Transcribers:
Marc Roby de Chavez (MARX)
Marc Roby de Chavez (MARX)
Marc Roby de Chavez (MARX)
Marc Roby de Chavez (MARX)
What is a letter of credit?
Any arrangement however named of described, whereby a bank acting upon the request of its client or in its own behalf, agrees to pay another, against a stipulated documents provided that the terms of the credit are complied with.
The definition of letter of credit based on the National Chamber of Commerce
Can there ever be a letter of credit were there is no sale setting?
Yes, Let say a debtor wants to obtain a loan from creditor, the creditor is willing to lend money to the debtor under the condition that there is a security arrangement issued by a bank. So the creditor is comfortable with any collateral coming from the debtor; the creditor is not comfortable with any guaranty agreement that would be executed by an ordinary person; he wants a security coming from a bank. So in that case, there is a letter of credit issued in favor of the creditor. It is a non-sale setting. It is a contract of loan, then the bank issues a letter of credit. So it is not correct to say then that the letter of credit always presupposes for a sale setting.
Commercial letter of credit conforms to sale setting. The
transaction underlying the letter of credit is sale.
Standby letter of credit conforms to non-sale setting. The
transaction underlying the letter of credit is non-sale. Example of Commercial Letter of credit
Buyer is a company based in the Philippines, it wants to purchase equipment from a company based in Japan. Only this company based in Japan has the capability or technical knowhow to manufacture this equipment that the Buyer needs for his business. The only problem is they reside in different jurisdiction the Buyer is on the Philippines the seller is in abroad. If the buyer advance payment there is a possibility that he will not get the equipment, on the other hand if the seller causes the shipment of the equipment there is a possibility that the buyer may not pay. In that case there is a risk on the part of either the buyer or the seller. Through a letter of credit we can solve the deadlock. So the buyer will apply with the Issuing Bank to issue a letter of credit in favor of the seller, now the beneficiary of the letter of credit, so the buyer, now called the applicant of the letter of credit will apply to the issuing bank a letter of credit. We he makes an application he pays a certain deposit, before the bank can be induced or encourage to issue an undertaking to pay in favor of a beneficiary, the buyer-applicant pays a certain amount representing a certain percentage of the total obligation to be incurred under the letter of credit, it is called a marginal
deposit. Buyer-applicant pays 30% of the total obligation and pay fees and commission to the issuing bank. Of course, the bank will not issue a letter of credit without an income, there is a gain and the gain or income comes in the form of payment of commission and interest charges on the obligation to be paid in favor of the seller-beneficiary later on. As the buyer applicant pays the marginal deposit and agrees on the terms and conditions that the issuing bank may impose, the issuing bank will now undertake to pay the seller-beneficiary for issuing a letter of credit. The undertaking to pay by the issuing bank is conditioned on submission of certain stipulated documents, that why earlier in our definition “Any arrangement however named of described, whereby a bank acting upon the request of its client or in its own behalf, agrees to pay another, against a stipulated documents” which means the obligation of the issuing bank to pay, the commitment of the issuing bank to pay the beneficiary is on the condition or against the stipulated document meaning on the condition that the seller-beneficiary will submit certain stipulated documents. This documents stipulated by the parties usually are the shipping documents, the same documents to show that the seller-beneficiary has complied with his obligation under the contract of sale with the buyer and the same documents that the buyer-applicant will need later on to obtain delivery of the equipment. The shipping documents are the Bill of lading (issued by a common carrier acknowledging receipt of the goods with the obligation to deliver the same to the consignee), sale invoices (contains the description of the equipment, the purchase price) and a draft to be drawn by the issuing bank etc. once the document have been defined or verified, these documents are submitted to the issuing bank, upon receipt of the issuing bank of those documents, the issuing bank will pay the seller-beneficiary. The issuing bank will release the documents of title to the buyer-applicant, so the buyer-applicant will be able to obtain delivery of equipment from the common carrier or the customs as the case may be. But the issuing bank will not just release the documents, it has to be reimburse by the buyer-applicant of the total amount paid under the letter of credit. So the issuing bank pays $10,000.00 and the buyer-applicant paid only 30%. The issuing bank has to be reimburse the remaining balance and other charges. Once the charges and reimbursement are effected, then the issuing bank will now release the documents in favor of the buyer. By the receipt of such documents the buyer will go to the common carrier or the customs as the case may be, present such documents and made delivery of the equipments. The buyer got the equipment, the seller got paid, and the issuing bank got the business.
Example of stand-by letter of credit
Debtor would like to obtain a loan from a creditor on the amount of Php 5M. the creditor will issue the money to the
debtor on the condition that the debtor will have to procure a security arrangement to be issued by a bank. So the creditor is not comfortable in granting a loan to the debtor with any security, at the same time the creditor is not comfortable granting loan to the debtor simply on the strength of its mortgage on his properties or the creditor is not comfortable granting loan to the debtor with a guaranty agreement to be signed by a third party. So the creditor will only be comforted in granting a loan to the debtor in a security arrangement comes from a bank, the bank is presumably with resources or with the ability to pay the debtor’s obligation. So the debtor now procures a standby letter of credit in favor of the creditor, he pays the marginal deposit and agrees with the commission. The issuing bank will now open the letter of credit in favor of the creditor. Undertaking to pay the creditor upon submission of the stipulated documents. In standby letter of credits the documents to be submitted are documents showing that the obligor did not perform his obligation under the contract supporting the letter of credit. In a commercial letter of credit, the documents submitted by the seller-beneficiary are documents showing that he has taken the required steps to comply with his obligations under the contract of sale. So by shipping that equipment he obtained the bill of lading, so he has taken the positive steps to comply with his obligation.
In a standby letter of credit the documents submitted by the creditor that the debtor did not perform his obligation under the contract that supports the letter of credit. So, it is either a certificate of non-payment or certificate of default or certificate of non-performance. So once the documents has been submitted and identified and documents have been submitted by the creditor, such creditor can now draw on the standby letter of credit. The payment is made by the issuing bank to the creditor, then the bank must be reimburse from the debtor. So, whatever is the amount paid to the creditor plus the charges and the commission.
A letter of credit by itself does not come into operation without a contract supporting it. It is not a contract that can stand on its own, it needs a supporting contract. In a commercial letter of credit it is a sale in standby letter of credit, it is a non-sale transaction.
