LETTERS OF CREDIT and TRUST RECEIPTS

1.

What is a letter of credit?

It is an instrument issued by a bank on behalf of one of its customers, authorizing
an individual or a firm to draw drafts on the bank or one of its correspondents for its
account under certain conditions of the credit.

2.

Who are the parties to a letter of credit and what are their respective roles?
a.
b.
c.
d.
e.

f.
g.
3.

The buyer he is the buyer of the merchandise who is also the buyer of the
credit instrument; he initiates the operation
The seller or beneficiary he is the seller of the merchandise to whom the letter
of credit is addressed and in whose favor it is issued
The opening/issuing bank it is the bank which actually issues the letter of
credit; it should be a strong bank and regarded in international trading circles
The notifying bank the corresponding bank of the opening/issuing bank through
which it advises the beneficiary of the existence of the letter of credit
The negotiating bank - it is any bank in the city of the beneficiary which buys or
discounts the draft contemplated by the letter of credit, if such draft is to be
drawn on the opening bank or on another designated bank not in the city of
the beneficiary
The paying bank it is the bank on which the drafts are to be drawn
The confirming bank it is the bank which upon the request of the beneficiary,
confirms the letter of credit issued by the opening bank

What is a trust receipt? (2007)

It is a document executed between an entruster (bank) and an entrustee (buyer),
under which the goods are released to the latter who binds himself to hold the
goods in trust, or to sell or dispose of the goods with the obligation to turn over the
proceeds to the entruster to the extent of the entrustees obligation to him, or if
unsold, to return the goods.
Under a letter of credit-trust receipt transaction, a bank extends to a borrower a
loan covered by the letter of credit, with the trust receipt as security of the loan.

4.

Who are the parties in a trust receipt transaction?

a) Entrustee the party to whom the goods are delivered for sale or processing and
who bears the risk of loss
b) Entrustor usually a bank

5.

Distinguish a letter of credit from a trust receipt:

A letter of credit is an engagement by a bank or other person made

at the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the conditions
specified in the credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise to pay of one of
its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon.
By contrast, a trust receipt transaction is one where the entruster,
who holds an absolute title or security interests over certain goods,
documents or instruments, released the same to the entrustee, who
executes a trust receipt binding himself to hold the goods,
documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents and 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 return 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. (Bank of Commerce vs. Serrano, GR No. 151895, Feb. 16,
2005)

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6.

Points to remember:
a)
b)
c)

d)

7.

Under PD 115, although the entrustee is not the owner of the goods under a trust
receipt (ownership is retained by the entrustor), anyone who acquires the
goods from the entrustee acquires good title (ownership)
Although the entrustee is not the owner of the goods covered by a trust receipt,
should the goods be lost while in his possession, he will bear the risk of loss.
The Trust Receipts Law does not seek to enforce payment of a loan but 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.

Since the entrustee has neither absolute ownership, free disposal

nor the authority to freely dispose of the goods subject of the
trust receipt transaction, the said enstrustee cannot validly
subject 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. (DBP vs. Prudential Bank GR No. 143772,
November 22, 2005)

Remedies available:
Under PD 115, the failure of the entrustee to return the goods covered by the trust
receipt or of the proceeds from the sale thereof shall constitute the crime of estafa
penalized under Art. 315(b) of the RPC.
Note:
Damage to the entrustor need not be proven because the nature of the trust
receipt agreements and damage caused to trade circles and the banking
community in case of violation thereof is the basis for the criminal offense.
Malice or deceit is not an element of the offense because it is malum
prohibitum.

WAREHOUSE RECEIPTS LAW (Act 2137) and

GENERAL BONDED WAREHOUSE ACT (Act 3893)
1.

Concept of warehouse receipt:

It is a written acknowledgment by a warehouseman that he has received and holds
certain goods therein described in store for the person to whom it is issued.
Vs. negotiable instrument:
a)
In negotiable instruments, the subject is money; in warehouse receipts, the
subject is merchandise
b)
In negotiable instruments, the instrument itself is the object of value; in
warehouse receipts, the goods are the objects of value
c)
In negotiable instruments, intermediate parties become secondarily liable; in
warehouse receipts, intermediate parties are not liable for the
warehousemans failure to deliver the goods

2.

