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TRUST RECEIPTS LAW CASES

SECTION 4
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA v. INSULAR BANK OF ASIA AND
AMERICA
G.R. No. L-737!" # Ma$ !#%7" FIRST DIVISION &MELENCIO-'ERRERA" J.)
Spouses Tirso and Loreta Vintola (Vintolas) applied for and were granted a domestic letter of
credit by the Insular Bank of Asia and America (IBAA) The Letter of !redit authori"ed the bank to
negoriate for the account of the Vintolas for the purchase of puka and oli#e shells The Vintolas also
e$ecuted a Trust %eceipt agreement with IBAA The Vintolas agreed to hold in trust for IBAA the puka
and oli#e shells as IBAA&s property with liberty to sell the products for its account and in case of sale'
turn o#er the proceeds to IBAA The Vintolas defaulted in the payment of their obligation and IBAA
demanded for payment The Vintolas' who were unable to sell the shells' responded by offering to return
the goods IBAA refused to accept and the Vintolas continued to refuse to pay their obligation
IBAA charged the Vintolas with (stafa before the !ourt of )irst Instance (!)I) *uring the trial'
the Vintolas returned the seashells to the custody of the !)I The !)I ac+uitted the Vintolas ,owe#er'
IBAA filed an action to reco#er the #alue of the seashells before the %egional Trial !ourt The %T!
dismissed the complaint -n reconsideration' the %T! ruled in fa#or IBAA The Vintolas appealed to the
Supreme !ourt contending that their obligation toward IBAA ha#e been e$tinguished as they were unable
to sell the seashells without their fault and that they ha#e already relin+uished possession of the seashells
to the IBAA as the owner of the goods by depositing them with the court
ISSUE(
.hether or not the relin+uishment of the possession of the seashells by the Vintolas and handing
them o#er to IBAA e$tinguished the former&s obligation towards the latter
'ELD(
/etition DENIED.
0nder a letter of credit1trust receipt agreement' a bank e$tends a loan co#ered by the Letter of
!redit' with the trust receipt as security for the loan The transaction in#ol#es a loan feature represented
by the letter of credit and a security feature which is in the co#ering of trust receipt A trust receipt'
therefore' is a security agreement' pursuant to which a bank ac+uires a security interest in the goods It
secures an indebtedness and there can be no such thing as security interest that secures no obligation
!ontrary to the allegation of the Vintolas' IBAA did not become the real owner of the goods It
was merely the holder of a security title for the ad#ances it had made to the Vintolas The goods the
Vintolas had purchased through IBAA financing remain their own property and they hold it at their own
risk The trust receipt arrangement did not con#ert the IBAA into an in#estor2 the latter remained a lender
and creditor
Since the IBAA is not the factual owner of the goods' the Vintolas cannot 3ustifiably claim that
because they ha#e surrendered the goods to IBAA and subse+uently deposited them in the custody of the
court' they are absolutely relie#ed of their obligation to pay their loan because of their inability to dispose
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 1
of the goods The fact that they were unable to sell the seashells in +uestion does not affect IBAA&s right
to reco#er the ad#ances it had made under the Letter of !redit
ALLIED BANKING CORPORATION v. ORDONE) and C'ING
G.R. No. %4#*" D+,+-.+/ !0" !##0" SECOND DIVISION &PADILLA" J.1
/hilippine Blooming 4ills (/B4)' thru its officer Alfredo !hing (!hing)' applied for the
issuance of commercial letters of credit with Allied Banking !orporation (Allied) to finance the purchase
of 566 47T 4agtar Branch *olomites and one (8) Lot ,igh )ired %efractory Sliding 9o""le Bricks
Allied issued an irre#ocable letter of credit and by #irtue of which four (:) drafts were drawn and were
accepted by /B4 and duly honored and paid by Allied To secure payment and in consideration of the
transfer by Allied of the possession of the goods to /B4' the latter e$ecuted four (:) Trust %eceipt
Agreements
The obligation resulted in an o#erdue' but despite repeated demands' /B4 failed and refused to
either turn o#er the proceeds of the sale of the goods or to return the same Accordingly' Allied filed a
criminal complaint against !hing for #iolation of /* 885 After preliminary in#estigation wherein !hing
failed to appear' the )iscal found a prima facie case for #iolation of /* 885
!hing appealed the )iscal;s resolution to the *epartment of <ustice (*-<) but the latter held that
/B4&s failure to remit to the complainant proceeds of the sale of the finished products if sold or the
finished products themsel#es if not sold' at the maturity dates of the trust receipts' constitutes a #iolation
of /* 885
A subse+uent motion for reconsideration was denied
Another motion for reconsideration was filed by !hing alleging that there could be no #iolation
of the trust receipt agreements because the articles imported by the corporation and sub3ect of the trust
receipts were fungible or consumable goods and do not form part of the steel product itself These goods
were not procured to be sold in whate#er state or condition they were in or were supposed to be after the
manufacturing process
*-< re#ersed its ruling and held that2 what the law contemplates or co#ers are goods which ha#e'
for their ultimate destination' the sale thereof or if unsold' their surrender to the entruster' this whether the
goods are in their original form or in their manufactured7processed state Since the goods co#ered by the
trust receipts and sub3ect matter of these proceedings are to be utili"ed in the operation of the e+uipment
and machineries of the corporation' they could not ha#e been contemplated as being co#ered by /* 885
The motion for reconsideration ha#ing been denied' Allied filed petition for certiorari and
prohibition to annul the *-< rulings
ISSUE(
.hether or not the penal pro#ision of /* 885 apply when the goods co#ered by a Trust %eceipt
do not form part of the finished products which are ultimately sold but are instead' utili"ed7used up in the
operation of the e+uipment and machineries of the entrustee1manufacturer=
'ELD(
/etition GRANTED.
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 2
In trust receipts' there is an obligation to repay the entruster The entrustee binds himself to sell or
otherwise dispose of the entrusted goods with the obligation to turn o#er to the entruster the proceeds if
sold' or return the goods if unsold or not otherwise disposed of' in accordance with the terms and
conditions specified in the trust receipt A #iolation of this undertaking constitutes estafa under Sec 8>'
/* 885
The wording of Sec 8> co#ers failure to turn o#er the proceeds of the sale of entrusted goods' or
to return said goods if unsold or disposed of in accordance with the terms of the trust receipts !hing
claims that at the time of /B4;s application for the issuance of the L!;s' it was not represented to Allied
that the items were intended for sale' hence' there was no deceit resulting in a #iolation of the trust
receipts which would constitute a criminal liability .e cannot uphold this contention The non1payment
of the amount co#ered by a trust receipt is an act #iolati#e of the entrustee;s obligation to pay There is no
reason why the law should not apply to all transactions co#ered by trust receipts' e$cept those e$pressly
e$cluded
The penal pro#ision of /* 885 encompasses any act #iolati#e of an obligation co#ered by the
trust receipt2 it is not limited to transactions in goods which are to be sold (retailed)' reshipped' stored or
processed as a component of a product ultimately sold The act punishable is malum prohibitum
METROPOLITAN BANK AND TRUST COMPANY v. GON)ALES" OLIVER YAO and DIANA
YAO
G.R. No. !%0!2*" A3/45 7" 00#" T'IRD DIVISION &C'ICO-NA)ARIO" J.1
-li#er T ?ao and *iana T ?ao (%espondents)' on behalf of Visaland' applied with 4etrobank
(4B) for @: letters of credit to finance the importation of materials necessary for the operations of its
sister company' Titan Ikeda !onstruction and *e#elopment !orporation (TI!*!) Simultaneous with the
issuance of the letters of credit' respondents signed trust receipts in fa#or of 4B %espondents bound
themsel#es to sell the goods co#ered by the letters of credit and to remit the proceeds to petitioner' if sold'
or to return the goods' if not sold' on or before their agreed maturity dates
.hen the trust receipts matured' respondents failed to return the goods or to return their #alue
despite demand Thus' 4B filed a criminal complaint

