DBP v. Prudential Bank, 475 SCRA 623 (2005)

FACTS:

-In 1973 Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with Prudential Bank. This was in connection with its importation of 5,000 spindles for spinning machinery with frame etc. These were released to Litex under covering “trust receipts” it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal.   

-On Oct 10, 1980, DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the “trust receipts.” 

-In June 1982, When Prudential Bank learned about DBP’s plan for the overall rehabilitation of Litex, Prudential Bank notified DBP of its claim over the various items covered by the “trust receipts” which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP.

-For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank.

-Prudential Bank sent again a letter to DBP reasserting its claim over the items covered by “trust receipts” in its name and advising DBP not to include them in the auction. It also demanded the turn-over of the articles or alternatively, the payment of their value.

-There being no concrete action on DBP’s part, Prudential Bank, in a letter dated, made a final demand on DBP for the turn-over of the contested articles or the payment of their value. Without the knowledge of Prudential Bank, however, DBP sold the Litex textile mill, as well as the machineries and equipments therein, to Lyon Textile Mills, Inc. (Lyon)

 -Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money with damages against DBP.

TC and CA:

-In favor of Prudential Bank. Applying the provisions of PD 115 and held that the ownership over the contested articles belonged to Prudential Bank as entrustor, not to Litex. Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty bound to turn-over the proceeds to Prudential Bank being the party that advanced the payment for them.

HELD:-The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means.

 -Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.-Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale.

Landl Co vs.METROPOLITAN BANK & TRUST COMPANY. G.R. No. 159622 July 30, 2004

The possession by the bank of the goods under the trust receipts does not bar collection of the loan. Mere 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. 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.

Facts: Landl Co opened Commercial Letter of Credit No. 4998 with respondent bank, in the amount of US$19,606.77, which was 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 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.

 Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof. On 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. 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. After petitioners failed to do so, respondent bank instituted the instant case to collect the said deficiency.

Issue: Whether or not possession by the bank of the goods under the trust receipts does not bar collection of the loan. Held: The initial repossession by the bank of the goods subject of the trust receipt did not result in the full satisfaction of the petitioners’ loan obligation. Petitioners are apparently laboring under the mistaken impression that the full turn-over of the goods suffices to divest them of their obligation to repay the principal amount of their loan obligation. The entrustee’s possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC’s loan obligation. Mere 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. 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.

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, we 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 the covering 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 indebtedness and there can be no such thing as security interest that secures no obligation. 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 in international 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. 

Landl & Company v. Metropolitan Bank, 435 SCRA 639 (2004)

FACTS:

-Landl and Company is engaged in the business of selling imported welding rods and alloys.

-It opened a commercial letter of credit with MBTC for the purchase of various welding rods and electrons from PERMA ALLOYS Inc., New York, USA. Landl put up a marginal deposit of P50, 000.00 from the proceeds of a separate clean loan.

-As an additional security, and as a condition for the approval of the application, MBTC required Percival Llaban and Manuel Lucente to execute a continuing surety agreement. Lucente also executed a Deed of assignment in favor of MBTC to cover the amount of the corporation’s obligation to the bank. Upon compliance with these requisites, MBTC opened an irrevocable Letter of Credit for Landl.

-Trust Receipt was executed to secure indebtedness of Landl.

-Upon Maturity, Landl defaulted payment of its obligation or to return the goods to MBTC.

-The goods were sold at public auction to MBTC as the highest bidder.

-However, the proceeds of the auction sale were insufficient to completely satisfy the outstanding obligation of Landl notwithstanding the application of the time deposit account of its director Lucente.

-Accordingly, MBTC demanded that Landl pay the remaining balance of their obligation.

-Landl failed to do so.

-MBTC filed a complaint for sum of money against Landl and its directors for the amount of the deficiency.

TC and CA:

-Ordered Landl to pay the bank.

ISSUE:

-Whether or not in a trust receipt transaction, an entruster which had taken actual and juridical possession of the goods covered by trust receipt may subsequently avail of the right to demand from the entrustee the deficiency of the amount covered by the trust receipt.

HELD

- A trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a loan.

-In the event of default or failure of the entrustee to comply with the terms of the trust receipt agreement, the entruster may cancel the trust and take possession of the goods subject of the trust receipt and while in possession cause the sale of the goods after at least five (5) day notice to the entrustee, in a private or public sale. The entruster may at public sale become a purchaser. If the proceeds of the sale were insufficient to satisfy entirely entrustee’s indebtedness, the entruster is well within its rights to file an action to collect the deficiency.