Kinds of warehouse receipts:

A. Non-negotiable one in which it is stated that the goods will be delivered to the
depositor or any specified person
1) The words non-negotiable or not negotiable must be placed on the face
of the receipt
2) Effect of failure to mark - it may be considered negotiable by the holder for
value who supposed it to be negotiable
B. Negotiable - one in which it is stated that the goods will be delivered (1) to the
bearer or (2) to the order of any person named therein
1) Effect of the words Non-negotiable inserted in the receipt negotiability is
not affected
2) If more than one receipt is issued for the same goods duplicate shall be
placed on the face of copies other than the original

3.

What are the obligations of the warehouseman?

a) To take care of the goods entrusted to his safekeeping
b) To deliver the goods upon demand by the holder or depositor
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What must accompany the demand?

The demand must be accompanied by:
1) An offer to satisfy the warehousemans lien;
2) An offer to surrender the negotiable warehouse receipt, properly indorsed, if
necessary; and
3) A readiness and willingness to sign an acknowledgement receipt of the fact
of delivery if so requested by the warehouseman
To whom must delivery be made?
a) To the person lawfully entitled to the goods or his agent
person to whom a competent court has ordered the delivery of the goods
attaching creditor
purchaser in case of sale of the goods to enforce the warehousemans lien or
where the goods are perishable or hazardous
b) To the person entitled to delivery under a non-negotiable receipt or with written
authority
c)
To the person in possession of the negotiable receipt
What is misdelivery?
a) Delivery to one who is not in fact lawfully entitled to the possession of the goods
b) Delivery after he had been requested, by the person lawfully entitled to
possession, not to make delivery
c)
Delivery after he had information that the delivery about to be made was to one
not lawfully entitled to possession, i.e., notice of adverse claim of a third
person
What is the liability of the warehouseman for misdelivery?
The warehouseman is liable as for conversion.
**

Conversion is the unauthorized assumption and exercise of the right of ownership

over goods belonging to another through the alteration of their condition or
the exclusion of the owners right

Example:
Last July 20, 2005, Alfred sold to Bingo his negotiable warehouse receipt
covering 100 sacks of rice stored in Bodega Warehouse, Inc. In payment
thereof, Bingo issued a check of P100,000 dated July 22, 2005, in favor of
Alfred. On the same date, the check was dishonored by the bank for lack of
funds. Alfred immediately instructed Bodega Warehouse in writing not to
deliver the 100 sacks of rice to anyone. On July 23, 2005, an employee of
Bodega Warehouse, unaware of the written instruction received by its
president, delivered the 100 sacks to Bingo. State the cause or causes of
action, if any, which Alfred may have against Bodega Warehouse and Bingo.
Answer:
Against Bodega Warehouse, Alfred may claim for the value of the goods
delivered by Bodega Warehouse to Bingo, in violation of the instruction of
Alfred, which instructions Bodega Warehouse received in time.
Against Bingo, Alfred may file a criminal case for violation of BP 22 (Bouncing
Checks Law), upon compliance by him (Alfred) of the prerequisites for filing a
case under said law.
4.

What are the rules where the goods are covered by a negotiable receipt?
a) The warehouseman cannot be compelled to deliver up the actual possession of the
goods until the receipt is surrendered to him or impounded by the court
b) Receipt must be cancelled when goods are delivered
c)
Receipt must be cancelled or marked when part of the goods are delivered
d) The goods cannot be attached by garnishment or be levied upon under an execution
May goods covered by a negotiable receipt be attached or levied on execution?
No, the goods cannot be attached by garnishment or be levied upon under an
execution.
Exception: Unless
a) the receipt is first surrendered;
b) its negotiation is enjoined; or
c)
the document is impounded by the court
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Exception to the exception (i.e., the goods may be attached, etc.):

aa) if the person depositing the goods is not the owner or is one who has
no right to convey title to the goods binding upon the owner; or
bb) actions for recovery or manual delivery of the goods by the real owner;
or
cc) where the attachment is made before the issuance of the negotiable
receipt
5.

