Negotiable Instruments Law: Ch 12

CHAPTER 12 LETTERS OF CREDIT AND TRUST RECEIPTS I. Letters of credit Letter of credit engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. a. Through a letter of credit, the BANK merely substitutes its own promise to pay for the PROMISE to pay 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. LOC used in trade of goods Used for security for other types of obligations including those arising from loan agreements, contracts for the supply of services or construction of buildings and infrastructure. Commercial letters of credit used in the trade of goods

A. DEFINITION

b. c. d.

B. NATURE OF LETTERS OF CREDIT

Standby letters of credit secure the performance of some service or work. Issuer is committed to honor the credit upon evidence or a mere declaration of the customers default in the underlying transaction with the beneficiary. Evolved as mercantile specialty Entity unto itself Beneficiary and issuer of a letter of credit relationship is NOT strictly contractual, because privity and a meeting of the minds are lacking. Also not a third-party beneficiary contract BECAUSE: the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Banks customer cannot draw on the letter, it DOES NOT function as an assignment by the customer to the beneficiary. Also not a contract of suretyship or guarantee BECAUSE: it entails a primary liability following a default. NOT a negotiable instrument BECAUSE: it is not payable to order or bearer and is generally conditional. (BUT: the draft presented under it is often negotiable. COMMERCIAL TRANSACTIONS Letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with SALES OF GOODS. PURPOSE: to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer who wants to have control of the goods before paying. Use of credits in commercial transactions serves to reduce the risk of non-payment of the purchases price under the contract for the sale of goods. Used also in non-sale settings: where they serve to REDUCE THE RISK OF NONPERFORMANCE (known as: STANDBY CREDITS)

LETTER OF CREDIT v. GUARANTEE - Settlement of dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. - If drawable after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be NO PRACTICAL and BENEFICIAL use for letters of credit in commercial transactions. Like surety: bank will be liable under s STANDBY CREDIT, if there is default in the secured obligation. Standby letter of credit is diff from surety o Attractive commercial device o Inexpensive and efficient o Generate higher costs than credits do o Usually triggered by a factual decocts rather than by examination of documents o Surety and standby letter of credit share the common purpose (ENSURE AGAINST THE OBLIGORS NONPERFORMANCE.) o Functions are different. Surety contract o Upon obligors default he undertakes to complete the obligors nonperformance o Involve costs of determining whether the obligor defaulted plus cost of performance o Surety is often a strong financial institution (known by the beneficiary) o Performance takes time o No duty to indemnify the beneficiary until beneficiary established the fact of obligors performance o Litigation: surety holds the money and the beneficiary bears most of the cost of delay in performance Standby letter of credit o He reasonable expects that he will receive cash in the event of nonperformance o Receive promptly o Receive before any litigation with the obligor o Opposite effect of the surety contract o Reverses the financial burden of parties during litigation o Beneficiary AVOIDS the burden of litigation and receives money promptly o Applicant has performed his obligation and beneficiarys presentation of those documents is not 1

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o C. GOVERNING LAW Code of commerce on letters of credit not repealed by the new civil code Embodied in UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS Usually bank to bank transactions Facilitate distant and unfamiliar buyers and sellers Certain documents are presented: (a) bill of lading (b) drafts rightful Litigation: beneficiary holds the money

D. PARTIES

At least 3: (may be increased) a. Buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title b. The bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement c. Seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment d. * Advising or notifying bank convey the seller the existence of credit e. * Confirming bank which will lend credence to the letter of credit issued by the seller (issuing bank) f. * Paying bank which undertakes to encash the drafts drawn by the exporter. (discount) g. * Negotiating bank instead of going to the place of the issuing bank to claim payment, buyer may approach another bank to have the draft discounted.

a. Issuing bank

Issues the letter of credit obligating himself to pay the seller or accept any draft or bill that is drawn by the seller upon receipt of the tender of documents stipulated in the letter. 1. 2. 3. make payment to or the order of 3rd party (beneficiary) or to accept and pay the bills of exchange drawn by the beneficiary (drafts) authorize another bank to effect such payment or to accept draft authorize another bank to negotiate that the terms and conditions of the credit are complied with (negotiate: give value of the drafts, not mere examination of documents) i. Bill of lading ii. Insurance documents iii. Warehouse receipts iv. Delivery orders v. Consular invoices vi. Certificates of origin vii. Certificate of weight viii. Cert of quality, analysis

