G.R. No.

187919

February 20, 2013

In the main, petitioners submit the following arguments in support of their

motion for reconsideration:

RAFAEL
H.
GALVEZ,
and
KATHERINE
L.
GUY, Petitioners,
vs.
HON. COURT OF APPEALS AND ASIA UNITED BANK, Respondents.

First, the petitioners cannot be charged for estafa whether simple or

syndicated for the element of deceit was absent in the transactions that
transpired between the petitioners and respondent. This is a case of
collection of sum of money, hence, civil in nature.

x----------------x

Second, the petitioners cannot be charged for syndicated estafa defined in

Presidential Decree No. 1689 because they did not solicit funds from the
general public, an indispensable element for syndicated estafa to prosper.5

G.R. No. 187979

ASIA
UNITED
BANK, Petitioner,
vs.
GILBERT G. GUY, PHILIP LEUNG, KATHERINE L. GUY, RAFAEL H.
GALVEZ and EUGENIO H. GALVEZ, .JR.,Respondents.
x----------------x

In our 25 April 2012 Decision, we have more than amply discussed the
petitioners arguments, specifically, as to the first issue whether deceit was
present in the transaction as to warrant prosecution for the crime
of estafa. If only to emphatically write finis to this aspect of the case, we
examine again the petitioners arguments vis--visthis Courts ruling.

G.R. No. 188030

The facts

GILBERT G. GUY, PHILIP LEUNG,

JR., Petitioners,
vs.
ASIA UNITED BANK, Respondents.

and

EUGENIO

H.

GALVEZ,

In 1999, Radio Marine Network Inc. (RMSI) claiming to do business under

the name Smartnet Philippines6 and/or Smartnet Philippines, Inc.
(SPI),7 applied for an Omnibus Credit Line for various credit facilities with
Asia United Bank (AUB). To induce AUB to extend the Omnibus Credit Line,
RMSI, through its directors and officers, presented its Articles of
Incorporation with its 400-peso million capitalization and its congressional
telecom franchise. RMSI was represented by the following officers and
directors occupying the following positions:

RESOLUTION
PEREZ, J.:
We resolve the Motion for Reconsideration filed by petitioner-movants,
Rafael H. Galvez and Katherine L. Guy in G.R. No. 187919, 1 and Gilbert G.
Guy, Philip Leung and Eugenio H. Galvez, Jr. in G.R. No. 188030 2 addressed
to our consilidated Decision dated 25 April 2012 3 finding probable cause to
charge petitioners of the crime of SYNDICATED ESTAFA under Article 315
(2)(a) in relation to Presidential Decree No. 1689.
Our consilidated decision read:
WHEREFORE, the Decision of the Court of Appeals dated 27 June 2008 in
CA-G.R. SP No. 97160 is hereby AFFIRMED with MODIFICATION that
Gilbert G. Guy, Rafael H. Galvez, Philip Leung, Katherine L. Guy and
Eugenio H. Galvez, Jr. be charged for SYNDICATED ESTAFA under Article
315 (2) (a) of the Revised Penal Code in relation to Section 1 of Presidential
Decree No. 1689.4

Gilbert Guy

- Exec. V-Pres./Director

Philip Leung

- Managing Director

Katherine Guy

- Treasurer

Rafael Galvez

- Executive Officer

Eugenio Galvez, Jr.

Chief
Officer/Comptroller

Financial

Satisfied with the credit worthiness of RMSI, AUB granted it a P250 Million
Omnibus Credit Line, under the name of Smartnet Philippines, RMSIs
Division. On 1 February 2000, the credit line was increased to P452 Million
pesos after a third-party real estate mortgage by Goodland Company, Inc.,
an affiliate of Guy Group of Companies, in favor of Smartnet Philippines,
was offered to the bank. Simultaneous to the increase of the Omnibus
Credit Line, RMSI submitted a proof of authority to open the Omnibus
Credit Line and peso and dollar accounts in the name of Smartnet

The Motion for Reconsideration

Philippines, Inc., which Gilbert Guy, et al., represented as a division of

RMSI, as evidenced by the letterhead used in its formal correspondences
with the bank and the financial audit made by SGV & Co., an independent
accounting firm. Attached to this authority was the Amended Articles of
Incorporation of RMSI, doing business under the name of Smartnet
Philippines, and the Secretarys Certificate of SPI authorizing its directors,
Gilbert Guy and Philip Leung to transact with AUB. 8 Prior to this major
transaction, however, and, unknown to AUB, while RMSI was doing
business under the name of Smartnet Philippines, and that there was a
division under the name Smartnet Philippines, Gilbert Guy, et al. formed a
subsidiary corporation, the SPI with a paid-up capital of only P62,500.00.

al.,employed in inducing AUB to part with its money." 9 Our Decision

meticulously discussed how we found probable cause, a finding affirming
that of the prosecutor and the Court of Appeals, to indict petitioners for the
crime of estafa under Article 315 (2)(a) of the Revised Penal Code. 10 We
noted there and we now reiterate that it was neither the petitioners act of
borrowing money and not paying it, nor their denial thereof, but their very
act of deceiving AUB in order for the latter to part with its money that is
sought to be penalized. Thus:
x xx As early as the Penal Code of Spain, which was enforced in the
Philippines as early as 1887 until it was replaced by the Revised Penal
Code in 1932, the act of fraud through false pretenses or similar deceit was
already being punished. Article 335 of the Penal code of Spain punished a
person who defrauded another by falsely pretending to possess any
power, influence, qualification, property, credit, agency or business, or by
means of similar deceit.11

Believing that SPI is the same as Smartnet Philippines - the division of RMSI
- AUB granted to it, among others, Irrevocable Letter of Credit No. 990361
in the total sum of $29,300.00 in favor of Rohde & Schwarz Support Centre
Asia Ptd. Ltd., which is the subject of these consolidated petitions. To cover
the liability of this Irrevocable Letter of Credit, Gilbert Guy executed
Promissory Note No. 010445 in behalf of SPI in favor of AUB. This
promissory note was renewed twice, once, in the name of SPI (Promissory
Note No. 011686), and last, in the name of Smartnet Philippines under
Promissory Note No. 136131, bolstering AUBs belief that RMSIs directors
and officers consistently treated this letter of credit, among others, as
obligations of RMSI.

Under Article 315 (2)(a) of the Revised Penal Code, estafa is committed by
any person who shall defraud another by, among others, false pretenses or
fraudulent acts executed prior to or simultaneous with the commission of
fraud, i.e., by using a fictitious name, falsely pretending to possess power,
influence, qualifications, property, credit, agency, business or imaginary
transactions; or by means of other similar deceits.

When RMSIs obligations remained unpaid, AUB sent letters demanding

payments. RMSI denied liability contending that the transaction was
incurred solely by SPI, a corporation which belongs to the Guy Group of
Companies, but which has a separate and distinct personality from RMSI.
RMSI further claimed that while Smartnet Philippines is an RMSI division,
SPI, is a subsidiary of RMSI, and hence, is a separate entity.

Underscoring the aforesaid discussion, we found that:

First, Gilbert Guy, Philip Leung, Katherine Guy, Rafael Galvez and Eugene
Galvez, Jr., interlocking directors of RMSI and SPI, represented to AUB in
their transactions that Smartnet Philippines and SPI were one and the
same entity. While Eugene Galvez, Jr. was not a director of SPI, he actively
dealt with AUB in his capacity as RMSIs Chief Financial Officer/Comptroller
by falsely representing that SPI and RMSI were the same entity. Gilbert
Guy, Philip Leung, Katherine Guy, Rafael Galvez, and Eugene Galvez, Jr.
used the business names Smartnet Philippines, RMSI, and SPI
interchangeably and without any distinction. They successfully did this by
using the confusing similarity of RMSIs business name, i.e., Smartnet
Philippines its division, and, Smartnet Philippines, Inc. the subsidiary
corporation. Further, they were able to hide the identity of SPI, by having
almost the same directors as that of RMSI. In order to let it appear that SPI
is the same as that of Smartnet Philippines, they submitted in their
application documents of RMSI, including its Amended Articles of
Incorporation, third-party real estate mortgage of Goodland Company in
favor of Smartnet Philippines, and audited annual financial statement of
SGV & Co. Gilbert Guy, et al. also used RMSI letterhead in their official
communications with the bank and the contents of these official
communications conclusively pointed to RMSI as the one which transacted
with the bank.

Aggrieved, AUB filed a case of syndicated estafa under Article 315 (2)(a) of
the Revised Penal Code in relation to Section 1 of Presidential Decree No.
1689 against the interlocking directors of RMSI and SPI, namely, Gilbert G.
Guy, Rafael H. Galvez, Philip Leung, Katherine L. Guy, and Eugenio H.
Galvez, Jr., before the Office of the City Prosecutor of Pasig City.
AUB alleged that the directors of RMSI deceived it into believing that SPI
was a division of RMSI, only to insist on its separate juridical personality
later on to escape from its liabilities with AUB. AUB contended that had it
not been for the fraudulent scheme employed by Gilbert Guy, et al., AUB
would not have parted with its money, which, including the controversy
subject of this petition, amounted to hundreds of millions of pesos.
Our Ruling
We already emphasized in the 25 April 2012 Decision that "this controversy
could have been just a simple case for collection of sum of money had it
not been for the sophisticated fraudulent scheme which Gilbert Guy, et

These circumstances are all indicia of deceit. Deceit is the false

representation of a matter of fact whether by words or conduct, by false or
misleading allegations, or by concealment of that which should have been
disclosed which deceives or is intended to deceive another so that he shall
act upon it to his legal injury. [Citation omitted]

their act of representing SPI as RMSIs Division, were indicia of fraudulent

acts because they fully well know, even before transacting with the bank,
that: (a) SPI was a separate entity from Smartnet Philippines, the RMSIs
Division, which has the Omnibus Credit Line; and (b) despite this
knowledge, they misrepresented to the bank that SPI is RMSIs division.
Had it not [been] for this false representation, AUB would [not] have
granted SPIs letter of credit to be secured with a promissory note because
SPI as a corporation has no credit line with AUB and SPI by its own, has no
credit standing.

Second, the intent to deceive AUB was manifest from the start. Gilbert
Guy et al.[,] laid down first all the necessary materials they need for this
deception before defrauding the bank by first establishing Smartnet
Philippines as a division of Radio Marine under which Radio Marine Network
Inc. operated its business. Then it organized a subsidiary corporation, the
SPI, with a capital of only P62,000.00. Later, it changed the corporate
name of Radio Marine Network Inc. into RMSI.

Fourth, it is not in dispute that the bank suffered damage, which, including
this controversy, amounted to hundreds of millions of pesos. 12 (Emphasis
supplied)

Undoubtedly, deceit here was conceived in relation to Gilbert Guy, et

al.s transaction with AUB. There was a plan, documented in corporations
papers, that led to the defraudation of the bank. The circumstances of the
directors and officers acts in inserting in Radio Marine the name of
Smartnet; the creation of its division Smartnet Philippines; and its
registration as business name as Smartnet Philippines with the Department
of Trade and Industry, together with the incorporation of its subsidiary, the
SPI, are indicia of a pre-conceived scheme to create this elaborate fraud,
victimizing a banking institution, which perhaps, is the first of a kind in
Philippine business.

We revisit, however, our ruling as to the second issue, i.e., whether or not
the petitioners may be charged and tried for syndicated estafa under
Presidential Decree No. 1689.
While this case is all about finding probable cause to hold the petitioners
for trial for syndicated estafa, and, while, without doubt, a commercial
bank is covered by Presidential Decree No. 1689, as deduced from our
pronouncements in People v. Balasa,13 People v. Romero,14 and People v.
Menil, Jr.,15 cases where the accused used the legitimacy of the
entities/corporations to perpetrate their unlawful and illegal acts, a careful
re-evaluation of the issues indicate that while we had ample reason to look
into whether funds from commercial bank may be subject of syndicated
estafa, the issue of who may commit the crime should likewise be
considered.

x xxx
Third, AUB would not have granted the Irrevocable Letter of Credit No.
990361, among others, had it known that SPI which had only P62,500.00
paid-up capital and no assets, is a separate entity and not the division or
business name of RMSI. x xx.

Section 1 of Presidential Decree No. 1689 provides:

Section 1. Any person or persons who shall commit estafa or other forms
of swindling as defined in Article 315 and 316 of the Revised Penal Code,
as amended, shall be punished by life imprisonment to death if the
swindling (estafa) is committed by a syndicate consisting of five or more
persons formed with the intention of carrying out the unlawful or illegal
act, transaction, enterprise or scheme, and the defraudation results in the
misappropriation of moneys contributed by stockholders, or members of
rural banks, cooperative, "samahangnayon(s)", or farmers associations, or
of funds solicited by corporations/associations from the general public.

x xxx
It is true that ordinarily, in a letter of credit transaction, the bank merely
substitutes its own promise to pay for the promise to pay of one of its
customers, who in turn promises to pay the bank the amount of funds
mentioned in the letters of credit plus credit or commitments fees mutually
agreed upon. Once the issuing bank shall have paid the beneficiary after
the latters compliance with the terms of the letter of credit, the issuing
bank is entitled to reimbursement for the amount it paid under the letter of
credit. [Citation omitted]

When not committed by a syndicate as above defined, the penalty

imposable shall be reclusion temporal to reclusion perpetua if the amount
of the fraud exceeds 100,000 pesos.

In the present case, however, no reimbursement was made outright,

precisely because the letter of credit was secured by a promissory note
executed by SPI. The bank would have not agreed to this transaction had it
not been deceived by Gilbert Guy, et al. into believing the RMSI and SPI
were one and the same entity. Guy and his cohorts acts in (1) securing the
letter of credit guaranteed by a promissory note in behalf of SPI; and, (2)

Thus, the elements of syndicated estafa are: (a) estafa or other forms of
swindling as defined in Article 315 and 316 of the Revised Penal Code is
committed; (b) the estafa or swindling is committed by a syndicate of five
or more persons; and (c) defraudation results in the misappropriation of

moneys contributed by stockholders, or members of rural banks,

cooperatives, "samahangnayon(s)," or farmers associations or of funds
solicited by corporations/associations from the general public.

Corporation, a corporation engaged in marketing which later engaged in

soliciting funds and investments from the public.1wphi1
A similar reiteration was by People v. Menil, Jr., where the accused Vicente
Menil, Jr. and his wife were proprietors of a business operating under the
name ABM Appliance and Upholstery. Through ushers and sales executives,
the accused solicited investments from the general public and thereafter,
misappropriated the same.

On review of the cases applying the law, we note that the swindling
syndicate used the association that they manage to defraud the general
public of funds contributed to the association. Indeed, Section 1 of
Presidential Decree No. 1689 speaks of a syndicate formed with the
intention of carrying out the unlawful scheme for the misappropriation of
the money contributed by the members of the association. In other words,
only those who formed and manage associations that receive contributions
from the general public who misappropriated the contributions can commit
syndicated estafa.

The rulings in Romero and Menil, Jr. further guide us in the present case.
Notably, Romero and Menil, Jr. applied the second paragraph of Section 1
of Presidential Decree No. 1689 because the number of the accused was
below five, the minimum needed to form the syndicate.

Gilbert Guy, et al., however, are not in any way related either by
employment or ownership to AUB. They are outsiders who, by their
cunning moves were able to defraud an association, which is the AUB.
Theirs would have been a different story, had they been managers or
owners of AUB who used the bank to defraud the public depositors.

The second paragraph, Section 1 of Presidential Decree No. 1689 states:

When not committed by a syndicate as above defined, the penalty
imposable shall be reclusion temporal to reclusion perpetua if the amount
of fraud exceeds 100,000 pesos.1wphi1

This brings to fore the difference between the case of Gilbert Guy et
al., and that of People v. Balasa, People v. Romero, and People v. Menil, Jr.

Effectively, Romero and Menil, Jr. read as written the phrase "when not
committed by a syndicate as above defined," such that, for the second
paragraph of Section 1 to apply the definition of swindling in the first
paragraph must be satisfied: the offenders should have used the
association they formed, own or manage to misappropriate the funds
solicited from the public.

In People v. Balasa, the accused formed the Panata Foundation of the

Philippines, Inc., a non-stock/non-profit corporation and the accused
managed its affairs, solicited deposits from the public and misappropriated
the same funds.

In sum and substance and by precedential guidelines, we hold

that, first, Presidential Decree No. 1689 also covers commercial
banks; second, to be within the ambit of the Decree, the swindling must be
committed through the association, the bank in this case, which operate
on funds solicited from the general public; third,when the number of the
accused are five or more, the crime is syndicated estafa under paragraph 1
of the Decree; fourth, if the number of accused is less than five but the
defininf element of the crime under the Decree is present, the second
paragraph of the Decree applies (People v. Romero, People v. Balasa); fifth,
the Decree does not apply regardless of the number of the accused, when
(a) the entity soliciting funds from the general public is the victim and not
the means through which the estafa is committed, or (b) the offenders are
not owners or employees who used the association to perpetrate the
crime, in which case, Article 315 (2)(a) of the Revised Penal Code applies.

We clarified in Balasa that although, the entity involved, the Panata

Foundation, was not a rural bank, cooperative, samahangnayon or farmers
association, it being a corporation, does not take the case out of the
coverage of Presidential Decree No. 1689. Presidential Decree No. 1689s
third "whereas clause" states that it also applies to other
"corporations/associations operating on funds solicited from the general
public."
It
is
this
pronouncement
about
the
coverage
of
"corporations/associations" that led us to the ruling in our 25 April 2012
Decision that a commercial bank falls within the coverage of Presidential
Decree No. 1689. We have to note though, as we do now, that
the Balasa case, differs from the present petition because while
in Balasa, the offenders were insiders, i.e., owners and employees who
used their position to defraud the public, in the present petition, the
offenders were not at all related to the bank. In other words, while
in Balasa the offenders used the corporation as the means to defraud the
public, in the present case, the corporation or the bank is the very victim of
the offenders.

The present petition involves an estafa case filed by a commercial bank as

the offended party against the accused who, as clients, defrauded the
bank.

Balasa has been reiterated in People v. Romero, where the accused Martin
Romero and Ernesto Rodriguez were the General Manager and Operation
Manager, respectively, of Surigao San Andres Industrial Development

WHEREFORE, we MODIFY our 25 April 2012 Decision and RULE that Gilbert
G. Guy, Rafael H. Galvez, Philip Leung, Katherine L. Guy and Eugenio H.

Galvez, Jr., be charged for SIMPLE ESTAFA under Article 315 (2)(a) of the
Revised Penal Code.

BANKING
GROUP
LIMITED
CORPORATION, respondents.

and

SECURITY

BANK

SO ORDERED.

DECISION

TINGA, J.:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CAG.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al.," promulgated on 31 January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract 3 whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner
was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. 4
The Turnkey Contract provides that: (1) the target completion date of the
Project shall be on 1 June 2000, or such later date as may be agreed upon
between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure, and delays caused by
LHC itself.5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract.6

G.R. No. 146717

To secure performance of petitioner's obligation on or before the target

completion date, or such time for completion as may be determined by the
parties' agreement, petitioner opened in favor of LHC two (2) standby
letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with

November 22, 2004

TRANSFIELD
PHILIPPINES,
INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND

respondent Security Bank Corporation (SBC)8each in the amount of

US$8,988,907.00.9

Trial Court (RTC) of Makati. 17 Petitioner sought to restrain respondent LHC

from calling on the Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities or any renewals or
substitutes thereof. The RTC issued a seventy-two (72)-hour temporary
restraining order on the same day. The case was docketed as Civil Case No.
00-1312 and raffled to Branch 148 of the RTC of Makati.

In the course of the construction of the project, petitioner sought various

EOT to complete the Project. The extensions were requested allegedly due
to several factors which prevented the completion of the Project on target
date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a
series of legal actions between the parties which culminated in the instant
petition.

After appropriate proceedings, the trial court issued an Order on 9

November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.18

The first of the actions was a Request for Arbitration which LHC filed before
the Construction Industry Arbitration Commission (CIAC) on 1 June
1999.10 This was followed by another Request for Arbitration, this time filed
by petitioner before the International Chamber of Commerce (ICC) 11 on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date.

