Transfield Philippines vs Luzon Hydro Electric Corp.

GR No 146717, Nov 22, 2004

MARCH 15, 2014LEAVE A COMMENT
The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b) independence
may be only as to the justification aspect like in a commercial letter of credit or
repayment standby, which is identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of the credit.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon
Hydro Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric
plants in Benguet and Ilocos. Transfield was given the sole responsibility for the
design, construction, commissioning, testing and completion of the Project. The
contract provides for a period for which the project is to be completed and also
allows for the extension of the period provided that the extension is based on
justifiable grounds such as fortuitous event. In order to guarantee performance by
Transfield, two stand-by letters of credit were required to be opened. During the
construction of the plant, Transfield requested for extension of time citing typhoon
and various disputes delaying the construction. LHC did not give due course to the
extension of the period prayed for but referred the matter to arbitration committee.
Because of the delay in the construction of the plant, LHC called on the stand-by
letters of credit because of default. However, the demand was objected by Transfield
on the ground that there is still pending arbitration on their request for extension of
time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending
arbitration case

Held: Transfield’s argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to call
on the letter of credit in essence would convert the letter of credit into a mere
guarantee.

The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of
the purpose of the credit the payment of the credit would constitute fraudulent
abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a
guarantee in that the settlement of a dispute between the parties is not a pre-
requisite for the release of funds under a letter of credit. In other words, the
argument is incompatible with the very nature of the letter of credit. If a letter of
credit is drawable only after settlement of the dispute on the contract entered into
by the applicant and the beneficiary, there would be no practical and beneficial use
for letters of credit in commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit
once the draft and the required documents are presented to it. The so-called
“independence principle” assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not. Under
this principle, banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.

Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991
MARCH 15, 2014LEAVE A COMMENT
In case of a notifying bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or
discounts a draft under the letter of credit. Its liability is dependent upon the stage
of the negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the
negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the correspondent bank
itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in
which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at
$27.00 per cubic meter FOB. On the arrangements made and upon the instructions
of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of
Los Angeles, California issued an irrevocable letter of credit available at sight in
favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan
logs.

The letter of credit was mailed to the Feati Bank and Trust Company with the
instruction to the latter that it “forward the enclosed letter of credit to the
beneficiary.” The letter of credit also provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by certain documents.
The logs were thereafter loaded on a vessel but Christiansen refused to issue the
certification required in paragraph 4 of the letter of credit, despite repeated requests
by the private respondent. The logs however were still shipped and received by
consignee, to whom Christiansen sold the logs. Because of the absence of the
certification by Christiansen, the Feati Bank and Trust company refused to advance
the payment on the letter of credit until such credit lapsed. Since the demands by
Villaluz for Christiansen to execute the certification proved futile, he filed an action
for mandamus and specific performance against Christiansen and Feati Bank and
Trust Company before the Court of First Instance of Rizal. Christiansen however left
the Philippines and Villaluz filed an amended complaint making Feati Bank and
Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen

Held: In commercial transactions involving letters of credit, the functions assumed

by a correspondent bank are classified according to the obligations taken up by it.
The correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to

notify and/or transmit to the beneficiary the existence of the letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or

discounts a draft under the letter of credit. Its liability is dependent upon the stage
of the negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the
negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct

obligation to the seller and its liability is a primary one as if the correspondent bank
itself had issued the letter of credit.

In this case, the letter merely provided that the petitioner “forward the enclosed
original credit to the beneficiary.” (Records, Vol. I, p. 11) Considering the aforesaid
instruction to the petitioner by the issuing bank, the Security Pacific National Bank,
it is indubitable that the petitioner is only a notifying bank and not a confirming
bank as ruled by the courts below.

A notifying bank is not a privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the
beneficiary to whom he assumes no liability. It follows therefore that when the
petitioner refused to negotiate with the private respondent, the latter has no cause of
action against the petitioner for the enforcement of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify
and/or transmit the documentary of credit to the private respondent and its
obligation ends there.

At the most, when the petitioner extended the loan to the private respondent, it
assumed the character of a negotiating bank. Even then, the petitioner will still not
be liable, for a negotiating bank before negotiation has no contractual relationship
with the seller. Whether therefore the petitioner is a notifying bank or a negotiating
bank, it cannot be held liable. Absent any definitive proof that it has confirmed the
letter of credit or has actually negotiated with Feati, the refusal by the petitioner to
accept the tender of the private respondent is justified.

Landl Co vs.METROPOLITAN BANK & TRUST COMPANY. G.R. No. 159622 July
30, 2004
MARCH 16, 2014LEAVE A COMMENT
The possession by the bank of the goods under the trust receipts does not bar
collection of the loan. Mere possession does not amount to foreclosure for foreclosure
denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself. Neither can said repossession
amount to dacion en pago. Dation in payment takes place when property is alienated
to the creditor in satisfaction of a debt in money and the same is governed by sales.
Dation in payment is the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the obligation.
Facts: Landl Co opened Commercial Letter of Credit No. 4998 with respondent bank,
in the amount of US$19,606.77, which was equivalent to P218,733.92 in Philippine
currency at the time the transaction was consummated. The letter of credit was
opened to purchase various welding rods and electrodes from Perma Alloys, Inc.,
New York, U.S.A., As an additional security, and as a condition for the approval of
petitioner corporation’s application for the opening of the commercial letter of credit,
respondent bank required petitioners Percival G. Llaban and Manuel P. Lucente to
execute a Continuing Suretyship Agreement to the extent of P400,000.00.

Upon arrival of the goods in the Philippines, petitioner corporation took possession
and custody thereof. On the maturity date of the trust receipt, petitioner corporation
defaulted in the payment of its obligation to respondent bank and failed to turn over
the goods to the latter. The goods were sold for P30,000.00 to respondent bank as
the highest bidder. The proceeds of the auction sale were insufficient to completely
satisfy petitioners’ outstanding obligation to respondent bank, notwithstanding the
application of the time deposit account of petitioner Lucente. Accordingly,
respondent bank demanded that petitioners pay the remaining balance of their
obligation. After petitioners failed to do so, respondent bank instituted the instant
case to collect the said deficiency.

Issue: Whether or not possession by the bank of the goods under the trust receipts
does not bar collection of the loan.

Held: The initial repossession by the bank of the goods subject of the trust receipt
did not result in the full satisfaction of the petitioners’ loan obligation. Petitioners
are apparently laboring under the mistaken impression that the full turn-over of the
goods suffices to divest them of their obligation to repay the principal amount of
their loan obligation. The entrustee’s possession of the subject machinery and
equipment being precisely as a form of security for the advances given to TCC under
the Letter of Credit, said possession by itself cannot be considered payment of the
loan secured thereby. Payment would legally result only after PNB had foreclosed on
said securities, sold the same and applied the proceeds thereof to TCC’s loan
obligation. Mere possession does not amount to foreclosure for foreclosure denotes
the procedure adopted by the mortgagee to terminate the rights of the mortgagor on
the property and includes the sale itself. Neither can said repossession amount to
dacion en pago. Dation in payment takes place when property is alienated to the
creditor in satisfaction of a debt in money and the same is governed by sales. Dation
in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation.

A trust receipt is inextricably linked with the primary agreement between the
parties. Time and again, we have emphasized that a trust receipt agreement is
merely a collateral agreement, the purpose of which is to serve as security for a loan.
Thus, in Abad v. Court of Appeals, we ruled: A letter of credit-trust receipt
arrangement is endowed with its own distinctive features and characteristics. Under
that set-up, a bank extends a loan covered by the letter of credit, with the trust
receipt as security for the loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature which is in the
covering trust receipt. x x x. A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a “security interest” in the goods. It secures an
indebtedness and there can be no such thing as security interest that secures no
obligation. The Trust Receipts Law was enacted to safeguard commercial
transactions and to offer an additional layer of security to the lending bank. Trust
receipts are indispensable contracts in international and domestic business
transactions. The prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of goods,
documents or instruments held in trust for entruster banks, and the need for
regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of the Trust Receipts Law.

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

MARCH 15, 2014LEAVE A COMMENT
The ownership of the merchandise continues to be vested in the person who had
advanced payment until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted
for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to
renovate the latter’s convent at Camaman-an, Cagayan de Oro City. Colinares
applied for a commercial letter of credit with the Philippine Banking Corporation,
Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC
approved the letter of credit for P22,389.80 to cover the full invoice value of the
goods. Petitioners signed a pro-forma trust receipt as security.
PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of the
loan. After the initial payment, the spouses defaulted. PBC wrote to Petitioners
demanding that the amount be paid within seven days from notice. Instead of
complying with PBC’s demand, Veloso confessed that they lost P19,195.83 in the
Carmelite Monastery Project and requested for a grace period of until 15 June 1980
to settle the account. Colinares proposed that the terms of payment of the loan be
modified P2,000 on or before 3 December 1980, and P1,000 per month . Pending
approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980, and
thereafter P500 on 11 February 1981, 16 March 1981, and 20 April 1981.
Concurrently with the separate demand for attorney’s fees by PBC’s legal counsel,
PBC continued to demand payment of the balance. On 14 January 1983,
Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in
relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a “clean loan” as per
verbal guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner
Colinares signed the documents without reading the fine print, only learning of the
trust receipt implication much later. When he brought this to the attention of PBC,
Mr. Tuiza assured him that the trust receipt was a mere formality. The Trust
Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. Here, it is crystal
clear that on the part of Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of PBC. Petitioners continually
endeavored to meet their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.

Issue: Whether or not the transaction of Colinares falls within the ambit of the Law
on Trust Receipt

Held: Colinares received the merchandise from CM Builders Centre on 30 October

1979. On that day, ownership over the merchandise was already transferred to
Petitioners who were to use the materials for their construction project. It was only a
day later, 31 October 1979, that they went to the bank to apply for a loan to pay for
the merchandise. This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the importer in
trust subsequent to the grant of the loan.

The bank acquires a “security interest” in the goods as holder of a security title for
the advances it had made to the entrustee. The ownership of the merchandise
continues to be vested in the person who had advanced payment until he has been
paid in full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or successor
in interest. To secure that the bank shall be paid, it takes full title to the goods at
the very beginning and continues to hold that title as his indispensable security
until the goods are sold and the vendee is called upon to pay for them; hence, the
importer has never owned the goods and is not able to deliver possession. In a
certain manner, trust receipts partake of the nature of a conditional sale where the
importer becomes absolute owner of the imported merchandise as soon as he has
paid its price. There are two possible situations in a trust receipt transaction. The
first is covered by the provision which refers to money received under the obligation
involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The
second is covered by the provision which refers to merchandise received under the
obligation to “return” it (devolvera) to the owner. Failure of the entrustee to turn over
the proceeds of the sale of the goods, covered by the trust receipt to the entruster or
to return said goods if they were not disposed of in accordance with the terms of the
trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal
Code, without need of proving intent to defraud.

JARDELEZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner The Hongkong & Shanghai Banking Corporation, Limited (HSBC) filed this
petition to assail the Decision of the Court of Appeals (CA) dated November 19, 2007
(Assailed Decision) which reversed the ruling of the Regional Trial Court, Branch 62
of Makati City (RTC Makati) and its Resolution denying HSBC's Motion for
Reconsideration dated June 23, 2008 (Assailed Resolution).

The Facts

Respondent National Steel Corporation (NSC) entered into an Export Sales Contract
(the Contract) with Klockner East Asia Limited (Klockner) on October 12,
1993.[1] NSC sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB
ST Iligan terms. In accordance with the requirements in the Contract, Klockner
applied for an irrevocable letter of credit with HSBC in favor of NSC as the
beneficiary in the amount of US$468,000. On October 22, 1993, HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409 (the Letter of Credit) in favor
of NSC.[2] The Letter of Credit stated that it is governed by the International
Chamber of Commerce Uniform Customs and Practice for Documentary Credits,
Publication No. 400 (UCP 400). Under UCP 400, HSBC as the issuing bank, has the
obligation to immediately pay NSC upon presentment of the documents listed in the
Letter of Credit.[3] These documents are: (1) one original commercial invoice; (2) one
packing list; (3) one non-negotiable copy of clean on board ocean bill of lading made
out to order, blank endorsed marked 'freight collect and notify applicant;' (4) copy of
Mill Test Certificate made out 'to whom it may concern;' (5) copy of beneficiary's
telex to applicant (Telex No. 86660 Klock HX) advising shipment details including
D/C No., shipping marks, name of vessel, port of shipment, port of destination, bill
of lading date, sailing and ETA dates, description of goods, size, weight, number of
packages and value of goods latest two days after shipment date; and (6)
beneficiary's certificate certifying that (a) one set of non-negotiable copies of
documents (being those listed above) have been faxed to applicant (FAX No.
5294987) latest two days after shipment date; and (b) one set of documents
including one copy each of invoice and packing list, 3/3 original bills of lading plus
one non-negotiable copy and three original Mill Test Certificates have been sent to
applicant by air courier service latest two days after shipment date. [4]

The Letter of Credit was amended twice to reflect changes in the terms of delivery.
On November 2, 1993, the Letter of Credit was first amended to change the delivery
terms from FOB ST Iligan to FOB ST Manila and to increase the amount to
US$488,400.[5] It was subsequently amended on November 18, 1993 to extend the
expiry and shipment date to December 8, 1993.[6] On November 21, 1993, NSC,
through Emerald Forwarding Corporation, loaded and shipped the cargo of prime
cold rolled coils on board MV Sea Dragon under China Ocean Shipping Company
Bill of Lading No. HKG 266001. The cargo arrived in Hongkong on November 25,
1993.[7]

NSC coursed the collection of its payment from Klockner through City Trust
Banking Corporation (City Trust). NSC had earlier obtained a loan from City Trust
secured by the proceeds of the Letter of Credit issued by HSBC. [8]

On November 29, 1993, City Trust sent a collection order (Collection Order) to HSBC
respecting the collection of payment from Klockner. The Collection Order instructed
as follows: (1) deliver documents against payment; (2) cable advice of non-payment
with reason; (3) cable advice payment; and (4) remit proceeds via TELEX.[9] The
Collection Order also contained the following statement: "Subject to Uniform Rules
for the Collection of Commercial Paper Publication No. 322." [10] Further, the
Collection Order stated that proceeds should be remitted to Standard Chartered
Bank of Australia, Ltd., Offshore Branch Manila (SCB-M) which was, in turn, in
charge of remitting the amount to City Trust.[11] On the same date, City Trust also
presented to HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading;
(3) Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to
Klockner on shipping details; (7) Beneficiary's Certificate of facsimile transmittal of
documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and
(9) DHL Receipt No. 669988911 and Certificate of Origin. [12]

On December 2, 1993, LISBC sent a cablegram to City Trust acknowledging receipt

of the Collection Order. It also stated that the documents will be presented to "the
drawee against payment subject to UCP 322 [Uniform Rules for Collection (URC)
322] as instructed..."[13] SCB-M then sent a cablegram to ITSBC requesting the latter
to urgently remit the proceeds to its account. It further asked that LISBC inform it
"if unable to pay"[14] and of the "reasons thereof."[15] Neither CityTrust nor SCB-M
objected to LISBC's statement that the collection will be handled under the Uniform
Rules for Collection (URC 322).