for estafa
The !ity /rosecutor found that no probable cause e$isted for lack of e#idence that prior demand
was made by 4B and dismissed the Information Sheet 4B on its 4otion for %econsideration (4%)
attached a copy of a letter1demand Accordingly' the !ity /rosecutor issued a %esolution finding probable
cause for estafa
The respondents appealed the in#estigating prosecutor&s %esolution to the Secretary of <ustice
The Secretary of <ustice (*-<) denied 4B&s 4% by ruling that there was no probable cause to prosecute
the respondents for estafa in relation to /residential *ecree 9o 885 and declared that the legitimate
transactional relationship between the parties being merely a contract of loan' #iolations of the terms
thereunder were not co#ered by /residential *ecree 9o 885
-n appeal to the !ourt of Appeals' the *-<&s ruling was upheld %espondent&s 4% was likewise
denied ,ence' 4B filed a petition for re#iew on certiorari under %ule :5
ISSUE(
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 3
.hether the transaction in#ol#ed was a trust receipt transaction' and if so' whether probable
cause e$isted for #iolation of /* 885
'ELD(
/etition GRANTED
Trust receipt transactions are go#erned by the pro#isions of /residential *ecree 9o 885 It is
clear' based on the wording of Section : of /* 885' that the transaction in#ol#ed in this case is a trust
receipt transaction
The abuse of discretion is patent in the act of the Secretary of <ustice holding that the contractual
relationship forged by the parties was a simple loan' for in so doing' the Secretary of <ustice assumed the
function of the trial 3udge of calibrating the e#idence on record' done only after a full1blown trial on the
merits
0nder the law' the entruster shall be entitled to the proceeds from the sale of the goods'
documents or instruments released under a trust receipt to the entrustee to the e$tent of the amount owed
to the entruster or as appears in the trust receipt2 or to the return of the goods' documents or instruments in
case of non1sale2 and to the enforcement of all other rights conferred on him in the trust receipt' pro#ided
these are not contrary to the pro#isions of the document A #iolation of any of these undertakings
constitutes estafa
The pieces of e#idence adduced from the affida#its and documents submitted before the !ity
/rosecutor are sufficient to establish the e$istence of probable cause )irst' the trust receipts

