Landl & Company v. Metropolitan Bank
REITERATIONFacts
The Antecedents: Respondent Metropolitan Bank & Trust Company (Metrobank) filed a collection case against petitioner Landl & Company (Phil.) Inc. and its directors, Percival G. Llaban and Manuel P. Lucente. Landl & Company had opened a commercial letter of credit with Metrobank to import welding rods and alloys. As security, Landl & Company executed a trust receipt, agreeing to hold the goods in trust for Metrobank, with the obligation to sell them and turn over the proceeds, or return the unsold goods by a specified date. Landl & Company defaulted on its payment and failed to return the goods. Procedural History: After Landl & Company defaulted, Metrobank demanded the return of the goods, which were subsequently turned over by the petitioners. The goods were sold at public auction for P30,000.00, an amount insufficient to cover the outstanding obligation. Metrobank then filed a collection case to recover the deficiency. The Regional Trial Court ruled in favor of Metrobank, ordering the petitioners to pay the outstanding balance, interest, attorney's fees, and other charges. The petitioners appealed to the Court of Appeals, which affirmed the trial court's decision in its entirety. This led to the present petition for review on certiorari before the Supreme Court. The Petition: The petitioners seek review of the Court of Appeals' decision, primarily arguing that Metrobank, by taking possession and selling the goods covered by the trust receipt, extinguished their obligation and thus could not claim any deficiency. They contend that the remedies of demanding return of goods and seeking deficiency after sale are mutually exclusive. The petitioners also challenge the amounts awarded for the principal obligation, interest, attorney's fees, and penalty charges. The petition is filed under Rule 45 of the Rules of Court, seeking a reversal or modification of the appellate court's ruling.
Issue(s)
Whether or not respondent bank has the right to recover any deficiency after it has retained possession of and subsequently effected a public auction sale of the goods covered by the trust receipt. Whether or not respondent bank is entitled to the amount of P3,000.00 as and for litigation expenses and costs of the suit. Whether or not respondent bank is entitled to the award of attorney's fees. Whether or not the computation of the total amount of petitioners' indebtedness to respondent bank was correct.
Ruling
The petition is PARTIALLY GRANTED. The decision of the Court of Appeals is AFFIRMED with MODIFICATIONS. Petitioners are ordered to pay respondent bank the net obligation as of April 17, 1986, interest, penalty, attorney's fees, and litigation expenses. The service charge is deleted.
Ratio Decidendi
On the right to recover deficiency after repossession and sale: The Court held that the entruster's right to repossess and sell the goods under a trust receipt upon default of the entrustee does not extinguish the entrustee's liability for any deficiency. Section 7 of Presidential Decree No. 115 (Trust Receipts Law) explicitly states that the entrustee shall be liable to the entruster for any deficiency after the proceeds of the sale are applied to the expenses and the indebtedness. The repossession of the goods is merely a security measure and does not constitute payment or dacion en pago. The trust receipt is a security agreement that secures an indebtedness, and the bank remains a lender and creditor, not the factual owner of the goods. Therefore, the bank is entitled to recover the remaining balance of the obligation after the sale of the repossessed goods. On entitlement to litigation expenses: The Court affirmed the award of P3,000.00 for litigation expenses, as this was awarded by the trial court and affirmed by the Court of Appeals, and no specific error was raised against this particular award in the petition for review. On entitlement to attorney's fees: The Court modified the award of attorney's fees. While the trial court and Court of Appeals awarded attorney's fees equivalent to 10% per annum, the Court clarified that attorney's fees should be equivalent to 10% of the total amount due and collectible, not compounded annually. The Court found the compounding of attorney's fees to be unconscionable and without basis in the trust receipt. On the computation of indebtedness: The Court found an error in the computation of the total indebtedness. It ruled that the marginal deposit of P50,414.00 should be deducted from the principal obligation, citing prevailing jurisprudence that marginal deposits serve as collateral security and should be set off against the debt. The Court also noted that the proceeds of the auction sale (P30,000.00) and the Deed of Assignment (P35,000.00) should have been applied to the obligation. The Court recalculated the net principal obligation as P211,758.23 as of April 17, 1986. The Court also deleted the service charge of 2% per annum, finding no stipulation for it in the trust receipt. The interest rate of 19% per annum and penalty of 12% per annum were affirmed as per the trust receipt, to be reckoned from April 18, 1986.
Main Doctrine
In a trust receipt transaction, an entruster which has taken actual and juridical possession of the goods covered by the trust receipt may subsequently avail of the right to demand from the entrustee the deficiency of the amount covered by the trust receipt, as the repossession of the goods does not extinguish the obligation but merely serves as a security.