On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it

repeated that "this bill is being handled subject to [URC] 322 as instructed by [the]
collecting bank."[16] It also informed SCB-M that it has referred the matter to
Klockner for payment and that it will revert upon the receipt of the amount. [17] On
December 8, 1993, the Letter of Credit expired.[18]

On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that
Klockner had refused payment. It then informed SCB-M that it intends to return the
documents to NSC with all the banking charges for its account.[19] In a cablegram
dated December 14, 1993, CityTrust requested HSBC to inform it of Klockner's
reason for refusing payment so that it may refer the matter to NSC. [20] HSBC did not
respond and City Trust thus sent a follow-up cablegram to HSBC on December 17,
1993. In this cablegram, City Trust insisted that a demand for payment must be
made from Kloclaier since the documents "were found in compliance with LC terms
and conditions."[21]HSBC replied on the same day stating that in accordance with
CityTrust's instruction in its Collection Order, HSBC treated the transaction as a
matter under URC 322. Thus, it demanded payment from Klockner which
unfortunately refused payment for unspecified reasons. It then noted that under
URC 322, Kloclaier has no duty to provide a reason for the refusal. Hence, HSBC
requested for further instructions as to whether it should continue to press for
payment or return the documents.[22] City Trust responded that as advised by its
client, HSBC should continue to press for payment.[23]

Klockner continued to refuse payment and HSBC notified City Trust in a cablegram
dated January 7, 1994, that should Kloclaier still refuse to accept the bill by
January 12, 1994, it will return the full set of documents to City Trust with all the
charges for the account of the drawer.[24]

Meanwhile, on January 12, 1994, City Trust sent a letter to NSC stating that it
executed NSC's instructions "to send, ON COLLECTION BASIS, the export
documents..."[25] City Trust also explained that its act of sending the export
documents on collection basis has been its usual practice in response to NSC's
instructions in its transactions.[26]

NSC responded to this in a letter dated January 18, 1994. [27] NSC expressed its
disagreement with CityTrust's contention that it sent the export documents to HSBC
on collection basis. It highlighted that it "negotiated with City Trust the export
documents pertaining to LC No. HKH 239409 of HSBC and it was City Trust, which
wrongfully treated the negotiation, as 'on collection basis.'"[28] NSC further claimed
that City Trust used its own mistake as an excuse against payment under the Letter
of Credit. Thus, NSC argued that City Trust remains liable under the Letter of
Credit. It also stated that it presumes that City Trust has preserved whatever right
of reimbursement it may have against HSBC.[29]

On January 13, 1994, CityTrust notified HSBC that it should continue to press for
payment and to hold on to the document until further notice. [30]

However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994,
HSBC returned the documents to CityTrust.[31] In a letter accompanying the
returned documents, HSBC stated that it considered itself discharged of its duty
under the transaction. It also asked for payment of handling charges.[32] In response,
CityTrust sent a cablegram to HSBC dated February 21, 1994 stating that it is "no
longer possible for beneficiary to wait for you to get paid by applicant." [33] It
explained that since the documents required under the Letter of Credit have been
properly sent to HSBC, Citytrust demanded payment from it. CityTrust also stated,
for the first time in all of its correspondence with HSBC, that "re your previous
telexes, ICC Publication No. 322 is not applicable."[34] FISBC responded in cablegram
dated February 28, 1994.[35] It insisted that CityTrust sent documents which clearly
stated that the collection was being made under URC 322. Thus, in accordance with
its instructions, HSBC, in the next three months, demanded payment from Klockner
which the latter eventually refused. Flence, FISBC stated that it opted to return the
documents. It then informed CityTrust that it considered the transaction closed save
for the latter's obligation to pay the handling charges.[36]

Disagreeing with HSBC's position, CityTrust sent a cablegram dated March 9,

1994.[37] It insisted that HSBC should pay it in accordance with the terms of the
Letter of Credit which it issued on October 22, 1993. Under the Letter of Credit,
FISBC undertook to reimburse the presenting bank under "ICC 400 upon the
presentment of all necessary documents."[38] CityTrust also stated that the reference
to URC 322 in its Collection Order was merely in fine print. The Collection Order
itself was only pro-forma. CityTrust emphasized that the reference to URC 322 has
been "obviously superseded by our specific instructions to 'deliver documents
against payment/cable advice non-payment with reason/cable advice
payment/remit proceeds via telex' which was typed in on said form." [39] CityTrust
also claimed that the controlling document is the Letter of Credit and not the mere
fine print on the Collection Order.[40] FISBC replied on March 10, 1994.[41] It argued
that CityTrust clearly instructed it to collect payment under URC 322, thus,
CityTrust can no longer claim a contrary position three months after it made its
request. FISBC repeated that the transaction is closed except for City Trust's
obligation to pay for the expenses which HSBC incurred.[42]

Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time,
demanded payment under the Letter of Credit.[43]On March 11, 1994, the NSC sent
another letter to LISBC through the Office of the Corporate Counsel which served as
its final demand. These demands were made after approximately four months from
the expiration of the Letter of Credit.

Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of
money (Complaint)[44] docketed as Civil Case No. 94-2122 (Collection Case) of the
RTC Makati. In its Complaint, NSC alleged that it coursed the collection of the Letter
of Credit through CityTrust. However, notwithstanding CityTrust's complete
presentation of the documents in accordance with the requirements in the Letter of
Credit, HSBC unreasonably refused to pay its obligation in the amount of US$485,
767.93.[45]

HSBC filed its Answer[46] on January 6, 1995. HSBC denied any liability under the
Letter of Credit. It argued in its Answer that CityTrust modified the obligation when
it stated in its Collection Order that the transaction is subject to URC 322 and not
under UCP 400.[47] It also filed a Motion to Admit Attached Third-Party
Complaint[48] against CityTrust on November 21, 1995.[49] It claimed that CityTrust
instructed it to collect payment under URC 322 and never raised that it intended to
collect under the Letter of Credit.[50] HSBC prayed that in the event that the court
finds it liable to NSC, CityTrust should be subrogated in its place and be made
directly liable to NSC.[51]The RTC Makati granted the motion and admitted the third
party complaint. CityTrust filed its Answer[52] on January 8, 1996. CityTrust denied
that it modified the obligation. It argued that as a mere agent, it cannot modify the
terms of the Letter of Credit without the consent of all the parties.[53] Further, it
explained that the supposed instruction that the transaction is subject to URC 322
was merely in fine print in a pro forma document and was superimposed and pasted
over by a large pink sticker with different remittance instructions.[54]

After a full-blown trial,[55] the RTC Makati rendered a decision (RTC Decision) dated
February 23, 2000.[56] It found that IiSBC is not liable to pay NSC the amount stated
in the Letter of Credit. It ruled that the applicable law is URC 322 as it was the law
which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no
liability to pay when Klockner refused payment. The dispositive portion states -

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims

against NSC are DENIED.

2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the

following:

2.1 US$771.21 as actual and consequential damages; and

2.2 P100,000 as attorney's fees.
3. No pronouncement as to costs.

SO ORDERED.[57]

NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed
Decision dated November 19, 2007,[58] the CA reversed the RTC Makati. The CA
found that it is UCP 400 and not URC 322 which governs the transaction. According
to the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply.
Further, the CA explained that even if the Letter of Credit did not state that UCP 400
governs, it nevertheless finds application as this Court has consistently recognized it
under Philippine jurisdiction. Thus, applying UCP 400 and principles concerning
letters of credit, the CA explained that the obligation of the issuing bank is to pay
the seller or beneficiary of the credit once the draft and the required documents are
properly presented. Under the independence principle, the issuing bank's obligation
to pay under the letter of credit is separate from the compliance of the parties in the
main contract. The dispositive portion held -

WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED

and SET ASIDE. HSBC is ordered to pay its obligation under the irrevocable letter of
credit in the amount of US$485,767.93 to NSC with legal interest of six percent (6%)
per annum from the filing of the complaint until the amount is fully paid, plus
attorney's fees equivalent to 10% of the principal. Costs against appellee HSBC.

SO ORDERED.[59]

HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA
denied in its Assailed Resolution dated June 23, 2008. [60]

Hence, HSBC filed this Petition for Review on Certiorari[61] before this Court, seeking
a reversal of the CA's Assailed Decision and Resolution. In its petition, HSBC
contends that CityTrust's order to collect under URC 322 did not modify nor
contradict the Letter of Credit. In fact, it is customary practice in commercial
transactions for entities to collect under URC 322 even if there is an underlying
letter of credit. Further, City Trust acted as an agent of NSC in collecting payment
and as such, it had the authority to instruct HSBC to proceed under URC 322 and
not under UCP 400. Having clearly and expressly instructed HSBC to collect under
URC 322 and having fully intended the transaction to proceed under such rule as
shown by the series of correspondence between City Trust and HSBC, City Trust is
estopped from now claiming that the collection was made under UCP 400 in
accordance with the Letter of Credit.

NSC, on the other hand, claims that ITSBC's obligation to pay is clear from the
terms of the Letter of Credit and under UCP 400. It asserts that the applicable rule
is UCP 400 and HSBC has no basis to argue that CityTrust's presentment of the
documents allowed LISBC to vary the terms of their agreement.[62]

The Issues

The central question in this case is who among the parties bears the liability to pay
the amount stated in the Letter of Credit. This requires a determination of which
between UCP 400 and URC 322 governs the transaction. The obligations of the
parties under the proper applicable rule will, in turn, determine their liability.

The Ruling of the Court

We uphold the CA.

The nature of a letter of credit

A letter of credit is a commercial instrument developed to address the unique needs

of certain commercial transactions. It is recognized in our jurisdiction and is
sanctioned under Article 567[63] of the Code of Commerce and in numerous
jurisprudence defining a letter of credit, the principles relating to it, and the
obligations of parties arising from it.

In Bank of America, NT & SA v. Court of Appeals,[64] this Court defined a letter of

credit as "...a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying."[65] Through a letter of
credit, a buyer obtains the credit of a third party, usually a bank, to provide
assurance of payment.[66] This, in turn, convinces a seller to part with his or her
goods even before he or she is paid, as he or she is insured by the third party that
he or she will be paid as soon as he or she presents the documents agreed upon.[67]

A letter of credit generally arises out of a separate contract requiring the assurance
of payment of a third party. In a transaction involving a letter of credit, there are
usually three transactions and three parties. The first transaction, which constitutes
the underlying transaction in a letter of credit, is a contract of sale between the
buyer and the seller. The contract may require that the buyer obtain a letter of
credit from a third party acceptable to the seller. The obligations of the parties under
this contract are governed by our law on sales.

The second transaction is the issuance of a letter of credit between the buyer and
the issuing bank. The buyer requests the issuing bank to issue a letter of credit
naming the seller as the beneficiary. In this transaction, the issuing bank
undertakes to pay the seller upon presentation of the documents identified in the
letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse
the issuing bank for the payment made. In addition, this transaction may also
include a fee for the issuing bank's services.[68] This transaction constitutes an
obligation on the part of the issuing bank to perform a service in consideration of
the buyer's payment. The obligations of the parties and their remedies in cases of
breach are governed by the letter of credit itself and by our general law on
obligations, as our civil law finds suppletory application in commercial
documents.[69]
The third transaction takes place between the seller and the issuing bank. The
issuing bank issues the letter of credit for the benefit of the seller. The seller may
agree to ship the goods to the buyer even before actual payment provided that the
issuing bank informs him or her that a letter of credit has been issued for his or her
benefit. This means that the seller can draw drafts from the issuing bank upon
presentation of certain documents identified in the letter of credit. The relationship
between the issuing bank and the seller is not strictly contractual since there is no
privity of contract nor meeting of the minds between them. [70] It also does not
constitute a stipulation pour autrui in favor of the seller since the issuing bank
must honor the drafts drawn against the letter of credit regardless of any defect in
the underlying contract.[71] Neither can it be considered as an assignment by the
buyer to the seller-beneficiary as the buyer himself cannot draw on the
letter.[72] From its inception, only the seller can demand payment under the letter of
credit. It is also not a contract of suretyship or guaranty since it involves primary
liability in the event of default.[73] Nevertheless, while the relationship between the
seller-beneficiary and the issuing bank is not strictly contractual, strict payment
under the terms of a letter of credit is an enforceable right. [74] This enforceable right
finds two legal underpinnings. First, letters of credit, as will be further explained,
are governed by recognized international norms which dictate strict compliance with
its terms. Second, the issuing bank has an existing agreement with the buyer to pay
the seller upon proper presentation of documents. Thus, as the law on obligations
applies even in commercial documents,[75] the issuing bank has a duty to the buyer
to honor in good faith its obligation under their agreement. As will be seen in the
succeeding discussion, this transaction is also governed by international customs
which this Court has recognized in this jurisdiction.[76]

In simpler terms, the various transactions that give rise to a letter of credit proceed
as follows: Once the seller ships the goods, he or she obtains the documents
required under the letter of credit. He or she shall then present these documents to
the issuing bank which must then pay the amount identified under the letter of
credit after it ascertains that the documents are complete. The issuing bank then
holds on to these documents which the buyer needs in order to claim the goods
shipped. The buyer reimburses the issuing bank for its payment at which point the
issuing bank releases the documents to the buyer. The buyer is then able to present
these documents in order to claim the goods. At this point, all the transactions are
completed. The seller received payment for his or her performance of his obligation
to deliver the goods. The issuing bank is reimbursed for the payment it made to the
seller. The buyer received the goods purchased.

Owing to the complexity of these contracts, there may be a correspondent bank

which facilitates the ease of completing the transactions. A correspondent bank may
be a notifying bank, a negotiating bank or a confirming bank depending on the
nature of the obligations assumed.[77] A notifying bank undertakes to inform the
seller-beneficiary that a letter of credit exists. It may also have the duty of
transmitting the letter of credit. As its obligation is limited to this duty, it assumes
no liability to pay under the letter of credit.[78] A negotiating bank, on the other
hand, purchases drafts at a discount from the seller-beneficiary and presents them
to the issuing bank for payment.[79] Prior to negotiation, a negotiating bank has no
obligation. A contractual relationship between the negotiating bank and the seller-
beneficiary arises only after the negotiating bank purchases or discounts the
drafts.[80] Meanwhile, a confirming bank may honor the letter of credit issued by
another bank or confirms that the letter of credit will be honored by the issuing
bank.[81] A confirming bank essentially insures that the credit will be paid in
accordance with the terms of the letter of credit.[82] It therefore assumes a direct
obligation to the seller-beneficiary.[83]
Parenthetically, when banks are involved in letters of credit transactions, the
standard of care imposed on banks engaged in business imbued with public interest
applies to them. Banks have the duty to act with the highest degree of diligence in
dealing with clients.[84]Thus, in dealing with the parties in a letter of credit, banks
must also observe this degree of care.

The value of letters of credit in commerce hinges on an important aspect of such a

commercial transaction. Through a letter of credit, a seller-beneficiary is assured of
payment regardless of the status of the underlying transaction. International
contracts of sales are perfected and consummated because of the certainty that the
seller will be paid thus making him or her willing to part with the goods even prior to
actual receipt of the amount agreed upon. The legally demandable obligation of an
issuing bank to pay under the letter of credit, and the enforceable right of the seller-
beneficiary to demand payment, are indispensable essentials for the system of
letters of credit, if it is to serve its purpose of facilitating commerce. Thus, a
touchstone of any law or custom governing letters of credit is an emphasis on the
imperative that issuing banks respect their obligation to pay, and that seller-
beneficiaries may reasonably expect payment, in accordance with the terms of a
letter of credit.

Rules applicable to letters of credit

Letters of credit are defined and their incidences regulated by Articles 567 to
572[85] of the Code of Commerce. These provisions must be read with Article 2 [86] of
the same code which states that acts of commerce are governed by their provisions,
by the usages and customs generally observed in the particular place and, in the
absence of both rules, by civil law. In addition, Article 50[87] also states that
commercial contracts shall be governed by the Code of Commerce and special laws
and in their absence, by general civil law.