The RTC, in its Order19 dated 24 November 2000, denied petitioner's

application for a writ of preliminary injunction. It ruled that petitioner had
no legal right and suffered no irreparable injury to justify the issuance of
the writ. Employing the principle of "independent contract" in letters of
credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that
the principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled that the banks
were mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could submit
the required certification of its claims.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to

the pertinent provisions of the Turnkey Contract, 12 petitionerin two
separate letters13 both dated 10 August 2000advised respondent banks
of the arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution
of disputes before the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the Securities in favor of
LHC or any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.

Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of Appeals
via a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction. 20 Petitioner
submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC. It asserted that until the
fact of delay could be established, LHC had no right to draw on the
Securities for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to

petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on
the Securities if and when LHC calls on them. 15

Refuting petitioner's contentions, LHC claimed that petitioner had no right

to restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main
contract between them as shown on the face of the two Standby Letters of
Credit which both provide that the banks have no responsibility to
investigate the authenticity or accuracy of the certificates or the
declarant's capacity or entitlement to so certify.

LHC asserted that additional extension of time would not be warranted;

accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000
until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on
the securities for the payment of liquidated damages for the delay. 16

In its Resolution dated 28 November 2000, the Court of Appeals issued a

temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to
cease and desist from transferring, paying or in any manner disposing of
the Securities.

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,

with prayer for temporary restraining order and writ of preliminary
injunction, against herein respondents as defendants before the Regional

However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January
2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank
and withdrew the total amount of US$4,950,000.00, thereby reducing the
balance in ANZ Bank to US$1,852,814.00.

misrepresented the supposed existence of delay despite its knowledge that

the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that,
under the premises, injunction was the appropriate remedy obtainable
from the competent local courts.

On 2 February 2001, the appellate court dismissed the petition for

certiorari. The appellate court expressed conformity with the trial court's
decision that LHC could call on the Securities pursuant to the first principle
in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it
was of no moment that he had not complied with the underlying contract.
Further, the appellate court held that even assuming that the trial court's
denial of petitioner's application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not correctible
by certiorari, unlike error of jurisdiction.

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF

CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.

On 25 August 2003, petitioner filed a Supplement to the Petition 22 and

Supplemental Memorandum,23 alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing of
the petition facts and admissions were discovered which demonstrate that
LHC knowingly misrepresented that petitioner had incurred delays
notwithstanding its knowledge and admission that delays were excused
under the Turnkey Contractto be able to draw against the Securities.
Reiterating that fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling from this Court that
the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage if
LHC would be allowed to use the proceeds of the Securities and not
ordered to return the amounts it had wrongfully drawn thereon.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE

SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S
DISPUTES BY THE APPROPRIATE TRIBUNAL.

In its Manifestation dated 8 September 2003, 24 LHC contends that the

supplemental pleadings filed by petitioner present erroneous and
misleading information which would change petitioner's theory on appeal.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN

RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.

In yet another Manifestation dated 12 April 2004,25 petitioner alleges that

on 18 February 2004, the ICC handed down its Third Partial Award,
declaring that LHC wrongfully drew upon the Securities and that petitioner
was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.

Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:

WHETHER OR NOT PETITIONER WILL SUFFER

IRREPARABLE DAMAGE IN THE EVENT THAT:

GRAVE

AND

LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that

petitioner's Manifestation dated 12 April 2004 enlarges the scope of its
Petition for Review of the 31 January 2001 Decision of the Court of Appeals.
LHC notes that the Petition for Review essentially dealt only with the issue
of whether injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds that petitioner has
filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties
made
claims
and
counterclaims
arising
from
petitioner's
performance/misperformance of its obligations as contractor for LHC; and
(2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon
Hydro Corporation" before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ

BANK AND SECURITY BANK ARE ALLOWED TO RELEASE,
THE REMAINING BALANCE OF THE SECURITIES PRIOR TO
THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER
AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the
"independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately

In its Comment to petitioner's Motion for Leave to File Addendum to

Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the action to enforce
the ICC's partial award is now fully within the Makati RTC's jurisdiction in
Civil Case No. 04-332. LHC asserts that petitioner is engaged in forumshopping by keeping this appeal and at the same time seeking the suit for
enforcement of the arbitral award before the Makati court.

of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying. 30 The use of
credits in commercial transactions serves to reduce the risk of nonpayment
of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the
risk of nonperformance. Generally, credits in the non-sale settings have
come to be known as standby credits.31
There are three significant differences between commercial and standby
credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by
the seller-beneficiary of documents that show he has taken affirmative
steps to comply with the sales agreement. In the standby type, the credit
is payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's draft tend to
show that the applicant has not performed. The beneficiary of a
commercial credit must demonstrate by documents that he has performed
his contract. The beneficiary of the standby credit must certify that his
obligor has not performed the contract.32

Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that

the Court of Appeals correctly dismissed the petition for certiorari. Invoking
the independence principle, SBC argues that it was under no obligation to
look into the validity or accuracy of the certification submitted by
respondent LHC or into the latter's capacity or entitlement to so certify. It
adds that the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve any remedial
purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13
March 200328 posits that its actions could not be regarded as unjustified in
view of the prevailing independence principle under which it had no
obligation to ascertain the truth of LHC's allegations that petitioner
defaulted in its obligations. Moreover, it points out that since the Standby
Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer
for preliminary injunction had been rendered moot and academic.

By definition, a letter of credit is a written instrument whereby the writer

requests or authorizes the addressee to pay money or deliver goods to a
third person and assumes responsibility for payment of debt therefor to the
addressee.33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a
binding contract between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes between the
parties thereto.34

At the core of the present controversy is the applicability of the

"independence principle" and "fraud exception rule" in letters of credit.
Thus, a discussion of the nature and use of letters of credit, also referred to
simply as "credits," would provide a better perspective of the case.

Since letters of credit have gained general acceptability in international

trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP. 35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which
was in 1993.36

The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is
not strictly contractual, because both privity and a meeting of the minds
are lacking, yet strict compliance with its terms is an enforceable right. Nor
is it a third-party beneficiary contract, because the issuer must honor
drafts drawn against a letter regardless of problems subsequently arising
in the underlying contract. Since the bank's customer cannot draw on the
letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally,
it is not in itself a negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft presented under it is
often negotiable.29

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this

Court ruled that the observance of the UCP is justified by Article 2 of the
Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals, 38 this Court ruled that there
being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit, not only between or among
banks themselves but also between banks and the seller or the buyer, as
the case may be, the applicability of the UCP is undeniable.

In commercial transactions, a letter of credit is a financial device

developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests

Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be
based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a bank to pay,
accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the applicant and the issuing bank.

documents are presented and the conditions of the credit are complied
with.41 Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main
contract. As the principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and originating
contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only
the issuing bank that may invoke the independence principle on letters of
creditdoes not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions.
As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.

Thus, the engagement of the issuing bank is to pay the seller or

beneficiary of the credit once the draft and the required documents are
presented to it. The so-called "independence principle" assures the seller
or the beneficiary of prompt payment independent of any breach of the
main contract and precludes the issuing bank from determining whether
the main contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for
the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility
for the description, quantity, weight, quality, condition, packing, delivery,
value or existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or standing of
the consignor, the carriers, or the insurers of the goods, or any other
person whomsoever.39

Letters of credit are employed by the parties desiring to enter into

commercial transactions, not for the benefit of the issuing bank but mainly
for the benefit of the parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the
other hand, the other party to the business transaction, i.e., the beneficiary
of the letter of credit, can be rest assured of being empowered to call on
the letter of credit as a security in case the commercial transaction does
not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called "beneficiary."

The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a
typical standby; or (b) independence may be only as to the justification
aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of
the credit.40

Petitioner's argument that any dispute must first be resolved by the

parties, whether through negotiations or arbitration, before the beneficiary
is entitled to call on the letter of credit in essence would convert the letter
of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the
release of funds under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit
is drawable only after settlement of the dispute on the contract entered
into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract
to the very party for whom the benefit is intended. As beneficiary of the
letter of credit, LHC asserts it is entitled to invoke the principle.

Professor John F. Dolan, the noted authority on letters of credit, sheds more
light on the issue:
The standby credit is an attractive commercial device for many of
the same reasons that commercial credits are attractive.
Essentially, these credits are inexpensive and efficient. Often they
replace surety contracts, which tend to generate higher costs than

As discussed above, in a letter of credit transaction, such as in this case,

where the credit is stipulated as irrevocable, there is a definite undertaking
by the issuing bank to pay the beneficiary provided that the stipulated

credits do and are usually triggered by a factual determination

rather than by the examination of documents.

quarters to overlook this distinction between surety contracts and

standby credits and to reallocate burdens by permitting the obligor
or the issuer to litigate the performance question before payment
to the beneficiary.42

Because parties and courts should not confuse the different

functions of the surety contract on the one hand and the standby
credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share a
common
purpose.
Both
ensure
against
the
obligor's
nonperformance. They function, however, in distinctly different
ways.

While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to
draw thereon. The situation itself emasculates petitioner's posture that
LHC cannot invoke the independence principle and highlights its puerility,
more so in this case where the banks concerned were impleaded as parties
by petitioner itself.

Traditionally, upon the obligor's default, the surety undertakes to

complete the obligor's performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve
costs of determining whether the obligor defaulted (a matter over
which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary
is obvious. He knows that the surety, often an insurance company,
is a strong financial institution that will perform if the obligor does
not. The beneficiary also should understand that such performance
must await the sometimes lengthy and costly determination that
the obligor has defaulted. In addition, the surety's performance
takes time.

Respondent banks had squarely raised the independence principle to

justify their releases of the amounts due under the Securities. Owing to the
nature and purpose of the standby letters of credit, this Court rules that
the respondent banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was "ministerial" for them
to honor the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under
this Contract, the Contractor at its cost shall on the
Commencement Date provide security to the Employer in the form
of two irrevocable and confirmed standby letters of credit (the
"Securities"), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the
Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually
renewable basis.44

The standby credit has different expectations. He reasonably

expects that he will receive cash in the event of nonperformance,
that he will receive it promptly, and that he will receive it before
any litigation with the obligor (the applicant) over the nature of the
applicant's performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial
burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.

8.7.1 If the Contractor fails to comply with Clause 8.2, the

Contractor shall pay to the Employer by way of liquidated damages
("Liquidated Damages for Delay") the amount of US$75,000 for
each and every day or part of a day that shall elapse between the
Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in
the aggregate not exceed 20% of the Contract Price. The
Contractor shall pay Liquidated Damages for Delay for each day of
the delay on the following day without need of demand from the
Employer.

In the standby credit case, however, the beneficiary avoids that

litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the
applicant has, in fact, performed and that the beneficiary's
presentation of those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract, or in breach
of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the
beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some

8.7.2 The Employer may, without prejudice to any other method of

recovery, deduct the amount of such damages from any monies
due, or to become due to the Contractor and/or by drawing on the
Security."45

10

A contract once perfected, binds the parties not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which
according to their nature, may be in keeping with good faith, usage, and
law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency
for which the Securities have been proffered. Thus, even without the use of
the "independence principle," the Turnkey Contract itself bestows upon
LHC the right to call on the Securities in the event of default.

fraudulent abuse of the independent purpose of the letter of credit and not
only fraud under the main agreement; and (c) irreparable injury might
follow if injunction is not granted or the recovery of damages would be
seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that
it is entitled to a total extension of two hundred fifty-three (253) days
which would move the target completion date. It argued that if its claims
for extension would be found meritorious by the ICC, then LHC would not
be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.51

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's
call on the Securities is wrongful because it fraudulently misrepresented to
ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals.
It asserts that the "fraud exception" exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy available
to it.

Before a writ of preliminary injunction may be issued, there must be a clear

showing by the complaint that there exists a right to be protected and that
the acts against which the writ is to be directed are violative of the said
right.52 It must be shown that the invasion of the right sought to be
protected is material and substantial, that the right of complainant is clear
and unmistakable and that there is an urgent and paramount necessity for
the writ to prevent serious damage. 53 Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard
compensation.54

Citing Dolan's treatise on letters of credit, petitioner argues that the

independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles
of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is
largely intertwined with the fact of default which is the self-same issue
pending resolution before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement.47

In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own
admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey
Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of
default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

Would injunction then be the proper remedy to restrain the alleged

wrongful draws on the Securities?

4.2.5 The Employer shall give the Contractor seven days' notice of
calling upon any of the Securities, stating the nature of the default
for which the claim on any of the Securities is to be made, provided
that no notice will be required if the Employer calls upon any of the
Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within
14 days of their expiration in accordance with Clause 4.2.2. 56

Most writers agree that fraud is an exception to the independence

principle. Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify
as fraud sufficient to support an injunction against payment. 48 The remedy
for fraudulent abuse is an injunction. However, injunction should not be
granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes

11

8.7.2 The Employer may, without prejudice to any other method of

recovery, deduct the amount of such damages from any monies
due, or to become due, to the Contractor and/or by drawing on the
Security.57

was wrongful. To repeat, respondent banks' undertaking was simply to pay

once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHC's draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.

The pendency of the arbitration proceedings would not per se make LHC's
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC
would be allowed to call upon the Securities. It is therefore premature and
absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with finality
on the existence of default.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this

Court that the subject letters of credit had been fully drawn. This fact alone
would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.63 In Ticzon v. Video Post Manila, Inc. 64 this Court ruled
that where the period within which the former employees were prohibited
from engaging in or working for an enterprise that competed with their
former employerthe very purpose of the preliminary injunction has
expired, any declaration upholding the propriety of the writ would be
entirely useless as there would be no actual case or controversy between
the parties insofar as the preliminary injunction is concerned.

Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception rule as
a ground to justify the issuance of an injunction. 58 What petitioner did
assert before the courts below was the fact that LHC's draws on the
Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to
bring into play the fraud exception rule to sustain its claim for the issuance
of an injunctive relief. Matters, theories or arguments not brought out in
the proceedings below will ordinarily not be considered by a reviewing
court as they cannot be raised for the first time on appeal. 59 The lower
courts could thus not be faulted for not applying the fraud exception rule
not only because the existence of fraud was fundamentally interwoven
with the issue of default still pending before the arbitral tribunals, but more
so, because petitioner never raised it as an issue in its pleadings filed in
the courts below. At any rate, petitioner utterly failed to show that it had a
clear and unmistakable right to prevent LHC's call upon the Securities.

In the instant case, the consummation of the act sought to be restrained

had rendered the instant petition mootfor any declaration by this Court
as to propriety or impropriety of the non-issuance of injunctive relief could
have no practical effect on the existing controversy. 65 The other issues
raised by petitioner particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according to it, could properly
be threshed out in a separate proceeding.

Of course, prudence should have impelled LHC to await resolution of the

pending issues before the arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey Contract did not require
LHC to do so and, therefore, it was merely enforcing its rights in
accordance with the tenor thereof. Obligations arising from contracts have
the force of law between the contracting parties and should be complied
with in good faith.60 More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil
Code,61 petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals that
default had occurred would justify the enforcement of the Securities.
However, the fact is petitioner did not do so; hence, it would have to live
with its inaction.

One final point. LHC has charged petitioner of forum-shopping. It raised the
charge on two occasions. First, in its Counter-Manifestation dated 29 June
200466 LHC alleges that petitioner presented before this Court the same
claim for money which it has filed in two other proceedings, to wit: ICC
Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati.
LHC argues that petitioner's acts constitutes forum-shopping which should
be punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the
present appeal and at the same time pursuing Civil Case No. 04-332
wherein petitioner pressed for judgment on the issue of whether the funds
LHC drew on the Securities should be returnedpetitioner resorted to
forum-shopping. In both instances, however, petitioner has apparently
opted not to respond to the charge.

With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no obligation
to determine the veracity of LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's call thereon

Forum-shopping is a very serious charge. It exists when a party repetitively

avails of several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and the

12

same essential facts and circumstances, and all raising substantially the
same issues either pending in, or already resolved adversely, by some
other court.67 It may also consist in the act of a party against whom an
adverse judgment has been rendered in one forum, of seeking another and
possibly favorable opinion in another forum other than by appeal or special
civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or
the other court might look with favor upon the other party. 68 To determine
whether a party violated the rule against forum-shopping, the test applied
is whether the elements of litispendentia are present or whether a final
judgment in one case will amount to res judicata in another. 69 Forumshopping constitutes improper conduct and may be punished with
summary dismissal of the multiple petitions and direct contempt of court. 70

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private
respondents.

VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed
parties coming to court as adversaries in seeking a definition of their
respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received
by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly
issued by Bank of Ayudhya, Samyaek Branch, for the account of General
Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the
sale of plastic ropes and "agricultural files," with the petitioner as advising
bank and private respondent Inter-Resin Industrial Corporation as
beneficiary.

Considering the seriousness of the charge of forum-shopping and the

severity of the sanctions for its violation, the Court will refrain from making
any definitive ruling on this issue until after petitioner has been given
ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter

of the foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of
credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the
letter of credit confirmed. The bank did not. Reynaldo Dueas, bank
employee in charge of letters of credit, however, explained to Atty. Tanay
that there was no need for confirmation because the letter of credit would
not have been transmitted if it were not genuine.

Petitioner is hereby required to answer the charge of forum-shopping

within fifteen (15) days from notice.
SO ORDERED.

Between 26 March to 10 April 1981, Inter-Resin sought to make a partial

availment under the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of polyethylene rope to
General Chemicals valued at US$1,320,600.00, the corresponding packing
list, export declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions expressed in the
letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's
Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
documentary stamps, postage and mail issuance." 1 The check was picked
up by Inter-Resin's Executive Vice-President BarcelinaTio. On 10 April 1981,
Bank of America wrote Bank of Ayudhya advising the latter of the
availment under the letter of credit and sought the corresponding
reimbursement therefor.

G.R. No. 105395 December 10, 1993

BANK
OF
AMERICA,
NT
&
SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.

Meanwhile, Inter-Resin, through Ms.Tio, presented to Bank of America the

documents for the second availment under the same letter of credit
consisting of a packing list, bill of lading, invoices, export declaration and

Agcaoili& Associates for petitioner.

13

bills in set, evidencing the second shipment of goods. Immediately upon

receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of
credit. 3Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs personnel of
Thailand, the NBI agents, who were sent to Thailand, discovered that the
vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive Vice
President BarcelinaTio, who, thereafter, were criminally charged for estafa
through falsification of commercial documents. The case, however, was
eventually dismissed by the Rizal Provincial Fiscal who found no prima
facie evidence to warrant prosecution.

confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial availment of the
letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal,
belatedly raise the issue of being only an advising bank; (b) the findings of
the trial court that the ropes have actually been shipped is binding on the
Court; and, (c) Bank of America cannot recover from Inter-Resin because
the drawer of the letter of credit is the Bank of Ayudhya and not InterResin.
If only to understand how the parties, in the first place, got themselves into
the mess, it may be well to start by recalling how, in its modern use, a
letter of credit is employed in trade transactions.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying. 9 To break the impasse, the buyer may be
required to contract a bank to issue a letter of credit in favor of the seller
so that, by virtue of the latter of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of
credit. 10 The buyer and the seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the

peso equivalent of the draft for US$1,320,600.00 on the partial availment
of the now disowned letter of credit. On the other hand, Inter-Resin claimed
that not only was it entitled to retain P10,219,093.20 on its first shipment
but also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence, hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by
the BA which was careless and negligent" 5 for failing to utilize its modern
means of communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in
their favor the presumption of regularity in the performance of official
functions; and (d) Bank of America failed to prove the participation of InterResin or its employees in the alleged fraud as, in fact, the complaint for
estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.

