PNB vs. PINEDA Letter of Credit
A letter of credit is a financial device developed by merchants merchants as a convenient convenient and relatively relatively safe safe mode of deali dealing ng with with sale saless of goo goods ds to satis satisfy fy the seemi seeming ngly ly irreconcilable irreconcilable interests interests of the 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 To break the impasse, the buyer may be required to contract a bank to issue a letter of credit, the issuing bank can authorize authorize the seller to raw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and 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 Once the letter of credit is established, the seller ships the goods to the buyer and and in the process process secures the required shipping documents and 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 documents entitling him to the goods. The seller gets paid only if he delivers the documents of title over the goods while the buyer acquires the said documents documents and control over the goods only after reimbursing the bank. Trust Receipt
A trus trustt receip receiptt arra arrange ngeme ment nt is endow endowed ed with with its its own own distinctive features and characteristics. nder that set!up, a bank extends a loan covered by the "etter of #redit, with the trust receipt as a security for the loan. $n other words, the transaction involves a loan feature represented by the letter letter of credit credit,, and and a secur security ity featur featuree which which is in the the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a %security interest% interest% in the goods. $t secures an indebtedness indebtedness and there can be no such thing as security interest that secures no obligation. Facts:
$n &'(), $gnacio Arroyo, married to "ourdes Tuason Arroyo *the Arroyo +pouses, obtained a loan of -/0,000.00 from petitioner bank *-12 to purchase (03 of the subscribed capital stock of private respondent Tayabas #ement #ompany, $nc. *T##. As securit security y for said loan, loan, the spouse spousess Arroyo executed executed a real real estate estate mortgage mortgage *456 over a parcel of land in 7uezon #ity known as the "a 8ista propert y.
Thereafter, T## filed with -12 an application and agreement for the establishment of an eight */ year deferred letter of credit *"9# for :;,000,000.00 in favor of Toyo 6enka
acienda 2acon located in $sabela, 1egros Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their obligations with -12, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor. The "a 8ista property was foreclosed with -12 winning the bid. >owever, >owever, when said property was about to be awarded to -12, the representative of the mortgagor!spouses ob?ected and demanded from the -12 the difference between the bid price of -&,000,00&.00 and the indebtedness of -@'',0(0. of the Arroyo spouses on their personal account. $t was the contention of the spouse spousess ArroyoB ArroyoBs represe representat ntative ive that that the foreclos foreclosure ure proceed proceedings ings referre referred d only only to the person personal al account account of the mortgag mortgagor or spouse spousess without reference to the account of T##. -12 filed a supplemental petition requesting the +heriffBs Office to proceed with the sale of the sub?ect real properties to satisfy no t only the amount owed by the spouses Arroyos on their personal account but also the amount owed by said spouses as sureties of T##. +ubsequently +ubsequently,, -12Cs -12Cs petition for mandamus mandamus was granted and the sherif sherifff was directed directed to proceed proceed with the foreclosu foreclosure re sale sale of the mortgaged properties. 2efore the decision could attain finality, T## inter alia, the filed filed a complain complaintt seeking seeking,, inter the issu issuan ance ce of a writ writ of preliminary in?unction to restrain the foreclosure of the mortgages over the "a 8ista property and >acienda 2acon. $t also asked a declaration that its obligation with -12 had been fully paid by reason of the latterBs repossession of the imported machinery and equipment. The #D$, thru respondent =udge Eregorio -ineda, issued a restraining order order and granted granted a writ writ of prelimin preliminary ary in?unction. in?unction. >ence, >ence, this petition.
Issue:
Fhether or not T##Bs liability has been extinguished by the repossession of -12 of the imported cement plant machinery and equipment.
Held: No.
$t must be remembered that -12 took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement executed by and between -12 and T## giving the former the unqualified right to the possession and disposal of all property shipped under the "etter of #redit until such time as all the liabilities and obligations under said letter had been discharged. A letter of credit!trust receipt arrangement is endowed with its own distinctive features and characteristics. nder that set!up, a bank extends a loan covered by the "etter of #redit, with the trust receipt as a security for the loan. $n 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. PNB's possessio of t!e su"#ect $ac!ier% ad e&uip$et "ei precisel% as a for$ of securit% for t!e advaces ive to TCC uder t!e Letter of Credit( said possessio "% itself caot "e cosidered pa%$et of t!e loa secured t!ere"%. -ayment would legally result only after -12 had foreclosed on said securities, sold the same and applied the proceeds thereof to T##Bs loan obligation. 6ere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. Neit!er ca said repossessio a$out to dacion en pago. Datio i pa%$et ta)es place *!e propert% is alieated to t!e creditor i satisfactio of a de"t i $oe% and the same is governed by sales. Gation 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( t!e repossessio of t!e $ac!ier% ad e&uip$et i &uestio *as $erel% to secure t!e pa%$et of TCC's loa o"liatio ad ot for t!e purpose of trasferri o*ers!ip t!ereof to PNB i satisfactio of said loa. T!us( o dacion en pago *as ever acco$plis!ed.
-roceeding from this finding, -12 has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of T##. A surety is considered in law as being the same party as the debtor in relation to whatever is ad?udged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. As sureties, the Arroyo spouses are primarily liable as original promisors and are bound immediately to pay the creditor the amount outstandi ng.