STANDARD OF EXAMINATION (UCP) 1. Banks must examine all documents with reasonable care if it complied with the terms and conditions in lieu of the international standard banking practices (Must appear consisted on their face) 2. Issuing bank, confirming bank or nominated bank shall have REASONABLE time (not to exceed 7 banking days following the day of receipt of documents) to determine whether to take up or refuse the documents and inform the part accordingly 3. If credit contain conditions without stating the documents to be presented banks will deem them as not stated and will disregard them. PAYMENT issuing bank may not be the paying bank Paying bank on which the drafts are to be drawn may be the opening bank and not in the city of the beneficiary or bank in the city of the beneficiary Pays and then debit the payment to the account which the opening bank has with it. Opening bank maintains no account with the paying bank Paying bank reimburses itself by drawing a BOE on the opening bank beneficiary entirely out of the transaction, because his draft is completely discharged NEGOTIATING BANK if the draft contemplated by the credit is to be drawn on the opening bank or another designated bank NOT IN THE CITY of the seller, any bank in the city of the seller which buys or discounts the draft of the beneficiary Becomes an endorser and bona fide holder Protected by drawers signature Continues until discharged by payment IF: notifying bank is used beneficiary is apt to offer his drafts to the notifying bank for negotiation b. MMCN SelfSeller = beneficiary 2

Negotiable Instruments Law: Ch 12

beneficiary Instrument is addressed to him and in his favor Written contract of the bank Bank cannot compel the beneficiary to ship and avail himself of the benefits of the instrument SELLER MAY: recover from the bank the value of the shipment if made within the terms of the instrument (even if he has not given the bank any direct consideration for the banks promises contained. Commission to be paid by the buyer to the bank is the consideration flowing from the seller to the bank

c. Buyer-Importer

d. Notifying or Advising bank

Seller after availing the LOC deliver the tender documents to the paying bank (issuing or confirming) b. Strict compliance with the terms of credit necessary c. If bank accepts if there was departure form the documents, such bank acts on its own risk and may thereafter not recover from the buyer or issuing bank d. RULE OF STRICT COMPLIANCE e. Unless he does so, he has not cause of action against the bank for refusing the honor this draft Who applies for and for whose benefit the issuing bank issued the LOC Independent contract bet buyer and issuing bank in the form of credit agreement Buyer obligates himself to reimburse the issuing bank when the latter complies with the terms of the letter. Correspondent bank of the issuing bank a. -

E. TRANSACTIONS INVOLVED

Assumes no liability except to notify to the beneficiary the existence of the LOC Relationship is similar to that of agency The bank that elects to advise the Credit shall take reasonable care to check the apparent authenticity of the credit which it advises Of notifying bank cannot establish such apparent authenticity of the credit must inform without delay the bank from which instructions appear to have been received e. Confirming Not only notifies the beneficiary but also assumes the direct obligation to the seller bank - Liability is primary; it is as if the confirming bank issued the LOC f. Negotiating Buys or discounts a draft under the LOC bank Liability of dependent upon the stage of the negotiation Before negotiation, it has no liability with respect to the seller. After negotiation contractual relationship the prevail May buy or refuse Owes no contractual duty toward the person whose benefit the letter is written to discount or purchase any draft drawn against the credit Receiving bank and beneficiary no relationship of agency or trustee Nature and security scheme: LOC financial device by merchants Conveniently safe mode of dealing with sales of goods Seller refuses to deliver; buyer refuses to pay Buyer contract a bank to issue LOC Issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by LOC Documents of title attesting to the shipment of the goods to the buyer Once credit is established seller ships the goods To get paid seller executed a DRAFT and presents it together with the documents to the ISSUING BANK Issuing bank redeems the draft and pays cash to the seller (if documents conform) Transaction completed when the buyer reimburses the issuing bank Seller gets paid only when he delivers the goods Buyer acquires the documents and control over the goods after reimbursing the bank INDEPENDENT CONTRACTS (3 independent contracts involved in a letter of credit) 1. Contract of sale (buyer and seller) 2. Contract of the buyer with the issuing bank bank agrees to issues the LOC in favor of the seller subj to reimbursement by the buyer 3. Letter of credit proper bank obligates to pay the seller to the order of the seller (it will honor the drafts drawn by the seller) after presentation to the bank TENDER DOCUMENTS stipulated which normally includes doc of title OTHER CONTRACTS If payment made through a confirming bank contract between confirming and issuing bank. 1. Confirming bank authorize to make payment after the securing of tender documents 2. Must transmit the documents to the issuing bank 3. Issuing bank has the obligation to reimburse the confirming bank 4. Contract between confirming bank and seller 5. Seller can compel the bank to pay upon presentation of tender of documents. MAINTAINED IN A STATE OF PERPETAUL SEPARATION Undertaking of the bank to pay, accept and pay drafts or fulfill obligation under CREDIT not subject to claims or defenses by the Applicant resulting from his relationship with the issuing bank or beneficiary. Beneficiary cannot avail of the contractual relationship existing between the banks or between the applicant 3