Once the credit is established, the seller ships the goods to the buyer and
in the process secures the required shipping documents or documents of
title. To get paid, the seller executes a draft and presents it together with
the required documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents submitted
by the seller conform with what the letter of credit requires. The bank then
obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title
over the goods, while the buyer acquires said documents and control over
the goods only after reimbursing the bank.

The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a

What characterizes letters of credit, as distinguished from other accessory

contracts, is the engagement of the issuing bank to pay the seller of the
draft and the required shipping documents are presented to it. In turn, this

14

arrangement assures the seller of prompt payment, independent of any

breach of the main sales contract. By this so-called "independence
principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not. 11

generally observed. We have further observed that there being no specific

provisions which govern the legal complexities arising from transactions
involving letters of credit not only between or among banks themselves
but also between banks and the seller or the buyer, as the case may be,
the applicability of the U.C.P. is undeniable.

There would at least be three (3) parties: (a) the buyer, 12 who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of
credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer
upon reimbursement; and, (c) the seller, 14 who in compliance with the
contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.

The first issue raised with the petitioner, i.e., that it has in this instance
merely been advising bank, is outrightly rejected by Inter-Resin and is thus
sought to be discarded for having been raised only on appeal. We cannot
agree. The crucial point of dispute in this case is whether under the "letter
of credit," Bank of America has incurred any liability to the "beneficiary"
thereof, an issue that largely is dependent on the bank's participation in
that transaction; as a mere advising or notifying bank, it would not be
liable, but as a confirming bank, had this been the case, it could be
considered as having incurred that liability. 22

The number of the parties, not infrequently and almost invariably in

international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence
to the letter of credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed the negotiating bank, 18 to
have the draft discounted.

In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular
Life Assurance Co., Ltd., 23 the Court said: Where the issues already raised
also rest on other issues not specifically presented, as long as the latter
issues bear relevance and close relation to the former and as long as they
arise from the matters on record, the court has the authority to include
them in its discussion of the controversy and to pass upon them just as
well. In brief, in those cases where questions not particularly raised by the
parties surface as necessary for the complete adjudication of the rights
and obligations of the parties, the interests of justice dictate that the court
should consider and resolve them. The rule that only issues or theories
raised in the initial proceedings may be taken up by a party thereto on
appeal should only refer to independent, not concomitant matters, to
support or oppose the cause of action or defense. The evil that is sought to
be avoided, i.e., surprise to the adverse party, is in reality not existent on
matters that are properly litigated in the lower court and appear on record.

Being a product of international commerce, the impact of this commercial

instrument transcends national boundaries, and it is thus not uncommon to
find a dearth of national law that can adequately provide for its
governance. This country is no exception. Our own Code of Commerce
basically introduces only its concept under Articles 567-572, inclusive,
thereof. It is no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules. The rules were
later developed into what is now known as the Uniform Customs and
Practice for Documentary Credits ("U.C.P.") issued by the International
Chamber of Commerce. It is by no means a complete text by itself, for, to
be sure, there are other principles, which, although part of lexmercatoria,
are not dealt with the U.C.P.

It cannot seriously be disputed, looking at this case, that Bank of America

has, in fact, only been an advising, not confirming, bank, and this much is
clearly evident, among other things, by the provisions of the letter of credit
itself, the petitioner bank's letter of advice, its request for payment of
advising fee, and the admission of Inter-Resin that it has paid the same.
That Bank of America has asked Inter-Resin to submit documents required
by the letter of credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft required
by the letter of credit is to be drawn under the account of General
Chemicals (buyer) only means the same had to be presented to Bank of
Ayudhya (issuing bank) for payment. It may be significant to recall that the
letter of credit is an engagement of the issuing bank, not the advising
bank, to pay the draft.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted,

to the extent of their pertinency, the application in our jurisdiction of this
international commercial credit regulatory set of rules. 20 In Bank of
Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P.
is justified by Article 2 of the Code of Commerce which expresses that, in
the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and customs

15

No less important is that Bank of America's letter of 11 March 1981 has

expressly stated that "[t]he enclosure is solely an advise of credit opened
by the abovementioned correspondent and conveys no engagement by
us." 24This written reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the provisions of
U.C.P.

until reimbursement is obtained, Inter-Resin, as the drawer of the draft,

continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go after
the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of America
the right of reimbursement from the issuing bank, Bank of Ayudhyawhich,
in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of
credit, however, Bank of America may now turn to Inter-Resin for
restitution.

As an advising or notifying bank, Bank of America did not incur any

obligation more than just notifying Inter-Resin of the letter of credit issued
in its favor, let alone to confirm the letter of credit. 25 The bare statement
of the bank employees, aforementioned, in responding to the inquiry made
by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter
of credit certainly did not have the effect of novating the letter of credit
and Bank of America's letter of advise, 26 nor can it justify the conclusion
that the bank must now assume total liability on the letter of credit.
Indeed, Inter-Resin itself cannot claim to have been all that free from fault.
As the seller, the issuance of the letter of credit should have obviously
been a great concern to it. 27 It would have, in fact, been strange if it did
not, prior to the letter of credit, enter into a contract, or negotiated at the
every least, with General Chemicals. 28 In the ordinary course of business,
the perfection of contract precedes the issuance of a letter of credit.

Between the seller and the negotiating bank there is the

usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of
the credit are indicated to be without recourse therefore,
the negotiating bank has the ordinary right of recourse
against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the
negotiating bank may be one and the same does not affect
its rights and obligations in either capacity, although a
special agreement is always a possibility . . . 33

Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have
first checked the authenticity of the letter of credit with bank of Ayudhya,
by using advanced mode of business communications, before dispatching
the same to Inter-Resin finds no real support in U.C.P. Article 18 of the
U.C.P. states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any
messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising
bank, Bank of America is bound only to check the "apparent authenticity"
of the letter of credit, which it did. 29 Clarifying its meaning, Webster's
Ninth New Collegiate Dictionary 30 explains that the word "APPARENT
suggests appearance to unaided senses that is not or may not be borne
out by more rigorous examination or greater knowledge."

The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the operation
of a letter of credit, the involved banks deal only with documents and not
on goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or
not Bank of Ayudhya did issue the letter of credit and whether or not the
main contract of sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are matters, instead,
that can only be of concern to the herein parties in an appropriate recourse
against those, who, unfortunately, are not impleaded in these proceedings.

May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft for partial availment thereunder and
the required documents were later negotiated with it by Inter-Resin? The
answer is yes. This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating
bank, Bank of America has a right to recourse against the issuer bank and

In fine, we hold that

First, given the factual findings of the courts below, we conclude that
petitioner Bank of America has acted merely as a notifying bank and did
not assume the responsibility of a confirming bank; and

16

Second, petitioner bank, as a negotiating bank, is entitled to recover on

Inter-Resin's partial availment as beneficiary of the letter of credit which
has been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco
Trajano and other unidentified parties, can be made, in this instance, there
being no sufficient evidence to warrant any such finding.

G.R. No. 74834 November 17, 1988

WHEREFORE, the assailed decision is SET ASIDE, and respondent InterResin Industrial Corporation is ordered to refund to petitioner Bank of
America NT & SA the amount of P10,219,093.20 with legal interest from
the filing of the complaint until fully paid.

INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE

COMMERCIAL
INTERNATIONAL
BANK), petitioner,
vs.
HON.
INTERMEDIATE
APPELLATE
COURT,
THE
PHILIPPINE
AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M.
MENDOZA, respondents.

No costs.

Balili, Parado, Cavada&Maamo for petitioner.

SO ORDERED.

Romulo, Mabanta, Buenaventura, Sayoc& Delos Angeles for respondent

Spouses Mendozas.
Francisco, Zulueta& Associates for respondent Philam Life.

MELENCIO-HERRERA, J.:
An appeal by certiorari under Rule 45 of the Rules of Court by petitioner,
the Insular Bank of Asia and America (IBAA) [now the Philippine
Commercial International Bank], from the judgment of the public
respondent, then the Intermediate Appellate Court, * in CA-G.R. CV No.
03224.
Briefly, the antecedent facts disclose that sometime in 1976 and 1977
respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the
Mendozas, for brevity), obtained two (2) loans from respondent Philippine
American Life Insurance Co. (Philam Life) in the total amount of
P600,000.00 to finance the construction of their residential house at
Mandaue City. The said loans, with a 14% nominal interest rate, were to be
liquidated in equal amortizations over a period of five (5) years from March
1977 to March 1982.
To secure payment, Philam Life required that amortizations be guaranteed
by an irrevocable standby letter of credit of a commercial bank. Thus, the
Mendozas contracted with petitioner Insular Bank of Asia and America
(IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in
favor of Philam Life for the total amount of P600,000.00. The first L/C for
P500,000.00 was to expire on 1 October 1981 (Exhibit "7", IBAA) and the
second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA) These two
(2) irrevocable standby L/Cs were, in turn, secured by a real estate

17

mortgage for the same amount on the property of Respondent Spouses in

favor of IBAA.
On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77)
in favor of IBAA promising to pay the sum of P100,000.00 plus 19% p.a.
interest on 31 May 1979. Again, on 3 June 1977, Respondent Spouses
executed another Promissory Note (No. 564/77) binding themselves to pay
IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes
authorized IBAA "to sell at public or private sale such securities or things
for the purpose of applying their proceeds to such payments" of many
particular obligation or obligations" the Mendozas may have to IBAA.
(Exhibits "34" and "35"-IBAA, Annex "D" p. 131, Rollo)

Overpayment
by IBAA

( P 52,520.76)

Principal
(unpaid
advances under the
2

On 7 September 1979, because the Mendozas defaulted on their

amortization due on 1 September 1979, Philam Life again informed IBAA
that it was declaring the entire balance outstanding on both loans,
including liquidated damages, "immediately due and payable." Philam Life
then demanded the payment of P274,779.56 from IBAA but the latter took
the position that, as a melee guarantor of the Mendozas who are the
principal debtors, its remaining outstanding obligation under the two (2)
standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount
and showed instead an overpayment arrived at as follows:

of

372,227.65
652,520.76

On 21 April 1980 the Real Estate Mortgage, which secured the two (2)
standby L/Cs. was extrajudicially foreclosed by, and sold at public auction
for P775,000.00, to petitioner IBAA as the lone and highest bidder (Exhibit
"17-Mendoza"). The bid price of P775,000.00 by petitioner IBAA was
arrived at as follows:

The Mendozas failed to pay Philam Life the amortization that fell due on 1
June 1978 so that Philam Life informed IBAA that it was declaring both
loans as "entirely due and demandable" and demanded payment of
P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety
of calling ill the entire loan, Philam Life desisted and resumed availing of
the L/Cs by drawing on them for five (5) more amortizations.

Limit
Liability

b) Payment of
IBAA

P
432,386.
07

standby LCs) plus

interest & charges

P 600,000.00

Add:

Less:
a)
Stipulated
Attorney's
fees
(20%)

a) Payment of
Mendozas

P 280, 293.11
b) Principals (clean
loans) plus accrued

18

P
86,477.2
0

interest under P/Ns

Nos. 562/77 and

564/77

P
255,346.
95

b) Payment
IBAA

by

P342,127.05 P
622,420.16

Overpayment
IBAA

by

P 22,420.16

Thus, the Trial Court ruled:

c)
Expenses
foreclosure

of

TOTAL

P 72.20

ACCORDINGLY, judgment is hereby rendered ordering:

(1) Defendants-spouses Ben S. Mendoza and Juanita M.
Mendoza to pay plaintiff Philippine American Life Insurance
Company the sum of P322,000.00 plus 2% per month as
penalty interest from September 12, 1979 until the whole
amount is fully paid, P10,000 as attorney's fees, and costs.

P
775,000.
42

(2) Plaintiff Philippine American Life Insurance Company to

refund the sum of P22,420.16 to the defendant Insular
Bank of Asia and America plus legal interest from March
31, 1980 until the whole amount is fully paid; and

On a date that does not appear of record, Philam Life filed suit against
Respondent Spouses and IBAA before the Regional Trial Court of Manila,
Branch XXXXI, for the recovery of the sum of P274,779.56, the amount
allegedly still owing under the loan. After trial, said Court rendered a
Decision finding that IBAA had paid Philam Life only P342,127.05 and not
P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's check
in the amount of P30,100.60, which had to be deducted. With this
deduction, the Trial Court arrived at the following computation:

Limit of Liability
of IBAA Less:

P 600,000.00

a) Payment
Mendozas

P 280, 293.11

by

(3) Dismissal of the counterclaim and crossclaim filed by

the defendants- spouses against the plaintiff and the
defendant IBAA, as well as the counterclaim filed by
defendant IBAA against the plaintiff. (pp. 28-29, Rollo)
In so deciding, the Trial Court took the position that IBAA, "as surety" was
discharged of its liability to the extent of the payment made by the
Mendozas, as the principal debtors, to the creditor, Philam Life.
Both Philam Life and Respondent Spouses appealed to respondent
Appellate Court, which reversed the Trial Court and ruled instead that
IBAA's liability was not reduced by virtue of the payments made by the
Mendozas. Accordingly, the Appellate Court decreed:
WHEREFORE, premises considered, judgment is hereby
rendered ordering:
1. Defendants-appellant spouses Ben S. Mendoza and
Juanita M. Mendoza and defendant-appellee IBAA to pay
jointly and severally plaintiff-appellant Philamlife, the sum
of P222,000.00 plus 2% per month as penalty interest from

19

September 12, 1979 until the whole amount is fully paid;

plus P25,000.00, as attorney's fees, and costs; however,
defendant-appellee IBAA shall only be liable up to the
amount of P296,294.05;

which could have otherwise altered the result of the

decision.
4. Whether or not the award of attorney's fees to
respondent Philam is proper in so far as petitioner is
affected. (p. 15, Rollo)

2. Dismissal of the claim by the IBAA for a refund of

P22,420.16 from the Phil-American Life Insurance Co.; and

The pivotal issue is the first one. IBAA stresses that it has no more liability
to Philam Life under the two (2) standby Letters of Credit and, instead, is
entitled to a refund. Whereas Philam Life and the Mendoza spouses
separately maintain that IBAA's obligation under said two (2) L/Cs is
original and primary and is not reduced by the direct payments made by
the Mendozas to Philam Life.

3. Dismissal of the counterclaim and cross-claim filed by

the defendant- spouses against the plaintiff and the
defendant IBAA, as well as the counterclaim filed by
defendant IBAA against the plaintiff.
No special pronouncement as to costs in this instance. (p.
51, Rollo).

1. In construing the terms of a Letter of Credit, as in other contracts, it is

the intention of the parties that must govern.

Availing of the instant Petition, IBAA seeks a reversal of the aforesaid

judgment and the affirmance instead of that of the Trial Court. We resolved
to give due course. The issues addressed, as posited by IBAA, are:
1. Whether or not the partial payments made by
principal obligors (respondent MENDOZAS) would have
corresponding effect of reducing the liability of
petitioner as guarantor or surety under the terms of
standby LCs in question.

Letters of credit and contracts for the issuance of such

letters are subject to the same rules of construction as are
ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although
usage and custom cannot control express terms in letters
of credit, they are to be construed with reference to all the
surrounding facts and circumstances, to the particular and
often varying terms in which they may be expressed, the
circumstances and intention of the parties to them, and the
usages of the particular trade of business contemplated.
(International Banking Corp. vs. Irving National Bank, CCA
N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colony Trust
Co. vs. Lawyers' Title and Trust Co., CAA NY, 297 F. 152,
cited in Vol. 72, CJS sec. 178, pp. 387-388).<re||
an1w>

the
the
the
the

2. Whether or not respondent Intermediate Appellate Court

is correct in disregarding a documentary evidence (O.R. No.
74323, Exhibit 28-IBAA) showing the amount paid by
petitioner and which was admitted as evidence without
objection on the paint of the counsel for the respondent
Philam.

The terms of the subject Irrevocable Standby Letters of Credit read, in part,
as follows:

3. Whether or not the Intermediate Appellate Court is

correct in passing sub-silencio the following points raised
by the petitioner in its Brief to sustain the decision of the
Trial Court on some other grounds.

This credit secures the payment of any obligation of the

accountee to you under that Loan Agreement hereto
attached as Annex 'A' and made a part hereof, including
those pertaining to (a) surcharges on defaulted account;
stallments, (b) increased interest charges (in the event the
law should authorize this increase), and (c) liabilities
connected with taxes stipulated to be for Accountee's and
provided however, that our maximum liabilities hereunder
shall not exceed the amount of P500,000.00 (Pl00.000.00
for the other LC).

a. Effective rate of interest imposed by respondent Philam

exceeded the allowable ceiling;
b. Respondent Philam has no right to call in at one time the
two standby letters of credit;
c. Respondent Philam failed to follow the condition in the
two (2) standby letters of credit:

Each drawing under this credit shall be available at any

time after one (1) day from due date of the obligations

20

therein secured. Each drawing under this credit shall be

accomplished by your signed statement in duplicate that
the amount drawn represents payment due and unpaid by
the accountee. (pp. 11-12, Decision, pp. 38-39, Rollo).
[Emphasis our ].

any other writing, it will be construed most strongly against the writer and
so as to be reasonable and consistent with honest intentions. On the
whole, the construction will be generally a strict one (Lamborn vs. National
Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id , 204
N.Y.S. 557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As
found by the Appellate Court, however, the amount payable should not
exceed P296,294,05 (P600,000.00 less P303,705.95, the total amount
found by the Appellate Court to have been paid by IBAA to Philam Life).

Unequivocally, the subject standby Letters of Credit secure the payment of

any obligation of the Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed P600,000.00. But
while they are a security arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra vires rather than a
letter of credit, which is within the powers of a bank (Section 74[e], RA 337,
General Banking Act). 1 The standby L/Cs are, "in effect an absolute
undertaking to pay the money advanced or the amount for which credit is
given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670,
65 Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p.
1142). They are primary obligations and not accessory contracts. Being
separate and independent agreements, the payments made by the
Mendozas cannot be added in computing IBAA's liability under its own
standby letters of credit. Payments made by the Mendozas directly to
Philam Life are in compliance with their own prestation under the loan
agreements. And although these payments could result in the reduction of
the actual amount which could ultimately be collected from IBAA, the
latter's separate undertaking under its L/Cs remains.

2. The second issue as to whether or not documentary evidence was

disregarded by the Appellate Court regarding the amount actually paid by
IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial
Court), questions a finding of fact, which should be accorded not only
respect but even finality. It is not the function of this Court to analyze or
weigh such evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by lower Courts.
3. The third issue faults respondent Appellate Court with having passed
sub-silencio over certain points raised by petitioner IBAA in his Brief
sustaining the Decision of the Trial Court. It is accepted judicial practice,
however, that Courts are not required to resolve all issues raised in
pleadings unless necessary for the resolution of the case. Apparently,
respondent Appellate Court deemed it unnecessary to pass upon those
points. Be that as it may, suffice it to state:

Both the Trial Court and the Appellate Court found, as a fact, that there still
remains a balance on the loan, Pursuant to its absolute undertaking under
the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life
for this unexpended balance. The Appellate Court found it to be
P222,000.00, arrived at by the Trial Court and adopted by the Appellate
Court, as follows:

a) It is a matter of common knowledge in lending procedures that the

nominal interest is different from the effective rate of interest and that the
discounting interest scheme as well as the principal amortization scheme
are practices commonly resorted to by lending institutions. If IBAA
disagreed with the computation scheme adopted by Philam Life, which
could have been detected in the early stages of the controversy, IBAA
could have interposed its objections.

