DEFINITION AND NATURE OF LETTER OF CREDIT Letter of Credit (L/C)
It is any arrangement, however named or described,
whereby a bank (issuing bank), acting at the request
and on the instructions of a customer (applicant) or on its own behalf, binds itself to: (PAN)
1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and pay such drafts, or
3. Authorizes another bank to Negotiate, against stipulated documents
Provided, the terms and conditions of the credit are
complied with (Art. 2, Uniform Customs & Practice for
Documentary Credits).
Purpose of Letter of Credit
The purpose of a letter of credit is to ensure certainty of payment. The bank makes the commitment to pay. This addresses problems arising from seller’s refusal to part with his goods before being paid and the buyer’s refusal to part with his money before acquiring the goods, thus, facilitating commercial transactions.
Laws governing Letters of Credit
Letter of credit is governed by the Uniform Customs and Practice (UCP) for documentary Credits issued by the International Chamber of Commerce
(Metropolitan Waterworks vs. Daway, G.R. No. 160723, July 21, 2004).
NOTE: The law on contracts and damages shall also apply to provide remedies to the party aggrieved by the breach of the main contract although such breach will not affect the obligation of the bank to pay the beneficiary or its right to obtain reimbursement from the applicant of the letter of credit if the terms of the letters of credit have been complied with.
Duration of Letters of Credit
1. Upon the period fixed by the parties; or
2. If none is fixed, one year from the date of issuance
Incidents in the life of a Letter of Credit (SAIS-ERR) 1. Contract of Sale between the buyer and seller 2. Application for L/C by the buyer with the bank 3. Issuance of L/C by the bank
4. Shipping of goods by the seller
5. Execution of draft and tender of documents by the seller
6. Redemption of draft (payment) and obtaining of documents by the issuing bank
7. Reimbursement to the bank and obtaining of documents by the buyer
Essential conditions of a Letter of Credit 1. Issued in favor of a definite person.
2. Limited to a fixed or specified amount, or to one or more amounts, but with a maximum stated limit
(Art. 568, Ibid.).
NOTE: If any of these essential conditions is not present,
the instrument is merely considered as a letter of recommendation.
Q: Letters of Credit are financial devices in commercial transactions which will ensure that the seller of the goods is sure to be paid when he parts with the goods and the buyer of the goods gets control of the goods upon payment. Which statement is most accurate? (2012 Bar Question)
a. The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale transaction.
b. The Letters of Credit can only be used exclusively in a sales transaction.
c. The Letters of Credit are issued for the benefit of the seller only.
d. (a), (b) and (c) are all correct
A: A. The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale transaction
Kinds of Letter of Credit
COMMERCIAL L/C STANDBY L/C Involves the payment of
money under a contract of sale.
Involves non-sale transactions. Payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative
steps to comply with the
sales agreement Payable upon certification by the beneficiary of the applicant’s non-performance of the agreement. The documents that
LETTERS OF CREDIT
accompany the beneficiary's draft must show that the applicant has not performed the undertaking (Transfield
Phils., Inc. v. Luzon Hydro Corp., G.R. No. 146717, Nov. 22, 2004).
Irrevocable Letter of Credit v. Confirmed Letter of Credit
IRREVOCABLE L/C CONFIRMED L/C
The issuing bank may not, without the consent of the beneficiary and the applicant, revoke its undertaking under the letter.
The correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms and condition of the credit (Prudential
Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992).
Courts cannot order the release to the applicant of the proceeds of an Irrevocable Letter of Credit without the consent of the Beneficiary
Such order violates the irrevocable nature of the L/C. The terms of an irrevocable letter of credit cannot be changed without the consent of the parties, particularly the beneficiary thereof (Phil. Virginia
Tobacco Administration v. De Los Angeles, G.R. No. L-27829, Aug. 19, 1988).
Non-payment of the buyer of its obligation under the Letter of Credit does not give the bank the right to take possession of the goods covered by the Letter of Credit
The opening of a L/C does not vest ownership of the goods in the bank in the absence of a trust receipt agreement. A letter of credit is a mere financial device developed by merchants as a convenient and relatively safe mode of dealing with the 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 (Transfield Philippines, Inc. v.
Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004).
PARTIES TO A LETTER OF CREDIT Parties to a Letter of Credit transaction
1. Applicant/Buyer/Importer/Account Party – procures the letter of credit, purchases the goods and obliges himself to reimburse the issuing bank upon receipt of the documents title. He has the right to have the marginal deposit deducted from the principal obligation under the l/c and to have the interest computed only on the balance and not on the face value thereof. Applicant has no obligation to reimburse the issuing bank if the latter pays without the stipulated documents or in case of discrepant documents, unless the applicant waives the discrepance.
2. Issuing Bank – one which, whether a paying bank
or not, Issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement. After due payment, issuing bank is entitled to reimbursement as a matter of right. Reimbursement includes debiting the bank account of the applicant, if any.
3. Beneficiary/Seller/Exporter – in whose favor the
instrument is executed. One who delivers the documents of title and draft to the issuing bank to recover payment. He has a prestation to do under the main contract but his failure to fulfill his obligation under the main contract does not negate his right to payment from the issuing bank as long as he is able to submit the required documents and comply with the terms of the credit, without prejudice to his liability against the account party under the law on contracts and damages.
NOTE: The number of parties may be increased.
