Commercial Law Compilation Bar Q&a 1990-2017

Mercantile Law Bar Examination Q & A (1990-2006)

General Principles of Mercantile Law Commercial Transaction (2003) What do you understand by the term “commercial transaction”? Is it essential that at least one party to a contract be a merchant in order to consider such a commercial transaction? (4%) SUGGESTED ANSWER:

A “Commercial transaction” is defined as ...... It is not essential that at least one party to the commercial transaction be a merchant. What is essential is that the transaction evince an intent to engage in commerce or trade. Joint Account (2000) What is a joint account? (2%) SUGGESTED ANSWER:

A joint account is a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine. Joint Account vs. Partnership (2000) Distinguish joint account from partnership. (3%) SUGGESTED ANSWER:

The following are the distinctions between joint account and partnership: 5888 A partnership has a firm name while a joint account has none and is conducted in the name of the ostensible partner. 5889 While a partnership has juridical personality and may sue or be sued under its firm name, a joint account has no juridical personality and can sue or be sued only in the name of the ostensible partner. 5890 While a partnership has a common fund, a joint account has none. 5891 While in a partnership, all general partners have the right of management, in a joint account, the ostensible partner manages its business operations. 5892 While liquidations of a partnership may, by agreement, be entrusted to a partner or partners, in a joint account liquidation thereof can only be done by the ostensible partner. Theory of Cognition vs. Theory of Manifestation (1997) The Civil Code adopts the theory of cognition, while the Code of Commerce generally recognizes the theory of manifestation, in the perfection of

contracts. How do these two theories differ? SUGGESTED ANSWER:

Under the theory of cognition, the acceptance is considered to effectively bind the offeror only from the time it came to his knowledge. Under the theory of manifestation, the contract is perfected at the moment when the acceptance is declared or made by the offeree.

Page 12 of 103

Banking Law Banks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits (2005) Hi Yielding Corporation filed a complaint against five of its officers for violation of Section 31 of the Corporation Code. The corporation claimed that the said officers were guilty of advancing their personal interests to the prejudice of the corporation, and that they were grossly negligent in handling its affairs. Aside from documents and contracts, the corporation also submitted in evidence records of the officers’ U.S. Dollar deposits in several banks overseas - Boston Bank, Bank of Switzerland, and Bank of New York. For their part, the officers filed a criminal complaint against the directors of Hi Yielding Corporation for violation of Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines. The officers alleged that their bank deposits were illegally disclosed for want of a court order, and that such deposits were not even the subject of the case against them. 0 Will the complaint filed against the directors of Hi Yielding Corporation prosper? Explain. SUGGESTED ANSWER:

No, because the Foreign Currency Deposit Act (R.A. No. 6426), including its punitive provisions, refers to foreign currency deposits accounts constituted within the Philippines. It has no application at all to

Version 1990-2003 Arranged by SULAW Class 2005

accounts, even though they are banks, opened and constituted abroad. 23

Was there a violation of the Secrecy of Bank Deposits Law (Republic Act No. 1405)? Explain. (5%)

SUGGESTED ANSWER:

No, because the punitive provisions of the Secrecy of Bank Deposits Law (R.A. No. 1405), including the statutory exemptions provided therein, are not applicable to FCDU accounts, even when constituted locally. (Intengan v. Court of Appeals, G.R. No. 128996, February 15, 2002)

Banks: Collateral Security (2002) Andrew is engaged in the business of building low-cost housing units under contracts with real estate developers. He applied for a loan of P3 Million from Ready Credit Bank (the Bank), which required Andrew to provide collateral security for it. Andrew offered to assign to the Bank his receivables amounting to P4 million from Home Builders Development Corporation (the Obligor). The Bank accepted the offer. Accordingly, Andrew obtained the loan and he executed a promissory note undertaking to pay the loan in full in one lump sum on September 1, 2002, together with interest thereon at the rate of 20% per annum. At the same time, Andrew executed a Deed of Assignment in favor of the Bank assigning to the Bank his receivables from the Obligor. The deed of assignment read:

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

“I, Andrew Lee, hereby assign, transfer and convey, absolutely and unconditionally, to Ready Credit Bank (hereinafter called the Bank) all of my right, title and interest in and to my accounts receivable from Home Builders Development Corporation (hereinafter called the Obligor) arising from delivery of housing units with a total contract price of P4,000,000.00, the description and contract value of which are attached hereto as Annex A (hereinafter called the Receivables).” “In the event that I shall be unable to pay my outstanding indebtedness owned to the Bank, the Bank shall have the right, without any further formality or act on its part, to collect the Receivables from the Obligor and to apply the proceeds thereof toward payment of my said indebtedness.” Andrew failed to pay the loan on its due date on September 1, 2002. When the Bank attempted to collect from the Obligor, the Bank discovered that the latter had already closed operations and liquidated all its assets. The Bank sued Andrew for collection, but Andrew moved to dismiss the complaint on the ground that the debt had already been paid by reason of his execution of the aforesaid Deed of Assignment which, being absolute and unconditional, was in essence a dacion en pago. The Bank opposed the motion, contending that the Deed of Assignment was only a security for a loan. If you were the Judge, how would you resolve the motion to dismiss filed by Andrew? Explain (5%) SUGGESTED ANSWER:

(Since the question is outside the scope of the Bar Examination, it is recommended that the candidate be given full credit of 5%, whatever may be his answer, and he be given a bonus if he made an answer in the following manner:)

The motion to dismiss should be granted. The simple absolute and unconditional conveyance embodied in the deed of assignment would be operative, and the assignment would constitute essentially a mode of payment or dacion en pago. Banks: Secrecy of Bank Deposits; Garnishment (2004) CDC maintained a savings account with CBank. On orders of the MM Regional Trial Court, the Sheriff garnished P50,000 of his account, to satisfy the judgment in favor of his creditor, MO. CDC complained that the garnishment violated the Law on the Secrecy of Bank Deposits because the existence of his savings account was disclosed to the public. (5%)

Is CDC's complaint meritorious or not? Reason briefly. SUGGESTED ANSWER:

No. CDC's complaint is not meritorious. It was held in China Banking Corporation v. Ortega, 49 SCRA 355 (1973)

that peso deposits may be garnished and the depositary bank can comply with the order of garnishment without violating the Law on the Secrecy of Bank Deposits. Execution is the goal of litigation as it is its fruit. Garnishment is part of the execution process. Upon service of the notice of garnishment on the bank where the defendant deposited funds, such funds become part of the subject matter of litigation.

Page 13 of 103

Banks; Classifications of Banks (2002) There are six (6) classes of banks identified in the General Banking Law of 2000. Name at least four (4) of them and explain the distinguishing characteristic or function of each one. (5%) SUGGESTED ANSWER:

Any four (4) of the following six (6) classes of banks identified in the General Banking Law of 2002, to wit: 23 Universal Banks – These are those which used to be called expanded commercial banks and the operations of which are now primarily governed by the General Banking Law of 2002. They can exercise the powers of an investment house and invest in nonallied enterprises. They have the highest capitalization requirement. 24 Commercial Banks – These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in nonallied enterprises. 25 Thrift Banks – These banks (such as savings and mortgage banks, stock savings and loan associations, and private development banks) may exercise most of the powers and functions of a commercial bank except that they cannot, among others, open current or check accounts without prior Monetary Board approval, and they cannot issue letters of credit. Their

Version 1990-2003 Arranged by SULAW Class 2005

operations are governed primarily by the Thrift Banks Act of 1995 (RA 7906). 26 Rural Banks – these are those which are organized primarily to extend loans and other credit facilities to farmers, fishermen or farm families, as well as cooperatives, merchants, and private and public employees and whose operations are primarily governed by the Rural Banks Act of 1992 (RA 7353). 27 Cooperative Banks – these are those which are organized primarily to provide financial and credit services to cooperatives and whose operations are primarily governed by the Cooperative Code of the Philippines (RA 6938). 28 Islamic Banks – these are those which are organized primarily to provide financial and credit services in a manner or transaction consistent with the Islamic Shari’ah. At present, only the Al Amanah Islamic Investment Bank of the Philippines has been organized as an Islamic Bank. Banks; Conservator vs. Receiver (2006) Distinguish between the role of a conservator and that of a receiver of a bank. (2.5%) SUGGESTED ANSWER:

The Conservator is appointed for a period not exceeding one (1) year, to take charge of the assets, liabilities, and the management of a bank or a quasi-bank in a state of continuing inability, or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. On the other hand, the Receiver is appointed to manage a bank or quasi-bank that is unable to pay its liabilities in Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

the ordinary course of business, or has insufficient realizable assets to meet its liabilities, or cannot continue in business without probable losses to its depositors or creditors; or has willfully violated a final cease and desist order, involving acts or transactions amounting to fraud or a dissipation of the assets of the institution. The main purpose of the Receiver is to recommend the rehabilitation or liquidation of the bank. Banks; Diligence Required (1992) Placido, a bank depositor, left his checkbook on his desk at his house. Unknown to him, a visitor at the time, noticing the same, took a check therefrom, filled it up in the amount of P3,000.00 and succeeded in encashing the check on the same day. Placido’s account was thereby debited in the same amount. Discovering the erroneous debit, Placido demanded that the bank credit him with a like amount. The bank refused on the ground that Placido was negligent in leaving his checkbook on his desk so that he could not put up the defense of forgery or want of authority under the NIL. The Facts disclose that even to the naked eye, there were marked differences between Placido’s signature and the one in the check forged by the visitor. As between Placido and the bank, who should bear the loss? Explain. SUGGESTED ANSWER:

The bank should bear the loss. A drawee bank must exercise the highest diligence in safeguarding the accounts of its clientdepositors. The bank is also charged with genuineness of the signatures of its current account holders. But what can be more striking is that there were marked differences between Placido’s signature and the one in the check forged by the visitor. Certainly, Placido was not negligent in leaving his checkbook in his own desk (PNB v Quimpo 158 SCRA 582) Banks; Insolvency; Prohibited Transactions (2000) The Monetary Board of the BSP closed Urban Bank after it encountered crippling financial difficulties that resulted in a bank run. X, one of the members of the BOD of the bank, attended and stayed throughout the entire meeting of the Board that was held well in advance of the bank run and before news had begun to trickle to the business community about the dire financial pit the bank had fallen into. Immediately after the meeting, X caused

the preparation and issuance of a manager’s check payable to himself in the sum of 5 million pesos equivalent to the amount placed or invested in the bank by a business acquaintance. He now claims that he is keeping the funds in trust for the owner and that he had committed no violation of the General Banking Act (RA 337, as amended) for which he should be punished. Do you agree that there has been no violation of the statute? (3%) SUGGESTED ANSWER:

No. I do not agree that there is no violation of the statute (RA 337, as amended). X violated Sec 85 when he caused the preparation and issuance of a manager’s check

Page 14 of 103

payable to himself in the sum of P5 million. This is paying out or permitting to be paid out funds of the bank after the latter became insolvent. This act is penalized by fine of not less than P1,000.00 nor more than P10,000.00 and by imprisonment for not less than two nor more than ten years. Banks; Insolvency; Requirements (1997) Give the basic requirements to be complied with by the BSP before the Monetary Board can declare a bank insolvent, order it closed and forbid it from doing further business in the Philippines. SUGGESTED ANSWER:

Before the Monetary Board can declare a bank insolvent, order it closed and forbid it from doing further business in the Philippines, the following basic requirements must be complied with by the BSP, to wit: 23 There must be an examination by the head of the Department of Supervision or his examiners or agents into the condition of the bank. 24 The examination discloses that the condition of the bank is one of insolvency, or that its continuance in business would involve probable loss to creditors or depositors. 25 The head of said Department shall inform in writing the Monetary Board of such facts. 26 Upon finding said information or statement to be true, the Monetary Board shall appoint a receiver to take charge of the assets and liabilities of the bank. Version 1990-2003 Arranged by SULAW Class 2005

27 Within 60 days, the Monetary Board shall determine and confirm if the bank is insolvent, and public interest requires, to order the liquidation of the bank. Banks; Restrictions on Loan Accommodations (2002) As part of the safeguards against imprudent banking, the General Banking Law imposes limits or restrictions on loans and credit accommodations which may be extended by banks. Identify at least two (2) of these limits or restrictions and explain the rationale of each of them. (5%) SUGGESTED ANSWER:

Any two (2) of the following limits or restrictions on loan and credit transactions which may be extended by banks, as part of the safeguards against imprudent banking, to wit: 23 SBL Rules – (i.e., Single Borrower’s Limit) rules are those promulgated by the Bangko Sentral ng Pilipinas, upon the authority of Section 35 of the General Banking Law of 2000, which regulate the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity. The rules seek to protect a bank from making excessive loans to a single borrower by prohibiting it from lending beyond a specified ceiling. 24 DOSRI Rules – These rules promulgated by the BSP, upon authority of Section 5 of the General Banking Law of 2000, which regulate the amount of credit accommodations that a bank may extend to its Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

directors, officers, stockholders and their related interests (thus, DOSRI) . Generally, a bank’s credit accommodations to its DOSRI must be in the regular course of business and on terms not less favorable to the bank than those offered to non-DOSRI borrowers. 23 No commercial bank shall make any loan or discount on the security of shares of its own capital stock. Banks; Restrictions on Loan Accommodations (2006) Pio is the president of Western Bank. His wife applied for a loan with the said bank to finance an internet cafe. The loan officer told her that her application will not be approved because the grant of loans to related interests of bank directors, officers, and stockholders is prohibited by the General Banking Law. Explain whether the loan officer is correct. (5%) SUGGESTED ANSWER:

Section 36 of the General Banking Law of 2000 does not entirely prohibit directors or officers of the bank, directly or indirectly, from borrowing from the bank. In this case, Pio is the president of Western Bank, which makes him an officer, director and stockholder of the said bank. The General Banking Law provides for additional restrictions to the bank before it can lend to its directors or officers. A written approval of the majority vote of all the directors of the bank, excluding the director concerned, is required. Furthermore, such dealings must be upon terms not less favorable to the bank than those offered to others (Section 1326, Central Bank's "Manual of Regulations for Banks and Other Financial Intermediaries, cited in Ranioso v. CA, G.R. No. 117416, December 8, 2000). A violation of this provision will cause his or her position to be declared vacant and the erring director or officer subjected to the penal provisions of the New Central Bank Act.

Banks; Safety Deposit Box; Liability MN and OP rented a safety deposit box at SIBANK. The parties signed a contract of lease with the conditions that: the bank is not a depository of the contents of the safe and has neither the possession nor control of the same; the bank assumed no interest in said contents and assumes no liability in connection therewith. The safety deposit box had two keyholes: one for the guard key which remained with the bank; and the other for the renters' key. The box can be opened only with the use of both keys. The renters deposited certificates of title in the box. But later, they discovered that the

certificates were gone. MN and OP now claim for damages from SIBANK. Is the bank liable? Explain briefly. (5%) SUGGESTED ANSWER:

The bank is liable, based on the decisions of the Supreme Court in CA Agro-Industrial

Development Corp. v. Court of Appeals, 219 SCRA 426 (1993) and Sia v. Court of Appeals, 222 SCRA 24 (1993). In those cases, the

Supreme Court ruled that the renting out of safety deposit boxes is a "special kind of deposit" wherein the bank is the depositary. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be Version 1990-2003 Arranged by SULAW Class 2005

Page 15 of 103

observed by the depositary. Any stipulation exempting the depositary from any liability arising from the loss of the thing deposited would be void for being contrary to law and public policy. The deposit box is located in the bank premises and is under the absolute control of the bank. Banks; Secrecy of Bank Deposit; AMLC (2006) Rudy is jobless but is reputed to be a jueteng operator. He has never been charged or convicted of any crime. He maintains several bank accounts and has purchased 5 houses and lots for his children from the Luansing Realty, Inc. Since he does not have any visible job, the company reported his purchases to the Anti-Money Laundering Council (AMLC). Thereafter, AMLC charged him with violation of the Anti-Money Laundering Law. Upon request of the AMLC, the bank disclosed to it Rudy's bank deposits amounting to P100 Million. Subsequently, he was charged in court for violation of the Anti-Money Laundering Law. 23 Can Rudy move to dismiss the case on the ground that he has no criminal record? (2.5%) SUGGESTED ANSWER:

No. Under the Anti-Money Laundering Law, Rudy would be guilty of a "money laundering crime" committed when the proceeds of an "unlawful activity," like jueteng operations, are made to appear as having originated from legitimate sources. The money laundering crime is separate from the unlawful activity of being a jueteng operator, and requires no previous conviction for the unlawful activity (See also Sec. 3, Anti-Money Laundering Act of 2001). 23 To raise funds for his defense, Rudy sold the houses and lots to a friend. Can Luansing Realty, Inc. be compelled to transfer to the buyer ownership of the houses and lots? (2.5%) SUGGESTED ANSWER:

Luansing Realty, Inc. is a real estate company, hence it is not a covered institution under Section 3 of the AntiMoney Laundering Act. Only banking institutions, insurance companies, securities dealers and brokers, pre-need companies and other entities administering or otherwise dealing in currency, commodities or financial derivatives are covered institutions. Hence, Luansing Realty, Inc. may not use the Anti-Money Laundering Act to refuse to transfer to the buyer ownership of the houses and lots.

23 In disclosing Rudy's bank accounts to the AMLC, did the bank violate any law? (2.5%) SUGGESTED ANSWER:

No, the bank did not violate any law. The bank being specified as a "covered institution" under the Anti-Money Laundering Law, is obliged to report to the AMLC covered and suspicious transactions, without thereby violating any law. This is one of the exceptions to the Secrecy of Bank Deposit Act.

Version 1990-2006 Updated by

Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

23 Supposing the titles of the houses and lots are in possession of the Luansing Realty, Inc., is it under obligation to deliver the titles to Rudy? (2.5%) SUGGESTED ANSWER:

Yes, it has an obligation to deliver titles to Rudy. As Luansing Realty, Inc. is not a covered institution under Section 3 of the Anti-Money Laundering Act, it may not invoke this law to refuse delivery of the titles to Rudy. Banks; Secrecy of Bank Deposit; Exceptions (2006) Under Republic Act No.1405 (The Bank Secrecy Law), bank deposits are considered absolutely confidential and may not be examined, inquired or looked into by any person, government official, bureau or office. What are the exceptions? (5%) SUGGESTED ANSWER:

The exceptions to the Bank Secrecy Law are the following: 23 Special or general examination of a bank, authorized by the Bangko Sentral ng Pilipinas' Monetary Board, in connection with a bank fraud or serious irregularity. 24 Examination by an independent Auditor, hired by the Bank and for the Bank's exclusive use. 25 Disclosure with the Depositor's written permission. 23 In case of Impeachment. 24 In cases of Bribery or dereliction of duty by a Public Officer, upon order of a competent court. 25 In cases of money deposited/invested which, in turn, is the subject of Litigation, upon order of a competent Court. 26 DOSRI Loans: Loans with their Banks of Bank Directors, Officers, Stockholders and related interests. 23 Loans in excess of 5% of the Bank's Capital & Surplus 24 The Borrower waived his right as regards the Secrecy of Bank Deposits 27 Violation of the Anti-Graft and Corrupt Practices Act. 28 Coup d' etat Law (RA 6968, Oct 24,1990). 29 BIR Commissioner's authority to verify a decedent's Gross Estate and a taxpayer's request for a compromise agreement due to incapacity to pay his tax liability. 30 Foreign Currency Deposits by foreign lenders & investors under PDs 1034. 31 Violations of the Anti-Money Laundering Law.

32

When the State exercises/invokes its Police Power.

(NOTA BENE: It is suggested that any 6 of the above be given full credit)

Banks; Secrecy of Bank Deposits (1990) Manosa, a newspaper columnist, while making a deposit in a bank, overheard a pretty bank teller informing a co-employee that Gigi, a well known public official, has just a few hundred pesos in her bank account and that her next check will in all probability bounce. Manosa wrote this information in his newspaper column. Thus, Gigi

Page 16 of 103

filed a complaint with the City Fiscal of Manila for unlawfully disclosing information about her bank account. 23 Will the said suit prosper? Explain your answer. 24 Supposing that Gigi is charged with unlawfully acquiring wealth under RA 1379 and that the fiscal issued a subpoena duces tecum for the records of the bank account of Gigi. May Gigi validly oppose the said issuance on the ground that the same violates the law on secrecy of bank deposits? Explain your answer. SUGGESTED ANSWER:

23 The Secrecy of Bank Deposits Act prohibits, subject to its exclusionary clauses, any person from examining, inquiring or looking into all deposits of whatever nature with banks or banking institutions in the Philippines which by law are declared “absolutely confidential” in nature. Manosa who merely overheard what appeared to be a vague remark of a Bank employee to a co-employee and writing the same in his newspaper column is neither the inquiry nor disclosure contemplated by law. ALTERNATIVE ANSWER:

23 The complaint against Manosa will not prosper because merely writing a vague remark of a Bank employee to a coemployee is not the disclosure contemplated by law. If anyone should be liable, it will be the bank employee who disclosed the information. SUGGESTED ANSWER:

23 Among the instances excepted from the coverage of the Secrecy of Bank Deposits Act are Anti-graft cases. Hence Version 1990-2003 Arranged by SULAW Class 2005

Gigi may not validly oppose the issuance of a subpoena duces tecum for the bank records on her. Banks; Secrecy of Bank Deposits (1991) The law (RA 6832) creating a Commission to conduct a Thorough Fact-Finding Investigation of the Failed Coup d’etat of Dec 1989, Recommend Measures to Prevent the Occurrence of Similar Attempts At a Violent Seizure of Power and for Other Purposes, provides that the Commission may ask the Monetary Board to disclose information on and/or to grant authority to examine any bank deposits, trust or investment funds, or banking transactions in the name of and/or utilized by a person, natural or juridical, under investigation by the Commission, in any bank or banking institution in the Philippines, when the Commission has reasonable ground to believe that said deposits, trust or investment funds, or banking transactions have been used in support or in furtherance of the objectives of the said coup d’etat. Does the above provision not violate the Law on Secrecy of Bank Deposits (RA 1405)? SUGGESTED ANSWER:

The Law on Secrecy of Bank Deposits is itself merely a statutory enactment, and it may, therefore, be modified, or amended (such as by providing further exceptions therefrom), or even repealed, expressly or impliedly, by a subsequent law. The Secrecy of Bank Deposits Act did not amount to a contract between the depositors and depository banks within the meaning of the non-impairment clause of the Constitution. Even if it did, the police power of the State is superior to the nonVersion 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

impairment clause. RA 6832, creating a commission to conduct an investigation of the failed 1989 coup d’etat and to recommend measures to prevent similar attempts to seize power is a valid exercise of police power. Banks; Secrecy of Bank Deposits (1992) Socorro received $10,000 from a foreign bank although she was entitled only to $1,000.00. In an apparent plan to conceal the erroneously sent amount, she opened a dollar account with her local bank, deposited the $10,000 and issued 4 checks in the amount of $2,000 and 1 check for $1,000 each payable to different individuals who deposited the same in their respective dollar accounts with different local banks. The sender bank then brought a civil suit before the RTC for the recovery of the erroneously sent amount. In the course of the trial, the sender presented testimonies of bank officials to show that the funds were, in fact, deposited in a bank by Socorro and paid out to several persons, who participated in the concealment and dissipation of the amount that Socorro had erroneously received. Socorro moved to strike out said testimonies from the record invoking the law on secrecy of bank deposits. If you were the Judge, would you issue an order to strike them out? Why? SUGGESTED ANSWER:

I will not strike out the testimonies from the record. The testimonies of bank officials indicating where the questioned dollar accounts were opened in depositing misappropriated sums must be considered as likewise involved in litigation – one which is among the excepted cases under the Secrecy of Bank Deposits Act (Melon Bank v Magsino 190 SCRA 633)

Banks; Secrecy of Bank Deposits (1994) Miguel, a special customs agent is charged before the Ombudsman with having acquired property out of proportion to his salary, in violation of the Anti-Graft and Corrupt Practices Act. The Ombudsman issued a subpoena duces tecum to the Banco de Cinco commanding its representative to furnish the Ombudsman records of transactions by or in the name of Miguel, his wife and children. A second subpoena was issued expanding the first by including the production of records of friends of Miguel in said bank and in all its branches and extension offices, specifically naming them.

Miguel moved to quash the subpoenas arguing that they violate the Secrecy of Bank Deposits Law. In addition, he contends that the subpoenas are in the nature of “fishing expedition” or “general warrants” and are constitutionally impermissible with respect to private individuals who are not under investigation. Is Miguel’s contention tenable? SUGGESTED ANSWER:

No. Miguel’s contention is not tenable. The inquiry into illegally acquired property extends to cases where such property is concealed by being held by or recorded in the

Page 17 of 103

name of other persons. To sustain Miguel’s theory and restrict the inquiry only to property held by or in the name of the government official would make available to persons in government who illegally acquire property an easy means of evading prosecution. All they have to do would be to simply place the property in the name of persons other than their spouses and children (Banco Filipino Savings vs. Purisima 161 scra 576; Sec 8 Anti-Graft Law as amended by BP 195)

Banks; Secrecy of Bank Deposits (1995) Michael withdrew without authority funds of the partnership in the amounts of P500th and US$50th for services he claims he rendered for the benefit of the partnership. He deposited the P500th in his personal peso current account with Prosperity Bank and the US$50th in his personal foreign currency savings account with Eastern Bank. The partnership instituted an action in court against Michael, Prosperity, and Eastern to compel Michael to return the subject funds to the partnership and pending litigation to order both banks to disallow any withdrawal from his accounts. At the initial hearing of the case the court ordered Prosperity to produce the records of Michael’s peso current account, and Eastern to produce the records of his foreign currency savings account. Can the court compel Prosperity and Eastern to disclose the bank deposits of Michael? Discuss fully. Version 1990-2003 Arranged by SULAW Class 2005

SUGGESTED ANSWER:

Yes, as far as the peso account is concerned. Sec 2 of RA 1405 allows the disclosure of bank deposits in case where the money deposited is the subject matter of litigation. Since the case filed against Michael is aimed at recovering the amount he withdrew from the funds of the partnership, which amount he allegedly deposited in his account, a disclosure of his bank deposits would be proper. No, with respect to the foreign currency account. Under the Foreign Currency Law, the exemption to the prohibition against disclosure of information concerning bank deposits is the written consent of the depositor. Banks; Secrecy of Bank Deposits (1998) 1998 (20) An insurance company is deluded into releasing a check to A for P35th to pay for Treasury Bills (T-bills) which A claims to be en route on board an armored truck from a government bank. The check is delivered to A who deposits it to his account with XYZ Bank before the insurance company realizes it is a scam. Upon such realization, the insurance company files an action against A for recovery of the amount defrauded and obtains a writ of preliminary attachment. In addition to the writ, the Bank is also served a subpoena to examine the account records of A. The Bank declines to provide any information in response to the writ and moves to quash the subpoena invoking secrecy of bank

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

deposits under RA 1405, as amended. Can the Bank justifiably invoke RA 1405 and a) not respond to the writ and b) quash the subpoena for examination? (5%) SUGGESTED ANSWER:

Yes. Whether the transaction is considered a sale or money placement does not make the money “subject matter of litigation” within the meaning of Sec 2 of RA 1405 which prohibits the disclosure or inquiry into bank deposit except “in cases where the money deposited or invested is the subject matter of litigation” nor will it matter whether the money was “swindled.” Banks; Secrecy of Bank Deposits (2000) GP is a suspected jueteng lord who is rumored to be enjoying police and military protection. The envy of many drug lords who had not escaped the dragnet of the law, GP was summoned to a hearing of the Committee on Racketeering and Other Syndicated Crimes of the House of Representatives, which was conducting a congressional investigation “in aid of legislation” on the involvement of police and military personnel, and possibly even of local government officials, in the illegal activities of suspected gambling and drug lords. Subpoenaed to attend the investigation were officers of certain identified banks with a directive to them to bring the records and documents of bank deposits of individuals mentioned in the subpoenas, among them GP. GP and the banks opposed the production of the banks’ records of deposits on the ground that no such inquiry is allowed under the Law on Secrecy of Bank Deposits (RA 1405 as amended). Is the opposition of GP and the banks valid? Explain. SUGGESTED ANSWER:

Yes. The opposition is valid. GP is not a public official. The investigation does not involve one of the exceptions to the prohibition against disclosure of any information concerning bank deposits under the Law on Secrecy of Bank Deposits. The Committee conducting the investigation is not a competent court or the Ombudsman authorized under the law to issue a subpoena for the production of the bank record involving such disclosure. Banks; Secrecy of Bank Deposits; Exceptions (2004) The Law on Secrecy of Bank Deposits provides that all deposits of whatever nature with banks or banking institutions are absolutely confidential in nature and may not be examined, inquired or looked into by any person, government official, bureau or office. However, the law provides exceptions in certain instances.

Which of the following may not be among the exceptions: 23 In cases of impeachment. 24 In cases involving bribery 25 In cases involving BIR inquiry. 26 In cases of anti-graft and corrupt practices. 27 In cases where the money involved is the subject of litigation. Explain your answer or choice briefly. (5%) SUGGESTED ANSWER:

Page 18 of 103

Under Section 6(F) of the National Internal Revenue Code, the Commissioner of Internal Revenue can inquire into the deposits of a decedent for the purpose of determining the gross estate of such decedent. Apart from this case, a BIR inquiry into bank deposits cannot be made. Thus, exception 3 may not always be applicable.

Turning to exception 4, an inquiry into bank deposits is possible only in prosecutions for unexplained wealth under the Anti-Graft and Corrupt Practices Act, according to the Supreme Court in the cases of Philippine National Bank v. Gancayco, 15 SCRA 91 (1965) and Banco Filipino Savings and Mortgage Bank v. Purisima, 161 SCRA 576 (1988). However, all other cases of anti

-graft and corrupt practices will not warrant an inquiry into bank deposits. Thus, exception 4 may not always be applicable. Like any other exception, it must be interpreted strictly.

Exceptions 1, 2 and 5, on the other hand, are provided expressly in the Law on Secrecy of Bank Depositors. They are available to depositors at all times. Banks; Secrecy of Bank Deposits; Garnishment (2001) The Law on Secrecy of Bank Deposits, otherwise known as RA 1405, is intended to encourage people to deposit their money in banking institutions and also to discourage private hoarding so that the same may be properly utilized by banks to assist in the economic development of the country. Is a notice of garnishment served Version 1990-2003 Arranged by SULAW Class 2005

on a bank at the instance of a creditor of a depositor covered by the said law? State the reason(s) for your answer. (5%) SUGGESTED ANSWER:

No. The notice of garnishment served on a bank at the instance of a creditor is not covered by the Law on Secrecy of Bank Deposits. Garnishment is just a part of the process of execution. The moment a notice of garnishment is served on a bank and there exists a deposit by the judgment debtor, the bank is directly accountable to the sheriff, for the benefit of the judgment creditor, for the whole amount of the deposit. In such event, the amount of the deposit becomes, in effect, a subject of the litigation. BSP; Receivership; Jurisdiction (1992) Family Bank was placed under statutory receivership and subsequently ordered liquidated by the Central Bank (CB) due to fraud and irregularities in its lending operations which rendered it insolvent. Judicial proceedings for liquidation were thereafter commenced by the CB before the RTC. Family Bank opposed the petition. Shortly thereafter, Family Bank filed in the same court a special civil action against the CB seeking to enjoin and dismiss the liquidation proceeding on the ground of grave abuse of discretion by the CB. The court poised to: 23restrain the CB from closing Family Bank; and 2) authorize Family Bank to withdraw money from its deposits during the pendency of the case. If you were the Judge, would you issue such orders? Why? SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

No. The RTC has no authority to restrain the monetary board of the BSP from statutory authority to undertake receivership and ultimate liquidation of a bank. Any opposition to such an action could be made to the court itself where assistance is sought. The action of the RTC where the proceeding is pending appeal have to be made in the Court of Appeals. Legal Tender (2000) After many years of shopping in the Metro Manila area, housewife HW has developed the sound habit of making cash purchases only, none on credit. In one shopping trip to Mega Mall, she got the shock of her shopping life for the first time, a store’s smart salesgirl refused to accept her coins in payment for a purchase worth not more than one hundred pesos. HW was paying seventy pesos in 25-centavo coins and twenty five pesos in 10 centavo coins. Strange as it may seem, the salesgirl told HW that her coins were not “legal tender.” Do you agree with the salesgirl in respect of her understanding of “legal tender?” Explain (2%) SUGGESTED ANSWER:

No. The salesgirl’s understanding that coins are not legal tender is not correct. Coins are legal tender in amounts not exceeding fifty pesos for denominations from twenty five centavos and above, and in amounts not exceeding twenty pesos for denominations ten centavos and less. PDIC Law vs. Secrecy of Bank Deposits Act (1997) An employee of a large manufacturing firm earns a salary which is just a bit more than what he needs for a comfortable living. He is thus able to still maintain a P10,000 savings account, a P20,000 checking account, a P30,000 money market placement and a P40,000 trust fund in a medium-size commercial bank. 23 State which of the four accounts are deemed insured by the PDIC. 24 State which of the above accounts are covered by the Law on Secrecy of Bank Deposits. SUGGESTED ANSWER:

23 The P10th savings account and the P20th checking account are deemed insured by the PDIC. 24 The P10th savings account and the P20th checking account are covered by the Law on Secrecy of Bank Deposits. Responsibilities & Objectives of BSP (1998) What are the responsibilities and primary objectives of the BSP? (5%) SUGGESTED ANSWER:

The BSP shall provide policy directions in the areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in the Central Bank Act and other pertinent laws over the operations of finance companies and nonbank financial institutions performing quasi-banking functions, such as quasibanks and institutions performing similar functions. The primary objective of the BSP is to maintain price stability conducive to a balanced and sustainable growth

Page 19 of 103

of the economy. It shall promote and maintain monetary stability and convertibility of the Peso. Truth in Lending Act (1991) Dana Gianina purchased on a 36 month installment basis the latest model of the Nissan Sentra Sedan car from the Jobel Cars Inc. In addition to the advertised selling price, the latter imposed finance charges consisting of interests, fees and service charges. It did not, however, submit to Dana a written statement setting forth therein the information required by the Truth in Lending Act (RA 3765). Nevertheless, the conditional deed of sale which the parties executed mentioned that the total amount indicated therein included such finance charges. 23 Has there been substantial compliance of the aforesaid Act? 24 If your answer to the foregoing question is in the negative, what is the effect of the violation on the contract? 25 In the event of a violation of the Act, what remedies may be availed of by Dana? SUGGESTED ANSWER:

23 There was no substantial compliance with the Truth in Lending Act. The law provides that the creditor must make a full disclosure of the credit lost. The statement that the total amount due includes the principal and the financial charges, without specifying the amounts due on each portion thereof would be insufficient and unacceptable. Version 1990-2003 Arranged by SULAW Class 2005

24 A violation of the Truth in Lending Act will not adversely affect the validity of the contract itself. 25 It would allow Dana to refuse payment of financial charges or, if already paid, to recover the same. Dana may also initiate criminal charges against the creditor. ALTERNATIVE ANSWER:

23 (Per Atty Jomby Paras if u read the provisions closely) Under the Truth in Lending Act, said financial charges are valid, and Dana may not refuse payment thereof. Only criminal charges may be initiated against the creditor. Truth in Lending Act (2000) Embassy Appliances sells home theater components that are designed and customized as entertainment centers for consumers within the medium-to-high price bracket. Most, if not all, of these packages are sold on installment basis, usually by means of credit cards allowing a maximum of 36 equal monthly payments. Preferred credit cards of this type are those issued by banks, which regularly hold mall wide sales blitzes participated in by appliance retailers like Embassy Appliances. You are a buyer of a home theater center at Embassy Appliances. The salesclerk who is attending to you simply swipes your credit card on the electronic approval machine (which momentarily prints out your charge slip since you have unlimited credit), tears the slip from the machine, hands the same over to you for your signature, and Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

without more, proceeds to arrange the delivery and installation of your new home theater system. You know you will receive a statement on your credit card purchases from the bank containing an option to pay only a minimum amount, which is usually 1/36 of the total price you were charged for your purchase. Did Embassy Appliances comply with the provisions of the Truth in Lending Act (RA 3765)? SUGGESTED ANSWER:

There is no need for Embassy Appliances to comply with the Truth in Lending Act. The transaction is not a sale on installment basis. Embassy Appliances is a seller on cash basis. It is the credit card company which allows the buyer to enjoy the privilege of paying the price on installment basis.

Bulk Sales Law Bulk Sales Law; Covered Transactions (1994) Stanrus Inc a department store with outlets in Makati, Mandaluyong, and Quezon City, is contemplating to refurbish and renovate its Makati store in order to introduce the most modern and state of the art equipment in merchandise display. To carry out its plan, it intends to sell ALL of the existing fixtures and equipment (display cases, wall decorations, furniture, counters, etc.) to Crossroads Department Store. Thereafter, it will buy and install new fixtures and equipment and continue operations. Crossroads wants to know from you as counsel: 23 Whether the intended sale is “bulk sale.” 24 How can it protect itself from future claims of creditors of Stanrus. SUGGESTED ANSWER:

23 Yes. The sale involves all fixtures and equipment, not in the ordinary course of trade and the regular prosecution of business of Stanrus, Inc. (Sec 2 Act 3952, as amended) 24 Crossroads should require from Stanrus Inc. submission of a written waiver of the Bulk Sales Law by the creditors as shown by verified statements or to comply with the requirements of the Bulk Sales Law, that is, the seller must notify his creditors of the terms and conditions of the sale, and also, before receiving from the vendee any part of the purchase price, deliver to such vendee a written sworn statement of the names and addresses of all his creditors together with the amount of indebtedness due to each (Sec 2 Act 3952, amended)

Bulk Sales Law; Covered Transactions (2000) Company X, engaged in the business of manufacturing car parts and accessories, operates a factory with equipment, machinery and tools for this purpose. The manufactured goods are sold wholesale to distributors and dealers throughout the Philippines. Company X was among the business entities adversely hit by the 1997 Asian business crisis. Its sales dropped with the decline in car sales and its operating costs escalated, while its creditor banks and other financial institutions tightened

Page 20 of 103

their loan portfolios. Company X was faced with the dismal choice of either suspending its operations or selling its business. It chose the latter. Having struck a deal with Company Z, a more viable entity engaged in the same business, Company X sold its entire business to the former without much fanfare or any form of publicity. In fact, evidence exists that the transaction was furtively entered into to avoid the prying eyes of Company X’s creditors. The creditor banks and other financial institutions sued Company X for violation of the Bulk Sales Law. Decide. (5%) SUGGESTED ANSWER:

Company X violated the Bulk Sales Law when it sold its entire business to Company Z furtively to avoid the prying eyes of its creditors. Its manufactured goods are sold wholesale to distributors and dealers. The sale of all or substantially all of its stocks, not in the ordinary course of business, constitutes bulk sale. The transaction being a bulk sale, entering into such transaction without complying with the requirements of the Bulk Sales Law, Company X violated said law. Bulk Sales Law; Covered Transactions (2006) Pursuant to a writ of execution issued by the Regional Trial Court in "Express Bank v. Don Rubio," the sheriff levied and sold at public auction 8 photocopying machines of Don Rubio. Is the sheriff's sale covered by the Bulk Sales Law? (5%) SUGGESTED ANSWER:

Version 1990-2003 Arranged by SULAW Class 2005

No. The sale by sheriff at public sale is not a sale by a merchant. Section 8 of the Bulk Sales Law itself provides that it has no application to executors, administrators, receivers, assignees in insolvency, or public officers, acting under process. The Bulk Sales Law only applies to the sale or encumbrance of a merchant of goods, merchandise or commodity done "in bulk" as defined by the Law itself. Bulk Sales Law; Exclusions (1993) In the annual meeting of XYZ Corporation, the stockholders unanimously adopted a resolution proposed by the BOD to sell substantially all the fixtures and equipment used in and about its business. The President of the Corporation approached you and asked for legal assistance to effect the sale. 23 What steps should you take so that the sale may be valid? 24 What are the two instances when the sale, transfer, mortgage or assignment of stock of goods, wares, merchandise, provision, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor are not deemed to be a sale or transfer in bulk? SUGGESTED ANSWER:

23The requirements of the Bulk Sales Law must be complied with. The seller delivers to the purchaser a list of his creditors and the purchaser in turn notifies such creditors of the proposed sale at a stipulated time in advance. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

23 If the sale and transfer is made a) by the vendor, mortgagor, transferor or assignor who produces and delivers a written waiver of the provisions of the Bulk Sales Law from his creditors as shown by verified statement; and b) by a vendor, mortgagor, transferor or assignor who is an executor, administrator, receiver, assignee in insolvency, or public officer acting under judicial process, the sale or transfer is not covered by the Bulk Sales Law. Bulk Sales Law; Obligation of the Vendor (1995) House of Pizza (Pizza) is the owner and operator of a nationwide chain of pizza outlets. House of Liquor (Liquor) is a retailer of all kinds of liquor. House of Foods (Foods) has offered to purchase all of the outlets, equipment, fixtures and furniture of Pizza. Foods also offered to purchase from Liquor all of its moderately priced stock constituting 50% of its total inventory. Both Pizza and Liquor have creditors. What legal requirements must Pizza and Liquor comply with in order for Foods to consummate the transactions? Discuss fully. SUGGESTED ANSWER:

Pizza and Liquor must prepare an affidavit stating the names of all their creditors, their addresses, the amounts of their credits and their respective maturities. Pizza and Liquor must submit said affidavit to Foods which, in turn, should notify the creditors about the transaction which is about to be concluded with Pizza and Liquor. ALTERNATIVE ANSWER:

As far as Liquor is concerned, it must prepare an affidavit stating the names of all its creditors, their addresses, the amounts of their credits and their respective maturities. It must submit said affidavit to its buyer, who in turn, should notify the creditors about the transaction which is about to be concluded with his seller.

But as far as Pizza is concerned, it is not covered by the Bulk Sales Law. So Foods can consummate the transaction without doing anything. Bulk Sales Law; Obligation of the Vendor (1997) The sole proprietor of a medium-size grocery shop, engaged in both wholesale and retail transactions, sells the entire business “lock, stock and barrel” because of his plan to emigrate abroad with his family. Is he covered by the provisions of the Bulk Sales Law? In the affirmative,

what must be done by the parties so as to comply with the law? SUGGESTED ANSWER:

Yes. This is a sale of the stock of goods, fixtures and entire business, not in the ordinary course of business or trade of the vendor. Before receiving from the vendee any part of the purchase price, the vendor must deliver to such vendee a written statement, duly sworn, of the names and addresses of all creditors to whom said vendor may be indebted, together with the amount of

Page 21 of 103

indebtedness due or owing, on account of the goods, fixtures or business subject matter of the bulk sale. Bulk Sales Law; Obligation of the Vendor (2001) A is a merchant engaged in the sale of a variety of goods and merchandise. Because of the economic crisis, he incurred indebtedness to X, Y and Z. Thereafter, A sold to B all the stock of goods and merchandise. 23 What steps should A undertake to effect a valid sale in bulk of his goods to B. (2%). SUGGESTED ANSWER:

A must prepare an affidavit stating the names of all his creditors, in this case, X, Y, and Z, their addresses, the amount of their credits and their maturity. A should give the affidavit to B who, in turn, should furnish a copy to each creditor and notify the creditors that there is a proposed bulk sale in order to enable the latter to protect their interests. 23 Suppose A submitted a false statement on the schedule of his creditors. What is the effect of such false statement as to Vendee B. (2%) SUGGESTED ANSWER:

If the vendee does not have knowledge of the falsity of the schedule, the sale is valid. However, if the vendee has knowledge of such falsity, the sale is void because he is in bad faith. 23 What is the right of creditors X, Y, and Z if A failed to comply with the procedure/steps required by law Version 1990-2003 Arranged by SULAW Class 2005

under question letter (a) hereof? (1%) SUGGESTED ANSWER:

The recourse of X, Y, and Z is to question the validity of the sale from A to B so as to recover the goods and merchandise to satisfy their credits.

Consumer Protection Law Metric System Law (1994) Angelene is a customer of Meralco Electric Company (MECO). Because of the abrupt rise in electricity rates, Angelene complained with MECO insisting that she should be charged the former rates. However, Angelene did not tender any payment. When MECO’s employees served the first 48-hour notice of disconnection, Angelene protested. MECO, however, did not implement the 48-hour notice of disconnection. Instead, its employees examined Angelene’s electric meter, changed the same, and installed another. Still, Angelene, made no tender of payment. MECO served a second 48-hour notice of disconnection on June 22, 1984. It gave Angelene until 5 pm of June 25, 1984 within which to pay. As no payment had been made, MECO cut Angelene’s electric service on June 28, 1984. Angelene contends that the 48-hour written notice of disconnection rule cannot be invoked by MECO

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

when there is a bona fide and just dispute as to the amount due as her electric consumption rate. Is Angelene’s contention valid? SUGGESTED ANSWER:

No. Angelene’s only legal recourse in this case was to pay the electric bill under protest. Her failure to do so justified MECO to cut the electric service (Ceniza v CA 218 S 290)

Corporation Law BOD: Election of Aliens as members (2005) A Korean national joined a corporation which is engaged in the furniture manufacturing business. He was elected to the Board of Directors. To complement its furniture manufacturing business, the corporation also engaged in the logging business. With the additional logging activity, can the Korean national still be a member of the Board of Directors? Explain. (3%) SUGGESTED ANSWER:

Yes, just as long as sixty percent (60%) of the Board of Directors are Filipinos. Corporations that are sixty percent (60%) owned by Filipinos can engage in the business of exploration, development and utilization of natural resources. (Art. XII, Sec. 2, 1987 Constitution) The election of aliens as members of the Board Of Directors engaging in partially-nationalized activities is allowed in proportion to their allowable participation or share in the capital of such entities. (Sec. 2-A, AntiDummy Law) Nothing in the facts shows that more than forty percent (40%) of the Board of Directors are foreigners. BOD; Capacity of Directors (1996) Rodman, the President of TF Co, wrote a letter to Gregorio, offering to sell to the latter 5,000 bags of fertilizer at P100 per bag. Gregorio signed his conformity to the letter-offer, and paid a down-payment of P50th. A few days later, the Corporate Secretary of TF informed Gregorio of the decision of their BOD not to ratify the letter offer. However, since Gregorio had already paid the down-payment, TF delivered 500 bags of fertilizer which Gregorio accepted. TF made it clear that the delivery should be considered an entirely new transaction. Thereafter, Gregorio sought enforcement of the letteroffer. Is there a binding contract for the 5,000 bags of fertilizer? Explain. SUGGESTED ANSWER:

No, there is no binding contract for the 5,000 bags of fertilizer. First, the facts do not indicate that Rodman, the President of TF Co, was authorized by the BOD to enter into the said contract or that he was empowered to do so under some provision of the by-laws of TF Co. The facts do not also indicate that Rodman has been clothed with the apparent power to execute the contract or agreements similar to it. Second, TF Co has specifically informed Gregorio that it has not ratified the contract for the sale of 5,000 bags of fertilizer and that the delivery to

Page 22 of 103

Gregorio of 500 bags, which Gregorio accepted, is an entirely new transaction. (Yao Ka Sin Trading v CA GR 53820 June 15, 1992 209s763)

BOD; Compensation (1991) After many difficult years, which called for sacrifices on the part of the company’s directors, ABC Manufacturing Inc was finally earning substantial profits. Thus, the President proposed to the BOD that the directors be paid a bonus equivalent to 15% of the company’s net income before tax during the preceding year. The President’s proposal was unanimously approved by the BOD. A stockholder of ABC questioned the bonus. Does he have grounds to object? SUGGESTED ANSWER:

Yes, the stockholder as a valid and legal ground to object to the payment to the directors of a bonus equivalent to 15% of the company’s net income. The law provides that the total annual compensation of the directors, in the preceding year, cannot exceed 10% of the company’s net income before income tax (Sec 30 Corp Code). BOD; Conflict of Interest (1994) ABC Pigger Inc is engaged in raising and selling hogs in the local market. Mr. De Dios, one of its directors while traveling abroad, met a leather goods manufacturer who was interested in buying pig skins from the Philippines. Mr De Dios set up a separate company and started exporting pig skins to his foreign contact but the pig Version 1990-2003 Arranged by SULAW Class 2005

skins exported were not sourced from ABC. His fellow directors in ABC complained that he should have given this business to ABC. How would you decide on this matter? SUGGESTED ANSWER:

I would decide in favor of Mr De Dios. ABC is engaged in raising and selling hogs in the local market. The company that Mr De Dios had set up was to engage, as it did, in the export of pigs skins. There is thus no conflict of interest between Mr. De Dios and ABC Pigger Inc so as to make the case fall within the conflict of interest situation under the law (Sec 34 Corp Code) Observation: The term “conflict of interest” is susceptible to varied views and interpretations.

BOD; Interlocking Directors (1995) Chito Santos is a director of both Platinum Corporation and Kwik Silver Corporation. He owns 1% of the outstanding capital stock of Platinum and 40T of Kwik. Platinum plans to enter into a contract with Kwik that will make both companies earn very substantial profits. The contract is presented at the respective board meetings of Platinum and Kwik. 23 In order that the contract will not be voidable, what conditions will have to be complied with? Explain. 24 If these conditions are not met, how may this contract be ratified? Explain. SUGGESTED ANSWER:

23 At the meeting of the BOD of Platinum to approve the contract, Chito would have to make sure that Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

0

1 2

his presence as director at the meeting is not necessary to constitute a quorum for such meeting; his vote is not necessary for the approval of the contract; and the contract is fair and reasonable under the circumstances.

At the meeting of the BOD of Kwik to approve the contract, Chito would have to make sure that there is no fraud involved; and the contract is fair and reasonable under the circumstances. SUGGESTED ANSWER:

0 If the conditions relating to the quorum and required number of votes are not met, the contract must be ratified by the vote of stockholders representing at least 2/3 of the outstanding capital stock in a meeting called for the purpose. Furthermore, the adverse interest of Chito in the contract must be disclosed and the contract is fair and reasonable. (Secs. 32 and 33, BP 68) BOD; Interlocking Directors (1996) Leonardo is the Chairman and President, while Raphael is a Director of NT Corporation. On one occasion, NT Co, represented by Leonardo and A Ent, a single proprietorship owned by Raphael, entered into a dealership agreement whereby NT Co appointed A Ent as exclusive distributor of its products in Northern Luzon. Is the dealership agreement valid? Explain. SUGGESTED ANSWER:

The dealership agreement is voidable at the option of NT Co inasmuch as the facts do not indicate that the same was approved by the BOD of NT Co before it was signed or, assuming such approval, that it was approved under the following conditions: 0 That the presence of Raphael, the owner of A Ent, in the meeting of the BOD at which the agreement was approved was not necessary to constitute a quorum for such meeting; 1 That the vote of Raphael was not necessary for the approval of the agreement; 2 That the agreement is fair and reasonable under the circumstances (Sec 32 Corp Code) ALTERNATIVE ANSWER:

The dealership agreement is valid upon the assumption that the same was approved by the BOD of NT Co before it was signed and that such approval was made under the following conditions:

0

1 2

That the presence of Raphael, the owner of A Ent, in the meeting of the BOD at which the agreement was approved was not necessary to constitute a quorum for such meeting; That the vote of Raphael was not necessary for the approval of the agreement; That the agreement is fair and reasonable under the circumstances (Sec 32 Corp Code)

By-Laws; Validity; limiting qualifications of BOD members (1998)

Page 23 of 103

The BOD of X Co, acting on a standing authority of the stockholders to amend the by-laws, amended its by-laws so as to disqualify any of its stockholders who is also a stockholder and director of a competitor from being elected to its BOD. Y, a stockholder holding sufficient assets to assure him of a seat in the BOD, filed a petition with the SEC for a declaration of nullity of the amended by-laws. He alleged among other things that as a stockholder, he had acquired rights inherent in stock ownership such as the right to vote and be voted upon in the election of directors. Is the stockholder’s petition tenable? (5%) SUGGESTED ANSWER:

No. There is no vested right of a stockholder to be elected as director. When a person buys stock in a corporation he does so with the knowledge that its affairs are dominated by a majority of the stockholders. To this extent, the stockholder parted with his personal right to regulate the disposition of his property which he invested in the capital stock of the corporation and surrendered it to the will of the majority of his fellow incorporators or stockholders. Corporations have the power to make bylaws declaring a person employed in the service of a rival company to be ineligible for the Corporation’s BOD. An amendment which renders a director ineligible, or if elected, subjects him to removal, if he is also a director in a corporation whose business is in competition with or is Version 1990-2003 Arranged by SULAW Class 2005

antagonistic to the other corporation is valid. By-Laws; Validity; limiting qualifications of BOD members (2000) At the annual stockholders’ meeting of MS Corporation, the stockholders unanimously passed a resolution authorizing the Board of Directors to amend the corporate bylaws so as to disqualify any stockholder who is also a director or stockholder of a competing business from being elected to the Board of Directors of MS Corporation. The by-laws were accordingly amended. GK, a stockholder of MS Corporation and a majority stockholder of a competitor, sought election to the Board of Directors of MS Corporation. His nomination was denied on the ground that he was ineligible to run for the position. Seeking a nullification of the offending disqualification provision, GK consults you about its validity under the Corporation Code of the Phils. What would your legal advice be? (3%) SUGGESTED ANSWER:

The provision in the amended by-laws disqualifying any stockholder who is also a director or stockholder of a competing business from being elected to the Board of Directors of MS Corp is valid. The corporation is empowered to adopt a code of by-laws for its government not inconsistent with the Corp Code. Such disqualifying provision is not inconsistent with the Corp Code. By-Laws; Validity; limiting qualifications of BOD members (2001) Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Is a by-law provision of X Corporation “rendering ineligible or if elected, subject to removal, a director if he is also a director in a corporation whose business is in competition with or is antagonistic to said corporation” valid and legal? State your reasons. (5%). SUGGESTED ANSWER:

Yes, the by-law provision is valid. It is the right of a corporation to protect itself against possible harm and prejudice that may be caused by its competitors. The position of director is highly sensitive and confidential. To say the least, to allow a person, who is a director in a corporation whose business is in competition with or is antagonistic to X Corporation, to become also a director in X Corporation would be harboring a conflict of interest which is harmful to the latter (Gokongwei Jr v SEC 89 S 336 (1979); 97 S 78 (1980)).

By-Laws; Validity; limiting qualifications of BOD members (2003) To prevent the entry of Marlo Enriquez, whom it considered as one antagonistic to its interests, into its Board of Directors, Bayan Corporation amended its articles of incorporation and by-laws to add certain qualifications of stockholders to be elected as members of its Board of Directors. When presented for approval at a meeting of its stockholders duly called for the purpose, the amendments were overwhelmingly ratified. Marlo Enriquez brought suits against Bayan Corporation to question the amendments. Would the action prosper? Why? (4%) SUGGESTED ANSWER:

(per Dondee) The SC reiterated in the case

of SMC vs. SEC decided in April 11, 1979, that it is recognized by all authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.'" At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation."

Close Corporations; Deadlocks (1995) Robert, Rey and Ben executed a joint venture agreement to form a close corporation under the Corp Code the outstanding capital stock of which the three of them would equally own. They also provided therein that any corporate act would need the vote of 70% of the outstanding capital stock. The terms of the agreement were accordingly implemented and the corresponding close corporation was incorporated. After 3 years, Robert, Rey and Ben could not agree on the business in

Page 24 of 103

which to invest the funds of the corporation. Robert wants the deadlock broken. 0 What are the remedies available to Robert under the Corp code to break the deadlock? Explain. 1 Are there any remedies to prevent the paralyzation of the business available to Robert under PD 902-A while the petition to break the deadlock is pending litigation? Explain. SUGGESTED ANSWER:

0 Robert can petition the SEC to arbitrate the dispute, with such powers as provided in Sec 104 of the Corp Code. 1 The SEC can appoint a rehabilitation receiver or a management committee. Closed Corporation; Restriction; Transfer of shares (1994) Rafael inherited from his uncle 10,000 shares of Sta. Ana Corporation, a close corporation. The shares have a par value of P10.00 per share. Rafael notified Sta. Ana that he was selling his shares at P70.00 per share. There being no takers among the stockholders, Rafael sold the same to his cousin Vicente (who is not a stockholder) for P700,000. The Corporate Secretary refused to transfer the shares in Vicente’s name in the corporate books because Alberto, one of the stockholders, opposed the transfer on the ground that the same violated the bylaws. Alberto offered to buy the shares at

Version 1990-2003 Arranged by SULAW Class 2005

P12.50 per share, as fixed by the by-laws or a total price of P125,000 only. While the by-laws of Sta. Ana provides that the right of first refusal can be exercised “at a price not exceeding 25% more than the par value of such shares, the Articles of Incorporation simply provides that the stockholders of record “shall have preferential right to purchase said shares.” It is silent as to pricing. Is Rafael bound by the pricing proviso under the by-laws of Sta. Ana Corporation? SUGGESTED ANSWER:

Yes. In a close corporation, the restriction as to the transfer of shares has to be stated/ annotated in the Articles of Incorporation, the By-Laws and the certificate of stock. This serves as notice to the person dealing with such shares like Rafael in this case. With such notice, he is bound by the pricing stated in the By-laws. ALTERNATIVE ANSWER:

No, Rafael is not bound by the pricing proviso under the By-laws of Sta Ana Corporation. Under the corporation law, the restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock, otherwise, the same shall not be binding on any purchaser thereof in good faith. Moreover the restriction shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable term or period stated therein. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Here, limiting the price to be paid, when the right of first refusal is exercised, to not more than 25% par value, without any qualification whatsoever, is not in the articles. It is merely stated in the By-laws. Therefore such limitation shall not be binding on the purchaser. (GoSock & Sons & Sy Gui Huat Inc v IAC 19 Feb 87 Min Res)

Controversy; Intra-Corporate (1994) Because of disagreement with the BOD and a threat by the BOD to expel her for misconduct and inefficiency, Carissa offered in writing to resign as President and member of the BOD, and to sell to the company all her shares therein for P300,000.00 Her offer to resign was “effective as soon as my shares are fully paid.” At its meeting, the BOD accepted Carissa’s resignation, approved her offer to sell back her shares of stock to the company, and promised to buy the stocks on a staggered basis. Carissa was informed of the BOD Resolution in a letteragreement to which she affixed her consent. The Company’s new President singed the promissory note. After payment P100,000 the company defaulted in paying the balance of P200,000. Carissa wants to sue the Company to collect the balance. If you were retained by Carissa as her lawyer, where will you file the suit? A) Labor Arbiter; b) RTC; or c) SEC? SUGGESTED ANSWER:

The RTC has jurisdiction over this case which involves intra-corporate controversy. As of 2006, the applicable rule is that there is a TRANSFERRED JURISDICTION under Sec. 5.2 of the SRC, the Commission’s jurisdiction over all cases enumerated under PD 902-A sec. 5 has been transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court. Controversy; Intra-Corporate (1996) In 1970, Magno joined AMD Co as a Junior Accountant. He steadily rose from the ranks until he became AMD’s Executive VP. Subsequently, however because of his involvement in certain anomalies, the AMD BOD considered him resigned from the company due to loss of confidence. Aggrieved, Magno filed a complaint in the SEC questioning the validity of his termination, and seeking reinstatement to his former position, with backwages, vacation and sick leave benefits, 13th month pay and Christmas bonus, plus moral and exemplary damages, attorney’s fees and costs. AMD filed a motion to

dismiss, arguing that the SEC has no jurisdiction over cases of illegal dismissal, and has no power to award damages. Should the motion to dismiss be granted? Explain. SUGGESTED ANSWER:

As of 2006, the applicable rule is that there is a TRANSFERRED JURISDICTION under Sec. 5.2 of the SRC, the Commission’s jurisdiction over all cases enumerated under PD 902-A sec. 5 has been transferred to the Courts of general jurisdiction or the appropriate REGIONAL TRIAL COURT. Controversy; Intra-Corporate (1996)

Page 25 of 103

Jennifer and Gabriel owned the controlling stocks in MFF Co and CLO Inc, both family corporations. Due to serious disagreements, Jennifer assigned all her shares in MFF to Gabriel, while Gabriel assigned all his shares in CLO to Jennifer. Subsequently, Jennifer and CLO filed a complaint against Gabriel and MFF in the SEC seeking to recover the corporate records and funds of CLO which Gabriel allegedly refused to turn over, and which remained in the offices of MFF. Is there an intra-corporate controversy in this case? SUGGESTED ANSWER:

Yes, there is an intra -corporate controversy in this case. The fact that, when the complaint against Gabriel and MFF was filed with the SEC (per 2006, RTC’s Jurisdiction), Jennifer and CLO were no longer stockholders of MFF did not divest the SEC (per 2006, RTC’s Jurisdiction) of its jurisdiction over the case inasmuch as Jennifer was a former stockholder of MFF and the controversy arose out of this relation. (SEC v CA GR 93832 Aug 23 91; 201s124)

Controversy; Intra-Corporate (2006) What is an intra-corporate controversy? (8%) SUGGESTED ANSWER:

An intra-corporate controversy is a conflict between stockholders, members or partners and the corporation, association or partnership regarding the regulation of the corporation. The controversy must arise out of intra-corporate or partnership relations of the parties; or between such corporation, partnership or association and the State insofar as it concerns their Version 1990-2003 Arranged by SULAW Class 2005

individual franchises. It is further required that the dispute be intrinsically connected with the regulation of the corporation (Speed Distributing Corp., et al. v. Court of Appeals, et al, G.R. No. 149351, March 17, 2004; Intestate Estate of Alexander T.Tyv. Court of Appeals, G.R. No. 112872, April 19, 2001).

Is the Securities and Exchange Commission the venue for actions involving intra-corporate controversies? (2%) SUGGESTED ANSWER:

No, pursuant to Subsection 5.2 of the Securities Regu-lation Code, the quasijudicial jurisdiction of the Securities and Exchange Commission to hear corporate cases, including intra-corporate controversies, under Section 5 of Pres. Decree No. 902-A, has been expressly transferred to the designated Regional Trial Court. Pursuant to a memorandum circular issued by the Supreme Court, only particularly designated RTC special commercial courts in each judicial region have original and exclusive jurisdiction over such cases (See Intestate Estate of Alexander T. Ty v. Court of Appeals, G.R. No. 112872, April 19, 2001).

Controversy; Intra-corporate; Jurisdiction (1997) Juan was a stockholder of X Co. He owned a total of 500 shares evidenced by Cert of Stock No 1001. He sold the shares to Pedro. After getting paid, Juan indorsed and delivered said Certificate of Stock No 1001 to Pedro. The following day, Juan went to the offices of the corporation and claimed that his Certificate of Stock No 1001 was lost and that, despite diligent efforts, the certificate could Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

not be located. The formalities prescribed by law for the replacement of the “lost” certificate were complied with. Eventually X Co issued in substitution of the “lost” certificate, Cert of Stock No 2002. Juan forthwith transferred for valuable consideration the new certificate to Jose who knew nothing of the previous sale to Pedro. In time, the corporation was confronted with the conflicting claims of Jose and Pedro. The BOD of X Co invited you to enlighten them on these questions; viz: 0 If a suit were to be initiated in order to resolve the controversy between Pedro and Jose, should the matter be submitted to the SEC or to the regular courts? 1 Between Jose and Pedro, whom should the corporation so recognize as the rightful stockholder? How would you respond to the above queries? SUGGESTED ANSWER:

The matter should be submitted to the regular courts – specifically in the Regional Trial Court where the principal office of the corporation is located. The controversy between Pedro and Jose is not an intracorporate controversy. If there is no over-issuance of shares resulting from the two-transactions of Juan, the corporation should recognize both Pedro and Jose as rightful stockholders. This is without prejudice to the right of the corporation to claim against Juan for the value of the shares which Juan sold to Jose. Corporation Sole; Definition (2004) What is a corporation sole? SUGGESTED ANSWER:

Section 110 of the Corporation Code defines a "corporation sole" as one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. It is formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. Corporation: Issuance of shares of stock to pay for the services (2005) Janice rendered some consultancy work for XYZ Corporation. Her compensation included shares of stock therein. Can XYZ Corporation issue shares of stock to pay for the services of Janice as its consultant? Discuss your answer. (2%) SUGGESTED ANSWER:

Yes, provided the approval of stockholders representing two-thirds (2/3) of the outstanding capital stock is obtained. Although the facts indicate that the consultancy work has already been "rendered" constituting "previously contracted debt," under Section 39 of the Corporation Code, the pre-emptive rights of existing stockholders need not be respected "in payment of a previously contracted debt," but only with the indicated stockholders' approval. Under Section 62 of the Corporation Code, consideration for the issuance of

Page 26 of 103

stock may include labor performed for or services actually rendered to the corporation. Corporation: Right of Repurchase of Shares; Trust Fund Doctrine (2005) Under what conditions may a stock corporation acquire its own shares? (2%) SUGGESTED ANSWER:

In line with the trust fund doctrine that generally renders it unlawful for the corporation to return assets to the stockholders representing capital, a corporation may acquire its own shares only when there exists in the books unrestricted retained earnings to cover the repurchase of shares. The purpose of the repurchase of shares must be a legitimate business purpose of the corporation, such as to: 0ELIMINATE fractional shares arising out of stock dividends; 1COLLECT or COMPROMISE an indebtedness to the corporation arising out of unpaid subscription in a delinquency sale; 2to PURCHASE delinquent shares sold during the sale; and 3to PAY dissenting or withdrawing stockholders entitled to such payment under the Corporation Code. (Sees. 41 and 82, Corporation Code) Corporation: Sole Proprietorship (2004) YKS Trading filed a complaint for specific performance with damages against PWC Corporation for failure to deliver cement ordered by plaintiff. In its answer, PWC Version 1990-2003 Arranged by SULAW Class 2005

denied liability on the ground, inter alia, that YKS has no personality to sue, not being incorporated, and that the President of PWC was not authorized to enter into a contract with plaintiff by the PWC Board of Directors, hence the contract is ultra vires. YKS Trading replied that it is a sole proprietorship owned by YKS, and that the President of PWC had made it appear in several letters presented in evidence that he had authority to sign contracts on behalf of the Board of Directors of PWC. Will the suit prosper or not? Reason briefly. (5%) SUGGESTED ANSWER:

Yes the suit will prosper. As a sole proprietorship, the proprietor of YKS Trading has the capacity to act and the personality to sue PWC. It is not necessary for YKS Trading to be incorporated before it can sue. On the other hand, PWC is estopped from asserting that its President had no authority to enter into the contract, considering that, in several of PWC's letters, it had clothed its President with apparent authority to deal with YKS Trading. Corporation; Articles of Incorporation (1990) The articles of incorporation to be registered in the SEC contained the following provisions -23 “First Article. The name of the corporation shall be Toho Marketing Company.” 24 “Third Article. The principal office of such corporation shall be located in Region III, in such municipality therein as its Board of Directors may designate.” Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

23 “Seventh Article. The capital stock of the corporation is One Million Pesos (P1,000,000) Philippine Currency.” What are your comments and suggested changes to the proposed articles? SUGGESTED ANSWER:

23 On the First Article, I would suggest that the corporate name indicate the fact of incorporation by using either “Toho Marketing Corporation” or “Toh Marketing Company, Incorporated.” 24 The Third Article should indicate the City or the Municipality and the Province in the Philippines, and not merely the region or as its BOD may later designate, to be its place of principal office. 25 The Seventh Article must additionally point out the number of shares into which the capital stock is divided, as well as the par value thereof or a statement that said stock or a portion thereof are without par value. (Sec 14 & 15 Corp Code) Corporation; Bulk Sales Law (2005) Divine Corporation is engaged in the manufacture of garments for export. In the course of its business, it was able to obtain loans from individuals and financing institutions. However, due to the drop in the demand for garments in the international market, Divine Corporation could not meet its obligations. It decided to sell all its equipment such as sewing machines, perma-press machines, high speed sewers, cutting tables, ironing tables, etc., as well as its supplies and materials to Top Grade Fashion Corporation, its competitor. (5%) 23 How would you classify the transaction? SUGGESTED ANSWER:

The transactions would constitute a sale of "substantially all of the assets of Divine Corporation complying with the test under Sec. 40 of the Corporation Code, the transactions not being "in the ordinary course of business," and one "thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated." ALTERNATIVE ANSWER:

It is a sale and transfer in bulk in contemplation of the Bulk Sales Law. Under Sec. 2 of the Bulk Sales Law, a bulk sale includes any sale, transfer, mortgage, or assignment of all, or substantially all, of the business or trade theretofore

conducted by the vendor, mortgagor, transferor, or assignor. This is exactly what happened in the case at bar. 23 Can Divine Corporation sell aforesaid items to its competitor, Grade Fashion Corporation? What the requirements to validly sell items? Explain.

the Top are the

SUGGESTED ANSWER:

For such a transaction to be valid, it requires not only the favorable resolution of the Board of Directors of Divine Corporation, but also the ratificatory vote of

ALTERNATIVE ANSWER:

Page 27 of 103

stockholders representing at least twothirds (2/3) of the outstanding capital stock, as mandated under Sec. 40 of the Corporation Code. The sale would be void in case of failure to meet the twin approvals. (Islamic Directorate of the Philippines v. Court of 117897, May 14, 1997)

Appeals,

G.R.

No.

ALTERNATIVE ANSWER:

Divine Corporation can sell the items to its competitor, Top Grade Fashion Corporation. However, Divine Corporation must comply with Sections 3, 4 and 5 of the Bulk Sales Law, namely: (1) deliver sworn statement of the names and addresses of all the creditors to whom the vendor or mortgagor may be indebted together with the amount of indebtedness due or owing to each of the said creditors; (2) apply the purchase or mortgage money to the prorata payment of bona fide claims of the creditors; and (3) make a full detailed inventory of the stock of goods, wares, merchandise, provisions or materials, in bulk, and notify every creditor at least ten (10) days before transferring possession. 23 How would you protect the interests of the creditors of Divine Corporation?

SUGGESTED ANSWER:

Considering that Divine Corporation has entered a de facto stage of dissolution with the ceasing of its operations, I would invoke on behalf of the creditors the protection under Sec. 122 of the Corporation Code, that the proceeds of the sale should first be applied towards the settlement of the obligations of the corporation, before any amount can be paid to the stockholders. Version 1990-2003 Arranged by SULAW Class 2005

Under the Bulk Sales Law, if the proceeds are not; applied proportionately towards the settlement of the accounts of the corporate debts, to have the sale of the subject matters to Top Grade Fashion Corp., as being "fraudulent and void" and obtain satisfaction from the properties which are deemed to still be owned by Divine Corporation in spite of delivery to the buyer. The creditors can collect on the credit against Divine Corporation, and if it cannot pay, the creditors can apply for attachment on the property fraudulently sold. (See People v. Mapoy, G.R. No. 48836, September 21, 1942)

23 In case Divine Corporation violated the law, what remedies are available to Top Grade Fashion Corporation against Divine Corporation? SUGGESTED ANSWER:

If the sale by Divine Corporation did not obtain the required two-thirds (2/3) vote of the outstanding capital stock, then the transaction is void. (Islamic Directorate of the

Philippines v. Court of Appeals, G.R. No, 117897, May 14, 1997) Top Grade Fashion

Corporation can have the purchase declared void and recover the purchase price paid, as well as damages against the directors and officers who undertook the transaction in violation of the law. ALTERNATIVE ANSWER:

For violation of the Bulk Sales Law, the principal officers of the Divine Corporation can be held criminally liable. In addition, Top Grade can sue Divine Corporation for damages. Violation of the Bulk Sales Law would render such a sale fraudulent and void. Since Top Grade would be compelled to return the goods to Divine Corporation, Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Top Grade can compel Divine Corporation to return the purchase price and pay damages. Corporation; By-laws (2001) Suppose that the by-laws of X Corp, a mining firm provides that “The directors shall be relieved from all liability for any contract entered into by the corporation with any firm in which the directors may be interested.” Thus, director A acquired claims which overlapped with X’s claims and were necessary for the development and operation of X’s mining properties. 23 Is the by-law provision valid? Why? (3%) 24 What happens if director A is able to consummate his mining claims over and above that of the corporation’s claims? (2%) SUGGESTED ANSWER:

5888 No. It is in violation of Section 32 of the Corp Code. 5889 A should account to the corporation for the profits which he realized from the transaction. He grabbed the business opportunity from the corporation. (Section 34, Corp Code) Corporation; Commencement; Corporate Existence (2003) 256⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀ ᜀĀᜀĀᜀĀĀȀ⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⤀ĀᜀĀᜀ ĀᜀĀᜀĀᜀĀᜀĀᜀ When does a corporation acquire corporate existence? SUGGESTED ANSWER:

0

CBY & Co., Inc., registered with the Securities and Exchange Commission its articles of incorporation. It failed, however, for one reason or another, to have its by-laws filed with, and registered by, the Commission. It nevertheless transacted and did business as a corporation for sometime. A suit was commenced by its minority stockholders assailing the continued existence of CBY & Co., Inc., because of the non-adoption and registration of its by-laws. Would the action prosper? Why? (6%)

SUGGESTED ANSWER:

Corporation; Conversion of Stock Corporation (2001) X company is a stock corporation composed of the Reyes family engaged in the real estate business. Because of the regional crisis, the stockholders decided to convert their stock corporation into a charitable non-stock and non-profit

association by amending the articles of incorporation. 23 Could this be legally done? Why? (3%) 24 Would your answer be the same if at the inception, X Company is a non-stock corporation? Why? (2%) SUGGESTED ANSWER:

23 Yes, it can be legally done. In converting the stock corporation to a nonstock corporation by a mere amendment of the articles of incorporation, the stock corporation is not distributing any of its assets to the stockholders. On the contrary, the stockholders are deemed to have waived their right to share in the profits of the corporation which is a gain not a loss to the corporation.

Page 28 of 103

23 No, my answer will not be the same. In a non-stock corporation, the members are not entitled to share in the profits of the corporation because all present and future profits belong to the corporation. In converting the non-stock corporation to a stock corporation by a mere amendment of the Articles of Incorporation, the non-stock corporation is deemed to have distributed an asset of the corporation – i.e. its profits, among its members, without a prior dissolution of the corporation. Under Sec 122, the non-stock corporation must be dissolved first. (Observation: The question is rather vague more particularly question 1b. The question does not specify that the conversion is from a non-stock corporation to a stock corporation. The candidate is likely to be confused because of the words “if at the inception, X Co is a nonstock corporation.” Hence, any answer along the same line should be treated with liberality)

Corporation; De Facto Corporation (1994) A corporation was created by a special law. Later, the law creating it was declared invalid. May such corporation claim to be a de facto corporation? SUGGESTED ANSWER:

No. A private corporation may be created only under the Corporation Code. Only public corporations may be created under special law. Where a private corporation is created under a special law, there is no attempt at a valid incorporation. Such corporation cannot claim a de facto status. Version 1990-2003 Arranged by SULAW Class 2005

Corporation; Dissolution; Methods of Liquidation (2001) X Corporation shortened its corporate life by amending its Articles of Incorporation. It has no debts but owns a prime property located in Quezon City. How would the said property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation. (5%) SUGGESTED ANSWER:

The prime property of X Corporation can be liquidated among the five stockholders after the property has been conveyed by the corporation to the five stockholders, by dividing or partitioning it among themselves in any two of the following ways: 23 by PHYSICAL DIVISION or PARTITION based on the proportion of the values of their stockholdings; or 24 SELLING THE PROPERTY to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or 25 after the determination of the value of the property, by ASSIGNING or TRANSFERRING THE PROPERTY to one stockholder with the obligation on the part of said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each. Corporation; Incorporation; Requirements (2006) What is the minimum and maximum number of in-corporators required to incorporate a stock corporation?

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Is this also the same minimum and maximum number of directors required in a stock corporation? (2.5%) SUGGESTED ANSWER:

Under Section 10 of the Corporation Code, any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose. This is the same minimum and maximum number of directors required in a stock corporation under Section 14(6) of the Corporation Code. Corporation; Incorporation; Residency Requirements (2006) Must all incorporators and directors be residents of the Philippines? (2.5%) SUGGESTED ANSWER:

Not all directors and incorporators need to be residents of the Philippines. Under Section 10 of the Corporation Code, only a majority of the incorporators need to be residents of the Philippines. As provided in Section 23 of the same Code, only a majority of the members of the Board of Directors need to be residents of the Philippines. Corporation; Incorporation; Requisites (2002) You have been asked to incorporate a new company to be called FSB Savings & Mortgage Bank, Inc. List the documents that you must submit to the Securities and Exchange Commission (SEC) to obtain a certificate of incorporation for FSB Savings & Mortgage Bank, Inc. (5%) SUGGESTED ANSWER:

The documents to be submitted to the Securities and Exchange Commission (SEC) to incorporate a new company to be called FSB Savings & Mortgage Bank, Inc., to obtain the certificate of incorporation for said company, are: 23 Articles of Incorporation 24 Treasurer’s Affidavit; 25 Certificate of Authority from the Monetary Board of the BSP; 26 Verification slip from the records of the SEC whether or not the proposed name has already been adopted by another corporation, partnership or association; 27 Letter undertaking to change the proposed name if already adopted by another corporation, partnership or association; 28 Bank certificate of deposit concerning the paid-up capital; 29 Letter authorizing the SEC or Monetary Board or its duly authorized representative to examine the bank

records regarding the deposit of the paid-up capital; 30 Registration Sheet; Corporation; Meetings; BOD & Stockholders (1993) Under the Articles of Incorporation of Manila Industrial Corp, its principal place of business shall be in Pasig, MM. The principal corporate offices are at the Ortigas

Page 29 of 103

Center, Pasig, MM while its factory processing leather products, is in Manila. The corporation holds its annual stockholders’ meeting at the Manila Hotel in Manila and its BOD meeting at a hotel in Makati MM. The by-laws are silent as to the place of meetings of the stockholders and directors. 23 Who shall preside at the meeting of the directors? 24 Can Ting, a stockholder, who did not attend the stockholders’ annual meeting in Manila, question the validity of the corporate resolutions passed at such meeting? 25 Can the same stockholder question the validity of the resolutions adopted by the BOD at the meeting held in Makati? SUGGESTED ANSWER:

23 The President presides over the meeting of the directors, if there is no position of Chairman provided in the By-Laws. If there is the position of Chairman provided in the By-Laws, the Chairman presides over the meeting of the Directors (Sec 54 Corp Code) 24 No. The law provides that the annual stockholders’ meeting shall be held in the city or municipality where the principal office of the Corporation is located. For this purpose, the law also provides that Metro Manila is considered a city or municipality. Since the principal place of business of MIC is Pasig, MM, the holding of the annual stockholders meeting in Manila is proper. (Sec 51 Corp) Version 1990-2003 Arranged by SULAW Class 2005

25 No. The law allows the BOD to hold its meeting anywhere in the Philippines. The holding of the BOD meeting in Makati was proper and the validity of the resolutions adopted by the Board in that meeting cannot be questioned. (Sec 53 Corp code) Corporation; Nationality of Corporation (1998) What is the nationality of a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos? (2%) SUGGESTED ANSWER:

Under the control test of corporate nationality, this foreign corporation is of Filipino Nationality. Where there are grounds for piercing the veil of corporate entity, that is, disregarding the fiction, the corporation will follow the nationality of the controlling members or stockholders, since the corporation will then be considered as one and the same. Corporation; Non-Stock Corporation (1993) The AB Memorial Foundation was incorporated as a non-profit, non-stock corporation in order to establish and maintain a library and museum in honor of the deceased parents of the incorporators. Its Articles of Incorporation provided for a board of trustees composed of 5 incorporators, which authorized to admit new members. The Articles of Incorporation also allow the foundation to receive donations from members. As of Jan 30, 1993, 60 members had been admitted by the BOT. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

23 Can the Foundation use the funds donated to it by its members for purchase of food and medicine for distribution to the victims of the Pinatubo eruption? 24 Can the Foundation operate a specialty restaurant that caters to the general public in order to augment its funds?

25 One of the original trustees died and the other two resigned because they immigrated to the US. How will the vacancies in the BOT be filled? SUGGESTED ANSWER:

23Yes, (Sec 36(9) of the Corp Code) as long as the amount of donation is reasonable. 24 If the purposes of the corporation are limited to the establishment and maintenance of the library and museum as stated in the problem, the foundation cannot operate a specialty restaurant that caters to the general public. In such case, the action of the foundation will be ultra vires. ALTERNATIVE ANSWER:

23 If the act of the corporation is justified by the secondary purpose of the corporation which includes the act of operating a restaurant, the foundation will be within its power to do so. 24 Since there are only 2 of the members of the BOT remaining and there is no quorum, the vacancies will have to be filled up in a special meeting of the members (sec 29 Corp) Corporation; Power to Invest Corporate Funds for other Purpose (1995) Stikki Cement Co was organized primarily for cement manufacturing. Anticipating substantial profits, its President proposed that Stikki invest in a) a power plant project, b) a concrete road project, and c) quarry operations for limestone in the manufacture of cement. 23 What corporate approvals or votes are needed for the proposed investments? Explain. 24 Describe the procedure in securing these approvals. SUGGESTED ANSWER:

23 Unless the power plant and the concrete road project are reasonable necessary to the manufacture of cement by Stikki (and they do not appear to be so), then the approval of said projects by a majority of the BOD and the ratification of such approval by the stockholders representing at least 2/3 of the outstanding capital stock would be necessary. As for the quarry operations for limestone, the same is an indispensable ingredient in

the manufacture of cement and may, therefore, be considered reasonably necessary to accomplish the primary purpose of Stikki. In such case, only the approval of the BOD would be necessary (Sec 42 BP 68) ALTERNATIVE ANSWER:

23The majority vote of the BOD is necessary. The investment in a) a power plant project, b) a concrete road project, and c) quarry operations of limestone used in the manufacture of cement, is within the express or implied power of the corporation, or at least the same is

Page 30 of 103

incidental to, or necessary for the existence of the corporation. SUGGESTED ANSWER:

2. a) The procedure in securing the approval of the BOD is as follows: 23 a notice of the BOD should be sent to all the directors. The notice should state the purpose of the meeting. 24 At the meeting, each of the project should be approved by a majority of the BOD (not merely a majority of those present at the meeting) 2.b) The procedure in securing the approval of the stockholders is as follows: 23 Written notice of the proposed investment and the time and place of the stockholders’ meeting should be sent to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. 24 At the meeting, each of the projects should be approved by the stockholders representing at least 2/3 of the outstanding capital stock. (Sec 42 BP 68) Corporation; Power to Invest Corporate Funds in another Corporation (1996) When may a corporation invest its funds in another corporation or business or for any other purposes? SUGGESTED ANSWER:

A corporation may invest its funds in another corporation or business or for any other purpose other than the primary purpose for which it was organized when the said investment is approved by a majority of the BOD and such approval is ratified by the stockholders representing at least 2/3 of the outstanding capital stock. Written notice of the proposed investment and the date, time and place of the stockholders’ meeting at which such proposal will be taken up must be sent to each stockholder. (Sec 42 Corp Code) Corporation; Recovery of Moral Damages (1998) In a complaint filed against XYZ Corporation, Luzon Trading Corporation alleged that its President & General Manager, who is also a stockholder, suffered mental anguish, fright, social humiliation and serious anxiety as a result of the tortuous acts of XYZ Corporation. In its counterclaim, XYZ Co claimed to have suffered moral damages due to besmirched reputation or goodwill as a result of Luzon Trading Co’s complaint. 23 May Luzon Trading Co recover damages based on the allegations of the complaint? (2%) 24 May XYZ Co recover moral damages? (3%) SUGGESTED ANSWER:

No. A corporation, being an artificial person which has no feelings, emotions or senses, and which cannot experience physical suffering or mental anguish, is not entitled to moral damages. ALTERNATIVE ANSWER:

Version 1990-2003 Arranged by SULAW Class 2005

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Yes. When a juridical person has a good reputation that is debased, resulting in social humiliation, moral damages may be awarded. Moreover, goodwill can be considered an asset of the corporation. TAKE NOTE: In the case of FBN Inc. vs

AMEC, January 17, 2005, the SC ruled that; FBNI contends that AMEC is not entitled to moral damages because it is a corporation. A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages. However, the Court's statement in Mambulao that "a corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages" is an obiter dictum. Nevertheless, AMEC's claim for moral damages falls under item 7 of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Moreover, where the broadcast is libelous per se, the law implies damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some damages. In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages. Corporation; Separate Juridical Personality (1995) Ronald Sham doing business under the name of SHAMRON Machineries (Shamron) sold to Turtle Mercantile (Turtle) a diesel farm tractor. In payment, Turtle’s President and Manager Dick Seldon issued a check for P50th in favor of Shamron. A week later, Turtle sold the tractor to Briccio Industries (Briccio) for P60th. Briccio discovered that the engine of the tractor was reconditioned so he refused to pay Turtle. As a result, Dick

Seldon ordered “Stop Payment” of the check issued to Shamron. Shamron sued Turtle and Dick Seldon. Shamron obtained a favorable judgment holding co-defendants Turtle and Dick Seldon jointly and severally liable. Comment on the decision of the trial court. Discuss fully. SUGGESTED ANSWER:

The trial court erred in holding Dick Seldon, President and GM of Turtle, jointly and severally liable with Turtle. In issuing the check issued to Shamron and, thereafter,

Page 31 of 103

stopping payment thereof, Seldon was acting in his capacity as an officer of Turtle. He was not acting in his personal capacity. Furthermore, no facts have been provided which would indicate that the action of Seldon was dictated by an intent to defraud Shamron by himself or in collusion with Turtle. Having acted in what he considered as his duty as an officer of the corporation, Seldon should not be held personally liable. Corporation; Separate Juridical Personality (1996) PR Co owns a beach resort with several cottages. Jaime, the President of PR, occupied one of the cottages for residential purposes. After Jaime’s term expired, PR wanted to recover possession of the cottage. Jaime refused to surrender the cottage, contending that as a stockholder and former President, he has a right to possess and enjoy the properties of the corporation. Is Jaime’s contention correct? Explain. SUGGESTED ANSWER:

Jaime’s contention is not correct. Jaime may own shares of stock in PR Corp but such ownership does not entitle him to the possession of any specific property of the corporation or a definite portion thereof. Neither is he a co-owner of corporate property. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its stockholders. Stockholders like Jaime only own shares of stock in the corporation. Such shares of Version 1990-2003 Arranged by SULAW Class 2005

stock do not represent specific corporate property. (Rebecca Boyer-Roxas v CA GR 100866 Jul 14, 92 211s470)

Corporation; Separate Juridical Personality (1996) Richard owns 90% of the shares of the capital stock of GOM Co. On one occasion, GOM represented by Richard as President and General Manager executed a contract to sell a subdivision lot in favor of Tomas. For failure of GOM to develop the subdivision, Tomas filed an action for rescission and damages against GOM and Richard. Will the action prosper? Explain. SUGGESTED ANSWER:

The action may prosper against GOM but definitely not against Richard. Richard has a legal personality separate and distinct from that of GOM. If he singed the contract to sell, he did so as the President and General Manager of GOM and not in his personal capacity. Mere ownership by Richard of 90% of the capital stock of GOM is not of itself sufficient ground to disregard his separate legal personality absent a showing, for example that he acted maliciously or in bad faith (EPG Const Co v CA GR 103372 Jn 22,92 210s230)

Corporation; Separate Juridical Personality (1999) As a result of perennial business losses, a corporation’s net worth has been wiped out. In fact, it is now in negative territory. Nonetheless, the stockholders did not like to give up. Creditor-banks, however, do not share the confidence of the stockholders and refuse to grant more loans. 23 What tools are available to the stockholders to replenish capital? (3%) Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

23 Assuming that the corporation continues to operate even with depleted capital, would the stockholders or the managers be solidarily liable for the obligations incurred by the corporation? Explain. (3%) SUGGESTED ANSWER:

23 In the face of the refusal of the creditor-banks to grant more loans, the following are tools available to the stockholders to replenish capital, to wit: additional subscription to shares of stock of the corporation by stockholders or by investors; advances by the stockholders to the corporation; payment of unpaid subscription by the stockholders. SUGGESTED ANSWER:

23 No. As a general rule, the stockholders or the managers cannot be held solidarily liable for the obligations incurred by the corporation. The corporation has a separate and distinct personality from that of the stockholders or managers. The latter are presumed to be acting in good faith in continuing the operation of the corporation. The obligations incurred by the corporation are those of the corporation which alone is liable therefor. However, when the corporation is already insolvent, the directors and officers become trustees of the business and assets of the corporation for the benefit of the creditors and are liable for negligence or mismanagement. Corporation; Separate Juridical Personality (2000) Marulas Creative Technology Inc., an ebusiness enterprise engaged in the manufacture of computer media accessories; rents an office and store space at a commercial building owned by X. Being a start-up company, Marulas enjoyed some leniency in its rent payments; but after three years, X put a stop to it and asked Marulas president and general manager, Y, who is a stockholder, to pay the back rentals amounting to a hundred thousand pesos or to vacate the premises at the end of the month. Marulas neither paid its debt nor vacated the premises. X sued Marulas and Y for collection of the unpaid rentals, plus interest and costs of litigation. Will the suit prosper against X? Against Y? (5%) SUGGESTED ANSWER:

Yes, the suit will prosper against Marulas. It is the one renting the office and store space, as lessee, from the owner of the building, X, as lessor.