If we remove the issuing bank, what we’ll have is a promise to pay made by the buyer in favor of the seller to pay the purchase price without the issuing bank. By introducing the issuing bank, the promise to pay by the buyer is substituted by the promise to pay made by the bank. The bank is presumably with resources, the seller finds comfort in dealing with the bank not just with the buyer.
Without the issuing bank in the equation, what we have is a promise to pay by debtor to the creditor, in a standby letter of credit, by introducing an issuing bank in the equation, the promise to pay by the debtor is substituted by a better promise to pay made by the issuing bank.
In both cases, whether commercial or standby letter of credit, they conform or fits the definition of letter of credit.
Who are the parties to the letter of credit?
• Applicant
• Beneficiary
• Issuing bank
When we say in the definition “against stipulated documents” what does it mean? What is the condition that these stipulated are submitted?
Provided that the terms of the credit are complied with
Who are the parties to the letter of credit? (Basic Parties)
• Applicant/Account party – he may be a buyer,
importer or obligor. The person who procures the opening of letter of credit and who agrees to reimburse the issuing bank any and all amount should be paid under the letter of credit once the issuing bank is compelled to pay because the beneficiary is able to submit the document stipulated.
• Issuing Bank – the one that undertakes to pay the
beneficiary upon submission of the beneficiary of these stipulated documents and compliance with the terms of the credit
• Beneficiary – the one titled to payment from the
issuing bank upon his submission of the document stipulated and compliance with the terms of the credit.
Other Party
Correspondent Bank of the issuing bank
Why do we need a Correspondent Bank? If the account party is in the Philippines, the beneficiary is in abroad. How will the beneficiary know that there is a letter of credit, if the bank is Philippine based? In payment time, how will the beneficiary be paid?
Thru a Correspondent Bank of the issuing bank Kinds of Correspondent Bank
• Advising/Notifying Bank – is not liable to pay the
beneficiary; it does not have any contractual relations with the beneficiary. Its only obligation is to determine the apparent authenticity of the letter of credit; to check if at first glance that the same is genuine or valid. If at first glance the letter of credit
if genuine, the advising/notifying bank notifies the beneficiary of the letter of credit; transmit the letter of credit in favor of the beneficiary so that the beneficiary can cause shipment of the equipment.
• Paying Bank – is an agent of the issuing bank for the
purpose of making payment to the beneficiary. Usually an issuing bank has a bank account in Tokyo, let’s say BDO has an account in the Bank of Tokyo. Bank of Tokyo may be a paying bank. BDO will instruct Bank of Tokyo to pay the beneficiary, debit the account of BDO then credit the account to the beneficiary. The Paying Bank collects fees from the issuing bank.
Is it possible for an advising bank and the paying bank to be the same bank?
Yes
• Confirming Bank –
Why is it called confirming bank?
Because it lends credence to a letter of credit issued by a lesser known bank as if it is the one who issued the letter of credit. Let’s say BDO in the Philippines is the largest bank in Philippines but BDO in Japan is small. So BDO in Japan is a lesser-known bank in Japan. So why will the beneficiary agree on a letter of credit to be issued by a lesser-known bank? A confirming bank may come into the equation. That confirming bank lends credence to the letter of credit issued by a lesser-known bank as of it is the one that issued the letter of credit. Which means the beneficiary, instead of going directly to the issuing bank, may just present the documents to the confirming bank, and the confirming bank will be the one to pay the beneficiary. Once the confirming bank pays the beneficiary it will claim reimbursement from the issuing bank and collect also its own fees. If there is a confirming bank, the letter of credit becomes more expensive because there are more fees to be paid.
• Negotiating Bank – the moment that the mode of
payment of the letter of credit is a draft/bill of exchange, draft drawn by the beneficiary against either the issuing bank or confirming bank, pay to the order of myself at sight the amount of $10,000. Once a draft is accepted by the issuing bank, it becomes liable. If the drawee does not accept, there is no liability. In a letter of credit the issuing bank or confirming bank is the drawee bank, the one ordered to pay by the beneficiary.
Who will give the order to pay to the issuing bank or confirming bank as the drawee of the draft?
The one liable to pay. So the drawer and the payee can be both the seller-beneficiary What will the payee do on the draft?
On maturity, the payee may present the draft to the drawee. The drawee accepts and pays.
What if the draft is payable 60 days after sight?
Upon acceptance by the drawee, it is not yet due for payment. That the payee will have to wait for 60 more days upon acceptance by the drawee
If it is a user’s draft, the payee may not want to wait for 60 days, what will the payee-beneficiary do?
He may have the option to negotiate the draft into somebody else. So if the payee-beneficiary negotiates that draft to a bank (XYZ bank). This bank is known as the negotiating bank. The bank that buys the drafts drawn against the issuing bank or confirming bank is the negotiating bank In negotiable instruments law, if you have a draft, the drawer address the drawee to pay the payee. The payee has 2 options: present the instrument for acceptance or negotiate. If he payee negotiate, the holder, the one who pays the instrument, becomes the owner and the owner now has 2 options: present the instrument for acceptance or negotiate Why will a bank by the draft?
Because it will buy it with a discount. So if the draft is valued of $10,000.00, the bank will only buy it for $9500.00. So the payee gets the $9500.00 without waiting for 60 days. The entire $10,000.00 will be collected by XYZ bank on maturity from the issuing or confirming bank.
So as far the as the payee is concerned, he need not to wait for maturity. The waiting will be done by the negotiating bank, but the same earns the difference between the face value of the instrument and the actual value it paid to the payee-beneficiary.
What are the 3 distinct relationship arising from a letter of credit?
• Issuing Bank and the applicant – relationship is
agreement for the issuance of the letter-credit by the bank
• Issuing Bank and beneficiary – relationship is
governed by the terms of the letter of credit issued by the bank
• Applicant and the beneficiary – relationship is
governed by the law on sales. They agree on the terms and conditions of the sale
Is the contract between the applicant and beneficiary independent from the contract between the issuing bank and the applicant?