The following additional parties may be:
a. Advising/notifying bank – the correspondent bank (agent) of the issuing bank through which it advises the beneficiary of the L/C.
b. Confirming bank – bank which, upon the request of the beneficiary, confirms the L/C issued.
c. Paying bank – bank on which the drafts are to be drawn, which may be the issuing bank or another bank not in the city of the beneficiary.
d. Negotiating bank – bank in the city of the beneficiary which buys or discounts the drafts contemplated by the L/C, if such draft is to be drawn on the opening bank not in the city of the beneficiary.
RIGHTS AND OBLIGATIONS OF PARTIES Three (3) distinct but intertwined contracts in a Letter of Credit transaction
1. Between the applicant/buyer/importer/account
party and the beneficiary/seller/exporter - The
applicant is the one who procures the letter of credit while the beneficiary is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods.
2. Between the issuing bank and the beneficiary/seller/exporter - The issuing bank is the
one that issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title. On the other hand, the beneficiary surrenders document of title to the bank in compliance with the terms of the L/C. Their relationship is governed by the terms of the L/C.
3. Between the issuing bank and the applicant/buyer/importer - The applicant obliges
himself to reimburse the issuing bank upon receipt of the documents of title. Their relationship is governed by the terms of the application for the issuance of the L/C by the bank.
An Issuing Bank is not a guarantor
The concept of guarantee vis-a-vis the concept of irrevocable L/C is inconsistent with each other. L/Cs are primary obligations and not security contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty (MWSS v. Hon. Daway, G.R. No.160732, June 21,
2004).
NOTE: The liability of issuing bank is primary and solidary. Neither is the issuing bank entitled to the benefit of excussion.
Entitlement of a bank to reimbursement
Once the issuing bank shall have paid the beneficiary after the latter’s compliance with the terms of the L/C. Presentment for acceptance to the customer/applicant is not a condition sine qua non for reimbursement (Prudential Bank v. IAC, G.R. No.
74886, Dec. 8, 1992).
Consequence of payment upon an expired Letter of Credit
An issuing bank which paid the beneficiary upon an expired L/C can recover the payment from the applicant which obtained the goods from the beneficiary to prevent unjust enrichment (Rodzssen
Supply Co. v. Far East Bank and Trust Co, G.R. No. 109087, May 9, 2001).
Different roles and liabilities of the banks involved in Letter of Credit transactions
KIND OF BANK ROLE LIABILITY
Notifying/ Advising Bank
Serves as an agent of the issuing bank;
Warrants the apparent (Appearance to unaided senses) authenticity of the L/C(Bank of America NT & SA v.
CA, G.R. No. 105395, Dec. 10, 1993).
Does not incur any obligation more than just notifying the seller/beneficiary of the opening of the L/C after it has determined its apparent authority. (Bank of America NT & SA v. CA, G.R. No. 105395,
Dec. 10, 1993)
It does not guarantee the genuineness or due execution of the l/c. It is not liable for damages even if the l/c turns out to be spurious provided the spurious character is not apparent on the face of the instrument.
Confirming Bank Lends credence to the L/C issued by
a lesser-known bank.
The confirming bank collects fees for such engagement and obtains reimbursement from the issuing bank.
Direct obligation, as if it is the one which issued the L/C.
Its obligation is similar to the issuing banks. Thus, beneficiary may tender documents to the confirming bank and collect payment.
Negotiating Bank
Buys the seller’s draft and later on sells the draft to the issuing bank.
Depends on the stage of negotiation, thus:
1. Before negotiation – No liability with respect to the seller. Merely suggests its willingness to negotiate. 2. After negotiation – A contractual relationship will then arise, making the bank liable. As holder, it has the right to payment from the bank primarily liable on the draft (either the issuing or confirming bank). If the party primarily liable on the l/c refuses to honor the draft, the negotiating bank has the right to proceed against the drawer thereof.
Paying Bank May either be the issuing bank or any other bank in the place of the issuing bank to facilitate payment to the beneficiary.
Direct obligation.
BASIC PRINCIPLES OF LETTER OF CREDIT Letters of Credit are not considered as Negotiable Instruments
A L/C is not considered a negotiable instrument. However, drafts issued in connection with L/C’s can be considered negotiable instruments. The presumption that the drafts drawn in connection with the L/C’s have sufficient consideration applies (Lee v.
CA, G.R. No. 117913, Feb. 1, 2002).
Stay order issued by the rehabilitation court does not preclude the beneficiary from collecting on the Letter of Credit
The stay order issued by the rehabilitation court enjoining the enforcement of claims against the principal debtor, its guarantor, surety not liable solidarily with the principal debtor does not preclude the beneficiary from collecting on the letter of credit.
DOCTRINE OF INDEPENDENCE
Doctrine of Independence/ Independence Principle The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the L/C has been fulfilled or not because in transactions involving L/C, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries, Inc.,
L-2481, Oct. 16, 1970). In effect, the buyer has no
course of action against the issuing bank.
Two-Fold nature of the Independence Principle 1. Independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement. This principle is illustrated by standby L/C; or
2. Independence only as to the justification aspect which is identical with the same obligations under the underlying agreement. This principle is illustrated by a commercial L/C or repayment standby (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
Effect of the buyer’s failure to procure a Letter of Credit to the main contract
The L/C is independent from the contract of sale. Failure of the buyer to open the L/C does not prevent the birth of the contract of sale. The opening of the LC is only a mode of payment. The LC is not an essential requisite to the contract of sale (Reliance
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993). He will be liable for fraud
of creditor.