bearing the
genuine signatures of respondents2 second' the demand letter of 4B addressed to respondents2 and third'
the initial admission by respondents of the receipt of the imported goods from 4B
/robable cause does not re+uire an in+uiry into whether there is sufficient e#idence to procure a
con#iction It is enough that it is belie#ed that the act or omission complained of constitutes the offense
charged
4ore so' the offense punished under /residential *ecree 9o 885 is in the nature of malum
prohibitum A mere failure to deli#er the proceeds of the sale or the goods' if not sold' constitutes a
criminal offense that causes pre3udice not only to another' but more to the public interest
CONSOLIDATED BANK AND TRUST CORPORATION v. COURT OF APPEALS
G.R. No. !!4%2" A3/45 !#" 00!" FIRST DIVISION &YNARES-SANTIAGO" J.1
%espondents !ontinental !ement !orporation (respondent !orporation) and its ($ecuti#e Vice1
/resident Aregory Lim obtained a Letter of !redit from !onsolidated Bank and Trust !orporation in the
amount of 8'6BC'85666 for the purchase of bunker fuel from /etrophil !orporation 9early two (@)
months after the complete deli#ery of the bunker fuel' respondent !orporation' with respondent Lim as
signatory' e$ecuted a trust receipt for the amount of 8'668'5@6D> 0pon default' a complaint for sum of
money with application for preliminary attachment was filed by the Bank before the %T! of 4anila In
its defense' the respondents a#erred that the transaction was a simple loan and not a trust receipt
transaction and further claimed for reimbursement for alleged o#erpayment The trial court dismissed the
complaint and ordered the bank to pay respondent the amounts claimed under their counterclaim Both
the parties appealed to the !ourt of Appeals' which partially modified the %T!&s decision by deleting the
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 4
attorney;s fees in fa#or of respondents and' instead' ordered respondent !orporation to pay petitioner
attorney&s fees and litigation e$penses ,ence' this petition
ISSUE(
.hether or not the transaction in#ol#ed was a simple loan or a trust receipt transaction
'ELD(
/etition DENIED
The recent case of Colinares v. Court of Appeals appears to be fours+uare with the facts obtaining
in the case at bar There' we found that inasmuch as the debtor recei#ed the goods sub3ect of the trust
receipt before the trust receipt itself was entered into' the transaction in +uestion was a simple loan and
not a trust receipt agreement /rior to the date of e$ecution of the trust receipt' ownership o#er the goods
was already transferred to the debtor This situation is inconsistent with what normally obtains in a pure
trust receipt transaction' wherein the goods belong in ownership to the bank and are only released to the
importer in trust after the loan is granted
In the case at bar' as in Colinares' the deli#ery to respondent !orporation of the goods sub3ect of
the trust receipt occurred long before the trust receipt itself was e$ecuted 4ore specifically' deli#ery of
the bunker fuel oil to respondent !orporation&s Bulacan plant commenced on <uly E' 8DC@ and was
completed by <uly 8D' 8DC@ )urther' the oil was used up by respondent !orporation in its normal
operations by August' 8DC@ -n the other hand' the sub3ect trust receipt was only e$ecuted nearly two
months after full deli#ery of the oil was made to respondent !orporation' or on September @' 8DC@
SECTION 7
P'ILIPPINE NATIONAL BANK v. PINEDA
G.R. No. 422*%" Ma$ !3" !##!" T'IRD DIVISION &FERNAN C.J.1
In 8DB>' Spouses Ignacio Arroyo and Lourdes Tuason Arroyo (the Arroyo Spouses)' obtained a
loan of /5C6'66666 from /9B to purchase B6F of the subscribed capital stock' and thereby ac+uire the
controlling interest of pri#ate respondent Tayabas !ement !ompany' Inc (T!!) As security for said
loan' the spouses Arroyo e$ecuted a real estate mortgage o#er a parcel of land known as the La Vista
property Thereafter' T!! filed with the bank an application and agreement for the establishment of an
eight (C) year deferred letter of credit (L7!) for GE'666'66666 in fa#or of Toyo 4enka Haisha' Ltd of
Tokyo' <apan' to co#er the importation of a cement plant machinery and e+uipment To secure said loan
accommodation' a Surety Agreement and a !o#enant were e$ecuted )urther' T!! e$ecuted a trust
receipt agreement for the release of the imported cement plant machinery and e+uipment T!!' howe#er'
defaulted2 thus' pursuant to the trust receipt agreement' /9B notified T!! of its intention to repossess' as
it later repossessed' the imported machinery and e+uipment In the meantime' the personal accounts of the
spouses Arroyo' which included another loan of /8B6'66666 secured by a real estate mortgage o#er
parcels of agricultural land known as ,acienda Bacon located in Isabela' 9egros -ccidental' had likewise
become due !onse+uently' the real estate mortgages were e$tra13udicially foreclosed and /9B was the
highest bidder with a bid price of 8'6666'668 ,owe#er' when said property was about to be awarded to
/9B' the representati#e of the mortgagor1spouses ob3ected' contending that the foreclosure proceedings
referred only to the personal account of the mortgagor1spouses without reference to the account of T!!
and are' therefore' entitled to the difference between the bid price and the indebtedness of the Arroyo
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 5
spouses ,olding that the +uestions were pre3udicial to the holding of the foreclosure sale' !ity Sheriff
*iana *ungca ruled that her -ffice cannot properly proceed with the foreclosure sale unless and until
there be a court ruling on the aforementioned issues Thus' /9B filed with the !ourt of )irst Instance of
Iue"on !ity a petition for mandamus against the !ity Sheriff to compel her to proceed with the
foreclosure sale of the mortgaged properties The petition was granted and *ungca was directed to
proceed with the foreclosure sale of the mortgaged properties Before the decision could attain finality'
T!! filed on September 8:' 8DEB before the !ourt of )irst Instance of %i"al' /asig' a complaint against
/9B' *ungca' and the /ro#incial Sheriff of 9egros -ccidental and ($1-fficio Sheriff of Bacolod !ity
seeking' inter alia' the issuance of a writ of preliminary in3unction to restrain the foreclosure of the
mortgages o#er the La Vista property and ,acienda Bacon as well as a declaration that its obligation with
/9B had been fully paid by reason of the latter;s repossession of the imported machinery and e+uipment
The !)I' thru respondent <udge Aregorio /ineda' issued a restraining order and on 4arch :' 8DEE'
granted a writ of preliminary in3unction /9B;s motion for reconsideration was denied2 hence this
petition
ISSUE(
.hether or not T!!&s liability has been e$tinguished by the repossession of /9B of the imported
cement plant machinery and e+uipment
'ELD(
/etition GRANTED.
It must be remembered that /9B took possession of the imported cement plant machinery and
e+uipment pursuant to the trust receipt agreement e$ecuted by and between /9B and T!! gi#ing the
former the un+ualified right to the possession and disposal of all property shipped under the Letter of
!redit until such time as all the liabilities and obligations under said letter had been discharged
/9B;s possession of the sub3ect machinery and e+uipment being precisely as a form of security for the
ad#ances gi#en to T!! under the Letter of !redit' said possession by itself cannot be considered payment
of the loan secured thereby /ayment would legally result only after /9B had foreclosed on said
securities' sold the same and applied the proceeds thereof to T!!;s loan obligation 4ere possession does
not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate
the rights of the mortgagor on the property and includes the sale itself
LANDL 6 COMPANY &P'IL1 INC. +7 a5. v. METROPOLITAN BANK AND TRUST COMPANY
G.R. No. !*#2" 895$ 30" 004" FIRST DIVISION &YNARES SANTIAGO" J.1
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the
entruster for any deficiency after the proceeds of the sale have been applied to the payment of the
expenses of the sale, the payment of the expenses of re-taking, keeping and storing the goods, documents
or instruments, and the satisfaction of the entrustees indebtedness to the entruster.
Landl J !o is a corporation engaged in the business of selling imported wielding rods and
alloys -n <une 8E' 8DC>' it opened a commercial letter of credit with 4etropolitan Bank to purchase
#arious wielding rods and electrodes from /erma Alloys Inc' 9ew ?ork 0SA As an additional security
and as a condition for the appro#al of the letter of credit' /erci#al Llaban and 4anuel Lucente e$ecuted a
!ontinuing Suretyship Agreement To secure the indebtedness' 4etrobank re+uired the e$ecution of a
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 6
Trust %eceipt on the condition that Landl would hold the goods in trust for the bank with the right to sell
the goods and the obligation to turn o#er the proceeds of the sale' if any
-n maturity date of the trust receipt' Landl defaulted payment of its obligation 4etroBank then
demanded that the entrustees turn o#er the sub3ect goods' which Landl did The goods were then sold at
public auction' with the bank as the highest bidder ,owe#er' the proceeds of the sale were insufficient to
completely satisfy the obligation of Landl 4etroBank demanded for the payment of the remaining
balance but Landl failed to pay An action was thus filed by 4etroBank for the collection of the
remaining balance %T! ordered Landl to pay the balance This was affirmed by the !ourt of Appeals
,ence' the instant petition
ISSUE(
.hether or not 4etroBank cannot reco#er the deficiency of the amount co#ered by the trust
receipt after taking possession of the goods co#ered by the trust receipt
'ELD(
/etition DENIED.
A trust receipt is ine$tricably linked with the primary agreement between the parties A trust
receipt is merely a collateral agreement' the purpose of which is to ser#e as security for a loan The
second paragraph of Section E pro#ides a statutory remedy a#ailable to an entruster in the e#ent of default
or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee 4ore specifically' the entruster Kmay cancel the trust
and take possession of the goods' documents or instruments sub3ect of the trust or of the proceeds reali"ed
therefrom at any time The law further pro#ides that th eentruster in possession of the goods' documents
or instruments may' on or after default' gi#e notice to the entrustee of the intention to sell' and may' not
less than fi#e days after ser#ing or sending of such notice' sell the goods' documents or instruments at
public or pri#ate sale' and the entruster may' at a public sale' become a purchaser The proceeds of any
such sale' whether public or pri#ate' shall be applied (a) to the payment of the e$penses thereof2 (b) to the
payment of the e$penses of re1taking' keeping and storing the goods' documents or instruments2 (c) to the
satisfaction of the entrustee&s indebtedness to the entruster The entrustee shall recei#e any surplus but
shall be liable to the entruster for any deficiencyL