Yes, they are inter-connected or related but they are independent and separate from one another Let’s say that the buyer-applicant and the seller-beneficiary agreed to enter into a contract of sale and the object of the sale refers to a dye stuff. A letter of credit has been opened procured by the buyer in favor of the seller. The seller presented the document to the issuing bank and the issuing bank pays the seller. Then the documents were returned to the buyer-applicant, the buyer-applicant presented the document to the common carrier and obtained the shipment. When the buyer opened the goods, what was delivered were not dye stuff. Can the buyer refuse to reimburse the issuing bank?
No, in this case, the object did not conform on what was agreed upon by the buyer and the seller, there is a breach of contract. The buyer cannot refuse to reimburse the issuing bank despite the breach of contract by the seller. This is the DOCTRINE OF INDEPENDENCE
Doctrine of Independence
Under this doctrine, the obligation of the issuing bank to pay the beneficiary does not depend on the fulfillment or non-fulfillment of the contract supporting the letter of credit. If it is a commercial letter of credit, the obligation if the issuing bank to pay the beneficiary is not affected by any breach of contract by the seller to the buyer because the contract between the issuing bank and beneficiary is separate and distinct from the contract between the seller and the buyer.
The SC held that banks deals with documents, they don’t deal with goods. The issuing bank has no obligation to check the object, the quantity or quality of the goods. The bank needs not to verify or go beyond the four corners of the document. The issuing bank will determine the documents to be
submitted, where the stipulated documents
tendered faithfully. If the documents were submitted, the issuing pays the seller.
The right of the issuing bank to reimbursement the buy from the buyer applicant does not depend on the fulfillment or non-fulfillment of the contract. It depends on whether or not the issuing bank was compelled to pay beneficiary because the latter submitted the documents stipulated.
It is not part and it will never be a part of the contract between the issuing bank and the buyer that the bank will investigate whether the goods conformed to the goods ordered.
What are remedies of the buyer in case the goods did not conformed to the goods ordered?
File an action for breach of contract against the seller. The remedy of the buyer is based on the law on contracts and not based on the principles of letter of credit
Let’s say the buyer and seller in a commercial letter of credit entered into a contract of sale for a delivery of certain object. They stipulated that the buyer will procure the opening of a letter of credit in favor of the seller. The buyer, however, was not able to obtain a letter of credit with a bank. In the stipulation that the buyer will procure a letter of credit but failed to do so prevent the consummation of the contract of sale? Is the non-opening of the letter of credit is at least a resolutory condition that extinguished the contract of sale?
In Reliance Commodities, Inc vs Daewoo Industrial, the contract of sale between the seller and the buyer is separate, distinct and independent from the opening of the letter of credit because it is a matter between the buyer and the issuing bank. A contract of sale is perfected by mere consent and such nature of a contract of sale is not affected by the non-opening of a letter of credit
Letter of Credit in a non-sale setting or a STAND-BY LETTER OF CREDIT
Let’s say the debtor obtained a loan from a creditor for 5 million pesos secured by a stand-by letter of credit issued by ABC bank. Let’s say the debtor made a partial payment of 2.5 million out of 5 million obligation. The issuing bank is committed to pay the creditor the amount of 5 million upon the submission of the stipulated documents. The debtor failed to pay. The creditor tendered the documents stipulated (promissory note, certificated of non-payment). Can the issuing bank deduct the partial payment made by the debtor in determining the amount of his liability to the creditor?
The contract of loan is independent from the contract between the debtor and the bank and the bank with the creditor-beneficiary. The amount of liability by the bank to the beneficiary is 5M under
the letter of credit. The only amount that the issuing bank may recover from the debtor is 5M under their own relationship. But to prevent unjust enrichment at the expense of another, the SC said that the excess payment may be recovered by the debtor from the creditor.
What are the kinds of letter of credit?
• Irrevocable letter of credit – A letter of credit
wherein the terms and the undertakings of the issuing bank cannot be amended or altered or revoked without the consent of the beneficiary
• Revocable letter of credit – can be amended,
altered or revoked even without the consent of the beneficiary
• Standby letter of credit – non-sale setting
• Commercial letter of credit – the principal
transaction is a sale or importation setting
• Confirmed letter of credit - the liability of the
confirming bank is primary
• Non-confirmed letter of credit - SPCL2
Can we say that the obligation of the issuing bank in a letter of credit is similar to a guarantor particularly to stand-by letter of credit?
No, the obligation in a letter of credit is primary and solidary while in a case of a guarantor, it is subsidiary.
In a contract of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable; a letter of credit is an engagement by a bank or other person made at the request
How about a surety?
The issuing bank has to pay even there is no default payment
Let’s say between the debtor and the creditor, there are issues of overpayment, capacity, minority or defenses which are personal to the debtor. While these defenses are being determined, can the creditor made the surety liable?
No
How about in letter of credit transaction, if the issues are personal to the debtor, can the issuing bank be held liable?
No, for as long as the stipulated documents are submitted.
Is there an exception to the Doctrine of Independence?
Fraud exemption rule
Does the fraud refers to the performance of the contract? What kind of fraud that is contemplated with the fraud exemption principle to prevent the beneficiary from collecting on the letter of credit?
Fraud in relation with the independent purpose or character of the letter of credit, not fraud in the performance of the obligation or contract supporting the letter of credit.
Because if it is fraud in the performance of the contract, under the doctrine of independence, it is not a bar for the beneficiary to collect from the issuing bank.
Example: the Letter of credit requires submission of the Bill
of Lading but the submitted document was a spurious bill of lading.
Doctrine of Strict Compliance
It requires that the document to be submitted or tendered by the beneficiary conforms strictly, faithfully and absolutely with the document stipulated such that if there is a discrepancy between the document stipulated and the document tendered, the beneficiary is not entitled to payment. Supposing that the document required is submitted by the beneficiary is a document that is within the power of the applicant to issue, but the applicant refuses to issue despite having received the shipment, will the document of strict complaince still bars the beneficiary in collecting the letter of credit?