The International Chamber of Commerce (ICC)[88] drafted a set of rules to govern

transactions involving letters of credit. This set of rules is known as the Uniform
Customs and Practice for Documentary Credits (UCP). Since its first issuance in
1933, the UCP has seen several revisions, the latest of which was in 2007, known as
the UCP 600. However, for the period relevant to this case, the prevailing version is
the 1993 revision called the UCP 400. Throughout the years, the UCP has grown to
become the worldwide standard in transactions involving letters of credit. [89] It has
enjoyed near universal application with an estimated 95% of worldwide letters of
credit issued subject to the UCP.[90]

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[91] this Court
applied a provision from the UCP in resolving a case pertaining to a letter of credit
transaction. This Court explained that the use of international custom in our
jurisdiction is justified by Article 2 of the Code of Commerce which provides that
acts of commerce are governed by, among others, usages and customs generally
observed. Further, in Feati Bank & Trust Company v. Court of Appeals,[92] this Court
ruled that the UCP should be applied in cases where the letter of credit expressly
states that it is the governing rule.[93] This Court also held in Feati that the UCP
applies even if it is not incorporated into the letter of the credit. [94] The application of
the UCP in Bank of Philippine Islands and in Feati was further affirmed
in Metropolitan Waterworks and Sewerage System v. Daway [95] where this Court held
that "[l]etters of credit have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credit[s] of the International
Chamber of Commerce."[96] These precedents highlight the binding nature of the
UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed primarily by their own
provisions,[97] by laws specifically applicable to them,[98] and by usage and
custom.[99] Consistent with our rulings in several cases,[100] usage and custom refers
to UCP 400. When the particular issues are not covered by the provisions of the
letter of credit, by laws specifically applicable to them and by UCP 400, our general
civil law finds suppletory application.[101]

Applying this set of laws and rules, this Court rules that HSBC is liable under the
provisions of the Letter of Credit, in accordance with usage and custom as embodied
in UCP 400, and under the provisions of general civil law.

HSBC's Liability

The Letter of Credit categorically stated that it is subject to UCP 400, to wit:

Except so far as otherwise expressly stated, this documentary credit is subject to

uniform Customs and Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No. 400. [102]

From the moment that HSBC agreed to the terms of the Letter of Credit - which
states that UCP 400 applies - its actions in connection with the transaction
automatically became bound by the rules set in UCP 400. Even assuming that URC
322 is an international custom that has been recognized in commerce, this does not
change the fact that HSBC, as the issuing bank of a letter of credit, undertook
certain obligations dictated by the terms of the Letter of Credit itself and by UCP
400. In Feati, this Court applied UCP 400 even when there is no express stipulation
in the letter of credit that it governs the transaction.[103] On the strength of our
ruling in Feati, we have the legal duty to apply UCP 400 in this case independent of
the parties' agreement to be bound by it.

UCP 400 states that an irrevocable credit payable on sight, such as the Letter of
Credit in this case, constitutes a definite undertaking of the issuing bank to pay,
provided that the stipulated documents are presented and that the terms and
conditions of the credit are complied with.[104] Further, UCP 400 provides that an
issuing bank has the obligation to examine the documents with reasonable
care.[105] Thus, when City Trust forwarded the Letter of Credit with the attached
documents to LISBC, it had the duty to make a determination of whether its
obligation to pay arose by properly examining the documents.

In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern
the transaction.[106] URC 322 is a set of norms compiled by the ICC. [107] It was
drafted by international experts and has been adopted by the ICC members. Owing
to the status of the ICC and the international representation of its membership,
these rules have been widely observed by businesses throughout the world. It
prescribes the collection procedures, technology, and standards for handling
collection transactions for banks.[108] Under the facts of this case, a bank acting in
accordance with the terms of URC 322 merely facilitates collection. Its duty is to
forward the letter of credit and the required documents from the entity seeking
payment to another entity which has the duty to pay. The bank incurs no obligation
other than as a collecting agent. This is different in the case of an issuing bank
acting in accordance with UCP 400. In this case, the issuing bank has the duty to
pay the amount stated in the letter of credit upon due presentment. HSBC claims
that while UCP 400 applies to letters of credit, it is also common for beneficiaries of
such letters to seek collection under URC 322. HSBC further claims that URC 322 is
an accepted custom in commerce.[109]

HSBC's argument is without merit. We note that HSBC failed to present evidence to
prove that URC 322 constitutes custom and usage recognized in commerce. Neither
was there sufficient evidence to prove that beneficiaries under a letter of credit
commonly resort to collection under URC 322 as a matter of industry practice.
HSBC claims that the testimony of its witness Mr. Lincoln MacMahon (Mr.
MacMahon) suffices for this purpose.[110] However, Mr. MacMahon was not presented
as an expert witness capable of establishing the existing banking and commercial
practice relating to URC 322 and letters of credit. Thus, this Court cannot hold that
URC 322 and resort to it by beneficiaries of letters of credit are customs that
demand application in this case.[111]

HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to
disregard the Letter of Credit, and merely demand collection from Klockner cannot
be countenanced. Such an argument effectively asks this Court to give imprimatur
to a practice that undermines the value and reliability of letters of credit in trade
and commerce. The entire system of letters of credit rely on the assurance that upon
presentment of the proper documents, the beneficiary has an enforceable right and
the issuing bank a demandable obligation, to pay the amount agreed upon. Were a
party to the transaction allowed to simply set this aside by the mere invocation of
another set of norms related to commerce - one that is not established as a custom
that is entitled to recognition by this Court - the sanctity of letters of credit will be
jeopardized. To repeat, any law or custom governing letters of credit should have, at
its core, an emphasis on the imperative that issuing banks respect their obligation
to pay and that seller-beneficiaries may reasonably expect payment in accordance
with the terms of a letter of credit. Thus, the CA correctly ruled, to wit:

At this juncture, it is significant to stress that an irrevocable letter of credit cannot,

during its lifetime, be cancelled or modified without the express permission of the
beneficiary. Not even partial payment of the obligation by the applicant-buyer would
amend or modify the obligation of the issuing bank. The subsequent
correspondences of [CityTrust] to HSBC, thus, could not in any way affect or amend
the letter of credit, as it was not a party thereto. As a notifying bank, it has nothing
to do with the contract between the issuing bank and the buyer regarding the
issuance of the letter of credit.[112] (Citations omitted)

The provisions in the Civil Code and our jurisprudence apply suppletorily in this
case.[113] When a party knowingly and freely binds himself or herself to perform an
act, a juridical tie is created and he or she becomes bound to fulfill his or her
obligation. In this case, HSBC's obligation arose from two sources. First, it has a
contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of
the Letter of Credit and the attached documents. Second, it has an obligation to
NSC to honor the Letter of Credit. In complying with its obligation, HSBC had the
duty to perform all acts necessary. This includes a proper examination of the
documents presented to it and making a judicious inquiry of whether City Trust, in
behalf of NSC, made a due presentment of the Letter of Credit.

Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In
all of its transactions, it must exercise the highest standard of care and must fulfill
its obligations with utmost fidelity to its clients. Thus, upon receipt of City Trust's
Collection Order with the Letter of Credit, HSBC had the obligation to carefully
examine the documents it received. Had it observed the standard of care expected of
it, HSBC would have discovered that the Letter of Credit is the very same document
which it issued upon the request of Klockner, its client. Had LISBC taken the time to
perform its duty with the highest degree of diligence, it would have been alerted by
the fact that the documents presented to it corresponded with the documents stated
in the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC ought to
have noticed the discrepancy between City Trust's request for collection under URC
322 and the terms of the Letter of Credit. Notwithstanding any statements by City
Trust in the Collection Order as to the applicable rules, FISBC had the independent
duty of ascertaining whether the presentment of the Letter of Credit and the
attached documents gave rise to an obligation which it had to Klockner (its client)
and NSC (the beneficiary). Regardless of any error that City Trust may have
committed, the standard of care expected of LISBC dictates that it should have made
a separate determination of the significance of the presentment of the Letter of
Credit and the attached documents. A bank exercising the appropriate degree of
diligence would have, at the very least, inquired if NSC was seeking payment under
the Letter of Credit or merely seeking collection under URC 322. In failing to do so,
HSBC fell below the standard of care imposed upon it.

This Court therefore rules that CityTrust's presentment of the Letter of Credit with
the attached documents in behalf of NSC, constitutes due presentment. Under the
terms of the Letter of Credit, LISBC undertook to pay the amount of US$485,767.93
upon presentment of the Letter of Credit and the required documents. [114] In
accordance with this agreement, NSC, through CityTrust, presented the Letter of
Credit and the following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to
Klockner on shipping details; (7) Beneficiary's Certificate of facsimile transmittal of
documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and
(9) DHL Receipt No. 669988911 and Certificate of Origin. [115]

In transactions where the letter of credit is payable on sight, as in this case, the
issuer must pay upon due presentment. This obligation is imbued with the
character of definiteness in that not even the defect or breach in the underlying
transaction will affect the issuing bank's liability. [116] This is the Independence
Principle in the law on letters of credit. Article 17 of UCP 400 explains that under
this principle, an issuing bank assumes no liability or responsibility "for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or
for the general and/or particular conditions stipulated in the documents or
superimposed thereon..." Thus, as long as the proper documents are presented, the
issuing bank has an obligation to pay even if the buyer should later on refuse
payment. Hence, Klockner's refusal to pay carries no effect whatsoever on HSBC's
obligation to pay under the Letter of Credit. To allow HSBC to refuse to honor the
Letter of Credit simply because it could not collect first from Klockner is to
countenance a breach of the Independence Principle.

HSBC's persistent refusal to comply with its obligation notwithstanding due

presentment constitutes delay contemplated in Article 1169 of the Civil
Code.[117] This provision states that a party to an obligation incurs in delay from the
time the other party makes a judicial or extrajudicial demand for the fulfillment of
the obligation. We rule that the due presentment of the Letter of Credit and the
attached documents is tantamount to a demand. IISBC incurred in delay when it
failed to fulfill its obligation despite such a demand.

Under Article 1170 of the Civil Code,[118] a party in delay is liable for damages. The
extent of these damages pertains to the pecuniary loss duly proven. [119] In this case,
such damage refers to the losses which NSC incurred in the amount of
US$485,767.93 as stated in the Letter of Credit. We also award interest as
indemnity for the damages incurred in the amount of six percent (6%) from the date
of NSC's extrajudicial demand.[120] An interest in the amount of six percent (6%) is
also awarded from the time of the finality of this decision until full payment.[121]

Having been remiss in its obligations under the applicable law, rules and
jurisprudence, HSBC only has itself to blame for its consequent liability to NSC.

However, this Court finds that there is no basis for the CA's grant of attorney's fees
in favor of NSC. Article 2208 of the Civil Code [122]enumerates the grounds for the
award of attorney's fees. This Court has explained that the award of attorney's fees
is an exception rather than the rule.[123] The winning party is not automatically
entitled to attorney's fees as there should be no premium on the right to
litigate.[124] While courts may exercise discretion in granting attorney's fees, this
Court has stressed that the grounds used as basis for its award must approximate
as closely as possible the enumeration in Article 2208.[125] Its award must have
sufficient factual and legal justifications.[126] This Court rules that none of the
grounds stated in Article 2208 are present in this case. NSC has not cited any
specific ground nor presented any particular fact to warrant the award of attorney's
fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting under the Letter of Credit,
it constituted CityTrust as its agent. Article 1868 of the Civil Code states that a
contract of agency exists when a person binds himself or herself "to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter." In this case, CityTrust bound itself to collect
under the Letter of Credit in behalf of NSC.

One of the obligations of an agent is to carry out the agency in accordance with the
instructions of the principal. In ascertaining NSC's instructions to CityTrust, its
letter dated January 18, 1994 is determinative. In this letter, NSC clearly stated that
it "negotiated with CityTrust the export documents pertaining to LC No. HKH
239409 of HSBC and it was CityTrust which wrongfully treated the negotiation as
'on collection basis.'"128 HSBC persistently communicated with CityTrust and
consistently repeated that it will proceed with collection under URC 322. At no point
did CityTrust correct HSBC or seek clarification from NSC. In insisting upon its
course of action, CityTrust failed to act in accordance with the instructions given by
NSC, its principal. Nevertheless while this Court recognizes that CityTrust
committed a breach of its obligation to NSC, this carries no implications on the clear
liability of HSBC. As this Court already mentioned, HSBC had a separate obligation
that it failed to perform by reason of acts independent of CityTrust's breach of its
obligation under its contract of agency. If CityTrust has incurred any liability, it is to
its principal NSC. However, NSC has not raised any claim against CityTrust at any
point in these proceedings. Thus, this Court cannot make any finding of liability
against City Trust in favor of NSC.

WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19,
2007 is AFFIRMED to the extent that it orders HSBC to pay NSC the amount of
US$485,767.93. HSBC is also liable to pay legal interest of six percent (6%) per
annum from the time of extrajudicial demand. An interest of six percent (6%) is also
awarded from the time of the finality of this decision until the amount is fully paid.
We delete the award of attorney's fees. No pronouncement as to cost.

SO ORDERED.
 IRST DIVISION

[ G.R. No. 185590, December 03, 2014 ]

METROPOLITAN BANK AND TRUST COMPANY, PETITIONER, VS. LEY

CONSTRUCTION AND DEVELOPMENT CORPORATION AND SPOUSES MANUEL
LEY AND JANET LEY, RESPONDENTS.

DECISION
LEONARDO-DE CASTRO, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks the
reversal of the Court of Appeals' Decision[1] dated September 4, 2008 in CA-G.R. CV
No. 75590 dismissing the appeal of petitioner Metropolitan Bank and Trust
Company assailing the dismissal of its complaint by the Regional Trial Court (RTC)
of Makati City, Branch 56, and the Resolution[2] dated December 5, 2008 denying
the Bank's motion for reconsideration.

The Court of Appeals adopted the following recital of facts in the Decision [3] dated
July 3, 2001 of the RTC in Civil Case No. 91-1878:

This is an action for recovery of a sum of money and damages with a prayer for the
issuance of writ of preliminary attachment filed by the plaintiff Philippine Banking
Corporation[4] against the defendants, namely: Ley Construction and Development
Corporation (hereafter "LCDC") and Spouses Manuel and Janet C. Ley (hereafter
"[defendant]-spouses").

The complaint alleges that: Defendant LCDC, a general contracting firm, through the
oral representations of defendant-spouses, applied with plaintiff, a commercial
bank, for the opening of a Letter of Credit. Plaintiff issued, on April 26, 1990, Letter
of Credit DC 90[-]303-C in favor of the supplier-beneficiary Global Enterprises
Limited, in the amount of Eight Hundred Two Thousand Five Hundred U.S. Dollars
(USD 802,500.00). The letter of credit covered the importation by defendant LCDC of
Fifteen Thousand (15,000) metric tons of Iraqi cement from Iraq. Defendant applied
for and filed with plaintiff two (2) Applications for Amendment of Letter of Credit on
May 3, 1990 and May 11, 1990, respectively.

Thereafter, the supplier-beneficiary Global Enterprises, Inc. negotiated its Letter of

Credit with the negotiating bank Credit Suisse of Zurich, Switzerland. Credit Suisse
then sent a reimbursement claim by telex to American Express Bank Ltd., New York
on July 25, 1990 for the amount of Seven Hundred Sixty[-]Six Thousand Seven
Hundred Eight U.S. Dollars (USD 766,708.00) with a certification that all terms and
conditions of the credit were complied with. Accordingly, on July 30, 1990,
American Express Bank debited plaintiff's account Seven Hundred Seventy
Thousand Six Hundred Ninety[-]One U.S. Dollars and Thirty Cents (USD
770,691.30) and credited Credit Suisse Zurich Account with American Express
Bank, Ltd., New York for the negotiation of Letter of Credit. On August 6, 1990,
plaintiff received from Credit Suisse the necessary shipping documents pertaining to
Letter of Credit DC 90-303-C that were in turn delivered to the defendant. Upon
receipt of the aforesaid documents, defendants executed a trust receipt. However,
the cement that was to be imported through the opening of the subject Letter of
Credit never arrived in the Philippines.

