comlaw cases [lc, wr, tr]

SPECIAL SECOND DIVISION

[G.R. NO. 146717 : May 19, 2006]

TRANSFIELD PHILIPPINES, INC., Petitioner, v. LUZON HYDRO CORPORATION, AUSTRALIA AND NEW ZEALAND BANKING

GROUP LIMITED and SECURITY BANK CORPORATION, Respondents.

R E S O L U T I O N

TINGA, J.:

The adjudication of this case proved to be a two-stage process as its constituent parts involve two segregate but equally important issues. The first stage relating to the merits of the case, specifically the question of the propriety of calling on the securities during the pendency of the arbitral proceedings, was resolved in favor of Luzon Hydro Corporation (LHC) with the Court's Decision1 of 22 November 2004. The second stage involving the issue of forum-shopping on which the Court required the parties to submit their respective memoranda2 is disposed of in this Resolution.

The disposal of the forum-shopping charge is crucial to the parties to this case on account of its profound effect on the final outcome of the international arbitral proceedings which they have chosen as their principal dispute resolution mechanism.3

LHC claims that Transfield Philippines, Inc. (TPI) is guilty of forum-shopping when it filed the following suits:

1. Civil Case No. 04-332 filed on 19 March 2004, pending before the Regional Trial Court (RTC) of Makati, Branch 56 for confirmation, recognition and enforcement of the Third Partial Award in case 11264 TE/MW, ICC International Court of Arbitration, entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation.4

2. ICC Case No. 11264/TE/MW, Transfield Philippines, Inc. v. Luzon Hydro Corporation filed before the International Court of Arbitration, International Chamber of Commerce (ICC) a request for

arbitration dated 3 November 2000 pursuant to the Turnkey Contract between LHC and TPI;

3. G.R. No. 146717, Transfield Philippines, Inc. v. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corp. filed on 5 February 2001, which was an appeal bycertiorari with prayer for TRO/preliminary prohibitory and mandatory injunction, of the Court of Appeals Decision dated 31 January 2001 in CA-G.R. SP No. 61901.

A. CA-G.R. SP No. 61901 was a Petition for Review of the Decision in Civil Case No. 00-1312, wherein TPI claimed that LHC's call on the securities was premature considering that the issue of default has not yet been resolved with finality; the petition was however denied by the Court of Appeals;

b. Civil Case No. 00-1312 was a complaint for injunction with prayer for temporary restraining order and/or writ of preliminary injunction dated 5 November 2000, which sought to restrain LHC from calling on the securities and respondent banks from transferring or paying of the securities; the complaint was denied by the RTC.

On the other hand, TPI claims that it is LHC which is guilty of forum-shopping when it raised the issue of forum-shopping not only in this case, but also in Civil Case No. 04-332, and even asked for the dismissal of the other case based on this ground. Moreover, TPI argues that LHC is relitigating in Civil Case No. 04-332 the very same causes of action in ICC Case No. 11264/TE/MW, and even manifesting therein that it will present evidence earlier presented before the arbitral tribunal.5

Meanwhile, ANZ Bank and Security Bank moved to be excused from filing a memorandum. They claim that with the finality of the Court's Decision dated 22 November 2004, any resolution by the Court on the issue of forum-shopping will not materially affect their role as the banking entities involved are concerned.6 The Court granted their respective motions.

On 1 August 2005, TPI moved to set the case for oral argument, positing that the resolution of the Court on the issue of forum-shopping may have significant implications on the interpretation of

1 LOMONGO, BASTIAN MIGUEL Y.

the Alternative Dispute Resolution Act of 2004, as well as the viability of international commercial arbitration as an alternative mode of dispute resolution in the country.7 Said motion was opposed by LHC in its opposition filed on 2 September 2005, with LHC arguing that the respective memoranda of the parties are sufficient for the Court to resolve the issue of forum-shopping.8 On 28 October 2005, TPI filed its Manifestation and Reiterative Motion9 to set the case for oral argument, where it manifested that the International Chamber of Commerce (ICC) arbitral tribunal had issued its Final Award ordering LHC to pay TPI US$24,533,730.00 (including the US$17,977,815.00 proceeds of the two standby letters of credit). TPI also submitted a copy thereof with a Supplemental Petition10 to the Regional Trial Court (RTC), seeking recognition and enforcement of the said award.11