... In the summary of application of payments (Exhibit "KK")

the plaintiff applied Pl,918.00 as commitment fee,
P4,397.66 as surcharges, P199,683.40 as interests, and
P320,000.00 on the principal. The P58,000.00 which is
covered by OR No. 74396 was also applied "against the
total loan." Since plaintiff applied P378,000.00 against the
total indebtedness of P600,000.00 there still remains an
outstanding balance on the principal P322,000.00 (should
be P222,000.00) aside from the agreed penalty interest
until the whole amount is fully paid. ... (Decision, Trial
Court, p. 50, Rollo)

b) The right to call in at one time the two standby L/Cs was specifically
provided for in the Loan Agreement, which was specifically made an
integral part of the L/Cs Section 8 thereof read:
... 8. The Lender shall have the light to declare the entire
balance of the loans and all obligations of the borrower to
the lender as immediately due and payable in case the
borrower fails for any reason to comply with any payment
or other obligations of the Lender. (p. 248, Rollo)
c) The omission by Philam Life to draw the required drafts on the standby
L/Cs can be explained by the fact that all the drafts were pre-prepared, predated
and
pre-accepted by the Mendozas. Philam Life, therefore, could not have
complied to the letter with the provision in the L/Cs that drawings
therefrom were to be made by drafts for each due and unpaid

The amount of P222,000.00, therefore, considered as "any obligation of the

accountee" under the L/Cs will still have to be paid by IBAA under the
explicit terms thereof, which IBAA had itself supplied. Letters of credit are
strictly construed to the end that the rights of those directly parties to
them may be preserved and their interest safeguarded (Moss vs. Old
Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152).<re||an1w> Like

21

amortization. Besides, the accelaration of the entire balance of the loan

was sufficient notice of dishonor of the pre-drawn and pre-accepted drafts.

G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

4. Coming now to the award of attorney's fees of P25,000.00, the same

appears reasonable under the circumstances of the case specially
considering that in the foreclosure of the mortgage in its favor IBAA
charged the Mendozas attorney's fees in the amount of P86,477.20, supra.

Pelaez,
Adriano
&
Gregorio
Ezequiel S. Consulta for private respondent.

As to the liability of the Mendozas to IBAA, it bears recalling that the

Mendozas, upon their application for the opening and issuance of the
Irrevocable Standby Letters of Credit in favor of Philam Life, had executed
a Real Estate Mortgage as security to IBAA for any payment that the latter
may remit to Philam Life on the strength of said Letters of Credit; and that
IBAA had recovered from the Mendozas the amount of P432,386.07 when it
foreclosed on the mortgaged property of said spouses in the concept of
"principal (unpaid advances under the 2 standby L/Cs plus interest and
charges)." In addition, IBAA had recovered P255,364.95 representing its
clean loans to the Mendozas plus accrued interest besides the fact that it
now has the foreclosed property. As between IBAA and the Mendozas,
therefore, there has been full liquidation. The remaining obligation of
P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole
responsibility to pay to Philam Life by virtue of its absolute and irrevocable
undertaking under the standby L/Cs. Specially so, since the promissory
notes executed by the Mendozas in favor of IBAA authorized the sale of the
mortgaged security "for the purpose of applying their proceeds to ...
payments" of their obligations to IBAA.

for

petitioner.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the
Court of Appeals dated June 29, 1990 which affirmed the decision of the
Regional Trial Court of Rizal dated October 20, 1986 ordering the
defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant
Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic
meter FOB.

WHEREFORE, the Decision of respondent Intermediate Appellate Court,

dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the
Philippine Commercial International Bank) shall pay Philippine American
Life Insurance Company the sum of P222,000.00 plus 2% per month as
penalty interest from 12 September 1979 until the whole amount is fully
paid, but in no case to exceed P296,294.05, plus P25,000.00 as attorney's
fees. No costs.

After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee,
Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
Pacific National Bank of Los Angeles, California issued Irrevocable Letter of
Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs.

SO ORDERED.

The letter of credit was mailed to the Feati Bank and Trust Company (now
Citytrust) with the instruction to the latter that it "forward the enclosed
letter of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by the following
documents:
1. Signed Commercial Invoice in four copies showing the number of
the purchase order and certifying that

22

a. All terms and conditions of the purchase order have

been complied with and that all logs are fresh cut and
quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs
have been marked "BEV-EX."

After the loading of the logs was completed, the Chief Mate, Shao Shu
Wang issued a mate receipt of the cargo which stated the same are in
good condition (Records, Vol. I, p. 363). However, Christiansen refused to
issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent.

b. One complete set of documents, including 1/3 original

bills of lading was airmailed to Consignee and Parties to be
advised by Hans-Axel Christiansen, Ship and Merchandise
Broker.

Because of the absence of the certification by Christiansen, the Feati Bank

and Trust Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July
31, 1971) without the private respondent receiving any certification from
Christiansen.

c. One set of non-negotiable documents was airmailed to

Han Mi Trade Development Company and one set to
Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.

The persistent refusal of Christiansen to issue the certification prompted

the private respondent to bring the matter before the Central Bank. In a
memorandum dated August 16, 1971, the Central Bank ruled that:

2. Tally sheets in quadruplicate.

. . . pursuant to the Monetary Board Resolution No. 1230 dated
August 3, 1971, in all log exports, the certification of the lumber
inspectors of the Bureau of Forestry . . . shall be considered final
for purposes of negotiating documents. Any provision in any letter
of credit covering log exports requiring certification of buyer's
agent or representative that said logs have been approved for
shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee

and Parties to be advised by Hans Axel Christiansen, showing
Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971

Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p.
39)

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa

Ana, California 92711 and Han Mi Trade Development Company,
Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise
Broker, stating that logs have been approved prior to shipment in
accordance with terms and conditions of corresponding purchase
Order. (Record, Vol. 1 pp. 11-12)

Since the demands by the private respondent for Christiansen to execute

the certification proved futile, Villaluz, on September 1, 1971, instituted an
action for mandamus and specific performance against Christiansen and
the Feati Bank and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. The petitioner was impleaded as defendant before
the lower court only to afford complete relief should the court a quo order
Christiansen to execute the required certification.

Also incorporated by reference in the letter of credit is the Uniform

Customs and Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was
chartered by Christiansen. Before its loading, the logs were inspected by
custom inspectors NeloLaurente, Alejandro Cabiao, EstanislaoEdera from
the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 1617) all of whom certified to the good condition and exportability of the
logs.

The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him
under the Letter of Credit;

23

2. Upon issuance of such certification, or, if the court should find it

unnecessary, FEATI BANK be ordered to accept negotiation of the
Letter of Credit and make payment thereon to Villaluz;

x xx

x xx

x xx

The Court likewise agrees with the plaintiff that the defendant
BANK may also be held liable under the principles and laws on both
trust and estoppel. When the defendant BANK accepted its role as
the notifying and negotiating bank for and in behalf of the issuing
bank, it in effect accepted a trust reposed on it, and became a
trustee in relation to plaintiff as the beneficiary of the letter of
credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be
held liable for damages and loss resulting to the plaintiff from its
failure to perform that obligation.

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left
the Philippines without informing the Court and his counsel. Hence, Villaluz,
filed an amended complaint to make the petitioner solidarily liable with
Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended
complaint.

Furthermore, when the defendant BANK assumed the role of a

notifying and negotiating BANK it in effect represented to the
plaintiff that, if the plaintiff complied with the terms and conditions
of the letter of credit and presents the same to the BANK together
with the documents mentioned therein the said BANK will pay the
plaintiff the amount of the letter of credit. The Court is convinced
that it was upon the strength of this letter of credit and this implied
representation of the defendant BANK that the plaintiff delivered
the logs to defendant CHRISTIANSEN, considering that the issuing
bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other Security
for the payment of the logs. Defendant BANK cannot now be
allowed to deny its commitment and liability under the letter of
credit:

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and
the plaintiffs right to demand payment is absolute. Defendant
CHRISTIANSEN having accepted delivery of the logs by having
them loaded in his chartered vessel the "Zenlin Glory" and
shipping them to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to pay the
purchase order had clearly arisen and the plaintiff may sue and
recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad
faith and deceit and with intent to defraud the plaintiff, reflected in
and aggravated by, not only his refusal to issue the certification
that would have enabled without question the plaintiff to negotiate
the letter of credit, but his accusing the plaintiff in his answer of
fraud, intimidation, violence and deceit. These accusations said
defendant did not attempt to prove, as in fact he left the country
without even notifying his own lawyer. It was to the Court's mind a
pure swindle.

A holder of a promissory note given because of gambling

who indorses the same to an innocent holder for value and
who assures said party that the note has no legal defect, is
in estoppel from asserting that there had been an illegal
consideration for the note, and so, he has to pay its value.
(Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of
defendant CHRISTIANSEN as a condition precedent to negotiating
the letter of credit, likewise in the Court's opinion acted in bad
faith, not only because of the clear declaration of the Central Bank
that such a requirement was illegal, but because the BANK, with all
the legal counsel available to it must have known that the
condition was void since it depended on the sole will of the debtor,
the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 2931)

The defendant Feati Bank and Trust Company, on the other hand,
must be held liable together with his (sic) co-defendant for having,
by its wrongful act, i.e., its refusal to negotiate the letter of credit
in the absence of CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement was illegal), prevented
payment to the plaintiff. The said letter of credit, as may be seen
on its face, is irrevocable and the issuing bank, the Security Pacific
National Bank in Los Angeles, California, undertook by its terms
that the same shall be honored upon its presentment. On the other
hand, the notifying bank, the defendant Feati Bank and Trust
Company, by accepting the instructions from the issuing bank,
itself assumed the very same undertaking as the issuing bank
under the terms of the letter of credit.

On the basis of the foregoing the trial court on October 20, 1986, ruled in
favor of the private respondent. The dispositive portion of its decision
reads:

24

WHEREFORE, judgment is hereby rendered for the plaintiff,

ordering the defendants to pay the plaintiff, jointly and severally,
the following sums:

WHEREFORE, the petition for certiorari is granted. Respondent

Judge's order of execution dated December 29, 1986, as well as his
order dated January 14, 1987 denying the petitioner's urgent
motion to suspend the writ of execution against its properties are
hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank &
Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No.
15121. However, the execution of the same decision against
defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's
properties, and the notice of sale dated January 13, 1987 (Annex
M), are hereby annulled and set aside. Rollo p. 44)

a) $54,000.00 (US), or its peso equivalent at the prevailing rate as

of the time payment is actually made, representing the purchase
price of the logs;
b) P17,340.00, representing government fees and charges paid by
plaintiff in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod
and Korea).

A motion for reconsideration was thereafter filed by the private

respondent. The Court of Appeals, in a resolution dated June 29, 1987
denied the motion for reconsideration.

All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed,
until fully paid:

In the meantime, the appeal filed by the petitioner before the Court of
Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October 20,
1986 and ruled that:

d) P70,000.00 as moral damages;

e) P30,000.00 as exemplary damages; and

1. Feati Bank admitted in the "special and negative defenses"

section of its answer that it was the bank to negotiate the letter of
credit issued by the Security Pacific National Bank of Los Angeles,
California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of
such letter of credit. In fact, as such negotiating bank, even before
the letter of credit was presented for payment, Feati Bank had
already made an advance payment of P75,000.00 to Villaluz in
anticipation of such presentment. As the negotiating bank, Feati
Bank, by notifying Villaluz of the letter of credit in behalf of the
issuing bank (Security Pacific), confirmed such letter of credit and
made the same also its own obligation. This ruling finds support in
the authority cited by Villaluz:

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two
days thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the
immediate execution of the judgment on the ground that the appeal of the
petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the
private respondent's filing of a bond.

A confirmed letter of credit is one in which the notifying bank gives

its assurance also that the opening bank's obligation will be
performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making
it also its own undertaking, or commitment, or guaranty or
obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial
Laws, 1978 edition, p. 77).

The petitioner then filed a motion for reconsideration and a motion to

suspend the implementation of the writ of execution. Both motions were,
however, denied. Thus, petitioner filed before the Court of Appeals a
petition for certiorari and prohibition with preliminary injunction to enjoin
the immediate execution of the judgment.

Feati Bank argues further that it would be considered as the

negotiating bank only upon negotiation of the letter of credit. This
stance is untenable. Assurance, commitments or guaranties
supposed to be made by notifying banks to the beneficiary of a
letter of credit, as defined above, can be relevant or meaningful

The Court of Appeals in a decision dated April 9, 1987 granted the petition
and nullified the order of execution, the dispositive portion of the decision
states:

25

only with respect to a future transaction, that is, negotiation.

Hence, even before actual negotiation, the notifying bank, by the
mere act of notifying the beneficiary of the letter of credit,
assumes as of that moment the obligation of the issuing bank.

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE

ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE
AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER
BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE
RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,

2. Since Feati Bank acted as guarantor of the issuing bank, and in

effect also of the latter's principal or client, i.e. Hans AxelChristiansen. (sic) Such being the case, when Christiansen refused
to issue the certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps to secure the
certification from Christiansen; and, if the latter should still refuse
to comply, to hale him to court. In short, Feati Bank should have
honoredVillaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz'sfavor and guaranteed
by Feati Bank.

Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT
HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE
RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS
GUARANTOR OF THE ISSUING BANK.
Third Reason

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051,

which contained the statement "Since Villaluz" draft was not drawn
strictly in compliance with the terms of the letter of credit, Feati
Bank's refusal to negotiate it was justified," did not dispose of this
question on the merits. In that case, the question involved was
jurisdiction or discretion, and not judgment. The quoted
pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF

LAW WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p.
12)
The principal issue in this case is whether or not a correspondent bank is to
be held liable under the letter of credit despite non-compliance by the
beneficiary with the terms thereof?

4. The original action was for "Mandamus and/or specific

performance." Feati Bank may not be a party to the transaction
between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or
agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly on
specific performance as a procedural means by which the relief
sought by Villaluz may be entertained. (Rollo, pp. 32-33)

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that
the documents tendered must strictly conform to the terms of the letter of
credit. The tender of documents by the beneficiary (seller) must include all
documents required by the letter. A correspondent bank which departs
from what has been stipulated under the letter of credit, as when it accepts
a faulty tender, acts on its own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be, the money
thus paid to the beneficiary Thus the rule of strict compliance.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and
accordingly, the appeal is hereby dismissed. Costs against the
petitioner. (Rollo, p. 33)

In the United States, commercial transactions involving letters of credit are

governed by the rule of strict compliance. In the Philippines, the same
holds true. The same rule must also be followed.

Hence, this petition for review.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741
[1933]) expounded clearly on the rule of strict compliance.

The petitioner interposes the following reasons for the allowance of the
petition.

We have heretofore held that these letters of credit are to be

strictly complied with which documents, and shipping documents
must be followed as stated in the letter. There is no discretion in
the bank or trust company to waive any requirements. The terms
of the letter constitutes an agreement between the purchaser and
the bank. (p. 743)

First Reason

26

Although in some American decisions, banks are granted a little discretion

to accept a faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous precedents.
Since a bank deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit are material
or superfluous. The mere fact that the document was specified therein
readily means that the document is of vital importance to the buyer.

Article 7.
Banks must examine all documents with reasonable care to
ascertain that they appear on their face to be in accordance with
the terms and conditions of the credit,"
Article 8.

Moreover, the incorporation of the Uniform Customs and Practice for

Documentary Credit (U.C.P. for short) in the letter of credit resulted in the
applicability of the said rules in the governance of the relations between
the parties.

Payment, acceptance or negotiation against documents which

appear on their face to be in accordance with the terms and
conditions of a credit by a bank authorized to do so, binds the
party giving the authorization to take up documents and reimburse
the bank which has effected the payment, acceptance or
negotiation. (Emphasis Supplied)

And even if the U.C.P. was not incorporated in the letter of credit, we have
already ruled in the affirmative as to the applicability of the U.C.P. in cases
before us.

Under the foregoing provisions of the U.C.P., the bank may only negotiate,
accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary credit. And
since a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary
credit justifies the refusal by the correspondent bank to negotiate, accept
or pay the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the
Code of Commerce. Article 2 of the Code of Commerce enunciates that in
the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal complexities
arising from transactions involving letters of credit not only between the
banks themselves but also between banks and seller and/or buyer, the
applicability of the U.C.P. is undeniable.

In regard to the ruling of the lower court and affirmed by the Court of
Appeals that the petitioner is not a notifying bank but a confirming bank,
we find the same erroneous.

The pertinent provisions of the U.C.P. (1962 Revision) are:

The trial court wrongly mixed up the meaning of an irrevocable credit with
that of a confirmed credit. In its decision, the trial court ruled that the
petitioner, in accepting the obligation to notify the respondent that
the irrevocable credit has been transmitted to the petitioner on behalf of
the private respondent, has confirmed the letter.

Article 3.
An irrevocable credit is a definite undertaking on the part of the
issuing bank and constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn and/or
documents presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit are
complied with.

The trial court appears to have overlooked the fact that an irrevocable
credit is not synonymous with a confirmed credit. These types of letters
have different meanings and the legal relations arising from there varies. A
credit may be an irrevocable credit and at the same time a confirmed
credit or vice-versa.

An irrevocable credit may be advised to a beneficiary through

another bank (the advising bank) without engagement on the part
of that bank, but when an issuing bank authorizes or requests
another bank to confirm its irrevocable credit and the latter does
so, such confirmation constitutes a definite undertaking of the
confirming bank. . . .

An irrevocable credit refers to the duration of the letter of credit. What is

simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under
the letter. The issuing bank does not reserve the right to revoke the credit.
On the other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it

27

will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83)

Since the petitioner was only a notifying bank, its responsibility was solely
to notify and/or transmit the documentary of credit to the private
respondent and its obligation ends there.

Hence, the mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank in accepting the instructions
of the issuing bank has also confirmed the letter of credit. Another error
which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.

The notifying bank may suggest to the seller its willingness to negotiate,
but this fact alone does not imply that the notifying bank promises to
accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer
and the seller, its relationship is only with that of the issuing bank and not
with the beneficiary to whom he assumes no liability. It follows therefore
that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the enforcement
of his rights under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)

In commercial transactions involving letters of credit, the functions

assumed by a correspondent bank are classified according to the
obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the
letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York,
218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating
bank, on the other hand, is a correspondent bank which buys or discounts
a draft under the letter of credit. Its liability is dependent upon the stage of
the negotiation. If before negotiation, it has no liability with respect to the
seller but after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller. (Scanlon v. First National
Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p.
293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)

In order that the petitioner may be held liable under the letter, there
should be proof that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that
the petitioner has confirmed the letter of credit. The only evidence in this
case, and upon which the private respondent premised his argument, is
the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that
the letter of credit was confirmed by the petitioner. He claims that the loan
was granted by the petitioner to him, "in anticipation of the presentment of
the letter of credit."

In the case of a confirming bank, the correspondent bank assumes a direct

obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit. (Shaterian,
Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)

The proposition advanced by the private respondent has no basis in fact or

law. That the loan agreement between them be construed as an act of
confirmation is rather far-fetched, for it depends principally on speculative
reasoning.

In this case, the letter merely provided that the petitioner "forward the
enclosed original credit to the beneficiary." (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing bank,
the Security Pacific National Bank, it is indubitable that the petitioner is
only a notifying bank and not a confirming bank as ruled by the courts
below.

As earlier stated, there must have been an absolute assurance on the part
of the petitioner that it will undertake the issuing bank's obligation as its
own. Verily, the loan agreement it entered into cannot be categorized as an
emphatic assurance that it will carry out the issuing bank's obligation as its
own.
The loan agreement is more reasonably classified as an isolated
transaction independent of the documentary credit.

If the petitioner was a confirming bank, then a categorical declaration

should have been stated in the letter of credit that the petitioner is to
honor all drafts drawn in conformity with the letter of credit. What was
simply stated therein was the instruction that the petitioner forward the
original letter of credit to the beneficiary.

Of course, it may be presumed that the petitioner loaned the money to the
private respondent in anticipation that it would later be paid by the latter
upon the receipt of the letter. Yet, we would have no basis to rule
definitively that such "act" should be construed as an act of confirmation.

28

The private respondent no doubt was in need of money in loading the logs
on the ship "Zenlin Glory" and the only way to satisfy this need was to
borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral.

What actually transpires in an irrevocable credit is that the correspondent

bank does not receive in advance the sum of money from the buyer or the
issuing bank. On the contrary, when the correspondent bank accepts the
tender and pays the amount stated in the letter, the money that it doles
out comes not from any particular fund that has been advanced by the
issuing bank, rather it gets the money from its own funds and then later
seeks reimbursement from the issuing bank.

