Full Text Comm Law 2

8/12/2019 Full Text Comm Law 2

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G.R. No. 137232 June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO

YUJUICO,petitioners,

vs.

HOME BANKERS SAVINGS AND TRUST COMPANY,respondent.

D E C I S I O N

SANDOVAL-GUTIERREZ,J.:

For our resolution is the petition for review on certiorariassailing

the Decision1of the Court of Appeals dated March 31, 1998 in CA-

G.R. CV No. 48708 and its Resolution dated January 12, 1999.

The facts of the case as found by the Court of Appeals are:

"Sometime in 1989, Rosario Textile Mills Corporation (RTMC)

applied from Home Bankers Savings & Trust Co. for an Omnibus

Credit Line for P10 million. The bank approved RTMCs credit line

but for only P8 million. The bank notified RTMC of the grant of the

said loan thru a letter dated March 2, 1989 which contains terms

and conditions conformed by RTMC thru Edilberto V. Yujuico. On

March 3, 1989, Yujuico signed a Surety Agreement in favor of the

bank, in which he bound himself jointly and severally with RTMC for

the payment of all RTMCs indebtedness to the bank from 1989 to1990. RTMC availed of the credit line by making numerous

drawdowns, each drawdown being covered by a separate

promissory note and trust receipt. RTMC, represented by Yujuico,

executed in favor of the bank a total of eleven (11) promissory

notes.

Despite the lapse of the respective due dates under the promissory

notes and notwithstanding the banks demand letters, RTMC failed

to pay its loans. Hence, on January 22, 1993, the bank filed a

complaint for sum of money against RTMC and Yujuico before the

Regional Trial Court, Br. 16, Manila.

In their answer (OR, pp. 44-47), RTMC and Yujuico contend that

they should be absolved from liability. They claimed that although

the grant of the credit line and the execution of the suretyship

agreement are admitted, the bank gave assurance that the

suretyship agreement was merely a formality under which Yujuico

will not be personally liable. They argue that the importation of raw

materials under the credit line was with a grant of option to them to

turn-over to the bank the imported raw materials should these fail

to meet their manufacturing requirements. RTMC offered to make

such turn-over since the imported materials did not conform to the

required specifications. However, the bank refused to accept the

same, until the materials were destroyed by a fire which gutteddown RTMCs premises.

For failure of the parties to amicably settle the case, trial on the

merits proceeded. After the trial, the Court a quorendered a

decision in favor of the bank, the decretal part of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered

in favor of plaintiff and against defendants who are ordered to pay

jointly and severally in favor of plaintiff, inclusive of stipulated 30%

per annum interest and penalty of 3% per month until fully paid,under the following promissory notes:

90-1116 6-20-90 P737,088.25 9-18-90

(maturity)

90-1320 7-13-90 P650,000.00 10-11-90
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90-1334 7-17-90 P422,500.00 10-15-90

90-1335 7-17-90 P422,500.00 10-15-90

90-1347 7-18-90 P795,000.00 10-16-90

90-1373 7-20-90 P715,900.00 10-18-90

90-1397 7-27-90 P773,500.00 10-20-90

90-1429 7-26-90 P425,750.00 10-24-90

90-1540 8-7-90 P720,984.00 11-5-90

90-1569 8-9-90 P209,433.75 11-8-90

90-0922 5-28-90 P747,780.00 8-26-90

The counterclaims of defendants are hereby DISMISSED.

SO ORDERED." (OR, p. 323; Rollo, p. 73)."2

Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the

Court of Appeals, contending that under the trust receipt contracts

between the parties, they merely held the goods described therein

in trust for respondent Home Bankers Savings and Trust Company

(the bank) which owns the same.Since the ownership of the goods

remains with the bank, then it should bear the loss. With thedestruction of the goods by fire, petitioners should have been

relieved of any obligation to pay.

The Court of Appeals, however, affirmed the trial courts judgment,

holding that the bank is merely the holder of the security for its

advance payments to petitioners; and that the goods they

purchased, through the credit line extended by the bank, belong to

them and hold said goods at their own risk.

Petitioners then filed a motion for reconsideration but this was

denied by the Appellate Court in its Resolution dated January 12,

1999.

Hence, this petition for review on certiorariascribing to the Court of

Appeals the following errors:

"I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT

THE ACTS OF THE PETITIONERS-DEFENDANTS WERE TANTAMOUNT

TO A VALID AND EFFECTIVE TENDER OF THE GOODS TO THE

RESPONDENT-PLAINTIFF.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE

DOCTRINE OF RES PERIT DOMINO IN THE CASE AT BAR

CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE

DEFECTIVE RAW MATERIALS BY THE PETITIONERS-DEFENDANTS TO

THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION IN

THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH

THE RESPONDENT-PLAINTIFF.

III

THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF

THE CIVIL CODE AND THE LONG-STANDING JURISPRUDENCE THAT

INTENTION OF THE PARTIES IS PRIMORDIAL IN ITS FAILURE TO

UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY

AGREEMENT WAS A MERE FORMALITY AND DID NOT INTEND TO

HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY

AGREEMENT.
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IV

ASSUMINGARGUENDOTHAT THE SURETYSHIP AGREEMENT WAS

VALID AND EFFECTIVE, THE HONORABLE COURT OF APPEALS

VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT LIABLE

UNLESS THE DEBTOR IS HIMSELF LIABLE.

V

THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF

TRUST RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE

RESPONDENT."

The above assigned errors boil down to the following issues: (1)

whether the Court of Appeals erred in holding that petitioners are

not relieved of their obligation to pay their loan after they tried to

tender the goods to the bank which refused to accept the same, and

which goods were subsequently lost in a fire; (2) whether the Court

of Appeals erred when it ruled that petitioners are solidarily liable

for the payment of their obligations to the bank; and (3) whether

the Court of Appeals violated the Trust Receipts Law.

On thefirst issue, petitioners theorize that when petitioner RTMC

imported the raw materials needed for its manufacture, using the

credit line, it was merely acting on behalf of the bank, the true

owner of the goods by virtue of the trust receipts. Hence, under thedoctrine of res perit domino, the bank took the risk of the loss of

said raw materials. RTMCs role in the transaction was that of end

user of the raw materials and when it did not accept those materials

as they did not meet the manufacturing requirements, RTMC made

a valid and effective tender of the goods to the bank. Since the bank

refused to accept the raw materials, RTMC stored them in its

warehouse. When the warehouse and its contents were gutted by

fire, petitioners obligation to the bank was accordingly

extinguished.