What are the warranties of a person negotiating a negotiable receipt?

a) that the receipt is genuine;
b) that he has legal right to negotiate or transfer it;
c)
that he has no knowledge of any fact which would impair the validity or worth of the
receipt; and
d) that he has a right to transfer the title to the goods and that the goods are
merchantable or fit for a particular purpose, if such warranties have been implied
Is the indorser liable for failure of the warehouseman or previous indorsers to fulfill their
respective obligations?
No.
Example:
Brando is indebted to Carlos for P100,0000. To secure its payment, Brando delivers a
warehouse receipt issued to him (Brando). Thereafter, Carlos demands payment
from Brando, and Daniel pays for Brando, which payment is accepted by Carlos.
Carlos in turn delivers the receipt to Daniel.
In case Daniel cannot obtain
possession of the goods because they do not exist, will Carlos be liable to Daniel?
Answer:
Carlos will not be liable to Daniel. Carlos in the problem appears as an
indorser of a warehouse receipt. An indorser of a warehouse receipt is not a
guarantor to the party primarily liable (the warehouseman) under the said
receipt. Hence, the failure of the warehousemen to deliver the goods under
the receipt will not make Carlos liable to Daniel.

6.

Validity of negotiation as against the real owner:

a) If the receipt is acquired from the real owners agent (regardless of how he acquired it
from the owner) within his actual or apparent authority, the purchaser for value in
good faith acquires title to the goods as against the real owner
b) If the receipt is stolen or lost, the purchaser, who for value and in good faith acquires
it from the thief or finder, does not acquire any title as against the real owner
Example:
Aldrin stole five bales of hemp from the pier and stored them in Arlington
Warehouse. The latter issued a negotiable warehouse receipt under the terms
of which the hemp is deliverable to Aldrin or order. Aldrin indorsed the receipt
in blank to Charles, who paid value for it without knowing about the theft.
In the meantime, Mandy, the owner of the hemp, with the help of the
delivery of the same. Arlington Warehouse, after being satisfied that Mandy
was the real owner of the hemp, delivered the same to him despite the fact
that the negotiable warehouse receipt was outstanding and was no in Mandys
possession, and therefore could to be surrendered or cancelled.
Subsequently, Charles demanded delivery of the hemp and since he could not
obtain it, now claims damages from Arlington Warehouse on the ground that
he, Charles, was the only one entitled to the delivery because he was holder
for value in good faith of the negotiable warehouse receipt covering the hemp.
Is Arlington Warehouse liable to Charles for damages?
Answer:
Arlington Warehouse is not liable to Charles for damages. The issue by
Arlington Warehouse of a negotiable receipt covering stolen goods did not
vest any right of ownership over the stolen goods on the depositor named
in the receipt, or on any transferee or subsequent holder of said negotiable
warehouse receipt.
The depositor transfers to his transferee only those rights which he has
over the goods. If as a thief who stole the goods, he had no right at all
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over the goods, he transferred nothing at all to his transferee. That the
transferee, Charles, had no knowledge about the theft, or that he paid
value fro the indorsement to him of the negotiable warehouse receipt, are
of no moment.
The concept of holder in due course in negotiable
instrument does not apply to warehouse receipts.
On vendors lien:
a) No sellers lien or stoppage in transitu shall defeat the rights of a purchaser for
value in good faith to whom the receipt is negotiated
b) The warehouseman shall not be obliged to deliver or justified in delivering the
goods to an unpaid seller unless the receipt is first surrendered for cancellation.
Example:
Andrew issued a warehouse receipt for 100 sacks of rice to be delivered to the
order of Bart, the rice having been purchased from Matt for P100,000 which
remained unpaid.
Subsequently, Bart delivered the receipt to Luke, with an indorsement in blank,
to secure the payment of a loan in the sum of P150,000.
May Matt enforce his lien for the unpaid price on the rice covered by the
aforesaid warehouse receipt pledged to Luke?
Answer:
No, Matt may not enforce his lien for the unpaid price on the sugar covered
by the pledged receipt. Reason: No unpaid sellers lien or right of
stoppage can defeat the rights of a pledgee for value.
7.

What are the rights of a transferee of a non-negotiable receipt?

a) the title to the goods as against the transferor;
b) the right to notify the warehouseman of the transfer thereof; and
c) the right, thereafter, to acquire the obligation of the warehouseman to hold the goods
for him

8.

