Letters of Credit

Trust ReceiptsA. PrimerA trust receipt is a document whereby one party, called the entruster, which is usually the bank, delivers the goods and the possession thereof to another, called the entrustee, who promises to hold the goods in trust (thus the name) for the entruster. The entrustee is given the possession of the goods so that he can do something with them, usually to sell them.

The main point of Trust Receipts is that the entrustee can sell the goods or in any other way use them for his business, while the entruster retains ownership over the goods. In return, the entrustee must turn over any proceeds to the entruster.

Why would they want to do that?

On the part of the entruster, the bank can retain ownership over the goods, while still being able to receive proceeds on their sale or use.

On the part of the entrustee, he may use the goods for his business, without having to buy them first. If he can sell it at a higher price than the amount for which the trust receipt is issued, he can keep the profits.

How this works:Lets continue from the Olive Oil Example Above.1. The olive oil arrives in New York. 2. Vito feels that he needs more money. Who doesnt?3. He takes out a loan from Five Families for $3,000,000. The bank requires a security. There is nothing more convenient than the olive oil itself.4. Thus, the olive oil is used as a security, and a Trust Receipt covering the oil and for $3,000,000 is issued to Vito. By the terms of the receipt, Vito is to sell the olive oil and remit proceeds therefrom to the amount of his loan.5. Heres the important bit: After issuing the trust receipt, the bank releases the olive oil to Vito, subject to the terms and conditions thereon, i.e. for him to pay back the loan using the proceeds from the sale.6. Vito then sells the olive oil. a. If he sells it for exactly $3,000,000, he breaks even.b. If he sells it for less, he still owes the bank the deficit.c. If he sells it for more, he gets to keep the profits.

B. DefinedSec. 2, (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt.

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: xxx

Lets break that down.[footnoteRef:1] [1: In fact, lets break everything down. The TR Law is fairly straightforward, and the only obstacle is the TL:DR-ness of the provisions.]

a written/printed document, signed and delivered by the entrustee in favor of the entruster, whereby the entruster, who owns or holds absolute title or security interest over the goods, documents on instruments, releases said goods, documents or instruments to the possession of the entrustee, upon the entrustees promise, as embodied in a document called a trust receipt to hold said goods in trust for the entruster, and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over the proceeds thereof to the extent of what is owing to the entruster; or to return the goods if unsold, or not otherwise disposed of, or for other purposes equivalent to those listed. (See Rights acquired, infra.)

Cf. What is not a trust receipt.Sec. 4. XxxThe sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.

This paragraph differentiates trust receipts from sales where at the start of the transaction, the seller has general property rights as against the buyer over the goods, documents, or instruments, or when there is a credit sale and the seller invokes the unpaid sellers lien.

Governing LawPD 115, which took effect on Jan. 29, 1973.

Nature1. A trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a loan.2. In relation to a letter of credit, a letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations.3. That being said, it is common for a letter of credit and a trust receipt to be issued for the same transaction. Usually, the bank finances the purchase via a loan evidenced by a letter of credit between the issuing bank and the buyer. As security for that loan, a trust receipt is issued over the goods.

PartiesSection 3. Definition of terms. As used in this Decree, unless the context otherwise requires, the term

1. Entruster (c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.

2. Entrustee(b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement.

Strictly speaking, a purchaser in good faith for value acquires by such purchase a superior title to the Trust Receipt, but that doesnt really make him a party thereto.

Subject Matter Goods, Documents, or Instruments(a) "Document" shall mean written or printed evidence of title to goods.(d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof.(e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in this Decree. NB. Documents cannot be instruments. Goods must be movables, and cannot include money or things in action. Things in actionusually rights to an obligation, e.g. rights of a mortgagee, pledgee.

FormSection 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must substantially contain (a) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein.

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

Trust receipts are formal contracts, and thus must be written. However, what must be on the face of the trust receipt need not appear in any particular form, but must substantially contain:1. A description of the goods, documents or instruments subject of the trust receipt2. The total invoice value of the goods and the amount of the draft to be paid by theentrustee3. An undertaking or a commitment of the entrustee:a. to hold in trust for the entruster the goods, documents or instruments therein describedb. to dispose of them in the manner provided for in the trust receipt; andc. to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster, i. or as appears in the trust receipt or ii. to return the goods, documents or documents in the event of their non-sale within the period specified therein. May contain other terms and conditions, so long as they are not contrary to the Big 5. (LMGCPOPP.)

As to Currency

Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.

The trust receipt may be denominated a. In Philippine currency, orb. Any foreign currency acceptable and eligible as part of the international reserves of the Phils. However,i. This is subject to any contrary provision in law, executive orders or rules and regulations;ii. If foreign currency is used, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of the sale are turned over to the entruster, or on another date as may be stipulated.