The essence of forum-shopping is the filing of multiple suits involving the same parties for the same cause of action, either simultaneously or successively, for the purpose of obtaining a favorable judgment.12 Forum-shopping has likewise been defined as the act of a party against whom an adverse judgment has been rendered in one forum, seeking and possibly getting a favorable opinion in another forum, other than by appeal or the special civil action ofcertiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court would make a favorable disposition.13

Thus, for forum-shopping to exist, there must be (a) identity of parties, or at least such parties as represent the same interests in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) the identity of the two preceding particulars is such that any judgment rendered in the other action will, regardless of which party is successful, amount to res judicata in the action under consideration.14

There is no identity of causes of action between and among the arbitration case, the instant petition, and Civil Case No. 04-332.

The arbitration case, ICC Case No. 11264 TE/MW, is an arbitral proceeding commenced pursuant to the Turnkey Contract between TPI and LHC, to determine the primary issue of whether the delays in the construction of the project were excused delays, which would consequently render valid TPI's claims for extension of time to finish the project. Together with the primary issue to be settled

in the arbitration case is the equally important question of monetary awards to the aggrieved party.

On the other hand, Civil Case No. 00-1312, the precursor of the instant petition, was filed to enjoin LHC from calling on the securities and respondent banks from transferring or paying the securities in case LHC calls on them. However, in view of the fact that LHC collected the proceeds, TPI, in its appeal and Petition for Review asked that the same be returned and placed in escrow pending the resolution of the disputes before the ICC arbitral tribunal.15

While the ICC case thus calls for a thorough review of the facts which led to the delay in the construction of the project, as well as the attendant responsibilities of the parties therein, in contrast, the present petition puts in issue the propriety of drawing on the letters of credit during the pendency of the arbitral case, and of course, absent a final determination by the ICC Arbitral tribunal. Moreover, as pointed out by TPI, it did not pray for the return of the proceeds of the letters of credit. What it asked instead is that the said moneys be placed in escrow until the final resolution of the arbitral case. Meanwhile, in Civil Case No. 04-332, TPI no longer seeks the issuance of a provisional relief, but rather the issuance of a writ of execution to enforce the Third Partial Award.

Neither is there an identity of parties between and among the three (3) cases. The ICC case only involves TPI and LHC logically since they are the parties to the Turnkey Contract. In comparison, the instant petition includes Security Bank and ANZ Bank, the banks sought to be enjoined from releasing the funds of the letters of credit. The Court agrees with TPI that it would be ineffectual to ask the ICC to issue writs of preliminary injunction against Security Bank and ANZ Bank since these banks are not parties to the arbitration case, and that the ICC Arbitral tribunal would not even be able to compel LHC to obey any writ of preliminary injunction issued from its end.16 Civil Case No. 04-322, on the other hand, logically involves TPI and LHC only, they being the parties to the arbitration agreement whose partial award is sought to be enforced.

As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for provisional reliefs. The Rules of the ICC, which governs the parties' arbitral dispute, allows the


application of a party to a judicial authority for interim or conservatory measures.17 Likewise, Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law)18 recognizes the rights of any party to petition the court to take measures to safeguard and/or conserve any matter which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known as the "Alternative Dispute Resolution Act of 2004," allows the filing of provisional or interim measures with the regular courts whenever the arbitral tribunal has no power to act or to act effectively.19

TPI's verified petition in Civil Case No. 04-332, filed on 19 March 2004, was captioned as one "For: Confirmation, Recognition and Enforcement of Foreign Arbitral Award in Case 11264 TE/MW, ICC International Court of Arbitration, 'Transfield Philippines, Inc. v. Luzon Hydro Corporation (Place of arbitration: Singapore)."20 In the said petition, TPI prayed:

1. That the THIRD PARTIAL AWARD dated February 18, 2004 in Case No. 11264/TE/MW made by the ICC International Court of Arbitration, the signed original copy of which is hereto attached as Annex "H" hereof, be confirmed, recognized and enforced in accordance with law.

2. That the corresponding writ of execution to enforce Question 31 of the said Third Partial Award, be issued, also in accordance with law.

