In Hur Tin Yang v. People, the Supreme Court ruled that a transaction structured as a trust receipt can be recharacterized as a simple loan if the involved parties knew the goods were not intended for resale. This means that even if documents are labeled as “trust receipts,” the true intention behind the agreement determines its legal nature. This decision protects borrowers from potential criminal liability when the substance of a transaction is merely a loan secured by goods.

The Case of Construction Materials: Loan or Trust Deceit?

Hur Tin Yang, representing Supermax Philippines, Inc., was charged with estafa for failing to turn over proceeds from construction materials allegedly held under trust receipts from Metropolitan Bank and Trust Company (Metrobank). The core issue was whether the transactions were genuine trust receipt agreements or disguised loans, considering Metrobank knew the materials were for Supermax’s use, not resale.

The Regional Trial Court (RTC) initially convicted Hur Tin Yang, but the Court of Appeals (CA) affirmed this decision, leading to the present Supreme Court review. The Supreme Court emphasized that courts must look beyond the titles of contracts to discern the parties’ true intentions. As the Court articulated:

Section 4. What constitutes a trust receipts 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:

The Court examined precedents like Ng v. People and Land Bank of the Philippines v. Perez, where similar trust receipt arrangements were deemed simple loans. These cases highlighted that when a bank knows the materials are for use, not resale, the transaction falls outside the purview of a trust receipt agreement. Building on this understanding, the Court underscored the importance of the intent of the parties over the formal labeling of the transaction.

The Court reasoned that a trust receipt transaction fundamentally involves an obligation to either sell goods and remit proceeds or return the goods if unsold. In this case, since the materials were for Supermax’s use, the obligation to sell was nonexistent from the start. The Court stated that:

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 fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. x x x (Emphasis supplied.)

The Supreme Court looked at the established facts, especially the prior knowledge of Metrobank regarding the intended use of the construction materials. This knowledge, coupled with the lack of intent for resale, was pivotal in determining that the arrangement was, in essence, a simple loan. The Court stated further that:

Nonetheless, when both parties enter into an agreement knowing fully well that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties would be the return of  the proceeds of the sale  transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.

The Court criticized the practice of banks using trust receipts as a tool to secure loans and exert undue pressure on borrowers. The Court referenced Colinares v. Court of Appeals:

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable. if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks and is prone to misinterpretation x x x.

The Supreme Court ultimately acquitted Hur Tin Yang, emphasizing the constitutional protection against imprisonment for debt. This decision underscores the principle that the true nature of a contract is determined by the intention of the parties, not merely its form. By prioritizing the parties’ intent, the court safeguarded against the misuse of trust receipt agreements as tools for debt collection and criminal prosecution.

In light of this ruling, businesses and individuals should carefully scrutinize the terms and implications of any trust receipt agreements. It is crucial to ensure that the agreement aligns with the actual intent and purpose of the transaction. Understanding this distinction can help avoid potential criminal liability and ensure that contractual obligations are fair and equitable.

FAQs

What was the key issue in this case?	The central issue was whether the transaction between Hur Tin Yang (Supermax) and Metrobank was a trust receipt agreement or a simple loan, based on the intent of the parties.
What is a trust receipt transaction?	A trust receipt transaction involves an entrustee holding goods in trust for an entruster, with the obligation to sell the goods and remit the proceeds or return the goods if unsold.
What is the significance of the entruster’s knowledge in this case?	Metrobank’s knowledge that the construction materials were for Supermax’s use, not resale, was crucial in determining that the transaction was a loan rather than a trust receipt.
How did the Supreme Court differentiate between a trust receipt and a loan in this scenario?	The Court emphasized that if the goods were never intended for sale, and the entruster was aware of this, the transaction is essentially a loan secured by the goods.
What is the penalty for violating a trust receipt agreement?	Violation of a trust receipt agreement can lead to a charge of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, potentially resulting in imprisonment.
Why was Hur Tin Yang acquitted?	Hur Tin Yang was acquitted because the Supreme Court determined that the transaction was a loan, not a trust receipt agreement, and therefore, he could not be held criminally liable for estafa.
What does the ruling mean for banks using trust receipts?	The ruling serves as a warning to banks against misusing trust receipts as a means to secure loans and exert undue pressure on borrowers, especially when the goods are not intended for resale.
Can a trust receipt agreement be recharacterized as a loan?	Yes, if the court finds that the true intention of the parties was to create a loan, and the entruster knew the goods were not for resale, the trust receipt agreement can be recharacterized as a loan.
What should businesses do to avoid similar issues?	Businesses should carefully review trust receipt agreements, ensuring they accurately reflect the transaction’s purpose and intent, and seek legal advice if there is any doubt or ambiguity.

The Supreme Court’s decision in Hur Tin Yang v. People provides critical clarity on the distinction between trust receipt agreements and simple loans. It serves as a reminder that the true intent behind a transaction holds greater weight than its formal documentation. This ruling safeguards against the potential misuse of trust receipts and upholds the constitutional protection against imprisonment for debt, ensuring fairness and equity in commercial transactions.

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: Hur Tin Yang v. People, G.R. No. 195117, August 14, 2013