The Concept of ‘Trust Receipts’ Law

I. Introduction and Legal Foundation
The Trust Receipts Law, formally known as Presidential Decree No. 115, governs transactions where a bank or financing institution (the “entruster”) releases goods, documents, or instruments to a merchant (the “entrustee”) with the agreement that the latter will hold them with the obligation to sell, manufacture, process, or otherwise deal with them in a manner that will generate funds to pay the entruster. It is a security transaction intended to aid in financing importers and merchants without requiring a full cash outlay prior to the sale of goods. Its primary purpose is to stimulate commercial activity while providing security to financial institutions.
II. Essential Elements of a Trust Receipt Transaction
For a transaction to be governed by P.D. 115, the following elements must concur: (1) The entruster, who must be a bank or financing institution, holds a security interest over the goods, documents, or instruments; (2) The entrustee, who must be a merchant, receives possession of the goods, documents, or instruments; (3) The possession is upon the entrustee’s agreement to hold them in trust for the entruster and to dispose of them in a manner expressly authorized by the entruster; and (4) The proceeds from the disposal are to be turned over to the entruster to the extent of the amount owed.
III. The Nature of the Entrustee’s Obligation: A Fiduciary Duty in Trust
The entrustee’s obligation is fiduciary in nature. Upon receipt of the goods or documents, the entrustee becomes a trustee for the benefit of the entruster. This is not an ordinary debtor-creditor relationship. The entrustee holds the goods and the proceeds from their sale in trust and is legally bound to account for them. Failure to properly account for the goods or to remit the proceeds constitutes a breach of this fiduciary duty, which gives rise to both civil liability and criminal prosecution.
IV. The Two-Part Structure: Security Agreement and Trust Receipt
A trust receipt transaction is typically structured in two stages. First, the entruster acquires a security interest in the goods, often through a letter of credit arrangement financing the importation or purchase. This secures the primary loan or credit extension. Second, upon arrival of the goods, the entruster releases them to the entrustee by executing a trust receipt agreement. The trust receipt itself is the document evidencing the entrustee’s acceptance of the goods in trust and the undertaking to perform the obligations stipulated therein.
V. Rights and Remedies of the Entruster
The entruster retains ownership of the goods, documents, or instruments until the entrustee fulfills the obligation secured by the trust receipt. The entruster’s key remedies include: (a) The right to cancel the trust and take possession of the goods at any time upon default or breach; (b) The right to collect the proceeds directly from the entrustee’s buyers; (c) The right to require the entrustee to turn over the goods or proceeds; and (d) The right to prosecute the entrustee criminally for violations of P.D. 115.
VI. Criminal Liability for Violation
Violation of the terms of a trust receipt agreement constitutes the criminal offense of estafa under Article 315(1)(b) of the Revised Penal Code, as amended by P.D. 115. The elements are: (1) The entrustee received the goods, documents, or instruments under a trust receipt agreement; (2) The entrustee misappropriated, converted, or used them for purposes other than those specified in the agreement, or failed to return or account for them upon demand; and (3) Such act caused prejudice to the entruster. Notably, a separate civil action for recovery is not a prerequisite for the criminal prosecution.
VII. Defenses Typically Raised by an Entrustee
Common defenses include: (a) Lack of a valid trust receipt agreement; (b) Absence of fiduciary duty, claiming the transaction was a simple loan; (c) Full payment or settlement of the obligation; (d) The entruster’s failure to make a valid demand for the turnover of goods or proceeds; and (e) Waiver or estoppel on the part of the entruster, such as by consistently accepting late payments without protest. The defense that the criminal case is a mere collection suit is unavailing if a fiduciary breach is proven.
VIII. Distinction from Related Contracts
A trust receipt must be distinguished from a simple loan, a pledge, and a chattel mortgage. Unlike a simple loan, ownership remains with the entruster, and a fiduciary duty is created. Unlike a pledge, the entrustee gains physical possession for the purpose of sale or processing. Unlike a chattel mortgage, the transaction is not primarily a mortgage but a security device following a prior credit accommodation, and the remedy includes criminal prosecution.
IX. Practical Remedies
For the Entruster (Bank/Financing Institution): (1) Upon default, immediately send a notarized demand letter to the entrustee, specifically demanding the turnover of the goods or the proceeds, and retaining proof of service. (2) Simultaneously, file a criminal complaint for estafa under P.D. 115 with the Office of the City/Provincial Prosecutor. The threat of criminal liability often prompts settlement. (3) Pursue a civil action for specific performance or sum of money to recover the outstanding obligation, which can proceed independently of the criminal case. (4) Exercise the right to take possession of the remaining goods, if locatable, through a court order or extrajudicial means, if peaceably attainable, to mitigate losses. (5) Ensure all trust receipt documents are meticulously notarized and executed, clearly stating the trust purpose, to strengthen the case for fiduciary duty.

For the Entrustee (Merchant): (1) Upon encountering financial difficulty, proactively communicate with the entruster to negotiate a restructuring or dacion en pago before a demand is made. (2) If a criminal complaint is filed, immediately secure counsel to argue the absence of fiduciary breach, potentially showing that the transaction was a pure loan or that the entruster waived strict compliance. (3) In a civil suit, consider filing a counterclaim for damages if the entruster acted in bad faith or arbitrarily took possession of other properties. (4) Scrupulously maintain separate and accurate accounting records for the trust receipt goods and their proceeds to be able to properly account for them if demanded. (5) Be aware that settlement and payment of the civil liability after the criminal complaint is filed does not extinguish criminal liability, although it may be considered a mitigating circumstance.