Partial payments on the loan cannot be added in computing the issuing bank’s liability under its own Standby Letter of Credit
Although these payments could result in the reduction of the actual amount, which could ultimately be collected from the issuing bank, the latter’s separate undertaking under its letters of credit remain. The letter of credit is an absolute and primary undertaking which is separate and distinct from the contract underlying it (Insular Bank of Asia
& America v. IAC, Nov. 17, 1988).
In standby letter of credit securing a loan obligation, any payment of the debtor to the creditor should not be deducted from the total obligation of the issuing
bank to the beneficiary. The issuing bank, after payment of the full amount, is entitled to full reimbursement from the debtor. But the debtor may recover excess payment from the creditor to prevent unjust enrichment.
Q: AAA Carmakers opened an irrevocable Letter of Credit with BBB Banking Corporation with CCC Cars Corporation as beneficiary. The irrevocable Letter of Credit was opened to pay for the importation of ten (10) units of Mercedes Benz S class. Upon arrival of the cars, AAA Carmakers found out that the cars were all not in running condition and some parts were missing. As a consequence, AAA Carmakers instructed BBB Banking Corporation not to allow drawdown on the Letter of Credit. Is this legally possible? (2012 Bar Question)
a. No, because under the "Independence Principle", conditions for the drawdown on the Letters of Credit are based only on documents, like shipping documents, and not with the condition of the goods subject of the importation. b. Yes, because the acceptance by the importer of the goods subject of importation is material for the drawdown of the Letter of Credit.
c. Yes, because under the "Independence Principle", the seller or the beneficiary is always assured of prompt payment if there is no breach in the contract between the seller and the buyer. d. No, because what was opened was an irrevocable letter of credit and not a confirmed letter of credit.
A: a. Under the "Independence Principle", conditions for the drawdown on the Letters of Credit are based only on documents, like shipping documents, and not with the condition of the goods subject of the importation
FRAUD EXCEPTION PRINCIPLE The Exception to the Independence Principle
The “Fraud Exception Principle” is the exception to the Independence Principle. It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment.
Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of credit if the beneficiary committed fraud by substituting fraudulent documents even if on their face the documents complied with the requirements.
This principle refers to fraud in relation with the independent purpose or character of the L/C and not
only fraud in the performance of the obligation or
contract supporting the letter of credit (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
Remedy for fraudulent abuse
Injunction against payment is the remedy; provided the requisites enumerated immediately below this item are present.
Requisites in order to enjoin the Beneficiary from drawing or collecting under the Letter of Credit on the basis of fraud (PAI)
1. Clear Proof of fraud;
2. Fraud constitutes fraudulent Abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and
3. Irreparable Injury might follow if injunction is not
granted or the recovery of damages would be seriously damaged (Ibid.)
DOCTRINE OF STRICT COMPLIANCE Doctrine of Strict Compliance
The documents tendered by the seller/beneficiary must strictly conform to the terms of the L/C. The tender of documents must include all documents required by the letter. It is not a question of whether or not it is fair or equitable to require submission of documents but whether or not the documents were agreed upon. Thus, a correspondent bank which departs from what has been stipulated under the L/C acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary
(Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991).
Doctrine of Strict Compliance v. the Independence Principle Doctrine of Strict Compliance Doctrine of Independence Principle Documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit. Relationship of the buyer and the bank is
separate and distinct from the
relationship of the buyer and seller in the
main contract. Consequence of the Doctrine A correspondent bank which departs from what has been stipulated and acts on its own risk may not thereafter be able to recover.
The bank is not required to investigate whether the contract underlying the L/C has been fulfilled or not. Payment of the Beneficiary Beneficiary cannot draw on the letter of credit if he did not comply with its terms and conditions. Fraud Exception Principle can enjoin beneficiary from drawing or collecting under the L/C if there is fraud in relation with the independent purpose of the L/C.
Q: At the instance of CCC Corporation, AAA Bank issued an irrevocable Letter of Credit in favor of BBB Corporation. The terms of the irrevocable Letter of Credit state that the beneficiary must present certain documents including a copy of the Bill of Lading of the importation for the bank to release the funds. BBB Corporation could not find the original copy of the Bill of Lading so it instead presented to the bank a xerox copy of the Bill of Lading. Would you advise the bank to allow the drawdown on the Letter of Credit? (2012 Bar Question)
a. No, because the rule of strict compliance in commercial transactions involving letters of credit, requiring documents set as conditions for the release of the fund, has to be strictly complied with or else funds will not be released. b. Yes, because an irrevocable letter of credit means that the issuing bank undertakes to release the fund anytime when claimed by the beneficiary, .regardless of the kind of document presented.
c. Yes, because the issuing bank can always justify to CCC Corporation that xerox copies are considered as faithful reproduction of the original copies.
d. Yes, because the issuing bank really has no discretion to determine whether the documents presented by the beneficiary are sufficient or not. A: No, because the rule of strict compliance in commercial transactions involving letters of credit, requiring documents set as conditions for the release
of the fund, has to be strictly complied with or else funds will not be released.
DEFINITION/CONCEPT OF A TRUST RECEIPT TRANSACTION
Trust Receipt (TR) transaction
It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds title or security interests over certain specified goods, documents or instrument (GDI), releases the same to the possession of entrustee upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of default,
a. to sell or otherwise dispose such GDI with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to it or
b. to turn over the GDI itself if not sold or otherwise disposed of in accordance with the terms and conditions specified in the TR.
Subjects of a Trust Receipt transaction (GDI)
1. Goods – shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof
(Sec. 3 [d], PD 115.) Goods must be object of lawful
commerce.
