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Prudential Bank v. IAC

FACTS

(1) On August 8, 1962, Philippine Rayon Mills, Inc.entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineriesunder a five-year deferred payment plan

(2) To effect payment for said machineries, Phil.

Rayon applied for a commercial letter of creditwith the Prudential Bank and Trust Company infavor of Nissho. By virtue of said application, thePrudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78

(3) Against this letter of credit, drafts were drawnand issued by Nissho which were all paid by thePrudential Bank through its correspondent inJapan, the Bank of Tokyo, Ltd.

(4) Two of these drafts were accepted by Phil. Rayonthrough its president, Anacleto R. Chi, while theothers were not.

(5) Upon the arrival of the machineries, thePrudential Bank indorsed the shipping documents

to Phil. Rayon which accepted delivery of thesame.

(6) As condition imposed by Prudential on Phil.Rayon to take delivery of the machineries, itexecuted, a trust receipt covering allmachineries, which was signed by Anacleto R.Chi in his capacity as President of Phil. Rayon, infavor of Prudential.

(7) At the back of the trust receipt is a printed formto be accomplished by two sureties who, by thevery terms and conditions thereof, were to bejointly and severally liable to the Prudential Bankshould Phil. Rayon fail to pay the total amount orany portion of the drafts issued by Nissho and

paid for by Prudential Bank. Anacleto Chi signedthis form.(8) Phil. Rayon was able to take delivery of the

textile machineries and installed the same at itsfactory site.

(9) Sometime in 1967, Phil. Rayon ceased businessoperations. On December 29, 1969, its factorywas leased by Yupangco Cotton Mills for anannual rental of P200,000.00 . The lease wasrenewed on January 3, 1973. On January 5, 1974,all the textile machineries in the defendant-appellant's factory were sold to AIC DevelopmentCorporation for P300,000.00

(10) The obligation of Phil. Rayon arising from the

letter of credit and the trust receipt remainedunpaid and unliquidated. Repeated formaldemands for the payment of the said trustreceipt yielded no result. Hence, the presentaction for the collection of the principal amountof P956,384.95 against Phil. Rayon and AnacletoR. Chi.

RTC Decision

(1) Philippine Rayon Mills, Inc. to pay Prudential thesum of P153,645.22, the amount reflected in theDrafts presented to Phil Rayon for payment, withinterest at 6% per annum

(2) Insofar as the amounts involved in the drafts nopresented to Phil. Rayon, the same not havingbeen accepted by defendant Philippine RayonMills, Inc., plaintiff's cause of action thereon hasnot accrued, hence, the instant case ispremature.

(3) Insofar as defendant Anacleto R. Chi isconcerned, the case is dismissed.

IAC Decision

RTC affirmed in all respects

Issues

(1) Whether presentment for acceptance of thedrafts was indispensable to make PhilippineRayon liable thereon; (NO)

(2) Whether Philippine Rayon is liable on the basis othe trust receipt; (YES)

(3) Whether private respondent Chi is jointly andseverally liable with Philippine Rayon for theobligation sought to be enforced (NO) and if notwhether he may be considered a guarantor

(YES) in the latter situation, whether the caseshould have been dismissed on the ground olack of cause of action as there was no prioexhaustion of Philippine Rayon's properties. (NO)

Ratio

Issue 1

A letter of credit is defined as an engagement bya bank or other person made at the request of acustomer that the issuer will honor drafts oother demands for payment upon compliancewith the conditions specified in thecredit. 11 Through a letter of credit, the bankmerely substitutes its own promise to pay for oneof its customers who in return promises to paythe bank the amount of funds mentioned in theletter of credit plus credit or commitment feesmutually agreed upon. In the instant case thenthe drawee was necessarily Prudential. It was toPhil. Rayon that the drafts were presented fopayment. In fact, there was no need foacceptance as the issued drafts are sight drafts(Parties have in fact agreed that the drafts weresight drafts)

Section 143 of the Negotiable Instruments Lawlists when presentment for acceptance must bemade. Under this provision, sight drafts do no

require presentment for acceptance. even if these were not sight drafts, thereby

necessitating acceptance, it would be thepetitioner - and not Philippine Rayon - which hadto accept the same for the latter was not thedrawee. Presentment for acceptance is definedan the production of a bill of exchange to adrawee for acceptance.