But the suit against Y will not prosper. Y, as president and general manager, and also stockholder of Marulas Creative Technology, Inc., has a legal personality separate and distinct from that of the corporation. The liability of the corporation is that of the corporation and not that of its officers and stockholders who are not liable for corporate liabilities. Corporation; Separate Juridical Personality (2000) Nine individuals formed a private corporation pursuant to the provisions of the Corporation Code of the

Page 32 of 103

Philippines (BP 68). Incorporator S was elected director and president – general manager. Part of his emolument is a Ford Expedition, which the corporation owns. After a few years, S lost his corporate positions but he refused to return the motor vehicle claiming that as a stockholder with a substantial equity share, he owns that portion of the corporate assets now in his possession. Is the contention of S valid? Explain (5%) SUGGESTED ANSWER:

No. The contention of S is not valid. The Ford Expedition is owned by the corporation. The corporation has a legal personality separate and distinct from that of its stockholder. What the corporation owns is its own property and not the property of any stockholder even how substantial the equity share that stockholder owns. Corporation; Set-Off; Unpaid Subscription (1994) Victor was employed in MAIA Corporation. He subscribed to 1,500 shares of the corporation at P100 per share or a total of P150,000. He made an initial down payment of P37,500.00. He was appointed President and General Manager. Because of his disagreement with the BOD, he resigned and demanded payment of his unpaid salaries, his cost of living allowance, his bonus, and reimbursement of his gasoline and representation expenses. MAIA Corporation admits that it owed Victor P40,000. but told him that this will be applied to the unpaid balance of his subscription in the amount of P100,000.00 Version 1990-2003 Arranged by SULAW Class 2005

There was no call or notice for the payment of the unpaid subscription. Victor questioned the set-off. 23 May MAIA set-off the unpaid subscription with victor’s claim for salaries? 24 Would your answer be the same if indeed there had been a call for the unpaid subscription? SUGGESTED ANSWER:

No. MAIA cannot setoff the unpaid subscription with Victor’s claim for salaries. The unpaid subscription is not yet due as there is no call.

23

24 Yes. The reason is that Victor is entitled

to the payment of his salaries which MAIA has no right to withhold in payment of unpaid subscription. To do so would violate Labor Laws (Apodaco v NLRC 172 S 442) Corporation; Stock Corporation (2001) “XY” is a recreational club which was organized to operate a golf course for its members with an original authorized capital stock of P100M. The articles of incorporation nor the by-laws did not provide for distribution of dividends although there is a provision that after its dissolution, the assets shall be given to a charitable corporation. Is “XY” a stock corporation? Give reasons for your answer? (5%) SUGGESTED ANSWER:

XY is a stock corporation because it is organized as a stock corporation and there is no prohibition in its Articles of Incorporation or its by -laws for it to declare dividends. When a corporation is organized as a stock corporation and its articles of Incorporation or By-Laws Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

are silent, the corporation is deemed to have the power to declare dividends under Sec 43. Since it has the power to declare dividends, XY is a stock corporation. The provision of the Articles of Incorporation that at dissolution the assets of the corporation shall be given to a charitable corporation does not prohibit the corporation from declaring dividends before dissolution. Corporation; Validity of Corporate Acts (1998) The stockholders of People Power Inc (PPI) approved two resolutions in a special stockholders’ meeting: 23 Resolution increasing the authorized capital stock of PPI; and 24 Resolution authorizing the BOD to issue, for cash payment, the new shares from the proposed capital stock increase in favor of outside investors who are nonstockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jimmy Morato who owned 1% of the stock. 23 Are the resolutions binding on the corporation and its stockholders including Jimmy Morato, the dissenting stockholder? (3%) 24 What remedies, if any, are available to Morato? (2%) SUGGESTED ANSWER:

23 No. The resolutions are not binding on the corporation and its stockholders including Jimmy Morato. While these resolutions were approved by the stockholders, the directors’ approval, which is required by law in such case, does not exist. 24 Jimmy Morato can petition the SEC (Now RTC) to declare the 2 resolutions, as well as any and all actions taken by the BOD thereunder, null and void. Corporation; Validity of Corporate Acts (2002) Which of the following corporate acts are valid, void, or voidable? Indicate your answer by writing the paragraph number of the query, followed by your corresponding answer as “Valid,” “Void,” or “Voidable,” as the case may be. If your answer is “Void,” explain your answer. In case of a “Voidable” answer, specify what conditions must be present or complied with to make the corporate act valid. (5%) XL Foods Corporation, which is engaged in the fast-food business, entered into a contract with its President Jose Cruz,

whereby the latter would supply the corporation with its meat and poultry requirements.

SUGGESTED ANSWER:

Voidable – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation (Sec 32, Corporation Code). The Board of Directors of XL Foods Corporation declared and paid cash dividends without approval of the stockholders.

Page 33 of 103 SUGGESTED ANSWER:

Valid XL Foods Corporation guaranteed the loan of its sister company XL Meat Products, Inc. SUGGESTED ANSWER:

Void – This is an ultra vires act on part of XL Foods Corporation, and is not one of the powers provided for in Sec. 36 of the Corporation Code. Corporation; Voluntary Dissolution (2002) Name three (3) methods by which a stock corporation may be voluntarily dissolved. Explain each method. (5%) SUGGESTED ANSWER:

The three (3) methods by which a stock corporation may be voluntarily dissolved are: Voluntary Dissolution where no creditors are affected. This is done by a majority vote of the directors, and resolution of at least 2/3 vote of stockholders, submitted to the Securities and Exchange Commission. Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must be filed with the Securities and Exchange Commission, signed by a majority of the members of the board of directors, verified by the president or secretary, and upon affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock.

Version 1990-2003 Arranged by SULAW Class 2005

Dissolution by shortening of the corporate term. This is done by amendment of the articles of incorporation. Corporation; Voting Trust Agreement (1992) A distressed company executed a voting trust agreement for a period of three years over 60% of its outstanding paid up shares in favor of a bank to whom it was indebted, with the Bank named as trustee. Additionally, the Company mortgaged all its properties to the Bank. Because of the insolvency of the Company, the Bank foreclosed the mortgaged properties, and as the highest bidder, acquired said properties and assets of the Company. The three-year period prescribed in the Voting Trust Agreement having expired, the company demanded the turn-over and transfer of all its assets and properties, including the management and operation of the Company, claiming that under the Voting Trust Agreement, the Bank was constituted as trustee of the management and operations of the Company. Does the demand of the Company tally with the concept of a Voting Trust Agreement? Explain briefly. SUGGESTED ANSWER:

The demand of the company does not tally with the concept of a Voting Trust Agreement. The Voting Trust Agreement merely conveys to the trustee the right to vote the shares of grantor/s. The consequence of foreclosure of the mortgaged properties would be alien to the Voting Trust Agreement and its effects. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006) NOTE: (per D ondee) The law sim ply provides thata voting trust agreem ent is an agreem ent in writing whereby one or m ore stockholders of a corporation consentto transferhis or theirshares to a trustee in orderto vestin the lattervoting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillm entof statutory conditions and such other term s and conditions specified in the agreem ent. The five year-period m ay be extended in cases where the voting trust is executed pursuant to a loan agreem entwhereby the period is m ade contingentupon full paym entof the loan. Undersection 59 of the C orporation C ode, supra, a voting trust agreem ent m ay confer upon a trustee not only the stockholder's voting rights butalso otherrights pertaining to his shares as long as the voting trustagreem entis notentered "for the purpose of circum venting the law againstm onopolies and illegalcom binations in restraintof trade orused forpurposes of fraud." (section 59, 5th paragraph of the C orporation C ode). Thus, the traditional concept of a voting trust agreem ent prim arily intended to single out a stockholder's rightto vote from his other rights as such and m ade irrevocabl for a lim ited duration m ay in practice becom e a legal device whereby a transfer of the stockholders shares is effected subjectto the specific provision of the voting trustagreem ent. The execution of a voting trust agreem ent, therefore, m ay creat a dichotom y between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legaltitle thereto on the other hand. (Lee vs. CA, Feb. 4, 1992)

Derivative Suit: Requisites (2004) AA, a minority stockholder, filed a suit against BB, CC, DD, and EE, the holders of majority shares of MOP Corporation, for alleged misappropriation of corporate funds. The complaint averred, inter alia, that MOP Corporation is the corporation in whose behalf and for whose benefit the derivative suit is brought. In their capacity as members of the Board of Directors, the majority stockholders adopted a resolution authorizing MOP Corporation to withdraw the suit. Pursuant to said resolution, the corporate counsel filed a Motion to Dismiss in the name of the MOP Corporation. Should the motion be granted or denied? Reason briefly. (5%) SUGGESTED ANSWER:

No. All the requisites for a valid derivative suit exist in this case. First, AA was exempt from exhausting his remedies within the corporation, and did not have to make a demand on the Board of Directors for the latter to sue. Here, such a demand would be futile, since the directors who comprise the majority (namely, BB, CC, DD and EE) are the ones guilty of the wrong complained of. Second, AA appears to be stockholder at the time the alleged misappropriation of corporate funds. Third, the suit is brought on behalf and for the benefit of MOP Corporation. In this connection, it was held in Conmart (Phils.) Inc. v. Securities and Exchange Commission,

198 SCRA 73 (1991) that to grant to the

corporation concerned the right of withdrawing or dismissing the suit, at the instance of the majority stockholders and directors who themselves are the persons alleged to have

Page 34 of 103

committed the breach of trust against the interests of the corporation would be to emasculate the right of minority stockholders to seek redress for the corporation. Filing such action as a derivative suit even by a lone stockholder is one of the protections extended by law to minority stockholders against abuses of the majority. Derivative Suit: Watered Stock (1993) A became a stockholder of Prime Real Estate Corporation (PREC) on July 10, 1991, when he was given one share by another stockholder to qualify him as a director. A was not re-elected director in the July 1, 1992 annual meeting but he continued to be a registered shareholder of PREC. When he was still a director, A discovered that on Jan 5, 1991, PREC issued free of charge 10,000 shares to X a lawyer who assisted in a court case involving PREC. Can A now bring an action in the name of the corporation to question the issuance of the shares to X without receiving any payment? Can X question the right of A to sue him in behalf of the corporation on the ground that A has only one share in his name? Cannot the shares issued to X be considered as watered stock? SUGGESTED ANSWER:

Version 1990-2003 Arranged by SULAW Class 2005

As a general rule, A cannot bring a derivative suit in the name of the corporation concerning an act that took place before he became a stockholder. However, if the act complained of is a continuing one, A may do so. No. In a derivative suit, the action is instituted/ brought in the name of a corporation and reliefs are prayed for therein for the corporation, by a minority stockholder. The law does not qualify the term “minority” in terms of the number of shares owned by a stockholder bringing the action in behalf of the corporation. (SMC v Khan 176 SCRA 448)

No. WATERED SHARES are those sold by the corporation for less than the par/book value. In the instant case, it will depend upon the value of services rendered in relation to the total par value of the shares. Derivative Suit; Close Corporation; Corporate Opportunity (2005) Malyn, Schiera and Jaz are the directors of Patio Investments, a close corporation formed to run the Patio Cafe, an al fresco coffee shop in Makati City. In 2000, Patio Cafe began experiencing financial reverses, consequently, some of the checks it issued to its beverage distributors and employees bounced. In October 2003, Schiera informed Malyn that she found a location for a second cafe in Taguig City. Malyn objected because of the dire financial condition of the corporation. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Sometime in April 2004, Malyn learned about Fort Patio Cafe located in Taguig City and that its development was undertaken by a new corporation known as Fort Patio, Inc., where both Schiera and Jaz are directors. Malyn also found that Schiera and Jaz, on behalf of Patio Investments, had obtained a loan of P500,000.00 from PBCom Bank, for the purpose of opening Fort Patio Cafe. This loan was secured by the assets of Patio Investments and personally guaranteed by Schiera and Jaz. Malyn then filed a corporate derivative action before the Regional Trial Court of Makati City against Schiera and Jaz, alleging that the two directors had breached their fiduciary duties by misappropriating money and assets of Patio Investments in the operation of Fort Patio Cafe. (5%) Did Schiera and Jaz violate the principle of corporate opportunity? Explain. SUGGESTED ANSWER:

Yes. Although Malyn refused the business before, nevertheless, using the resources and credit standing of the company, Schiera and Jaz clearly demonstrated that the business could have been successfully pursued in the name of the close corporation. More importantly, Schiera and Jaz are guilty of diverting the resources of the close corporation to another entity, equivalent to fraud and bad faith. Was it proper for Malyn to file a derivative suit with a prayer for injunctive relief? Explain. SUGGESTED ANSWER:

Although it is a close corporation, nevertheless the principles of separate juridical personality still apply. The business of the corporation is still separate and distinct from the proprietary interests of its stockholders and directors. Consequently, since the business opportunity and the resource's used pertain to the close corporation, the standing to sue and to recover remains with the close corporation and not with Malyn. Therefore, it is still necessary to file a derivative suit on behalf of the close corporation, although the proceedings would be governed under the Interim Rules of Procedure for Intra-Corporate Disputes. Assuming that a derivative suit is proper; may the action continue if the corporation is dissolved during

the pendency of the suit? Explain. SUGGESTED ANSWER:

Yes, for in spite of the dissolution of any corporation, it remains a juridical person for purpose of dissolution for three years from the date of dissolution, precisely one of the purposes is to allow the winding-up of its affairs, including the termination of pending suits. Derivative Suit; Minority Stockholder (2003) Gina Sevilla, a minority stockholder of Bayan Corporation, felt that various investments of the company’s capital were ultra vires if not, indeed, made in violation of law. She filed a derivative suit seeking to

Page 35 of 103

nullify the questioned investments. Would her action prosper? Why? SUGGESTED ANSWER:

Yes, she is already a stockholder at the time the alleged misappropriation of corporate funds. And that filing such action as a derivative suit even by a lone stockholder is one of the protections extended by law to minority stockholders against abuses of the majority. Nevertheless, Gina must first exhaust any administrative remedies before her suit be consider in court. Distinction: De facto Corporation vs. Corporation by Estoppel (2004) Is there a difference between a de facto corporation and a corporation by estoppel? Explain briefly. (2%) SUGGESTED ANSWER:

A DE FACTO CORPORATION is one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. It is essential to the existence of a de facto corporation that there be (1) a valid law under which a corporation might be incorporated, (2) a bona fide attempt to organize as a corporation under such law, and actual use or exercise in good faith of corporate powers conferred upon it by law. A CORPORATION BY ESTOPPEL exists when persons assume to act as a corporation knowing it to be without authority to do so. In this case, those Version 1990-2003 Arranged by SULAW Class 2005

persons will be liable as general partners for all debts, liabilities and damages incurred or arising as a result of their actions. Distinction: Dividends vs. Profit: Cash Dividend vs. Stock Dividend (2005) Distinguish dividend from profit; cash dividend from stock dividend. (2%) SUGGESTED ANSWER:

PROFITS are residual amounts representing return of capital after deducting all corporate costs and expenses from revenues. The accumulated profits, from year to year, represent the corporate retained earnings from which the dividends can be declared. CASH DIVIDENDS represent an actual distribution of accumulated profits to the stockholders as a return on their investments. Declaration of cash dividends requires only the approval of the majority of the Board of Directors in a proper resolution. STOCK DIVIDENDS are simply transfers of retained earnings to capital stock, thereby increasing the number of shares of stocks of each stockholder with no required cash contribution. A two-thirds vote of the stockholders, coupled with a majority vote of the Board of Directors, is needed to declare stock dividends. Distinction; Private vs. Public Corporation (2004) Distinguish clearly a private corporation from a public corporation SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

A PRIVATE CORPORATION is one formed for some private purpose, benefit or end, while a PUBLIC CORPORATION is formed for the government of a portion of the State for the general good or welfare. The true test is the purpose of the corporation. If the corporation is created for political or public purpose connected with the administration of government, then it is a public corporation. If not, it is a private corporation although the whole or substantially the whole interest in the corporation belongs to the State. A public corporation is created by special legislation or act of Congress. A private corporation must be organized under the Corporation Code. Distinction; Stock vs. Non-Stock Corporation (2004) Distinguish clearly a stock corporation from a non-stock corporation. SUGGESTED ANSWER:

A stock corporation is one that has capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. All other corporations are non-stock corporations. Dividends: Declaration of Dividends (2005) Under what circumstances may corporation declare dividends? (2%)'

a

SUGGESTED ANSWER:

No form of dividends can be declared and paid by the corporation except from unrestricted retained earnings appearing on its books. Dividends must be paid in amounts proportional to all stockholders on the basis of outstanding stock held by them. Cash or property dividends, can be declared from such unrestricted retained earnings by a proper resolution of the Board of Directors. Stock dividends, however, must be declared by a proper resolution of the Board of Directors from existing unrestricted retained earnings and ratified by stockholders representing at least two-thirds (2/8) of the outstanding capital stock of the corporation, obtained in a meeting duly called for the purpose. (Sec. 43, Corporation Code) Dividends: Sources of Dividends; Trust Fund Doctrine (2005) From what funds are cash and stock dividends sourced? Explain why. (2%) SUGGESTED ANSWER:

All cash and stock dividends are always paid out of the unrestricted retained earnings (also called surplus profit) of the corporation. If the corporation has no unrestricted retained earnings, the

dividends would have to be sourced from the capital stock. This is illegal. It violates the "TRUST FUND DOCTRINE" that provides that the capital stock of the corporation is a trust fund to be kept intact during the life of the corporation for the benefit of the creditors of the corporation. (Commissioner of Internal- Revenue v. Court of Appeal®, G.R. No. 108576, January 20, 1999; Boman Environmental Development Corp. v. Court of Appeals, G.R. No. 77860, November 22, 1988; and Steinberg v. Velasco, G.R. No. 30460, March 12,1929)

Page 36 of 103

Dividends; Declaration of Dividends (1990) At least 2/3 of the stockholders of Solar Corporation, meeting upon the recommendation of the BOD, declared a 50% stock dividend during their annual meeting. The notice of the annual stockholders’ meeting did not mention anything about a stock dividend declaration. The matter was taken up only under the item “other business” in the agenda of the meeting. C.K. Senwa, a stockholder, who received his copy of the notice but did not attend the meeting, subsequently learned about the 50% stock dividend declaration. He desires to have the stock dividend declaration cancelled and set aside, and wishes to retain your services as a lawyer for the purpose. Will you accept the case? Discuss with reasons. SUGGESTED ANSWER:

I will not accept the case. Sec 43 of the Corp Code states that no stock dividend shall be issued without the approval of the stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose. Conformably with Sec 50 of the Corp Code, a written notice of the holding of the regular meeting sent to the shareholders will suffice. The notice itself specified the said subject matter. ALTERNATIVE ANSWER:

Yes, I will accept the case. The problem does not indicate that there is action by the BOD which is also necessary for the declaration of 50% stock dividend. Dividends; Declaration of Dividends (1991) Version 1990-2003 Arranged by SULAW Class 2005

During the annual stockholders meeting, Riza, a stockholder proposed to the body that a part of the corporation’s unreserved earned surplus be capitalized and stock dividends be distributed to the stockholders, arguing that as owners of the company, the stockholders, by a majority vote, can do anything. As chairman of the meeting, how would you rule on the motion to declare stock dividends? SUGGESTED ANSWER:

As the chairman of the meeting, I would rule against the motion considering that a declaration of stock dividends should initially be taken by the BOD and thereafter to be concurred in by a 2/3 vote of the stockholders (Sec 43 Corp Code). There is no prohibition, however, against the stockholders’ resolving to recommend to the BOD that it consider a declaration of stock dividends for concurrence thereafter by the stockholders. Dividends; Declaration of Dividends (2001) For the past three years of its commercial operation, X, an oil company, has been earning tremendously in excess of 100% of the corporation’s paid-in capital. All of the stockholders have been claiming that they share in the profits of the corporation by way of dividends but the Board of Directors failed to lift its finger. Is Corporation X guilty of violating a law? If in the affirmative, state the basis (2%) SUGGESTED ANSWER:

Corporation X is guilty of violating Section 43 of the Corp Code. This provision prohibits stock corporations

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

In brief, the doctrine disqualifies a director, trustee or officer from appropriating for his personal benefit a transaction or opportunity that pertains to the corporation, and which under the duty of loyalty he should first bring to the corporation for its use or exploitation.

The instances when a corporation shall not be held liable for not declaring dividends are: when justified by definite corporate expansion projects or programs approved by the BOD; or

The doctrine of corporate opportunity is an enforcement of the duty of loyalty of corporate directors and officers. When a director, trustee or officer attempts to acquire or

from retaining surplus profits in excess of 100% of their paid-in capital. Are there instances when a corporation shall not be held liable for not declaring dividends? (3%)

when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its or his consent, and such consent has not yet been secured; or when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. Dividends; Right; Managing Corporation (1991) ABC Management Inc. presented to the DEF Mining Co, the draft of its proposed Management Contract. As an incentive, ABC included in the terms of compensation that ABC would be entitled to 10% of any stock dividend which DEF may declare during the lifetime of the Management Contract. Would you approve of such provision? If not, what would you suggest as an alternative? SUGGESTED ANSWER:

I would not approve a proposed stipulation in the management contract that the managing corporation, as an additional compensation to it, should be entitled to 10% of any stock dividend that may be declared. Stockholders are the only ones entitled to receive stock dividends (Nielsen & Co v Lepanto Mining 26 s 569) I would add that the unsubscribed capital stock of a corporation may only be issued for cash or property or for services already rendered constituting a demandable debt (Sec 62 Corp Code). As an alternative, I would suggest that the managing corporation should instead be given a net profit participation and, if it later so desires, to then convert the amount that may be due thereby to equity or shares of stock at no less than the par value thereof. Doctrine of Corporate Opportunity (2005) Briefly discuss the doctrine of corporate opportunity. (2%)

Page 37 of 103

acquires, in violation of his duty, an interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. Equity imposes liability upon him not to deal for his own benefit. (Sec. 31, Corporation Code) Under Sec. 34 of the Corporation Code where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/8) of the outstanding capital stock. Effect: Expiration of Corporate Term (2004) XYZ Corporation entered into a contract of lease with ABC, Inc., over a piece of real estate for a term of 20 years, renewable for another 20 years, provided that XYZ's corporate term is extended in accordance with law. Four years after the term of XYZ Corporation expired, but still within the period allowed by the lease contract for the extension of the lease period, XYZ Corp. notified ABC, Inc., that it is exercising the option to extend the lease. ABC, Inc., objected to the proposed extension, arguing that since the corporate life of XYZ Corp. had expired, it could no longer opt to renew the lease. XYZ Corp. countered that Version 1990-2003 Arranged by SULAW Class 2005

withstanding the lapse of its corporate term it still has the right to renew the lease because no quo warranto proceedings for involuntary dissolution of XYZ Corp. has been instituted by the Office of the Solicitor General. Is the contention of XYZ Corp. meritorious? Explain briefly. (5%) SUGGESTED ANSWER:

XYZ Corporation's contention is not meritorious. Based on the ruling of the Supreme Court in Philippine National Bank vs. CFI of Rizal, 209 SCRA (1992). XYZ Corp. was dissolved ipso facto upon the expiration of its original term. It ceased to be a body corporate for the purpose of continuing the business for which it was organized, except only for purposes connected with its winding up or liquidation. Extending the lease is not an act to wind up or liquidate XYZ Corp.'s affairs. It is contrary to the idea of winding up the affairs of the corporation. Effects; Merger of Corporations (1999) Two corporations agreed to merge. They then executed an agreement specifying the surviving corporation and the absorbed corporation. Under the agreement of merger dated November 5, 1998, the surviving corporation acquired all the rights, properties and liabilities of the absorbed corporation. What would happen to the absorbed corporation? Must the absorbed corporation undertake dissolution and the winding up procedures? Explain your answer. (3%) SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

No. There is no need for the absorbed corporation to undertake dissolution and winding up procedure. As a result of the merger, the absorbed corporation is automatically dissolved and its assets and liabilities are acquired and assumed by the surviving corporation. Pending approval of the merger by the SEC, may the surviving corporation already institute suits to collect all receivables due to the absorbed corporation from

its customers? Explain your answer. (3%) SUGGESTED ANSWER:

No. The merger does not become effective until and unless approved by the SEC. Before approval by the SEC of the merger, the surviving corporation has no legal personality with respect to receivables due to the absorbed corporation. A case was filed against a customer to collect on the promissory note issued by him after the date of the merger agreement. The customer raised the defense that while the receivables as of the date of the merger agreement was transferred to the surviving corporation, those receivables which were created after the merger agreement remained to be owned by the absorbed corporation. These receivables would be distributed to the stockholders conformably with the dissolution and liquidation procedures under the New Corporation Code? Discuss the merits of this argument. (3%) SUGGESTED ANSWER:

Whether the receivable was incurred by the absorbed corporation before or after the merger agreement, or before or after the approval thereof by the SEC, the said receivable would still belong to the surviving corporation under Sec 80 of the Corp. Code which does not make any distinction as to the assets and liabilities of the absorbed corporation that the surviving corporation would inherit. Effects; Winding Up Period of a Corporation (1997) The corporation, once dissolved, thereafter continues to be a body corporate for three years for purposes of prosecuting and defending suits by and against it and of enabling it to settle and close its affairs, culminating in the final disposition and distribution of its remaining assets. If the 3 year extended life expires without a trustee or receiver being designated by the corporation within that period and by that time (expiry of the 3 year extended term),

the corporate liquidation is not yet over, how, if at all, can a final settlement of the corporate affairs be made? SUGGESTED ANSWER:

The liquidation can continue with the winding up. The members of the BOD can continue with the winding of the corporate affairs until final liquidation. They can act as trustees or receivers for this purpose. Effects; Winding Up Period of a Corporation (2000) The SEC approved the amendment of the Articles of Incorporation of GHQ Corp shortening its corporate life to only 25 years in accordance with Sec 120 of the Corp

Page 38 of 103

Code. As shortened, the corporation continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date, there were a number of pending civil actions, of varying nature but mostly money claims filed by creditors, none of which was expected to be completed or resolved within five years from May 30, 1997. If the creditors had sought your professional help at that time about whether or not their cases could be pursued beyond May 30, 1997, what would have been your advice? (2%) SUGGESTED ANSWER:

The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence of GHQ Corp. The Corporation is not actually dissolved upon the expiration of its corporate term. There is still the period for liquidation or winding up. NOTE: U nder Section 122 of the C orporation C ode, a corporation whose corporate existence is term inated in any m anner continues to be a body corporate for three (3) years afterits dissolution forpurposes of prosecuting and defending suits by and againstitand to enabl itto settle and close its affairs, culm inating in the disposition and distribution of its rem aining assets. Itm ay, during the three-yearterm , appointa trustee ora receiverwho m ay actbeyond thatperiod. The term ination of the life of a corporate entity does notby itself cause the extinction or dim inution of the rights and liabilities of such entity. 27 If the three-yearextended life has expired without a trustee or receiver having been expressly designated by the corporation, within thatperiod, the board of directors (or trustees) itself, m ay be perm itted to so continue Version 1990-2003 Arranged by SULAW Class 2005

as "trustees" by legal im plication to com plet the corporate liquidation. (PEPSI-COLA PHILIPPINES, INC., vs. THE COURT OF APPEALS, [G.R. No. 145855. November 24, 2004.])

Foreign Corporation; “Doing Business” in the Philippines (1998) When is a foreign corporation deemed to be “doing business in the Philippines?” (3%) SUGGESTED ANSWER:

A foreign corporation is deemed to be “doing business in the Philippines” if it is continuing the body or substance of the business or enterprise for which it was organized. It is the intention of an entity to continue the body of its business in the country. The grant and extension of 90-day credit terms of a foreign corporation to a domestic corporation for every purchase shows an intention to continue transacting with the latter. Foreign Corporation; “Doing Business” in the Philippines; Acts or Activities (2002) Give at least three (3) examples of the acts or activities that are specifically identified under our foreign investment laws as constituting “doing business” in the Philippines (3%) SUGGESTED ANSWER:

Any three (3) of the following acts or activities constitute “doing business” in the Philippines under our foreign investment laws: Soliciting orders Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Opening offices by whatever name Participating in the management, supervision or control of any domestic entity Entering into service contracts Appointing representatives or distributors, operating under the control of the foreign entity, who is domiciled in the Philippines or who stays in the country for a period or periods totaling at least 180 days in any calendar year.

interest of the corporation resulting in damages to the corporation, its stockholders or other persons; When he consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; When he agrees to hold himself personally and solidarily liable with the corporation; or

Foreign Corporation; “Doing Business” in the Philippines; Test (2002) What is the legal test for determining if an unlicensed foreign corporation is doing business in the Philippines? (2%) SUGGESTED ANSWER:

The test is whether or not the unlicensed foreign corporation has performed an act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business corporation. Joint Venture; Corporation (1996) May a corporation enter into a joint venture? SUGGESTED ANSWER:

A corporation may enter into a joint venture. However, inasmuch as the term ‘joint venture’ has no precise legal definition, it may take various forms. It could take the form of a simple pooling of resources (not involving incorporation) between two or more corporations for a specific project, purpose or undertaking, or for a limited time. It may involve the creation of a more formal structure and, hence, the formation of a corporation. If the joint venture would involve the creation of a partnership, as the term is understood under the Civil Code, then a corporation cannot be a party to it. Liabilities; BOD; Corporate Acts (1996) When may a corporate director, trustee, or officer be held personally liable with the corporation? SUGGESTED ANSWER:

A corporate director, trustee or officer may be held personally liable with the corporation under the following circumstances: When he assents to a patently unlawful act of the corporation; When he acts in bad faith or with gross negligence in directing the affairs of the corporation, or in conflict with the

(Delpher Trades Corp v SCRA

existence

Page 39 of 103

When he is made, by a specific provision of law, to personally answer for the corporate action. (Tramat Mercantile Inc v CA GR 111008, Nov 7, 94 238s14)

Liabilities; Stockholders, Directors, Officers (1997) A, B, and C are shareholders of XYZ Co. A has an unpaid subscription of P100th, B’s shares are fully paid up, while C owns only nominal but fully paid up shares and is a director and officer. XYZ becomes insolvent, and it is established that the insolvency is the result of fraudulent practices within the company. If you were counsel for a creditor of XYZ, would you advise legal action against A, B, and C? SUGGESTED ANSWER:

As to A—an action can be brought against A for P100th which is the amount of unpaid subscription. Since the corporation is insolvent, the limit of the stockholder’s liability to the creditor is only up to the extent of his unpaid subscription. As to B—there is no cause of action against B because he has already fully paid for his subscription. As stated earlier, the limit of the stockholder’s liability to the creditor of the corporation, when the latter becomes insolvent, is the extent of his subscription. As to C—an action can be filed against C, not as stockholder because he has already paid up the shares, but in his capacity as director and officer because of the corporation’s insolvency being the result of fraudulent practices within the company. Directors are liable jointly and severally for Version 1990-2003 Arranged by SULAW Class 2005

damages sustained by the corporation, stockholders or other persons resulting from gross negligence or bad faith in directing the affairs of the corporation. (Sec 31 Corp Code) Piercing the Corporate Veil (1994) Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit which could subject him to substantial damages. A year before the court rendered judgment, Pablo sought his lawyer’s advice on how to plan his estate to avoid taxes. His lawyer suggested that he should form a corporation with himself, his wife and his children (all students and still unemployed) as stockholders and then transfer all his assets and liabilities to this corporation. Mr Pablo followed the recommendation of his lawyer. 1 year later, the court rendered judgment against Pablo and the plaintiff sought to enforce this judgment. The sheriff, however, could not locate any property in the name of Pablo and therefore returned the writ of execution unsatisfied. What remedy, if any, is available to the plaintiff? SUGGESTED ANSWER:

The plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction which can be invoked when a corporation is formed or used in avoiding a just obligation. While it is true that a family corporation may be organized to pursue an estate tax; planning, which is not per se illegal or unlawful

the factual settings, however, indicate the a lawsuit that could subject Pablo to a Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Corporation (CIR v Norton & Harrison Co 11 S

substantial amount of damages. It would thus be difficult for Pablo to convincingly assert that the incorporation of the family corporation was intended merely as a case of “estate tax planning.” (Tan Boon Bee v

714 (1964))

Jarencio 41337 30June88)

The veil of corporate fiction may be pierced by proving in court that the notion of legal entity is being used to defeat public convenience, justify wrong, protect fraud, or defend crime or the entity is just an instrument or alter ego or adjunct of another entity or person.

Piercing the Corporate Veil (1996) E Co sold its assets to M Inc after complying with the requirements of the Bulk Sales Law. Subsequently, one of the creditors of E Co tried to collect the amount due it, but found out that E Co had no more assets left. The creditor then sued M Inc on the theory that M Inc is a mere alter ego of E Co. Will the suit prosper? Explain. SUGGESTED ANSWER:

The suit will not prosper. The sale by E Co of its assets to M Inc does not result in the transfer of the liabilities of the latter to, nor in the assumption thereof by, the former. The facts given do not indicate that such transfer or assumption took place or was stipulated upon by the parties in their agreement. Furthermore, the sale by E Co of its assets is a sale of its property. It does not involve the sale of the shares of stock of the corporation belonging to its stockholders. There is therefore no merger or consolidation that took place. E Co continues to exist and remains liable to the creditor. Piercing the Corporate Veil (2001) Plaintiffs filed a collection action against X Corporation. Upon execution of the court’s decision, X Corporation was found to be without assets. Thereafter plaintiffs filed an action against its present and past stockholder Y Corporation which owned substantially all of the stocks of X Corporation. The two corporations have the same board of directors and Y Corporation financed the operations of X Corporation. May Y Corporation be held liable for the debts of X Corporation? Why? (5%) SUGGESTED ANSWER:

Yes, Y Corporation may be held liable for the debts of X Corporation. The doctrine of piercing the veil of corporation fiction applies to this case. The two corporations have the same board of directors and Y Corporation owned substantially all of the stocks of X Corporation, which facts justify the conclusion that the latter is merely an extension of the personality of the former, and that the former controls the policies of the latter. Added to this is the fact that Y Corporation controls the finances of X Corporation which is merely an adjunct, business conduit or alter ego of Y

Piercing the Corporate Veil (2004) How does one pierce the veil of corporate fiction? SUGGESTED ANSWER:

Piercing

407H407H

the Corporate Veil (2006)

Page 40 of 103

What is the doctrine of "piercing the veil of corporate entity?" Explain. SUGGESTED ANSWER:

The doctrine of "piercing the veil of corporate entity," is the doctrine that allows the courts to look behind the separate juridical personality of a corporation and treat the corporation as an association of persons and thereby make the individual actors personally liable for corporate liabilities. The fiction of corporate identity is disregarded and the individuals comprising it can be treated identically. The stockholders can be held directly liable for corporate obligations, even to the extent of their personal assets (Concept Builders v. NLRC, Marabe, et al, G.R. No. 108734, May 29, 1996). To what circumstances doctrine apply? (2.5%)

will

the

The doctrine is applicable when the notion of legal entity is used to — Defeat public convenience. Justify wrong. Protect fraud. Defend crime (PNB v. Andrada Electric, G.R. No. 142936, April 17, 2002). Shield a violation of the proscription against forum shopping (First Philippine International Bank v. Court of Appeals, G.R. No. 137537, January 24, 1996).

Work inequities among members of the corporation internally, involving no rights of the public or third persons

(Secosa v. Heirs ofErwin Suarez Francisco, G.R. No. 156104, June 29, 2004).

Version 1990-2003 Arranged by SULAW Class 2005

Evade the lawful obligations of the corporation like a judgment credit (Sibagat Timber Corp. v. Garcia, G.R. No. 112546, December 11, 1992). Escape liability arising from a debt (Arcilla v. Court of Appeals, G.R. No. 88113, October 23, 1992).

Avoid inclusion of corporate assets as part of the estate of the decedent (Cease v. Court of Appeals, October 18, 1979).

G.R.

No.

L-35861,

To promote or to shield unfair objectives

(Villanueva v. Adre, G.R. No. 80863, April 27, 1989).

Pre-emptive Right (2001) Suppose that X Corporation has already issued the 1000 originally authorized shares of the corporation so that its BOD and stockholders wish to increase X’s authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. Assume that the stockholder A presently holds 200 out of the 1000 original shares. Would A have a pre-emptive right to 200 of the new issue of 1000 shares? Why? (3%) When should stockholder A exercise the pre-emptive right? (2%) SUGGESTED ANSWER:

Yes, A would have a pre-emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corpo. According to the Corp Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

the number of shares he holds on record in the corporation. Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When the Articles of Incorporation and the By-Laws are silent, the BOD may fix a reasonable time within which the stockholders may exercise the right. Pre-Emptive Right vs. Appraisal Right (1999) ABC Corporation has an authorized capital stock of P1M divided into 50,000 common shares and 50,000 preferred shares. At its inception, the Corporation offered for subscription all the common shares. However, only 40,000 shares were subscribed. Recently, the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the Corporation at their market value. Would Mr. X, a stockholder holding 4,000 shares, have pre-emptive rights to the remaining 10,000 shares? (2%) Would Mr. X have pre-emptive rights to the 50,000 preferred shares? (2%) Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will the shares be offered? (2%) Assuming a stockholder disagrees with the issuance of new shares and the pricing for the shares, may the stockholder invoke his appraisal rights and demand payment for his shareholdings? (2%) SUGGESTED ANSWER:

a. Yes. Mr. X, a stockholder holding 4,000 shares, has pre-emptive right to the remaining 10,000 shares. All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. ALTERNATIVE ANSWER.

a. No, Mr X does not have pre-emptive right over the remaining 10,000 shares because these shares have already been offered at incorporation and he chose not to subscribe to them. He, therefore, has waived his right thereto and the corporation may offer them to anyone. SUGGESTED ANSWER:

b. Yes. Mr. X would have pre-emptive rights to the 50,000 preferred shares. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. ALTERNATIVE ANSWER:

b. Yes, Mr. X has preemptive right over the 50,000 preferred shares because they were not offered before by the corporation for subscription. SUGGESTED ANSWER:

c. The shares will be offered to existing stockholders, who are entitled to preemptive right, at a price fixed by the BOD, which shall not be less than the par value of such shares.

Page 41 of 103 SUGGESTED ANSWER:

d. No, the stockholder may not exercise appraisal right because the matter that he dissented from is not one of those where right of appraisal is available under the corporation code. SEC; Jurisdiction; Transferred Jurisdiction (1996) What is the original and exclusive jurisdiction of the SEC? SUGGESTED ANSWER:

The SEC has original and exclusive jurisdiction over cases involving: Devices or schemes amounting to fraud and misrepresentation; Controversies arising out of intracorporate or partnership relations; Controversies in the election or appointment of directors, officers, etc; Petitions to be declared in a state of suspension of payments (Sec 5 PD 902A) The RTC has jurisdiction over the cases which involves intra-corporate controversy. As of 2006, the applicable rule is that there is a TRANSFERRED JURISDICTION under Sec. 5.2 of the SRC, the Commission’s jurisdiction over all cases enumerated under PD 902-A sec. 5 has been transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court. TAKE NOTE:

Version 1990-2003 Arranged by SULAW Class 2005

Stockholder; Delinquent; Unpaid Subscription (1997) The BOD of a corporation, by a vote of ten in favor of one against, declared due and payable all unpaid subscription to the capital stock. The lone dissenting director failed to pay on due date, i.e., 19 Sept 1997, his unpaid subscription. Other than the shares wherein he was unable to complete payment, he did not own any share in the corporation. On 23 Sept 1997, he was informed by the BOD that, unless due payment is meanwhile received, he: could no longer serve as a director of the corporation forthwith: would not be entitled to the cash and stock dividends which were declared and payable on 24 Sep 1997; and could not vote in the stockholders meeting scheduled to take place on 26 Sept 1997. Was the action of the BOD on each of the foregoing matters valid? SUGGESTED ANSWER:

No. The period of 30 days within which the stockholder can pay the unpaid subscription had not yet expired. No. The delinquency did not deprive the stockholder of his right to receive dividends declared. However, the cash dividend declared may be applied by the corporation to the unpaid subscription. (Sec 71 Corp Code)

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

No. The period of 30 days within which the stockholder can pay the unpaid subscription had not yet expired. Stockholders: Preemptive Right (2004) The Board of Directors of ABC, Inc., a domestic corporation, passed a resolution authorizing additional issuance of shares of stocks without notice nor approval of the stockholders. DX, a stockholder, objected to the issuance, contending that it violated his right of pre-emption to the unissued shares. Is his contention tenable? Explain briefly. (5%) SUGGESTED ANSWER:

Yes. DX's contention is tenable. Under Section 39 of the Corporation Code, all stockholders of ABC, Inc. enjoy preemptive right to subscribe to all issues of shares of any class, including the reissuance of treasury shares in proportion to their respective shareholdings. Stockholders; Appraisal Right (2003) In what instances may the right of appraisal be availed of under the Corporation Code? SUGGESTED ANSWER:

SECTION 81. Instances of Appraisal Right. — Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and In case of merger or consolidation. (n) Stockholders; Removal of Officers & BOD (2001) In 1999, Corporation A passed a board resolution removing X from his position as manager of said corporation. The by-laws of A corporation provides that the officers are the president, vice-president, treasurer and secretary. Upon complaint filed with the SEC, it held that a manager could be removed by mere resolution of the board of directors. On motion for reconsideration, X alleged that he could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital

stock. Is X’s contention legally tenable. Why? (5%) SUGGESTED ANSWER:

No. Stockholders’ approval is necessary only for the removal of the members of the BOD. For the removal of a corporate officer or employee, the vote of the BOD is sufficient for the purpose. Stockholders; Removal; Minority Director (1991) Assuming that the minority block of the XYZ Corporation is able to elect only 1 director and therefore,

Page 42 of 103

the majority stockholders can always muster a 2/3 vote, would you allow the majority stockholders to remove the one director representing the minority? SUGGESTED ANSWER:

No. I will not allow the majority stockholders to remove the director. While the stockholders may, by a 2/3 vote, remove a director, the law also provides, however, that his right may not, without just cause, be exercised so as to deprive the minority of representation in the BOD (Sec 28 Corp code; Gov’t vs Agoncillo 50p348)

Stockholders; Rights (1996) What are the rights of a stockholder? SUGGESTED ANSWER:

The rights of a stockholder are as follows: The right to vote, including the right to appoint a proxy; The right to share in the profits of the corporation, including the right to declare stock dividends; The right to a proportionate share of the assets of the corporation upon liquidation; The right of appraisal; The pre-emptive right to shares; The right to inspect corporate books and records; The right to elect directors; Such other rights as may contractually be granted to the stockholders by the corporation or by special law. Version 1990-2003 Arranged by SULAW Class 2005

Stockholders; Voting Power of Stockholders (1990) Mercy subscribed to 1,000 shares of stock of Rosario Corporation. She paid 25% of said subscription. During the stockholders’ meeting, can Mercy vote all her subscribed shares? Explain. SUGGESTED ANSWER:

Yes, Mercy can vote all her subscribed shares. Section 72 of the Corporation Code states that holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Stocks; Increase of Capital Stock (2001) Suppose X Corporation has an authorized capital stock of P1M divided into 100,000 shares of stock with par value of P10 each. Give two ways whereby said authorized capital stock may be increased to about P1.5M. (3%) Give three practical reasons for a corporation to increase its capital stock (2%) SUGGESTED ANSWER:

Two ways of increasing the Authorized Capital Stock of X corporation to P1.5M are: Increase the number of shares from 100,000 to 150,000 shares with the same par value of P10.00 each. Increase par value of 100,000 shares to P15.00 each. Three practical reasons for a corporation to increase its capital stock are: to generate more working capital; Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

to have more shares with which to pay for the acquisition of more assets like acquisition of company car, stocks, house, machinery or business; and to have extra share with which to cover or meet the requirement for declaration of stock dividend. Stocks; Sale, Transfer of Certificates of Stock (1996) Arnold has in his name 1,000 shares of the capital stock of ABC Co as evidenced by a stock certificate. Arnold delivered the stock certificate to Steven who now claims to be the real owner of the shares, having paid for Arnold’s subscription. ABC refused to recognize and register Steven’s ownership. Is the refusal justified? Explain. SUGGESTED ANSWER:

ABC’s refusal to recognize and register Steven’s ownership is justified. The facts indicate that the stock certificate for the 1,000 shares in question is in the name of Arnold. Although the certificate was delivered by Arnold to Steven, the facts do not indicate that the certificate was duly endorsed by Arnold at the time it was delivered to Steven or that the procedure for the effective transfer of shares of stock set out in the by-laws of ABC Co, if any, was observed. Since the certificate was not endorsed in favor of Steven (or anybody else for that matter), the only conclusion could be no other than that the shares in question still belong to Arnold. (Razon v IAC GR 74306 Mar 16,92 207s234)

Stocks; Sale, Transfer of Certificates of Stock (2001) A is the registered owner of Stock Certificate No. 000011. He entrusted the possession of said certificate to his best friend B who borrowed the said endorsed certificate to support B’s application for passport (or for a purpose other than transfer). But B sold the certificate to X, a bona fide purchaser who relied on the endorsed certificates and believed him to be the owner thereof. Can A claim the shares of stock from X? Explain (3%) Would your answer be the same if A lost the stock certificate in question or if it was stolen from him? (2%) SUGGESTED ANSWER:

No. Assuming that the shares were already transferred to B, A cannot claim the shares of stock from X. The certificate of stock covering said shares have been duly endorsed by A and entrusted by him to B. By his said acts, A is now estopped from claiming said shares from X, a bona fide purchaser who relied on the endorsement by A of the certificate of stock.

Yes. In the case where the certificate of stock was lost or stole from A, A has a right to claim the certificate of stock from the thief who has no right or title to the same. “One who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same.” (Art 559 NCC) Stocks; Sale, Transfer of Certificates of Stock (2004) Four months before his death, PX assigned 100 shares of stock registered in his name in favor of his wife and his

Page 43 of 103

children. They then brought the deed of assignment to the proper corporate officers for registration with the request for the transfer in the corporation's stock and transfer books of the assigned shares, the cancellation of the stock certificates in PX's name, and the issuance of new stock certificates in the names of his wife and his children as the new owners. The officers of the Corporation denied the request on the ground that another heir is contesting the validity of the deed of assignment. May the Corporation be compelled by mandamus to register the shares of stock in the names of the assignees? Explain briefly. (5%) SUGGESTED ANSWER:

Yes. The corporation may be compelled by mandamus to register the shares of stock in the name of the assignee. The only legal limitation imposed by Section 63 of the Corporation Code is when the Corporation holds any unpaid claim against the shares intended to be transferred. The alleged claim of another heir of PX is not sufficient to deny the issuance of new certificates of stock to his wife and children. It would be otherwise if the transferee's title to the shares has no prima facie validity or is uncertain. Trust Fund Doctrine (1992) A Corporation executed a promissory note binding itself to pay its President/Director, who had tendered his resignation, a certain sum in payment of the latter’s shares and interests in the company. The corporation defaulted in paying the full amount so that

Version 1990-2003 Arranged by SULAW Class 2005

said former President filed suit for collection of the balance before the SEC. Under what conditions is a stock corporation empowered to acquire its own shares? Is the arrangement between the corporation and its President covered by the trust fund doctrine? Explain your answers briefly. SUGGESTED ANSWER:

A stock corporation may only acquire its own shares of stock if the trust fund doctrine is not impaired. This is to say, for instance, that it may purchase its own shares of stock by utilizing merely its surplus profits over and above the subscribed capital of the corporation. ALTERNATIVE ANSWER:

(an answer enumerating the instances or cases under the Corporation Code where the Corp allows the acquisition of shares such as in the stockholder’s exercise of appraisal right, failure of bids in the sale of delinquent shares, etc.) SUGGESTED ANSWER:

The arrangement between the corporation and its President to the extent that it calls for the payment of the latter’s shares is covered by the trust fund doctrine. The only exceptions from the trust fund doctrine are the redemption of redeemable shares and, in the case of close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value of a stockholder’s share. Trust Fund Doctrine; Intra-Corporate Controversy (1991) Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

On December 6, 1988, A, an incorporator and the General Manager of the Paje Multi Farms Co, resigned as GM and sold to the corporation his shares of stocks in the corporation for P300th, the book value thereof, payable as follows: a) P100th as down payment; b) P100th on or before 31 July1989; and c) the remaining balance of P100th on or before 30 Sep 1989. A promissory note, with an acceleration clause, was executed by the corporation for the unpaid balance. The corporation failed to pay the first installment on due date. A then sued Paje on the promissory note in the RTC. Does the court have jurisdiction over the case? Would your answer be the same if A instead sold his shares to his friend Mabel and the latter filed a case with the RTC against the corporation to compel it to register the sale and to issue new certificates of stock in her name? SUGGESTED ANSWER:

The RTC has jurisdiction over the case. The SC said that a corporation may only buy its own shares of stock if it has enough surplus profits therefore. My answer would be the same. An action to compel a corporation to register a sale and to issue new certificates of stock is itself an intra-corporate matter that exclusively lies with the RTC. The RTC has jurisdiction over the cases which involves intra-corporate controversy. As of 2006, the applicable rule is that there is a TRANSFERRED JURISDICTION under Sec. 5.2 of the SRC, the Commission’s jurisdiction over all cases enumerated under PD 902-A sec. 5 has been transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court. TAKE NOTE:

Credit Transactions Chattel Mortgage vs. After-Incurred Obligations (1991) To secure the payment of an earlier loan of P20,000 as well as subsequent loans which her friend Noreen, would extend to her, Karen executed in favor of Noreen a chattel mortgage over her (Karen) car. Is the mortgage valid? SUGGESTED ANSWER:

A chattel mortgage cannot effectively secure after-incurred obligations. While a stipulation to include after-incurred obligations in a chattel mortgage is itself not invalid, the obligation cannot, however,

be deemed automatically secured by that mortgage until after a new chattel mortgage or an addendum to the original chattel mortgage is executed to cover the obligation after it has been actually incurred. Accordingly, unless such supplements are made, the chattel mortgage in the problem given would be deemed to secure only the loan of P20,000 (Sec 5 Act 1505; Belgian Catholic Missionaries v Magallanes Press 49p647)

Page 44 of 103

Chattel Mortgage vs. After-Incurred Obligations (1999) On December 1, 1996, Borrower executed a chattel mortgage in favor of the Bank to secure a loan of P3M. In due time the loan was paid. On December 1, 1997, Borrower obtained another loan for P2M which the Bank granted under the same security as that which secured the first loan. For the second loan, Borrower merely delivered a promissory note; no new chattel mortgage agreement was executed as the parties relied on a provision in the 1996 chattel mortgage agreement which included future debts as among the obligations secured by the mortgage. The provision reads: “In case the Mortgagor executes subsequent promissory note or notes either as a renewal, as an extension, or as a new loan, this mortgage shall also stand as security for the payment of said promissory note or notes without necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes were existing on date hereof.” As Borrower failed to pay the second loan, the Bank proceeded to foreclose the Chattel Mortgage.Borrower sued the Bank claiming that the mortgage was no longer in force. Borrower claimed that a fresh chattel mortgage should have been executed when the second loan was granted. Version 1990-2003 Arranged by SULAW Class 2005

Decide the case and ratiocinate. (4%) Suppose the chattel mortgage was not registered, would its validity and effectiveness be impaired? Explain. (4%) SUGGESTED ANSWER:

a. The foreclosure of the chattel mortgage regarding the second loan is not valid. A chattel mortgage cannot validly secure after incurred obligations. The affidavit of good faith required under the chattel mortgage law expressly provides that “the foregoing mortgage is made for securing the obligation specified in the conditions hereof, and for no other purpose.” The after-incurred obligation not being specified in the affidavit, is not secured by mortgage. b. Yes. The chattel mortgage is not valid as against any person, except the mortgagor, his executors and administrators. Chattel Mortgage; Foreclosure (1997) Ritz bought a new car on installments which provided for an acceleration clause in the event of default. To secure payment of the unpaid installments, as and when due, he constituted two chattel mortgages, i.e., one over his very old car and the other covering the new car that he had just bought as aforesaid, on installments. After Ritz defaulted on three installments, the seller-mortgagee foreclosed on the old car. The proceeds of the foreclosure were not enough to satisfy the due obligation; hence, he similarly sought to foreclose on the new car.

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Would the seller-mortgagee be legally justified in foreclosing on this second chattel mortgage? SUGGESTED ANSWER:

No. The two mortgages were executed to secure the payment of the unpaid installments for the purchase of a new car. When the mortgage on the old car was foreclosed, the seller-mortgagee is deemed to have renounced all other rights. A foreclosure of additional property, that is, the new car covered by the second mortgage would be a nullity. Chattel Mortgage; Ownership of Thing Mortgaged (1990) Zonee, who lives in Bulacan, bought a 1988 model Toyota Corolla sedan on July 1, 1989 from Anadelaida, who lives in Quezon City, for P300th, paying P150th as downpayment and promising to pay the balance in 3 equal quarterly installments beginning October 1, 1989. Anadelaida executed a deed of sale of the vehicle in favor of Zonee and, to secure the unpaid balance of the purchase price, had Zonee execute a deed of chattel mortgage on the vehicle in Anadelaida’s favor. Ten days after the execution of the abovementioned documents, Zonee had the car transferred and registered in her name. Contemporaneously, Anadelaida had the chattel mortgage on the car registered in the Chattel Mortgage Registry of the Office of the Register of Deeds of Quezon City. In Sep 1989, Zonee sold the sedan to Jimbo without telling the latter that the car was mortgaged to Anadelaida. When Zonee failed to pay the first installment on October 1, 1989, Anadelaida went to see Zonee and discovered that the latter had sold the car to Jimbo. Jimbo refused to give up the car on the ground that the chattel mortgage executed by Zonee in favor of Anadelaida is not valid because it was executed before the car was registered in Zonee’s name, i.e., before Zonee became the registered owner of the car. Is the said argument meritorious? Explain your answer. Jimbo also argued that even if the chattel mortgage is valid, it cannot affect him because it was not properly registered with the government offices where it should be registered. What government office is Jimbo referring to? SUGGESTED ANSWER:

Jimbo’s argument is not meritorious. Zonee became the owner of the property upon delivery; registration is not essential to

vest that ownership in the buyer. The execution of the chattel mortgage by the buyer in favor of the seller, in fact, can demonstrate the vesting of such ownership to the mortgagor. Jimbo was referring to the Register of Deeds of Bulacan where Zonee was a resident. The Chattel Mortgage Law requires the registration to be made in the Office of the Register of Deeds of the province where the mortgagor resides and also in which the property is

Page 45 of 103

situated as well as the LTO where the vehicle is registered. (Sec 4 Chattel Mortgage Law) Credit Transactions (1999) Various buyers of lots in a subdivision brought actions to compel either or both the developer and the bank to lease and deliver free and clear the titles to their respective lots. The problem arose because notwithstanding prior sales mostly on installments – made by the developer to buyers, developer had mortgaged the whole subdivision to a commercial bank. The mortgage was duly executed and registered with the appropriate governmental agencies. However, as the lot buyers were completely unaware of the mortgage lien of the bank, they religiously paid the installments due under their sale contracts. As the developer failed to pay its loan, the mortgage was foreclosed and the whole subdivision was acquired by the bank as the highest bidder. May the bank dispossess prior purchasers of individual lots or, alternatively, require them to pay again for the paid lots? Discuss (3%) What are the rights of the bank vis-à-vis those buyers with remaining unpaid installments? Discuss. (3%) Recommendation: Since the subject matter of these two (2) questions is not included within the scope of the Bar Version 1990-2003 Arranged by SULAW Class 2005

Questions in Mercantile Law, as it is within Civil Law, it is suggested that whatever answer is given by the examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit. SUGGESTED ANSWER:

a. No. The bank may not dispossess the prior purchasers of the individual lots, much less require them to pay for the said lots. The bank has to respect the rights of the prior purchasers of the individual lots. The purchasers have the option to pay the installments of the mortgagee. b. The bank has to respect the rights of the buyers with remaining unpaid installments. The purchaser has the option to pay the installments to the mortgagee who should apply the payments to the mortgage indebtedness. Mortgage (1999) Debtor purchased a parcel of land from a realty company payable in five yearly installments. Under the contract of sale, title to the lot would be transferred upon full payment of the purchase price. But even before full payment, debtor constructed a house on the lot. Sometime thereafter, debtor mortgaged the house to secure his obligation arising from the issuance of a bond needed in the conduct of his business. The mortgage was duly registered with the proper chattel mortgage registry.

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Five years later after completing payment of the purchase price, debtor obtained title to the lot. And even as the chattel mortgage on the house was still subsisting, debtor mortgaged to a bank the lot and improvement thereon to secure a loan. This real estate mortgage was duly registered and annotated at the back of the title. Due to business reverses, debtor failed to pay his creditors. The chattel mortgage was foreclosed when the debtor failed to reimburse the surety company for payments made on the bond. In the foreclosure sale, the surety company was awarded the house as the highest bidder. Only after the foreclosure sale did the surety company learn of the real estate mortgage in favor of the lending investor on the lot and the improvement thereon. Immediately, it filed a complaint praying for the exclusion of the house from the real estate mortgage. It was submitted that as the chattel mortgage was executed and registered ahead, it was superior to the real estate mortgage. On the suggestion that a chattel mortgage on a house- a real property- was a nullity, the surety company countered that when the chattel mortgage was executed, debtor was not yet the owner of the lot on which the house was built. Accordingly, the house was a personal property and a proper subject of a chattel mortgage. a. Discuss the validity of the position taken by the surety company. (3%) b. Who has a better claim to the house, the surety company or the lending investor? Explain (3%) c. Would the position of the surety company be bolstered by the fact that it acquired title in a foreclosure sale conducted by the Provincial Sheriff. Explain (3%) SUGGESTED ANSWER:

The house is always a real property even though it was constructed on a land not belonging to the builder. However, the parties may treat it as a personal property and constitute a chattel mortgage thereon. Such mortgage shall be valid and binding but only on the parties. It will not bind or affect third parties. The lending investor has a better claim to the house. The real estate mortgage covering the house and lot was duly registered and binds the parties and third persons. On the other hand, the chattel mortgage on the house securing the credit of the surety company did not affect the

rights of third parties such as the lending investor despite registration of the chattel mortgage. No. The chattel mortgage over the house which was foreclosed did not affect the rights of third parties like the lending investor. Since the third parties are not bound by the chattel mortgage, they are not also bound by any enforcement of its provisions. The foreclosure of such chattel mortgage did not bolster or add anything to the position of the surety company. Mortgage vs. Levy (2003)

Page 46 of 103

To pay for her loan obtained from Stela, Liza constituted in Stela’s favor a chattel mortgage over an electric generator. Cecil, a creditor of Liza, levied on attachment the generator. Stela filed a third party claim. Cecil opposed the claim. Rule on their conflicting claims. SUGGESTED ANSWER:

Mortgage; Extrajudicial Foreclose (2006) A real estate mortgage may be foreclosed judicially or extrajudicially. In what instance may a mortgagee extrajudicially foreclose a real estate mortgage? (5%) SUGGESTED ANSWER:

When a sale is made under a special power inserted or attached to any real-estate mortgage, thereafter given as security for the payment of money or the fulfillment of any other obligation, then the mortgagee may extrajudicially foreclose the real estate mortgage (Sec. 1, Act No. 3135, as amended). Mortgage; Foreclosure (2003) May the sale at public auction by a bank of a property mortgaged to it be nullified because the price was extremely low? Why? SUGGESTED ANSWER:

Mortgage; Foreclosure (2003) Because of failure of Janette and Jeanne to pay their loan to X Bank, the latter foreclosed on the mortgage constituted on their property which was put up by them as security for the payment of the loan. The price paid for the property at the foreclosure sale was not enough to Version 1990-2003 Arranged by SULAW Class 2005

liquidate the obligation. The bank sued for deficiency. In their answer, Janette and Jeanne did not deny the existence of the loan nor the fact of their default. They, however, interposed the defenses that the price at the auction was extremely low and that their loan, despite the loan documents, was a long-term loan which had not yet matured. If you were the judge, how would you rule on the case? Why? (6%) SUGGESTED ANSWER:

Mortgage; Foreclosure of Improvements (1999) Borrower obtained a loan against the security of a mortgage on a parcel of land. While the mortgage was subsisting, borrower leased for fifty years the mortgaged property to Land Development Company (LDC). The mortgagee was duly advised of the lease. Thereafter, LDC constructed on the mortgaged property an office condominium. Borrower defaulted on his loan and mortgagee foreclosed the mortgage. At the foreclosure sale, the mortgagee was awarded the property as the highest bidder. The corresponding Certificate of Sale was executed and after the lapse of one year, title was consolidated in the name of mortgagee. Mortgagee then applied with the RTC for the issuance of a writ of possession not only over the land but also the condominium building. The mortgagee contended that the mortgage included all accessions, improvements and accessories found on the mortgaged property. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

LDC countered that it had built on the mortgaged property with the prior knowledge of mortgagee which had received formal notice of the lease. How would you resolve the dispute between the mortgagee and LDC? (3%) Is the mortgagee entitled to the lease rentals due from LDC under the lease agreement? (3%) Recommendation: Since the subject matter of these two questions is not included within the scope of the Bar Questions in Mercantile Law, as it is within Civil Law, it is suggested that whatever answer is given by the examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit. SUGGESTED ANSWER:

a. The mortgagee has a better right than LDC. The mortgage extends to the improvements introduced on the land, with the declarations, amplifications, and limitations established by law, whether the estate remains in the possession of the mortgagor or passes into the hands of a third person (Art 2127 NCC). The notice given by LDC to the mortgagee was not enough to remove the building from coverage of the mortgage considering that the building was built after the mortgage was constituted and the notice was only as regards the lease and not as to the construction of the building. Since the mortgagee was informed of the lease and did not object to it, the mortgagee became bound by the terms of the lease when it acquired the property as the highest bidder. Hence, the mortgagee steps into the shoes of the mortgagor and acquires the rights of the lessor under Art 1768 of the NCC. This provision gives the lessor the right to appropriate the condominium building but after paying the lessee half of the value of the building at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvement even though the land will suffer damage thereby. 1st Alternative Answer:

a. The mortgagee has a better right to the building. Under Art 2127 of the NCC, the mortgage extends to all improvements on the mortgaged property regardless of who and when the improvements were introduced. LDC cannot complain otherwise, because it knew that the property it was leasing was mortgaged when it built the condominium. 2nd alternative Answer:

a. Assuming that the office condominium was duly constituted under the Condominium Law, before LDC could validly constitute the same as a condominium, it should cause to be recorded in the register of deeds of the province or city where the land is situated an enabling or master deed showing, among others, a certificate of the registered owner and of all registered holders of any lien or encumbrance on the property that they consent to the registration of the deed. (Sec 4. RA 4726). If the mortgagee gave its consent thereto, then LDC should prevail. If no consent was given, the condominium was included in the mortgage. SUGGESTED ANSWER:

Page 47 of 103

b. The lease rentals belong to the mortgagor. However, the mortgage extends to rentals not yet received when the obligation becomes due and the mortgagee may ran after the said rentals for the payment of the mortgage debt. Mortgage; Foreclosure; Effect of mere taking by creditor-mortgagor of property (1992) X & Co obtained a loan from a local bank in the amount of P500th, mortgaging as security therefore its real property. Subsequently, the company applied with the same bank for a Letter of Credit (LC) for $200th in favor of a foreign bank to cover the importation of machinery. To guarantee payment of the obligation under the LC, the company and its President and Treasurer executed a surety agreement in the local bank’s favor. The machinery arrived and was released to the company under a trust receipt agreement. As the company defaulted in the payment of its obligations, the bank took possession of the imported machinery. At the same time, it sought to foreclose the mortgaged property and to hold the company as well as its President and Treasurer, liable under the Surety Agreement. Did the taking of possession of the machinery by the bank result in the 1) full payment of the obligations of the company

Version 1990-2003 Arranged by SULAW Class 2005

and its officers, and 2) foreclosure of the mortgage? SUGGESTED ANSWER:

The taking of possession of the machinery by the bank did not result in full payment of the obligations owing from the company and its officers. The taking of such possession must be considered merely as a measure in order to protect or further safeguard the bank’s security interest. Dacion en pago can only be considered as having taken place when a creditor accepts and appropriates the ownership of the goods in payment of a due obligation. (PNB v Pineda 197 s 1)

The mere taking of possession of mortgaged assets does not amount to foreclosure. Foreclosure requires a sale at public auction. The foreclosure, therefore, has not as yet been effected. Mortgage; Redemption Period; Foreclosed Property (2002) Primetime Corporation (the Borrower) obtained a P10 Million, five-year term loan from Universal Bank (the Bank) in 1996. As security for the loan and as required by the Bank, the Borrower gave the following collateral security in favor of the Bank: a real estate mortgage over the land and building owned by the Borrower and located in Quezon City; the joint and several promissory note of Pr. Primo Timbol, the President of the Borrower; and a real estate mortgage over the residential house and lot owned by Mr. Timbol, also located in Quezon City. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Because of business reverses, neither the Borrower nor Mr. Timbol was able to pay the loan. In June 2001, the Bank extrajudicially foreclosed the two real estate mortgages, with the Bank as the only bidder in the foreclosure sale. On September 16, 2001, the certificates of sale of the two properties in favor of the Bank were registered with the Register of Deeds of Quezon City. Ten months later, both the Borrower and Mr. Timbol were able to raise sufficient funds to redeem their respective properties from the Bank, but the Bank refused to permit redemption on the ground that the period for redemption had already expired, so that the Bank now has absolute ownership of both properties. The Borrower and Mr. Timbol came to you today, September 15, 2002, to find out if the position of the Bank is correct. What would be your answer? State your reasons (5%). SUGGESTED ANSWER:

With respect to the real estate mortgage over the land and building owned by the Borrower, Primetime Corporation, a juridical body, the period of redemption is only three (3) months, which period already expired. As to the real estate mortgage over the residential house and lot owned by Mr. Timbol, the period of redemption is one (1) year from the date of registration of the certificate of sale, which period has not yet expired in this case. Mortgage; Remedies (2003) Carmakers, Inc., sold a motor vehicle on installment basis to Chari Paredes. The transaction was reflected on a promissory note executed by Chari in favor of Carmakers. The note was secured by a mortgage over the car. Contemporaneous with the execution of the note and the mortgage deed, Carmakers, Inc., assigned the instruments sans recourse to Adelantado Finance Corporation. Chari defaulted in her obligations. Could Adelantado Finance corporation take action against both Carmakers Inc., and Chari? Why? (6%) SUGGESTED ANSWER:

Preference of Credits (2002) As of June 1, 2002, Edzo Systems Corporation (Edzo) was indebted to the following creditors: Ace Equipment Supplies – for various personal computers and accessories

sold to Edzo on credit amounting to P300,000. Handyman Garage – for mechanical repairs (parts and service) performed on Edzo’s company car amounting to P10,000. Joselyn Reyes – former employee of Edzo who sued Edzo for unlawful termination of employment and was able to obtain a final judgment against Edzo for P100,000. Bureau of Internal Revenue – for unpaid value-added taxes amounting to P30,000.

Page 48 of 103

Integrity Bank – which granted Edzo a loan in 2001 in the amount of P500,000. The loan was not secured by any asset of Edzo, but it was guaranteed unconditionally and solidarily by Edzo’s President and controlling stockholder, Eduardo Z. Ong, as accommodation surety. The loan due to Integrity Bank fell due on June 15, 2002. Despite pleas for extension of payment by Edzo, the bank demanded immediate payment. Because the bank threatened to proceed against the surety, Eduardo Z. Ong, Edzo decided to pay up all its obligations to Integrity Bank. On June 20, 2002, Edzo paid to Integrity Bank the full principal amount of P500,000, plus accrued interests amounting to P55,000. As a result, Edzo had hardly any cash left for operations and decided to close its business. After paying the unpaid salaries of its employees, Edzo filed a petition for insolvency on July 1, 2002. How would you, as judge in the insolvency proceedings, rank the respective credits or claims of the five (5) creditors mentioned above in terms of preference or priority against each other? (5%) SUGGESTED ANSWER:

The claim of Handyman Garage for P10,000 has a specific lien on the car repaired. The remaining four (4) claims have preference or priority against each other in the following order: Version 1990-2003 Arranged by SULAW Class 2005

No. 4 – claim of the BIR for unpaid value added taxes No. 3 – claim of Joselyn Reyes for Unlawful termination No. 1 – claim of Ace equipment Supplies as an unpaid seller; and No. 5 – claim of Integrity Bank. Promissory Note: Liability (2001) X, Y and Z signed a promissory note in favor of A stating: “We promise to pay A on December 31, 2001 the sum of P5,000.00” When the note fell due, A sued X and Y who put up the defense that A should have impleaded Z. Is the defense valid? Why? (5%) SUGGESTED ANSWER:

The defense is not valid. The liability of X, Y, and Z under the promissory note is joint. Such being the case, Z is not an indispensable party. The fact that A did not implead Z will not prevent A from collecting the proportionate share of X and Y in the payment of the loan. (Observation: Even if the liability of X, Y, and Z is solidary, the defense would still not be valid) Remedies; Available to Mortgagee-Creditor (1996) Finding a 24-month payment plan attractive, Anjo purchased a Tamaraw FX from Toyota QC. He paid a down-payment of P100th and obtained financing for the balance from IOU Co. He executed a chattel mortgage

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

over the vehicle in favor of IOU. When Anjo defaulted, IOU foreclosed the chattel mortgage, and sought to recover the deficiency. May IOU still recover the deficiency? Explain. SUGGESTED ANSWER:

IOU may no longer recover the deficiency. Under Art 1484 of the NCC, in a contract of sale of personal property the price of which is payable in installments, the vendor may, among several options, foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In such case, however, the vendor shall have no further action against the purchaser to recover any unpaid balance of the price and any agreement to the contrary is void. While the given facts did not explicitly state that Anjo’s failure to pay covered 2 or more installments, this may safely be presumed because the right of IOU Co to foreclose the chattel mortgage under the circumstances is premised on Anjo’s failure to pay 2 or more installments. The foreclosure would not have been valid if it were not so. (The given facts did not also state explicitly whether Anjo’s default was a payment default or a default arising from a breach of a negative pledge or breach of a warranty. In such case, however, IOU Company would not have been able to foreclose the chattel mortgage validly as such foreclosure, under the circumstances contemplated by the law, could only be effected for a payment default covering two or more installments) (Luis Ridad v Filipinas Investment and Finance Co GR L-39806 Jan27,83 120s246) Remedies; Available to Mortgagee-Creditor (2001) Debtor “A” issued a promissory note in the amount of P10M in favor of commercial bank Y secured by mortgage of his properties worth P30M. When A failed to pay his indebtedness, despite demands made by bank Y, the latter instituted a collection suit to enforce payment of the P10M account. Subsequently, bank Y also filed foreclosure proceedings against A for security given for the account. If you were the judge, how would you resolve the two cases? (5%) SUGGESTED ANSWER:

The case for collection will be allowed to proceed. But the foreclosure proceedings have to be dismissed. In instituting foreclosure proceedings, after filing a collection case involving the same account or transaction, bank Y is guilty of splitting a cause of action. The loan of P10M is the

principal obligation while the mortgage securing the same is merely an accessory to said loan obligation. The collection of the loan and the foreclosure of the mortgage securing said loan constitute one and the same cause of action. The filing of the collection case bars the subsequent filing of the foreclosure proceedings. Remedies; Secured Debt (1991) To secure the payment of his loan of P200th, A executed in favor of the Angeles Banking Co in 1 document, a real estate mortgage over 3 lots registered in his name and a chattel mortgage over his 3 cars and 1 Isuzu cargo truck.

Page 49 of 103

Upon his failure to pay the loan on due date, the bank foreclosed the mortgage on the 3 lots, which were subsequently sold for only P99th at the foreclosure sale. Thereafter, the bank filed an ordinary action for the collection of the deficiency. A contended that the mortgage contract he executed was indivisible and consequently, the bank had no legal right to foreclose only the real estate mortgage and leave out the chattel mortgage, and then sue him for a supposed deficiency judgment. If you were the Judge, would you sustain the contention of A? SUGGESTED ANSWER:

If I were the Judge, I would dismiss the action as being premature since the proper remedy would be to complete the foreclosure of the mortgages and only thereafter can there by an action for collection of any deficiency. In Caltex v IAC (GR 74730, 25 Aug 89), the remedies on a secured debt, said the court, are either an action to collect or to foreclose a contract of real security. These remedies are alternative remedies, although an action for any deficiency is not precluded, subject to certain exceptions such as those stated in Art 1484 of the Civil Code, by a foreclosure on the mortgages. While the factual settings in the case of Suria v IAC (30 June 87) are not similar to the facts given in the problem, the SC implied that foreclosure as a remedy in secured obligations must first be availed of by a creditor in preference to other remedies that might also be invoked by him. ALTERNATIVE ANSWER:

The indivisibility of a contract of real security, such as a real estate mortgage or a chattel mortgage, only means that a division or a partial payment of a secured obligation does not warrant a corresponding division or proportionate reduction of the security given. A creditor in such secured debts may pursue the remedy of foreclosure, in part or in full, or file an ordinary action for collection on any amount due. A favorable judgment can warrant an issuance of a writ of execution on any property, not exempt from execution, belonging to the judgment debtor. There should be no legal obstacle for a creditor to waive, in full or in part, his right to foreclosure on contracts of real security.

Insurance Law Beneficiary: Effects: Irrevocable Beneficiary (2005) What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2%) SUGGESTED ANSWER:

The irrevocable designation gives the beneficiary a vested right over Life Insurance. The Insured cannot act to divest the irrevocable beneficiary, in whole or in part, without the beneficiary's consent. To be specific: The beneficiary designated in a life insurance contract cannot be changed without the consent of the beneficiary because he has a vested interest in the policy (Philamlife v. Pineda, G.R. No. 54216, July 19,

Version 1990-2003 Arranged by SULAW Class 2005

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

1989, citing Gcrcio v. Sun Life, G.R. No. 23703, September 28, 1925; and Go v. Redfern, G.R. No. 47705, April 25, 1841);

Neither can the Insured take the cash surrender value, assign or even borrow on said policy without the beneficiary's consent (Nario v. Philamlife, G.R. No. 22796, June 26, 1967);

The Insured cannot add another beneficiary because that would reduce the amount which the first beneficiary may recover and therefore adversely affect his vested right (Go v. Redfem, G.R. No. 47705, April 25, 1941);

Unless the policy allows, the Insured cannot even designate another beneficiary should the original beneficiary predecease him. His estate acquires the beneficiary's vested right upon his death; and The Insured cannot allow his creditors to attach or execute on the policy. (Philamlife v. Pineda, G.R. No. 54216, July 19, 1989)

Beneficiary: Rights; Irrevocable Beneficiary (2005) Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his other friends, to be included as beneficiaries considering that the proceeds of the policy are sufficient for the three friends. Can Jacob still add Yob and Jojo as his beneficiaries? Explain. (2%) SUGGESTED ANSWER:

No, Jacob can no longer add Yob and Jojo as his beneficiaries in addition to Diwata. As the irrevocable beneficiary, Diwata has acquired a-vested right over Jacob's life insurance policy. Any additional beneficiaries will reduce the amount which Diwata, as the first beneficiary, may recover, which will adversely affect her vested right. (Go v. Redfern, G.R. No. 47705, April 25, 1941) Beneficiary; Life Insurance; Prohibited Beneficiaries (1998) Juan de la Cruz was issued Policy No. 8888 of the Midland Life Insurance Co on a whole life plan for P20,000 on August 19, 1989. Juan is married to Cynthia with whom he has three legitimate children. He, however, designated Purita, his commonlaw wife, as the revocable beneficiary. Juan referred to Purita in his application and policy as the legal wife. 3 years later, Juan died. Purita filed her claim for the proceeds of the policy as the

designated beneficiary therein. The widow, Cynthia, also filed a claim as the legal wife. To whom should the proceeds of the insurance policy be awarded? (5%) SUGGESTED ANSWER:

The proceeds of the insurance policy shall be awarded to the ESTATE of Juan de la Cruz. Purita, the common-law-wife, is disqualified as the beneficiary of the deceased because of illicit relation between the deceased and Purita, the designated beneficiary. Due to such illicit

Page 50 of 103

relation, Purita cannot be a donee of the deceased. Hence, she cannot also be his beneficiary. Concealment; Material Concealment (2001) A applied for a non-medical life insurance. The insured did not inform the insurer that one week prior to his application for insurance, he was examined and confined at St. Luke’s Hospital where he was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured? Why? (5%) SUGGESTED ANSWER:

No. The concealed fact is material to the approval and issuance of the insurance policy. It is well settled that the insured need not die of the disease he failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate of the risks of the proposed insurance policy or in making inquiries. Concealment; Material Concealment: Incontestability Clause (1994) On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on November 6, 1990. He died on April 26, 1992 of hepatoma. The insurance company denied the beneficiaries’ claim and rescinded the policy by reason of alleged misrepresentation and concealment of material facts made by Tan in his application. It returned the premiums paid. Version 1990-2003 Arranged by SULAW Class 2005

The beneficiaries contend that the company had no right to rescind the contract as rescission must be done “during the lifetime” of the insured within two years and prior to the commencement of the action. Is the contention of the beneficiaries tenable? SUGGESTED ANSWER:

No. The incontestability clause does not apply. The insured dies within less than two years from the issuance of the policy on September 23, 1990. The insured died on April 26, 1992, or less than 2 years from September 23, 1990. The right of the insurer to rescind is only lost if the beneficiary has commenced an action on the policy. There is no such action in this case. (Tan v CA 174 s 143) Concealment; Material Concealment: Incontestability Clause (1996) Juan procured a “non-medical” life insurance from Good Life Insurance. He designated his wife, Petra, as the beneficiary. Earlier, in his application in response to the question as to whether or not he had ever been hospitalized, he answered in the negative. He forgot to mention his confinement at the Kidney Hospital. After Juan died in a plane crash, Petra filed a claim with Good Life. Discovering Juan’s previous hospitalization, Good Life rejected Petra’s claim on the ground of concealment and misrepresentation. Petra sued Good Life, invoking good faith on part of Juan. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Will Petra’s suit prosper? Explain. SUGGESTED ANSWER:

No, Petra’s suit will not prosper (assuming that the policy of life insurance has been in force for a period of less than 2 years from the date of its issue). The matters which Juan failed to disclose was material and relevant to the approval and issuance of the insurance policy. They would have affected Good Life’s action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of Juan by Good Life in order for it to reasonably assess the risk involved in accepting the application. In any case, good faith is no defense in concealment. The waiver of a medical examination in the ‘non-medical’ life insurance from Good Life makes it even more necessary that Juan supply complete information about his previous hospitalization for such information constitutes an important factor which Good Life takes into consideration in deciding whether to issue the policy or not. (See Sunlife Assurance Co of Canada v CA GR 105135, June 22, 1995 245 s 268)

If the policy of life insurance has been in force for a period of 2 years or more from the date of its issue (on which point the given facts are vague) then Good Life can no longer prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of Juan ( Sec 48 Ins Code) Concealment; Material Concealment: Incontestability Clause (1997) The assured answers “No” to the question in the application for a life policy: “Are you suffering from any form of heart illness?” In fact, the assured has been a heart patient for many years. On 7 Sep 1991, the assured is killed in a plane crash. The insurance company denies the claim for insurance proceeds and returns the premiums paid. Is the decision of the insurance company justified? SUGGESTED ANSWER:

Assuming that the incontestability clause does not apply because the policy has not been in force for 2 years, from the date of issue, during the lifetime of the insured, the decision of the insurance company not to pay is justified. There was fraudulent concealment. It is not material that the insured died of a different cause than the fact concealed. The fact concealed, that is heart ailment, is material to the determination by the insurance company

whether or not to accept the application for insurance and to require the medical examination of the insured. However, if the incontestability clause which applies to the insurance policy covering the life of the insured had been in force for 2 years from issuance thereof, the insurance company would not be justified in denying the claim for proceeds of the insurance and in returning the premium paid. In that case, the insurer cannot prove the policy void ab initio or rescindible by reason of fraudulent concealment or misrepresentation of the insured.