The right of repossession and subse+uent sale at public auction which were a#ailed of by
4etroBank were rights a#ailable upon default' and which were conferred by statute and reinforced by the
contract between the parties The initial repossession by the bank of the goods sub3ect of the trust receipt
did not result in the full satisfaction of the loan obligation In !hilippine "ational #ank v. $on. %regorio
!ineda and Tayabas Cement Company &nc.' the !ourt had the occasion to ruleM
/9B&s possession of the sub3ect machinery and e+uipment being precisely as a
form of security for the ad#ances gi#en to T!! under the Letter of !redit' said
possession by itself cannot be considered payment of the loan secured thereby. !ayment
'ould legally result only after !"# had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCCs loan obligation.
The second paragraph of Section E e$pressly pro#ides that the entrustee shall be liable to the
entruster for any deficiency after the proceeds of the sale ha#e been applied to the payment of the
e$penses of the sale' the payment of the e$penses of re1taking' keeping and storing the goods' documents
or instruments' and the satisfaction of the entrustee&s indebtedness to the entruster In the case at bar' the
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 7
proceeds of the auction sale were insufficient to satisfy entirely the Landl&s indebtedness to the bank
4etroBank was thus well within it s rights to institute the instant case to collect the deficiency
SECTION !0
ROSARIO TE:TILE MILLS CORPORATION v. 'OME BANKERS SAVINGS AND TRUST
COMPANY
G.R. No. !373" 89n+ #" 00*" T'IRD DIVISION &SANDOVAL-GUTIERRE)" J.)
%osario Te$tile 4ills !orporation (%T4!) applied from ,ome Bankers Sa#ings and Trust !o
(,ome Bankers) for an omnibus credit line ,ome Bankers appro#ed the %T4!&s credit line %T4!
a#ailed of the credit line by making numerous drawdowns' each drawdown being co#ered by a separate
promissory note and trust receipt %T4! failed to pay the loans despite ,ome Bankers& demands ,ence'
,ome Bankers filed a complaint for a sum of money against %T4! before the %egional Trial !ourt
(%T!) %T4! offered to return to ,ome Bankers the raw materials they bought using the funds a#ailed
from the credit line ,ome Bankers refused to accept the same until the materials were destroyed by a fire
which gutted down %T4!&s premises As the parties failed to settle' trial on the merits pushed through
and the %T! ruled in fa#or of ,ome Bankers %T4! appealed to the !ourt of Appeals (!A) contending
that under the Trust %eceipt contracts between the parties' they merely held the goods described therein in
trust for ,ome Bankers Since the ownership of the goods remains with ,ome Bankers' then it should
bear the loss .ith the destruction of the goods by fire' %T4! should ha#e been relie#ed of any
obligation to pay ,owe#er' the !A affirmed the decision of the %T! ,ence' this petition
ISSUEM
.hether or not %T4! is relie#ed of its obligation to pay the loan after it tried to tender the
goods to the ,ome Bankers which refused to accept
'ELDM
/etition DENIED.
It is clear that the principal transaction between %T4! and ,ome Bankers is a contract of loan
%T4! used the proceeds of this loan to purchase raw materials from a supplier abroad In order to secure
payment of the loan' %T4! deli#ered the raw materials to ,ome Bankers as collateral Trust receipts
were e$ecuted by the parties to e#idence this security arrangement Simply stated' the trust receipts were
mere security %T4!&s insistence that the ownership of the raw materials remained with ,ome Bankers
is untenable In Sia vs. !eople' Abad vs. Court of Appeals and !"# vs. !ineda, the !ourt held thatM
KIf under the trust receipt' the bank is made to appear as the owner' it was but an artificial
e$pedient' more of legal fiction than fact' for if it were really so' it could dispose of the goods in
any manner it wants' which it cannot do' 3ust gi#e consistency with purpose of the trust receipt of
gi#ing a stronger security for the loan obtained by the importer To consider the bank as the true
owner from the inception of the transaction would be to disregard the loan feature thereofNL
Thus' %T4! cannot be relie#ed of their obligation to pay their obligation to pay their loan in
fa#or of the bank
SECTION !
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 8
PRUDENTIAL BANK v. NATIONAL LABOR RELATIONS COMMISSION
G.R. No. !!*#" D+,+-.+/ !#" !##*" FIRST DIVISION &BELLOSILLO" J.1
!.(. ))* assures the entruster of the validity of his claim against all creditors. To a certain
extent, such interest becomes a +lien, on the goods because the entrusters advances 'ill have to be
settled first before the entrustee can consolidate his o'nership over the goods.
Interasia !ontainer Industries' Inc was embroiled with > labor cases which were e#entually
resol#ed against it .ith the finality of the > decisions' writs of e$ecution were issued /rudential Bank
later filed an Affida#it of Third /arty !laim asserting ownership o#er the sei"ed properties on the strength
of Trust %eceipts e$ecuted by Interasia The Sheriff suspended the auction sale but the Labor Arbiter
denied the claim of /rudential Bank and directed the Sheriff to proceed with the le#y -n appeal' the
decision of the Labor Arbiter was affirmed by 9L%! ,ence' the instant petition
ISSUE(
.hether or not goods co#ered by a Trust %eceipt cannnot be le#ied upon
'ELD(
/etition GRANTED.
In /eople # 9itafan' citing Vintola and Samo cases' the !ourt e$plained the nature of a trust
receipt' thus O
A trust receipt arrangement does not in#ol#e a simple loan transaction between a
creditor and a debtor1importer Apart from a loan feature' the trust receipt arrangement
has a security feature that is co#ered by the trust receipt itself (-intola v. &nsular #ank of
Asia and America' 856 S!%A 5EC P8DCEQ) The second feature is what pro#ides the much
needed financial assistance to our traders in the importation or purchase of goods or
merchandise as collateral for the ad#ancements made by a bank (Samo v. !eople' 885
/hil >:BP8DB@Q) The Title of the bank to the security is the one sough to be protected and
not the loan which is a separate and distinct agreement
The mechanics and effects flowing from a trust receipt transaction' particularly the importance
gi#en to the security held by the entruster' ie' the person holding title o#er the goods' were discussed
fully in earlier decisions' as follows R
By this arrangement' a banker ad#ances money to an intending importer' and
thereby lends the aid of capital' of credit' or of business facilities and agencies abroad' to
the enterprise of foreign commerce In order to secure that the banker shall be paid at the
critical point R that is' when the imported goods finally reach the hands of the intended
#endee R the banker takes the full title to the goods at the very beginning. he takes it as
soon as the goods are brought and settled for by his payments or acceptances in the
foreign country, and he continues to hold that title as his indispensable security until the
goods are sold This security is not an ordinary pledge by the importer to the banker' for
the importer has ne#er owned the goods' and moreo#er' he is not able to deli#er the
possession2 but the security is the complete title vested originally in the bankers.
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 9
4ore importantly' owing to the #ital role trust receipts play in international and domestic
commerce' Sec 8@ of /* 9o 885 assures the entruster of the #alidity of his claim against all creditors
O
Sec 8@ -alidity of entrusters security interest as against creditors. R The entruster&s
security interest in goods' documents' or instruments pursuant to the written terms of a
trust receipt shall be #alid as against all creditors of the entrustee for the duration of the
trust receipt agreement
)rom the legal and 3urisprudential standpoint' it is clear that the security interest of the entruster is
not merely an empty or idle title To a certain e$tent' such interest becomes a KlienL on the goods because
the entruster&s ad#ances will ha#e to be settled first before the entrustee can consolidate his ownership
o#er the goods The law warrants the #alidity of /rudential Bank&s security interest in the goods pursuant
to the written terms of the trust receipt agreement The only e$ception to the rule is when the properties
are in the hands of an innocent purchaser for #alue and in good faith
SECTION !3
METROPOLITAN BANK 6 TRUST COMPANY v. GO
G.R. No. !**247" No;+-.+/ 3" 007" T'IRD DIVISION &NAC'URA" J.1
%espondent <immy Ao' as general manager of BAB' applied for ele#en (88) commercial letters of
credit to co#er the shipment of raw materials and spare parts Accordingly' 4etrobank issued the 88
irre#ocable letters of credit to BAB The merchandise7shipments were deli#ered to and accepted by BAB
!onse+uently' 88 trust receipts were e$ecuted by BAB thru <immy Ao and Ben3amin Ao' as entrustees' in
fa#or of 4etrobank as entruster
By the terms of the trust receipts' BAB agreed to hold the goods in trust for 4etrobank and' in
case of sale of the goods' to hand the proceeds to the bank to be applied against the total obligation ob3ect
of the trust receipts
-n maturity dates of the trust receipts' because the goods remained unsold' BAB and <immy and
Ben3amin Ao failed to satisfy their obligation 4etrobank filed three (>) separate complaints against
BAB' for collection of sum of money Later' 4etrobank instituted 88 criminal charges against <immy
and Ben3amin Ao for #iolation of /residential *ecree 9o 885 (Trust %eceipts Law) before the -ffice of
the !ity /rosecutor of 4anila
The -ffice of the !ity /rosecutor of 4anila recommended the dismissal of the case It e$plained
that the liability of respondents is only ci#il in nature in the absence of commission and misappropriation
%espondents are liable e$1contractu for breach of the Letters of !redit R Trust %eceipt
4etrobank filed a motion for reconsideration' but the same was denied 4etrobank then filed an
appeal to the *epartment of <ustice and !ourt of Appeals successi#ely' both dismissed the petition
ISSUE(
.-9 <immy and Ben3amin Ao for failing to comply with their obligation under the trust receipts
are liable under the Trust %eceipts Law and conse+uently be prosecuted for estafa
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 10
'ELD(
/etition DENIED
In order that respondents <immy and Ben3amin Ao may be #alidly prosecuted for estafa under
Article >85' paragraph 8(b) of the %e#ised /enal !ode' in relation to Section 8> of the Trust %eceipts
Law' the following elements must be establishedM (a) they recei#ed the sub3ect goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to 4etrobank' or to return the goods if not
sold2 (b) they misappropriated or con#erted the goods and7or the proceeds of the sale2 (c) they performed
such acts with abuse of confidence to the damage and pre3udice of 4etrobank2 and (d) demand was made
on them by 4etrobank for the remittance of the proceeds or the return of the unsold goods
The !ourt agrees with the findings of fact of the -ffice of the !ity /rosecutor and of the !ourt of
