What
does “security interest” mean?
Security
Interest means a property interest in goods, documents or instruments to secure
performance of some obligations 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. (ibid)
Validity
of the Security Interest as Against the Creditors of the Entrustee/Innocent
Purchasers for Value
[T]he
security interest of the entruster is not merely an empty or idle title. To a
certain extent, such interest becomes a "lien" on the goods because
the entruster's advances will have to be settled first before the entrustee can
consolidate his ownership over the goods. A contrary view would be disastrous.
For to refuse to recognize the title of the banker under the trust receipt as
security for the advance of the purchase price would be to strike down a bona
fide and honest transaction of great commercial benefit and advantage
founded upon a well-recognized custom by which banking credit is officially
mobilized for manufacturers and importers of small means.[1]
The
mechanics and effects flowing from a trust receipt transaction, particularly
the importance given to the security held by the entruster, i.e.,
the person holding title over the goods, were fully discussed in earlier
decisions, as follows —
By
this arrangement a banker advances money to an intending importer, and thereby
lends the aid of capital, of credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce. Much of this trade could hardly
be carried on by any other means, and therefore it is of the first importance
that the fundamental factor in the transaction, the banker's advance of money
and credit, should receive the amplest protection. Accordingly, in order to
secure that the banker shall be repaid at the critical point — that is, when
the imported goods finally reach the hands of the intended vendee — the
banker takes the full title to the goods at the very beginning; he takes
it as soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that title as his
indispensable security until the goods are sold in the United States and
the vendee is called upon to pay for them. This security is not an ordinary
pledge by the importer to the banker, for the importer has never owned the goods,
and moreover, he is not able to deliver the possession; but the security is
the complete title vested originally in the bankers, and this characteristic of
the transaction has again and again been recognized and protected by the courts.
Of course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey; but
only after his advances have been fully repaid and after the importer has
fulfilled the other terms of the contract (emphasis supplied).[2]
.
. . . [I]n a certain manner, (trust receipt contracts) partake of the nature of
a conditional sale as provided by the Chattel Mortgage Law, that is, the
importer becomes absolute owner of the imported merchandise as soon as he has
paid its price. The ownership of the merchandise continues to be vested in
the owner thereof or in the person who has advanced payment, until he has been
paid in full, or if the merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his representative or
successor in interest (emphasis supplied).[3]
More
importantly, owing to the vital role trust receipts play in international and
domestic commerce, Sec. 12 of P.D. No. 115[4] assures
the entruster of the validity of his claim against all creditors —