Page 51 of 103

Concealment; Material Concealment; Incontestability Clause (1991) Atty Roberto took out a life insurance policy from the Dana Ins Co (DIC) on 1 Sep 1989. On 31 Aug 1990, Roberto died. DIC refused to pay his beneficiaries because it discovered that Robert had misrepresented certain material facts in his application. The beneficiaries sued on the basis that DIC can contest the validity of the insurance policy only within 2 years from the date of issue and during the lifetime of the insured. Decide the case. SUGGESTED ANSWER:

I would rule in favor of the insurance company. The incontestability clause, applies only if the policy had been in effect for at least 2 years. The 2 year period is counted from the time the insurance becomes effective until the death of the insured and not thereafter (Tan v CA GR 48044 29Jun1989) ALTERNATIVE ANSWER:

I would rule in favor of the insurance company. Although an insurer may not rescind the contract on ground of misrepresentation after an action is commenced for recovery under the policy, the insurer is not precluded from invoking the ground of misrepresentation as a defense in the action for recovery. This is alright since the bar problem is not covered yet by the incontestability clause. Concealment; Material Concealment; Incontestability Clause (1998) Version 1990-2003 Arranged by SULAW Class 2005

Renato was issued a life insurance policy on January 2, 1990. He concealed the fact that 3 years prior to the issuance of his life insurance policy, he had been seeing a doctor about his heart ailment. On March 1, 1992, Renato died of heart failure. May the heirs file a claim on the proceeds of the life insurance policy of Renato? (5%) SUGGESTED ANSWER:

Yes. The life insurance policy in question was issued on January 9, 1990. More than 2 years had elapsed when Renato, the insured, died on March 1, 1992. The incontestability clause applies. INCONTESTABILITY CLAUSE

The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the policy, whether or not, the insured still lives within such period. After two years, the defenses of concealment or misrepresentation, no matter how patent or well founded, no longer lie. Insurable Interest: Bank Deposit (2000) BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the Philippine Deposit Insurance Corp (PDIC) (RA 3591) is only one tenth of BD’s deposit, he would like some protection for the excess by taking out an insurance against all risks or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

the continuing crisis involving the banking and financial sector in the Asian region. Does BD have an insurable interest within the meaning of the Insurance Code of the Philippines (PD1460)? (2%) SUGGESTED ANSWER:

Yes. BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess of the limit covered by the PDIC Act, PBD will be damnified. He will suffer pecuniary loss of P300,000.00, that is, his bank deposit of half a million pesos minus P200,000.00 which is the maximum amount recoverable from the PDIC. Insurable Interest: Public Enemy (2000) May a member of the MILF or breakaway group, the Abu Sayyaf, insured with a company licensed to business under the Insurance Code of Phils (PD 1460)? Explain. (3%)

its be do the

SUGGESTED ANSWER:

A member of the MILF or the Abu Sayyaf may be insured with a company licensed to do business under the Insurance Code of the Phils. What is prohibited to be insured is a public enemy. A public enemy is a citizen or national of a country with which the Philippines is at war. Such member of the MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines. Insurable Interest: Separate Insurable Interest (1999) A businessman in the grocery business obtained from First Insurance an insurance policy for P5M to fully cover his stocks-intrade from the risk of fire. Three months thereafter, a fire of accidental origin broke out and completely destroyed the grocery including his stocksin-trade. This prompted the businessman to file with First Insurance a claim for five million pesos representing the full value of his goods. First Insurance denied the claim because it discovered that at the time of the loss, the stocks-in-trade were mortgaged to a creditor who likewise obtained from Second Insurance Company fire insurance coverage for the stocks at their full value of P5M. May the businessman and the creditor obtain separate insurance coverages over the same stocks-in-trade? Explain (3%) First Insurance refused to pay claiming that double insurance is contrary to law. Is this contention tenable? (3%)

Suppose you are the Judge, how much would you allow the businessman and the creditor to recover from their respective insurers. Explain (3%) SUGGESTED ANSWER:

Yes. The businessman, as owner, and the creditor, as mortgagee, have separate insurable interests in the same stocks-intrade. Each may insure such interest to protect his own separate interest. The contention of First Insurance that double insurance is contrary to law is untenable. There is no law providing that double insurance is illegal per se.

Page 52 of 103

Moreover, in the problem at hand, there is no double insurance because the insured with the First Insurance is different from the insured with the Second Insurance Company. The same is true with respect to the interests insured in the two policies. As Judge, I would allow the businessman to recover his total loss of P5M representing the full value of his goods which were lost through fire. As to the creditor, I would allow him to recover the amount to the extent of or equivalent to the value of the credit he extended to the businessman for the stocks-in-trade which were mortgaged by the businessman. Insurable Interest; Equitable Interest (1991) A piece of machinery was shipped to Mr Pablo on the basis of C&F Manila. Pablo insured said machinery with the Talaga Merchants Ins Co (Tamic) for loss or damage during the voyage. The vessel sank en route to Manila. Pablo then filed a claim with Tamic which was denied for the reason that prior to deliver, Pablo had no insurable interest. Decide the case. SUGGESTED ANSWER:

Pablo had an existing insurable interest on the piece of machinery he bought. The purchase of goods under a perfected contract of sale already vests equitable interest on the property in favor of the buyer even while it is pending delivery (Filipino Merchants Ins Co v CA GR 85144 28Nov1989)

Insurable Interest; Life vs. Property Insurance (1997) Version 1990-2003 Arranged by SULAW Class 2005

A obtains a fire insurance on his house and as a generous gesture names his neighbor as the beneficiary. If A’s house is destroyed by fire, can B successfully claim against the policy? A obtains insurance over his life and names his neighbor B the beneficiary because of A’s secret love for B. If A dies, can B successfully claim against the policy? SUGGESTED ANSWER:

No. In property insurance, the beneficiary must have insurable interest in the property insured. (Sec 18 Ins Code). B does not have insurable interest in the house insured. Yes. In life insurance, it is not required that the beneficiary must have insurable interest in the life of the insured. It was the insured himself who took the policy on his own life. Insurable Interest; Life vs. Property Insurance (2000) IS, an elderly bachelor with no known relatives, obtained life insurance coverage for P250,000.00 from Starbrite Insurance Corporation, an entity licensed to engage in the insurable business under the Insurance Code of the Philippines (PD1460). He also insured his residential house for twice that amount within the same corporation. He immediately assigned all his rights to the insurance proceeds to BX, a friend-companion living with him. Three years later, IS died in a fire that gutted his insured house two days after he had sold it. There is Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

no evidence of suicide or arson or involvement of BX in these events. BX demanded payment of the insurance proceeds from the two policies, the premiums for which IS had been faithfully paying during all the time he was alive. Starbrite refused payment, contending that BX had no insurable interest and therefore was not entitled to receive the proceeds from IS’s insurance coverage on his life and also on his property. Is Starbrite’s contention valid? Explain? (5%) SUGGESTED ANSWER:

Starbrite is correct with respect to the insurance coverage on the property of IS. The beneficiary in the property insurance policy or the assignee thereof must have insurable interest in the property insured. BX, a mere friend-companion of IS, has no insurable interest in the residential house of IS. BX is not entitled to receive the proceeds from IS’s insurance on his property. As to the insurance coverage on the life of IS, BX is entitled to receive the proceeds. There is no requirement that BX should have insurable interest in the life of IS. It was IS himself who took the insurance on his own life. Insurable Interest; Life vs. Property Insurance (2002) Distinguish insurable interest in property insurance from insurable interest in life insurance. (5%) SUGGESTED ANSWER:

In property insurance, the expectation of benefit must have a legal basis. In life insurance, the expectation of benefit to be derived from the continued existence of a life need not have any legal basis. In property insurance, the actual value of the interest therein is the limit of the insurance that can validly be placed thereon. In life insurance, there is no limit to the amount of insurance that may be taken upon life. In property insurance, an interest insured must exist when the insurance takes effect and when the loss occurs but need not exist in the meantime. In life insurance, it is enough that insurable interest exists at the time when the contract is made but it need not exist at the time of loss. Insurable Interest; Property Insurance (1994) In a civil suit, the Court ordered Benjie to pay Nat P500,000.00. To execute the judgment, the sheriff levied upon Benjie’s

registered property (a parcel of land and the building thereon),and sold the same at public auction to Nat, the highest bidder. The latter, on March 18, 1992, registered with the Register of Deeds the certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured with Garapal Insurance for P1,000,000.00 the same building that was sold at public auction to Nat. Benjie failed to redeem the property by March 18, 1993.

Page 53 of 103

On March 19, 1993, a fire razed the building to the ground. Garapal Insurance refused to make good its obligation to Benjie under the insurance contract. Is Garapal Insurance legally justified in refusing payment to Benjie? Is Nat entitled to collect on the insurance policy? SUGGESTED ANSWER:

1)Yes. At the time of the loss, Benjie was no longer the owner of the property insured as he failed to redeem the property. The law requires in property insurance that a person can recover the proceeds of the policy if he has insurable interest at the time of the issuance of the policy and also at the time when the loss occurs. At the time of fire, Benjie no longer had insurable interest in the property insured. No. While at the time of the loss he had insurable interest in the building, as he was the owner thereof, Nat did not have any interest in the policy. There was no automatic transfer clause in the policy that would give him such interest in the policy. Insurable Interest; Property Insurance (2001) JQ, owner of a condominium unit, insured the same against fire with the XYZ Insurance Co., and made the loss payable to his brother, MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy? State the reason(s) for your answer. (5%) SUGGESTED ANSWER:

Version 1990-2003 Arranged by SULAW Class 2005

JQ can recover on the fire insurance policy for the loss of said condominium unit. He has the insurable interest as ownerinsured. As beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have insurable interest in the condominium unit. Insurance; Cash & Carry Basis (2003) What is meant by “cash and carry” in the business of insurance? SUGGESTED ANSWER:

Insurance; Co-Insurance vs. Re-Insurance (1994) Distinguish co-insurance from re-insurance. SUGGESTED ANSWER:

CO-INSURANCE is the percentage in the value of the insured property which the insured himself assumes or undertakes to act as insurer to the extent of the deficiency in the insurance of the insured property. In case of loss or damage, the insurer will be liable only for such proportion of the loss or damage as the amount of insurance bears to the designated percentage of the full value of the property insured. REINSURANCE is where the insurer procures a third party, called the reinsurer, to insure him against liability by reason of such original insurance. Basically, a

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured. Insurance; Double Insurance (2005) When does double insurance exist? (2%) SUGGESTED ANSWER:

Under Section 93 of the Insurance Code, there is double insurance when there is over-insurance with two or more companies, covering the same property, the same insurable interest and the same risk. Double insurance exists where the same person is insured by several insurers separately in respect of the same subject matter and interests. (Geagonia v. Court of Appeals, G.R. No. 114427, February 6, 1995)

Insurance; Double Insurance; effect (1993) Julie and Alma formed a business partnership. Under the business name Pino Shop, the partnership engaged in a sale of construction materials. Julie insured the stocks in trade of Pino Shop with WGC Insurance Co for P350th. Subsequently, she again got an insurance contract with RSI for P1m and then from EIC for P200th. A fire of unknown origin gutted the store of the partnership. Julie filed her claims with the three insurance companies. However, her claims were denied separately for breach of policy condition which required the insured to give notice of any insurance effected covering the stocks in trade. Julie went to court and contended that she should not be blamed for the omission, alleging that the insurance agents for WGC, RSI and EIC knew of the existence of the additional insurance coverages and that she was not informed about the requirement that such other or additional insurance should be stated in the policy. Is the contention of Julie tenable? Explain. May she recover on her fire insurance policies? Explain. SUGGESTED ANSWER:

No. An insured is required to disclose the other insurances covering the subject matter of the insurance being applied for. (New Life Ent v CA 207 s 669) No, because she is guilty of violation of a warranty/ condition. Insurance; Effects; Payment of Premiums by Installment (2006) The Peninsula Insurance Company offered to insure Francis' brand new car against all risks in the sum of PI Million for 1 year. The policy was issued with the premium fixed at 160,000.00 payable in 6 months. Francis only paid the first two months installments. Despite demands, he failed to

pay the subsequent installments. Five months after the issuance of the policy, the vehicle was carnapped. Francis filed with the insurance company a claim for its value. However, the company denied his claim on the ground that he failed to pay the premium resulting in the cancellation of the policy. Can Francis recover from the Peninsula Insurance Company? (5%) SUGGESTED ANSWER:

Page 54 of 103

Yes, when insured and insurer have agreed to the payment of premium by installments and partial payment has been made at the time of loss, then the insurer becomes liable. When the car loss happened on the 5th month, the six months agreed period of payment had not yet elapsed (UCPB General

Insurance v. Masagana Telamart, G.R. No. 137172, April 4, 2001). Francis can recover

from Peninsula Insurance Company, but the latter has the right to deduct the amount of unpaid premium from the insurance proceeds. Insurance; Life Insurance; Assignment of Policy (1991) The policy of insurance upon his life, with a face value of P100th was assigned by Jose, a married man with 2 legitimate children, to his nephew Y as security for a loan of P50th. He did not give the insurer any written notice of such assignment despite the explicit provision to that effect in the policy. Jose died. Upon the claim on the policy by the assignee, the insurer refused to pay on the ground that it was not notified of the assignment. Upon the other hand, the heirs of Jose contended that Y is not entitled to any amount under the policy because the assignment without due notice to the insurer was void. Resolve the issues. SUGGESTED ANSWER:

A life insurance is assignable. A provision, however, in the policy stating that written notice of such an assignment should be given to the insurer is valid (Secs 181-182 Ins Code). The failure of the notice of

Version 1990-2003 Arranged by SULAW Class 2005

assignment would thus preclude the assignee from claiming rights under the policy. The failure of notice did not, however, avoid the policy; hence, upon the death of Jose, the proceeds would, in the absence of a designated beneficiary, go to the estate of the insured. The estate, in turn, would be liable for the loan of P50,000 owing in favor of Y. Insurance; Perfection of Insurance Contracts (2003) Josie Gatbonton obtained from Warranty Insurance Corporation a comprehensive motor vehicle insurance to cover her brand new automobile. She paid, and the insurer accepted payment in check. Before the check could be encashed, Josie was involved in a motor vehicle accident where her car became a total wreck. She sought payment from the insurer. Could the insurer be made liable under the insurance coverage? (6%) SUGGESTED ANSWER:

(per Dondee) Yes, because there was a perfected contract of insurance the moment there is a meeting of the minds with respect to the object and the cause of payment. The payment of check is a valid payment unless upon encashment the check bounced. Insurance; Property Insurance; Prescription of Claims (1996) Robin insured his building against fire with EFG Assurance. The insurance policy contained the usual stipulation that any action or suit must be filed within one year after the rejection of the claim. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

After his building burned down, Robin filed his claim for fire loss with EFG. On Feb 28, 1994, EFG denied Robin’s claim. On April 3, 1994, Robin sought reconsideration of the denial, but EFG reiterated its position. On March 20, 1995, Robin commenced judicial action against EFG. Should Robin’s action be given due course? Explain. SUGGESTED ANSWER:

No, Robin’s action should not be given due course. Is filing of the request for reconsideration did not suspend the running of the prescriptive period of one year stipulated in the insurance policy. Thus, when robin commenced judicial action against EFG Assurance on March 20, 1995, his ability to do so had already prescribed. The one-year period is counted from Feb 28, 1994 when EFG denied Robin’s claim, not from the date (presumably after April 3, 1994) when EFG reiterated its position denying Robin’s claim. The reason for this rule is to insure that claims against insurance companies are promptly settled and that insurance suits are brought by the insured while the evidence as to the origin and cause of the destruction has not yet disappeared. (See Sun Ins Office Ltd v CA gr 89741, Mar 13 91 195s193)

Insurance; Return of Premiums (2000) Name at least three instances when an insured is entitled to a return of the premium paid. SUGGESTED ANSWER:

Three instances when an insured is entitled to a return of premium paid are: To the WHOLE PREMIUM, if no part of his interest in the thing insured be exposed to any of the perils insured against. Where the insurance is made for a definite period of time and the insured surrenders his policy, to such portion of the premium as corresponds with the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued. When the contract is voidable on account of the fraud or misrepresentation of the insurer or of his agent or on account of facts the existence of which the insured was ignorant without his fault; or when, by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy.

ALTERNATIVE INSTANCE:

In case of an over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. Insured; Accident Policy (2004) CNI insure SAM under a homeowner's policy against claims for accidental injuries by neighbors. SAM's minor Version 1990-2003 Arranged by SULAW Class 2005

However,

Page 55 of 103

son, BOY, injured 3 children of POS, a neighbor, who sued SAM for damages. SAM's lawyer was ATT, who was paid for his services by the insurer for reporting periodically on the case to CNI. In one report, ATT disclosed to CNI that after his investigations, he found the injuries to the 3 children not accidental but intentional. SAM lost the case in court, and POS was awarded one million pesos in damages which he sought to collect from the insurer. But CNI used ATTs report to deny the claim on the ground that the injuries to POS's 3 children were intentional, hence excluded from the policy's coverage. POS countered that CNI was estopped from using ATTs report because it was unethical for ATT to provide prejudicial information against his client to the insurer, CNI. Who should prevail: the claimant, POS; or the insurer, CNI? Decide with reasons briefly. (5%) SUGGESTED ANSWER:

CNI is not estopped from using ATT's report, because CNI, in the first place, commissioned it and paid ATT for it. On the other hand, ATT has no conflict of interest because SAM and CNI are on the same side — their interests being congruent with each other, namely, to oppose POS's claim. It cannot be said that ATT has used the information to the disadvantage or prejudice of SAM. Finman General Assurance Corp. v. Court of Appeals, 213 SCRA 493 (1992), it was

explained that there is no "accident" in the context of an accident policy, if it is the natural result of the insured's voluntary act, unaccompanied by anything unforeseen except the injury. There is no accident when a deliberate act is performed, unless some additional and unforeseen happening occurs that brings about the injury. This element of deliberateness is not clearly shown from the facts of the case, especially considering the fact that BOY is a minor, and the injured parties are also children. Accordingly, it is possible that CNI may not prosper. ATT's report is not conclusive on POS or the court.

Insured; Accident vs. Suicide (1990) Luis was the holder of an accident insurance policy effective Nov 1, 1988 to Oct 31, 1989. At a boxing contest held on Jan 1, 1989 and sponsored by his employer, he slipped and was hit on the fact by his opponent so he fell and his head hit one of the posts of the boxing ring. He was rendered unconscious and was dead on arrival at the hospital due to “intra-cranial hemorrhage.”

Can his father who is a beneficiary under said insurance policy successfully claim indemnity from the insurance company? Explain. SUGGESTED ANSWER:

Yes, the father who is a beneficiary under the accidental insurance can successfully claim indemnity for the death of the insured. Clearly, the proximate cause of death was the boxing contest. Death sustained in a boxing contest is an accident. (De la Cruz v Capital Ins & Surety Co 17s559)

Version 1990-2006 Updated by

Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Insured; Accident vs. Suicide (1993) S Insurance Co issued a personal accident policy to Bob Tan with a face value of P500th. In the evening of Sep 5, 1992, after his birthday party, Tan was in a happy mood but not drunk. He was playing with his hand gun, from which he previously removed the magazine. As his secretary was watching television, he stood in front of her and pointed the gun at her. She pushed it aside and said that it may be loaded. He assured her that it was not and then pointed it at his temple. The next moment, there was an explosion and Tan slumped to the floor lifeless. The wife of the deceased sought payment on the policy but her claim was rejected. The insurance company agreed that there was no suicide. However, it was the submission of the insurance company that there was no accident. In support thereof, it contended a) that there was no accident when a deliberate act was performed unless some additional, unexpected, independent and unforeseen happening occur which produces or brings about the injury or death; and b) that the insured willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy. Are the two contentions of the insurance company tenable? Explain. SUGGESTED ANSWER:

No. These two contentions are not tenable. The insurer is liable for injury or death even due to the insured’s gross negligence. The fact that the insured removed the magazine from the hand gun means that the insured did not willfully expose himself to needless peril. At most, the insured is only guilty of negligence (Sun Ins v CA 211 s 554)

Insured; Accident vs. Suicide (1995) Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value of P500th. A provision in the policy states that “the company shall not be liable in respect of “bodily injury’ consequent upon the insured person attempting to commit suicide or willfully exposing himself to needless peril except in an attempt to save human life.” Six months later Henry Dy died of a bullet wound in his head. Investigation showed that one evening Henry was in a happy mood although he was not drunk. He was playing with his handgun from which he had previously removed its magazine. He pointed the gun at his sister who got scared. He assured her it was not loaded. He then pointed the

gun at his temple and pulled the trigger. The gun fired and Henry slumped on the floor. Henry’s wife Beverly, as the designated beneficiary, sought to collect under the policy. Sun-Moon Insurance rejected her claim on the ground that the death of Henry was not accidental. Beverly sued the insurer. Decide and Discuss fully. SUGGESTED ANSWER:

Beverly can recover the proceeds of the policy from the insurer. The death of the insured was not due to suicide

Page 56 of 103

or willful exposure to needless peril which are excepted risks. The insured’s act was purely an act of negligence which is covered by the policy and for which the insured got the insurance for his protection. In fact, he removed the magazine from the gun and when he pointed the gun to his temple he did so because he thought that it was safe for him to do so. He did so to assure his sister that the gun was harmless. There is none in the policy that would relieve the insurer of liability for the death of the insured since the death was an accident. Insurer: Effects: Several Insurers (2005) What is the nature of the liability of the several insurers in double insurance? Explain. (2%) SUGGESTED ANSWER:

The nature of the liability of the several insurers in double insurance is that each insurer is bound to the contribute ratably to the loss in proportion to the amount for which he is liable under his contract as provided for by Sec 94 of ICP par. The ratable contribution of each of each insurer will be determined based on the following formula: AMOUNT OF POLICY divided by TOTAL INSURANCE TAKEN multiplied by LOSS = LIABILITY OF THE INSURER. ALTERNATIVE ANSWER:

Each insurer is bound, as between himself and other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Sec. 94, Insurance Code)

Version 1990-2003 Arranged by SULAW Class 2005

Insurer; 3rd Party Liability (1996) While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the latter, Roberto sued Cesar and the third party liability insurer for damages and/or insurance proceeds. The insurance company moved to dismiss the complaint, contending that the liability of Cesar has not yet been determined with finality. Is the contention of the insurer correct? Explain. May the insurer be held liable with Cesar? SUGGESTED ANSWER:

No, the contention of the insurer is not correct. There is no need to wait for the decision of the court determining Cesar’s liability with finality before the third party liability insurer could be sued. The occurrence of the injury to Roberto immediately gave rise to the liability of the insurer under its policy. In other words, where an insurance policy insures directly against liability, the insurer’s liability accrues immediately upon the occurrence of the injury or event upon which the liability depends (Sherman Shafer v Judge RTC Olongapo City Branch 75 GR l-78848, Nov 14 88 167s386)

The insurer cannot be held solidarily liable with Cesar. The liability of the insurer is based on contract while that of Cesar is based on tort. If the insurer were solidarily liable with Cesar, it could be made to pay more than the amount stated in the policy. This would, however, be contrary to the principles underlying insurance contracts. On the other hand, if the insurer were solidarily liable with Cesar and it is made to pay only up to the amount Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

stated in the insurance policy, the principles underlying solidary obligations would be violated. (Malayan Ins Co v CA GR L-36413 Sep 26, 88 165s536; Figuracion vda de Maglana v Consolacion GR 60506 Aug 6, 92 212s268)

Insurer; 3rd Party Liability (2000) X was riding a suburban utility vehicle (SUV) covered by a comprehensive motor vehicle liability insurance (CMVLI) underwritten by FastPay Insurance Company when it collided with a speeding bus owned by RM Travel Inc. The collision resulted in serious injuries to X; Y, a passenger of the bus; and Z, a pedestrian waiting for a ride at the scene of the collision. The police report established that the bus was the offending vehicle. The bus had CMVLI policy issued by Dragon Ins Co. X, Y, and Z jointly sued RM Travel and Dragon Ins for indemnity under the Insurance Code of the Phils (PD1460). The lower court applied the “no fault” indemnity policy of the statute, dismissed the suit against RM Travel, and ordered Dragon Ins to pay indemnity to all three plaintiffs. Do you agree with the court’s judgment? Explain (2%) SUGGESTED ANSWER:

No. The cause of action of Y is based on the contract of carriage, while that of X and Z is based on torts. The court should not have dismissed the suit against RM Travel. The court should have ordered Dragon Ins to pay each of X, Y , and Z to the extent of the insurance coverage, but whatever amount is agreed upon in the policy should be answered first by RM Travel and the succeeding amount should be paid by Dragon Insurance up to the amount of the insurance coverage. The excess of the claims of X, Y, and Z, over and above such insurance coverage, if any, should be answered or paid by RM Travel. Insurer; 3rd Party Liability; No Fault Indemnity (1994) What is your understanding of a “no fault indemnity” clause found in an insurance policy? SUGGESTED ANSWER:

Under the “NO FAULT INDEMNITY” clause, any claim for death or injury of any passenger or third party shall be paid without the necessity of proving fault or negligence of any kind. The indemnity in respect of any one person shall not exceed P5,000.00, provided they are under oath, the following proofs shall be sufficient: police report of the accident; and death certificate and evidence sufficient to establish the proper payee; or

medical report and evidence of medical or hospital disbursement in respect of which refund is claimed. Claim may be made against one motor vehicle only. Insurer; 3rd Party Liability; Quitclaim (1994) Raul’s truck bumped the car owned by Luz. The car was insured by Cala Insurance. For the damage caused, Cala paid Luz P5,000.00 in amicable settlement. Luz executed a release of claim, subrogating Cala to all her rights against Raul. When Cala demanded reimbursement from Raul, the latter refused saying that he had already paid

Page 57 of 103

Luz P4,500 for the damage to the car as evidenced by a release of claim executed by Luz discharging Raul. So Cala demanded reimbursement from Luz, who refused to pay, saying that the total damage to the car was P9,500.00 Since Cala paid P5,000 only, Luz contends that she was entitled to go after Raul to claim the additional P4,500.00 Is Cala, as subrogee of Luz, entitled to reimbursement from Raul? May Cala recover what it has paid Luz? SUGGESTED ANSWER:

No. Luz executed a release in favor of Raul

(Manila Mahogany Mfg Corp v CA GR 52756, 12 Oct 1987)

Yes. Cala lost its right against Raul because of the release executed by Luz. Since the release was made without the consent of Cala, Cala may recover the amount of P5,000 form Luz (Manila Mahogany Mfg Corp v CA GR 52756, 12 Oct 1987).

Insurer; Authorized Driver Clause (1991) Sheryl insured her newly acquired car, a Nissan Maxima against any loss or damage for P50th and against 3rd party liability for P20th with the XYZ Ins Co. Under the policy, the car must be driven only by an authorized driver who is either: 1) the insured, or 2) any person driving on the insured’s order or with his permission: provided that the person driving is permitted in accordance with the licensing or other laws or regulations to drive the motor vehicle and is not disqualified from Version 1990-2003 Arranged by SULAW Class 2005

driving such motor vehicle by order of a court. During the effectivity of the policy, the car, then driven by Sheryl herself, who had no driver’s license, met an accident and was extensively damaged. The estimated cost of repair was P40th. Sheryl immediately notified XYZ, but the latter refused to pay on the policy alleging that Sheryl violated the terms thereof when she drove it without a driver’s license. Is the insurer correct? SUGGESTED ANSWER:

The insurer was not correct in denying the claim since the proviso “that the person driving is permitted in accordance with the licensing, etc.” qualified only a person driving the vehicle other than the insured at the time of the accident (Palermo v Pyramid Ins Co GR 36480 31 May 88) ALTERNATIVE ANSWER:

The insurer is correct. The clause “authorized driver” in the policy evidently applies to both the insured and any other person driving the vehicle at the time of the accident. The term “authorized driver” should be construed as a person who is authorized by law to driver the vehicle (Peza v Alikpala 160s31)

Insurer; Authorized Driver Clause (2003) Rick de la Cruz insured his passenger jeepney with Asiatic Insurers, Inc. The policy provided that the authorized driver of the vehicle should have a valid and existing driver’s license. The passenger jeepney of Rick de la Cruz which was at the time driven by Jay Cruz, Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

figured in an accident resulting in the death of a passenger. At the time of the accident, Jay Cruz was licensed to drive but it was confiscated by an LTO agent who issued him a Traffic Violation Report (TVR) just minutes before the accident. Could Asiatic Insurers, Inc., be made liable under its policy? Why? (6%) SUGGESTED ANSWER:

Asiatic Insurers, Inc., should be made liable under the policy. The fact that the driver was merely holding a TVR does not violate the condition that the driver should have a valid and existing driver’s license. Besides, such a condition should be disregarded because what is involved is a passenger jeepney, and what is involved here is not own damage insurance but third party liability where the injured party is a third party not privy to the contract of insurance. Insurer; Authorized Driver Clause; vehicle is stolen (1993) HL insured his brand new car with P Ins Co for comprehensive coverage wherein the insurance company undertook to indemnify him against loss or damage to the car a) by accidental collision ... b) by fire, external explosion, burglary, or theft, and c) malicious act. After a month, the car was carnapped while parked in the parking space in front of the Intercontinental Hotel in Makati. HL’s wife who was driving said car before it was carnapped reported immediately the incident to various government agencies in compliance with the insurance requirements. Because the car could not be recovered, HL filed a claim for the loss of the car with the insurance company but it was denied on the ground that his wife who was driving the car when it was carnapped was in the possession of an expired driver’s license, a violation of the “authorized driver” clause of the insurance company. May the insurance company be held liable to indemnify HL for the loss of the insured vehicle? Explain. Supposing that the car was brought by HL on installment basis and there were installments due and payable before the loss of the car as well as installments not yet payable. Because of the loss of the car, the vendor demanded from HL the unpaid balance of the promissory note. HL resisted the demand and claimed that he was only liable for the installments due and payable before the

loss of the car but no longer liable for other installments not yet due at the time of the loss of the car. Decide. SUGGESTED ANSWER:

Yes. The car was lost due to theft. What applies in this case is the “theft” clause, and not the “authorized driver” clause. It is immaterial that HL’s wife was driving the car with an expired driver’s license at the time it was carnapped. (Perla Compania de Seguros v CA 208 s 487)

The promissory note is not affected by whatever befalls the subject matter of the accessory contract. The

Page 58 of 103

unpaid balance on the promissory note should be paid and not only the installments due and payable before the loss of the car. Insurer; Group Insurance; Employer-Policy Holder (2000) X company procured a group accident insurance policy for its construction employees variously assigned to its provincial infrastructure projects. Y Insurance Company underwrote the coverage, the premiums of which were paid for entirely by X Company without any employee contributions. While the policy was in effect, five of the covered employees perished at sea on their way to their provincial assignments. Their wives sued Y Insurance Company for payment of death benefits under the policy. While the suit was pending, the wives signed a power of attorney designating X Company executive, PJ, as their authorized representative to enter into a settlement with the insurance company. When a settlement was reached, PJ instructed the insurance company to issue the settlement check to the order of X Company, which will undertake the payment to the individual claimants of their respective shares. PJ misappropriated the settlement amount and the wives pursued their case against Y Insurance Co. Will the suit prosper? Explain (3%) SUGGESTED ANSWER:

Yes. The suit will prosper. Y Ins Co is liable. X Co, through its executive, PJ, acted as agent of Y Ins Co. The latter is thus bound by the misconduct of its agent. It is the Version 1990-2003 Arranged by SULAW Class 2005

usual practice in the group insurance business that the employer-policy holder is the agent of the insurer. Insurer; Liability of the Insurers (1990) Suppose that Fortune owns a house valued at P600th and insured the same against fire with 3 insurance companies as follows: X – P400th Y – P200th Z – P600th In the absence of any stipulation in the policies from which insurance company or companies may Fortune recover in case fire should destroy his house completely? SUGGESTED ANSWER:

Fortune may recover from the insurers in such order as he may select up to their concurrent liability (Sec 94 Ins Code) Valued Policy If each of the fire insurance policies obtained by Fortune in the problem (a) is a valued policy and the value of his house was fixed in each of the policies at P1m, how much would Fortune recover from X if he has already obtained full payment on the insurance policies issued by Y and Z? SUGGESTED ANSWER:

Fortune may still recover only the balance of P200,000 from X insurance company since the insured may only recover up to the extent of his loss. ALTERNATIVE:

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Having already obtained full payment on the insurance policies issued by Y and Z, Fortune may no longer recover from X insurance policy. Open Policy If each of the policies obtained by Fortune in the problem (a) above is an open policy and it was immediately determined after the fire that the value of Fortune’s house was P2.4m, how much may he collect from X,Y and Z? SUGGESTED ANSWER:

In an open policy, the insured may recover his total loss up to the amount of the insurance cover. Thus, the extent of recovery would be P400th from X, P200th from Y, and P600th from Z. In problem (a), what is the extent of the liability of the insurance companies among themselves? SUGGESTED ANSWER:

In problem (a), the insurance companies among themselves would be liable, viz: X – 4/12 of P600th = P200th Y – 2/12 of P600th = P100th Z – 6/12 of P600th = P300th Supposing in problem (a) above, Fortune was able to collect from both Y and Z, may he keep the entire amount he was able to collect from the said 2 insurance companies? SUGGESTED ANSWER:

No, he can only be indemnified for his loss, not profit thereby; hence he must return P200th of the P800th he was able to collect. Loss: Actual Total Loss (1996) RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to stormy weather, the ship carrying the rice became submerged in sea water, and with it the rice cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the insurer, because the rice was no longer fit for human consumption. Admittedly, the rice could still be used as animal feed. Is RC’s claim for total loss justified? Explain. SUGGESTED ANSWER:

Yes, RC’s claim for total loss is justified. The rice, which was imported from Thailand for sale locally, is obviously intended for consumption by the public. The complete physical destruction of the rice is not essential to constitute an actual total loss. Such a loss exists in this case since the rice, having been soaked in sea water and thereby rendered unfit for human consumption, has become totally useless for the purpose for which it was

imported (Pan Malayan Ins Co v CA gr 95070 Sep 5, 1991)

Loss: Constructive Total Loss (2005) M/V Pearly Shells, a passenger and cargo vessel, was insured for P40,000,000.00 against “constructive total loss.” Due to a typhoon, it sank near Palawan. Luckily, there were no casualties, only injured passengers. The ship owner sent a notice of abandonment of his interest over the vessel to the insurance company which then

Page 59 of 103

hired professionals to afloat the vessel for P900,000.00. When re-floated, the vessel needed repairs estimated at P2,000,000.00. The insurance company refused to pay the claim of the ship owner, stating that there was “no constructive total loss.” Was there “constructive total loss” to entitle the ship owner to recover from the insurance company? Explain. Was it proper for the ship owner to send a notice of abandonment to the insurance company? Explain. (5%) SUGGESTED ANSWER:

No, there was no "constructive total loss" because the vessel was refloated and the costs of refloating plus the needed repairs (P 2.9 Million) will not be more than threefourths of the value of the vessel. A constructive total loss is one which gives to a person insured a right to abandon. (Sec, 131, Insurance Code) There would have been a constructive total loss had the vessel MN Pearly Shells suffer loss or needed refloating and repairs of more than the required three-fourths of its value, i.e., more than P30.0 Million (Sec. 139, Insurance Code, cited in Oriental Assurance v. Court of Appeals and Panama Saw Mill, G.R. No. 94052, August 9, 1991)

However, the insurance company shall pay for the total costs of refloating and needed repairs (P2.9 Million). Was it proper for the ship owner to send a notice of abandonment to the insurance company? Explain. SUGGESTED ANSWER: Version 1990-2003 Arranged by SULAW Class 2005

No, it was not proper for the ship owner to send a notice of abandonment to the insurance company because abandonment can only be availed of when, in a marine insurance contract, the amount to be expended to recover the vessel would have been more than three-fourths of its value. Vessel MN Pearly Shells needed only P2.9 Million, which does not meet the required three-fourths of its value to merit abandonment. (Section 139, Insurance Code, cited in Oriental Assurance v. Court of Appeals and Panama Saiv Mill, G.R. No. 94052, August 9, 1991)

Loss: Total Loss Only (1992) An insurance company issued a marine insurance policy covering a shipment by sea from Mindoro to Batangas of 1,000 pieces of Mindoro garden stones against “total loss only.” The stones were loaded in two lighters, the first with 600 pieces and the second with 400 pieces. Because of rough seas, damage was caused the second lighter resulting in the loss of 325 out of the 400 pieces. The owner of the shipment filed claims against the insurance company on the ground of constructive total loss inasmuch as more than ¾ of the value of the stones had been lost in one of the lighters. Is the insurance company liable under its policy? Why? SUGGESTED ANSWER:

The insurance company is not liable under its policy covering against “total loss only” the shipment of 1,000 pieces of Mindoro garden stones. There is no constructive total loss that can claimed since the ¾ rule is to be computed on the total 1,000 pieces of Mindoro Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

garden stones covered by the single policy coverage (see Oriental Assurance Co v CA 200 s 459)

Marine Insurance; Implied Warranties (2000) What warranties are implied in marine insurance? SUGGESTED ANSWER:

The following warranties are implied in marine insurance: That the ship is seaworthy to make the voyage and/or to take in certain cargoes That the ship shall not deviate from the voyage insured; That the ship shall carry the necessary documents to show nationality or neutrality and that it will not carry any document which will cast reasonable suspicion thereon; That the ship shall not carry contraband, especially if it is making a voyage through belligerent waters. Marine Insurance; Peril of the Ship vs. Peril of the Sea (1998) A marine insurance policy on a cargo states that “the insurer shall be liable for losses incident to perils of the sea.” During the voyage, seawater entered the compartment where the cargo was stored due to the defective drainpipe of the ship. The insured filed an action on the policy for recovery of the damages caused to the cargo. May the insured recover damages? (5%) SUGGESTED ANSWER:

No. The proximate cause of the damage to the cargo insured was the defective drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect in the drainpipe was the result of the ordinary use of the ship. To recover under a marine insurance policy, the proximate cause of the loss or damage must be peril of the sea. Mutual Insurance Company; Nature & Definition (2006) What is a mutual insurance company or association? SUGGESTED ANSWER:

A mutual life insurance corporation is a cooperative that promotes the welfare of its own members, with the money collected from among themselves and solely for their own protection and not for profit. Members are both the insurer and insured. A mutual life insurance company has no capital stock and relies solely upon its contributions or premiums to meet unexpected losses, contingencies and expenses (Republic v. Sunlife, G.R. No 158085, October 14, 2005).

Intellectual Property

Copyright (1995) What intellectual property protected by copyright?

rights

are

SUGGESTED ANSWER:

Sec 5 of PD 49 provides that Copyright shall consist in the exclusive right:

Page 60 of 103

to print, reprint, publish, copy, distribute, multiply, sell and make photographs, photo engravings, and pictorial illustrations of the works; to make any translation or other version or extracts or arrangements or adaptation thereof; to dramatize if it be a nondramatic work; to convert it into a nondramatic work if it be a drama; to complete or execute it if it be a model or design; to exhibit, perform, represent, produce or reproduce the work in any manner or by any method whatever for profit or otherwise; if not reproduced in copies for sale, to sell any manuscripts or any record whatsoever thereof; to make any other use or disposition of the work consistent with the laws of the land Copyright; Commissioned Artist (1995) Solid Investment House commissioned Mon Blanco and his son Steve, both noted artists, to paint a mural for the Main Lobby of the new building of Solid for a contract price of P2m. who owns the mural? Explain Who owns the copyright of the mural? Explain. SUGGESTED ANSWER:

Solid owns the mural. Solid was the one who commissioned the artists to do the work and paid for the work in the sum of P2m Version 1990-2003 Arranged by SULAW Class 2005

b)Unless there is a stipulation to the contrary in the contract, the copyright shall belong in joint ownership to Solid and Mon and Steve. Copyright; Commissioned Artist (2004) BR and CT are noted artists whose paintings are highly prized by collectors. Dr. DL commissioned them to paint a mural at the main lobby of his new hospital for children. Both agreed to collaborate on the project for a total fee of two million pesos to be equally divided between them. It was also agreed that Dr. DL had to provide all the materials for the painting and pay for the wages of technicians and laborers needed for the work on the project. Assume that the project is completed and both BR and CT are fully paid the amount of P2M as artists' fee by DL. Under the law on intellectual property, who will own the mural? Who will own the copyright in the mural? Why? Explain. (5%) SUGGESTED ANSWER:

Under Section 178.4 of the Intellectual Property Code, in case of commissioned work, the creator (in the absence of a written stipulation to the contrary) owns the copyright, but the work itself belongs to the person who commissioned its creation. Accordingly, the mural belongs to DL. However, BR and CT own the copyright, since there is no stipulation to the contrary. Copyright; Infringement (1994)

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

The Victoria Hotel chain reproduces videotapes, distributes the copies thereof to its hotels and makes them available to hotel guests for viewing in the hotel guest rooms. It charges a separate nominal fee for the use of the videotape player. Can the Victoria Hotel be enjoined for infringing copyrights and held liable for damages? Would it make any difference if Victoria Hotel does not charge any fee for the use of the videotape? SUGGESTED ANSWER:

Yes. Victoria Hotel has no right to use such video tapes in its hotel business without the consent of the creator/ owner of the copyright. No. The use of the videotapes is for business and not merely for home consumption. (Filipino Society of Composers, Authors Publishers v Tan 148 s 461; pd 1988)

Copyright; Infringement (1997) In an action for damages on account of an infringement of a copyright, the defendant (the alleged pirate) raised the defense that he was unaware that what he had copied was a copyright material. Would this defense be valid? SUGGESTED ANSWER:

No. An intention to pirate is not an element of infringement. Hence, an honest intention is no defense to an action for infringement. ALTERNATIVE ANSWER:

Yes. The owner of the copyright must make others aware that the material in question is under or covered by a copyright. This is done by the giving of such notice at a prominent portion of the copyright material. When the alleged pirate is thus made aware thereof, his act of pirating the copy material will constitute infringement. Copyright; Infringement (1998) Juan Xavier wrote and published a story similar to an unpublished copyrighted story of Manoling Santiago. It was, however, conclusively proven that Juan Xavier was not aware that the story of Manoling Santiago was protected by copyright. Manoling Santiago sued Juan Xavier for infringement of copyright. Is Juan Xavier liable? (2%) SUGGESTED ANSWER:

Yes. Juan Xavier is liable for infringement of copyright. It is not necessary that Juan Xavier is aware that the story of Manoling Santiago was protected by copyright. The work of Manoling Santiago is protected at the time of its creation. Copyright; Infringement (2006)

In a written legal opinion for a client on the difference between apprenticeship and learnership, Liza quoted without permission a labor law expert's comment appearing in his book entitled "Annotations on the Labor Code." Can the labor law expert hold Liza liable for infringement of copyright for quoting a portion of his book without his permission? (5%) SUGGESTED ANSWER:

Page 61 of 103

Liza cannot be held liable for infringement of copyright since under the Intellectual Property Code, one of the limitations to the copyright is the making of quotations from a published work for purpose of any judicial proceedings or for giving of professorial advice by legal practitioner, provided that the source and name of the author are identified (See Section 184.1[k] of the Intellectual Property Code of the Philippines). Copyright; Photocopy; when allowed (1998) May a person have photocopies of some pages of the book of Professor Rosario made without violating the copyright law? (3%) SUGGESTED ANSWER:

Yes. The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, is permitted, without the authorization of the owner of the copyright in the work. Infringement vs. Unfair Competition (1996) What is the distinction between infringement and unfair competition? SUGGESTED ANSWER:

The distinction between infringement (presumably trademark) and unfair competition are as follows: Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of one’s goods as those of another; Version 1990-2003 Arranged by SULAW Class 2005

Fraudulent intent is unnecessary in infringement of trademark, whereas fraudulent intent is essential in unfair competition; The prior registration of the trademark is a prerequisite to an action for infringement of trademark, whereas registration of the trademark is not necessary in unfair competition. (Del Monte Corp v CA 78325 Jan 25,90 181s410)

Infringement vs. Unfair Competition (2003) In what way is an infringement of a trademark similar to that which pertains to unfair competition? SUGGESTED ANSWER:

Infringement; Jurisdiction (2003) K-9 Corporation, a foreign corporation alleging itself to be the registered owner of trademark “K-9” and logo “K”, filed an Inter Partes case with the Intellectual Property Office against Kanin Corporation for the cancellation of the latter’s mark “K-9” and logo “K.” During the pendency of the case before the IPO, Kanin Corporation brought suit against K-9 Corporation before the RTC for infringement and damages. Could the action before the RTC prosper? Why? SUGGESTED ANSWER:

Patent; Non-Patentable Inventions (2006) Supposing Albert Einstein were alive today and he filed with the Intellectual Property Office (IPO) an application for patent for his theory of relativity expressed in the Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

formula E=mc2. The IPO disapproved Einstein's application on the ground that his theory of relativity is not patentable. Is the IPO's action correct? (5%) SUGGESTED ANSWER:

Yes, the IPO is correct because under the Intellectual Property Code, discoveries, scientific theories and mathematical methods, are classified to be as "nonpatentable inventions." Eintein's theory of relativity falls within the category of being a non-patentable "scientific theory." Patents: Gas-Saving Device: first to file rule (2005) Cezar works in a car manufacturing company owned by Joab. Cezar is quite innovative and loves to tinker with things. With the materials and parts of the car, he was able to invent a gas-saving device that will enable cars to consume less gas. Francis, a co-worker, saw how Cezar created the device and likewise, came up with a similar gadget, also using scrap materials and spare parts of the company. Thereafter, Francis filed an application for registration of his device with the Bureau of Patents. Eighteen months later, Cezar filed his application for the registration of his device with the Bureau of Patents. Is the gas-saving device patentable? Explain. SUGGESTED ANSWER:

Yes, the gas-saving device is patentable because it provides a technical solution to a problem in a field of human activity. It is new and involves an inventive step, and certainly industrially applicable. It therefore fulfills the requisites mandated by the intellectual Property Code for what is patentable. Assuming that it is patentable, who is entitled to the patent? What, if any, is the remedy of the losing party? SUGGESTED ANSWER:

Cezar is entitled to the patent because he was the real inventor. Francis, copying from the work of Cezar, cannot claim the essential criteria of an inventor, who must possess essential elements of novelty, originality and precedence to be entitled to protection. Nevertheless, under the "first to file rule," Francis application would have to be given priority. Cezar, however, has within three months from the decision, to have it cancelled as the rightful inventor; or within one year from publication, to file an action to prove his priority to the invention, which has been taken from him and fraudulently registered by Francis.

Supposing Joab got wind of the inventions of his employees and also laid claim to the patents, asserting that Cezar and Francis were using his materials and company time in making the devices, will his claim prevail over those of his employees? Explain. SUGGESTED ANSWER:

No, Joab's claim cannot prevail over those of his employees. In the first place, Joab did not commission any of the two employees to invent the device, and its

Page 62 of 103

invention did not fall within their regular duties. What prevails is the provision of the Intellectual Property Code that holds that the invention belongs to the employee, if the inventive activity is not a part of his regular duties, even if he uses the time, facilities and materials of the employer. Patents: Infringement; Remedies & Defenses (1993) Ferdie is a patent owner of a certain invention. He discovered that his invention is being infringed by Johann. What are the remedies available to Ferdie against Johann? If you were the lawyer of Johann in the infringement suit, what are the defenses that your client can assert? SUGGESTED ANSWER:

The following remedies are available to Ferdie against Johann. seize and destroy injunction damages in such amount may have been obtained from the use of the invention if properly transacted which can be more than what the infringer (Johann ) received. Attorney’s fees and cost These are the defenses that can be asserted in an infringement suit: Patent is invalid (Sec 45 RA 165, as amended) Patent is not new or patentable

Version 1990-2003 Arranged by SULAW Class 2005

Specification of the invention does not comply with Sec 14 Patent was issued not to the true and actual inventor, designer or author of the utility model or the plaintiff did not derive his rights from the true and actual inventor, designer or author of the utility model (Sec 28 RA 165 as amended)

Patents; Infringement (1992) In an action for infringement of patent, the alleged infringer defended himself by stating 1) that the patent issued by the Patent Office was not really an invention which was patentable; 2) that he had no intent to infringe so that there was no actionable case for infringement; and 3) that there was no exact duplication of the patentee’s existing patent but only a minor improvement. With those defenses, would you exempt the alleged violator from liability? Why? SUGGESTED ANSWER:

I would not exempt the alleged violator from liability for the following reasons: A patent once issued by the Patent Office raises a presumption that the article is patentable; it can, however be shown otherwise (Sec 45 RA 165). A mere statement or allegation is not enough to destroy that presumption. (Aquas v de Leon 30 Jan 82 L-32160) An intention to infringe is not necessary nor an element in a case for infringement of a patent. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

There is no need of exact duplication of the patentee’s existing patent such as when the improvement made by another is merely minor (Frank v Benito, 51p713). To be independently patentable, an improvement of an existing patented invention must be a major improvement (Aquas v de Leon L-32160 30Jan82)

Patents; Rights over the Invention (1990) Cheche invented a device that can convert rainwater into automobile fuel. She asked Macon, a lawyer, to assist in getting her invention patented. Macon suggested that they form a corporation with other friends and have the corporation apply for the patent, 80% of the shares of stock thereof to be subscribed by Cheche and 5% by Macon. The corporation was formed and the patent application was filed. However, Cheche died 3 months later of a heart attack. Franco, the estranged husband of Cheche, contested the application of the corporation and filed his own patent application as the sole surviving heir of Cheche. Decide the issue with reasons. SUGGESTED ANSWER:

The estranged husband of Checke cannot successfully contest the application. The right over inventions accrue from the moment of creation and as a right it can lawfully be assigned. Once the title thereto is vested in the transferee, the latter has the right to apply for its registration. The estranged husband of Cheche, if not disqualified to inherit, merely would succeed to the interest of Cheche. Note: An examinee who answers on the basis of the issue of validity of the transfer of patent as a valid consideration for subscription of the shares of stocks should be given due credit.

Trademark (1990) In 1988, the Food and Drug Administration approved the labels submitted by Turbo Corporation for its new drug brand name, “Axilon.” Turbo is now applying with the Bureau of Patents, Trademarks and Technology Transfer for the registration of said brand name. It was subsequently confirmed that “Accilonne” is a generic term for a class of anti-fungal drugs and is used as such by the medical profession and the pharmaceutical industry, and that it is used as a generic chemical name in various scientific and professional publications. A competing drug manufacturer asks you to contest the registration of the brand name “Axilon” by Turbo. What will you advice be?

SUGGESTED ANSWER:

The application for registration by Turbo Corporation may be contested. The Trademark Law would not allow the registration of a trademark which, when applied to or used in connection with his products, is merely descriptive or deceptively misdescriptive of them. Confusion can result from the use of “Axilon” as the generic product itself. ALTERNATIVE ANSWER:

Medical drugs may be procured only upon prescription made by a duly licensed physician. The possibility of

Page 63 of 103

deception could be rather remote. Since it cannot really be said that physicians can be so easily deceived by such trademark as “Axilon,” it may be hard to expect an opposition thereto to succeed. ANOTHER ANSWER:

The application for registration of Turbo Corporation may be contested. The factual settings do not indicate that there had been prior use for at least 2 months of the trademark “Axilon.” Trademark (1994) Laberge, Inc., manufactures and markets after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap, using the trademark “PRUT”, which is registered with the Phil Patent Office. Laberge does not manufacture briefs and underwear and these items are not specified in the certificate of registration. JG who manufactures briefs and underwear, wants to know whether, under our laws, he can use and register the trademark “PRUTE” for his merchandise. What is your advice? SUGGESTED ANSWER:

Yes. The trademark registered in the name of Laberge Inc covers only after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap. It does not cover briefs and underwear. The limit of the trademark is stated in the certificate issued to Laberge Inc. It does not include briefs and underwear which Version 1990-2003 Arranged by SULAW Class 2005

are different products Larberge’s trademark.

protected

by

JG can register the trademark “PRUTE” to cover its briefs and underwear (Faberge Inc v IAC 215 s 316)

Trademark, Test of Dominancy (1996) What is the “test of dominancy?” SUGGESTED ANSWER:

The test of dominancy requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; not is it necessary that the infringing label should suggest an effort to imitate. Similarity in size, form and color, while relevant, is not conclusive. (Asia Brewery v CA GR 103543 Jul5,93 224s437)

Trademark; Infringement (1991) Sony is a registered trademark for TV, stereo, radio, cameras, betamax and other electronic products. A local company, Best Manufacturing Inc produced electric fans which it sold under the trademark Sony without the consent of Sony. Sony sued Best Manufacturing for infringement. Decide the case. SUGGESTED ANSWER:

There is no infringement. In order that a case for infringement of trademark can prosper, the products on which the trademark is used must be of the same kind. The electric fans produced by Best Manufacturing cannot Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

be said to be similar to such products as TV, stereo and radio sets or cameras or betamax products of Sony. ALTERNATIVE ANSWER:

There is infringement. If the owner of a trademark which manufactures certain types of goods could reasonably be expected to engage in the manufacture of another product using the same trademark, another party who uses the trademark for that product can be held liable for using that trademark. Using this standard, infringement exists because Sony can be reasonably expected to use such trademark on electric fans. Trademark; Test of Dominancy (1996) N Corporation manufactures rubber shoes under the trademark “Jordann” which hit the Phil market in 1985, and registered its trademark with the Bureau of Patents, Trademarks and Technology (BPTTT) in 1990. PK Company also manufactures rubber shoes with the trademark “Javorski” which it registered with BPTTT in 1978. In 1992, PK Co adopted and copied the design of N Corporation’s “Jordann” rubber shoes, both as to shape and color, but retained the trademark “Javorski” on its products. May PK Company be held liable to N Co? Explain. SUGGESTED ANSWER:

PK Co may be liable for unfairly competing against N Co. By copying the design, shape and color of N Corporation’s “Jordann” rubber shoes and using the same in its rubber shoes trademarked “Javorski,” PK is obviously trying to pass off its shoes for those of N. It is of no moment that he trademark “Javorski” was registered ahead of the trademark “Jordann.” Priority in registration is not material in an action for unfair competition as distinguished from an action for infringement of trademark. The basis of an action for unfair competition is confusing and misleading similarity in general appearance, not similarity of trademarks (Converse Rubber Co v Jacinto Rubber & Plastics Co GR 27425 and 30505, Apr28,80 97s158)

Tradename: International Affiliation (2005) S Development Corporation sued Shangrila Corporation for using the “S” logo and the tradename “Shangrila”. The former claims that it was the first to register the logo and the tradename in the Philippines and that it had been using the same in its restaurant business. Shangrila Corporation counters

that it is an affiliate of an international organization which has been using such logo and tradename “Shangrila” for over 20 years. However, Shangrila Corporation registered the tradename and logo in the Philippines only after the suit was filed. Which of the two corporations has a better right to use the logo and the tradename? Explain. SUGGESTED ANSWER:

S Development Corporation has a better right to use the logo and the tradename, since the protective benefits of

Page 64 of 103

the law are conferred by the fact of registration and not by use. Although Shangrila Corporation's parent had used the tradename and logo long before, the protection of the laws will be for S Development Corporation because it was the first entity to register the intellectual properties. How does the international affiliation of Shangrila Corporation affect the outcome of the dispute? Explain. (5%) SUGGESTED ANSWER:

The international affiliation of Shangrila Corporation may be critical in the event that its affiliates or parent company abroad had registered in a foreign jurisdiction the tradename and the logo. A well-known mark and tradename is subject to protection under Treaty of Paris for the Protection of Intellectual Property to which the Philippines is a member.

Insolvency & Corporate Recovery Insolvency vs. Suspension of Payment (1998) Distinguish insolvency from suspension of payments. (3%) SUGGESTED ANSWER:

In insolvency, the liabilities of the debtor are more than his assets, while in

Version 1990-2003 Arranged by SULAW Class 2005

suspension of payments, assets of the debtor are more than his liabilities. In insolvency, the assets of the debtor are to be converted into cash for distribution among his creditors, while in suspension of payments, the debtor is only asking for time within which to convert his frozen assets into liquid cash with which to pay his obligations when the latter fall due. Insolvency: Voluntary Insolvency (2005) Aaron, a well-known architect, is suffering from financial reverses. He has four creditors with a total claim of P26 Million. Despite his intention to pay these obligations, his current assets are insufficient to cover all of them. His creditors are about to sue him. Consequently, he was constrained to file a petition for insolvency. (5%) Since Aaron was merely forced by circumstances to petition the court to declare him insolvent, can the judge properly treat the petition as one for involuntary insolvency? Explain. SUGGESTED ANSWER:

No. This is a case for voluntary insolvency because this was filed by an insolvent debtor owing debts exceeding the amount of P1,000.00 under Section 14 of the Insolvency Law. Under Section 20 of the Insolvency Law, the petition must be filed by three or more creditors. In the case at bar, it is Aaron, the debtor, who filed the insolvency proceedings. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

If Aaron is declared an insolvent by the court, what would be the effect, if any, of such declaration on his creditors? Explain. SUGGESTED ANSWER:

A declaration by the court that the petitioner is insolvent will have the following effects: The sheriff shall take possession of all assets of the debtor until the appointment of a receiver or assignee; Payment to the debtor of any debts due to him and the delivery to the debtor of any property belonging to him, and the transfer of any property by him are forbidden; All civil proceedings pending against the insolvent shall be stayed; and Mortgages and pledges are not affected by the order declaring a person insolvent. (Sec. 59, Insolvency Law) Assuming that, Aaron has guarantors for his debts, are the guarantors released from their obligations once Aaron is discharged from his debts? Explain. SUGGESTED ANSWER:

No, precisely under the principle of excussion, the liability of the guarantors arises only after the exhaustion of the assets of the principal obligor. The effect of discharge merely confirms exhaustion of the assets of the obligor available to his creditors. ALTERNATIVE ANSWER:

Yes. Article 2076 of the Civil Code provides: The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. What remedies are available to the guarantors in case they are made to pay the creditors? Explain. SUGGESTED ANSWER:

Under Article 2081, the guarantor may set up against the creditor all the defenses that pertain to the principal debtor. The discharge obtained by Aaron on the principal obligation can now be used as a defense by the guarantors against the creditors. The guarantors are also entitled to indemnity under Article 2066 of the Civil Code. Insolvency; Assets vs. Liabilities (1998) Horacio opened a coffee shop using money borrowed from financial institutions. After 3 months, Horacio left for the US with the intent of defrauding his creditors. While his liabilities are worth P1.2m, his assets, however are worth P1.5m. May Horacio be declared insolvent? (2%)

SUGGESTED ANSWER:

No. Horacio may not be declared insolvent. His assets worth P1.5m are more than his liabilities worth P1.2m. Insolvency; Assignees (1996) On June 16, 1995, Vicente obtained a writ of preliminary attachment against Carlito. The levy on Carlito’s property occurred on June 25, 1995. On July 29, 1995, another creditor filed a petition for involuntary insolvency against Carlito. The insolvency court gave due course to the

Page 65 of 103

petition. In the meantime, the case filed by Vicente proceeded and resulted in a judgment award in favor of Vicente. May the judgment obtained by Vicente be enforced independently of the insolvency proceedings? Explain. SUGGESTED ANSWER:

The judgment obtained by Vicente can be enforced independently of the insolvency proceedings. Under Sec 32 of the Insolvency Law, the assignment to the assignee of all the real and personal property, estate and effects of the debtor made by the clerk of the court shall vacate and set aside any judgment entered in any action commenced with 30 days immediately prior to the commencement of insolvency proceedings. In this case, however, the action filed by Vicente against Carlito was commenced by Vicente not later than June 16, 1995 (the facts on this point are not clear) when Vicente obtained a writ of preliminary attachment against Carlito or more than 30 days before the petition for involuntary insolvency was filed against Carlito by his other creditors. (i.e. on July 29, 1995) (Radiola-Toshiba Phil v IAC GR 75222 July18,91 199s373)

Insolvency; Effect; Declaration of Insolvency (1991) What are the effects of a judgment in insolvency in Voluntary Insolvency cases? SUGGESTED ANSWER:

The adjudication or declaration of insolvency by the court, after hearing or default, shall have the following effects: Forbid the payment to the debtor of any debt due to him and the delivery to him of any property belonging to him; Version 1990-2003 Arranged by SULAW Class 2005

Forbid the transfer of any property by him; and Stay of all civil proceedings against the insolvent but foreclosure may be allowed (Secs 18 & 24 Insolvency Law) Insolvency; Fraudulent Payment (2002) As of June 1, 2002, Edzo Systems Corporation (Edzo) was indebted to the following creditors: Ace Equipment Supplies – for various personal computers and accessories sold to Edzo on credit amounting to P300,000. Handyman Garage – for mechanical repairs (parts and service) performed on Edzo’s company car amounting to P10,000. Joselyn Reyes – former employee of Edzo who sued Edzo for unlawful termination of employment and was able to obtain a final judgment against Edzo for P100,000. Bureau of Internal Revenue – for unpaid value-added taxes amounting to P30,000. Integrity Bank – which granted Edzo a loan in 2001 in the amount of P500,000. The loan was not secured by any asset of Edzo, but it was guaranteed unconditionally and solidarily by Edzo’s President and controlling stockholder, Eduardo Z. Ong, as accommodation surety. The loan due to Integrity Bank fell due on June 15, 2002. Despite pleas for extension of payment by Edzo, the

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

bank demanded immediate payment. Because the bank threatened to proceed against the surety, Eduardo Z. Ong, Edzo decided to pay up all its obligations to Integrity Bank. On June 20, 2002, Edzo paid to Integrity Bank the full principal amount of P500,000, plus accrued interests amounting to P55,000. As a result, Edzo had hardly any cash left for operations and decided to close its business. After paying the unpaid salaries of its employees, Edzo filed a petition for insolvency on July 1, 2002. In the insolvency proceedings in court, the assignee in insolvency sought to invalidate the payment made by Edzo to Integrity Bank for being a fraudulent transfer because it was made within 30 days before the filing of the insolvency petition. In defense, Integrity Bank asserted that the payment to it was for a legitimate debt that was not covered by the prohibition because it was “a valuable pecuniary consideration made in good faith,” thus falling within the exception specified in the Insolvency Law. As judge in the pending insolvency case, how would you decide the respective contentions of the assignee in insolvency and of Integrity Bank? Explain (5%) SUGGESTED ANSWER:

The contention of the assignee in insolvency is correct. The payment made by Edzo to Integrity Bank was a fraudulent preference or payment, being made within thirty (30) days before the filing of the insolvency petition. Insolvency; Jurisdiction; Sole Proprietorship (1990) One day Jerry Haw, doing business under the name Starlight Enterprise, a sole proprietorship, finds himself short on cash and unable to pay his debts as they fall due although he has sufficient property to cover such debts. He asks you, as his retained counsel, for advice on the following queries: Should he file a petition with the SEC to be declared in a state of suspension of payments in view of the said financial condition he faces? Explain your answer. Should he sell profit participation certificates to his 10 brothers and sisters in order to raise cash for his business? Explain. SUGGESTED ANSWER:

I would counsel Jerry to file the Petition for Suspension of Payment with the ordinary courts, rather than the SEC. SEC’s jurisdiction over such cases is confined only to petitions filed by corporations and partnerships under its regulatory powers.

Instead of selling profit participation certificates, I would urge Jerry to enter into a partnership or to incorporate in order to raise cash for his business. ALTERNATIVE ANSWER:

Jerry may sell profit participation certificates to his brothers and sisters without registering the same with the SEC because his sale is an exempted transaction being isolated and not a sale to the public. Insolvency; obligations that survive (1997)

Page 66 of 103

An insolvent debtor, after lawful discharge following an adjudication of insolvency, is released from, generally, all debts, claims, liabilities and demands which are or have been proved against his estate. Give 5 obligations of the insolvent debtor to survive. SUGGESTED ANSWER:

The 5 obligations of the insolvent debtor that survive are as follows: Taxes and assessments due the government, national or local; Obligations arising from embezzlement or fraud; Obligation of any person liable with the insolvent debtor for the same debt, either as a solidary co-debtor, surety, guarantor, partner, indorser or otherwise. Alimony or claim for support; and Debts not provable against the estate (such as after-incurred obligations) of, or not included in the schedule submitted by, the insolvent debtor. Insolvency; Voluntary Insolvency Proceeding (1991) Is the issuance of an order, declaring a petition in a Voluntary Insolvency proceeding insolvent, mandatory upon the court? SUGGESTED ANSWER:

Assuming that the petition was in due form and substance and that the assets of the petitioner are less than his liabilities, the court must adjudicate the insolvency (Sec 18 Insolvency Law) Version 1990-2003 Arranged by SULAW Class 2005

Insolvency; Voluntary vs. Involuntary Solvency (1995) Distinguish between voluntary insolvency and involuntary insolvency. SUGGESTED ANSWER:

In voluntary insolvency, it is the debtor himself who files the petition for insolvency, while in involuntary insolvency, at least 3 creditors are the ones who file the petition for insolvency against the insolvent debtor. ALTERNATIVE ANSWER:

The following are the distinctions: In involuntary insolvency, 3 or more creditors are required, whereas in voluntary insolvency, one creditor may be sufficient; In involuntary insolvency, the creditors must be residents of the Philippines, whose credits or demand accrued in the Philippines, and none of the creditors has become a creditor by assignment within 30 days prior to the filing of the petition, whereas in voluntary insolvency, these are not required. In involuntary insolvency, the debtor must have done any of the acts of insolvency as enumerated by Sec 20, whereas in voluntary insolvency, the debtor must not have done any of said acts. In involuntary insolvency, the amount of indebtedness must not be less than P1,000 whereas in voluntary insolvency, it must exceed P1,000. In involuntary insolvency, the petition must be accompanied by a bond, whereas such is not required in voluntary insolvency. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Law on Corporate Recovery (2003) X Corporation applied for its rehabilitation and submitted a rehabilitation plan which called for the entry by it into a joint venture agreement with Y Corporation. Under the agreement, Y Corporation was to lend to X Corporation its credit facilities with certain banks to obtain funds not only to operate X Corporation but also for a part thereof in the amount of P1 million as initial deposit in a sinking fund to be augmented annually in amounts equivalent to 10% of the yearly income from its operation of the business of X Corporation. From this fund the creditors of X Corporation were to be paid annually, starting from the second year of operations, with the entire indebtedness to be liquidated in 15 years. The creditors of X Corporation objected to the plan because Y Corporation would be taking over the business and assets of X Corporation. Could the court approve the plan despite the objections of the creditors of X Corporation and could the creditors be compelled to follow the plan? Could Y Corporation, in managing the business of X Corporation in the meantime, be deemed to have taken-over X Corporation itself? (6%) SUGGESTED ANSWER:

Rehabilitation; Stay Order (2006) The Blue Star Corporation filed with the Regional Trial Court a petition for rehabilitation on the ground that it foresaw the impossibility of paying its obligations as they fall due. Finding the petition sufficient in form and substance, the court issued an Order appointing a rehabilitation receiver and staying the enforcement of all claims against the corporation. What is the rationale for the Stay Order? (5%) SUGGESTED ANSWER:

The purpose of the stay order is intended to give the management committee or rehabilitation receiver the leeway to make the business viable again, without having to divert attention and resources to litigation in various fora (Philippine Airlines

v. Spouses Kurangking, et al, G.R. No. 146698, September 24, 2002; BF Homes, Inc. v. Court of Appeals, G.R. Nos. 76879 & 77143, October 3, 1990; Rubberworld [Phils.] Inc. v. NLRC, G.R. No. 126773, April 14, 1999; Sobrejuanite v. ASB Dev. Corp., G.R. No. 165675, September 30, 2005). It also prevents a creditor from

obtaining an advantage or preference over another with respect to actions against the corporation (Finasia Investments and Finance Corp v. Court of Appeals, G. R. No. 107002, October 7,1994).

Suspension of Payment vs. Insolvency (1995) Distinguish between suspension of payments and insolvency. SUGGESTED ANSWER:

In suspension of payments, the debtor is not insolvent. He only needs time within which to convert his asset/s into cash with which to pay his obligations when they fall due. In the case of insolvency, the debtor is insolvent, that is, his assets are less than his liabilities. ALTERNATIVE ANSWER:

The following are the distinctions:

Page 67 of 103

In suspension of payments, the debtor has sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due, whereas, in insolvency, the debtor does not have sufficient property to pay all his debts in full; In suspension of payments, the purpose is to suspend or delay payment of debts which remain unaffected although a postponement of payment is declared, whereas, in insolvency, the object is to obtain discharge from all debts and liability; In suspension of payments, no limit for the amount of indebtedness is required, whereas, in insolvency, the debts must exceed P1,000 in case of voluntary insolvency, or must not be less than P1,000 in case of involuntary insolvency. Suspension of Payments vs. Stay Order (2003) Distinguish the stay order in corporate rehabilitation from a declaration in a state of suspension of payments? (4%)

The objective was for SEC to take control of the corporation and all its assets and liabilities, earnings and operations, and to determine the feasibility of continuing operations and rehabilitating the company for the benefit of investors and creditors. Generally, the unsecured creditors had manifested willingness to cooperate with Debtor Corporation. The secured creditors, however, expressed serious objections and reservations. First Bank had already initiated judicial foreclosure proceedings on the mortgage constituted on the factory of Debtor Corporation. Second Bank had already initiated foreclosure proceedings on a third-party mortgage constituted on certain assets of the principal stockholders. Third Bank had already filed a suit against the principal stockholders who had held themselves liable jointly and severally for the loans of Debtor Corporation with said Bank.

SUGGESTED ANSWER:

Suspension of Payments; Rehabilitation Receiver (1999) Debtor Corporation and its principal stockholders filed with the Securities and Exchange Commission (SEC) a petition for rehabilitation and declaration of a state of suspension of payments under PD 902-A.

Version 1990-2003 Arranged by SULAW Class 2005

After hearing, the SEC directed the appointment of a rehabilitation receiver and ordered the suspension of all actions and claims against the Debtor corporation as well as against the principal stockholders. Discuss the validity of the SEC order or suspension? (2%)

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Discuss the effects of the SEC order of suspension on the judicial foreclosure proceedings initiated by First Bank. (2%) Would the order of suspension have any effect on the foreclosure proceedings initiated by Second Bank? Explain (2%) Would the order of suspension have any effect on the suit filed by Third Bank? Explain. (2%) What are the legal consequences of a rehabilitation receivership? (2%) What measures may the receiver take to preserve the assets of Debtor Corporation? (2%) SUGGESTED ANSWER:

a. The SEC order of suspension of payment is valid with respect to the debtor corporation, but not with respect to the principal stockholders. The SEC has jurisdiction to declare suspension of payments with respect to corporations, partnership or associations, but not with respect to individuals. SUGGESTED ANSWER:

b. The SEC order of suspension of payment suspended the judicial proceedings initiated by the First Bank. According to the Supreme Court in a line of cases, the suspension order applies to secured creditors and to the action to enforce the security against the corporation regardless of the stage thereof. SUGGESTED ANSWER:

c. The order of suspension of payments suspended the foreclosure proceedings initiated by the Second Bank. While the foreclosure is against the property of a third party, it is in reality an action to collect the principal obligation owned by the corporation. During the time that the payment of the principal obligation is suspended, the debtor corporation is considered to be not in default and, therefore, even the right to enforce the security, whether owned by the debtorcorporation or of a third party, has not yet arisen. ALTERNATIVE ANSWER:

c. The suspension order does not apply to a third party mortgage because in such a case, the credit is not yet being enforced against the corporation but against the third party mortgagor’s property. SUGGESTED ANSWER:

d. For the same reason as in (c), the order of suspension of payments suspended the suit filed by Third Bank against the principal stockholders. ALTERNATIVE ANSWER:

d. The action against the principal stockholders’ surety in favor of the corporation is not suspended as it is not an action against the corporation but against the stockholders whose personality is separate from that of the corporation. SUGGESTED ANSWER:

e. Under PD 902A, the appointment of a rehabilitation receiver will suspend all actions for claims against the corporation and the corporation will be placed under

Page 68 of 103

rehabilitation in accordance with rehabilitation plan approved by the SEC.

a

SUGGESTED ANSWER:

f. To preserve the assets of the Debtor Corporation, the receiver may take custody of, and control over, all the existing assets and property of the corporation; evaluate existing assets and liabilities, earnings and operations of the corporation; and determine the best way to salvage and protect the interest of the investors and creditors. Suspension of Payments; Remedies (2003) When is the remedy of declaration in a state of suspension of payments available to a corporation? SUGGESTED ANSWER:

(per dondee) This remedy is available to a corporation when it experiences inability to pay one's debts and liabilities, and where the petitioning corporation either: has sufficient property to cover all its debts but foresees the impossibility of meeting them when they fall due (solvent but illiquid) or has no sufficient property (insolvent) but is under the management of a rehabilitation receiver or a management committee, the applicable law is P.D. No. 902-A pursuant to Sec. 5 par.

Letters of Credit Version 1990-2003 Arranged by SULAW Class 2005

Letter of Credit: Mortgage (2005) Ricardo mortgaged his fishpond to AC Bank to secure a P1 Million loan. In a separate transaction, he opened a letter of credit with the same bank for $500,000.00 in favor of HS Bank, a foreign bank, to purchase outboard motors. Likewise, Ricardo executed a Surety Agreement in favor of AC Bank. The outboard motors arrived and were delivered to Ricardo, but he was not able to pay the purchase price thereof. Can AC Bank take possession of the outboard motors? Why? Can AC Bank also foreclose the mortgage over the fishpond? Explain. (5%) SUGGESTED ANSWER:

No, for AC Bank has no legal standing, much less a lien, on the outboard motors. Insofar as AC Bank is concerned, it has privity with the person of Ricardo under the Surety Agreement, and a lien on the fishpond based on the real estate mortgage constituted therein. Yes, but only to enforce payment of the principal loan of P1million secured by the real estate mortgage on the fishpond Letter of Credit; Certification from Consignee (1993)

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order. On the arrangements made upon instruction of the consignee, H&T Corporation of LA, California, the SP Bank of LA issued an irrevocable letter of credit available at sight in favor of BV for the total purchase price of the logs. The letter of credit was mailed to FE Bank with the instruction “to forward it to the beneficiary.” The letter of credit provided that the draft to be drawn is on SP Bank and that it be accompanied by, among other things, a certification from AC, stating that the logs have been approved prior shipment in accordance with the terms and conditions of the purchase order. Before loading on the vessel chartered by AC, the logs were inspected by custom inspectors and representatives of the Bureau of Forestry, who certified to the good condition and exportability of the logs. After the loading was completed, the Chief Mate of the vessel issued a mate receipt of the cargo which stated that the logs are in good condition. However, AC refused to issue the required certification in the letter of credit. Because of the absence of certification, FE Bank refused to advance payment on the letter of credit. May Fe Bank be held liable under the letter of credit? Explain. Under the facts above, the seller, BV, argued that FE Bank, by accepting the obligation to notify him that the irrevocable letter of credit has been transmitted to it on his behalf, has confirmed the letter of credit. Consequently, FE Bank is liable under the letter of credit. Is the argument tenable? Explain. SUGGESTED ANSWER:

No. The letter of credit provides as a condition a certification of AC. Without such certification, there is no obligation on the part of FE Bank to advance payment of the letter of credit. (Feati Bank v CA 196 S 576)

No. FE Bank may have confirmed the letter of credit when it notified BV, that an irrevocable letter of credit has been transmitted to it on its behalf. But the conditions in the letter of credit must first be complied with, namely that the draft be accompanied by a certification from AC. Further, confirmation of a letter of credit must be expressed. (Feati Bank v CA 196 s 576)

Letters of Credit; Liability of a confirming and notifying bank (1994) In letters of credit in banking transactions, distinguish the liability of a confirming bank from a notifying bank. SUGGESTED ANSWER:

In case anything wrong happens to the letter of credit, a confirming bank incurs liability for the amount of the letter of credit, while a notifying bank does not incur any liability. Letters of Credit; Liability of a Notifying Bank (2003) What liability, if any is incurred by an advising or notifying bank in a letter of credit transaction?

Page 69 of 103 SUGGESTED ANSWER:

It incurs no liability unless it is also the negotiating bank Bravo Bank received from Cisco Bank by registered mail an irrevocable letter of credit issued by Delta Bank for the account of Y Company in the amount of US$10,000,000 to cover the sale of canned fruit juices. The beneficiary of the letter of credit was X Corporation which later on partially availed itself of the letter of credit by submitting to Bravo Bank all documents relative to the shipment of the cans of fruit juices. Bravo Bank paid X Corporation for its partial availment. Later, however, it refused further availment because of suspicions of fraud being practiced upon it and, instead , sued X Corporation to recover what it had paid the latter. How would you rule if you were the judge to decide the controversy? (6%)

Between the applicant/buyer/importer and the beneficiary/seller/exporter – The applicant/buyer/importer is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title, while the beneficiary/seller/exporter is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods. Their relationship is governed by the contract of sale.

SUGGESTED ANSWER:

Between the issuing bank and the beneficiary/seller/exporter – The issuing bank is the one that issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title and to surrender the documents to the buyer upon reimbursement. Their relationship is governed by the terms of the letter of credit issued by the bank.

Letters of Credit; Three Distinct Contract Relationships (2002) Explain the three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction.

Between the issuing bank and the applicant/buyer/importer – Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank.

SUGGESTED ANSWER:

The three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction are: Version 1990-2003 Arranged by SULAW Class 2005

Maritime Commerce Average; Particular Average vs. General Average (2003) Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

M/V Ilog de Manila with a cargo of 500 tons of iron ore left the Port of Zamboanga City bound for Manila. For one reason or another, M/V Ilog de Manila hit a submerged obstacle causing it to sink along with its cargo. A salvor, Salvador, Inc., was contracted to refloat the vessel for P1 Million. What kind of average was the refloating fee of P1 million, and for whose account should it be? Why? (4%) SUGGESTED ANSWER:

Particular Average. The owner of the vessel shall shoulder the average. Generally speaking, simple or particular averages include all expenses and damages caused to the vessel or cargo which have not inured to the common benefit (Art. 809, and are, therefore, to be borne only by the owner of the property which gave rise to the same (Art. 810) while general or gross averages include "all the damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real and known risk" (Art. 811). Being for the common benefit, gross averages are to be borne by the owners of the articles saved (Art. 812). In the present case there is no proof that the vessel had to be put afloat to save it from an imminent danger. Bottomry (1994) Gigi obtained a loan from Jojo Corporation, payable in installments. Gigi executed a chattel mortgage in favor of Jojo whereby she transferred “in favor of Jojo, its successors and assigns, all her title, rights ... to a vessel of which Gigi is the absolute owner.” The chattel mortgage was registered with the Philippine Coast Guard pursuant to PD 1521. Gigi defaulted and had a total accountability of P3M. But Jojo could not foreclose the mortgage on the vessel because it sank during a typhoon. Meanwhile, Lutang Corporation which rendered salvage services for refloating the vessel sued Gigi. Whose lien should be given preference, that of Jojo or Lutang? SUGGESTED ANSWER:

Lutang Corporation’s lien should be given preference. The lien of Jojo by virtue of a loan of bottomry was extinguished when the vessel sank. Under such loan on bottomry Jojo acted not only as creditor but also as insurer. Jojo’s right to recover the amount of the loan is predicated on the safe arrival of the vessel at the port of destination. The right was lost when the vessel sank (Sec 17 PD 1521) Carriage of Goods: Deviation: Liability (2005)

On a clear weather, M/V Sundo, carrying insured cargo, left the port of Manila bound for Cebu. While at sea, the vessel encountered a strong typhoon forcing the captain to steer the vessel to the nearest island where it stayed for seven days. The vessel ran out of provisions for its passengers. Consequently, the vessel proceeded to Leyte to replenish its supplies. Assuming that the cargo was damaged because of such deviation, who between the insurance company and the owner of the cargo bears the loss? Explain. SUGGESTED ANSWER:

Page 70 of 103

The insurance company should bear the loss to the cargo because the deviation of the vessel was proper in order to avoid a peril, which was the strong typhoon. The running out of provisions was a direct consequence of the proper deviation in order to avoid the peril of the typhoon. ALTERNATIVE ANSWER:

The owner of the cargo bears the loss because in the case at bar, they stayed too long at the island, making it an improper deviation. Every deviation not specified in Sec. 124 is improper. (Sec. 125, Insurance Code) Carriage of Goods; Deviation; When Proper (2005) Under what circumstances can a vessel properly proceed to a port other than its port of destination? Explain. (4%) SUGGESTED ANSWER:

Deviation is proper: when caused by circumstances over which neither the master nor the owner of the ship has any control; when necessary to comply with a warranty or avoid a peril, whether or not the peril is insured against; when made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or when in good faith, for the purpose of saving human life, or relieving another vessel in distress. (Sec. 124, Insurance Code) Carriage of Goods; Exercise Extraordinary Diligence (2005)

Version 1990-2003 Arranged by SULAW Class 2005

Star Shipping Lines accepted 100 cartons of sardines from Master to be delivered to 555 Company in Manila. Only 88 cartons were delivered, however, these were in bad condition. 555 Company claimed from Star Shipping Lines the value of the missing goods, as well as the damaged goods. Star Shipping Lines refused because the former failed to present a bill of lading. Resolve with reasons the claim of 555 Company. (4%) SUGGESTED ANSWER:

The claim of 555 Company is meritorious, even if it fails to present a bill of lading. Although a bill of lading is the best evidence of the contract of carriage for cargo, nevertheless such contract can exist even without a bill of lading. Like any other contract, a contract of carriage is a meeting of minds that gives rise to an obligation on the part of the carrier to transport the goods. Jurisprudence has held that the moment the carrier receives the cargo for transport, then its duty to exercise extraordinary diligence arises. (Cia. Maritima v. Insurance Co. of North America, G.R. No. L-18965, October 30, 1964; Negre v. Cabahug Shipping & Co., G.R. No. L19609, April 29, 1966) ALTERNATIVE ANSWER:

Star Shipping Lines can refuse to honor 555 Company's claim for the missing and damaged goods. The Bill of Lading is the document of title that legally establishes the ownership of 555 Company over said goods. 555 needs to present the Bill of Lading to legally claim said goods. (National Union Fire Insurance of Pittsburg v. Stolt-Nielaen, G.R. No. 87958, April 26, 1990)

Charter Party (1991) Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

The Saad Dev Co enters into a voyage charter with XYZ over the latter’s vessel, the MV LadyLove. Before the Saad could load it, XYZ sold Lady Love to Oslob Maritime Co which decided to load it for its own account. May XYZ Shipping Co validly ask for the rescission of the charter party? If so, can Saad recover damages? To what extent? If Oslob did not load it for its own account, is it bound by the charter party? Explain the meaning of “owner pro hac vice of the vessel.” In what kind of charter party does this obtain? SUGGESTED ANSWER:

XYZ may ask for the rescission of the charter party if, as in this case, it sold the vessel before the charterer has begun to load the vessel and the purchaser loads it for his own account. Saad may recover damages to the extent of its losses (Art 689 Code of Commerce) If Oslob did not load Lady Love for its own account, it would be bound by the charter party, but XYZ would have to indemnify Oslob if it was not informed of the Charter Party at the time of sale. (Art 689 Code of Commerce) The term Vessel,” is charterer bareboat

“Owner Pro Hac Vice of the generally understood to be the of the vessel in the case of or demise charter (Litonjua

Shipping Co v National Seamen’s Board GR 51910 10Aug1989)

Charter Party (2004) Under a charter party, XXO Trading Company shipped sugar to Coca-Cola Company through SS Negros Shipping Corp., insured by Capitol Insurance Company. The cargo arrived but with shortages. Coca-Cola demanded from Capitol Insurance Co. P500.000 in settlement for XXO Trading. The MM Regional Trial Court, where the civil suit was filed, "absolved the insurance company, declaring that under the Code of Commerce, the shipping agent is civilly liable for damages in favor of third persons due to the conduct of the carrier's captain, and the stipulation in the charter party exempting the owner from liability is not against public policy. Coca-Cola appealed. Will its appeal prosper? Reason briefly. (5%) SUGGESTED ANSWER:

No. The appeal of Coca-Cola will not prosper. Under Article 587 of the Code of Commerce, the shipping agent is civilly liable for damages in favor of third persons due to the conduct of the carrier's captain,

and the shipping agent can exempt himself therefrom only by abandoning the vessel with all his equipment and the freight he may have earned during the voyage. On the other hand, assuming there is bareboat charter, the stipulation in the charter party exempting the owner from liability is not against public policy because the public at large is not involved (Home Insurance Co. v. American Steamship Agencies, Inc., 23 SCRA25 (1968).

COGSA: Prescription of Claims/Actions (2004) Version 1990-2003 Arranged by SULAW Class 2005

Page 71 of 103

entered into a contract with BB thru CC to transport ladies' wear from Manila to France with transhipment at Taiwan. Somehow the goods were not loaded at Taiwan on time. Hence, when the goods arrived in France, they arrived "off-season" and AA was paid only for one-half the value by the buyer. AA claimed damages from the shipping company and its agent. The defense of the respondents was prescription. Considering that the ladies' wear suffered "loss of value," as claimed by AA, should the prescriptive period be one year under the Carriage of Goods by Sea Act, or ten years under the Civil Code? Explain briefly. (5%) SUGGESTED ANSWER:

The applicable prescriptive period is ten years under the Civil Code. The one-year prescriptive period under the Carriage of Goods by Sea Act applies in cases of loss or damages to the cargo. The term "loss" as interpreted by the Supreme Court in Mitsui

O.S.K. Lines Ltd. v. Court of Appeals, 287 SCRA 366 (1998), contemplates a situation where

no delivery at all was made by the carrier of the goods because the same had perished or gone out of commerce deteriorated or decayed while in transit. In the present case, the shipment of ladies' wear was actually delivered. The "loss of value" is not the total loss contemplated by the Carriage of Goods by Sea Act.

