LETTERS OF CREDIT and TRUST RECEIPTS

1. What is a letter of credit?

It is an instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit.

2. Who are the parties to a letter of credit and what are their respective roles?

a. The buyer – he is the buyer of the merchandise who is also the buyer of the credit instrument; he initiates the operation

b. The seller or beneficiary – he is the seller of the merchandise to whom the letter of credit is addressed and in whose favor it is issued

c. The opening/issuing bank – it is the bank which actually issues the letter of credit; it should be a strong bank and regarded in international trading circles

d. The notifying bank – the corresponding bank of the opening/issuing bank through which it advises the beneficiary of the existence of the letter of credit

e. The negotiating bank - it is any bank in the city of the beneficiary which buys or discounts the draft contemplated by the letter of credit, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary

f. The paying bank – it is the bank on which the drafts are to be drawng. The confirming bank – it is the bank which upon the request of the beneficiary,

confirms the letter of credit issued by the opening bank

3. What is a trust receipt? (2007)It is a document executed between an entruster (bank) and an entrustee (buyer), under which the goods are released to the latter who binds himself to hold the goods in trust, or to sell or dispose of the goods with the obligation to turn over the proceeds to the entruster to the extent of the entrustee’s obligation to him, or if unsold, to return the goods.

Under a letter of credit-trust receipt transaction, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as security of the loan.

4. Who are the parties in a trust receipt transaction?a) Entrustee – the party to whom the goods are delivered for sale or processing and

who bears the risk of lossb) Entrustor – usually a bank

5. Distinguish a letter of credit from a trust receipt:

A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.  Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.

By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and 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 return 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. (Bank of Commerce vs. Serrano, GR No. 151895, Feb. 16, 2005)

6. Points to remember:

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a) Under PD 115, 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)

b) Although the entrustee is not the owner of the goods covered by a trust receipt, should the goods be lost while in his possession, he will bear the risk of loss.

c) The Trust Receipts Law does not seek to enforce payment of a loan but rather, it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner.

d) Since the entrustee has neither absolute ownership, free disposal nor the authority to freely dispose of the goods subject of the trust receipt transaction, the said enstrustee cannot validly subject 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. (DBP vs. Prudential Bank GR No. 143772, November 22, 2005)

7. Remedies available:Under PD 115, the failure of the entrustee to return the goods covered by the trust receipt or of the proceeds from the sale thereof shall constitute the crime of estafa penalized under Art. 315(b) of the RPC.

Note:Damage to the entrustor need not be proven because the nature of the trust receipt agreements and damage caused to trade circles and the banking community in case of violation thereof is the basis for the criminal offense. Malice or deceit is not an element of the offense because it is malum prohibitum.

WAREHOUSE RECEIPTS LAW (Act 2137) andGENERAL BONDED WAREHOUSE ACT (Act 3893)

1. Concept of warehouse receipt:It is a written acknowledgment by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued.

Vs. negotiable instrument:a) In negotiable instruments, the subject is money; in warehouse receipts, the

subject is merchandiseb) In negotiable instruments, the instrument itself is the object of value; in

warehouse receipts, the goods are the objects of valuec) In negotiable instruments, intermediate parties become secondarily liable; in

warehouse receipts, intermediate parties are not liable for the warehouseman’s failure to deliver the goods

2. Kinds of warehouse receipts:A. Non-negotiable – one in which it is stated that the goods will be delivered to the

depositor or any specified person 1) The words “non-negotiable” or “not negotiable” must be placed on the face

of the receipt 2) Effect of failure to mark - it may be considered negotiable by the holder for

value who supposed it to be negotiableB. Negotiable - one in which it is stated that the goods will be delivered (1) to the

bearer or (2) to the order of any person named therein1) Effect of the words “Non-negotiable” inserted in the receipt – negotiability is

not affected 2) If more than one receipt is issued for the same goods – “duplicate” shall be

placed on the face of copies other than the original

3. What are the obligations of the warehouseman?a) To take care of the goods entrusted to his safekeepingb) To deliver the goods upon demand by the holder or depositor

What must accompany the demand? The demand must be accompanied by:

1) An offer to satisfy the warehouseman’s lien;

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2) An offer to surrender the negotiable warehouse receipt, properly indorsed, if necessary; and

3) A readiness and willingness to sign an acknowledgement receipt of the fact of delivery if so requested by the warehouseman

To whom must delivery be made?a) To the person lawfully entitled to the goods or his agent

- person to whom a competent court has ordered the delivery of the goods- attaching creditor- purchaser in case of sale of the goods to enforce the warehouseman’s lien or

where the goods are perishable or hazardousb) To the person entitled to delivery under a non-negotiable receipt or with written

authority c) To the person in possession of the negotiable receipt

What is misdelivery?a) Delivery to one who is not in fact lawfully entitled to the possession of the goodsb) Delivery after he had been requested, by the person lawfully entitled to

possession, not to make deliveryc) Delivery after he had information that the delivery about to be made was to one

not lawfully entitled to possession, i.e., notice of adverse claim of a third person

What is the liability of the warehouseman for misdelivery?The warehouseman is liable as for conversion.

