Bank of the Philippine Islands vs.

Casa Montessori Internationale, 430

SCRA 261, May 28, 2004
1. Negotiable Instruments Law; A forged signature is a real or absolute defense,
and a person whose signature on a negotiable instrument is forged is deemed to
have never become a party thereto and to have never consented to the contract
that allegedly gave rise to it.Section 23 of the NIL provides: Section 23. Forged signature; effect of.When a
signature is forged or made without the authority of the person whose signature
it purports to be, it is wholly inoperative, and no right x x x to enforce payment
thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority. Under this provision,
a forged signature is a real or absolute defense, and a person whose signature
on a negotiable instrument is forged is deemed to have never become a party
thereto and to have never consented to the contract that allegedly gave rise to
it. The counterfeiting of any writing, consisting in the signing of anothers name
with intent to defraud, is forgery.
2. Negotiable Instruments Law; Checks; Evidence; Best Evidence Rule; Under the
best evidence rule as applied to documentary evidence, like the checks in
question, no secondary evidence or substitutionary evidence may inceptively be
introduced, as the original writing itself must be produced in court, but when,
without bad faith on the part of the offeror, the original checks have already
been destroyed or cannot be produced in court, secondary evidence, like
microfilm copies, may be produced.Forgery cannot be presumed. It must be established by clear, positive and
convincing evidence. Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or substitutionary evidence
may inceptively be introduced, as the original writing itself must be produced in
court. But when, without bad faith on the part of the offeror, the original checks
have already been destroyed or cannot be produced in court, secondary
evidence may be produced. Without bad faith on its part, CASA proved the loss
or destruction of the original checks through the Affidavit of the one person who
knew of that factYabut. He clearly admitted to discarding the paid checks to
cover up his misdeed. In such a situation, secondary evidence like microfilm
copies may be introduced in court.
3. Negotiable Instruments Law; Checks; Evidence; Best Evidence Rule; Even with
respect to documentary evidence, the best evidence rule applies only when the
contents of the documentsuch as the drawers signature on a checkis the
subject of inquiry.Even with respect to documentary evidence, the best evidence rule applies only
when the contents of a documentsuch as the drawers signature on a checkis
the subject of inquiry. As to whether the document has been actually executed,
this rule does not apply; and testimonial as well as any other secondary
evidence is admissible. Carina Lebron herself, the drawers authorized signatory,

testified many times that she had never signed those checks. Her testimonial
evidence is admissible; the checks have not been actually executed. The
genuineness of her handwriting is proved, not only through the courts
comparison of the questioned hand-writings and admittedly genuine specimens
thereof, but above all by her.
4. Negotiable Instruments Law; Checks; Evidence; Best Evidence Rule; Of no
consequence is the fact that the depositor did not present the signature card
containing the signatures with which those on the checks were compared
specimens of standard signatures are not limited to such a card.The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence nor creates an unfavorable inference
against it. Such failure merely authorizes the introduction of secondary evidence
in the form of microfilm copies. Of no consequence is the fact that CASA did not
present the signature card containing the signatures with which those on the
checks were compared. Specimens of standard signatures are not limited to such
a card. Considering that it was not produced in evidence, other documents that
bear the drawers authentic signature may be resorted to. Besides, that card was
in the possession of BPIthe adverse party.
5. Banks and Banking; Checks; Since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the
public in generalthe highest degree of diligence is expected, and high
standards of integrity and performance are even required of it; A bank is bound
to know the signatures of its customers, and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was
forged.We have repeatedly emphasized that, since the banking business is impressed
with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required, of
it. By the nature of its functions, a bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship. BPI contends that it has a signature verification procedure,
in which checks are honored only when the signatures therein are verified to be
the same with or similar to the specimen signatures on the signature cards.
Nonetheless, it still failed to detect the eight instances of forgery. Its negligence
consisted in the omission of that degree of diligence required of a bank. It cannot
now feign ignorance, for very early on we have already ruled that a bank is
bound to know the signatures of its customers; and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose
name was forged. In fact, BPI was the same bank involved when we issued this
ruling seventy years ago.
6. Banks and Banking; Checks; Audit Procedures; The notice in the monthly
statements issued by the bank that if no error is reported in ten (10) days, the