3. That TPI be granted such other relief as may be deemed just and equitable, and allowed, in accordance with law.21

The pertinent portion of the Third Partial Award22 relied upon by TPI were the answers to Questions 10 to 26, to wit:

"Question 30 Did TPI [LHC] wrongfully draw upon the security? cralawlibrary

Yes

"Question 31 Is TPI entitled to have returned to it any sum wrongfully taken by LHC for liquidated damages? cralawlibrary

Yes

"Question 32 Is TPI entitled to any acceleration costs? cralawlibrary

TPI is entitled to the reasonable costs TPI incurred after Typhoon Zeb as a result of LHC's 5 February 1999 Notice to Correct.23

According to LHC, the filing of the above case constitutes forum-shopping since it is the same claim for the return of US$17.9 Million which TPI made before the ICC Arbitral Tribunal and before this Court. LHC adds that while Civil Case No. 04-332 is styled as an action for money, the Third Partial Award used as basis of the suit does not authorize TPI to seek a writ of execution for the sums drawn on the letters of credit. Said award does not even contain an order for the payment of money, but instead has reserved the quantification of the amounts for a subsequent determination, LHC argues. In fact, even the Fifth Partial Award,24 dated 30 March 2005, does not contain such orders. LHC insists that the declarations or the partial awards issued by the ICC Arbitral Tribunal do not constitute orders for the payment of money and are not intended to be enforceable as such, but merely constitute amounts which will be included in the Final Award and will be taken into account in determining the actual amount payable to the prevailing party.25

R.A. No. 9825 provides that international commercial arbitrations shall be governed shall be governed by the Model Law on International Commercial Arbitration ("Model Law") adopted by the United Nations Commission on International Trade Law (UNCITRAL).26 The UNCITRAL Model Law provides:

ARTICLE 35. Recognition and enforcement

(1) An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36.

(2) The party relying on an award or applying for its enforcement shall supply the duly authenticated original award or a duly certified copy thereof, and the original arbitration agreement referred to in article 7 or a duly certified copy thereof. If the award or agreement is not made in an official language of this State, the


party shall supply a duly certified translation thereof into such language.

Moreover, the New York Convention,27 to which the Philippines is a signatory, governs the recognition and enforcement of foreign arbitral awards. The applicability of the New York Convention in the Philippines was confirmed in Section 42 of R.A. 9285. Said law also provides that the application for the recognition and enforcement of such awards shall be filed with the proper RTC. While TPI's resort to the RTC for recognition and enforcement of the Third Partial Award is sanctioned by both the New York Convention and R.A. 9285, its application for enforcement, however, was premature, to say the least. True, the ICC Arbitral Tribunal had indeed ruled that LHC wrongfully drew upon the securities, yet there is no order for the payment or return of the proceeds of the said securities. In fact, Paragraph 2142, which is the final paragraph of the Third Partial Award, reads:

2142. All other issues, including any issues as to quantum and costs, are reserved to a future award.28

Meanwhile, the tribunal issued its Fifth Partial Award29 on 30 March 2005. It contains, among others, a declaration that while LHC wrongfully drew on the securities, the drawing was made in good faith, under the mistaken assumption that the contractor, TPI, was in default. Thus, the tribunal ruled that while the amount drawn must be returned, TPI is not entitled to any damages or interests due to LHC's drawing on the securities.30 In the Fifth Partial Award, the tribunal ordered:

6. Order

6.1 General

166. This Fifth Partial Award deals with many issues of quantum.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

However, it does not resolve them all. The outstanding quantum issues will be determined in a future award. It will contain a reconciliation of the amounts awarded to each party and a determination of the net amount payable to Claimant or Respondent, as the case may be.

167. In view of this the Tribunal will make no orders for payment in this Fifth Partial Award. The Tribunal will make a number of declarations concerning the quantum issues it has resolved in this Award together with the outstanding liability issues. The declarations do not constitute orders for the payment of money and are not intended to be enforceable as such. They merely constitute amounts which will be included in the Final Award and will be taken into account in determining the actual amount payable.31 (Emphasis Supplied.)

