Trust Receipts LAW Handout PDF

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TRUST RECEIPTS LAWA. DEFINITION/CONCEPT OF A TRUST RECEIPTS TRANSACTIONGOVERNING LAW (SEC. 1) P. No. 115, also known as “The Trust Receipt Law”.RATIONALE FOR THE LAW P. 115 was enacted to safeguard commercial transactions and to offer an additional layer of security to the lending bank.PURPOSE (SE...

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TRUST RECEIPTS LAW A. DEFINITION/CONCEPT OF A TRUST RECEIPTS TRANSACTION GOVERNING LAW (SEC. 1) 

P.D. No. 115, also known as “The Trust Receipt Law”.

RATIONALE FOR THE LAW 

P.D. 115 was enacted to safeguard commercial transactions and to offer an additional layer of security to the lending bank.

documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents, a) to sell the goods or procure their sale; or

PURPOSE (SEC. 2) 1.

To encourage and promote the use of trust receipts as additional and convenient aid to commerce and trade;

2.

To provide for the regulation of trust receipts transactions in order to assure the protection of the rights and enforcement of obligations of the parties involved therein; and

3.

To declare the misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts as a criminal offense.

b) to manufacture or process the goods with the purpose of ultimate sale, or o

c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale.

WHAT IS A TRUST RECEIPT? (SEC. 3) 

(j) – refers to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt.

2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or

PARTIES (SEC 3.) 



(b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement. (c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.

WHAT CONSTITUTES A TRUST RECEIPT TRANSACTION? (SEC 4.) It is any transaction between the entruster and the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,

Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt;

d) to effect their presentation, collection or renewal. NATURE OF A TRUST RECEIPTS TRANSACTION 

Involves both loan and security feature

OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A TRUST RECEIPT 

Ownership is retained with the entruster.

WHAT IS A SECURITY INTEREST? (SEC. 3) 

(h) “Security Interest” means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some 3rd persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only.

1

PURPOSE OF ACQUISITION OF GOODS 

The release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale.

B. RIGHTS OF THE ENTRUSTER 1.



FORM AND CONTENTS (SEC.5)  



A trust receipt need not be in any particular form. But every such receipt must substantially contain: 1. a description of the goods, documents or instruments subject of the trust receipt; 2. the total invoice value of the goods and the amount of the draft to be paid by the entrustee; 3. an undertaking or a commitment of the entrustee – a. to hold in trust for the entruster the goods, documents or instruments therein described; b. to dispose of them in the manner provided for in the trust receipt; and c. to turn over the proceeds of the sale of the goods, documents or instruments to the entruster in the event of their non-sale within the period specified therein.

 

THE

TRUST

RECEIPT

MAY

Entitled to the return of goods, documents or instruments in case of non-sale (SEC. 7)

3.

Enforce all other rights conferred on him under the TRL (SEC. 7)

4.

To cancel the trust and take possession of goods etc. (Sec. 7) 

5.



 

6.

at any time upon 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 them

To sell goods etc. in a public auction in case of default (SEC. 7)

BE

Philippine currency or Any foreign currency – 1. Acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations. 2. Payment shall be made in its equivalent in Philippine currency 3. Payment shall be computed at the prevailing exchange rate a. on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster, or b. on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.

to the extent of the amount owing to the entruster or as appears in the trust receipt.

2.

The trust receipt evidences the absolute title or security interest of the entruster over the goods.

CURRENCY IN WHICH DENOMINATED (SEC. 6)

Entitled to the proceeds from the sale of goods, documents or instruments (SEC. 7)

He may sell the goods, documents or instruments at a public or private sale and may give notice to the entrustee of the intention to sell. However, he cannot sell it less less than five days (5) after serving or sending of such notice. The proceeds shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee’’s indebtedness to the entruster.

May be the purchaser in the public sale. (Sec. 7)  

The entruster may, at a public sale, become a purchaser. Notice of sale is deemed sufficiently given if in writing AND either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee’s last known business address.

LIABILITY OF ENTRUSTER (SEC. 8) 

Not liable as principal or vendor under any sale or contract to sell made by the entrustee.

