case digest from feati to pilipinas bank

7/28/2019 Case Digest From Feati to Pilipinas Bank

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COMMERCIAL LAW REVIEWCASE DIGESTS

FROM CODE OF COMMERCE TO TRUST RECEIPTS

A. LETTERS OF CREDIT

The Rule of Strict Compliance

Feati Bank and Trust Co., (now Citytrust Banking Corp), Petitioner, vs.The Court of Appeals and Bernardo Villaluz, Respondents.GR NO. 94209 April 30, 1991 Gutierrez, Jr., J.:

Facts:Respondent Bernardo Villaluz agreed to sell to the Axel Christiansen 2,000 cu.m. of lauan logs. On thearrangements made and upon instructions of the consignee, Hanmi Trade Devt., in the US, the SecurityPacific National Bank of L.A., California, issued an irrevocable letter of credit in favor of Villaluz for thetotal purchase price of the logs. The letter of credit was mailed to petitioner Feati Bank with theinstruction to the latter that it forward the enclosed letter of credit to the beneficiary. Under the letterof credit, one of the stipulations therein provided, was that Christiansen shall issue a certification thatthe logs have approved prior to shipment in accordance with the terms and conditions of thecorresponding purchase order. The logs were thereafter loaded to a vessel. However, Christiansenrefused to issue the certification as required in the letter of credit despite several requests made byVillaluz. Because of the absence of the certification by Christiansen, Feati Bank refused to advance thepayment on the letter of credit. This prompted Villaluz to file an action for mandamus and specificperformance against Christiansen and Feati Bank. However, while the case was pending Christiansenleft the country and as such Villaluz made Feati Bank solidarily liable with Christiansen. The trial courtruled in favor of Villaluz and was affirmed by CA on appeal. Hence, this present petition for review.

Issue:Whether or not a correspondent bank is to be held liable under the letter of credit despite the non-compliance by the beneficiary with the terms thereof.

Held:No. The petition is impressed with merit.

It is settled rule in commercial transactions involving letters of credit that the documents tendered must

strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller)must include all documents required by the letter of credit. A correspondent bank which departs fromwhat has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its ownrisks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case maybe, the money thus paid to the beneficiary. Thus, the rule of strict compliance.

The bank may only negotiate, accept or pay, if the documents tendered on it are on their face inaccordance with the terms and conditions of the documentary credit. And since a correspondent bank,like the petitioner, principally deals only with documents, the absence of any document require in thedocumentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay thebeneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on thecompleteness of the documents tendered by the beneficiary.


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Opening of a letter of credit in favor of a vendor= is only a mode of payment,= but it is not among the essential requirements of a contract of sale enumerated in Arts. 1305and 1475 of the Civil Code

= that is, consent, object or subject matter, and cause or consideration

= and therefore, the non-opening of the letter of credit does not prevent the perfection of thecontract of sale between the parties (when not specifically provided as suspensive condition)

Johannes Schuback & Sons Phil. Trading Corp., petitioner, vs.Hon. Court of Appeals, Ramon San Jose (Philippine SJ Industrial Trading), respondents.GR No. 105387 November 11, 1993 Romero, J.;

Facts:Sometime in 1981, respondent Ramon San Jose, submitted to Schuback Philippines a list of MAN busspare parts he wanted to purchase from its counterpart in the Hamburg, Germany. San Jose informedSchuback that he preferred genuine parts and requested a discount thereon. Schuback submitted itsformal offer. San Jose immediately ordered the items from Schuback Hamburg, which thereafterordered the same from a supplier in Germany. Thereafter, Shcuback Hamburg sent San Jose aproforma invoice to used by the latter in applying for letter of credit. Said invoice required that theletter of credit be opened in favor of Schuback Hamburg. But for some reason or another, San Josefailed to open the letter of credit in favor of Schuback Hamburg. For several times, Schuback remindedSan Jose of his order and demanded payment from him. However, San Jose replied that there was nodefinite contract between him and Schuback. This prompted Schuback to file a complaint against San

Jose for recovery of actual and compensatory damages. The trial court ruled in favor of Schuback butwas eventually reversed on appeal since there was no perfection of the contract. Hence, this presentfor review on certiorari.

Issue:Whether or not a contract of sale has been perfected betw een the parties despite the non-opening of aletter of credit by private respondent.