The prompt payment of the obligation of the defendant LCDC was guaranteed by
[defendant]-spouses under the Continuing Surety Agreement executed by the latter
in favor of the defendant.

The obligation covered by the subject Letter of Credit in the amount of USD
802,500.00 has long been overdue and unpaid, notwithstanding repeated demands
for payment thereof. Plaintiff, therefore, instituted the instant complaint for recovery
of the following amounts: Twenty[-]Three [M]illion Two Hundred [F]ifty[-]Nine
Thousand One Hundred Twenty[-]Four Pesos and Fourteen Centavos
(PHP23,259,124.14) as of June 15, 1991, inclusive of interest and penalty, plus
additional interest thereon of Thirty percent (30%) per annum; attorney's fees
equivalent to Twenty[-]Five percent [25%] of the total obligation; and costs of suit.

In support of its cause of action against defendant, plaintiff presented the testimony
of Mr. Fenelito Cabrera, Head of the Foreign Department of plaintiff's Head Office.
(T.S.N. dated June 16, 1995, p. 4) There being no other witness to be presented by
the plaintiff (Order dated June 27, 1997), the plaintiff filed its formal offer of exhibits
dated July 18, 1997 to which defendant filed its comments/objections to formal offer
of evidence dated February 23, 1998. In an order dated March 4, 1998, Exhibits "A"
to "N" to "N-4" including [their] sub-markings were admitted for the purposes they
were respectively offered. However, on defendants' motion for reconsideration dated
[March 30,] 1998 that was duly opposed by the plaintiff in its opposition dated June
3, 1998, this Court partially granted defendants' motion for reconsideration.
Consequently, Exhibits "D", "E", "H", "I", "J", "K", "L", and "M" and their sub-
markings were not admitted for not being properly identified and authenticated by a
competent witness. Only Exhibits "A", "B", "C", "C-1", and "N", "N-1" to "N-4" remain
admitted in evidence. (Order dated September 9, 1998)

Defendant filed a motion to dismiss by way of demurrer to evidence on the ground

that plaintiff's witness Mr. Fenelito Cabrera was incompetent to testify with respect
to the transaction between the plaintiff and the defendant and that the plaintiff's
documentary exhibits were not properly identified and authenticated.[5]

The trial court found that the Bank's only witness, Fenelito Cabrera, was
incompetent to testify on the documents presented by the Bank during the
trial. Cabrera was with the Bank's Dasmariñas Branch and not with the Head
Office from March 1990 to June 1991, the period the transaction covered by the
documents took place. Thus, he could not have properly identified and
authenticated the Bank's documentary exhibits. His lack of competence was even
admitted by the Bank's counsel who did not even ask Cabrera to identify the
documents. As the documents were not identified and duly authenticated, the
Bank's evidence was not preponderant enough to establish its right to recover from
LCDC and the spouses Ley.[6]

The trial court further ruled that only the following documents remained admitted in
evidence:

Exhibit Document

"A" Continuing Surety Agreement dated July 25, 1989

Application and Agreement for Commercial Letter of

"B"
Credit

"C" and "C-1" Letter of Credit No. DC 90-303-C

"N" and "N-1" to "N-4" Statement of Outstanding Obligations

For the trial court, these were insufficient to show that LCDC and the spouses Ley
were responsible for the improper negotiation of the letter of credit. Thus, the trial
court concluded in its Decision dated July 3, 2001 that the Bank failed to establish
its cause of action and to make a sufficient or preponderant case. [7] The dispositive
portion of the decision reads:

WHEREFORE, the demurrer to evidence is granted. The case is dismissed.[8]

The Bank appealed to the Court of Appeals. It claimed that the trial court erred in
granting the demurrer to evidence of LCDC and the spouses Ley on the ground that
the Bank failed to establish its cause of action. The Bank insisted that, even
without considering the exhibits excluded in evidence by the trial court, the Bank
was able to prove by preponderant evidence that it had a right and that right was
violated by LCDC and the spouses Ley. It explained that the trial court was wrong
in considering only Exhibits "A," "B," "C," "C-1," "N" and "N-1" to "N-4" as the
following documents were also admitted in evidence and should have been
considered in the resolution of the demurrer to evidence. [9]

Exhibit Document

"F" Register Copy or Memorandum on the Letter of Credit

"G" Trust Receipt No. TRI432/90 dated August 16, 1990

"G-1" Bank Draft

"G-2" Bill of Exchange

The Bank asserted that the consideration of Exhibits "F," "G" and "G-1" to "G-2"
would have established the following:

(a) On August 16, 1990, LCDC and the spouses Ley received from the Bank the
necessary shipping documents relative to the Letter of Credit evidencing title to the
goods subject matter of the importation which the Bank had previously received
from Credit Suisse;

(b) Upon receipt of the shipping documents, LCDC and the spouses Ley executed a
trust receipt, Trust Receipt No. TRI432/90, in favor of the Bank covering the
importation of cement under Letter of Credit No. DC 90-303-C;

(c) The issuance of the trust receipt was an acknowledgement by LCDC and the
spouses Ley of their receipt of the shipping documents and of their liability to the
Bank;

(d) By signing the trust receipt, constituted an admission by LCDC and the spouses
Ley that the Letter of Credit was in order, including the Bank's payment of the
amount of US$766,708.00 under the Letter of Credit.[10]

Thus, even with only the testimony of Cabrera and Exhibits "A," "B," "C," "C-1," "N"
and "N-1" to "N-4" and "F," "G" and "G-1" to "G-2," the demurrer should have been
denied and LCDC and the spouses Ley held liable to the Bank.

Moreover, the Bank contended that its Exhibits "D," "E," "H," and "I" should have
been also admitted in evidence because LCDC and the spouses Ley effectively
admitted the authenticity of the said documents when they stated in the pre-trial
brief which they submitted during the pre-trial of the case at the trial court:

III. DOCUMENTARY EXHIBITS

Defendants shall adopt the documents submitted by plaintiff and marked as

Annexes "A", "B", "C", "D", "E", "E-1", "F", "G", "G-1", "H" and "H-1" in the plaintiff's
complaint.

Defendants reserve the right to mark or adopt such other documentary evidence as
may be discovered or warranted to support its claim in the course of the trial. x x
x.[11]

The Court of Appeals found no merit in the Bank's appeal. It observed that Cabrera,
the Bank's only witness, prepared and properly identified Exhibits "F," "G," "N" and
"N-1" to "N-4" only. The Bank's counsel even admitted in open court during
Cabrera's direct examination that Cabrera was incompetent to testify on the rest of
the Exhibits. The trial court was therefore correct in not giving any evidentiary
weight to those Exhibits not properly identified by Cabrera. [12]
For the Court of Appeals, the statement in the pre-trial brief that LCDC and the
spouses Ley "shall adopt" Annexes "A," "B," "C," "D," "E," "E-1," "F," "G," "G-1," "H"
and "H-1" of the Bank's complaint did not constitute an admission of the said
documents by LCDC and the spouses Ley. However, the appellate court noted that
LCDC and the spouses Ley admitted the existence and authenticity of the Bank's
Exhibits "A," "B," "C," "C-1," and "G."[13]

Nevertheless, the Court of Appeals ruled that the following Exhibits of the Bank were
admitted in evidence:

Exhibit Document

"A" Continuing Surety Agreement dated July 25, 1989

Application and Agreement for Commercial Letter of

"B"
Credit

"C" and "C-1" Letter of Credit No. DC 90-303-C

"F" Register Copy or Memorandum on the Letter of Credit

"G" Trust Receipt No. TRI432/90 dated August 16, 1990

"N" and "N-1" to "N-4" Statement of Outstanding Obligations

Even upon inclusion and consideration of the above-mentioned exhibits, the Court
of Appeals held that the Bank still failed to show that LCDC and the spouses Ley
were directly responsible for the improper negotiation of the letter of credit. Thus,
the Court of Appeals, in its Decision dated September 4, 2008, dismissed the appeal
and affirmed the decision of the trial court.[14] The dispositive portion of the
Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and

the assailed decision of the RTC, National Capital Judicial Region, Branch 56,
Makati City in Civil Case No. 91-1878 is AFFIRMED.[15]

The Court of Appeals denied the Bank's motion for reconsideration, prompting the
Bank to file this petition.

The Bank insists that it has been able to establish its cause of action not only
through preponderance of evidence but even by the admissions of LCDC and the
spouses Ley. It maintains that its cause of action is not predicated on the improper
negotiation of the letter of credit but on the breach of the terms and conditions of
the trust receipt.[16]

The petition fails.

First, the Bank's petition suffers from a fatal infirmity. In particular, it contravenes
the elementary rule of appellate procedure that an appeal to this Court by petition
for review on certiorari under Rule 45 of the Rules of Court "shall raise only
questions of law."[17] The rule is based on the nature of this Court's appellate
function this Court is not a trier of facts[18] and on the evidentiary weight given to
the findings of fact of the trial court which have been affirmed on appeal by the
Court of Appeals they are conclusive on this Court.[19] While there are recognized
exceptions to the rule,[20] this Court sees no reason to apply the exception and not
the rule in this case.

The conceptual distinction between a question of law and a question of fact is well-
settled in case law:

There is a "question of law" when the doubt or difference arises as to what the law is
on a certain state of facts, and which does not call for an examination of the
probative value of the evidence presented by the parties-litigants. On the other
hand, there is a "question of fact" when the doubt or controversy arises as to the
truth or falsity of the alleged facts. x x x.[21]

The issue of whether or not the Bank was able to establish its cause of action by
preponderant evidence is essentially a question of fact. Stated in another way, the
issue which the Bank raises in this petition is whether the evidence it presented
during the trial was preponderant enough to hold LCDC and the spouses Ley liable.

The required burden of proof, or that amount of evidence necessary and sufficient to
establish one's claim or defense, in civil cases is preponderance of
evidence.[22] Preponderance of evidence is defined as follows:

Preponderance of evidence is the weight, credit, and value of the aggregate evidence
on either side and is usually considered to be synonymous with the term "greater
weight of evidence" or "greater weight of the credible evidence." Preponderance of
evidence is a phrase which, in the last analysis, means probability to truth. It is
evidence which is more convincing to the court as worthier of belief than that which
is offered in opposition thereto.[23] (Emphasis supplied, citation omitted.)

As preponderance of evidence refers to the probability to truth of the matters

intended to be proven as facts, it concerns a determination of the truth or falsity of
the alleged facts based on the evidence presented. Thus, a review of the respective
findings of the trial and the appellate courts as to the preponderance of a party's
evidence requires that the reviewing court address a question of fact.

Moreover, a demurrer to evidence is a motion to dismiss on the ground of

insufficiency of evidence. Evidence is the means, sanctioned by the Rules of Court,
of ascertaining in a judicial proceeding the truth respecting a matter of fact. [24] As
such, the question of sufficiency or insufficiency of evidence, the basic issue
presented by the Bank, pertains to the question of whether the factual matters
alleged by the Bank are true. Plainly, it is a question of fact and, as such, not
proper subject of a petition for review on certiorari under Rule 45 of the Rules of
Court. It was incumbent upon the Bank to demonstrate that this case fell under any
of the exceptions to this rule but it failed to do so.

Second, the Bank attempts to avoid the "only questions of law" rule for appeals filed
under Rule 45 by invoking the misapprehension of facts exception. [25] According to
the Bank, the trial and the appellate courts misapprehended the facts with respect
to the determination of the basis of the Bank's cause of action.[26] In particular, the
Bank contends that both the trial and the appellate courts erred in the
consideration of the proper actionable document upon which the Bank based its
cause of action. The Bank asserts that its cause of action is not grounded on the
Letter of Credit but on the Trust Receipt.

The Bank's reference to the Trust Receipt as its "primary actionable document" [27] is
mistaken and misleading.

The nature of the cause of action is determined by the facts alleged in the
complaint.[28] A party's cause of action is not what the party says it is, nor is it what
the designation of the complaint states, but what the allegations in the body define
and describe.[29]

In this case, the Bank's allegations as to the basis of its cause of action against
LCDC and the spouses Ley, however, belie the Bank's claim. In particular, the
relevant portion of the Bank's Complaint[30] reads:

1.2 The defendants:

a. Ley Construction and Development Corporation (LCDC) is a general contracting

firm engaged in the construction of buildings, infrastructures, and other civil works
with principal office at Mapulang Lupa St., Malinta, Valenzuela, Metro Manila where
it [may be] served with summons and other processes of this Court.

b. Sps. Manuel and Janet C. Ley, the major stockholders of defendant (LCDC) with
business address at 23rd Floor Pacific Star Bldg., Makati Avenue, Makati, Metro
Manila where the processes of this Honorable Court [may be] served upon them are
impleaded herein in their capacity as Surety for the obligation incurred by defendant
LCDC with the herein plaintiff by virtue of a Continuing Surety Agreement they
executed in favor of the plaintiff, a copy of which is hereto attached as Annex "A";

2. STATEMENT OF CAUSE OF ACTION AGAINST DEFENDANT LCDC AND

SPOUSES MANUEL AND JANET LEY

2.1 In conjunction with its business, defendant LCDC sought to import "Iraqi
Cement" from Iraq thru its supplier "Global Enterprises, Limited" with address at 15
A. Tuckeys Lane, Gibraltar.

2.2 To finance this importation, defendant LCDC applied with the plaintiff for the
opening of Letter of Credit as evidenced by the Application and Agreement for
Commercial Letter of Credit, copy of which is marked as Annex "B" and made
integral part hereof.

2.3 Acting on defendant[']s oral representation and those stated in its application
(Annex "B"), plaintiff issued on April 26, 1990 its Letter of Credit No. DC 90[-]303-C
in favor of the supplier Global Enterprises Limited, as beneficiary in the amount of
U.S. Dollars: EIGHT HUNDRED TWO THOUSAND FIVE HUNDRED (US $802,500)
for the account of defendant, covering the importation of 15,000 metric tons of Iraqi
Cement from Iraq, copy of the Letter of Credit is marked as Annex "C" and made
integral part hereof;

2.4 On May 3, 1990, defendant applied for and filed with plaintiff an Application for
Amendment of Letter of Credit, copy of which is attached as Annex "D" hereof, and
another application for amendment was filed on May 11, 1990 copy of which is
marked as Annexes "E" and "E-1" hereof;

2.5 After these amendments were communicated to the negotiating bank, Credit
Suisse of Zurich, Switzerland, the beneficiary negotiated its Letter of Credit
therewith. Thereafter, Credit Suisse sent a reimbursement claim by telex to
American Express Bank Ltd., New York on July 25, 1990 for the amount of
US$766,708.00 with a Certification that all terms and conditions of the credit were
complied with;

2.6 Accordingly, on July 30, 1990, American Express Bank debited plaintiff's
account US$770,691.30 and credited Credit Suisse Zurich Account with American
Express Bank Ltd., New York for the negotiation of Letter of Credit;

2.7 On August 6, 1990, plaintiff received from Credit Suisse the necessary shipping
documents pertaining to Letter of Credit DC 90-303-C all of which were in turn
delivered and received by the defendant on August 16, 1990 as evidenced by their
acknowledgment appearing on the plaintiff's register copy, a copy of which is hereto
attached as Annex "F";

2.8 Upon defendant's receipt of the shipping documents and other documents of
title to the imported goods, defendant signed a trust receipt manifesting its
acceptance/conformity that the negotiation of the LC is in order. A copy of the TR
and the draft issued by the defendant as a means of paying its LC obligation to the
plaintiff are hereto attached and marked as Annexes "G" and "G-1" hereof;

2.9 Sometime during the 3rd week of August, defendant LCDC informed the plaintiff
that the expected shipment of cement subject matter of the LC was allegedly held up
in Iraq purportedly on account of the trade embargo imposed against it by the
United Nation[s] and sought assistance from the plaintiff to secure no-dollar import
permit from the Central Bank as defendant was negotiating with its supplier Global
Enterprises Limited, Inc. for an alternate shipment of Syrian Cement.
2.10 Plaintiff acceded to the request of the defendant and conformably secured the
requested approval from Central Bank to allow the defendant to import cement on a
no-dollar basis, a copy of the defendant's request as well as the Central Bank
approval are hereto attached as Annexes "H" and "H-1".

