed had
never been questioned or denied by LBP. What can only be attributed to the
respondents would be the failure to return the goods subject of the trust receipts.
There is no allegation in the complaint that ACDC had used the construction
materials in a manner that LBP had not authorized. As earlier pointed out, LBP had
authorized the delivery of these materials to these project sites for which they were
used. When it had done so, LBP should have been aware that it could not possibly
recover the processed materials as they would become part of government projects,
two of which (the Metro Rail Transit Project and the Quezon Power Plant Project)
had even become part of the operations of public utilities vital to public service. It
clearly had no intention of getting these materials back; if it had, as a primary
government lending institution, it would be guilty of extreme negligence and
incompetence in not foreseeing the legal complications and public inconvenience
that would arise should it decide to claim the materials. ACDCs failure to return
these materials or their end product at the time these trust receipts expired could
not be attributed to its volition. No bad faith, malice, negligence or breach of
contract has been attributed to ACDC, its officers or representatives. Therefore,
absent any abuse of confidence or misappropriation on the part of the respondents,
the criminal proceedings against them for estafa should not prosper.

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NEGO DIGESTS- Letters of Credit & Trust Receipts Law CADIZ. DELOS SANTOS. DYSANGCO. LENCIO. MANONGSONG. MONZON.

. LENCIO. MANONGSONG. MONZON. PEDAYO. VERACRUZ

2. YES. Other parties:

. ." As advising bank, Bank of America is bound only to

SECOND ISSUE: Petitioner-Feati

It is a fundamental rule that an irrevocable credit is independent

Facts: Respondent SBC in its Memorandum contends that it was under no

Thus, the engagement of the issuing bank is to pay the seller or

misappropriated, misapplied and converted for their own personal

PRUDENTIAL BANK V. IAC

The trial court and the public respondent likewise erred in

Chinabank, through Ms. Maria Rosario De Mesa, Staff Assistant, filed

these projects, as seen in the letters of credit it attached to its complaint.

In this case, no dishonesty or abuse of confidence existed in the handling of the

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NEGO Letters of Credit &amp; Trust Receipts

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NEGO Letters of Credit &amp; Trust Receipts

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Copyright:

Verfügbare Formate

NEGO DIGESTS- Letters of Credit & Trust Receipts Law CADIZ. DELOS SANTOS. DYSANGCO. LENCIO. MANONGSONG. MONZON.

. LENCIO. MANONGSONG. MONZON. PEDAYO. VERACRUZ

2. YES. Other parties:

. ." As advising bank, Bank of America is bound only to

SECOND ISSUE: Petitioner-Feati

It is a fundamental rule that an irrevocable credit is independent

Facts: Respondent SBC in its Memorandum contends that it was under no

Thus, the engagement of the issuing bank is to pay the seller or

misappropriated, misapplied and converted for their own personal

PRUDENTIAL BANK V. IAC

The trial court and the public respondent likewise erred in

Chinabank, through Ms. Maria Rosario De Mesa, Staff Assistant, filed

these projects, as seen in the letters of credit it attached to its complaint.

In this case, no dishonesty or abuse of confidence existed in the handling of the

Das könnte Ihnen auch gefallen

NEGO Letters of Credit & Trust Receipts

NEGO Letters of Credit & Trust Receipts