2. Documents – written or printed evidence of title to goods (Sec. 3 [a], PD 115). E.g. are L/C’s.
3. Instruments – negotiable instruments; certificates of stock, or bond or debenture for the payment of money issued by a corporation, or certificates of deposit, participation certificates or receipts, credit or investment instruments of a sort marketed in the ordinary course of business or finance (Sec. 3 [e], PD
115). E.g. are checks, drafts, promissory notes, bills of
exchange.
Parties to a Trust Receipt transaction
1. Entruster - A lender, financer or creditor. Person holding title over the GDI subject of a TR transaction; releases possession of the goods upon execution of TR (Sec. 3[c], PD 115).
2. Entrustee - A borrower, buyer, importer or debtor. He is the person to whom the goods are delivered for
sale or processing in trust, with the obligation to return the proceeds of sale of the goods or the goods themselves to the entruster (Sec. 3[b], PD 115).
Transactions not considered as Trust Receipt
1. A sale by a person in the business of selling for profit who retains general property rights in the GDI.
2. Where the seller retains title or other interest as security for the payment of the purchase price
(Sec. 4, P.D. 115).
NOTE: To be in the nature of trust receipt, the entruster
should have financed the acquisition or importation of the goods. The funds should have been delivered before or simultaneously with delivery of the goods. If the entrustee is already the owner or in possession of the goods before delivery of the loan and execution of the trust receipt arrangement, the transaction shall be considered a simple loan even though the parties may have denominated the agreement as one of the trust receipt.
Two views regarding Trust Receipt
1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for the entruster and to sell or otherwise dispose of GDI with the obligation to turn over to the entruster the proceeds if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the TR (Sec. 4,
P.D. 115).
2. As a commercial transaction – It is a separate and
independent security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds (Nacu v. CA, G.R. No.
108638, Mar. 11, 1994).
Trust Receipt is not a negotiable instrument
Like L/C’s, TR’s are not negotiable instruments. The presumption of consideration under the negotiable instrument law may not necessarily be applicable to trust receipts (Lee v. CA, supra).
LOAN/SECURITY FEATURE Two features of a Trust Receipt transaction
1. Loan feature - is brought about by the fact that
the entruster financed the importation or purchase of the goods under TR (Sps. Vintola vs.
Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the entrustee or of some third persons to the entruster (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, G.R. No. 137232, June 29, 2005).
Effects of the dual features of a Trust Receipt
1. The entrustee cannot absolutely be relieved of
the obligation to pay his loan just because he surrendered the goods to the entruster if the entruster refuses to accept and subsequently deposited them in the custody of the court (Sps.
Vintola vs. Insular Bank of Asia and America, ibid).
2. The entrustee cannot be relieved of his
obligation to pay the loan in favor of the entruster bank in case of loss or destruction of the GDI (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, ibid). 3. Where the proceeds of the sale are insufficient to
satisfy the loan executed by the entrustee, the entruster bank can institute an action to collect the deficiency (Landl Co. v Metropolitan Bank
and Trust Co. G.R. No. 159622, July 30, 2004). 4. Repossession by the entruster of the GDI does
not amount to dacion en pago. The repossession of the goods by the entrustee was merely to secure the payment of its obligation to the entrustor and not for the purpose of transferring ownership in satisfaction of the obligation (PNB
vs. Pineda, G.R. No. L-46658 May 13, 1991).
OWNERSHIP OF THE GOODS, DOCUMENTS, AND INSTRUMENTS UNDER A TRUST RECEIPT Real owner of the articles subject of the Trust Receipt transaction
The real owner of the articles subject of the Trust Receipt is the entrustee who binds himself to hold the designated GDI. The entruster merely holds a security interest. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof (Rosario Textile
Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232. June 29, 2005).
The entrustee, however, cannot mortgage the goods because one of the requisites of a valid mortgage is that the mortgagor must be the absolute owner of the property mortgaged or must have free disposal thereof. Entrustee is not the absolute owner of the goods under trust receipt nor has free disposal thereof.
The entrustee is not responsible as principal or vendor under any sale or contract to sell made by the entrustee.
RIGHTS OF THE ENTRUSTER
1. To be entitled to the Proceeds from the sale of the GDI to the extent of the amount owing to him.
2. To the Return of the GDI in case of non-sale and enforcement of all other rights conferred to him in the TR.
3. May Cancel the trust and take possession of the
goods, upon default or failure of the entrustee to comply with any of the terms and conditions of the TR (Sec. 7, P.D. 115).
4. To Sell the goods with at least five day notice to the entrustee and apply the proceeds in payment of the obligation. Entrustee liable to pay deficiency, if any.
VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF
THE ENTRUSTEE/ INNOCEENT PURCHASERS FOR VALUE
Entruster has a better right over the goods than that of the creditors of the entrustee
The entruster’s security interest in goods, documents, or instruments pursuant to the written terms of a TR shall be valid as against all creditors of the entrustee
for the duration of the TR agreement (Sec. 12, P.D. 115).
The security interest of the entruster over the goods under the trust receipt is superior than the monetary claims of the laborers of the entrustee.
Purchaser in good faith can defeat the rights of the entruster over the goods
A purchaser in good faith acquires the goods, documents or instruments free from the entruster's security interest (Sec. 11, P.D. 115).