Petitioners stance, however, conveniently ignores the true nature

of its transaction with the bank. We recall that RTMC filed with the

bank an application for a credit line in the amount of P10 million,

but only P8 million was approved. RTMC then made withdrawals

from this credit line and issued several promissory notes in favor of

the bank. In banking and commerce, a credit line is "that amount of

money or merchandise which a banker, merchant, or supplier

agrees to supply to a person on credit and generally agreed to in

advance."3It is the fixed limit of credit granted by a bank, retailer,

or credit card issuer to a customer, to the full extent of which the

latter may avail himself of his dealings with the former but which he

must not exceed and is usually intended to cover a series of

transactions in which case, when the customers line of credit isnearly exhausted, he is expected to reduce his indebtedness by

payments before making any further drawings.4

It is thus clear that the principal transaction between petitioner

RTMC and the bank is a contract of loan. RTMC used the proceeds

of this loan to purchase raw materials from a supplier abroad. In

order to secure the payment of the loan, RTMC delivered the raw

materials to the bank as collateral. Trust receipts were executed by

the parties to evidence this security arrangement. Simply stated, the

trust receipts were mere securities.

In Samo vs. People,5we described a trust receipt as "a security

transaction intended to aid in financing importers and retail dealers

who do not have sufficient funds or resources to finance the

importation or purchase of merchandise, and who may not be able

to acquire credit except through utilization, as collateral, of the

merchandise imported or purchased."6
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In Vintola vs. Insular Bank of Asia and America,7we elucidated

further that "a trust receipt, therefore, is a security agreement,

pursuant to which a bank acquires a security interest in the goods.

It secures an indebtedness andthere can be no such thing as

security interest that secures no obligation."8Section 3 (h) of the

Trust Receipts Law (P.D. No. 115) defines a "security interest" as

follows:

"(h) Security Interest means a property interest in goods,

documents, or instruments to secure performance of some

obligation of the entrustee or of some third 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."

Petitioners insistence that the ownership of the raw materials

remained with the bank is untenable. In Sia vs. People,9Abad vs.

Court of Appeals,10and PNB vs. Pineda,

11we held that:

"If under the trust receipt, the bank is made to appear as the owner,

it was but an artificial expedient, 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, just to give consistency with purpose of

the trust receipt of giving 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 featurethereof..."

12

Thus, petitioners cannot be relieved of their obligation to pay their

loan in favor of the bank.

Anent the second issue, petitioner Yujuico contends that the

suretyship agreement he signed does not bind him, the same being

a mere formality.

We reject petitioner Yujuicos contentions for two reasons.

First, there is no record to support his allegation that the surety

agreement is a "mere formality;" and

Second, as correctly held by the Court of Appeals, the Suretyship

Agreement signed by petitioner Yujuico binds him. The terms clearly

show that he agreed to pay the bank jointly and severally with

RTMC. The parole evidence rule under Section 9, Rule 130 of the

Revised Rules of Court is in point, thus:

"SEC. 9. Evidence of written agreements.When the terms of an

agreement have been reduced in writing, it is considered as

containing all the terms agreed upon and there can be, between the

parties and their successors in interest, no evidence of such terms

other than the contents of the written agreement.

However, a party may present evidence to modify, explain, or add

to the terms of the written agreement if he puts in issue in his

pleading:

(a) An intrinsic ambiguity, mistake, or imperfection in the

written agreement;

(b) The failure of the written agreement to express the true

intent and agreement of the parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or

their successors in interest after the execution of the

written agreement.

x x x."
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Under this Rule, the terms of a contract are rendered conclusive

upon the parties and evidence aliundeis not admissible to vary or

contradict a complete and enforceable agreement embodied in a

document.13We have carefully examined the Suretyship Agreement

signed by Yujuico and found no ambiguity therein. Documents must

be taken as explaining all the terms of the agreement between the

parties when there appears to be no ambiguity in the language of

said documents nor any failure to express the true intent and

agreement of the parties.14

As to the third and final issue At the risk of being repetitious, we

stress that the contract between the parties is a loan. What

respondent bank sought to collect as creditor was the loan it

granted to petitioners. Petitioners recourse is to sue their supplier,

if indeed the materials were defective.

WHEREFORE, the petition is DENIED. The assailed Decision and

Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are

AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.

Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ.,

concur.

BANK OF COMMERCE,petitioner, vs.TERESITA S.SERRANO, respondent.

D E C I S I O N

QUISUMBING,J.:

For our review on certiorari is the civil aspect of the Court of

AppealsDecision,[1]

dated September 28, 2001, in CA-G.R. CR No.

24570 as well as its Resolution,[2]

dated January 17, 2002, denying

petitioners motion for reconsideration. The Court of Appeals set

aside the Decision[3]

dated May 31, 2000, of the Regional Trial Court

(RTC) Branch 105 of Quezon City.

The facts are as follows:

Petitioner Bank of Commerce (formerly Boston Bank of the

Philippines) is a private domestic banking institution. Respondent

Teresita S. Serrano is the General Manager and Treasurer of Via

Moda International, Inc., a domestic business entity primarily

engaged in the import and export of textile materials and fabrics.

Via Moda International, represented by respondent, obtained

an export packing loan from petitioner, Bank of Commerce (BOC)-

Diliman, Quezon City Branch, in the amount of US$50,000

(P1,382,250), secured by a Deed of Assignment over IrrevocableTransferable Letter of Credit No. 100072119. Respondent Serrano

executed in favor of BOC Promissory Note No. 94/086 for

US$50,000 dated May 6, 1994 with maturity date on July 14, 1994.

Via Moda then opened a deposit account for the proceeds of the

said loan.[4]

On March 15, 1994, BOC issued to Via Moda, Irrevocable Letter

of Credit No. BCZ-940051, in the amount of US$56,735, for the

purchase and importation of fabric and textile products from Tiger

Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods

covered, respondent, in representation of Via Moda, executed TrustReceipt No. 94-22221 dated April 21, 1994 with due date on July 20,

1994 for US$55,944.73 (P1,554,424.32).[5]

Under the terms of the trust receipt, Via Moda agreed to hold

the goods in trust for petitioner as the latters property and to sell

the same for the latters account. In case of sale, the proceeds are

to be remitted to the bank as soon as it is received, but not later

than the maturity date. Said proceeds are to be applied to the

relative acceptances, with interest at the rate of 26% per annum,
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with a penalty of 36% per annum of the total amount due until fully

paid in case of non-payment of the trust receipt and relative

acceptance at maturity date or, in the alternative, to return the

goods in case of non-sale.[6]

The goods covered by the trust receipt were shipped by ViaModa to its consignee in New Jersey, USA, who sent an Export

Letter of Credit issued by the Bank of New York, in favor of BOC.