Held:

Yes. The situation reveals that San Jose failed to open an irrevocable letter of credit without recourse infavor of Johannes Schuback of Hamburg, Germany. This omission, however, does not prevent theperfection of the contract between the parties, for the opening of the letter of credit is not deemed tobe a suspensive condition. The facts herein do not show that Schuback reserved title to the goods untilprivate respondent had opened a letter of credit. Schuback, in the course of its dealings with privaterespondent, did not incorporate any provision declaring their contract of sale without effect until afterthe fulfillment of the act of opening a letter of credit.

The opening of a letter of credit in favor of a vendor is only a mode of payment. It is not among theessential requirements of a contract of sale enumerated in Art. 1305 and 1474 of the Civil Code, theabsence of any of which will prevent the perfection of the contract from taking place.


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Letters of Credit; Presentment of Draft drawn against the letter of credit.

Prudential Bank, petitioner, vs.IAC, Philippine Rayon Mills,Inc., and Anacleto Chi, respondents.GR No. 74886 December 8, 1992 Davide, Jr., J.:

Facts:Respondent Philippine Rayon Mills Inc., (PRMI) entered into a contract with Nissho Co., of Japan for theimportation of textile machineries under a five-year deferred payment plan. To effect the payment ofsaid machineries, PRMI applied for a commercial letter of credit with the petitioner Prudential Bank infavor of the Nissho and by of which Prudential open the letter of credit. Against this letter of credit, 12drafts were drawn and issued by Nissho which were all paid by Prudential Bank through itscorrespondent bank in Japan. Two of these drafts were accepted by PRMI through its president,Anacleto Chi. The machineries eventually arrived and Prudential Bank immediately indorsed theshipping documents to PRMI. However, before the latter could take the delivery of the machineries, itexecuted a trust receipt in favor of Prudential Bank which was signed by Anacleto Chi.

Unfortunately, several years later, PRMI ceased its business operation and its factory waseventually sold to AIV Corporation. At this point, the obligation of PRMI arising from the letter of creditand trust receipt remained unpaid and unliquidated. Formal demands were made by Prudental Bank,yet it yielded no result. Hence, Prudential filed an action for collection of the principal amount of theobligation. The trial court, and on appeal, the IAC ruled that Philippine Rayon could only be held liablefor the two drafts because only these appear to have been accepted by the latter after presentment.

The liability for the remaining ten drafts did not arise because the same were not presented foracceptance. Hence, this present petition for review.

Issue:Whether or not presentment for acceptance of the drafts drawn against the letter of credit wasindispensible to make Philippine Rayon liable thereon.

Held:No. Through a letter of credit, the bank merely substitutes its own promise to pay for one of itscustomers who in return promises to pay the bank the amount of funds mentioned in the letter of creditplus commitment fees mutually agreed upon. In the instant case then, the drawee was the petitioner

Prudential bank. It was to the latter that the drafts were presented for payment. In fact, there was noneed for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary onlyin the cases expressly provided for in Section 143 of the NIL.* The Court further ruled, that even if thedrafts were not sight drafts, thereby necessitating acceptance, it would be Prudential Bank - and notPhilippine Rayon which had to accept the same for the latter was not the drawee. Therefore, the trialcourt and the appellate court erred in ruling that presentment for acceptance was an indispensablerequisite for Philippine Rayons liability on the drafts to attach. Contrary to both courtspronouncements, Philippine Rayon immediately became liable thereon upon Prudential Banks paymentthereof. Such is the essence of the letter of credit issued by the petitioner Prudential Bank.

* Section 143, NIL

Presentment for acceptance must be made:a. where the bill is payable after sight, or in any other case, where presentment for acceptance isnecessary in order to fix the maturity of the instrument; or

b. where the bill expressly stipulates that it shall be presented for acceptance; or

c. where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment is necessary in order to render any party to the bill liable.


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Fraud as an exception to Independence Principle

Transfield Philippines, Inc., petitioner, vs.Luzon Hydro Corporation, etal., respondents.GR No. 146717 November 22, 2004 Tinga, J.:

Facts:Petitioner Transfield Phil., Inc., (TPI) and respondent Luzon Hydro Corp., (LHC) entered into a TrunkeyContract whereby TPI undertook to construct on a turnkey basis a hydro electric power plant station inthe provinces of Benguet and Ilocos Sur. The contract provides for a period for which the project is tobe completed and also allows for the extension of the period provided that the extension is based on

justifiable grounds such as fortuitous event. To secure the performance of TPIs obligation on or beforethe target completion date, TPI opened in favor the LHC

Two standby letters of credit. During the construction of the hydro power plant, TPI sought variousextensions of time to complete the project due to fortuitous events brought about by typhoon. LHCdenied the requests and was eventually referred to the arbitration committee.