** Conversion is the unauthorized assumption and exercise of the right of ownership over goods belonging to another through the alteration of their condition or the exclusion of the owner’s right

Example:Last July 20, 2005, Alfred sold to Bingo his negotiable warehouse receipt covering

100 sacks of rice stored in Bodega Warehouse, Inc. In payment thereof, Bingo issued a check of P100,000 dated July 22, 2005, in favor of Alfred. On the same date, the check was dishonored by the bank for lack of funds. Alfred immediately instructed Bodega Warehouse in writing not to deliver the 100 sacks of rice to anyone. On July 23, 2005, an employee of Bodega Warehouse, unaware of the written instruction received by its president, delivered the 100 sacks to Bingo. State the cause or causes of action, if any, which Alfred may have against Bodega Warehouse and Bingo.

Answer:Against Bodega Warehouse, Alfred may claim for the value of the goods delivered by Bodega Warehouse to Bingo, in violation of the instruction of Alfred, which instructions Bodega Warehouse received in time.

Against Bingo, Alfred may file a criminal case for violation of BP 22 (Bouncing Checks Law), upon compliance by him (Alfred) of the prerequisites for filing a case under said law.

4. What are the rules where the goods are covered by a negotiable receipt?a) The warehouseman cannot be compelled to deliver up the actual possession of the

goods until the receipt is surrendered to him or impounded by the courtb) Receipt must be cancelled when goods are deliveredc) Receipt must be cancelled or marked when part of the goods are deliveredd) The goods cannot be attached by garnishment or be levied upon under an execution

May goods covered by a negotiable receipt be attached or levied on execution?No, the goods cannot be attached by garnishment or be levied upon under an execution.

Exception: Unlessa) the receipt is first surrendered;b) its negotiation is enjoined; orc) the document is impounded by the court

Exception to the exception (i.e., the goods may be attached, etc.):aa) if the person depositing the goods is not the owner or is one who has no

right to convey title to the goods binding upon the owner; orbb) actions for recovery or manual delivery of the goods by the real owner;

or

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cc) where the attachment is made before the issuance of the negotiable receipt

5. What are the warranties of a person negotiating a negotiable receipt?a) that the receipt is genuine;b) that he has legal right to negotiate or transfer it;c) that he has no knowledge of any fact which would impair the validity or worth of the

receipt; andd) that he has a right to transfer the title to the goods and that the goods are

merchantable or fit for a particular purpose, if such warranties have been implied

Is the indorser liable for failure of the warehouseman or previous indorsers to fulfill their respective obligations? No.

Example:Brando is indebted to Carlos for P100,0000. To secure its payment, Brando delivers a

warehouse receipt issued to him (Brando). Thereafter, Carlos demands payment from Brando, and Daniel pays for Brando, which payment is accepted by Carlos. Carlos in turn delivers the receipt to Daniel. In case Daniel cannot obtain possession of the goods because they do not exist, will Carlos be liable to Daniel?

Answer:Carlos will not be liable to Daniel. Carlos in the problem appears as an indorser of a warehouse receipt. An indorser of a warehouse receipt is not a guarantor to the party primarily liable (the warehouseman) under the said receipt. Hence, the failure of the warehousemen to deliver the goods under the receipt will not make Carlos liable to Daniel.

6. Validity of negotiation as against the real owner:a) If the receipt is acquired from the real owner’s agent (regardless of how he acquired it

from the owner) within his actual or apparent authority, the purchaser for value in good faith acquires title to the goods as against the real owner

b) If the receipt is stolen or lost, the purchaser, who for value and in good faith acquires it from the thief or finder, does not acquire any title as against the real owner

Example:Aldrin stole five bales of hemp from the pier and stored them in Arlington

Warehouse. The latter issued a negotiable warehouse receipt under the terms of which the hemp is deliverable to Aldrin or order. Aldrin indorsed the receipt in blank to Charles, who paid value for it without knowing about the theft.

In the meantime, Mandy, the owner of the hemp, with the help of the delivery of the same. Arlington Warehouse, after being satisfied that Mandy was the real owner of the hemp, delivered the same to him despite the fact that the negotiable warehouse receipt was outstanding and was no in Mandy’s possession, and therefore could to be surrendered or cancelled.

Subsequently, Charles demanded delivery of the hemp and since he could not obtain it, now claims damages from Arlington Warehouse on the ground that he, Charles, was the only one entitled to the delivery because he was holder for value in good faith of the negotiable warehouse receipt covering the hemp.

Is Arlington Warehouse liable to Charles for damages?

Answer:Arlington Warehouse is not liable to Charles for damages. The issue by Arlington Warehouse of a negotiable receipt covering stolen goods did not vest any right of ownership over the stolen goods on the depositor named in the receipt, or on any transferee or subsequent holder of said negotiable warehouse receipt.