At the most, when the petitioner extended the loan to the private
respondent, it assumed the character of a negotiating bank. Even then, the
petitioner will still not be liable, for a negotiating bank before negotiation
has no contractual relationship with the seller.

Granting that a trust has been created, still, the petitioner may not be
considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel
on its part resulting in the acceptance of the trust. Precisely, as a notifying
bank, its only obligation is to notify the private respondent of the existence
of the letter of credit. How then can such create estoppel when that is its
only duty under the law?

The case of Scanlon v. First National Bank (supra) perspicuously explained

the relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true
that it owes no contractual duty toward the person for whose
benefit the letter is written to discount or purchase any draft drawn
against the credit. No relationship of agent and principal, or of
trustee and cestui, between the receiving bank and the beneficiary
of the letter is established. (P.568)

We also find erroneous the statement of the Court of Appeals that the
petitioner "acted as a guarantor of the issuing bank and in effect also of
the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only
of the contract between the buyer and the seller but also of the credit
agreement between the issuing bank and the buyer. (See Kingdom of
Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by
the latter.

Whether therefore the petitioner is a notifying bank or a negotiating bank,

it cannot be held liable. Absent any definitive proof that it has confirmed
the letter of credit or has actually negotiated with the private respondent,
the refusal by the petitioner to accept the tender of the private respondent
is justified.
In regard to the finding that the petitioner became a "trustee in relation to
the plaintiff (private respondent) as the beneficiary of the letter of credit,"
the same has no legal basis.

The contract between the two has no bearing as to the non-compliance by

the buyer with the agreement between the latter and the seller. Their
contract is similar to that of a contract of services (to open the letter of
credit) and not that of agency as was intimated by the Court of Appeals.
The unjustified refusal therefore by Christiansen to issue the certification
under the letter of credit should not likewise be charged to the issuing
bank.

A trust has been defined as the "right, enforceable solely in equity, to the
beneficial enjoyment of property the legal title to which is vested to
another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property
which has been conferred upon the person for the benefit of another. In
order therefore for the trust theory of the private respondent to be
sustained, the petitioner should have had in its possession a sum of money
as specific fund advanced to it by the issuing bank and to be held in trust
by it in favor of the private respondent. This does not obtain in this case.

As a mere notifying bank, not only does the petitioner not have any
contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance of
the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to
necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.

The mere opening of a letter of credit, it is to be noted, does not involve a

specific appropriation of a sum of money in favor of the beneficiary. It only
signifies that the beneficiary may be able to draw funds upon the letter of
credit up to the designated amount specified in the letter. It does not
convey the notion that a particular sum of money has been specifically
reserved or has been held in trust.

In the first place, the guarantee theory destroys the independence of the
bank's responsibility from the contract upon which it was opened. In the
second place, the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor's obligation is merely

29

collateral and it arises only upon the default of the person primarily liable.
On the other hand, in an irrevocable credit the bank undertakes a primary
obligation. (SeeNational Bank of Eagle Pass, Tex v. American National Bank
of San Francisco, 282 F. 73 [1922])

In any event, we affirm the earlier ruling of the Court of Appeals dated April
9, 1987 in regard to the petition before it for certiorari and prohibition with
preliminary injunction, to wit:
There is no merit in the respondent's contention that the
certification required in condition No. 4 of the letter of credit was
"patently illegal." At the time the letter of credit was issued there
was no Central Bank regulation prohibiting such a condition in the
letter of credit. The letter of credit (Exh. C) was issued on June 7,
1971, more than two months before the issuance of the Central
Bank Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of credit had already
expired on July 30, 1971 when the Central Bank memorandum was
issued. In any event, it is difficult to see how such a condition could
be categorized as illegal or unreasonable since all that plaintiff
Villaluz, as seller of the logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and
conditions of his purchase order. Apparently, Villaluz was in too
much haste to ship his logs without taking all due precautions to
assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)

The relationship between the issuing bank and the notifying bank, on the
contrary, is more similar to that of an agency and not that of a guarantee.
It may be observed that the notifying bank is merely to follow the
instructions of the issuing bank which is to notify or to transmit the letter of
credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not
undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only
to follow the instructions of the issuing bank and to it alone is it obligated
and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents
required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only
engagement is to notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the
petitioner cannot be forced to pay the amount under the letter. As we have
previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby

NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June
29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

The failure by him to submit the certification was fatal to his

case.1wphi1 The U.C.P. which is incorporated in the letter of credit ordains
that the bank may only pay the amount specified under the letter if all the
documents tendered are on their face in compliance with the credit. It is
not tasked with the duty of ascertaining the reason or reasons why certain
documents have not been submitted, as it is only concerned with the
documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.

SO ORDERED.

We are aware of the injustice committed by Christiansen on the private

respondent but we are deciding the controversy on the basis of what the
law is, for the law is not meant to favor only those who have been
oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people
in our justice system may be eroded if we are to decide not what the law
states but what we believe it should declare. Dura lexsedlex.
Considering the foregoing, the materiality of ruling upon the validity of the
certificate of approval required of the private respondent to submit under
the letter of credit, has become insignificant.

G.R. No. L-24821 October 16, 1970

BANK
vs.

30

OF

THE

PHILIPPINE

ISLANDS, plaintiff-appellee,

DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA

CARCERENY alias AURORA C. GONZALES, defendants-appellants.

Oct. 23,
19,473.64

1961

61/1483

$25,867.34

Aviado and Aranda for plaintiff-appellee.

Oct. 30,
14,610.88

1961

61/1495

$19,408.39

S. Emiliano Calma for defendants-appellants.

Nov.
10,
1961
$26,687.6420,090.90

61/1564

TOTAL .... $129,621.75 P97,582.75

CASTRO, J.:.

By virtue of the foregoing transactions, the Bank issued irrevocable

commercial letters of credit addressed to its correspondent banks in the
United States, with uniform instructions for them to notify the beneficiary
thereof, the J.B. Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned the
respectively, if accompanied, upon presentation, by a full set of negotiable
clean "on board" ocean bills of lading covering the merchandise appearing
in the LCs that is, dyestuffs of various colors. Consequently, the J.B.
Distributing Company drew upon, presented to and negotiated with these
banks, its sight drafts covering the amounts of the merchandise ostensibly
being exported by it, together with clean bills of lading, and collected the
full value of the drafts up to the amounts appearing in the L/Cs as above
indicated. These correspondent banks then debited the account of the
Bank of the Philippine Islands with them up to the full value of the drafts
presented by the J.B. Distributing Company, plus commission thereon, and,
thereafter, endorsed and forwarded all documents to the Bank of the
Philippine Islands.

This is an appeal from the decision of the Court of First Instance of Manila
ordering the defendants-appellants to pay to the Bank of the Philippine
Islands (hereinafter referred to as the Bank), jointly and severally, the
value of the credit it extended to them in several letters of credit which the
Bank opened at the behest of the defendants appellants to finance their
importation of dyestuffs from the United States, which however turned out
to be mere colored chalk upon arrival and inspection thereof at the port of
Manila.
The record shows that on four (4) different occasions in 1961, the De Reny
Fabric Industries, Inc., a Philippine corporation through its co-defendantsappellants, Aurora Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo,
president and secretary, respectively of the corporation, applied to the
Bank for four (4) irrevocable commercial letters of credit to cover the
purchase by the corporation of goods described in the covering L/C
applications as "dyestuffs of various colors" from its American supplier, the
J.B. Distributing Company. All the applications of the corporation were
approved, and the corresponding Commercial L/C Agreements were
executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as
joint and solidary debtors with the corporation. Pursuant to banking
regulations then in force, the corporation delivered to the Bank peso
marginal deposits as each letter of credit was opened.

In the meantime, as each shipment (covered by the above-mentioned

letters of credit) arrived in the Philippines, the De Reny Fabric Industries,
Inc. made partial payments to the Bank amounting, in the aggregate, to
P90,000. Further payments were, however, subsequently discontinued by
the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods
that arrived in Manila were colored chalks instead of dyestuffs.

The dates and amounts of the L/Cs applied for and approved as well as the
peso marginal deposits made were, respectively, as follows:.
Date
Application
& L/C No. Deposit
Oct. 10, 1961
P43,407.33

Amount

61/1413

The corporation also refused to take possession of these goods, and for
this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing of its
complaint with the court below on December 10, 1962.

Marginal

$57,658.38

On October 24, 1963 the lower court rendered its decision ordering the
corporation and its co-defendants (the herein appellants) to pay to the
plaintiff-appellee the amount of P291,807.46, with interest thereon, as

31

provided for in the L/C Agreements, at the rate of 7% per annum from
October 31, 1962 until fully paid, plus costs.

accordance with the terms and conditions of a credit by a

Bank authorized to do so binds the party giving the
authorization to take up the documents and reimburse the
Bank making the payment, negotiation or acceptance.

It is the submission of the defendants-appellants that it was the duty of the

foreign correspondent banks of the Bank of the Philippine Islands to take
the necessary precaution to insure that the goods shipped under the
covering L/Cs conformed with the item appearing therein, and, that the
foregoing banks having failed to perform this duty, no claim for
recoupment against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the articles ordered,
could accrue.

The existence of a custom in international banking and financing circles

negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually
tallies with what was loaded aboard ship, having been positively proven as
a fact, the appellants are bound by this established usage. They were, after
all, the ones who tapped the facilities afforded by the Bank in order to
engage in international business.

We can appreciate the sweep of the appellants' argument, but we also find
that it is nestled hopelessly inside a salient where the valid contract
between the parties and the internationally accepted customs of the
banking trade must prevail.1

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants'

cost. This is without prejudice to the Bank, in proper proceedings in the
court below in this same case proving and being reimbursed additional
expenses, if any, it has incurred by virtue of the continued storage of the
goods in question up to the time this decision becomes final and executory.

Under the terms of their Commercial Letter of Credit Agreements with the
Bank, the appellants agreed that the Bank shall not be responsible for the
"existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred
to in the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore, no recourse
but to comply with their covenant. 2

G.R. No. 160732

June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of
the Regional Trial Court of Quezon City, Branch 90 and Maynilad
Water Services, Inc., respondents
DECISION

But even without the stipulation recited above, the appellants cannot shift
the burden of loss to the Bank on account of the violation by their vendor
of its prestation.

AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City,
Branch 90, made a determination that the Petition for Rehabilitation with
Prayer for Suspension of Actions and Proceedings filed by Maynilad Water
Services, Inc. (Maynilad) conformed substantially to the provisions of Sec.
2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules). It forthwith issued a Stay Order 1 which states, in part, that
the court was thereby:

It was uncontrovertibly proven by the Bank during the trial below that
banks, in providing financing in international business transactions such as
those entered into by the appellants, do not deal with the property to be
exported or shipped to the importer, but deal only with documents. The
Bank introduced in evidence a provision contained in the "Uniform Customs
and Practices for Commercial Documentary Credits Fixed for the Thirteenth
Congress of International Chamber of Commerce," to which the Philippines
is a signatory nation. Article 10 thereof provides: .

x xx
In documentary credit operations, all parties concerned
deal in documents and not in goods. Payment,
negotiation or acceptance against documents in

x xx

x xx

2. Staying enforcement of all claims, whether for money or

otherwise and whether such enforcement is by court action or

32

otherwise, against the petitioner, its guarantors and sureties not

solidarily liable with the petitioner;

the West Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of
petitioners mostly foreign loans.

3. Prohibiting the petitioner from selling, encumbering,

transferring, or disposing in any manner any of its properties
except in the ordinary course of business;

To secure the concessionaires performance of its obligations under the

Concession Agreement, Maynilad was required under Section 6.9 of said
contract to put up a bond, bank guarantee or other security acceptable to
MWSS.

4. Prohibiting the petitioner from making any payment of its

liabilities, outstanding as at the date of the filing of the petition;
x xx

x xx

In compliance with this requirement, Maynilad arranged on July 14, 2000

for a three-year facility with a number of foreign banks, led by Citicorp
International Limited, for the issuance of an Irrevocable Standby Letter of
Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and
prompt performance of Maynilads obligations to MWSS as aforestated.

x xx

Subsequently, on November 27, 2003, public respondent, acting on two

Urgent Ex Parte motions2 filed by respondent Maynilad, issued the herein
questioned Order3 which stated that it thereby:

Sometime in September 2000, respondent Maynilad requested MWSS for a

mechanism by which it hoped to recover the losses it had allegedly
incurred and would be incurring as a result of the depreciation of the
Philippine Peso against the US Dollar. Failing to get what it desired,
Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a Memorandum of
Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between
them. Sometime in August 2001 Maynilad again filed another Force
Majeure Notice and, since MWSS could not agree with the terms of said
Notice, the matter was referred on August 30, 2001 to the Appeals Panel
for arbitration. This resulted in the parties agreeing to resolve the issues
through an amendment of the Concession Agreement on October 5, 2001,
known as Amendment No. 1, 8 which was based on the terms set down in
MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS
Board of Trustees Resolution No. 487-2001, 9 which provided inter alia for a
formula that would allow Maynilad to recover foreign exchange losses it
had incurred or would incur under the terms of the Concession Agreement.

"1. DECLARES that the act of MWSS in commencing on November

24, 2003 the process for the payment by the banks of US$98
million out of the US$120 million standby letter of credit so the
banks have to make good such call/drawing of payment of US$98
million by MWSS not later than November 27, 2003 at 10:00 P. M.
or any similar act for that matter, is violative of the above-quoted
sub-paragraph 2.) of the dispositive portion of this Courts Stay
Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under
pain of contempt the written certification/notice of draw to Citicorp
International Limited dated November 24, 2003 and DECLARES
void any payment by the banks to MWSS in the event such written
certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of
credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System
(MWSS) filed this petition for review by way of certiorari under Rule 65 of
the Rules of Court questioning the legality of said order as having been
issued without or in excess of the lower courts jurisdiction or that the
court a quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction.4

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding
support from its stockholders;

ANTECEDENTS OF THE CASE

b) resume payment of the concession fees; and

On February 21, 1997, MWSS granted Maynilad under a Concession

Agreement a twenty-year period to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and sewerage services in

c) mutually seek the dismissal of the cases pending before the

Court of Appeals and with Minor Dispute Appeals Panel.

33

However, on November 5, 2002, Maynilad served upon MWSS a Notice of

Event of Termination, claiming that MWSS failed to comply with its
obligations under the Concession Agreement and Amendment No. 1
regarding the adjustment mechanism that would cover Maynilads foreign
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter
was eventually brought before the Appeals Panel on January 7, 2003 by
MWSS.10 On November 7, 2003, the Appeals Panel ruled that there was no
Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.

In support of the first issue, petitioner maintains that as a matter of law,

the US$120 Million Standby Letter of Credit and Performance Bond are not
property of the estate of the debtor Maynilad and, therefore, not subject to
the in rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not
involve any asset of Maynilad but only assets of the banks. Furthermore, a
call on the Standby Letter of Credit cannot also be considered a "claim"
falling under the purview of the stay order as alleged by respondent as it is
not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and
holding that the commencement of the process for the payment of US$98
million is a violation of the order issued on November 17, 2003.

The award of the Appeals Panel became final on November 22, 2003.
MWSS, thereafter, submitted a written notice 11 on November 24, 2003, to
Citicorp International Limited, as agent for the participating banks, that by
virtue of Maynilads failure to perform its obligations under the Concession
Agreement, it was drawing on the Irrevocable Standby Letter of Credit and
thereby demanded payment in the amount of US$98,923,640.15.

RESPONDENT MAYNILADS CASE

Respondent Maynilad seeks to refute this argument by alleging that:

Prior to this, however, Maynilad had filed on November 13, 2003, a petition
for rehabilitation before the court a quo which resulted in the issuance of
the Stay Order of November 17, 2003 and the disputed Order of November
27, 2003.12

a) the order objected to was strictly and precisely worded and

issued after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or
creditors Chinatrust Commercial Bank and Suez in relation to
admissions, pleadings and/or pertinent records 13 and that public
respondent had the authority to issue the same;

PETITIONERS CASE
Petitioner hereby raises the following issues:

b) public respondent never considered nor held that the

Performance bond or assets of the issuing banks are part or
property of the estate of respondent Maynilad subject to
rehabilitation and which respondent Maynilad has not and has
never claimed to be;14

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR

ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE
PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART
OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.

c) what is relevant is not whether the performance bond or assets

of the issuing banks are part of the estate of respondent Maynilad
but whether the act of petitioner in commencing the process for
the payment by the banks of US$98 million out of the US$120
million performance bond is covered and/or prohibited under subparagraphs 2.) and 4.) of the stay order dated November 17, 2003;

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR

EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN
HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE
BANKS WERE NOT SOLIDARY IN NATURE.

d) the jurisdiction of public respondent extends not only to the

assets of respondent Maynilad but also over persons and assets of
"all those affected by the proceedings x xx upon publication of the
notice of commencement;15" and

3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN

ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF
THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

34

e) the obligations under the Standby Letter of Credit are not

solidary and are not exempt from the coverage of the stay order.

sureties not solidarily liable with the debtor" and that there is nothing in
the Standby Letter of Credit nor in law nor in the nature of the obligation
that would show or require the obligation of the banks to be solidary with
the respondent Maynilad.

OUR RULING
We will discuss the first two issues raised by petitioner as these are
interrelated and make up the main issue of the petition before us which is,
did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of
the concession fees from the banks that issued the Irrevocable Standby
Letter of Credit in its favor and for the account of respondent Maynilad?

We disagree.

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on

Corporate Rehabilitation to support its jurisdiction over the Irrevocable
Standby Letter of Credit and the banks that issued it. The section reads in
part "that jurisdiction over those affected by the proceedings is considered
acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to
define rehabilitation as an in rem proceeding. This provision is a logical
consequence of the in rem nature of the proceedings, where jurisdiction is
acquired by publication and where it is necessary that the assets of the
debtor come within the courts jurisdiction to secure the same for the
benefit of creditors. The reference to "all those affected by the
proceedings" covers creditors or such other persons or entities holding
assets belonging to the debtor under rehabilitation which should be
reflected in its audited financial statements. The banks do not hold any
assets of respondent Maynilad that would be material to the rehabilitation
proceedings nor is Maynilad liable to the banks at this point.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only those
claims against guarantors and sureties who are not solidarily
liable with the debtor. Respondent Maynilads claim that the banks are
not solidarily liable with the debtor does not find support in jurisprudence.

First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance of
certain terms and conditions of the Concession Agreement, particularly the
payment of concession fees.

We held in Feati Bank & Trust Company v. Court of Appeals 16 that the
concept of guarantee vis--vis the concept of an irrevocable letter of credit
are inconsistent with each other. The guarantee theory destroys the
independence of the banks responsibility from the contract upon which it
was opened and the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantors obligation is merely
collateral and it arises only upon the default of the person primarily liable.
On the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a customer
that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit. 17

Respondent Maynilads Financial Statement as of December 31, 2001 and

2002 do not show the Irrevocable Standby Letter of Credit as part of its
assets or liabilities, and by respondent Maynilads own admission it is not.
In issuing the clarificatory order of November 27, 2003, enjoining petitioner
from claiming from an asset that did not belong to the debtor and over
which it did not acquire jurisdiction, the rehabilitation court acted in excess
of its jurisdiction.