OBLIGATIONS AND LIABILITY OF THE ENTRUSTEE Obligations and liabilitites of the Entrustee
(HR-IKRO)
1. To Hold GDI in trust for the entruster and to dispose of them strictly in accordance with the terms of TR;
2. To Receive the proceeds of the sale for the entruster and to turn over the same to the entruster to the extent of amount owing to the latter;
3. To Insure GDI against loss from fire, theft, pilferage or other casualties;
4. To Keep GDI or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; 5. To Return GDI to the entruster in case they could
not be sold or upon demand of the entruster; and
6. To Observe all other conditions of the TR (Sec. 9, P.D. 115).
NOTE: Not all obligations of the entrustee are criminal in
nature. The gravamen of the criminal offense under the trust receipts law is the failure of the entrustee to deliver the proceeds of the sale to the entruster up to the extent of the entrutee's obligations or the return of the same in case of non-sale.
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF GOODS, DOCUMENTS OR
INSTRUMENTS
Disposition of the proceeds of the sale of the goods, documents or instruments
The proceeds of the sale of GDI shall be applied in the following (SDP):
1. Expenses of the Sale;
2. Expenses Derived from re-taking, keeping and storing the GDI; and
3. Principal obligation (Sec. 7, PD 115).
NOTE: Full payment of the loan or delivery of the sale
proceeds equivalent to the full amount of the obligation extinguishes both criminal and civil liabilities of the entrustee. In case of deficiency, the entrustee shall be liable thereon. However, any excess shall belong to him.
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF NON-SALE
Obligation of the Entrustee in case the goods, documents or instruments were not sold
The entrustee should return the GDI to the entruster
(Sec. 4, P.D. 115).
The return of the goods, documents or instruments in case of non-sale extinguishes only the criminal liability of the entrustee unless he pays in full his loan obligation. The consequent acquittal of the entrustee in the criminal case does not bar the filing of a separate civil action to enforce the civil liability of the entrustee.
The failure to turn over goods or proceeds realized from the sale thereof is a criminal offense under Art. 315(l)(b) of RPC (estafa) except if he disposed of the goods in
accordance with the terms.
LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR INSTRUMENTS
Entrustee shall bear the loss of the goods, documents, or instruments which are the subject of a Trust Receipt
Loss of the GDI which is the subject of a TR, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof (Sec. 10, P.D. 115).
Principle of Res Perit Domino is not a valid defense against an Entrustee in cases of loss or destruction of the goods, documents, or instruments secured by a Trust Receipt
For the principle of res perit domino to apply the entrustee must be the owner of the goods at the time of the loss. A trust receipt 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. If under a trust receipt transaction, the entruster is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants. Thus, the ownership of the goods remaining with the entrustee, he cannot be relieved of the obligation to pay his/her loan in case of loss or destruction
(Rosario Textile Mills vs. Home Bankers Association, supra).
PENAL SANCTION IF OFFENDER IS A CORPORATION Elements to be established in order to validly prosecute the Entrustee for Estafa
In order that the entrustee may be validly prosecuted for estafa under Art. 315, paragraph 1(b) of the RPC, in relation with Sec. 13 of PD 115, the following elements must be established (R-MAD):
1. The entrustee Received the subject goods in trust or under the obligation to sell the same and to remit the proceeds thereof to the entruster, or to return the goods if not sold;
2. The entrustee Misappropriated or converted the goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse of confidence to the damage and prejudice of entruster; and
4. A Demand was made on the entrustee by entruster for the remittance of the proceeds or the return of the unsold goods (Land Bank of the
Philippines vs. Perez, GR No. 166884, June 13, 2012).
NOTE: If proof as regards the delivery of GDI to the accused
(entrustee) is insufficient, estafa cannot lie (Ramos v. CA,
G.R. No. L-3992-25, Aug. 21, 1987).
Compliance with the obligation under the Trust Receipt agreement vis-a-vis criminal liability
1. If compliance occurred before the criminal
charge- there is no criminal liability.
2. If compliance occurred after the charge even
before conviction- the criminal action will not be
extinguished.
P.D. 115 does not violate the prohibition in the Constitution against imprisonment for non-payment of a debt
What is being punished is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner or not. It does not seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt (People v. Nitafan, G.R. No. 81559, Apr 6, 1992).
Q: Is lack of intent to defraud a bar to the prosecution of these acts or omissions? (2006 Bar Question)
A: No. The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud (Ching v.
Penal sanction is not available if the goods are not intended for sale or resale
To be a TR transaction, the goods must be intended for sale or resale.
In Ng v. People, the Supreme Court held that the trial court erred in ruling that the agreement in the case was a TR transaction because the goods involved were intended to be used in the fabrication of steel communication towers.
The Court further ruled that, “[T]he 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.”
The principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions. 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 (G.R. No. 173905, April 23,
2010).
In another case, Land Bank of the Philippines v. Perez, it was held that 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 entrustee, 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. The transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.
Penal sanction when the offender is a corporation Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense.
If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense
rshall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment (Ching vs.
Secretary of Justice, GR No. 164317, Feb. 6, 2006).
Rationale behind the accountability of the officers of the corporation
The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law (ibid).
NOTE: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate personality of the corporation, where “he is the actual, present and efficient actor.” Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime. The principle applies whether or not the crime requires the consciousness of wrongdoing (Ching vs. Secretary of Justice,
supra).
REMEDIES AVAILABLE
Defenses available to negate CRIMINAL liability of the Entrustee (CoCo CaCo No LP)
1. Compliance with the terms of the TR either by payment, return of the proceeds or return of the goods (Sec. 13, PD 115.)
2. Consignment.
3. Cancellation of the TR agreement and taking into possession of the goods by the entruster.
NOTE: Repossession of the goods will extinguish only
the criminal liability.