2.11 About two months after the plaintiff has obtained the requested Central Bank
approval (Annex "H-1")[,] plaintiff was again advised by the defendant that the
alternate shipment of Syrian Cement is no longer forthcoming and that defendant
LCDC after a series of negotiation with its supplier has agreed with the latter for a
reimbursement of the value of the negotiated Letter of Credit.

2.12 While defendant was negotiating with its supplier for that replacement of
Syrian cement, defendant advised plaintiff not to initiate any move as it might
jeopardize defendant's negotiation with its supplier.

2.13 In December 1990, four (4) months from defendant's receipt of the shipping
and export documents from plaintiff, as it became perceptible that defendant's
negotiation with its supplier for reimbursement or replacement would fail[,]
defendant for the first time asked for copies of the beneficiary's draft, the Charter
Party Agreement even as it contested the validity of defendant's obligation to
plaintiff.

2.14 For the first time, defendant also began to assail the validity of the payment
made by the plaintiff to the supplier (Global Enterprises Ltd.) through Credit Suisse,
with the intention of avoiding the payment of its lawful obligation to reimburse the
plaintiff the amount of US $802,500 which obligation is now long overdue and
unpaid notwithstanding repeated demands.

2.15 The obligation covered by the aforesaid Letter of Credit bears interest and
charges at the rate of 30% per annum which rate [may be] increased or decreased
within the limits allowed by the law.

2.16 The prompt payment of the obligations contracted by defendant LCDC from the
plaintiff inclusive of the subject Letter of Credit is guaranteed by defendant Sps.
Manuel and Janet Ley by making themselves jointly and severally liable with the
defendant LCDC in accordance with the terms of a Continuing Surety Agreement
which they executed in favor of the plaintiff (Annex "A"). [31] (Emphases supplied.)

That the Bank's cause of action was hinged on the Letter of Credit is
unmistakable. Taken as a whole, the Bank's allegations make a cause of action
based on the Letter of Credit. The Trust Receipt was mentioned incidentally and
appears only in paragraph 2.8 of the Complaint.[32] In stark contrast, the Letter of
Credit figures prominently in the Complaint as it is mentioned in almost all of the
paragraphs of Part 2 (Statement of Cause of Action Against Defendant LCDC and
Spouses Manuel and Janet Ley). More tellingly, in paragraph 2.15, the Bank speaks
of "the obligation covered by the aforesaid Letter of Credit." [33]
Moreover, under paragraphs 1.2(b) and 2.16 of the Complaint, the spouses Ley have
been impleaded as co-defendants of LCDC on account of their execution of a
Continuing Surety Agreement in the Bank's favor to guarantee the "prompt payment
of the obligations contracted by defendant LCDC from the plaintiff inclusive of the
subject Letter of Credit."[34] In short, the Bank seeks to hold liable (1) LCDC for its
obligations under the Letter of Credit, and (2) the spouses Ley for their obligations
under the Continuing Surety Agreement which stands as security for the Letter of
Credit and not for the Trust Receipt.

Another significant factor that contradicts the Bank's assertion that its "primary
actionable document" is the Trust Receipt is the manner it pleaded the Letter of
Credit and the Trust Receipt, respectively.

The relevant rule on actionable documents is Section 7, Rule 8 of the Rules of Court
which provides:

Section 7. Action or defense based on document. Whenever an action or defense is

based upon a written instrument or document, the substance of such instrument or
document shall be set forth in the pleading, and the original or a copy thereof shall
be attached to the pleading as an exhibit, which shall be deemed to be a part of the
pleading, or said copy may with like effect be set forth in the pleading.

An "actionable document" is a written instrument or document on which an action

or defense is founded. It may be pleaded in either of two ways:

(1) by setting forth the substance of such document in the pleading and attaching
the document thereto as an annex, or

(2) by setting forth said document verbatim in the pleading.[35]

A look at the allegations in the Complaint quoted above will show that the Bank did
not set forth the contents of the Trust Receipt verbatim in the pleading. The Bank
did not also set forth the substance of the Trust Receipt in the Complaint but simply
attached a copy thereof as an annex. Rather than setting forth the substance of the
Trust Receipt, paragraph 2.8 of the Complaint shows that the Bank simply
described the Trust Receipt as LCDC's manifestation of "its acceptance/conformity
that the negotiation of the [Letter of Credit] is in order."[36]

In contrast, while the Bank did not set forth the contents of the Letter of Credit
verbatim in the Complaint, the Bank set forth the substance of the Letter of Credit
in paragraph 2.3 of the Complaint and attached a copy thereof as Annex "C" of the
Complaint. The Bank stated that it "issued on April 26, 1990 its Letter of Credit No.
DC 90[-]303-C in favor of the supplier Global Enterprises Limited, as beneficiary[,] in
the amount of U.S. Dollars: EIGHT HUNDRED TWO THOUSAND FIVE HUNDRED
(US$802,500.00) for the account of defendant [LCDC], covering the importation of
15,000 metric tons of Iraqi Cement from Iraq." [37]

Thus, the Bank's attempt to cling to the Trust Receipt as its so-called "primary
actionable document" is negated by the manner of its allegations in the
Complaint. Thus, too, the trial and the appellate courts did not misapprehend the
facts when they considered the Letter of Credit as the basis of the Bank's cause of
action.

Third, a look at the Letter of Credit, the actionable document on which the Bank
relied in its case against LCDC and the spouses Ley, confirms the identical findings
of the Regional Trial Court and the Court of Appeals.

In Keng Hua Paper Products Co., Inc. v. Court of Appeals, we held[38]:

In a letter of credit, there are three distinct and independent contracts: (1) the
contract of sale between the buyer and the seller, (2) the contract of the buyer with
the issuing bank, and (3) the letter of credit proper in which the bank promises to
pay the seller pursuant to the terms and conditions stated therein. x x x.

Here, what is involved is the second contract the contract of LCDC, as the buyer of
Iraqi cement, with the Bank, as the issuer of the Letter of Credit. The Bank refers to
that contract in the Petition for Review on Certiorari and the Memorandum filed by
the Bank in this case when the Bank argues that, as LCDC and the spouses Ley
have admitted the issuance of the Letter of Credit in their favor, they are "deemed to
have likewise admitted the terms and conditions thereof, as evidenced by the
stipulation therein appearing above the signature of respondent Janet Ley," [39] viz:

"In consideration of your arranging, at my/o[u]r request[,] for the establishment of

this commercial letter of credit (thereinafter referred to as the ["]Credit["])
substantially in accordance with the foregoing, I/we hereby covenant and agree to
each and all of [the] provisions and conditions stipulated on the reverse side
hereof."[40]

The above stipulation actually appears on the Application and Agreement for
Commercial Letter of Credit, the Bank's Exhibit "B." It is the contract which
contains the provisions and conditions governing the legal relationship of the Bank
and LCDC, particularly their respective rights and obligations, in connection with
the Bank's issuance of Letter of Credit No. DC 90-303-C. The importance of the
provisions and conditions supposed to be stipulated on the reverse side of the
Application and Agreement for Commercial Letter of Credit is underscored by the
following note appearing below the space for the signature of Janet Ley:
IMPORTANT: PLEASE READ PROVISIONS AND CONDITIONS ON REVERSE SIDE
HEREOF BEFORE SIGNING ABOVE.[41]

However, the Bank's Exhibit "B" has nothing on its reverse side. In other words, the
reverse side of the Application and Agreement for Commercial Letter of Credit is a
blank page.[42] Even the copy of the Application and Agreement for Commercial
Letter of Credit attached to the Bank's Complaint also has nothing on its back
page.[43]

A cause of action the act or omission by which a party violates the right of
another[44] has three essential elements:

(1) the existence of a legal right in favor of the plaintiff;

(2) a correlative legal duty of the defendant to respect such right; and

an act or omission by such defendant in violation of the right of the plaintiff

(3) with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant. [45]

Although the first two elements may exist, a cause of action arises only upon the
occurrence of the last element, giving the plaintiff the right to maintain an action in
court for recovery of damages or other appropriate relief. [46] In this case, however,
even the legal rights of the Bank and the correlative legal duty of LCDC have not
been sufficiently established by the Bank in view of the failure of the Bank's
evidence to show the provisions and conditions that govern its legal relationship
with LCDC, particularly the absence of the provisions and conditions supposedly
printed at the back of the Application and Agreement for Commercial Letter of
Credit. Even assuming arguendothat there was no impropriety in the negotiation of
the Letter of Credit and the Bank's cause of action was simply for the collection of
what it paid under said Letter of Credit, the Bank did not discharge its burden to
prove every element of its cause of action against LCDC.

This failure of the Bank to present preponderant evidence that will establish the
liability of LCDC under the Letter of Credit necessarily benefits the spouses Ley
whose liability is supposed to be based on a Continuing Surety Agreement
guaranteeing the liability of LCDC under the Letter of Credit.

The Court therefore finds no reason to disturb the rulings of the courts a quo as the
petition put forward insufficient basis to warrant their reversal.

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

Sereno, C.J., (Chairperson), Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

 PNB v. San Miguel

FACTS:

Respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive
Dealership Agreement with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein
the latter was given by SMC the right to trade, deal, market or otherwise sell its
various beer products.

Goroza applied for a credit line with SMC, but one of the requirements for the credit
line was a letter of credit. Thus, Goroza applied for and was granted a letter of credit
by the PNB in the amount of two million pesos (P2,000,000.00). Under the credit
agreement, the PNB has the obligation to release the proceeds of Goroza's credit line
to SMC upon presentation of the invoices and official receipts of Goroza's purchases
of SMC beer products to the PNB, Butuan Branch.

Goroza availed of his credit line with PNB and started selling SMC's beer products.
When Goroza applied for an additional credit line with the PNB, the latter granted
Goroza a one (1) year revolving credit line in the amount not exceeding two million
four hundred thousand pesos (P2,400,000.00). Thus, Goroza's total credit line
reached four million four hundred thousand pesos (P4,400,000.00). Initially, Goroza
was able to pay his credit purchases with SMC. Sometime, however, Goroza started
to become delinquent with his accounts.

Demands to pay the amount of three million seven hundred twenty-two thousand
four hundred forty pesos and 88/100 (P3,722,440.88) were made by SMC against
Goroza and PNB, but neither of them paid. Thus, SMC filed a Complaint for
collection of sum of money against PNB and Goroza with the respondent Regional
Trial Court Branch 3, Butuan City.3

After summons, PNB filed its Answer, while Goroza did not. Upon respondent's
Motion to Declare Defendant in Default, Goroza was declared in default.

Trial ensued insofar as Goroza was concerned and respondent presented its
evidence ex parte against the former. Respondent SMC made a formal offer of its
exhibits and the trial court admitted them.

RTC ordered Goroza to pay SMC the principal amount of P3,722,440.00 plus
interest, attorney’s fees and litigation expenses.

In the meantime, trial continued with respect to PNB who filed an Urgent Motion to
Terminate Proceedings14 on the ground that a decision was already rendered finding
Goroza solely liable.

The RTC denied PNB's motion in its Resolution.

Aggrieved, PNB filed an appeal to the CA. CA affirmed RTC’s Decision for the
continuance of the hearing on the other defendant PNB who was not declared in
default.

ISSUE:

(1) Whether the CA erred in holding that proceedings may continue against PNB
despite the complete adjudication of relief in favour of SMC
(2) Whether the RTC’s judgment against Goroza did not make any determination as
to whether or not PNB is liable under the letter of credit it issued and, if so, up to
what extent is its liability

RULING: NO. Petition lacks merit. Decision of the CA is affirmed.

RATIO:

(1) NO. CA did not err. Proceedings against PNB may continue.

The procedure adopted the RTC is, nonetheless, allowed under Section 4, Rule 36 of
the Rules of Court, which provides that "in an action against several defendants, the
court may, when a several judgment is proper, render judgment against one or more
of them, leaving the action to proceed against the others. Thus, the appeal of
Goroza, assailing the judgment of the RTC finding him liable, will not prevent the
continuation of the ongoing trial between SMC and PNB. The RTC retains
jurisdiction insofar as PNB is concerned, because the appeal made by Goroza was
only with respect to his own liability. In fact, PNB itself, in its Reply to respondent's
Comment, admitted that the May 10, 2005 judgment of the RTC was "decided solely
against defendant Rodolfo Goroza."

(2) YES. RTC’s judgment against Goroza did not make any determination as to
whether or not PNB is liable under the letter of credit it issued.

In this regard, this Court's disquisition on the import of a letter of credit, in the
case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation,26 as correctly cited
by the CA, is instructive, to wit:

By definition, a letter of credit is a written instrument whereby the writer

requests or authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the addressee.
A letter of credit, however, changes its nature as different transactions occur and
if carried through to completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation to the underlying
contract or disputes between the parties thereto.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-
called "independence principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents,
or for the good faith or acts and/or omissions, solvency, performance or standing
of the consignor, the carriers, or the insurers of the goods, or any other person
whomsoever.

As discussed above, in a letter of credit transaction, such as in this case, where

the credit is stipulated as irrevocable, there is a definite undertaking by the
issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the
 independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract. As the principle's nomenclature
clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.27

In other words, PNB cannot evade responsibility on the sole ground that the RTC
judgment found Goroza liable and ordered him to pay the amount sought to be
recovered by SMC. PNB's liability, if any, under the letter of credit is yet to be
determined.

Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 173905 April 23, 2010

ANTHONY L. NG, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

VELASCO, JR.

The Case

This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set
aside the August 29, 2003 Decision1 and July 25, 2006 Resolution of the Court of
Appeals (CA) in CA-G.R. CR No. 25525, which affirmed the Decision2 of the Regional
Trial Court (RTC), Branch 95 in Quezon City, in Criminal Case No. Q-99-85133
for Estafaunder Article 315, paragraph 1(b) of the Revised Penal Code (RPC) in
relation to Section 3 of Presidential Decree No. (PD) 115 or the Trust Receipts Law.

The Facts

Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the
business of building and fabricating telecommunication towers under the trade
name "Capitol Blacksmith and Builders," applied for a credit line of PhP 3,000,000
with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrust’s credit
investigation, petitioner voluntarily submitted the following documents: (1) the
contracts he had with Islacom, Smart, and Infocom; (2) the list of projects wherein
he was commissioned by the said telecommunication companies to build several
steel towers; and (3) the collectible amounts he has with the said companies. 3

On May 30, 1997, Asiatrust approved petitioner’s loan application. Petitioner was
then required to sign several documents, among which are the Credit Line
Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt
Agreements,4 and Promissory Notes. Though the Promissory Notes matured on
September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not
bear any maturity dates as they were left unfilled or in blank by Asiatrust. 5

After petitioner received the goods, consisting of chemicals and metal plates from his
suppliers, he utilized them to fabricate the communication towers ordered from him
by his clients which were installed in three project sites, namely: Isabel, Leyte;
Panabo, Davao; and Tongonan.