It matters not that the submission of the documents are unfair, unjust or inequitable, the point is, it requires that the document stipulated must be the document to be submitted, otherwise, the issuing bank is not liable or the beneficiary is not entitled to payment
The SC said in various cases that in Sec 2 of the code of Commerce that in the absence of any particular law in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed What are the requisites in order to have a basis to enjoin the beneficiary from drawing or collecting under the letter of credit? (fraud exemption rule)
There must be fraud in relation with the independent purpose or character of the letter of credit
Long definition of Letter of Credit: (international chamber of commerce sec 2)
Any arrangement, however named or described, whereby a bank, acting upon the request of his client or on his own behalf agrees to:
• Pay a third party to the order of the beneficiary
• Accept draft drawn by the beneficiary
• Authorize another bank to pay the beneficiary
• Authorize another bank to accept a draft drawn by the beneficiary
• To negotiate against stipulated documents provided
that the terms of the letter of credit are complied with
TRUST RECEIPTS LAW (PD 115)
Trust Receipt Transaction – any transaction between the
entruster and the entrustee, whereby the entruster who owns or holds absolute title or security interest over specified goods, documents or instruments releases the same to the possession of the entrustee, who in turn, binds himself to the designated goods, documents or instruments with the obligation to turn over the proceeds to the entrustor to the extent of the entrustee’s obligation to him, or if unsold, to return the said goods, documents, or instruments to the entrustor
Who are the parties in a trust receipt transaction?
• Entruster
• entrustee
Describe the rights of the entruster over the goods, documents or instrument
He has absolute title or security interest over the goods
Think of a trust receipt similar to a chattel mortgage. In trust receipts transaction, the goods are held in trust for the benefit of the entruster. By express provision of law, the entrustee has the obligation to hold the goods, documents, or instruments in trust for the entruster and if he sells the goods, he must account for and deliver the same proceeds in favor of the entruster. Or, if he did not sell the goods, he must return the same to the entruster, otherwise, he is liable for the crime of estafa under section 13 of PD 115 in relation to section 315 of the RPC.
In a letter of credit transaction, the issuing bank pays the beneficiary. The issuing bank release the shipping document to the buyer only after the buyer reimburse the issuing bank of the amount paid under the letter of credit. In a trust receipt transaction, the Bank may release the goods, despite non-payment yet to the Bank. But subject to the execution by the buyer, now the entrustee of a trust receipt agreement, whereby he hold the goods, documents or instruments in trust. If he sells, he must deliver the proceeds. If he did not
sell, he must return the goods, documents or instruments, otherwise there is a crime committed.
From an issuing bank, it becomes the entruster and the buyer becomes the entrustee, he is able to receive the goods even though he does not pay in full, in time the obligation is converted from mere civil to criminal.
In Bank of Commerce vs Serrano, the SC distinguished between trust receipt and letter of credit. The liability of the buyer-importer to reimburse the issuing bank is civil in nature, even he does not pay, there is no crime committed. In a trust receipt transaction, it is true that the bank may release the goods even though it is not pay in full, but there are concomitant obligation to be performed by the entrustee such that he did not performed such obligation, there is a crime committed. The issuing bank finds comfort in issuing the goods or documents to the buyer-importer even though he did not pay in full yet of the amount advanced by the bank for the importation on shipment of the goods.
The basic obligation of the buyer-importer, now the entrustee, is to pay. The bank advanced the money, the bank lent the funds to enable the buyer to acquire the goods. Basically, it is the money of the bank because the bank paid the beneficiary, even though it has not been paid in full by the buyer.
What is the basic obligation of the buyer?
To pay the amount advanced by the bank. If the entrustee does not pay and he sold the goods but he did not deliver the proceeds, a crime is committed. Or, he did not pay the obligation, not able to sell the goods but he did not return the goods, then a crime of estafa is committed.
If he is able to pay the obligation to the bank, then both civil and criminal obligation are extinguished. Are there any other obligation imposed upon the entrustee?
• The obligation to insure the goods
• The obligation to keep the goods separate and
distinct from other properties
• The obligation to observe the terms and conditions of the agreement
But only the obligations to deliver the proceeds or return the goods if not sold will give rise to criminal liability. A and B are engaged in the business of exporting sea crafts. They need shells to be able to create sea crafts. They purchased shells to the supplier secured by a letter of credit issued by ABC bank. A and B could not pay their obligation to the Bank, they decided to return the shells but the bank is not
interested in the shells, did not accept the return. So bank did not receive the return of the goods. A and B consigned the goods in court but the consequence is, a complaint for estafa was filed against A and B, but it was dismissed because the goods are consigned in court. Can the Bank file a separate civil action to enforce the civil liability of A and B?
In the case of Vintola vs IBAA, the action will prosper because a trust receipt transaction has 2 features:
• Loan feature
• Security Feature
Loan feature is brought about by the fact that the
bank financed the cost of acquisition or importation. The bank lent the money to enable the buyer to obtain the goods that he wants to purchase.
Security feature lies on the goods itself, the goods
are held under a trust for the benefit of the entruster. If they are sold, the proceeds must be accounted for and delivered to the entruster. If they are not sold, the goods must be returned to the entruster, otherwise the crime of estafa is committed.
Basically, for as long as the loan is not paid, the civil liability remains. The return of the goods will only have a bearing on the criminal liability of the entrustee not on the civil liability. For as long as the load advanced by the bank is not paid, the civil obligation remains.
The return of the goods will only extinguished the criminal liability but not the civil liability, the loan is yet to be paid.
When is the civil liability be extinguished?
Only when the goods are sold and the proceeds will be applied for the payment of the obligation
Who is the owner under the trust receipt transaction?
Entrustee, the entrustor is merely a holder of a security title
Can he mortgage the goods?
In ___ vs Prudential bank, the SC said that the entrustee cannot mortgage the goods under trust receipt transaction because one of the requisites of the mortgage under Art 2085 the civil code is that the mortgagor be the absolute owner of the thing mortgage or has freedom of disposal
Does the entrustee have absolute ownership on the property? No, because the property is held in trust for the benefit of the entruster. He does not have freedom of disposal, therefore, he cannot mortgage the goods.
The inclusion of goods under trust receipt transaction in a mortgage is void and the ensuing foreclosure sale is likewise null and void
The entrustee cannot mortgage but he can sell. If the entrustee is the owner and the object is lost, suppose to be there is no more liability. But under the trust receipt law, the loss of the goods will not extinguish the civil liability of the entrustee. (Section 10)
In one case, the SC said that the owner of the goods is the entruster (in vintola case, it is the entrustee). The SC clarified that it is an artificial concept or notion meant to protect its interest over the goods.