Issue 2

By this arrangement a banker advances moneyto an intending importer, and thereby lends theaid of capital, of credit, or of business facilities

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and agencies abroad, to the enterprise of foreigncommerce. Much of this trade could hardly becarried on by any other means, and therefore itis of the first importance that the fundamentalfactor in the transaction, the banker's advance ofmoney and credit, should receive the amplestprotection. Accordingly, in order to secure thatthe banker shall be repaid at the critical point -that is, when the imported goods finally reachthe hands of the intended vendee - the bankertakes the full title to the goods at the verybeginning; he takes it as soon as the goods arebought and settled for by his payments oracceptances in the foreign country, and hecontinues to hold that title as his indispensablesecurity until the goods are sold in the UnitedStates and the vendee is called upon to pay forthem. This security is not an ordinary pledge bythe importer to the banker, for the importer hasnever owned the goods, and moreover he is notable to deliver the possession; but the security isthe complete title vested originally in thebankers, and this characteristic of thetransaction has again and again been recognizedand protected by the courts. Of course, the title

is at bottom a security title, as it has sometimesbeen called, and the banker is always under theobligation to reconvey; but only after hisadvances have been fully repaid and after theimporter has fulfilled the other terms of thecontract.

As stated in National Bank vs. Viuda e Hijos deAngel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of thenature of a conditional sale as provided bythe Chattel Mortgage Law, that is, theimporter becomes absolute owner of theimported merchandise as soon an he haspaid its price. The ownership of themerchandise continues to be vested in theowner thereof or in the person who hasadvanced payment, until he has been paid infull, or if the merchandise has already beensold, the proceeds of the sale should beturned over to him by the importer or by hisrepresentative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction isdefined as "any transaction by and between aperson referred to in this Decree as theentruster, and another person referred to in thisDecree as the entrustee, whereby the entruster,

who owns or holds absolute title or securityinterests' over certain specified goods,documents or instruments, releases the same tothe possession of the entrustee upon the latter'sexecution and delivery to the entruster of asigned document called the "trust receipt"wherein the entrustee binds himself to hold thedesignated goods, documents or instruments intrust for the entruster and to sell or otherwisedispose of the goods, documents or instrumentswith the obligation to turn over to the entrusterthe proceeds thereof to the extent of the amountowing to the entruster or as appears in the trustreceipt or the goods, instruments themselves if

they are unsold or not otherwise disposed of, inaccordance with the terms and conditionsspecified in the trusts receipt, or for othepurposes substantially equivalent to any one ofthe following: . . ."

Issue 3

the obligation of Chi is only that of a guarantor This is bolstered by the last sentence whicspeaks of waiver of exhaustion, which isineffective because the space therein for theparty whose property may not be exhausted wasnot filled up.

Under Article 2058 of the Civil Code, the defenseof exhaustion (excussion) may be raised by aguarantor before he may be held liable for theobligation. Petitioner likewise admits that thequestioned provision is a solidary guarantyclause, thereby clearly distinguishing it from acontract of surety.

It, however, described the guaranty as solidarybetween the guarantors; this would have beencorrect if two (2) guarantors had signed it. Theclause "we jointly and severally agree and

undertake" refers to the undertaking of the two(2) parties who are to sign it or to the liabilityexisting between themselves. It does not refer tothe undertaking between either one or both othem on the one hand and the petitioner on theother with respect to the liability described undethe trust receipt. Elsewise stated, their liability isnot divisible as between them, i.e., it can beenforced to its full extent against any one othem

Excussion is not a condition sine qua non for theinstitution of an action against a guarantor. InSouthern Motors, Inc. vs. Barbosa, 34 this Courtstated:

Although an ordinary personal guarantor not a mortgagor or pledgor - may demandthe aforementioned exhaustion, the creditormay, prior thereto, secure a judgmenagainst said guarantor, who shall be entitledhowever, to a deferment of the execution osaid judgment against him until after theproperties of the principal debtor shall havebeen exhausted to satisfy the obligationinvolved in the case.

Chi's liability is limited to the principal obligationin the trust receipt plus all the accessoriesthereof including judicial costs; with respect tothe latter, he shall only be liable for those costsincurred after being judicially required to

pay.36 Interest and damages, being accessoriesof the principal obligation, should also be paidthese, however, shall run only from the date ofthe filing of the complaint. Attorney's fees mayeven be allowed in appropriate cases.

SC Decision

(1) Declaring private respondent Philippine RayonMills, Inc. liable on the twelve drafts in questionand on the trust receipt, and ordering it to paypetitioner:

a. the amounts due thereon in the totasum of P956,384.95 as of 15 September

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1974, with interest thereon at six percent(6%) per annum from 16 September1974 until it is fully paid, less whatevermay have been applied thereto by virtueof foreclosure of mortgages, if any;

b. a sum equal to ten percent (10%) of theaforesaid amount as attorney's fees; and

c. the costs.(2) Declaring private respondent Anacleto R. Chi

secondarily liable on the trust receipt and

ordering him to pay the face value thereof, withinterest at the legal rate, commencing from thedate of the filing of the complaint in Civil CaseNo. Q-19312 until the same is fully paid as wellas the costs and attorney's fees in the sum ofP10,000.00 if the writ of execution for theenforcement of the above awards againstPhilippine Rayon Mills, Inc. is returnedunsatisfied.