When a Trust Receipt Is Really a Loan: Acquittal in Estafa Cases

The Supreme Court has reminded banks and prosecutors that the Trust Receipts Law (Presidential Decree No. 115) cannot be used as a collection tool for ordinary loans. In Hur Tin Yang v. People (G.R. No. 195117, August 14, 2013), the Court acquitted a corporate officer of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, ruling that the transactions involved were simple loans, not trust receipt transactions, because the bank knew the goods were never intended for resale.

The Facts of the Case

Supermax Philippines, Inc., a construction company, obtained several commercial letters of credit from Metrobank in 1998 to pay for construction materials. Metrobank required Hur Tin Yang, Supermax's Vice-President for Internal Affairs, to sign 24 trust receipts as security for the materials. When the trust receipts fell due, Supermax failed to pay or return the goods despite repeated demands.

The prosecution charged Yang with estafa under Article 315, par. 1(b) of the RPC in relation to PD 115. The trial court convicted him, and the Court of Appeals affirmed. The CA reasoned that the offense under PD 115 is malum prohibitum, so a mere failure to deliver proceeds or return goods was enough for conviction.

The Issue

The sole question before the Supreme Court was whether Yang could be liable for estafa under the Trust Receipts Law even when it was proven that Metrobank knew beforehand that the construction materials were never intended for sale but only for use in Supermax's construction business.

The Ruling: Substance Over Form

The Court granted Yang's motion for reconsideration and acquitted him. In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor is the intention of the parties, as shown by their conduct, words, and actions before, during, and after executing the agreement.

The Court found that the dealings between Yang and Metrobank were not trust receipt transactions but simple loans. Yang's admission that he signed the trust receipts and that Supermax failed to pay did not conclusively prove a trust receipt transaction existed.

What the Trust Receipts Law Requires

Under Section 4 of PD 115, a trust receipt transaction requires the entrustee to hold goods in trust and either sell them and turn over the proceeds, or return the goods if unsold. The law was designed to assist importers and retail dealers who need financing for merchandise they intend to sell.

The Court emphasized that when both parties enter an agreement knowing that the return of the goods is not possible, the transaction ceases to be a trust receipt transaction. The only obligation actually agreed upon becomes the return of the proceeds—which is a mere loan, where the borrower must pay the bank the amount spent for the goods.

Following Precedent: Ng and Land Bank

The Court applied the doctrine of stare decisis, citing two nearly identical cases. In Ng v. People, the Court acquitted a borrower who used loan proceeds for construction materials for telecommunication towers because the bank knew he was neither an importer nor a retail dealer. In Land Bank of the Philippines v. Perez, the Court acquitted construction company officers for the same reason—construction materials used in projects are not goods held for sale.

The Court noted that construction materials are often placed under the control of the clients employing the contractor, making it difficult for a contractor to return them on demand. This disqualifies such transactions from being covered by trust receipt agreements.

The Court's Warning Against Bank Abuse

The Court condemned the practice of banks making borrowers sign trust receipts to facilitate loan collection while threatening criminal prosecution. These are contracts of adhesion that borrowers have no option but to sign. The Court quoted Colinares v. Court of Appeals: this practice is "unjust and inequitable, if not reprehensible," and leaves borrowers at the mercy of banks.

To give life to the constitutional provision against imprisonment for non-payment of debt (Article III, Section 20 of the Constitution), the Court acquitted Yang.

Practical Takeaways

• Trust receipts require goods meant for sale. A transaction where the bank knows the goods are for the borrower's own use or construction projects is a simple loan, not a trust receipt transaction.
• Courts look at substance, not labels. Calling an agreement a "trust receipt" does not make it one if the parties' actual intention was a loan.
• Banks cannot use criminal law as a collection tool. The Trust Receipts Law is not a weapon to threaten borrowers with imprisonment for failing to pay debts.
• Construction companies and their officers have protection. If the bank knew the materials were for the borrower's own projects, officers cannot be convicted of estafa under PD 115.
• The Constitution protects against imprisonment for debt. Article III, Section 20 of the Constitution prohibits imprisonment for non-payment of debt, and courts will apply this protection where the transaction is truly a loan.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.