4. Compromise by parties before filing of information in court. Compromise of estafa case arising from TR transaction, after the case has been filed in court does not amount to novation and does not erase the criminal liability of the accused (Ong v. CA, 124 SCRA 578 [1983]).
5. Non-receipt of the goods by the entrustee or where proof of delivery of goods to the accused is insufficient. (Ramos v. CA, G.R. No. L-3992-25,
Aug. 21, 1987).
6. Loss of goods without fault of the entrustee. 7. The transaction does not fall under PD 115
(Colinares v. CA, G.R. No. 90828, Sept. 5, 2000,
Consolidated v. CA, G.R. No. 114286, Apr. 19, 2001).
NOTE: In these cases, the execution of a TR was made after
the goods covered by it had been purchased, making the buyer the owner thereof. The transaction does not involve a TR but a simple loan even though the parties denominate the transaction as one of a TR.
Failure of the entrustee to deliver the proceeds of sale will give the entruster the right to file a civil action and a criminal action for estafa
The civil action may be instituted in the criminal action or separately filed independently of the criminal action. The criminal action is based on
ex-delictu for violation of the law while the civil action
is based on ex-contractu for violation of the trust receipt arrangement.
Repossession of the goods by the Entruster cannot be considered as payment
Payment would legally result only after the entruster has foreclosed on the securities, sold the same and applied the proceeds thereof to the entrustee’s obligation. Since the TR is a mere security arrangement, the repossession by the entruster cannot be considered payment of the loan/advances given to the entrustee under the letter of credit/trust receipt (PNB v. Pineda, G.R. No. 46658, May 13,
1991).
In the event of default by the Entrustee on his obligation under the Trust Receipt agreement, it is NOT absolutely necessary for the Entruster to cancel the trust and take possession of the goods to be able to enforce his right thereunder
The law uses the word "may" in granting to the entruster the right to cancel the trust and take possession of the goods. Consequently, the entrustee has the discretion to avail of such right or seek any alternative action, such as a third party claim or a separate civil action which it deems best to protect its right, at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust agreement (South City Homes,
Inc. v. BA Finance Corporation, G.R. No. 135462, Dec. 7, 2001).
Q: BBB Banking Corporation issued a Letter of Credit in the amount of P5Million, for the purchase of five (5) tons of corn by X. Upon arrival of the goods, the goods were delivered to the warehouse of X. Thereafter he was asked to sign a Trust Receipt covering the goods. When the goods were sold, X did not deliver the proceeds to BBB Banking Corporation, arguing that he will need the fund for
the subsequent importation. Is there sufficient basis to sue for criminal action? (2012 Bar Question)
a. Yes, because X's failure to turn over the proceeds to the bank is a violation of the Trust Receipt Law.
b. No, because the trust receipt was signed only after the delivery of the goods. When the trust receipt was signed, the ownership of the goods was already with X.
c. Yes, because violation of Trust Receipt Law is mala prohibita, intention is irrelevant.
d. No, because X has a valid reason not to deliver the proceeds to BBB Banking Corporation. A: B. When the trust receipt was signed, the ownership of the goods was already with X.
Q. Dennis failed to comply with his undertaking under the TR he issued in favor of ABC bank. The bank filed both criminal and civil cases against Dennis. The court proceeded with the civil case independently from the criminal case. Is the court correct in proceeding independently although a criminal case is also instituted?
A: Yes, the complaint against Dennis is based on the failure of the latter to comply with his obligation as spelled out in the TR. This breach of obligation is separate and distinct from any criminal liability for "misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts", punishable under Sec. 13 of the PD 115. Being based on an obligation ex contractu and not ex delicto, the civil action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter (Sarmiento vs.
CA, G.R. No. 122502, Dec. 27, 2002).
Effect of novation of a Trust Agreement
Where the entruster and entrustee entered into an agreement which provides for conditions incompatible with the TR agreement, the obligation under the trust receipt is extinguished. Hence, the breach in the subsequent agreement does not give rise to a criminal liability under P.D. 115 but only civil liability (Philippine Bank v. Ong, G.R. No. 133176, Aug.
Deposits in a savings account opened by the buyer subsequent to the Trust Receipt transaction cannot be automatically applied to outstanding obligations under the Trust Receipt account
The receipt of the bank of a sum of money without reference to the TR obligation does not obligate the bank to apply the money received against the trust receipt obligation. Neither does compensation arise because compensation is not proper when one of the debts consists in civil liability arising from criminal
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).
Q: E received goods from T for display and sale in E's store. E was to turn over to T the proceeds of any sale and return the ones unsold. To document their agreement, E executed a trust receipt in T’s favor covering the goods. When E failed to turn over the proceeds from his sale of the goods or return the ones unsold despite demand, he was charged in court for estafa. E moved to dismiss on the ground that his liability is only civil. Is he correct? (2011 Bar Question)
A: No, since his breach of the trust receipt agreement subjects him to both civil and criminal liability for estafa.
Warehouse Receipt (WHR)
It is a written acknowledgment by the warehouseman that he has received and holds certain goods therein described in his warehouse for the person to whom the document is issued. The warehouse receipt has two-fold functions, that is, it is a contract and a receipt (Telengtan Bros. & Sons v. CA, G.R. No.
L-110581, Sept 21, 1994).
Warehouse receipt law v. Documents of title under the Civil Code
WAREHOUSE RECEIPTS LAW
DOCUMENTS OF TITLE UNDER CIVIL CODE Warehouse receipts issued by warehouses, whether public or private, bonded or not. Other receipts of documents issued in bailment contracts other than warehouse receipts
(Art.1507-1520 NCC)
Warehouseman (WHM)
A person, natural or juridical, lawfully engaged in the business of storing of goods for profit (Sec. 58, WRL).