In the meanwhile, foreseeing the LHC would call on the standby letters of credit, it advised the issuingbanks not to release any funds in favor of LHC because there is a pending arbitration proceeding ontheir request for extension of time. LHC did serve a notice that it would call on the standby letters ofcredit for the payment of liquidated damages for the delay. Despite TPIs advise, the issuing banksinformed TPI that they would pay on the standby letters of credit. This prompted TPI to file a complaintfor injunction with a prayer for TRO against LHC and the issuing banks.However, the trial court denied TPIs application for a writ of preliminary injunction. On appeal, thedenial was appealed. In this present petition, TPI invoked the fraud exception principle. It avers thatLHCs call on the standby letters of credit is wrongful because it fraudulently misrepresented the twoissuing banks that there is already a breach in the Turnkey Contract knowing fully well that this is yet tobe determined by the arbitral tribunals. On the other hand LHC and the respondent banks invokeindependence rule.

Issue:Whether or not LHC deliberately misrepresented the supposed existence of delay despite its knowledgethat the issue was still pending arbitration, hence the case falls squarely within the fraud exception

rule.

Held:No. It is recognized that fraud is an exception to the independence of contracts involving letters ofcredit. Fraud exception exists when the beneficiary, for the purpose of drawing on the credit,fraudulently presents to the confirming bank, documents that contain, express or by implication,material representations of fact that to his knowledge are untrue. In this situation, demand for paymentunder a standby credit may qualify as fraud sufficient to support an injunction against payment.

However, the Court held and agreed with the finding of the lower court that the fraud exception ruledoes not apply in this case. The pendency of the arbitration proceedings would not per se make LHCsdraws on the Securities wrongful of fraudulent for there was nothing in the Contract which wouldindicate that the parties intended that all disputes regarding delay should first be settled through

arbitration before LHC would be allowed to call upon the Securities. It is therefore premature andabsurd to conclude that the draws on the Securities were outright fraudulent given the fact thearbitration committee had not ruled with finality on the existence of default. The Court reiterates thatpursuant to the independence principle the banks were under no obligation to determine the veracity ofthe LHCs certification that default has occurred. Neither were they bound by TPIs declaration thatLHCs call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once therequired documents are presented by the beneficiary.


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TRUST RECEIPTS

Landl & Company (Phil.) Inc., etal., petitioners, vs.

Metropolitan Bank & Trust Company, respondent.

GR No. 159622 July 30, 2004 Ynare-Santiago, J.:

Facts:

Petitioner Landl & Co. is a corporation engaged in the business of selling imported welding rods and

alloys. It opened a letter of credit with respondent Metrobank to purchase various welding rods and

electrodes from the US. Landl put up a marginal deposit from the proceeds of a separate loan. To

ensure the indebtedness of Landl, Metrobank required the execution of a Trust Receipt in an amount

equivalent to the letter of credit on the condition the Landl 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, Landl had the further obligation to return them to

Metrobank. Petitioner corporation defaulted in the payment of its obligation and failed to turn over the

goods to the latter. In compliance with Metrobanks demand, petitioner, as entrustee, turned over the

goods subject of the trust receipt to Metrobank. The goods were eventually sold at a public auction and

the goods were sold to Metrobank as the highest bidder. However, the proceeds of the auction sale

were insufficient to completely satisfy petitioners outstanding obligation. Accordingly, Metrobank

demanded that petitioner pay the remaining balance of their obligation. Since petitioner still failed to

do, Metrobank instituted an action to collect said deficiency. The lower court rendered judgment in

favor of Metrobank and was affirmed by the CA on appeal. Hence, this instant case.