VALIDITY OF THE SECURITY INTEREST – AS AGAINST INNOCENT PURCHASER FOR VALUE (SEC. 11)  

Entruster is not preferred. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith 2

from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest. AS AGAINST CREDITORS OF ENTRUSTEE (SEC. 12)  

Entruster is preferred. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

C. OBLIGATION AND LIABILITY OF THE ENTRUSTEE

Q: What is the effect of payment or delivery of the proceeds of the sale or disposition of goods, documents or instruments on the liability of the entrustee? A: Full payment of the loan or delivery of the sale proceeds equivalent to the full amount of the obligation extinguishes both criminal and civil liabilities of the entrustee.

RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF SALE 

WHAT ARE THE OBLIGATIONS OF THE ENTRUSTEE? (SEC. 9) (HIRRKO) 1.

To hold the goods, documents or instruments in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt;

2.

To insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

3.

To receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the obligation to the entruster;

4.

To return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;

5.

To keep said goods or proceeds thereof separate and capable of identification as property of the entruster; and

6.



Q: What is the effect of the return of goods, documents or instruments in case of non-sale on the liability of the entrustee? A: The return of the goods, documents or instruments in case of non-sale extinguishes only the criminal liability of the entrustee unless he pays in full his loan obligation. The return of the goods and the consequent acquittal of the entrustee in the criminal case does not bar the filing of a separate civil action to enforce the civil liability of the entrustee. LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR INSTRUMENTS (SEC. 10) 

The loss of the goods, documents or instrument, which is the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.



The entrustee shall bear the loss of the goods, documents, or instruments which are the subject of the TR. The principle of Res Perit Domino is not a valid defense against an entrustee in cases of loss or destruction of the goods, instruments, or documents secured by the TR.

To observe all other terms and conditions of the trust receipts not contrary to law.

ARE ALL OBLIGATIONS OF THE ENTRUSTEE CRIMINAL IN NATURE? NO, only the failure of the entrustee to deliver the proceeds of the sale of the goods or instruments subject of the trust receipt up to the extent of the amount owing to the entruster or failure of the entrustee to return the goods in case of non-sale. Such violation constitutes estafa. Under recent jurisprudence, however, the penal sanction under the trust receipts law does not apply in case the goods are not intended for sale or resale such as when they are for actual use. PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF GOODS, DOCUMENTS OR INSTRUMENTS

The obligation of the entrustee in case the goods, documents or instruments were not sold is to return it to the entruster. The failure to turn over the goods or proceeds realized from the sale thereof is a criminal offense under Art. 315(1)(b) of the RPC (estafa) except if he disposed of the goods in accordance with the terms.

Q: Who bears the risk of loss of goods, documents or instruments in a trust receipt? A: The risk of loss shall be borne by the entrustee. Loss of the goods under trust receipt, pending their disposition, irrespective of whether or not it was due to the fault of negligence of the entrustee, shall not 3

extinguish the his obligation to the entruster for the value thereof.

c.

Non-delivery of the goods to the entrustee;

The principle of res perit domino (when the thing is lost, the owner bears the loss) will not apply against the entruster.

d.

Compromise agreement before the filing of the criminal information for violation of the trust receipts law;

Q: What is the effect of the loss or surrender by the entrustee or repossession by the entruster of the goods under trust receipt?

e.

Cancellation of the trust and taking of possession by the entruster; and

f.

Loss of the goods due to force majeure.

A: The following are the effects: a.

b.

c.

d.

e.

The loss of the goods subject of the trust receipt regardless of the cause does not extinguish the civil liability of the entrustee up to the extent of the amount owing to the entruster; The return of the goods may extinguish the criminal liability but not the civil liability of the entrustee unless the goods are sold and proceeds thereof applied in full payment of the loan; The repossession of the goods by the entruster in case of default by the entrustee does not extinguish the civil liability of the entrustee unless the goods are sold and proceeds applied in payment of the obligation; In all of the foregoing cases, the civil obligation of the entrustee remains until the loan granted by the entruster to finance the acquisition of the goods is fully paid and satisfied; In one case, the Supreme Court ruled that the repossession of the goods in case of default of the entrustee does not prevent the entruster from foreclosing any mortgage on the property which the entrustee or surety offered as additional security for the loan.