As petitioner realized difficulty in collecting from his client Islacom, he failed to pay
his loan to Asiatrust. Asiatrust then conducted a surprise ocular inspection of
petitioner’s business through Villarva S. Linga, Asiatrust’s representative appraiser.
Linga thereafter reported to Asiatrust that he found that approximately 97% of the
subject goods of the Trust Receipts were "sold-out and that only 3 % of the goods
pertaining to PN No. 1963 remained." Asiatrust then endorsed petitioner’s account
to its Account Management Division for the possible restructuring of his loan. The
parties thereafter held a series of conferences to work out the problem and to
determine a way for petitioner to pay his debts. However, efforts towards a
settlement failed to be reached.

On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed
a Complaint-Affidavit before the Office of the City Prosecutor of Quezon City.
Consequently, on September 12, 1999, an Information for Estafa, as defined and
penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the
Trust Receipts Law, was filed with the RTC. The said Information reads:

That on or about the 30th day of May 1997, in Quezon City, Philippines, the above-
named petitioner, did then and there willfully, unlawfully, and feloniously defraud
Ma. Girlie C. Bernardez by entering into a Trust Receipt Agreement with said
complainant whereby said petitioner as entrustee received in trust from the said
complainant various chemicals in the total sum of P4.5 million with the obligation to
hold the said chemicals in trust as property of the entruster with the right to sell the
same for cash and to remit the proceeds thereof to the entruster, or to return the
said chemicals if unsold; but said petitioner once in possession of the same,
contrary to his aforesaid obligation under the trust receipt agreement with intent to
defraud did then and there misappropriated, misapplied and converted the said
amount to his own personal use and benefit and despite repeated demands made
upon him, said petitioner refused and failed and still refuses and fails to make good
of his obligation, to the damage and prejudice of the said Ma. Girlie C. Bernardez in
the amount of P2,971,650.00, Philippine Currency.

CONTRARY TO LAW.

Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-
blown trial ensued.

During the pendency of the abovementioned case, conferences between petitioner

and Asiatrust’s Remedial Account Officer, Daniel Yap, were held. Afterward, a
Compromise Agreement was drafted by Asiatrust. One of the requirements of the
Compromise Agreement was for petitioner to issue six (6) postdated checks.
Petitioner, in good faith, tried to comply by issuing two or three checks, which were
deposited and made good. The remaining checks, however, were not deposited as
the Compromise Agreement did not push through.

For his defense, petitioner argued that: (1) the loan was granted as his working
capital and that the Trust Receipt Agreements he signed with Asiatrust were merely
preconditions for the grant and approval of his loan; (2) the Trust Receipt Agreement
corresponding to Letter of Credit No. 1963 and the Trust Receipt Agreement
corresponding to Letter of Credit No. 1964 were both contracts of adhesion, since
the stipulations found in the documents were prepared by Asiatrust in fine print; (3)
unfortunately for petitioner, his contract worth PhP 18,000,000 with Islacom was
not yet paid since there was a squabble as to the real ownership of the latter’s
company, but Asiatrust was aware of petitioner’s receivables which were more than
sufficient to cover the obligation as shown in the various Project Listings with
Islacom, Smart Communications, and Infocom; (4) prior to the Islacom problem, he
had been faithfully paying his obligation to Asiatrust as shown in Official Receipt
Nos. 549001, 549002, 565558, 577198, 577199, and 594986,6 thus debunking
Asiatrust’s claim of fraud and bad faith against him; (5) during the pendency of this
case, petitioner even attempted to settle his obligations as evidenced by the two
United Coconut Planters Bank Checks7 he issued in favor of Asiatrust; and (6) he
had already paid PhP 1.8 million out of the PhP 2.971 million he owed as per
Statement of Account dated January 26, 2000.

Ruling of the Trial Court

After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding
petitioner guilty of the crime of Estafa. The fallo of the Decision reads as follows:

WHEREFORE, judgment is hereby rendered finding the petitioner, Anthony L. Ng

GUILTY beyond reasonable doubt for the crime of Estafa defined in and penalized by
Article 315, paragraph 1(b) of the Revised Penal Code in relation to Section 3 of
Presidential Decree 115, otherwise known as the Trust Receipts Law, and is hereby
sentenced to suffer the indeterminate penalty of from six (6) years, eight (8) months,
and twenty one (21) days of prision mayor, minimum, as the minimum penalty, to
twenty (20) years of reclusion temporal maximum, as the maximum penalty.

The petitioner is further ordered to return to the Asiatrust Development Bank Inc.
the amount of Two Million, Nine Hundred Seventy One and Six Hundred Fifty Pesos
(P2,971,650.00) with legal rate of interest computed from the filing of the
information on September 21,1999 until the amount is fully paid.

IT IS SO ORDERED.

In rendering its Decision, the trial court held that petitioner could not simply argue
that the contracts he had entered into with Asiatrust were void as they were
contracts of adhesion. It reasoned that petitioner is presumed to have read and
understood and is, therefore, bound by the provisions of the Letters of Credit and
Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with
a Statement of Account enumerating therein the precise figures of the outstanding
balance, which he failed to pay along with the computation of other fees and
charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in Lending
Act). Finally, the trial court declared that petitioner, being the entrustee stated in
the Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for
the entruster and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipts; otherwise, he is obliged to return the goods in the
event of non-sale or upon demand of the entruster, failing thus, he evidently violated
the Trust Receipts Law.

Ruling of the Appellate Court

Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6,
2001. In his Appellant’s Brief dated March 25, 2002, petitioner argued that the
court a quo erred: (1) in changing the name of the offended party without the benefit
of an amendment of the Information which violates his right to be informed of the
nature and cause of accusation against him; (2) in making a finding of facts not in
accord with that actually proved in the trial and/or by the evidence provided; (3) in
not considering the material facts which if taken into account would have resulted
in his acquittal; (4) in being biased, hostile, and prejudiced against him; and (5) in
considering the prosecution’s evidence which did not prove the guilt of petitioner
beyond reasonable doubt.1avvphi1

On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the fallo
of which reads:

WHEREFORE, the foregoing considered, the instant appeal is DENIED. The decision
of the Regional Trial Court of Quezon City, Branch 95 dated May 29, 2001 is
AFFIRMED.

SO ORDERED.

The CA held that during the course of the trial, petitioner knew that the complainant
Bernardez and the other co-witnesses are all employees of Asiatrust and that she is
suing in behalf of the bank. Since petitioner transacted with the same employees for
the issuance of the subject Trust Receipts, he cannot feign ignorance that Asiatrust
is not the offended party in the instant case. The CA further stated that the change
in the name of the complainant will not prejudice and alter the fact that petitioner
was being charged with the crime of Estafa in relation to the Trust Receipts Law,
since the information clearly set forth the essential elements of the crime charged,
and the constitutional right of petitioner to be informed of the nature and cause of
his accusations is not violated.8

As to the alleged error in the appreciation of facts by the trial court, the CA stated
that it was undisputed that petitioner entered into a trust receipt agreement with
Asiatrust and he failed to pay the bank his obligation when it became due.
According to the CA, the fact that petitioner acted without malice or fraud in
entering into the transactions has no bearing, since the offense is punished
as malum prohibitum regardless of the existence of intent or malice; the mere failure
to deliver the proceeds of the sale or the goods if not sold constitutes the criminal
offense.

With regard to the failure of the RTC to consider the fact that petitioner’s
outstanding receivables are sufficient to cover his indebtedness and that no written
demand was made upon him hence his obligation has not yet become due and
demandable, the CA stated that the mere query as to the whereabouts of the goods
and/or money is tantamount to a demand.9

Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner,
the CA said that petitioner failed to present any substantial proof to support the
aforementioned allegations against the RTC.

After the receipt of the CA Decision, petitioner moved for its reconsideration, which
was denied by the CA in its Resolution dated July 25, 2006. Thereafter, petitioner
filed this Petition for Review on Certiorari. In his Memorandum, he raised the
following issues:

Issues:

1. The prosecution failed to adduce evidence beyond a reasonable doubt

to satisfy the 2nd essential element that there was misappropriation or
conversion of subject money or property by petitioner.

2. The state was unable to prove the 3rd essential element of the crime
that the alleged misappropriation or conversion is to the prejudice of the
 real offended property.

3. The absence of a demand (4th essential element) on petitioner

necessarily results to the dismissal of the criminal case.

The Court’s Ruling

We find the petition to be meritorious.

Essentially, the issues raised by petitioner can be summed up into one—whether or

not petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to
PD 115.

It is a well-recognized principle that factual findings of the trial court are entitled to
great weight and respect by this Court, more so when they are affirmed by the
appellate court. However, the rule is not without exceptions, such as: (1) when the
conclusion is a finding grounded entirely on speculations, surmises, and
conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave
abuse of discretion; and (4) the judgment is based on misapprehension of facts or
premised on the absence of evidence on record.10 Especially in criminal cases where
the accused stands to lose his liberty by virtue of his conviction, the Court must be
satisfied that the factual findings and conclusions of the lower courts leading to his
conviction must satisfy the standard of proof beyond reasonable doubt.

In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of
the RPC in relation to PD 115. The RPC defines Estafa as:

ART. 315. Swindling (estafa).—Any person who shall defraud another by any of the
means mentioned hereinbelow x x x

1. With unfaithfulness or abuse of confidence, namely:

a. x x x

b. By misappropriating or converting, to the prejudice of another, money,

goods, or any other personal property received by the offender in trust or
on commission, or for administration, or under any other obligation
involving the duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond; or by
denying having received such money, goods, or other property x x x. 11

Based on the definition above, the essential elements of Estafa are: (1) that money,
goods or other personal property is received by the offender in trust or on
commission, or for administration, or under any obligation involving the duty to
make delivery of or to return it; (2) that there be misappropriation or conversion of
such money or property by the offender, or denial on his part of such receipt; (3)
that such misappropriation or conversion or denial is to the prejudice of another;
and (4) there is demand by the offended party to the offender. 12

Likewise, Estafa can also be committed in what is called a "trust receipt transaction"
under PD 115, which is defined as:

Section 4. What constitutes a trust receipts transaction.—A trust receipt

transaction, within the meaning of this Decree, is any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in
this Decree as entrustee, whereby the entruster, who owns or holds absolute title or
security interests 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 a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears in the trust receipt or
the goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents: (a) to sell the goods or procure

their sale; or (b) to manufacture or process the goods with the purpose of
ultimate sale: Provided, That, in the case of goods delivered under trust
receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied full with his
obligation under the trust receipt; or (c) to load, unload, ship or
transship or otherwise deal with them in a manner preliminary or
necessary to their sale; or

2. In the case of instruments: (a) to sell or procure their sale or exchange;

or (b) to deliver them to a principal; or (c) to effect the consummation of
some transactions involving delivery to a depository or register; or (d) to
effect their presentation, collection or renewal.

The sale of good, documents or instruments by a person in the business of selling

goods, documents or instruments for profit who, at the outset of transaction, has, as
against the buyer, general property rights in such goods, documents or instruments,
or who sells the same to the buyer on credit, retaining title or other interest as
security for the payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree.

In other words, a trust receipt transaction is one where the entrustee has the
obligation to deliver to the entruster the price of the sale, or if the merchandise is
not sold, to return the merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the merchandise received under the
obligation to "return" it (devolvera) to the owner.13 A violation of any of these
undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115, viz:

Section 13. Penalty Clause.—The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred fifteen, paragraph one (b)
of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code. x x x (Emphasis supplied.)

A thorough examination of the facts obtaining in the instant case, however, reveals
that the transaction between petitioner and Asiatrust is not a trust receipt
transaction but one of simple loan.

PD 115 Does Not Apply

It must be remembered that petitioner was transparent to Asiatrust from the very
beginning that the subject goods were not being held for sale but were to be used for
the fabrication of steel communication towers in accordance with his contracts with
Islacom, Smart, and Infocom. In these contracts, he was commissioned to build, out
of the materials received, steel communication towers, not to sell them.

The true nature of a trust receipt transaction can be found in the "whereas" clause
of PD 115 which states that a trust receipt is to be utilized "as a convenient
business device to assist importers and merchants solve their financing problems."
Obviously, the State, in enacting the law, sought to find a way to assist importers
and merchants in their financing in order to encourage commerce in the Philippines.

As stressed in Samo v. People,14 a trust receipt is considered a security transaction

intended to aid in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of "financing
importations or financing sales."15 The principle is of course not limited in its
application to financing importations, since the principle is equally applicable to
domestic transactions.16 Regardless of whether the transaction is foreign or
domestic, it is important to note that the transactions discussed in relation to trust
receipts mainly involved sales.

Following the precept of the law, such transactions affect situations wherein the
entruster, who owns or holds absolute title or security interests over specified goods,
documents or instruments, releases the subject goods to the possession of the
entrustee. The release of such goods to the entrustee is conditioned upon his
execution and delivery to the entruster of a trust receipt wherein the former binds
himself to hold the specific goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds to the extent of the
amount owing to the entruster or the goods, documents or instruments themselves
if they are unsold. Similarly, we held in State Investment House v. CA, et al. that the
entruster is entitled "only to the proceeds derived from the sale of goods released
under a trust receipt to the entrustee."17

Considering that the goods in this case were never intended for sale but for use in
the fabrication of steel communication towers, the trial court erred in ruling that the
agreement is a trust receipt transaction.

In applying the provisions of PD 115, the trial court relied on the Memorandum of
Asiatrust’s appraiser, Linga, who stated that the goods have been sold by petitioner
and that only 3% of the goods remained in the warehouse where it was previously
stored. But for reasons known only to the trial court, the latter did not give weight to
the testimony of Linga when he testified that he merely presumed that the goods
were sold, viz:

COURT (to the witness)

Q So, in other words, when the goods were not there anymore. You
presumed that, that is already sold?

A Yes, your Honor.

Undoubtedly, in his testimony, Linga showed that he had no real personal

knowledge or proof of the fact that the goods were indeed sold. He did not notify
petitioner about the inspection nor did he talk to or inquire with petitioner regarding
the whereabouts of the subject goods. Neither did he confirm with petitioner if the
subject goods were in fact sold. Therefore, the Memorandum of Linga, which was
based only on his presumption and not any actual personal knowledge, should not
have been used by the trial court to prove that the goods have in fact been sold. At
the very least, it could only show that the goods were not in the warehouse.

Having established the inapplicability of PD 115, this Court finds that petitioner’s
liability is only limited to the satisfaction of his obligation from the loan. The real
intent of the parties was simply to enter into a simple loan agreement.

To emphasize, the Trust Receipts Law was created to "to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the merchandise imported or purchased."
Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it
should have known that the said agreement could not possibly apply to petitioner.

Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC
and PD 115.

Goods Were Not Received in Trust

The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the
money, goods or other personal property must be received by the offender in trust or
on commission, or for administration, or under any other obligation involving the
duty to make delivery of, or to return it. But as we already discussed, the goods
received by petitioner were not held in trust. They were also not intended for sale
and neither did petitioner have the duty to return them. They were only intended for
use in the fabrication of steel communication towers.

No Misappropriation of Goods or Proceeds

The second element of Estafa requires that there be misappropriation or conversion

of such money or property by the offender, or denial on his part of such receipt.