What is the purpose of the General Bonded Warehouse Act?

To encourage and facilitate business transactions by affording protection to persons
dealing with warehouseman

9.

What are the salient features of the act?

A warehouseman receiving commodities for storage, milling or commingling:
a) must obtain prior license from the Department Trade and Industry
b) must file a bond in an amount equivalent to 33-1/3% of the capacity of the
warehouse against which bond depositors may sue directly
c)
must be open to the public; no discrimination allowed
d) is liable for double the market value should he accept goods in excess of
the capacity of the warehouse if goods are damaged or destroyed
e) must Insure the commodities received and stored against fire

BULK SALES LAW

(Act 3592, as amended)
1.

What transactions are considered as sales in bulk? (2007)

a) Sale, transfer or disposition other than in the ordinary course of business;
b) Sale, transfer or disposition other of all, or substantially all, of the business or
trade;
c)
Sale, transfer or disposition of all, or substantially all, fixtures and equipment

2.

What transactions are not considered as sales in bulk? (exceptions)

a) Sales/transfers made in the ordinary course of business;
b) Sales/transfers made when there is waiver (written) from all creditors; and
c) Sales/transfers by virtue of a judicial order
d) goods that are exempt from execution
e) sale of all the goods of a manufacturer
f) if an entity(sole proprietorship) sells to an corporation(solely organize for that
purpose)
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3.

What are the duties of the vendor under the law? (2007)
a)

to deliver to the vendee/transferee a sworn statement of the names and

addresses of all creditors to whom said vendor/transferor may be indebted
together with the amount of indebtedness due or to become due
b) quantity and the cost price of the goods and to notify every creditor of the price,
terms and conditions of the sale/transfer
**both documents must be submitted to the DTI
4.

What is the effect of failure to comply with the requirements?

The buyer does not become the owner of what he bought, but merely serves as
trustee for these properties, in behalf of the creditors of the merchant.

TN: only apllies to present creditors

seller and buyer, contract still valid
buyer still have the recourse
can the buyer compel? Yes, because freedom of contract

SECURITIES REGULATION CODE

1.

Under the Securities Regulation Code, which body has jurisdiction over intra-corporate
controversies?
Under Sec. 5.2 of the SRC, the SECs jurisdiction over the following cases was
transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: (2006 Bar)
a) Devices and schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public and/or of the
stockholders, partners, members of the associations or organizations
registered with the Commission;
b) Controversies arising out of intracorporate or partnership relations, between and
among stockholders, members or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations;
d) Petitions of corporations, partnerships or associations to be declared in the state
of suspension of payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases
where the corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the management of a Rehabilitation Receiver
or Management Committee created pursuant to this Decree (PD 902-A).

2.

What is tender offer?

Tender offer means publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public company as
defined in SRC Rule 3.
When is a tender offer mandatory?
a) Any person or group of persons acting in concert, who intends to acquire thirty
five percent (35%)1 or more of equity shares in a public company shall
disclose such intention and contemporaneously make a tender offer for the
percent sought to all holders of such class, subject to paragraph (9)(E) of this
Rule.
b) Any person or group of persons acting in concert, who intends to acquire thirty
five percent (35%)1 or more of equity shares in a public company in one or
more transactions within a period of twelve (12) months, shall be required to
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make a tender offer to all holders of such class for the number of shares so
acquired within the said period.
c) If any acquisition of even less than thirty five percent (35%) would result in
ownership of over fifty one percent (51%) of the total outstanding equity
securities of a public company, the acquirer shall be required to make a tender
offer under this Rule for all the outstanding equity securities to all remaining
stockholders of the said company at a price supported by a fairness opinion
provided by an independent financial advisor or equivalent third party. The
acquirer in such a tender offer shall be required to accept any and all
securities thus tendered.
3.

Definition of securities
Securities are shares, participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.
Examples of securities:
(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, assetbacked securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting
trust certificates or similar instruments;
(f) Proprietary or non proprietary membership certificates incorporations; and
(g) Other instruments as may in the future be determined by the SEC

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