Letters of credit were developed for the purpose of insuring to a seller

payment of a definite amount upon the presentation of documents 18 and is
thus a commitment by the issuer that the party in whose favor it is issued
and who can collect upon it will have his credit against the applicant of the
letter, duly paid in the amount specified in the letter. 19 They are in
effect absolute undertakings to pay the money advanced or the amount
for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security
arrangements, they are not converted thereby into contracts of
guaranty.20 What distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the
draft and other required shipping documents are presented to it. 21 They are
definite undertakings to pay at sight once the documents stipulated
therein are presented.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the

Interim Rules that supports its claim that the commencement of the
process to draw on the Standby Letter of Credit is an enforcement of claim
prohibited by and under the Interim Rules and the order of public
respondent.
Respondent Maynilad would persuade us that the above provision justifies
a leap to the conclusion that such an enforcement is prohibited by said
section because it is a "claim against the debtor, its guarantors and

35

Letters of Credits have long been and are still governed by the provisions
of the Uniform Customs and Practice for Documentary Credits of the
International Chamber of Commerce. In the 1993 Revision it provides in
Art. 2 that "the expressions Documentary Credit(s) and Standby Letter(s)
of Credit mean any arrangement, however made or described, whereby a
bank acting at the request and on instructions of a customer or on its own
behalf is to make payment against stipulated document(s)" and Art. 9
thereof defines the liability of the issuing banks on an irrevocable letter of
credit as a "definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or the issuing
bank and the terms and conditions of the Credit are complied with, to pay
at sight if the Credit provides for sight payment." 22

The terms of the Irrevocable Standby Letter of Credit do not show that the
obligations of the banks are not solidary with those of respondent
Maynilad. On the contrary, it is issued at the request of and for the account
of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks
and Sewerage System, as a bond for the full and prompt performance of
the obligations by the concessionaire under the Concession
Agreement28 and herein petitioner is authorized by the banks to draw on it
by the simple act of delivering to the agent a written certification
substantially in the form Annex "B" of the Letter of Credit. It provides
further in Sec. 6, that for as long as the Standby Letter of Credit is valid
and subsisting, the Banks shall honor any written Certification made by
MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless
of the date on which the event giving rise to such Written Certification
arose.29

We have accepted, in Feati Bank and Trust Company v. Court of

Appeals23 and Bank of America NT & SA v. Court of Appeals,24 to the extent
that they are pertinent, the application in our jurisdiction of the
international credit regulatory set of rules known as the Uniform Customs
and Practice for Documentary Credits (U.C.P) issued by the International
Chamber of Commerce, which we said in Bank of the Philippine Islands v.
Nery25 was justified under Art. 2 of the Code of Commerce, which states:

Taking into consideration our own rulings on the nature of letters of credit
and the customs and usage developed over the years in the banking and
commercial practice of letters of credit, we hold that except when a letter
of credit specifically stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and
definite undertaking to pay the beneficiary upon the presentation of the
set of documents required therein.

"Acts of commerce, whether those who execute them be

merchants or not, and whether specified in this Code or not should
be governed by the provisions contained in it; in their absence, by
the usages of commerce generally observed in each place; and in
the absence of both rules, by those of the civil law."

The public respondent, therefore, exceeded his jurisdiction, in holding that

he was competent to act on the obligation of the banks under the Letter of
Credit under the argument that this was not a solidary obligation with that
of the debtor. Being a solidary obligation, the letter of credit is excluded
from the jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of Credit to which it
had a clear right under the law and the terms of said Standby Letter of
Credit, public respondent acted in excess of his jurisdiction.

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
apply to herein petitioner as the prohibition is on the enforcement of claims
against guarantors or sureties of the debtors whose obligations are not
solidary with the debtor. The participating banks obligation are solidary
with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion
of the debtors assets. These are the same characteristics of a surety or
solidary obligor.

ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and
included in the parties memoranda:

Being solidary, the claims against them can be pursued separately from
and independently of the rehabilitation case, as held in Traders Royal Bank
v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v.
Court of Appeals,27 where we said that property of the surety cannot be
taken into custody by the rehabilitation receiver (SEC) and said surety can
be sued separately to enforce his liability as surety for the debts or
obligations of the debtor. The debts or obligations for which a surety may
be liable include future debts, an amount which may not be known at the
time the surety is given.

1. Respondent Maynilad argues that petitioner had a plain, speedy

and adequate remedy under the Interim Rules itself which provides
in Sec. 12, Rule 4 that the court may on motion or motuproprio,
terminate, modify or set conditions for the continuance of the stay
order or relieve a claim from coverage thereof. We find, however,
that the public respondent had already accomplished this during
the hearing set for the two Urgent Ex Parte motions filed by
respondent Maynilad on November 21 and 24, 2003, 30 where the

36

parties including the creditors, Suez and Chinatrust Commercial

"presented their respective arguments."31 The public respondent
then ruled, "after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or
the creditors Chinatrust Commercial Bank and Suez in relation to
the admissions, the pleadings, and/or pertinent portions of the
records, this court is of the considered and humble view that the
issue must perforce be resolved in favor of Maynilad." 32 Hence to
pursue their opposition before the same court would result in the
presentation of the same arguments and issues passed upon by
public respondent.

rehabilitation has merit or not. The propriety of the stay order as

well as the clarificatory order had already been passed upon in the
hearing previously had for that purpose. The determination of
whether the public respondent was correct in enjoining the
petitioner from drawing on the Standby Letter of Credit will have
no bearing on the determination to be made by public respondent
whether the petition for rehabilitation has merit or not. Our
decision on the instant petition does not pre-empt the original
jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November
27, 2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby
declared NULL AND VOID and SET ASIDE. The status quo Order herein
previously issued is hereby LIFTED. In view of the urgency attending this
case, this decision is immediately executory.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any

other effective remedy questioning the orders of the rehabilitation
court since they are immediately executory and a petition for
review or an appeal therefrom shall not stay the execution of the
order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us
through this petition for certiorari.

No costs.

In Silvestre v. Torres and Oben,33 we said that it is not enough that

a remedy is available to prevent a party from making use of the
extraordinary remedy of certiorari but that such remedy be an
adequate remedy which is equally beneficial, speedy and
sufficient, not only a remedy which at some time in the future may
offer relief but a remedy which will promptly relieve the petitioner
from the injurious acts of the lower tribunal. It is the inadequacy -not the mere absence -- of all other legal remedies and the danger
of failure of justice without the writ, that must usually determine
the propriety of certiorari.34
2. Respondent Maynilad argues that by commencing the process
for payment under the Standby Letter of Credit, petitioner violated
an immediately executory order of the court and, therefore, comes
to Court with unclean hands and should therefore be denied any
relief.
It is true that the stay order is immediately executory. It is also
true, however, that the Standby Letter of Credit and the banks that
issued it were not within the jurisdiction of the rehabilitation court.
The call on the Standby Letter of Credit, therefore, could not be
considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the
original jurisdiction of the lower court is without merit. The purpose
of the initial hearing is to determine whether the petition for

37

G.R. No. 159622

July 30, 2004

Lucente also executed a Deed of Assignment in the amount of P35,000.00

in favor of respondent bank to cover the amount of petitioner corporation's
obligation to the bank. Upon compliance with these requisites, respondent
bank opened an irrevocable letter of credit for the petitioner corporation.

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL

P.
LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.

To secure the indebtedness of petitioner corporation, respondent bank

required the execution of a Trust Receipt in an amount equivalent to the
letter of credit, on the condition that petitioner corporation would hold the
goods in trust for respondent bank, with the right to sell the goods and the
obligation to turn over to respondent bank the proceeds of the sale, if any.
If the goods remained unsold, petitioner corporation had the further
obligation to return them to respondent bank on or before November 23,
1983.

DECISION

Upon arrival of the goods in the Philippines, petitioner corporation took

possession and custody thereof.
YNARES-SANTIAGO, J.:

On November 23, 1983, the maturity date of the trust receipt, petitioner
corporation defaulted in the payment of its obligation to respondent bank
and failed to turn over the goods to the latter. On July 24, 1984, respondent
bank demanded that petitioners, as entrustees, turn over the goods
subject of the trust receipt. On September 24, 1984, petitioners turned
over the subject goods to the respondent bank.

At issue in this petition for review on certiorari is whether or not, in a trust

receipt transaction, an entruster which had taken actual and juridical
possession of the goods covered by the trust receipt may subsequently
avail of the right to demand from the entrustee the deficiency of the
amount covered by the trust receipt.

On July 31, 1985, in the presence of representatives of the petitioners and

respondent bank, the goods were sold at public auction. The goods were
sold for P30,000.00 to respondent bank as the highest bidder.

As correctly appreciated by the Court of Appeals, the undisputed facts of

this case are as follows:
Respondent Metropolitan Bank and Trust Company (Metrobank) filed a
complaint for sum of money against Landl and Company (Phil.) Inc. (Landl)
and its directors, Percival G. Llaban and Manuel P. Lucente before the
Regional Trial Court of Cebu City, Branch 19, docketed as Civil Case No.
CEB-4895.

The proceeds of the auction sale were insufficient to completely satisfy

petitioners' outstanding obligation to respondent bank, notwithstanding
the application of the time deposit account of petitioner Lucente.
Accordingly, respondent bank demanded that petitioners pay the
remaining balance of their obligation. After petitioners failed to do so,
respondent bank instituted the instant case to collect the said deficiency.

Respondent alleged that petitioner corporation is engaged in the business

of selling imported welding rods and alloys. On June 17, 1983, it opened
Commercial Letter of Credit No. 4998 with respondent bank, in the amount
of US$19,606.77, which was equivalent to P218,733.92 in Philippine
currency at the time the transaction was consummated. The letter of credit
was opened to purchase various welding rods and electrodes from Perma
Alloys, Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice dated
March 10, 1983. Petitioner corporation put up a marginal deposit of
P50,414.00 from the proceeds of a separate clean loan.

On March 31, 1997, after trial on the merits, the trial court rendered a
decision, the dispositive portion of which reads:
WHEREFORE, foregoing premises considered, Judgment is hereby
rendered in favor of the plaintiff and against the defendant by (1)
ordering the defendant to pay jointly and severally to the plaintiff
the sum of P292,172.23 representing the defendant's obligation, as
of April 17, 1986; (2) to pay the interest at the rate of 19% per
annum to be reckoned from April 18, 1986 until [the] obligation is
fully paid; (3) to pay service charge at the rate of 2% per annum
starting April 18, 1986; (4) to pay the sum equivalent to 10% per
annum of the total amount due collectible by way of Attorney's
Fees; (5) to pay Litigation Expenses of P3,000.00 and to pay the
cost of the suit; and (6) to pay penalty charge of 12% per annum.

As an additional security, and as a condition for the approval of petitioner

corporation's application for the opening of the commercial letter of credit,
respondent bank required petitioners Percival G. Llaban and Manuel P.
Lucente to execute a Continuing SuretyshipAgreement to the extent of
P400,000.00, excluding interest, in favor of respondent bank. Petitioner

38

SO ORDERED.1

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, and 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. The proceeds
of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents
or instruments; (c) 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.
Notice of 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.

Petitioners appealed to the Court of Appeals, raising the issues of: (1)
whether or not respondent bank has the right to recover any deficiency
after it has retained possession of and subsequently effected a public
auction sale of the goods covered by the trust receipt; (2) whether or not
respondent bank is entitled to the amount of P3,000.00 as and for litigation
expenses and costs of the suit; and (3) whether or not respondent bank is
entitled to the award of attorney's fees.
On February 13, 2003, the Court of Appeals rendered a decision affirming
in toto the decision of the trial court.2
Hence, this petition for review on the following assignment of errors:
I.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN
AFFIRMING THE TRIAL COURT'S RULING THAT RESPONDENT HAD
THE RIGHT TO CLAIM THE DEFICIENCY FROM PETITIONERS
NOTWITHSTANDING THE FACT THAT THE GOODS COVERED BY THE
TRUST RECEIPT WERE FULLY TURNED OVER TO RESPONDENT.

There is no question that petitioners failed to pay their outstanding

obligation to respondent bank. They contend, however, that when the
entrustee fails to settle his principal loan, the entruster may choose
between two separate and alternative remedies: (1) the return of the
goods covered by the trust receipt, in which case, the entruster now
acquires the ownership of the goods which the entrustee failed to sell; or
(2) cancel the trust and take possession of the goods, for the purpose of
selling the same at a private sale or at public auction. Petitioners assert
that, under this second remedy, the entruster does not acquire ownership
of the goods, in which case he is entitled to the deficiency. Petitioners
argue that these two remedies are so distinct that the availment of one
necessarily bars the availment of the other. Thus, when respondent bank
availed of the remedy of demanding the return of the goods, the actual
return of all the unsold goods completely extinguished petitioners' liability. 4

II.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN
AFFIRMING THE TRIAL COURT'S PATENTLY ERRONEOUS AWARD OF
PRINCIPAL OBLIGATION, INTEREST, ATTORNEY'S FEES, AND
PENALTY AGAINST THE PETITIONERS.3
The instant petition is partly meritorious.

Petitioners' argument is bereft of merit.

The resolution of the first assigned error hinges on the proper

interpretation of Section 7 of Presidential Decree No. 115, or the Trust
Receipts Law, which reads:

A trust receipt is inextricably linked with the primary agreement between

the parties. Time and again, we have emphasized that a trust receipt
agreement is merely a collateral agreement, the purpose of which is to
serve as security for a loan. Thus, in Abad v. Court of Appeals,5 we ruled:

Sec. 7. Rights of the entruster. - The entruster shall be entitled to

the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or
to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on
him in the trust receipt provided such are not contrary to the
provisions of this Decree.

A letter of credit-trust receipt arrangement is endowed with its own

distinctive features and characteristics. Under that set-up, a bank
extends a loan covered by the letter of credit, with the trust receipt
as security for the loan. In other words, the transaction involves a
loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt. x xx.

The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the

39

A trust receipt, therefore, is a security agreement, pursuant to

which a bank acquires a "security interest" in the goods. It secures
an indebtedness and there can be no such thing as security
interest that secures no obligation.6

applied: (a) to the payment of the expenses thereof; (b) to the

payment of the expenses of retaking, keeping and storing the
goods/documents/instruments; (c) to the satisfaction of all of the
ENTRUSTEE's indebtedness to the BANK/ENTRUSTER; and Provided,
further, that the ENTRUSTEE shall receive any surplus thereof but
shall, in any case, be liable to the BANK/ENTRUSTER for any
deficiency. x xx

The Trust Receipts Law was enacted to safeguard commercial transactions

and to offer an additional layer of security to the lending bank. Trust
receipts are indispensable contracts in international and domestic business
transactions. The prevalent use of trust receipts, the danger of their
misuse and/or misappropriation of the goods or proceeds realized from the
sale of goods, documents or instruments held in trust for entruster banks,
and the need for regulation of trust receipt transactions to safeguard the
rights and enforce the obligations of the parties involved are the main
thrusts of the Trust Receipts Law.7

No act or omission on the part of the BANK/ENTRUSTER shall be

deemed and considered a waiver of any of its rights hereunder or
under any related letters of credit, drafts or other documents
unless such waiver is expressly made in writing over the signature
of the BANK/ENTRUSTER.8
The afore-cited stipulations in the trust receipt are a near-exact
reproduction of the second paragraph of Section 7 of the Trust Receipts
Law. The right of repossession and subsequent sale at public auction which
were availed of by respondent bank were rights available upon default, and
which were conferred by statute and reinforced by the contract between
the parties.

The second paragraph of Section 7 provides a statutory remedy available

to an entruster in the event of 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. More specifically, 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". The law further provides that "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. The proceeds of any such sale,
whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments; (c) 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."

The initial repossession by the bank of the goods subject of the trust
receipt did not result in the full satisfaction of the petitioners' loan
obligation. Petitioners are apparently laboring under the mistaken
impression that the full turn-over of the goods suffices to divest them of
their obligation to repay the principal amount of their loan obligation. This
is definitely not the case. In Philippine National Bank v. Hon. Gregorio G.
Pineda and Tayabas Cement Company, Inc.,9 we had occasion to rule:
PNB's possession of the subject machinery and equipment being
precisely as a form of security for the advances given to TCC under
the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for foreclosure denotes
the procedure adopted by the mortgagee to terminate the rights of
the mortgagor on the property and includes the sale itself.

The trust receipt between respondent bank and petitioner corporation

contains the following relevant clauses:
The BANK/ENTRUSTER may, at any time, and only at its option,
cancel
this
trust
and
take
possession
of
the
goods/documents/instruments subject hereof or of the proceeds
realized therefrom wherever they may then be found, upon default
or failure of the ENTRUSTEE to comply with any of the terms and
conditions of this Trust Receipt or of any other agreement between
the
BANK/ENTRUSTER
and
the
ENTRUSTEE;
and
the
BANK/ENTRUSTER
having
taken
repossession
of
the
goods/documents/instruments object hereof may, on or after
default, give at least five (5) days' previous notice to the
ENTRUSTEE
of
its
intention
to
sell
the
goods/documents/instruments at public or private sale, at which
public sale, it may become a purchaser; Provided, that the
proceeds of any such sale, whether public or private, shall be

Neither can said repossession amount to dacion en pago. Dation in

payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by sales.
Dation in payment is the delivery and transmission of ownership of
a thing by the debtor to the creditor as an accepted equivalent of
the performance of the obligation. As aforesaid, the repossession
of the machinery and equipment in question was merely to secure
the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan.

40

Thus, no dacion en pago was ever

omitted, underscoring supplied)10

accomplished.

(Citations

not affect IBAA's right to recover the advances it had made under
the Letter of Credit. (Citations omitted.)12

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and

America,11 we struck down the position of the petitioner-spouses that their
obligation to the entruster bank had been extinguished when they
relinquished possession of the goods in question. Thus:

Respondent bank's repossession of the properties and subsequent sale of

the goods were completely in accordance with its statutory and contractual
rights upon default of petitioner corporation.

A trust receipt is a security agreement, pursuant to which a bank

acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest
that secures no obligation. As defined in our laws:

The second paragraph of Section 7 expressly provides that the entrustee

shall be liable to the entruster for any deficiency after the proceeds of the
sale have been applied to the payment of the expenses of the sale, the
payment of the expenses of re-taking, keeping and storing the goods,
documents or instruments, and the satisfaction of the entrustee's
indebtedness to the entruster.

(h) 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.

In the case at bar, the proceeds of the auction sale were insufficient to
satisfy entirely petitioner corporation's indebtedness to the respondent
bank. Respondent bank was thus well within its rights to institute the
instant case to collect the deficiency.

x xx

x xx

We find, however, that there has been an error in the computation of the
total amount of petitioners' indebtedness to respondent bank.

x xx

Contrary to the allegations of the VINTOLAS, IBAA did not become

the real owner of the goods. It was merely the holder of a security
title for the advances it had made to the VINTOLAS. The goods the
VINTOLAS had purchased through IBAA financing remain their own
property and they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor.

Although respondent bank contends that the error of computation is a

question of fact which is beyond the power of this Court to review, 13 the
total amount of petitioners' indebtedness in this case is not a question of
fact. Rather, it is a question of law, i.e., the application of legal principles
for the computation of the amount owed to respondent bank, and is thus a
matter properly brought for our determination.
The first issue involves the amount of indebtedness prior to the imposition
of interest and penalty charges. The initial amount of the trust receipt of
P218,733.92, was reduced to P192,265.92 as of June 14, 1984, as per
respondent's Statement of Past Due Trust Receipt dated December 1,
1993.14 This amount presumably includes the application of P35,000.00,
the amount of petitioner Lucente's Deed of Assignment, which amount was
applied by respondent bank to petitioners' obligation. No showing was
made, however, that the P30,000.00 proceeds of the auction sale on July
31, 1985 was ever applied to the loan. Neither was the amount of
P50,414.00, representing the marginal deposit made by petitioner
corporation, deducted from the loan. Although respondent bank contends
that the marginal deposit should not be deducted from the principal
obligation, this is completely contrary to prevailing jurisprudence allowing
the deduction of the marginal deposit, thus:

"x xx for the bank has previously extended a loan which

the L/C represents to the importer, and by that loan, the
importer should be the real owner of the goods. If under
the trust receipt, the bank is made to appear as the owner,
it was but an artificial expedient, more of a legal fiction
than fact, for if it were so, it could dispose of the goods in
any manner it wants, which it cannot do, just to give
consistency with the purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature
thereof. x xx"
Since the IBAA is not the factual owner of the goods, the VINTOLAS
cannot justifiably claim that because they have surrendered the
goods to IBAA and subsequently deposited them in the custody of
the court, they are absolutely relieved of their obligation to pay
their loan because of their inability to dispose of the goods. The
fact that they were unable to sell the seashells in question does

The marginal deposit requirement is a Central Bank measure to cut

off excess currency liquidity which would create inflationary
pressure. It is a collateral security given by the debtor, and is
supposed to be returned to him upon his compliance with his
secured obligation. Consequently, the bank pays no interest on the

41

marginal deposit, unlike an ordinary bank deposit which earns

interest in the bank. As a matter of fact, the marginal deposit
requirement for letters of credit has been discontinued, except in
those cases where the applicant for a letter of credit is not known
to the bank or does not maintain a good credit standing therein.