This is the very essence of Estafa under Art. 315, par. 1(b). The words "convert" and
"misappropriated" connote an act of using or disposing of another’s property as if it
were one’s own, or of devoting it to a purpose or use different from that agreed upon.
To misappropriate for one’s own use includes not only conversion to one’s personal
advantage, but also every attempt to dispose of the property of another without a
right.18

Petitioner argues that there was no misappropriation or conversion on his part,

because his liability for the amount of the goods subject of the trust receipts arises
and becomes due only upon receipt of the proceeds of the sale and not prior to the
receipt of the full price of the goods.

Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply,
petitioner is not liable for Estafa because Sec. 13 of PD 115 provides that an
entrustee is only liable for Estafa when he fails "to turn over the proceeds of the sale
of the goods x x x covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt x x x in accordance with the terms of the
trust receipt."

The trust receipt entered into between Asiatrust and petitioner states:
In case of sale I/we agree to hand the proceeds as soon as received to the BANK to
apply against the relative acceptance (as described above) and for the payment of
any other indebtedness of mine/ours to ASIATRUST DEVELOPMENT
BANK.19 (Emphasis supplied.)

Clearly, petitioner was only obligated to turn over the proceeds as soon as he
received payment. However, the evidence reveals that petitioner experienced
difficulties in collecting payments from his clients for the communication towers.
Despite this fact, petitioner endeavored to pay his indebtedness to Asiatrust, which
payments during the period from September 1997 to July 1998 total approximately
PhP 1,500,000. Thus, absent proof that the proceeds have been actually and fully
received by petitioner, his obligation to turn over the same to Asiatrust never arose.

What is more, under the Trust Receipt Agreement itself, no date of maturity was
stipulated. The provision left blank by Asiatrust is as follows:

x x x and in consideration thereof, I/we hereby agree to hold said goods in Trust for
the said Bank and as its property with liberty to sell the same for its account within
________ days from the date of execution of the Trust Receipt x x x 20

In fact, Asiatrust purposely left the space designated for the date blank, an action
which in ordinary banking transactions would be noted as highly irregular. Hence,
the only way for the obligation to mature was for Asiatrust to demand from
petitioner to pay the obligation, which it never did.

Again, it also makes the Court wonder as to why Asiatrust decided to leave the
provisions for the maturity dates in the Trust Receipt agreements in blank, since
those dates are elemental part of the loan. But then, as can be gleaned from the
records of this case, Asiatrust also knew that the capacity of petitioner to pay for his
loan also hinges upon the latter’s receivables from Islacom, Smart, and Infocom
where he had ongoing and future projects for fabrication and installation of steel
communication towers and not from the sale of said goods. Being a bank, Asiatrust
acted inappropriately when it left such a sensitive bank instrument with a void
circumstance on an elementary but vital feature of each and every loan transaction,
that is, the maturity dates. Without stating the maturity dates, it was impossible for
petitioner to determine when the loan will be due.

Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject
goods and that petitioner will use them for the fabrication and installation of
communication towers. Before granting petitioner the credit line, as aforementioned,
Asiatrust conducted an investigation, which showed that petitioner fabricated and
installed communication towers for well-known communication companies to be
installed at designated project sites. In fine, there was no abuse of confidence to
speak of nor was there any intention to convert the subject goods for another
purpose, since petitioner did not withhold the fact that they were to be used to
fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of
confidence and misappropriation occurred in this instance due to Asiatrust’s
knowledge of the facts.

Furthermore, Asiatrust was informed at the time of petitioner’s application for the
loan that the payment for the loan would be derived from the collectibles of his
clients. Petitioner informed Asiatrust that he was having extreme difficulties in
collecting from Islacom the full contracted price of the towers. Thus, the duty of
petitioner to remit the proceeds of the goods has not yet arisen since he has yet to
receive proceeds of the goods. Again, petitioner could not be said to have
misappropriated or converted the proceeds of the transaction since he has not yet
received the proceeds from his client, Islacom.

This Court also takes judicial notice of the fact that petitioner has fully paid his
obligation to Asiatrust, making the claim for damage and prejudice of Asiatrust
baseless and unfounded. Given that the acceptance of payment by Asiatrust
necessarily extinguished petitioner’s obligation, then there is no longer any
obligation on petitioner’s part to speak of, thus precluding Asiatrust from claiming
any damage. This is evidenced by Asiatrust’s Affidavit of Desistance 21 acknowledging
full payment of the loan.

Reasonable Doubt Exists

In the final analysis, the prosecution failed to prove beyond reasonable doubt that
petitioner was guilty of Estafa under Art. 315, par. 1(b) of the RPC in relation to the
pertinent provision of PD 115 or the Trust Receipts Law; thus, his liability should
only be civil in nature.

While petitioner admits to his civil liability to Asiatrust, he nevertheless does not
have criminal liability. It is a well-established principle that person is presumed
innocent until proved guilty. To overcome the presumption, his guilt must be shown
by proof beyond reasonable doubt. Thus, we held in People v. Mariano22 that while
the principle does not connote absolute certainty, it means the degree of proof which
produces moral certainty in an unprejudiced mind of the culpability of the accused.
Such proof should convince and satisfy the reason and conscience of those who are
to act upon it that the accused is in fact guilty. The prosecution, in this instant case,
failed to rebut the constitutional innocence of petitioner and thus the latter should
be acquitted.

At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt,
thus:

The practice of banks of making borrowers sign trust receipts to facilitate collection
of loans and place them under the threats of criminal prosecution should they be
unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign
lest their loan be disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation x x x. 23

Such is the situation in this case.

Asiatrust’s intention became more evident when, on March 30, 2009, it, along with
petitioner, filed their Joint Motion for Leave to File and Admit Attached Affidavit of
Desistance to qualify the Affidavit of Desistance executed by Felino H. Esquivas, Jr.,
attorney-in-fact of the Board of Asiatrust, which acknowledged the full payment of
the obligation of the petitioner and the successful mediation between the parties.

From the foregoing considerations, we deem it unnecessary to discuss and rule

upon the other issues raised in the appeal.

WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision
dated May 29, 2001 is SET ASIDE. Petitioner ANTHONY L. NG is hereby
ACQUITTED of the charge of violation of Art. 315, par. 1(b) of the RPC in relation to
the pertinent provision of PD 115.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

LAND BANK OF THE PHILIPPINES, G.R. No. 166884

Petitioner,
Present:

CARPIO, J., Chairperson,

- versus -
BRION,

PEREZ,

SERENO, and

REYES, JJ.
LAMBERTO C. PEREZ, NESTOR C.
KUN, MA. ESTELITA P. ANGELES-
PANLILIO, and NAPOLEON O.
Promulgated:
GARCIA,

Respondents.
June 13, 2012

x------------------------------------------------------------------------------------x

DECISION

BRION, J.:

Before this Court is a petition for review on certiorari,[1] under Rule 45 of the Rules of
Court, assailing the decision[2] dated January 20, 2005 of the Court of Appeals in
CA-G.R. SP No. 76588. In the assailed decision, the Court of Appeals dismissed the
criminal complaint for estafa against the respondents, Lamberto C. Perez, Nestor C.
Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon Garcia, who allegedly violated
Article 315, paragraph 1(b) of the Revised Penal Code, in relation with Section 13 of
Presidential Decree No. (P.D.) 115 the Trust Receipts Law.

Petitioner Land Bank of the Philippines (LBP) is a government financial institution

and the official depository of the Philippines.[3] Respondents are the officers and
representatives of Asian Construction and Development Corporation (ACDC), a
corporation incorporated under Philippine law and engaged in the construction
business.[4]

On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. 115, against the
respondents before the City Prosecutors Office in Makati City. In the affidavit-
complaint[5] of June 7, 1999, the LBPs Account Officer for the Account Management
Development, Edna L. Juan, stated that LBP extended a credit accommodation to
ACDC through the execution of an Omnibus Credit Line Agreement
(Agreement)[6] between LBP and ACDC on October 29, 1996. In various instances,
ACDC used the Letters of Credit/Trust Receipts Facility of the Agreement to buy
construction materials. The respondents, as officers and representatives of ACDC,
executed trust receipts[7] in connection with the construction materials, with a total
principal amount of P52,344,096.32. The trust receipts matured, but ACDC failed to
return to LBP the proceeds of the construction projects or the construction materials
subject of the trust receipts. LBP sent ACDC a demand letter,[8] dated May 4, 1999,
for the payment of its debts, including those under the Trust Receipts Facility in the
amount of P66,425,924.39. When ACDC failed to comply with the demand letter,
LBP filed the affidavit-complaint.

The respondents filed a joint affidavit[9] wherein they stated that they signed the
trust receipt documents on or about the same time LBP and ACDC executed the
loan documents; their signatures were required by LBP for the release of the
loans. The trust receipts in this case do not contain (1) a description of the goods
placed in trust, (2) their invoice values, and (3) their maturity dates, in violation of
Section 5(a) of P.D. 115. Moreover, they alleged that ACDC acted as a subcontractor
for government projects such as the Metro Rail Transit, the Clark Centennial
Exposition and the Quezon Power Plant in Mauban, Quezon. Its clients for the
construction projects, which were the general contractors of these projects, have not
yet paid them; thus, ACDC had yet to receive 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 received from these clients, no misappropriation thereof
could have taken place.

On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda issued
a Resolution[10] dismissing the complaint. He pointed out that the evidence
presented by LBP failed to state the date when the goods described in the letters of
credit were actually released to the possession of the respondents. Section 4 of P.D.
115 requires that the goods covered by trust receipts be released to the possession
of the entrustee after the latters execution and delivery to the entruster of a signed
trust receipt. He adds that LBPs evidence also fails to show the date when the trust
receipts were executed since all the trust receipts are undated. Its dispositive
portion reads:

WHEREFORE, premises considered, and for insufficiency of

evidence, it is respectfully recommended that the instant complaints be
 dismissed, as upon approval, the same are hereby dismissed. [11]

LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor
denied in his order of January 7, 2000.[12]
On appeal, the Secretary of Justice reversed the Resolution of the Assistant
City Prosecutor. In his resolution of August 1, 2002,[13] the Secretary of Justice
pointed out that there was no question that the goods covered by the trust receipts
were received by ACDC. He likewise adopted LBPs argument that while the subjects
of the trust receipts were not mentioned in the trust receipts, they were listed in the
letters of credit referred to in the trust receipts. He also noted that the trust receipts
contained maturity dates and clearly set out their stipulations. He further rejected
the respondents defense that ACDC failed to remit the payments to LBP due to the
failure of the clients of ACDC to pay them. The dispositive portion of the resolution
reads:

WHEREFORE, the assailed resolution is REVERSED and SET

ASIDE. The City Prosecutor of Makati City is hereby directed to file an
information for estafa under Art. 315 (1) (b) of the Revised Penal Code in
relation to Section 13, Presidential Decree No. 115 against respondents
Lamberto C. Perez, Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and
Napoleon O. Garcia and to report the action taken within ten (10) days
from receipt hereof.[14]

The respondents filed a motion for reconsideration of the resolution dated August 1,
2002, which the Secretary of Justice denied.[15] He rejected the respondents
submission that Colinares v. Court of Appeals[16] does not apply to the case. He
explained that in Colinares, the building materials were delivered to the accused
before they applied to the bank for a loan to pay for the merchandise; thus, the
ownership of the merchandise had already been transferred to the entrustees before
the trust receipts agreements were entered into. In the present case, the parties
have already entered into the Agreement before the construction materials were
delivered to ACDC.

Subsequently, the respondents filed a petition for review before the Court of
Appeals.

After both parties submitted their respective Memoranda, the Court of Appeals
promulgated the assailed decision of January 20, 2005. [17] Applying the doctrine
in Colinares, it ruled that this case did not involve a trust receipt transaction, but a
mere loan. It emphasized that construction materials, the subject of the trust receipt
transaction, were delivered to ACDC even before the trust receipts were executed. It
noted that LBP did not offer proof that the goods were received by ACDC, and that
the trust receipts did not contain a description of the goods, their invoice value, the
amount of the draft to be paid, and their maturity dates. It also adopted ACDCs
argument that since no payment for the construction projects had been received by
ACDC, its officers could not have been guilty of misappropriating any payment. The
dispositive portion reads:

WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE

COURSE. The assailed Resolutions of the respondent Secretary of
Justice dated August 1, 2002 and February 17, 2003, respectively in I.S.
 No. 99-F-9218-28 are hereby REVERSED and SET ASIDE.[18]

LBP now files this petition for review on certiorari, dated March 15, 2005, raising the
following error:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND

SET ASIDE THE RESOLUTIONS OF THE HONORABLE SECRETARY OF
JUSTICE BY APPLYING THE RULING IN THE CASE OF COLINARES V.
COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN
THE CASE AT BAR.[19]

On April 8, 2010, while the case was pending before this Court, the respondents
filed a motion to dismiss.[20] They informed the Court that LBP had already assigned
to Philippine Opportunities for Growth and Income, Inc. all of its rights, title and
interests in the loans subject of this case in a Deed of Absolute Sale dated June 23,
2005 (attached as Annex C of the motion). The respondents also stated that Avent
Holdings Corporation, in behalf of ACDC, had already settled ACDCs obligation to
LBP on October 8, 2009. Included as Annex A in this motion was a
certification[21] issued by the Philippine Opportunities for Growth and Income, Inc.,
stating that it was LBPs successor-in-interest insofar as the trust receipts in this
case are concerned and that Avent Holdings Corporation had already settled the
claims of LBP or obligations of ACDC arising from these trust receipts.
We deny this petition.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

Section 4. What constitutes a trust receipt transaction. A trust receipt

transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster,
who owns or holds absolute title or security interests 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 a "trust receipt" wherein the
entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of
the goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents
or instruments themselves if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the
following:

1. In the case of goods or documents, (a) to sell the goods or procure

their sale; or (b) to manufacture or process the goods with the purpose of
ultimate sale: Provided, That, in the case of goods delivered under trust
 receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or tranship
or otherwise deal with them in a manner preliminary or necessary to
their sale[.]

There are two obligations in a trust receipt transaction. The first is covered by
the provision that refers to money under the obligation to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by the provision referring
to merchandise received under the obligation to return it (devolvera) to the
owner. Thus, under the Trust Receipts Law,[22] intent to defraud is presumed when
(1) the entrustee fails to turn over the proceeds of the sale of goods covered by the
trust receipt to the entruster; or (2) when the entrustee fails to return the goods
under trust, if they are not disposed of in accordance with the terms of the trust
receipts.[23]

In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative the return of the proceeds of the sale or the return or
recovery of the goods, whether raw or processed. [24] When both parties enter into an
agreement knowing that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan,[25] where the borrower is
obligated to pay the bank the amount spent for the purchase of the goods.

Article 1371 of the Civil Code provides that [i]n order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. Under this provision, we can examine the contemporaneous
actions of the parties rather than rely purely on the trust receipts that they signed in
order to understand the transaction through their intent.

We note in this regard that at the onset of these transactions, LBP knew that
ACDC was in the construction business and that the materials that it sought to buy
under the letters of credit were to be used for the following projects: the Metro Rail
Transit Project and the Clark Centennial Exposition Project. [26] LBP had in fact
authorized the delivery of the materials on the construction sites for these projects,
as seen in the letters of credit it attached to its complaint. [27] Clearly, they were
aware of the fact that there was no way they could recover the buildings or
constructions for which the materials subject of the alleged trust receipts had been
used. Notably, despite the allegations in the affidavit-complaint wherein LBP sought
the return of the construction materials,[28] its demand letter dated May 4, 1999
sought the payment of the balance but failed to ask, as an alternative, for the return
of the construction materials or the buildings where these materials had been
used.[29]

The fact that LBP had knowingly authorized the delivery of construction materials to
a construction site of two government projects, as well as unspecified construction
sites, repudiates the idea that LBP intended to be the owner of those construction
materials. As a government financial institution, LBP should have been aware that
the materials were to be used for the construction of an immovable property, as well
as a property of the public domain. As an immovable property, the ownership of
whatever was constructed with those materials would presumably belong to the
owner of the land, under Article 445 of the Civil Code which provides:

Article 445. Whatever is built, planted or sown on the land of another

and the improvements or repairs made thereon, belong to the owner of
the land, subject to the provisions of the following articles.

