The Supreme Court has clarified that a transaction is not a trust receipt if the parties know the entrustee cannot return the goods. In Land Bank of the Philippines v. Lamberto C. Perez, the Court ruled that when a bank is aware that materials are used in construction projects and cannot be recovered, the agreement is a loan, not a trust receipt. This distinction is critical because it affects whether a borrower can be charged with estafa (fraud) for failing to pay.

Construction Materials and Trust: When Does a Loan Masquerade as Something Else?

This case revolves around Land Bank of the Philippines (LBP) and Asian Construction and Development Corporation (ACDC). LBP extended credit to ACDC, and the latter used letters of credit and trust receipts to acquire construction materials. When ACDC failed to pay, LBP filed an estafa complaint against ACDC’s officers, alleging a violation of the Trust Receipts Law. The respondents countered that the transactions were merely loans because the materials were used for construction projects and could not be returned. The central legal question is whether the transactions constituted valid trust receipts or simply loans, impacting the potential criminal liability of ACDC’s officers.

The court’s analysis hinged on the nature of a **trust receipt transaction**, defined in Section 4 of Presidential Decree No. 115 (P.D. 115):

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:

In essence, a trust receipt involves the entruster (usually a bank) holding title over goods released to the entrustee (the borrower) who must either sell the goods and remit the proceeds or return the goods if unsold. The failure to do so can lead to estafa charges under Section 13 of P.D. 115, which states:

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.

The Supreme Court emphasized that the intent of the parties is crucial in determining the true nature of the transaction. Article 1371 of the Civil Code supports this:

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

The Court considered the contemporaneous actions of LBP and ACDC. LBP knew ACDC was a construction company and that the materials would be used for projects like the Metro Rail Transit and Clark Centennial Exposition. This knowledge negated the possibility of LBP expecting the return of the construction materials. This aligns with the ruling in Colinares v. Court of Appeals, which held that transactions involving construction materials delivered before the trust receipt are generally considered loans, not trust receipt agreements.

The Court also pointed out that the construction materials, once used, became part of immovable or public domain properties, further eliminating any possibility of LBP reclaiming them. Article 445 of the Civil Code states:

Article 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made thereon, belong to the owner of the land, subject to the provisions of the following articles.

Moreover, Article 420 of the Civil Code defines properties of public dominion:

Article 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some public service or for the development of the national wealth.

The Court distinguished genuine trust receipts from secured loans, highlighting that in true trust receipts, the entruster retains ownership until full payment or sale proceeds are remitted. Since LBP could not realistically expect the return of the materials, the transaction was deemed a loan.

Even if the transactions were considered trust receipts, the Court found no evidence of misappropriation or abuse of confidence by ACDC. The failure to remit proceeds was due to non-payment by ACDC’s clients, a fact LBP did not dispute. The Court also addressed the requirement for the Office of the Solicitor General (OSG) to represent the government in criminal proceedings.

The Court acknowledged two exceptions where a private party can file a petition without OSG intervention: denial of due process and questioning the civil aspect of a decision. However, LBP did not allege any OSG inaction or denial of due process. Additionally, LBP had already assigned ACDC’s debts and the civil liabilities appeared settled, further weakening their claim.

FAQs

What was the key issue in this case?	The key issue was whether the transactions between LBP and ACDC were genuine trust receipts or merely loans, impacting the potential criminal liability for estafa.
What is a trust receipt transaction?	A trust receipt transaction involves an entruster (usually a bank) releasing goods to an entrustee (borrower) who must sell the goods and remit the proceeds or return the goods if unsold. The entruster retains ownership of the goods.
What happens if an entrustee fails to comply with the trust receipt agreement?	Failure to turn over proceeds or return the goods can lead to estafa charges under Section 13 of Presidential Decree No. 115.
Why were the transactions in this case considered loans and not trust receipts?	The transactions were considered loans because LBP knew the construction materials would be used in projects and could not be returned. The intent of the parties and the nature of the goods were considered.
What is the significance of the Colinares case?	Colinares v. Court of Appeals established the principle that transactions involving construction materials delivered before the trust receipt agreement are generally considered loans.
What role does the intent of the parties play in determining the nature of the transaction?	The intent of the parties, as evidenced by their actions, is crucial in determining whether a transaction is a trust receipt or a loan. Article 1371 of the Civil Code supports this principle.
What is the role of the Office of the Solicitor General (OSG) in criminal proceedings?	The OSG is responsible for representing the government in criminal proceedings before the Supreme Court and the Court of Appeals.
When can a private party file a petition in a criminal case without the OSG?	A private party can file a petition without the OSG when there is a denial of due process or when questioning the civil aspect of a decision.
What constitutes misappropriation in a trust receipt transaction?	Misappropriation occurs when the entrustee fails to turn over the proceeds of the sale of the goods or fails to return the goods themselves, without proper authorization.

This ruling underscores the importance of carefully evaluating the nature of transactions and the intent of the parties involved. Banks must be aware of the specific circumstances of the borrower’s business and the feasibility of recovering the goods subject to the trust receipt. This ensures fairness and prevents the misuse of estafa charges in situations that are essentially secured loans.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Land Bank of the Philippines, vs. Lamberto C. Perez, G.R. No. 166884, June 13, 2012