The liability of the SURETY shall be solidary, direct and immediate

and not contingent upon the bank's pursuit of whatever remedies
the BANK have [sic] against the Borrower or the securities or liens
the BANK may possess and the SURETY will at any time, whether
due or not due, pay to the BANK with or withour demand upon the
Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.18

It is only fair then that the importer's marginal deposit (if one was
made, as in this case), should be set off against his debt, for while
the importer earns no interest on his marginal deposit, the bank,
apart from being able to use said deposit for its own purposes, also
earns interest on the money it loaned to the importer. It would be
onerous to compute interest and other charges on the face value of
the letter of credit which the bank issued, without first crediting or
setting off the marginal deposit which the importer paid to the
bank. Compensation is proper and should take place by operation
of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent
amount (Art. 1290, Civil Code). Although Abad is only a surety, he
may set up compensation as regards what the creditor owes the
principal debtor, TOMCO (Art. 1280, Civil Code). 15

Solidary liability is one of the primary characteristics of a surety

contract,19 and the Continuing Suretyship Agreement expressly stipulates
the solidary nature of Lucente and Llaban's liability. All three petitioners
thus share the solidary obligation in favor of respondent bank, which is
given the right, under the Civil Code, to proceed against any one of the
solidary debtors or some or all of them simultaneously. 20
WHEREFORE, premises considered, the instant petition is PARTIALLY
GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 58193
dated February 13, 2003 is AFFIRMED with MODIFICATIONS. Accordingly,
petitioners are ordered to pay respondent bank the following: (1)
P211,758.23 representing petitioners' net obligation as of April 17, 1986;
(2) interest at the rate of 19% per annum and penalty at the rate of
12% per annum reckoned from April 18, 1986; (3) attorney's fees
equivalent to 10% of the total amount due and collectible; and (4) litigation
expenses in the amount of P3,000.00. The service charge at the rate of
2% per annum beginning April 18, 1986 is deleted. Costs against
petitioners.

The net amount of the obligation, represented by respondent bank to be

P292,172.23 as of April 17, 1986, would thus be P211,758.23.
To this principal amount must be imposed the following charges: (1) 19%
interest per annum, in keeping with the terms of the trust receipt; 16 and (2)
12% penalty per annum, collected based on the outstanding principal
obligation plus unpaid interest, again in keeping with the wording of the
trust receipt.17 It appearing that petitioners have paid the interest and
penalty charges until April 17, 1986, the reckoning date for the
computation of the foregoing charges must be April 18, 1986.

SO ORDERED.

A perusal of the records reveals that the trial court and the Court of
Appeals erred in imposing service charges upon the petitioners. No such
stipulation is found in the trust receipt. Moreover, the trial court and the
Court of Appeals erred in computing attorney's fees equivalent to 10% per
annum, rather than 10% of the total amount due. There is no basis for
compounding the interest annually, as the trial court and Court of Appeals
have done. This amount would be unconscionable.
Finally, Lucente and Llaban's contention that they are not solidarily liable
with petitioner corporation is untenable. As co-signatories of the
Continuing Suretyship Agreement, they bound themselves, inter alia, to
pay the principal sum in the amount of not more than P400,000.00;
interest due on the principal obligation; attorney's fees; and expenses that
may be incurred in collecting the credit. The amount owed to respondent
bank is the amount of the principal, interest, attorney's fees, and expenses
in collecting the principal amount. The Continuing Suretyship Agreement
expressly states the nature of the liability of Lucente and Llaban:

G.R. No. 90828

42

September 5, 2000

MELVIN
COLINARES
and
LORDINO
VELOSO, petitioners,
vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE
PHILIPPINES, respondents.

On 14 January 1983, Petitioners were charged with the violation of P.D. No.
115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal
Code in an Information which was filed with Branch 18, Regional Trial Court
of Cagayan de Oro City. The accusatory portion of the Information reads:

DECISION

That on or about October 31, 1979, in the City of Cagayan de Oro,

Philippines, and within the jurisdiction of this Honorable Court, the abovenamed accused entered into a trust receipt agreement with the Philippine
Banking Corporation at Cagayan de Oro City wherein the accused, as
entrustee, received from the entruster the following goods to wit:

DAVIDE, JR., C.J.:

In 1979 Melvin Colinares and LordinoVeloso (hereafter Petitioners) were
contracted for a consideration of P40,000 by the Carmelite Sisters of
Cagayan de Oro City to renovate the latters convent at Camaman-an,
Cagayan de Oro City.

Solatone
Tanguile
Marcelo
Umylin Cement Adhesive

On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical

board 2x4x", 300 SF tanguile wood tiles 12"x12", 260 SF Marcelo
economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders
Centre for the construction project. 1 The following day, 31 October 1979,
Petitioners applied for a commercial letter of credit 2 with the Philippine
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor
of CM Builders Centre. PBC approved the letter of credit 3 for P22,389.80 to
cover the full invoice value of the goods. Petitioners signed a pro-forma
trust receipt4 as security. The loan was due on 29 January 1980.

Acoustical
Wood
Cement

board
Tiles
Tiles

with a total value of P22,389.80, with the obligation on the part of the
accused-entrustee to hold the aforesaid items in trust for the entruster
and/or to sell on cash basis or otherwise dispose of the said items and to
turn over to the entruster the proceeds of the sale of said goods or if there
be no sale to return said items to the entruster on or before January 29,
1980 but that the said accused after receipt of the goods, with intent to
defraud and cause damage to the entruster, conspiring, confederating
together and mutually helping one another, did then and there wilfully,
unlawfully and feloniously fail and refuse to remit the proceeds of the sale
of the goods to the entruster despite repeated demands but instead
converted, misappropriated and misapplied the proceeds to their own
personal use, benefit and gain, to the damage and prejudice of the
Philippine Banking Corporation, in the aforesaid sum of P22,389.80,
Philippine Currency.

On 31 October 1979, PBC debited P6,720 from Petitioners marginal

deposit as partial payment of the loan.5
On 7 May 1980, PBC wrote6 to Petitioners demanding that the amount be
paid within seven days from notice. Instead of complying with PBCs
demand, Veloso confessed that they lost P19,195.83 in the Carmelite
Monastery Project and requested for a grace period of until 15 June 1980 to
settle the account.7

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. 16

The case was docketed as Criminal Case No. 1390.

PBC sent a new demand letter8 to Petitioners on 16 October 1980 and

informed them that their outstanding balance as of 17 November 1979
was P20,824.40 exclusive of attorneys fees of 25%.9

During trial, petitioner Veloso insisted that the transaction was a "clean
loan" as per verbal guarantee of Cayo Garcia Tuiza, PBCs former manager.
He and petitioner Colinares signed the documents without reading the fine
print, only learning of the trust receipt implication much later. When he
brought this to the attention of PBC, Mr.Tuiza assured him that the trust
receipt was a mere formality.17

On 2 December 1980, Petitioners proposed 10 that the terms of payment of

the loan be modified as follows: P2,000 on or before 3 December 1980,
and P1,000 per month starting 31 January 1980 until the account is fully
paid. Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4
December 1980,11 and thereafter P500 on 11 February 1981, 12 16 March
1981,13 and 20 April 1981.14 Concurrently with the separate demand for
attorneys fees by PBCs legal counsel, PBC continued to demand payment
of the balance.15

On 7 July 1986, the trial court promulgated its decision 18 convicting

Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of
the Revised Penal Code and sentencing each of them to suffer
imprisonment of two years and one day of prisioncorreccional as minimum

43

to six years and one day of prision mayor as maximum, and to solidarily
indemnify PBC the amount of P20,824.44, with legal interest from 29
January 1980, 12 % penalty charge per annum, 25% of the sums due as
attorneys fees, and costs.

1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL

ON THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY,
"DISCLOSURE ON LOAN/CREDIT TRANSACTION," WHICH IF
INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT,
DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS.

The trial court considered the transaction between PBC and Petitioners as a
trust receipt transaction under Section 4, P.D. No. 115. It considered
Petitioners use of the goods in their Carmelite monastery project an act of
"disposing" as contemplated under Section 13, P.D. No. 115, and treated
the charge invoice19 for goods issued by CM Builders Centre as a
"document" within the meaning of Section 3 thereof. It concluded that the
failure of Petitioners to turn over the amount they owed to PBC constituted
estafa.

2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR

NOT THE ACCUSED WERE PROPERLY CHARGED, TRIED AND
CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION
TO ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE
NOVATION OF THE SO-CALLED TRUST RECEIPT CONVERTING THE
TRUSTOR-TRUSTEE
RELATIONSHIP
TO
CREDITOR-DEBTOR
SITUATION.

Petitioners appealed from the judgment to the Court of Appeals which was
docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that the
trial court erred in ruling that they violated the Trust Receipt Law, and in
holding them criminally liable therefor. In the alternative, they contend that
at most they can only be made civilly liable for payment of the loan.

In its Comment of 22 January 1990, the Office of the Solicitor General

urged us to deny the petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the
ground that they had already fully paid PBC on 2 February 1990 the
amount of P70,000 for the balance of the loan, including interest and other
charges, as evidenced by the different receipts issued by PBC, 24 and that
the PBC executed an Affidavit of desistance.25

In its decision20 6 March 1989, the Court of Appeals modified the judgment
of the trial court by increasing the penalty to six years and one day
of prision mayor as minimum to fourteen years eight months and one day
of reclusion temporal as maximum. It held that the documentary evidence
of the prosecution prevails over Velosos testimony, discredited Petitioners
claim that the documents they signed were in blank, and disbelieved that
they were coerced into signing them.

We required the Solicitor General to comment on the Motion to Dismiss.

In its Comment of 30 July 1990, the Solicitor General opined that payment
of the loan was akin to a voluntary surrender or plea of guilty which merely
serves to mitigate Petitioners culpability, but does not in any way
extinguish their criminal liability.

On
25
March
1989,
Petitioners
filed
a
Motion
for
New
Trial/Reconsideration21 alleging that the "Disclosure Statement on
Loan/Credit Transaction"22 (hereafter Disclosure Statement) signed by them
and Tuiza was suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it bears a 14%
interest as opposed to the trust receipt which does not at all bear any
interest. Petitioners further maintained that when PBC allowed them to pay
in installment, the agreement was novated and a creditor-debtor
relationship was created.

In the Resolution of 13 August 1990, we gave due course to the Petition

and required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to the ponente.
Thereafter, we required the parties to move in the premises and for
Petitioners to manifest if they are still interested in the further prosecution
of this case and inform us of their present whereabouts and whether their
bail bonds are still valid.

In its resolution23 of 16 October 1989 the Court of Appeals denied the

Motion for New Trial/Reconsideration because the alleged newly discovered
evidence was actually forgotten evidence already in existence during the
trial, and would not alter the result of the case.

Petitioners submitted their Compliance.

Hence, Petitioners filed with us the petition in this case on 16 November
1989. They raised the following issues:

The core issues raised in the petition are the denial by the Court of Appeals
of Petitioners Motion for New Trial and the true nature of the contract

44

between Petitioners and the PBC. As to the latter, Petitioners assert that it
was an ordinary loan, not a trust receipt agreement under the Trust
Receipts Law.

possession of the entrustee upon the latters 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 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.

The grant or denial of a motion for new trial rests upon the discretion of the
judge. New trial may be granted if: (1) errors of law or irregularities have
been committed during the trial prejudicial to the substantial rights of the
accused; or (2) new and material evidence has been discovered which the
accused could not with reasonable diligence have discovered and produced
at the trial, and which, if introduced and admitted, would probably change
the judgment.26

There are two possible situations in a trust receipt transaction. The first is
covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to "return" it (devolvera) to the
owner.33

For newly discovered evidence to be a ground for new trial, such evidence
must be (1) discovered after trial; (2) could not have been discovered and
produced at the trial even with the exercise of reasonable diligence; and
(3) material, not merely cumulative, corroborative, or impeaching, and of
such weight that, if admitted, would probably change the judgment. 27 It is
essential that the offering party exercised reasonable diligence in seeking
to locate the evidence before or during trial but nonetheless failed to
secure it.28

Failure of the entrustee to turn over the proceeds of the sale of the goods,
covered by the trust receipt to the entruster or to return said goods if they
were not disposed of in accordance with the terms of the trust receipt shall
be punishable as estafa under Article 315 (1) of the Revised Penal
Code,34 without need of proving intent to defraud.

We find no indication in the pleadings that the Disclosure Statement is a

newly discovered evidence.

A thorough examination of the facts obtaining in the case at bar reveals

that the transaction intended by the parties was a simple loan, not a trust
receipt agreement.

Petitioners could not have been unaware that the two-page document
exists. The Disclosure Statement itself states, "NOTICE TO BORROWER:
YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL
SIGN."29 Assuming Petitioners copy was then unavailable, they could have
compelled its production in court, 30which they never did. Petitioners have
miserably failed to establish the second requisite of the rule on newly
discovered evidence.

Petitioners received the merchandise from CM Builders Centre on 30

October 1979. On that day, ownership over the merchandise was already
transferred to Petitioners who were to use the materials for their
construction project. It was only a day later, 31 October 1979, that they
went to the bank to apply for a loan to pay for the merchandise.

Petitioners themselves admitted that "they searched again their

voluminous records, meticulously and patiently, until they discovered this
new and material evidence" only upon learning of the Court of Appeals
decision and after they were "shocked by the penalty imposed." 31 Clearly,
the alleged newly discovered evidence is mere forgotten evidence that
jurisprudence excludes as a ground for new trial.32

This situation belies what normally obtains in a pure trust receipt

transaction where goods are owned by the bank and only released to the
importer in trust subsequent to the grant of the loan. The bank acquires a
"security interest" in the goods as holder of a security title for the
advances it had made to the entrustee. 35 The ownership of the
merchandise continues to be vested in the person who had advanced
payment until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the
importer or by his representative or successor in interest. 36 To secure that
the bank shall be paid, it takes full title to the goods at the very beginning
and continues to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay for them; hence, the
importer has never owned the goods and is not able to deliver
possession.37 In a certain manner, trust receipts partake of the nature of a

However, the second issue should be resolved in favor of Petitioners.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt
transaction as any transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain
specified goods, documents or instruments, releases the same to the

45

conditional sale where the importer becomes absolute owner of the

imported merchandise as soon as he has paid its price. 38

A October 31, 1979.

COURT:

Trust receipt transactions are intended to aid in financing importers and

retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.39

Make it of record as appearing in Exhibit D, the zero in 30 has been

superimposed with numeral 1.42
During the cross and re-direct examinations he also impliedly admitted
that the transaction was indeed a loan. Thus:

The antecedent acts in a trust receipt transaction consist of the application

and approval of the letter of credit, the making of the marginal deposit and
the effective importation of goods through the efforts of the importer. 40

Q In short the amount stated in your Exhibit C, the trust receipt was a loan
to the accused you admit that?

PBC attempted to cover up the true delivery date of the merchandise, yet
the trial court took notice even though it failed to attach any significance
to such fact in the judgment. Despite the Court of Appeals contrary view
that the goods were delivered to Petitioners previous to the execution of
the letter of credit and trust receipt, we find that the records of the case
speak volubly and this fact remains uncontroverted. It is not uncommon for
us to peruse through the transcript of the stenographic notes of the
proceedings to be satisfied that the records of the case do support the
conclusions of the trial court. 41 After such perusal GregoMutia, PBCs credit
investigator, admitted thus:

A Because in the bank the loan is considered part of the loan.

xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?

ATTY. CABANLET: (continuing)

A Loan is a promise of a borrower from the value received. The borrower

will pay the bank on a certain specified date with interest43

Q Do you know if the goods subject matter of this letter of credit and trust
receipt agreement were received by the accused?

Such statement is akin to an admission against interest binding upon PBC.

A Yes, sir

Petitioner Velosos claim that they were made to believe that the
transaction was a loan was also not denied by PBC. He declared:

Q Do you have evidence to show that these goods subject matter of this
letter of credit and trust receipt were delivered to the accused?

Q Testimony was given here that that was covered by trust receipt. In short
it was a special kind of loan.1wphi1 What can you say as to that?

A Yes, sir.

A I dont think that would be a trust receipt because we were made to

understand by the manager who encouraged us to avail of their facilities
that they will be granting us a loan44

Q I am showing to you this charge invoice, are you referring to this

document?
A Yes, sir.

PBC could have presented its former bank manager, Cayo Garcia Tuiza,
who contracted with Petitioners, to refute Velosos testimony, yet it only
presented credit investigator GregoMutia. Nowhere from Mutias testimony
can it be gleaned that PBC represented to Petitioners that the transaction
they were entering into was not a pure loan but had trust receipt
implications.

xxx
Q What is the date of the charge invoice?

46

The Trust Receipts Law does not seek to enforce payment of the loan,
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.45 Here, it is crystal clear that on the part of Petitioners
there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE
BENITO C. SE, JR., RTC, BR. 45, MANILA; NOAHS ARK SUGAR
REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON
T. GO, respondents.

The Information charges Petitioners with intent to defraud and

misappropriating the money for their personal use. The mala
prohibita nature of the alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners
sought favorable terms precisely to meet their obligation.

SYLLABUS
1. COMMERCIAL
LAW;
WAREHOUSE
RECEIPTS
LAW;
THE
UNCONDITIONAL PRESENTMENT OF THE RECEIPTS FOR
PAYMENT CARRIED WITH IT THE ADMISSIONS OF THE
EXISTENCE AND VALIDITY OF THE TERMS, CONDITIONS AND
STIPULATIONS WRITTEN ON THE FACE OF THE WAREHOUSE
RECEIPTS, INCLUDING THE UNQUALIFIED RECOGNITION OF THE
PAYMENT OF WAREHOUSEMANS LIEN FOR STORAGE FEES AND
PRESERVATION EXPENSES; CASE AT BAR. - Petitioner is in
estoppel in disclaiming liability for the payment of storage fees due
the private respondents as warehouseman while claiming to be
entitled to the sugar stocks covered by the subject Warehouse
Receipts on the basis of which it anchors its claim for payment or
delivery of the sugar stocks. The unconditional presentment of the
receipts by the petitioner for payment against private respondents on
the strength of the provisions of the Warehouse Receipts Law (R.A.
2137) carried with it the admission of the existence and validity of the
terms, conditions and stipulations written on the face of the
Warehouse Receipts, including the unqualified recognition of the
payment of warehousemans lien for storage fees and preservation
expenses. Petitioner may not now retrieve the sugar stocks without
paying the lien due private respondents as warehouseman.

Also noteworthy is the fact that Petitioners are not importers acquiring the
goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their
construction project. At no time did title over the construction materials
pass to the bank, but directly to the Petitioners from CM Builders Centre.
This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the
event of violation of its provisions.46
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, as had happened in this case.
Eventually, PBC showed its true colors and admitted that it was only after
collection of the money, as manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution
of 16 October 1989 of the Court of Appeals in CA-GR. No. 05408 are
REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the crime
charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of the
Revised Penal Code.

2. ID.; ID.; ID.; WAREHOUSEMANS LIEN; POSSESSORY IN NATURE.

- While the PNB is entitled to the stocks of sugar as the endorsee of
the quedans, delivery to it shall be effected only upon payment of the
storage fees. Imperative is the right of the warehouseman to demand
payment of his lien at this juncture, because, in accordance with
Section 29 of the Warehouse Receipts Law, the warehouseman loses
his lien upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman surrenders the

47

possession of the goods without requiring payment of his lien,

because a warehousemans lien is possessory in nature.