account will be correct cannot be considered a waiver, even if the depositor

failed to report the error, and neither is it estopped from questioning the mistake
after the lapse of the ten-day periodsuch notice is a simple confirmation or
circularization,in accounting parlance, that requests client-depositors to
affirm the accuracy of items recorded by the banks.The monthly statements issued by BPI to its clients contain a notice worded as
follows: If no error is reported in ten (10) days, account will be correct. Such
notice cannot be considered a waiver, even if CASA failed to report the error.
Neither is it estopped from questioning the mistake after the lapse of the ten-day
period. This notice is a simple confirmation or circularizationin accounting
parlancethat requests client-depositors to affirm the accuracy of items
recorded by the banks. Its purpose is to obtain from the depositors a direct
corroboration of the correctness of their account balances with their respective
banks. Internal or external auditors of a bank use it as a basic audit procedure
the results of which its client-depositors are neither interested in nor privy toto
test the details of transactions and balances in the banks records. Evidential
matter obtained from independent sources outside a bank only serves to provide
greater assurance of reliability than that obtained solely within it for purposes of
an audit of its own financial statements, not those of its client-depositors.
7. Banks and Banking; Checks; Audit Procedures; Banks have no right to impose a
condition unilaterally and thereafter consider failure to meet such condition a
waiver, and neither may a depositor renounce a right it never possessed.There is always the audit risk that errors would not be detected for various
reasons. One, materiality is a consideration in audit planning; and two, the
information obtained from such a substantive test is merely presumptive and
cannot be the basis of a valid waiver. BPI has no right to impose a condition
unilaterally and thereafter consider failure to meet such condition a waiver.
Neither may CASA renounce a right it has never possessed.
8. Banks and Banking; Checks; Audit Procedures; Every right has subjectsactive
and passive, the active subject being entitled to demand its enforcement while
the passive one being duty-bound to suffer such enforcement; The bank could
not have been an active subject, because it could not have demanded from the
depositor a response to its notice, while, on the other hand, the depositor could
not have been a passive subject because it had no obligation to respond.Every right has subjectsactive and passive. While the active subject is entitled
to demand its enforcement, the passive one is duty-bound to suffer such
enforcement. On the one hand, BPI could not have been an active subject,
because it could not have demanded from CASA a response to its notice.
Besides, the notice was a measly request worded as follows: Please examine x x
x and report x x x. CASA, on the other hand, could not have been a passive
subject, either, because it had no obligation to respond. It couldas it did
choose not to respond.
9. Banks and Banking; Checks; Estoppel; Words and Phrases; Estoppel precludes
individuals from denying or asserting, by their own deed or representation,

anything contrary to that established as the truth, in legal contemplation;

Estoppel will not arise from a conduct due to ignorance founded upon an
innocent mistake.Estoppel precludes individuals from denying or asserting, by their own deed or
representation, anything contrary to that established as the truth, in legal
contemplation. Our rules on evidence even make a juris et de jure presumption
that whenever one has, by ones own act or omission, intentionally and
deliberately led another to believe a particular thing to be true and to act upon
that belief, one cannotin any litigation arising from such act or omissionbe
permitted to falsify that supposed truth. In the instant case, CASA never made
any deed or representation that misled BPI. The formers omission, if any, may
only be deemed an innocent mistake oblivious to the procedures and
consequences of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise. A person who has no
knowledge of or consent to a transaction may not be estopped by it. Estoppel
cannot be sustained by mere argument or doubtful inference x x x. CASA is not
barred from questioning BPIs error even after the lapse of the period given in
the notice.
10. Banks and Banking; Checks; For allowing payment on the checks to a wrongful
and fictitious payee, the drawee bank becomes liable to its depositor-drawer.For allowing payment on the checks to a wrongful and fictitious payee, BPIthe
drawee bankbecomes liable to its depositor-drawer. Since the encashing bank
is one of its branches, BPI can easily go after it and hold it liable for
reimbursement. It may not debit the drawers account and is not entitled to
indemnification from the drawer. In both law and equity, when one of two
innocent persons must suffer by the wrongful act of a third person, the loss
must be borne by the one whose negligence was the proximate cause of the loss
or who put it into the power of the third person to perpetrate the wrong.
11. Banks and Banking; Checks; Proximate Cause; Words and Phrases; Proximate
cause is that cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result
would not have occurred.Proximate cause is determined by the facts of the case. It is that cause which,
in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have
occurred. Pursuant to its prime duty to ascertain well the genuineness of the
signatures of its client-depositors on checks being encashed, BPI is expected to
use reasonable business prudence. In the performance of that obligation, it is
bound by its internal banking rules and regulations that form part of the contract
it enters into with its depositors.
12. Banks and Banking; Checks; Proximate Cause; Negligence; Forgery; In this
jurisdiction, the negligence of the party invoking forgery is recognized as an
exception to the general rule that a forged signature is wholly inoperative.-

In this jurisdiction, the negligence of the party invoking forgery is recognized as

an exception to the general rule that a forged signature is wholly inoperative.
Contrary to BPIs claim, however, we do not find CASA negligent in handling its
financial affairs. CASA, we stress, is not precluded from setting up forgery as a
real defense.
13. Damages; Negotiable Instruments Law; Code of Commerce; Under Section 196
of the NIL, any case not provided for shall be governed by the provisions of
existing legislation or, in default thereof, by the rules of the law merchant, and,
since damages are not provided for in the NIL, resort is had to the Code of
Commerce and the Civil Code.Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract. Because BPI evidently
breached its contract of deposit with CASA, we award interest in addition to the
total amount adjudged. Under Section 196 of the NIL, any case not provided for
shall be governed by the provisions of existing legislation or, in default thereof,
by the rules of the law merchant. Damages are not provided for in the NIL.
Thus, we resort to the Code of Commerce and the Civil Code. Under Article 2 of
the Code of Commerce, acts of commerce shall be governed by its provisions
and, in their absence, by the usages of commerce generally observed in each
place; and in the absence of both rules, by those of the civil law. This law being
silent, we look at Article 18 of the Civil Code, which states: In matters which are
governed by the Code of Commerce and special laws, their deficiency shall be
supplied by its provisions. A perusal of these three statutes unmistakably shows
that the award of interest under our civil law is justified.
Transfield Philippines, Inc. vs. Luzon Hydro Corporation, 443 SCRA 307,
November 22, 2004
1. Commercial Law; Banks and Banking; Letters of Credit; Standby Credits; Words
and Phrases; In commercial transactions, a letter of credit is a financial device
developed by merchants as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who wants to
have control of the goods before paying; Generally, credits in non-sale settings
have come to be known as standby credits.The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying contract. Since the
banks customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because it is
not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable. In commercial transactions, a letter of