A entered into a contract with ABC to renovate the cemetery in Cebu. After entering into the contract, A purchased supplies from a construction supplier. The following day, he went to a bank, got a loan to pay off his construction supplier. The bank asked him to sign a trust receipt agreement. A was not able to pay his obligation to the bank. The bank filed a criminal case for estafa against A. is he liable? Is that a trust receipt transaction just because the parties signed a trust receipt agreement? Can we say that the bank financed the goods?
It is not a trust receipt agreement but an ordinary loan because when A signed the trust receipt agreement, he is already the owner of the goods. The bank did not financed the goods. It is the nature of the transaction that determined whether the transaction is a trust receipt transaction, not the nomenclature or name of the agreement.
If the supposed entrustee was already the owner of the goods before he signs the trust receipt agreement even though he is not in possession of the goods, it is not a trust receipt transaction as contemplated by law even though the parties have signed a trust receipt agreement.
If the offense is committed by a corporation, can you held the officers liable criminally?
Yes, but only those responsible for the violation. Only those who signed the resolution
Under section 13 of PD 115, if the offense is committed x x x x If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.
What about an agent of the corporation, it was violated by the corporation thru an agent. Who is liable civilly? The agent who signed in behalf of the corporation or the corporation?
Corporation is liable civilly Who is criminally liable?
In the case of Ong vs CA, it was the agent who is criminally liable because he is a person responsible for the offense
Can we file a criminal case against the corporation?
It depends, if the penalty is imprisonment, we cannot file a criminal case, but if the penalty is a fine or forfeiture or revocation of the corporation’s franchise, then we can
What are the defenses that can be invoked to negate criminal liability?
• The entrustee has fulfilled his obligation, that is, he had surrendered the proceeds or returned the goods to the entruster (delivery of the proceeds up to the extent owing to the entruster will extinguish the civil liability; partial delivery will not extinguish civil liability), (return of the goods do not extinguish civil liability, it has to be sold and apply the proceeds)
• The transaction is only a loan and not a trust receipt transaction as contemplated by law (it does not extinguish civil liability)
• The goods or documents subject of the trust receipt
was not delivered or received by the entrustee (it does not extinguished civil liability)
• When the entruster cancels the agreement and
takes possession of the goods and eventually sells the said goods. Mere repossession of goods will extinguish criminal liability (it does not extinguish the civil liability)
• Loss of goods due to fortuitous event or force majeure; (it does not extinguish civil liability)
• If there is compromise agreement before the filing of the criminal case in court, there is novation changing the relationship from trust to creditor-debtor relationship (it extinguish civil liability if it covers the extinguishment of civil liability)
SPCL4
What is a TRUST RECEIPTS TRANSACTION?
It is a transaction between two parties (the entruster and the entrustee).
The entruster, who has absolute title or security interest over the goods, documents or instruments, releases the same to
the entrustee, but subject to the execution by the entrustee of an agreement whereby he undertakes to hold the goods, documents or instruments in trust for the entruster.
In case he sells the goods, documents or instruments to deliver the proceeds to the entruster up to the extent of the amount owing to the entruster, or return the goods if not sold. Otherwise, he commits the crime of estafa.
Think of trust receipt transaction as basically a loan secured by chattel mortgage. Same concept except that the goods are held in trust for the benefit of the entruster and if the goods are sold there is a corresponding obligation to deliver the sale proceeds or if unsold to return the goods otherwise there is a crime of estafa under Sec 13 of PD 115 in relation to Art 315 of the RPC.
The basic obligation of the entrustee is to pay the obligation. So the bank financed, lend money, advanced to funds to finance the acquisition or purchase of goods under trust receipts. So there is money out insofar as the bank is concerned. The security of the bank lies with the goods themselves, such that if the goods are sold the sale proceeds must be delivered to the entruster, or if not the same must be returned to the entruster.
If the obligation is paid, if the loan advanced by the bank is paid then the obligation is extinguished or there is no obligation to talk about.
If it is only when the entrustee does not pay the obligation that what he does with goods becomes critical insofar as his liability is concerned.
If he does not pay and sells the goods, he must deliver the proceeds up to the full amount owing to the entruster. If he does not pay and did not sell the goods, he must return the goods to the entruster. This is clear in the case of Allied Bank vs DOLE.
If the only obligation of the entrustee is to sell and deliver the proceeds or return the goods if not sold it would seem, based on the literal interpretation, PD 115 will only apply if the goods are for sale or intended for resale because there is too much emphasis on selling. This is not true according to the SC in the case of Allied Bank vs DOLE.
Allied Bank vs DOLE
The object of the TR Transaction refers to a dolomite nozzle, which obviously is not for sale. It is a part of an equipment that manufactures the product. So when you purchase a dolomite nozzle you do not
intend to sell it. You intend to use it. So the criminal sanction under PD 115 applies even if that object is not for sale or resale.
So how can the entrustee comply with the obligation to deliver the sale proceeds or return the goods if not sold if it is not for sale anyway?
The SC the criminal sanction under PD 115 encompasses the basic obligation to pay. So if that obligation is not fulfilled then criminal liability is also present.
That is why we clarify that it is only when the entrustee is able to pay that the obligation is extinguished. And it is only when the entrustee failed to pay that what he does to the goods as a security becomes important to determine the nature and extent of his liablity.
What are the other obligations imposed by law upon the entrustee?
1. to insure the goods against theft, pilferage, fire and other natural calamities
2. keep the goods separate and distinct from his other properties
3. to Observe the other terms and conditions of the agreement, like if the agreement prohibits that the goods be transferred to other location then such must be respected.
But, only the obligation to deliver the sale proceeds or return the goods if not sold will give rise to criminal liability in case the loan is not paid. The rest of the obligations will not give rise of to criminal liability.
The gravamen of the offense or the core of the offense is the failure to pay matched with the failure to deliver the sale proceeds or return the goods if not sold.
In cases of Vintola vs IBAA and Rosario Textile Mills vs ___ the SC explained the nature of TR Transaction. It has a loan feature and a security feature.
The loan feature brought about by the fact of the bank lend the money to finance the acquistion.