Q: What are the instances where there is no criminal liability despite execution of a trust receipt agreement? A: The following instances are: a.

The transaction is not a trust receipt within the contemplation of the trust receipt law;

b.

Surrender of the goods to the entruster;

D. REMEDIES AVAILABLE In the event of default, the entruster may file collection case and a criminal case against the entrustee and the cases may proceed independently of each other (Sarmiento v CA GR No 122502, Dec. 27, 2002). An action for specific performance is available to the entruster. The entruster can file an action to compel the entrustee to pay his obligation to pay the loan. The basis of this action may be the contract of loan that is independent of the trust receipt or the trust receipt itself. (Aquino Banking Law and Negotiable Instruments Law Vol. I, 2009) After commencing a criminal action for violation of the trust receipts law, the entruster may enforce the civil liability arising out of the trust receipt in a separate civil action. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud, and physical injuries. Estafa falls under fraud. (Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 2557 [1992]) Is previous demand by the entrustor to the entrustee essentially to set-up any of the remedies under the trust receipts? 

NO. In case of default by entrustee under trust receipt agreement, it is not absolutely necessary that entruster cancel the trust and take possession of the goods to be able to enforce his rights thereunder. “Significantly, the law uses the word ‘may’ in granting to the entruster the right to cancel the trust and take possession of the goods. Consequently, the entrustor has the discretion to avail of such right or seek any alternative action, such as a third party claim or a separate civil action which it deems best to protect its rights, at any time upon default or failure of the entrustee to comply with the terms and conditions of the trust agreement.” (South City Homes, Inc. v BA Finance Corp 371 SCRA 603 [2001], quoting Prudential Bank v IAC 251 SCRA 421 [1995])

In a trust receipts transaction, can entruster who has actual and juridical possession of the goods subsequently avail of the right 4

and the entrustee extinguished the obligation under the existing trust receipt because the agreement did not only reschedule the debts of the entrustee but it provided principal conditions which are incompatible with the trust agreement. Hence, the liability for breach of the memorandum of agreement would be purely civil in nature and no criminal liability under the trust receipts law can be imposed (Pilipinas Bank v Ong, G.R. No. 133176 [2002]).

to demand from the entrustee the deficiency of the amount covered by the trust receipt? 



YES. Trust receipts agreements being only a security for the loan agreement, the full turn-over of the goods subject of the trust receipts does not suffice to divest debtors of their obligations to pay principal amount of their loan. Sec. 7 of P.D. 115 expressly provides that entrustee shall be liable to entruster for any deficiency. (Landl & Company v Metrobank 435 SCRA 639 [2004]) Entrustee is always bound to pay the loan.

May the entrustee set-off the loan by abandoning the goods with the entruster? 

NO. If under the trust receipt, bank is made to appear as owner, it was but an artificial expedient, more of legal fiction than fact, for it were really so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. Thus, the entrustee-borrower cannot be relieved of his obligation to pay the loan simply by abandoning the property with the bank (Rosario Textile Mills v Home Bankers Savings, 462 SRA 88 [2005]).

What is the effect of the acquittal of the Entrustee in the criminal charge of estafa? 





Yes, because the loan feature of a trust receipt is distinct from its security features. What the entrustee does with the goods, as security for the loan, determines his criminal liability. For instance, the return of the goods may extinguish his criminal liability but until the loan is paid, his civil obligation remains. The civil action of the entrustee is based on excontractu while the criminal action is based on exdelictu. The two actions may proceed independently of each other despite the failure of the entruster to make reservation in the criminal action.

What is the effect of a novation of the agreement? 



Under P.D. 115, performance of the act is an obligation directly imposed by law on the corporation, and consequently, since a corporation can only act through its officers, then the responsible officers must necessarily be the ones criminally liable (Sia v CA, 121 SCRA 655 [1983]).



If the violation is committed by a corporation, the criminal liability shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense without prejudice to civil liabilities arising from the criminal offense.



The officer of the corporation who signed a trust receipt cannot hide behind the cloak of the separate legal personality of the corporation and cannot avoid criminal prosecution even though he had no...