credit is a financial device developed by merchants as a convenient and

relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying. The
use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods.
However, credits are also used in non-sale settings where they serve to reduce
the risk of nonperfor- mance. Generally, credits in the non-sale settings have
come to be known as standby credits.
2. Commercial Law; Banks and Banking; Letters of Credit; Standby Credits;
Commercial Credits and Standby Credits, Distinguished.There are three significant differences between commercial and standby credits.
First, commercial credits involve the payment of money under a contract of sale.
Such credits become payable upon the presentation by the seller-beneficiary of
documents that show he has taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is payable upon certification of a
partys nonperformance of the agreement. The documents that accompany the
beneficiarys draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has
performed his contract. The beneficiary of the standby credit must certify that
his obligor has not performed the contract.
3. Commercial Law; Banks and Banking; Letters of Credit; A letter of credit changes
its nature as different transactions occur and if carried through to completion
ends up as a binding contract between the issuing and honoring banks without
any regard or relation to the underlying contract or disputes between the parties
thereto.By definition, a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding
contract between the issuing and honoring banks without any regard or relation
to the underlying contract or disputes between the parties thereto.
4. Commercial Law; Banks and Banking; Letters of Credit; Uniform Customs and
Practice (UCP) for Documentary Credits; Since letters of credit have gained
general acceptability in international trade transactions, the International
Chamber of Commerce (ICC) has published from time to time updates on the
Uniform Customs and Practice for Documentary Credits to standardize practices
in the letter of credit area; The observance of the UCP is justified by Article 2 of
the Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed
by usages and customs generally observed.Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform

Customs and Practice (UCP) for Documentary Credits to standardize practices in

the letter of credit area. The vast majority of letters of credit incorporate the
UCP. First published in 1933, the UCP for Documentary Credits has undergone
several revisions, the latest of which was in 1993. In Bank of the Philippine
Islands v. De Reny Fabric Industries, Inc., this Court ruled that the observance of
the UCP is justified by Article 2 of the Code of Commerce which provides that in
the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. More
recently, in Bank of America, NT SA v. Court of Appeals, this Court ruled that
there being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case may
be, the applicability of the UCP is undeniable.
5. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Under the independence principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based and
banks are in no way concerned with or bound by such contract(s), even if any
reference whatsoever to such contract(s) is included in the credit. Consequently,
the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or
fulfill any other obligation under the credit is not subject to claims or defenses by
the applicant resulting from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the applicant and the
issuing bank. Thus, the engagement of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required documents are
presented to it. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract
and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.

6. Commercial Law; Banks and Banking; Letters of Credit; Independence

Principle; The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the justification
aspect and is a separate obligation from the underlying agreement; or (b)
independence may be only as to the justification aspect, though in both cases
the payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.The independent nature of the letter of credit may be: (a) independence in toto
where the credit is independent from the justification aspect and is a separate
obligation from the underlying agreement like for instance a typical standby; or
(b) independence may be only as to the justification aspect like in a commercial
letter of credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.
7. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; The independence principle liberates the issuing bank from the duty
of ascertaining compliance by the parties in the main contract; As it is, the
independence doctrine works to the benefit of both the issuing bank and the
beneficiary.As discussed above, in a letter of credit transaction, such as in this case, where
the credit is stipulated as irrevocable, there is a definite undertaking by the
issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract. As the principles nomenclature
clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction. Given the nature of letters of credit,
petitioners argumentthat it is only the issuing bank that may invoke the
independence principle on letters of creditdoes not impress this Court. To say
that the independence principle may only be invoked by the issuing banks would
render nugatory the purpose for which the letters of credit are used in
commercial transactions. As it is, the independence doctrine works to the benefit
of both the issuing bank and the beneficiary.
8. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Guarantee; Jurisprudence has laid down a clear distinction between a
letter of credit and a guarantee in that the settlement of a dispute between the
parties is not a prerequisite for the release of funds under a letter of credit.Petitioners argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to
call on the letter of credit in essence would convert the letter of credit into a
mere guarantee. Jurisprudence has laid down a clear distinction between a letter
of credit and a guarantee in that the settlement of a dispute between the parties
is not a pre-requisite for the release of funds under a letter of credit. In other

words, the argument is incompatible with the very nature of the letter of credit.
If a letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no
practical and beneficial use for letters of credit in commercial transactions.
9. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Owing to the nature and purpose of standby letters of credit, banks
are left with little or no alternative but to honor the credit or the call for
payment.
While it is the bank which is bound to honor the credit, it is the beneficiary who
has the right to ask the bank to honor the credit by allowing him to draw
thereon. The situation itself emasculates petitioners posture that LHC cannot
invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and
purpose of the standby letters of credit, this Court rules that the respondent
banks were left with little or no alternative but to honor the credit and both of
them in fact submitted that it was ministerial for them to honor the call for
payment.
10. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Contracts; A contract once perfected, binds the parties not only to the
fulfillment of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping with good
faith, usage, and law.
A contract once perfected, binds the parties not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which according
to their nature, may be in keeping with good faith, usage, and law. A careful
perusal of the Turnkey Contract reveals the intention of the parties to make the
Securities answerable for the liquidated damages occasioned by any delay on
the part of petitioner. The call upon the Securities, while not an exclusive remedy
on the part of LHC, is certainly an alternative recourse available to it upon the
happening of the contingency for which the Securities have been proffered.
Thus, even without the use of the independence principle, the Turnkey
Contract itself bestows upon LHC the right to call on the Securities in the event
of default.
11. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Injunction; Requisites; Most writers agree that fraud is an exception to
the independence principle; The remedy for fraudulent abuse is an injunction.Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate accompanying a
demand for payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless: (a) there is clear
proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent

purpose of the letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously damaged.
12. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Injunction; The issuance of the writ of preliminary injunction as an
ancillary or preventive remedy to secure the rights of a party in a pending case
is entirely within the discretion of the court taking cognizance of the case, the
only limitation being that this discretion should be exercised based upon the
grounds and in the manner provided by law.Generally, injunction is a preservative remedy for the protection of ones
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law. Before a
writ of preliminary injunction may be issued, there must be a clear showing by
the complaint that there exists a right to be protected and that the acts against
which the writ is to be directed are violative of the said right. It must be shown
that the invasion of the right sought to be protected is material and substantial,
that the right of complainant is clear and unmistakable and that there is an
urgent and paramount necessity for the writ to prevent serious damage.
Moreover, an injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.
13. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; It is premature and absurd to conclude that the draws on the
Securities were outright fraudulent where the International Chamber of
Commerce and the Construction Industry Authority Commission have not ruled
with finality on the existence of default.The pendency of the arbitration proceedings would not per se make LHCs draws
on the Securities wrongful or fraudulent for there was nothing in the Contract
which would indicate that the parties intended that all disputes regarding delay
should first be settled through arbitration before LHC would be allowed to call
upon the Securities. It is therefore premature and absurd to conclude that the
draws on the Securities were outright fraudulent given the fact that the ICC and
CIAC have not ruled with finality on the existence of default.
14. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Actions; Appeals; Pleadings and Practice; Matters, theories or
arguments not brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the first time on
appeal.Nowhere in its complaint before the trial court or in its pleadings filed before the
appellate court, did petitioner invoke the fraud exception rule as a ground to

justify the issuance of an injunction. What petitioner did assert before the courts
below was the fact that LHCs draws on the Securities would be premature and
without basis in view of the pending disputes between them. Petitioner should
not be allowed in this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief. Matters, theories or
arguments not brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the first time on
appeal. The lower courts could thus not be faulted for not applying the fraud
exception rule not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the arbitral tribunals,
but more so, because petitioner never raised it as an issue in its pleadings filed
in the courts below. At any rate, petitioner utterly failed to show that it had a
clear and unmistakable right to prevent LHCs call upon the Securities.
15. Commercial Law; Banks and Banking; Letters of Credit; Independence
Principle; Obligations and Contracts; Obligations arising from contracts have the
force of law between the contracting parties and should be complied with in
good faith.Prudence should have impelled LHC to await resolution of the pending issues
before the arbitral tribunals prior to taking action to enforce the Securities. But,
as earlier stated, the Turnkey Contract did not require LHC to do so and,
therefore, it was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. More importantly, pursuant to
the principle of autonomy of contracts embodied in Article 1306 of the Civil
Code, petitioner could have incorporated in its Contract with LHC, a proviso that
only the final determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities. However, the fact is petitioner
did not do so; hence, it would have to live with its inaction.
Lee vs. Court of Appeals, 375 SCRA 579 , February 01, 2002
1. Commercial Law; Negotiable Instruments Law; Essential Requisites of a
Negotiable Instrument; Letters of credit and trust receipts are not negotiable
instruments.Negotiable instruments which are meant to be substitutes for money, must
conform to the following requisites to be considered as such a) it must be in
writing; b) it must be signed by the maker or drawer; c) it must contain an
unconditional promise or order to pay a sum certain in money; d) it must be
payable on demand or at a fixed or determinable future time; e) it must be
payable to order or bearer; and f) where it is a bill of exchange, the drawee must
be named or otherwise indicated with reasonable certainty. Negotiable
instruments include promissory notes, bills of exchange and checks. Letters of
credit and trust receipts are, however, not negotiable instruments. But drafts
issued in connection with letters of credit are negotiable instruments.

2. Commercial Law; Negotiable Instruments Law; Essential Requisites of a

Negotiable Instrument; A trust receipt is a document of security pursuant to
which a bank acquires a security interest in the goods under trust receipt.A trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral of the merchandise
imported or purchased. A trust receipt, therefor, is a document of security
pursuant to which a bank acquires a security interest in the goods under trust
receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan
covered by a letter of credit, with the trust receipt as a security for the loan. The
transaction involves a loan feature represented by a letter of credit, a security
feature which is in the covering trust receipt which secures an indebtedness.

Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576, April 30,
1991
1. Commercial Law; Letters of Credit; Commercial transactions involving letters of
credit are governed by the rule of strict compliance.It is settled rule in commercial transactions involving letters of credit that the
documents tendered must strictly conform to the terms of the letter of credit.
The tender of documents by the beneficiary (seller) must include all documents
required by the letter. A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty tender, acts on
its own risks and it 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. Thus
the rule of strict compliance. In the United States, commercial transactions
involving letters of credit are governed by the rule of strict compliance. In the
Philippines, the same holds true. The same rule must also be followed. The case
of Anglo-South American Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded
clearly on the rule of strict compliance. We have heretofore held that these
letters of credit are to be strictly complied with, which documents, and shipping
documents must be followed as stated in the letter. There is no discretion in the
bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank.
2. Commercial Law; Letters of Credit; An irrevocable letter of credit is not
synonymous with a confirmed letter of credit; in an irrevocable letter of credit,
the issuing bank may not, without the consent of the beneficiary and the
applicant revoke his undertaking under the letter; whereas, in a confirmed letter
of credit, the correspondent bank gives and absolute assurance to the

beneficiary that it will undertake the issuing banks obligation as its own
according to the terms and conditions of the credit.The trial court appears to have overlooked the fact that an irrevocable credit is
not synonymous with a confirmed credit. These types of letters have different
meanings and the legal relations arising from there varies. A credit may be an
irrevocable credit and at the same time a confirmed credit or vice-versa. An
irrevocable credit refers to the duration of the letter of credit. What it simply
means is that the issuing bank may not without the consent of the beneficiary
(seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a
confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the issuing banks obligation
as its own according to the terms and conditions of the credit.
3. Commercial Law; Letters of Credit; Mere opening of a letter of credit does not
involve a specific appropriation of a sum of money in favor of the beneficiary.The mere opening of a letter of credit, it is to be noted, does not involve a
specific appropriation of a sum of money in favor of the beneficiary. It only
signifies that the beneficiary may be able to draw funds upon the letter of credit
up to the designated amount specified in the letter. It does not convey the notion
that a particular sum of money has been specifically reserved or has been held
in trust. What actually transpires in an irrevocable credit is that the
correspondent bank does not receive in advance the sum of money from the
buyer or the issuing bank. On the contrary, when the correspondent bank
accepts the tender and pays the amount stated in the letter, the money that it
doles out comes not from any particular fund that has been advanced by the
issuing bank, rather it gets the money from its own funds and then later seeks
reimbursement from the issuing bank.
4. Commercial Law; Letters of Credit; The concept of guarantee vis-a-vis the
concept of an irrevocable credit are inconsistent with each other.The theory of guarantee relied upon by the Court of Appeals has to necessarily
fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are
inconsistent with each other. In the first place, the guarantee theory destroys the
independence of the banks responsibility from the contract upon which it was
opened. In the second place, the nature of both contracts is mutually in conflict
with each other. In contracts of guarantee, the guarantors obligation is merely
collateral and it arises only upon the default of the person primarily liable. On
the other hand, in an irrevocable credit the bank undertakes a primary
obligation.
Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 , July 09, 1998
1. Warehouse Receipts Law; Warehousemans Lien; Remedies Available to
Warehouseman to Enforce His Warehousemans Lien.

The remedies available to a warehouseman, such as private respondents, to

enforce his warehousemans lien are: (1)To refuse to deliver the goods until his
lien is satisfied, pursuant to Section 31 of the Warehouse Receipt Law; (2) To sell
the goods and apply the proceeds thereof to the value of the lien pursuant to
Sections 33 and 34 of the Warehouse Receipts Law; and (3) By other means
allowed by law to a creditor against his debtor, for the collection from the
depositor of all charges and advances which the depositor expressly or impliedly
contracted with the warehouseman to pay under Section 32 of the Warehouse
Receipt Law; or such other remedies allowed by law for the enforcement of a lien
against personal property under Section 35 of said law. The third remedy is
sought judicially by suing for the unpaid charges.
2. Same; Pledges; The indorsement of the warehouse receipts (quedans), to perfect
the pledge, merely constitutes a symbolical or constructive delivery of the
possession of the thing thus encumbered. The indorsement and delivery of the warehouse receipts (quedans) by Ramos
and Zoleta to petitioner was not to convey title to or ownership of the goods but
to secure (by way of pledge) the loans granted to Ramos and Zoleta by
petitioner. The indorsement of the warehouse receipts (quedans), to perfect the
pledge, merely constituted a symbolical or constructive delivery of the
possession of the thing thus encumbered.
3. Same; Same; Pactum Commissorio; The creditor, in a contract of real security,
like pledge, cannot appropriate without foreclosure the things given by way of
pledge. The creditor, in a contract of real security, like pledge, cannot appropriate
without foreclosure the things given by way of pledge. Any stipulation to the
contrary, termed pactum commissorio, is null and void. The law requires
foreclosure in order to allow a transfer of title of the good given by way of
security from its pledgor, and before any such foreclosure, the pledgor, not the
pledgee, is the owner of the goods.
4. Same; Same; Warehousemans Lien; Where a a valid demand by the lawful
holder of the quedans for the delivery of the goods is refused by the
warehouseman, despite the absence of a lawful excuse provided by the statute
itself, the warehousemans lien is thereafter concomitantly lost.
Simply put, where a valid demand by the lawful holder of the quedans for the
delivery of the goods is refused by the warehouseman, despite the absence of a
lawful excuse provided by the statute itself, the warehousemans lien is
thereafter concomitantly lost. As to what the law deems a valid demand, Section
8 enumerates what must accompany a demand; while as regards the reasons
which a warehouseman may invoke to legally refuse to effect delivery of the
goods covered by the quedans, these are:
(1) That the holder of the receipt does not satisfy the conditions prescribed in
Section 8 of the Act. (See Sec. 8, Act No. 2137)