F. INEDEPENDENCE PRINCIPLE

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and the issuing bank. Contract of sale independent form LOC LOC independent from COS Violation of COS will not affect LOC obligation of the issuing bank to the seller so long as the tender of documents are delivered. LOC: constitutes a complete agreement and independent LOC unaffected by any breach on the part of the seller LOC independent from the contract between issuing bank and buyer (no bearing with the contract of issuing bank to the seller) LOC independent from contract of carriage Bank not expected to look beyond the documents presented to it by the seller also the carrier no t expected to look beyond the presentation of the shipper in the BILL OF LADING

What distinguishes LOC form accessory contracts assures seller prompt payment independent of any breach of the mains sales contract bank determines the LOC only by examining the shipping documents presented BANK ASSUMES NO LIABILITY FROM: sufficient, accuracy, genuineness or legal effect of any documents nor any responsibility for the description, quality, weight or condition of the goods. It is a paper transaction Determine only whether the bank is obliged to make payment or not Not go to the field and determine of the contract has been performed INDEPENDENT NATURE MAY BE: 1. Independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby 2. May also be as to the justification aspect, which is identical with the same obligations underlying agreement Banks deal with documents not to the properties to be exported or shipped important is the delivery of tender documents that conforms with the letters of credit requires make sure there is strict compliance with the terms and conditions if drawable only after the settlement of any dispute on the main contract then there would be no practical and beneficial use for letters of credit in commercial transactions. Issuing bank can invoke the independence rule Beneficiary can invoke the independence rule (otherwise, LOC would render nugatory) LOC for the benefit of the parties to the original transactions Beneficiary is rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through or applicant fails Fraud is an exception to the independence rule Exists when the beneficiary for the purpose of drawing credit, fraudulently presents to the confirming bank documents that contain material representations that to his knowledge are untrue. Untruthfulness of a certificate accompanying a demand for payment may qualify as fraud sufficient to support an injunction against payment UCP DOES NOT CONTAIN A FRAUD EXCEPTION However: stated in the Uniform Commercial Code in the US Reasonable balance between the interests of offering minimal protection to bank customers and of assuring reasonable certainty in the execution of international transactions. REQUIREMENTS FOR INJUNCTION: a. Clear proof of fraud b. Fraud constitutes fraudulent abuse of the independent purpose of LOC and not only fraud under the main agreement c. Irreparable injury might follow in injunction is not granted COURTS MAY ENJOIN PAYMENT a. Circumstances show that the contracts forbids the beneficiary to call a LOC b. Contract deprives the beneficiary of even a colorable right to call on a LOC c. Beneficiary demand for payment has absolutely no basis in fact d. Where the beneficiarys conduct has so vitiated the transaction that the legitimate purposes of the independence of the issuers obligation would no longer be served. PROTECTION OF INNOCENT PARTY Uniform Commercial Code Despite fraud or forgery, Code provides that: a. Issuer shall honor the presentation of honor is demanded by a (i) nominated person who has given value in good faith and without notice of such fraud (ii) confirmer who has honored its confirmation in good faith (iii) holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person (iv) assignee of the issuer, without notice MMCN 4

