Navigating Trust Receipts: Why Corporate Officers Can Be Held Criminally Liable

TLDR: This case clarifies that corporate officers signing trust receipts on behalf of their companies can be held criminally liable for estafa if the company fails to fulfill its obligations under the trust receipt, even if the officer did not personally benefit or directly handle the entrusted goods. It underscores the importance of due diligence and compliance in trust receipt transactions for corporations and their officers.

Alfredo Ching, Petitioner, vs. The Secretary of Justice, Asst. City Prosecutor Cecilyn Burgos-Villaviert, Judge Edgardo Sudiam of the Regional Trial Court, Manila, Branch 52; Rizal Commercial Banking Corp. and the People of the Philippines, Respondents. G.R. NO. 164317, February 06, 2006

Introduction

Imagine a business deal built on trust, where goods are released based on a promise to pay or return them. Trust receipt agreements in the Philippines are exactly that – a cornerstone of import and trade financing. But what happens when that trust is broken? This isn’t just a matter of contract law; it can lead to criminal charges, especially for corporate officers involved. The Supreme Court case of Alfredo Ching v. Secretary of Justice provides a stark reminder of this reality, highlighting the personal criminal liability that can befall corporate officers for violations of trust receipt agreements, even when acting on behalf of their companies. This case serves as a critical lesson for businesses and their leaders on the serious implications of trust receipt transactions.

The Legal Framework of Trust Receipts in the Philippines

At the heart of this case is Presidential Decree No. 115 (P.D. No. 115), also known as the Trust Receipts Law. This law governs trust receipt transactions, which are crucial for facilitating commerce, particularly import financing. A trust receipt is a security agreement where a bank (the entruster) releases goods to a borrower (the entrustee) upon the latter’s execution of a trust receipt. The entrustee then holds the goods in trust for the bank, with the obligation to either sell the goods and remit the proceeds to the bank or return the goods if unsold.

Section 4 of P.D. No. 115 clearly defines a trust receipt transaction:

“A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called a “trust receipt” wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt…”

Crucially, Section 13 of P.D. No. 115 outlines the penalty for failing to comply with the obligations under a trust receipt, classifying it as estafa under Article 315, paragraph 1(b) of the Revised Penal Code. This section extends liability to corporate officers:

“If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.”

This provision is central to understanding why Alfredo Ching, a corporate officer, faced criminal charges in this case, even though the trust receipts were for his company’s transactions.

Case Facts: The Paper Trail of Trust and Alleged Breach

The story begins with Philippine Blooming Mills, Inc. (PBMI), where Alfredo Ching held the position of Senior Vice-President. PBMI sought to finance its importation of goods through Rizal Commercial Banking Corporation (RCBC). RCBC approved PBMI’s application and issued irrevocable letters of credit. Goods were purchased and delivered to PBMI under trust receipts. Alfredo Ching signed these thirteen trust receipts “as surety,” acknowledging receipt of various imported goods, from synthetic graphite electrodes to spare parts for machinery. These receipts stipulated that PBMI held the goods in trust for RCBC, with authority to sell but not to pledge or conditionally sell them. The proceeds from any sale were to be turned over to RCBC. If the goods remained unsold, they were to be returned to the bank.

When the trust receipts matured, PBMI failed to either return the goods or remit their value, totaling a significant P6,940,280.66, despite RCBC’s demands. Consequently, RCBC filed a criminal complaint for estafa against Alfredo Ching. The case navigated a complex procedural path:

• Initially, the City Prosecutor found probable cause for estafa, and Informations were filed against Ching.
• The Minister of Justice initially dismissed Ching’s appeal, then surprisingly reversed course, ordering the withdrawal of the Informations.
• RCBC’s motion for reconsideration was denied, and the RTC initially granted Ching’s Motion to Quash.
• However, a pivotal Supreme Court ruling in Allied Banking Corporation v. Ordoñez clarified that P.D. No. 115 applied even if goods were not for resale but for manufacturing use. This ruling changed the landscape.
• RCBC refiled the criminal complaint. This time, the City Prosecutor found no probable cause, arguing Ching was merely a surety.
• The Secretary of Justice, on appeal by RCBC, reversed this again, finding probable cause against Ching as the responsible corporate officer.
• Thirteen Informations were refiled against Ching. His motion for reconsideration was denied.
• Ching then filed a Petition for Certiorari with the Court of Appeals (CA), which was dismissed.

Finally, the case reached the Supreme Court via a Petition for Review on Certiorari filed by Ching, questioning the CA’s decision.

Supreme Court Decision: Upholding Corporate Officer Liability

The Supreme Court upheld the Court of Appeals’ decision, firmly establishing that Alfredo Ching could indeed be held criminally liable. The Court addressed two key issues: the procedural defect in Ching’s petition before the CA (certification of non-forum shopping) and the substantive issue of whether the Secretary of Justice gravely abused discretion in finding probable cause.

While acknowledging a procedural lapse in Ching’s petition, the Supreme Court proceeded to rule on the merits, emphasizing the crucial point of corporate officer liability under P.D. No. 115. The Court reiterated the definition of a trust receipt transaction and stressed Ching’s role as Senior Vice-President of PBMI who signed the trust receipts. The Court quoted Section 13 of P.D. No. 115, emphasizing that when a violation is committed by a corporation, liability extends to the responsible officers.