Appeals The prosecution for estafa under Article >85' paragraph 8(b) of the %e#ised /enal code' cannot
prosper because the second (misappropriation7con#ersion) and the fourth (demand) elements of the
offense are not present
The trust receipts uniformly contain the following pro#isionM
)ailure on the part of the (9T%0ST(( to account to the BA9H7(9T%0ST(% for the
goods7documents7instruments recei#ed in trust and7or for the proceeds of the sale thereof within thirty
(>6) days from demand made by the BA9H7(9T%0ST(% shall constitute an admission that the
(9T%0ST(( has con#erted or misappropriated said goods7documents7instruments for the personal
benefit of the (9T%0ST(( and to the detriment and pre3udice of the BA9H7(9T%0ST(%' and the
BA9H7(9T%0ST(% is forthwith authori"ed to file and prosecute the corresponding and appropriate
action' ci#il or criminal' against the (9T%0ST((
?et' not one of the 88 criminal complaints was accompanied by a demand letter to show that
4etrobank demanded the remittance of the proceeds of the sale of the goods or the return of goods' if
unsold .e find this deficiency e$ceptionally re#ealing' especially considering that the said trust receipts
had different maturity dates
Second The trust receipts sub3ect of this case partake of the nature of contracts of adhesion
The sub3ect trust receipts' being contracts of adhesion' are not per se in#alid and inefficacious But should
there be ambiguities therein' such ambiguities are to be strictly construed against 4etrobank' the party
that prepared them
There is no doubt as to the obligation of <immy and Ben3amin Ao to turn o#er the proceeds of the
sale of the goods or to return the unsold goods ,owe#er' an ambiguity e$ists as to when this obligation
arises' whether upon maturity of the trust receipts or upon demand by 4etrobank A strict construction of
the pro#isions of the contracts of adhesion dictates that the reckoning point should be the demand made
by 4etrobank
<immy and Ben3amin Ao turned o#er the proceeds of the goods sold under the two letters of
credit7trust receipts which were not sub3ect of the criminal cases They also made the offer to return the
unsold goods co#ered by the ele#en trust receipts e#en before the three ci#il cases were filed against
them The offer was reiterated in their answer 4ore importantly' the unsold goods remained intact'
contrary to the claim of 4etrobank that they had misappropriated or con#erted the same .hile there was
a stipulation of a presumpti#e admission on the part of <immy and Ben3amin Ao of misappropriation or
con#ersion upon failure to account for the goods or for the proceeds of the sale thereof within >6 days
from demand' which will authori"e 4etrobank to pursue legal remedies in court' the fact of demand made
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 11
by 4etrobank was not established by competent e#idence ($cept for the bare allegation that it did so in
the 88 criminal complaints' no letter of demand accompanied all of the criminal complaints
As to the other obligations under the trust receipts adapted from Section D of the Trust %eceipts
Law' there is no sufficient e#idence proffered by 4etrobank that <immy and Ben3amin Ao had actually
#iolated them .hat the law punishes is the dishonesty and abuse of confidence in the handling of money
or goods to the pre3udice of another' whether the latter is the owner
:8
The malum prohibitum nature of
the offense notwithstanding' the intent to misuse or misappropriate the goods or their proceeds on the part
of <immy and Ben3amin Ao should ha#e been pro#ed 0nfortunately' no such proof appears on record
ANT'ONY NG v. PEOPLE
G.R. No. !73#0*" A3/45 3" 0!0" T'IRD DIVISION &VELASCO 8R." J.1
Anthony 9g (9g)' then engaged in the business of building and fabricating telecommunication
towers' applied for a credit line with Asiatrust *e#elopment Bank' Inc (Asiatrust) Asiatrust appro#ed
9g&s loan application ,e was then re+uired to sign se#eral documents' among which are the !redit Line
Agreement' Application and Agreement for Irre#ocable L7!' Trust %eceipt Agreements' and /romissory
9otes
After 9g recei#ed the goods' consisting of chemicals and metal plates from his suppliers' he
utili"ed them to fabricate the communication towers ordered from him by his clients
9g failed to pay his loan to Asiatrust Asiatrust then conducted a surprise ocular inspection of his
business and found that appro$imately DEF of the sub3ect goods of the Trust %eceipts were Ssold1out and
that only > F of the goods pertaining remained
(fforts towards a settlement failed to be reached !onse+uently' Asiatrust filed a Complaint-
Affidavit before the -ffice of the !ity /rosecutor and thereafter' an Information for (stafa was filed with
the %T!
The %T! decided against 9g so he then ele#ated the case to the !A by filing a 9otice of Appeal
!A rendered a *ecision affirming the %T! and stated that it was undisputed that 9g entered into a trust
receipt agreement with Asiatrust and he failed to pay the bank his obligation when it became due The
fact that 9g acted without malice or fraud in entering into the transactions has no bearing' since the
offense is punished as malum prohibitum regardless of the e$istence of intent or malice2 the mere failure
to deli#er the proceeds of the sale or the goods if not sold constitutes the criminal offense
9g mo#ed for its reconsideration' but was denied ,ence' this petition for re#iew under %ule :5
ISSUE(
.hether or not the transaction in#ol#ed is a trust receipt transaction' and if so' whether 9g is
liable for (stafa under Art >85 par 8(b) of the %/! in relation to /* 885
'ELD(
A9T,-9? L 9A is AC<UITTED
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 12
(stafa can be committed in what is called a Strust receipt transactionS under /* 885 A thorough
e$amination of the facts obtaining in the instant case' howe#er' re#eals that the transaction between 9g
and Asiatrust is not a trust receipt transaction but one of simple loan
The true nature of a trust receipt transaction can be found in the SwhereasS clause of /* 885
which states that a trust receipt is to be utili"ed Sas a con#enient business de#ice to assist importers and
merchants sol#e their financing problemsS -b#iously' the State' in enacting the law' sought to find a way
to assist importers and merchants in their financing in order to encourage commerce in the /hilippines
The principle is of course not limited in its application to financing importations' since the
principle is e+ually applicable to domestic transactions %egardless of whether the transaction is foreign
or domestic' it is important to note that the transactions discussed in relation to trust receipts mainly
in#ol#ed sales
)ollowing the precept of the law' such transactions affect situations wherein the entruster' who
owns or holds absolute title or security interests o#er specified goods' documents or instruments' releases
the sub3ect goods to the possession of the entrustee The release of such goods to the entrustee is
conditioned upon his e$ecution and deli#ery to the entruster of a trust receipt wherein the former binds
himself to hold the specific goods' documents or instruments in trust for the entruster and 7o =+55 or
otherwise dispose of the goods' documents or instruments with the obligation to turn o#er to the entruster
the 3/o,++d= to the e$tent of the amount owing to the entruster or the goods' documents or instruments
themsel#es if they are 9n=o5d
!onsidering that the goods in this case were ne#er intended for sale but for use in the fabrication
of steel communication towers' the trial court erred in ruling that the agreement is a trust receipt
transaction
To emphasi"e' the Trust %eceipts Law was created to Sto aid in financing importers and retail
dealers who do not ha#e sufficient funds or resources to finance the importation or purchase of
merchandise' and who may not be able to ac+uire credit e$cept through utili"ation' as collateral' of the
merchandise imported or purchasedS Since Asiatrust knew that 9g was neither an importer nor retail
dealer' it should ha#e known that the said agreement could not possibly apply to him
)orthwith' 9g is not liable for (stafa both under the %/! and /* 885 As to the first element of
(stafa2 the goods recei#ed by 9g were not held in trust They were also not intended for sale and neither
did 9g ha#e the duty to return them They were only intended for use in the fabrication of steel
communication towers As to the second element of (stafa2 9g is not liable because Sec 8> of /* 885
pro#ides that an entrustee is only liable for (stafa when he fails Sto turn o#er the proceeds of the sale of
the goods $ $ $ co#ered by a trust receipt to the e$tent of the amount owing to the entruster or as appears
in the trust receipt $ $ $ in accordance with the terms of the trust receipt As e$pressed in the trust receipt'
9g was only obligated to turn o#er the proceeds as soon as he recei#ed payment' and the e#idence re#eals
that 9g e$perienced difficulties in collecting payments from his clients for the communication towers
*espite this fact' 9g endea#ored to pay his indebtedness to Asiatrust Thus' absent proof that the proceeds
ha#e been actually and fully recei#ed by 9g' his obligation to turn o#er the same to Asiatrust ne#er arose
.hat is more' under the Trust %eceipt Agreement itself' no date of maturity was stipulated
,ence' the only way for the obligation to mature was for Asiatrust to demand from 9g to pay the
obligation' which it ne#er did
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 13
Lastly' Asiatrust was informed at the time of 9g&s application for the loan that the payment for
the loan would be deri#ed from the collectibles of his clients Thus' the duty of 9g to remit the proceeds
of the goods has not yet arisen since he has yet to recei#e proceeds of the goods Again' 9g could not be
said to ha#e misappropriated or con#erted the proceeds of the transaction since he has not yet recei#ed the
proceeds from his client
TRUT' IN LENDING ACT CASES
'EIRS OF )OILO ESPIRITU and PRIMITIVA ESPIRITU vs. SPOUSES MA:IMO LANDRITO
and PA) LANDRITO
G.R. No. !2#2!7" A3/45 3" 007" T'IRD DIVISION &C'ICO-NA)ARIO" J.)
Spouses 4a$imo and /a" Landrito (Spouses Landrito) loaned from Spouses Toilo and /rimiti#a
(spiritu (Spouses (spiritu) a certain amount To secure the said loan' the spouses Landrito e$ecuted a real
estate mortgage o#er a property in fa#or of the spouses (spiritu The spouses Landrito were unable to pay
their obligations towards the (spiritus' howe#er' the loan agreement was e$tended and renewed se#eral
times But the debt of the Landritos remained unpaid Thus' the spouses Landrito foreclosed the
mortgaged property and they emerged as the winners in the bid The spouses Landrito failed to redeem
the sub3ect property although they alleged that they negotiated for the redemption of the property before
the 8 year period for redemption e$pired ,owe#er' they found out that the (spiritus had already e$ecuted
an affitda#it to consolidate ownership and registered the property in their name Thus' the spouses
Landrito filed an action for con#eyance of title against the spouses (spiritu before the %egional Trial
!ourt (%T!) They contended that the spouses (spiritu as creditors and mortgagees' imposed interest