Issue:

Whether or not, in a trust receipt transaction, an entruster which had taken actual and juridicalpossession 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:

Yes. A trust receipt is inextricably linked with the primary agreement between the parties. Time and

again, it has been emphasized that a trust receipt agreement is merely a collateral agreement, the

purpose of which is to serve as a security for a loan. 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

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 re-taking, keeping and storing the goods, and the satisfaction of the entrustees

indebtedness to the entruster. In the case at bar, the proceeds of the auction sale were insufficient to

satisfy entirely petitioner corporations indebtedness to the respondent bank. Respondent bank was

thus well within its rights to institute the instant case to collect the deficiency.


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Development Bank of the Philippines, petitioner, vs.Prudential Bank, respondent.

GR No. 143772 November 22, 2005 Corona, J.:

Facts:

In connection with its importation of spindles including parts and accessories for spinning machinery,

Lirag Textile Mills, Inc., (Litex) opened an irrevocable commercial letter of credit with respondent

Prudential Bank. These goods were release to Litex under covering trust receipts it executed in favor of

Prudential. The items were installed and used by Litex in its textile mill. Several years later, DBP

granted a foreign currency loan to Litex. To secure the loan, Litex executed a real estate and chattel

mortgage on its plant site, including buildings and other improvements, machineries and equipment

there. Among the machineries and equipment mortgaged in favor of DBP were the article covered by

the trust receipts. Prudential notified DBP of its claim over the various items covered by the trust

receipts. For failure of Litex to pay its obligations, DBP extrajudicially foreclosed on the real and chattel

mortgages including the articles claimed by Prudential Bank. During the foreclosure sale, DBP acquired

the foreclosed properties. However, despite the claim of Prudential Bank over the items covered by the

trust receipts and not to include them in the auction and to turn over the articles to it or pay for their

value, DBP proceeded with the public auction. Eventually, without the knowledge of Prudential Bank,

DBP sold Litex as well as the machineries and equipment therein, to Lyon Textile Mills. This prompted

Prudential Bank to file a complaint for a sum of money with damages against DBP. Judgment was

rendered against DBP.

Issue:

Whether or not the contract of mortgage entered into by Litex and DBP, the subject of which includesthe items covered by the trust receipts, is valid.

Held:

No. The article were owned by Prudential Bank and they were held in trust by Litex. 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 conduct 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 article. 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. Thus, DBP could not be

considered either as a mortgagee or as a purchaser in good faith. No one can transfer a right to

another greater than what he himself has. Corollarily, DBP could not acquire a right greater than what

its predecessor in interest had. DBP merely stepped into the shoes of Lites as trustee of the imported

articles with an obligation to pay their value or to return them on Prudential Banks demand. By failure

to pay or return them despite Prudential Banks repeated demands, and by selling them to Lyon without

Prudential Banks knowledge and conformity, DBO became a trustee ex maleficio.


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Alfredo Ching, petitioner, vs.

The Secretary of Justice, etal., respondents.

GR No. 164317 February 6, 2006 Callejo, Jr., J.:

Facts:

Petitioner Alfredo Ching was the SVP of Philippine Blooming Mills, Inc., (PBMI). PBMI through Ching,

applied with respondent RCBC for the issuance of commercial letters of credit to finance the importation

of assorted goods. RCBC approved the application and issued an irrevocable letters of credit in favor of

Alfredo Ching. The goods were purchased and delivered in trust to PBMI. Ching signed 13 trust receipts


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Melvin Colinares and Lordino Veloso, petitioners, vs.

Hon. Court of Appeals, and the People of the Philippines, respondents.

GR No. 90828 September 5, 2000 Davide, Jr., C.J.:

Facts:

Petitioners Melvin Colinares and Lordino Veloso were contracted for a consideration by the Carmelite

Sisters to renovate the latters convent. On October 30, 1979, petitioners obtained from CM Builders

various construction materials for the construction project. The following day, petitioners applied for a

commercial letter of credit with Philippine Banking Corporation (PBC) in favor of CM Builders to cover

the full invoice value of the goods. Petitioners likewise signed a trust receipt as security. Because of

petitioners failure to pay their obligation, PBC demanded payment from them. Instead of complying

with PBCs demand, petitioner Veloso confessed that they incurred losses in the construction projectand proposed that the terms of payment of the loan be modified. Pending approval thereof, petitioners

made several partial payments of the loan. However, petitioners were charged with violation of Trust

Receipts Law (PD 115) in relation to Art. 315 of the RPC in an information filed with RTC-CDO. Despite

of their insistence that the transaction was a clean loan, they were convicted of estafa for violating PD

115. On appeal, the CA affirmed the decision of the trial court but increased the penalty imposed upon

the petitioners. Hence, the instant case.