And security feature because the goods are held in trust for the benefit of the entruster.
Vintola vs IBAA
This involves purchase of pucca shells secured by a LC and trust receipts.
The loan advanced by the bank to purchase the pucca shells were not paid prompting the filing of a criminal complaint by the bank against the Vintolas.
The Vintolas tendered the return the of the goods in court but obviously rejected by the IBBA. The Vintolas were forced to consign to goods in court. The consignation will result in acquittal, but not in the extinguishment of the civil liability, because for as long as the loan is not paid the civil obligation remains.
So the return of the goods will only address the criminal liability, but unless the goods are sold and proceeds are applied to the obligation, the civil liability remains.
So in the case of Vintola vs IBAA that the acquittal of the entrustee in the criminal case which impliedly includes the civil case does not preclude or is not a bar to the filing of a separate civil action in court of the civil liability of the entrustee.
In Vintola vs IBBA acquittal first then separate civil action. In Sarmiento vs CA, it is simultaneous filing.
May a criminal action proceed indecently of a civil action? Can they go hand in hand - criminal action for estafa, civil action to recover the obligation or enforce civil liability?
The SC said yes, because the criminal action is based on ex delicto, violation of PD 115 as a law and the civil action is based on ex contractu, violation of the terms and conditions of the agreement itself.
Rosario Textile Mills vs Homebankers Trust
In this case the goods were not accepted by the entrustee because they did not conform with the specifications. The goods were stored in a bodega. While in the bodega they were destroyed by fire. So without the receipt of the goods by the entrustee. Does that extinguish the civil obligation of the entrustee? The goods were lost without actual receipt by the entrustee
The SC said, citing the two features – loan and security features, the loss of the goods regardless of the cause of the loss, whether due to force majeure or not, and the period of the loss will not extinguish the civil obligation of the entrustee up to the extent owing to the entruster. For as long as the loan is not paid the civil obligation remains. Who is the real owner of the goods under TR? If it is the entrustee how come he cannot mortgage?
As we saw in the case of DBP vs Prudential Bank (475 SCRA) touching on the issue of whether or not the entrustee can mortgage the goods under TR.
The SC said,''No, because one of the elements of a valid mortgage under Art 2085 of the Civil Code is that the mortgagor must be the absolute owner of the property mortgaged, or must have freedom of disposal which is not present in this case of a TR transaction, where the goods are simply held in trust.''
But anytime he can sell, this is one case where not being the owner he could sell but with the corresponding obligation to deliver the sale proceeds to the the entruster.
If the entruster is the owner, however, how come the principle of res perit domino will not apply against him?
If he is the owner the loss of the goods would have its effect against the entruster. If he is the owner then he will bear the risk of loss. But that is not so. The loss does not in any way impair the obligation of the entrustee to pay the entruster.
In Rosario Textile Mills, the owner is the entruster but only in an artificial concept or notion meant to preserve, protect, and enhance the security interest over the goods.
If the facts are similar to DBP, apply DBP. If the issue is whether or not you can mortgage, apply DBP.
If the issue is whether or not the loss of the goods extinguishes the civil liability apply the case of Rosario Textile Mills.
If the issue is whether or not the acquittal of the entrustee will be a bar to the filing of a separate civil action in enforcing the civil liability, apply the case of Vintola vs IBAA or Sarmiento vs CA.
Defenses which the entrustee may invoke or raise against the entruster if ever he is charged with violation PD 115
1. It is not a real transaction as contemplated by law. 2. Fulfilment of the terms and conditions of the
agreement.
3. Novation or compromise agreement entered into
before the filing of the Information in court. 4. Non-delivery of goods.
5. Cancellation of the trust and repossession of the goods.
6. loss of the goods.
It is not a real transaction as contemplated by law
This is so in the case of Colinares vs CA and Trust Company vs CA. It is not the name the matters, it is not what the parties call it or designate it, but nature
of the transaction that determines the rights and obligations of the parties to the transaction. That is what exactly happened in the case of Colinares vs CA.
Colinares vs CA
A entered into a contract for _ the purchase of two sacks of rice and the following day he obtained loan from a bank to pay-off the two sacks of rice_. The bank made him sign a TR agreement. He did not pay the obligation to the bank. He was charged with the crime estafa.
Is there a crime committed?
The sequence is: He got a contract today. The following day purchased the supplies and became the owner thereof although on loan. After buying the supplies, went to the bank got a loan to pay-off the supplier.
The question is: when he signed the agreement was he in possession and the owner of the goods?
Yes. Then if he is in possession of the goods and the owner then that is not a TR transaction, because in a TR transaction the bank should have financed the acquisition of the goods.
In this case it is the reverse. It cannot be said that the bank finances because he was an owner at the time that the funds came in. So the funds have been delivered before or simultaneously with the delivery. So it cannot be said that the bank financed the acquisition of the goods which is in keeping with the nature and concept of a TR transaction.
Fulfilment of the terms and conditions of the agreement Fulfilment may come in the form of payment or delivery of the sale proceeds or return of the goods. If the obligation is paid on its entirety then criminal and civil liability are extinguished.
If it is delivery of the sale proceeds, it depends on how much were the amount delivered. If it corresponds to the full obligation then liability is also extinguished.
If it is return of the goods it is also fulfilment. It will only extinguish the criminal but not the civil liability. Novation or compromise agreement entered into before the filing of the Information in court. As you saw in People vs Ong and Pilipinas Bank vs Ong.
People vs Ong
The compromise agreement, unfortunately, was entered into after the filing of the Information in court. When the prosecution continued the entrustee questioned the continuance of the case because he already entered into a compromise agreement with the entruster.
The SC said the compromise agreement after the filing is not a ground to extinguish criminal liability. Conversely, if the compromise agreement was entered into after the filing of the Information there is novation, it prevents the rising of criminal liability. It is not a ground to extinguish criminal liability but it prevents the rising of criminal liability.
It stops the giving birth of the criminal liability because the basis of criminal liability was converted into a creditor-debtor relationship.
A trust if breached will give rise to a criminal liability, but if a trust is converted to a creditor-debtor relationship then the trust element is gone. What you have is simply an obligation to pay under the compromise agreement, if breached would only give rise to a civil liability.