The Regional Operations Officer of BOC signed the export

declarations to show consent to the shipment. The total value of

the entrusted goods which were shipped per export declaration was

US$81,987 (P2,246,443.80). The proceeds of the entrusted goods

sold were not credited to the trust receipt but, were applied by the

bank to the principal, penalties and interest of the export packing

loan. The excess P472,114.85 was applied to the trust receipt,

leaving a balance of P1,444,802.28 as of November 15, 1994.

[7]

On November 16, 1994, petitioner sent a demand letter to Via

Moda to pay the said amount plus interest and penalty charges, or

to return the goods covered by Trust Receipt No. 94-22221 within 5

days from receipt. The demand was not heeded. As of December

15, 1998, the outstanding balance of Via Moda

was P4,783,487.15.[8]

On March 8, 1998, respondent was charged with the crime of

estafa under Article 315 (b) of the Revised Penal Code in relation to

Presidential Decree No. 115.[9]

On May 31, 2000, the trial court rendered judgment and the

dispositive portion of which reads:

WHEREFORE, in the light of the foregoing, the Court finds accused

Teresita S. Serrano GUILTY beyond reasonable doubt of the crime

charged in the Information filed in this case and sentences her to

serve the indeterminate penalty of imprisonment from EIGHT (8)

YEARS AND ONE (1) DAY OF PRISION MAYOR, AS MINIMUM, TO

TWENTY (20) YEARS OF RECLUSION TEMPORAL, AS MAXIMUM,

including the accessory penalties. She is ordered to pay her civil

liability to Bank of Commerce in the amount of P4,783,487.15, with

interest until fully paid, and the costs of this suit.

SO ORDERED.[10]

Respondent appealed to the Court of Appeals which rendered

a decision dated September 28, 2001, reversing the trial courts

decision. The Court of Appeals held that the element of

misappropriation or conversion in violation of P.D. No. 115, in

relation to the crime of estafa, was absent in this case, thereby

acquitting the respondent and deleting her civil liability. The

decretal portion of the decision reads as follows:

WHEREFORE, premises considered, the appealed decision is herebyREVERSED, and the accused-appellant ACQUITTED of the crime

charged. The civil liability adjudged by the court a quo is hereby

deleted, there being no showing that accused-appellant bound

herself personally liable with respect to the loan secured by the

trust receipt.

SO ORDERED.[11]

Petitioner filed a Motion for Reconsideration which was

denied. Petitioner now comes to this Court submitting thefollowing issues for our resolution:

I. WHETHER RESPONDENT IS JOINTLY AND SEVERALLY

LIABLE WITH VIA MODA UNDER THE GUARANTEE

CLAUSE OF LC NO. [BCZ-940051] (EXHIBIT A) SECURED

BY TRUST RECEIPT NO. [94-22221] (EXHIBIT C).[12]

II. WHETHER THE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR IN DELETING THE CIVIL LIABILITY OF
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RESPONDENT SERRANO IN ITS DECISION DATED

SEPTEMBER 28, 2001.[13]

On thefirst issue, petitioner contends that the Court of Appeals

made a manifestly mistaken inference from its findings or a

misapprehension of facts and overlooked a vital piece of evidenceon record, particularly, the Guarantee Clause of the Letter of Credit

secured by the Trust Receipt. Petitioner further alleges that the said

Guarantee Clause provides that the liability of respondent is joint

and solidary; hence, she should be held liable on the obligation.

A letter of credit is a separate document from a trust receipt.

While the trust receipt may have been executed as a security on the

letter of credit, still the two documents involve different

undertakings and obligations. A letter of credit is an engagement by

a bank or other person made at the request of a customer that the

issuer will honor drafts or other demands for payment uponcompliance with the conditions specified in the credit. Through a

letter of credit, the bank merely substitutes its own promise to pay

for the promise to pay of one of its customers who in return

promises to pay the bank the amount of funds mentioned in the

letter of credit plus credit or commitment fees mutually agreed

upon.[14]By contrast, a trust receipt transaction is one where the

entruster, who holds an absolute title or security interests over

certain goods, documents or instruments, released the same to the

entrustee, who executes a trust receipt binding himself to hold the

goods, documents or instruments in trust for the entruster and tosell or otherwise dispose of the goods, documents and instruments

with the obligation to turn over to the entruster the proceeds

thereof to the extent of the amount owing to the entruster, or as

appears in the trust receipt, or return the goods, documents or

instruments themselves if they are unsold, or not otherwise

disposed of, in accordance with the terms and conditions specified

in the trust receipt.[15]

However, the question of the liability of respondent based on

the Guarantee Clause of the Letter of Credit, was not raised either

at the trial court or before the Court of Appeals. A question that

was never raised in the courts below cannot be allowed to be raised

for the first time on appeal without offending basic rules of fair play,

justice and due process. Such an issue was not brought to the fore

either in the trial court or the appellate court, and would have been

disregarded by the latter tribunal for the reasons previously stated.

With more reason, the same does not deserve consideration by this

Court.[16]

On the second issue, the Court of Appeals held that respondent

Serrano cannot be held civilly liable under the trust receipt since she

was not made personally liable nor was she a guarantor therein.

The parties stipulated during the pre-trial that respondent Serrano

executed the trust receipt in representation of Via Moda, Inc.,which has a separate personality from Serrano, and petitioner BOC

failed to show sufficient reason to justify the piercing of the veil of

corporate fiction. It thus ruled that this was not Serranos personal

obligation but that of Via Moda and there was no basis of finding

her solidarily liable with Via Moda.[17]

Worthy of mention at this point is the Court of Appeals finding

that there was no misappropriation or conversion by the

respondent of the proceeds of the sale in the goods, subject of the

trust receipt since the proceeds were actually received by petitioner

but the latter applied the same to Via Modas other obligationsunder the export packing loan. It further stated that such

application of payment to another obligation was done by

petitioner on its own and should not create a criminal liability on

the part of respondent who did not take part nor had any

knowledge thereof. It is on this premise that the respondent was

acquitted of the crime charged.[18]

Incidentally, petitioner urged this Court to review the factual

findings of the case due to contradictory findings of the trial court
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and the Court of Appeals arising from misappreciation of facts by

the Court of Appeals. Such plea must be rejected. It is a well

established rule that in an appeal via certiorari, only questions of

law may be raised,[19]and we find petitioners averments

insufficient to disregard this well-entrenched rule. This Court does

not, of itself, automatically delve into the record of a case to

determine the facts anew where there is disagreement between the

findings of fact by the trial court and by the Court of Appeals. When

the disagreement is merely on the probative value of the evidence,

i.e., which is more credible of two versions, we limit our review to

only ascertaining if the findings of the Court of Appeals are

supported by the records. So long as the findings of the appellate

court are consistent with and not palpably contrary to the evidence

on record, we shall decline to make a review on the probative value

of such evidence. The findings of fact of the Court of Appeals, and

not those of the trial court, will be considered final and conclusive,even in this Court.[20] In this case, we find no cogent reason to

disturb the foregoing factual findings of the Court of Appeals.