Rights and Obligations arising from the Trust Receipt

Obligations of the Entrustee.

Section 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

Generally, the entrustee is to comply with the undertaking embodied in the trust receipt:

1. To hold the designated goods, documents or instruments in trust for the entruster

Sec. 9, (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;

Section 4. A trust receipt transaction, xxx is any transaction xxxe, whereby the entruster, xxx releases the same to the possession of the entrustee upon the latter's execution xxx of a xxx "trust receipt"wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster xxx

2. Sell or otherwise dispose of the goods, documents or instruments

Sec. 9, (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;

Sec. 4. Xxx and to sell or otherwise dispose of the goods, documents or instruments in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: xxx

How goods, etc. are supposed to be disposed of.a. In general , according to the terms and conditions set forth in the trust receipt.a. Primarily contemplates sale. b. If there are no such terms and conditions, the use of the goods or documents must be substantially equivalent to:

For goods or documents:Sec 4. xxx1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

i. Saleii. Manufacture or processing of goods ultimately for the purpose of sale.a. In this case, the entruster retains ownership of the goods, whether as raw materials or processed goods, until the entrustee has fully complied with his obligations under the trust receipt.iii. Load, unload, ship or transship, or otherwise deal with them in a manner preliminary or necessary to their sale.

For Instruments

2. In the case of instruments,a) to sell or procure their sale or exchange; orb) to deliver them to a principal; orc) to effect the consummation of some transactions involving delivery to a depository or register; ord) to effect their presentation, collection or renewali. Sale or procurement of sale or exchangeii. Delivery to a principaliii. Effect consummation of transaction which requires delivery to a depository or register, or iv. Effect presentation, collection or renewal.

3. Turn over the proceeds or return the undisposed goodsSec. 9 (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;

Sec. 4. xxx with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of xxxThe entrustee must either Turn over the proceeds to the extent of his obligation to the entruster, or Return the goods, documents or instruments themselves if he has failed to dispose of them.

4. Insure the goods.(3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

5. Keep the goods or proceeds thereof separate and capable of identification.(4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;

6. Observe all other terms and conditions. (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

7. Bear the risk of loss.Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

The entrustee, being in possession of goods over which he does not have title, and which have been entrusted to him, bears the risk of loss. From the provisions of the article, fault or negligence on the part of the entrustee is immaterial. By implication, he is liable for loss even due to a fortuitous event. The liability for loss is that such loss, even if it be due to a fortuitous event, does not extinguish the obligation, and the entrustee is liable for the value of the obligation.

Rights of the Entruster

1. To the proceeds from the sale of the goods.Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.

Counterpart right to the entrustees obligations to dispose of the goods and remit the proceeds to the entruster.

2. To cancel the trust and take possession of the goodsThe 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,

If the entrustee defaults or fails to comply with the terms and conditions of the Trust Receipt, or any other agreement, the entruster may cancel the trust and take possession of the goods.

3. Sell the goods upon default.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. xxxNotice 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. Having taken possession of the goods, the entruster may sell the goods to satisfy the obligation, after following the ff. procedure:i. Notify the entrustee of intention to sell. a. Notice is sufficient if it is in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last known business address.ii. Not less than 5 days after the serving or sending of notice, selling the goods, either at a public or private sale.a. At such sale, the entruster himself may be a purchaser.iii. After such sale, the proceeds 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.

4. Security interest as against creditors of the entrusteeSection 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

Security InterestSec. 3(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. A property interest only to secure performance of some obligation. In a trust receipt, the entruster has a security interest in the goods, documents or instruments covered thereby in order to secure the performance of the obligation for which the receipt was issued. Such interest is much like a pledgees or a mortgagees interest, and is valid against all creditors of the entrustee for the duration of the trust receipt agreement.

Cf. Rights of BFVGFsSection 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.

In contrast, the rights of a purchaser for value in good faith over the goods he purchased defeats the entrusters security interest, if he purchased such goods from an entrustee with the right to sell or transfer the goods or instruments.

5. Freedom from liability as vendor.Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. The entruster is not liable principally as a vendor under and sale or contract to sell made by the entrustee. This is a departure from the general rule. The entruster still owns the goods covered by the trust receipt. Generally, the owner of the goods would be liable as vendor. However, here, the entruster has a mere security interest, and as such is not merely thereby made responsible as a vendor or primarily.

Effect of Failure to comply with the Trust Receipts Law

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

For once, an express pronouncement: failure to turn over the proceeds of the sale of the goods, documents, or instruments, or to return the unsold goods, documents or instruments constitute the crime of estafa, under Art. 315, 1 (b), More specifically, this is estafa by misappropriation or conversion.

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