COGSA; Prescription of Claims (1992) A local consignee sought to enforce judicially a claim against the carrier for loss of a shipment of drums of lubricating oil from Japan under the Carriage of Goods by Sea Act (COGSA) after the carrier had rejected its demand. The carrier pleaded in its Answer the affirmative defense of prescription under the provisions of said Act inasmuch as the suit was brought by the consignee after one (1) year from the delivery of the goods. In turn, the consignee contended that the period of prescription was suspended by the written extrajudicial demand it had made against the carrier within the one-year period, pursuant to Article 1155 of the Civil Code providing that the prescription of actions is interrupted when there is a written extrajudicial demand by the creditors. Has the action in fact prescribed? Why? If the consignee’s action were predicated on misdelivery or conversion of the goods, would your answer be the same? Explain briefly. SUGGESTED ANSWER:

The action taken by the local consignee has, in fact, prescribed. The period of one

year under the Carriage of Goods by Sea Act (COGSA) is not interrupted by a written extrajudicial demand. The provisions of Art 1155 of the NCC merely apply to prescriptive periods provided for in said Code and not to special laws such as COGSA except when otherwise provided. (Dole v Maritime Co 148 s 118).

If the consignee’s action were predicated on misdelivery or conversion of goods, the provisions of the COGSA would be inapplicable. In these cases, the NCC prescriptive periods, including Art 1155 of the NCC will apply (Ang v Compania Maritama 133 s 600) Version 1990-2006 Updated by

Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

COGSA; Prescription of Claims (2000) RC imported computer motherboards from the United States and had them shipped to Manila aboard an ocean-going cargo ship owned by BC Shipping Company. When the cargo arrived at Manila seaport and delivered to RC, the crate appeared intact; but upon inspection of the contents, RC discovered that the items inside had all been badly damaged. He did not file any notice of damage or anything with anyone, least of all with BC Shipping Company. What he did was to proceed directly to your office to consult you about whether he should have given a notice of damage and how long a time he had to initiate a suit under the provisions of the Carriage of Goods by Sea Act (CA 65). What would your advice be? (2%) SUGGESTED ANSWER:

My advice would be that RC should give notice of the damage sustained by the cargo within 3 days and that he has to file the suit to recover the damage sustained by the cargo within one year from the date of the delivery of the cargo to him. COGSA; Prescriptive Period (1995) What is the prescriptive period for actions involving lost or damaged cargo under the Carriage of Goods by Sea Act? SUGGESTED ANSWER:

ONE YEAR after the delivery of the goods or the date when the goods should have been delivered (Sec 3(6), COGSA) Doctrine of Inscrutable Fault (1995) 2 vessels coming from the opposite directions collided with each other due to fault imputable to both. What are the liabilities of the two vessels with respect to the damage caused to them and their cargoes? Explain. If it cannot be determined which of the vessels was at fault resulting in collision, which party should bear damage caused to the vessels and cargoes? Explain.

two the the the

Which party should bear the damage to the vessels and the cargoes if the cause of the collision was a fortuitous event? Explain. SUGGESTED ANSWER:

Each vessel must bear its own damage. Both of them were at fault. (Art 827, Code of Commerce) Each of them should bear their respective damages. Since it cannot be determined as to which vessel is at fault. This is the doctrine of “inscrutable fault.”

No party shall be held liable since the cause of the collision is fortuitous event. The carrier is not an insurer. Doctrine of Inscrutable Fault (1997) Explain the doctrine in Maritime accidents – Doctrine of Inscrutable Fault

Page 72 of 103 SUGGESTED ANSWER:

Under the “doctrine of inscrutable fault,” where fault is established but it cannot be determined which of the two vessels were at fault, both shall be deemed to have been at fault. Doctrine of Inscrutable Fault (1998) A severe typhoon was raging when the vessel SS Masdaam collided with MV Princes. It is conceded that the typhoon was the major cause of the collision, although there was a very strong possibility that it could have been avoided if the captain of SS Masdaam was not drunk and the captain of the MV Princes was not asleep at the time of collisions. Who should bear the damages to the vessels and their cargoes? (5%) SUGGESTED ANSWER:

The shipowners of SS Masdaam and MV Princess shall each bear their respective loss of vessels. For the losses and damages suffered by their cargoes both shipowners are solidarily liable. Limited Liability Rule (1994) Toni, a copra dealer, loaded 1000 sacks of copra on board the vessel MV Tonichi (a common carrier engaged in coastwise trade owned by Ichi) for shipment from Puerto Galera to Manila. The cargo did not reach Manila because the vessel capsized and sank with all its cargo. When Toni sued Ichi for damages based on breach of contract, the latter invoked the “limited liability rule.” Version 1990-2003 Arranged by SULAW Class 2005

What do you understand of the “rule” invoked by Ichi? Are there exceptions to the “limited liability rule”? SUGGESTED ANSWER:

By “limited liability rule” is meant that the liability of a shipowner for damages in case of loss is limited to the value of the vessel involved. His other properties cannot be reached by the parties entitled to damages. Yes. When the ship owner of the vessel involved is guilty of negligence, the “limited liability rule” does not apply. In such case, the ship owner is liable to the full extent of the damages sustained by the aggrieved parties (Mecenas v CA 180 s 83)

Limited Liability Rule (1997) Explain the doctrine in Maritime accidents – The Doctrine of Limited Liability SUGGESTED ANSWER:

Under the “doctrine of limited liability” the exclusively real and hypothecary nature of maritime law operates to limit the liability of the shipowner to the value of the vessel, earned freightage and proceeds of the insurance. However, such doctrine does not apply if the shipowner and the captain are guilty of negligence. Limited Liability Rule (1999) Thinking that the impending typhoon was still 24 hours away, MV Pioneer left port to sail for Leyte. That was a miscalculation of the typhoon signals by both the ship-

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

owner and the captain as the typhoon came earlier and overtook the vessel. The vessel sank and a number of passengers disappeared with it. Relatives of the missing passengers claimed damages against the shipowner. The shipowner set up the defense that under the doctrine of limited liability, his liability was co-extensive with his interest in the vessel. As the vessel was totally lost, his liability had also been extinguished. a. How will you advice the claimants? Discuss the doctrine of limited liability in maritime law. (3%) b. Assuming that the vessel was insured, may the claimants go after the insurance proceeds? (3%) SUGGESTED ANSWER:

a. Under the doctrine of limited liability in maritime law, the liability of the shipowner arising from the operation of a ship is confined to the vessel, equipment, and freight, or insurance, if any, so that if the shipowner abandoned the ship, equipment, and freight, his liability is extinguished. However, the doctrine of limited liability does not apply when the shipowner or captain is guilty of negligence. b. Yes. In case of a lost vessel, the claimants may go after the proceeds of the insurance covering the vessel. Limited Liability Rule (2000) MV Mariposa, one of five passenger ships owned by Marina Navigation Co, sank off the coast of Mindoro while en route to Iloilo City. More than 200 passengers perished in the disaster. Evidence showed that the ship captain ignored typhoon bulletins issued by Pag-asa during the 24hour period immediately prior to the vessel’s departure from Manila. The bulletins warned all types of sea crafts to avoid the typhoon’s expected path near Mindoro. To make matters worse, he took more load than was allowed for the ship’s rated capacity. Sued for damages by the victim’s surviving relatives, Marina Nav Co contended 1) that its liability, if any, had been extinguished with the sinking of MV Mariposa; and 2) that assuming it had not been so extinguished, such liability should be limited to the loss of the cargo. Are these contentions meritorious in the context of applicable provisions of the Code of Commerce? (3%) SUGGESTED ANSWER:

Yes. The contentions of Marina Nav Co are meritorious. The captain of MV Mariposa is guilty of negligence in ignoring the typhoon bulletins issued by PAGASA and in overloading the vessel. But only the captain of the vessel MV Mariposa is guilty of negligence. The ship owner is not. Therefore, the ship owner can invoke the doctrine of limited liability. Limited Liability Rule; Doctrine of Inscrutable Fault (1991) In a collision between M/T Manila, a tanker, and M/V Don Claro, an inter-island vessel, Don Claro sank and many of its passengers drowned and died. All its cargoes were lost. The collision occurred at nighttime but the sea was calm, the weather fair and visibility was good. Prior to the collision and while still 4 nautical miles apart, Don

Page 73 of 103

Claro already sighted Manila on its radar screen. Manila had no radar equipment. As for speed, Don Claro was twice as fast as Manila. At the time of the collision, Manila failed to follow Rule 19 of the International Rules of the Road which requires 2 vessels meeting head on to change their course by each vessel steering to starboard (right) so that each vessel may pass on the port side (left) of the other. Manila signaled that it would turn to the port side and steered accordingly, thus resulting in the collision. Don Claro’s captain was off-duty and was having a drink at the ship’s bar at the time of the collision. Who would you hold liable for the collision? If Don Claro was at fault, may the heirs of the passengers who died and the owners of the cargoes recover damages from the owner of said vessel? SUGGESTED ANSWER:

I can hold the 2 vessels liable. In the problem given, whether on the basis of the factual settings or under the doctrine of inscrutable fault, both vessels can be said to have been guilty of negligence. The liability of the 2 carriers for the death or injury of passengers and for the loss of or damage to the goods arising from the collision is solidary. Neither carrier may invoke the doctrine of last clear chance which can only be relevant, if at all, between the two vessels but not on the claims made by passengers or shippers (Litonjua Shipping v National Seamen Board GR 51910 10Aug1989) Version 1990-2003 Arranged by SULAW Class 2005

SUGGESTED ANSWER:

Yes, but subject to the doctrine of limited liability. The doctrine is to the effect that the liability of the shipowners would only be to the extent of any remaining value of the vessel, proceeds of insurance, if any, and earned freightage. Given the factual settings, the shipowner himself was not guilty of negligence and, therefore, the doctrine can well apply (Amparo de los Santos v CA 186 s 69)

Limited Liability Rule; General Average Loss (2000) X Shipping Company spent almost a fortune in refitting and repairing its luxury passenger vessel, the MV Marina, which plied the inter-island routes of the company from La Union in the north to Davao City in the south. The MV Marina met an untimely fate during its post-repair voyage. It sank off the coast of Zambales while en route to La Union from Manila. The investigation showed that the captain alone was negligent. There were no casualties in that disaster. Faced with a claim for the payment of the refitting and repair, X Shipping company asserted exemption from liability on the basis of the hypothecary or limited liability rule under Article 587 of the Code of Commerce. Is X Shipping Company’s assertion valid? Explain (3%). SUGGESTED ANSWER:

No. The assertion of X Shipping Company is not valid. The total destruction of the vessel does not affect the liability of the ship owner for repairs on the vessel completed before its loss. Limited Liability Rule; General Average Loss (2000)

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

MV SuperFast, a passenger-cargo vessel owned by SF Shipping Company plying the inter-island routes, was on its way to Zamboanga City from the Manila port when it accidentally, and without fault or negligence of anyone on the ship, hit a huge floating object. The accident caused damage to the vessel and loss of an accompanying crated cargo of passenger PR. In order to lighten the vessel and save it from sinking and in order to avoid risk of damage to or loss of the rest of the shipped items (none of which was located on the deck), some had to be jettisoned. SF Shipping had the vessel repaired at its port of destination. SF Shipping thereafter filed a complaint demanding all the other cargo owners to share in the total repair costs incurred by the company and in the value of the lost and jettisoned cargoes. In answer to the complaint, the shippers’ sole contention was that, under the Code of Commerce, each damaged party should bear its or his own damage and those that did not suffer any loss or damage were not obligated to make any contribution in favor of those who did. Is the shippers’ contention valid? Explain (2%) SUGGESTED ANSWER:

No. The shippers’ contention is not valid. The owners of the cargo jettisoned, to save the vessel from sinking and to save the rest of the cargoes, are entitled to contribution. The jettisoning of said cargoes constitute general average loss which entitles the owners thereof to contribution from the owner of the vessel and also from the owners of the cargoes saved. SF Shipping is not entitled to contribution/ reimbursement for the costs of repairs on the vessel from the shippers.

Nationalized Activities or Undertakings Nationalized Activities or Undertakings (1993) A invested P500th in a security agency on October 30, 1990. He was charged with being a dummy of his friend, a foreigner. If you were the prosecutor, what evidence can you present to prove violation of the Anti-Dummy Law? Juana de la Cruz, a common law wife of a foreigner wrested the control of a television firm. At the instance of the minority group of the firm, she was charged with violation of the Anti-Dummy Law. May she be convicted by the mere fact that she is a common law wife of a foreigner? Explain.

SUGGESTED ANSWER:

A allows or permits the use or exploitation or enjoyment of a right, privilege or business, the exercise or enjoyment of which is expressly reserved by the Constitution or the laws to citizens of the Philippines, by the foreigner not possessing the requisites prescribed by the Constitution or the laws of the Philippines. The prosecutor should prove the above elements of the crime

Page 74 of 103

and also the fact that A does not have the means and resources to invest P500th in the security agency. ALTERNATIVE ANSWER:

The prosecutor may establish the fact that the P500th would constitute a major investment and yet A is not even elected member of the BOD or one of the officers. Furthermore, it may also be shown that A does not even have the means to raise the amount of P500th and that the officers or majority of the directors are foreigners. SUGGESTED ANSWER:

No. The mere fact of being a common law wife of a foreigner does not bring her within the ambit of the Anti-Dummy Law. ALTERNATIVE ANSWER:

Yes. Being a common law wife, it can be presumed that she is the one running the business, which raises a prima facie presumption of violation of the Anti-dummy Law, (RA 6084). Nationalized Activities or Undertakings (1994) Celeste, a domestic corporation wholly owned by Filipino citizens, is engaged in trading and operates as general contractor. It buys and resells the products of Matilde, a domestic corporation, 90% of whose capital stock is owned by aliens. All of Matilde’s goods are made in the Philippines from materials found or produced in the Philippines. On the other hand, ECQ Integrated is a 100% Filipino owned corporation and manufacturer of asbestos products.

Version 1990-2003 Arranged by SULAW Class 2005

Celeste and ECQ took part in a public bidding conducted by MWSS for its asbestos pipe requirements. Celeste won the bid, having offered 13% lower than that offered by ECQ; and MWSS awarded the contract to supply its asbestos pipes to Celeste. ECQ sought to nullify the award in favor of Celeste. Is Celeste barred under the Flag Law from taking part in biddings to supply the government? Did Celeste and Matilde violate the AntiDummy Law? Did Celeste and Matilde violate the Retail Trade Nationalization Law? Explain. SUGGESTED ANSWER:

No. The materials offered in the bids submitted are made in the Philippines from articles produced or grown in the Philippines, and the bidder, Celeste, is a domestic entity. The Flag Law does not apply. It can be invoked only against a bidder who is not a domestic entity, or against a domestic entity who offers imported materials. No, since Celeste is merely a dealer of Matilde and not an alter ego of the latter. Celeste buys and sells on its own account the products of Matilde. Matilde did not violate the Retail Trade Law since it does not sell its products to consumers, but to dealers who resell them. Neither did Celeste violate the Retail Trade Law since, in the first place, it is not prohibited to Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

engage in retail trade. Besides, Matilde’s sale of the asbestos products to Celeste, being wholesale, the transaction is not covered by the Retail Trade Law (Asbestos Integrated v Peralta 155 S 213)

Nationalized Activities or Undertakings (1995) Global KL Malaysia, a 100% Malaysian owned corporation, desires to build a hotel beach resort in Samal Island, Davao City, to take advantage of the increased traffic of tourists and boost the tourism industry of the Philippines. Assuming that Global has US$100M to invest in a hotel beach resort in the Philippines, may it be allowed to acquire the land on which to build the resort? If so, under what terms and conditions may Global acquire the land? Discuss fully. May Global be allowed to manage the hotel beach resort? Explain. May Global be allowed to operate restaurants within the hotel beach resort? Explain. SUGGESTED ANSWER:

Global can secure a lease on the land. As a corporation with a Malaysian nationality, Global cannot own the land. Yes, Global can manage the hotel beach resort. There is no law prohibiting it from managing the resort. Global may be allowed to operate restaurants within the beach resort. This is part of the operation of the resort. Retail Trade Law (1990) Acme Trading Co Inc, a trading company wholly owned by foreign stockholders, was persuaded by Paulo Alva, a Filipino, to invest in 20% of the outstanding shares of stock of a corporation he is forming which will engage in the department store business (the “department store corporation”). Paulo also urged Acme to invest in 40% of the outstanding shares of stock of the realty corporation he is putting up to own the land on which the department store will be built (the “realty corporation”). May Acme invest in the said department store corporation? Explain your answer. May Acme invest in the realty corporation? Discuss. May the President of Acme, a foreigner, sit in the BOD of the said department store corporation? May he be a director of the realty corporation? Discuss. May the Treasurer of Acme, another foreigner, occupy the same position in the said department store corporation? May he be the treasurer of the

said realty corporation? Explain. SUGGESTED ANSWER:

Acme may not invest in the department store corporation since the Retail Trade Act allows, in the case of corporations, only 100% Filipino owned companies to engage in retail trade. Acme may invest in the realty corporation, on the assumption that the balance of 60% of ownership of the latter corporation, is Filipino owned since the law merely

Page 75 of 103

requires 60% Filipino holding in land corporate ownership. The Anti-dummy Law allows board representation to the extent of actual and permissible foreign investments in corporations. Accordingly, the President of Acme may no sit in the BOD of the department store corporation but can do so in the realty corporation. The Treasurer of Acme may not hold that position either in the department store corporation or in the realty corporation since the Anti-Dummy Law prohibits the employment of aliens in such nationalized areas of business except those that call for highly technical qualifications. Retail Trade Law (1991) Is the Filipino common-law wife of a foreigner barred from engaging in the retail business? SUGGESTED ANSWER:

A Filipino common-law wife of a foreigner is not barred from engaging in retail business. On the assumption that she acts for and in her own behalf, and absent a violation of the Anti-Dummy Law which prohibits a foreigner from being either the real proprietor or an employee of a person engaged in the retail trade, she would be violating the Retail Trade Act. ALTERNATIVE ANSWER:

An engagement by a wife (including common-law relationships) of a foreigner in Version 1990-2003 Arranged by SULAW Class 2005

the retail trade business, raises the presumption that she has violated the AntiDummy Law. Hence, the wife is barred from engaging in the retail trade business. Retail Trade Law (1992) A Cooperative purchased from Y Co on installments a rice mill and made a down payment therefore. As security for the payment of the balance, the Cooperative executed a chattel mortgage in favor of Y Corporation. Y Co in turn assigned its rights to the chattel mortgage to Z Co a 5% foreign owned company doing business in the Philippines. The cooperative thereafter made installment payments to Z Co. Because the Cooperative was unable to meet its obligations in full, Z Co filed against it a court suit for collection. The Coop resisted contending that Z Co was illegally engaged in the retail trade business for having sold a consumer good as opposed to a producer item. The Coop also alleged that Z had violated the AntiDummy Law. Is Z guilty of violating the Retail Trade Law and the Anti-Dummy Law? Why? SUGGESTED ANSWER:

Z Co is not guilty of violating the Retail Trade Law and the Anti-Dummy Law. The term RETAIL under the Retail Trade Act requires that the seller must be habitually engaged in selling to the general public consumption goods. By consumption goods are meant “personal, family and household” purposes. A Rice Mill Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

does not fall under the category. Neither does it appear that Z is habitually engaged in selling to the general public that commodity. Since there is no violation of the Retail Trade Law, there would likewise by no violation of the Anti-Dummy Law. Retail Trade Law (1993) A foreign firm is engaged in the business of manufacturing and selling rubber products to dealers who in turn sell them to others. It also sells directly to agricultural enterprises, automotive assembly plants, public utilities which buy them in large bulk, and to its officers and employees. Is there violation of the Retail Trade Law? Explain. May said firm operate a canteen inside the premises of its plant exclusively for its officials and employees without violating the Retail Trade Act? Explain. SUGGESTED ANSWER:

On the assumption that the foreign firm is doing business in the Philippines, the sale to the dealers of agricultural enterprises, automotive assembly plants, and public utilities is wholesale and, therefore, not in violation of the Retail Trade Act (BF Goodrich v Reyes 121 s

Yes. The operation of the canteen inside the premises exclusively for its officers and employees, would amount to an input in the manufacturing process and, therefore, does not violate the Retail Trade Act. Retail Trade Law (1996) With a capital of P2th Maria operates a stall at a public market. She manufactures soap that she sells to the general public. Her common law husband, MaLee, who has a pending petition for naturalization, occasionally finances the purchase of goods for resale, and assists in the management of the business. Is there a violation of the Retail Trade Law? Explain. SUGGESTED ANSWER:

No, there is no violation of the Retail Trade Law. Maria is a manufacturer who sells to the general public, through her stall in the public market, the soap which she manufactures. Inasmuch as her capital does not exceed P5th (it is only P2th) then she is considered under Sec 4a of the Retail Trade Law as not engaged in the “retail business.” Inasmuch as Maria’s business is not a “retail business,” then the requirement in Sec 1 of the Retail Trade Law that only Philippine nationals shall engage, directly, or indirectly, in the retail business is inapplicable. For this reason,

the participation of Ma Lee, Maria’s common Law husband, in the management of the business would not be a violation of the Retail Trade Law in relation to the AntiDummy Law. Retail Trade Law (1996) EL Inc, a domestic corporation with foreign equity, manufactures electric generators, and sells them to the following customers: a) government offices which use the generators during brownouts to render public service, b) agricultural enterprises which utilize the generators as

Page 76 of 103

backup in the processing of goods, c) factories, and d) its own employees. Is EL engaged in retail trade? Explain. SUGGESTED ANSWER:

The sale by EL of generators to government offices, agricultural enterprises and factories are outside the scope of the term “retail business” and may, therefore, be made by the said corporation. However, sales of generators by EL to its own employees constitute retail sales and are proscribed. Under the amendment to the Retail Trade Law introduced by PD 714, the term “retail business” shall not include a manufacturer (such as EL) selling to industrial and commercial users or consumers who use the products bought by them to render service to the general public (eg government offices) and/or to produce or manufacture goods which are in turn sold by them (eg agricultural enterprises and factories). (Goodyear Tires v Reyes Sr Gr 30063, Jly 2, 83 123s273).

Retail Trade Law; Consignment (1991) ABC Manufacturing Inc, a company wholly owned by foreign nationals, manufactures typewriters which ABC distributes to the general public in 2 ways: ABC consigns its typewriters to independent dealers who in turn sell them to the public; and, Through individuals, who are not employees of ABC, and who are paid strictly on a commission basis for each sale. Do these arrangements violate the Retail Trade Law? Version 1990-2003 Arranged by SULAW Class 2005

SUGGESTED ANSWER:

The first arrangement would not be in violation of the Retail Trade Law. The law applies only when the sale is direct to the general public. A dealer buys and sells for and in his own behalf and, therefore, the sale to the general public is made by the dealer and not by the manufacturer (Marsman & Co v First Coconut Control Co GR39841 20June1988) ALTERNATIVE ANSWER:

The first arrangement violates the Retail Trade Law because when ABC “consigned” the typewriters, the transaction was one of consignment sale. In consignment sale, an agency relationship is created so it is as if ABC sells directly to the public through its agents. SUGGESTED ANSWER:

The second arrangement would be violative of the Retail Trade Law, since the sale is done through individuals being paid strictly on a commission basis. The said individuals would then be acting merely as agents of the manufacturer. Sales, therefore, made by such agents are deemed direct sales by the manufacturer. ALTERNATIVE ANSWER:

The 2nd arrangement is not violative of the Retail Trade Law because typewriters are not consumption goods or goods for personal, household and family use.

Negotiable Instruments Law Bond: Cash Bond vs. Surety Bond (2004) Distinguish clearly cash bond from surety bond. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006) SUGGESTED ANSWER:

A SURETY BOND is issued by a surety or insurance company in favor of a designated beneficiary, pursuant to which such company acts as a surety to the debtor or obligor of such beneficiary. A CASH BOND is a security in the form of cash established by a guarantor or surety to secure the obligation of another. Checks: Crossed Checks (2005) What is a crossed check? What are the effects of crossing a check? Explain. SUGGESTED ANSWER:

A Crossed Check under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of that company. Effects of Crossed Checks The check may not be encashed but only deposited in the bank. The check may be negotiated only once—to one who has an account with a bank. The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose, so that he must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. Checks: Crossed Checks vs. Cancelled Checks (2004) Distinguish clearly (1) crossed checks from cancelled checks; SUGGESTED ANSWER:

A crossed check is one with two parallel lines drawn diagonally across its face or across a corner thereof. On the other hand, a cancelled check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof. Checks; Crossed Check (1991) Mr Pablo sought to borrow P200th from Mr Carlos. Carlos agreed to loan the amount in the form of a post-dated check which was crossed (i.e. 2 parallel lines diagonally drawn on the top left portion of the check). Before the due date of the check, Pablo discounted it with Noble On due date, Noble deposited the check with his bank. The check was dishonored. Noble sued Pablo. The court dismissed Noble’s complaint. Was the court’s decision correct? SUGGESTED ANSWER:

The court’s decision was incorrect. Pablo and Carlos, being immediate parties to the instrument, are governed by the rules of privity. Given the factual circumstances of the problem, Pablo has no valid excuse from denying liability, (State investment House v IAC GR 72764 13July1989). Pablo undoubtedly had benefited in the transaction. To hold otherwise would also contravene the basic rules of unjust enrichment. Even in negotiable instruments, the

Page 77 of 103

Civil Code and other laws of general application can still apply suppletorily. ALTERNATIVE ANSWER:

The dismissal by the court was correct. A check whether or not post-dated or crossed, is still a negotiable instrument and unless Pablo is a general indorser, which is not expressed in the factual settings, he cannot be held liable for the dishonor of the instrument. In State Investment House v IAC (GR 72764 13Jul1989) , the court did not go so far as to hold that the fact of crossing would render the instrument nonnegotiable. ALTERNATIVE ANSWER:

In State Investment House v IAC (GR 72764 13Jul1989), the SC considered a crossed check as subjecting a subsequent holder thereof to the contractual covenants of the payor and the payee. If such were the case, then the instrument is not one which can still be said to contain an unconditional promise to pay or order a sum certain in money. In the transfer of non-negotiable credits by assignment, the transferor does not assume liability for the fault of the debtor or obligor. Accordingly the court’s decision was correct. ALTERNATIVE ANSWER:

Yes. The check is crossed. It should have forewarned Mr. Noble that it was issued for a specific purpose. Hence, Mr Noble could not be a holder in due course. He is subject to the personal defense of breach of trust/ agreement by Mr. Pablo. Such defense is available in favor of Mr Carlos against Mr Noble.

Version 1990-2003 Arranged by SULAW Class 2005

Checks; Crossed Check (1994) Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel: What are the effects of crossing a check? Whether as second indorser and holder of the crossed check, is it a holder in due course? Whether Po’s defense of lack of consideration as against Jose is also available as against Excel? SUGGESTED ANSWER:

The effects of crossing a check are: The check is for deposit only in the account of the payee The check may be indorsed only once in favor of a person who has an account with a bank The check is issued for a specific purpose and the person who takes it not in accordance with said purpose does not become a holder in due course and is not entitled to payment thereunder. No. It is a crossed check and Excel did not take it in accordance with the purpose for which the check was issued. Failure on its part to inquire as to said purpose, Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

prevented Excel from becoming a holder in due course, as such failure or refusal constituted bad faith. Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press can set up against Jose (State Investment House v IAC 175 S 310)

Checks; Crossed Check (1995) On Oct 12, 1993, Chelsea Straights, a corp engaged in the manufacture of cigarettes, ordered from Moises 2,000 bales of tobacco. Chelsea issued to Moises two crossed checks postdated 15 Mar 94 and 15 Apr 94 in full payment therefor. On 19 Jan 94 Moises sold to Dragon Investment House at a discount the two checks drawn by Chelsea in his favor. Moises failed to deliver the bales of tobacco as agreed despite Chelsea’s demand. Consequently, on 1 Mar 94 Chelsea issued a “stop payment” order on the 2 checks issued to Moises. Dragon, claiming to be a holder in due course, filed a complaint for collection against Chelsea for the value of the checks. Rule on the complaint of Dragon. Give your legal basis. SUGGESTED ANSWER:

Dragon cannot collect from Chelsea. The instruments are crossed checks which were intended to pay for the 2,000 bales of tobacco to be delivered to Moises. It was therefore the obligation of Dragon to inquire as to the purpose of the issuance of the 2 crossed checks before causing them to be discounted. Failure on its part to make such inquiry, which resulted in its bad faith, Dragon cannot claim to be a holder in due course. Moreover, the checks were sold, not endorsed, by him to Dragon which did not become a holder in due course. Not being a holder in due course, Dragon is subject to the personal defense on the part of Chelsea concerning the breach of trust on the part of Moises Lim in not complying with his obligation to deliver the 2000 bales of tobacco. Checks; Crossed Check (1996) What are the effects of crossing a check? SUGGESTED ANSWER:

The effects of crossing a check are as follows: The check may not be encashed but only deposited in a bank; The check may be negotiated only once to one who has an account with a bank; The act of crossing a check serves as a warning to the holder thereof that the check has been issued for a definite purpose so that the holder must inquire

if he has received the check pursuant to that purpose, otherwise he is not a holder in due course (See Bataan Cigar and Cigarette Factory, Inc. v CA GR 93048, Mar 3, 1994; 230 s 643)

Checks; Crossed Check (1996) On March 1, 1996, Pentium Company ordered a computer from CD Bytes, and issued a crossed check in the amount of P30,000 post-dated Mar 31, 1996. Upon receipt of the check, CD Bytes discounted the check with Fund House.

Page 78 of 103

On April 1, 1996, Pentium stopped payment of the check for failure of CD Bytes to deliver the computer. Thus, when Fund House deposited the check, the drawee bank dishonored it. If Fund House files a complaint against Pentium and CD Bytes for the payment of the dishonored check, will the complaint prosper? Explain. SUGGESTED ANSWER: : The complaint filed by Fund House against Pentium will not prosper but the one against CD Bytes will. Fund House is not a holder in due course and, therefore, Pentium can raise the defense of failure of consideration against it. The check in question was issued by Pentium to pay for a computer that it ordered from CD Bytes. The computer not having been delivered, there was a failure of consideration. The check discounted with Fund House by CD Bytes is a crossed check and this should have put Fund House on inquiry. It should have ascertained the title of CD Bytes to the check or the nature of the latter’s possession. Failing in this respect, Fund House is deemed guilty of gross negligence amounting to legal absence of good faith and, thus, not a holder in due course. Fund House can collect from CD Bytes as the latter was the immediate indorser of the check. (See Bataan Cigar and Cigarette Factory v CA et al 230 s 643 GR 93048 Mar 3, 94)

Checks; Effect; Acceptance by the drawee bank (1998) X draws a check against his current Version 1990-2003 Arranged by SULAW Class 2005

account with the Ortigas branch of Bonifacio Bank in favor of B. Although X does not have sufficient funds, the bank honors the check when it is presented for payment. Apparently, X has conspired with the bank’s bookkeeper so that his ledger card would show that he still has sufficient funds. The bank files an action for recovery of the amount paid to B because the check presented has no sufficient funds. Decide the case (5%) SUGGESTED ANSWER:

The bank cannot recover the amount paid to B for the check. When the bank honored the check, it became an acceptor. As acceptor, the bank became primarily and directly liable to the payee/holder B. The recourse of the bank should be against X and its bookkeeper who conspired to make X’s ledger show that he has sufficient funds. ALTERNATIVE ANSWER:

The bank can recover from B. This is solutio indebiti because there is payment by the bank to B when such payment is not due. The check issued by X to B as payee had no sufficient funds. Checks; Effects; Alterations; Prescriptive Period (1996) William issued to Albert a check for P10,000 drawn on XM Bank. Albert altered the amount of the check to P210,000 and deposited the check to his account with ND Bank. When ND Bank presented the check for

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

payment through the Clearing House, XM Bank honored it. Thereafter, Albert withdrew the P210,000 and closed his account. When the check was returned to him after a month, William discovered the alteration. XM Bank recredited P210,000 to William’s current account, and sought reimbursement from ND Bank. ND Bank refused, claiming that XM Bank failed to return the altered check to it within 24 hour clearing period. Who, as between, XM Bank and ND Bank, should bear the loss? Explain. SUGGESTED ANSWER:

ND Bank should bear the loss if XM Bank returned the altered check to ND Bank within twenty four hours after its discovery of the alteration. Under the given facts, William discovered the alteration when the altered check was returned to him after a month. It may safely be assumed that William immediately advised XM Bank of such fact and that the latter promptly notified ND Bank thereafter. Central Bank Circular No. 9, as amended, on which the decisions of the Supreme Court in Hongkong & Shanghai Banking Corp v People’s Bank & Trust Co and Republic Bank vs CA were based was expressly cancelled and superseded by CB No 317 dated Dec 23 1970. The latter was in turn amended by CB Circular No 580, dated Sept 19, 1977. As to altered checks, the new rules provide that the drawee bank can still return them even after 4:00 pm of the next day provided it does so within 24 hours from discovery of the alteration but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same. Assuming that the relationship between the drawee bank and the collecting bank is evidenced by some written document, the prescriptive period would be 10 years. (Campos, NIL 5th ed 454-455) ALTERNATIVE ANSWER:

XM Bank should bear the loss. When the drawee bank (XM Bank) failed to return the altered check to the collecting bank (ND Bank) within the 24 hour clearing period provided in Sec 4c of CB Circular 9, dated Feb 17, 1949, the latter is absolved from liability. (See HSBC v PB&T Co GR L-28226 Sep 30 1970; 35 s 140; also Rep Bank v CA GR 42725 Apr 22, 1991 196 s 100)

Checks; Forged Check; Effects (2006) Discuss the legal consequences when a bank honors a forged check. (5%) SUGGESTED ANSWER:

The legal consequences when a bank honors a forged check are as follows: When Drawer's Signature is Forged: Drawee-bank by accepting the check cannot set up the defense of forgery, because by accepting the instrument, the drawee bank admits the genuineness of signature of drawer (BPI Family Bank vs. Buenaventura G.R. No. 148196, September 30, 2005; Section 23, Negotiable Instruments Law).

Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the drawee-bank is against the party responsible for the forgery. Otherwise,

Page 79 of 103

drawee-bank bears the loss (BPI Family

Bank v. Buenaventura, G.R. No. 148196, September 30, 2005). A drawee-bank paying

on a forged check must be considered as paying out of its funds and cannot charge the amount to the drawer

(Samsung Construction Co. Phils, v. Far East Bank, G.R. No. 129015, August 13, 2004). If the

drawee-bank has charged drawer's account, the latter can recover such amount from the drawee-bank (Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996; Bank of P. I. v. Case Montessori Internationale, G.R. No. 149454, May 28, 2004).

However, the drawer may be precluded or estopped from setting up the defense of forgery as against the drawee-bank, when it is shown that the drawer himself had been guilty of gross negligence as to have facilitated the forgery (Metropolitan Waterworks v. Court of Appeals, G.R. No. L62943, 143 SCRA 20, July 14, 1986). (NOTA BENE: The question does not qualify the term "forged check". An answer addressing the liabilities of a drawer should be deemed sufficient. Answers addressing liabilities of parties should likewise be given full credit)

Drawee Bank versus Collecting Bank — When the signature of the drawer is forged, as between the drawee-bank and collecting bank, the drawee-bank sustains the loss, since the collecting bank does not guarantee the signature of the drawer. The payment of the check by the drawee bank constitutes the proximate negligence since it has the duty to know the signature of its client-drawer. Version 1990-2003 Arranged by SULAW Class 2005

(Philippine National Bank v. Court of Appeals, G.R. No. L-26001, October 29, 1968).

Forged Payee's Signature: When draweebank pays the forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary duty is to verify the authenticity of the payee's signature (Traders Royal Bank v. Radio Philippines Network, G.R. No. 138510, October 10, 2002; Westmont Bank v. Ong, G.R. No. 132560, January 30, 2002).

Forged Indorsement: Drawer's account cannot be charged, and if charged, he can recover from the drawee-bank (Associated Bank v. Court of Appeals, G.R. No. 107382 January 31,1996).

Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee. A collecting bank is not guilty of negligence over a forged indorsement on checks for it has no way of ascertaining the authority of the endorsement and when it caused the checks to pass through the clearing house before allowing withdrawal of the proceeds thereof (Manila Lighter Transportation, Inc. v. Court of Appeals, G.R. No. 50373, February 15, 1990). On the other

hand, a collecting bank which endorses a check bearing a forged endorsement and presents it to the drawee bank guarantees all prior endorsements including the forged endorsement itself and should be held liable Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

therefor (Traders Royal Bank v. RPN, G.R. No. 138510, October 10, 2002).

Drawee-bank can recover from the collecting bank (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, G.R. No. 18657, August 23,1922)

because even if the indorsement on the check deposited by the bank's client is forged, collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank (Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996).

Checks; Liability; Drawee Bank (1995) Mario Guzman issued to Honesto Santos a check for P50th as payment for a 2nd hand car. Without the knowledge of Mario, Honesto changed the amount to P150th which alteration could not be detected by the naked eye. Honesto deposited the altered check with Shure Bank which forwarded the same to Progressive Bank for payment. Progressive Bank without noticing the alteration paid the check, debiting P150th from the account of Mario. Honesto withdrew the amount of P15th from Shure Bank and disappeared. After receiving his bank statement, Mario discovered the alteration and demanded restitution from Progressive Bank. Discuss fully the rights and the liabilities of the parties concerned. SUGGESTED ANSWER:

The demand of Mario for restitution of the amount of P150,000 to his account is tenable. Progressive Bank has no right to deduct said amount from Mario’s account since the order of Mario is different. Moreover, Progressive Bank is liable for the negligence of its employees in not noticing the alteration which, though it cannot be detected by the naked eye, could be detected by a magnifying instrument used by tellers. As between Progressive Bank and Shure Bank, it is the former that should bear the loss. Progressive Bank failed to notify Shure Bank that there was something wrong with the check within the clearing hour rule of 24 hours. Checks; Material Alterations; Liability (1999) A check for P50,000.00 was drawn against drawee bank and made payable to XYZ Marketing or order. The check was deposited with payee’s account at ABC Bank which then sent the check for clearing to drawee bank.

Drawee bank refused to honor the check on ground that the serial number thereof had been altered. XYZ marketing sued drawee bank. Is it proper for the drawee bank to dishonor the check for the reason that it had been altered? Explain (2%) In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the drawee bank as there was no privity between then. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain. (3%) SUGGESTED ANSWER:

a. No. The serial number is not a material particular of the check. Its alteration does not constitute material

Page 80 of 103

alteration of the instrument. The serial number is not material to the negotiability of the instrument. b. Yes. As a general rule, the drawee is not liable under the check because there is no privity of contract between XYZ Marketing, as payee, and ABC Bank as the drawee bank. However, if the action taken by the bank is an abuse of right which caused damage not only to the issuer of the check but also to the payee, the payee has a cause of action under quasi-delict. Checks; Presentment (1994) Gemma drew a check on September 13, 1990. The holder presented the check to the drawee bank only on March 5, 1994. The bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma through a letter dated April 27, 1994. What is meant by “unreasonable time” as applied to presentment? Is Gemma liable to the holder?

this is due to the giving of the notice of dishonor beyond the period allowed by law. The giving of notice of dishonor on April 27, 1994 is more than one (1) month from March 5, 1994 when the check was dishonored. Since it is not shown that Gemma and the holder resided in the same place, the period within which to give notice of dishonor must be the same time that the notice would reach Gemma if sent by mail. (NIL Sec 103 & 104; Far East Realty Investment Inc v CA 166 S 256) ALTERNATIVE ANSWER:

Gemma can still be liable under the original contract for the consideration of which the check was issued. Checks; Presentment (2003) A bank issues its own check. May the holder hold the bank liable thereunder if he fails to – prove presentment for payment, or present the bill to the drawee for acceptance? Explain your answers. (4%) SUGGESTED ANSWER:

SUGGESTED ANSWER:

As applied to presentment for payment, “reasonable time: is meant not more than 6 months from the date of issue. Beyond said period, it is “unreasonable time” and the check becomes stale. No. Aside form the check being already stale, Gemma is also discharged form liability under the check, being a drawer and a person whose liability is secondary, Version 1990-2003 Arranged by SULAW Class 2005

Checks; Validity; Waiver of Bank’s liability for negligence (1991) Mr. Lim issued a check drawn against BPI Bank in favor of Mr Yu as payment of certain shares of stock which he purchased. On the same day that he issued the check to Yu, Lim ordered BPI to stop payment. Per standard banking practice, Lim was made to sign a waiver of BPI’s Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

liability in the event that it should pay Yu through oversight or inadvertence. Despite the stop order by Lim, BPI nevertheless paid Yu upon presentation of the check. Lim sued BPI for paying against his order. Decide the case. SUGGESTED ANSWER:

In the event that Mr. Lim, in fact, had sufficient legal reasons to issue the stop payment order, he may sue BPI for paying against his order. The waiver executed by Mr Lim did not mean that it need not exercise due diligence to protect the interest of its account holder. It is not amiss to state that the drawee, unless the instrument has earlier been accepted by it, is not bound to honor payment to the holder of the check that thereby excludes it from any liability if it were to comply with its stop payment order (Sec 61 NIL) ALTERNATIVE ANSWER:

1991 6b) BPI would not be liable to Mr Lim. Mr Lim and BPI are governed by their own agreement. The waiver executed by Mr Lim, neither being one of future fraud or gross negligence, would be valid. The problem does not indicate the existence of fraud or gross negligence on the part of BPI so as to warrant liability on its part. Defenses; Forgery (2004) CX maintained a checking account with UBANK, Makati Branch. One of his checks in a stub of fifty was missing. Later, he discovered that Ms. DY forged his signature and succeeded to encash P15,000 from another branch of the bank. DY was able to encash the check when ET, a friend, guaranteed due execution, saying that she was a holder in due course. Can CX recover the money from the bank? Reason briefly. (5%) SUGGESTED ANSWER:

Yes, CX can recover from the bank. Under Section 23 of the Negotiable Instruments Law, forgery is a real defense. The forged check is wholly inoperative in relation to CX. CX cannot be held liable thereon by anyone, not even by a holder in due course. Under a forged signature of the drawer, there is no valid instrument that would give rise to a contract which can be the basis or source of liability on the part of the drawer. The drawee bank has no right or authority to touch the drawer's funds deposited with the drawee bank. Forgery; Liabilities; Prior & Subsequent Parties (1990) Jose loaned Mario some money and, to evidence his indebtedness, Mario executed and delivered to Jose a promissory note payable to his order.

Jose endorsed the note to Pablo. Bert fraudulently obtained the note from Pablo and endorsed it to Julian by forging Pablo’s signature. Julian endorsed the note to Camilo. May Camilo enforce the said promissory note against Mario and Jose? May Camilo go against Pablo? May Camilo enforce said note against Julian? Against whom can Julian have the right of recourse?

Page 81 of 103

e) May Pablo recover from either Mario or Jose? SUGGESTED ANSWER:

Camilo may not enforce said promissory note against Mario and Jose. The promissory note at the time of forgery being payable to order, the signature of Pablo was essential for the instrument to pass title to subsequent parties. A forged signature was inoperative (Sec 23 NIL). Accordingly, the parties before the forgery are not juridically related to parties after the forgery to allow such enforcement. Camilo may not go against Pablo, the latter not having indorsed the instrument. Camilo may enforce the instrument against Julian because of his special indorsement to Camilo, thereby making him secondarily liable, both being parties after the forgery. Julian, in turn, may enforce the instrument against Bert who, by his forgery, has rendered himself primarily liable. Pablo preserves his right to recover from either Mario or Jose who remain parties juridically related to him. Mario is still considered primarily liable to Pablo. Pablo may, in case of dishonor, go after Jose who, by his special indorsement, is secondarily liable. Note: It is possible that an answer might distinguish between blank Version 1990-2003 Arranged by SULAW Class 2005

and special indorsements of prior parties which can thereby materially alter the above suggested answers. The problem did not clearly indicate the kind of indorsements made. Forgery; Liabilities; Prior & Subsequent Parties (1995) Alex issued a negotiable PN (promissory note) payable to Benito or order in payment of certain goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celso’s possession the PN was stolen by Dennis who forged Celso’s signature and discounted it with Edgar, a money lender who did not make inquiries about the PN. Edgar indorsed the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex the latter refused to pay. Dennis could no longer be located. What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar? Explain Does Celso have any right against Alex, Benito and Felix? Explain. SUGGESTED ANSWER:

Felix has no right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celso’s signature by Dennis. Parties to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be held liable by the latter. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Celso has the right to collect from Alex and Benito. Celso is a party subsequent to the two. However, Celso has no right to claim against Felix who is a party subsequent to Celso (Sec 60 and 66 NIL) Incomplete & Delivered (2004) AX, a businessman, was preparing for a business trip abroad. As he usually did in the past, he signed several checks in blank and entrusted them to his secretary with instruction to safeguard them and fill them out only when required to pay accounts during his absence. OB, his secretary, filled out one of the checks by placing her name as the payee. She filled out the amount, endorsed and delivered the check to KC, who accepted it in good faith for payment of gems that KC sold to OB. Later, OB told AX of what she did with regrets. AX timely directed the bank to dishonor the check. Could AX be held liable to KC? Answer and reason briefly. (5%) SUGGESTED ANSWER:

Yes. AX could be held liable to KC. This is a case of an incomplete check, which has been delivered. Under Section 14 of the Negotiable Instruments Law, KC, as a holder in due course, can enforce payment of the check as if it had been filled up strictly in accordance with the authority given by AX to OB and within a reasonable time. Incomplete and Delivered (2005) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brad’s life if he failed to pay. Brad and Pete went to see Señorita Isobel, Brad’s rich cousin, and asked her if she could sign a promissory note in his favor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad, Señorita Isobel acceded to the request. She affixed her signature on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then filled up the blank paper, making a promissory note for the amount of P100,000.00. He then indorsed and delivered the same to Pete, who accepted the note as payment of the debt. What defense or defenses can Señorita Isobel set up against Pete? Explain. (3%) SUGGESTED ANSWER:

The defense (personal defense) which Señorita Isobel can set up against Pete is that the amount of P100,000.00 is not in accordance with the authority given to her to Brad (in the presence of Pete) and that Pete was not a holder in due course for acting in bad faith when accepted the note as payment despite his knowledge that it

was only 10,000.00 that was allowed by Señorita Isobel during their meeting with Brad. Incomplete Instruments; Incomplete Delivered Instruments vs. Incomplete Undelivered Instrument (2006) Jun was about to leave for a business trip. As his usual practice, he signed several blank checks. He instructed Ruth, his secretary, to fill them as payment for his obligations. Ruth filled one check with her name as payee, placed P30,000.00 thereon, endorsed and

Page 82 of 103

delivered it to Marie. She accepted the check in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did and apologized to Jun. Immediately he directed the drawee bank to dishonor the check. When Marie encashed the check, it was dishonored. Is Jun liable to Marie? (5%) SUGGESTED ANSWER:

Yes. This covers the delivery of an incomplete instru-ment, under Section 14 of the Negotiable Instruments Law, which provides that there was prima facie authority on the part of Ruth to fill-up any of the material particulars thereof. Having done so, and when it is first completed before it is negotiated to a holder in due course like Marie, it is valid for all purposes, and Marie may enforce it within a reasonable time, as if it had been filled up strictly in accordance with the authority given. Supposing the check was stolen while in Ruth's pos-session and a thief filled the blank check, endorsed and delivered it to Marie in payment for the goods he purchased from her, is Jun liable to Marie if the check is dishonored? (5%) SUGGESTED ANSWER:

No. Even though Marie is a holder in due course, this is an incomplete and undelivered instrument, covered by Section 15 of the Negotiable Instruments Law. Where an incomplete instrument has not been delivered, it will not, if completed and Version 1990-2003 Arranged by SULAW Class 2005

negotiated without authority, be a valid contract in the hands of any holder, as against any person, including Jun, whose signature was placed thereon before delivery. Such defense is a real defense even against a holder in due course, available to a party like Jun whose signature appeared prior to delivery. Indorser: Irregular Indorser vs. General Indorser (2005) Distinguish an irregular indorser from a general indorser. (3%) SUGGESTED ANSWER:

Irregular Indorser is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes one because of his signature in the instrument. Because his signature he is considered an indorser and he is liable to the parties in the instrument. While, a General Indorser warrants that the instrument is genuine, that he has a good title to it, that all prior parties had capacity to contract; that the instrument at the time of the indorsement is valid and subsisting; and that on due presentment, the instrument will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary proceedings for dishonor are made. Negotiability (1993) Discuss the negotiability or negotiability of the following notes 1) Manila, September 1, 1993 Version 1990-2006 Updated by Dondee

non-

Mercantile Law Bar Examination Q & A (1990-2006)

P2,500.00 I promise to pay Pedro San Juan or order the sum of P2,500. (Sgd.) Noel Castro 2) Manila, June 3, 1993 P10,000.00 For value received, I promise to pay Sergio Dee or order the sum of P10,000.00 in five (5) installments, with the first installment payable on October 5, 1993 and the other installments on or before the fifth day of the succeeding month or thereafter. (Sgd.) Lito Villa SUGGESTED ANSWER:

The promissory note is negotiable as it complies with Sec 1, NIL. Firstly, it is in writing and signed by the maker, Noel Castro. Secondly, the promise is unconditional to pay a sum certain in money, that is, P2,500.00 Thirdly, it is payable on demand as no date of maturity is specified. Fourth, it is payable to order. The promissory note is negotiable. All the requirements of Sec 1 NIL are complied with. The sum to be paid is still certain despite that the sum is to be paid by installments (Sec 2b NIL) Negotiability (2002) Which of the following stipulations or features of a promissory note (PN) affect or do not affect its negotiability, assuming that the PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below and your corresponding answer, either “Affected” or “Not affected.” Explain (5%). The date of the PN is “February 30, 2002.” The PN bears interest payable on the last day of each calendar quarter at a rate equal to five percent (5%) above the then prevailing 91-day Treasury Bill rate as published at the beginning of such calendar quarter. The PN gives the maker the option to make payment either in money or in quantity of palay or equivalent value. The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 30 days.

SUGGESTED ANSWER:

Paragraph 1 – negotiability is “NOT AFFECTED.” The date is not one of the requirements for negotiability.

Page 83 of 103

Paragraph 2 – negotiability is “NOT AFFECTED” The interest is to be computed at a particular time and is determinable. It does not make the sum uncertain or the promise conditional. Paragraph 3 – negotiability is “AFFECTED.” Giving the maker the option renders the promise conditional Paragraph 4 – negotiability is “NOT AFFECTED.” Giving the option to the holder does not make the promise conditional. Negotiability; Holder in Due Course (1992) Perla brought a motor car payable on installments from Automotive Company for P250th. She made a down payment of P50th and executed a promissory note for the balance. The company subsequently indorsed the note to Reliable Finance Corporation which financed the purchase. The promissory note read: “For value received, I promised to pay Automotive Company or order at its office in Legaspi City, the sum of P200,000.00 with interest at twelve (12%) percent per annum, payable in equal installments of P20,000.00 monthly for ten (10) months starting October 21, 1991. Manila September 21, 1991. (sgd) Perla

Pay to the order of Reliable Finance Corporation. Automotive Company By: (Sgd) Manager Because Perla defaulted in the payment of her installments, Reliable Finance Corporation initiated a case against her for a sum of money. Perla argued that the promissory note is merely an assignment of credit, a non-negotiable instrument open to all defenses available to the assignor and, therefore, Reliable Finance Corporation is not a holder in due course. Is the promissory note a mere assignment of credit or a negotiable instrument? Why? Is Reliable Finance Corp a holder in due course? Explain briefly. SUGGESTED ANSWER:

The promissory note in the problem is a negotiable instrument, being in compliance with the provisions of Sec 1 NIL. Neither the fact that the payable sum is to be paid with interest nor that the maturities are in stated installments renders uncertain the amount payable (Sec 2 NIL) Yes, Reliable Finance Corporation is a holder in due course given the factual settings. Said corporation apparently took the promissory note for value, and there are no indications that it acquired it in bad faith (Sec 52 NIL see Salas v CA 181 s 296) Negotiability; Requisites (2000)

Version 1990-2003 Arranged by SULAW Class 2005

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

MP bought a used cell phone from JR. JR preferred cash but MP is a friend so JR accepted MR’s promissory note for P10,000. JR thought of converting the note into cash by endorsing it to his brother KR. The promissory note is a piece of paper with the following hand-printed notation: “MP WILL PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM TODAY.” Below this notation MP’s signature with “8/1/00” next to it, indicating the date of the promissory note. When JR presented MP’s note to KR, the latter said it was not a negotiable instrument under the law and so could not be a valid substitute for cash. JR took the opposite view, insisting on the note’s negotiability. You are asked to referee. Which of the opposing views is correct? TH is an indorsee of a promissory note that simply states: “PAY TO JUAN TAN OR ORDER 400 PESOS.” The note has no date, no place of payment and no consideration mentioned. It was signed by MK and written under his letterhead specifying the address, which happens to be his residence. TH accepted the promissory note as payment for services rendered to SH, who in turn received the note from Juan Tan as payment for a prepaid cell phone card worth 450 pesos. The payee acknowledged having received the note on August 1, 2000. A Bar reviewee had told TH, who happens to be your friend, that TH is not a holder in due course under Article 52 of the Negotiable Instruments Law (Act 2031) and therefore does not enjoy the rights and protection under the statute. TH asks for our advice specifically in connection with the note being undated and not mentioning a place of payment and any consideration. What would your advice be? (2%). SUGGESTED ANSWER:

KR is right. The promissory note is not negotiable. It is not issued to order or bearer. There is no word of negotiability containing therein. It is not issued in accordance with Section 1 of the Negotiable Instruments Law The fact that the instrument is undated and does not mention the place of payment does not militate against its being negotiable. The date and place of payment are not material particulars required to make an instrument negotiable. The fact that no mention is made of any consideration is not material. Consideration is presumed.

Negotiable Instrument: Ambiguous Instruments (1998) How do you treat a negotiable instrument that is so ambiguous that there is doubt whether it is a bill or a note? (5%) SUGGESTED ANSWER:

Where a negotiable instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it either as a bill of exchange or a promissory note at his election.

Page 84 of 103

Negotiable Instrument: Definition & Characteristics (2005) What is a negotiable instrument? Give the characteristics of a negotiable instrument. (2%) SUGGESTED ANSWER:

Negotiable Instrument is a written contract for the payment of money which is intended as a substitute for money and passes from one person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free from defenses available to prior parties. Such instrument must comply with Sec. 1 of the Negotiable Instrument Law to be considered negotiable. The characteristics of a negotiable instrument are; Negotiability - That quality or attribute whereby a bill, note or check passes or may pass from hand to hand, similar to money, so as to give the holder in due course the right to hold the instrument and collect the sum payable for himself free from defenses. Accumulation of Secondary Contracts as they are transferred from one person to another. Negotiable Instrument: Identification (2005) State and explain whether the following are negotiable instruments under the Negotiable Instruments Law: (5%)

Version 1990-2003 Arranged by SULAW Class 2005

Postal Money Order; A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND PESOS (P4,000.00) only, repayable to the depositor 200 days after date.” Letters of credit; Warehouse receipts; Treasury warrants payable from a specific fund. SUGGESTED ANSWER:

Postal Money Order – Non-Negotiable as it is governed by postal rules and regulation which may be inconsistent with the NIL and it can only be negotiated once. A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND PESOS (P4,000.00) only, repayable to the depositor 200 days after date.” – Non-Negotiable as it does not comply with the requisites of Sec. 1 of NIL Letters of credit - Non-Negotiable Warehouse receipts - Non-Negotiable for the same as Bill of Lading it merely represents good, not money. Treasury warrants payable from a specific fund - Non-Negotiable being payable out of a particular fund. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Negotiable Instrument: Negotiable Document vs. Negotiable Instrument (2005) Distinguish a negotiable document from a negotiable instrument. (2%) SUGGESTED ANSWER:

Negotiable Instrument have requisites of Sec. 1 of the NIL, a holder of this instrument have right of recourse against intermediate parties who are secondarily liable, Holder in due course may have rights better than transferor, its subject is money and the Instrument itself is property of value. On the other hand, negotiable document does not contain requisites of Sec. 1 of NIL, it has no secondary liability of intermediate parties, transferee merely steps into the shoes of the transferor, its subject are goods and the instrument is merely evidence of title; thing of value are the goods mentioned in the document. Negotiable Instrument; Negotiability (1997) Can a bill of exchange or a promissory note qualify as a negotiable instrument if – it is not dated; or the day and the month, but not the year of its maturity, is given; or it is payable to “cash”’ or it names two alternative drawees SUGGESTED ANSWER:

Yes. Date is not a material particular required by Sec 1 NIL for the negotiability of an instrument. No. The time for payment is not determinable in this case. The year is not stated. Yes. Sec 9d NIL makes the instrument payable to bearer because the name of the payee does not purport to be the name of any person. A bill may not be addressed to two or more drawees in the alternative or in succession, to be negotiable (Sec 128 NIL). To do so makes the order conditional. Negotiable Instruments; Bearer Instrument (1998) Richard Clinton makes a promissory note payable to bearer and delivers the same to Aurora Page. Aurora Page, however, endorses it to X in this manner: “Payable to X. Signed: Aurora Page.” Later, X, without endorsing the promissory note, transfers and delivers the same to Napoleon. The note is subsequently dishonored by Richard Clinton. May

Napoleon proceed against Richard Clinton for the note? (5%) SUGGESTED ANSWER:

Yes. Richard Clinton is liable to Napoleon under the promissory note. The note made by Richard Clinton is a bearer instrument. Despite special indorsement made by Aurora Page thereon, the note remained a bearer instrument and can be negotiated by mere delivery. When X delivered and transferred the note to Napoleon, the

Page 85 of 103

latter became a holder thereof. As such holder, Napoleon can proceed against Richard Clinton. Negotiable Instruments; Bearer Instruments (1997) A delivers a bearer instrument to B. B then specially indorses it to C and C later indorses it in blank to D. E steals the instrument from D and, forging the signature of D, succeeds in “negotiating” it to F who acquires the instrument in good faith and for value. If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument against the drawer? In case of the dishonor of the check by both the drawee and the drawer, can F hold any of B, C and D liable secondarily on the instrument? SUGGESTED ANSWER:

Yes. The instrument was payable to bearer as it was a bearer instrument. It could be negotiated by mere delivery despite the presence of special indorsements. The forged signature is unnecessary to presume the juridical relation between or among the parties prior to the forgery and the parties after the forgery. The only party who can raise the defense of forgery against a holder in due course is the person whose signature is forged. Only B and C can be held liable by F. The instrument at the time of the forgery was payable to bearer, being a bearer instrument. Moreover, the instrument was indorsed in blank by C to D. D, whose

Version 1990-2003 Arranged by SULAW Class 2005

signature was forged by E cannot be held liable by F. Negotiable Instruments; bearer instruments; liabilities of maker and indorsers (2001) A issued a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C. C placed the note in his drawer, which was stolen by the janitor X. X indorsed the note to D by forging C’s signature. D indorsed the note to E who in turn delivered the note to F, a holder in due course, without indorsement. Discuss the individual liabilities to F of A, B and C. (5%) SUGGESTED ANSWER:

A is liable to F. As the maker of the promissory note, A is directly or primarily liable to F, who is a holder in due course. Despite the presence of the special indorsements on the note, these do not detract from the fact that a bearer instrument, like the promissory note in question, is always negotiable by mere delivery, until it is indorsed restrictively “For Deposit Only.” B, as a general indorser, is liable to F secondarily, and warrants that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless; that at the time of his indorsement, the instrument is valid and subsisting; and that on due presentment, it shall be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay. C is not liable to F since the latter cannot trace his title to the former. The signature of C in the supposed indorsement by him to D was forged by X. C can raise the defense of forgery since it was his signature that was forged. ALTERNATIVE ANSWER:

As a general endorser, B is secondarily liable to F. C is liable to F since it is due to the negligence of C in placing the note in his drawer that enabled X to steal the same and forge the signature of C relative to the indorsement in favor of D. As between C and F who are both innocent parties, it is C whose negligence is the proximate cause of the loss. Hence C should suffer the loss. Negotiable Instruments; incomplete and undelivered instruments; holder in due course (2000)

PN makes a promissory note for P5,000.00, but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have filched the note from PN’s office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery. But X said he had no participation in, or knowledge about, the pilferage and alteration of the note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law. Who is correct and why? (3%) Can the payee in a promissory note be a “holder in due course” within the meaning of the Negotiable Instruments Law (Act 2031)? Explain your answer. (2%) SUGGESTED ANSWER:

PN is right. The instrument is incomplete and undelivered. It did not create any contract that would bind PN to an obligation to pay the amount thereof. A payee in a promissory note cannot be a “holder in due course” within the meaning of the Negotiable Instruments Law, because a payee is an immediate party in relation to the maker. The payee is subject to whatever defenses, real of personal, available to the maker of the promissory note.

ALTERNATIVE ANSWER:

A payee can be a “holder in due course.” A holder is defined as the payee or indorsee of the instrument who is in possession of it. Every holder is deemed prima facie to be a holder in due course. Negotiable Instruments; Incomplete Delivered Instruments; Comparative Negligence (1997)

Page 86 of 103

A, single proprietor of a business concern, is about to leave for a business trip and, as he so often does on these occasions, signs several checks in blank. He instructs B, his secretary, to safekeep the checks and fill them out when and as required to pay accounts during his absence. B fills out one of the checks by placing her name as payee, fills in the amount, endorses and delivers the check to C who accepts it in good faith as payment for goods sold to B. B regrets her action and tells A what she did. A directs the Bank in time to dishonor the check. When C encashes the check, it is dishonored. Can A be held liable to C? SUGGESTED ANSWER:

Yes, A can be held liable to C, assuming that the latter gave notice of dishonor to A. This is a case of an incomplete instrument but delivered as it was entrusted to B, the secretary of A. Moreover, under the doctrine of comparative negligence, as between A and C, both innocent parties, it was the negligence of A in entrusting the check to B which is the proximate cause of the loss. Negotiable Instruments; kinds of negotiable instrument; words of negotiability (2002) A. Define the following: (1) a negotiable promissory note, (2) a bill of exchange and (3) a check. (3%) B. You are Pedro Cruz. Draft the appropriate contract language for (1) your negotiable promissory note and (2) your Version 1990-2003 Arranged by SULAW Class 2005

check, each containing the essential elements of a negotiable instrument (2%) SUGGESTED ANSWER:

A. (1) A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or bearer. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.

A check is a bill of exchange drawn on a bank payable on demand. B. (1) Negotiable promissory note “September 15, 2002 “For value received, I hereby promise to pay Juan Santos or order the sum of TEN THOUSAND PESOS (P10,000) thirty (30) days from date hereof. (Signed) Pedro Cruz to: Philippine National Bank Escolta, Manila Branch” Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Negotiable Instruments; Requisites (1996) What are the requisites of a negotiable instrument? SUGGESTED ANSWER:

The requisites of a negotiable instrument are as follows: It must be in writing and signed by the maker or drawer; It must contain an unconditional promise or order to pay a sum certain in money; It must be payable to order or to bearer; and Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. (Sec 1 NIL) Notice Dishonor (1996) When is notice of dishonor not required to be given to the drawer? SUGGESTED ANSWER:

Notice of dishonor is not required to be given to the drawer in any of the following cases: Where the drawer and drawee are the same person; When the drawee is a fictitious person or a person not having capacity to contract; When the drawer is the person to whom the instrument is presented for payment; Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; Where the drawer has countermanded payment (Sec 114 NIL) Parties; Accommodation Party (1990) To accommodate Carmen, maker of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to Raffy, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accomodation party only. When the promissory note was not paid, and Raffy discovered that Carmen had no funds, he sued Jorge. Jorge pleads in defense the fact that he had endorsed the instrument without receiving value therefor, and the further fact that Raffy knew that at the time he took the instrument Jorge had not received any value or consideration of any kind for his indorsement. Is Jorge liable? Discuss. SUGGESTED ANSWER:

Yes. Jorge is liable. Sec 29 of the NIL provides that an accommodation party is liable on the instrument to a holder for value, notwithstanding the holder at the time of taking said instrument knew him to be only an accommodation party. This is the nature or the essence of accommodation.

Parties; Accommodation Party (1991) On June 1, 1990, A obtained a loan of P100th from B, payable not later than 20Dec1990. B required A to issue him a check for that amount to be dated 20Dec1990. Since he does not have any checking account, A, with the knowledge of B, requested his friend, C, President of Saad Banking Corp (Saad) to accommodate him. C agreed, he signed a check for the aforesaid amount dated 20Dec 1990, drawn against Saad’s account with the ABC

Page 87 of 103

Commercial Banking Co. The By-laws of Saad requires that checks issued by it must be signed by the President and the Treasurer or the Vice- President. Since the Treasurer was absent, C requested the Vice-President to co-sign the check, which the latter reluctantly did. The check was delivered to B. The check was dishonored upon presentment on due date for insufficiency of funds. Is Saad liable on the check as an accommodation party? If it is not, who then, under the above facts, is/are the accommodation party? SUGGESTED ANSWER:

a.) Saad is not liable on the check as an accommodation party. The act of the corporation in accommodating a friend of the President, is ultra vires (Crisologo-Jose v CA GR 80599, 15Sep1989). While it may be legally possible for the corporation, whose business is to provide financial accommodations in the ordinary course of business, such as one given by a financing company to be an accommodation party, this situation, however, is not the case in the bar problem. Considering that both the President and Vice-President were signatories to the accommodation, they themselves can be subject to the liabilities of accommodation parties to the instrument in their personal capacity (Crisologo-Jose v CA 15Sep1989) Parties; Accommodation Party (1996)

Version 1990-2003 Arranged by SULAW Class 2005

Nora applied for a loan of P100th with BUR Bank. By way of accommodation, Nora’s sister, Vilma, executed a promissory note in favor of BUR Bank. When Nora defaulted, BUR Bank sued Vilma, despite its knowledge that Vilma received no part of the loan. May Vilma be held liable? Explain. SUGGESTED ANSWER:

Yes, Vilma may be held liable. Vilma is an accommodation party. As such, she is liable on the instrument to a holder for value such as BUR Bank. This is true even if BUR Bank was aware at the time it took the instrument that Vilma is merely an accommodation party and received no part of the loan (See Sec 29, NIL; Eulalio Prudencio v CA GR L-34539, Jul 14, 86 143 s 7)

Parties; Accommodation Party (1998) For the purpose of lending his name without receiving value therefore, Pedro makes a note for P20,000 payable to the order of X who in turn negotiates it to Y, the latter knowing that Pedro is not a party for value. May Y recover from Pedro if the latter interposes the absence of consideration? (3%) Supposing under the same facts, Pedro pays the said P20,000 may he recover the same amount from X? (2%) SUGGESTED ANSWER:

Yes. Y can recover from Pedro. Pedro is an accommodation party. Absence of consideration is in the nature of an accommodation. Defense of absence of consideration cannot be validly interposed by accommodation party against a holder in due course. Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

If Pedro pays the said P20,000 to Y, Pedro can recover the amount from X. X is the accommodated party or the party ultimately liable for the instrument. Pedro is only an accommodation party. Otherwise, it would be unjust enrichment on the part of X if he is not to pay Pedro. Parties; Accommodation Party (2003) Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with Rose Reyes who did not receive any amount from the bank, to execute a promissory note payable to the bank, or its order on stated maturities. The note was executed as so agreed. What kind of liability was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain. (4%) SUGGESTED ANSWER:

(per Dondee) Rose may be held liable. Rose is an accommodation party. Absence of consideration is in the nature of an accommodation. Defense of absence of consideration cannot be validly interposed by accommodation party against a holder in due course. Parties; Accommodation Party (2003) Juan Sy purchased from “A” Appliance Center one generator set on installment with chattel mortgage in favor of the vendor. After getting hold of the generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa. To settle the case extra judicially, Juan Sy paid the sum of P20,000 and for the balance of P5,000.00 he executed a promissory note for said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance. What is the liability of Ben Lopez as an accommodation party? Explain. What is the liability of Juan Sy? SUGGESTED ANSWER:

Ben Lopez, as an accommodation party, is liable as maker to the holder up to the sum of P5,000 even if he did not receive any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement from Juan Sy, the accommodation party. Juan Sy is liable to the extent of P5,000 in the hands of a holder in due course (Sec 14 NIL). If Ben Lopez paid the promissory note, Juan Sy has the obligation to reimburse Ben Lopez for the amount paid. If Juan Sy pays directly to the holder of the promissory note, or he pays Ben Lopez for the reimbursement of the payment by the

latter to the holder, the instrument is discharged. Parties; Accommodation Party (2005) Dagul has a business arrangement with Facundo. The latter would lend money to another, through Dagul, whose name would appear in the promissory note as the lender. Dagul would then immediately indorse the note to Facundo. Is Dagul an accommodation party? Explain. (2%) SUGGESTED ANSWER:

Page 88 of 103

YES! Dagul is an accommodation party because in the case at bar, he is essentially, a person who signs as maker without receiving any consideration, signs as an accommodation party merely for the purpose of lending the credit of his name. And as an accommodation party he cannot set up lack of consideration against any holder, even as to one who is not a holder in due course. Parties; Holder in Due Course (1993) Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account in the sum of P1,000. However, Evelyn inserted P5,000 in violation of the instruction. She negotiated the note to Julie who had knowledge of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity. Can Devi enforce the note against Larry and if she can, for how much? Explain. Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the latter enforce the note against Larry? SUGGESTED ANSWER:

Yes, Devi can enforce the negotiable promissory note against Larry in the amount of P5,000. Devi is a holder in due course and the breach of trust committed by Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a holder in due course, Devi is not subject to such personal defense. Yes. Baby is not a holder in due course because she has knowledge of the breach Version 1990-2003 Arranged by SULAW Class 2005

of trust committed by Evelyn against Larry which is just a personal defense. But having taken the instrument from Devi, a holder in due course, Baby has all the rights of a holder in due course. Baby did not participate in the breach of trust committed by Evelyn who filled the blank but filled up the instrument with P5,000 instead of P1,000 as instructed by Larry (Sec 58 NIL) Parties; Holder in Due Course (1996) What constitutes a holder in due course? SUGGESTED ANSWER:

A holder in due course is one who has taken the instrument under the following conditions: That it is complete and regular upon its face; That he became holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact; That he took it in good faith and for value; That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (Sec 52, NIL) Parties; Holder in Due Course (1996) 1996 2.2) Eva issued to Imelda a check in the amount of P50th post-dated Sep 30, 1995, as security for a diamond ring to be sold on commission. On Sep 15, 1995, Imelda negotiated the check to MT investment which paid the amount of P40th to her. Eva failed to sell the ring, so she returned it to Imelda on Sep 19, 1995. Unable to retrieve her check, Eva withdrew Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

her funds from the drawee bank. Thus, when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her, Eva raised the defense of absence of consideration, the check having been issued merely as security for the ring that she could not sell. Does Eva have a valid defense? Explain. SUGGESTED ANSWER:

No. Eva does not have a valid defense. First, MT Investment is a holder in due course and, as such, holds the postdated check free from any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a holder in due course. Second, it is not a ground for the discharge of the post-dated check as against a holder in due course that it was issued merely as security. The only grounds for the discharge of negotiable instruments are those set forth in Sec 119 of the NIL and none of those grounds are available to Eva. The latter may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. (State Investments v CA GR 101163, Jan 11, 93 217s32). Parties; Holder in Due Course (1998) X makes a promissory note for P10,000 payable to A, a minor, to help him buy school books. A endorses the note to B for value, who in turn endorses the note to C. C knows A is a minor. If C sues X on the note, can X set up the defenses of minority and lack of consideration? (3%) SUGGESTED ANSWER:

Yes. C is not a holder in due course. The promissory note is not a negotiable instrument as it does not contain any word of negotiability, that is, order or bear, or words of similar meaning or import. Not being a holder in due course, C is to subject such personal defenses of minority and lack of consideration. C is a mere assignee who is subject to all defenses. ALTERNATIVE ANSWER:

X cannot set up the defense of the minority of A. Defense of minority is available to the minor only. Such defense is not available to X. X cannot set up the defense against C. Lack of consideration is a personal defense which is only available between immediate parties or against parties who are not holders in due course. C’s knowledge that

A is a minor does not prevent C from being a holder in due course. C took the promissory note from a holder for value, B. Parties; Holder in Due Course; Indorsement in blank (2002) A. AB issued a promissory note for P1,000 payable to CD or his order on September 15, 2002. CD indorsed the note in blank and delivered the same to EF. GH stole the note from EF and on September 14, 2002 presented it to AB for payment. When asked by AB, GH said CD

Page 89 of 103

gave him the note in payment for two cavans of rice. AB therefore paid GH P1,00 on the same date. On September 15, 2002, EF discovered that the note of AB was not in his possession and he went to AB. It was then that EF found out that AB had already made payment on the note. Can EF still claim payment from AB? Why? (3%) B. As a sequel to the same facts narrated above, EF, out of pity for AB who had already paid P1,000.00 to GH, decided to forgive AB and instead go after CD who indorsed the note in blank to him. Is CD still liable to EF by virtue of the indorsement in blank? Why? (2%)

Bank during banking hours. ON maturity date, RP was at the aforesaid office ready to pay the note but PN did not show up. What PN later did was to sue XL for the face value of the note, plus interest and costs. Will the suit prosper? Explain. (5%) SUGGESTED ANSWER:

Yes. The suit will prosper as far as the face value of the note is concerned, but not with respect to the interest due subsequent to the maturity of the note and the costs of collection. RP was ready and willing to pay the note at the specified place of payment on the specified maturity date, but PN did not show up. PN lost his right to recover the interest due subsequent to the maturity of the note and the costs of collection.

SUGGESTED ANSWER:

A. No. EF cannot claim payment from AB. EF is not a holder of the promissory note. To make the presentment for payment, it is necessary to exhibit the instrument, which EF cannot do because he is not in possession thereof. B. No, because CD instrument by delivery.

negotiated

the

Place of Payment (2000) PN is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law (Act 2031). The note was originally issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the specified maturity date as the office of the corporate secretary of PX Version 1990-2003 Arranged by SULAW Class 2005

Public Service Law Certificate of public Convenience (1998) The Batong Bakal Corporation filed with the Board of Energy an application for a Certificate of Public Convenience for the purpose of supplying electric power and lights to the factory and its employees living within the compound. The application was opposed by the Bulacan Electric Corporation contending that the Batong Bakal Corporation has not secured a franchise to operate and maintain an electric plant. Is the opposition’s contention correct? (5%) SUGGESTED ANSWER:

No. A certificate of public convenience may be granted to Batong Bakal Corporation, though not possessing a Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

legislative franchise, if it meets all the other requirements. There is nothing in the law nor the Constitution, which indicates that a legislative franchise is necessary or required for an entity to operate as supplier of electric power and light to its factory and its employees living within the compound. Certificate of Public Convenience; inseparability of certificate and vessel (1992) Antonio was granted a Certificate of Public Convenience (CPC) in 1986 to operate a ferry between Mindoro and Batangas using the motor vessel “MV Lotus.” He stopped operations in 1988 due to unserviceability of the vessel. In 1989, Basilio was granted a CPC for the same route. After a few months, he discovered that Carlos was operating on his route under Antonio’s CPC. Because Basilio filed a complaint for illegal operations with the Maritime Industry Authority, Antonio and Carlos jointly filed an application for sale and transfer of Antonio’s CPC and substitution of the vessel “MV Lotus” with another owned by Carlos. Should Antonio’s and Carlos’ joint application be approved? Giver your reasons. SUGGESTED ANSWER:

The joint application of Antonio and Carlos for the sale and transfer of Antonio’s CPC and substitution of the vessel MV Lotus with another vessel owned by the transferee should not be approved. The certificate of public convenience and MV Lotus are inseparable. The unserviceability of the vessel covered by the certificate had likewise rendered ineffective the certificate itself, and the holder thereof may not legally transfer the same to another. (Cohon v CA 188 s 719). Certificate of Public Convenience; Requirements (1995) What requirements must be met before a certificate of public convenience may be granted under the Public Service Act? SUGGESTED ANSWER:

The following are the requirements for the granting of a certificate of public convenience, to wit: The applicant must be a citizen of the Philippines, or a corporation, copartnership or association organized under the laws of the Philippines and at least 60% of the stock of paid-up capital of which must belong to citizens of the Philippines. (Sec 16a, CA 146, as amended) The applicant must prove public necessity.

The applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner. (Sec 16a CA 146 as amended) The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation. Powers of the Public Service Commission (1993) The City of Manila passed an ordinance banning provincial buses from the city. The ordinance was challenged as invalid under the Public Service Act by X

Page 90 of 103

who had a certificate of public convenience to operate auto-trucks with fixed routes from certain towns in Bulacan and Rizal to Manila and within Manila. Firstly, he claimed that the ordinance was null and void because, among other things, it in effect amends his certificate of public convenience, a thing which only the Public Service Commission can do under Sec 16 (m) of the Public Service Act. Under said section, the Commission is empowered to amend, modify, or revoke a certificate of public convenience after notice and hearing. Secondly, he contended that even if the ordinance was valid, it is only the Commission which can require compliance with its provisions under Sec 17 (j) of said Act and since the implementation of the ordinance was without sanction or approval of the Commission, its enforcement was unauthorized and illegal. May the reliance of X on Section 16 (m) of the Public Service Act be sustained? Explain. Was X correct in his contention that under Section 17 (j) of the Public Service Act it is only the Commissioner which can require compliance with the provisions of the ordinance? Explain. SUGGESTED ANSWER:

No. The power vested in the Public Service Commission under Sec 16m is subordinate to the authority of the City of Manila under Sec 18 (hh) of its revised charter to superintend, regulate or control the streets of the city of Manila. (Lagman v City of Manila 17 s 579) Version 1990-2003 Arranged by SULAW Class 2005

No. The powers conferred by law upon the Public Service Commission were not designed to deny or supersede the regulatory power of local governments over motor traffic in the streets subject to their control. (Lagman v City of Manila 17 s 579) Public utilities (2000) Communications Inc. is an e-commerce company whose present business activity is limited to providing its clients with all types of information technology hardware. It plans to re-focus its corporate direction of gradually converting itself into a full convergence organization. Towards this objective, the company has been aggressively acquiring telecommunications businesses and broadcast media enterprises, and consolidating their corporate structures. The ultimate plan is to have only two organizations: one to own the facilities of the combined businesses and to develop and produce content materials, and another to operate the facilities and provide mass media and commercial telecommunications services. WWW Communications will be the flagship entity which will own the facilities of the conglomerate and provide content to the other new corporation which, in turn, will operate those facilities and provide the services. WWW Communications seeks your professional advice on whether or not its reorganized business activity would be considered a public utility requiring a franchise or certificate or any other form of authorization from the government. What will be your advice? Explain (5%) SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

The reorganized business activity of WWW Communications Inc. would not be considered a public utility requiring a franchise or certificate or any other form of authorization from the government. It owns the facilities, but does not operate them. Revocation of Certificate (1993) Robert is a holder of a certificate of public convenience to operate a taxicab service in Manila and suburbs. One evening, one of his taxicab units was boarded by three robbers as they escaped after staging a hold-up. Because of said incident, the LTFRB revoked the certificate of public convenience of Robert on the ground that said operator failed to render safe, proper and adequate service as required under Sec 19a of the Public Service Act. a) Was the revocation of the certificate of public convenience of Robert justified? Explain. b) When can the Commission (Board) exercise its power to suspend or revoke certificate of public convenience? SUGGESTED ANSWER:

1a) No. A single hold-up incident which does not link Robert’s taxicab cannot be construed that he rendered a service that is unsafe, inadequate and improper (Manzanal v Ausejo 164 s 36) 1b) Under Sec 19a of the Public Service Act, the Commission (Board) can suspend or revoke a certificate of public convenience when the operator fails to provide a service that is safe, proper or adequate, and refuses to render any service which can be reasonably demanded and furnished. Revocation of Certificate (1993) Pepay, a holder of a certificate of public convenience, failed to register to the complete number of units required by her certificate. However, she tried to justify such failure by the accidents that allegedly befell her, claiming that she was so shocked and burdened by the successive accidents and misfortunes that she did not know what she was doing, she was confused and thrown off tangent momentarily, although she always had the money and financial ability to buy new trucks and repair the destroyed one. Are the reasons given by Pepay sufficient grounds to excuse her from completing units? Explain. SUGGESTED ANSWER:

No. The reasons given by Pepay are not sufficient grounds to excuse her from completing her units. The same could be undertaken by her children or by other

authorized representatives (Sec 16n Pub Serv Act; Halili v Herras 10 s 769)

Securities Regulation Insider (2004) Ms. OB was employed in MAS Investment Bank. WIC, a medical drug company, retained the Bank to assess whether it is desirable to make a tender offer for DOP company, a drug manufacturer. OB overheard in the

Page 91 of 103

course of her work the plans of WIC. By herself and thru associates, she purchased DOP stocks available at the stock exchange priced at P20 per share. When WIC's tender offer was announced, DOP stocks jumped to P30 per share. Thus OB earned a sizable profit. Is OB liable for breach and misuse of confidential or insider information gained from her employment? Is she also liable for damages to sellers or buyers with whom she traded? If so, what is the measure of such damages? Explain briefly. (5%) SUGGESTED ANSWER:

OB is an insider (as defined in Subsection 3.8(3) of the Securities Regulation Code) since she is an employee of the Bank, the financial adviser of DOP, and this relationship gives her access to material information about the issuer (DOP) and the latter's securities (shares), which information is not generally available to the public. Accordingly, OB is guilty of insider trading under Section 27 of the Securities Regulation Code, which requires disclosure when trading in securities. OB is also liable for damages to sellers or buyers with whom she traded. Under Subsection 63.1 of the Securities Regulation Code, the damages awarded could be an amount not exceeding triple the amount of the transaction plus actual damages. Exemplary damages may also be awarded in case of bad faith, fraud, malevolence or wantonness in the violation of the Securities Regulation Code or its implementing rules. The court is also

Version 1990-2003 Arranged by SULAW Class 2005

authorized to award attorney's fees not exceeding 30% of the award. Insider Trading (1995) Under the Revised Securities Act, it is unlawful for an insider to sell or buy a security of the issuer if he knows a fact of special significance with respect to the issuer or the security that is not generally available, without disclosing such fact to the other party. 3.a) What does the term “insider” mean as used in the Revised Securities act? 3.b) When is a fact considered to be “of special significance” under the same Act? 3.c) What are the liabilities of a person who violates the pertinent provisions of the Revised Securities Act regarding the unfair use of inside information? SUGGESTED ANSWER:

3a. “Insider” means 1) the issuer, 2) a director or officer of, or a person controlling, controlled by, or under common control with, the issuer, 3) a person whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or 4) a person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is such an insider (Sec 30b, RSA) 3b. It is one which, in addition to being material, would be likely to affect the market price of a security to a significant extent on being made generally available, or one which a reasonable person would consider especially Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability. (Sec. 30c, RSA) 3c. The person may be liable to 1) a fine of not less than P5th nor more than P500th or 2) imprisonment of not less than 7 years nor more than 21 years, 3) or both such fine and imprisonment in the discretion of the court. If the person is a corporation, partnership, association or other juridical entity, the penalty shall be imposed upon the officers of the corporation, etc. responsible for the violation. And if such an officer is an alien, he shall, in addition to the penalties prescribed, be deported without further proceedings after service of sentence. (Sec 56 RSA) Insider Trading; Manipulative Practices (1994) Give a case where a person who is not an issuing corporation, director or officer thereof, or a person controlling, controlled by or under common control with the issuing corporation, is also considered an “insider.” In Securities Law, what is a “shortswing” transaction. In “insider trading,” what is a “fact of special significance”? SUGGESTED ANSWER:

It may be a case where a person, whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or a person, who learns such a fact from any of the insiders, with knowledge that the person from whom he learns the fact, is such an insider (Sec 30, par (b) Rev Securities Act) A “shortswing” is a transaction where a person buys securities and sells or disposes of the same within a period of six (6) months. ALTERNATIVE ANSWER:

It is a purchase by any person for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to the control of the issuer or any such person, resulting in beneficial ownership of more than 10% of any class of shares (Sec 32 R Sec Act) In “insider trading,” a “fact of special significance” is, in addition to being

material, such fact as would likely, on being made generally available, to affect the market price of a security to a significant extent, or which a reasonable person would consider as especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability (Sec 30 par c RSecAct) Manipulative Practices (2001) Suppose A is the owner of several inactive securities. To create an appearance of active trading for such securities,

Page 92 of 103

A connives with B by which A will offer for sale some of his securities and B will buy them at a certain fixed price, with the understanding that although there would be an apparent sale, A will retain the beneficial ownership thereof. Is the arrangement lawful? (3%) If the sale materializes, what is it called? (2%) SUGGESTED ANSWER:

No. The arrangement is not lawful. It is an artificial manipulation of the price of securities. This is prohibited by the Securities Regulation Code. If the sale materializes, it is called a wash sale or simulated sale. Securities Regulation Code; Purpose (1998) What is the principal purpose of laws and regulations governing securities in the Philippines? (2%) SUGGESTED ANSWER:

The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against the nefarious practices of unscrupulous brokers and salesmen in selling securities. Securities; Definition (1996) Define securities SUGGESTED ANSWER:

Stocks, bonds notes, convertible debentures, warrants or other documents that represent a share in a company or a debt owned by a company or government entity. Evidences of obligations to pay money or of rights to participate in earnings and distribution of corporate assets. Instruments giving to their legal Version 1990-2003 Arranged by SULAW Class 2005

holders rights to money or other property; they are therefore instruments which have intrinsic value and are recognized and used as such in the regular channels of commerce. (Note: Sec 2a of the Revised Securities Act does not really define the term ‘securities.’)

