Substance Over Form: Why Mislabeling a Loan as a Trust Receipt Can Save You from Estafa in the Philippines

In the Philippines, the label on a contract isn’t always the final word. Sometimes, what appears to be a trust receipt – a document carrying potential criminal liability – is, in reality, just a simple loan. This distinction is crucial because it determines whether failure to pay is a mere breach of contract or a criminal offense. The Supreme Court case of Colinares v. Court of Appeals illuminates this very point, serving as a beacon of hope for borrowers who find themselves facing criminal charges under the Trust Receipts Law (Presidential Decree No. 115) when their transactions are essentially straightforward loans mischaracterized as trust receipts.

G.R. No. 90828, September 05, 2000

INTRODUCTION

Imagine running a small construction business and securing materials for a project. You believe you’re taking out a loan to pay for these materials, but later, you’re accused of a crime because the bank insists the transaction was a ‘trust receipt.’ This nightmare scenario is precisely what Melvin Colinares and Lordino Veloso faced. They were contractors renovating a convent, procured construction materials, and sought financing from Philippine Banking Corporation (PBC). While they signed a document labeled a ‘trust receipt,’ the Supreme Court ultimately recognized the true nature of their agreement as a simple loan, acquitting them of criminal charges. This case underscores a vital principle: Philippine courts will look beyond the form of a contract to its substance, especially when criminal liability is at stake. The central legal question: When does a ‘trust receipt’ truly represent a trust receipt transaction under the law, and when is it merely a disguised loan?

LEGAL CONTEXT: UNDERSTANDING TRUST RECEIPTS IN THE PHILIPPINES

To understand the significance of the Colinares case, we must first define what a trust receipt is under Philippine law. Presidential Decree No. 115, also known as the Trust Receipts Law, governs trust receipt transactions. Section 4 of this law defines a trust receipt transaction as:

“any transaction by and between a person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest 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 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.”

In simpler terms, a trust receipt is typically used in import-export or inventory financing. A bank (entruster) finances the purchase of goods but retains ownership or a security interest in those goods. The borrower (entrustee) receives the goods to sell or process, obligated to remit the proceeds to the bank or return the goods if unsold. Failure to fulfill this obligation can lead to criminal charges of estafa (swindling) under Article 315 of the Revised Penal Code, specifically paragraph 1(b), which punishes:

“By misappropriating or converting, to the prejudice of another, money, goods, or other personal property received by the offender in trust, or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.”

Crucially, under the Trust Receipts Law, intent to defraud is not a necessary element for criminal liability. The mere failure to account for the goods or their proceeds as stipulated in the trust receipt is sufficient to constitute estafa. This strict liability underscores the importance of correctly classifying transactions and understanding the true nature of obligations incurred.

CASE BREAKDOWN: COLINARES AND VELOSO’S ORDEAL

The case of Melvin Colinares and Lordino Veloso began with a seemingly straightforward construction project. In 1979, the Carmelite Sisters contracted them to renovate their convent. To procure materials from CM Builders Centre, Colinares and Veloso applied for a commercial letter of credit with PBC. The bank approved a credit line of P22,389.80, and the petitioners signed a pro-forma trust receipt as security. The loan was due in January 1980.

However, critical details deviated from a typical trust receipt scenario. The materials were actually delivered to Colinares and Veloso before they even applied for the letter of credit. This timeline is crucial. In a genuine trust receipt transaction, the bank typically owns the goods first and then releases them to the entrustee under the trust receipt agreement.

When Colinares and Veloso faced difficulties in payment, PBC sent demand letters. Veloso even confessed to losing money on the convent project and requested a grace period. Despite partial payments made by the petitioners, PBC filed criminal charges for violation of the Trust Receipts Law. The Regional Trial Court convicted them of estafa, a decision upheld, with a modified penalty, by the Court of Appeals.

The petitioners then elevated the case to the Supreme Court, arguing that the transaction was a simple loan, not a trust receipt. They presented a “Disclosure Statement on Loan/Credit Transaction” which was allegedly suppressed by PBC during the trial, further supporting their claim of a loan agreement. While the Supreme Court rejected the ‘newly discovered evidence’ argument regarding the Disclosure Statement, it meticulously examined the facts and transcript of records.

The Supreme Court highlighted the admission of PBC’s own credit investigator, Grego Mutia, who acknowledged that the goods were delivered to the petitioners before the trust receipt was executed. The Court quoted Mutia’s testimony:

“In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused you admit that? … Because in the bank the loan is considered part of the loan.”

The Court also noted Veloso’s testimony that PBC’s manager assured them it was a loan, and the trust receipt was a mere formality. PBC failed to present this manager to refute Veloso’s claim.

