Trust Receipts and Estafa: Why a Payment Agreement Does Not Erase Criminal Liability

The Supreme Court has ruled that a subsequent payment agreement does not erase criminal liability for violating the Trust Receipts Law. In a 2022 decision, the Court affirmed that failure to turn over proceeds from goods sold under a trust receipt constitutes estafa, even if the parties later agree to a new payment schedule. This ruling is a critical reminder for businesses and individuals that trust receipt obligations carry serious legal consequences.

The Case: NF Agri-Business Corporation and BDO Unibank

The case involved NF Agri-Business Corporation and its officers, Tony N. Chua, Jimmy N. Chua, and Ernest T. Jeng. They were accused of estafa for failing to fulfill obligations under several trust receipt agreements with BDO Unibank, Inc., the successor-in-interest of Equitable Banking Corporation (EBC).

In 1999 and 2000, EBC issued commercial letters of credit to finance the import of fish meal and soybean meal for NF ABC's agricultural business. In return, the company executed trust receipts, promising to either turn over the proceeds from the sale of the goods to the bank or return the goods if unsold. NF ABC failed to meet these obligations, leading to a demand for payment of P17,430,882.88 in 2008.

The Novation Defense: Why It Failed

The petitioners argued that a subsequent payment agreement with BDO novated the original trust receipt agreements, effectively transforming the transaction into a simple loan. They cited the Asian Financial Crisis and successive typhoons as factors that severely impacted their business.

The City Prosecutor initially dismissed the complaint, but the Secretary of Justice reversed this decision. The Court of Appeals affirmed the reversal, and the Supreme Court agreed.

Under Article 1292 of the Civil Code, for an obligation to be extinguished by another that substitutes it, the substitution must be declared in unequivocal terms, or the old and new obligations must be on every point incompatible with each other. The Court found that the new payment schedule met neither requirement: it did not expressly declare the extinguishment of the original obligation, nor was it entirely incompatible with it.

The Court emphasized that novation is never presumed and must be proven as a fact. The test of incompatibility requires that the two contracts cannot stand together, each having an independent existence. Here, the new payment schedule merely modified the payment terms and recognized the existing debt. It did not extinguish the original obligations under the trust receipts.

Malum Prohibitum: Intent Is Not Required

The Court underscored that a violation of the Trust Receipts Law is malum prohibitum, meaning the act is wrong because it is prohibited by law, regardless of whether it is inherently immoral. Intent to defraud is not a necessary element for conviction.

Section 13 of the Trust Receipts Law explicitly states that failure to turn over proceeds or return goods constitutes estafa under Article 315, paragraph 1(b) of the Revised Penal Code. The mere failure to fulfill the obligations under the trust receipt is sufficient to establish criminal liability.

Practical Takeaways

• Strict compliance is essential. Businesses must adhere to the terms of trust receipt agreements, including the obligation to remit proceeds or return unsold goods.
• Payment agreements are not a shield. A subsequent payment schedule that merely modifies terms will not extinguish criminal liability. Only a clear, formal novation can do so.
• Document everything. If unforeseen circumstances prevent compliance, seek legal advice immediately and negotiate a formal novation that expressly states the intent to extinguish the original obligation.
• Understand the risk. Trust receipt violations are malum prohibitum; intent to defraud is immaterial. The mere failure to comply can result in criminal prosecution.
• Know the alternatives. If goods cannot be sold profitably, returning them to the entruster may be a safer option than defaulting on the obligation.

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