Issue:

Whether or not the contract between the petitioners and PBC is a trust receipt agreement under the

Trust Receipt Law.

Held:

No. There are two situations in a trust receipt transaction. The first is covered by the provision which

refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner

of the merchandise sold. The second is covered by the provision which refers to merchandise received

under the obligation to return it (devolvera) to the owner. Failure of the entrustee to turn over the

proceeds of the sale of goods, covered by the trust receipt to the entruster or to return said goods if

they were not disposed of in accordance with the terms of the trust receipt shall punishable as estafa

under Art. 315(1) of the RPC, without need of proving intent to defraud. A thorough examination of the

facts obtaining in the case at bar reveals that the transaction intended by the parties was simple loan,

not a trust receipt agreement.


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Petitioners received the merchandise from CM Builders on October 30, 1979. On that day ownership

over the merchandise was already transferred to petitioners who were to use the materials for their

construction project. It was only a day later that they went to the bank to apply for a loan to pay for the

merchandise. This situation belies what normally obtains in a pure trust receipt transaction were goods

are owned by the bank and only released to the importer in trust subsequent to the grant of the loan.

In this case, petitioners are not importers acquiring goods for re-sale, contrary to the express provision

embodied in the trust receipt. They are contractors who obtained the fungible goods for their

construction project. At no time did the title over the construction materials pass to the bank, but

directly to the petitioners from CM Builders. This impresses upon the trust receipt in questionvagueness and ambiguity, which should not be the basis for criminal prosecution in the event of

violation of its provisions.


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Pilipinas Bank, petitioner, vs.

Alfredo T. Ong and Leoncia Lim, respondents.

GR No. 133176 August 8, 2002 Sandoval-Gutierrez, J.:

Facts:In 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent Alfredo Ong, applied

for a letter of domestic letter of credit with petitioner Pilipinas Bank (the Bank) to finance the purchase

of air dried, dark red lauan sawn lumber. The Bank approved the application and accordingly issued

the letter of credit. To secure the payment of the amount of the letter of credit, BMC, through Mr. Ong,

executed 2 trust receipts providing that the proceeds of the goods shall be turned over to the bank, if

sold, or return the goods, if unsold upon maturity of the trust receipts.

However, BMC failed to comply with the trusts receipt agreement. Later on, BMC filed with the SEC a

Petition for Rehabilitation and Suspension of Payments. BMC informed its creditors including the Bank

of the filing of the petition and consequently a creditors meeting was held. Thereafter, BMC and a

consortium of 14 of its creditor banks entered into a MOA rescheduling the payment of BMCs existing

debts. Neverthless, BMC and respondent Ong defaulted the payment of their obligations under the

rescheduled payment scheme. Thus, the Bank filed with the Makati Prosecutors Office a complaint

charging the respondents with violation of Trust Receipts Law for having failed to pay their obligations

under the trust receipts. The complaint was, however, dismissed. The Bank appealed and the

resolution of the prosecution dismissing the complaint was set aside. However, the decision of the CA

was reconsidered upon motion of the respondents holding that the execution of the MOA constitutes

novation and bars the petitioner bank to file any criminal information for violation of the Trust Receipt

Law.

Issue:

Did the MOA entered into by the respondent and the Bank novate the trust agreement between the

parties.

Held:

Yes. There are two ways which could indicate the presence of novation thereby producing the effect of

extinguishing an obligation by another which substitute the same. The first is when novation has been

stated and declared unequivocal. The seconds is when the old and the new obligations are

incompatible on every point. The test of incompatibility is whether or not the two obligations can stand

together. If they cannot, they are incompatible and the latter obligation novates the first. The

incompatibility must take place in any of the essential elements of the obligation, such as its object,

cause or principal conditions. In the case at bar, the MOA did not only reschedule BMCs debts, but

more importantly, it provided principal obligations which are incompatible with the trust receipt

agreement and it can be safely concluded that the MOA novated and effectively extinguished BMCs

obligations under the trust receipt. Such is the case, the BMCs liability if any, would only be civil in

nature since the trust receipts were transformed into mere loan documents after the execution of the

MOA.

case digest from feati to pilipinas bank

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