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b. Issuer acting in GF, may honor or dishonor the presentation in any other case G. KINDS OF LETTERS OF CREDIT a. CONFIRMED LC Whenever beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of a bank to himself Bank local to the beneficiary becomes the confirming bank Bankers Almanac and be confirmed by a well-known bank Confirming bank: primary liability, as if it was the one who issued the LOC IRREVOCABLE LC Definite undertaking on the part of the issuing bank and constitutes an engagement of that bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly filled, provided that all the terms and conditions of the credit are complied with. IRREVOCABLE: refers to the duration of the LOC (issuing bank may not without the consent of the beneficiary and applicant revoke his undertaking under the letter Issuing bank does not reserve the right to revoke OTHER KINDS 1. Revolving letter of credit provides for renewed credit to become available as soon as the opening bank has advised the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer (For series of shipments made over a period of time and total amount is greater than the amount the bank or the buyer is willing to have outstanding at any given time 2. Back to back letter of credit with identical documentary requirements and covering some merchandise EXCEPT: price of the merchandise as shown by the invoice. Second letter of credit can be negotiated only after the first is negotiated 3. Standby letter of credit security arrangement for the performance of certain obligations. Drawn only against only if another business transaction is not performed. Issued in lieu of a performance bond. 4. General letter of credit addressed to all or any persons, without naming any one in particular. Does not restrict the beneficiarys right to transfer his interest thereunder. IF : special addressed to a particular individual, limit to permissible transfer 5. Straight letter of credit does not run in favor of purchasers of drafts drawn thereunder 6. Fixed letter of credit exhausted when drafts for payment have been drawn by the beneficiary for the full amount of the credit or when the time or period for drawing upon the letter has expired 7. Sight letter of credit payable on demand; Time letter of credit payable within a certain period. Standby Credit Payable upon certification of partys nonperformance of the agreement Documents that accompany the beneficiarys draft tend to show that the applicant has not performed Present that obligor has not performed contract

b.

c.

Commercial Credit Involve the payment of money under COS Payable upon presentation by the seller of documents that comply with sales agreement Beneficiary must demonstrate by documents that he has performed his contract

II.

Trust receipts

A. BASIC CONCEPTS

The price of the goods will be ADVANCED by the issuing bank in favor of the buyer. Buyer will reimburse the issuing bank whatever amount that was paid to the seller Buyer may immediately pay the issuing bank when the issuing bank turns over the document of title covering the goods There can be an agreement: where money advanced by the bank will be paid by the buyer out of the proceeds of the sale of the goods Obligation of the buyer may be SECURED BY DIFF SECURITY arrangements (mortgage, suretyship, guaranty) Can also be secured by TRUST RECEIPTS o Governing Law: TRUST RECEIPTS LAW PD 115 5

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Banks become the ENTRUSTER of the goods while buyer is the ENTRUSTEE Goods will be released by the bank to the buyer by the DELIVERY OF THE DOCUMENT OF TITLE OR BILL OF LADING covering the goods o Buyer as entrustee obligated to SELL THE GOODS and APPLY THE PROCEEDS thereof to the payment of the loan extended. o Buyer will only get the balance of the proceeds of the sale after making such application. o BANK retains security interest over the goods o Buyer bears the loss after delivery o Buyer (ENTRUSTEE) may be liable for estafa if he fails to TURN-ONER the proceeds of the sale or docuemnts covered by trust receipt PRESIDENTIAL DECREE No. 115 January 29, 1973 PROVIDING FOR THE REGULATION OF TRUST RECEIPTS TRANSACTIONS WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their financing problems, had gained popular acceptance in international and domestic business practices, particularly in commercial banking transactions; WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions, especially the rights and obligations of the parties involved therein and the enforcement of the said rights in case of default or violation of the terms of the trust receipt agreement; WHEREAS, the recommendations contained in the report on the financial system which have been accepted, with certain modifications by the monetary authorities included, among others, the enactment of a law regulating the trust receipt transactions; NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social, economic, and political structure of our society, do hereby order and decree and make as part of the law of the land the following: Section 1. Short Title. This Decree shall be known as the Trust Receipts Law. Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a) (b) (c) to encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade; 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 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 punishable under Article Three hundred and fifteen of the Revised Penal Code. o o