(2) That the warehouseman has legal title in himself on the goods, such title or
right being derived directly or indirectly from a transfer made by the depositor at
the time of or subsequent to the deposit for storage, or from the warehousemans
lien. (Sec. 16, Act No. 2137)
(3) That the warehouseman has legally set up the title or right of third persons
as lawful defense for non-delivery of the goods as follows:
(a) Where the warehouseman has been requested, by or on behalf of the
person lawfully entitled to a right of property of or possession in the goods,
not to make such delivery (Sec. 10, Act No. 2137), in which case, the
warehouseman may, either as a defense to an action brought against him for
nondelivery of the goods, or as an original suit, whichever is appropriate,
require all known claimants to interplead (Sec. 17, Act No. 2137);
(b) Where the warehouseman had information that the delivery about to be
made was to one not lawfully entitled to the possession of the goods (Sec. 10,
Act No. 2137), in which case, the warehouseman shall be excused from
liability for refusing to deliver the goods, either to the depositor or person
claiming under him or to the adverse claimant, until the warehouseman has
had a reasonable time to ascertain the validity of the adverse claims or to
bring legal proceedings to compel all claimants to interplead (Sec. 18, Act No.
2137); and
(c) Where the goods have already been lawfully sold to third persons to
satisfy a warehousemans lien, or have been lawfully sold or disposed of
because of their perishable or hazardous nature. (Sec. 36, Act No. 2137).
(4) That the warehouseman having a lien valid against the person demanding
the goods refuses to deliver the goods to him until the lien is satisfied. (Sec.
31, Act No. 2137)
(5) That the failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand for delivery and refusal,
the goods were stolen or destroyed by fire, flood, etc., without any negligence
on his part, unless he has contracted so as to be liable in such case, or that
the goods have been taken by the mistake of a third person without the
knowledge or implied assent of the warehouseman, or some other justifiable
ground for non-delivery.
5. Same; Same; Adverse claim of ownership as a basis by a warehouseman for
refusing to deliver the goods covered by warehouse receipts is not a valid, legal
excuse.Regrettably, the factual settings do not sufficiently indicate whether the demand
to obtain possession of the goods complied with Section 8 of the law. The
presumption, nevertheless, would be that the law was complied with, rather than
breached, by petitioner. Upon the other hand, it would appear that the refusal of
private respondents to deliver the goods was not anchored on a valid excuse,
i.e., non-satisfaction of the warehousemans lien over the goods, but on an
adverse claim of ownership. Private respondents justified their refusal to deliver
the goods, as stated in their Answer with Counterclaim and Third-Party

Complaint in Civil Case No. 90-53023, by claiming that they are still the legal
owners of the subject quedans and the quantity of sugar represented therein.
Under the circumstances, this hardly qualified as a valid, legal excuse. The loss
of the warehousemans lien, however, does not necessarily mean the
extinguishment of the obligation to pay the warehousing fees and charges which
continues to be a personal liability of the owners, i.e., the pledgors, not the
pledgee, in this case. But even as to the owners-pledgors, the warehouseman
fees and charges have ceased to accrue from the date of the rejection by Noahs
Ark to heed the lawful demand by petitioner for the release of the goods.
6. Same; Same; Foreclosures; A warehousemans lien should in no event go beyond
the value of the credit in favor of the pledgee the foreclosure of the thing
pledged results in the full satisfaction of the loan liabilities to the pledgee of the
pledgers; It is basic in foreclosures that the buyer does not assume the
obligations of the pledger to his other creditors even while such buyer acquires
title over the goods less any existing preferred lien thereover.
The finality of our denial in G.R. No. 119231 of petitioners petition to nullify the
trial courts order of 01 March 1995 confirms the warehousemans lien; however,
such lien, nevertheless, should be confined to the fees and charges as of the
date in March 1990 when Noahs Ark refused to heed PNBs demand for delivery
of the sugar stocks and in no event beyond the value of the credit in favor of the
pledgee (since it is basic that, in foreclosures, the buyer does not assume the
obligations of the pledgor to his other creditors even while such buyer acquires
title over the goods less any existing preferred lien thereover). The foreclosure of
the thing pledged, it might incidentally be mentioned, results in the full
satisfaction of the loan liabilities to the pledgee of the pledgors.
Colinares vs. Court of Appeals, 339 SCRA 609 , September 05, 2000
1. Trust receipt law (PD 115); Words and Phrases; Trust Receipt Transaction,
defined.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt
transaction as any transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain
specified goods, documents or instruments, releases the same to the possession
of the entrustee upon the latters execution and delivery to the entruster of a
signed document called a trust receipt wherein the entrustee binds himself to
hold the designated goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.
2. Same; Same; Estafa; . Failure of the entrustee to turn over the proceeds of the
sale of the goods, covered by the trust receipt to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust
receipt shall be punishable as estafa.-