At any rate, petitioner BOC is not precluded from filing a

separate civil action against the responsible party where the

abovementioned issues could be properly resolved or determined.

The issues raised by herein petitioner involve a determination of

facts and require the admission and examination of additional

evidence for its resolution. That cannot be done in a petition for

review on certiorariby merely appealing the civil aspect of an

acquittal in a criminal case.

WHEREFORE, the petition is DENIED for lack of merit. The

Decision dated September 28, 2001 and the Resolution dated

January 17, 2002, of the Court of Appeals in CA-G.R. CR No. 24570,

are AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago,

Carpio, andAzcuna, JJ., concur.

METROPOLITAN BANK & TRUST COMPANY v. HON. SECRETARY OF

JUSTICE RAUL M. GONZALES, OLIVER T. YAO and DIANA T. YAO,

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45

of the Revised Rules of Court filed by petitioner Metropolitan Bank

and Trust Company, seeking to reverse and set aside the Decision[1]

dated 30 March 2007and the Resolution[2] dated 16 October 2007

of the Court of Appeals in CA-G.R. SP No. 91892. In its assailed

Decision and Resolution, the appellate court affirmed theResolution[3] of the Secretary of Justice directing the City

Prosecutor of Manila to move for the withdrawal of the

Informations for Estafa filed against private respondents Oliver T.

Yao and Diana T. Yao.

The factual and procedural antecedents of this present petition are

as follows:

Petitioner is a banking institution duly authorized to engage in the

banking business under Philippine laws.
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Private respondents were the duly authorized representatives of

Visaland Inc. (Visaland), likewise a domestic corporation engaged in

the real estate development business.

In order to finance the importation of materials necessary for the

operations of its sister company, Titan Ikeda Construction and

Development Corporation (TICDC), private respondents, on behalf

of Visaland, applied with petitioner for 24 letters of credit, the

aggregate amount of which reached the sum of P68,749,487.96.

Simultaneous with the issuance of the letters of credit, private

respondents signed trust receipts[4] in favor of petitioner. Private

respondents bound themselves to sell the goods covered 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.

When the trust receipts matured, private respondents failed to

return the goods to petitioner, or to return their value amounting to

P68,749,487.96 despite demand. Thus, petitioner filed a criminal

complaint[5] for estafa[6] against Visaland and private respondents

with the Office of the City Prosecutor of Manila (City Prosecutor).[7]

In their Counter-Affidavit,[8] private respondents denied having

entered into trust receipt transactions with petitioner. Instead,

private respondents claimed that the contract entered into by the

parties was a Contract of Loan secured by a Real Estate Mortgage

over two parcels of land situated at Tagaytay City and registered

under the name of the spouses Wilbert and Isabelita King (the

spouses King).[9] According to private respondents, petitioner

made them sign documents bearing fine prints without apprising

them of the real nature of the transaction involved. Privaterespondents came to know of the trust receipt transaction only

after they were served a copy of the Affidavit-Complaint of the

petitioner.

After the requisite preliminary investigation, the City Prosecutor

found that no probable cause existed and dismissed Information

Sheet (I.S.) No. 02G-30918 in a Resolution[10] dated 23 January

2003. While the City Prosecutor was not persuaded by the defense

proffered by private respondents that no trust receipt transaction

existed, it nonetheless, dismissed the case for lack of evidence that

prior demand was made by petitioner. The City Prosecutor

underscored that for a charge of estafa with grave abuse of

confidence to prosper, previous demand is an indispensable

requisite.

To prove that a demand was made prior to the institution of the

criminal complaint, petitioner attached to its Motion for

Reconsideration a copy of a letter-demand[11] dated 27 February

2001, addressed to private respondents.


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10

After the element of prior demand was satisfied, the City Prosecutor

issued a Resolution[12] dated 11 October 2004 finding probable

cause for estafa under Article 315, paragraph 1(b)[13] of the

Revised Penal Code, in relation to Presidential Decree No. 115.[14]

Accordingly, 23 separate Informations[15] for estafa were f iledbefore the Regional Trial Court (RTC) of Manila against private

respondents. The cases were docketed as Criminal Cases No.

04231721-44 and raffled to Branch 17 of the said court.

In the interim, private respondents appealed the investigating

prosecutors Resolution to the Secretary of Justice. In a

Resolution[16] dated 31 March 2005, the Secretary of Justice ruled

that there was no probable cause to prosecute private respondents

for estafa in relation to Presidential Decree No. 115. The Secretary

of Justice declared that the legitimate transactional relationship

between the parties being merely a contract of loan, violations of

the terms thereunder were not covered by Presidential Decree No.

115. Thus, the Secretary of Justice directed the City Prosecutor of

Manila to move for the withdrawal of the Informations. In a

subsequent Resolution[17] dated 30 August 2005, the Secretary of

Justice denied petitioners Motion for Reconsideration, for the

matters raised therein had already been passed upon in his prior

resolution.

Acting on the directive of the Secretary of Justice, the City

Prosecutor moved for the withdrawal of the Informations which

was granted by the RTC in an Order[18] dated 29 July 2005.

Consequently, Criminal Cases No. 04-231721 to No. 04231744 were

withdrawn. The RTC refused to reconsider its earlier resolution in

an Order[19] dated 3 February 2006, thereby denying petitioners

Motion for Reconsideration.

From the adverse Resolutions of the Secretary of Justice, petitioner

elevated its case before the Court of Appeals by filing a Petition for

Certiorari,[20] which was docketed as CA-G.R. SP No. 91892.

Petitioner averred in its Petition that the Secretary of Justice abused

his discretion in ignoring the established facts and legal principles

when he ruled that probable cause for the crime of estafa was

absent.

The Court of Appeals, however, in its Decision[21] dated 30 March

2007, dismissed petitioners Petition for Certiorari after finding that

the Secretary of Justice committed no grave abuse of discretion in

ruling against the existence of probable cause to prosecute private

respondents. In arriving at its assailed decision, the appellate court

recognized the authority of the Secretary of Justice to control and

supervise the prosecutors, which includes the power to reverse or

modify their decisions without committing grave abuse of

discretion.

Similarly ill-fated was Petitioners Motion for Reconsideration in a

Resolution[22] dated 16 October 2007.