The Supreme Court reasoned:

“There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. Since a corporation cannot be proceeded against criminally because it cannot commit crime in which personal violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself… Thus, the execution by respondent of said receipts is enough to indict him as the official responsible for violation of PD 115.”

The Court dismissed Ching’s argument that he did not personally receive the goods or benefit, stating that P.D. No. 115 aims to punish the dishonesty and abuse of confidence inherent in trust receipt transactions, regardless of personal benefit. The Court highlighted that the law is malum prohibitum, meaning the act itself is prohibited, and intent to defraud is not a necessary element for conviction.

Furthermore, the Supreme Court affirmed that P.D. No. 115 covers goods intended for manufacturing, not just resale, citing its previous ruling in Allied Banking Corporation v. Ordoñez. This broadened the scope of trust receipt transactions subject to criminal penalties.

Practical Implications and Key Takeaways for Businesses

Alfredo Ching v. Secretary of Justice carries significant implications for businesses in the Philippines, particularly for corporate officers involved in trust receipt agreements. It serves as a potent reminder that:

• Corporate officers are not shielded from criminal liability: Signing trust receipts on behalf of a corporation exposes officers to personal criminal charges for estafa under P.D. No. 115 if the corporation fails to meet its obligations. The “corporate veil” does not automatically protect them in trust receipt violations.
• Personal benefit is not a prerequisite for liability: Criminal liability under P.D. No. 115 arises from the failure to fulfill the trust receipt obligations, not from personal enrichment or direct handling of goods.
• Trust Receipts Law is broad in scope: P.D. No. 115 applies to goods used in manufacturing processes, not just those intended for resale. This expands the reach of the law to various business operations relying on trust receipt financing for production inputs.
• Due diligence is paramount: Corporations and their officers must exercise extreme diligence in managing trust receipt obligations. This includes robust tracking of goods, diligent sales efforts (if applicable), and strict adherence to payment schedules.
• Clear internal controls are essential: Companies should implement clear internal controls and compliance mechanisms to ensure proper handling of goods and proceeds under trust receipts, mitigating the risk of unintentional violations.

Key Lessons

• Understand the Gravity of Trust Receipts: Treat trust receipts with utmost seriousness. They are not mere commercial documents but instruments with penal consequences.
• Officer Training and Awareness: Ensure that corporate officers, especially those involved in finance and procurement, are thoroughly trained on trust receipt obligations and potential liabilities.
• Prioritize Compliance: Make compliance with trust receipt terms a corporate priority, backed by effective monitoring and reporting systems.
• Seek Legal Counsel: Consult with legal counsel when entering into trust receipt agreements and if facing difficulties in fulfilling obligations. Early legal intervention can help mitigate risks.

Frequently Asked Questions (FAQs) about Trust Receipts and Corporate Liability

Q1: Can a corporate officer be jailed for a company’s failure to pay a trust receipt?

A: Yes, under P.D. No. 115 and as clarified in Alfredo Ching v. Secretary of Justice, corporate officers responsible for trust receipt transactions can face criminal charges for estafa, which carries potential imprisonment.

Q2: What if the corporate officer didn’t directly benefit from the transaction?

A: Personal benefit is irrelevant. Liability stems from the officer’s role in the trust receipt transaction and the company’s failure to meet its obligations, not personal enrichment.

Q3: Is it only the President of the company who can be held liable?

A: No, P.D. No. 115 extends liability to “directors, officers, employees or other officials or persons therein responsible for the offense.” The key is responsibility and involvement in the trust receipt transaction.

Q4: What should a company do if it anticipates difficulty in meeting a trust receipt obligation?

A: Proactive communication with the entruster (bank) is crucial. Negotiate for extensions or restructuring of terms. Seeking legal advice early on is also highly recommended to explore available options and mitigate potential criminal liability.

Q5: Does P.D. No. 115 apply if the imported goods are used for manufacturing and not for resale?

A: Yes, as established in Allied Banking Corporation v. Ordoñez and affirmed in Alfredo Ching, P.D. No. 115 covers goods used in manufacturing, broadening the scope of the law beyond just resale scenarios.

Q6: What is the difference between civil and criminal liability in trust receipt cases?

A: Civil liability involves financial obligations to repay the debt. Criminal liability under P.D. No. 115 involves potential imprisonment for estafa, arising from the breach of trust inherent in the agreement. Both can exist simultaneously.

Q7: If I sign a trust receipt as “surety,” am I still criminally liable as a corporate officer?

A: The term “surety” in the context of corporate officers signing trust receipts can be misleading. Regardless of being labeled as “surety,” if you sign as a responsible corporate officer, you can still be held criminally liable under P.D. No. 115 in your official capacity, as clarified in Alfredo Ching.

Q8: What are the possible defenses in a criminal case for trust receipt violation?

A: Defenses are case-specific and require legal expertise. They might include challenging the existence of a valid trust receipt agreement, demonstrating fulfillment of obligations, or proving lack of responsibility or involvement of the accused officer. However, mere lack of intent to defraud is not a valid defense as the offense is malum prohibitum.

ASG Law specializes in banking and finance litigation and corporate criminal defense. Contact us or email hello@asglawpartners.com to schedule a consultation and ensure your business navigates trust receipt agreements with confidence and compliance.