G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

FACTS

On August 8, 1962, Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan. To effect payment, Philippine Rayon applied for a commercial letter of credit with Prudential Bank in favor of Nissho. Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78. Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by Prudential Bank through its correspondent in Japan. Two of these drafts were accepted by Philippine Rayon through its president, Anacleto R. Chi, while the others were not. Upon arrival of the machineries, Prudential Bank indorsed the shipping documents to Philippine Rayon, which accepted delivery. To enable Philippine Rayon to take delivery, it executed a trust receipt signed by Anacleto R. Chi as President. Sometime in 1967, Philippine Rayon ceased business operations. Its obligation arising from the letter of credit and the trust receipt remained unpaid. Prudential Bank filed an action for collection. The trial court rendered judgment sentencing Philippine Rayon to pay the amounts due under the two accepted drafts, dismissing the case as to the other ten unaccepted drafts for prematurity, and dismissing the case against Anacleto R. Chi. The Intermediate Appellate Court affirmed the decision in toto.

ISSUE

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon.
2. Whether Philippine Rayon is liable on the basis of the trust receipt.
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation and if not, whether he may be considered a guarantor, and whether the case should have been dismissed for lack of cause of action due to no prior exhaustion of Philippine Rayon’s properties.

RULING

1. On the first issue, the Supreme Court ruled that presentment for acceptance of the drafts was not indispensable to make Philippine Rayon liable. The drafts were sight drafts, which are presented for payment, not for acceptance. The undertaking of Philippine Rayon under the trust receipt constituted an acceptance of the drafts. The trust receipt, which Philippine Rayon signed, stated that the goods were received in trust for the bank, with the obligation to turn over the proceeds of the sale or to return the goods if not sold. By executing the trust receipt, Philippine Rayon acknowledged its liability for the total amount of the drafts. Therefore, Philippine Rayon is liable for all twelve drafts.
2. On the second issue, the Supreme Court ruled that Philippine Rayon is liable on the basis of the trust receipt. The trust receipt transaction was a security agreement. By executing the trust receipt, Philippine Rayon assumed the obligation to pay Prudential Bank the total amount of the drafts. Its failure to pay constituted a breach of the trust receipt.
3. On the third issue, the Supreme Court ruled that Anacleto R. Chi is not jointly and severally liable under the trust receipt. The so-called solidary guaranty clause at the back of the trust receipt was incomplete and not properly executed. However, Chi is liable as a guarantor. His judicial admissions in his Answer, where he admitted signing the trust receipt “as security for the payment of the goods,” constituted a valid guaranty. As a guarantor, his liability is subsidiary. The case against him should not have been dismissed for lack of cause of action. The rule on exhaustion of the principal debtor’s property (excussion) is not a ground for dismissal but merely a defense that must be set up and proved. The Supreme Court modified the decision, holding Philippine Rayon liable for the total amount of the drafts and holding Chi subsidiarily liable if execution against Philippine Rayon is returned unsatisfied.