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11

Unfazed by the turn of events, petitioner now comes before this

Court urging us to reverse the Court of Appeals Decision and

Resolution and to direct the filing of Informations against private

respondents. For the disposition of this Court is the sole issue of:

WHETHER OR NOT PROBABLE CAUSE EXISTS FOR THE PROSECUTION

OF PRIVATE RESPONDENTS FOR THE CRIME OF ESTAFA IN RELATION

TO P.D. NO. 115.

Petitioner impugns the findings of the appellate court sustaining the

non-existence of probable cause as found by the Secretary of

Justice. Petitioner insists that the allegations in its complaint,

together with the pieces of evidence appended thereon, are

sufficient to sustain a finding of probable cause in preliminary

investigation.

Asserting their innocence, private respondents continue to argue

that the agreement contracted by parties is one of loan, and not of

trust receipt. To buttress their contention, private respondents aver

that a contract of mortgage was executed by the spouses King to

secure private respondents loan obligation with petitioner, the

proceeds of which were the ones utilized to finance the importation

of materials.[23] Private respondents likewise defend the assailed

Court of Appeals Decision and assert that the Secretary of Justice

was justified in overruling the investigating prosecutors findings, as

sanctioned by Section 12 of DOJ Department Order No. 70.[24]

The present petition bears impressive merits.

Probable cause has been defined as the existence of such facts and

circumstances as would excite the belief in a reasonable mind,

acting on the facts within the knowledge of the prosecutor, that the

person charged was guilty of the crime for which he was

prosecuted. Probable cause is a reasonable ground of presumption

that a matter is, or may be, well founded on such a state of facts in

the mind of the prosecutor as would lead a person of ordinary

caution and prudence to believe, or entertain an honest or strong

suspicion, that a thing is so.[25] The term does not mean actual or

positive cause nor does it import absolute certainty. It is merely

based on opinion and reasonable belief. Thus, a finding of probable

cause does not require an inquiry into whether there is sufficient

evidence to procure a conviction. It is enough that it is believed that

the act or omission complained of constitutes the offense charged.

Precisely, there is a trial for the reception of evidence of the

prosecution in support of the charge.[26]

To determine the existence of probable cause, there is need to

conduct preliminary investigation. A preliminary investigation

constitutes a realistic judicial appraisal of the merits of a case.[27]

Its purpose is to determine whether (a) a crime has been


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12

committed; and (b) whether there is a probable cause to believe

that the accused is guilty thereof.[28] It is a means of discovering

which person or persons may be reasonably charged with a crime.

The conduct of preliminary investigation is executive in nature. The

Court may not be compelled to pass upon the correctness of the

exercise of the public prosecutors function unless there is a

showing of grave abuse of discretion or manifest error in his

findings.[29] Grave abuse of discretion implies a capricious and

whimsical exercise of judgment tantamount to lack or excess of

jurisdiction.[30] The exercise of power must have been done in an

arbitrary or a despotic manner by reason of passion or personal

hostility. It must have been so patent and gross as to amount to an

evasion of positive duty or a virtual refusal to perform the duty

enjoined or to act at all in contemplation of law.[31]

In the present case, the abuse of discretion is patent in the act of

the Secretary of Justice holding that the contractual relationship

forged by the parties was a simple loan, for in so doing, the

Secretary of Justice assumed the function of the trial judge of

calibrating the evidence on record, done only after a full-blown trial

on the merits. The fact of existence or non-existence of a trust

receipt transaction is evidentiary in nature, the veracity of which

can best be passed upon after trial on the merits, for it is virtually

impossible to ascertain the real nature of the transaction involved

based solely on the self-serving allegations contained in the

opposing parties pleadings. Clearly, the Secretary of Justice is not

in a competent position to pass judgment on substantive matters.

The bases of a partys accusation and defenses are better ventilated

at the trial proper than at the preliminary investigation.

We need not overemphasize that in a preliminary investigation, the

public prosecutor merely determines whether there is probable

cause or sufficient ground to engender a well-founded belief that a

crime has been committed, and that the respondent is probably

guilty thereof and should be held for trial. It does not call for the

application of rules and standards of proof that a judgment of

conviction requires after trial on the merits. The complainant need

not present at this stage proof beyond reasonable doubt. A

preliminary investigation does not require a full and exhaustive

presentation of the parties evidence.[32] Precisely, there is a trial

to allow the reception of evidence for both parties to substantiate

their respective claims.

Having said the foregoing, this Court now proceeds to determine

whether probable cause exists for holding private respondents

liable for estafa in relation to Presidential Decree No. 115.

Trust receipt transactions are governed by the provisions of

Presidential Decree No. 115 which defines such a transaction as

follows:


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13

Section 4. What constitutes a trust receipt transaction.A trust

receipt transaction, within the meaning of this Decree, is any

transaction by and between a person referred to in this Decree as

the entruster, and another person referred to in this Decree as the

entrustee, whereby the entruster, who owns or holds absolute titleor security interests over certain specified goods, documents or

instruments, releases the same to the possession of the entrustee

upon the latters execution and delivery to the entruster of a signed

document called a trust receipt wherein the entrustee binds

himself to hold the designated goods, documents or instruments 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 one of the following:

1. In the case of goods or documents, (a) to sell the goods or

procure their sale; or (b) to manufacture or process the goods with

the purpose of ultimate sale: Provided, That, 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; or (c) to load, unload, ship or transship or otherwise deal

with them in a manner preliminary or necessary to their sale; or

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 d) to effect their presentation, collection

or renewal.

The sale of goods, documents or instruments by a person in the

business of selling goods, documents or instruments for profit who,

at the outset of the transaction, has, as against the buyer, general

property rights in such goods, documents or instruments, or who

sells the same to the buyer on credit, retaining title or other interestas security for the payment of the purchase price, does not

constitute a trust receipt transaction and is outside the purview and

coverage of this Decree.

An entrustee is one having or taking possession of goods,

documents or instruments under a trust receipt transaction, andany successor in interest of such person for the purpose of payment

specified in the trust receipt agreement. The entrustee is obliged to

(1) hold the goods, documents or instruments in trust for the

entruster and shall dispose of them strictly in accordance with the

terms and conditions of the trust receipt; (2) receive the proceeds in

trust for the entruster and turn over the same to the entruster to

the extent of the amount owed to the entruster or as appears on


14/23


15/23

15

for the purpose of the other provisions of this Code, the penalty

shall be termed prision mayor to reclusion temporal, as the case

may be.

2nd. The penalty of prision correccional in its minimum and

medium periods, if the amount of the fraud is over 6,000 pesos but

does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision

correccional in its minimum period, if such amount is over 200

pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such

amount does not exceed 200 pesos, provided that in the four cases

mentioned, the fraud be committed by any of the following means;

x x x.