Securities; Selling of Securities; Meaning (2002) 2002 (18) Equity Online Corporation (EOL), a New York corporation, has a securities brokerage service on the Internet after obtaining all requisite U.S. licenses and permits to do so. EOL’s website (www.eonline..com), which is hosted by a server in Florida, enables Internet users to trade on-line in securities listed in the various stock exchanges in the U.S. EOL buys and sells U.S. listed securities for the accounts of its clients all over the world, who convey their buy and sell instructions to EOL through the Internet. EOL has no offices, employees or representatives outside the U.S. The website has icons for many countries, including an icon “For Filipino Traders” containing the day’s prices of U.S. listed securities expressed in U.S. dollars and their Philippine peso equivalent. Grace Gonzales, a resident of Makati, is a regular customer of the website and has been purchasing and selling securities through EOL with the use of her American Express credit card. Grace has never traveled outside the Philippines. After a series of erroneous stock picks, she had incurred a net indebtedness of US$30,000. with EOL, at which time she cancelled her American Express credit card. After a Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

number of demand letters sent to Grace, all of them unanswered, EOL, through a Makati law firm, filed a complaint for collection against Grace with the Regional Trial Court of Makati. Grace, through her lawyer, filed a motion to dismiss on the ground that EOL (a) was doing business in the Philippines without a license and was therefore barred from bringing suit and (b) violated the Securities Regulation Code by selling or offering to sell securities within the Philippines without registering the securities with the Philippine SEC and thus came to court “with unclean hands.” EOL opposed the motion to dismiss, contending that it had never established a physical presence in the Philippines, and that all of the activities related to plaintiffs trading in U.S. securities all transpired outside the Philippines. If you are the judge, decide the motion to dismiss by ruling on the respective contentions of the parties on the basis of the facts presented above. (10%) SUGGESTED ANSWER:

The grounds of the motion to dismiss are both untenable. EOL is not doing business in the Philippines, and it did not violate the Securites Act, because it was not selling securities in the country. The contention of EOL is correct, because it never did any business in the Philippines. All its transactions in question were consummated outside the Philippines. Tender Offer (2002) 2002 (6) A. What is a tender offer? B. In what instances is a tender offer required to be made? SUGGESTED ANSWER:

A. Tender offer is a publicly announced intention of a person acting alone or in concert with other persons to acquire equity securities of a public company. It may also be defined as a method of taking over a company by asking stockholders to sell their shares at a price higher than the current market price and on a particular date. B. Instances where tender offer is required to be made: The person intends to acquire 15% or more of the equity share of a public company pursuant to an agreement made between or among the person and one or more sellers. The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months.

The person intends to acquire equity shares of a public company that would result in ownership of more than 50% of the said shares.

Transportation Law Boundary System (2005) Baldo is a driver of Yellow Cab Company under the boundary system. While cruising along the South Expressway, Baldo’s cab figured in a collision, killing his

Page 93 of 103

passenger, Pietro. The heirs of Pietro sued Yellow Cab Company for damages, but the latter refused to pay the heirs, insisting that it is not liable because Baldo is not its employee. Resolve with reasons. (2%)

Peter being based on culpa contractual, the carrier’s negligence is presumed upon the breach of contract. The burden of proof instead would lie on Jimmy to establish that despite an exercise of utmost diligence the collision could not have been avoided.

SUGGESTED ANSWER:

Yellow Cab Company shall be liable with Baldo, on a solidary basis, for the death of passenger Pietro. Baldo is an employee of Yellow Cab under the boundary system. As such, the death of passenger Pietro is breach of contract of carriage, making both the common carrier Yellow Cab and its employee, Baldo, solidarily liable. (Hernandez v. Dolor, G.R, No. 160286, July 30, 2004)

Carriage; Breach of Contract; Presumption of Negligence (1990) Peter so hailed a taxicab owned and operated by Jimmy Cheng and driven by Hermie Cortez. Peter asked Cortez to take him to his office in Malate. On the way to Malate, the taxicab collided with a passenger jeepney, as a result of which Peter was injured, i.e., he fractured his left leg. Peter sued Jimmy for damages, based upon a contract of carriage, and Peter won. Jimmy wanted to challenge the decision before the SC on the ground that the trial court erred in not making an express finding as to whether or not Jimmy was responsible for the collision and, hence, civilly liable to Peter. He went to see you for advice. What will you tell him? Explain. SUGGESTED ANSWER:

I will counsel Jimmy to desist from challenging the decision. The action of Version 1990-2003 Arranged by SULAW Class 2005

Carriage; Breach of Contract; Presumption of Negligence (1997) In a court case involving claims for damages arising from death and injury of bus passengers, counsel for the bus operator files a demurrer to evidence arguing that the complaint should be dismissed because the plaintiffs did not submit any evidence that the operator or its employees were negligent. If you were the judge, would you dismiss the complaint? SUGGESTED ANSWER:

No. In the carriage of passengers, the failure of the common carrier to bring the passengers safely to their destination immediately raises the presumption that such failure is attributable to the carrier’s fault or negligence. In the case at bar, the fact of death and injury of the bus passengers raises the presumption of fault or negligence on the part of the carrier. The carrier must rebut such presumption. Otherwise, the conclusion can be properly made that the carrier failed to exercise extraordinary diligence as required by law. Carriage; Fortuitous Event (1995) M. Dizon Trucking entered into a hauling contract with Fairgoods Co whereby the former bound itself to haul the latter’s 2000 sacks of Soya bean meal from Manila Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Port Area to Calamba, Laguna. To carry out faithfully its obligation Dizon subcontracted with Enrico Reyes the delivery of 400 sacks of the Soya bean meal. Aside from the driver, three male employees of Reyes rode on the truck with the cargo. While the truck was on its way to Laguna two strangers suddenly stopped the truck and hijacked the cargo. Investigation by the police disclosed that one of the hijackers was armed with a bladed weapon while the other was unarmed. For failure to deliver the 400 sacks, Fairgoods sued Dizon for damages. Dizon in turn set up a 3rd party complaint against Reyes which the latter registered on the ground that the loss was due to force majeure. Did the hijacking constitute force majeure to exculpate Reyes from any liability to Dizon? Discuss fully. SUGGESTED ANSWER:

No. The hijacking in this case cannot be considered force majeure. Only one of the two hijackers was armed with a bladed weapon. As against the 4 male employees of Reyes, 2 hijackers, with only one of them being armed with a bladed weapon, cannot be considered force majeure. The hijackers did not act with grave or irresistible threat, violence or force. Carriage; Liability; Lost Baggage or Acts of Passengers (1997) 1997 (15) Antonio, a paying passenger, boarded a bus bound for Batangas City. He chose a seat at the front row, near the bus driver, and told the bus driver that he had valuable items in his hand carried bag which he then placed beside the driver’s seat. Not having slept for 24 hours, he requested the driver to keep an eye on the bag should he doze off during the trip. While Antonio was asleep, another passenger took the bag away and alighted at Calamba, Laguna. Could the common carrier be held liable by Antonio for the loss? SUGGESTED ANSWER:

Yes. Ordinarily, the common carrier is not liable for acts of other passengers. But the common carrier cannot relieve itself from liability if the common carrier’s employees could have prevented the act or omission by exercising due diligence. In this case, the passenger asked the driver to keep an eye on the bag which was placed beside the driver’s seat. If the driver exercised due diligence, he could have prevented the loss of the bag. Carriage; Prohibited & Valid Stipulations (2002)

Discuss whether or not the following stipulations in a contract of carriage of a common carrier are valid: a stipulation limiting the sum that may be recovered by the shipper or owner to 90% of the value of the goods in case of loss due to theft. a stipulation that in the event of loss, destruction or deterioration of goods on account of the defective condition of the vehicle used in the contract of carriage, the carrier’s liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declares a higher value (5%) SUGGESTED ANSWER:

Page 94 of 103

The stipulation is considered unreasonable, unjust and contrary to public policy under Article 1745 of the Civil Code. The stipulation limiting the carrier’s liability to the value of the goods appearing in the bill of lading unless the shipper or owner declares a higher value, is expressly recognized in Article 1749 of the Civil Code. Carriage; Valuation of Damaged Cargo (1993) A shipped thirteen pieces of luggage through LG Airlines from Teheran to Manila as evidenced by LG Air Waybill which disclosed that the actual gross weight of the luggage was 180 kg. Z did not declare an inventory of the contents or the value of the 13 pieces of luggage. After the said pieces of luggage arrived in Manila, the consignee was able to claim from the cargo broker only 12 pieces, with a total weight of 174 kg. X advised the airline of the loss of one of the 13 pieces of luggage and of the contents thereof. Efforts of the airline to trace the missing luggage were fruitless. Since the airline failed to comply with the demand of X to produce the missing luggage, X filed an action for breach of contract with damages against LG Airlines. In its answer, LG Airlines alleged that the Warsaw Convention which limits the liability of the carrier, if any, with respect to cargo to a sum of $20 per kilo or $9.07 per pound, unless a higher value is declared in advance and additional charges are paid by the passenger and the conditions of the contract as set forth in the air waybill, expressly subject the Version 1990-2003 Arranged by SULAW Class 2005

contract of the carriage of cargo to the Warsaw Convention. May the allegation of LG Airlines be sustained? Explain. SUGGESTED ANSWER:

Yes. Unless the contents of a cargo are declared or the contents of a lost luggage are proved by the satisfactory evidence other than the self-serving declaration of one party, the contract should be enforced as it is the only reasonable basis to arrive at a just award. The passenger or shipper is bound by the terms of the passenger ticket or the waybill. (Panama v Rapadas 209 s 67)

Common Carrier (1996) Define a common carrier? SUGGESTED ANSWER:

A common carrier is a person, corporation, firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water or air for compensation, offering its services to the public (Art 1732, Civil Code) Common Carrier; Breach of Contract; Damages (2003) Vivian Martin was booked by PAL, which acted as a ticketing agent of Far East Airlines, for a round trip flight on the latter’s aircraft, from Manila-HongkongManila. The ticket was cut by an employee of PAL. The ticket showed that Vivian was scheduled to leave Manila at 5:30 p.m. on 05 January 2002 aboard Far East’s Flight F007. Vivian arrived at the Ninoy Aquino International Airport an hour before the time scheduled in her ticket, but was told that Far East’s Flight F007 had left at 12:10 p.m. It Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

turned out that the ticket was inadvertently cut and wrongly worded. PAL employees manning the airport’s ground services nevertheless scheduled her to fly two hours later aboard their plane. She agreed and arrived in Hongkong safely. The aircraft used by Far East Airlines developed engine trouble, and did not make it to Hongkong but returned to Manila. Vivian sued both airlines, PAL and Far East, for damages because of her having unable to take the Far East flight. Could either or both airlines be held liable to Vivian? Why? (6%) SUGGESTED ANSWER:

(per dondee) No, there was breach of contract and that she was accommodated well with the assistance of PAL employees to take the flight without undue delay. Common Carrier; Defenses (2002) Why is the defense of due diligence in the selection and supervision of an employee not available to a common carrier? (2%) SUGGESTED ANSWER:

The defense of due diligence in the selection and supervision of an employee is not available to a common carrier because the degree of diligence required of a common carrier is not the diligence of a good father of a family but extraordinary diligence, i.e., diligence of the greatest skill and utmost foresight. Common Carrier; Defenses; Fortuitous Events (1994) Marites, a paying bus passenger, was hit above her left eye by a stone hurled at the bus by an unidentified bystander as the bus was speeding through the National Highway. The bus owner’s personnel lost no time in bringing Marites to the provincial hospital where she was confined and treated. Marites wants to sue the bus company for damages and seeks your advice whether she can legally hold the bus company liable. What will you advise her? SUGGESTED ANSWER:

Marites can not legally hold the bus company liable. There is no showing that any such incident previously happened so as to impose an obligation on part of the personnel of the bus company to warn the passengers and to take the necessary precaution. Such hurling of a stone constitutes fortuitous event in this case. The bus company is not an insurer. (Pilapil v CA 180 s 346) Common Carrier; Defenses; Limitation of Liability (1998) X took a plane from Manila bound for Davao via Cebu where there was a change of planes. X arrived in Davao safely but to his dismay, his two suitcases were left behind in Cebu. The airline company

assured X that the suitcases would come in the next flight but they never did. X claimed P2,000 for the loss of both suitcases, but the airline was willing to pay only P500 because the airline ticket stipulated that unless a higher value was declared, any claim for loss cannot exceed P250 for each piece of luggage. X reasoned out that he did not sign the stipulation and in fact had not even read it.

Page 95 of 103

X did not declare a greater value despite the fact that the clerk had called his attention to the stipulation in the ticket. Decide the case (5%) SUGGESTED ANSWER:

Even if he did not sign the ticket, X is bound by the stipulation that any claim for loss cannot exceed P250 for each luggage. He did not declare a higher value. X is entitled to P500 for the two luggages lost. Common Carrier; Defenses; Limitation of Liability (2001) Suppose A was riding on an airplane of a common carrier when the accident happened and A suffered serious injuries. In an action by A against the common carrier, the latter claimed that there was a stipulation in the ticket issued to A absolutely exempting the carrier from liability from the passenger’s death or injuries ad notices were posted by the common carrier dispensing with the extraordinary diligence of the carrier, and A was given a discount on his plane fare thereby reducing the liability of the common carrier with respect to A in particular. a) Are those valid defenses? (1%) b) What are the defenses available to any common carrier to limit or exempt it from liability? (4%) SUGGESTED ANSWER:

No. These are not valid defenses because they are contrary to law as they are in violation of the extraordinary diligence required of common carriers. (Article 1757, 1758 New Civil Code) Version 1990-2003 Arranged by SULAW Class 2005

The defenses available to any common carrier to limit or exempt it from liability are: observance of extraordinary diligence, or the proximate cause of the incident is a fortuitous event or force majeure, act or omission of the shipper or owner of the goods, the character of the goods or defects in the packing or in the containers, and order or act of competent public authority, without the common carrier being guilty of even simple negligence (Article 1734, NCC). Common Carrier; Duration of Liability (1996) A bus of GL Transit on its way to Davao stopped to enable a passenger to alight. At that moment, Santiago, who had been waiting for a ride, boarded the bus. However, the bus driver failed to notice Santiago who was still standing on the bus platform, and stepped on the accelerator. Because of the sudden motion, Santiago slipped and fell down suffering serious injuries. May Santiago hold GL Transit liable for breach of contract of carriage? Explain. SUGGESTED ANSWER:

Santiago may hold GL Transit liable for breach of contract of carriage. It was the duty of the driver, when he stopped the bus, to do no act that would have the effect of increasing the peril to a passenger such as Santiago while he was attempting to board the same. When a bus is not in motion there is no necessity for a Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

person who wants to ride the same to signal his intention to board. A public utility bus, once it stops, is in effect making a continuous offer to bus riders. It is the duty of common carriers of passengers to stop their conveyances for a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so. Santiago, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled to all the rights and protection pertaining to a contract of carriage. (Dangwa Trans Co v CA 95582 Oct 7,91 202s574) Common Carrier; Duty to Examine Baggages; Railway and Airline (1992) Marino was a passenger on a train. Another passenger, Juancho, had taken a gallon of gasoline placed in a plastic bag into the same coach where Marino was riding. The gasoline ignited and exploded causing injury to Marino who filed a civil suit for damages against the railway company claiming that Juancho should have been subjected to inspection by its conductor. The railway company disclaimed liability resulting from the explosion contending that it was unaware of the contents of the plastic bag and invoking the right of Juancho to privacy. Should the railway company be held liable for damages? If it were an airline company involved, would your answer be the same? Explain briefly. SUGGESTED ANSWER:

No. The railway company is not liable for damages. In overland transportation, the common carrier is not bound nor empowered to make an examination on the contents of packages or bags, particularly those handcarried by passengers. If it were an airline company, the common carrier should be made liable. In case of air carriers, it is not lawful to carry flammable materials in passenger aircrafts, and airline companies may open and investigate suspicious packages and cargoes (RA 6235) Common Carrier; Test (1996) What is the test for determining whether or not one is a common carrier? SUGGESTED ANSWER:

The test for determining whether or not one is a common carrier is whether the

person or entity, for some business purpose and with general or limited clientele, offers the service of carrying or transporting passengers or goods or both for compensation. Common Carriers; Defenses (1996) AM Trucking, a small company, operates two trucks for hire on selective basis. It caters only to a few customers, and its trucks do not make regular or scheduled trips. It does not even have a certificate of public convenience.

Page 96 of 103

On one occasion, Reynaldo contracted AM to transport for a fee, 100 sacks of rice from Manila to Tarlac. However, AM failed to deliver the cargo, because its truck was hijacked when the driver stopped in Bulacan to visit his girlfriend. May Reynaldo hold AM liable as a common carrier? May AM set up the hijacking as a defense to defeat Reynaldo’s claim? SUGGESTED ANSWER:

Reynaldo may hold AM Trucking liable as a common carrier. The facts that AM Trucking operates only two trucks for hire on a selective basis, caters only to a few customers, does not make regular or scheduled trips, and does not have a certificate of public convenience are of no moment as • the law does not distinguish between one whose principal business activity is the carrying of persons or goods or both and anyone who does such carrying only as an ancillary activity, the law avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis, and the law refrains from making a distinction between a carrier offering its services to the general public and one who offers services or solicits business only

Version 1990-2003 Arranged by SULAW Class 2005

from a narrow segment of the general population (Pedro de Guzman v CA L-47822 Dec 22,88 168s612) SUGGESTED ANSWER:

AM Trucking may not set up the hijacking as a defense to defeat Reynaldo’s claim as the facts given do not indicate that the same was attended by the use of grave or irresistible threat, violence, or force. It would appear that the truck was left unattended by its driver and was taken while he was visiting his girlfriend. (Pedro de Guzman v CA L-47822 Dec 22,88 168 scra 612).

Common Carriers; Liability for Loss (1991) Alejandor Camaling of Alegria, Cebu, is engaged in buying copra, charcoal, firewood, and used bottles and in reselling them in Cebu City. He uses 2 big Isuzu trucks for the purpose; however, he has no certificate of public convenience or franchise to do business as a common carrier. On the return trips to Alegria, he loads his trucks with various merchandise of other merchants in Alegria and the neighboring municipalities of Badian and Ginatilan. He charges them freight rates much lower than the regular rates. In one of the return trips, which left Cebu City at 8:30 p.m. 1 cargo truck was loaded with several boxes of sardines, valued at P100th, belonging to one of his customers, Pedro Rabor. While passing the zigzag road between Carcar and Barili, Cebu, which is midway between Cebu City and Alegria, the truck was hijacked by 3 armed men who took all the boxes of Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

sardines and kidnapped the driver and his helper, releasing them in Cebu City only 2 days later. Pedro Rabor sought to recover from Alejandro the value of the sardines. The latter contends that he is not liable therefore because he is not a common carrier under the Civil Code and, even granting for the sake of argument that he is, he is not liable for the occurrence of the loss as it was due to a cause beyond his control. If you were the judge, would you sustain the contention of Alejandro? SUGGESTED ANSWER:

If I were the Judge, I would hold Alejandro as having engaged as a common carrier. A person who offers his services to carry passengers or goods for a fee is a common carrier regardless of whether he has a certificate of public convenience or not, whether it is his main business or incidental to such business, whether it is scheduled or unscheduled service, and whether he offers his services to the general public or to a limited few (De Guzman v CA GR 47822 27Dec1988)

I will however, sustain the contention of Alejandro that he is not liable for the loss of the goods. A common carrier is not an insurer of the cargo. If it can be established that the loss, despite the exercise of extraordinary diligence, could not have been avoided, liability does not ensue against the carrier. The hijacking by 3 armed men of the truck used by Alejandro is one of such cases (De Guzman v CA GR 47822 27Dec1988).

Common vs. Private Carrier; Defenses (2002) Name two (2) characteristics which differentiate a common carrier from a private carrier. (3%). SUGGESTED ANSWER:

Two (2) characteristics that differentiate a common carrier from a private carrier are: A common carrier offers its service to the public; a private carrier does not. A common carrier is required to observe extraordinary diligence; a private carrier is not so required. Kabit System (2005) Discuss the “kabit system” in land transportation and its legal consequences. (2%) SUGGESTED ANSWER:

The kabit system is an arrangement where a person granted a certificate of public convenience allows other persons to operate their motor vehicles under his

license, for a fee or percentage of their

earnings (Lim v. Court of Appeals and Gonzalez, G.R, No. 125817, January 16, 2002, citing Baliwag Trannit v. Court of Appeals, G.R. No. 57493, January 7, 1987) The law enjoining the

kabit system aims to identify the person responsible for an accident in order to protect the riding public. The policy has no force when the public at large is neither deceived nor involved. The law does not penalize the parties to a kabit agreement. But the kabit system is contrary to public

Page 97 of 103

policy and therefore void and inexistent. (Art. 1409[1], Civil Code) Kabit System; Agent of the Registered Owner (2005) Procopio purchased an Isuzu passenger jeepney from Enteng, a holder of a certificate of public convenience for the operation of public utility vehicle plying the Calamba-Los Baños route. While Procopio continued offering the jeepney for public transport services, he did not have the registration of the vehicle transferred in his name. Neither did he secure for himself a certificate of public convenience for its operation. Thus, per the records of the Land Transportation Franchising and Regulatory Board, Enteng remained its registered owner and operator. One day, while the jeepney was traveling southbound, it collided with a ten-wheeler truck owned by Emmanuel. The driver of the truck admitted responsibility for the accident, explaining that the truck lost its brakes. Procopio sued Emmanuel for damages, but the latter moved to dismiss the case on the ground that Procopio is not the real party in interest since he is not the registered owner of the jeepney. Resolve the motion with reasons. (3%) SUGGESTED ANSWER:

The motion to dismiss should be denied because Procopio, as the real owner of the jeepney, is the real party in interest. Procopio falls under the Kabit system. However, the legal restriction as regards the Kabit system does not apply in this case Version 1990-2003 Arranged by SULAW Class 2005

because the public at large is not deceived nor involved. (Lim v. Court of Appeals, G.R. No. 125817, January 16, 2002, citing Baliwag Transit v. Court of Appeals, G.R. No. 57493, January 7, 1987) In any event, Procoprio is deemed to be "the agent" of the registered owner. (First Malayan Leasing v. Court of Appeals, G.R. No. 91378, June 9,1992; and "F" Transit Co., Inc. v. NLRC, G.R. Nos, 88195-96, January 27, 1994) Maritime Commerce; Bareboat (2003) For the transportation of its cargo from the Port of Manila to the Port of Kobe, Japan, Osawa & Co., chartered “bareboat” M/V Ilog of Karagatan Corporation. M/V Ilog met a sea accident resulting in the loss of the cargo and the death of some of the seamen manning the vessel. Who should bear the loss of the cargo and the death of the seamen? Why? (4%) SUGGESTED ANSWER:

(per Dondee) Osawa and Co. shall bear the loss because under a demise or bareboat charter, the charterer (Osawa Co.) mans the vessel with his own people and becomes, in effect, the owner for the voyage or service stipulated, subject to liability for damages caused by negligence. Prior Operator Rule (2003) Bayan Bus Lines had been operating satisfactorily a bus service over the route Manila to Tarlac and vice versa via the McArthur Highway. With the upgrading of the new North Expressway, Bayan Bus Lines service became Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

seemingly inadequate despite its efforts of improving the same. Pasok Transportation, Inc., now applies for the issuance to it by the Land Transportation Franchising and Regulatory Board of a certificate of public convenience for the same Manila-TarlacManila route. Could Bayan Bus Lines, Inc., invoke the “prior operator” rules against Pasok Transportation, Inc.? Why? (6%) SUGGESTED ANSWER:

(per Dondee) No, Bayan Bus Lines, Inc., cannot invoke the “prior operator” rules against Pasok Transportation, Inc. because such “Prior or Old Operator Rule” under the Public Service Act only applies as a policy of the law of the Public Service Commission to issue a certificate of public convenience to a second operator when prior operator is rendering sufficient, adequate and satisfactory service, and who in all things and respects is complying with the rule and regulation of the Commission. In the facts of the case at bar, Bayan Bus Lines service became seemingly inadequate despite its efforts of improving the same. Hence, in the interest of providing efficient public transport services, the use of the 'prior operator' and the 'priority of filing' rules shall is untenable n this case. Registered Owner; Conclusive Presumption (1990) Johnny owns a Sarao jeepney. He asked his neighbor Van if he could operate the said jeepney under Van’s certificate of public convenience. Van agreed and, accordingly, Johnny registered his jeepney under Van name. On June 10, 1990, one of the passenger jeepneys operated by Van bumped Tomas. Tomas was injured and in due time, he filed a complaint for damages against Van and his driver for the injuries he suffered. The court rendered judgment in favor of Tomas and ordered Van and his driver, jointly and severally, to pay Tomas actual and moral damages, attorney’s fees, and costs. The Sheriff levied on the jeepney belonging to Johnny but registered in the name of Van. Johnny filed a 3rd party claim with the Sheriff alleging ownership of the jeepney levied upon and stating that the jeepney was registered in the name of Van merely to enable Johnny to make use of Van’s certificate of public convenience. May the Sheriff proceed with the public auction of Johnny’s jeepney. Discuss with reasons. SUGGESTED ANSWER:

Yes, the Sheriff may proceed with the auction sale of Johnny’s jeepney. In contemplation of law as regards the public

and third persons, the vehicle is considered the property of the registered operator (Santos v Sibug 104 S 520)

Trans-Shipment; Bill of Lading; binding contract (1993) JRT Inc entered into a contract with C Co of Japan to export anahaw fans valued at $23,000. As payment thereof, a letter of credit was issued to JRT by the buyer. The letter of credit required the issuance of an onboard bill of lading and prohibited the transshipment. The President of JRT then contracted a shipping agent to ship the anahaw fans through O Containers Lines, specifying the requirements of the letter of credit. However, the bill of lading issued by the shipping lines bore the notation Version 1990-2003 Arranged by SULAW Class 2005

Page 98 of 103

“received for shipment” and contained an entry indicating transshipment in Hongkong. The President of JRT personally received and signed the bill of lading and despite the entries, he delivered the corresponding check in payment of the freight. The shipment was delivered at the port of discharge but the buyer refused to accept the anahaw fans because there was no onboard bill of lading, and there was transshipment since the goods were transferred in Hongkong from MV Pacific, the feeder vessel, to MV Oriental, a mother vessel. JRT argued that the same cannot be considered transshipment because both vessels belong to the same shipping company. Was there transshipment? Explain JRT further argued that assuming that there was transshipment, it cannot be deemed to have agreed thereto even if it signed the bill of lading containing such entry because it was made known to the shipping lines from the start that transshipment was prohibited under the letter of credit and that, therefore, it had no intention to allow transshipment of the subject cargo. Is the argument tenable? Reason. SUGGESTED ANSWER:

Yes. Transshipment is the act of taking cargo out of one ship and loading it in another. It is immaterial whether or not the same person, firm, or entity owns the two vessels. (Magellan v CA 201 s 102) No. JRT is bound by the terms of the bill of lading when it accepted the bill of lading with full knowledge of its contents which included transshipment in Hongkong. Acceptance under such circumstances makes the bill of lading a binding contract. (Magellan v Ca 201 s 102)

Trust Receipts Law Trust Receipts Law; Acts & Omissions; Covered (2006) What acts or omissions are penalized under the Trust Receipts Law? (2.5%) SUGGESTED ANSWER:

The Trust Receipts Law (P.D. No. 115) declares the fail-ure to turn over goods or proceeds realized from sale thereof, as a criminal offense under Art. 315(l)(b) of Revised Penal Code. The law is violated whenever the entrustee or person to whom trust receipts were issued fails to: (a) return the goods covered by the trust receipts; or (b) return the proceeds of the sale of said goods (Metropolitan Bank v. Tonda, G.R. No. 134436, August 16, 2000).

Is lack of intent to defraud a bar to the prosecution of these acts or omissions? (2.5%) SUGGESTED ANSWER:

No. The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the goods, or (2) return the goods covered by the trust receipts if the goods are not sold. The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud (Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006; Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000; Ong v. Court of Appeals, G.R. No. 119858, April 29, 2003). Version 1990-2006 Updated by

Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Trust Receipts Law; Liability for estafa (1991) Mr. Noble, as the President of ABC Trading Inc executed a trust receipt in favor of BPI Bank to secure the importation by his company of certain goods. After release and sale of the imported goods, the proceeds from the sale were not turned over to BPI. Would BPI be justified in filing a case for estafa against Noble? SUGGESTED ANSWER:

BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that the trust receipt was issued in favor of a bank, instead of a seller, to secure the importation of the goods did not preclude the application of the Trust Receipt Law. (PD 115) Under the law, any officer or employee of a corporation responsible for the violation of a trust receipt is subject to the penal liability thereunder (Sia v People 166s655) ALTERNATIVE ANSWER:

The filing of a case for estafa under the penal provisions of the RPC would not be justified. It has been held in Sia v People (161 s 655) that corporate officers and directors are not criminally liable for a violation of said Code. 2 conditions are required before a corporate officer may be criminally liable for an offense committed by the corporation; viz: There must be a specific provision of law mandating a corporation to act or not to act; and There must be an explicit statement in the law itself that, in case of such violation by a corporation, the officers and directors thereof are to be personally and criminally liable therefore. These conditions are not met in the penal provisions of the RPC on trust receipts. Trust Receipts Law; Liability for Estafa (1997) A buys goods from a foreign supplier using his credit line with a bank to pay for the goods. Upon arrival of the goods at the pier, the bank requires A to sign a trust receipt before A is allowed to take delivery of the goods. The trust receipt contains the usual language. A disposes of the goods and receives payment but does not pay the bank. The bank files a criminal action against A for violation of the Trust Receipts Law. A asserts that the trust receipt is only to secure his debt and that a criminal action cannot lie against him because that would be violative of his constitutional right against “imprisonment for nonpayment of a debt.” Is he correct? SUGGESTED ANSWER:

No. Violation of a trust receipt is criminal as it is punished as estafa under Art 315 of the RPC. There is a public policy involved which is to assure the entruster the reimbursement of the amount advanced or the balance thereof for the goods subject of the trust receipt. The execution of the trust receipt or the use thereof promotes the smooth flow of commerce as it helps the importer or buyer of the goods covered thereby.

Page 99 of 103

Trusts Receipt Law (2003) PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw materials for use by it in the manufacture of its products. The importation was effected through a trust receipt arrangement with AB Banking corporation. When it applied for the issuance by AB Banking Corporation of a letter of credit, PB & Co., Inc., did not make any representation to the bank that it would be selling what it had imported. It failed to pay the bank. When demand was made upon it to account for the importation, to return the articles, or to turn-over the proceeds of the sale thereof to the bank, PB & Co., Inc., also failed. The bank sued PB & Co.’s President who was the signatory of the trust receipt for estafa. The President put up the defense that he could not be made liable because there was no deceit resulting in the violation of the trust receipt. He also submitted that there was no violation of the trust receipt because the raw materials were not sold but used by the corporation in the manufacture of its products. Would those defenses be sustainable? Why? (6%) SUGGESTED ANSWER:

No, the defenses are not sustainable. The lack of deceit should not be sustained because the mere failure to account for the importation, or return the articles constitutes the abuse of confidence in the crime of estafa. The fact that the goods

Version 1990-2003 Arranged by SULAW Class 2005

aren’t sold but are used in the manufacture of its products is immaterial because a violation of the trust receipts law happened when it failed to account for the goods or return them to the Bank upon demand.

Usury Law Usury Law (199) Borrower obtained a loan from a money lending enterprise for which he issued a promissory note undertaking to pay at the end of a period of 30 days the principal plus interest at the rate 5.5% per month plus 2% per annum as service charge. On maturity of the loan, borrower failed to pay the principal debt as well as the stipulated interest and service charge. Hence, he was sued. How would you dispose of the issues raised by the borrower? That the stipulated interest rate is excessive and unconscionable? (3%) Is the interest rate usurious? (3%) Recommendation: Since the subject matter of these two (2) questions is not included within the scope of the Bar Questions in Mercantile Law, it is suggested that whatever answer is given by the examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit. SUGGESTED ANSWER:

a. The rate of interest of 5.5% per month is excessive and unconscionable.

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

b. The interest cannot be considered usurious. The Usury Law has been suspended in its application, and the interest rates are made “floating.”

Warehouse Receipts Law Bill of Lading (1998) What do you understand by a “bill of lading?” (2%) Explain the two-fold character of a “bill of lading.” (3%) SUGGESTED ANSWER:

A bill of lading may be defined as a written acknowledgement of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named therein or on his order. A bill of lading has a two-fold character, namely, a) it is a receipt of the goods to be transported; and b) it constitutes a contract of carriage of the goods. Delivery of Goods; Requisites (1998) Luzon Warehousing Co received from Pedro 200 cavans of rice for deposit in its warehouse for which a negotiable receipt was issued. While the goods were stored in said warehouse, Cicero obtained a judgment against Pedro for the recover of a sum of money. The sheriff proceeded to levy upon the goods on a writ of execution and directed the warehouseman to deliver the goods. Is the warehouseman under obligation to comply with the sheriffs order? (5%) SUGGESTED ANSWER:

No. There was a valid negotiable receipt as there was a valid delivery of 200 cavans of rice for deposit. In such case, the warehouseman (LWC) is not obliged to deliver the 200 cavans of rice deposited to any person, except to the one who can comply with sec 8 of the Warehouse Receipts Law, namely: surrender the receipt of which he is a holder; willing to sign a receipt for the delivery of the goods; and pays the warehouseman’s liens that is, his fees and advances, if any. The sheriff cannot comply with these requisites especially the first, as he is not the holder of the receipt. Delivery of the Goods (1991) When is a warehouseman bound to deliver the goods, upon a demand made either by the holder of a receipt for the goods or by the depositor?

SUGGESTED ANSWER:

The warehouseman is bound to deliver the goods upon demand made either by the holder of the receipt for the goods or by the depositor if the demand is accompanied by an offer to satisfy the warehouseman’s lien, an offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation thereof,

Page 100 of 103

and readiness and willingness to sign when the goods are delivered if so requested by the warehouseman (Sec 8 Warehouse Receipts Law). Garnishment or Attachment of Goods (1999) A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said merchant. A month after, a creditor obtained judgment against the said merchant for a sum of money. The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the deposited rice.

a. What advice will you give the Warehouse Company? Explain (2%) b. Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the sheriff. Would the rice mill have better rights to the rice than the creditor? Explain your answer. (2%) SUGGESTED ANSWER:

a. The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a negotiable receipt was issued therefor. The rice cannot thereafter, while in the possession of the Warehouse Company, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the warehouseman, or its negotiation enjoined. The Warehouse Version 1990-2003 Arranged by SULAW Class 2005

Company cannot be compelled to deliver the actual possession of the rice until the receipt is surrendered to it or impounded by the court. b. Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than the creditor. It is the rice mill that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the warehouseman’s liens and fees and other charges. Negotiable Documents of Title (1992) For a cargo of machinery shipped from abroad to a sugar central in Dumaguete, Negros Oriental, the Bill of Lading (B/L) stipulated “to shipper’s order,” with notice of arrival to be addressed to the Central. The cargo arrived at its destination and was released to the Central without surrender of the B/L on the basis of the latter’s undertaking to hold the carrier free and harmless from any liability. Subsequently, a Bank to whom the central was indebted, claimed the cargo and presented the original of the B/L stating that the Central had failed to settle its obligations with the Bank. Was there misdelivery by the carrier to the sugar central considering the nonsurrender of the B/L? Why? SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

There was no misdelivery by the carrier since the cargo was considered consigned to the Sugar central per the “Shipper’s Order” (Eastern Shipping Lines v CA 190 s 512) ALTERNATIVE ANSWER:

There was misdelivery. The B/L was a negotiable document of title because it was to the “Shipper’s Order.” Hence, the common carrier should have delivered the cargo to the Central only upon surrender of the B/L. The non-surrender of the B/L will make it liable to holders in due course. Ownership of Goods Stored (1992) To guarantee the payment of a loan obtained from a bank, Raul pledged 500 bales of tobacco deposited in a warehouse to said bank and endorsed in blank the warehouse receipt. Before Raul could pay for the loan, the tobacco disappeared from the warehouse. Who should bear the loss – the pledgor or the bank? Why? SUGGESTED ANSWER:

The pledgor should bear the loss. In the pledge of a warehouse receipt the ownership of the goods remain with depositor or his transferee. Any contract or real security, among them a pledge, does not amount to or result in an assumption of risk of loss by the creditor. The Warehouse Receipts Law did not deviate from this rule. Right to the Goods (2005) Jojo deposited several cartons of goods with SN Warehouse Corporation. The corresponding warehouse receipt was issued to the order of Jojo. He endorsed the warehouse receipt to EJ who paid the value of the goods deposited. Before EJ could withdraw the goods, Melchor informed SN Warehouse Corporation that the goods belonged to him and were taken by Jojo without his consent. Melchor wants to get the goods, but EJ also wants to withdraw the same. (5%) Who has a better right to the goods? Why? SUGGESTED ANSWER:

EJ has a better right to the goods, being covered by a negotiable document of title, namely the warehouse receipts issued to the "order of Jojo." Under the Sales provisions of the Civil Code on negotiable documents of title, and under the provisions of the Warehouse Receipts Law, when goods deposited with the bailee are covered by a negotiable document of title, the endorsement and delivery of the document transfers ownership of the goods to the transferee. By operation of law, the transferee obtains the direct obligation of

the bailee to hold the goods in his name." (Art. 1513, Civil Code; Section 41, Warehouse Receipts Law) Since EJ is the holder of the warehouse receipt, he has the better right to the goods. SN Warehouse is obliged to hold the goods in his name. If SN Warehouse Corporation is uncertain as to who is entitled to the property, what is the proper recourse of the corporation? Explain. SUGGESTED ANSWER:

Page 101 of 103

SN Warehouse can file an INTERPLEADER to compel EJ and Melchor to litigate against each other for the ownership of the goods. Sec. 17 of the Warehouse Receipts Law states, "If more than one person claims the title or possession of the goods, the warehouse may, either as a defense to an action brought against him for nondelivery of the goods or as an original suit, whichever is appropriate, require all known claimants to interplead." Unpaid Seller; Negotiation of the Receipt (1993) A purchased from S 150 cavans of palay on credit. A deposited the palay in W’s warehouse. W issued to A a negotiable warehouse receipt in the name of A. Thereafter, A negotiated the receipt to B who purchased the said receipt for value and in good faith. Who has a better right to the deposit, S, the unpaid vendor or b, the purchaser of the receipt for value and in good faith? Why? When can the warehouseman be obliged to deliver the palay to A? SUGGESTED ANSWER:

B has a better right than S. The right of the unpaid seller, S, to the goods was defeated by the act of A in endorsing the receipt to B. The warehouseman can be obliged to deliver the palay to A if B negotiates back the receipt to A. In that case, A becomes a holder again of the receipt, and A can comply with Sec 8 of the Warehouse Receipts Law. Version 1990-2003 Arranged by SULAW Class 2005

Validity of stipulations excusing warehouseman from negligence (2000) S stored hardware materials in the bonded warehouse of W, a licensed warehouseman under the General Bonded Warehouse Law (Act 3893 as amended). W issued the corresponding warehouse receipt in the form he ordinarily uses for such purpose in the course of his business. All the essential terms required under Section 2 of the Warehouse Receipts Law (Act 2137 as amended) are embodied in the form. In addition, the receipt issued to S contains a stipulation that W would not be responsible for the loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of W or his representatives or employees. S endorsed and negotiated the warehouse receipt to B, who demanded delivery of the goods. W could not deliver because the goods were nowhere to be found in his warehouse. He claims he is not liable because of the free-from-liability clause stipulated in the receipt. Do you agree with W’s contention? Explain. (5%) SUGGESTED ANSWER:

No. I do not agree with the contention of W. The stipulation that W would not be responsible for the loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of W or his representative or employees is void. The law requires that a warehouseman should exercise due diligence in the care and custody of the things deposited in his warehouse.

Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

Miscellaneous Energy Regulatory Commission: Jurisdiction & Power (2004) CG, acustomer, sued MERALCO in the MM Regional Trial Court to disclose the basis of the computation of the purchased power adjustment (PPA). The trial court ruled it had no jurisdiction over the case because, as contended by the defendant, the customer not only demanded a breakdown of MERALCO's bill with respect to PPA but questioned as well the imposition of the PPA, a matter to be decided by the Board of Energy, the regulatory agency which should also have jurisdiction over the instant suit. Is the trial court's ruling correct or not? Reason briefly. (5%) SUGGESTED ANSWER:

The trial court's ruling is correct. As held in Manila Electric Company v. Court of Appeals, 271SCRA 417 (1997), the Board of Energy had the power to regulate and fix power rates to be charged by franchised electric utilities like MERALCO. In fact pursuant to Executive Order No. 478 (April 17, 1998), this power has been transferred to the Energy Regulatory Board (now the Energy Regulatory Commission). Under Section 43(u) of the Electric Power Industry Reform Act of 2001, the Energy Regulatory Commission has original and exclusive jurisdiction over all cases contesting power rates. Four ACID Problems of Philippine Judiciary (2006) In several policy addresses extensively covered by media since his appointment on December 21, 2005, Chief Justice Artemio V. Panganiban vowed to leave a judiciary characterized by "four Ins" and to focus in solving the "four ACID" problems that corrode the administration of justice in our country. Explain this "four Ins" and "four ACID" problems. SUGGESTED ANSWER:

Upon assuming his office, Chief Justice Panganiban vowed to lead a judiciary characterized by the "four Ins:" Integrity, Independence, Industry and Intelligence; one that is morally courageous to resist influence, interference, indifference and insolence. He envisions a judiciary that is impervious to the plague of undue influence brought about by kinship, relationship, friendship and fellowship. He calls on the judiciary to battle the "Four ACID" problems corroding our justice system: (1) limited access to justice by the poor; (2) corruption; (3) incompetence; and

(4) delay in the delivery of quality judgments. The judicial department should discharge its functions with transparency, accountability and dignity. (NOTA BENE: It is respectfully suggested that all Bar Candidates receive a 2.5% bonus for the above question regardless of the answer)

Page 102 of 103

The Chief Justice also said that the judiciary must "safeguard the liberty" and "nurture the prosperity" of our people. Explain this philosophy. Cite Decisions of the Supreme Court implementing each of these twin beacons of the Chief Justice. (2.5%) SUGGESTED ANSWER:

The Chief Justice's philosophy "Safeguarding Liberty, Nurturing Prosperity" embodies the Supreme Court's approach in decision- making in the exercise of its constitutional power of judicial review which provides: In cases involving liberty, the scales of justice should weight heavily against government and in favor of the poor, the oppressed, the marginalized, the dispossessed and the weak; and that laws and action that restrict fundamental rights come to the court "with a heavy presumption against their constitutional validity. On the other hand, as a general rule, the Supreme Court must adopt a deferential or respectful attitude towards actions taken by the governmental agencies that have primary responsibility for the economic development of the country; and only when an act has been clearly made or executed with grave abuse of discretion does the Court get involved in policy issues. Decisions implementing the "safeguarding of liberty" in-clude those involving the constitutionality of Presidential Proclamation No. 1017 (David v. Arroyo, G.R. No. 171390, May 3, 2006); the validity of Calibrated Pre-emptive Response (CPR) and B.P. Big. 880 or the Public Assembly Act (Bayan v. Ermita, G.R. No. 169848, Version 1990-2003 Arranged by SULAW Class 2005

April 25, 2006); and the legality of Executive Order No. 464 and the President's exercise of Execu-tive Privilege (Senate of the Philippines v. Ermita, G.R. No. 169777, April 20, 2006). On the other hand, cases that relate to "nurturing the prosperity" of the people include the question the constitutionality of the Mining Law (La Bugal-B'Laan v. Ramos, G.R. No. 127882, Dec. 1, 2004) and the WTO Agreement (Tanada v. Angara, G.R. 118295, May 2,1997). Government Deregulation vs. Privatization of an Industry (2004) What is the difference between government deregulation and the privatization of an industry? Explain briefly. (2%) SUGGESTED ANSWER:

Government deregulation is the relaxation or removal of regulatory constraints on firms or individuals, with a view to promoting competition and marketoriented approaches toward pricing, output, entry, and other related economic decisions. Privatization of an industry refers to the transfer of ownership and control by the government of assets, firms and operations in an industry to private investors. Political Law; WTO (1999) Government plans to impose an additional duty on imported sugar on top of the current tariff rate. The intent is to ensure that the landed cost of sugar shall not be lower than P800 per bag. This is the price at which locally produced sugar would be sold in order to enable sugar producers to realize reasonable profits. Without Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)

this additional duty, the current low price of sugar in the world market will surely pull the domestic price to levels lower than the cost to producer domestic sugar – a situation that could spell the demise of the Phil sugar industry. Discuss the validity of this proposal to impose an additional levy on imported sugar (3%) Would the proposal be consistent with the tenets of the World Trade Organization (WTO)? (3%) Recommendation: Since the subject matter of these two (2) questions is not included within the scope of the Bar Questions in Mercantile Law, it is suggested that whatever answer is given by the examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit. SUGGESTED ANSWER:

The proposal to impose an additional duty on imported sugar on top of the current tariff rate is valid, not being prohibited by the Constitution. It would enable producers to realize reasonable profits, and would allow the sugar industry of the country to survive. No. The proposal would not be consistent with the tenets of the WTO which call for the liberalization of trade. However, such proposal may be acceptable within the allowable period under the WTO for adjustment of the local industry Power of the State: Regulating of Domestic Trade (2004) In its exercise of police power and business regulation, the legislature of LVM State passed a law prohibiting aliens from engaging in domestic timber trade. Violators including dummies would, after proper trial, be fined and imprisoned or deported. Mrs. BC, a citizen of LVM but married to ZC, an alien merchant of PNG, filed suit to invalidate the law or exempt from its coverage their timber business. She contended that the law is, inter alia, gravely oppressive and discriminatory. It violated the Universal Declaration of Human Rights (UDHR) passed in 1948 by the United Nations, of which LVM is a member, she said, as well as the reciprocity provisions of the World Trade Organization (WTO) Agreement of 1994, of which PNG and LVM are parties. Aside from denying them equal protection, according to BC, the law will also deprive her family their livelihood without due process nor just compensation. Assuming that the legal

system of LVM is similar to ours, would Mrs. BC's contention be tenable or not? Reason briefly. (5%) SUGGESTED ANSWER:

Mrs. BC's contention is not tenable. First, the UDHR does not purport to limit the right of states (like LVM) to regulate domestic trade. Second, the WTO Agreement involves international trade between states or governments, not domestic trade in timber or other commodities. Third, nationality is an accepted norm for making classifications that do not run counter to the

Page 103 of 103

equal protection of law clause of the Constitution. Fourth, there is no impairment of due process here because violators of the law will be punished only after "proper trial." Fifth, the issue of "just compensation" does not arise, because the property of Mrs. BC is not being expropriated. On the contrary, as a citizen of LVM, Mrs. BC is freely allowed to engage in domestic timber trade in LVM. Tariff and Customs Code: Violation of Customs Laws (2004) The Collector of Customs ordered the seizure and forfeiture of new electronic appliances shipped by TON Corp. from Hongkong for violation of customs laws because they were falsely declared as used office equipment and then undervalued for purposes of customs duties. TON filed a Version 1990-2003 Arranged by SULAW Class 2005

complaint before the MM Regional Trial Court for replevin, alleging that the Customs officials erred in the classification and valuation of its shipment, as well as in the issuance of the warrant of seizure. The Collector moved to dismiss the suit for lack of jurisdiction on the part of the trial court. Should the Collector's motion be granted or denied? Reason briefly. (5%) SUGGESTED ANSWER:

The Collector's motion should be granted. Under Section 602(g) of the Tariff and Customs Code, the Bureau of Customs has exclusive original jurisdiction over seizure and forfeiture cases under the tariff and customs laws. NOTE: (This question is outside the coverage of the Bar Examinations. It is therefore recommended that whatever answer made by the candidate should be given full credit.)

Version 1990-2006 Updated by Dondee

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

A Compilation of the Questions and Suggested Answers In the PHILIPPINE BAR EXAMINATIONS 2007-2013 In

MERCANTILE LAW Compiled and Arranged By: Salise, Hector Christopher “Jay-Arh” Jr. M. (University of San Jose-Recoletos School of Law)

ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX (2007, 2009, 2010) & PHILIPPINE ASSOCIATION OF LAW SCHOOLS (2008)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 1 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

FOREWORD This work is a compilation of the ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX , Philippine Association of Law Schools from 2007-2010 and local law students and lawyers’ forum sites from 2011-2013 and not an original creation or formulation of the author. The author was inspired by the work of Silliman University’s College of Law and its students of producing a very good material to everyone involved in the legal field particularly the students and the reviewees for free. Hence, this work is a freeware. Everyone is free to distribute and mass produce copies of this work, however, the author accepts no liability for the content of this reviewer, or for the consequences of the usage, abuse, or any actions taken by the user on the basis of the information given. The answers (views or opinions) presented in this reviewer are solely those of the authors in the given references and do not necessarily represent those of the author of this work. The Author.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 2 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

TABLE OF CONTENTS (Titles are based on Silliman’s Compilation [Arranged by Topic])

General Principles Presumption: Habitually Engaging in Commerce (2009)………………………………….............9

Banking Law Banks; Bank Deposits vs. Deposit Substitutes (2010)..........................................................................9 Banks; Deposit: Safety Deposit Box, Relationship from Banks (2010).......................................10 Banks; Money Laundering: Predicate Crimes (2007)..........................................................................10 Banks; Mortgage; Redemption (2007)........................................................................................................11 Banks; Insolvency; Actions of the Monetary Board (2009)..............................................................12 Banks; Insolvency; Claims (2010)..............................................................................................................13 Banks; Receivership (2007)............................................................................................................................ 13 Banks; Receivership; Prohibited Transaction (2009).........................................................................14 Banks; Secrecy of Bank Deposit; AMLC (2013).....................................................................................14 Banks; Secrecy of Bank Deposits (2009).................................................................................................. 15 Banks; Single Borrower’s Limit; Collateral Security (2008)............................................................16 Banks; Types of Banks (2010).......................................................................................................................16 Truth in Lending Act (2009).........................................................................................................................17

Bulk Sales Law Bulk Sales Law; Covered Transactions (2010)........................................................................................18 “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 3 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Bulk Sales Law; Covered Transactions (2009).......................................................................................19 Bulk Sales Law; Covered Transactions (2007)........................................................................................19 Bulk Sales Law; Validity (2009)....................................................................................................................20

Corporation Law BOD; Conflict of Interest; Ratification (2008)......................................................................................20 BOD; Qualifications (2012)............................................................................................................................21 Corporation; Dissolution (2012).................................................................................................................. 23 Corporation; Formation; Enactment of a Law (2008).........................................................................24 Corporation; Sole Proprietorship (2010).................................................................................................. 24 Derivative Suit; Expiration of Term (2013)........................................................................................... 26 Derivative Suit; Jurisdiction (2009).......................................................................................................... 26 Dividends; Declaration of Dividends (2009)........................................................................................... 27 Dividends; Declaration of Dividends (2009)........................................................................................... 28 Dividends; Declaration of Dividends (2008)........................................................................................... 28 Liabilities; BOD; Corporate Acts (2012)....................................................................................................29 Piercing the Corporate Veil (2008).............................................................................................................31 Stock and Transfer Book (2009)...................................................................................................................32 Stockholders; Appraisal Right (2007)........................................................................................................32 Stockholders; Contractual Relationship; Quorum (2009)................................................................ 33 Stockholders; Preferred Shares (2013).....................................................................................................34 Trust Fund Doctrine (2007)...........................................................................................................................35 Ultra Vires Acts (2009)......................................................................................................................................35

Credit Transaction “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 4 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Chattel Mortgage; Foreclosure (2009)...................................................................................................... 36 Chattel Mortgage; Foreclosure (2008)...................................................................................................... 37 Mortgage; Extrajudicial Foreclosure; Blanket Mortgage & Damage Clause (2012)................38 Mortgage; Foreclosure (2012)........................................................................................................................39 Mortgage; Foreclosure (2010)........................................................................................................................40

Insolvency & Corporate Recovery Insolvency; Preferred Claims (2007).......................................................................................................... 41 Rehabilitation; Proceeding; Rehabilitation & Insolvency (2012)..................................................42 Rehabilitation; Stay Order (2012)...............................................................................................................44

Insurance Law Beneficiary; Death of Insured Due to Beneficiary (2008)................................................................45 Concealment; Material Concealment (2013)..........................................................................................45 Insurable Interest; Building Destroyed by Fire (2010)......................................................................46 Insurance; Double Insurance, Validity (2012).......................................................................................47 Insurance; Perfection of Insurance Contracts (2009)........................................................................ 47 Insurance; Property Insurance; Assignments (2009)..........................................................................48 Insurance; Property Insurance; Late Payment of Premiums (2010)............................................49 Insurance; Property Insurance; Payment of Premiums by Check (2007).................................50 Insurance; Property Insurance; Payment of Premiums even after Loss (2013).....................51 Insurer: Effects: Several Insurers (2008).................................................................................................51

Intellectual Property Agreements: Technology Transfer Agreements; Requisites & Prohibitions (2010)..............52 Article of Commerce; As Trademark, Patent & Copyright (2010)................................................53

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 5 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Copyright (2013)................................................................................................................................................54 Copyright; Commissioned Artist (2008)..................................................................................................54 Copyright; Commissioned Work (2008)....................................................................................................56 Copyright; Infringement (2007)...................................................................................................................57 Denicola Test (2009)..........................................................................................................................................57 Infringement; Claims (2010)..........................................................................................................................58 Infringement; Trademark, Copyright (2009)..........................................................................................59 Patent: Non-Patentable; Method of Diagnosis & Treatment (2010).............................................60 Trademark; Unfair Competition (2010)....................................................................................................61

Letters of Credit Independence Principle (2010).....................................................................................................................61 Letter of Credit (2012)..................................................................................................................................... 62 Letter of Credit; Liabilities of a Confirming and Notifying Bank (2008).................................. 63

Maritime Commerce Averages: Types (2010)....................................................................................................................................64 Barratry (2010).................................................................................................................................................... 64 Carriage of Goods; Deviation; Liability (2009)......................................................................................65 Carriage of Goods; Implied Warranty; Liability (2010)......................................................................65 Carriage of Goods; Indemnity; Jettisoned Goods (2010)..................................................................66 COGSA; Prescription of Claims/Action (2010)......................................................................................67 Liability; Loss; Fortuitous Event (2008).................................................................................................. 67

Negotiable Instruments Law “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 6 of 173

Mercantile Law Q&As (2007-2013)

[email protected]

JayArhSals

Checks: Forged Checks; Liability of Drawee Bank (2008)................................................ 68 Checks; Liability; Drawer and Drawee Bank (2010)......................................................... 69 Checks; Notice of Dishonor (2009)................................................................................. 70 Forgery; Liabilities; Drawee Bank (2009)........................................................................ 71 Negotiability (2013) ...................................................................................................... 71 Negotiability (2012) ...................................................................................................... 72 Negotiable Instruments; Illicit/Illegal Consideration (2007)........................................... 73 Negotiable Instruments; Illicit/Illegal Consideration; Lawful Dishonor (2009)................ 74 Negotiable Instruments: Incomplete, Delivered; Doctrine: Comparative Negligence (2008)............................................................................................................................ 74 Negotiable Instruments: Subject to a Term (2009)......................................................... 75 Parties; Holder in Due Course (2012) ............................................................................ 75 Parties; Instances a Subsequent Party is Liable (2008)................................................... 76

Securities Regulation Howey Test (2009)......................................................................................................... 77 Insider Trading (2013) .................................................................................................. 77 Insider Trading (2008) .................................................................................................. 78 Investment Contract; Procedure (2010) ........................................................................ 79 Margin Trading Rule (2009) .......................................................................................... 80 Securities; Exempt Securities (2009) ............................................................................ 80 Securities; Selling of Securities (2009) .......................................................................... 81 Tender Offer (2010) ...................................................................................................... 82

Transportation Law Carriage; Breach of Contract (2008) .............................................................................. 83 “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 7 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Carriage; Breach of Contract; Cause of Action; Defenses (2009).................................................83 Carriage; Breach of Contract; Presumption of Negligence (2013)................................................85 Maritime Protest (2007)...................................................................................................................................86

Trust Receipts Law Trust Receipt (2007)..........................................................................................................................................87 Trust Receipt; Security for a Loan (2008).............................................................................................. 88 Trust Receipts Law; Liability for Estafa (2013).....................................................................................88 Trust Receipts Law; Violation Committed by a Corporation (2012)...........................................89

Warehouse Receipts Law Warehouse Receipt: Surrendering of Possession; Lien (2009).......................................................90 Negotiable Instrument; Delivery of Goods (2007)...............................................................................90

MULTIPLE CHOICE QUESTIONS 2013 Mercantile Law Exam MCQ (October 20, 2013) ….…………………………………….…....92 2012 Mercantile Law Exam MCQ (October 21, 2012) ….………………………………………..102 2011 Mercantile Law Exam MCQ (November 20, 2011).……………………………….………..144

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 8 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

General Principles

establishment which has for its object some

Presumption:

Habitually

Engaging

in

Commerce (2009)

commercial

operation.

“

Text

messages may qualify to be equivalent to electronic documents.

Banking Law

No.V. Cecilio is planning to put up a grocery store in the subdivision where he and his family reside. To promote this

Banks;

proposed business venture, he told his wife

Substitutes (2010)

and three children to send out promotional text messages to all the residents in the as instructed, and succeeded in reaching, through text messages, more than 80% of the residents in the subdivision.

even if the grocery store has yet to be established? Explain your answer. (3%)

SUGGESTED ANSWER: Bank deposits are funds obtained by a bank from the public which are relent by substitutes

are

alternative

forms

of

obtaining funds from the public, other than deposits, through the issuance, or

acceptance

of

debt

instruments for the own account of the

Yes. Even if the grocery store has yet to be established, Cecilio already habitually engaged in commerce, when per his instruction the members of his family contacted more than 80% the residents of the subdivision where they reside. According to Article 3 of the Code of presumption

of

habitually engaging in commerce shall exist from the moment the person who intends to engage therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any manner

Deposit

No.II. (C) Differentiate ―bank deposits‖ from

endorsement,

SUGGESTED ANSWER:

other

vs.

such bank to its own borrowers. Deposit

Is Cecilio habitually engaged in commerce

“legal

Deposits

―deposit substitutes.‖ (2%)

subdivision. Cecilio’s family members did

Commerce,

Bank

whatsoever

an

borrower, for the purpose of relending or purchasing

of

obligations.

receivables

These

and

instruments

other may

include, but need not be limited to, banker’s acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements (Section 95, Rep. Act No. 7653, “The New Central Bank Act”). Why

are

banks

required

to

maintain

reserves against their deposits and deposit substitutes? State one of three purposes for these reserves. (2%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 9 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

ALTERNATIVE ANSWER:

Any one of the following 4 purposes for

The legal relationship of the bank and its

requiring banks to maintain reserves

safety deposit box client is that of lessor

against

and lessee.

their

deposits

and

deposit

substitutes will suffice: One of the purposes of the requirement

Is a stipulation in the contract for the use

to maintain bank reserves is to control

of a safety deposit box relieving the bank of

the volume of money created by the

liability in connection with the use thereof

credit operations of the banking system

valid? (2%).

(Section 94 of the New Central Bank

SUGGESTED ANSWER:

Act);

The stipulation relieving the bank of

It is to enable the banks to answer any

liability in connection with the use of

withdrawal;

the safety deposit box is void as it is

To help Government to finance its

against law and public policy (CA Agro-

operation;

Industrial Development Corp. v. Court of

To help the Government control money

Appeals, supra).

supply.

Banks;

Deposit:

Safety

Deposit

Box,

Relationship from Banks (2010)

Banks; Money Laundering: Predicate Crimes (2007)

No.II. (A) How do you characterize the legal relationship between a commercial bank

No.X. Name at least five predicate crimes to money laundering. (5%)

and its safety deposit box client? (20%) SUGGESTED ANWERS:

SUGGESTED ANSWER:

The Relationship between a commercial bank and its safety deposit box client is that

of

a

bailment

bailee

crimes to money laundering:

of Act No.3815, otherwise known as the

CA

and

the

benefit (Sia v. Court of Appeals, 222 (1993);

hire

bailor,

Kidnapping for ransom under Article 267

24

for

a

mutual

SCRA

being

and

Any five of the following are predicate

Agro-Industrial

Revised Penal Code, as amended;

Development Corp. v. Court of Appeals, 219 SCRA 426(1993)).

Sections 3,4,5,7,8 and 9 of Article Two of Republic Act No. 6425, as

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 10 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

amended, otherwise known as the

Violations under Republic Act No. 8792,

Dangerous Drugs Act of 1972;

otherwise

known

as

the

Electronic

Commerce Act of 2000 Section 3 paragraphs B,C,E,G,H and I of Republic Act No. 3019, as amended;

Hijacking and other violations under

otherwise known as the Anti-graft and

Republic Act No 6235;destructive arson

Corrupt Practices Act;

and

murder,

Revised

as

Penal

defined Code,

under

as

the

amended,

Plunder under Republic Act No. 7080, as

including those perpetrated by terrorist

amended;

against

Robbery and extortion under Articles

similar targets;

non-combatant

persons

and

294,295,296,299,300,301 and 302 of the Fraudulent

Revised Penal Code, as amended;

practices

and

other

violations under Republic Act No. 8799, Jueteng and Masiao punished as illegal

otherwise

gambling under Presidential Decree No.

Regulation Code of 2000

1602; Piracy

known

as

the

securities

Felonies or offenses of a similar nature on

the

high

seas

under

the

Revised Penal Code, as amended and Presidential Decree No. 532;

those are punishable under the penal laws of other countries. (Sec 3, AntiMoney Laundering Act of 2001).

Qualified theft under Article 310 of the Revised Penal Code, as amended; (9) Swindling

under

Article

315

of

the

Banks; Mortgage; Redemption (2007)

Revised Penal Code, as amended. No.IX.

On

December

4,

2003,

RED

Swindling under 315 of the Revised

Corporation executed a real estate mortgage

Penal code, as amended;

in favor of BLUE Bank. RED Corporation defaulted in the payment of its loan.

Smuggling under Republic Act Nos.

Consequently, on June 4, 2004, BLUE

455 and 1937

Bank

extra

judicially

foreclosed

the

property. Being the highest bidder in the auction sale conducted, the Bank was

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 11 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

issued a Certificate of Sale which was

(SED) of the Monetary Board prepared a

registered on August 4, 2004.

detailed report (SED Report) specifying the

Does RED Corporation still have the right to redeem the property as of September 14, 2007? Reason briefly. (5%)

facts and the chronology of events relative to the problems that beset MPBC rural bank branches. The report concluded that the bank branches were unable to pay their liabilities as they fell due, and could not

SUGGESTED ANSWER: No, RED Corporation has lost its right to redeem the property. Juridical persons

possibly

continue

incurring

in

business

substantial

without

losses

to

its

depositors and creditors.

whose property is sold pursuant to an extrajudicial foreclosure, shall have the

May the Monetary Board order the closure

right

of the MPBC rural banks relying only on the

to

redeem

the

property

until

registration of the certificate of sale with

SED

the Register of Deeds, which shall in no

examination? Explain. (3%)

case be more than three months after

SUGGESTED ANSWER:

foreclosure, whichever is earlier (Section

Yes. Upon receipt of the report of the

47, General Banking Law).

SED, the Monetary Board is authorized

Report,

without

need

of

an

to take any of the actions enumerated under Sec. 30, Republic Act No. 7653, Banks;

Insolvency;

Actions

of

the

Bank Act, leading to the receivership

Monetary Board (2009) No.VIII.

Maharlikang

Corporation

(MPBC)

otherwise known as the New Central

Pilipino operates

Banking several

branches of Maharlikang Pilipino Rural Bank in Eastern Visayas. Almost all the branch managers are close relatives of the members of the Board of Directors of the corporation. Many undeserving relatives of the branch managers were granted loans. In time, the branches could not settle their obligations to depositors and creditors. Receiving reports of these irregularities, the Supervising and Examining Department

and liquidation of a bank or quasi-bank. There

is

no

requirement

that

an

examination be first conducted before a banking institution may be placed under receivership ( Rural Bank of Buhi v. Court of Appeals, 162 SCRA 288 (1988)). If MPBC hires you as lawyer because the Monetary Board has forbidden it from carrying

on

its

business

due

to

its

imminent insolvency, what action will you institute to question the Monetary Board’s order? Explain. (3%)]

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 12 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

and the money market placements are

The order of the Monetary Board may be

not included in the insured deposits

questioned on a petition for certiorari on

(section 4(f) of Republic Act No. 3591, as

the ground that the action taken was in

amended).

excess of jurisdiction or with grave abuse of

discretion

amounting

to

lack

or

excess of jurisdiction. The petition of

Banks; Receivership (2007)

certiorari may only be filed by the stockholders of record representing the

No.VIII.

majority of the capital stock within ten

difficulties, Z Bank was unable to finish

days

construction of its 21-storey building on a

from

receipt

by

the

board

of

Due

to

growing

financial

directors of MPBC of the order directing

prime lot located in Makati City. Inevitably,

receivership,

or

the Bangko Sentral ordered the closure of Z

conservatorship (Sec. 30, par. (2), R.A.

Bank and consequently placed it under

liquidation

receivership. In a bid to save the bank’s

No. 7653).

property investment, the President of Z Bank entered into a financing agreement with a group of investors for the completion

Banks; Insolvency; Claims (2010)

of the construction of the 21-storey building

No.XIV. When OCCIDENTAL Bank folded

in exchange for a ten-year lease and the

up due to insolvency, Manuel had the

exclusive option to purchase the building.

following separate deposits in his name:

(10%)

P200,000 in savings deposit; P250,000 in time deposit; P50,000 in current account; P1 million in a trust account and P3 million in money market placement. Under the Philippine Deposit Insurance Corporation Act, how much could Manuel recover?

recover

P500,

000.00,

because this is the total of his savings deposit,

time

SUGGESTED ANSWER: No, the bank president’s act is not valid. financing agreement. Z Bank was ordered

SUGGESTED ANSWER: can

why not?

He had no authority to enter into the

Explain. (2%) Manuel

Is the act of the President valid? Why or

deposit

and

current

account (Section 4(g) of Republic Act No. 3591, as amended). The trust account

closed and placed under receivership. Control over the properties of Z Bank passed to the receiver. The appointment of a receiver operates to suspend the authority of the bank and its officers over the bank’s assets and properties,

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 13 of 173

Mercantile Law Q&As (2007-2013)

[email protected]

JayArhSals

such authority being reposed in the

False.

receiver

Estate

assets and properties of the corporation

Manila

are being gathered for conversion into

(Abacus

Development Banking

Real

Center,

Inc.

v.

Corporation,

455

SCRA

97

During

Will a suit to enforce the exclusive right of the investors to purchase the property prosper? Reason briefly.

receivership,

the

cash in preparation for distribution to creditors.

(2005)).

the

Granting

new

loans

and

accepting new deposits would constitute doing business for the bank in the ordinary course of business which is contrary to the purpose and nature of a receivership proceeding.

SUGGESTED ANSWER: No, the exclusive options granted to the investors, having been entered into by one

without

authority

unenforceable.

The

to

bank,

do

so,

is

therefore,

Banks; Secrecy of Bank Deposit; AMLC (2013)

cannot be compelled to sell the property.

No.III.

Under Section 30 of Republic Act No.

Congressman Abner has been endorsing his

7653,

the

pork barrel allocations to Twin Rivers in

be

exchange for a commission of 40% of the

its

face value of the allocation. Twin Rivers is a

New

properties

Central of

administered

Z for

Bank

Bank the

Act, should

benefit

of

From

his

first

term

in

2007,

creditors. The property in question can

non-governmental

be disposed of only for the purpose of

supporting papers, after audit, were found

paying the debts of Z Bank (Sec. 30,

by the Commission on Audit to be fictitious.

Republic Act No. 7653, and New Central

Other than to prepare and submit falsifies

Bank Act).

papers to support the encashment of the

organization

whose

pork barrel checks, Twin Rivers does not appear to have done anything on the endorsed projects and Congressman Abner Banks;

Receivership;

Prohibited

likewise does not appear to have bothered to monitor the progress of the project he

Transaction (2009)

endorsed. The congressmen converted most

No.I. (E) A bank under receivership can still

of the commissions he generated into US

grant new loans and accept new deposits.

dollars, and deposited these in a foreign

SUGGESTED ANSWER:

currency account with Banco de Plata (BDP).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 14 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Anti-Money Laundering Council (AntiBased on amply-supported tips given by a

Money

Laundering

Act;

Republic

v.

congressman from another political party,

Cabrini Green Ross, 489 SCRA 644,

the Anti-Money Laundering Council sent B

2006).

DP an order: (1) to confirm Cong. Abner’s deposits with the bank and to provide details of these deposits; and (2) to hold all withdrawals involving

and the

other

transactions

congressman’s

bank

accounts.

Banks; Secrecy of Bank Deposits (2009) No.I. (B) If the Ombudsman is convinced

As counsel for BDP, would you advise the bank to comply with the order? (8%)

that there is a violation of law after investigating a complaint alleging illicit

SUGGESTED ANSWER: I shall advise Banco de Plata not to comply with the order of the Anti-Money Laundering Council. It cannot inquire into the deposits of Congressman Abner,

bank

deposits

Ombudsman

of

public

may

order

officer, the

the bank

concerned to allow in camera inspection of bank records and documents.

regardless of currency, without a bank

SUGGESTED ANSWER:

inquiry order from a competent court,

False. The Bank Secretary Law prohibits

because

not

the inspection of a bank account unless

kidnapping for ransom, violations of the

the permission of the account holder is

Comprehensive Dangerous Drugs Act,

obtained, or upon lawful order of the

hijacking

court or when the deposit is the subject

Republic arson,

crimes

and Act

involved

other No.

murder,

violations

6235,

and

are

of

destructive

terrorism

and

conspiracy to commit terrorism (Section 11 of Anti-Money Laundering Act). The

Anti-Money

Laundering

Council

cannot order Banco de Plata to hold all withdrawals

and

other

of

litigation.

Ombudsman pending

is

Investigation not

litigation

by

considered to

allow

the as

a

the

examination of the bank records and documents (Marquez v. Desierto, 359 SCRA 772 (2001)).

transactions

involving the accounts of Congressman Abner. It is the Court of Appeals which has the power to issue a freeze order over the accounts upon petition of the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 15 of 173

Mercantile Law Q&As (2007-2013)

Banks;

Single

[email protected] JayArhSals

Borrower’s

Limit;

Collateral Security (2008)

the amount of reduction.

No.XIX. Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties Inc. amounting to P270 Million.

The

loan

was

not release any part of the collateral by

secured

by

a

mortgage over a vast commercial lot in the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Banko Sentral ng Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrower’s limit of 25% of the bank’s net worth under a recent BSP Circular. In light of other previous similar violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount of the

The collateral is a single commercial lot in the Fort, covered by a single title and beings

essentially

character,

the

indivisible

mortgage

cannot

in be

“partially released.” Besides, since a real estate mortgage cannot be “partially released.” Besides, since a real estate mortgage is merely a collateral contract, it can be enforced only to the amount of the loan; and the moment the loan exposure is reduced, then automatically, reduction of the collateral coverage of the real estate mortgage follows.

loan to Celestial Properties under pain of severe sanctions. When Industry Bank informed

Celestial

Properties

that

it

intended to reduce the loan by P50 Million, Celestial

Properties

countered

that

Banks; Types of Banks (2010)

the

bank should first release a part of the

No.I. Briefly describe the ff. types of banks;

collateral worth P50 Million. Industry Bank

(2% each)

rejected the counter-proposal, and referred the matter to you as counsel. How would

Universal bank

you advise Industry Bank to proceed, with

SUGGESTED ANSWER:

its best interests in mind? (5%)

A universal bank is a commercial bank

SUGGESTED ANSWER:

with 2 additional powers, namely: (1) the power of an investment house and (2)

With a net worth of P1.0 Billion, the

the

maximum loan exposure of the bank to

enterprises (Section 23, Rep. Act No.

Celestial Properties can reach up to

8791, “The General Banking Law of

P250.0 Million. The bank should proceed

2000”).

power

to

invest

in

non-allied

with to reduce the loan of Celestial properties by P20.0 Million, but should

Commercial bank

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 16 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

enterprises and individuals (Section 3

A commercial bank is a bank that can:

(a), Rep. Act No. 7906 “Thrift Banks Act

accept drafts; (2) issue letters of credit;

of 1995”).

(3) discount and negotiate promissory notes, drafts, bills of exchange, and

Rural bank

other evidence of debt; (4) accept or

SUGGESTED ANSWER:

create demand deposits; (5) receive other

A

types of deposits, as well as deposit

provide credit facilities to farmers and

substitutes; (6) buy and sell foreign

merchants or their cooperatives and, in

exchange, as well as gold or silver

general

bullion; (7) acquire marketable bonds and

communities (Section 3, Rep. Act No.

other debts securities; and (8) extend

7353, “The Rural Banks Act of 1992”).

rural

bank

to

is

the

one

people

established

of

the

to

rural

credit, subject to such rules promulgated by the Monetary Board

Cooperative bank

(Section 29, Rep. Act No. 8791, “The

SUGGESTED ANSWER:

General Banking Law of 2000”).

A cooperative bank is organized under the

Cooperative

provide

financial

SUGGESTED ANSWER:

cooperatives. It may perform any or all

A thrift bank is one established as a

the services offered by a rural bank,

savings and mortgage bank, a stock

including the operation of a Foreign

savings and loan association, or a private

Currency Deposit Unit subject to certain

development bank, for the purpose of: (1)

conditions

accumulating the savings of depositors

No.6938, “The Cooperative Code of the

and

Philippines”).

them

in

outlets

credit

to

Thrift bank

investing

and

Code

(Section

services

100,

Rep.

to

Act

determined by the Monetary Board as necessary in the furtherance of national economic objectives; (2) providing short-

Truth in Lending Act (2009)

term working capital, medium and longterm financing, to business engaged in agriculture,

services,

industry

and

housing; and (3) providing diversified financial chosen

and

allied

market

and

services

for

its

constituencies

specially for small and medium

No.XI. (A) A loan agreement which provides that the debtor shall pay interest at the rate determined by the bank’s branch manager violates the disclosure requirement of the Truth in Lending Act. SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 17 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

True. This contrary to the duty of the

Manila outlet constitutes only one-third

creditor

of its total business and, therefore, it

to

interests,

disclose

charges

in

and

detail

other

the

figures

would

not

conducted

by

Venezia.

indicating in detail the cost of the credit

Moreover, the requirements of the Bulk

granted to the debtor (United Coconut

Sales Law reflected in Sections 3,4,5,

Planters Bank v. Beluso, 530 SCRA 567

and 9, by the express language of said

(2007)).

provisions, apply only to the first type of bulk sales, i.e., to any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions or

Bulk Sales Law

materials otherwise than in the ordinary

Bulk Sales Law; Covered Transactions

course

of

trade

and

the

regular

(2010)

prosecution of business of the vendor, mortgagor, transferor, or assignor, and

No.V. Venezia is a famous international

not to the second type (as in the sale

fashion

Makati,

described in the problem) or the third

Ortigas, and Manila. It has complied with

type (i.e., sale, etc. of all or substantially

the minimum capitalization required under

all of the fixtures and equipment used in

the Retail Trade Nationalization Act and

and about the business). As the Bulk

carries on retail business worth more than

Sales Law is penal in nature, it should be

S3 million for each of its outlets. As its

interpreted strictly against the State

Manila outlet is not doing very well, it

(People v. Wong Szu Tung, CA G.R. No.

decides to sell all of its business there

9776-R, March 26, 1954;50 O.G. 4867;

consisting of remaining inventory, furniture

Section 2 of the Bulk Sales Law).

and

chain

fixtures

with

and

outlets

other

in

assets

to

its

competitor.

If instead of selling its Manila outlet, Venezia merely mortgages its assets there,

Venezia’s Manila outlet constitutes onethird of its total business. Should it comply

would

it

need

to

comply

with

the

requirements of the Bulk Sales Law? (2%)

with the requirements of the Bulk Sales Law? Why or why not? (2%)

SUGGESTED ANSWERS: For the same reasons stated in the

SUGGESTED ANSWER: Venezia need not comply with the requirements of the Bulk Sales Law as its

answer to A above, Venezia need not comply with the requirements of the Bulk Sales Law. The second type of bulk

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 18 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

sales also includes the mortgage of all or

The receiver seeks your advice on whether

substantially all of the business of the

the Bulk Sales law will apply to either, or

mortgagor (Section 2, Bulk Sales Law).

both, options. What will your advice be? Explain (4%)

What are the legal consequences of a failure

SUGGESTED ANSWER:

to comply with the requirements of the

I will advice the receiver that the Bulk

Bulk Sales law? (2%)

Sales law does not apply to both options. Sect. 8 of the Bulk Sales Law expressly

SUGGESTED ANSWER:

provides that it will not apply executors,

Failure to comply with the requirements

administrators, receivers, and assignees

of the Bulk Sales Law renders the Sale,

in insolvency, or public officers, acting

transfer,

under judicial process. In this case, the

mortgage,

or

assignment

fraudulent and void (Section 4, Bulk

receiver is acting under judicial process.

Sales Law), and makes any person found guilty of violating any provision of the Bulk Sales Law punishable by 5 years, or a fine in an amount not exceeding P5, 000, or both such imprisonment and fine in the discretion of the court (Section 11, Bulk Sales Law).

Bulk Sales Law; Covered Transactions (2007) No.XII. Seeking to Streamline its operations and to ball out its losing ventures, the stockholders of X corporation unanimously

Bulk Sales Law; Covered Transactions

adopted a proposal to sell substantially all

(2009)

of the machineries and equipment used in

No.XIV. XXX Corporation (XXX) and its sister company, YYY Corporation (YYY), are both

under

receiver

has

judicial the

receivership.

option

to

sell

The or

and about its manufacturing business and to sink the proceeds of the sale for the expansion of its cargo transport services. (5%)

substantially all of the properties of YYY to

Would the transaction be covered by the

XX, or simply merges the two Corporations.

provisions of eh Bulk Sales Law?

Under

either

option,

the

requirements

under the Corporation Code have to be complied with.

SUGGESTED ANSWER: No. the transaction is not covered by the provisions of the Bulk sales law, Bulk

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 19 of 173

Mercantile Law Q&As (2007-2013)

sales

law

applies

only

[email protected] JayArhSals

to

retail

merchants, traders and dealers. It does not

apply

to

manufacturers.

Corporation

is

engaged

manufacturing bank

of

the

business Phil.

V.

in

X the

(Development Judge

of

the

Regional Trial Court of manial86 O.G. 1137 (1987)).

Bulk Sales Law; Validity (2009) No.I. (C) Even if the seller and the buyer in a sale in bulk violate the Bulk Sales Law, the sale would still be valid. SUGGESTED ANSWER: False. When the Bulk Sales Law is violated, the sale is null and void. When the provisions of the said law have not

ALTERNATIVE ANSWER:

been

YES, the transaction is covered by the Bulk Sales Law because it involves the sale of substantially all the equipment used in the business of X corporation (Sec. 2 Bulk sales law)

complied

with,

considered

as

void”

even

and

being

the

sale

“fraudulent

when

coupled

is and with

delivery, the title over the goods does not transfer to the buyer. However, the civil

liabilities

arising

from

the

transaction remain enforceable between the parties thereto.

How would X Corporation effect a valid sale?

Corporation Law

SUGGESTED ANSWER: BOD; Conflict of Interest; Ratification To effect a valid sale. X corporation must prepare an affidavit stating the

(2008)

their

No.XII. Pedro was 70% of the subscribed

addresses, the amount of their credits

capital stock of a company which owns an

and

Corporation

office building. Paolo and Juan own the

should give the affidavit to the buyer

remaining stock equally between them.

who , in turn, should furnish a copy to

Paolo also owns a security agency, a

each creditor and notify the creditors of

janitorial company and a catering business.

the proposed bulk sale to enable them to

In behalf of the office building company,

protect their interest.

Paolo engaged his companies to render

names

of

their

all

its

maturities.

creditors, X

their services to the office building. Are the service contracts valid? Explain. (4%) SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 20 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

The contracts of Paolo, who owns 15% of

full disclosure of the adverse interest of

the Outstanding Capital Stock of the

Paolo to Pedro.

office building company is concerned if they were not approved by the Board of Directors and Paolo was not designated to

execute

them

on

behalf

of

said No.VI. X is a Filipino immigrant residing in

company. On the other hand, if the contracts were duly approved by the Board of Directors of the office building company with Paolo

BOD; Qualifications (2012)

duly

designated

as

company

representative, they would nevertheless be voided at the option of the company. Under Sec. 32 of the Corporation Code. “A contract of the corporation with one or more of its directors or trustees or officers is voidable at the option of such corporation,

unless

all

the

following

conditions are present,” (a) if Paolo as a director in the board meeting in which

Sacramento, California. Y is a Filipino residing in Quezon City, Philippines. Z is a resident alien residing in Makati City. GGG Corporation is a domestic corporation 40% owned by foreigners and 60% owned by

Filipinos,

with

T

representative.

CCC

Corporation

foreign

corporation

Philippine domestic

KKK

authorized

registered

Securities

Commission.

as

and

with

(100%)

a the

Exchange

Corporation

corporation

is

is

a

Filipino

owned. S is a Filipino, 16 years of age, arid the daughter of Y.

the contracts were approved was not

Who can be incorporators? Who can be

necessary to constitute a quorum for

subscribers? (2%)

such meeting; (b) Paolo’s vote at such meeting

was

not

necessary

for

the

SUGGESTED ANSWER:

approval of the contracts; (c) Each of the contract are fair and reasonable under

X,Y,Z and T could all be incorporators

the circumstances.

and subscribers. Note, however, that Sec.10 of the Corporation Code requires

If condition (a) or (b) is absent, Sec, 32

that there must be at least five but not

requires that the contracts must be

more than fifteen incorporators (who

ratified by the shareholders representing

must all be natural persons) and that a

at least two-thirds (2/3) of outstanding

majority of the incorporators must be

capital stock, provided that there was

residents of the Philippines. S, being a minor, could neither be an incorporator nor a subscriber. GGG Corporation, CCC

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 21 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Corporation, and KKK Corporation, CCC

requirement under the law governing the

Corporation, and KKK Corporation could

business of the corporation) but not GGG

not be incorporators as they are not

Corporation, CCC Corporation, and KKK

natural persons. However, they could be

Corporation as they are not natural

subscribers.

persons. However, the aforementioned corporations could have their respective

What

are

the

differences

between

an

representatives nominated and possibly

incorporator and a subscriber, if there are

elected as directors by the stockholders.

any? (2%)

Each director must own at least one share

SUGGESTED ANSWER:

first, all the incorporators are required to sign and acknowledge the Articles of Incorporation while the subscribers, as are

not

the

capital

stock

of

the

corporation (Sec.23, Corporation Code).

Some of the differences are as follows:

such,

of

subject

to

the

Who are qualified to act as Treasurer of the company? (2%) SUGGESTED ANSWER:

same

requirement; second, the incorporators

The Corporation Code does not impose

could

any nationality or residency requirement

be

either

natural

or

juridical of

in respect of the Treasurer. Any such

fifteen

requirement or any other reasonable

while the number of subscribers could be

requirement may be adopted by the

more

to

corporation and reflected in its by-laws,

compliance, in the appropriate cases,

or required by the law(s) governing the

with the requirements of the Securities

business of the corporation or a law of

Regulation Code).

general

application

Dummy

Law

persons;

and

incorporators than

third, cannot fifteen

the

number

exceed

(subject

which

(e.g.,

the

applies

Antito

all

Who are qualified to become members of

nationalized

the board of directors of the corporation?

anybody with the qualifications required

(2%)

under the by-laws of the corporation or

SUGGESTED ANSWER: X,Y,Z and T could be directors (subject to the residency requirement mentioned in (a) above and any nationality

businesses).

