DBP v.

Prudential Bank, 475 SCRA 623 (2005)

FACTS:

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

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

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

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

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

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

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

TC and CA:

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

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

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






Landl Co vs.METROPOLITAN BANK & TRUST COMPANY. G.R. No. 159622 July 30, 2004
The possession by the bank of the goods under the trust receipts does not bar collection of the loan. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property
and includes the sale itself. Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is
alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.

Facts: Landl Co opened Commercial Letter of Credit No. 4998 with respondent bank, in the amount of US$19,606.77,
which was equivalent to P218,733.92 in Philippine currency at the time the transaction was consummated. The letter of
credit was opened to purchase various welding rods and electrodes from Perma Alloys, Inc., New York, U.S.A., As an
additional security, and as a condition for the approval of petitioner corporations application for the opening of the
commercial letter of credit, respondent bank required petitioners Percival G. Llaban and Manuel P. Lucente to execute a
Continuing Suretyship Agreement to the extent of P400,000.00.

Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody thereof. On the maturity
date of the trust receipt, petitioner corporation defaulted in the payment of its obligation to respondent bank and failed to
turn over the goods to the latter. The goods were sold for P30,000.00 to respondent bank as the highest bidder. The
proceeds of the auction sale were insufficient to completely satisfy petitioners outstanding obligation to respondent bank,
notwithstanding the application of the time deposit account of petitioner Lucente. Accordingly, respondent bank
demanded that petitioners pay the remaining balance of their obligation. After petitioners failed to do so, respondent
bank instituted the instant case to collect the said deficiency.

Issue: Whether or not possession by the bank of the goods under the trust receipts does not bar collection of the loan.

Held: The initial repossession by the bank of the goods subject of the trust receipt did not result in the full satisfaction of
the petitioners loan obligation. Petitioners are apparently laboring under the mistaken impression that the full turn-over
of the goods suffices to divest them of their obligation to repay the principal amount of their loan obligation. The
entrustees 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 TCCs loan obligation. Mere possession does not amount to foreclosure for foreclosure denotes the
procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself.
Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the
creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation.

A trust receipt is inextricably linked with the primary agreement between the parties. Time and again, we have
emphasized that a trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for
a loan. Thus, in Abad v. Court of Appeals, we ruled: A letter of credit-trust receipt arrangement is endowed with its own
distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the
trust receipt as security for the loan. In other words, the transaction involves a loan feature represented by the letter of
credit, and a security feature which is in the covering trust receipt. x x x. A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a security interest in the goods. It secures indebtedness and there can be no such
thing as security interest that secures no obligation. The Trust Receipts Law was enacted to safeguard commercial
transactions and to offer an additional layer of security to the lending bank. Trust receipts are indispensable contracts in
international and domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held in trust for
entruster banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of the Trust Receipts Law.

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

FACTS:

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

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

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

-Trust Receipt was executed to secure indebtedness of Landl.

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

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

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

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

-Landl failed to do so.

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

TC and CA:

-Ordered Landl to pay the bank.

ISSUE:

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

HELD

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

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