Further, in the Declarations part of the award, the tribunal held:

6.2 Declarations

168. The Tribunal makes the following declarations:

x x x

3. LHC is liable to repay TPI the face value of the securities drawn down by it, namely, $17,977,815. It is not liable for any further damages claimed by TPI in respect of the drawdown of the securities.

x x x.32

Finally, on 9 August 2005, the ICC Arbitral tribunal issued its Final Award, in essence awarding US$24,533,730.00, which included TPI's claim of U$17,977,815.00 for the return of the securities from LHC.33

The fact that the ICC Arbitral tribunal included the proceeds of the securities shows that it intended to make a final determination/award as to the said issue only in the Final Award and not in the previous partial awards. This supports LHC's position that when the Third Partial Award was released and Civil Case No. 04-332 was filed, TPI was not yet authorized to seek the issuance of a writ of execution since the quantification of the amounts due to TPI had not yet been settled by the ICC Arbitral tribunal. Notwithstanding the fact that the amount of proceeds drawn on the securities was not disputed the application for the enforcement


of the Third Partial Award was precipitately filed. To repeat, the declarations made in the Third Partial Award do not constitute orders for the payment of money.

Anent the claim of TPI that it was LHC which committed forum-shopping, suffice it to say that its bare allegations are not sufficient to sustain the charge.

WHEREFORE, the Court RESOLVES to DISMISS the charges of forum-shopping filed by both parties against each other.

No pronouncement as to costs.

SO ORDERED.

Endnotes:

FIRST DIVISION

[G.R. No. 119231. April 18, 1996]


PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45, MANILA; NOAH’S ARK SUGAR REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO, respondents.

SYLLABUS

1. COMMERCIAL LAW; WAREHOUSE RECEIPTS LAW; THE UNCONDITIONAL PRESENTMENT OF THE RECEIPTS FOR PAYMENT CARRIED WITH IT THE ADMISSIONS OF THE EXISTENCE AND VALIDITY OF THE TERMS, CONDITIONS AND STIPULATIONS WRITTEN ON THE FACE OF THE WAREHOUSE RECEIPTS, INCLUDING THE UNQUALIFIED RECOGNITION OF THE PAYMENT OF WAREHOUSEMAN’S LIEN FOR STORAGE FEES AND PRESERVATION EXPENSES; CASE AT BAR. - Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payment against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence and

validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehouseman’s lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without paying the lien due private respondents as warehouseman.

2. ID.; ID.; ID.; WAREHOUSEMAN’S LIEN; POSSESSORY IN NATURE. - While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman’s lien is possessory in nature.

APPEARANCES OF COUNSEL

Rolan A. Nieto for petitioner.Madella & Cruz Law Offices for private respondents.

D E C I S I O N


HERMOSISIMA, JR., J.:

The source of conflict herein is the question as to whether the Philippine National Bank should pay storage fees for sugar stocks covered by five (5) Warehouse Receipts stored in the warehouse of private respondents in the face of the Court of Appeals’ decision (affirmed by the Supreme Court) declaring the Philippine National Bank as the owner of the said sugar stocks and ordering their delivery to the said bank. From the same facts but on a different perspective, it can be said that the issue is: Can the warehouseman enforce his warehouseman’s lien before delivering the sugar stocks as ordered by the Court of Appeals or need he file a separate action to enforce payment of storage fees?

The herein petition seeks to annul: (1) the Resolution of respondent Judge Benito C. Se, Jr. of the Regional Trial Court of Manila, Branch 45, dated December 20, 1994, in Civil Case No. 90-53023, authorizing reception of evidence to establish the claim of respondents Noah’s Ark Sugar Refinery, et al., for storage fees and preservation expenses over sugar stocks covered by five (5) Warehouse Receipts which is in the nature of a warehouseman’s lien; and (2) the Resolution of the said respondent Judge, dated March 1, 1995, declaring the validity of private respondents’ warehouseman’s lien under Section 27 of Republic Act No 2137 and ordering that execution of the Court of Appeals’ decision, dated

December 13, 1991, be in effect held in abeyance until the full amount of the warehouseman’s lien on the sugar stocks covered by five(5) quedans subject of the action shall have been satisfied conformably with the provisions of Section 31 of Republic Act 2137.