rates that are shocking to one&s moral senses
The %T! dismissed the complaint and upheld the #alidity of the foreclosure sale The spouses
Landrito appealed to the !ourt of Appeals (!A) The !A re#ersed the decision of the %T! and ruled in
fa#or of the Landritos ,ence' this petition is brought by the (spiritus before the Supreme !ourt
ISSUEM
.hether or not the imposition of the interest rates by the spouses (spiritu are in #iolation of the
Truth in Lending Act
'ELDM
/etition DENIED.
In enacting %epublic Act 9o >EB5' known as the KTruth in Lending Act'L the State seeks to
protect its citi"en from a lack of awareness of the true cost of credit by assuring the disclosure of such
cost Section :' in connection with Section >(>) of the said law' gi#es a detailed enumeration of the
specific information re+uired to be disclosed' among which are the interest and other charges incident to
the e$tension of credit
The %eal (state 4ortgage e$ecuted between the parties specified that the principal indebtedness
shall earn interest at the legal rate The agreement contained no other pro#ision on interest or any fees or
charges incident to the debt In at least > contracts' all designated as Amendment of %eal (state
4ortgage' the interest rate imposed was likewise unspecified The charges and interests imposed to the
Landrito spouses are not found in any written agreement between the parties The records fail to show any
computation on how much interest was charged and what other fees were imposed 9ot only did lack of
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 14
transparency characteri"e the aforementioned agreements' the interest rates and the ser#ice charge
imposed' at an a#erage of B>DF' are e$cessi#e
Although any action seeking to impose either ci#il or criminal liability had already prescribed'
this !ourt frowns upon the underhanded manner in which the spouses (spiritu imposed interest and
charges' in connection with the loan The omission of the spouses (spiritu in specifying in the contract of
the interest rate which was actually imposed' in contra#ention of the law' manifested bad faith
Since the spouses Landrito' the debtors in this case' were not gi#en an opportunity to settle their
debt' at the correct amount and without the ini+uitous interest imposed2 no foreclosure proceedings may
be instituted A 3udgment ordering a foreclosure sale is conditioned upon a finding on the correct amount
of the unpaid obligation and the failure of the debtor to pay the said amount In this case' it has not yet
been shown that the spouses Landrito had already failed to pay the correct amount of the debt' and'
therefore' a foreclosure sale cannot be conducted in order to answer for the unpaid debt
CONSOLIDATED BANK AND TRUST CORPORATION &SOLIDBANK1 v. COURT OF
APPEALS
G.R. No. #!4#4" 895$ !4" !##*" FIRST DIVISION &<UIASON" J.1
-n different dates' Aeorge Hing Tim /ua' in his personal capacity' applied for and was granted
by plaintiff !onsolidated Bank and Trust !orporation si$(B) separate loans with different due dates for
the total amount of E>5'666 !orrespondingly' promissory notes were issued which contained the
following stipulationsM
a Interest rate at 8:F' which was to be compounded monthly' in case of failure on the part of
the borrower to pay on maturity
b In addition' 86F of total amount due but in no case less than /@6666 as attorney&s fees shall
also be paid
To secure the payment of the loans' Aeorge Hing Tim /ua assigned to the Bank the proceeds of a
fire insurance policy issued by the Herr Insurance !o in the amount if @'D6C':C566 -n the other hand'
Aeorge and Aeorge Trade' Inc through defendant Aeorge Hing Tim /ua and his co1maker /ua Se Heng
obtained three (>) separate loans from the same bank which were all co#ered by promissory notes
containing the following stipulationsM
a The first loan bears an annual interest of 8>@>F' which was to be increased to 8:F in case
of failure to pay on due date' compounded monthly' until fully paid
b The second and third loans bear an annual interest rate of 8:F plus a penalty of >F per
annum on the amount due in case of failure to pay on maturity
c In addition to e$penses and costs of suits' an additional sum of 86F of the total amount due
as and for attorney&s fees shall be paid
d The reco#erable amount to bear interest at the rate of 85F per month until paid
The proceeds of the insurance policy were subse+uently paid to the bank' which applied the same
to the personal account of Aeorge king Tim /ua The remaining proceeds were then applied to the
corporate loan' thus lea#ing a balance of @CC' :BDC6 of the loans !onse+uently' the bank commenced an
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 15
action for the reco#ery of the unpaid balances including attorney&s fees In its defense' pri#ate
respondents claimed that the loans had been e$tinguished through the assignment of the fire insurance
proceeds and that it was in fact petitioner which owed them the balance of said insurance proceeds The
trial court rendered its 3udgment in fa#or of the bank' ordering respondents to pay the bank the sum of
@@C':BDC6 with legal interest and attorney&s fees in the sum of @5'666' with costs of suit /ri#ate
respondents appealed to the !ourt of Appeals' which re#ersed the decision of the trial court The !ourt of
Appeals instead ordered the bank to pay the respondents the amount 6f :BB'8C@>D with legal interest plus
86'666 attorney&s fees and the costs of suit A motion for reconsideration was filed but the same was
denied2 hence' this petition
ISSUE(
.hether pri#ate respondents are indebted to petitioners in the amount of @CC' :BDC6 as held by
the then !)I of 4anila or whether said pri#ate respondents are entitled to a reimbursement from
petitioner in the amount of :BB'8C@>D as decreed by the !ourt of Appeals
'ELD(
!A&s decision was AFFIRMED >47? MODIFICATION' that the amount to be reimbursed to
respondent be reduced to >'B8B
As to payment of interest
The )/0 interest rate charged by petitioner 'as 'ithin the limits set by Section 1 of the 2sury
3a', as amended.
The charging of compounded interest has been held as proper as long as the payment thereof has
been agreed upon by the parties. In 4ambulao Lumber !ompany # /hilippine 9ational Bank' @@ S!%A
>5D (8DBC)' we ruled that the parties may' by stipulation' capitali"e the interest due and unpaid' which as
added principal shall earn new interest In the instant case' pri#ate respondents agreed to the payment of
8:F interest per annum' compounded monthly' should they fail to pay the principal loan on the date of
maturity
As to payment of handling charges
As to handling charges' banks are authori"ed under !entral Bank !ircular 9o 56: to collect such
charges on loans o#er /566'66666 with a maturity of E>6 days or less at the rate of @F per annum' on the
principal or the outstanding balance thereof' whiche#er is lower2 8E5F on loans o#er /566'66666 but
not o#er /8'666'666662 856F on loans o#er /8'666'66666 but not o#er @'666'66666' etc Section E of
the same !ircular' howe#er' pro#ides that all banks and non1bank financial intermediaries authori"ed to
engage in +uasi1banking functions are re+uired to strictly adhere to the pro#isions of %epublic Act 9o
>EB5 otherwise known as the STruth in Lending ActS and shall make the true and effecti#e cost of
borrowing an integral part of e#ery loan contract The promissory notes signed by pri#ate respondents do
not contain any stipulation on the payment of handling charges !etitioner bank cannot, therefore, charge
private respondents such handling charges.
As to payment of penalty
The payment of penalty is sanctioned by law' although the penalty may be reduced by the courts
if it is ini+uitous or unconscionable ((+uitable Banking !orporation # Liwanag' >@ S!%A @D> P8DE6Q)
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 16
The payment of penalty was pro#ided for under the terms and conditions of the promissory notes for
Loans B and ! of Aeorge and Aeorge Trade' Inc The penalty actually imposed, being only 10 per
annum of the unpaid balance of the principal of said 3oan #, is considered reasonable and proper.
As to payment of attorneys fees
The same cannot' howe#er' be said of the payment being insisted upon by petitioner of the
attorney;s fees stipulated in all the promissory notes' consisting of 86F of the total amount due and
payable A stipulation regarding the payment of attorney;s fees is neither illegal nor immoral and is
enforceable as the law between the parties as long as such stipulation does not contra#ene law' good
morals' good customs' public order or public policy (Social Security !ommission # Almeda' 8BC S!%A
:E: P8DCCQ2 %eparations !ommission # Visayan /acking !orporation' 8D> S!%A 5>8 P8DD8Q) As stated
in the promissory notes' respondent Aeorge Hing Tim /ua agreed to pay attorney;s fees only Sin addition
to e$penses and costs of suitS In other words' petitioner is entitled to collect from respondent Aeorge
Hing Tim /ua the attorney;s fees agreed upon only in case it was compelled to litigate with third persons
or to incur e$penses to protect its interest (!hina Airlines' Ltd # Intermediate Appellate !ourt' 8BD
S!%A @@B P8DCDQ2 Songcuan # Intermediate Appellate !ourt' 8D8 S!%A @C P8DD6Q) These conditions
are not obtaining in the case at bench There 'as no need for petitioner to litigate to protect its interest
inasmuch as private respondents had fully paid their obligations months before it filed the complaint for
recovery of sum of money. "either has it been sho'n by competent proof that petitioner had to engage
the services of a la'yer or incur expenses in collecting the fire insurance proceeds from 4err and
Company.
The award of attorney;s fees lies within the discretion of the court and depends upon the
circumstances of each case ,owe#er' the discretion of the court to award attorney;s fees under Article
@@6C of the !i#il !ode of the /hilippines demands factual' legal and e+uitable 3ustification' without
which the award is a conclusion without a premise and improperly left to speculation and con3ecture It
becomes a #iolation of the proscription against the imposition of a penalty on the right to litigate
(0ni#ersal Shipping Lines' Inc # Intermediate Appellate !ourt' 8CC S!%A 8E6 P8DD6Q) The reason for
the award must be stated in the te$t of the court;s decision If it is stated only in the dispositi#e portion of
the decision' the same shall be disallowed As to the award of attorney;s fees being an e$ception rather
than the rule' it is necessary for the court to make findings of fact and law that would bring the case
within the e$ception and 3ustify the grant of the award (%efractories !orporation of the /hilippines #
Intermediate Appellate !ourt' 8EB S!%A 5>D P8DCDQ)
In this case' the !ourt of Appeals strictly followed the abo#e1stated standard set by this !ourt
The award of /86'66666 as attorney;s fees to pri#ate respondents was reasonable and 3ustified as they
were compelled to litigate and incur e$penses to protect their interest
NEW SAMPAGUITA BUILDERS CONSTRUCTION" INC &NSBCI1 v. PNB
G.R. No. !4%7*3" 895$ 30" 004" T'IRD DIVISION &PANGANIBAN" J.1