B. THE STATUTE

Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires, the term (a) "Document" shall mean written or printed evidence of title to goods. (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. (d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof. (e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in this Decree. (f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable.

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(g) "Purchaser" means any person taking by purchase. (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. (i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation, business trust or other association, and two more persons having a joint or common interest. (j) "Trust Receipt" shall refer 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. (k) "Value" means any consideration sufficient to support a simple contract. 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 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, 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) (b) to sell the goods or procure their sale; or 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 to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

(c)

2. In the case of instruments, a) b) c) d) to sell or procure their sale or exchange; or to deliver them to a principal; or to effect the consummation of some transactions involving delivery to a depository or register; or 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 interest as 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. Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must substantially contain (1) (2) (3) a description of the goods, documents or instruments subject of the trust receipt; the total invoice value of the goods and the amount of the draft to be paid by the entrustee; 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 to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs. Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in the Philippine MMCN 7

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currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate 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 on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee. Section 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 him in 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, sell 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) (b) (c) to the payment of the expenses thereof; to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; 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 the entrustee's last known business address.

Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Section 9. Obligations of the entrustee. The entrustee shall (1) (2) (3) (4) (5) (6) 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; receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; insure the goods for their total value against loss from fire, theft, pilferage or other casualties; keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are 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. Section 11. Rights of purchaser for value and in good faith. 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 from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest. Section 12. Validity of entruster's security interest as against creditors. 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. Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. MMCN 8

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Section 14. Cases not covered by this Decree. Cases not provided for in this Decree shall be governed by the applicable provisions of existing laws. Section 15. Separability clause. If any provision or section of this Decree or the application thereof to any person or circumstance is held invalid, the other provisions or sections hereof and the application of such provisions or sections to other persons or circumstances shall not be affected thereby. Section 16. Repealing clause. All Acts inconsistent with this Decree are hereby repealed. Section 17. This Decree shall take effect immediately. 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 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, 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 . For other purposes substantially equivalent to any of the following: 1. In the case of goods or documents, (a) (b) to sell the goods or procure their sale; or 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 to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

C. TRUST RECEIPT TRANSACTIONS DEFINED

(c)

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

NOT APPLICABLE TO SALE TR involve importation of goods Security of the bank in LC transactions They cannot secure contracts to sell or any other contract where the ownership of the goods retain by the seller.

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 interest as 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. D. RATIONALE Enacted to a. SAFEGUARD commercial transactions b. Offer an additional layer of security to the lending bank Indispensable contracts in international land and domestic business Danger of misuse and/or misappropriation of the goods or proceeds realized Need for regulation of trust receipt to safeguard the rights Entrustee has the possession of goods, documents or instruments under trust receipt transactions and any successor in interest of such person for the purpose of payment specified in the TRA. Section 9. Obligations of the entrustee. The entrustee shall (1) MMCN hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in 9

E. THE PARTIES

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(2) (3) (4) (5) (6) accordance with the terms and conditions of the trust receipt; receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; insure the goods for their total value against loss from fire, theft, pilferage or other casualties; keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

ENTRUSTER SHALL BE ENTITLED TO THE FF: 1. 2. 3. F. PURPOSE OF ACQUISITION OF GOODS Proceeds of the sale of goods, documents or isntruments released under a trust receipt (extent of the amount owing to the entruster or as appears in the trust receipt.) Return of the goods, documents or instruments in case of non-sale Enforcement of all other rights conferred on him in the trust receipt.