As found in the Complaint-Affidavit of petitioner, private

respondents were charged with failing to account for or turn over to

petitioner the merchandise or goods covered by the trust receipts

or the proceeds of the sale thereof in payment of their obligations

thereunder. The following pieces of evidence adduced from the

affidavits and documents submitted before the City Prosecutor are

sufficient to establish the existence of probable cause, to wit:

First, the trust receipts[35] bearing the genuine signatures of private

respondents; second, the demand letter[36] of petitioner addressed

to respondents; and third, the initial admission by private

respondents of the receipt of the imported goods from

petitioner.[37]

Prescinding from the foregoing, we conclude that there is ample

evidence on record to warrant a finding that there is a probable

cause to warrant the prosecution of private respondents for estafa.

It must be once again stressed that probable cause does not require

an inquiry into whether there is sufficient evidence to procure a

conviction. It is enough that it is believed that the act or omission

complained of constitutes the offense charged.

That private respondents did not sell the goods under the trust

receipt but allowed it to be used by their sister company is of nomoment. The offense punished under Presidential Decree No. 115

is in the nature of malum prohibitum. A mere failure to deliver the

proceeds of the sale or the goods, if not sold, constitutes a criminal

offense that causes prejudice not only to another, but more to the

public interest.[38] Even more incredible is the contention of

private respondents that they did not give much significance to the

documents they signed, considering the enormous value of the


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16

transaction involved. Thus, it is highly improbable to mistake trust

receipt documents for a contract of loan when the heading thereon

printed in bold and legible letters reads: Trust Receipts. We are

not prejudging this case on the merits. However, by merely

glancing at the documents submitted by petitioner entitled TrustReceipts and the arguments advanced by private respondents, we

are convinced that there is probable cause to file the case and to

hold them for trial.

All told, the evidentiary measure for the propriety of filing criminal

charges has been reduced and liberalized to a mere probable cause.

As implied by the words themselves, probable cause is concerned

with probability, not absolute or moral certainty.[39]

WHEREFORE, premises considered, the instant Petition is GRANTED.

The Decision dated 30 March 2007 and the Resolution dated 16

October 2007 of the Court of Appeals in CA-G.R. SP No. 91892 are

REVERSED and SET ASIDE. The Secretary of Justice is hereby

ORDERED to direct the Office of the City Prosecutor of Manila to

forthwith FILE Informations for estafa against private respondents

Oliver T. Yao and Diana T. Yao before the appropriate court.

SO ORDERED.

G.R. No. 159622 July 30, 2004

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and

MANUEL P. LUCENTE,petitioners,

vs.

METROPOLITAN BANK & TRUST COMPANY,respondent.

D E C I S I O N

YNARES-SANTIAGO,J.:

At issue in this petition for review on certiorariis whether or not, ina trust receipt transaction, an entruster which had taken actual and

juridical possession of the goods covered by the trust receipt may

subsequently avail of the right to demand from the entrustee the

deficiency of the amount covered by the trust receipt.

As correctly appreciated by the Court of Appeals, the undisputed

facts of this case are as follows:

Respondent Metropolitan Bank and Trust Company (Metrobank)

filed a complaint for sum of money against Landl and Company(Phil.) Inc. (Landl) and its directors, Percival G. Llaban and Manuel P.

Lucente before the Regional Trial Court of Cebu City, Branch 19,

docketed as Civil Case No. CEB-4895.

Respondent alleged that petitioner corporation is engaged in the

business of selling imported welding rods and alloys. On June 17,

1983, it opened Commercial Letter of Credit No. 4998 with

respondent bank, in the amount of US$19,606.77, which was


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17

equivalent to P218,733.92 in Philippine currency at the time the

transaction was consummated. The letter of credit was opened to

purchase various welding rods and electrodes from Perma Alloys,

Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated

March 10, 1983. Petitioner corporation put up a marginal deposit of

P50,414.00 from the proceeds of a separate clean loan.

As an additional security, and as a condition for the approval of

petitioner corporation's application for the opening of the

commercial letter of credit, respondent bank required petitioners

Percival G. Llaban and Manuel P. Lucente to execute a Continuing

Suretyship Agreement to the extent of P400,000.00, excluding

interest, in favor of respondent bank. Petitioner Lucente also

executed a Deed of Assignment in the amount of P35,000.00 in

favor of respondent bank to cover the amount of petitioner

corporation's obligation to the bank. Upon compliance with theserequisites, respondent bank opened an irrevocable letter of credit

for the petitioner corporation.

To secure the indebtedness of petitioner corporation, respondent

bank required the execution of a Trust Receipt in an amount

equivalent to the letter of credit, on the condition that petitioner

corporation would hold the goods in trust for respondent bank, with

the right to sell the goods and the obligation to turn over to

respondent bank the proceeds of the sale, if any. If the goods

remained unsold, petitioner corporation had the further obligationto return them to respondent bank on or before November 23,

1983.

Upon arrival of the goods in the Philippines, petitioner corporation

took possession and custody thereof.

On November 23, 1983, the maturity date of the trust receipt,

petitioner corporation defaulted in the payment of its obligation to

respondent bank and failed to turn over the goods to the latter. On

July 24, 1984, respondent bank demanded that petitioners, as

entrustees, turn over the goods subject of the trust receipt. On

September 24, 1984, petitioners turned over the subject goods to

the respondent bank.

On July 31, 1985, in the presence of representatives of the

petitioners and respondent bank, the goods were sold at public

auction. The goods were sold for P30,000.00 to respondent bank as

the highest bidder.

The proceeds of the auction sale were insufficient to completely

satisfy petitioners' outstanding obligation to respondent bank,

notwithstanding the application of the time deposit account of

petitioner Lucente. Accordingly, respondent bank demanded that

petitioners pay the remaining balance of their obligation. Afterpetitioners failed to do so, respondent bank instituted the instant

case to collect the said deficiency.

On March 31, 1997, after trial on the merits, the trial court

rendered a decision, the dispositive portion of which reads:

WHEREFORE, foregoing premises considered, Judgment is

hereby rendered in favor of the plaintiff and against the

defendant by (1) ordering the defendant to pay jointly and

severally to the plaintiff the sum of P292,172.23representing the defendant's obligation, as of April 17,

1986; (2) to pay the interest at the rate of 19% per annum

to be reckoned from April 18, 1986 until [the] obligation is

fully paid; (3) to pay service charge at the rate of 2% per

annum starting April 18, 1986; (4) to pay the sum equivalent

to 10% per annum of the total amount due collectible by

way of Attorney's Fees; (5) to pay Litigation Expenses of


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18

P3,000.00 and to pay the cost of the suit; and (6) to pay

penalty charge of 12% per annum.