9BS!I obtained an /C 4illion loan from /9B The loan was secured by a first mortgage on
se#eral parcels of land located in /angasinan It was further secured by the 3oint and se#eral signatures of
Spouses *ee' who signed as accommodation1mortgagors since all the collaterals were owned by them and
registered in their names

4oreo#er 9SB!I e$ecuted three promissory notes of different amounts and maturity dates
9SB!I also signed a !redit Agreement relating to the re#ol#ing credit line and another in support of the
unad#ised line )urther' Spouses *ee e$ecuted a U<oint and Solidary Agreement& (<SA) in fa#or of /9B
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 17
Uunconditionally and irre#ocably binding themsel#es to be 3ointly and se#erally liable with the borrower
for the payment of all sums due and payable to the Bank under the !redit *ocument&

Later on' 9SB!I failed to comply with its obligations under the promissory notes *ee on behalf
of 9SB!I re+uested
for a D61day e$tension for the payment of interests and restructuring of its loan for another term
9BS!I ne#ertheless failed to pay their loan obligations within the PtimeframeQ gi#en them and as
a result'Q /9B filed with the /ro#incial Sheriff of /angasinan at Lingayen for the foreclosure of the
real estate mortgage

After the foreclosure sale' /9B informed 9SB!I that the proceeds of the sale were not
sufficient to co#er its total claim amounting to /8@'56B':EB:>P'Q and thus demanded from the latter the
deficiency of /@'8E@':EB:> plus interest and other chargesP'Q until the amount PwasQ fully paid

9BS!I refused to pay the abo#e deficiency claim which compelled P%espondentQ /9B to
institute the instant P!Qomplaint for the collection of its deficiency claim

The court a +uo ruled in fa#or of 9SB!I -n appeal' /9B assailed the trial court&s decision
dismissing its deficiency claim on the mortgage debt It also challenged the ruling of the lower court that
9SB!I&s loan account was bloated' and that the inade+uacy of the bid price was sufficient to set aside the
auction sale The !A re#ersed the decision of the trial court and rendered 3udgment in fa#or of /9B
,ence this /etition
ISSUE(
.-9 /9B bloated the loan account of 9BS!I by imposing interests' penalties and attorney&s
fees without legal' #alid and e+uitable 3ustification

'ELD(
/etition GRANTED

NSBCIs loan accounts were loated y reason of aseless increases in interests! un"ustified penalties
and charges and unwarranted other charges

/etitioner 9SB!I&s loan accounts with /9B appear to be bloated with some ini+uitous imposition
of interests' penalties' other charges and attorney&s fees

In each drawdown' the /romissory 9otes specified the interest rate to be chargedM 8D5 percent in
the first' and @85 percent in the second and again in the third ,owe#er' a uniform clause therein
permitted respondent to increase the rate Kwithin the limits allowed by law at any time depending on
whate#er policy it may adopt in the future $ $ $'L without e#en gi#ing prior notice to petitioners The
!ourt holds that petitioners& accessory duty to pay interest did not gi#e respondent unrestrained freedom
to charge any rate other than that which was agreed upon 9o interest shall be due' unless e$pressly
stipulated in writing It would be the "enith of farcicality to specify and agree upon rates that could be
subse+uently upgraded at whim by only one party to the agreement

Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 18
)urther' the Kunilateral determination and impositionL of increased rates is K#iolati#e of the
principle of mutuality of contracts ordained in Article 8>6C of the !i#il !odeL -ne1sided impositions do
not ha#e the force of law between the parties' because such impositions are not based on the parties&
essential e+uality

K.hile the 0sury Law ceiling on interest rates was lifted by P!entral BankQ !ircular 9o
D65'
Q
nothing in the said !ircular grants lenders carte blanche authority to raise interest rates to le#els
which will either ensla#e their borrowers or lead to a hemorrhaging of their assetsL In fact' we ha#e
declared nearly ten years ago that neither this !ircular nor /* 8BC:' which further amended the 0sury
Law' authori"ed either party to unilaterally raise the interest rate without the other&s consentL
P


.ith regard to the *isclosure Statements and !redit agreements furnished by respondent which
set forth the same interest rates as those respecti#ely indicated in the /romissory 9otes' no penalty
charges or increases thereof appear The disclosure statements' as well as the two credit agreements
considered by this !ourt' did not pro#ide for any increase in the specified interest rates Thus' none
would now be permitted

.hile a standard penalty charge of B percent per annum has been imposed on the amounts stated
in all three /romissory 9otes still remaining unpaid or unrenewed when they fell due' there is no
stipulation therein that would 3ustify any increase in that charges The effect' therefore' when the
borrower is not clearly informed of the *isclosure Statements 11 prior to the consummation of the
a#ailment or drawdown 11 is that the lender will ha#e no right to collect upon such charge or increases
thereof' e#en if stipulated in the 9otes The time is now ripe to gi#e teeth to the often ignored forty1one1
year old KTruth in Lending ActL and thus transform it from a sni#elling paper tiger to a growling financial
watchdog of hapless borrowers

Besides' we ha#e earlier said that the 9otes are contracts of adhesion2 although not in#alid per se'
any apparent ambiguity in the loan contracts 11 taken as a whole 11 shall be strictly construed against
respondent who caused it .orse' in the statements of account' the penalty rate has again been unilaterally
increased by respondent to >B percent without petitioners& consent As a result of its mo#e'
such li+uidated damages intended as a penalty shall be e+uitably reduced by the !ourt to "ilch for being
ini+uitous or unconscionable

In like manner' the other charges imposed by respondent are not warranted 9o particular #alues or
rates of ser#ice charge are indicated in the /romissory 9otes or !redit Agreements' and no total #alue or
e#en the breakdown figures of such non1finance charge are specified in the *isclosure
Statements 4oreo#er' the pro#ision in the 4ortgage that re+uires the payment of insurance and other
charges is neither made part of nor reflected in such 9otes' Agreements' or Statements

To summari"e' to gi#e full force to the Truth in Lending Act' only the interest rates of 8D5 percent
and @85 percent stipulated in the /romissory 9otes may be imposed by respondent on the respecti#e
a#ailments After E>6 days' the portions remaining unpaid are automatically con#erted into medium1term
loans at the legal rate of 8@ percent In all instances' the simple method of interest computation is
followed /ayments made by petitioners are applied and pro1rated according to basic legal
principles !harges on penalty and insurance are eliminated' and 8 percent attorney&s fees imposed upon
the total unpaid balance of the principal and interest as of the date of public auction The /@ million
deficiency claim therefore #anishes' and a refund of />'BCB'8685@ arises
DEVELOPMENT BANK OF T'E P'ILIPPINES v. FELIPE ARCILLA 8R.
G.R. No. !2!3#7" 30 89n+ 00*" SECOND DIVISION &Ca55+@o" S/. J.1
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 19
(#! failed to disclose the re5uisite information in the disclosure statement form authori6ed by
the Central #ank, but did so in the loan transaction documents bet'een it and Arcilla.
Atty )elipe / Arcilla' <r was employed by the *e#elopment Bank of the /hilippines (*B/) ,e
was assigned to the legal department' and thereafter' decided to a#ail of a loan under the Indi#idual
,ousing /ro3ect (I,/) of the bank *B/ and Arcilla e$ecuted a *eed of !onditional Sale o#er a parcel of
land' as well as the house to be constructed ,e obliged himself to pay the loan in @5 years' with DF
interest per annum' to be deducted from his monthly salary It was also agreed therein that if Arcilla
a#ailed of optional retirement' he could elect to continue paying the loan' pro#ided that the loan7amount
would be con#erted into a regular real estate loan account Arcilla also agreed to the reser#ation by the
*B/ of its right to increase (with notice to him) the Krate of interest on the loan' as well as all other fees
and charges on loans and ad#ances pursuant to such policy as it may adopt from time to time during the
period of the loan2 /ro#ided' that the rate of interest on the loan shall be reduced by law or by the
4onetary Board2 /ro#ided' further' that the ad3ustment in the rate of interest shall take effect on or after
the effecti#ity of the increase or decrease in the ma$imum rate of interestL
.hen Arcilla opted to resign from the bank it informed him that the balance of his loan account
with the bank had been con#erted to a regular housing loan 0pon his re+uest' *B/ agreed to grant
Arcilla an additional cash ad#ance of />@'66666 The additional ad#ance was' thus' consolidated to the
outstanding balance of Arcilla&s original ad#ance' payable within the remaining term thereof at DF per
annum ,owe#er' upon his failure to pay his loan account' ad#ances' penalty charges and interests' *B/
rescinded the *eed of !onditional Sale by notarial act 9e#ertheless' it still ga#e time to Arcilla to
repurchase the property But Arcilla failed to respond !onse+uently' the property was ad#ertised for sale
at public bidding
Arcilla filed a complaint against *B/ with the %egional Trial !ourt (%T!) alleging that *B/
failed to furnish him with the disclosure statement re+uired by %epublic Act (%A) 9o >EB5 and !entral
Bank (!B) !ircular 9o 85C prior to the e$ecution of the deed of conditional sale and despite this' *B/
immediately deducted the account from his salary In its answer to the complaint' the *B/ alleged that
the details re+uired in said statements were particularly disclosed in the promissory notes' deed of
conditional sale and the re+uired notices sent to Arcilla The trial court rendered 3udgment in fa#or of
Arcilla The !ourt of Appeals re#ersed the decision of the %T! ,ence the instant petition
ISSUE(
.hether or not the charges must always be included in the disclosure statement
'ELD(
/etition DENIED
Section 8 of %A 9o >EB5 pro#ides that prior to the consummation of a loan transaction' the
bank' as creditor' is obliged to furnish a client with a clear statement' in writing' setting forth' to the
e$tent applicable and in accordance with the rules and regulations prescribed by the 4onetary Board of
the !entral Bank of the /hilippines' the following informationM
(8) the cash price or deli#ered price of the property or ser#ice to be ac+uired2