Usually the goods are meant for sale or disposition Release is for the purpose of the sale or is necessarily connected with their ultimate or subsequent sale

UPON RELEASE TO THE ENTRUSTEE, ENTRUSTEE HAS 2-FOLD OBLIGATION: 1. hold the goods, documents, instruments for the purpose of selling 2. turn over the proceeds to the entrusted in accordance with the terms and conditions RELEASED: 1. immediate sale or 2. subsequent sale or 3. to the ff: (a) sale of procurement of their sale (b) manufacture or processing with the purpose of ultimate sale, entruster retains title until entrustee complies (c) loading and unloading, shipment or transshipment or otherwise dealing with them in a manner prescribed or necessary to their sale G. NATURE ENTRUSTERS OVER THE GOODS OF RIGHT 2 VIEWS: I. OWNERSHIP NOT ACQUIRED BY ENTRUSTER Entruster-bank does not acquire real ownership over the subject goods Mere security interest is acquired "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. TR linked to the primary agreement bet the parties Collateral agreement Prupsoe: security for a loan Loan feature represented by LOC, TR as security for the loan Secures an indebtedness and there can be no such thing as security interest that secures no obligation TR serves as security, cannot be deemed that the entruster is the owner of the goods Aid importers who do not have sufficient funds or resources to finance the importation To consider the bank as the true owner would be to DISREGARD the loan feature thereof. Non-payment of the amount covered by a trust receipt is an act violative of the entrustees obligation to pay. Trust receipt evidences the absolute title or security interest of the entruster over the goods.

II. ENTRUSTER OWNS THE GOODS Entrustee cannot mortgage the properties that are covered by trust receipts because ownership was retained by the bank. o No one can transfer a right to another greater than what he himself has. Entrustee did not have free disposal of the subject goods because its right to dispose was limited by the contract.

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OBSERVATIONS Absolute ownership NOT retained by the entruster Banks merely financed the needs of its customer and trust receipts only signed for purposes of securing the loan Rights of entrustee has all the earmarks of ownership though subject to limitation imposed by law 1. Entrustee sells the goods in his own personal capacity not as an agent 2. Entruster shall NOT be responsible as vendor under any sale or contract to sell 10

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3. 4. 5. H. REMEDIES ENTRUSTEE OF Entruster shall sell the goods when entruster takes possession after cancelling the trust agreement to answer for the obligation Public ale, entrustee shall be entitled to the surplus of the price paid after deducting the amount owing to the entruster and The risk of loss shall be borne by the entrustee consistent with the principle RES PERIT DOMINO.

Trust receipt limitation to ownership Violation entrustee may be punished

Section 7. Rights of the entruster. The entruster shall be (a) 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 (b) return of the goods, documents or instruments in case of non-sale, and to the (b=c) enforcement of all other rights conferred on him in 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, sell 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) (b) (c) to the payment of the expenses thereof; to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; 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 the entrustee's last known business address. Specific performance is available to entruster Can file action to compel entrustee to pay his obligation to pay the loan Basis: contract of loan (independent from trust receipt) If sold: demand delivery of the proceeds Full turn-over of the goods does not satisfy his obligation to repay the principal amount of his loan obligation It is not dacion en pago (delivery and transmission of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation) Obligation NOT extinguished even if they relinquish the possession of the goods to the bank. Bank did not become INVESTOR under the TRA. Bank remained as lender and creditor

I. PENALTY CLAUSE

Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. RATIONALE: such officers are vested with the authority and responsibility to devise the means necessary to ensure compliance with the law NOT A DEFENSE: that they are not in physical possession Cannot hide under the cloak of separate personality of the corporation; where he is actual, present and efficient actor. If there is novation criminal liability is also extinguished Which substituted the existing TRA CANNOT STAND TOGETHER Novated for example by Memorandum of agreement that converted the agreement into an ordinary contract of loan criminal liab of officers are extinguished Converted to civil malum prohibitum (estafa)

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estafa with abuse of confidence Art. 315. Swindling (estafa). Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: 1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such cases, and in connection with the accessory penalties which may be imposed under the provisions of this Code, the penalty shall be termed prision mayor or 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 maximum period, if such amount does not exceed 200 pesos, provided that in the four cases mentioned

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