Accordingly,

under the law(s) governing the business of the corporation, could be elected Treasurer by the Board of Directors. Note, however, that the Treasurer could not be the President at the same time (Sec. 25, Corporation Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 22 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Who can be appointed Corporate Secretary?

Corporation

automatically

dissolve

or

(2%)

terminate the corporate existence of AAA Corporation? Explain your answer. (5%)

SUGGESTED ANSWER: SUGGESTED ANSWERS: The Secretary is required to be both a resident and a citizen of the Philippines

No,

the

sale

of

all

the

assets

and

(Sec. 10, Corporation Code).

liabilities of AAA Corporation to BBB Banking Corporation will not result in

[Note: The problem does not state what kind

the automatic dissolution of termination

of business the corporation would engaged

of

in. Neither does it state whether X,Y,Z and T

decision to dissolve AAA Corporation or

are all of legal age and otherwise have the

to

capacity to enter into contracts. Accordingly,

would require a separate approval by a

the suggested answer set out below assume

majority of the Board of Directors of AAA

that the corporation would not be engaging

Corporation and its stockholders holding

in a nationalized activity and that X,Y,Z and

at

T are all of legal age and otherwise have the

outstanding capital stock, as well as the

capacity to enter into contracts.]

separate

the

existence

terminate

least

its

two

of

former.

corporate

thirds

approval

the

by

of

existence

the

the

A

total

Monetary

Board. What are the legal requirements in order

Corporation; Dissolution (2012)

that a corporation may be dissolved? (5%) No.X. AAA Corporation is a bank. The operations of AAA Corporation as a bank was not doing well. So, to avert any bank run, AAA Corporation, with the approval of the Monetary Board, sold all its assets and liabilities

to

BBB

Banking

Corporation

which includes all deposit accounts. In effect then, BBB Corporation will service all deposits

of

all

depositors

of

AAA

Corporation.

SUGGESTED ANSWERS: A

corporation

may

be

dissolved

voluntarily under Section 118 (where no creditors are affected) or under Section 119 (where creditors are affected), or by shortening of the corporate term under Section 120, or involuntarily by the SEC under Section 122, all of the Corporation Code. Dissolution under Section 118,119

Will the sale of all assets and liabilities of

and 120 require the same corporate

AAA Corporation to BBB Banking

approvals stated in (a) above.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 23 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Note that the SEC also has the authority

May the composition of the board of

under Section 6 of PD 902-A to revoke

directors of the National Power Corporation

the

(NPC) be validly reduced to three (3)?

certificate

of

registration

of

a

corporation upon any of the grounds

Explain your answer fully. (2%)

provided

SUGGESTED ANSWER:

by

law,

including

the

aforementioned Section 6-A

The NPC Board may be reduced to only three (3) members, but this would have to be affected by legislative amendment of

its

charter.

The

Corporation

Law (2008)

government corporation, not governed the

general

is

a

Power

Corporation; Formation; Enactment of a

by

(NPC

National

chartered

provisions

of

the

No.XI. (A) Since February 8, 1935, the

Corporation Code which requires that

legislature has not passed even a single law

Boards

creating

a

private

corporation.

What

provision of the Constitution precludes the passage of such a law? (3%) SUGGESTED ANSWER: Under Sec. 16, Art. XII of the 1987

of

Directors

of

private

corporations shall not have less than 5 members.

The

provisions

Corporation

Code

are

government

corporations

of

the

applicable

to

only

a

in

suppletory manner.

Constitution, Congress cannot, except by

general

law,

provide

for

the

formation, organization, or regulation of private

corporations.

government

owned

It or

is

only

controlled

Corporation; Sole Proprietorship (2010)

corporations that may be created or

No.IX. Your client Dianne approaches you

established

for legal advice on putting up a medium-

through

special

charters.

Consequently, it has been held that a

sized

private corporation created pursuant to

specialize in a novel type of cuisine. As

a special law is a nullity, and such

Dianne feels that the business is a little

special law is void for being in violation

risky, she wonders whether she should use

of

Phil.

a corporation as the business vehicle, or

Veterans Bank, G.R. Nos. 84132-33, 10

just run it as a single proprietorship. She

December 1990).

already has an existing corporation that is

the

Constitution

(NDC

v.

restaurant

business

that

will

producing meat products profitably and is

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 24 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

also considering the alternative of simply

capital than if she were to form a

setting up the restaurant as a branch office

separate corporation. However, all the

of the existing corporation.

assets of the existing corporation will be liable for the debts and losses of the

Briefly explain to your client what you see

restaurant business.

as the legal advantages and disadvantages of using a separate corporation, a single

If

proprietorship, or a branch of an existing

corporation, what officer positions must the

corporation for the proposed restaurant

corporation at least have?(2%)

business. (3%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

The corporation must have at least five

If

Dianne

will

a

your

client

to

use

a

directors (Section 14 of the Corporation

for

its

Code). It Must also have a president, a

obligations and losses will be limited to

treasure, and secretary (Section 25 of

the amount of her subscription in the

the Corporation Code).

her

up

advise

separate

corporation,

set

you

liability

absence of showing that there is a ground to disregard its separate juridical

What particular qualifications, if any, are

personality. If she were to operate a

these officers legally required to possess

single proprietorship, her liability for its

under the Corporation Code? (2%)

debts and losses will be unlimited.

SUGGESTED ANSWER: Every director must own at least one

The formation and the operation of a

share

corporation require a great deal of paper

corporation, which must be recorded in

work and record-keeping. This is not the

his

situation

corporation,

in

the

case

of

a

single

of name

directors

proprietorship.

the

If

Dianne

will

form

a

separate

on and

must

Philippines

capital

stock

of

the

the

books

of

the

a

majority

of

the

residents

of

the

be

(Section

25

of

the

Corporation Code).

corporation, it can raise more funds for the business than if she were to set up a

The president must also be a director.

single proprietorship.

The secretary must be a resident and citizen of the Philippines (Section 25 of

If she were to set up the restaurant as a

the Corporation Code).

branch office an existing corporation, the corporation will have more funds as “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 25 of 173

Mercantile Law Q&As (2007-2013)

Derivative

Suit;

[email protected] JayArhSals

Expiration

of

Term

The remaining directors cannot elect

(2013) No.VIII. In the November 2010 stockholders meeting of Greenville Corporation, eight (8) directors were elected to the board. The directors assumed their posts in January 2011. Since no stockholders meeting was held in November 2011, the eight directors served in a holdover capacity and thus continued discharging their powers. In

June

SUGGESTED ANSWER:

2012,

two

(2)

of

Greenville

Corporation’s directors - Director A and Director B – resigned from the board. Relying on Section 29 of the Corporation Code, the remaining six (6) directors elected two (2) new directors to fill in the vacancy caused by the resignation of Directors A and B.

directors

to

fill

in

the

two

vacancies. The board of directors may fill up vacancy only if the ground is not due to

expiration

of

term,

removal

or

increase in the number of board seats. In this case, the term of the two directors expired after one year. They hold-over period is not part of their term. The vacancies should be filled up by election by the stockholders (Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202, 2009). The derivative suit was improper. In a derivative suit, the corporation, not the individual

stockholder,

must

be

the

aggrieved party and that the stockholder is suing on behalf of the corporation.

Stockholder X questioned the election of the new directors, initially, through a lettercomplaint addressed to the board, and later (when his letter-complaint went unheeded), through a derivative suit filed with the court. He claimed that he vacancy in the board should be filled up by the vote of the stockholders

new

of

Greenville

What stockholder X is asserting is his individual right as a stockholder to elect the two directors. The case partakes more of an election contest under the rules

on

intra-corporate

controversy

(Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453, 2012).

Corporation.

Greenville Corporation’s directors defended the legality of their action, claiming as well that Stockholder X’s derivative suit was improper. Rule on the issues raised. (8%)

Derivative Suit; Jurisdiction (2009) No.II. Atlantis Realty Corporation (ARC), a local

firm

engaged

in

real

estate

development, plans to sell one of its prime “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 26 of 173

Mercantile Law Q&As (2007-2013)

assets—a

three-hectare

land

[email protected] JayArhSals

valued

at

why and where would such a suit be filed?

about P100-million. For this purpose, the

If not, why not? (2%)

board of directors of ARC unanimously

SUGGESTED ANSWER:

passed a resolution approving the sale of

Yes, such suit would constitute an entra-

the property for P75-million to Shangrila

corporate dispute as it is a suit initiated

Real Estate Ventures (SREV) a rival realty

by

firm. The resolution also called for a special

stockholders

stockholders meeting at which the proposed

directors of the same corporation (P.D.

sale would be up for ratification.

No. 902-A, Sec. 5(b)). Such suit should be

a

filed

stockholder

in

who

the

against

are

officers

Regional

Trial

other and

Court

Atty. Edric, a stockholder who owns only

designated by the Supreme Court as a

one (1) share in ARC, wants to stop the

corporate or commercial court.

sale. He then commences a derivative suit for and in behalf of the corporation, to

Will the suit prosper? Why or why not? (3%)

enjoin the board of directors and the

SUGGESTED ANSWER:

stockholders from approving the sale.

No. The suit will not prosper. There is no requisite demand on the officers and

Can Atty. Edric, who owns only one share

directors concerned. There is, therefore,

in the company, initiate a derivative suit?

no

Why or why not? (2%)

remedies.

exhaustion

of

administrative

SUGGESTED ANSWER Yes, Atty. Edric can initiate a derivative suit, otherwise known as the minority stockholders’ suit. It is allowed by law to enable the minority stockholder/s to

Dividends;

protect the interest of the corporation

(2009)

against illegal or disadvantageous act/s of its officers or directors, the people who

are

supposed

to

protect

the

corporation (Pascual v. Del Zaz Orozco, 19 Phil. 82 (1991)). If such a suit is commenced, would it constitute an intra-corporate dispute? If so,

Declaration

of

Dividends

No.I. (D) Dividends on shares of stocks can only

be

declared

out

of

unrestricted

retained earnings of the corporation. SUGGESTED ANSWER: True. Dividends on shares of stock of a corporation, whether cash dividend or stock dividend, can be validly declared only out of unrestricted retained

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 27 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

earnings (Sec. 43, Corporation Code). It

No. the suit will not prosper. Paterno

cannot be declared out of the capital.

cannot compel XYZ Corporation to pay

Otherwise, such declaration of dividend

dividends, which have to be declared by

will violate the trust fund doctrine.

the Board of Directors and the latter cannot do so, unless there are sufficient unrestricted

retained

earnings.

Otherwise, the corporation will be forced Dividends;

Declaration

of

Dividends

to use its capital to make said payments in violation of the trust fund doctrine.

(2009)

Likewise, redemption of shares cannot

No.XVI. On September 15, 2007, XYZ

be compelled. While the certificate allws

Corporation

such

issued

to

Paterno

eight

hundred preferred shares with the ff. terms:

redemption,

the

option

and

discretion to do so are clearly vested in the corporation (Republic Planters Bank

―The Preferred Shares shall have the

v. Agana, 269 SCRA 1 [1997]).

rights, preferences, qualifications, and limitations, to wit: The right to receive a quarterly dividend of One per Centum cumulative and participating; These shares may be redeemed, by

Dividends;

Declaration

of

Dividends

(2008)

drawing of lots, at any time after two years

No.XIV. Ace Cruz subscribed to 100,000

from date of issue, at the option of the

shares

Corporation; xxx

Corporation, which ahs a par value of P1

of

stock

of

JP

Development

per share. He paid P25,000 and promised Today, Paterno sues XYZ Corporation for

to pay the balance before December 31,

specific performance, for the payment of

2008. JP Development Corporation declared

dividends on, and to compel the redemption

a cash dividend on October 15, 2008,

of , the preferred shares, under the terms

payable on December 1, 2008

and

conditions

provided

in

the

stock

certificates. Will the suit prosper? Explain.

For how many shares is Ace Cruz entitled

(3%)

to be paid cash dividends? Expalin. (2%)

SUGGESTED ANSWER: “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 28 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

On December 1, 2008, can Ace Cruz

Ace Cruz is entitled to be paid each cash dividends to the entire 100,1000 shares subscribed, and not only to the paid-up portion thereof. The legal character of being a “stockholder,” and therefore the entitlement

to

all

the

rights

of

a

compel JP Development Corporation to issue

to

him

the

stock

certificate

corresponding to the P25,000 paid by him? (2%) SUGGESTED ANSWER: No,

Ace

Cruz

cannot

compel

JP

stockholder, are determined from the

Development Corporation to issue him

time of “subscription” and not from

the stock certificate for the P 25,000.00.

payment of the subscription.

No Certificate of Stock can be issued to a subscriber until the full amount of his

Under Sec. 43 of the Corporation Code,

subscription together with interest and

“a

expense, if any is due, has been paid. A

stock

dividends

corporation out

of

may

the

declare

unrestricted

Subscription

is

one,

entire

and

retained earnings which shall be payable

indivisible whole contract which cannot

in cash, in property, or in stock to all

be

stock-holders on the basis of outstanding

stockholder

stock held by them” on not on the basis

Certificate

on what stocks have been paid.

remitted

divided

into is

of

not Stock

the

full

portions. entitled

The to

a

until

he

has

amount

of

his

subscription (Sec. 64, Corporation Code; ALTERNATIVE ANSWER:

SEC Opinion [January 6, 1989]).

Under Sec. 71, only when a stockholder has been declared delinquent do his rights as stockholder become suspended.

Liabilities; BOD; Corporate Acts (2012)

It means therefore that a stockholder who has not paid the full subscription,

No.IX. A, B, C, D, E are all duly elected

provided he is not declared delinquent

members of the Board of Directors of XYZ

has complete exercise of all of his rights,

Corporation.

including the right to receive dividends.

entered into a supply contract with an

But

American firm. The contract was duly

any

cash

dividends

due

on

by

F,

the

the

general

Board

of

manager,

delinquent stock shall first be applied to

approved

Directors.

the unpaid balance of the subscription

However, with the knowledge and consent

(Sec. 43, Corporation Code).

of F, no deliveries were made to the American firm. As a result of the non-

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 29 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

delivery of the promised supplies, the

consented to the non-delivery of the

American

promised

firm

incurred

damages.

The

supplies

contrary

to

the

American firm would like to file a suit for

contract that was duly approved by the

damages. Can the American firm sue:

Board of Directors. The problem does indicate any circumstance that would

The members of the Board of Directors

excuse or favorably explain the action of

individually, because they approved the

F.

transaction? (2%) Explain SUGGESTED ANSWERS:

the

rules

on

liabilities

of

a

corporation for the act of its corporate

No. In approving the transaction, the directors were not acting their personal capacities but rather in behalf of XYZ Corporation exercising the powers of the corporation and conduction its business

officers and the liabilities of the corporate officers

and

corporation

Board acting

of

Directors

in

behalf

of

of

a the

corporation. (4%) SUGGESTED ANSWERS:

(Sec. 23, Corporation Code). The problem contains no facts that would indicate

A corporation would be liable for the acts

that the directors acted otherwise.

of its Board of Directors and officers if the said acts were performed by them in

(B) The corporation? (2%)

accordance with powers granted to them under the Corporation Code, the articles

SUGGESTED ANSWERS:

of

Yes. The Board approved the supply contract

and

the

General

Manager

entered into the contract, both of them acting on behalf of the XYZ Corporation. F, the general manager, personally, because the non-delivery was with his knowledge and consent? (2%) SUGGESTED ANSWERS:

incorporation and

by-laws of

the

corporation, the laws and regulations governing the business of, or otherwise applicable to, the corporation, and, in the case of officers, the resolutions approved by the Board of Directors. As

the

directors

have

a

personality

separate from that of the corporation, they would be personally liable only if they acted wilfully and knowingly vote for or assent to a patently unlawful act

Yes, F could be sued in his personal

of the corporation, or when they are

capacity because he knowingly

guilty of gross negligence or bad faith in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 30 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

directing the affairs of the corporation, or when they acquire any personal or pecuniary interest in conflict with their duty as directors, which acts result in damages

to

the

corporation,

its

stockholders or other persons, when they agree to hold themselves personally and

solidarily

liable

with

the

corporation, or when they are made, by a specific provision of law, to personally answer for the corporate action. (Sec. 31, Corporation Code).

SUGGESTED ANSWER: I would sue Nelson, as the person who owned

and

Contruction

controlled Company,

Sonnel

under

the

doctrine of “piercing the veil of corporate

fiction.”

Although

a

corporation has a juridical personality separate and distinct from that of its stockholders, when the corporation is used merely as an alter ego or controlled for the benefit of a stockholder, or when it is necessary to render justice, then the courts have the right to pierce the veil of corporate fiction to hold the controlling

personally liable for the corporate tort or

Piercing the Corporate Veil (2008) No.X. Nelson owned and controlled Sonnel Construction company,

Company. Nelson

Acting

for

contracted

the the

construction of a building. Without first installing

a

protective

net

atop

the

sidewalks adjoining the construction site, the

company

proceeded

with

stockholder-officer

the

construction work. One day a heavy piece of lumber fell from the building. It smashed

wrong committed. The contractor should also be held liable, since being an independent contractor it is liable for the fault or negligence of its people. If

you

were

the

counsel

for

Sonnel

Construction, how would you defend your client? What would be your theory? (2%)

a taxicab which at that time had gone

SUGGESTED ANSWER:

offroad and onto the sidewalk in order to

I would use the theory that the company

avoid traffic. The taxicab passenger died as a result. Assume that the company had no more account and property in its name. As counsel for the heirs of the victim, whom will you sue for damages, and what theory

cannot

be

held

liable

for

damages

because there was no fraud or negligence by its officers in undertaking the project for the construction of the building or the selection of a construction company. Since a contractor is not an agent of

will you adopt? (3%) “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 31 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Sonnel Construction, the latter cannot be

held

liable

negligence.

I

for

would

the

contractor’s

also

argue

that

piercing the veil of corporate fiction is a remedy of last resort and cannot be availed

of

without

showing

fraud

separate

juridical

or

clear

evidence

disrespect

of

the

personality

of

the

corporation. Mere control of equity has not been considered as sufficient basis for piercing the veil.

Stock and Transfer Book (2009) No.XVIII. (C) What is a stock and transfer book? (1%) SUGGESTED ANSWER: A Stock and transfer book is a book which records all stocks in the name of the stockholders alphabetically arranged; the installments paid or unpaid on all stocks for which subscription has been made and the date of payment of any installment,

a

statement

of

every

alienation, sale or transfer of stock Could the heirs hold the taxicab owner and

made, the date thereof, and by and to

driver liable? Explain. (2%)

whom made; and such other entries as

SUGGESTED ANSWER:

the by-laws may prescribe (Section 74,

Yes, the taxicab company can be liable

Corporation Code).

for damages because it failed to comply with its obligation as a common carrier to

use

extraordinary

diligence

in

transporting the passenger, and because

Stockholders; Appraisal Right (2007)

at the time of death of the passenger, the cab driver was violating a traffic

No.VII.

regulation. Under Art. 2185 of Civil

dissented from the corporate act converting

Code, it is presumed that a person

preferred

driving

shares.

a

motor

vehicle

has

been

negligent if at time of mishap he was violating a traffic regulation, such as when he was driving on the wrong side of the road (Mallari, Sr. v. CA, G.R. No. 128607, 31 January 2000).

In

a

stockholders

voting

shares

Thereafter,

S

meeting,

to

S

non-voting

submitted

his

certificates of stock for notation that his shares are dissenting. The next day, S transferred his shares are dissenting. The next day, S transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the payment of the value of his shares. (10%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 32 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

What is the meaning of a stockholder’s appraisal right?

Stockholders; Contractual Relationship; Quorum (2009)

SUGGESTED ANSWER: Appraisal

right

of

No.XVIII. Triple a Corporation (Triple A) was

a

incorporated in 1960, with 500 founders’

fundamental or extraordinary corporate

shares and 78 common shares as its initial

action, to demand payment of the fair

capital stock subscription. However, Triple

value of his shares. It is the right of a

A registered its stock and transfer book

stockholder

the

only in 1978, and recorded merely 33

corporation and demand payment of the

common shares as the corporation’s issued

fair value of his shares after dissenting

and outstanding shares.

stockholder,

is

who

to

the

right

dissents

withdraw

from

from

form certain corporate acts involving fundamental changes in the corporate

In 1982, Juancho, the sole heir of one of

structure (Section 81, Corporation Code).

the original incorporators filed a petition with

the

Securities

and

Exchange

Can T exercise the right of appraisal?

Commission (SEC) for the registration of his

Reason briefly?

property rights over 120 founder’s shares

SUGGESTED ANSWER: No,

T

cannot

and 12 common shares. The petition was right

of

When

S

Incorporation indicating the incorporator’s

transferred his shares to T and T was

initial capital stock subscription. Will the

issued

petition be granted? Why or why not? (3%)

appraisal

in

new

appraisal

exercise this

case.

stock

right

of

the

certificates, S

ceased,

and

the T

supported by a copy of the Articles of

SUGGESTED ANSWER:

acquired all the rights of a regular

Yes. The articles of Incorporation define

stockholder. The transfer of shares from

the charter of the corporation and the

S to T constitutes an abandonment of

contractual

the appraisal right of S. All the T

State and the Corporation, the State and

acquired from the issuance of new stock

the

certificated was the rights of a regular

corporation and the stockholders. Its

stockholders (Section 86, Corporation

contents are thus binding upon both the

Code).

corporation

relationship

stockholders,

and

and

the

between between

the the

stockholders,

conferring on Juancho a clear right to have his stockholding recorded (Lanuza

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 33 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

v. Court of Appeals, 454 SCRA 54

with equal par values of P100.00/share.

(2005)).

Currently,

the

issued

and

outstanding

capital stock of BelPhil consists only of On May 6, 1992, a special stockholders’

common shares shared between Bayani

meeting was held. At this meeting, what

Cruz, a Filipino with 60% of the issued

would have constituted a quorum? Explain.

common shares, and Bernard Fleet, a

(3%)

Canadian, with 40%.

SUGGESTED ANSWER: A quorum consists of the majority of the

To secure additional working fund, BelPhil

totality of the shares which gave been

issued preferred shares to Bernard Fleet

subscribed and issued. Thus the quorum

equivalent to the currently outstanding

for such meeting would be 289 shares or

common

a majority of the 576 shares issued and

questioning the corporate action on the

outstanding as indicated in the article of

ground that the foreign equity holdings in

incorporation.

33

the company would now exceed the 40%

common shares reflected in the stock

foreign equity limit allowed under the

and

Constitution the for public utilities.

transfer

This book,

includes there

the

being

no

shares.

A

suit

was

filed

mention or showing of any transaction effected from the time of Triple A’s

Rule on the legality of Bernard Fleet’s

incorporation in 1960up to the said

current holdings. (8%)

meeting

SUGGESTED ANSWER:

(Section

52

in

Relation

to

Section 137 of corporation Code; Lanuza

The holding of Bernard Fleet equivalent

v. court of Appeals, 454 SCRA 54 (2005)).

to the outstanding common shares is illegal. His holdings of preferred shares should

not

constitutional Stockholders; Preferred Shares (2013)

exceed

40%.

requirement

Since

the

of

60%

Filipino ownership of the capital of public utilities applies not only to voting

No.X. Bell Philippines, Inc. (BelPhil) is a

control but also to beneficial ownership

public utility company, duly incorporated

of the corporation, it should also apply

and registered with the Securities and

to the preferred shares. Preferred shares

Exchange

authorized

are also entitled to vote in certain

capital stock consists of voting common

corporated matters. (Gamboa v. Teves,

shares and non-voting preferred shares,

682 SCRA 397, 2012) The state shall

Commission.

Its

develop a self-reliant and independent “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 34 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

national economy effectively controlled

directors; and (c) the corporate officers?

by Filipinos. (Articles II, Sec. 19, 1987

(3%)

Constitution) The effective control here should be mirrored across the board on

the corporation;

all kinds of shares.

SUGGESTED ANSWER: Under Section 45 of the Corporation Code, no corporation shall possess or exercise any corporate power except those conferred by the Code or by its

Trust Fund Doctrine (2007)

articles of incorporation and except such

No.VI. Discuss the trust fund doctrine. (5%)

as are necessary or incidental to the

SUGGESTED ANSWER:

exercise of the powers so conferred.

The trust fund doctrine means that the

When a corporation does an act or

capital

other

engages in an activity which is outside

assets of a corporation are regarded as

of its express, implied or incidental

equity in trust for the payment of

powers

corporate creditors. Stated simply, the

incorporation, the act is deemed to be

trust fund doctrine states that all funds

ultra vires.

stock,

properties

and

set

out

in

its

articles

of

received by the corporation in payment of the shares of stock shall be held in

the board of directors;

trust for the corporate creditors and

SUGGESTED ANSWER:

other stockholders of the corporation.

When the Board engages in an activity or

Under such doctrine, no fund shall be

enters

used to buy back the issued shares of

ratificatory vote of the stockholders in

stock

those instances where the Corporation

except

only

in

instances

into

a

contract

without

the

specifically allowed by the Corporation

Code so Requires such ratificatory vote,

Code

such as when the corporation is made to

(Boman

Environmental

Development Corporation v. Court of Appeals, 167 SCRA 540 [1988]).

invest in another corporation or engage in a business which is not in pursuit of its primary purpose, the board resolution not ratified by stockholders owning or

Ultra Vires Acts (2009)

representing at least two-thirds of the outstanding capital stock would make

When is there an ultra vires act on the part

the transaction void, as being ultra

of (a) the corporation; (b) the board of

vires.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 35 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

to nullify the foreclosure and the the corporate officers

mortgages, raising the following issues:

SUGGESTED ANSWER: When a corporate officer enters into a

The execution of only one Affidavit of Good

contract on behalf of the corporation

Faith for both mortgages invalidated the

without having been so expressly or

two mortgages; (2%) and

impliedly authorized by the Board of

SUGGESTED ANSWER:

Directors, even when the act or contract

The execution of only one Affidavit of

falls within the corporation’s express,

Good Faith for both mortgages is not a

implied or incidental power, then the

ground to nullify the said mortgages and

unauthorized act of the corporate officer

the foreclosure thereof. Said mortgages

is deemed to be ultra vires.

are valid as between immediate parties (Lilius v. Manila Railroad Company, 62 Phil. 56 (1935)), although they cannot

Credit Transaction

bind third parties (Philippine Refining v. Jarque, 61 Phil. 229 (1935)).

Chattel Mortgage; Foreclosure (2009) The mortgage on the shares of stocks No.III. Armando, a resident of Manila, borrowed

P3-million

from

Bernardo,

offering as security his 500 shares of stock worth P1.5-million in Xerxes Corporation, and his 2007BMW sedan, valued at P2million. The mortgage on the shares of

should have been registered in the office of the Register of Deeds of Manila where he resides, as well as in the stock and transfer book of Xerxes Corporation. (3%) Rule on the foregoing issues with reasons.

stock was registered in the Office of the Register of Deeds of Makati City where

SUGGESTED ANSWER:

Xerxes Corporation has its principal office.

The mortgage on the shares of stock

The mortgage on the car was registered in

should be registered in the chattel

the Office of the Register of Deeds of

mortgage registry in the Register of

Manila. Armando executed a single Affidavit of Good Faith, covering both mortgages. Armando defaulted on the payment of his obligation; thus, Bernardo foreclosed on the two chattel mortgages. Armando filed suit

Deeds of Makati City where the corporation has its principal office and also in the Register of Deeds of Manila where the mortgagor resides (Chua Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 (1935)). Registration of chattel

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 36 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

mortgage in the stock and transfer book

February 1, 2008, Al obtained another loan

is not required to make the chattel

of P10,000 from Bob to be paid on February

mortgage valid. Registration of dealings

15, 2008. He secured this by executing a

in the stock and transfer book under

chattel mortgage on a Honda motorcycle.

Section 63 of the Corporation Code

On the due date of the first loan Al failed to

applies only to sale or disposition of

pay. Bob foreclosed the chattel mortgage

shares,

to

but the car was bidded for P6,000 only. Al

of

also failed to pay the second loan due on

encumbrances (Monserrat v. Ceron, 58

February 15, 2008. Bob filed an action for

Phil. 469 (1933)).

collection of sum of money. Al filed a

and

mortgages

has and

no

application

other

forms

motion to dismiss claiming that Bob should extrajudicially

first foreclose the mortgage on The Honda

foreclosed on the mortgages, and both the

motorcycle before he can file the action for

car and the shares of stocks were sold at

sum of money. Decide with reasons. (4%)

public auction. If the proceeds from such

SUGGESTED ANSWER:

Assume

that

Bernardo

public sale should be 1-million short of Armando’s total obligation, can Bernardo recover the deficiency? Why or why not? (2%)

suit for a sum of money in lieu of foreclosing on the chattel mortgage. It has been ruled that a c chattel mortgage is a security arrangement to support a

SUGGESTED ANSWER: Yes.

Bob has the legal right to file a collection

Bernardo

can

recover

the

deficiency. Chattels are given as mere security, and not as payment or pledge (CuH ada v. Drilon, 432 SCRA 618 (2004)).

primary contract (Serra v. Rodriguez, G.R. no. L-25546, 22 April 1974). Since the chattel mortgage is only a collateral contract prerogative to choose which of the

remedies

available

to

pursue.

However, the filing of the collection suit constitutes

a

waiver

of

the

chattel

mortgage (Land Settlement and Dev. Corp. v. Carlos, 22 SCRA 202, 1968). And Chattel Mortgage; Foreclosure (2008)

even if the collection suit included the recovery of the P6,000 deficiency on the

No.XVII. On January 1, 2008, Al obtained a

first loan, the same is valid because

loan of P10,000 from Bob to be paid on

unlike in a pledge the lender has the

January 30, 2008, secured by a chattel

legal right to recover the deficiency

mortgage on a Toyota motor car. On “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 37 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

incurred on the foreclosure of a chattel

Yes. X executed a real estate mortgage

mortgage (PAMECA Wood Treatment v.

containing a “blanket mortgage clause.”

CA, G.R. No. 106435, 14 July 1999).

Mortgages

given

advancements

to

are

secure

valid

future

and

legal

contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage Mortgage;

Extrajudicial

may stand as security if from the four

Foreclosure; Blanket Mortgage &

corners of the instrument the intent to

Damage Clause (2012)

secure future and other indebtedness

No.VIII. X obtained a Php10Million loan from BBB Banking Corporation. The loan is

can be gathered. (Prudential Bank v. Alviar, G.R. No. 150197, 28 July 2005)

secured by Real Estate Mortgage on his

What is the meaning of a "dragnet clause"

vacation

in a Deed of Real Estate Mortgage? Under

house

in

Tagaytay

City.

The

original Deed of Real Estate Mortgage for the Php10Million was duly registered. The

what

circumstances

will

the

"dragnet

clause" be applicable? ( 5%)

Deed of Real Estate Mortgage also provides that "The mortgagor also agrees that this mortgage

will

secure

the

payment

SUGGESTED ANSWERS:

of

additional loans or credit accommodations

Generally, a dragnet clause is a clause in

that may be granted by the mortgagee ... "

a deed of real estate mortgage stating

Subsequently, because he needed more

that the mortgage secures all the loans

funds, he obtained another Php5Million

and advances that the mortgagor may at

loan. On due dates of both loans, X failed to

any time owe to the mortgagee. The

pay the Php5Million but fully paid the

word “dragnet” is a reference to a net

Php10Million. BBB Banking Corporation

drawn through a river or across ground

instituted

to trap fish or game. It is also known in

extrajudicial

foreclosure

proceedings.

American jurisprudence as a “blanket mortgage

clause”

or

an

“anaconda

Will the extrajudicial foreclosure prosper

clause.”

considering that the additional Php5Million

clause enables the parties to provide

was not covered by the registration? (5%)

continuous

SUGGESTED ANSWERS:

A mortgage dealings,

with a the

dragnet

nature

or

extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 38 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

executing a new security on each new

Mortgage; Foreclosure (2012)

transaction. It operates as a convenience and accommodation to the borrower as it

No.VII. X obtained a loan for Php50Million

makes available additional funds to him

from SSS Bank. The collateral is his

without his having to execute additional

vacation house in Baguio City under a real

security

saving

estate mortgage. X needed more funds for

time, travel, cost of extra legal services,

his business so he again borrowed another

recording fees, etc. (Prudential Bank v.

Php10Million, this time from BBB Bank,

Alviar, id.)

another bank, using the same collateral.

documents,

thereby

The loan secured from SSS Bank fell due The “dragnet clause” may not apply to

and X defaulted.

other loans extended by the mortgagee other

If SSS Bank forecloses the real estate

securities were given. In the case of

mortgage, what rights, if any, are left with

Prudential Bank v. Alviar, the Supreme

888 Bank as mo1igagee also? (2%)

to

the

Court

mortgagor

adopted

the

for

which

“reliance

on

the

security test” to the effect that “when

SUGGESTED ANSWER:

the mortgagor takes another loan [from

Bank, as junior mortgagee, would have a

the mortgage] for which another security

right to redeem the foreclosed property,

was given, it could not be inferred that

together

with

X,

such loan was made in reliance solely on

interest,

any

judicial

the original security with the “dragnet

creditor of X, or any other person or

clause,” but, rather, on the new security

entity having a lien on the vacation

given.” This means that the existence of

house subsequent to the real estate

the new security must be respected and

mortgage in favour of SSS Bank (i.e.,

the foreclosure of the old security should

other junior mortgagees, if any)(Sec. 6,

only

Act 3135)

be

for

the

other

loans

not

his

successors or

in

judgement

separately collateralized and for any amount not covered by the new security for the new loan.

If the value of the Baguio property is less than the amount of loan, what would be the recourse of SSS Bank? BBB Bank? (2%) SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 39 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

In case of a deficiency, SSS bank could

If X defaulted in respect of his loan from

file suit to claim for the deficiency. BBB

Bank but fully paid his loan from SSS

Bank could file an ordinary action to

Bank, BBB Bank could now foreclose the

collect its loan from X. if it does so, it

mortgaged property as it would be the

would be deemed to have waived its

only remaining mortgagee of the same.

mortgage lien. If the judgement in the action to collect is favorable to BBB

Does X have any legal remedy after the

Bank,

foreclosure in the event that later on he has

and

it

becomes

final

and

executory , BBB Bank could enforce the said judgement by execution. It could even levy execution execution on the same mortgaged property, but it would not have priority over the latter. (Caltex Philippines v. IAC, et al., G.R. No. 74730, August 25,1989) If the value of the property is more that the amount of the loan, who will benefit from the excess value of the property? (2%) SUGGESTED ANSWER: If the value of the property is more that the amount of the loan, the excess could benefit and be claimed by BBB Bank, any judicial or judgement creditor of X, any other junior mortgagee, and X. If X defaulted with its loan in favor of BBB Bank but fully paid his loan with SSS

the money to pay for the loan? (1%) SUGGESTED ANSWER: Yes, X could redeem the property within one (1) year from the date of registration of the sheriff’s certificate of foreclosure sale. If SSS Bank and BBB Bank abandon their rights under the real estate mortgage, is there any legal recourse available to them? (1%) SUGGESTED ANSWER: Bank and BBB Bank could each file an ordinary action to collect its loan from X.

Mortgage; Foreclosure (2010)

Bank, can BBB Bank foreclose the real

No.III. Ozamis Paper Corporation secured

mortgage executed in its favor? (2%)

loans from ABC Universal Bank in the

SUGGESTED ANSWER:

aggregate principal amount of P100 million, evidenced by several promissory notes, and

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 40 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

secured by a continuing guaranty of its

and SA v. American Realty Corporation,

principal stockholder Menandro Marquez; a

321 SCRA 659(1999)).

pledge

of

Marquez’s

shares

in

the

corporation valued at P45 million; and a

Can the bank foreclose on the pledged

real estate mortgage over certain parcels of

shares

land owned by Marquez.

deficiency from the corporation? Explain.

of

Marquez

and

recover

the

(2%) The corporation defaulted and the bank

SUGGESTED ANSWER:

extra-judicially foreclosed on the real estate

If the bank forecloses the pledge, it

mortgage. The bank which was the sole

cannot recover the deficiency because

bidder for P75 million, won the award.

the

foreclosure

extinguishes

the

principal obligation, whether or not the Can the bank sue Marquez for the

proceeds from the foreclosure are equal

Deficiency of P25 million? Explain. (2%)

to the amount of the principal obligation

SUGGESTED ANSWER:

(Art. 2115, Civil Code).

Yes, the bank can sue Marquez for the deficiency of P25million. In extrajudicial foreclosure of a real estate mortgage, if the proceeds of the sale are insufficient

Insolvency & Corporate Recovery

to pay the debt, the mortgagee has the right to sue for the deficiency (Suico Rattan and Buri Interiors, Inc. v. Court of Appeals, 490 SCRA 560 (2006)).

Insolvency; Preferred Claims (2007) No.XIII. (A) What are the preferred claims that shall be satisfied first from the assets

If the bank opts to file an action for

of an insolvent corporation? (10%)

collection against the corporation, can it afterwards

institute

a

real

action

to

foreclose the mortgage? Explain (2%) SUGGESTED ANSWER: No, the bank can no longer file an action to foreclose the real estate mortgage. When it filed a collection case, it was

SUGGESTED ANSWER: Under

the

Insolvency

law

necessary

funeral expenses of the debtor is the most preferred claim. However, this is an insolvent corporation, thus, claims shall be paid in the ff. order:

deemed to have abandoned the real estate mortgage (Bank of America, NT

Debts due for personal services rendered the insolvent by employees,

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 41 of 173

Mercantile Law Q&As (2007-2013)

laborers,

or

domestic

immediately

[email protected] JayArhSals

servants

preceding

commencement

of

the

proceeding

Philippine Islands (Section 50, Insolvency Law).

in How shall the remaining non-preferred

insolvency;

creditors share in the estate of the insolvent Compensation due the laborers or their

corporation above?

dependents under the provisions of act

SUGGESTED ANSWER:

numbered

The remaining non-preferred creditors,

thirty-four

hundred

and

twenty-eight, known as the workmen’s

whose debts are duly proved and allowed,

Compensation Act, as amended by Act

shall be entitled to share pro-rata in the

Numbered

and

assets, without priority or preference

twelve, and under the provisions of Act

whatsoever (Section 49, Insolvency Law;

Numbered

Article 2251, Civil Code).

Thirty-eight Eighteen

hundred hundred

and

seventy-four, known as the Employees’ Liability Act, and of other laws providing for payment of indemnity for damages in cases of labor accidents;

Rehabilitation;

Proceeding;

Rehabilitation & Insolvency (2012) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for the common interest of the creditors, when properly authorized and approved by the court;

No.XVIII. (A) Can be distressed corporation file a petition for corporation rehabilitation after the dismissal of its earlier petition for insolvency? Why? (2%) SUGGESTED ANSWER:

Debts, taxes, and assessments due the

Yes, when a distressed corporation’s

Insular Government;

petition

for

insolvency

has

been

dismissed, it can only mean that it still Debts, taxes, and assessments due to

possesses more than enough assets to

any

cover all its liabilities, and consequently,

province

or

provinces

of

the

Philippine Islands;

it can still be “rehabilitated” (PAL v. Zamora, G.R. No. 166996, 06 February

Debts, taxes, and assessments due to any municipality or municipalities of the

2007,

and

Sec.

5[d],

Securities

Regulation Act).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 42 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Although in Ching v. LBP, G.R. No. Under Sec. 6(d) of P.D. 902-A, a petition

73123, 02 September 1991, it was held

for corporate rehabilitation is allowed

that when a petitioning corporate debtor

only

“in

cases

corporation**possesses property

to

cover

the

has been denied rehabilitation, the SEC

sufficient

may declare a corporation insolvent as

where

all

its

debts

but

an incident and in continuation of its

foresees the impossibility of meeting

already

them when they respectively fall due or

petitioner, such a procedure does not

in cases where the corporation** has no

seem warranted under the Interim Rules

sufficient assets to cover liabilities, but

of

is

Rehabilitation.

under

the

management

of

a

acquired

jurisdiction

Procedure

for

over

Corporate

rehabilitation receiver or management committee

created

pursuant

to

this

Sec. 27, Rule 4 of the Interim Rules state that, “the court shall upon motion,

Decree.”

motu

porprio

or

upon

the

Under Sec. 1, Rule 4, Interim Rule of

recommendation of the Rehabilitation

Procedure for Corporate Rehabilitation.

Receiver, terminate the proceedings,

A petitioner corporate debtor must be

without

one who is “Any debtor who foresees the

insolvency/dissolution.” In other words,

impossibility of meeting its debts when

a

they respectively fall due,” which means

proceedings

that it is not insolvent, but merely

jurisdiction of RTC, whereas petition for

illiquid, which under Section 2 provides

corporate rehabilitation fall within the

the

original and exclusive jurisdiction of

minimum

that

the

debtor

is

“rehabilitable” thus: “the manner by

different

proceeding petition fall

with

for

to insolvency

the

general

RTC special Commercial Courts.

which the debtor may be rehabilitated and how such rehabilitation may benefit

Explain the key phrase ―equality is

the general body of creditors, employees

equity‖ in corporate rehabilitation proceedings.

and stock holders.

(2%) SUGGESTED ANSWER:

Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition foR insolvency? Why? (2%) SUGGESTED ANSWER:

The principle of “equality in equity” means that when a corporation is placed under the control of a court-appointed rehabilitation receiver, then “all the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 43 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

creditors should stand on equal footing.

Can XYC Company still be able to draw on

Not anyone of them should be given any

their irrevocable Standby Letter of Credit

preference by paying one or some of

when due? Explain your answer. (5%)

them

ahead

of

the

others.

This

is

precisely the reason for the suspension

SUGGESTED ANSWER:

of all pending claims against the

Yes, As an exception to a Stay or

corporation

Suspension

under

receivership”

Order

included

in

a

(Sobrejuanite v. ASB Dev. Corp., G.R. No.

Commencement Order issued pursuant

165675,

Ruby

to Section 16(q) of the FRIA, Section

Industrial v. Lim, G.R. Nos. 124185-87,

18(c) if the said law provides that a Stay

20 January 1998).

or Suspension Order shall not apply “to

30

September

2005:

the

enforcement

of

claims

against

sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as Rehabilitation; Stay Order (2012)

issuers

of

letters

of

credit

x

xx.”

Similarly, assuming that it has not been No.I. ABC Company filed a Petition for Rehabilitation with the Court. An Order was issued by the Court, (1) staying enforcement of all claims, whether money or otherwise against ABC Company, its guarantors and sureties not solidarily liable with the company; and (2) prohibiting ABC Company from making payments of its liabilities, outstanding as of the date of the filing of the Petition. XYC Company is a holder of an irrevocable Standby Letter of Credit which was previously procured by

superseded by the FRIA, Section 7(b) of the Supreme Court Rules of Procedure on

Corporate

Rehabilitation

(2008)

provides that a stay order shall not cover claims

against

letters

of

credit

and

similar security arrangements issued by a third party to secure the payment of the debtor’s obligations. This was the basis of the decision in the case of Metropolitan Waterworks and Sewerage System v. Hon. Reynaldo B. Daway, et al. (G.R. No. 160732, June 21,2004).

ABC Company in favor of XYC Company to secure performance of certain obligations. In the light of the Order issued by the Court.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 44 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Insurance Law

Concealment;

Material

Concealment

(2013) Beneficiary; Death of Insured Due to No.II. Benny applied for life insurance for

Beneficiary (2008)

Php 1.5 Million. The insurance company

No.VI. On January 1, 2000, Antonio Rivera

approved his application and issued an

secured

insurance policy effective Nov, 6, 2008.

a

life

insurance

from

SOS

Insurance Corp. for P1 Million with Gemma

Benny

Rivera,

beneficiaries. On April 6, 2010, Benny died

his

adopted

daughter,

as

the

beneficiary. Antonio Rivera died on March

named

his

children

as

his

of hepatoma, a liver ailment.

4, 2005 and in the police investigation, it was

ascertained

that

Gemma

Rivera

The

insurance

company

denied

the

participated as an accessory in the killing of

children’s claim for the proceeds of the

Antonio Rivera. Can SOS Insurance Corp.

insurance policy on the ground that Benny

avoid liability by setting up as a defense the

failed to disclose in his application two

participation of Gemma Rivera in the killing

previous consultations with his doctors for

of Antonio Rivera? Discuss with reasons.

diabetes and hypertension, and that he had

(4%)

been

diagnosed

to

be

suffering

from

hepatoma. The insurance company also

SUGGESTED ANSWER:

rescinded the policy and refunded the

Under Sec. 12 of the Insurance Code.

premiums paid.

The interest of a beneficiary shall be

Was the insurance company correct? (8%)

forfeited when the beneficiary is the

SUGGESTED ANSWER

principal, accomplice, or accessory in

The

willfully bringing about the death of the

rescinded

insured. In which event, the nearest

concealment (Section 27 of Insurance

relative of the insured shall receive the

Code). Benny did not disclose that he

proceeds

not

was

the

hypertension,

otherwise

of

said

insurance,

disqualified.

if

Thus,

insurance

company

the

policy

suffering and

from

correctly

because

of

diabetes,

hepatoma.

The

insurance company must still pay out

concealment is material, because these

the proceed of the life insurance policy

are serious ailments (Florendo v. Philam

to the nearest qualified relative of the

Plans, Inc., 666 SCRA 618, 2012). Benny

insured.

died less than two years from the date of the issuance of the policy (Section 48 of Insurance Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 45 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Insurable Interest; Building Destroyed by

Globe

Fire (2010)

Company, 57 Phil. 576 (1932)). Second,

No.X. To secure a loan of P10 million, Mario mortgaged his building to Armando. In accordance with the loan arrangements, Mario had the building insured with First Insurance

Company

for

P10

million,

designating Armando as the beneficiary. Armando also took an insurance of the building upon his own interest with Second Insurance Company for P5 million. The building was totally destroyed by fire, a peril insured against under both insurance policies. It was subsequent determined that the fire had been intentionally started by Mario and that in violation of the loan agreement,

he

had

been

storing

inflammable materials in the building.

from either or both insurance companies? (2%) Armando can receive P5 million from Company.

As

mortgagee, he had an insurable interest in the building (Panlileo v. Cosio, 97 Phil.

919

(1955)).

Armando

insurance

Fire

policies

Insurance contain

a

warranty that the insured will not store hazardous materials within the insured premises. Mario breached this warranty when he stored inflammable materials in the building. (Young v. Midland Textile Insurance

Company,

30

Phil.

617

(1915)).These two factors exonerate First Insurance

Company from

liability to

Armando as mortgagee even though it was Mario who committed them (Section 8 of the Insurance Code). What happens to the P10 million debt of Mario to Armando? Explain. (3%) SUGGESTED ANSWER: million

cannot

collect anything from First Insurance

from

Company,

this

Second amount

Insurance should

be

considered as partial payment of the loan.

SUGGESTED ANSWER: Insurance

Rutgers

Since Armando would have collected P5

How much, if any, can Armando recover

Second

fire

&

Armando can

only collect

the

balance of P5 million (Panlileo v. Cosio, supra). Second Insurance Company can recover from Mario the amount of P5 million

it

paid,

because

it

became

subrogated to the rights of Armando (Panlileo v. Cosio, supra).

Company. First Insurance Company is not liable for the loss of the building. First, it was due to a willful act of Mario, who committed arson (Section 87 of the Insurance Code; East Furnitures, Inc. v. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 46 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Insurance; Double Insurance, Validity (2012)

SUGGESTED ANSWER: Yes. If X obtained an open policy then

No.V X borrowed from CCC Bank. She

she

could

claim

mortgaged her house and lot in favor of the

corresponding

bank. X insured her house. The bank also

damage based on the value of the house

got the house insured.

determined as of the date the damage

to

an

the

amount

extent

of

the

occurred, but not to exceed the face Is this double insurance? Explain your

value of the insurance policy; however, if

answer. (3%)

she obtained a valued policy then she could claim an amount corresponding to

SUGGESTED ANSWER:

the extent of the damage based on the

No, there is no double insurance. Double insurance exists where the same person is insured by several insurers separately with respect to the same subject and interest. (Sec. 93, Insurance Code) Is this legally valid? Explain your answer.

agreed upon valuation of the house. As for CCC Bank, it could claim an amount corresponding to the extent of the

damage

but

not

to

exceed

the

amount of the loan it extended to X or so much thereof as may remain unpaid.

(3%) SUGGESTED ANSWER: Yes, X and CCC Bank can both insure the

Insurance;

house as they have different insurable

Contracts (2009)

interest

therein.

X,

the

borrower

mortgagor, has an insurable interest in the house being the owner thereof while Bank, the lender, also has an insurable interest

in

the

house

as

mortgagee

thereof.

Antarctica

Corporation

(ALAC)

of

Insurance

Life

Assurance

publicly

offered

a

specially designed insurance policy covering persons between the ages of 50 to 75 who may

be

afflicted

with

serious

and

debilitating illnesses. Quirico applied for

In case of damage, can X and CCC Bank separately

No.IV.

Perfection

claim

proceeds? (4%)

for

the

insurance

insurance coverage, stating that he was already 80 years old. Nonetheless, ALAC approved his application.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 47 of 173

Mercantile Law Q&As (2007-2013)

Quirico

then

requested

ALAC

[email protected] JayArhSals

for

the

issuance of a cover note while he was trying

The cover note is a receipt whereby the

to

insurance

company agrees to insure the insured for

premium. ALAC granted the request. Ten

60 days pending the issuance of a

days after he received the cover note,

regular policy. No separate premium is

Quirico had a heart seizure and had to be

to be paid on a cover note. It is not a

hospitalized. He then filed a claim on the

separate policy but is integrated in the

policy.

regular policy to be subsequently issued.

raise

funds

to

pay

the

Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly offered, was available only to persons 50 to 75 years of age? Why or why

Insurance;

Insurance;

Assignments (2009)

not? (2%)

No.XIII. SUGGESTED ANSWER: No. By approving the application of Quirino

Property

who

disclosed

that

he

was

Ciriaco

apartment

leased

from

a

commercial

Supreme

Building

Corporation (SBC). One of the provisions of the one-year lease contract states:

already 80 years old, ALAC waived the age requirement. ALAC is now stopped

―18.xxx The LESSEE shall not insure against

from raising such defense of age of the

fire the chattels, merchandise, textiles,

insured.

goods and effects placed at any stall or store or space in the leased premises

Did ALAC’s issuance of a cover note result in

without first obtaining the written consent

the perfection of an insurance contract

of the LESSOR. If the LESSEE obtains fire

between Quirico and ALAC? Explain. (3%)

insurance coverage without the consent of the

LESSOR,

the

insurance

policy

is

deemed assigned and transferred SUGGESTED ANSWER:

to the LESSOR for the latter’s benefit.‖

The issuance of a cover note by ALAC resulted in the perfection of the contract of insurance. In that case, it is only

Notwithstanding

the

stipulation

in

the

contract, without the consent of SBC,

because there is delay in the issuance of

Ciriaco insured the merchandise inside the

the policy that the cover notes was

leased premises against loss by fire in the

issued. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 48 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

amount of P500, 000 with First United On April 5, 2010, the car was involved in an

Insurance Corporation (FUIC).

accident that resulted in its total loss. A day before the lease contract expired, fire broke out inside the leased premises,

On April 10, 2010,

damaging

returned Enrique’s check with the notation

Ciriaco’s

merchandise.

Having

funds.‖

the

drawee bank

learned of the insurance earlier procured by

―Insurance

Ciriaco, SBC demanded from FUIC that the

Enrique immediately deposited additional

proceeds of the insurance policy be paid

funds with the bank and asked the insurer

directly to it, as provided in the lease

to redeposit the check.

Upon

notification,

contract. Enrique thereupon claimed indemnity from Who is legally entitled to receive the

the insurer. Is the insurer liable under the

insurance proceeds? Explain. (4%)

insurance coverage? Why or why not? (3%)

SUGGESTED ANSWER:

SUGGESTED ANSWER: the

The insurer is not liable under the

proceeds of the insurance policy. The

insurance policy. Under Article 1249 of

stipulation that the policy is deemed

the Civil Code, the delivery of a check

assigned and transferred to SBC is void,

produces the effect of payment only

because SBC has no insurable interest in

when it is encashed. The loss occurred

the merchandise of Ciriaco (Cha v. Court

on April 5, 2010. When the check was

of Appeals, 277 SCRA 690 (1997))

deposited, it was returned on April 10,

Ciriaco

is

entitled

to

receive

2010, for insufficiency of funds. The check was honored only after Enrique deposited Insurance;

Property

Insurance;

Late

Payment of Premiums (2010) No.XI.

Enrique

obtained

from

additional

funds

with

the

bank. Hence, it did not produce the effect of payment (Vitug, Commercial Laws and Jurisprudence, Vol. I, p.250).

Seguro

Insurance Company a comprehensive motor vehicle insurance to cover his top of the line Aston martin. The policy was issued on March 31, 2010 and, on even date, Enrique paid the premium with a personal check

ALTERNATIVE ANSWER: Yes. The insurer is liable. The insurance policy was issued. In effect, there was a grant of credit for the payment of the premium. The insurer can deduct the

postdated April 6, 2010. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 49 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

amount of the check from the proceeds

Would your answer in (a) be the same if it

of the insurance.

was found that the proximate cause of the fire was an explosion and that fire was but the immediate cause of loss and there is no excepted peril under the policy? SUGGESTED ANSWER:

Insurance; Property Insurance; Payment

Yes,

of Premiums by Check (2007)

contract is allowed if the cause of the

No.IV. Alfredo took out a policy to insure

recovery

under

the

insurance

loss was either the proximate or the

this commercial building fire. The broker

immediate cause as long as an excepted

for the insurance company agreed to give a

peril, if any was not the proximate cause

15-day

of the loss (Section 86, Insurance Code

credit

within

which

pay

the

insurance premium. Upon delivery of the

of the Philippines).

policy on May 15, 2006, Alfredo issued a postdated check payable on May 30, 2006.

If the fire was found to have been caused by

On May 28, 2006, a fire broke out and

Alfredo’s

own

negligence,

destroyed the building owned by Alfredo.

recover on the policy?

can

he

still

(10%) Reason briefly in (a), (b) and (c). May Alfredo recover on the insurance SUGGESTED ANSWER:

policy?

Yes, mere negligence on the part of the

SUGGESTED ANSWER:

insured will not prevent recovery under

Yes, Alfredo may recover on the policy.

the insurance policy. The law merely

It is valid to stipulate that the insured

prevents recovery when the cause of loss

will be granted credit term for payment

is the willful act of the insured, alone or

of premium. Payment by means of a

in connivance with others (Section 87,

check

Insurance Code of The Philippines).

which

was

accepted

by

the

insurer, bearing a date prior to the loss, would

be

sufficient.

The

subsequent

effects of encashment retroact to the date

of

Insurance

the

check

Co.,

Inc.

(UCPB v.

General Masagana

Telamart, Inc., 356 SCRA 307 [2001]).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 50 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Insurance; Property Insurance; Payment

St.

of Premiums even after Loss (2013)

entitled to recover for the loss from

No.VII. Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a long-standing insurance relationship with each

other;

SPMC

secures

the

comprehensive fire insurance on its plant and

facilities

from

SIC.

The

standing

business practice between them has been to allow SPMC a credit period of 90 days from the renewal of the policy with which to pay the premium.

Peter

stable

Manufacturing

Insurance

Company

Company.

is

Stable

Insurance Company granted a credit term to pay the premiums. This is not against the law, because the standing business practice of allowing St. Peter Manufacturing

Company

to

pay

the

premiums after 60 or 90 days, was relied upon in good faith by SPMC. Stable Insurance

Company

is

in

estoppels

(UCPB General Insurance Company, Inc. v. Masagana Telemart, Inc. 356 SCRA

Soon after the new policy was issued and

307, 2001).

before premium payments could be made, a fire gutted the covered plant and facilities to the ground. The day after the fire, SPMC

Insurer: Effects: Several Insurers (2008)

issued a manager’s check to SIC for the fire

No.VII.

insurance premium, for which it was issued

condominium building, has a value of P50

a receipt; a week later SPMC issued its

Million. The owner insured the building

notice of loss.

against

Terrazas

fire

with

de

Patio

three

(3)

Verde,

a

insurance

companies for the following amounts: SIC

responded

manager’s

by

issuing

its

of the

Northern Insurance Corp. – P20 Million

paid, and denied

Southern Insurance Corp. – P30 Million

check for the amount

premiums SPMC had

own

SPMC’s claim on the ground that under the ―cash and carry‖ principle governing fire insurance, no coverage existed at the time the fire occurred because the insurance premium had not been paid. Is SPMC entitled to recover for the loss form SIC? (8%) SUGGESTED ANSWER:

Eastern Insurance Corp. – P50 Million Is the owner’s taking of insurance for the building with three (3) insurers valid? Discuss. (3%) SUGGESTED ANSWER: Taking out insurance covering the same property, same insurable interest and same risk with three insurance

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 51 of 173

Mercantile Law Q&As (2007-2013)

companies

is

recognized

“double

under

[email protected] JayArhSals

insurance,” the

its coverage but may recover one-half of

Insurance Code. However, in American

the total indemnity from the co-insurers

Home Assurance Co. v, Chua, G.R. No.

in the proportion of 60% (Southern

130421,

Insurance) – 40% (Northern Insurance).

28

Sec.

June

93

1999,

of

insurance Corp. is liable to the extent of

the

court

referred to the common inclusion of the “other

insurance

clause”

in

fire

insurance policies, requiring disclosure

Intellectual Property

of co-insurance of the same property Agreements:

with other insurers.

Technology

Transfer

Agreements; Requisites & Prohibitions The Building was totally razed by fire. If the owner

decides

to

claim

from

(2010)

Eastern

Insurance Corp. only P50 Million, will the

No.VI. (A) What contractual stipulations are

claim prosper? Explain. (2%)

required

SUGGESTED ANSWER:

agreements? (2%)

Insured

can

recover

from

Eastern

in

all

technology

transfer

SUGGESTED ANSWER:

Insurance Corp. up to the extent of his

The following stipulations are required in

loss. However, Eastern may refuse to pay

all technology transfer agreements:

if

the

policy

contains

an

“other

insurance clause” stipulating that non-

The laws of the Philippines shall govern

disclosure of double insurance will avoid

its interpretation and in the event of

the policy (Geagonia v. Country Bankers

litigation, the venue shall be the proper

Insurance, G.R. No. 114427, 06 February

court in the place where the licensee has

1995.) As there is no indication of a

its principal office;

contractual prohibition on double or other insurance, all insurance contracts

Continued access to improvements in

over the building are deemed valid and

techniques and processes related to the

enforceable.

technology

The

law

prohibits

double

or

over-

recovery, not double insurance. Since Eastern insured the property up 50% of the total coverage, it is liable for only 50% of the total actual loss. Eastern

shall

be

made

available

during the period of the technology transfer arrangement; In case it shall provide for arbitration, the Procedure of Arbitration

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 52 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations

Commission

on

International

Trade Law or the Rules of Arbitration of

Article of Commerce; As Trademark, Patent & Copyright (2010)

the International Chamber of Commerce

No.VI. (C) Can an article of commerce serve

(ICC)

of

as a trademark and at the same time enjoy

arbitration shall be the Philippines or

patent and copyright protection? Explain

any neutral country;

and give an example. (2%)

shall

apply

and

the

venue

SUGGESTED ANSWER: The Philippine taxes on all payments

A stamped or marked container of goods

relating

can

to

the

technology

transfer

be

registered

as

trademark

agreement shall be borne by the licensor

(subsections 113.1 of the Intellectual

(Sec. 88, Intellectual Property Code).

Property Code). An original ornamental design

Enumerate

three

stipulations

prohibited

in

technology

that

are

transfer

or

model

for

articles

can

be

copyrighted

manufacturer

of

(Subsection 172.1 of the Intellectual

agreements. (3%)

Property Code). An ornamental design

SUGGESTED ANSWER:

cannot be patented, because aesthetic

The following stipulations are prohibited

creations cannot be patented (Section 22

in technology transfer agreements:

of

the

Intellectual

Property

Code).

However, it can be registered as an Those that contain restrictions regarding

industrial design (Subsections 113.1 and

the volume and structure of production;

172.1 of the Intellectual Code). Thus, a

Those

that

competitive

prohibit

the

technologies

in

use a

of non-

exclusive agreement; and

Those that establish a full or partial purchase option in favor of the licensor (Subsections 87.3, 87.4 and 87.5 of the Intellectual Property Code).

container of goods which has an original ornamental design can be registered as trademark, can be copyrighted, and can be registered as an industrial design. ALTERNATIVE ANSWER: It is entirely possible for an article of commerce

to

bear

a

registered

trademark, be protected by a patent and have

most,

or

some

part

of

it

copyrighted. A book is a good example. The name of the publisher or the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 53 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

colophon used in the book may be

Intellectual Property Code) His rights

registered trademarks, the ink used in

existed from the moment of its creation

producing the book may be covered by a

(Section 172 of the Intellectual Property

patent, and the text and design of the

Code; Unilever Philippines (PRC) v. Court

book may be covered by copyrighted.

of Appeals, 498 SCRA 334, 2006). The registration of the painting by Bernie with the National Library did not confer copyright upon him. The registration is

Copyright (2013) No.IV. Ruby is a fine arts student in a university. He stays in a boarding house with Bernie as his roommate. During his

merely for the purpose of completing the records of the National Library. (Section 191 of the Intellectual Property Code).

free time, Rudy would paint and leave his finished works lying around the boarding house. One day, Rudy saw one of his works – an abstract painting entitled Manila Traffic Jam – on display at the university cafeteria. The cafeteria operator said he purchased the painting

from

Bernie

who

represented

himself as its painter and owner

confronted Bernie. While admitting that he did not do the painting,. Bernie claimed ownership of its copyright since he had already registered it in his name with the Library

as

provided

in

the

Intellectual Property Code. Who owns the copyright to the painting? Explain (8%). SUGGESTED ANSWER. Rudy owns the copyright to the painting because he was the one who actually created it. (Section 178.1 of the

No.XVI. In 1999, Mocha warn, an American musician, had a bit rap single called Warm Warm Honey which he himself composed and performed. The single was produced by

Rudy and the cafeteria operator immediately

National

Copyright; Commissioned Artist (2008)

a

California

record

company,

Galactic

Records. Many notice that some passages from Warm Warm Honey sounded eerily similar to parts of Under Hassle, a 1978 hit song by the British rock and Majesty. A copyright infringement suit was filed in the United States against Mocha Warm by Majesty. It was later settled out of court, with Majesty receiving attribution as coauthor of Warm Warm Honey as well as a share in the royalties. By

2002,

Moeha

Warm

was

nearing

bankruptcy and he sold his economic rights

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 54 of 173

Mercantile Law Q&As (2007-2013)

over

Warm

Warm

Honey

[email protected] JayArhSals

to

Galactic

Records for $10,000.

In the case of Mocha Warm and Majesty, who are the attributed co-authors, and in spite of the sale of the economic right to

In 2008, Planet Films, a Filipino movie

Galactic Records, they retain their moral

producing company, commissioned DJ Chef

rights to the copyrighted rap, which

Jean, a Filipino musician, to produce an

include the right to demand attribution

original re-mix of Warm Warm Honey for

to them of the authorship (Sec. 193,

use in one of its latest films, Astig!. DJ Chef

IPC).

Jean remixed Warm Warm Honey with a salsa beat, and interspersed as well a

Which respect to DJ Chef Jean, in spite

recital of poetic stanza by John Blake, 1

of

17th century Scottish poet. DJ Chef Jean

commissioned by Planet Films for the

died shortly after submitting the remixed

remix, the rule is that the person who so

Warm Warm Honey to Planet Films.

commissioned

his

death,

and

although

work

he

shall

was

have

ownership of the work, but copyright Prior to the release of Astig!. Mocha Warm

thereto shall remain with creator, unless

learns of the remixed Warm Warm Honey

there is a written stipulation to the

and demands that he be publicly identified

contrary.

as the author of the remixed song is all the CD covers and publicity releases of Planet

Even if no copyright exist in favor of

Films.

poet John Blake, intellectual integrity requires that the authors of creative

Who are the parties or entities entitled to be

work should properly be credited.

credited as author of the remixed Warm Warm Honey? Reason out your answers.

Who are the particular parties or entities

(3%)

who exercise copyright over the remixed

SUGGESTED ANSWER:

Warm Warm Honey? Explain. (3%)

The parties entitled to be credited as

SUGGESTED ANSWER:

authors of the remixed Warm Warm

The parties who exercise copyright or

Honey are Mocha Warm, Majesty, DJ

economic rights over the remixed Warm

Chef Jean and John Blake, for the

Warm Honey would be Galactic Records

segments that was the product of their

and Planet Films. In the case of Galactic

respective intellectual efforts.

Records, it bought the economic rights of Mocha Warm. In the case of Planet

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 55 of 173

Mercantile Law Q&As (2007-2013)

Films,

it

commissioned

[email protected] JayArhSals

the

remixed

Eloise may publish the columns without securing authorization from New Media

work.

Enterprises.

Under

Sec.

Intellectual

Property

172

Code,

of

the

original

intellectual creations in the literary and artistic domain are protected from the Copyright; Commissioned Work (2008)

moment

of their

No.XV. Eloise, an accomplished writer, was

include

those

hired by Petong to write a bimonthly

newspapers. Under Sec. 178, copyright

newspaper column for Diario de Manila, a

ownership shall belong to the author. In

newly-established

which

case of commissioned work, the person

Petong was the editor-in-chief. Eloise was to

who so commissioned work shall have

be paid P1,000 for each column that was

ownership of work, but copyright shall

published. In the course of two months,

remain with creator, unless there is a

Eloise submitted three columns which,

written stipulation to the contrary.

newspaper

of

creation and

shall

periodicals

and

in

after some slight editing, were printed in the newspaper. However, Diario de Manila proved unprofitable and closed only after two months. Due to the minimal amounts involved, Eloise chose not to pursue any claim for payment from the newspaper, which

was

owned

by

New

Media

Enterprises. Three years later, Eloise was planning to publish an anthology of her works, and wanted to include the three columns that

Assume that New Media Enterprises plans to publish Eloise’s columns in its own anthology entitled, ―The Best of Diario de Manila‖ Eloise wants to prevent the publication of her columns in that anthology since she was never paid by the newspaper. Name one irrefutable legal argument Eloise could cite to enjoin New Media Enterprises from including her columns in its anthology. (2%) SUGGESTED ANSWER:

appeared in the Diario de Manila in her

Under

anthology She asks for you legal advice:

economic rights to the columns she

the

IPC,

the

copyright

or

authored pertains only to Eloise. She can Does Eloise have to secure authorization

invoke the right to either “authorize or

from New Media Enterprises to be able to

prevent”

publish her Diario de Manila columns in her own anthology? Explain fully. (4%) SUGGESTED ANSWER:

reproduction

of

the

work,

including the public distribution of the original and each copy of the work “by

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 56 of 173

Mercantile Law Q&As (2007-2013)

sale

or

other

forms

of

[email protected] JayArhSals

transfer

of

protecting electronic documents. What

ownership,” Since this would be the

are involved here are text messages, not

effect of including her column in the

letter in their ordinary sense. Hence, the

anthology.

protection under the copyright law does not extend to text messages (Section 172, Intellectual Property Code).

Copyright; Infringement (2007) The No.III.

Diana

and

Piolo

are

messages

that

Diana

and

Piolo

famous

exchanged through the use of messaging

personalities in showbusiness who kept

service do not constitute literary and

their love affair secret. They use a special instant messaging service which allows them to see one another’s typing on their own screen as each letter key is pressed.

artistic works under Section 172 of the Intellectual Property Code. They are not letter under Section 172(d).

When Greg, the controller of the service

For copyright to subsist in a “message”,

facility, found out their identities, he kept a

it must qualify as a “work” (Section 172

copy of all the messages Diana and Piolo sent each other and published them. Is Greg

liable for

copyright infringement?

Reason briefly. (5%) Greg

is

infringement.

messages are entitled or not to copyright protection would have to be resolved in the

SUGGESTED ANSWER: Yes,

Intellectual Property Code). Whether the

liable Letter

for are

copyright among

light

of

the

provision

of

the

Intellectual Property Code.

the

Note: Since the law on this matter is not

works which are protected from the

clear, it is suggested that either of the above

moment of their creation (Section 172, intellectual

Property

Code;

Columbia

of the above suggested answers should be given full credit.

Pictures, Inc. v Court of Appeals, 261 SCRA 144 [1996]). The publication of the letters without the consent of their writers

constitutes

infringement

of

copyright. ALTERNATIVE ANSWER No, Greg is not liable for copyright infringement. There is no copyright

Denicola Test (2009) No.I. (A) The Denicola Test in intellectual property law states that if design elements of an article reflect a merger of aesthetic and functional considerations, the artistic

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 57 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

aspects of the work cannot be conceptually separable from the utilitarian aspects; thus,

Monaliza

the article cannot be copyrighted.

Valentino damages based on, among other

SUGGESTED ANSWER:

grounds,

True. Applying the Denicola Test in

property rights. Does she have any cause of

Brandir

action? Explain. (2%)

International,

Inc.

v.Cascade

filed

a

complaint

violation

of

her

against

intellectual

Pacific Lumber Co. (834 F. 2d 1142,

SUGGESTED ANSWER:

1988 Copr.L.Dec. P26), the United States

Monaliza

Court of Appeals for the Second Circuit

violation of her intellectual property

held

aesthetic

rights, because she was not the one who

element which can be separated from the

took the pictures (Subsection 178.1 of

utilitarian elements, then the aesthetic

the Intellectual Property Code). She may

element may be copyrighted.

sue Valentino instead for violation of her

that

if

there

is

any

cannot

sue

Valentino

for

right to privacy. He surreptitiously took (Note: It is suggested that the candidate

photographs of her and then sold the

be given full credit for whatever answer

photographs to a magazine and uploaded

or lack of it. Further, it is suggested that

them to his personal blog in the Internet

terms or any matter originating from

(Tolentino,

foreign laws or jurisprudence should not

Jurisprudence on the Civil Code of the

be asked.)

Philippines, Vol. I, 1987 ed., p. 169). Valentino’s

Commentaries

friend

Francesco

and

stole

the

photographs and duplicated them and sold

Infringement; Claims (2010)

them to a magazine publication. Valentino No.XV.

While

vacationing

in

Boracay,

sued

Francisco

for

infringement

and

Valentino surreptitiously took photographs

damages. Does Valentino have any cause of

of his girlfriend Monaliza in her skimpy

action? Explain. (2%)

bikini. Two weeks later, her photographs

SUGGESTED ANSWER:

appeared in the Internet and in a national

Valentino

celebrity magazine.

infringement, because he has already

cannot

sue

Francesco

for

sold the photographs to a magazine Monaliza found out that Valentino had sold the photographs to the magazine, adding

(Angeles vs. Premier Productions, Inc., 6 CAR (2s) 159).

insult to injury, uploaded them to his personal blog on the Internet.

ALTERNATIVE ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 58 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, as the author of the photographs,

Lacoste International, the French firm that

Valentino has exclusive economic rights

manufactures lacoste apparel and owns the

thereto, which include the rights to

Lacoste trademark, decided to cash in on

reproduce, to distribute, to perform, to

the universal popularity of the boxing icon.

display, and to prepare derivative works

It reprinted the photographs, with the

based upon the copyrighted work. He

permission of the newspaper publishers,

sold

the

and went on a world-wide blitz of print

retained

commercials in which Sonny is shown

only

magazine;

the

photographs

however,

he

to

still

some economic rights thereto. Thus, he

wearing a Lacoste shirt alongside the

has

phrase ―Sonny Bachao just loves Lacoste.‖

a

cause

of

action

against

infringement against Francesco. When

Sonny

sees

the

Lacoste

Does Monaliza have any cause of action

advertisements, he hires you as lawyer and

against Francesco? Explain. (2%)

asks you to sue Lacoste International

SUGGESTED ANSWER:

before a Philippine court:

Monaliza can also sue Francesco for violation of her right to privacy.

For

trademark

Infringement

in

the

Philippines because Lacoste International used his image without his permission: (2%) Infringement;

Trademark,

Copyright

SUGGESTED ANSWER: Sonny

Bachao

cannot

sue

for

(2009)

infringement

No.XV. After disposing of his last opponent

photographs

in only two rounds in Las Vegas, the

Lacoste shirt were not registered as a

renowned Filipino boxer Sonny Bachao

trademark (Pearl & Dean (Phil.), Inc. v.

arrived at the Ninoy Aquino International

Shoemart, Inc., 409 SCRA 231 (2003)).

Airport

met

by

thousands

of

of

trademark.

showing

him

The

wearing

a

hero-

worshipping fans and hundreds of media

For copyright infringement because of the

photographers. The following day, a colored

unauthorized

photograph of Sonny wearing a black polo

photographs; (2%)and

shirt embroidered with the 2-inch Lacoste

SUGGESTED ANSWER:

Crocodile logo appearedon the front page of

Sonny

every Philippine newspaper.

infringement

use

Bachao of

of

the

cannot copyright

published

sue

for

for

the

unauthorized use of the photographs “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 59 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

showing him wearing a Lacoste shirt.

Philippines

without

The copyright to the photographs belong

business, cannot sue or intervene in any

to the newspapers which published them

action, it may be sued or proceeded

inasmuch as the photographs were the

against

result of the performance of the regular

administrative

duties of the photographers (Subsection

Marquez, 481 SCRA 376 (2006)).

before

license

our

tribunal

to

courts (De

Joya

do

or v.

173.3 (b), Intellectual Property Code (IPC)).Moreover,

the

newspaper

publishers authorized the reproduction of

the

photographs

(Section

177,

Intellectual Property Code).

Patent:

Non-Patentable;

Method

of

Diagnosis & Treatment (2010) For injunction in order to stop Lacoste

No.XIX. Dr. Nobel discovered a new method

International from featuring him in their

of treating Alzheimer’s involving a special

commercials. (2%)

method of diagnosing the disease, treating it with a new medicine that has been

Will these actions prosper? Explain.

discovered after long experimentation and

SUGGESTED ANSWER: The complaint for injunction to stop Lacoste International from featuring him in its advertisements will prosper. This

field testing, and novel mental isometric exercises. He comes to you for advice on how he can have his discoveries protected. Can he legally protect his new method of

is a violation of subsection 123, 4(c) of

diagnosis, the new medicine, and the new

the IPC and Art.169 in relation to

method of treatment? If no, why? If yes,

Art.170 of the IPC.

how? (4%)

Can Lacoste International validly invoke the

SUGGESTED ANSWER:

defense that it is not a Philippine company

Dr. Nobel can be protected by a patent

and, therefore, Philippine courts have no

for the new medicine as it falls within

jurisdiction? Explain. (2%)

the scope of Sec. 21 of the Intellectual

SUGGESTED ANSWER:

Property Code (Rep. Act No. 8293, as

No. Philippine courts have jurisdiction over it, if it is doing business in the Philippines.

Moreover,

under

Section

amended). But no protection can be legally extended to him for the method of diagnosis and method of treatment

133 of the Corporation Code, while a

which are expressly non-patentable (Sec.

foreign corporation doing business in the

22, Intellectual Property Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 60 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Intellectual Property Code (Section 122 of the Intellectual Property Code).

Trademark; Unfair Competition (2010) No.XVIII. For years, Y has been engaged in

Suppose

the

the parallel importation of famous brands,

Philippine patent issued to the owner, what

including shoes carrying the foreign brand

would your answer be? Explain. (2%)

MAGIC. Exclusive distributor X demands

SUGGESTED ANSWER:

that Y cease importation because of his

A patent for a product confers upon its

appointment as exclusive distributor of

owner the exclusive right of importing

MAGIC shoes in the Philippines.

the product (Subsection 71.1 of the Intellectual

shoes

are

covered

Property

not registered with the Intellectual Property

without the authorization of the owner

Office as a trademark and therefore no one

of the patent constitutes infringement of

has

the

to

prevent

its

parallel

patent

Intellectual

importation.

patented

The

importation

right

a

Code).

a

Y counters that the trademark MAGIC is

the

of

by

(Subsection Property

76.1

Code).

product

of

the

X

can

prevent the parallel importation of such shoes by Y without its authorization.

Who is correct? Why? (2%) SUGGESTED ANSWER: X

is

correct.

His

rights

under

his

exclusive distributorship agreement are

Letters of Credit

property rights entitled to protection. The importation and sale by Y of MAGIC shoes constitute unfair competition (Yu v. Court of Appeals, 217 SCRA 328 (1993)). Registration of the trademark is not necessary in case of an action for unfair

competition

(Del

Monte

Corporation v. Court of Appeals, 181 SCRA 410 (1990)). ALTERNATIVE ANSWER: Y is correct. The rights in a trademark are acquired through registration made validly in accordance with the

Independence Principle (2010) No.XVII. The Supreme Court has held that fraud is an exception to the ―independence principle‖ governing letters of credit. Explain this principle and give an example of how fraud can be an exception. (3%) SUGGESTED ANSWER: The “independence principle” posits that the obligations of the parties to a letter of

credit

are

independent

of

the

obligations of the parties to the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 61 of 173

Mercantile Law Q&As (2007-2013)

underlying

the

liabilities, outstanding as of the date of the

beneficiary of the letter of credit, which

filing of the Petition. XYC Company is a

is able to comply with the documentary

holder of an irrevocable Standby Letter of

requirements under the letter of credit,

Credit which was previously procured by

must

or

ABC Company in favor of XYC Company to

confirming bank, notwithstanding the

secure performance of certain obligations.

existence

In the light of the Order issued by the

be

transaction.

[email protected] JayArhSals

paid of

a

by

the

dispute

Thus,

issuing between

the

parties to the underlying transaction,

Court.

say a contract of sale of goods where the buyer is not satisfied with the quality of

Explain the nature of Letters of Credit as a

the goods delivered by the seller. The

financial devise. (5%)

Supreme Court in Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443

SUGGESTED ANSWER:

SCRA 307 (2004) for the first time

A letter of credit is a financial device

declared that fraud is an exception to

developed by merchants as a convenient

the

For

and relatively safe mode of dealing with

instance, if the beneficiary fraudulently

sales of goods to satisfy the seemingly

presents to the issuing or confirming

irreconcilable interests of a seller, who

bank documents that contain material

refuses to part with his goods before he

facts that, to his knowledge, are untrue,

is paid, and a buyer, who wants to have

then payment under the letter of credit

control of the goods before paying. To

may

break the impasse, the buyer may be

independence

be

prevented

principle.

through

a

court

injunction.

required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the

Letter of Credit (2012)

issuing bank can authorize the seller to draw drafts and engage to pay them

No.I. ABC Company filed a Petition for

upon their presentment simultaneously

Rehabilitation with the Court. An Order

with the tender of documents required

was issued by the Court, (1) staying

by the letter of credit. The buyer and the

enforcement of all claims, whether money

seller agree on what documents are to be

or otherwise against ABC Company, its

presented for payment, but ordinarily

guarantors and sureties not solidarily liable

they are documents of title evidencing

with the company; and (2) prohibiting ABC

or attesting to the shipment of the goods

Company from making payments of its

to the buyer. Once the credit is

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 62 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

established, the seller ships the goods to

Letter

the buyer and in the process secures the

Confirming and Notifying Bank (2008)

required

shipping

documents

or

documents of title. To get paid, the seller executes a draft and present it together with the required documents to the

issuing

bank.

The

issuing

bank

redeems draft and pays cast to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the

issuing

bank

and

acquires

the

documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank. (Bank of America NT & SA v. CA, et al., G.R. No. 105395, December 10,1993) However, letters of credit are also used in non-sale settings where they serve

to

reduce

the

risk

of

non-

of

Credit;

Liabilities

of

a

No.I. X Corporation entered into a contract with PT Construction Corp. for the latter to construct and build a sugar mill with six (6) months. They agreed that in case of delay, PT

Construction

Corp.

will

pay

X

Corporation P100,000 for every day of delay. To ensure payment of the agreed amount of damages, PT Construction Corp. secured from Atlantic Bank a confirmed and irrevocable letter of credit which was accepted by X Corporation in due time. One week before the expiration of the six (6) month

period,

PT

Construction

Corp.

requested for an extension of time to deliver claiming that the delay was due to the fault of X Corporation. A controversy as to the cause of the delay which involved the workmanship of the building ensued. The controversy remained unresolved. Despite the controversy, X Corporation presented a claim against Atlantic Bank by executing a draft against the letter of credit. Can Atlantic Bank refuse payment due to

performance. Generally, letters of credit

the unresolved controversy? Explain. (3%)

in non-sale settings have come to be

SUGGESTED ANSWER:

known

credit.

No, Atlantic Bank cannot refuse payment

(Transfield Philippines, Inc. v. Luzon

to the unresolved controversy between

Hydro

the

as

standby

Corporation,

letters et

al.,

146717, November 22,2004)

of

G.R.

No.

two

companies.

The

Bank

is

solidarily liable to pay based on the terms and conditions of the Letter of Credit. In FEATI Bank v. Court of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 63 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Appeals, G.R. No.94209, 30 April 1991,

The types of average are particular and

the Court held that an irrevocable letter

general (Article 808 of the Code of

of credit is independent of the contract

Commerce). Particular averages include

between the buyer-applicant and the

all expenses and damages caused to the

seller-beneficiary.

vessel or to the cargo which did not inure to the common benefit and profit

Can X Corporation claim directly from PT

of all the persons interested in the vessel

Construction Corp.? Explain. (3%)

and the cargo (Article 809 of the Code of

SUGGESTED ANSWER:

Commerce). General averages include all

Yes, X Corporation can claim directly from

PT

Construction

Corp.

The

irrevocable letter of credit was merely a security

arrangement

that

did

not

replace the main contract between the

damages

and

expenses

which

are

deliberately caused to save the vessel, its cargo, or both at the same time, from a real and known risk (Article 811 of the Code of Commerce).

two companies. In FEATI Bank c. CA, G.R. No. 94209, 30 April 1991, opening a letter

of

credit

does

not

involve

a

specific appropriation of money in favor

Barratry (2010)

of the beneficiary. It only signifies that the beneficiary may draw funds up to the designated amount. It does not mean that a particular sum of money has been specifically reserved of held in trust.

No.XIII. (B) What is ―barratry‖ in marine insurance? (2%) SUGGESTED ANSWER: Barratry is any willfull misconduct in the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owner and to the prejudice of the interest of the owner (Roque v. Intermediate Appellate

Maritime Commerce

Court, supra).

Averages: Types (2010) No.XVI. (B) What are the types of averages in marine commerce (3%) SUGGESTED ANSWER: “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 64 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Carriage of Goods; Deviation; Liability

entitles

(2009)

indemnification from the shipowner and

No.VII.

Global

Transport

Services,

Inc.

(GTSI) operates a fleet of cargo vessels plying interisland routes. One of its vessels, MV Dona Juana, left the port of Manila for Cebu

laden

10,000

with,among

television

sets

other

goods,

consigned

to

Romualdo, a TV retailer in Cebu. When the vessel was about ten nautical miles away from Manila, the ship captain heard on the radio that a typhoon which, as announced by PAG-ASA, was on its way out of the country, had suddenly veered back into

Philippine

realized

that

territory,

MV

Dona

the

captain

Juana

would

traverse the storm’s path, but decided to proceed with the voyage. True enough, the vessel sailed into the storm. The captain ordered the jettison of the 10, 000 television sets, along with some other cargo, in order

him

to

compensation

or

the owners of the cargoes saved by the jettison. ALTERNATIVE ANSWER: The jettison resulted to a particular average loss because the damage was due to the fault of the captain. Against whom does Romualdo have a cause of action for indemnity of his lost TV sets? Explain. (3%) SUGGESTED ANSWER; Romualdo has a cause of action for his lost TV sets against the shipowner and the owners of the cargoes saved by the jettison. The jettison of the TV sets resulted

in

a

general

average

loss,

entitling Romualdo to indemnity for the lost TV sets.

to lighten the vessel and make it easier to steer the vessel out of the path of the typhoon. Eventually, the vessel, with its crew intact, arrived safely in Cebu.

Carriage of Goods; Implied Warranty; Liability (2010)

Will you characterize the jettison of Romualdo’s TV sets as an average? If so,

No.XIII. Paulo, the owner of an ocean-going

what kind of an average, and why? If not,

vessel, offered to transport the logs of

why not? (3%)

Constantino

from

SUGGESTED ANSWER:

Constantino

accepted

The

jettison of

Romualdo’s TV

sets

resulted in a general average loss, which

Manila the

to

Nagoya.

offer,

not

knowing that the vessel was manned by an irresponsible

crew

with

deep-seated

resentments against Paolo, their employer. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 65 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

(Roque v. Intermediate Appellate Court, Constantino insured the cargo of logs

139 SCRA 596 [1985]).

against both perils of the sea and barratry. The logs were improperly loaded on one side, thereby causing the vessel to tilt on one side. On the way to Nagoya, the crew

Carriage of Goods; Indemnity; Jettisoned

unbolted the sea valves of the vessel

Goods (2010)

causing water to flood the ship hold. The No.XVI. An importer of Christmas toys

vessel sank.

loaded 100 boxes of Santa Claus talking Constantino

tried

to

collect

from

the

insurance company which denied liability, given the unworthiness of both the vessel

dolls aboard a ship in Korea bound for Manila. With the intention of smuggling one-half of his cargo, he took a bill of lading for only 50 boxes. On the voyage to Manila,

and its crew.