The depositor transfers to his transferee only those rights which he has over the goods. If as a thief who stole the goods, he had no right at all over the goods, he transferred nothing at all to his transferee. That the transferee, Charles, had no knowledge about the theft, or that he paid value fro the indorsement to him of the negotiable warehouse receipt, are of no moment. The concept of holder in due course in negotiable instrument does not apply to warehouse receipts.

On vendor’s lien:a) No seller’s lien or stoppage in transitu shall defeat the rights of a purchaser for

value in good faith to whom the receipt is negotiated

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b) The warehouseman shall not be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.

Example:Andrew issued a warehouse receipt for 100 sacks of rice to be delivered to the order of Bart, the rice having been purchased from Matt for P100,000 which remained unpaid.

Subsequently, Bart delivered the receipt to Luke, with an indorsement in blank, to secure the payment of a loan in the sum of P150,000.

May Matt enforce his lien for the unpaid price on the rice covered by the aforesaid warehouse receipt pledged to Luke?

Answer:No, Matt may not enforce his lien for the unpaid price on the sugar covered by the pledged receipt. Reason: No unpaid seller’s lien or right of stoppage can defeat the rights of a pledgee for value.

7. What are the rights of a transferee of a non-negotiable receipt?a) the title to the goods as against the transferor;b) the right to notify the warehouseman of the transfer thereof; andc) the right, thereafter, to acquire the obligation of the warehouseman to hold the goods

for him

8. What is the purpose of the General Bonded Warehouse Act?To encourage and facilitate business transactions by affording protection to persons dealing with warehouseman

9. What are the salient features of the act?A warehouseman receiving commodities for storage, milling or commingling:

a) must obtain prior license from the Department Trade and Industryb) must file a bond in an amount equivalent to 33-1/3% of the capacity of the

warehouse against which bond depositors may sue directlyc) must be open to the public; no discrimination allowedd) is liable for double the market value should he accept goods in excess of the

capacity of the warehouse if goods are damaged or destroyede) must Insure the commodities received and stored against fire

BULK SALES LAW (Act 3592, as amended)

1. What transactions are considered as sales in bulk? (2007)a) Sale, transfer or disposition other than in the ordinary course of business;b) Sale, transfer or disposition other of all, or substantially all, of the business or

trade; c) Sale, transfer or disposition of all, or substantially all, fixtures and equipment

2. What transactions are not considered as sales in bulk? (exceptions)a) Sales/transfers made in the ordinary course of business;b) Sales/transfers made when there is waiver (written) from all creditors; andc) Sales/transfers by virtue of a judicial orderd) goods that are exempt from executione) sale of all the goods of a manufacturerf) if an entity(sole proprietorship) sells to an corporation(solely organize for that

purpose)

3. What are the duties of the vendor under the law? (2007)

a) to deliver to the vendee/transferee a sworn statement of the names and addresses of all creditors to whom said vendor/transferor may be indebted together with the amount of indebtedness due or to become due

b) quantity and the cost price of the goods and to notify every creditor of the price, terms and conditions of the sale/transfer

**both documents must be submitted to the DTI

4. What is the effect of failure to comply with the requirements?The buyer does not become the owner of what he bought, but merely serves as trustee for these properties, in behalf of the creditors of the merchant.

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TN: only apllies to present creditors

seller and buyer, contract still valid…

buyer still have the recourse

can the buyer compel? Yes, because freedom of contract

SECURITIES REGULATION CODE

1. Under the Securities Regulation Code, which body has jurisdiction over intra-corporate controversies?

Under Sec. 5.2 of the SRC, the SEC’s jurisdiction over the following cases was transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: (2006 Bar)

a) Devices and schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of the associations or organizations registered with the Commission;

b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations;

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree (PD 902-A).

2. What is tender offer?Tender offer means publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company as defined in SRC Rule 3.

When is a tender offer mandatory?a) Any person or group of persons acting in concert, who intends to acquire thirty

five percent (35%)1 or more of equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all holders of such class, subject to paragraph (9)(E) of this Rule.

b) Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%)1 or more of equity shares in a public company in one or more transactions within a period of twelve (12) months, shall be required to make a tender offer to all holders of such class for the number of shares so acquired within the said period.

c) If any acquisition of even less than thirty five percent (35%) would result in ownership of over fifty one percent (51%) of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party.  The acquirer in such a tender offer shall be required to accept any and all securities thus tendered.

3. Definition of securities“Securities” are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character.

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Examples of securities:(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-

backed securities; (b) Investment contracts, certificates of interest or participation in a profit sharing

agreement, certificates of deposit for a future subscription; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting

trust certificates or similar instruments; (f) Proprietary or non proprietary membership certificates incorporations;  and (g) Other instruments as may in the future be determined by the SEC

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