ROSARIO TEXTILE MILLS CORPORATION AND EDILBERTO YUJUICO, PETITIONERS, VS. HOME BANKERS SAVINGS AND TRUST COMPANY, RESPONDENT.

Rosario Textile Mills versus Home Bankers Savings and Trust Company

The Case

This is a petition for review on certiorari brought by Rosario Textile Mills Corporation and Edilberto Yujuico against Home Bankers Savings and Trust Company. The bank sued the corporation and its surety to collect on a series of promissory notes issued under an approved credit line. The borrowers and the surety resisted, arguing that the goods financed by the loan were owned by the bank under trust receipts, that they validly tendered those goods back, and that the surety agreement was a mere formality. The case matters because it settles, in one clean stroke, the true nature of a credit line and a trust receipt, the solidary liability of a surety, and the bar of the parol evidence rule against varying a written contract.

Procedural History

The bank filed a complaint for sum of money before the Regional Trial Court of Manila, Branch 16. After trial on the merits, the trial court rendered judgment in favor of the bank, ordering the corporation and Yujuico to pay jointly and severally the amounts due under the listed promissory notes, inclusive of the stipulated interest and penalty, and dismissed their counterclaims. The borrowers and the surety appealed to the Court of Appeals, which affirmed the trial court's judgment. They moved for reconsideration, but the Court of Appeals denied the motion. Hence, they elevated the matter to the Supreme Court through this petition for review on certiorari.

Facts

Sometime in 1989, Rosario Textile Mills Corporation applied with Home Bankers Savings and Trust Company for an omnibus credit line of 10 million pesos. The bank approved a credit line of only 8 million pesos and notified the corporation through a letter dated March 2, 1989, whose terms and conditions the corporation conformed through Edilberto Yujuico. On March 3, 1989, Yujuico signed a surety agreement in favor of the bank, binding himself jointly and severally with the corporation for the payment of all its indebtedness to the bank from 1989 to 1990.

The corporation availed of the credit line through numerous drawdowns, each covered by a separate promissory note and trust receipt. In all, the corporation, represented by Yujuico, executed eleven promissory notes in favor of the bank. Despite the lapse of the due dates under the notes and the bank's demand letters, the corporation failed to pay. On January 22, 1993, the bank filed its complaint for sum of money.

In their answer, the corporation and Yujuico admitted the grant of the credit line and the execution of the surety agreement, but claimed the bank assured them the surety agreement was a mere formality under which Yujuico would not be personally liable. They also claimed that the importation of raw materials carried an option to turn the goods over to the bank should these fail to meet manufacturing requirements. The corporation offered to make such a turnover because the materials did not conform to specifications, but the bank refused to accept them, until the materials were destroyed by a fire that gutted the corporation's premises. The trial court ruled for the bank, and the Court of Appeals affirmed.

Issues

• Whether or not the Court of Appeals erred in holding that the petitioners are not relieved of their obligation to pay their loan after they tried to tender the goods to the bank, which refused to accept them, and which goods were subsequently lost in a fire.
• Whether or not the Court of Appeals erred in ruling that the petitioners are solidarily liable for the payment of their obligations to the bank.
• Whether or not the Court of Appeals violated the Trust Receipts Law.

Applicable Provisions

Section 3, paragraph h of the Trust Receipts Law, Presidential Decree Number 115, defines a security interest as follows:

(h) Security Interest means a property interest in goods, documents, or instruments to secure performance of some obligation of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only.

This definition is the key to the first and third issues, because it shows that the bank's title over the goods under the trust receipts was taken for security only, not as true ownership.

Section 9 of Rule 130 of the Revised Rules of Court, the parol evidence rule, provides:

Section 9. Evidence of written agreements. When the terms of an agreement have been reduced in writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. However, a party may present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleading: (a) An intrinsic ambiguity, mistake, or imperfection in the written agreement; (b) The failure of the written agreement to express the true intent and agreement of the parties thereto; (c) The validity of the written agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement.

This rule bears on the second issue, because Yujuico's claim that the surety agreement was a mere formality is precisely the kind of evidence aliunde the rule excludes.

Ruling

On the first issue, the Court held that the petitioners are not relieved of their obligation. The principal transaction between the corporation and the bank is a contract of loan. The corporation used the loan proceeds to purchase raw materials abroad, and to secure payment it delivered the raw materials to the bank as collateral, with trust receipts executed merely to evidence that security arrangement. The Court stressed that the trust receipts were mere securities. Quoting its earlier rulings, the Court explained that if under the trust receipt the bank is made to appear as the owner, this is but an artificial expedient, more of legal fiction than fact, for if it were really so, the bank could dispose of the goods in any manner it wants, which it cannot do. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof. Thus, the risk of loss did not shift to the bank, and the petitioners' recourse, if the materials were indeed defective, is to sue their supplier.

On the second issue, the Court rejected Yujuico's contention that the surety agreement was a mere formality, for two reasons. First, there is no record to support the allegation. Second, the surety agreement clearly binds him, since its terms show that he agreed to pay the bank jointly and severally with the corporation. The parol evidence rule applies, rendering the terms of the contract conclusive upon the parties, and evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement embodied in a document. The Court examined the surety agreement and found no ambiguity in it.

On the third issue, the Court reiterated that the contract between the parties is a loan. What the bank sought to collect as creditor was the loan it granted to the petitioners, and the Trust Receipts Law does not convert that loan into an ownership arrangement that would shift the risk of loss to the bank.

Doctrine

A credit line is the fixed limit of credit granted by a bank to a customer, to the full extent of which the latter may avail himself but which he must not exceed, and it is usually intended to cover a series of transactions. The principal transaction under a credit line is a contract of loan.

A trust receipt is a security agreement under which the bank acquires a security interest in the goods. The bank's apparent ownership is a legal fiction, an artificial expedient to give stronger security for the loan, and the bank is not the true owner from the inception of the transaction. Under Section 3, paragraph h of the Trust Receipts Law, the title retained is in substance taken for security only. Hence, the doctrine that the thing perishes to its owner, res perit domino, does not apply to shift the risk of loss to the bank.

A surety binds himself solidarily with the principal debtor, and a written surety agreement that is clear and unambiguous is conclusive upon the parties under the parol evidence rule. Evidence aliunde is not admissible to vary or contradict it, and a claim that the agreement was a mere formality cannot prevail absent any ambiguity or any of the exceptions in Section 9 of Rule 130.

Disposition

The petition was denied, and the Decision and Resolution of the Court of Appeals were affirmed in toto, with costs against the petitioners.

Remember This

Memorize this line: a trust receipt is a security arrangement, not a transfer of true ownership, so the bank is not the owner and does not bear the risk of loss. Examiners use this case to test the nature of a credit line and trust receipt, the solidary liability of a surety, and the parol evidence rule against the claim that a surety agreement was a mere formality.