50 boxes were jettisoned to save the more Constantino countered that he was not the

precious cargo.

owner of the vessel and he could therefore not be responsible for conditions about

Is the importer entitled to receive any indemnity for average? Explain. (2%)

which he was innocent.

SUGGESTED ANSWER:

Is the insurance company liable? Why or

The importer is not entitled to receive any indemnity for average. In order that

why not? (3%) SUGGESTED ANSWER:

the goods jettisoned may be included in

The insurance company is not liable,

the general average and the owner be

because there is an implied warranty in

entitled to indemnity, it is necessary

every marine insurance that the ship is

that their existence on board be proven

seaworthy whoever is insuring the cargo,

by means of the bill of lading (Article

whether it be the ship-owner or not.

816 of the Code of Commerce).

There was a breach of warranty, because the logs were improperly loaded and the crew

was

irresponsible.

It

is

the

obligation of the owner of the cargo to look for a reliable common carrier which keeps its vessel in seaworthy condition

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 66 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

COGSA; Prescription of Claims/Action (2010)

Liability; Loss; Fortuitous Event (2008) No.IX. On October 30, 2007, M/V Pacific, a

No.XII. AA entered into a contract with BB

Philippine registered vessel owned by Cebu

for the latter to transport ladies wear from

Shipping Company (CSC), sank on her

Manila to France with transshipment via

voyage from Hong Kong to Manila. Empire

Taiwan. Somehow the goods were not

Assurance Company (Emprie) is the insurer

loaded in Taiwan on time, hence, these

of the lost cargoes loaded on board the

arrived in France ―off-season.‖ AA was only

vessel which were consigned to Debenhams

paid for one half the value by the buyer.

Company. After it indemnified Debenhams, Empire as subrogee filed an action for

claimed damages from BB. BB invoked prescription

as

a

defense

under

damages against CSC.

the

Carriage of Goods by Sea Act Considering

Assume that the vessel was seaworthy.

the ―loss of value‖ of the ladies wear as

Before departing, the vessel was advised by

claimed by AA, is BB’s defense tenable?

theJapanese Meteorological Center that it

Explain. (3%)

was safe to travel to its destination. But

SUGGESTED ANSWER:

while at sea, the vessel received a report of

The defense of BB is not tenable. The

a typhoon moving within its general path.

one-year

the

To avoid the typhoon, the vessel changed

Carriage of Goods Sea Act applies only in

its course. However, it was still at the fringe

case the goods were not delivered or

of the typhoon when it was repeatedly hit

were

or

by huge waves, were saved three (3) who

deteriorated condition. It does not apply

perished. Is CSC liable to empire? What

to damages as a result of delay in the

principle of maritime law is applicable?

delivery of the goods. The prescription of

Explain. (3%)

the action is governed by Article 1144 of

SUGGESTED ANSWER:

prescriptive

delivered

in

period

a

in

damaged

the Civil Code, which provides for a prescriptive period of ten years in case of actions based on a written contract (Mitsui O.S.K. Lines Ltd. v. Court of Appeals, 287 SCRA 366 (1998)).

The common carrier incurs no liability for the loss of the cargo during a fortuitous event, because the following circumstances

were

present:

(1)

the

typhoon was the cause of the cargo loss; the carrier did not contribute to the loss; and

(3)

the

carrier

exercised

extraordinary diligence in order to “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 67 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

minimize the attendant damage before,

the full extent of the claims of the cargo

during

(See

owners (Aboitiz Shipping v. New India

Fortune Express v. CA, Caorong. G.R. No.

Assurance Company, G.R. No. 156978,

119756, 18 March 1999; Yobido v. CA,

02 May 2006).

and

after

the

typhoon

G.R. No. 113003, 17 October 1997; Gathalian v. Delim, G.R. No. L-56487, 21

Assume the facts in question (b). Can the

October 1991).

heirs of the three (3) crew members who perished recover from CSC? Explain fully.

Under Art. 587 of Code of Commerce, in

(3%)

case

SUGGESTED ANSWER:

of

maritime

transactions,

the

liability of the owner of the vessel is limited to the vessel itself. Since the vessel of CSC was seaworthy at the time it sank, the CSC is not liable to Empire under the maritime principle that the obligations of the owner of a vessel are hypothecary in nature.

Yes, because the crew members died while performing their assigned duties, aggravated by the failure of the ship owner to ensure that the vessel is seaworthy. Workmen’s compensation has been classified by jurisprudence as an exception to the hypothecary nature of

Assume the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will you answer be the same? Explain. (2%)

maritime commerce, Abueg v. San Diego, 77 Phil. 730 (1948), especially in this case where the vessel was not seaworthy at the time it sank.

SUGGESTED ANSWER: When the vessel is not seaworthy, it is an

exception

principle

in

to

the

maritime

hypothecary

commerce.

To

limit its liability to the amount of the insurance proceeds, the carrier has the burden

of

proving

that

the

unseaworthiness of its vessel was not due to its fault or negligence. The failure to

discharge

precludes

such

application

a

heavy of

the

burden limited

liability rule and the carrier is liable to

Negotiable Instruments Law Checks:

Forged

Checks;

Liability

of

Drawee Bank (2008) No.V. Pancho drew a check to Bong and Gerard jointly, Bong indorsed the check and also forged Gerard’s indorsement . The payor bank paid the check and charged Pancho’s account for the amount of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 68 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

check. Gerard received nothing from the

Checks; Liability; Drawer and Drawee

payment.

Bank (2010)

Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully. (3%) SUGGESTED ANSWER:

No.VIII. Marlon deposited with LYRIC Bank a money market placement of P1 million for tern of 31 days. On Maturity date, one claiming to be Marlon called up the LYRIC Bank account officer and instructed him to

Yes, Sec. 41 of the NIL provides that all

give the manager’s check representing the

payees or indorsees who are not partners

proceeds of the money market placement to

must indorse jointly, unless the one

Marlon’s girlfriend Ingrid.

indorsing has authority to endorse for the others. Since the signature of Gerard

The check, which bore the forged signature

was forged, then the endorsement by

of

Bong was wholly inoperative. The Bank

account with YAMAHA Bank. YAMAHA

is under strict liability to pay to the

Bank stamped a guaranty on the check

order of payee. Payment under a forged

reading: ―All prior endorsements and/or lack of

endorsement is not to the drawer’s

endorsement guaranteed.‖

Marlon,

was

deposited

in

Ingrid’s

order, and consequently, the drawee bank must bear the loss as against the

Upon presentment of the check, LYRIC

drawer (Associated Bank v. CA, G.R. Nos.

Bank funds the check. Days later, Marlon

107382 and 107612, 31 January 1996).

goes to LYRIC Bank to collect his money

Based on the facts, was Pancho as drawer discharged on the instrument? Why? (2%) SUGGESTED ANSWER:

market

placement

and

discovers

the

foregoing transactions. Marlon thereupon sues LYRIC Bank which

No. The payee Gerard can recover as he

in turn files a third-party complaint against

still retains his claim on the debt of

YAMAHA Bank. Discuss the respective

Pancho.

rights and liabilities of the banks. (5%) SUGGESTED ANSWER: Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the money market placement to Ingrid, the obligation of Lyric Bank to

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 69 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

him has not been paid. Lyric Bank still

the

has the obligation to pay him.

irrevocably

ASSIGNOR

unconditionally

agrees

to

pay

the

and same,

assuming the liability to pay by way of Since Yamaha Bank indorsed the check

penalty, three percent of the total amount

bearing

unpaid, for the period of delay until the

the

forged

indorsement

of

Marlon and guaranteed all indorsements,

same is fully paid.”

including the forged indorsement, when it presented the check to Lyric Bank, it

When

the

checks

became

due,

BFC

should be held liable to it.

deposited them for collection, but the drawee banks dishonored all the checks for

However, since the issuance of the check

one of the ff. reasons: ―account closed,‖

was attended with the negligence of

―payment

Lyric Bank, it should share the loss with

garnishment, ―or ―insufficiency of funds.‖

Yamaha Bank on a fifty percent basis

BFC wrote Gaudencio notifying him of the

(Allied Banking Corporation v. Lim Sio

dishonored

Wan, 549 SCRA 504 (2008)).

payment of the loan. Because Gaudencio

stopped,‖

checks,

―account

and

under

demanding

did not pay, BFC filed a collection suit. In his defense, Gaudencio contended that Checks; Notice of Dishonor (2009)

BFC did not give timely notice of dishonor

No.XII. Gaudencio, a store owner, obtained

(of the checks); and (b) considering that the

a P1-million loan from Bathala Financing

checks were duly indorsed, BfC should

Corporation (BFC). As security, Gaudencio

proceed

executed

indorsers of the checks.

a

―Deed

of

Assignment

of

against

the

drawers

and

the

Receivables.‖ Assigning fifteen checks received

from

various

customers

who

bought merchandise from his store. The

Are Gaudencio’s defenses tenable? Explain. (5%)

checks were duly indorsed by Gaudencio’s customers.

SUGGESTED ANSWER: No. Gaudencio’s defenses are untenable.

The Deed of Assignment contains the ff.

The cause of action of BFC was really on

stipulation:

the contract of loan, with the checks merely serving as collateral to secure the

―If, for any reason, the receivables or any

payment of the loan. By virtue of the

part thereof cannot be paid by the obligors,

Deed of Assignment which he signed,

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 70 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Gaudencio undertook to pay for the

the east the following morning to welcome

receivables if for any reason they cannot

the day.

be paid by the obligors (Velasquez v.

(Sgd.) Antonio Reyes

Solidbank Corporation, 550 SCRA 119 Explain each requirement of negotiability

(2008)).

present or absent in the instrument. (8%) SUGGESTED ANSWER: The instrument contains a promise to Forgery; Liabilities; Drawee Bank (2009)

pay

No.XI. (E) ―A bank is bound to know its

Antonio Reyes (Section 1(a) of Negotiable

depositor’s signature‖ is an inflexible rule in

Instruments Law).

and was

signed by

the maker,

determining the liability of a bank in forgery cases.

The promise to pay is unconditional

SUGGESTED ANSWER:

insofar as the reference to the setting of

False. In cases of forgery, the forger may

the sun in the west in the evening and

not necessarily be a depositor of the

its rising in the east in the morning are

bank, especially in the case of a drawee

concerned. These are certain to happen

bank. Yet in many cases of forgery, it is

(Section 4(c) of Negotiable Instruments

the drawee that is held liable for the

Law). The promise to pay is conditional,

loss.

because the money will be taken from a particular fund, BPI Account No. 1234 (Section 3 of Negotiable Instruments Law).

Negotiability (2013) No.I.

Antonio

issued

the

following

The Instrument contains a promise to pay

instrument: August 10, 2013 Makati City

a

sum

certain

in

money,

P100,000.00 (Section (b) of Negotiable Instruments Law).

P1OO,OOO,OO Sixty days after date, I promise to pay

The money is payable at a determinable

Bobby or his designated representative the

future time, sixty days after August 10,

sum of ONE HUNDRED THOUSAND PESOS

2013

(P100,000.00) from my BPI Acct. No. 1234

Instruments Law).

(Section

4(a)

of

Negotiable

if, by this due date, the sun still sets in the west to usher in the evening and rises in “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 71 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

The instrument is not payable to order

there

or to bearer (Section 1(d) of Negotiable

(although there are 91-day, 182-day, and

Instruments Law).

364-days bills); second the promise does not

are

no

specify

90-day

whether

treasury

the

bills

so-called

“interest rate” is that established at the primary market (where new T-bills are

Negotiability (2012)

sold for the first time by the Bureau of No.IV. Indicate and explain whether the

Treasury) or at the secondary market

promissory note is negotiable or non-

(where T-bills can be bought and sold

negotiable.

after they have been issued in the primary market).; and third, T-bills are

I promise to pay A or bearer Php100,000.00

conventionally quoted in terms of their

from my inheritance which I will get after

discount rate, rather than their interest

the death of my father. (2%)

rate. They do not pay any interest directly; instead, they are sold at a

SUGGESTED ANSWER: Not

negotiable.

discount of their face value and this There

is

no

unconditional promise to pay a sum certain in money (Sec. 1 [b], NIL) as the promise is to pay the amount out of a particular

fund,

i.e.,

the

inheritance

from the father of the promisor(Sec. 3, NIL).

maturity.

(See,

among

other,

www.treasury.gov.ph/govsec/aboutsec.h tml) I promise to pay A or bearer the sum of Php100,000 if A passes the 2012 bar exams. (2%)

I promise to pay A or bearer Php100,000 plus the interest rate of ninety (90) – day treasury bills. (2%)

negotiable.

SUGGESTED ANSWER: Not negotiable. The promise to pay is subject to a condition, i.e., that A will

SUGGESTED ANSWER: Not

“earn” by selling at face value upon

pass the 2012 bar exams (Sec.1[b],NIL). There

is

no

unconditional promise to pay a sum certain in money. The promise to pay “the interest rate of ninety (90)-day treasury bills” is vague because, first,

I promise to pay A or bearer the sum of Php100.000 on or before December 30, 2012. (2%) SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 72 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Negotiable. It conforms fully with the

constitute a defect of title (Section 55,

requirements

Negotiable Instruments Law).

of

negotiability

under

Section 1, NIL. Does S have a cause of action against R in I promise to pay A or bearer the sum of

case of dishonor by the drawee bank?

Php100,000. (2%) SUGGESTED ANSWER:

SUGGESTED ANSWER:

No, s does not have a cause of action

Negotiable. It conforms fully with the requirements

of

negotiability

under

Section 1,NIL. It is payable on demand because the note does not express a time for its payment(Sec.7[b], NIL).

against R in case of dishonor of the check by the drawee bank. S is not a holder in due course, thus, R can raise the defense that the check was issued for an illegal consideration (Section 58, Negotiable Instruments Law). It S negotiated the check to T, who accepted it in good faith and for value, may R be held

Negotiable

Instruments;

Illicit/Illegal

secondarily liable by T?

Consideration (2007) Reason Briefly in (a), (b) and (c). No.I. R issued a check for P1m which he used to pay S for killing his political enemy.

SUGGESTED ANSWER:

(10%)

Yes, R may be held secondarily liable by T who took the check in good faith and

Can be the check be considered a

for value. T is a holder in due course. R

negotiable instrument?

cannot raise the defense of illegality of the considerarion, because T took the

SUGGESTED ANSWER: Yes, the check can be considered a negotiable instrument even if it was

check fre from the defect of title of S (Section 57, Negotiable Instrumets Law).

issued to pay S to kill his political enemy. The validity of the consideration is

not

one

negotiable

of

the

requisites

instruments

of

(Section

a 1,

Negotiable Instruments Law.) it merely “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 73 of 173

Mercantile Law Q&As (2007-2013)

Negotiable

Instruments;

[email protected] JayArhSals

Illicit/Illegal

does

Consideration; Lawful Dishonor (2009) No.VI. Lorenzo drew a bill of exchange in the amount of P100, 000.00 payable to Barbara or order, with his wife, Diana, as drawee. At the time the bill was drawn. Diana

was

unaware

that

Barbara

is

Lorenzo’s paramour.

sister, Elena, who paid for it for value, and who did not know who Lorenzo was. On due date, Elena presented the bill to Diana payment,

but

not

adversely

affect

the

negotiability of the bill, especially in the hands of a holder in due course. Under Sec. 1 of the Negotiable Instruments law, the bill of exchange is a negotiable instrument. Every negotiable instrument is deemed prima facie to have been issued for valuable consideration, and

Barbara then negotiated the bill to her

for

No. the illicit cause or consideration

the

latter

every person whose signature appears thereon is deemed to have become a party

thereto

for

value

(Sec.

24,

Negotiable Instruments Law).

promptly

dishonored the instrument because, by then, Diana had already learned of her husband’s dalliance. Was the bill lawfully dishonored by Diana? Explain. (3%)

Negotiable

Instruments:

Incomplete,

Delivered;

Doctrine:

Comparative

Negligence (2008) No.IV. AB Corporation drew a check for payment to XY Bank. The check was given

SUGGESTED ANSWER:

to an officer of AB Corporation who was No, the bill was not lawfully dishonored

instructed deliver it to XY Bank. Instead ,

by Diana. Elena, to whom the instrument

the

was negotiated, was a holder in due course

inasmuch

as

she

paid

value

therefore in good faith. Does the illicit cause or consideration adversely affect the negotiability of the bill? Explain. (3%)

officer

intending

to

defraud

the

Corporation, filled up the check by making himself as the payee and delivered it to XY Bank for deposit to his personal account. XY Bank debited AB Corporation’s account. AB Corporation came to know of the officer’s fraudulent act after he absconded. AB Corporation asked XY Bank to recredit its amount. XY Bank refused.

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 74 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

If you were the judge, what issues would

5,000.00 five days after his pet dog, Sparky,

you consider relevant to resolve the case?

dies. Signed Y.‖ is a negotiable instrument.

Explain. (3%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

True. The document is subject to a term

The filling up by the officer of his name as payee does not constitute forgery, and contemplates a mechanically incomplete but delivered instrument. Under Sec. 14 of the NIL, in order to enforce an incomplete

but

delivered

instrument

against a prior party, it must be filled-up strictly in accordance with the authority given.

The

doctrine

of

comparative

and not a condition. The dying of the dog is a day which is certain to come. Therefore,

the

unconditional,

order in

to

pay

compliance

is with

Section 1 of the Negotiable Instruments Law (NIL). (Note: This answers presumes that there is a drawee)

negligence provides that AB Corp. is deemed negligent for having issued the check with a blank payee section that facilitated the fraud; it should be AB Corp. that must bear the loss, and not XY Bank.

Parties; Holder in Due Course (2012) No.III. X borrowed money from Y in the

How would you decide the case? Explain.

amount of Php1Million and as payment,

(2%)

issued a check. Y then indorsed the check

SUGGESTED ANSWER:

to his sister Z for no consideration. When Z

I would fin AB Corp. liable for its negligence in delivering an incomplete

deposited the check to her account, the check was dishonored for insufficiency of funds.

instrument to XY Bank (Sec. 14, NIL). Is Z a holder in due course? Explain your answer. (5%) SUGGESTED ANSWER: Negotiable Instruments: Subject to a Term (2009) No.XI. (D) A document, dated July 15, 2009 that reads: ―Pay to X or order the sum of

Z is not a holder in due course. She did not give any valuable consideration for the check. To be a holder in due course, the holder must have taken the check in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 75 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

good faith and for value (Sec. 52[c],

Give two (2) instances where a prior party

Negotiable Instruments Law).

may hold a subsequent party liable. (2%) SUGGESTED ANSWER:

Who is liable on the check. The drawer or In the following cases, a prior party may

the indorser? Explain your answer. (5%)

hold a subsequent party liable: (1) where SUGGESTED ANSWER:

an instrument is negotiated back to a

X, the drawer, will be liable. As the

prior party, and he reissues and further

drawer,

negotiates the same, he is entitled to en

X

engaged

that

on

due

presentment the check would be paid

force

according to its tenor and that if it is

party who qualifies as an intervening

dishonored and he is given notice of

party to whom the prior party is not

dishonor, he will pay the amount to the

personally liable; and (2) in the case of

holder

of

an accommodation party arrangement,

dishonor need be given to X if he is

where the accommodation party may

aware that he has insufficient funds in

recover from the party accommodated,

his account. Under Section 114(d) of the

even when the latter is a subsequent

Negotiable Instruments Law, notice of

party (Sec. 29, NIL).

(Sec.

61,

NIL).

No

notice

dishonor is not required to be given to the drawer where he has no right to expect that the drawee will honor the instrument.

Z

cannot

hold

Y,

the

endorser, liable as the latter can raise the defense that there was no valuable

payment

against

a

subsequent

How does the ―shelter principle‖ embodied in the Negotiable Instruments Law operate to give the rights of a holder-in-dine course to a holder who does not have the status of a holder-in-due course? Briefly explain. (2%) SUGGESTED ANSWER:

consideration for the endorsement of the check(Sec. 58, NIL).

The “shelter principle” provides that a holder who is not himself a holder in due course but is not a party to any fraud or illegality affecting the instrument, and

Parties; Instances a Subsequent Party is Liable (2008)

who derives his title from a holder in due course, acquires the rights of a holder in due course (Sec. 58, NIL).

No.III. (A) As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice versa. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 76 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Securities Regulation

While working with Atty. Buenexito on another file, he accidentally gave you the

Howey Test (2009)

Coco

No.XI. (C) The Howey Test states that there is an investment contract when a person invests money in a common enterprise and is led to expect profits primarily from the efforts of others.

Products

company’s

file

planned

containing corporate

the

financial

rehabilitation. While you knew you had the wrong file, your curiosity prevailed and you browsed through the file before returning it. Thus, you learned that a petition for financial rehabilitation is imminent, as the

SUGGESTED ANSWER: The Howey Test requires a transaction, contract, or scheme whereby a person makes an investment of money in a common enterprise with the expectation of profits to be derived solely, not primarily from the efforts of others (Power Homes Unlimited Corp. v. SEC, 546 SCRA 567 (2008)).

company

could

no

longer

meet

its

obligations as they fell due. Soon After, you mother is rushed to the hospital for an emergency operation, and you have to raise money for her hospital bills. An immediate option for you is to sell your Coco Products shares. The sale would be very timely because the price of the company’s stocks are still high. Would you sell the shares to raise the needed

Insider Trading (2013)

funds

for

your

mother’s

hospitalization? Take into account legal No.V. You are a member of the legal staff of

(5%) and ethical (3%) considerations. (8%)

a law firm doing corporate and securities

SUGGESTED ANSWER

work for Coco Products Inc., a company

The

with

constitute

unique

products

derived

from

sale

of

the

insider

shares trading.

does

not

Although

coconuts and whose shares are traded in

Atty. Buenexito, as corporate secretary

the Philippine Stock Exchange. A partner in

of Coco Products, Inc., was an insider, it

the law firm, Atty. Buenexito, to whom you

did not obtain the information regarding

report, is the Corporate Secretary of Coco

the planned corporate rehabilitation by a

Products. You have long been investing in

communication

Coco Products stocks even before you

accidentally gave the wrong file (Section

become a lawyer.

3.8 of Securities Regulation Code).

from

him.

He

just

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 77 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

It would be unethical to sell the shares.

What provision of the Securities Regulation

Rule 1.01 of the Code of Professional

Code (SRC) did they violate, if any ?

Responsibility provide, “A lawyer shall

Explain. (4%)

not

SUGGESTED ANSWER:

engage

in

unlawful,

dishonest,

immoral or deceitful conduct.”

The directors and key officers of the

A lawyer should not only refrain from performing unlawful acts. He should also desist from engaging in unfair deceitful conduct to conceal from the buyer of the shares

the

planned

corporate

rehabilitation.

company violated the prohibition against insider trading under Sec. 27 of the Securities

Regulation

Code,

which

declares it unlawful for an “insider” (which includes directors and officers of a publicly listed company) to sell or buy its securities, if they know of a fact of special significance with respect to the company or the security, that is not

Insider Trading (2008)

generally available to the public, before

No.XIII. Grand Gas Corporation, a publicly

such material information made public

listed company, discovered after extensive

through

drilling a rich deposit of natural gas along

directors and key officers are liable to

the coast of Antique. For five (5%) months,

disgorge the profits earned and to pay

the company did not disclose the discovery

damages.

disclosure

proceedings.

The

so that it could quietly and cheaply acquire neighboring land and secure mining rights

Assuming

to the land. Between the discovery and its

establishment handling the printing work of

disclosure

the

Grand Gas Corporation saw the exploration

Securities and Exchange Commission, all

reports which were mistakenly sent to their

the

the

establishment together with other materials

company bought shares in the company at

to be printed. They too bought shares in the

very low prices. After the disclosure, the

company at low prices and later sold them

price of the shares went up. The directors

at huge profits. Will they be liable for

and officers sold their shares at huge

violation of the SRC? Why? (3%)

profits,

SUGGESTED ANSWER:

of

directors

the and

information key

officers

to of

that

the

employees

of

the

The employees are liable for violation of the prohibition against insider trading. They fall within the definition of “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 78 of 173

Mercantile Law Q&As (2007-2013)

“insider”.

Subsection

[email protected] JayArhSals

3.8

of

the

under the Securities Regulation Code.

Securities Regulation Code defines an

An “investment contract” is a contract,

insider as “a person whose relationship

transaction or scheme (1) involving an

or former relationship to Issuer gives or

investment of money, (2) in a common

gave him access to a fact of special

enterprise,

significance about Issuer or the security

profits, (4) primarily from the efforts of

that is not generally available.”

others

(3)

with

(Power

expectation

Homes

of

Unlimited

Corporation v. Securities and Exchange Commission, 546 SCRA 567 (2008)). What procedure must be followed under the Investment Contract; Procedure (2010)

Securities Regulation Code to authorize the

No.IV. Andante Really, a marketing company

sale or offer for sale or distribution of an

that promotes and facilitates sales of real

investment contract? (2%)

property through leverage marketing, solicits investors who are required to be a Business Center Owner (BCO) by paying an enrollment fee of S250. The BCO is then entitled to recruit two other investors who pay S250 each. The BCO receives S90 from the S250

SUGGESTED ANSWER: Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be registered

paid by each of his recruits and is credited a

Exchange

certain

with

amount

for

payments

made

by

with

the

Securities

Commission

Section

8

of

accordance

the

Securities

investors through the initial efforts of his

Regulation

Business

accumulated

Unlimited Corporation v. Securities and

amount reaches S5, 000, the same is used as

Exchange Commission, 546 SCRA 567

down payment for the real property chosen by

(2008)).

Center.

Once

the

Code

in

and

(Power

Homes

the BCO.

What are the legal consequences of failure Does this multi-level marketing scheme

to follow this procedure? (2%)

constitute an ―investment contract‖ under the

SUGGESTED ANSWER:

Securities Regulation Code? Define an

The failure to follow the procedure has

―investment contract.‖ (2%)

criminal

SUGGESTED ANSWER:

conviction, a fine 50,000 to 5 million

Yes.

The

multi-level

marketing

constitutes an “investment contract”

consequences

(i.e.,

upon

pesos and / or imprisonment of 7 to 21 years). It carries also civil liabilities in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 79 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

that the purchaser can recover from the

market

price

(Section

seller (i) the consideration paid with

Regulation Code).

48,

Securities

interest thereon, less the amount of any income

received

on

the

purchased

The purpose of the Margin Trading Rule

such

is to prevent excessive use of credit for

the

the purchase of securities. It is a counter

purchaser no longer owns such securities

to a broker’s desire to generate more

(Sections

sales

securities,

upon the

securities,

or

(ii)

57

Regulation

and

damages

and

Code).

Securities

tender of

73,

if

Securities

Furthermore,

Exchange

by

encouraging

clients

to

but

the

securities on credit (Carolina Industries,

Commission

Inc. vs. CMS STock Brokerage, Inc. 97

(SEC) may issue a cease and desist order

SCRA 734 [1980]).

(Subsection 64.1, Securities Regulation Code).

Securities; Exempt Securities (2009) No.X.

Margin Trading Rule (2009)

What

are

the

so-called

exempt

securities under the Securities Regulation No.XX. Under the Securities Regulation

Code? (2%)

Code, what is the margin Trading Rule? (2%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

Under

Under

the

Margin

Trading

Rule,

no

registered broker or dealer, or member of

Section

9

of

the

Securities

Regulation Code, the so-called exempt securities are:

an exchange shall extend credit on any security

an

amount

greater

than

whichever is higher of:

Those

issued

or

guaranteed

by

the

government of the Philippines or any of its political subdivisions or agencies;

65 percent of the current market price of the security, or

Those

issued

or

guaranteed

by

the

government of any foreign country with 100 percent of the lowest market price

which the Philippines has diplomatic

of the security during the preceding 36

relation, or any other state on the basis

calendar months, but not more than 75

of reciprocity, although the SEC may

percent of the current “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 80 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

require compliance with the form and

authorized

content of disclosures;

timeshares.

Those issued by the receiver or by the

On March 30, 1998, Leon and Carina wrote

trustee in a bankruptcy duly approved by

PPR rescinding their purchase agreement

the proper adjudicatory board;

and demanding the refund of the amount

to

sell

securities,

including

they paid because the Palacio Del Boracay Those involving the sale or transfer

timeshare was sold to them by PPR without

which is bylaw, under the regulation of

the requisite license or authority from the

the OIC, HLURB, BIR; and

SEC. PPR contended that the grant of the SEC authority had the effect of ratifying the

Those issued by banks, except its own

purchase agreement (with Leon and Carina)

shares.

of Oct.6, 1996.

(Note: It is suggested that any two of the

Is the contention of PPR correct? Explain

above

(3%)

exempt

securities

should

be

considered as enough answer to the

SUGGESTED ANSWER:

question.)

The contention of PPR is not correct. It is settled that no securities shall be sold or offered for sale or distribution in the Philippines without a registration duly

Securities; Selling of Securities (2009)

filed and approved by the Commission. Corporate registration is one of the

No.XVII. Philippine Palaces Realty (PPR)

requirements

had been representing itself as a registered

pambansa Blg. 178 (timeshare Realty

broker of securities, duly authorized by the

Corporation

Securities

(2008)).

and

Exchange

Commission

under v.

Lao,

Sec. 544

8of

batas

SCRA

254

(SEC). On October6, 1996, PPR sold to spouses Leon and Carina one timeshare of Palacio del Boracay for US S7, 500.00.

ALTERNATIVE ANSWER: No. Such contention is not correct. Sale

However, its Registration Statement became

or offer to sell securities which are not

effective only on Feb.11, 1998 after the SEC

exempt securities or which do not arise

issued a resolution declaring that PPR was

out

of

therefore,

exempt

transactions,

requiring

and,

registration,

is

unlawful as such act is violative of the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 81 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Securities Regulation Cod. Subsequent

any scheme that dilutes the share value

grant of authority by the SEC does not

of their investments. It gives them the

retroact to past sales or offers to sell.

chance to exit the company under the same

terms offered

to the

majority

stockholders. Under the Securities Regulations Code

Tender Offer (2010)

and its implementing rules, a mandatory No.VII. Union Mines, Inc. has total assets of

tender offer is required (i) when at least

P60 Million with 210 stockholders holding

35% of the outstanding shares of a

at least 100 shared each.

public company is to be acquired in one

The

company

has

two

principal

stockholders, ABC which owns 60% of the shares of stock, and XYZ; which owns 17%. ABC in turns is owned to the extent of 21.13% by Acme, Inc.; 29.69% by Golden Boy Inc.; 9% by XYZ; and the rest by individual stockholders. None of the parties is a publicly-listed company. XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which would give it, direct control of ABC and indirect control of Union Mines.

transaction or a series of transaction during 12-month period, or (ii) even if any

acquisition

is

less

than

35%

threshold but the result thereof is the ownership of more than 51% of the total outstanding shares of a public company. The mandatory offer rule also applies to share acquisition meeting the threshold, which is done at the level of the holding or

Parent

Corporation

controlling

a

public company (Cemco Holding, Inc. v. National Life Insurance Company of the Philippines, Inc. 529 SCRA 355 [2007]).

Is the proposal acquisition by XYZ subject to the mandatory tender offer rule? Why or

In this case, Union Mines is clearly a

why not? What is tender offer and when is

public company, since it has total assets

it mandatory? (5%) SUGGESTED ANSWER Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is publicly announced intention by a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to protect minority stockholders against

of

P60

million

pesos

with

210

stockholders holding at least 100 shares each. A public company is defined as a corporation

listed

on

the

stock

exchange, or a corporation with assets exceeding 50 million pesos and with 200 or more stockholders at least 200 of them holding not less than 100 shares of such corporation.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 82 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

train

and

that

it

was

XYZ’s acquisition of shares of Acme, Inc.

negligence. Decide. (5%)

and Golden Boy, Inc., taken separately,

SUGGESTED ANSWER:

does not reach 35% threshold. If taken collectively, the two acquisitions total only

50%.

However,

when

the

acquisitions are added to XYZ’s existing shares in Union Mines, they meet the more-

than

-51%

thresholds

for

mandatory tender offer.

not

guilty

of

CRI is liable for death of Ricardo Santos because

it

failed

to

exercise

extraordinary diligence (LRTA v. Navidad G.R. No. 145804, 06 February 2003). The contract of carriage began when the passenger

purchased

proceeded

to

the

his

ticket

designated

and

loading

facilities to board the train (Dangwa Transp. Co., Inc. v. Court of Appeals, G.R. No. 95582, 07 October 1991), CRI is

Transportation Law

also liable for all persons in its employ (Caltex

Carriage; Breach of Contract

Lines,

No.VIII. City Railways, Inc. (CRI) provides

Philippines, Inc.,

G.R.

Inc. No.

v.

Sulpicio

131166,

30

September 1999).

train service, for a fee, to commuters from Manila to Calamba, Laguna. Commuter are required to purchase tickets and then proceed

to

designated

loading

and

unloading facilities to board the train. Ricardo Santos purchased a ticket for Calamba and entered the station. While waiting, he had an altercation with the security guard of CRI leading to a fistfight. Ricardo Santos fell on the railway just as a train was entering the station. Ricardo Santos was run over by the train. He died. In the action for damages filed by the heirs of Ricardo Santos, CRI interposed lack of cause of action, contending that the mishap

Carriage; Breach of Contract; Cause of Action; Defenses (2009) No.XIX. One of the passenger buses owned by Continental Transit Corporation (CTC), plying its usual route figured in a collision with another bus owned by Universal Transport, Inc. (UTI). Among those injured inside the CTC bus were: Romeo, a stow away: Samuel, a pickpocket then in the act of robbing his seatmate when the collision occurred; Teresita, the bus driver’s mistress who usually accompanied the driver on his

occurred before Ricardo Santos boarded the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 83 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

trips for free; and Uriel, holder of a free

Do Romeo, Samuel, Teresita, and Uriel have

riding pass he won in a raffle held by CTC.

a cause of action for damages against UTI?

Will a suit for breach of contract of carriage

Explain. (3%)

filed by Romeo, Samuel, Teresita, and Uriel

SUGGESTED ANSWER:

against CTC prosper? Explain. (3%)

Romeo, Samuel, Teresita and Uriel may sue UtI on the basis of quasi-delict since

SUGGESTED ANSWER:

they have no pre-existing contractual

Romeo cannot sue for breach of contract

relationship with UTI. They may allege

of carriage. A stowaway like Romeo, Who

that

secures

negligence of driver of UTI and UTI was

passage

by

fraud,

is

not

a

the

collision

was

due

to

the

passenger (Vda. De nueca v. Manial

negligent

Railroad Company, 13 C.A. R. 49(1968)).

supervision of its driver (Articles 2176

in

the

selection

and

and 2180, New Civil Code). Samuel and Teresita cannot sue for breach

The

What, if any, are the valid defenses that

Elements in the definition of a passenger

CTC and UTI can raise in the respective

are: an undertaking of a person to travel

actions against them? Explain. (3%)

in

SUGGESTED ANSWER:

the

of

contract

conveyance

of

carriage.

provided

by

the

carrier and an acceptance by the carrier

With respect to Romeo, Samuel and

of the person as a passenger. (14 Am Jur

Teresita, since there was no pre-existing

2d, Carriers, So. 714,p. 164). Samuel did

contractual relationship between them

not board the bus to be transported but

and CTC, CTC can raise the defense that

to commit robbery. Teresita did not

it exercised the due diligence of a good

board the bus to be transported but to

father of a family in the selection and

accompany the driver while he was

supervision of its driver (Article 2180,

performing his work.

New Civil Code).

Uriel can sue for breach of contract. He was a passenger although he was being

It can raise the same defense against

transported gratuitously, because he won

Uriel

a free riding pass in a raffle held by CTC

exempts

(Article 1753, New Civil Code).

negligence, but not for willful acts or

if

there

is

it from

a

stipulation

liability for

that

simple

gross negligence (Article 1758, New Civil Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 84 of 173

Mercantile Law Q&As (2007-2013)

CTC

can

also

raise

[email protected] JayArhSals

against

all

the

de Oro airport; the pilot miscalculated the

plaintiffs the defense that the collision

plane’s

was due exclusively to the negligence of

runway. Of the 150 people on board, ten

the driver of UTI, and this constitutes a

(10) passengers died at the crash scene.

approach

and

undershot

the

fortuitous event, because there was no concurrent negligence on the part of its

Of the ten who died, one was a passenger

own

v.Guinoo

who managed to leave the plane but was

Transportation Company, G.R. No. L-

run over by an ambulance coming to the

5044, April 30, 1953).

rescue. Another was an airline employee

driver

(Ampang

who hitched a free ride to Cagayan de Oro CTC can also raise against Samuel the defense

that

he

was

engaged

in

and who was not in the passenger manifest.

a

seriously illegal act at the time of the

It

appears

from

the

Civil

Aeronautics

collision, which can render him liable for

Authority investigation that the co-pilot

damages on the basis of quasi-delict

who had control of the plane’s landing had

(Dobbs, the Law of Torts, pp.524-525).

less than the required flying and landing time experience, and should not have been

Since

UTI

had

no

pre-existing

in control of the plane at the time. He was

contractual relationship with any of the

allowed to fly as a co-pilot because of the

plaintiffs, it can raise the defense that it

scarcity of pilots – Philippine pilots have

exercised due diligence in the selection

been recruited by foreign airlines under

and supervision of its driver that the

vastly improved flying terms and wages so

collision was due exclusively to the

that newer and less trained pilots are being

negligence of the driver of CTC, and that

locally deployed. The main pilot, on the

Samuel was committing a serious illegal

other hand, had a very high level of blood

act at the time of the collision.

alcohol at the time of the crash. You are part of the team that the victims hired to handle the case for them as a

Carriage;

Breach

of

Contract;

group.

In

your

case

conference,

the

following questions came up:

Presumption of Negligence (2013) No.IX.

Fil-Asia

Flight

916

was

on

a

scheduled passenger flight from Manila when it crashed as it landed at the Cagayan

Explain the causes of action legally possible under the given facts against the airline and the Pilots; whom will you

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 85 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

specifically implead in these causes of

over. This is in accordance with Articles

action? (5%)

2176 and 2180 of the Civil Code. There could also be a criminal prosecution for

SUGGESTED ANSWER:

reckless

A complaint for breach of contract of

homicide against the ambulance driver

carriage can be filed against Fil-Asia for

and the consequent civil liability.

failure

to

exercise

imprudence

resulting

in

extraordinary

diligence in transporting the passengers

Since the airline employee was being

safety from their point of embarkation to

transported gratuitously, Fil-Asia Air was

their destination (Article 1755, Civil

not required to exercise extraordinary

Code).

diligence for his safety and only ordinary care. (Lara v. Valencia, 104 Phil. 65,

complaint based on a quasi-delict can be

1958).

filed against the pilots because of their fault and negligence (Article 2176, Civil Code). Fil-Asia Air can be included for negligence

in

the

selection

and

supervision of the pilots (Article 2180, Civil Code).

Maritime Protest (2007) No.XI. Two vessels figured in a collision along the Straits of Guimaras resulting in

third cause of action may be a criminal prosecution

for

reckless

imprudence

resulting in homicide against two pilots.

considerable loss of cargo. The damaged vessels were safely conducted to the Port of Iloilo Passenger A failed to file a maritime

The airline will be subsidiarily liable for

protest. B, a non-passenger but a shipper

the civil liability only after the pilots are

who suffered damage to his cargo, likewise

convicted and found to be insolvent.

did not file a maritime protest at all. (10%)

How will you handle the cases of the

(A) What is a maritime protest?

passenger run over the ambulance and the airline employee allowed to hitch a free ride

SUGGESTED ANSWER:

to Cagayan de Oro? (3%)

A maritime protest is a sworn statement

SUGGESTED ANSWER:

made with 24 hours after a collision in

It is the driver of the ambulance and his

which the circumstances thereof are

employer who should be held liable for

declared

damages, because a passenger was run

competent authority at the point of

or

made

known

before

a

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 86 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Trust Receipts Law

accident or the first port of arrival if in the Philippines or the Philippine consul in a foreign country (Article 835, Code of Commerce; Goro v. William Lines, Inc., 3 CAR 1(1963)).

to recover

losses and

damages

arising from the collision? Reason briefly SUGGESTED ANSWER:

an action to recover losses and damages from

building.

D

ordered

construction materials from E and received delivery thereof. The following day, C went to F Bank to apply for loan to pay for the construction materials. As security for the loan, C was made to execute a trust receipt.

B, the shipper, can successfully maintain arising

No.V. C contracted D to renovate his commercial

Can A and B successfully maintain an action

Trust Receipt (2007)

the

collision

notwithstanding his failure to file a maritime protest since the filing thereof is required only on the part of A, who being a passenger of the vessel at the time of the collision, was expected to know the circumstances of the collision. A’s failure to file a maritime protest will therefore prevent him from successfully maintaining an action to recover his losses and damages (Art. 836, Code of Commerce) ALTERNATIVE ANSWER:

One year later, after C failed to pay the balance of the loan, F Bank charged him with violation of the Trust Receipts Law. (5%) What is a Trust Receipt? SUGGESTED ANSWER: A Trust Receipt is a written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provision of the Trust Receipts Law, whereby the bank as entruster releases the goods to the possession of the

entrustee

but

retains

ownership

thereof while the entrustee may sell the goods and apply the proceeds for the full

A can maintain an action to recover damages if he was not in a condition to

payment of his liability to the bank (Section 3(j), Trust Receipts Law).

make known his wishes. B can maintain an action to recover damages since he

Will the case against C prosper? Reason

was not on board the vessel (Article 836,

briefly.

Code of Commerce).

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 87 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, the case against C will not prosper,

No, Tom Cruz’s obligation to pay the

Since

loan covered by the trust receipts to XYZ

C

received

the

Construction

material from E Before the trust receipt

Bank

transaction was a simple loan, with the

merely a collateral agreement which

trust receipt merely as a collateral or

serves as security for a loan, with the

security

is

Bank appearing as the owner of the

receipt

goods. The Bank cannot dispose of the

transaction where the title to the goods

goods in any manner it chooses, because

remains with the bank and the goods are

it is not the true owner thereof (Rosario

released to the entrustee before the loan

Textile Miss v. Home Bankers, G.R. No.

is granted (Consolidated Bank and Trust

137232, 29 June 2005, citing Sia v.

Corporation v. Court of Appeals, 356

People, G.R. No. 30896, 28 April 1983,

SCRA 671 [2001].

Abad v. CA, G.R. No. 42735, 22 January

for

inconsistent

the with

loan. a

trust

This

remains,

A

“Trust

receipt”

is

1990, and PNB v. Pineda, G.R. No. 46658, 13 May 1991). The loss of the goods covered by the trust receipts Trust Receipt; Security for a Loan (2008)

cannot

extinguish

the

principal

obligation of the borrower to pay the

No.II. Tom Cruz obtained a loan of P1

bank

(Landl

&

Company

[Phil.]

v.

Million from XYZ Bank to finance his

Metropolitan Bank, G.R. 159622, 30 July

purchase of 5,000 bags of fertilizer. He

2004).

executed a trust receipt in favor of XYZ Bank over the 5,000 bags of fertilizer. Tom Cruz withdrew the 5,000 bags from the warehouse to be transported to Lucena City where his store was located. On the way, armed robbers took from Tom Cruz the

Trust Receipts Law; Liability for Estafa (2013)

5,000 bags of fertilizer. Tom Cruz now

No.VI. Delano Cruz is in default in the

claims that his obligation to pay the loan to

payment of his existing loan from BDP

XYZ Bank is extinguished because the loss

Bank. To extend and restructure this loan,

was not due to his fault. Is Tom Cruz

Delano agreed to execute a trust receipt in

correct? Explain. (4%)

the bank’s favor covering the iron pellets

SUGGESTED ANSWER:

Delano agreed to execute a trust receipt in the bank’s favor covering the iron pellets Delano imported from China one year

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 88 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

earlier. Delano subsequently succeeded in

consequence acquired ownership to the

selling the iron pellets to a smelting plant,

goods, the transaction does not involve a

but the proceeds went to the payment of

trust receipt but a simple loan even

the separation benefits of his employees

though

who were laid off as he reduced his

transaction

operations.

(Colinares vs. Court of Appels, 339 SCRA

the

parties as

one

denominated of

trust

the

receipt

609, 2000; Consolidated Bank and Trust When

the

without

extend

any

loan

significant

period

expired

payment

Corporation v. CA, SCRA 671, 2001).

from

Delano (not even to the extent of the proceeds of the sale of the iron pellets), BDP Bank consulted you on how to proceed against Delano. The bank is contemplating the

filing

of

estafa

pursuant

to

the

provisions of Pres. Decree No. 115 (Trust Receipts Law) to force Delano to tum in at least the proceeds of the sale of the iron pellets.

Receipts

Law;

Violation

Committed by a Corporation (2012) No.II. CCC Car, Inc. obtained a loan from Bank, which fund was used to import ten (10)

units

of

Mercedes

Benz

S

class

vehicles. Upon arrival of the vehicles and

Would you, as bank counsel and as an officer of the court, advise the bank to proceed with its contemplated action? (8%)

criminal case for estafa against Delano. imported

one

the

year

Inc., X and Y, the President and Treasurer, respectively, of CCC Car, Inc. signed the Trust Receipt to cover the value of the ten after which, the vehicles were all delivered

I will not advise BDP Bank to file a received

before release of said vehicles to CCC Car,

(10) units of Mercedes Benz S class vehicles

SUGGESTED ANSWER:

Delano

Trust

iron before

pellets the

he

trust

receipt was executed. As held by the Supreme Court, where the execution of a trust of a trust receipt agreement was made after the goods covered by it had been purchased by and delivered to the

to the Car display room of CCC Car, Inc. Sale of the vehicles were slow, and it took a month to dispose of the ten (10) units. CCC Car, Inc. wanted to be in business and to save on various documentations required by the bank, decided that instead of turning over the proceeds of the sales, CCC Car, Inc. used the proceeds to buy another ten (10) units of BMW 3 series.

entrustee and the latter as a “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 89 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Is the action of CCC Car, Inc. legally

[Note:The problem does not state that BBB

justified? Explain your answer. (5%)

bank

issued

a

letter

of

credit

upon

application of CCC Car, Inc, to enable the

SUGGESTED ANSWER:

latter to pay for its importation. In the

No. It is the obligation of CCC Car, Inc.,

suggested answers above, we assume this

as entrustee, to receive the proceeds of

to be the case because the trust receipt,

the sale of the Mercedes Benz S class

being an accessory contract, cannot validly

vehicles

exist without a principal contract, i.e., the

intrust

for

BBB

Bank,

as

entruster, and turn over the same to

application for the letter of credit.]

Bank to the extent of the amount owing to the latter or as appears in the trust receipt (Sec. 9(2), Trust Receipt Law). Will the corporate officers of CCC Car, Inc. be held liable under the circumstances? Explain your answer. (5%)

Treasurer of CCC Car, Inc. who both signed the trust receipts in the problem. Section 13 of the Trust Receipt Law(PD provides that if the violation or offense partnership,

by

Receipt:

Surrendering

of

Possession; Lien (2009)

lien upon the goods when he surrenders

Yes, particularly the President and the

committed

Warehouse

No.XI. (B) Under the Warehouse loses his

SUGGESTED ANSWER:

is

Warehouse Receipts Law

a

association,

corporation, or

other

juridical entity, the penalty provided for

possession thereof. SUGGESTED ANSWER: True. A lien is dependent on possession. When

a

warehouseman

surrenders

possession, he thereby loses his lien on the goods over which hi no longer has possession

(Sec.29

(a),

Warehouse

Receipts Law).

in the law shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the

Negotiable Instrument; Delivery of Goods (2007)

civil liabilities arising from the criminal

No.II. Alex deposited goods for which Billy,

offense.

a

warehousemen,

issued

a

negotiable

warehouse receipt wherein the good were deliverable to Alex or order. Alex negotiated the receipt TC Caloy. Thereafter, Dario a “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 90 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

creditor, secured judgment against Alex and served notice of levy over the goods on the warehouseman. To whom should the warehousemen deliver the goods upon demand?(5%) SUGGESTED ANSWER: The warehouseman should deliver the goods upon demand to Caloy who is a holder of the receipt in good faith and for value. The goods cannot be levied upon by the creditor of Alex after it was negotiated

to

Caloy

(Section

25,

Negotiable Instruments Law). Would your answer be the same if the warehouseman

issued

a

non-negotiable

warehouse receipt? Reason briefly. (5%) SUGGESTED ANSWER: No, my answer would not be the same if the

warehousemen

issued

a

non-

negotiable warehouse receipt. In such case. The warehouseman should deliver the goods to Datio, if the notice of levy was served on the warehouseman prior to the notification of the warehouseman by Alex or Caloy of the transfer of the non-negotiable receipt. In such case, the title of Caloy would be defeated by the notice of levy by Dario (Section 42, Warehouse Receipts Law).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 91 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

MULTIPLE CHOICE

equivalent to a lawful pledge of the shares

QUESTIONS (MCQ)

of stock.

2013 Mercantile Law Exam MCQ (October 20, 2013) 1,000 shares in ABC Corp., pledged the shares to Conrad by endorsement in blank the covering

stock certificates

Yes, because the execution of the Deed of Assignment of Shares of Stock is

I. Claude, the registered stock holder of

of

SUGGESTED ANSWER:

and,

equivalent to a lawful pledge of the shares

of

stock

(Lopez

v.

Court

of

Appeals, 114 SCRA 617). I.(2) After Claude defaulted on the loan,

execution of a Deed of Assignment of

Conrad

Shares of Stock, intended as collateral for a

registered in his name In the books of the

loan

corporation. If you are the Corporate

of

P

1.0

Million

that

was

also

supported by a separate promissory note.

sought

to

have

the

shares

Secretary of ABC Corporation, would you register the shares in the name of

I.(A) Under these facts, is there a valid pledge of the shares of stock to Conrad?

Conrad without any written instruction from Claude? (1%)

(1%) Yes, since the endorsement and delivery of No, because shares of stock are intangible

the certificates of stock executed by Claude

personal

possession

constitute the legal authority to cancel the

cannot be delivered and, hence, cannot be

shares in his name and to place them in

the subject of a pledge.

Conrad’s name.

No, because the pledge of shares of stock

Yes, since the execution of the Deed of

requires

the

Assignment by Claude would constitute the

Register of the principal place of business of

legal authority to cancel the shares in his

the corporation and of the residence of the

name and place them in Conrad’s name.

pledgor.

No, because corporate officers can only take

Yes, because endorsement and delivery of

direct

the certificates of stock is equivalent to the

owners on the proper disposition of shares

transfer of possession of the covered shares

registered in their names.

to the pledgee.

No, because the corporation has a primary

properties

double

whose

registration

with

Yes, because the execution of the Deed of Assignment of Shares of Stock is

instructions

from

the

registered

lien on the shares covering the unpaid subscription.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 92 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

The ―Filipino First Policy‖

None of the answer is correct. The

The ―Foreign Investment Positive Lists‖

pledge must be foreclosed. (Article 2112,

concept

Civil

The ―Foreign Investment Negative Lists‖

Code)

Conrad

cannot

just

appropriate the shares of stock (Article

concept

2088, Civil Code).

The ―Control Test‖ concept All of the above.

NOTE: (D) could have been the correct answer if the facts stated that there are

SUGGESTED ANSWER:

unpaid

The “Foreign Investment Negative Lists”

subscriptions

because

under

Section 63 of the Corporation Code, the

concept

corporation may refuse the transfer if it

(Section 7 of Foreign Investments Act)

holds unpaid claim on the subscribed shares (See China Banking Corp. v. CA

II.(2) The delegation asked: aside from

and Valle Verde Country Club, G.R. No.

Filipino citizens, what entities would fall

117604, March 26, 1997).

under the definition of ―Philippine National‖ under FIA ’91?

A foreign delegation of businessmen and replied

that

the

investment bankers called on your law firm

You

to discuss the possibilities of investing in

“Philippine

national”

various projects in the Philippines, and

covers

.(1%)

definition under

FIA

of ’91

wanted your thoughts on certain issues regarding

foreign

investment

in

the

domestic partnerships wholly composed of Filipino citizens

Philippines.

domestic corporations 60% of whose capital II.(1) The delegation has been told about

stock, outstanding and entitled to vote, are

the Foreign Investment Act of 1991, as

owned and held by Filipino citizens

amended (FIA ’91), and they asked what

foreign corporations considered as doing

exactly is the law’s essential thrust regarding

business in the Philippines under the

foreign investment in Philippine business

Corporation Code, 100% of whose capital

and industries.

stock, outstanding and entitled to vote, are wholly-owned by Filipino citizens

You replied

that

reflects

. (1%)

FIA

’91

essentially

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 93 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

All of the above, because the law considers

Exports consistently at least 60% of its

the juridical personality, whether domestic

goods or services produced, and can sell

or foreign, as a mere medium; the test of

goods or services to the domestic market

nationally is on the individual who control

None of the above.

the medium None of the above, because the term

SUGGESTED ANSWER:

Philippine

(E) None of the above.

national

can

only

cover

individuals and not juridical entities.

(Section 3(e) of Foreign Investments Act)

SUGGESTED ANSWER:

II.(4) As a last question and by way of a

All of the above, because the law

concrete example, a delegation member

considers the juridical personality,

finally inquired – which of the following

whether domestic or foreign, as a mere

corporations or businesses in the

medium: the test of nationality is on the

Philippines may it invest and up to what

individuals who control the medium

extent? (1%)

(Section 3(a) of Foreign Investments Act) A lifestyle magazine publication II.(3) The delegation heard that foreigners

corporation, up to 40% equity

can invest up to 100% of the equity in

An advertising corporation, up to 100%

―export oriented enterprises‖ and you were

equity

asked exactly what the term covers.

A commercial bank, up to 60% equity A jeepney manufacturing corporation, up to

You

replies

that

an

―export oriented

100% equity

enterprise ”under FIA ’91 is an enterprise

A real estate development corporation, up

that

to 60% equity

.(1%)

only engages in the export of goods and

SUGGESTED ANSWER:

services, and does not sell goods or services

(D) A Jeepney manufacturing

to the domestic market

corporation, up to 100% equity (Section

exports consistently at least 40% of its

7 of Foreign Investment Act)

goods or services, and sells at least 60% of the rest to the domestic market exports consistently at least 60% of the

Dennis subscribed to 10,000 shares of XYZ

goods or services produced, and sell at least

Corporation with a par value of P100 per

40% of the rest to the domestic market.

share. However, he paid only 25% of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 94 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

subscription or P250,000.00 No call has

ABC Corp. may redeem the shares at the

been made on the unpaid subscription.

end

of

10

years

without

need

for

unrestricted earnings provided that, after How many shares in Dennis entitled to

the redemption, there are sufficient assets

vote

to cover its debts.

at

the

annual

meeting

of

the

stockholders of XYZ? (1%)

All of the above are incorrect.

10,000 shares

SUGGESTED ANSWER:

2,500 shares

ABC Corp. may redeem the shares at the

100 shares

end

0 shares

unrestricted

None of the above.

after the redemption, there are sufficient

of

10

years

without

earnings

need

provided

for that,

assets to cover its debts. SUGGESTED ANSWER:

(Section 8 of Corporation Code; Republic

(A) 10,000 Shares

Planters Bank v. Agana, 269 SCRA 1,

(Section 24 and 71 of Corporation Code)

1997)

IV. ABC Corp, issued redeemable shares,

V. Arnold, representing himself as an agent

Under the terms of the issuance, the shares

of Brian for the sale of Brian’s car,

shall be redeemed at the end of 10 years

approached

from date of issuance, at par value plus a

interested in buying the car. At Arnold’s

premium of 10%

prodding, Dennis issued a crossed check

Dennis

who

appeared

would only be shown to Brian as evidence Choose the correct statement relating to

of Dennis’ good faith and interest in buying

these redeemable shares. (1%)

the car. Instead, Arnold used the check to pay for the medical expenses of his wife in

ABC

Corp.

would

need

unrestricted

retained earnings to be able to redeem the

Brian’s clinic after Brian, a doctor, treated her.

shares. Corporations are not allowed to issue

Is Brian a holder in due course (HIDC)?

redeemable shares; thus, the issuance by

(1%)

ABC Corp. is ultra vires. Holders of redeemable shares enjoy a

Yes, Brian is a HIDC because he was the

preference over creditors.

payee of the check and he received it for services rendered.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 95 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, Brian is a HIDC because he did not

Gawsengsit Corp. is doing business in the

need to go behind the check that was

Philippines and requires a license from the

payable to him.

Securities

No, Brian is not a HIDC because Dennis

(SEC).

issued the check only as evidence of good

Gawsengsit Corp. is not doing business in

faith and interest in buying the car.

the Philippines by its mere investment in a

No, Brian is not a HIDC because Brian

Philippine corporation and does not need a

should have been placed on notice: the

license from the SEC

check was crossed in his favor and Arnold

Gawsengsit Corp. has to appoint a resident

was not the drawer.

agent in the Philippines.

No, Brian is not a HIDC because the

Gawsengsit Corp. cannot elect directors in

requisite consideration to Dennis was not

Bumblebee Corp.

present.

All the above choices are incorrect.

SUGGESTED ANSWER:

SUGGESTED ANSWER:

No, Brian is not a HIDC because Brian

Gawsengsit Corp. is not doing business

should have been placed on notice: the

in

check was crossed in his favor and

investment in a Philippines corporation

Arnold was not the drawer.

and does not need a license from the

(Vicente R. de Ocampo & Company v.

SEC.

Gatchalian, 3 SCRA 566, 1961)

(Section 3(d) of Foreign Investment Act)

VI. Gawsengsit Corp. is a corporation

VII. The BIR assessed ABC Corp. for

incorporated in Singapore. It invested in

deficiency income tax for taxable year 2010

Bumblebee Corp., a Philippine corporation,

in the amount of P26,731,208.00, inclusive

by acquiring 30% of its shares. As a result,

of surcharge and penalties.

Gawsengsit Corp. nominated 30% of the

The BIR Can . (1%)

the

and

Exchange

Philippines

Commission

by

its

mere

directors of Bumblebee Corp., all of whom are

Singaporeans

and

officers

of

Gawsengsit Corp.

Run after the directors and officers of ABC Corp. to collect the deficiency tax and their liability will be solidary.

Choose the correct statement relating to

Run after the stockholders of ABC Corp.

Gawsengsit Corp. (1%)

and their liability will be joint Run after the stockholders of ABC Corp. and their liability will be solidary

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 96 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Run after the unpaid subscriptions still due

(Rosario

to ABC Corp., if any

Home

None of the above choices is correct.

Company, 462 SCRA 88, 2005)

SUGGESTED ANSWER:

IX. A Bank may acquire real property

Run after the unpaid subscriptions still

Textile

Mills

Bankers

Corporation

Savings

and

v.

Trust

(1%)

due to ABC Corp., if any

By purchase at a public sale of properties

(Halley v. Printwell, 648 SCRA 116,

levied to satisfy tax delinquencies

2011).

By purchase from a real estate corporation in

VIII.

Anton

imported

perfumes

from

the ordinary

course of

the bank’s

business

Taiwan and these were released to him

Through dacion en pago in satisfaction of a

by the bank under a trust receipt. While

debt in favor of the bank

the perfumes were in Anton’s warehouse,

In exchange for the purchase of shares of

thieves broke in and stole all of them.

stocks of the bank All of the above.

Who will shoulder the lossof the stolen

None of the above.

perfumes? (1%) SUGGESTED ANSWER: The loss of the perfumes will be borne by

By

purchase

from

a

real

estate

the bank in whose behalf the perfumes

corporation in the ordinary course of the

were held in trust.

bank’s business; or

Anton will bear the loss.

Through dacion en pago in satisfaction

The exporter can hold both the bank and

of a debt in favor of the bank; or

Anton liable for the loss.

in exchange for the purchase of shares of

The exporter form whom Anton bought the

stocks of the bank.

perfumes will bear the loss.

(Section 36 (7) and 62 (2) of the

No one bears the loss for an unforeseen

Corporation Code)

event.

(Section 52 of the General Banking Law)

SUGGESTED ANSWER:

Under the Anti-Money Laundering Act, a

(B) Anton will bear the loss.

depositor’s bank account may be frozen.

(Section 10 of the Trust Receipts Law)

(1%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 97 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

. (1%)

person

already

convicted

of

money

laundering By the bank when the account is the subject

of

a

suspicious

or

covered

transaction report By the Anti-Money Laundering Council (AMLC) when the account belongs to a

By the Regional Trial Court, upon ex parte motion

by

the

AMLC,

in

a

criminal

prosecution for money laundering pending before it.

By the Court of Appeals motu proprio in an appeal from a judgment of conviction of a criminal charge for money laundering. In none of the above.

De facto corporation

(E) In none of the above. 10

of

the

Anti-Money

Laundering Act)

Enrico (who had been given the task of attending to the Articles of Incorporation of the proposed corporation, Auto Mo, Ayos Ko) misappropriated the filing fees and never filed the Articles of Incorporation with the Securities and Exchange Commission (SEC). Instead, he prepared and presented to the proposed incorporators a falsified certificate

approving

the

Articles.

Relying on the falsifies SEC certificate, the latter began assuming and discharging corporate powers.

Corporation by estoppels General partnership None of the above.

XI. Unknown to the other four proponents,

SEC

. (1%)

De jure corporation

SUGGESTED ANSWER: (Section

Auto Mo, Ayos Ko is a

SUGGESTED ANSWER: NOTE: The last sentence of the given problem is unclear as to whether the term “latter” refers to Enrico or to the incorporators. As such, it is necessary to qualify the answer depending on the meaning given to the term “latter” (C) Corporation by estoppels If

the

term

“latter”

refers

to

the

incorporators, the correct answer is C (Section 20 and 21 of the Corporation Code). (E) None of the above. If the term “latter” refers to Enrico, the correct answer is E (Sections 20 and 21 of the Corporation Code). XII. Preferred shares cannot vote on the proposal

To include other corporate officers in the corporation’s by-laws To issue corporate bonds To shorten the corporate term “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 98 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Is the policy valid and binding? (1%)

All of the above None of the above.

Yes, the policy is valid and binding because SUGGESTED ANSWER:

Aurelia has an insurable interest on the life

(E) None of the above.

of Kaddafy Benjelani. No, the policy is not valid and binding

Under

letter

(A),

to

include

other

because

Kaddafy

Benjelani

has

been

corporate officers in the corporation’s

officially declared a public enemy.

by-laws.

the

Yes, the policy is valid and binding because

amendment of the by-laws, and as such,

it has been in force for more than two

preferred shares shall be allowed to

years.

vote.

No, the policy is not valid and binding since

Under letter (B), to issue corporate bonds

the spouses’ estrangement removed Aurelia’s

– Such corporate bonds are construed as

insurable interest in Benjelani’s life.

This

bonded

will

indebtedness,

require

then

preferred

shares shall be allowed to vote.

None of the above.

Under letter (C), to shorten the corporate term,

-

Under

Section

6

of

the

SUGGESTED ANSWER”

Corporation Code, preferred shares shall

Yes the policy is valid and binding

be allowed to vote.

because Aurelia has an insurable interest on the life of Kaddafy Benjelani.

XIII. In 2010, the Philippine National Police declared Kaddafy Benjelani ―Public Enemy No.

The policy is valid. Aurelia had insurable

1‖ because of his terrorist activities in

interest in the life of Kaddafy Benjelani,

the country that have resulted in the death

because he is her husband even if they

of thousands of Filipino. A ransom of P15

are estranged (Section 10 (a) of the

million was placed on Kaddafy Benjelani’s head.

Insurance Code). Kaddafy Benjelani is not a public enemy, because he is not a national of an enemy country (Filipinas

Worried about the future of their family,

Compañia

Kaddafy Benjelani’s estranged wife, Aurelia,

Huefeld & Company, Inc., 89 Phil. 54,

secured in December 2010 a life insurance

1951).

de

Sejunos

v.

Christern,

policy on his life and designated herself as the beneficiary.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 99 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

XIV. Muebles Classico, Inc. (MC), a Manila-

Deny STI’s claim. The Stay Order covers all

based furniture shop, purchased hardwood

claims against the debtor and binds all its

lumber from Surigao Timber, Inc. (STI), a

creditors. The letter of credit is a claim

Mindanao-based logging company. MC was

against the debtor that is covered by the

pay STI the amount of P5.0 million for 50

Stay Order.

tons of lumber. To pay STI, MC opened a

Grant STI’s claim. The letter of credit is not a

letter of credit with Baco de Plata (BDP).

claim

BDP duly informed STI of the opening of a

rehabilitation, but against the bank which

letter of credit in its favor.

has assumed a solidary obligation.

against

the

debtor

under

Deny STI’s claim. If the bank disregards the In The meantime, MC- which had been

Stay Order, it may be subject to contempt

undergoing financial reverses = filed a

by the rehabilitation court. STI should file

petition for corporate rehabilitation. The

its claim with the rehabilitation court.

rehabilitation court issued a Stay Order to stay the enforcement of all claims against

File an action for interpleader to resolve the

MC.

parties’ competing claims

After shipping the lumber, STI went to BDP,

SUGGESTED ANSWER:

presented the shipping documents, and

Grant SIT’s claim. The letter of credit is

demanded payment of the letter of credit

not a claim against the debtor under

opened in its favor. MC, on the other hand,

rehabilitation.

informed the bank of the Stay Order and

which has assumed a solidary obligation.

instructed it to deny payment to STI

(Metropolitan Waterworks and Sewerage

because of the Stay Order.

System v. Daway, 432 SCRA 559, 2004)

BDP comes to you for advice. Your best

XV. Akiro of Tokyo, Japan sent various

advice is to . (1%)

goods to his friend Juan in Cebu City,

But

against

the

bank

Philippines , through one of the vessels of (A)

Grant

STI’s

claim,

Under

the

Worthsell

Shippers,

Inc.,

an

American

―Independence Principle,‖ the bank deals only

corporation. En route to Cebu City, the

with the documents and not the underlying

vessel had two stops, first in Hong Kong,

circumstances; hence, the presentation of

and second, in Manila.

the letter of credit is sufficient. XV.(1) While traveling from Tokyo to Hong Kong, the goods were damaged. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 100 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER: What law will govern? (1%)

Yes, provided he files the complaint within 1 year from delivery.

Japanese law

(Section 3 (6) of Carriage of Goods by Sea

Hong Kong law

Act;

Chinese law

&Shipping

Philippine law

Insurance Company, Inc., 383 SCRA 23,

American law

2002)

Belgian N.V.

Overseas v.

Chartering

Philippine

First

SUGGESTED ANSWER: Philippine law (Article 1753, Civil Code)

(Eastern

Shipping

Lines,

Inc.

v.

Intermediate Appellate Court, G.R. No. L69044, May 29, 1987).

XV.(2)

Assuming Philippine law to be

applicable and Juan fails to file a claim with the carrier, may he still commence an action to recover damages with the court? (1%) No, the failure to file a claim with the carrier

is

a

condition

precedent

for

recovery. Yes, provided he files the complaint with 10 years from delivery. Yes, provided he files the complaint with 10 years from discovery of the damage. Yes, provided he files the complaint within 1 year from delivery. Yes, provided he files the complaint with 1 year from discovery of the damage.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 101 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

2012 Mercantile Law Exam

serves to reduce the risk of nonperformance is called -

MCQ (October 21, 2012)

irrevocable letter of credit; standby letter of credit;

Letters of Credit are financial devices in

confirmed letter of credit;

commercial transactions which will

None of the above.

ensure that the seller of the goods is sure to be paid when he parts with

SUGGESTED ANSWER:

the goods and the buyer of the goods gets control of the goods upon

b. standby letter of credit;

payment. Which statement is most accurate? The use of the Letter of Credit serves to reduce the risk of nonpayment

of

the

purchase price in a sale transaction. The Letters of Credit can only be used exclusively in a sales transaction. The Letters of Credit are issued for the benefit of the seller only. (a), (b) and (c) are all correct. SUGGESTED ANSWER:

At the instance of CCC Corporation, AAA Bank issued an irrevocable Letter of Credit in favor of BBB Corporation.

The

terms

of

the

irrevocable Letter of Credit state that the beneficiary must presfmt certain documents including a copy of

the

Bill

of

Lading

of

the

importation for the bank to release the funds. BBB Corporation could not find the original copy of the Bill of Lading so it instead presented to the bank a xerox copy of the Bill of Lading. Would you advise the bank

The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale transaction.

to allow the drawdown on theLetter of Credit? No, because the rule of strict compliance in commercial transactions

involving

letters of credit, requiring Letter of Credit which is used in nonsale transaction, where it

documents

set

as

conditions for the release of the fund ,has to be

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 102 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

strictly corn plied with or else

funds

will

not

be

released.

4.

AAA

Carmakers

opened

an

irrevocable Letter of Credit with BBB Banking Corporation with CCC Cars Corporation

as

letter of credit means that

irrevocable

Letter

the issuing bank undertakes

opened to pay for the importation of

to release the fund anytime

ten (1 0) units of Mercedes Benz S

when

the

class. Upon arrival of the cars, AAA

beneficiary, regardless of the

Carmakers found out that the cars

kind of document presented.

were all not in running condition

Yes,

because

an

irrevocable

claimed

by

Yes, because the issuing bank

beneficiary. of

Credit

consequence, AAA Carmakers

Corporation

instructed

xerox

was

and some parts were missing. As a

can always justify to CCC that

The,

BBB

Banking

as

Corporation not to allow drawdown

faithful reproduction of the

on the Letter of Credit. Is this legally

original copies.

possible?

copies

are

considered

Yes, because the issuing bank

a. No,

because

under

the

really has no discretion to

"Independence Principle",

determine

conditions

whether

the

for

the

documents presented by the

drawdown on the Letters of

beneficiary are sufficient or

Credit are based only on

not.

documents, like shipping documents, and not with

SUGGESTED ANSWER: a. No,

the condition of the goods

because the rule of

compliance

in

subject of the importation. strict

commercial

transactions involving letters of credit, requiring documents set as conditions for the release of the FUND ,has to be strictly corn

Yes, because the acceptance by the importer of the goods subject

of

importation

is

material for the drawdown of the Letter of Credit. Yes,

because

under

the

plied with or else funds will not be

"Independence Principle", the

released.

seller or the beneficiary is always assured of prompt payment if there is no breach

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 103 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

in the contract between the

b.

seller and the buyer. d.

No, because

what

opened was an

to Z to transfer ownership of was

the goods.

irrevocable

c.

Negotiate

letter of credit and not a

warehouse

by

specifically

indorsing it to Z. d.

SUGGESTED ANSWER: because

the

receipt

confirmed letter of credit.

a. No,

Assign the warehouse receipt

The warehouse

receipt

in

this case is non-negotiable. under

"Independence

the

SUGGESTED ANSWER:

Principle",

conditions for the drawdown on the Letters of Credit are based

a. No,

because

under

"Independence

the

Principle",

only on documents, like shipping

conditions for the drawdown on

documents, and not with the

the Letters of Credit are based

condition of the goods subject of

only on documents, like shipping

the importation.

documents, and not with the condition of the goods subject of the importation.

For a fee, X deposited 1,000 sacks of corn in the warehouse owned by Y. Y is in the business of warehousing.

6. The warehouseman, by issuing the

Y issued a warehouse receipt as

warehouse

proof of the possession of the 1,000

that the goods are in his possession,

sacks of corn. The warehouse

but he can refuse to deliver the

receipt states as follows: "Deliver to

goods to the holder of the

X or bearer 1,000 sacks of corn." X wanted to use the warehouse receipt as payment of his debt in favor of Z. How can the ownership of the goods covered by the warehouse receipt be transferred? a. Negotiate

warehouse

receipt, acknowledges

receipt

goods if a. the

warehouse

warehouse

receipt by just delivering

receipt

covering the goods is not presented. b. the

the

covering the

lien

of

warehouseman

is

the not

satisfied.

the warehouse receipt to Z. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 104 of 173

Mercantile Law Q&As (2007-2013)

the

said

holder

[email protected] JayArhSals

presents

a

was asked to sign a Trust Receipt

materially altered warehouse

covering the goods. When the goods

receipt.

were sold, X did not deliver the

All of the above.

proceeds

to

BBB

Banking

Corporation, arguing that he will need the fund for the subsequent importation. Is there sufficient basis

SUGGESTED ANSWER:

to sue for criminal action? Yes, because X's failure to turn

d. All of the above.

over the proceeds to the bank is a violation of the Trust Receipt Law. 7. The

legal

the

No, because the trust receipt

warehouseman in case of conflicting

was signed only after the

claims is to ---

delivery of the goods. When

a. file

remedy

an

of

action

for

the trust receipt was signed,

interpleader.

the ownership of the goods

give the goods to the first one who

first

presented

the

was already with X. Yes, because violation of Trust

warehouse receipt.

Receipt

use his discretion as to who he

prohibita,

believes has the prior right. keep the goods and appropriate

Law

is

mala

intention

is

irrelevant. No, because X has a valid reason

them to himself.

not to deliver the proceeds to BBB Banking Corporation.

SUGGESTED ANSWER: SUGGESTED ANSWER: a. file an action for interpleader. Yes, because X's failure to turn over BBB Banking Corporation issued a

the proceeds to the BANK is a

Letter of Credit in the amount of

violation of the Trust Receipt

P5Million, for the purchase of five (5)

Law.

tons of corn by X. Upon arrival of the goods, the goods were delivered to the warehouse of X. Thereafter he “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 105 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

c. Yes, because violation of Trust

payment under the Trust Receipts Law.

Receipt Law is mala prohibita,

c. X can be held criminally

intention is irrelevant.

liable Recommendation in respect of MCQ #8:

gave as there are two possible correct

the

Trust

Receipts Law regardless of the purpose or intention

It is recommended that examinees be given full credit for whatever answer they

under

for the use of the proceeds. X cannot be held criminally liable because the underlying

answers of equal value: (a) and (c).

obligation is one of simple loan.

X secured a loan from BBB Bank to pay for the importation of some dried fruits. Upon arrival of the goods consisting of dried fruits imported by X but before delivery to him, a trust receipt was executed by X to cover the transfer of the dried fruits

SUGGESTED ANSWER: c. X can be held criminally liable under the Trust Receipts Law regardless

of

the

purpose

intention

for

the

use

of

or the

proceeds.

to his possession. The dried fruits were so saleable but instead of turning over the proceeds of the

X is the President of AAA Products

sale, X used the funds to pay for the

Corporation. X signs all the Trust

medical expenses of his mother who

Receipts

was sick of cancer of the bone.

importations of the company. In the

Which statement is most accurate?

event

of

documents failure

for

to

certain

deliver

the

X cannot be held criminally

proceeds of the sale of the goods to

liable because although he

the bank, which statement is most

did not pay the bank he used

accurate?

the

proceeds

for

a

good

reason. Fraud or deceit is a necessary element to hold X criminally liable for non -

The criminal liability will not attach to X as President because of separate juridical personality. For violation of Trust Receipts Law, the law

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 106 of 173

Mercantile Law Q&As (2007-2013)

specifically

[email protected] JayArhSals

provides

for

who bears the risk of the

the imposition of penalty

loss;

upon directors I officers of

d. the

the corporation.

security

The officer will not be held criminally

who

interest

acquires in

the

goods.

accountable

because he is just signing

SUGGESTED ANSWER:

the trust receipt for and in

the person to whom goods are

behalf of the corporation.

delivered for sale and who

The officer of the corporation will

bears the risk of the loss;

be held liable provided it is clear

party

that

the

officer

concerned participated in the decision not to pay.

Which

completes

the

Trust Receipt Law, purchasers of

violation

Receipts

best

statement - In accordance with the

SUGGESTED ANSWER: b. For

phrase

of

Law,

specifically

Trust

the

provides

law for

the imposition of penalty upon directors I officers of the corporation.

the goods from the Entrustee will: get the goods only as a collateral; not get good title to the goods; only get security interest over the goods; get good title to the goods.

Who is the Entrustee in a Trust Receipt arrangement?

SUGGESTED ANSWER: get good title to the goods.

the owner of the goods; the one who holds the goods and receives the proceeds from the sale of the goods; the person to whom goods are

X acted as an accommodation party in signing as a maker of a promissory note. Which phrase best

delivered for sale and “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 107 of 173

Mercantile Law Q&As (2007-2013)

completes

the

[email protected] JayArhSals

sentence

-

This

b. The

promissory

note

is

means that X is liable on the

non-negotiable because the

instrument to any holder for value:

option as to which form of payment

for as long as the holder does not know that X is only an

is

with

the

maker. The

accommodation party.

promissory

note

is

an

invalid instrument because

even though the holder knew

there is more than one form

all along that X is only an accommodation party.

of payment. The promissory note can be

for as long as X did not receive

negotiated by way of delivery.

any consideration for acting as accommodation party. provided

X

SUGGESTED ANSWER:

received

consideration for acting as

b. The promissory note is non-

accommodation party.

negotiable because the option as to which form of payment is with

SUGGESTED ANSWER: b. even

the maker.

though

holder

X issued a promissory note which states

knew all along that X is

"I promise to pay Y or bearer the

only

amount of HK$50,000 on or before

an

the

accommodation

party.

December

30,

2013."

Is

the

promissory note negotiable? X issued a promissory note which

No,

the

promissory

note

states, "I promise to pay Y or order

becomes invalid because the

Php100,000.00 or one (1) unit Volvo

amount

Sedan." Which statement is most

currency.

accurate? The

is

in

foreign

Yes, the promissory note is promissory

is

negotiable even though the

negotiable because the forms

amount is stated in foreign

of

currency.

payment

stated.

note are

clearly

No, the promissory note is not negotiable amount

because is

in

the foreign

currency. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 108 of 173

Mercantile Law Q&As (2007-2013)

Yes,

the

[email protected] JayArhSals

promissory

note

negotiable because the Hong Kong

dollar

foreign

is

a

currency

a. Z can encash the check even

is

though Y did not indorse the check.

known in

the

A stale check is a check that cannot anymore be

Philippines.

paid SUGGESTED ANSWER:

although

the

underlying obligation still exists.

b. Yes. The promissory note is negotiable amount

even

is

though

stated

in

that cannot anymore be paid

the

and

foreign

also extinguished. that can still be negotiated or

X delivered a check issued by him and

indorsed so that whoever is

payable to the order of CASH to Y in for

certain

the holder can

obligations

which has not been presented for

incurred by X in favor of Y. Y then

payment within a period of

delivered the check to Z in payment for

underlying

obligation under the check is

currency.

payment

the

certain

obligations.

thirty (30) days.

Which

statement is most accurate?

SUGGESTED ANSWER:

Z can encash the check even though Y did not indorse the check.

although the underlying obligation still

Z cannot encash the check for lacking

a. that cannot anymore be paid

in

exists.

proper In payment for his debt in favor of X, Y

endorsement. Y is the only one liable because

gave X a Manager's Check in the

he was the one who delivered

amount of Php100,000 dated May

the check to Z.

30,

The

negotiation

is

not

valid

because the check is an instrument payable to order.

2012.

completes

the

phrase

statement

best -

A

Manager's Check: is a check issued by a manager of

SUGGESTED ANSWER:

Which

a

bank

for

his

own

account. is a check issued by a manager of a bank in the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 109 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

name of the bank against the

bank

itself

for

the

a. negotiation can be made by delivery only.

account of the bank. c. is like any ordinary check

As payment for a debt, X issued a

that needs to be presented

promissory note in favor of Y but the

for payment also.

promissory note on its face was

d. is better than a cashier's

marked

non-negotiable.

Then

Y

check in terms of use and

instead of indorsing the promissory

effect.

note, assigned the same in favor of Z to whom he owed some debt also. Which statement is most accurate? Z cannot claim payment from X

SUGGESTED ANSWER:

on

b. Is a check issued by a manager of a bank in the name of the bank against the bank itself for the account of the bank. Which

phrase

statement payable

best --

to

A

basis

of

the

promissory note because it is marked non-negotiable. Z can claim payment from X even though it is marked non-negotiable.

completes check

bearer

the

is

the

which a

is

bearer

instrument and: negotiation can be made by delivery only; negotiation must be by written indorsement; negotiation must be by specific

Z can claim payment from Y because

under

the

Negotiable Instrument Law, negotiation and assignment is one and the same. Z can claim payment from Y only because he was the endorser of the promissory note. SUGGESTED ANSWER:

indorsement; negotiation must be by indorsement and delivery.

b. Z can claim payment from X even though it is marked non-negotiable.

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 110 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Negotiable instruments are used as

The drawee bank can recover

substitutes for money, which means

from X, because he is the

-

drawer that they can be considered legal when

can

be

negotiated, used

to

they pay

his

signature was forged.

that at all times the delivery of the instrument is equivalent

genuineness

of

the

drawer of the check. The drawee bank can recover from Y because as endorser

to delivery of the cash. that at all times negotiation of instruments

from denying the signature of the X, the

indebtedness.

the

though

The drawee bank is estopped

tender. that

even

requires

proper indorsement.

he warrants the genuineness of the signature. SUGGESTED ANSWER:

SUGGESTED ANSWER: c. The drawee bank is estopped b. That when negotiated, they can

from denying the genuineness of the signature of the X, the drawer

be used to pay indebtedness.

of the check. A issued a check in the amount of The signature of X was forged as drawer

Php20,000 payable to B. B endorsed

of a check. The check was deposited

the check but only to the extent of

in the account of Y and when

Php1 0,000. Which statement is

deposited was accepted by AAA

most accurate?

Bank,

the

drawee

bank.

The partial indorsement is not

Subsequently, AAA Bank found out

a

that the signature of X was actually

although will result in the

forged. Which statement is most

assignment of that part.

accurate?

indorsement,

The partial indorsement will

The drawee bank can recover from Y, because the check was

valid

deposited

account.

in

his

invalidate the whole instrument. The endorsee will be considered as a holder in due course.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 111 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

d. The partial indorsement is

SUGGESTED ANSWER:

valid indorsement up to the extent of the Php10,000. SUGGESTED ANSWER:

a. a bill of exhchange A check was issued to Tiger Woods. But what was written as payee is the

a. The partial indorsement is not

word

a valid indorsement, although will

endorse the check -

result in the assignment of the

"Tiger

Woods".

To

validly

Tiger Woods must sign his real name.

part.

Tiger Woods must sign both his A promissory note which does not have the words "or order" or "or bearer" will render the promissory note nonnegotiable, and therefore it will render the maker not liable;

real

name

and

assumed

name. Tiger Woods can sign his assumed name. the check has become nonnegotiable.

the note can still be assigned and the maker made liable;

SUGGESTED ANSWER:

the holder can become holder in due course; the promissory note can just

a. Tiger Woods can sign his assumed name.

be delivered and the maker will still be liable. SUGGESTED ANSWER: d. the note can still be assigned and the marker made liable

Y, as President of and in behalf of AAA Corporation, accommodate

as X,

a

way

to

of

its

one

stockholders, endorsed the check issued by X. Which statement is

A check is -

most acurate?

a bill of exchange;

It is an ultra vires act.

the same as a promissory note;

It is a valid indorsement.

is drawn by a maker;

The corporation will be held

a non-negotiable instrument.

liable to any holder in due course.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 112 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

a. the sum expressed in words will

d. It is an invalid indorsement. prevail SUGGESTED ANSWER:

expressed

in

presumed to be -

Recommendation in respect of MCQ #27: It is recommended that examinees be given full credit for whatever answer they gave as there are two possible correct answers of equal value: (a) which is supported by the case of Jose v. CA, et al., G.R. No. 80599, and

one

A promissory note which is undated is

it is a valid indorsement.

15,1989,

the

numbers.

it is an ultra vires act.

