Trust Receipts vs Loans: When Intent Defines the Contract

The Supreme Court has long warned against banks using trust receipts as a collection device that threatens borrowers with criminal prosecution. In Hur Tin Yang v. People (G.R. No. 195117, August 14, 2013), the Court reaffirmed this principle, holding that when a bank knows the goods covered by a trust receipt are not intended for sale, the transaction is a simple loan—not a trust receipt transaction—and cannot support a conviction for estafa.

The Case: Construction Materials and Signed Trust Receipts

Supermax Philippines, Inc., a construction firm, obtained commercial letters of credit from Metrobank to purchase construction materials. As security, Hur Tin Yang, Supermax's Vice-President, signed 24 trust receipts covering the materials. When Supermax failed to pay or return the goods upon demand, Metrobank filed criminal complaints for estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree No. 115 (the Trust Receipts Law).

The trial court convicted Yang, and the Court of Appeals affirmed. The appellate court reasoned that since the offense under PD 115 is malum prohibitum, mere failure to deliver the proceeds or return the goods sufficed for conviction.

The Issue: What Did the Parties Really Intend?

The sole issue was whether Yang could be liable for estafa under the Trust Receipts Law 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 Supreme Court granted Yang's motion for reconsideration and acquitted him. The Court emphasized that 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, shown by their conduct, words, and actions before, during, and after executing the agreement.

The Court cited its earlier rulings in Ng v. People and Land Bank of the Philippines v. Perez—cases "in all four corners the same" as the instant case—which held that when the entruster bank knows even before executing the trust receipt that the covered goods were never intended for resale or manufacture for sale, the transaction is a simple loan.

Why This Matters: The Purpose of the Trust Receipts Law

The Trust Receipts Law was designed to assist importers and retail dealers who lack funds to finance the importation or purchase of merchandise for resale. A true trust receipt transaction involves goods held in trust for the purpose of sale, with the entrustee obligated either to turn over the proceeds of the sale or return the unsold goods.

When both parties know that returning the goods is not possible—such as construction materials that become part of a building—the only real obligation is the return of the proceeds. That makes the transaction a mere loan, where the borrower is obligated to pay the bank the amount spent for the goods. A failure to pay a loan is a civil obligation, not a criminal offense.

The Court also quoted Colinares v. Court of Appeals, calling the bank practice of making borrowers sign trust receipts to facilitate collection "unjust and inequitable, if not reprehensible." Such contracts of adhesion leave borrowers with no option but to sign, lest their loans be disapproved.

Practical Takeaways

• The label doesn't decide the case. A document called a "trust receipt" may actually be a loan if the parties' true intent—shown by their conduct and the nature of the goods—indicates otherwise.
• Banks that know the goods aren't for sale cannot invoke PD 115. If a bank knows the borrower will use the goods in its own business rather than resell them, the transaction falls outside the Trust Receipts Law.
• Non-payment of a loan is not estafa. The Constitution prohibits imprisonment for non-payment of debt. Criminal prosecution under the Trust Receipts Law should not be used as a collection tool for what is essentially a loan.
• For borrowers, document everything. Evidence that the bank knew the purpose of the goods—such as submitted financial statements or business plans—can be crucial in proving the true nature of the transaction.
• For lenders, use the right security. If a transaction is a loan, secure it with a loan agreement and appropriate collateral, not trust receipts that mischaracterize the arrangement.

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