Ultimately, the Supreme Court reversed the lower courts’ decisions, acquitting Colinares and Veloso. The Court reasoned:

“A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was a simple loan, not a trust receipt agreement… Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan.”

The Supreme Court emphasized that trust receipts are designed for financing importers and retail dealers who need credit to acquire goods for resale. Colinares and Veloso, as contractors using the materials for their project, did not fit this profile. The true nature of the transaction, evidenced by the sequence of events and the testimonies, pointed to a loan, not a genuine trust receipt agreement.

PRACTICAL IMPLICATIONS: LESSONS FOR BUSINESSES AND BORROWERS

The Colinares case offers crucial lessons for businesses and individuals entering financing agreements, especially those involving documents labeled as ‘trust receipts’:

• Substance Over Form: Philippine courts will prioritize the true nature of a transaction over its label. Just because a document is called a ‘trust receipt’ doesn’t automatically make it one, especially in criminal cases.
• Timing is Key: In genuine trust receipt transactions, the bank typically owns the goods before releasing them to the borrower. If goods are delivered to the borrower before the financing and ‘trust receipt’ agreement, it raises a red flag and suggests a loan, not a true trust receipt.
• Document Everything: While verbal assurances might be given, it is critical to have all agreements and understandings clearly documented in writing. The ‘Disclosure Statement’ in Colinares, though not considered ‘newly discovered evidence,’ would have significantly strengthened their case had it been presented earlier.
• Seek Legal Advice: Before signing any financing agreement, especially those involving ‘trust receipts’ or similar instruments, consult with a lawyer. Legal counsel can help you understand the implications of the documents and ensure your interests are protected.
• Negotiate Contract Terms: Don’t be afraid to negotiate contract terms. If you believe a ‘trust receipt’ is being used inappropriately for a simple loan, discuss this with the bank and seek clarification or modification of the agreement.

Key Lessons:

• Understand the True Nature of Transactions: Don’t be misled by labels. Analyze the substance of the agreement.
• Review Documents Meticulously: Read the fine print and understand the implications of every clause, especially concerning liability.
• Preserve Evidence: Keep all documents related to the transaction, including disclosure statements, loan agreements, and communication with the bank.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q: What exactly is a trust receipt?

A: A trust receipt is a security agreement where a bank (entruster) releases goods to a borrower (entrustee) for sale or processing, while the bank retains ownership or a security interest in the goods until payment is made.

Q: What is estafa, and how is it related to trust receipts?

A: Estafa is a form of swindling under Philippine law. Under the Trust Receipts Law, failure to remit proceeds from the sale of goods or return unsold goods covered by a trust receipt can be considered estafa, even without intent to defraud.

Q: When is a ‘trust receipt’ transaction considered a simple loan?

A: When the transaction’s substance is a loan, even if a ‘trust receipt’ document is signed. Factors include: delivery of goods before the trust receipt agreement, the borrower using goods for their own use (not resale), and evidence suggesting the parties intended a loan.

Q: Can I be criminally charged if I fail to pay a loan disguised as a trust receipt?

A: Potentially, yes, if the bank pursues charges under the Trust Receipts Law. However, as shown in Colinares, you have a strong defense if you can prove the transaction was genuinely a loan and not a true trust receipt. The Supreme Court will look at the substance over the form.

Q: What should I do if I’m pressured to sign a trust receipt for what I believe is a loan?

A: Express your concerns to the bank. Document your understanding that it’s a loan. Try to negotiate the removal of the ‘trust receipt’ clause. Seek legal advice immediately to understand your rights and options.

Q: Does paying the loan extinguish criminal liability in trust receipt cases?

A: According to the Solicitor General’s opinion in Colinares, payment mitigates culpability but doesn’t automatically extinguish criminal liability. However, the Supreme Court acquitted in Colinares, highlighting that the transaction was not a genuine trust receipt from the outset.

Q: What is the significance of the Affidavit of Desistance in the Colinares case?

A: While PBC executed an Affidavit of Desistance after full payment, the Supreme Court’s acquittal was primarily based on the finding that the transaction was not a trust receipt, not solely on the desistance. Desistance can indicate the creditor’s primary interest is collection, further supporting the loan argument, but it’s not the sole deciding factor.

Q: How can ASG Law help me with trust receipt issues?

A: ASG Law specializes in banking and finance law, and criminal defense. We can provide expert legal advice on trust receipt transactions, represent you in disputes, and defend you against wrongful criminal charges. We can help you analyze your agreements, understand your obligations, and protect your rights.

ASG Law specializes in Banking and Finance Law and Criminal Litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.