Trust Receipts (PD 115)

Read this post in conjunction with Letters of Credit. A trust receipt is is a security transaction intended to help finance importers or dealers in merchandise by allowing them to obtain delivery of the goods under certain agreements. It embodies a security transaction where an entruster (a bank) lends money to an entrustee (a borrower) in order to purchase goods but with the entruster having a lien over all or part of the security while the entrustee is obliged to pay the entrustee the amount owed him. This amount comes from the proceeds of the sale of the goods; the remaining balance goes to the entrustee. If the goods aren't sold in accordance to the terms and conditions of the trust receipt they must be turned over to the entruster.

Elements and Obligations

1.) Entrustee

A person who takes possession of goods, documents or instruments under a trust receipts transaction, and any of his successors-in-interest for the purpose(s) specified in the trust receipt agreement. Simply put, the borrower. He is bound to hold the goods in trust for the entrustor and return them if unsold or, if sold, turn over the amount owed to the entruster (and can keep what's left.) Failure to turn over the money the entrustee owes the entruster is treated as estafa under the Revised Penal Code and will be punished accordingly.

2.) Entruster

The person who has title over the goods, documents or instrument in the transaction, including his successors-in-interest for the same purposes (a.k.a. the bank.) It releases the goods to the trustee when the trustee executes the trust receipt. The nature of its title is that of a security interest. The entruster is, by legal fiction, the owner of the goods until paid by the entrustee. The entruster can't mortgage the property because it doesn't have free disposal of the goods (because of the trust receipt) and can't be responsible as a principal or seller under any sale or contract to sell the entrustee makes. It also bears the loss after the goods are delivered to it.

3.) Goods

Includes chattels and personal property other than money, things in action or things attached to land in order to become part of the real property.

4.) Security Interest

A property interest in goods, documents or instruments to secure the performance of some obligations of the entrustee or some third persons to the entruster and includes title (which is either absolute or not) whenever the title is is substance taken or retained for security only.

There is no contract of agency established when a trust receipt is executed. An agreement between the entruster and entrustee can be changed (by a Memorandum of Agreement, for instance) if the new terms and conditions are incompatible with the old ones. A breach of the new agreement has only a civil liability and no criminal liability. (Pilipinas Bank vs. Ong, GR 133176, August 8, 2002.)

Regarding the release  of goods, they may also be released under the following instances:

1.) Their sale/procurement of their sale

2.) Their loading, unloading, shipment or transshipment or otherwise handling them in a way preliminary or necessary for their sale

3.) Their manufacture/processing for the purpose of ultimate sale (in this case, the entruster retains ownership over the goods in their original or processed form until the entruster has fully complied with his obligations under the trust receipts