Even if we consider the vague possibility that the materials, consisting of cement,
bolts and reinforcing steel bars, would be used for the construction of a movable
property, the ownership of these properties would still pertain to the government
and not remain with the bank as they would be classified as property of the public
domain, which is defined by the Civil Code as:

Article 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads,
and others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth.

In contrast with the present situation, it is fundamental in a trust receipt

transaction that the person who advanced payment for the merchandise becomes
the absolute owner of said merchandise and continues as owner until he or she is
paid in full, or if the goods had already been sold, the proceeds should be turned
over to him or to her.[30]

Thus, in concluding that the transaction was a loan and not a trust receipt, we
noted in Colinares that the industry or line of work that the borrowers were engaged
in was construction. We pointed out that the borrowers were not importers
acquiring goods for resale.[31] Indeed, goods sold in retail are often within the
custody or control of the trustee until they are purchased. In the case of materials
used in the manufacture of finished products, these finished products if not the raw
materials or their components similarly remain in the possession of the trustee until
they are sold. But the goods and the materials that are used for a construction
project are often placed under the control and custody of the clients employing the
contractor, who can only be compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal proceedings. The contractors
difficulty and uncertainty in claiming these materials (or the buildings and
structures which they become part of), as soon as the bank demands them,
disqualify them from being covered by trust receipt agreements.

Based on these premises, we cannot consider the agreements between the

parties in this case to be trust receipt transactions because (1) from the start, the
parties were aware that ACDC could not possibly be obligated to reconvey to LBP the
materials or the end product for which they were used; and (2) from the moment the
materials were used for the government projects, they became public, not LBPs,
property.
 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 passing, it is
useful to note that this is the threat held against borrowers that Retired Justice
Claudio Teehankee emphatically opposed in his dissent in People v.
Cuevo,[32] restated in Ong v. CA, et al.:[33]

The very definition of trust receipt x x x sustains the lower courts

rationale in dismissing the information that the contract covered by a
trust receipt is merely a secured loan. The goods imported by the small
importer and retail dealer through the banks financing remain of their
own property and risk and the old capitalist orientation of putting them
in jail for estafa for non-payment of the secured loan (granted after they
had been fully investigated by the bank as good credit risks) through the
fiction of the trust receipt device should no longer be permitted in this
day and age.

As the law stands today, violations of Trust Receipts Law are criminally
punishable, but no criminal complaint for violation of Article 315, paragraph 1(b) of
the Revised Penal Code, in relation with P.D. 115, should prosper against a borrower
who was not part of a genuine trust receipt transaction.

Misappropriation or abuse of confidence is absent

in this case.

Even if we assume that the transactions were trust receipts, the complaint
against the respondents still should have been dismissed. The Trust Receipts Law
punishes the dishonesty and abuse of confidence in the handling of money or goods
to the prejudice of another, regardless of whether the latter is the owner or not. The
law does not singularly seek to enforce payment of the loan, as there can be no
violation of [the] right against imprisonment for non-payment of a debt.[34]

In order that the respondents may be validly prosecuted for estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, [35] in relation with Section 13
of 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
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) they
performed such acts with abuse of confidence to the damage and prejudice of
Metrobank; and (d) demand was made on them by [the trustor] for the remittance of
the proceeds or the return of the unsold goods.[36]

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.

We do not likewise see any 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.

In Metropolitan Bank,[37] we affirmed the city prosecutors dismissal of a

complaint for violation of the Trust Receipts Law. In dismissing the complaint, we
took note of the Court of Appeals finding that the bank was interested only in
collecting its money and not in the return of the goods. Apart from the bare
allegation that demand was made for the return of the goods (raw materials that
were manufactured into textiles), the bank had not accompanied its complaint with
a demand letter. In addition, there was no evidence offered that the respondents
therein had misappropriated or misused the goods in question.

The petition should be dismissed because the OSG

did not file it and the civil liabilities have already
been settled.

The proceedings before us, regarding the criminal aspect of this case, should
be dismissed as it does not appear from the records that the complaint was filed
with the participation or consent of the Office of the Solicitor General (OSG). Section
35, Chapter 12, Title III, Book IV of the Administrative Code of 1987 provides that:

Section 35. Powers and Functions. The Office of the Solicitor General
shall represent the Government of the Philippines, its agencies and
instrumentalities and its officials and agents in any litigation,
proceedings, investigation or matter requiring the services of lawyers. x x
x It shall have the following specific powers and functions:

(1) Represent the Government in the Supreme Court and the Court of
Appeals in all criminal proceedings; represent the Government and its
officers in the Supreme Court, the Court of Appeals and all other courts
or tribunals in all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a party.
 (Emphasis provided.)

In Heirs of Federico C. Delgado v. Gonzalez,[38] we ruled that the preliminary

investigation is part of a criminal proceeding. As all criminal proceedings before the
Supreme Court and the Court of Appeals may be brought and defended by only the
Solicitor General in behalf of the Republic of the Philippines, a criminal action
brought to us by a private party alone suffers from a fatal defect. The present
petition was brought in behalf of LBP by the Government Corporate Counsel to
protect its private interests. Since the representative of the People of the Philippines
had not taken any part of the case, it should be dismissed.

On the other hand, if we look at the mandate given to the Office of the Government
Corporate Counsel, we find that it is limited to the civil liabilities arising from the
crime, and is subject to the control and supervision of the public prosecutor. Section
2, Rule 8 of the Rules Governing the Exercise by the Office of the Government
Corporate Counsel of its Authority, Duties and Powers as Principal Law Office of All
Government Owned or Controlled Corporations, filed before the Office of the
National Administration Register on September 5, 2011, reads:

Section 2. Extent of legal assistance The OGCC shall represent the

complaining GOCC in all stages of the criminal proceedings. The legal
assistance extended is not limited to the preparation of appropriate
sworn statements but shall include all aspects of an effective private
prosecution including recovery of civil liability arising from the crime,
subject to the control and supervision of the public prosecutor.

Based on jurisprudence, there are two exceptions when a private party

complainant or offended party in a criminal case may file a petition with this Court,
without the intervention of the OSG: (1) when there is denial of due process of law to
the prosecution, and the State or its agents refuse to act on the case to the prejudice
of the State and the private offended party;[39] and (2) when the private offended
party questions the civil aspect of a decision of the lower court. [40]

In this petition, LBP fails to allege any inaction or refusal to act on the part of
the OSG, tantamount to a denial of due process. No explanation appears as to why
the OSG was not a party to the case. Neither can LBP now question the civil aspect
of this decision as it had already assigned ACDCs debts to a third person, Philippine
Opportunities for Growth and Income, Inc., and the civil liabilities appear to have
already been settled by Avent Holdings Corporation, in behalf of ACDC. These facts
have not been disputed by LBP. Therefore, we can reasonably conclude that LBP no
longer has any claims against ACDC, as regards the subject matter of this case, that
would entitle it to file a civil or criminal action.

WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005
decision of the Court of Appeals in CA-G.R. SP No. 76588. No costs.

SO ORDERED
10. Land Bank of the Philippines v. Perez
Erwin Fuentes
G.R. No. 166884
June 13, 2012
Art. 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land, subject to
the provisions of the following articles. (358)

FACTS:

Petitioner Land Bank of the Philippines (LBP) is a government financial institution

and the official depository of the Philippines. Respondents were officers of Asian
Construction and Development Corporation (ACDC), a corporation engaged in the
construction business. On several occasions, respondents executed in favor of Land
Bank of the Philippines (LBP) trust receipts to secure the purchase of construction
materials that they will need in their construction projects. When the trust receipts
matured, ACDC failed to return to LBP the proceeds of the construction projects or
the construction materials subject of the trust receipts. After several demands went
unheeded, LBP filed a complaint for Estafa or violation of Art. 315, par. 1(b) of the
RPC, in relation to PD 115, against the respondent officers of ACDC.

ISSUE:

1. WON the disputed transactions is a trust receipt or a loan?

HELD:

1. TRUST RECEIPT.

There are two obligations in a trust receipt transaction. The first is covered by the
provision that refers to money under the obligation to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision referring to
merchandise received under the obligation to return it (devolvera) to the owner.
Thus, under the Trust Receipts Law,] intent to defraud is presumed when (1) the
entrustee fails to turn over the proceeds of the sale of goods covered by the trust
receipt to the entruster; or (2) when the entrustee fails to return the goods under
trust, if they are not disposed of in accordance with the terms of the trust receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in
the alternative the return of the proceeds of the sale or the return or recovery of the
goods, whether raw or processed. When both parties enter into an agreement
knowing that the return of the goods subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not a trust receipt transaction
penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by
the parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.

Article 1371 of the Civil Code provides that [i]n order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally
considered. Under this provision, we can examine the contemporaneous actions of
the parties rather than rely purely on the trust receipts that they signed in order to
understand the transaction through their intent.

We note in this regard that at the onset of these transactions, LBP knew that ACDC
was in the construction business and that the materials that it sought to buy under
the letters of credit were to be used for the following projects: the Metro Rail Transit
Project and the Clark Centennial Exposition Project. LBP had in fact authorized the
delivery of the materials on the construction sites for these projects, as seen in the
letters of credit it attached to its complaint. Clearly, they were aware of the fact that
there was no way they could recover the buildings or constructions for which the
materials subject of the alleged trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought the return of the
construction materials, its demand letter dated May 4, 1999 sought the payment of
the balance but failed to ask, as an alternative, for the return of the construction
materials or the buildings where these materials had been used.

The fact that LBP had knowingly authorized the delivery of construction materials to
a construction site of two government projects, as well as unspecified construction
sites, repudiates the idea that LBP intended to be the owner of those construction
materials. As a government financial institution, LBP should have been aware that
the materials were to be used for the construction of an immovable property, as well
as a property of the public domain. As an immovable property, the ownership of
whatever was constructed with those materials would presumably belong to the
owner of the land, under Article 445 of the Civil Code.

Even if we consider the vague possibility that the materials, consisting of cement,
bolts and reinforcing steel bars, would be used for the construction of a movable
property, the ownership of these properties would still pertain to the government
and not remain with the bank as they would be classified as property of the public
domain, which is defined by the Civil Code as:

In contrast with the present situation, it is fundamental in a trust receipt

transaction that the person who advanced payment for the merchandise becomes
the absolute owner of said merchandise and continues as owner until he or she is
paid in full, or if the goods had already been sold, the proceeds should be turned
over to him or to her.

WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005 decision of
the Court of Appeals in CA-G.R. SP No. 76588. No costs.
MWSS vs. DAWAY AND MAYNILAD

MARCH 25, 2011 ~ VBDIAZ

MWSS vs. DAWAY AND MAYNILAD

G.R. No. 160732.
June 21, 2004
FACTS: MWSS granted Maynilad under a Concession Agreement to manage,
operate, repair, decommission and refurbish the existing MWSS water delivery and
sewerage services in the West Zone Service Area, for which Maynilad undertook to
pay the corresponding concession fees which, among other things, consisted of
payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, Maynilad was required
under Section 6.9 of said contract to put up a bond, bank guarantee or other
security acceptable to MWSS.

In compliance with this requirement, Maynilad arranged for a three-year facility with
a number of foreign banks, led by Citicorp Int’l Ltd., for the issuance of an
Irrevocable Standby Letter of Credit in favor of MWSS for the full and prompt
performance of Maynilads obligations to MWSS as aforestated.

Later, the parties agreed to resolve the issues between them [Maynilad is asking for
a mechanism by which it hoped to recover the losses it had allegedly incurred and
would be incurring as a result of the depreciation of the Philippine Peso against the
US Dollar and in filing to get what it desired, Maynilad unilaterally suspended the
payment of the concession fees] through an amendment of the Concession
Agreement which was based on the terms set down in MWSS Board of Trustees
Resolution which provided inter alia for a formula that would allow Maynilad to
recover foreign exchange losses it had incurred or would incur under the terms of
the Concession Agreement.
However Maynilad served upon MWSS a Notice of Event of Termination, claiming
that MWSS failed to comply with its obligations under the Concession Agreement
and its Amendment regarding the adjustment mechanism that would cover
Maynilads foreign exchange losses. Maynilad filed a Notice of Early Termination of
the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel by MWSS. the Appeals Panel ruled that there was
no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession
Agreement and that, therefore, Maynilad should pay the concession fees that had
fallen due.
The award of the Appeals Panel became final. MWSS, thereafter, submitted a written
notice to Citicorp Int’l Ltd, as agent for the participating banks, that by virtue of
Maynilads failure to perform its obligations under the Concession Agreement, it was
drawing on the Irrevocable Standby Letter of Credit and thereby demanded
payment.

Prior to this, however, Maynilad had filed on a petition for rehabilitation before the
RTC of Quezon City which resulted in the issuance of the Stay Order and the
disputed Order of November 27, 2003.

ISSUE: WON the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of the
concession fees from the banks that issued the Irrevocable Standby Letter of Credit
in its favor
HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the
RTC of Quezon City 90, is hereby declared null and voidand set aside.
YES

First, the claim is not one against the debtor but against an entity that respondent
Maynilad has procured to answer for its non-performance of certain terms and
conditions of the Concession Agreement, particularly the payment of concession
fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of
all claims against guarantors and sureties, but only those claims against guarantors
and sureties who are not solidarily liable with the debtor. Respondent Maynilads
claim that the banks are not solidarily liable with the debtor does not find support in
jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documentsand is thus a commitment by
the issuer that the party in whose favor it is issued and who can collect upon it will
have his credit against the applicant of the letter, duly paid in the amount specified
in the letter They are in effect absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security arrangements,
they are not converted thereby into contracts of guaranty. What distinguishes letters
of credit from other accessory contracts, is the engagement of the issuing bank to
pay the seller once the draft and other required shipping documents are presented
to it. They are definite undertakings to pay at sight once the documents stipulated
therein are presented.

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to
herein petitioner as the prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not solidary with the
debtor. The participating banks obligation are solidary with respondent Maynilad in
that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And being solidary, the claims against
them can be pursued separately from and independently of the rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit do not show that the
obligations of the banks are not solidary with those of respondent Maynilad. On the
contrary, it is issued at the request of and for the account of Maynilad in favor of the
MWSS as a bond for the full and prompt performance of the obligations by the
concessionaire under the Concession Agreement and herein MWSS is authorized by
the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form of the Letter of Credit.

Taking into consideration our own rulings on the nature of letters of credit and the
customs and usage developed over the years in the banking and commercial practice
of letters of credit, we hold that except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters of credit are solidary with that
of the person or entity requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary upon the presentation of
the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was
competent to act on the obligation of the banks under the Letter of Credit under the
argument that this was not a solidary obligation with that of the debtor. Being a
solidary obligation, the letter of credit is excluded from the jurisdiction of the
rehabilitation court and therefore in enjoining petitioner from proceeding against the
Standby Letters of Credit to which it had a clear right under the law and the terms
of said Standby Letter of Credit, public respondent acted in excess of his
jurisdiction.

NOTES:
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of
guarantee vis–vis the concept of an irrevocable letter of credit are inconsistent with
each other.The guarantee theory destroys the independence of the banks
responsibility from the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. In contracts of guarantee, the
guarantors obligation is merely collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an irrevocable letter of credit, the
bank undertakes a primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a customer that the
issuer shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.