Also prayed for by the petition is a Writ of Prohibition to require respondent RTC Judge to desist from further proceeding with Civil Case No. 90-53023, except order the execution of the Supreme Court judgment; and a Writ of Mandamus to compel respondent RTC Judge to issue a Writ of Execution in accordance with the said executory Supreme Court decision.

THE FACTS

In accordance with Act No. 2137, the Warehouse Receipts Law, Noah’s Ark Sugar Refinery issued on several dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St. Therese Merchandising; (d)March 31, 1989, Receipt No. 18086, covering sugar deposited by St. Therese Merchandising; and (e) April 1, 1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising. The receipts are substantially


in the form, and contains the terms, prescribed for negotiable warehouse receipts by Section 2 of the law.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T. Ramos; and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then used the quedans as security for two loan agreements - one for P15.6 million and the other for P23.5 million - obtained by them from the Philippine National Bank. The aforementioned quedans were endorsed by them to the Philippine National Bank.

Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9, 1990. Consequently, on March 16, 1990, the Philippine National Bank wrote to Noah’s Ark Sugar Refinery demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noah’s Ark Sugar Refinery refused to comply with the demand alleging ownership thereof, for which reason the Philippine National Bank filed with the Regional Trial Court of Manila a verified complaint for “Specific Performance with Damages and Application for Writ of Attachment” against Noah’s Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as the sole proprietor, managing partner, and Executive Vice President of Noah’s Ark, respectively.

Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for Preliminary Attachment. Reconsideration therefor was likewise denied.

Noah’s Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in which they claimed that they are the owners of the subject quedans and the sugar represented therein, averring as they did that:

“9.*** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising the total volume of sugar indicated in the quedans stored at Noah’s Ark Sugar Refinery for a total consideration of P63,000,000.00,

*** The corresponding payments in the form of checks issued by the vendees in favor of defendants were subsequently dishonored by the drawee banks by reason of ‘payment stopped’ and ‘drawn against insufficient funds,’

*** Upon proper notification to said vendees and plaintiff in due course, defendants refused to deliver to vendees therein the quantity of sugar covered by the subject quedans.

10. *** Considering that the vendees and first endorsers of subject quedans did not acquire ownership thereof, the subsequent endorsers and


plaintiff itself did not acquire a better right of ownership than the original vendees/first endorsers. “1

The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, doing business under the trade name and style Noah’s Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that the latter be ordered to deliver or return to them the quedans (previously endorsed to PNB and the subject of the suit) and pay damages and litigation expenses.

The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is essentially to the effect that the transaction between them, on the one hand, and Jimmy T. Go, on the other, concerning the quedans and the sugar stocks covered by them was merely a simulated one being part of the latter’s complex banking schemes and financial maneuvers, and thus, they are not answerable in damages to him.

On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in favor of the plaintiff as against the defendants for the reliefs prayed for in the complaint.

On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary Judgment. Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court

of Appeals, docketed as CA-G.R. SP. No. 25938 on December 13, 1991.

Pertinent portions of the decision of the Court of Appeals read:

“In issuing the questioned Orders, the respondent Court ruled that ‘questions of law should be resolved after and not before, the questions of fact are properly litigated.’ A scrutiny of defendant’s affirmative defenses does not show material questions of fact as to the alleged nonpayment of purchase price by the vendees/first endorsers, and which nonpayment is not disputed by PNB as it does not materially affect PNB’s title to the sugar stocks as holder of the negotiable quedans.

What is determinative of the propriety of summary judgment is not the existence of conflicting claims from prior parties but whether from an examination of the pleadings, depositions, admissions and documents on file, the defenses as to the main issue do not tender material questions of fact (see Garcia vs. Court of Appeals, 167 SCRA 815) or the issues thus tendered are in fact sham, fictitious, contrived, set up in bad faith or so unsubstantial as not to constitute genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). The questioned Orders themselves do not specify


http://sc.judiciary.gov.ph/jurisprudence/1996/apr1996/119231.htm#_ftn1

what material facts are in issue. (See Sec. 4, Rule 34, Rules of Court).

To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the record, would constitute a waste of time and an injustice to the PNB whose rights to relief to which it is plainly entitled would be further delayed to its prejudice.