Pilipinas Bank vs Ong
The entrustee here is the __ corporation. The entrustor is the bank. The entrustee file a petition for suspension of payment with the SEC (At that time the SEC has jurisdiction over petition for suspension of payment. Now it is the RTC acting as a special
commercial court). The SEC appointed a
management committee that oversaw the operation of the entrustee corporation and forbade the
entrustee corporation from making any
payment_crisis and difficulties including the
obligation under TR.
The question is, if you have and order coming from a management committee constituted by the SEC, will there be criminal liability in case you do not pay your obligation under TR or is that prohibition all encompassing to even include payment of the obligation under TR?
The SC said that there was no intent to commit the act and therefore there is no criminal liability. The SC had to clarify, despite the malum prohibitum nature of the TR transaction. There is no intent to commit the act therefore there is no criminal liability.
In criminal law, if it is a violation of special law intent is not necessary. It is the violation of the law that makes it an offense. But in this case the SC said that there is no intent to commit the act. So it is not a question of whether there is intent to violate the law, but there is not intent to commit the act because the reason for the non-payment was brought about by the order coming from the management committee appointed by the SEC. Actually, that hair-splitting distinction would not have been necessary because all the SC would have to say is that there was a novation before the filing of the information.
In this case the parties converted the TR agreement into a 7 year term loan. They changed the term of the contract. They increased the interest rate. The bank requires a collateral. It is no longer a trust relationship agreement. It is now a creditor-debtor relationship under the loan agreement.
Non-delivery of goods
___ vs CA. The execution of a TR agreement with matching invoice attached to it, does not prove delivery. Just because the prosecution was able to present the TR agreement, the invoices does not prove delivery. The invoices merely contain the description of the goods, quantity and quality does not prove delivery.
The prosecution should have presented a document independently of the TR agreement to prove delivery.
If there is denial on the part of the entrustee of the receipt of the goods, it behooves upon the prosecution to substantiate delivery by producing or presenting additional documents on top of the TR agreement.
Cancellation of the trust and repossession of the goods The entruster, in case of default of the entrustee, may cancel the trust and take possession of the goods.
If the entruster cancels the trust, take back possession of the goods, can he still foreclose the mortgage on a property owned or belonging to the entrustee? PNB vs Pineda
PNB repossessed the goods under TR and then foreclosed the mortgage constituted to secure the obligation of the TR.
Does the repossession per se bar the PNB from foreclosing the mortgage?
If the repossession is enough to extinguish the obligation, then PNB would have no basis to foreclose the mortgage.
But repossession per se does not extinguish the civil obligation. For as long as the loan is not paid, the civil obligation remains. So it is only when the goods are repossessed, sold, and the proceeds applied to the obligation that the civil liability is extinguished and by that time there is no need to foreclose the mortgage.
In the case of South City Homes, we learned that the remedies are there, but it is up to the entruster to determine which remedy to pursue. He may file a criminal case for estafa. He may cancel the trust and take repossession. The option does not belong to anyone but to the entruster. In that case the South City Homes, the surety contended that entruster should have cancelled the trust and take possession.
The SC said the law says “may” cancel the trust. It is permissive, not mandatory and the option belongs to the entruster.
What happens if the entruster retake possession, sells the goods, apply to proceeds but then there is a deficiency, in the sense that the proceeds of the sale are not enough to cover the obligation secured by the TR?
Metrobank vs _ that the deficiency shall be for the
account of the entrustee.
Keep in mind that the goods are only security, they are not mode of payment. So if the goods are sold, the proceeds generated applied to the loan obligation but that is not enough, then the entrustee should pay for the deficiency.
The same way if there is an excess. If any, the excess goes to the entrustee.
Loss of the goods
The law is clear on the effects of the goods on the civil liability of the entrustee. As pointed in the case of Rosario Textile Mills and the provision of the law itself. But the law is not clear on the effects of the loss on the criminal liability of the entrustee.
If the goods are lost without the fault of the entrustee, it is not fair to impute criminal liability against the entrustee. The goods must have been lost due to fraud, deliberately, so that there is a basis to file criminal action.
Who has the better right over the goods under TR – is it the entruster or the creditors of the entrustee? Prudential Bank
vs NLRC
A group of laborers filed a labor complaint against their employer and the employer corporation was also an entrustee to a TR agreement with prudential bank. The laborers obtained judgment against their employer. It became final...levied on the properties of the employer including the goods held under TR. Prudential Bank asserted its right and ownership over the goods.
Who has the better right over the goods held under TR – it is the unpaid laborer or is it the entruster itself?
The SC, citing the law, said that the security interest of the entruster is valid and enforceable against the creditors of the entrustee for the duration of the trust receipt agreement. The security interest
attaching to the goods, valid and
enforceable against the creditors of the entrustee all throughout the duration of the TR agreement. In simple words, the right of the creditor is inferior to the right of the entruster with respect to the goods held under TR
The SC pointed out that there is only one person who can defeat right of the entruster- an innocent purchaser for value.
The issue of the constitutionality of PD 115 was likewise tackled in the case of People vs ___. The SC said that it is a valid exercise of police power. It is not just a crime against private property. It is a crime against public order. What is penalized is not the non-payment of debt, it not a violation of the constitutional prohibition against imprisonment for non-payment of debt.
What is penalized is the not the non-payment of debt, but the abuse of confidence and the misuse of goods under TR which would destroy and impair the trade and commerce.
The case of Metrobank vs ___ tells us that a civil liability arising from a crime cannot be the subject of set-off or compensation under Art 1279 of the civil code.
here _ entered into a TR agreement with Metrobank. He failed to pay his obligation to Metrobank. Metrobank commenced criminal proceedings. The defense was that the parties explore a transaction agreement to convert the TR into a loan agreement and in good faith _ deposited about 2.8 M with Metrobank. But, unfortunately, not enough. The
agreement was not implemented, did not
materialize. Metrobank continued with the
prosecution of the case. _ said that no, there was compensation because he deposited 2.8 M _. The SC said that there can be no compensation if the debt consisting of a civil liability arises from a crime. Could there conventional or contractual set-off or set-off by agreement?
Yes, but it must be stipulated.
Metrobank and _ should have agreed expressly that this 2.8 M should be applied to the loan obligation under TR. But it is not.
