FACTS:

Lirag Textile Mills, Inc. (Litex) opened an irrevocable

commercial letter of credit with Prudential an! for
"#$%&',(((.
o In connection with its importation of ),(((
spindles for spinning machiner*
These were released to Litex under covering +trust
receipts+ it executed in favor of Prudential an!.
Litex installed and used the items in its textile mill
located in Montalban, ,i-al.
.P granted a foreign currenc* loan to Litex
o In the amount of "#$%,'(/,))0.
To secure the loan,
o Litex executed real estate and chattel
mortgages
o 1n its plant site in Montalban, ,i-al,
o Including the buildings and other
improvements, machineries and e2uipment
there covered b* the +trust receipts.+
Prudential an! learned about .P3s plan for the
overall rehabilitation of Litex.
Prudential an! noti4ed .P of its claim over the
various items covered b* the +trust receipts+.
Prudential an! informed .P that it was the
absolute and 5uridical owner of the said items and
o The* were thus not part of the mortgaged
assets
o That could be legall* ceded to .P.
Litex failed to pa* its obligation,
o .P extra65udiciall* foreclosed on the real
estate and chattel mortgages,
o .P ac2uired the foreclosed properties as the
highest bidder.
.P caused to be published public sale
Prudential an! wrote .P reasserting its claim
over the items covered b* +trust receipts+ and
o 7dvising .P not to include them in the
auction.
o It also demanded
The turn6over of the articles or
The pa*ment of their value.
7n exchange of correspondences ensued between
Prudential an! and .P.
.P informed Prudential an! that its claim had
been referred to .P3s legal department.
Prudential an! made a 4nal demand on .P for
the turn6over of the articles or the pa*ment of their
value.
8ithout the !nowledge of Prudential an!, .P
sold the textile mill, machineries and e2uipments,
to L*on Textile Mills.
Prudential an! 4led a complaint for a sum of
mone* with damages against .P with the
,egional Trial 9ourt of Ma!ati,
,T9:
o .ecided in favor of Prudential an!.
o 7ppl*ing the provisions of P. 00), it ruled:
P,".;<TI7L 7<= holds absolute title to the
sub5ect properties
,eleased possession of the sub5ect properties
to LIT;>
LIT;> upon execution of the trust receipts, was
bound to hold said properties in trust for the
former, and
(a) To sell or otherwise dispose of the same
and to turn over to P,".;<TI7L 7<= the
amount still owing? or
(b) To return the goods if unsold.
#ince LIT;> was allowed to sell, all the more
was it authori-ed to mortgage the same,
Provided LIT;> turns over to P,".;<TI7L
all amounts owing.
8hen .P, well aware of the status of the
properties, ac2uired the same in the public
auction, it was bound b* the terms of the trust
receipts
.P held no better right than LIT;>, and is thus
bound to turn over whatever amount was due
P,".;<TI7L 7<=.
eing a trustee ex male4cio of P,".;<TI7L
7<=, .P is necessaril* liable therefor.
9ourt of 7ppeals
o .ismissed the appeal and a@rmed the decision
of the trial court in toto.
o ;ven if Litex mortgaged the items to .P and
.P foreclosed on such mortgage,
.P was dut*6bound to turn over the
proceeds to Prudential an!,
being the part* that advanced the pa*ment
for them.
o 1n .P3s argument that the disputed articles
were not proper ob5ects of a trust receipt
agreement,
9ourt of 7ppeals ruled that the items were
part of the trust agreement
The agreement was not contrar* to law,
morals, public polic*, customs and good
order,
It was binding on the parties.
o 7ppellate court found that .P was not a
mortgagee in good faith.
"pheld the 4nding that .P was a trustee
ex male4cio of Prudential an!
RULING
P. 00) which de4nes such a transaction as follows:
Section 4. What constitutes a trust receipt
transaction
o Is an* transaction b* and between an
entruster, and entrustee
o The entruster, who owns or holds absolute title
or securit* interests over certain speci4ed
goods, documents or instruments, releases the
same to the possession of the entrustee
o ;ntrustee executes and delivers to the
entruster a signed document called a +trust
receipt+ wherein
;ntrustee binds himself
To hold the designated goods,
documents or instruments in trust for
the entruster and
To sell or otherwise dispose of the
goods, documents or instruments
8ith the obligation to turn over to
the entruster
The proceeds to the extent of the
amount owing to the entruster or
as appears in the trust receipt or
the goods, documents or
instruments themselves or
Aor other purposes substantiall*
e2uivalent to an* of the following:
In the case of goods or documents,
(a) to sell the goods or procure
their sale? or (b) to manufacture or
process the goods with the purpose
of ultimate sale: Provided, That the
entruster shall retain its title over
the goods whether in its original or
processed form? or
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(c) to load, unload, ship or tranship
or otherwise deal with them in a
manner preliminar* or necessar* to
their sale? or
In the case of instruments,
(a) to sell or procure their sale or
exchange? or
(b) to deliver them to a principal? or
(c) to eBect the consummation of
some transactions involving
deliver* to a depositor* or register?
or
(d) to eBect their presentation,
collection or renewal.
7greements between Prudential an! and Litex
commonl* denominated as +trust receipts+ were
valid.
o Their provisions did not contravene the law,
morals, good customs, public order or public
polic*.
The articles were owned b* Prudential an! and
the* were onl* held b* Litex in trust.
o 7rticle C(') (C) of the 9ivil 9ode
In a contract of pledge or mortgage, it is
essential that the pledgor or mortgagor
should be the absolute owner of the thing
pledged or mortgaged.
o 7rticle C(') (D)
Person constituting the pledge or mortgage
must have the free disposal of his propert*,
and
In the absence thereof, that he be legall*
authori-ed for the purpose.
Litex had neither absolute ownership, free disposal
nor the authorit* to freel* dispose of the articles.
Litex could not have sub5ected them to a chattel
mortgage.
Their inclusion in the mortgage was void.
o There being no valid mortgage, there could
also be no valid foreclosure or valid auction
sale.
o .P could not be considered as a mortgagee or
as a purchaser in good faith.
<o one can transfer a right to another greater than
what he himself has.
Litex could not transfer a right that it did not have
over the disputed items.
.P could not ac2uire a right greater than what its
predecessor6in6interest had.
.P merel* stepped into the shoes of Litex as
trustee of the imported articles with an obligation
to pa* their value or to return them on Prudential
an!3s demand.
8E;,;A1,;, the petition is hereb* .;<I;.. The
decision of the 9ourt of 7ppeals 7AAI,M;..
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