SO ORDERED.1

Petitioners appealed to the Court of Appeals, raising the issues of:

(1) whether or not respondent bank has the right to recover any

deficiency after it has retained possession of and subsequently

effected a public auction sale of the goods covered by the trust

receipt; (2) whether or not respondent bank is entitled to the

amount of P3,000.00 as and for litigation expenses and costs of the

suit; and (3) whether or not respondent bank is entitled to the

award of attorney's fees.

On February 13, 2003, the Court of Appeals rendered a decision

affirming in toto the decision of the trial court.2

Hence, this petition for review on the following assignment of

errors:

I.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN

AFFIRMING THE TRIAL COURT'S RULING THAT RESPONDENT

HAD THE RIGHT TO CLAIM THE DEFICIENCY FROM

PETITIONERS NOTWITHSTANDING THE FACT THAT THEGOODS COVERED BY THE TRUST RECEIPT WERE FULLY

TURNED OVER TO RESPONDENT.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN

AFFIRMING THE TRIAL COURT'S PATENTLY ERRONEOUS

AWARD OF PRINCIPAL OBLIGATION, INTEREST, ATTORNEY'S

FEES, AND PENALTY AGAINST THE PETITIONERS.3

The instant petition is partly meritorious.

The resolution of the first assigned error hinges on the proper

interpretation of Section 7 of Presidential Decree No. 115, or the

Trust Receipts Law, which reads:

Sec. 7. Rights of the entruster. - 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 extent of the amount owing to the

entruster or as appears in the trust receipt, or to the return

of the goods, documents or instruments in case of non-sale,

and to the enforcement of all other rights conferred on himin the trust receipt provided such are not contrary to the

provisions of this Decree.

The entruster may cancel the trust and take possession of

the goods, documents or instruments subject of the trust or

of the proceeds realized therefrom 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 entruster and the entrustee, and the entruster

in possession of the goods, documents or instruments may,on or after default, give notice to the entrustee of the

intention to sell, and may, not less than five days after

serving or sending of such notice, sel l the goods, documents

or instruments at public or private sale, and the entruster

may, at a public sale, become a purchaser. The proceeds of

any such sale, whether public or private, 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,
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documents or instruments; (c) to the satisfaction of the

entrustee's indebtedness to the entruster. The entrustee

shall receive any surplus but shall be liable to the entruster

for any deficiency. Notice of sale shall be deemed

sufficiently given if in writing, and either personally served

on the entrustee or sent by post-paid ordinary mail to theentrustee's last known business address.

There is no question that petitioners failed to pay their outstanding

obligation to respondent bank. They contend, however, that when

the entrustee fails to settle his principal loan, the entruster may

choose between two separate and alternative remedies: (1) the

return of the goods covered by the trust receipt, in which case, the

entruster now acquires the ownership of the goods which the

entrustee failed to sell; or (2) cancel the trust and take possession of

the goods, for the purpose of selling the same at a private sale or atpublic auction. Petitioners assert that, under this second remedy,

the entruster does not acquire ownership of the goods, in which

case he is entitled to the deficiency. Petitioners argue that these

two remedies are so distinct that the availment of one necessarily

bars the availment of the other. Thus, when respondent bank

availed of the remedy of demanding the return of the goods, the

actual return of all the unsold goods completely extinguished

petitioners' liability.4

Petitioners' argument is bereft of merit.

A trust receipt is inextricably linked with the primary agreement

between the parties. Time and again, we have emphasized that a

trust receipt agreement is merely a collateral agreement, the

purpose of which is to serve as security for a loan. Thus, in Abad v.

Court of Appeals,5we ruled:

A letter of credit-trust receipt arrangement is endowed with

its own distinctive features and characteristics. Under that

set-up, a bank extends a loan covered by the letter of credit,

with the trust receipt as security for the loan. In other

words, the transaction involves a loan feature represented

by the letter of credit, and a security feature which is in thecovering trust receipt. x x x.

A trust receipt, therefore, is a security agreement, pursuant

to which a bank acquires a "security interest" in the goods.

It secures an indebtedness and there can be no such thing

as security interest that secures no obligation.6

The Trust Receipts Law was enacted to safeguard commercial

transactions and to offer an additional layer of security to the

lending bank. Trust receipts are indispensable contracts ininternational and domestic business transactions. The prevalent use

of trust receipts, the danger of their misuse and/or

misappropriation of the goods or proceeds realized from the sale of

goods, documents or instruments held in trust for entruster banks,

and the need for regulation of trust receipt transactions to

safeguard the rights and enforce the obligations of the parties

involved are the main thrusts of the Trust Receipts Law.7

The second paragraph of Section 7 provides a statutory remedy

available to an entruster in the event of default or failure of theentrustee to comply with any of the terms and conditions of the

trust receipt or any other agreement between the entruster and the

entrustee. More specifically, the entruster "may cancel the trust

and take possession of the goods, documents or instruments

subject of the trust or of the proceeds realized therefrom at any

time". The law further provides that "the entruster in possession of

the goods, documents or instruments may, on or after default, give

notice to the entrustee of the intention to sell, and may, not less
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rights of the mortgagor on the property and includes the

sale itself.

Neither can said repossession amount to dacion en pago.

Dation in payment takes place when property is alienated to

the creditor in satisfaction of a debt in money and the same

is governed by sales. Dation in payment is the delivery and

transmission of ownership of a thing by the debtor to the

creditor as an accepted equivalent of the performance of

the obligation. As aforesaid, the repossession of the

machinery and equipment in question was merely to secure

the payment of TCC's loan obligation and not for the

purpose of transferring ownership thereof to PNB in

satisfaction of said loan. Thus, no dacion en pagowas ever

accomplished. (Citations omitted, underscoring supplied)10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and

America,11we struck down the position of the petitioner-spouses

that their obligation to the entruster bank had been extinguished

when they relinquished possession of the goods in question. Thus:

A trust receipt is a security agreement, pursuant to which

a bank acquires a "security interest" in the goods. It secures

an indebtedness and there can be no such thing as security

interest that secures no obligation. As defined in our laws:

(h) Security Interest means a property interest in

goods, documents or instruments to secure

performance of some obligations of the entrustee

or of some third 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.

x x x x x x x x x

Contrary to the allegations of the VINTOLAS, IBAA did not

become the real owner of the goods. It was merely the

holder of a security title for the advances 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

convert the IBAA into an investor; the latter remained a

lender and creditor.