Who is liable in case the offense is committed by a corporation?
PD 115 Sec 13 expressly provides now that if the offense is committed by a corporation the criminal liability may be imposed against the director, officer, any person responsible for the violation.
Not all the directors or officers of the corporation are to be held liable because the corporation has a personality separate and distinct from the officers. Only those who are responsible for the violation are liable. In market terms, it simply means who signed the agreement. The director or officer who signed the agreement will be the one liable criminally, even though he did not benefit from the transaction, even though the goods were not received by him, even though ____ and all the benefits accrued to the corporation. This is what the SC said in the case of
Ching vs Secretary of Justice.
It is not a defense that the corporate officer did not receive the goods, did not benefit from the transaction, that everything went to the corporation because the law makes you liable if the offense is committed by your corporation and you are acting in behalf of your corporation.
Ong vs CA
If mere agent signs the TR in behalf of the corporation, that is enough to make him liable criminally, because the operative word is “any
person responsible for the violation”. You need not be a director. You need not be an officer. You can be any person for as long as you acted in behalf of the corporation, _ responsible _ for the violation stand to be held criminally liable.
This is one instance where the one liable criminally is not the one liable civilly. The one liable civilly is the corporation, unless the officer or agent assumes personal liability but criminal liability devolves upon the responsible director, officer or person.
The same cases Ching vs Sec of Justice and Ong vs CA, it was pointed out that you cannot file a criminal case against the corporation if the penalty is imprisonment. Someone has to pay the price. You cannot put behind prison bars the corporation, it being an artificial person and that person is the one responsible for the violation.
But if the penalty is fine, revocation of franchise, then the corporation may be held criminally.
SPCL5
Chattel Mortgage
What is a Chattel Mortgage?
An accessory contract whereby a personal property is recorded in the Chattel Mortgage Register to secure the performance of a principal obligation. The concept of a chattel mortgage as a conditional sale under the old chattel mortgage law has been supplanted by the definition of chattel mortgage under Art 2140 of the Civil Code. It is now an accessory contract, no longer a conditional sale.
Debtor obtained a loan from a creditor secured by a chattel mortgage on personal property, let's say a car. The car was gutted by fire, completely perished and destroyed. Is the chattel mortgage extinguished?
Yes, because there is no more chattel. Is the loan obligation extinguished?
No, because of the change of concept from a conditional sale to an accessory contract, chattel mortgage now governed by the principle that the extinguishment of the accessory obligation does not extinguish the principal obligation. But the
extinguishment of the principal obligation
Will the lack of registration of the chattel mortgage affect its validity? Will the lack of registration destroy the very definition of a chattel mortgage?
All that the SC said in the case of Pilipinas Marble vs
IAC (142 SCRA) that lack of registration does not
invalidate the chattel mortgage because registration is only necessary to bind 3rd persons.
Unrecorded chattel mortgage is still valid between the contracting parties because registration is only for the purpose of binding 3rd persons.
When you read the case of Pilipinas Marble vs IAC you will realize that the provision cited by the SC in laying that conclusion is a provision applicable to Real Estate Mortgage. In credit transaction, there is an express provision on Real Estate Mortgage that lack of registration does not invalidate the contract. It is still valid between the contracting parties because registration is only for the purpose of binding 3rd parties. It is in real estate mortgage. But, there is no counterpart provision in chattel mortgage. In Act 1508, Art 2140 Chapter on Chattel mortgage, none.
But, just the same the SC court applied the provision on real estate mortgage and held, and there being no different decision, Pilipinas Marble vs IAC will stand that, jurisprudentially, unrecorded chattel mortgage binds the contracting parties, because registration is only for the purpose of binding 3rd persons.
What may be the object of chattel mortgage? Personal property
shares of stocks, cars, public or private vehicles, tugboats, vessels, aircrafts, growing crops, stocks in trade, stocks in inventory in a sari-sari store or department stores, large or small cattle (animals may be subject of chattel mortgage).
How about satellites?
They are personal property. They cannot be personal property because they are up there in the sky. Therefore for academic discussion they can be the object of chattel mortgage.
We had a transaction when I was still with the bank, the collateral was the Mabuhay satellite owned by PLDT. PLDT want to obtain a loan from |Equitable and other banks]. We were debating, arguing, contemplating, and discussing what type of security arrangement will best capture the transaction in a manner that will best protect the interest of all the creditors. Pledge has been ruled out obviously because in pledge the object has to be delivered to the pledgee or 3rd
party by agreement of the parties. Real estate was ruled out mortgage was ruled out because it is not a real property but a personal property. So the board suggested chattel mortgage. It is a personal property because theoretically you can have a valid chattel mortgage on a satellite. A question pops out on how do you foreclose if it is a chattel mortgage?
In chattel mortgage you cannot foreclose
extrajudicially unless you are in possession of the chattel.
You can file an action for replevin to seize possession preparatory to the foreclosure. But, even if you have a replevin how do you bring it up to foreclose it. So chattel mortgage is out of the question.
We thought of a deed of trust. A deed of trust in your law on agency, partnership and trust, in trust a dichotomy is created between the legal title and beneficial (equitable) title. Legal title is held by the trustee but for the benefit of the beneficiary. And when the legal title and beneficial title are merged in favor of one person, you have full ownership. So that’s what happened, PLDT conveyed legal title over the satellite in favor of the banks. The banks hold the satellite for the benefit of PLDT itself. So the trustor-beneficiary is PLDT and the legal title is with the bank. So the collection, income of the satellite redound to PLDT, but we have legal title. There was a stipulation that in case of default the legal title and beneficial title shall be merged in favor of the bank. So we do not have to foreclose because automatically we become the owner.
Will that violate the principle of pactum
commissorium?
In credit transaction in the case of Uytong vs CA there are 2 requisites for factum commissorium to a apply:
• there must be a pledge, antichresis, mortgage, and
• A stipulation that in case of default the creditors become the absolute owner. A trust is not a pledge, not mortgage, not an antichresis, therefore it is not subject to the rule on pactum commisorium. So that is how we documented the transaction.
Validity is different from being able to foreclose. In terms of validity you can have valid chattel mortgage on a satellite because it is a personal property. Do not equate validity with the ability to foreclose easily. While you cannot foreclose
