1. A trust receipt is a commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of the liability to the bank.
1.1 It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchases of merchandise, and who may not be able to acquire credit, except through utilization, as collaterals, of the merchandise imported or purchased.
1.2 The subject matter of a trust receipt is always chattel. It will not apply to chattel so attached to land so as to become part thereof.
2. A trust receipt transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or hold 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 trust receipt wherein the entrustee binds himself to hold the specified gods, 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 the goods, documents or instruments themselves if they are unsold or not otherwise disposed of.
2.1 A 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.
2.2 A trust receipt transaction distinguished from:(a) A pledge-in a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed (b) A conditional sale-in a conditional sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee (c) A
chattel mortgage-a chattel mortgage involves the creation of a lien upon the property; a trust receipt does not involve the creation of a lien (d) A consignment-in a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster, not to the entrustee
2.3 When a debtor has received the goods from a supplier thereby acquiring title and will after borrow money from a bank to pay for the same, the transaction is a loan even he signs a trust receipt agreement. It is essential for a trust receipt transaction for the bank to first acquire ownership and possession.
2.4 When a Memorandum of Agreement is entered between a debtor corporation and a creditor bank is entered into rescheduling the payments due from the former, the trust receipt transaction is novated and transformed into a simple loan.
3. The parties to a trust receipt transaction are: (a) The entruster- is the person holding title over the goods, documents or instruments subject to a trust receipt transaction, and any successor in interest of such person, and (b) The entrustee – is 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
4. The rights of the entruster are: (a) to be entitled to receive the proceeds of the sale of the goods released under a trust receipt to the entrustee to the extent of the amount owing to the entruster (b) to the return of the said goods, in case they could not be sold; and (c) to cancel the trust in case the entrustee defaults, take possession of the goods, and sell the same at public or private sale.
4.1 The process of taking possession and selling the goods is as follows: (a) 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 (b) 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. Notice of the 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 (c) the proceeds of any such sale, whether public or private, shall be applied (1) to the payment of the expenses thereof; (2) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (3) 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.
4.2 Cancellation of the trust receipt and repossession is not essential for the entruster to have a cause of action against the entrustee. They are options available to the entruster and do not prejudice resort to other remedies.
5. The obligations of the entrustee are as follows: (a) to hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; This includes the authority to manufacture or process the goods with the purpose of ultimate sale. Provided, however, that the entruster retains title over the goods whether in its original or processed form until the entrustee has complied with the obligation under the receipt. It also includes authority to load, unload, ship or transship or otherwise deal with the goods in a manner preliminary or necessary to their sale (b) To
receive the proceeds of the sale of the goods in trust for the entruster and to turn over the same to the entruster to the extent of the amount owing to the entruster (c) to insure the goods for their total value against loss from fire, theft, pilferage or other casualties (d) to keep the goods or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; and (e) to return the goods,to the entruster in case they could not be sold or upon demand of the entruster. 5.1 Notwithstanding the security interest of the entruster, the entrustee shall be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Hence, although the entrustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor) anyone who acquires the goods from the entrustee acquires good title (ownership) over the goods. Note that it runs counter to the provisions of Article 1505 of the Civil Code, where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected.
5.2 Risk of loss shall aslso be borne by the entrustee. Hence, the 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. This is not in accordance with the civil law principle that it is generally the owner who must bear the risk of loss of the object
6. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. The law warrants the validity of the trust receipt agreement. Consequently, the goods covered by the trust receipt cannot be levied upon by the creditors of the entrustee. The 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.
7. The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315, Section 1(b) of the Revised Penal Code are: (a) The failure to comply with the provision referring to the obligation involving the duty to deliver (entregaria) the money received to the owner of the merchandise sold, or(b)The failure to comply with the provision referring to the obligation involving the duty to return (devolvera) the goods to the owner if not disposed of in accordance with the terms of the trust receipt.
7.1 There is no need to prove intent to defraud as the offense is malum prohibitum. 7.2 There is also no need to prove damage to the entrustor because the nature of a trust receipt transaction and the damage caused to trade circles and the banking community in case of a violation thereof is the basis for the criminal offense.
7.3 Consequently, the law has consistently been declared as not violating the constitutional proscription against imprisonment for non-payment of debt. It is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by the receipt or to return the goods if not sold is a public nuisance to be abated by penal sanctions.