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.

DECISION
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 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, 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 corporations 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 defendants 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 Attorneys 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 attorneys fees.
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
COURTS 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
COURTS PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION, INTEREST,
ATTORNEYS 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 entrustees
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 ENTRUSTEEs 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:
PNBs 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.
xxxxxxxxx
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 IBAAs right to recover the advances it had made under the Letter of
Credit. (Citations omitted.)[12]
Respondent banks 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 entrustees indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner
corporations indebtedness to the respondent bank. Respondent bank was thus well within its
rights to institute the instant case to collect the deficiency.
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 respondents 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 Lucentes 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 importers 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 attorneys 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 Llabans 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; attorneys fees; and expenses that may be incurred in
collecting the credit. The amount owed to respondent bank is the amount of the principal,
interest, attorneys 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
banks 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
Llabans 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 annum and penalty at the rate of 12% per annum reckoned
from April 18, 1986; (3) attorneys 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.
Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.