Warehouse (WH)
The building or place where goods are deposited and stored for profit.
Persons who may issue a Warehouse Receipt 1. WHM, whether public or private, bonded or not
(Sec. 1, WHR Law).
2. A person authorized by a WHM.
Form and essential terms of a Warehouse Receipt It need not be in particular form but must embody within its written or printed terms (LCD-DSWD-LF):
1. Location of the WH
2. Consecutive number of the receipt 3. Date of the issue
4. A statement whether the goods received will be Delivered to bearer, to a specified person or to a specified person or his order
5. Signature of the WHM
6. If the receipt is issued for goods of which the Warehouseman is the owner, either solely or jointly or in common with others, the fact of such ownership; and
7. Description of the goods
8. A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a Lien.
9. Fees (Sec. 2, WH Law).
Effects of omission of any of the essential terms
(CIV-N)
1. Conversion of the contract to ordinary deposit. 2. Injured person can hold WHM liable for all
damages caused by the omission 3. Validity of receipt not affected
4. Negotiability of receipts not affected (Gonzales v.
Go Fiong & Luzon Surety Co., G.R. No. 91776, Aug. 30, 1958).
Prohibited terms in a Warehouse Receipt
A warehouseman may insert in a receipt issued by him, any other terms and conditions provided that such terms and conditions shall not be (C2-RMN):
1. Contrary to the Warehouse Receipts Law (Sec. 3).
WAREHOUSE RECEIPTS (WHR) LAW
(ACT 2137, AS AMENDED)
2. Contrary to law, morals, good customs, public order or public policy.
3. Terms Reducing the required diligence of the warehouseman (Ibid)
4. Those exempting the warehouseman from liability for Misdelivery or for not giving statutory notice in case of sale of goods. 5. Those exempting the warehouseman from
liability for Negligence.
Effect when the goods deposited are incorrectly described
GR: Warehouseman shall be liable for damages for non-existence or misdescription of goods at the time of its issue.
XPN: When the goods are described based on: 1. Series or labels upon them
2. Statement that the goods are of certain kind.
Person to whom the goods should be delivered
(PDO)
1. To the person lawfully entitled to the Possession of the goods, or his agent;
2. To the person entitled to Delivery under a non-negotiable instrument or with written authority; or
3. To the lawful Order of a negotiable receipt (person in possession of a negotiable receipt) (Sec. 9, WHR
Law). ,
KINDS Kinds of Warehouse Receipt 1. Negotiable warehouse receipt 2. Non-negotiable warehouse receipt
Negotiable WHR
It is a receipt in which it states that the goods received will be delivered to the bearer or to the order of any person named in such receipt (Sec. 5,
WHR Law). It is negotiated by delivery or
indorsement plus delivery.
NOTE: No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if inserted, shall be void, and the receipt shall remain negotiable. A negotiable
warehouse receipt cannot be converted into
non-negotiable (Sec. 5, WHR Law).
Person who may negotiate a Negotiable Warehouse Receipt
1. The owner
2. Any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the goods are deliverable to the order of the person to whom the possession or custody of receipt has been entrusted or in such form that it may be negotiated by delivery (Sec. 40, WHR
Law).
Effect when a Negotiable Warehouse Receipt was delivered without the necessary indorsement (AC -
DC)
1. The transferee ACquires title against the transferor 2. There is no Direct obligation of the WHM; and 3. The transferee can Compel the transferor to complete the negotiation by indorsing the instrument. Negotiation takes effect as of the time when the indorsement is actually made.
Rights of the owner of the Negotiable Warehouse Receipt in case the signature of an owner was forged and the forger was able to withdraw the goods from the Warehouseman
1. If under WHR, the goods are deliverable to the depositor or to his order, the owner of the said negotiable receipt may proceed against the WHM and/or the holder.
2. Without the valid indorsement of the owner to the holder or in blank, the WHM is liable to the owner for conversion in the misdelivery.
3. If the goods are deliverable to bearer, the owner may only proceed against the holder. The WHM is not liable for conversion where the goods are delivered to a person in possession of a bearer negotiable instrument.
Duplicate receipts must be so marked in case one negotiable receipt is issued for the same goods A WHM shall be liable for all damages caused by his failure to do so to anyone who purchased the subsequent receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the WHM to the holder of the original receipt (Sec. 6, WHR Law).
NOTE: The word “duplicate” shall be plainly placed upon
the face of every such receipt, except the first one issued
(ibid.).
Non-Negotiable Warehouse Receipt
It is a receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person (Sec. 4, WHR Law).
NOTE: To make it non-negotiable, it is needed to be
indicated in the face of the WHR by the warehouseman issuing it that the same is “non-negotiable,” or “not negotiable” (Sec.7, WHR Law).
Effect of failure to place an indication of non-negotiability in the WHR
Failure to mark the WR as “non-negotiable” shall entitle the holder, who purchased it for value supposing it to be negotiable, to treat such receipt negotiable (ibid).
Transfer of a Non-Negotiable Warehouse Receipt A non-negotiable warehouse receipt may be transferred by its delivery to the transferee accompanied by a deed of assignment, donation or other form of transfer.
Effect of indorsement of a Non-Negotiable Warehouse Receipt
Even if the receipt is indorsed, the transferee acquires no additional right (Sec. 39, WHR Law).