There are two possible situations in a trust receipt transaction. The first is
covered by the provision which refers to money received under the obligation
involving the duty to deliver it (entregarla) to the owner of the merchandise sold.
The second is covered by the provision which refers to merchandise received
under the obligation to return it (devolvera) to the owner. Failure of the entrustee
to turn over the proceeds of the sale of the goods, covered by the trust receipt to
the entruster or to return said goods if they were not disposed of in accordance
with the terms of the trust receipt shall be punishable as estafa under Article 315
(1) of the Revised Penal Code, without need of proving intent to defraud.
3. Same; Same; In a pure trust receipt transaction where goods are owned by the
bank and only released to the importer in trust subsequent to the grant of the
loan - the bank acquires a security interest in the goods as holder of a security
title for the advances it had made to the entrustee; In a certain manner, trust
receipts partake of the nature of a conditional sale where the importer becomes
absolute owner of the imported merchandise as soon as he has paid its price.
Petitioners received the merchandise from CM Builders Centre on 30 October
1979. On that day, ownership over the merchandise was already transferred to
Petitioners who were to use the materials for their construction project. It was
only a day later, 31 October 1979, that they went to the bank to apply for a loan
to pay for the merchandise. This situation belies what normally obtains in a pure
trust receipt transaction where goods are owned by the bank and only released
to the importer in trust subsequent to the grant of the loan. The bank acquires a
security interest in the goods as holder of a security title for the advances it had
made to the entrustee. The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in full,
or if the merchandise has already been sold, the proceeds of the sale should be
turned over to him by the importer or by his representative or successor in
interest. To secure that the bank shall be paid, it takes full title to the goods at
the very beginning and continues to hold that title as his indispensable security
until the goods are sold and the vendee is called upon to pay for them; hence,
the importer has never owned the goods and is not able to deliver possession.
In a certain manner, trust receipts partake of the nature of a conditional sale
where the importer becomes absolute owner of the imported merchandise as
soon as he has paid its price.
4. Same; Same; The Trust Receipts Law does not seek to enforce payment of the
loan, rather it punishes the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of another.
The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another regardless of whether the latter is the owner.
Here, it is crystal clear that on the part of Petitioners there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their obligations, as shown by
several receipts issued by PBC acknowledging payment of the loan.

5. Same; Same; Banks and Banking; Contracts; Contracts of Adhesion; The practice
of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable
to pay it may be unjust and inequitable, if not reprehensible.
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution
should they be unable to pay it may be unjust and inequitable, if not
reprehensible. Such agreements are contracts of adhesion which borrowers have
no option but to sign lest their loan be disapproved. The resort to this scheme
leaves poor and hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually, PBC showed its true
colors and admitted that it was only after collection of the money, as manifested
by its Affidavit of Desistance.
Development Bank of the Philippines vs. Prudential Bank, 475 SCRA 623 ,
November 22, 2005
1. Credit Transactions; Trust Receipts; In a trust receipt transaction, the goods are
released by the entruster (who owns or holds absolute title or security interests
over the said goods) to the entrustee on the latters execution and delivery to
the entruster of a trust receipt.In a trust receipt transaction, the goods are released by the entruster (who owns
or holds absolute title or security interests over the said goods) to the entrustee
on the latters execution and delivery to the entruster of a trust receipt. The trust
receipt evidences the absolute title or security interest of the entruster over the
goods. As a consequence of the release of the goods and the execution of the
trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to
hold the designated goods, documents or instruments in trust for the purpose of
selling or otherwise disposing of them and (2) to turn over to the entruster either
the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt, or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt. In the case of goods, they may also be
released for other purposes substantially equivalent to (a) their sale or the
procurement of their sale; or (b) their manufacture or processing with the
purpose of ultimate sale, in which case the entruster retains his title over the
said goods whether in their original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or (c) the loading,
unloading, shipment or transshipment or otherwise dealing with them in a
manner preliminary or necessary to their sale. Thus, in a trust receipt
transaction, the release of the goods to the entrustee, on his execution of a trust
receipt, is essentially for the purpose of their sale or is necessarily connected
with their ultimate or subsequent sale.
2. Credit Transactions; Trust Receipts; Pledge; Mortgage; Ownership; It is essential
that the pledgor or mortgagor should be the absolute owner of the things
pledged or mortgaged.-

Article 2085 (2) of the Civil Code requires that, in a contract of pledge or
mortgage, it is essential that the pledgor or mortgagor should be the absolute
owner of the things pledged or mortgaged. Article 2085 (3) further mandates
that the person constituting the pledge or mortgage must have the free disposal
of his property, and in the absence thereof, that he be legally authorized for the
purpose. Litex had neither absolute ownership, free disposal nor the authority to
freely dispose of the articles. Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void and had no legal effect.
There being no valid mortgage, there could also be no valid foreclosure or valid
auction sale. Thus, DBP could not be considered either as a mortgagee or as a
purchaser in good faith.
3. Credit Transactions; Trust Receipts; Pledge; Mortgage; No one can transfer to
another greater right than what he himself hasthe spring cannot rise higher
than its source.No one can transfer a right to another greater than what he himself has. Nemo
dat quod non habet. Hence, Litex could not transfer a right that it did not have
over the disputed items. Corollarily, DBP could not acquire a right greater than
what its predecessor-in-interest had. The spring cannot rise higher than its
source. DBP merely stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return them on Prudential
Banks demand. By its failure to pay or return them despite Prudential Banks
repeated demands and by selling them to Lyon without Prudential Banks
knowledge and conformity, DBP became a trustee ex maleficio.