In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of discretion which justify holding null and void and setting aside the Orders dated May 2 and July 4, 1990 of respondent Court, and that a summary judgment be rendered forthwith in favor of the PNB against Noah’s Ark Sugar Refinery, et al., as prayed for in petitioner’s Motion for Summary Judgment.“2

On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4, 1990 of the Regional Trial Court and ordered the trial court to render summary judgment in favor of the PNB. On June 18, 1992, the trial court rendered judgment dismissing plaintiffs complaint against private respondents for lack of cause of action and likewise dismissed private respondents’ counterclaim against PNB and of the Third-Party Complaint and the Third-Party Defendant’s Counterclaim. On September 4, 1992, the trial court denied PNB’s Motion for Reconsideration.

On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R. No. 107243, by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This Court rendered judgment on September 1, 1993, the dispositive portion of which reads:

“WHEREFORE, the trial judge’s decision in Civil Case No. 90-53023, dated June 18, 1992, is reversed and set aside and a new one rendered conformably with the final and executory decision of the Court of Appeals in CA-G.R SP. No. 25938, ordering the private respondents Noah’s Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, jointly and severally:

(a) to deliver to the petitioner Philippine National Bank, ‘the sugar stocks covered by the Warehouse Receipts/ Quedans which are now in the latter’s possession as holder for value and in due course; or alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 million,’ with legal interest thereon from the filing of the complaint until full payment; and

(b) to pay plaintiff Philippine National Bank attorney’s fees, litigation expenses and judicial costs hereby fixed at the amount of One Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.



SO ORDERED.”3

On September 29, 1993, private respondents moved for reconsideration of this decision. A Supplemental/Second Motion for Reconsideration with leave of court was filed by private respondents on November 8, 1993. We denied private respondents’ motion on January 10, 1994. .

Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1, 1993. We denied this motion in this manner:

“It bears stressing that the relief granted in this Court’s decision of September 1, 1993 is precisely that set out in the final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December 13, 1991, which was affirmed in toto by this Court and which became unalterable upon becoming final and executory. “4

Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the deferment of the proceedings until private respondents are heard on their claim for warehouseman’s lien. On the other hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a Writ of Execution and an Opposition to the Omnibus Motion filed by private respondents.

The trial court granted private respondents’ Omnibus Motion on December 20, 1994 and set

reception of evidence on their claim for warehouseman’s lien. The resolution of the PNB’s Motion for Execution was ordered deferred until the determination of private respondents’ claim.

On February 21, 1995, private respondents’ claim for lien was heard and evidence was received in support thereof. The trial court thereafter gave both parties five (5) days to file respective memoranda.

On February 28, 1995, the Philippine National Bank filed a Manifestation with Urgent Motion to Nullify Court Proceedings. In adjudication thereof, the trial court issued the following order on March 1, 1995:

“WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid warehouseman’s lien under Section 27 of Republic Act 2137 and accordingly, execution of the judgment is hereby ordered stayed and/ or precluded until the full amount of defendants’ lien on the sugar stocks covered by the five (5) quedans subject of this action shall have been satisfied conformably with the provisions of Section 31 of Republic Act 2137. “5

Consequently, the Philippine National Bank filed the herein petition to seek the nullification of the above-assailed orders of respondent judge.

The PNB submits that:

“I





PNB’s RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS DECISION IN CA-G.R. SP. NO. 25938; AND, THENOVEMBER 9, 1992 SUPREME COURT DECISION IN G.R NO. 107243. RESPONDENT RTC’S MINISTERIAL AND MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE DECRETAL PORTION OF SAID SUPREME COURT DECISION

II

RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS’ OMNIBUS MOTION. THE CLAIMS SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS’ ‘MOTION FOR CLARIFICATION OF DECISION’ IN .G.R. NO. 107243; AND (2) ARE BARRED FOREVER BY PRIVATE RESPONDENTS’ FAILURE TO INTERPOSE THEM IN THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992 RTC DECISION IN CIVIL CASE NO. 90-52023

III

RESPONDENT RTC’S ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION DATED DECEMBER 20, 1994 AND

THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 90-53023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT JUDGMENT IN FAVOR OF PNB”

The issues presented before us in this petition revolve around the legality of the questioned orders of respondent judge, issued as they were after we had denied with finality private respondents’ contention that the PNB could not compel them to deliver the stocks of sugar in their warehouse covered by the endorsed quedans or pay the value of the said stocks of sugar.