Warranties on a Warehouse Receipt
A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears warrants (GRIT) :
1. Receipt is Genuine
2. Legal Right to negotiate or transfer it
3. No knowledge of defects that may Impair the validity or worth of the receipt
4. That he has a right to Transfer title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been to transfer without a receipt of goods represented thereby (Sec. 44, WHR Law).
NOTE: The indorsee does not guarantee that the WHM will
comply with his duties (Sec. 45, WHR Law).
When no warranty implied
A mortgagee, pledgee, or holder for security of a receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of such receipt or the quantity or quality of the goods therein described. In short, a creditor receiving the WHR given as collateral makes no warranty (Sec. 46, WHR Law).
DISTINCTION BETWEEN A NEGOTIABLE INSTRUMENT AND A NEGOTIABLE WAREHOUSE RECEIPT Negotiable Instrument v. Negotiable Warehouse Receipt
NEGOTIABLE
INSTRUMENT NEGOTIABLE WHR
Contains an unconditional promise to pay a sum certain in money.
Does not contain an unconditional promise to pay a sum certain in money. The obligation is to deliver goods.
The subject is money. The subject is merchandise.
The negotiable
instrument is the object of value.
The warehouse receipt is not the object of value.
Intermediate parties become secondarily liable.
Intermediate parties are not liable for the warehouse man’s failure to deliver the goods.
The general endorsers warrant that the instrument after due presentment shall be paid and in case of dishonor and notice of dishonor given, the endorser shall pay the holder.
Although endorsers or intermediate parties are not liable for any failure on the part of the warehouseman or previous endorsers of the receipt to fulfill their obligations they may be held liable for breach of warranties such as: (1) receipt is genuine and in respect what it purports to be (2) they have legal title to the instrument (3) goods are fit for consumption and merchantable (4) they are not aware of any information that will make the instrument worthless
Rights of a holder of a Negotiable Warehouse Receipt v. the Rights of a transferee of a Non-Negotiable Warehouse Receipt
NEGOTIABLE WAREHOUSE RECEIPT
NON-NEGOTIABLE WAREHOUSE RECEIPT May be acquired through
negotiation
May be acquired through transfer or assignment Rights of the holder of the
receipt:
1. If indorsed:
Rights of transferee:
1. Acquires title to the goods subject to the
a. Acquires title to the goods as the person negotiating (Sec. 41,
WHR Law).
b. Acquires the direct obligation of the warehouseman to hold possession of the goods for him as if the warehouseman directly contracted with him
(ibid).
2. If not indorsed:
He may compel indorsement; other-wise, he would acquire title as that of an assignee (Sec.
43, WHR Law.).
terms of any agreement with the transferor (Sec.
42, WHR Law).
2. Acquires the right to notify the warehouseman of the transfer and thereby acquires the direct obligation of the warehouseman to hold possession of the goods for him (ibid).
NOTE: Prior to notice, the
title of the transferee may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a
notification to the
warehouseman by the
transferor or a subsequent
purchaser from the
transferor of a subsequent sale of the goods by the transferor. (ibid.)
Defeats the lien of the seller of the goods covered thereby (Sec. 49, WHR
Law).
Acquires the title as that of his transferor.
Good covered cannot be garnished, attached or levied on execution by unless:
1. Receipt is surrendered. 2. Its negotiation is enjoined by the court. 3. The goods are impounded by the court
(Sec. 25, WHR Law).
NOTE:
This shall not apply if the person depositing is not the owner of the goods or one who has no right to convey title to the goods binding upon the owner.
Pending notification to the warehouseman, goods can be garnished, attached or levied on execution
Reason: Absent such notice, both the warehouseman and the sheriff have a right to assume that the goods are still owned by the person whose name appears in the receipt.
Protects the purchaser in good faith and for value.
The assignee only steps into the shoes of the assignor.
Breach of duty on the part of the person making the negotiation or fraud, mistake or duress on the owner of the receipt to entrust possession or custody DOES NOT impair the validity of negotiation of a Warehouse Receipt
The same is true provided that the person to whom the receipt was negotiated or a person to whom the receipt was subsequently negotiated paid value therefor, without notice of the breach of duty, or fraud, mistake or duress (Sec. 47, WHR Law).
Q: Coco was issued by a Warehouseman a
negotiable receipt for safekeeping by the latter of
his goods. Can the judgment creditor of Coco levy by execution the goods covered by the negotiable receipt?
A: The goods cannot, while in the possession of the WHM, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the WHM, or its negotiation enjoined. The warehouseman cannot be compelled to deliver the actual possession of the goods until the receipt is surrendered to it or impounded by the court.
Q: Assuming that prior to the levy, the receipt was sold to Yoyo on the basis of which he filed a claim with the sheriff. Would Yoyo have better rights to the goods than the creditor? Explain your answer. (1999 Bar Question)
A: Yes. Yoyo, as a holder for value of the receipt, has a better right to the goods than the creditor. It is Yoyo that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the goods, namely, to sign a receipt for the delivery of the goods, and to pay the warehouseman's liens and fees and other charges.
Q: What is the proper recourse of the warehouseman if he is uncertain as to who is entitled to the goods? Explain. (2005 Bar Question) A: Since there is a conflicting claim of ownership or title, the warehouseman should file a complaint in
interpleader requiring the claimants to interplead.
The matter involves a judicial question as to whose claim is valid.
Rule where a warehouse receipt is transferred to secure payment of a loan by way of pledge or mortgage
The pledgee or mortgagee does not automatically become the owner of the goods but merely retains the right to keep, and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds for the simple reason that the transaction is