THE FACTS
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs
Ark Sugar Refinery issued on several dates, the following Warehouse
Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar
deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering
sugar deposited by RNS Merchandising (Rosa Ng Sy); (c) March 21, 1989,
Receipt No. 18081, covering sugar deposited by St. Therese
Merchandising; (d)March 31, 1989, Receipt No. 18086, covering sugar
deposited by St. Therese Merchandising; and (e) April 1, 1989, Receipt No.
18087, covering sugar deposited by RNS Merchandising. The receipts are
substantially in the form, and contains the terms, prescribed for negotiable
warehouse receipts by Section 2 of the law.

APPEARANCES OF COUNSEL
Rolan A. Nieto for petitioner.
Madella& Cruz Law Offices for private respondents.
DECISION
HERMOSISIMA, JR., J.:
The source of conflict herein is the question as to whether the
Philippine National Bank should pay storage fees for sugar stocks covered
by five (5) Warehouse Receipts stored in the warehouse of private
respondents in the face of the Court of Appeals decision (affirmed by the
Supreme Court) declaring the Philippine National Bank as the owner of the
said sugar stocks and ordering their delivery to the said bank. From the
same facts but on a different perspective, it can be said that the issue is:
Can the warehouseman enforce his warehousemans lien before delivering
the sugar stocks as ordered by the Court of Appeals or need he file a
separate action to enforce payment of storage fees?

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were

negotiated and endorsed to Luis T. Ramos; and Receipts Nos. 18086,
18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta.
Ramos and Zoleta then used the quedans as security for two loan
agreements - one for P15.6 million and the other for P23.5 million obtained by them from the Philippine National Bank. The aforementioned
quedans were endorsed by them to the Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon
maturity on January 9, 1990. Consequently, on March 16, 1990, the
Philippine National Bank wrote to Noahs Ark Sugar Refinery demanding
delivery of the sugar stocks covered by the quedans endorsed to it by
Zoleta and Ramos. Noahs Ark Sugar Refinery refused to comply with the
demand alleging ownership thereof, for which reason the Philippine
National Bank filed with the Regional Trial Court of Manila a verified
complaint for Specific Performance with Damages and Application for Writ
of Attachment against Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy
T. Go and Wilson T. Go, the last three being identified as the sole
proprietor, managing partner, and Executive Vice President of Noahs Ark,
respectively.

The herein petition seeks to annul: (1) the Resolution of respondent

Judge Benito C. Se, Jr. of the Regional Trial Court of Manila, Branch 45,
dated December 20, 1994, in Civil Case No. 90-53023, authorizing
reception of evidence to establish the claim of respondents Noahs Ark
Sugar Refinery, et al., for storage fees and preservation expenses over
sugar stocks covered by five (5) Warehouse Receipts which is in the nature
of a warehousemans lien; and (2) the Resolution of the said respondent
Judge, dated March 1, 1995, declaring the validity of private respondents
warehousemans lien under Section 27 of Republic Act No 2137 and
ordering that execution of the Court of Appeals decision, dated December
13, 1991, be in effect held in abeyance until the full amount of the
warehousemans lien on the sugar stocks covered by five (5) quedans
subject of the action shall have been satisfied conformably with the
provisions of Section 31 of Republic Act 2137.

Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled,
denied the Application for Preliminary Attachment. Reconsideration
therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim
and Third-Party Complaint in which they claimed that they are the owners
of the subject quedans and the sugar represented therein, averring as they
did that:

Also prayed for by the petition is a Writ of Prohibition to require

respondent RTC Judge to desist from further proceeding with Civil Case No.
90-53023, except order the execution of the Supreme Court judgment; and
a Writ of Mandamus to compel respondent RTC Judge to issue a Writ of
Execution in accordance with the said executory Supreme Court decision.

9.*** In an agreement dated April 1, 1989, defendants agreed to sell

to Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese

48

Merchandising the total volume of sugar indicated in the quedans stored at

Noahs Ark Sugar Refinery for a total consideration of P63,000,000.00,

does not show material questions of fact as to the alleged nonpayment of

purchase price by the vendees/first endorsers, and which nonpayment is
not disputed by PNB as it does not materially affect PNBs title to the sugar
stocks as holder of the negotiable quedans.

*** The corresponding payments in the form of checks issued by the

vendees in favor of defendants were subsequently dishonored by the
drawee banks by reason of payment stopped and drawn against
insufficient funds,

What is determinative of the propriety of summary judgment is not the

existence of conflicting claims from prior parties but whether from an
examination of the pleadings, depositions, admissions and documents on
file, the defenses as to the main issue do not tender material questions of
fact (see Garcia vs. Court of Appeals, 167 SCRA 815) or the issues thus
tendered are in fact sham, fictitious, contrived, set up in bad faith or so
unsubstantial as not to constitute genuine issues for trial. (See Vergara vs.
Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court of Appeals, 162
SCRA 75). The questioned Orders themselves do not specify what material
facts are in issue. (See Sec. 4, Rule 34, Rules of Court).

*** Upon proper notification to said vendees and plaintiff in due course,
defendants refused to deliver to vendees therein the quantity of sugar
covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject
quedans did not acquire ownership thereof, the subsequent endorsers and
plaintiff itself did not acquire a better right of ownership than the original
vendees/first endorsers. 1

To require a trial notwithstanding pertinent allegations of the pleadings

and other facts appearing on the record, would constitute a waste of time
and an injustice to the PNB whose rights to relief to which it is plainly
entitled would be further delayed to its prejudice.

The Answer incorporated a Third-Party Complaint by Alberto T.

Looyuko, Jimmy T. Go and Wilson T. Go, doing business under the trade
name and style Noahs Ark Sugar Refinery against Rosa Ng Sy and Teresita
Ng, praying that the latter be ordered to deliver or return to them the
quedans (previously endorsed to PNB and the subject of the suit) and pay
damages and litigation expenses.

In issuing the questioned Orders, We find the respondent Court to have

acted in grave abuse of discretion which justify holding null and void and
setting aside the Orders dated May 2 and July 4, 1990 of respondent Court,
and that a summary judgment be rendered forthwith in favor of the PNB
against Noahs Ark Sugar Refinery, et al., as prayed for in petitioners Motion
for Summary Judgment.2

The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990,

one of avoidance, is essentially to the effect that the transaction between
them, on the one hand, and Jimmy T. Go, on the other, concerning the
quedans and the sugar stocks covered by them was merely a simulated
one being part of the latters complex banking schemes and financial
maneuvers, and thus, they are not answerable in damages to him.

On December 13, 1991, the Court of Appeals nullified and set aside
the orders of May 2 and July 4, 1990 of the Regional Trial Court and ordered
the trial court to render summary judgment in favor of the PNB. On June
18, 1992, the trial court rendered judgment dismissing plaintiffs complaint
against private respondents for lack of cause of action and likewise
dismissed private respondents counterclaim against PNB and of the ThirdParty Complaint and the Third-Party Defendants Counterclaim.
On September 4, 1992, the trial court denied PNBs Motion for
Reconsideration.

On January 31, 1991, the Philippine National Bank filed a Motion for
Summary Judgment in favor of the plaintiff as against the defendants for
the reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the
Motion for Summary Judgment. Thereupon, the Philippine National Bank
filed a Petition for Certiorari with the Court of Appeals, docketed as CA-G.R.
SP. No. 25938 on December 13, 1991.

On June 9, 1992, the PNB filed an appeal from the RTC decision with
the Supreme Court, G.R. No. 107243, by way of a Petition for Review on
Certiorari under Rule 45 of the Rules of Court. This Court rendered
judgment on September 1, 1993, the dispositive portion of which reads:

Pertinent portions of the decision of the Court of Appeals read:

In issuing the questioned Orders, the respondent Court ruled that
questions of law should be resolved after and not before, the questions of
fact are properly litigated. A scrutiny of defendants affirmative defenses

WHEREFORE, the trial judges decision in Civil Case No. 90-53023, dated
June 18, 1992, is reversed and set aside and a new one rendered
conformably with the final and executory decision of the Court of Appeals

49

in CA-G.R SP. No. 25938, ordering the private respondents Noahs Ark Sugar
Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, jointly and
severally:

On February 21, 1995, private respondents claim for lien was heard
and evidence was received in support thereof. The trial court thereafter
gave both parties five (5) days to file respective memoranda.

(a) to deliver to the petitioner Philippine National Bank, the sugar

stocks covered by the Warehouse Receipts/ Quedans which
are now in the latters possession as holder for value and in
due course; or alternatively, to pay (said) plaintiff actual
damages in the amount of P39.1 million, with legal interest
thereon from the filing of the complaint until full payment;
and

On February 28, 1995, the Philippine National Bank filed a

Manifestation with Urgent Motion to Nullify Court Proceedings. In
adjudication thereof, the trial court issued the following order on March 1,
1995:
WHEREFORE, this court hereby finds that there exists in favor of the
defendants a valid warehousemans lien under Section 27 of Republic Act
2137 and accordingly, execution of the judgment is hereby ordered stayed
and/ or precluded until the full amount of defendants lien on the sugar
stocks covered by the five (5) quedans subject of this action shall have
been satisfied conformably with the provisions of Section 31 of Republic
Act 2137. 5

(b) to pay plaintiff Philippine National Bank attorneys fees,

litigation expenses and judicial costs hereby fixed at the
amount of One Hundred Fifty Thousand Pesos (P150,000.00)
as well as the costs.
SO ORDERED.3

Consequently, the Philippine National Bank filed the herein petition to

seek the nullification of the above-assailed orders of respondent judge.

On September
29,
1993,
private
respondents
moved
for
reconsideration of this decision. A Supplemental/Second Motion for
Reconsideration with leave of court was filed by private respondents
on November 8, 1993. We denied private respondents motion on January
10, 1994. .

The PNB submits that:

I
PNBs RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND
EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS
DECISION IN CA-G.R. SP. NO. 25938; AND, THE NOVEMBER 9,
1992SUPREME COURT DECISION IN G.R NO. 107243. RESPONDENT RTCS
MINISTERIAL AND MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION
TO IMPLEMENT THE DECRETAL PORTION OF SAID SUPREME COURT
DECISION

Private respondents filed a Motion Seeking Clarification of the

Decision, dated September 1, 1993. We denied this motion in this manner:
It bears stressing that the relief granted in this Courts decision of
September 1, 1993 is precisely that set out in the final and executory
decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December
13, 1991, which was affirmed in toto by this Court and which became
unalterable upon becoming final and executory. 4

II

Private respondents thereupon filed before the trial court an Omnibus

Motion seeking among others the deferment of the proceedings until
private respondents are heard on their claim for warehousemans lien. On
the other hand, on August 22, 1994, the Philippine National Bank filed a
Motion for the Issuance of a Writ of Execution and an Opposition to the
Omnibus Motion filed by private respondents.

RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE

RESPONDENTS OMNIBUS MOTION. THE CLAIMS SET FORTH IN SAID
MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN
ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS
MOTION FOR CLARIFICATION OF DECISION IN .G.R. NO. 107243; AND (2)
ARE BARRED FOREVER BY PRIVATE RESPONDENTS FAILURE TO INTERPOSE
THEM IN THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18,
1992 RTC DECISION IN CIVIL CASE NO. 90-52023

The trial court granted private respondents Omnibus Motion

on December 20, 1994 and set reception of evidence on their claim for
warehousemans lien. The resolution of the PNBs Motion for Execution was
ordered deferred until the determination of private respondents claim.

III

50

RESPONDENT RTCS ONLY JURISDICTION IS TO ISSUE THE WRIT TO

EXECUTE THE SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1)
A WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION
DATED DECEMBER 20, 1994 AND THE ORDER DATED FEBRUARY 7,
1995 AND ALL PROCEEDINGS TAKEN BY THE RTC THEREAFTER; (2) A WRIT
OF PROHIBITION TO PREVENT RESPONDENT RTC FROM FURTHER
PROCEEDING WITH CIVIL CASE NO. 90-53023 AND COMMITTING OTHER
ACTS VIOLATIVE OF THE SUPREME COURT DECISION IN G.R. NO. 107243;
AND (3) A WRIT OF MANDAMUS TO COMPEL RESPONDENT RTC TO ISSUE
THE WRIT TO EXECUTE THE SUPREME COURT JUDGMENT IN FAVOR OF PNB

We have carefully examined our resolution, dated March 9, 1994,

which denied Noahs Arks motion for clarification of our decision,
dated September 1, 1993, wherein we affirmed in full and adopted the
Court of Appeals earlier decision, dated December 13, 1991, in CA-G.R. SP.
No. 25938. We are not persuaded by the petitioners argument that our said
resolution carried with it the denial of the warehousemans lien over the
sugar stocks covered by the subject Warehouse Receipts. We have simply
resolved and upheld in our decision, dated September 1, 1993, the
propriety of summary judgment which was then assailed by private
respondents. In effect, we ruled therein that, considering the
circumstances obtaining before the trial court, the issuance of the
Warehouse Receipts not being disputed by the private respondents, a
summary judgment in favor of PNB was proper. We in effect further
affirmed the finding that Noahs Ark is a warehouseman which was obliged
to deliver the sugar stocks covered by the Warehouse Receipts pledged by
Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the
pertinent provisions of Republic Act 2137.

The issues presented before us in this petition revolve around the

legality of the questioned orders of respondent judge, issued as they were
after we had denied with finality private respondents contention that the
PNB could not compel them to deliver the stocks of sugar in their
warehouse covered by the endorsed quedans or pay the value of the said
stocks of sugar.

In disposing of the private respondents motion for clarification, we

could not contemplate the matter of warehousemans lien because the
issue to be finally resolved then was the claim of private respondents for
retaining ownership of the stocks of sugar covered by the endorsed
quedans. Stated otherwise, there was no point in taking up the issue of
warehousemans lien since the matter of ownership was as yet being
determined. Neither could storage fees be due then while no one has been
declared the owner of the sugar stocks in question.

Petitioners submission is on a technicality, that is, that private

respondents have lost their right to recover warehousemans lien on the
sugar stocks covered by the five (5) Warehouse Receipts for the reason
that they failed to set up said claim in their Answer before the trial court
and that private respondents did not appeal from the decision in this
regard, dated June 18, 1992. Petitioner asseverates that the denial by this
Court on March 9, 1994 of the motion seeking clarification of our decision,
dated September 1, 1993, has foreclosed private respondents right to
enforce their warehousemans lien for storage fees and preservation
expenses under the Warehouse Receipts Act.

Of considerable relevance is the pertinent stipulation in the subject

Warehouse Receipts which provides for respondent Noahs Arks right to
impose and collect warehousemans lien:

On the other hand, private respondents maintain that they could not
have claimed the right to a warehouseman s lien in their Answer to the
complaint before the trial court as it would have been inconsistent with
their stand that they claim ownership of the stocks covered by the quedans
since the checks issued for payment thereof were dishonored. If they were
still the owners, it would have been absurd for them to ask payment for
storage fees and preservation expenses. They further contend that our
resolution, dated March 9, 1994, denying their motion for clarification did
not preclude their right to claim their warehousemans lien under Sections
27 and 31 of Republic Act 2137, as our resolution merely affirmed and
adopted the earlier decision, dated December 13, 1991, of the Court of
Appeals (6th Division) in CA-G.R. SP. No. 25938 and did not make any
finding on the matter of the warehouseman s lien.

Storage of the refined sugar quantities mentioned herein shall be free up

to one (1) week from the date of the quedans covering said sugar and
thereafter, storage fees shall be charged in accordance with the Refining
Contract under which the refined sugar covered by this Quedan was
produced. 6
It is not disputed, therefore, that, under the subject Warehouse
Receipts provision, storage fees are chargeable.
Petitioner anchors its claim against private respondents on the five (5)
Warehouse Receipts issued by the latter to third-party defendants Rosa Ng
Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising,
which found their way to petitioner after they were negotiated to them by
Luis T. Ramos and Cresencia K. Zoleta for a loan of P39.1 Million.
Accordingly, petitioner PNB is legally bound to stand by the express terms

We find for private respondents on the foregoing issue and so the

petition necessarily must fail.

51

and conditions on the face of the Warehouse Receipts as to the payment of

storage fees. Even in the absence of such a provision, law and equity
dictate the payment of the warehouseman s lien pursuant to Sections 27
and 31 of the Warehouse Receipts Law (R.A. 2137), to wit:

Receipts on the basis of which it anchors its claim for payment or delivery
of the sugar stocks. The unconditional presentment of the receipts by the
petitioner for payment against private respondents on the strength of the
provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the
admission of the existence and validity of the terms, conditions and
stipulations written on the face of the Warehouse Receipts, including the
unqualified recognition of the payment of warehousemans lien for storage
fees and preservation expenses. Petitioner may not now retrieve the sugar
stocks without paying the lien due private respondents as warehouseman.

SECTION 27. What claims are included in the warehousemans lien. Subject to the provisions of section thirty, a warehouseman shall have lien
on goods deposited or on the proceeds thereof in his hands, for all lawful
charges for storage and preservation of the goods; also for all lawful claims
for money advanced, interest, insurance, transportation, labor, weighing
coopering and other charges and expenses in relation to such goods; also
for all reasonable charges and expenses for notice, and advertisement of
sale, and for sale of the goods where default has been made in satisfying
the warehousemans lien.

In view of the foregoing, the rule may be simplified thus: While the
PNB is entitled to the stocks of sugar as the endorsee of the quedans,
delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of
his lien at this juncture, because, in accordance with Section 29 of the
Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where
the warehouseman surrenders the possession of the goods without
requiring payment of his lien, because a warehousemans lien is possessory
in nature.

xxx xxx xxx

SECTION 31. Warehouseman need not deliver until lien is satisfied. - A
warehouseman having a lien valid against the person demanding the
goods may refuse to deliver the goods to him until the lien is satisfied.
After being declared not the owner, but the warehouseman, by the
Court of Appeals on December 13, 1991 in CA-G.R. SP. No. 25938, the
decision having been affirmed by us on December 1, 1993, private
respondents cannot legally be deprived of their right to enforce their claim
for warehousemans lien, for reasonable storage fees and preservation
expenses. Pursuant to Section 31 which we quote hereunder, the goods
under storage may not be delivered until said lien is satisfied.

We, therefore, uphold and sustain the validity of the assailed orders of
public respondent, dated December 20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the
public respondent in issuing the questioned orders which recognized the
legitimate right of Noahs Ark, after being declared as warehouseman, to
recover storage fees before it would release to the PNB sugar stocks
covered by the five (5) Warehouse Receipts. Our resolution, dated March 9,
1994, did not preclude private respondents unqualified right to establish its
claim to recover storage fees which is recognized under Republic Act No.
2137. Neither did the Court of Appeals decision, dated December 13, 1991,
restrict such right.

SECTION 31. Warehouseman need not deliver until lien is satisfied. - A

warehouseman having a lien valid against the person demanding the
goods may refuse to deliver the goods to him until the lien is satisfied.
Considering that petitioner does not deny the existence, validity and
genuineness of the Warehouse Receipts on which it anchors its claim for
payment against private respondents, it cannot disclaim liability for the
payment of the storage fees stipulated therein. As contracts, the receipts
must be respected by authority of Article 1159 of the Civil Code, to wit:

Our Resolutions reference to the decision by the Court of Appeals,

dated December 13, 1991, in CA-G.R. SP. No. 25938, was intended to guide
the parties in the subsequent disposition of the case to its final end. We
certainly did not foreclose private respondents inherent right as
warehouseman to collect storage fees and preservation expenses as
stipulated n the face of each of the Warehouse Receipts and as provided
for in the Warehouse Receipts Law (R.A. 2137).

ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.
Petitioner is in estoppel in disclaiming liability for the payment of
storage fees due the private respondents as warehouseman while claiming
to be entitled to the sugar stocks covered by the subject Warehouse

WHEREFORE, the petition should be, as it is, hereby dismissed for

lack of merit. The questioned orders issued by public respondent judge are
affirmed.

52

Costs against the petitioner.

SO ORDERED.

53