(@) the amounts' if any' to be credited as down payment and7or trade1in2

Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 20
(>) the difference between the amounts set forth under clauses (8) and (@)2

(:) the charges' indi#idually itemi"ed' which are paid or to be paid by such person in connection
with the transaction but which are not incident to the e$tension of credit2

(5) the total amount to be financed2

(B) the finance charges e$pressed in terms of pesos and centa#os2 and

(E) the percentage that the finance charge bears to the total amount to be financed e$pressed as a
simple annual rate on the outstanding unpaid balance of the obligation


0nder !ircular 9o 85C of the !entral Bank' the information re+uired by %A 9o >EB5 shall be
included in the contract co#ering the credit transaction or any other document to be acknowledged and
signed by the debtor' thusM

The contract co#ering the credit transaction' or any other document to be acknowledged
and signed by the debtor' shall indicate the abo#e se#en items of information In
addition' the contract or document shall specify additional charges' if any' which will be
collected in case certain stipulations in the contract are not met by the debtor
)urthermore' the contract or document shall specify additional charges' if any' which will
be collected in case certain stipulations in the contract are not met by the debtor
If the borrower is not duly informed of the data re+uired by the law prior to the consummation of
the a#ailment or drawdown' the lender will ha#e no right to collect such charge or increases thereof' e#en
if stipulated in the promissory note ,owe#er' such failure shall not affect the #alidity or enforceability
of any contract or transaction

In the present case' *B/ failed to disclose the re+uisite information in the disclosure statement
form authori"ed by the !entral Bank' but did so in the loan transaction documents between it and
Arcilla There is no e#idence on record that *B/ sought to collect or collected any interest' penalty or
other charges' from Arcilla other than those disclosed in the said deeds7documents

Apropos, .e agree with the appellant that appellee' a lawyer' would not be so gullible or
negligent as to sign documents without knowing fully well the legal implications and conse+uences of his
actions' and that appellee was a former employee of appellant As such employee' he is as well presumed
knowledgeable with matters relating to appellant&s business and fully cogni"ant of the terms of the loan
he applied for' including the charges that had to be paid

It might ha#e been different if the borrower was' say' an ordinary employee eager to buy his first
house and is easily lured into accepting onerous terms so long as the same is payable on installments In
such cases' the !ourt would be disposed to be stricter in the application of the Truth in Lending Act'
insisting that the borrower be fully informed of what he is entering into But in the case at bar'
considering appellee&s education and training' .e must hold' in the light of the e#idence at hand' that he
was duly informed of the necessary charges and fully understood their implications and effects
!onse+uently' the trial court&s annulment of the rescission anchored on this ground was un3ustified
BANK OF T'E P'ILIPPINE ISLANDS" INC v. SPOUSES YU
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 21
G.R. No. !%4!" 8an9a/$ 0" 0!0" SECOND DIVISION &ABAD" J.1

%espondents 9orman and Angelina ?u (the ?us)' doing business as Tuanson Builders borrowed
#arious sums totaling /E5 million from )ar (ast Bank and Trust !ompany )or collateral' they e$ecuted
real estate mortgages o#er se#eral of their properties' including certain lands in Lega"pi 0nable to pay
their loans' the ?us and Tuanson Builders re+uested a loan restructuring' which the bank' now merged
with Bank of the /hilippine Islands (B/I)' granted By this time' the ?us& loan balance stood
at />>':66'66666 The restructured loan used the same collaterals' with the e$ception of one property

*espite the restructuring' howe#er' the ?us still had difficulties paying their loan They asked
B/I to release some of the mortgaged lands since their total appraised #alue far e$ceeded the amount of
the remaining debt .hen B/I ignored their re+uest' the ?us withheld payments on their
amorti"ations Thus' B/I e$tra3udicially foreclosed the mortgaged properties in Lega"pi !ity and in /ili'
!amarines Sur
The ?us then filed a complaint before the %T! against B/I for reco#ery of alleged e$cessi#e
penalty charges' attorney&s fees' and foreclosure e$penses that the bank caused to be incorporated in the
price of the auctioned properties They alleged that the bank imposed e$cessi#e penalty charges and
interestsM o#er /5 million in penalty charges computed at >BF per annum and in addition' B/I collected a
8:F yearly interest on the principal' bringing the combined penalty charges and interest to 56F of the
principal per annum
The %T! granted a partial summary 3udgment' reducing the penalty charge of >BF per annum to
8@F per annum until the debt would ha#e been fully paid
The ?us sought reconsideration of the reduction of penalty charges and the allowance of the
attorney&s fees They claimed that the penalty charges should be deleted for #iolation of %epublic Act
(%A) >EB5 or the Truth in Lending Act The %T! reconsidered its earlier decision and rendered a
summary 3udgment deleting the penalty charges imposed by B/I for non1compliance with the Truth in
Lending Act
B/I appealed the decision to the !ourt of Appeals' but the latter affirmed the %T! decision in all
respects .hen B/I asked for reconsideration' the !A denied it
,ence' the bank&s recourse to this !ourt


ISSUES(
8 .-9 B/I failed to comply with the disclosure re+uirement of the Truth in Lending Act in its
imposition of penalty charges against the ?us
@ .-9 the penalty charges imposed by B/I are fair and reasonable
'ELD(
/etition DENIED.
#eference to the penalty charges in the promissory note constitutes sustantial compliance with the
disclosure re$uirement of the %ruth in &ending Act.
Section : of the Truth in Lending Act states thatM
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 22

S(! : Any creditor shall furnish to each person to whom credit is e$tended'
prior to the consummation of the transaction' a clear statement in writing setting forth' to
the e$tent applicable and in accordance with rules and regulations prescribed by the
Board' the following informationM

(8) the cash price or deli#ered price of the property or ser#ice to be ac+uired2
(@) the amounts' if any' to be credited as down payment and7or trade1in2
(>) the difference between the amounts set forth under clauses (8) and (@)2
(:) the charges' indi#idually itemi"ed' which are paid or to be paid by such
person in connection with the transaction but which are not incident to the e$tension of
credit2
(5) the total amount to be financed2
(B) the finance charge e$pressed in terms of pesos and centa#os2 and
(E) the percentage that the finance bears to the total amount to be financed
e$pressed as a simple annual rate on the outstanding unpaid balance of the obligation

/enalty charge' which is li+uidated damages resulting from a breach' falls under item (B) or finance
charge A finance charge Krepresents the amount to be paid by the debtor incident to the e$tension of
creditL The lender may pro#ide for a penalty clause so long as the amount or rate of the charge and the
conditions under which it is to be paid are disclosed to the borrower before he enters into the credit
agreement

The !ourt has affirmed that financial charges are amply disclosed if stated in the promissory note
in the case of (evelopment #ank of the !hilippines v. Arcilla, 7r. The !ourt there said' K0nder !ircular
85C of the !entral Bank' the lender is re+uired to include the information re+uired by %A >EB5 in the
contract co#ering the credit transaction or any other document to be acknowledged and signed by the
borrower In addition' the contract or document shall specify additional charges' if any' which will be
collected in case certain stipulations in the contract are not met by the debtorL In this case' the
promissory notes signed by the ?us contained data' including penalty charges' re+uired by the Truth in
Lending Act They cannot a#oid liability based on a rigid interpretation of the Truth in Lending Act that
contra#enes its goal
%he penalty charges imposed y B'I are unreasonale( 'enalty charge of )*+ per annum or )+ per
month is imposed.

The courts ha#e authority to reduce penalty charges when these are unreasonable and
ini+uitous !onsidering that B/I had already recei#ed o#er /@E million in interest and that it seeks to
impose the penalty charge of >F per month or >BF per annum on the total amount dueOprincipal plus
interest' with interest not paid when due added to and becoming part of the principal and also bearing
interest at the same rateOthe !ourt finds the ruling of the %T! in its original decision reasonable and
fair Thus' the penalty charge of 8@F per annum or 8F per month is imposed
Atienza, Baaga, De Guzman, Lacsina, Mabulac, Mandocdoc, Paguio, Salazar, and Silva Page 23