"x x x for the bank has previously extended a loan

which the L/C represents to the importer, and by

that loan, the importer should be the real owner of

the goods. If under the trust receipt, the bank is

made to appear as the owner, it was but an artificialexpedient, more of a legal fiction than fact, for if it

were so, it could dispose of the goods in any

manner it wants, which it cannot do, just to give

consistency with the purpose of the trust receipt of

giving 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 thereof. x x x"

Since the IBAA is not the factual owner of the goods, theVINTOLAS cannot justifiably claim that because they have

surrendered the goods to IBAA and subsequently deposited

them in the custody of the court, they are absolutely

relieved of their obligation to pay their loan because of their

inability to dispose of the goods. The fact that they were

unable to sell the seashells in question does not affect

IBAA's right to recover the advances it had made under the

Letter of Credit. (Citations omitted.)12
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Respondent bank's repossession of the properties and subsequent

sale of the goods were completely in accordance with its statutory

and contractual rights upon default of petitioner corporation.

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 entrustee's indebtedness to the entruster.

In the case at bar, the proceeds of the auction sale were insufficient

to satisfy entirely petitioner corporation's indebtedness to the

respondent bank. Respondent bank was thus well within its rights to

institute the instant case to collect the deficiency.

We find, however, that there has been an error in the computation

of the total amount of petitioners' indebtedness to respondent

bank.

Although respondent bank contends that the error of computation

is a question of fact which is beyond the power of this Court to

review,13the total amount of petitioners' indebtedness in this case

is not a question of fact. Rather, it is a question of law, i.e., the

application of legal principles for the computation of the amount

owed to respondent bank, and is thus a matter properly brought forour determination.

The first issue involves the amount of indebtedness prior to the

imposition of interest and penalty charges. The initial amount of the

trust receipt of P218,733.92, was reduced to P192,265.92 as of June

14, 1984, as per respondent's Statement of Past Due Trust Receipt

dated December 1, 1993.14This amount presumably includes the

application of P35,000.00, the amount of petitioner Lucente's Deed

of Assignment, which amount was applied by respondent bank to

petitioners' obligation. No showing was made, however, that the

P30,000.00 proceeds of the auction sale on July 31, 1985 was ever

applied to the loan. Neither was the amount of P50,414.00,

representing the marginal deposit made by petitioner corporation,

deducted from the loan. Although respondent bank contends thatthe marginal deposit should not be deducted from the principal

obligation, this is completely contrary to prevailing jurisprudence

allowing the deduction of the marginal deposit, thus:

The marginal deposit requirement is a Central Bank

measure to cut off excess currency liquidity which would

create inflationary pressure. It is a collateral security given

by the debtor, and is supposed to be returned to him upon

his compliance with his secured obligation. Consequently,

the bank pays no interest on the marginal deposit, unlike anordinary bank deposit which earns interest in the bank. As a

matter of fact, the marginal deposit requirement for letters

of credit has been discontinued, except in those cases

where the applicant for a letter of credit is not known to the

bank or does not maintain a good credit standing therein.

It is only fair then that the importer's marginal deposit (if

one was made, as in this case), should be set off against his

debt, for while the importer earns no interest on his

marginal deposit, the bank, apart from being able to usesaid deposit for its own purposes, also earns interest on the

money it loaned to the importer. It would be onerous to

compute interest and other charges on the face value of the

letter of credit which the bank issued, without first crediting

or setting off the marginal deposit which the importer paid

to the bank. Compensation is proper and should take place

by operation of law because the requisites in Article 1279 of

the Civil Code are present and should extinguish both debts
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to the concurrent amount (Art. 1290, Civil Code). Although

Abad is only a surety, he may set up compensation as

regards what the creditor owes the principal debtor,

TOMCO (Art. 1280, Civil Code).15

The net amount of the obl igation, represented by respondent bankto be P292,172.23 as of April 17, 1986, would thus be P211,758.23.

To this principal amount must be imposed the following charges: (1)

19% interest per annum, in keeping with the terms of the trust

receipt;16and (2) 12% penalty per annum, collected based on the

outstanding principal obligation plus unpaid interest, again in

keeping with the wording of the trust receipt.17

It appearing that

petitioners have paid the interest and penalty charges until April 17,

1986, the reckoning date for the computation of the foregoing

charges must be April 18, 1986.

A perusal of the records reveals that the trial court and the Court of

Appeals erred in imposing service charges upon the petitioners. No

such stipulation is found in the trust receipt. Moreover, the trial

court and the Court of Appeals erred in computing attorney's fees

equivalent to 10% per annum, rather than 10% of the total amount

due. There is no basis for compounding the interest annually, as the

trial court and Court of Appeals have done. This amount would be

unconscionable.

Finally, Lucente and Llaban's contention that they are not solidarily

liable with petitioner corporation is untenable. As co-signatories of

the Continuing Suretyship Agreement, they bound themselves, inter

alia, to pay the principal sum in the amount of not more than

P400,000.00; interest due on the principal obligation; attorney's

fees; and expenses that may be incurred in collecting the credit. The

amount owed to respondent bank is the amount of the principal,

interest, attorney's fees, and expenses in collecting the principal

amount. The Continuing Suretyship Agreement expressly states the

nature of the liability of Lucente and Llaban:

The liability of the SURETY shall be solidary, direct and

immediate and not contingent upon the bank's pursuit of

whatever remedies the BANK have [sic] against theBorrower or the securities or liens the BANK may possess

and the SURETY will at any time, whether due or not due,

pay to the BANK with or withour demand upon the

Borrower, any of the instruments of indebtedness or other

obligation hereby guaranteed by the SURETY.18

Solidary liability is one of the primary characteristics of a surety

contract,19and the Continuing Suretyship Agreement expressly

stipulates the solidary nature of Lucente and Llaban's liability. All

three petitioners thus share the solidary obligation in favor ofrespondent bank, which is given the right, under the Civil Code, to

proceed against any one of the solidary debtors or some or all of

them simultaneously.20

WHEREFORE, premises considered, the instant petition is PARTIALLY

GRANTED. The decision of the Court of Appeals in CA-G.R. CV No.

58193 dated February 13, 2003 is AFFIRMED with MODIFICATIONS.

Accordingly, petitioners are ordered to pay respondent bank the

following: (1) P211,758.23 representing petitioners' net obligation

as of April 17, 1986; (2) interest at the rate of 19%per annumandpenalty at the rate of 12%per annumreckoned from April 18, 1986;

(3) attorney's fees equivalent to 10% of the total amount due and

collectible; and (4) litigation expenses in the amount of P3,000.00.

The service charge at the rate of 2%per annumbeginning April 18,

1986 is deleted. Costs against petitioners.

SO ORDERED.Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and

Azcuna, JJ.,concur.
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