Petitioner’s submission is on a technicality, that is, that private respondents have lost their right to recover warehouseman’s lien on the sugar stocks covered by the five (5) Warehouse Receipts for the reason that they failed to set up said claim in their Answer before the trial court and that private respondents did not appeal from the decision in this regard, dated June 18, 1992. Petitioner asseverates that the denial by this Court on March 9, 1994 of the motion seeking clarification of our decision, dated September 1, 1993, has foreclosed private respondents’ right to enforce their warehouseman’s lien for storage


fees and preservation expenses under the Warehouse Receipts Act.

On the other hand, private respondents maintain that they could not have claimed the right to a warehouseman’ s lien in their Answer to the complaint before the trial court as it would have been inconsistent with their stand that they claim ownership of the stocks covered by the quedans since the checks issued for payment thereof were dishonored. If they were still the owners, it would have been absurd for them to ask payment for storage fees and preservation expenses. They further contend that our resolution, dated March 9, 1994, denying their motion for clarification did not preclude their right to claim their warehouseman’s lien under Sections 27 and 31 of Republic Act 2137, as our resolution merely affirmed and adopted the earlier decision, dated December 13, 1991, of the Court of Appeals (6th Division) in CA-G.R. SP. No. 25938 and did not make any finding on the matter of the warehouseman’ s lien.

We find for private respondents on the foregoing issue and so the petition necessarily must fail.

We have carefully examined our resolution, dated March 9, 1994, which denied Noah’s Ark’s motion for clarification of our decision, dated September 1, 1993, wherein we affirmed in full and adopted the Court of Appeals’ earlier decision, dated December 13, 1991, in CA-G.R.

SP. No. 25938. We are not persuaded by the petitioner’s argument that our said resolution carried with it the denial of the warehouseman’s lien over the sugar stocks covered by the subject Warehouse Receipts. We have simply resolved and upheld in our decision, dated September 1, 1993, the propriety of summary judgment which was then assailed by private respondents. In effect, we ruled therein that, considering the circumstances obtaining before the trial court, the issuance of the Warehouse Receipts not being disputed by the private respondents, a summary judgment in favor of PNB was proper. We in effect further affirmed the finding that Noah’s Ark is a warehouseman which was obliged to deliver the sugar stocks covered by the Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the pertinent provisions of Republic Act 2137.

In disposing of the private respondents’ motion for clarification, we could not contemplate the matter of warehouseman’s lien because the issue to be finally resolved then was the claim of private respondents for retaining ownership of the stocks of sugar covered by the endorsed quedans. Stated otherwise, there was no point in taking up the issue of warehouseman’s lien since the matter of ownership was as yet being determined. Neither could storage fees be due then while no one has been declared the owner of the sugar stocks in question.


Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which provides for respondent Noah’s Ark’s right to impose and collect warehouseman’s lien:

“Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the quedans covering said sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under which the refined sugar covered by this Quedan was produced. “6

It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees are chargeable.

Petitioner anchors its claim against private respondents on the five (5) Warehouse Receipts issued by the latter to third-party defendants Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising, which found their way to petitioner after they were negotiated to them by Luis T. Ramos and Cresencia K. Zoleta for a loan of P39.1 Million. Accordingly, petitioner PNB is legally bound to stand by the express terms and conditions on the face of the Warehouse Receipts as to the payment of storage fees. Even in the absence of such a provision, law and equity dictate the payment of the warehouseman’ s lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law (R.A. 2137), to wit:

“SECTION 27. What claims are included in the warehouseman’s lien. - Subject to the provisions of section thirty, a warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing coopering and other charges and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and advertisement of sale, and for sale of the goods where default has been made in satisfying the warehouseman’s lien.

xxx xxx xxx

SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.”

After being declared not the owner, but the warehouseman, by the Court of Appeals on December 13, 1991 in CA-G.R. SP. No. 25938, the decision having been affirmed by us on December 1, 1993, private respondents cannot legally be deprived of their right to enforce their claim for warehouseman’s lien, for reasonable storage fees and preservation expenses. Pursuant to Section 31 which we quote hereunder, the



goods under storage may not be delivered until said lien is satisfied.

“SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.”

Considering that petitioner does not deny the existence, validity and genuineness of the Warehouse Receipts on which it anchors its claim for payment against private respondents, it cannot disclaim liability for the payment of the storage fees stipulated therein. As contracts, the receipts must be respected by authority of Article 1159 of the Civil Code, to wit:

“ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.”

Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payment against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A.

2137) carried with it the admission of the existence and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehouseman’s lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without paying the lien due private respondents as warehouseman.

In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman’s lien is possessory in nature.

We, therefore, uphold and sustain the validity of the assailed orders of public respondent, dated December 20, 1994 and March 1, 1995.

In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in issuing the questioned orders which recognized the legitimate right of Noah’s Ark, after being


declared as warehouseman, to recover storage fees before it would release to the PNB sugar stocks covered by the five (5) Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude private respondents’ unqualified right to establish its claim to recover storage fees which is recognized under Republic Act No. 2137. Neither did the Court of Appeals’ decision, dated December 13, 1991, restrict such right.

Our Resolution’s reference to the decision by the Court of Appeals, dated December 13, 1991, in CA-G.R. SP. No. 25938, was intended to guide the parties in the subsequent disposition of the case to its final end. We certainly did not foreclose private respondents’ inherent right as warehouseman to collect storage fees and preservation expenses as stipulated n the face of each of the Warehouse Receipts and as provided for in the Warehouse Receipts Law (R.A. 2137).

WHEREFORE, the petition should be, as it is, hereby dismissed for lack of merit. The questioned orders issued by public respondent judge are affirmed.

Costs against the petitioner.

SO ORDERED.

Padilla (Chairman), Bellosillo, Vitug, and Kapunan, Jr., JJ., concur.

FIRST DIVISION

[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 certiorari is whether or not, in a 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 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 these requisites, 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 obligation to 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. After petitioners 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 P292,172.23 representing 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 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.


http://sc.judiciary.gov.ph/jurisprudence/2004/jul2004/159622.htm#_ftn1

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 THE GOODS 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 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) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee’s indebtedness to the entruster. 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.

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 at public 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,[5] 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 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 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.[7]






The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of 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. 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 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) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.”

The trust receipt between respondent bank and petitioner corporation contains the following relevant clauses:

The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust and take possession

of the goods/documents/instruments subject hereof or of the proceeds realized therefrom wherever they may then be found, upon default or failure of the ENTRUSTEE to comply with any of the terms and conditions of this Trust Receipt or of any other agreement between the BANK/ENTRUSTER and the ENTRUSTEE; and the BANK/ENTRUSTER having taken repossession of the goods/documents/instruments object hereof may, on or after default, give at least five (5) days’ previous notice to the ENTRUSTEE of its intention to sell the goods/documents/instruments at public or private sale, at which public sale, it may become a purchaser; Provided, that 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 retaking, keeping and storing the goods/documents/instruments; (c) to the satisfaction of all of the ENTRUSTEE’s indebtedness to the BANK/ENTRUSTER; and Provided, further, that the ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the BANK/ENTRUSTER for any deficiency. x x x

No act or omission on the part of the BANK/ENTRUSTER shall be deemed and considered a waiver of any of its rights hereunder or under any related letters of credit, drafts or other documents unless such waiver is expressly made in writing over the signature of the BANK/ENTRUSTER.[8]



The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second paragraph of Section 7 of the Trust Receipts Law. The right of repossession and subsequent sale at public auction which were availed of by respondent bank were rights available upon default, and which were conferred by statute and reinforced by the contract between the parties.

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. This is definitely not the case. In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement Company, Inc.,[9] we had occasion to rule:

PNB’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. 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 pago was ever accomplished. (Citations omitted, underscoring supplied)[10]

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,[11] we 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 artificial expedient, 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, the VINTOLAS 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]

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,[13] the 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 for our 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.[14] This 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 that the 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 an ordinary 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 use said 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 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 obligation, represented by respondent bank to 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;[16] and (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 the Borrower 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,[19] and 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 of respondent 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 annumand penalty at the rate of 12% per annum reckoned 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 annum beginning April 18, 1986 is deleted. Costs against petitioners.

SO ORDERED.



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