Rosario Textile Mills Corporation vs. Home Bankers Savings and Trust
Company, 462 SCRA 88 , June 29, 2005
1. Trust Receipts Law; A trust receipt was described in Samo vs. People.In Samo vs. People, we described a trust receipt as a security transaction
intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.
2. Trust Receipts Law; A trust receipt is a security agreement pursuant to which a
bank acquires a security interest in the goods.In Vintola vs. Insular Bank of Asia and America, we elucidated further that a
trust receipt, therefore, is a security agreement, pursuant to which a bank
acquires a security interest in the goods. It secures an indebtedness and there
can be no such thing as security interest that secures no obligation.
Ching vs. Secretary of Justice, 481 SCRA 609 , February 06, 2006

1. Trust Receipt Law; An entrustee is one having or taking possession of goods,

documents or instruments under a trust receipt transaction, and any successor
in interest of such person for the purpose of payment specified in the trust
receipt agreement; Obligations of an Entrustee.An entrustee is one having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in interest of
such person for the purpose of payment specified in the trust receipt agreement.
The entrustee is obliged to: (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt; (2) receive the proceeds in trust for the
entruster and turn over the same to the entruster to the extent of the amount
owing to the entruster or as appears on the trust receipt; (3) insure the goods for
their total value against loss from fire, theft, pilferage or other casualties; (4)
keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return the
goods, documents or instruments in the event of non-sale or upon demand of
the entruster; and (6) observe all other terms and conditions of the trust receipt
not contrary to the provisions of the decree.
2. Trust Receipt Law; The transaction between petitioner and respondent bank falls
under the trust receipt transactions envisaged in P.D. No. 115.In the case at bar, the transaction between petitioner and respondent bank falls
under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank
imported the goods and entrusted the same to PBMI under the trust receipts
signed by petitioner, as entrustee, with the bank as entruster.
3. Trust Receipt Law; The failure of person to turn over the proceeds of the sale of
the goods covered by the trust receipt to the entruster or to return said goods, if
not sold, is a public nuisance to be abated by the imposition of penal sanctions.It must be stressed that P.D. No. 115 is a declaration by legislative authority that,
as a matter of public policy, the failure of person to turn over the proceeds of the
sale of the goods covered by a trust receipt or to return said goods, if not sold, is
a public nuisance to be abated by the imposition of penal sanctions.
4. Trust Receipt Law; The issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been
resolved in the affirmative in Allied Banking Corporation v. Ordoez, 192 SCRA
246 (1990).The Court likewise rules that the issue of whether P.D. No. 115 encompasses
transactions involving goods procured as a component of a product ultimately
sold has been resolved in the affirmative in Allied Banking Corporation v.
Ordoez. The law applies to goods used by the entrustee in the operation of its
machineries and equipment. The non-payment of the amount covered by the
trust receipts or the non-return of the goods covered by the receipts, if not sold

or otherwise not disposed of, violate the entrustees obligation to pay the
amount or to return the goods to the entruster.
5. Trust Receipt Law; Failure of the entrustee to turn over the proceeds of the sale
of the goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust
receipt is a crime under P.D. No. 115, without need of proving intent to defraud.In Colinares v. Court of Appeals, the Court declared that there are two possible
situations in a trust receipt transaction. The first is covered by the provision
which refers to money received under the obligation involving the duty to deliver
it (entregarla) to the owner of the merchandise sold. The second is covered by
the provision which refers to merchandise received under the obligation to return
it (devolvera) to the owner. Thus, failure of the entrustee to turn over the
proceeds of the sale of the goods cov- ered by the trust receipts to the entruster
or to return said goods if they were not disposed of in accordance with the terms
of the trust receipt is a crime under P.D. No. 115, without need of proving intent
to defraud. The law punishes dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of the entruster, regardless of whether the
latter is the owner or not. A mere failure to deliver the proceeds of the sale of
the goods, if not sold, constitutes a criminal offense that causes prejudice, not
only to another, but more to the public interest.
6. Trust Receipt Law; Crime defined in P.D. No. 115 is malum prohibitum but is
classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code,
or estafa with abuse of confidence.The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa
under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with
abuse of confidence. It may be committed by a corporation or other juridical
entity or by natural persons. However, the penalty for the crime is imprisonment
for the periods provided in said Article 315.
7. Trust Receipt Law; Corporation Law; 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.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. 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.
8. Trust Receipt Law; Corporation Law; If the crime is committed by a corporation or
other juridical entity, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for the crime; A

corporation may be charged and prosecuted for a crime if the imposable penalty
is fine.If the crime is committed by a corporation or other juridical entity, the directors,
officers, employees or other officers thereof responsible for the offense shall 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.
However, a corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be fined.
9. Trust Receipt Law; Corporation Law; When a penal statute does not expressly
apply to corporations, it does not create an offense for which a corporation may
be punished; Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty of
the crime.When a criminal statute designates an act of a corporation or a crime and
prescribes punishment therefor, it creates a criminal offense which, otherwise,
would not exist and such can be committed only by the corporation. But when a
penal statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the
State, by statute, defines a crime that may be committed by a corporation but
prescribes the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty. Corporate officers or employees,
through whose act, default or omission the corporation commits a crime, are
themselves individually guilty of the crime.
Sarmiento, Jr. vs. Court of Appeals, 394 SCRA 315 , December 27, 2002
1. Private respondents right to file a separate complaint for a sum of money is
governed by the provisions of Article 31 of the Civil Code, to wit:
Article 31. When the civil action is based on an obligation not arising from the
act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the
latter.
In the present case, private respondents complaint against petitioners was
based on the failure of the latter to comply with their obligation as spelled out in
the Trust Receipt executed by them.[20] 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 Section 13 of the Trust Receipts
Law (P.D. 115) in relation to Article 315(1), (b) of the Revised Penal Code. 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