September

over

(b)

which

dated as of the date of issue; dated as of the date of the first indorsement; promissory note is invalid because there is no date; dated on due date. SUGGESTED ANSWER:

is

supported by Section 22 of the Negotiable

a. dated as of the date of issue

Instrument Law. An insurance contract is an aleatory In a negotiable instrument, when the sum is expressed both in numbers and

in

words

and

there

contract, which means that the insurer will pay the insured

is

equivalent to the amount of

discrepancy between the words and the numbers -

the premium paid.

the obligation of the insurer is

the sum expressed in words

to pay depending upon the

will prevail over the one

happening of an uncertain

expressed in numbers.

future event.

the sum expressed in numbers will

prevail

over

the

one

expressed in words. the instrument becomes void

the

insured

pays

a

fixed

premium for the duration of the policy period and the amount

of

the

premiums

because of the discrepancy.

paid to the insurer is not

this will render the instrument

necessarily the same amount

invalid. SUGGESTED ANSWER:

as what the insured will get upon the happening of an uncertain future event.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 113 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

the obligation of the insurer is to

b. are to be constructed liberally

the

in favour of the insured and strictly

happening of an event that is

against the insurer who drafted the

certain to happen.

insurance policy,

pay

depending

upon

SUGGESTED ANSWER:

X is the common law wife of Y. Y loves X so much that he took out a life

b. the obligation of the insurer is

insurance on his own life and made

to pay depending upon the happening of

her the sole beneficiary. Y did this to

an uncertain future event.

ensure that X will be financially comfortable when he is gone. Upon

An Insurance Contract is a contract of adhesion, resolving

which

means

ambiguities

that in

in

the death of Y, X as sole beneficiary under the

the

life insurance policy on the

provision of the insurance contract,

life of Y will be entitled to

-

the proceeds of the life the general rule is that, the insurance contract is to be interpreted accordance

strictly with

what

insurance. despite the designation of X as

in

the

is

favor of the insured and

policy. are

to

be

the

proceeds insurance

against

the

the

liberally

in

strictly

insured favor

of

will

the go

to

life the

proceeds

of will

the be

life

divided

equally amongst X and the

and

compulsory heirs of Y.

the

insurer.

of

compulsory heirs of Y. insurance

construed

the

will go to the estate of Y.

strictly against the insurer who drafted the insurance

beneficiary,

proceeds of the life insurance

written in the contract. are to be construed liberally in

sole

SUGGESTED ANSWER:

if there is an ambiguity in the insurance contract, this will invalidate the contract.

a. X as sole beneficiary under the life insurance policy on the life of Y will be entitled to the proceeds of the life

SUGGESTED ANSWER:

insurance.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 114 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

X, in January 30, 2009, or two (2) years before

reaching

the

age

of

d. The life insurance is valid

65,

provided the disposition of

insured his life for Php20Million.

the proceeds will be subject

For reason unknown to his family,

to the approval of the legal

he took his own life two (2) days

guardian of the minor.

after his 65th birthday. The policy contains no excepted risk. Which statement is most accurate?

c. the life insurance policy is valid

The insurer will be liable.

provided the beneficiary is his estate or

The insurer will not be liable. The state of sanity of the insured is relevant in cases of suicide in order to hold the insurer liable. The state of sanity of the insured is

irrelevant

in

SUGGESTED ANSWER:

cases

of

suicide in order to hold the insurer liable.

his parents, or spouse or child. The "incontestability clause" in a Life Insurance Policy means --that

life

insurance

proceeds

cannot be claimed two (2) years after the death of the insured. that two (2) years after date of issuance or reinstatement

SUGGESTED ANSWER:

of the life insurance policy, the

a. the insurer will be liable.

insurer

anymore

prove

cannot that

the

X, a minor, contracted an insurance on

policy is void ab initio or

his own life. Which statement is

rescindable by reason of

most accurate?

fraudulent concealment or

The life insurance policy is void life

insurance

provided

it

is

is

the

valid

that the insured can still claim

the

from the insurance policy

with

consent of the beneficiary. The life insurance policy is valid

of

insured.

ab initio. The

misrepresentation

provided

after

two

(2)

years

even

though premium is not paid. the

beneficiary is his estate or

that the insured can only claim proceeds in a life

his parents, or spouse or child. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 115 of 173

Mercantile Law Q&As (2007-2013)

insurance·

[email protected] JayArhSals

policy

two

(2)

b.

existing

at

the

time

of

perfection and at the time of loss for

years after death.

property

SUGGESTED ANSWER:

A house and lot is covered by a real b. the two (2) years after date of

estate mortgage (REM) in favor of

issuance or reinstatement of the life

ZZZ Bank. The bank required that

insurance

cannot

the house be insured. The owner of

anymore prove that the policy is void

the policy failed to endorse nor

abignitio or rescindable by reason of

assign

policy

fraudulent

the

insurer

concealment

or

misrepresentation of the insured. For

both

the

Life

Insurance

and

interest is required to be existing at the time of perfection of the contract and at the time of loss. at

the

time

of

perfection and at the time of

loss

for

property

insurance but only at the time of perfection for life insurance. existing at the time of perfection for property insurance but for life insurance both at the time of perfection and at the time of loss. existing at the time of perfection only. SUGGESTED ANSWER:

policy

to

the

bank.

However, the Deed of Real Estate Mortgage has· an express provision

Property Insurance, the insurable

existing

the

which says that the insurance policy is also endorsed with the signing of the REM. Will this be sufficient? No, insurance policy must be expressly endorsed to the bank so that the bank will have

a

right

in

the

proceeds of such insurance in the event of loss. The express provision contained in the Deed of Real Estate Mortgage to the effect that the policy is also endorsed is sufficient. Endorsement of Insurance Policy in any form is not legally allowed. Endorsement of the Insurance Policy must be in a formal document to be valid. SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 116 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

a. No, insurance policy must be

X insured the building she owns with

expressly endorsed to the bank so that

two (2) insurance companies for the

the

same amount. In case of damage, -

bank

will

have

a

right

in

the

X can not claim from any of the

proceeds of such insurance in the event

two (2) insurers because with

of loss.

the double insurance, the X is a passenger of a jeepney for hire

insurance coverage becomes

being driven by Y. The jeepney collided

with

another

automatically void.

passenger

the two (2) insurers will be

jeepney being driven by Z who was

solidarily liable to the extent

driving recklessly. As a result of the

of the loss.

collision, X suffered injuries. Both

the two (2) insurers will be

passenger jeepneys are covered by Comprehensive

Motor

proportionately liable.

Vehicular

X can choose who he wants to

Insurance Coverage. If X wants to

claim against.

claim under the "no fault indemnity SUGGESTED ANSWER:

clause", his claim will lie against

the

insurer

of

the

jeepney being driven by Z

claim against.

who was the one at fault. the claim shall lie against the insurer of the passenger jeepney because

driven X

by

was

d. X can choose who he wants to

Y his

passenger. X has a choice against whom he wants to make his claim. None of the above. SUGGESTED ANSWER:

When

X

insured

his

building,

X

indicated in the application that it is a residential building, but actually the building was being used as a warehouse

for

some

hazardous

materials. What is the effect on the insurance policy, i f any? The insurance policy can be cancelled

because

of

the

change in the use. b. the claim shall lie against the insurer of the passenger jeepney driven by Y because X was his passenger.

The insurance policy will automatically be changed. The insurance policy need not be changed.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 117 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

The insurance policy is fixed

over the house and lot was already transferred.

regardless of the change in

Y will be the one entitled to the

the use.

proceeds because he now

Recommendation in respect of MCQ #40:

owns

partially

burnt

house and lot.

It is recommended that examinees be given full credit for whatever answer they gave as

the

SUGGESTED ANSWER:

the question is unclear. What is clear is that b.

there was misrepresentation on the part of X

X

is

still

entitled

to

the

when he indication in his application that

proceeds of the insurance policy because

the building is residential when it was

what is material is that at the time of

actually being used as a warehouse. The

the loss, X is the owner of the house and

problem does not indicate that the change in

lot.

the use of the house was carried out by X and that it was done without the permission

X, while driving his Toyota Altis, tried to cross the railway tract of Philippine

of the insurer.

(xxx line 2 unread text X owned a house and lot. X insured the

approached

BlumentrittAvenida

house. The house got burned. Then

Ext., applied its horn as a warning

he sold the partially burnt house

to all the vehicles that might be

and the lot to Y. Which statement is

crossing the railway tract, but there

most accurate?

was really nobody manning the

X is not anymore entitled to the

crossing. X was listening to his lpod

proceeds of the insurance

touch, hence, he did not hear the

policy because he already

sound of the horn of the train and

sold

so his car was hit by the train. As a

the

partially

burnt

house and lot. X

No

is

still

entitled

result of the accident, X suffered the

some injuries and his car was totally

proceeds of the insurance

destroyed as a result of the impact.

policy

Is PNR liable?

because

to what

is

material is that at the time

PNR is not liable because X

of the loss, X is the owner

should have known that he

of the house and lot.

was

one

is

entitled

to

the

crossing

a

place

designated as crossing for

proceeds because ownership “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 118 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

train, and therefore should

instantly. Is AAA Bus Company

have been more careful.

liable?

b. PNR

is

liable

because

a. The

bus

company

is

not

Railroad companies owe to

liable for as long as the bus

the

company

public

exercising

a a

duty

of

reasonable

can

show

that

when they hired X, they did

degree of care to avoid injury

the right selection process.

to person and property at

The bus company cannot be

railroad

crossings

means

a

flagman

which

held liable because what X

or

did

a

watchman should have been

is

not

part

of

his

responsrbility. The

posted to warn the public at

bus

company

is

liable

because common carriers

all times.

are

PNR is not liable because it blew

liable

for

the

its horn when it was about to

negligence or willful act of

cross

its employees even though

the

railway

along

they acted beyond the

BlumentrittAvenida Ext. PNR is not liable because X was

scope of their

negligent, for listening to his

responsibility. The bus company is not liable

lpod touch while driving.

because there is no way that SUGGESTED ANSWER:

the

company

can

anticipate the act of X.

a. PNR is not liable because X should have known that he was crossing

bus

SUGGESTED ANSWER:

a place designated as crossing for train, c. The bus company is liable

and therefore should have been more

because common carriers are liable for

careful.

the The

AAA

Bus

passengers

Company along

picks

EDSA.

X,

negligence

or

wilful

act

of

its

up

employees

the

beyond the scope of their responsibility.

even

though

they

acted

conductor, while on board the bus, drew his gun and randomly shot the

X is a trader of school supplies in

passengers inside. As a result, Y, a

Calapan, Oriental Mindoro. To bring

passenger, was shot and died

the school supplies to Calapan, it has to be transported by a vessel.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 119 of 173

Mercantile Law Q&As (2007-2013)

Because

there

[email protected] JayArhSals

were

so

many

When X reached Los Angeles one (1)

passengers, the two (2) boxes of

of the two (2) checked in luggage

school supplies were loaded but the

could

shipping company was not able to

statement is most accurate?

the

Ship

Captain

be

found.

Which

PAL is liable for the loss of the

issue the Bill of Lading. So, on board,

not

checked- in luggage under

issued

instead a "shipping receipt" to X

the

indicating the two (2) boxes of

Warsaw Convention on Air

school supplies being part of the

Transport.

cargo of the vessel. Which phrase

lading

was

hence,

no

no

bill

of

to

X

issued

contract

states that the airline shall be liable in case of loss. PAL

of

is

possible

contract

to

of

have

be

held

liable

a passenger takes when she a

checks- in her baggage.

of

PAL can only be held liable if it

cargo even without a bill of

can be proven that PAL was

lading, and the "shipping

negligent.

receipt"

carriage

cannot

because that is the risk that

carriage was perfected. it

the

the baggage check expressly

the owner of the vessel is not because

of

PAL is liable for the loss only if

therefore, is the most accurate? liable

provisions

would

be SUGGESTED ANSWER:

sufficient. c. the

only

acceptable

document of title is a Bill of Lading. d. None of the above.

a. PAL is liable for the loss of the checked-in-luggage under the provisions of

the

Warsaw

Convention

on

Air

Transport. SUGGESTED ANSWER: X owns a passenger jeepney covered by b. it is possible to have a contract of carriage of cargo even wiht

Certificate of Public Convenience. He allowed Y to use its Certificate of Convenience for a consideration. Y

X took Philippine Airlines Flight PR 102

therefore

was

operating

the

to Los Angeles, USA. She had two (2)

passenger jeepney under the same

luggage checked-in and was issued

Certificate of Public Convenience

two (2) baggage checks. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 120 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

(Kabit System) under the name of X.

amount of Php1 ,000 daily under

The

the boundary system. This means

passenger

jeepney

met

an

accident. Who will be liable?

that

anything

above

Php1

,000

Y, the one actually operating the

would be the earnings of Y. Y,

jeepney, will be liable to the

driving recklessly, hit an old lady

injured party.

crossing the street. Which statement

X will be the one liable to the

is most accurate?

injured party despite the

a. X as the owner is exempt

fact that it is Y who is

from liability because he was

actually

not the one driving.

operating

the

jeepney, because while the

b. X as the owner is exempt

Kabit System is tolerated,

from

the public should not be

precisely the arrangement is

inconvenienced

one

by

the

arrangement.

liability under

the

because "boundary

system".

X will not be held liable if he can

X will not be exempt from

prove that he is not the

liability

because

owner anymore.

remains

to

be

he the

Public Policy dictates that the

registered owner and the

real owner, even not the

boundary system will not

registered one, will be held

allow the circumvention of

liable.

the law to avoid liability. Y is the only one liable because

SUGGESTED ANSWER:

he drove recklessly.

b. X will be the one liable to the

SUGGESTED ANSWER:

injured party despite the fact that it is Y who is actually operating the jeepney, because tolerated,

while the

the

Kabit

public

System

should

not

is be

inconvenienced by the arrangement.

through

what

is

known

liability because he remains to be the registered

owner

and

the

boundary

system will not allow the circumvention

X owns a fleet of taxicabs. He operates it

c. X will not be exempt from

as

of the law to avoid liability. The Articles of Incorporation of AAA

boundary system. Y drives one of

Corporation was approved by the

such taxicabs and pays X a fixed

SecuritiesandExchange

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 121 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Commission (SEC). After the receipt

he

signed

all

the

of the Certificate of Approval from

documents,

the SEC, AAA Corporation decided

loan was authorized by the

to immediately start the operation of

Board.

because

loan the

its business despite the fact that it

YYY Bank can choose as to who

has no approved By-Laws. What is

it wants to hold liable for the

the

loan.

legal

status

of

the

AAA

Corporation?

If ZZZ Corporation cannot pay, X

A de jure corporation;

can

A de facto corporation;

liable.

be

held

subsidiarity

A corporation by estoppel; SUGGESTED ANSWER:

An unregistered corporation.

b. X, as President, cannot be

SUGGESTED ANSWER:

personally held liable for the obligation a. A de jure corporation

of the corporation even though he signed all the loan documents, because the loan

X, the President of ZZZ Corporation,

was authorized by the Board.

was authorized by the Board of Directors of ZZZ Corporation to

X owns 99% of the capital stock of SSS

obtain a loan from YYY Bank and to

Corporation. X also owns 99% of

sign documents in behalf of the

TTT Corporation. SSS Corporation

corporation. X personally negotiated

obtained a loan from VW Bank. On

for the loan and got tile loan at very

due

low interest rates. Upon maturity of

defaulted.

the

financiallyhealthy. Which statement

loan,

ZZZ

Corporation

was

unable to pay. Which statement is most accurate?

date,

SSS TTT

Corporation

Corporation

is

is most accurate? X being a controlling owner of

Because X was personally acting

SSS

Corporation

can

in behalf of the Corporation,

automatically

he can be held personally

personally liable for the loan

liable.

of SSS Corporation.

be

held

X, as President, cannot be

TTT Corporation, owned 99% by

personally held liable for

X, can automatically be held

the

liable.

obligation

of

the

corporation even though “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 122 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

c. SSS Corporation and TTT

SUGGESTED ANSWER:

Corporation, although both are owned by X, are two (2) distinct corporations with separate

personalities TTT

juridical

hence,

Corporation

automatically

the

cannot

be

held

liable for the loan of SSS Corporation. The principle of piercing the veil of corporate fiction can be applied in this case.

Banks Father X, an American priest who came from

registered

the

Diocese of Bacolod of the Roman Catholic

Church

which

was

incorporated as a corporation sole. There were years when the head of the Diocese was a Filipino, but there were more years when the heads were foreigners. Today, the head is piece of land located in Bacolod City for

SSS

York,

an American again. Y donated a

SUGGESTED ANSWER: c.

New

Corporation

and

TTT

use

as

a

school.

Which

statement is most accurate?

corporation, although both are owned by

The Register of Deeds of Bacolod

X, are two (2) distinct corporation with

City can refuse to register

the

and transfer the title because

separate

hence,

the

juridical

TTT

personalities

Corporation

cannot

the

present

head

of

the

automatically be held liable for the loan

corporation sole is not a

of SSS corporation.

Filipino. The nationality of a corporation

A corporation generally can issue both

sole

depends

upon

the

par value stock and no par value

nationality of the head at any

stock. These are all fixed in the

given time.

Articles

of

Incorporation

of

the

Acorporationsole,

corporation. Which of the following

regardless

corporations may not be allowed to

nationality

issue no par value shares?

can acquire real property

Insurance companies; Banks; Trust companies;

of of

the

the head,

either by sale or donation. A corporation sole is not legally allowed to own real property.

All of the above. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 123 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

Was the Corporate Secretary correct?

c. A corporation sole, regardless

The Corporate Secretary is

of the nationality of the head, can

correct

acquire real property either by sale or

Corporation Code provides

donation.

that no certificate of stock

The number of the Board of Trustees of a non-stock, non-profit educational institution should be --five (5) only any number for as long as it is not less than five (5) and no more than eleven (11) any number in multiples of five (5), for as long as it is not less than five (5) and no more than fifteen (15). not less than five (5) nor more than ten (1 0) in multiples of five (5). SUGGESTED ANSWER:

shall

because

be

issued

the

to

a

subscriber until the shares as subscribed have been fully paid. The Corporate Secretary cannot refuse

because

Certificate

can

corresponding

a

Stock

be

issued

to

the

percentage of shares which were paid. The Corporate Secretary cannot refuse because a Certificate of

Stock

can

be

issued

provided it is indicated in the Certificate

the

actual

percentage of what has been paid.

c. Any number in multiples of five

The Corporate Secretary cannot

(5), for as long as it is not less than five

refuse because it is his legal

and no more than fifteen (15)

duty to issue a stock

certificate

X subscribed 10,000 shares in the

corresponding to the number

capital stocks of AAA Corporation.

of shares actually subscribed

He paid 50% of the 10,000 shares. X

regardless

asked the Corporate Secretary to

payment.

of

the

actual

issue him the corresponding stock certificate representing the 50% of

SUGGESTED ANSWER:

what he already paid. The Corporate Secretary of the corporation refused. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 124 of 173

Mercantile Law Q&As (2007-2013)

a.

The

Corporate

[email protected] JayArhSals

Secretary

is

merger anytime after the

correct because the Corporation Code

approval of the SEC.

provides that no certificate of stock shall be issued to a subscriber until the shares as subscribed have been fully paid.

SUGGESTED ANSWER: b.

The

effective

date

of

the

merger is always the date of the approval

55. XXX

Corporation

and

YYY

Corporation have agreed to be merged into one

corporation. To

facilitate

merger,

the

both

corporations agreed that the merger be made effective on May 31,2012. The Securities Commission

and

Exchange

(SEC) approved

the

Articles of Merger on June 30, 2012. Which statement is most accurate? a. The

effective

date

of

the

merger is May 31, 2012, the

of the Articles of Merger by the SEC. AAA Corporation is a wholly owned subsidiary of BBB Corporation. To support agreed

approval

of

effective

date

of

the

the

corporate

loan

of

AAA

of the Board of Directors of BBB Corporation. The

Articles

of

Incorporation

must provide such power and

be

approved

by

the

Board of Directors. Providingcorporate guarantee

to

another

corporation is a necessary

approved by the Board of

exercise

Directors and the

of

power

of

a

corporation.

stockholders. stockholders

its

It only requires the approval

merger would be the date

d. The

Corporation

valid?

Articles of Merger by the c. The

to

AAA

that the corporate guarantee will be

the

SEC.

give

of

Corporation. What is required so

b. The effective date of the the

BBB

to

guarantee

as the effective date.

of

business

Corporation,

date stipulated by the parties

merger is always the date

the

and

the

Board of Directors can set the effective date of the

It

would

require

both

the

approval of the Board of Directors and the stockholders on record.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 125 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

SUGGESTED ANSWER:

b. Classification of shares may be allowed for as long as it is clearly stated

a. It only requires the approval of the

Board

of

Directors

of

BBB

as such in the Articles of Incorporation of the Corporation.

Corporation. ABC 57.

The

capital

of

declared

stock

ABC

dividends to its stockholders. The

Corporation is divided into common

stock dividends were approved by

shares

the

and

stock

Corporation

preferred

shares.

Board

of

Directors

of

ABC

Preferred shares are preferred as to

Corporation. In the subsequent year

dividends and common shares are

however, the Board again approved

those shares which have the regular

the

and ordinary attributes of a share of

dividends

a corporation. Which statement is

shareholdings

most accurate?

statement is most accurate?

a. This kind of classification

redemption and

of

all

to

pay

in

cash.

stock the Which

The redemption of the stock

may not be allowed or else it

dividends

can

be

validly

will violate the Doctrine of

approved

by

the

Board

Equality of shares.

without any conditions.

b. Classifications

of

shares

The

redemption

of

stock

may be allowed for as long

dividends

as it is clearly stated as

allowed if there are sufficient

such

earnings and should not be

in

the

Articles

of

may

only

be

Incorporation of the

violative of the trust fund

Corporation.

doctrine.

c. Classifications of shares is

The redemption of the shares

mainly for business purpose

may

to attract investors.

existing property and other

Classifications of shares may be allowed with the approval of the

stockholders

Board of Directors. SUGGESTED ANSWER:

and

be

taken

from

the

assets of the corporation. None of the above.

the Recommendation in respect of MCQ #58: It is recommended that examinees be given full credit for whatever answer they give as the question is vague. It does not state that

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 126 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

stockholders representing at least two-thirds

SUGGESTED ANSWER:

of the outstanding capital stock approved b.

the declaration of stock dividends.

Despite

the

change

in

shareholder, there is actually no change X sold all his shares in AAA Hotel

in the juridical entity and therefore

Corporation to Y. X owns 99% of

existing employees cannot automatically

AAA Hotel Corporation. As the new

be considered separated.

owner, Y wanted a reorganization of the

hotel

primarily

which the

is

to

separation

include of

South China Airlines is a foreign airline company.

all

South

China

Airlines

existing employees and the hiring of

tickets are sold in the Philippines

new employees. Which statement is

though Philippine Airlines as their

most accurate?

general agent. South China Airlines

With the change in ownership,

is not registered to do business as

in effect there is a new

such with the Philippine Securities

juridical entity and therefore

and Exchange Commission. Which

all employees are considered

statement is most accurate? Although

separated. Despite

the

shareholder,

unlicensed

to

do

change

in

business in the Philippines,

there

is

South China Airlines can sue

actually no change in the

before the Philippine Courts

juridicalentityand

and can also be sued.

thereforeexisting

South China Airlines can sue but cannot be sued.

employeescannot

South China Airlines cannot sue

automatically be

and cannot be sued also.

considered separated. Y, as the new shareholder, has

South China Airlines can be

the right to retain only those

sued in Philippine Courts

employees

but cannot sue.

who

in

his

judgment are qualified. For as long as the existing

SUGGESTED ANSWER:

employees are given their separation pay, they can be terminated.

d. South China Airlines can be sued in Philippine Courts but cannot sue.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 127 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

So that ABC Corporation could venture

shares equivalent to their

into more projects, it needed to raise

existing

funds by issuing new shares to

because

increase its capitalization. X, Y, Z, J

Code provides that each of

and

existing

the existing stockholders

shareholders of the company. They

will have preemptive rights

hold

to

G

are

20%

the

each.

five How

will

the

additional shares be divided among

the

shareholdings the

Corporation

extent

of

their

existing shareholdings.

the existing shareholders? The existing shareholders can subscribe

to

the

new

shares equivalent to their existing because

shareholdings the

Corporation

Code provides that each of the existing stockholders will have preemptive rights to

the

extent

of

their

existing shareholdings. rights

is

equivalent to the percentage that they want. Each of the existing shareholder can exercise their right of first

refusal

against

authorized

capital

stock,

the

Corporation Code requires the approval of the majority of the Board of Directors only. the approval of the majority of the

stockholders

and

the

Board of Directors. the approval of 2/3 of the

The existing shareholders' preemptive

If ABC Corporation will increase its

each

other. Preemptive rights and right of first refusal are one and the same. SUGGESTED ANSWER: a. The existing shareholders can subscribe to the new

shareholders

of

the

outstanding capital stock as well as the approval of the Securities

and

Exchange

Commission. the approval of the majority of the Board of Directors and approval of the shareholders holding 2/3 share of the outstanding capital stock. Recommendation in respect of MCQ #62: It is recommended that examinees be given full credit for whatever answer they gave as

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 128 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

the question is vague. It does not state that

extended. What will happen to the

the increase of the authorized capital stock

corporation? a. The

also requires the approval of the SEC.

corporation

is

dissolved ipso facto. X is a minority stockholder of CCC

There is a need to pass a board

Corporation. Y is a member of the

resolution

Board

dissolve the corporation.

of

Directors

of

CCC

to

formally

Corporation and at the same time

The Board of Directors must

he is the President. X believes that Y

pass a resolution for the

is mismanaging CCC Corporation

corporation to formally go

hence, as a stockholder and in behalf of the other stockholders, he

into liquidation. The stockholders must pass a

wanted to sue Y. Which statement is

resolution

most accurate?

to

dissolve

the

corporation.

X can institute a derivative suit in behalf of himself as a

SUGGESTED ANSWER:

stockholder. A

derivative

suit

must

be

instituted in behalf of the

a. The corporation is dissolved ipso facto.

corporation. Derivative suit is an exclusive remedy that X can institute. Derivative suit is not the remedy

The term of one (1) year of the Board of Directors

AAA

Corporation

expired last February 15, 2012. No new

in this situation.

of

election

of

the

Board

of

Directors was called, hence, the existing members of Board continue

SUGGESTED ANSWER:

as Directors in hold over capacity. b. A derivative suit must be

Which statement is most accurate? This is allowed provided there

instituted in behalf of the corporation

is a valid and justifiable The

term accordance

GGG with

Corporation its

Articles

in of

Incorporation ended last January

reason for not calling for an

election

of

the

new

members of the Board.

30, 2012. The term was not

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 129 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

of its license to do

This is not allowed because the

business.

term of the directors must only be for one (1) year.

There is no more effect in the

The positions of the members of

license because anyway at

the Board of

the time of registration, a

Directorswillbe

resident agent was

automatically declared

appointed.

vacant.

This can be a ground for

Acting as members of the Board

suspension only.

of Directors in a hold over

This will result in automatic

capacity must be ratified by

revocation of its license to do

the stockholders.

business in the Philippines.

SUGGESTED ANSWER:

SUGGESTED ANSWER:

a. This is allowed provided there

a.

This

can

be

a

ground

for

is a valid and justifiable reason for not

revocation or suspension of its license to

calling

do business.

for

an

election

of

the

new

members of the Board. The By-laws of ABC Corporation is AAA

Corporation

is

foreign

silent as to when a stockholder can

corporation that wants to operate a

be qualified to attend the meeting of

representative office here in the

the

Philippines.

the

Secretary sent out the notice of the

Corporation Code, there is a need to

stockholders meeting two (2) days

appoint a Resident Agent as a

before the meeting and at that time

condition precedent to the issuance

X was not yet a stockholder. On the

of a license to transact business in

day of the meeting, however, X

the Philippines. After two (2) years,

became a shareholder which was

AAA

its

duly recorded in the stock and

Resident Agent and did not appoint

transfer book. Which statement is

anyone anymore. Which statement

most accurate?

As

a

required

Corporation

by

removed

is the most accurate? This

can

be

a

stockholders.

The

Corporate

X is a stockholder of ABC ground

for

revocation or suspension

Corporation as of the time of

meeting

of

the

stockholders for the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 130 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

purpose of electing the

b. bought

members of the board.

Corporation,

b. X is not qualified to elect members because

of at

the the

shares a

XYC

sister

company of ABC Corporation

board

time

of

when he learned that XYC

the

Corporation was about to

notice of the meeting was

also list its share in the

sent, she was not yet a

Philippine Stock Exchange. c. bought

stockholder.

shares

of

ZZZ

Qualifications as to who are

Corporation when he learned

considered as stockholders

that ABC Corporation would

on record for purposes of

acquire ZZZ Corporation.

being able to elect members of

the

board

are

to

All of the above.

be

determined by the By-laws alone.

SUGGESTED ANSWER: All of the above.

None of the above.

The purpose of the "Tender Offer" Rule

SUGGESTED ANSWER:

is to -

a. X is a stockholder of ABC

ensure an even playing field for

Corporation as of the time of meeting of

all

shareholders

the stockholders for the purpose of

company

in

opportunity

election the members of the board

to

of

a

terms

of

sell

their

shareholdings. X, who is the Executive Vice President

ensure

that

minority

listed

shareholders in a publicly

company, can be held liable or

listed company are protected

guilty of insider trading if, he -

in the sense that they will

of

ABC

Corporation,

bought

shares

Corporation

a

of

when

it

ABC

equally

have

the

was

opportunity as the majority

planning to acquire another

shareholders

in

company to improve its asset

selling their shares.

same

terms

of

base, the news of which

ensure that the shareholders

increased the price of the

who would also want to sell

shares

their shareholdings will have

in

the

Stock

Exchange. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 131 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

the opportunity for a better

b. the

price.

Philippine

Stock

Exchange;

All of the above.

c. the

Securities

and

Exchange Commission; SUGGESTED ANSWER: d.

the Securities and Exchange Commission and the

All of the above.

Philippine Stock Exchange.

Section 38 of The Securities Regulation Code

defines

an

independent

SUGGESTED ANSWER:

director as a person who must not have a relation with the corporation which

would

interfere

with

his

c. The Securities and Exchange Commission

exercise of independent judgment in carrying out the responsibilities of a

The government agency granted with

director. To ensure independence

the

therefore, he must be -

examination over banks and non-

nominated and elected by the entire shareholders;

power

bank

of

supervision

financial

and

institutions

performing quasi-banking functions,

nominated and elected by the

to ensure that the conduct of its

minority shareholders;

business is on a sound financial

nominated and elected by the majority shareholders; appointed by the Board.

basis that will provide continued solvency and liquidity is The Philippine Deposit Insurance Corporation;

SUGGESTED ANSWER: c. Nominated and elected by the majority shareholders; "Securities" issued to the public are required by law to be registered with -

The Bangko Sentral ng Pilipinas; The Anti-Money Laundering Council; The Securities and Exchange Commission. SUGGESTED ANSWER:

the Bangko Sentral ng Pilipinas; b. The Bangko Sentral ng Pilipinas “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 132 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

XYZ Corporation is a quasi-

X maintains a savings deposit in the

bank.

amount of Php·1 Million with ABC Bank

Corporation.

X

also

has

XYZ Corporation is an

obtained a loan from ABC Bank

Investment Company.

Corporation in the amount of Php1

XYZ is none of the above.

Million. In case of default, ABC Bank can set-off the loan from the savings account being maintained by X with ABC Bank. Set-off is not possible because legal compensation is not allowed

in

banking

transaction. Deposit accounts are usually earmarked

for

specific

purpose hence offsetting is not legally possible. Off

-setting

is

not

possible

because the obligation of X is a "simple loan".

savings

account

being

XYZ Corporation is engaged in lending funds to small vendors in various public markets. To fund the lending, Corporation

through

Bank

Corporation

and

ZZZ

Corporation were merged into XX ZZ Bank Corporation. So as not to create any unnecessary conflict, all the former directors of both banks wanted to be appointed /elected as members of the Board of Directors of the merged bank. Each bank used to have eleven (11) members of the board. The maximum number of directors of the merged bank is -

21;

maintained by X with ABC bank.

XYZ

XXX

22;

ABC Bank can set-off the loan the

XYZ Corporation is quasi-bank.

15;

SUGGESTED ANSWER:

from

SUGGESTED ANSWER:

raised

funds

borrowings from

friends

and investors. Which statement is most accurate?

11. SUGGESTED ANSWER: c. 21 All senior officers of ABC Bank are entitled to obtain a housing loan. X is an Executive Vice President for Operations

of

ABC

Bank.

She

obtained a housing loan with the

a. XYZ Corporation is a bank. “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 133 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

ABC Bank. Which statement is most

owned by ABC Holding Company.

accurate?

Which statement is most acurate?

a. The

housing

loan

of

X

Buying back the shares by XYZ

requires a guarantor from

Bank

somebody

allowed.

who

is

not

housing

loan

of

absolutely

not

Buying back the shares may be

connected with the bank. b. The

is

allowed provided it is with

X

requires the approval of the

the

Board of Directors of the

Monetary

bank.

disposed of within six (6)

(a)

but

the

Board

and

Buying back the shares may be

benefit for employees, does require

of

months.

The housing loan of X, being a not

approval

allowed

will

require (b).

provided

such

shares 'will be disposed of

The housing loan of X, being a

within ten (1 0) years.

benefit for employees, will

Buying back the shares may be

not require

done anytime provided the

(a) and (b).

Board

of

Directors

will

approve the same. SUGGESTED ANSWER: SUGGESTED ANSWER: d. The housing loan of X, being a benefit for employees, will not require (a)

b. Buying back the shares may be allowed provided it is with the approval

and (b).

of the Monetary Board and disposed of ABC Holdings Company, a Hong Kong

within six (6) months.

company, owns 10% of XYZ Bank. Because of the peace and order

X is being charged for violation of Anti-

situation in the Philippines, ABC

Graft and Corrupt Practices because

Holding Company wanted to sell its

he

shareholdings

accumulated unexplained wealth. X

in

XYZ

Bank.

is

suspected

of

having

Unfortunately, nobody is interested

maintains

deposit accounts

to buy a 1 0% shareholdings in a

ABC Bank. The Ombudsman filed

bank. The board of directors of XYZ

criminal cases against X before the

Bank thought that it would be a

Sandiganbayan.

good idea to buy back the shares

issue subpoenas against ABC Bank

Can

the

with

Court

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 134 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

to produce all documents pertaining

big amounts. Which statement is

to all the deposit accounts of X?

most accurate?

a. Yes,

because

there

is

a. The

same

rules

under

already a pending case and

Secrecy of Bank Deposit

provided

the

Act will apply.

must

specific

be

subpoena as

to

b. An

which account.

approval

from

the

Monetary Board is necessary

b. Yes, it is enough that the

to open the account.

specific bank is identified.

Because the deposit is in US

No, because the issuance of the

Dollars, it is covered by the

subpoena has no real legal

Foreign

basis.

Act which allows disclosure

Even

without

a

information

subpoena,

about

only

the

to

Sandiganbayan

because

upon

Deposit

the

written

permission of the depositor.

deposit accounts of X can be submitted

Currency

Approval

the

from

the

Court

is

necessary to order disclosure

it

of the account.

will be used in a pending SUGGESTED ANSWER:

case.

a. The same rules under Secrecy

SUGGESTED ANSWER:

of Bank deposit Act will apply. a. Yes, because there is already a pending case and provided the subpoena must be specific as to which account.

X is a depositor of AAA Bank. She has three (3) deposit accounts all under her

name.

One,

in

checking

X, a private individual, maintains a

account, one in saving account and

dollar deposit with ABC Bank. X is

another one in time deposit account.

suspected to be the leader of a

Each account has a balance of

Kidnap for Ransom Gang and he is

Php250,000. AAA Bank became

suspected of depositing all ransom

insolvent.

money

account

Insurance Corporation closed the

which are all in US Dollars. The

Bank. X therefore is unable to

police want to open said account to

withdraw from all of the accounts.

know if there are really deposits in

She then filed her claims with the

in

said

deposit

Philippine

Deposit

Philippine Deposit Insurance “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 135 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

a. In an examination to determine

Corporation. Which statement is most accurate?

gross estate of a decedent.

a. X can claim a total of Php500,000

for

all

the

Php750,000

a

research

with

the

computer

Institute

of

agency. When not busy with his

account of Php250,000. claim

as

Computer Technology, a government

X can only claim from one (1) can

works

engineer

three (3) accounts.

X

X

a

total

from

all

of

work, but during office hours, he

the

developed a software program for law firms that will allow efficient

three (3) accounts. X cannot claim anything from any of the deposit accounts.

monitoring software

of

the

program

cases, is

not

which at

all

related to his work. Assuming the SUGGESTED ANSWER:

program is patentable, who has the right over the patent?

a. X can claim a total of Php

X;

500,000 for all the three (3) accounts. The

Bank

Secrecy

Law

(RA

Institute of Computer

1405)

prohibits disclosing any information about

deposit

individual

records

without

of

court

an

examination

Neither X nor the Institute of Computer

an

to

can

invention; X and the employer of X will jointly have the rights over

determine gross estate of a

the patent.

decedent. in an investigation for violation

Technology

claim patent right over the

order

except in

Technology;

SUGGESTED ANSWER:

of Anti-Graft and Corrupt Practices.

a. X

in an investigation by the Ombudsman. in an impeachment proceeding.

The "test of dominancy" in the Law on Trademarks, is a way to determine whether

SUGGESTED ANSWER:

there

exists

an

infringement of a trademark by -

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 136 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

b. X

determining if the use of the

can

sue

mark has been dominant in

infringement

the market.

artistic

focusing on the similarity of

Y

for

because

works

are

protected from moment of

the prevalent features of

creation.

the competing marks

c. Works of art need to be

which might create

copyrighted

confusion.

protection under the law.

looking at the mark whether

also

to

get

Y can use the drawing even

they are similar in size, form

though

or color.

because it is already a public

looking at the mark whether

not

copyrighted

property having been

there is one specific feature

published already.

that is dominant. SUGGESTED ANSWER: SUGGESTED ANSWER: b. X can sue Y for infringement b. Focusing on the similarity of the prevalent features of the competing

because

artistic works

are protected

from moment of creation.

marks which might create confusion. Compulsory

Licensing

of

Inventions

X's painting of Madonna and Child was

which are duly patented may be

used by her mother to print some

dispensed with or will be allowed

personalized gift wrapper. As part of

exploitation even without agreement

her mother's efforts to raise funds

of the patent owner under certain

for Bantay Bata, the mother of X

circumstances,

sold the wrapper to friends. Y, an

emergency, for reason of public

entrepeneur, liked the painting in

interest, like national security, etc.

the wrapper and made many

The person who can grant such

copies and sold the same through National Bookstore. Which statement is most accurate? Y can use the painting for his

like

national

authority is the Director General of the Intellectual Property Office; the Director of Legal Affairs of

use because this is not a

the

Intellectual

copyrightable material.

Office;

Property

the owner of the Patent right; “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 137 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

any agent of the owner of the

a. obligations both past and future;

Patent right.

obligations SUGGESTED ANSWER:

time

the

mortgage

is

future obligations only;

the Intellectual Property Office;

past obligations only.

The Fair Use Doctrine allows others to copyrighted

the

at

constituted;

b. the Director of Legal Affairs of

utilize

existing

works

under

certain conditions. The factors to consider whether use is fair or not

SUGGESTED ANSWER: b. obligation existing at the time the mortgage is constituted;

would be the purpose and character of the use, nature of the copyrighted

Which

phrase

best

completes

the

work, amount and substantiality of

statement - A chattel mortgage can

the portions used, and what else?

cover:

effect of the use upon the creator

only property described in the

of the work.

deed without exception;

effect of the use upon the potential

market

of

can also cover substituted

the

property;

work.

properties deed

effect of the use upon the public

c.

potential market of the work. best

case

of

being

a

SUGGESTED ANSWER:

b. effect of the use upon the

phrase

trade

the

after acquired property.

in which the creator belongs. SUGGESTED ANSWER:

in

in

in

substitute;

effect of the use upon the class

Which

except

stock

in general.

described

completes

described

in

the

deed except in case of stock in trade the

statement - A chattel mortgage can be constituted to secure:

properties

being a substitute; Which

phrase

best

completes

the

statement - The Deed of Chattel mortgage, if not registered with the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 138 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Register of Deeds where debtor

c. in the Stock and Transfer Book of the corporation with

resides: a. is

not

valid,

binding

hence

between

mortgagor

and

the Corporate Secretary;

not the

with the Register of Deeds

the

where the debtor resides

mortgagee; b. is

and the principal office of

binding

between

mortgagor mortgagee

and but

the

the corporation.

the

will

not

between

the

SUGGESTED ANSWER:

affect third party; c. to

be

valid

mortgagor mortgagee,

and it

must

the be

coupled with the delivery of the subject matter of the chattel mortgage;

d. With the Register of Deeds where

the

debtor

resides

principal office of the corporation. Which

phrase

best

completes

statement - The affidavit of good

an

oath

where

the

made for the purpose of the

securing

the

mortgagor and the mortgagee but will

specified

and

between

an phrase

best

obligations that

the

obligation is just and valid;

not affect third party. Which

parties

swear that the mortgage is

SUGGESTED ANSWER: binding

the

is:

mortgage.

is

the

faith in a Deed of Chattel Mortgage

is as if a non-existent chattel

b.

and

completes

affidavit, which

the

statement - To bind third parties, a

mortgage

chattel mortgage of shares of stock

parties;

must be registered:

will

absence vitiate

between

of the the

necessary only if the chattel being mortgaged are growing

with the Register of Deeds where

crops;

the debtor resides; with the Register of Deeds where

the

a

certification

from

the

the principal office of the

mortgagor that he is the

corporation is;

mortgagor of the chattel. SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 139 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

a. an oath where then parties

SUGGESTED ANSWER:

swear that the mortgage is made for the purpose

of

securing

the

obligations

specified and that the obligation is just and valid.

b. the one (1) year period will not be interrupted by the filing of the action. What is the effect if the. proceeds in an

X defaulted in his loan with Y. Y instituted extra-judicial foreclosure

extra-judicial foreclosure sale is not sufficient to pay for the obligation?

of the property subject of a real

the mortgagee can claim for

estate mortgage that secured the

deficiency judgment from

loan. X has one year within which to

the debtor.

the

the mortgagee can claim for

action

deficiency judgment from the

questioning the validity of the extra-

mortgagor even though it is a

judicial

third party mortgage.

redeem

the

foreclosure,

property. X

filed

foreclosure

After an

sale.

Which the

statement is most accurate? to

redeem

will

has

no

more

recourse or claim against the

The one (1) year period within which

mortgagee debtor.

be

interrupted by the filing of

the mortgagee cannot claim for

an action questioning the

deficiency judgment from the

validity of the foreclosure.

debtor

filing of the action. The one (1) year period will be extended for another year because of the filing of an action validity

questioning of

the

the

foreclosure

sale.

an

SUGGESTED ANSWER: a. The mortgage can claim for deficiency judgement from the debtor. X mortgaged her residential house and lot

in

favor

of

ABC

Bank.

X

defaulted in her loan and so the

If the action which questions the validity

its

extrajudicial foreclosure.

The one (1) year period will not be interrupted by the

because

of

the

bank

foreclosed

the

real

estate

foreclosure

mortgage on the residential house. Y

prospers, the period will be

then bought the residential house

interrupted.

and lot before the expiration of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 140 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

redemption period. Can Y now take

foreclose if collection is not

possession of the property?

enough;

a. No,

because

it

is

still

the creditor can foreclose the

covered by the redemption

mortgage and demand

period and the purchaser is

collection for any

not

deficiency;

yet

entitled

as

a

matter of right to take

None of the above.

possession of the property. b. Yes, the purchaser is now entitled to the possession of the house. No, because there is a need to talk to X to leave the house. No, because Y was not the one who foreclosed the mortgage on the property.

SUGGESTED ANSWER: c. the creditor can foreclose the mortgage and demand collection for any deficiency. XYZ Corporation bought ten (1 0) units of

Honda

Civic

from

CCC

Corporation. ABC Bank granted a loan

SUGGESTED ANSWER:

to

XYC

executed a. No, because it is still covered

a

Corporation financing

which

agreement

which provided for the principal

the

amount, the installment payments,

purchaser is not yet entitled as a matter

the interest rates and the due dates.

of

On due dates of the installment

by

the right

redemption to

take

period

possession

and of

the

payments,

property.

XYZ

Corporation

was

asked to pay for some handling Which

phrase

best

completes

the

charges and other fees which were

statement - When a debt is secured

not mentioned in the Financing

by a real estate mortgage, upon

Agreement. Can XYC Corporation

default of the debtor:

refuse to pay the same?

the only remedy of the creditor is

No, because handling charges

to foreclose the real estate

and other fees are usual in

mortgage;

certain

another

remedy

is

filing

an

action for collection and then

banking

transactions. Yes,

because

ABC

Bank

is

required to provide XYZ Corporation not only the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 141 of 173

Mercantile Law Q&As (2007-2013)

amount

of

[email protected] JayArhSals

the

monthly

investments with any bank,

installments but also the

when

details

finance

examination is made in the

charges as required by the

course of the SSP's periodic

Truth in Lending Act.

special examination of said

c. No,

of

the

because

Agreement

the is

Finance a

valid

document to establish the existence of the obligation. Yes,

because

legally,

inquiry

or

bank to ensure compliance with

the

Anti-Money

Laundering Act (AMLA); b. Upon

finance

the

Philippine

Insurance

Deposit

Corporation

charges are never allowed in

(PDIC) and SSP inquiry into

any banking transaction.

and examination of deposit accounts in case there is a

SUGGESTED ANSWER: Yes,

finding of unsafe or unsound

because

ABC

Bank

is

required to provide XYZ Corporation not only the amount

of

the

monthly

installments but also the details

of

the

finance

charges as required by the Truth in Lending Act.

banking practice; c. Upon inquiry in cases of impeachment; d. Upon

inquiry

Commissioner Revenue

in

by of

the

the

Internal event

a

taxpayer files an application to

compromise

his

tax

liabilities on the ground of financial incapacity.

Which of the following is an exception to the secrecy of bank deposits which are in Philippine Pesos, but NOT an exception to the secrecy of foreign currency deposits? Upon BangkoSentralngPilipinas (SSP) inquiry into or examination of deposits or

SUGGESTED ANSWER: c. Upon inquiry in cases of impeachment. The Anti-Money Laundering Law is a law that seeks to prevent money laundering activities by providing for more transparency in the Philippine Financial System, hence the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 142 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

following institutions are covered by

The

the law, except:

Investment Act of 1991 is to introduce

a. bank and any financial

main

feature

of

the

Foreign

the concept of "Negative Lists". Under

institutions;

the said law, what is a "Negative List"?

pawnshops; It

casino operators;

is

a

list

of

business

activities or enterprises in

All of the above.

the SUGGESTED ANSWER:

Philippines

that

foreigners are disqualified to engage in.

c. casino operators

It is a list of business activities or enterprises in

For purposes of determining violation of the

prov1s1ons

of

the

Anti-Money

as

a

"Suspicious

Transaction"

with

Institutions"

regardless

"Covered of

engage in. It is a list of business activities or enterprises that are open

the

to

amount involved, where which the amount

involved

commensurate

is

with

client's business or financial

the

or enterprises that are open to

foreign

provided

trade obligation, purpose or

it

investments is

with

the

approval of the Securities

economic justification;

and Exchange Commission.

client is not properly identified;

SUGGESTED ANSWER: a. It is a list of business activities or enterprises

d. all of the above

with

It is a list of business activities

there is no underlying legal or

SUGGESTED ANSWER:

is

Investment.

capacity;

All of the above.

it

investments

approval of the Board of

not the

foreign

provided

following circumstances exist/s? the

that

foreigners are qualified to

Laundering Law, a transaction is considered

Philippines

in

the

Philippines

that

foreigners are disqualified to engage in.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 143 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

2011 Mercantile Law Exam

damages estimated at Php80 Million. The cargo owners filed a suit against X Shipping

MCQ (November 20, 2011)

but it invoked the doctrine of limited

P rode a Sentinel Liner bus going to Baguio from Manila. At a stop-over in Tarlac, the bus

driver,

passengers

the

conductor,

disembarked

for

and

the

lunch.

P

liability since its vessel suffered an Php80 Million damage, more than the collective value of all lost cargo. Is X Shipping correct?

decided, however, to remain in the bus, the

Yes, since under that doctrine, the

door of which was not locked. At this point,

value of the lost cargo and the

V, a vendor, sneaked into the bus and

damage to the ship can be set-off.

offered P some refreshments. When P rudely declined, V attacked him, resulting

No, since each cargo owner has a

in P suffering from bruises and contusions.

separate and individual claim for

Does he have cause to sue Sentinel Liner?

damages.

Yes, since the carrier's crew did

Yes, since the extent of the ship’s

nothing to protect a passenger

damage was greater than that of the

who remained in the bus during

value of the lost cargo.

the stop-over. No,

since

X

Shipping

No, since the carrier's crew could

incurred

not have foreseen the attack.

abandoned its ship.

a

total

neither

loss

nor

Yes, since the bus is liable for

A writes a promissory note in favor of his

anything that goes wrong in the

creditor, B. It says: "Subject to my option, I

course of a trip.

promise to pay B Php1 Million or his order or give Php1 Million worth of cement or to

No, since the attack on P took place

authorize him to sell my house worth Php1

when the bus was at a stop-over.

Million. Signed, A." Is the note negotiable?

A cargo ship of X Shipping, Co. ran

No, because the exercise of the

aground off the coast of Cebu during a

option to pay lies with A, the

storm and lost all its cargo amounting to

maker and debtor.

Php50 Million. The ship itself suffered

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 144 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, because it authorizes the sale of

No, since pre-emptive rights are

collateral securities in case the note

governed

is not paid at maturity.

incorporation.

by

the

articles

of

Yes, because the note is really

M makes a promissory note that states: "I,

payable to B or his order, the other

M, promise to pay Php5,000.00 to B or

provisions being merely optional.

bearer. Signed, M." M negotiated the note by delivery to B, B to N, and N to O. B had

Yes, because an election to require

known that M was bankrupt when M

something to be done in lieu of

issued the note. Who would be liable to O?

payment of money does not affect M and N since they may be assumed

negotiability.

to know of M's bankruptcy ABC Corp. increased its capital stocks from Php10 Million to Php15 Million and, in the

N, being O's immediate negotiator

process, issued 1,000 new shares divided

of a bearer note

into Common Shares "B" and Common Shares "C." T, a stockholder owning 500

B, M, and N, being indorsers by

shares, insists on buying the newly issued

delivery of a bearer note

shares through a right of pre-emption. The company claims, however, that its By-laws deny T any right of pre-emption. Is the corporation correct? No,

since the

B, having known of M's bankruptcy S delivered 10 boxes of cellphones to Trek Bus Liner, for transport from Manila to

By-Laws cannot

deny a shareholder his right of pre-emption.

Ilocos Sur on the following day, for which S paid the freightage. Meanwhile, the boxes were stored in the bus liner’s bodega. That night, however, a robber broke into the

Yes, but the denial of his pre-

bodega and stole S’s boxes. S sues Trek

emptive right extends only to 500

Bus Liner for contractual breach but the

shares.

latter argues that S has no cause of action based on such breach since the loss

Yes, since the denial of the right

occurred while the goods awaited transport.

under the By-laws is binding on T.

Who is correct?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 145 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

The bus liner since the goods were

serving as an arm for receiving its

not lost while being transported.

outside orders for pizzas.

S

Yes, it is not shown that one

since

the

goods

were

unconditionally placed with T for

company

transportation.

the

completely

finances,

dominates

policies,

and

business practices of the other. S since the freightage for the goods had been paid.

Yes, since the two companies perform two distinct businesses.

The bus liner since the loss was due to a fortuitous event.

A negotiable instrument can be indorsed by way of a restrictive indorsement, which

X Corp. operates a call center that received

prohibits

orders for pizzas on behalf of Y Corp. which

constitutes the indorsee as agent of the

operates a chain of pizza restaurants. The

indorser. As agent, the indorsee has the

two companies have the same set of

right, among others, to

further

negotiation

and

corporate officers. After 2 years, X Corp. dismissed its call agents for no apparent

demand payment of the instrument

reason. The agents filed a collective suit for

only.

illegal dismissal against both X Corp. and Y Corp. based on the doctrine of piercing the

notify the drawer of the payment of

veil of corporate fiction. The latter set up

the instrument.

the defense that the agents are in the employ of X Corp. which is a separate juridical entity. Is this defense appropriate? No, since the doctrine would apply, the two companies having the same set of corporate officers. No, the real employer is Y Corp., the pizza company, with X Corp.

receive payment of the instrument. instruct that payment be made to the drawee. Under the Negotiable Instruments Law, a signature by procuration operates as a notice that the agent has but a limited authority to sign. Thus, a person who takes a bill that is drawn, accepted, or indorsed by procuration is duty-bound to inquire into the extent of the agent's authority by:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 146 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

examining the agent’s special power

either actual or constructive

of attorney.

receipt.

examining the bill to determine

On X’s failure to pay his loan to ABC

the extent of such authority.

Bank, the latter foreclosed the Real Estate Mortgage he executed in its favor. The

asking the agent about the extent of

auction sale was set for Dec. 1, 2010 with

such authority.

the notices of sale published as the law

asking the principal about the extent of such authority. Under the Negotiable Instruments Law, if the holder has a lien on the instrument which arises either from a contract or by implication of law, he would be a holder for

required. The sale was, however, cancelled when Dec. 1, 2010 was declared a holiday and re-scheduled to Jan. 10, 2011 without republication of notice. The auction sale then proceeded on the new date. Under the circumstances, the auction sale is rescissible.

value to the extent of his successor's interest. his predecessor's interest. the lien in his favor. the amount indicated on the instrument's face. The liability of a common carrier for the goods it transports begins from the time of conditional receipt. constructive receipt.

unenforceable. void. voidable. X executed a promissory note with a face value of Php50,000.00, payable to the order of Y. Y indorsed the note to Z, to whom Y owed Php30,000.00. If X has no defense at all against Y, for how much may Z collect from X? Php20,000.00, as he is a holder for value to the extent of the difference between Y's debt and the value of

actual receipt.

the note. Php30,000.00, as he is a holder for value to the extent of his lien.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 147 of 173

Mercantile Law Q&As (2007-2013)

Php50,000.00,

but

[email protected] JayArhSals

with

the

P sold to M 10 grams of shabu worth

obligation to hold Php20,000.00

Php5,000.00. As he had no money at the

for Y's benefit.

time of the sale, M wrote a promissory note promising to pay P or his order Php5,000. P

None, as Z's remedy is to run after

then indorsed the note to X (who did not

his debtor, Y.

know about the shabu), and X to Y. Unable

Under the Anti-Money Laundering Law, a covered institution is required to maintain a system of verifying the true identity of their

to collect from P, Y then sued X on the note. X

set

up

the

defense

of

illegality

of

consideration. Is he correct?

clients as well as persons purporting to act

No, since X, being a subsequent

on behalf of

indorser, warrants that the note is

those doing business with such clients. unknown principals. the covered institution. such clients. It is settled that neither par value nor book value is an accurate indicator of the fair value of a share of stock of a corporation. As to unpaid subscriptions to its shares of stock, as they are regarded as corporate assets, they should be included in the capital value.

valid and subsisting. No, since X, a general indorser, warrants that the note is valid and subsisting. Yes, since a void contract does not give rise to any right. Yes, since the note was born of an illegal consideration which is a real defense. In a contract of carriage, the common carrier is liable for the injury or death of a passenger resulting from its employee’s fault although the latter acted beyond the scope of his authority. This is based on the

book value. par value.

rule

that

implied

the

carrier

duty to

has

an

transport the

passenger safely. (D) market value.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 148 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

rule that the carrier has an express

in every case even if the majority of

duty to transport the passenger

the

safely

during the elections.

Doctrine of Respondeat Superior.

members

decide

otherwise

The rule is that the valuation of the shares of a stockholder who exercises his appraisal

rule in culpa aquiliana. A

holder

in

due

course

rights is determined as of the day prior to holds

the

instrument free from any defect of title of prior

parties

and

free

from

the date on which the vote was taken. This is true -

defenses

regardless of any depreciation or

available to prior parties among themselves.

appreciation in the share's fair

An example of such a defense is -

value.

fraud in inducement.

regardless of any appreciation in the share's fair value.

duress amounting to forgery.

regardless of any depreciation in the

fraud in esse contractus.

share's fair value.

alteration.

only if there is no appreciation or depreciation

In elections for the Board of Trustees of

elected but may not cast more than one vote for one candidate. This is true unless set aside by the members in plenary session.

the

share's

fair

value.

non-stock corporations, members may cast as many votes as there are trustees to be

in

T Shipping, Co. insured all of its vessels with

R

Insurance,

Co.

The

insurance

policies stated that the insurer shall answer for all damages due to perils of the sea. One of the insured's ship, the MV Dona Priscilla, ran aground in the Panama Canal when its

in every case even if the Board of

engine pipes leaked and the oil seeped into

Trustees resolves otherwise.

the cargo compartment. The leakage was caused by the extensive mileage that the

unless otherwise provided in the

ship had accumulated. May the insurer be

Articles of Incorporation or in the

made to answer for the damage to the cargo

By-laws.

and the ship?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 149 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, because the insurance policy

Yes, since X and Y are Z’s

covered any or all damage arising

employees.

from perils of the sea. X, Co., a partnership, is composed of A Yes, since there appears to have

(capitalist partner), B (capitalist partner)

been no fault on the part of the

and C (industrial partner). If you were

shipowner and shipcaptain.

partner A, who between B and C would you have an insurable interest on, such that

No, since the proximate cause of the

you may then insure him?

damage was the breach of warranty of seaworthiness of the ship.

No

one,

as

there

is

merely

a

partnership contract among A, B No, since the proximate cause of

and C.

the damage was due to ordinary usage of the ship, and thus not

Both B and C, as they are your

due to a peril of the sea.

partners.

X has been a long-time household helper of

Only C, as he is an industrial

Z. X's husband, Y, has also been Z's long-

partner.

time driver. May Z insure the lives of both X and Y with Z as beneficiary?

Only B, as he is a capitalist partner.

Yes, since X and Y render services to

X is the holder of an instrument payable to

Z.

him (X) or his order, with Y as maker. X then indorsed it as follows: "Subject to no

No, since X and Y have no pecuniary

recourse, pay to Z. Signed, X." When Z went

interest on the life of Z arising from

to collect from Y, it turned out that Y's

their employment with him.

signature was forged. Z now sues X for collection. Will it prosper?

No, since Z has no pecuniary interest in the lives of X and Y

Yes, because X, as a conditional

arising from their employment

indorser, warrants that the note is

with him.

genuine.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 150 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, because X, as a qualified

divulge it. The reason for this is that the

indorser, warrants that the note

test of concealment of material fact is

is genuine.

determined

No, because X made a qualified

at the time of the issuance of the

indorsement.

policy.

No, because a qualified indorsement

at any time before the payment of

does not include the warranty of

premium.

genuineness. at the time of the payment of the A bill of exchange has T for its drawee, U as

premium.

drawer, and F as holder. When F went to T for presentment, F learned that T is only 15

at any time before the policy

years old. F wants to recover from U but the

becomes effective.

latter insists that a notice of dishonor must first be made, the instrument being a bill of exchange. Is he correct?

T, the captain of MV Don Alan, while asleep in his cabin, dreamt of an Intensity 8 earthquake along the path of his ship. On

Yes, since a notice of dishonor is

waking up, he immediately ordered the ship

essential to charging the drawer.

to

return

to

port.

True

enough,

the

earthquake and tsunami struck three days No, since T can waive the

later and his ship was saved. Was the

requirement of notice of dishonor.

deviation proper?

No, since F can treat U as maker

Yes,

due to the minority of T, the

made

drawee.

reasonable ground for believing that

because in

good

the

deviation

faith

and

was on

a

it was necessary to avoid a peril. Yes, since in a bill of exchange, notice of dishonor is at all times

No, because no reasonable ground

required.

for avoiding a peril existed at the time of the deviation.

An insured, who gains knowledge of a material fact already after the effectivity of

No, because T relied merely on his

the insurance policy, is not obliged to

supposed gift of prophecy.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 151 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, because the deviation took

Yes, because it is an original

place based on a reasonable belief of

creation.

the captain. Yes, because it entailed the X, drawee of a bill of exchange, wrote the

application of X's intellect.

words: "Accepted, with promise to make payment within two days. Signed, X." The

No, because it did not entail any

drawer

application of X's intellect.

questioned

the

acceptance

as

invalid. Is the acceptance valid?

D, debtor of C, wrote a promissory note

Yes, because the acceptance is in

payable to the order of C. C's brother, M,

reality a clear assent to the order

misrepresenting

of the drawer to pay.

obtained the note from D, then negotiated it

himself

as

C’s

agent,

to N after forging C's signature. N indorsed Yes, because the form of the

it to E, who indorsed it to F, a holder in due

acceptance is really immaterial.

course. May F recover from E?

No, because the acceptance must be

No, since the forgery of C's signature

a clear assent to the order of the

results in the discharge of E.

drawer to pay.

Yes,

since

only

the

forged

No, because the document must not

signature is inoperative and E is

express that the drawee will perform

bound as indorser.

his promise within two days. No, since the signature of C, the X came up with a new way of presenting a

payee, was forged.

telephone directory in a mobile phone, which he dubbed as the "iTel" and which

Yes, since the signature of C is

uses lesser time for locating names and

immaterial, he being the payee.

telephone numbers. May X have his "iTel" copyrighted in his name?

A material alteration of an instrument without the assent of all parties liable

No, because it is a mere system or

thereon results in its avoidance, EXCEPT

method.

against a prior indorsee.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 152 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

subsequent acceptor.

No, since the promise to just pay a sum of money is unclear.

subsequent indorser. No, since it contains a promise to prior acceptor.

do an act in addition to the payment of money.

X constituted a chattel mortgage on a car (valued at Php1 Million pesos) to secure a

A bank can be placed under receivership

P500,000.00 loan. For the mortgage to be

when, if allowed to continue in business, its

valid, X should have

depositors or creditors would incur

the right to mortgage the car to the

probable losses

extent of half its value. inevitable losses ownership of the car. possible losses unqualified free disposal of his a slight chance of losses

car. registered the car in his name.

EFG

Foundation,

Inc.,

a

non-profit

organization, scheduled an election for its B borrowed Php1 million from L and offered

six-member Board of Trustees. X, Y and Z,

to him his BMW car worth Php1 Million as

who

collateral. B then executed a promissory

foundation, wish to exercise cumulative

note that reads: "I, B, promise to pay L or

voting in order to protect their interest,

bearer the amount of Php1 Million and to

although the Foundation's Articles and By-

keep my BMW car (loan collateral) free from

laws are silent on the matter. As to each of

any other encumbrance. Signed, B." Is this

the three, what is the maximum number of

note negotiable?

votes that he/she can cast?

Yes, since it is payable to bearer. Yes,

since

it

contains

are

minority

members

of

the

6 an

9

unconditional promise to pay a sum certain in money.

12

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 153 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

3

law firm’s letterhead and its computer in preparing the letter. T also requested the

If the drawer and the drawee are the same

firm’s messenger to deliver the letter to the

person,

publisher. Who owns the copyright to the

the

holder

may

present

the

instrument for payment without need of a

letter?

previous presentment for acceptance. In T, since he is the original creator

such a case, the holder treats it as a

of the contents of the letter. non-negotiable instrument. Both T and the publisher, one wrote promissory note.

the letter to the other who has possession of it.

letter of credit.

The law office since T was an check.

employee and he wrote it on the

D draws a bill of exchange that states: "One month from date, pay to B or his order Php100,000.00.

Signed,

D."

The

drawee

firm’s letterhead. The publisher to whom the letter was sent.

named in the bill is E. B negotiated the bill to M, M to N, N to O, and O to P. Due to non-

E received goods from T for display and sale

acceptance and after proceedings for dishonor

in E's store. E was to turn over to T the

were made, P asked O to pay, which O did.

proceeds of any sale and return the ones

From whom may O recover?

unsold. To document their agreement, E executed

B, being the payee

a

trust

receipt

in

T’s

favor

covering the goods. When E failed to turn over the proceeds from his sale of the goods

N, as indorser to O

or return the ones unsold despite demand, he was charged in court for estafa. E moved

E, being the drawee

to dismiss on the ground that his liability is D, being the drawer

only civil. Is he correct?

T, an associate attorney in XYZ Law Office,

No, since he committed fraud when

wrote

he promised to pay for the goods

a

newspaper

publisher

a

letter

disputing a columnist’s claim about an

and did not.

incident in the attorney’s family. T used the “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 154 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since his breach of the trust

principal creditor.

receipt agreement subjects him to secondary creditor.

both civil and criminal liability for estafa.

secondary debtor.

Yes, since E cannot be charged with estafa over goods covered a trust receipt. Yes,

since

Upon execution of a trust receipt over goods, the party who is obliged to release such

it

was

merely

a

consignment sale and the buyer could not pay. The authorized alteration of a warehouse receipt which does not change its tenor renders the warehouseman liable according to the terms of the receipt

goods

and

who

retains

security

interest on those goods, is called the holder. shipper. entrustee. entrustor.

in its original tenor if the alteration

X, warehouseman, sent a text message to Y,

is material.

to whom X had issued a warehouse receipt

in its original tenor. as altered if there is fraud. as altered.

for Y's 500 sacks of corn, notifying him of the due date and time to settle the storage fees. The message stated also that if Y does not settle the warehouse charges within 10 days, he will advertise the goods for sale at a public auction. When Y ignored the

Any agreement binding upon the holder to

demand, X sold 100 sacks of corn at a

extend the time of payment or to postpone

public auction. For X’s failure to comply

the holder's right to enforce the instrument

with the statutory requirement of written

results in the discharge of the party

notice to satisfy his lien, the sale of the 100

secondarily liable unless made with the

sacks of corn is

latter's consent. This agreement refers to one which the holder made with the principal debtor.

voidable. rescissible.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 155 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

unenforceable.

A bill of exchange has D as drawer, E as drawee and F as payee. The bill was then

void.

indorsed to G, G to H, and H to I. I, the

On June 1, 2011, X mailed to Y Insurance, Co. his application for life insurance, with payment for 5 years of premium enclosed in it.

On

July

company

21,

accepted

2011, the

the

insurance

application

and

mailed, on the same day, its acceptance

current holder presented the bill to E for acceptance. E accepted but, as it later turned out, D is a fictitious person. Is E freed from liability? No, since by accepting, E admits the existence of the drawer.

plus the cover note. It reached X's residence on August 11, 2011. But, as it happened,

No, since by accepting, E warrants

on August 4, 2011, X figured in a car

that he is solvent.

accident. He died a day later. May X's heirs Yes, if E was not aware of that fact

recover on the insurance policy?

at the time of acceptance. Yes,

since

under

the

Cognition

Theory, the insurance contract was

Yes, since a bill of exchange with a

perfected upon acceptance by the

fictitious

insurer of X's application.

inexistent.

drawer

is

void

and

No, since there is no privity of

Due to his debt to C, D wrote a promissory

contract between the insurer and

note which is payable to the order of C. C's

X’s heirs.

brother, M, misrepresenting himself as agent of C, obtained the note from D. M

No, since X had no knowledge of

then negotiated the note to N after forging

the insurer's acceptance of his

the signature of C. May N enforce the note

application before he died.

against D?

Yes, since under the Manifestation Theory, the insurance contract was perfected upon acceptance of the insurer of X's application.

Yes, since D is the principal debtor. No, since the signature of C was forged.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 156 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since it is C who can enforce it,

earlier than 5 years prior to the

the note being payable to the order

corporation’s expiration date.

of C. No, since a corporation can in fact

Yes, since D, as maker, is primarily

have a corporate life of 50 years.

liable on the note. Yes, the amendment to shorten T Corp. has a corporate term of 20 years

corporate term cannot be made

under its Articles of Incorporation or from

earlier than 5 years prior to the

June 1, 1980 to June 1, 2000. On June 1,

corporation’s expiration date.

1991

it

amended

its

Articles

of

Incorporation to extend its life by 15 years

B, while drunk, accepted a passenger in his

from June 1, 1980 to June 1, 2015. The

taxicab. B then drove the taxi recklessly,

SEC approved this amendment. On June 1,

and inevitably, it crashed into an electric

2011, however, T Corp decided to shorten

post, resulting in serious physical injuries

its term by 1 year or until June 1, 2014.

to the passengers. The latter then filed a

Both the 1991 and 2011 amendments were

suit for tort against B's operator, A, but A

approved by majority vote of its Board of

raised the defense of having exercised

Directors and ratified in a special meeting

extraordinary diligence in the safety of the

by its stockholders representing at least

passenger. Is his defense tenable?

2/3 of its outstanding capital stock. The SEC,

however,

disapproved

the

2011

amendment on the ground that it cannot be made earlier than 5 years prior to the

Yes, as a common carrier can rebut the presumption of negligence by raising such a defense.

expiration date of the corporate term, which

No, as in tort actions, the proper

is June 1, 2014. Is this SEC disapproval

defense is due diligence in the

correct? No,

selection and supervision of the since

amendment

the of

5-year

rule

corporate

on

term

applies only to extension, not to shortening, of term. Yes,

any

amendment

employee by the employer. No, as B, the common carrier's employee, was obviously negligent due to his intoxication.

affecting

corporate term cannot be made

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 157 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, as a common carrier can invoke

Php1 Million since he warrants that

extraordinary diligence in the safety

the note is genuine and in all

of passengers in tort cases.

respects what it purports to be.

(49)X is a director in T Corp. who was

Php12 Million since he warrants his

elected to a 1-year term on Feb. 1, 2010.

solvency and that he has a good title

On April 11, 2010, X resigned and was

to the note.

replaced by R, who assumed as director on May 17, 2010. On Nov. 21, 2010, R died. S

Php12 Million since he warrants

was then elected in his place. Until which

that the note is genuine and in all

time should S serve as director?

respects what it purports to be. X Corp., whose business purpose is to

April 11, 2011.

manufacture and sell vehicles, invested its Feb. 1, 2011.

funds in Y Corp., an investment firm, through a resolution of its Board of

May 17, 2011.

Directors.

The

investment

grew

tremendously on account of Y Corp.'s Nov. 21, 2011.

excellent

M, the maker, issued a promissory note to P, the payee which states: "I, M, promise to pay P or order the amount of Php1 Million. Signed, M." P negotiated the note by indorsement to N, then N to O also by indorsement,

and

O

to

Q,

again

by

indorsement. But before O indorsed the

business

judgment.

But

minority stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the status of the investment? Yes, it is an ultra vires act of the corporation itself but voidable only, subject to stockholders’ ratification.

note to Q, O's wife wrote the figure "2" on

Yes, it is an ultra vires act of its

the

Board of Directors and thus void.

note

after

"Php1"

without

O's

a

knowledge, making it appear that the note is for Php12 Million. For how much is O

Yes, it is an ultra vires act of its

liable to Q?

Board of Directors but voidable only,

Php1 Million since it is the original

subject

to

stockholders’

ratification.

tenor of the note.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 158 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, it is an ultra vires act of the

Yes, since both companies use water

corporation itself and, consequently,

in conducting their business.

void. No, since the companies are not Notice of dishonor is not required to be

engaged

made in all cases. One instance where such

business.

in

the

same

line

of

notice is not necessary is when the indorser is the one to whom the instrument is

No, since the root word "Eagle" is a

suppose to be presented for payment. The

generic

rationale here is that the indorser

registration.

name

not

subject

to

already knows of the dishonor and

For a constructive total loss to exist in

it makes no sense to notify him of

marine insurance, it is required that the

it.

person insured relinquish his interest in the thing insured. This relinquishment

is bound to make the acceptance in

must be

all cases. actual. has no reason to expect the dishonor of the instrument.

constructive first and if it fails, then actual.

must be made to account for all his actions. "Eagleson Refillers, Co.," a firm that sells water to the public, opposes the trade name application of "Eagleson Laundry, Co.," on the ground that such trade name tends to deceive trade circles or confuse the public with respect to the water firm’s registered trade name. Will the opposition prosper?

either actual or constructive. constructive. The Corporation Code sanctions a contract between two or more corporations which have interlocking directors, provided there is no fraud that attends it and it is fair and reasonable under the circumstances. The interest of an interlocking director in one

Yes, since such use is likely to

corporation may be either substantial or

deceive or confuse the public.

nominal. It is nominal if his interest:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 159 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

does not exceed 25% of the

expressed, explained, illustrated,

outstanding capital stock.

or embodied in a work.

exceeds 25% of the outstanding

Yes, since Y’s article failed to make

capital stock.

any attribution to X.

exceeds 20% of the outstanding

In

case

of

disagreement

between

the

capital stock.

corporation and a withdrawing stockholder who exercises his appraisal right regarding

does not exceed 20% of the

the fair value of his shares, a three-member

outstanding capital stock.

group shall by majority vote resolve the

X, an amateur astronomer, stumbled upon what appeared to be a massive volcanic eruption in Jupiter while peering at the

issue with finality. May the wife of the withdrawing stockholder be named to the threemember group?

planet through his telescope. The following

No, the wife of the withdrawing

week, X, without notes, presented a lecture

shareholder is not a disinterested

on his findings before the Association of

person.

Astronomers of the Philippines. To his dismay, he later read an article in a science

Yes, since she could best protect her

journal

husband's shareholdings.

written

astronomer,

by

Y,

repeating

a

professional

exactly

what

X

discovered without any attribution to him.

Yes, since the rules do not

Has Y infringed on X's copyright, if any?

discriminate against wives.

No, since X did not reduce his

No, since the stockholder himself

lecture in writing or other material

should

form.

group.

sit

in

the

three-member

Yes, since the lecture is considered

Apart from economic rights, the author of a

X’s original work.

copyright also has moral rights which he may transfer by way of assignment. The

No, since no protection extends

term of these moral rights shall last

to any discovery, even if during the author's lifetime and for 50 years after his death.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 160 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

forever.

The insured’s formal assignment of his right to indemnification to the

50 years from the time the author

insurer.

created his work. The insured’s endorsement of its during the author's lifetime.

claim to the insurer.

Which of the following indorsers expressly

X invented a device which, through the use

warrants in negotiating an instrument that

of noise, can recharge a cellphone battery.

1) it is genuine and true; 2) he has a good

He applied for and was granted a patent on

title to it; 3) all prior parties have capacity

his device, effective within the Philippines.

to

As it turns out, a year before the grant of

negotiate;

and

4)

it

is

valid

and

subsisting at the time of his indorsement?

X's patent, Y, also an inventor, invented a similar

The irregular indorser.

device

which

he

used

in

his

cellphone business in Manila. But X files an injunctive suit against Y to stop him from

The regular indorser.

using the device on the ground of patent infringement. Will the suit prosper?

The general indorser.

No, since the correct remedy for X is

The qualified indorser.

a civil action for damages. Where the insurer was made to pay the insured for a loss covered by the insurance contract, such insurer can run after the third person who caused the loss through subrogation.

What

is

the

basis

for

conferring the right of subrogation to the insurer?

faith. Yes, since X is the first to register his device for patent registration. Yes, since Y unwittingly used X’s patented invention.

Their express stipulation in the contract of insurance. The

No, since Y is a prior user in good

equitable

results

from

P, a sales girl in a flower shop at the Ayala

assignment the

payment of the insured.

that

insurer’s

Station of the Metro Rail Transit (MRT) bought two tokens or tickets, one for her ride to work and another for her ride

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 161 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

home. She got to her flower shop where she

without acceptance but the bill is

usually worked from 8 a.m. to 5 p.m. At

paid by the drawer.

about 3 p.m., while P was attending to her duties at the flower shop, two crews of the

without acceptance but the bill is

MRT got into a fight near the flower shop,

paid by the drawee.

causing injuries to P in the process. Can P sue the MRT for contractual breach as she was within the MRT premises where she would shortly take her ride home?

with acceptance but the bill is paid by the drawer. If an insurance policy prohibits additional

No, since the incident took place, not in an MRT train coach, but at the MRT station.

insurance on the property insured without the insurer's consent, such provision being valid and reasonable, a violation by the insured

No, since P had no intention to board an MRT train coach when the incident occured.

reduces the value of the policy. avoids the policy.

Yes, since she already had a ticket for her ride home and was in the MRTs premises at the time of the incident.

offsets the value of the policy with the additional insurances’s value. forfeits premiums already paid.

Yes, since she bought a round trip

X found a check on the street, drawn by Y

ticket and MRT had a duty while she

against ABC Bank, with Z as payee. X

was at its station to keep her safe

forged Z's signature as an indorser, then

for her return trip.

indorsed it personally and delivered it to

Forgery

of

subdivided

bills into,

of a)

exchange forgery

may

be

of

an

indorsement on the bill and b) forgery of the drawer's signature, which may either be with acceptance by the drawee, or with acceptance but the bill is paid by the drawee.

DEF Bank. The latter, in turn, indorsed it to ABC Bank which charged it to the Y’s account. Y later sued ABC Bank but it set up the forgery as its defense. Will it prosper? No, since the payee's signature has been forged.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 162 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since Y’s remedy is to run after

Yes, but solidarily with Y.

the forger, X. Yes, since X’s is deemed to warrant Yes, since forgery is only a personal

that his land would cover the whole

defense.

obligation.

Yes, since ABC Bank is bound to

No, since it is the buyer at the

know

auction sale who should answer for

the

signature

of

Y,

its

client.

the deficiency.

The rule is that no stock dividend shall be

No, because X is not Z’s debtor.

issued without the approval of stockholders representing at least 2/3 of the outstanding capital stock at a regular or special meeting called for the purpose. As to other forms of dividends:

100% of the voting stocks in another universal bank and in a commercial bank? Yes, if with the permission of the

a mere majority of the entire Board of Directors applies.

the Board of Directors applies.

in equities. Yes, as there is no prohibition on

a mere majority of the votes of representing

Bangko Sentral ng Pilipinas. No, since it has no power to invest

a mere majority of the quorum of

stockholders

May a publicly listed universal bank own

the

outstanding capital stock applies. the same rule of 2/3 votes applies.

it. No, since under the law, the 100% ownership on voting stocks must be in either bank only.

X, at Y’s request, executed a Real Estate

Perils of the ship, under marine insurance

Mortgage (REM) on his (X’s) land to secure

law, refer to loss which in the ordinary

Y's loan from Z. Z successfully foreclosed

course of events results from

the REM when Y defaulted on the loan but half of Y's obligation remained unpaid. May Z sue X to enforce his right to the

natural and inevitable actions of the sea.

deficiency? “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 163 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

natural and ordinary actions of the

results in the discharge of the latter. With

sea.

respect to an indorser, the holder's right to cancel his signature is:

unnatural and inevitable actions of the sea.

without limitation.

unnatural and ordinary actions of

not limited to the case where the

the sea.

indorsement is necessary to his title. limited to the case where the

Under the Intellectual Property Code, lectures,

sermons,

addresses

indorsement is not necessary to

or

dissertations prepared for oral delivery,

his title.

whether or not reduced in writing or other limited

material forms, are regarded as

to

the

case

where

the

indorsement is necessary to his title. non-original works. X, in the hospital for kidney dysfunction, original works.

was about to be discharged when he met his friend Y. X told Y the reason for his

derivative works. not subject to protection. Can a drawee who accepts a materially altered check recover from the holder and the drawer? No, he cannot recover from either of them. Yes from both of them.

hospitalization. A month later, X applied for an insurance covering serious illnesses from ABC Insurance, Co., where Y was working as Corporate Secretary. Since X had

already

told

Y

about

his

hospitalization, he no longer answered a question regarding it in the application form. Would this constitute concealment? Yes,

since

hospitalization

the

previous

would

influence

the insurer in deciding whether to Yes but only from the drawer.

grant X's application.

Yes but only from the holder.

No, since Y may be regarded as ABC’s agent and he already knew of

The rule is that the intentional cancellation

X’s previous hospitalization.

of a person secondarily liable “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 164 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, it would constitute concealment

Yes, since as an indorser who is

that amounts to misrepresentation

secondarily liable, there must first

on X's part.

be presentment for payment and dishonor by the maker.

No, since the previous illness is not a material fact to the insurance

No, since the absolute rule is that

coverage.

there is no need for presentment for payment and dishonor to hold an

Several American doctors wanted to set up

indorser liable.

a group clinic in the Philippines so they could render modern medical services. If

Yes, since the secondary liability of

the clinic is to be incorporated under our

Y and Z would only arise after

laws, what is the required foreign equity

presentment

participation in such a corporation?

dishonor by the maker.

40%

for

payment

and

The Board of Directors of XYZ Corp. unanimously

0%

passed

a

Resolution

approving the taking of steps that in reality amounted

60%

to

willful

tax

evasion.

On

discovering this, the government filed tax evasion charges against all the company’s

70%

members of the board of directors. The

X executed a promissory note in favor of Y

directors invoked the defense that they

by way of accommodation. It says: "Pay to Y

have no personal liability, being mere

or order the amount of Php50,000.00.

directors of a fictional being. Are they

Signed, X." Y then indorsed the note to Z,

correct?

and Z to T. When T sought collection from Y, the latter countered as indorser that there should have been a presentment first to the maker who dishonors it. Is Y correct? No, since Y is the real debtor and thus,

there

presentment

is

no

need

for

for

payment

and

dishonor by the maker.

No, since as a rule only natural persons like the members of the board

of

directors

can

commit

corporate crimes. Yes, since it is the corporation that did not pay the tax and it has a personality

distinct

from

its

directors.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 165 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, since the directors officially and

No, since unlike T, he did not

collectively performed acts that are

register his own "CROCOS" mark for

imputable only to the corporation.

his product.

No, since the law makes directors

A, the proprietor of a fleet of ten taxicabs,

of the corporation solidarily liable

decides to adopt, as his business name, "A

for gross negligence and bad faith

Transport Co., Inc." May this be allowed?

in the discharge of their duties. No, it would be deceptive since he T is the registered trademark owner of

is a proprietor, not a corporation.

"CROCOS" which he uses on his ready-towear clothes. Banking on the popularity of

No, since "A" is a generic name, not

T's trade mark, B came up with his own

suitable for registration.

"CROCOS" mark, which he then used for

Yes, since his line of business is

his "CROCOS" burgers. T now sues B for

public transportation.

trademark infringement but B argues that his product is a burger, hence, there is no

Yes, since such name would give his

infringement. Is B correct?

business a corporate identity.

No, since the owner of a wellknown mark registered in the Philippines

has

rights

that

extends even to dissimilar kinds of goods. Yes, since the right of the owner of a well-known mark registered in the Philippines does not extend to goods which are not of the same kind. Yes, as B was in bad faith in coming up with his own "CROCOS" mark.

T

delivers

warehouse

two of

W

refrigerators who

then

to

the

issues

a

negotiable receipt undertaking the delivery of the refrigerators to "T or bearer." T entrusted the receipt to B for safekeeping only. B negotiated it, however, to F who bought it in good faith and for value. Who is entitled to the delivery of the refrigerators? T, since he is the real owner of the refrigerators. F, since he is a purchaser in good faith and for value.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 166 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

B, since T entrusted the receipt to

No, because the voting in the Board

him.

should have been by majority of a quorum.

W, since he has as a warehouseman Yes since the votes of 2/3 of the

a lien on the goods.

stockholders and majority of the The Articles of Incorporation must be

Board were secured.

accompanied by a Treasurer's Affidavit certifying under oath, among others, that

A group of Malaysians wanted to invest in

the total subscription paid is:

the Philippines’ insurance business. After negotiations, they agreed to organize

not less than P25,000.00.

"FIMA Insurance Corp." with a group of Filipino businessmen. FIMA would have a

not more than P5,000.00.

PhP50 Million paid up capital, PhP40 Million of which would come from the

not less than P5,000.00.

Filipino group. All corporate officers would be Filipinos and 8 out of its 10-member

not more than P25,000.00.

Board of Directors would be Filipinos. Can In a special meeting called for the purpose,

FIMA operate an insurance business in the

2/3 of the stockholders representing the

Philippines?

outstanding authorized

capital the

stock

company's

in

X.

Board

Co. of

No, since an insurance company

Directors to amend its By-laws. By majority

must have at least PhP75 Million

vote,

paid-up capital.

the

Board

then

approved

the

amendment. Is this amendment valid?

Yes,

since

there

is

substantial

No since the stockholders cannot

compliance with our nationalization

delegate their right to amend the

laws respecting paid-up capital and

By-laws to the Board.

Filipino

dominated

Board

of

Directors. Yes since the majority votes in the Board was sufficient to amend the

Yes, since FIMA’s paid up capital

By-laws.

more

than

meets

the

country’s

nationalization laws.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 167 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since an insurance company

A promissory note states, on its face: "I, X,

should be 100% owned by Filipinos.

promise to pay Y the amount of Php 5,000.00 five days after completion of the

Under

the

Public

Service

Act,

an

administrative agency has the power to

on-going construction of my house. Signed, X." Is the note negotiable?

approve provisionally the rates of public utilities without a hearing in case of urgent

Yes, since it is payable at a fixed

public needs. The exercise of this power is

period after the occurrence of a specified event.

supervisory. No, since it is payable at a fixed absolute.

period after the occurrence of an event which may not happen.

discretionary.

Yes, since it is payable at a fixed mandatory.

period or determinable future time.

X, creditor of Y, obtained a judgment in his favor in connection with Y's unpaid loan to him. The court's sheriff then levied on the goods that Y stored in T's warehouse, for which

the

latter

issued

a

No, since it should be payable at a fixed period before the occurrence of a specified event.

warehouse

P sold to M a pair of gecko (tuko) for

receipt. A month before the levy, however, Z

Php50,000.00. M then issued a promissory

bought the warehouse receipt for value.

note to P promising to pay the money

Who has a better right over the goods?

within 90 days. Unknown to P and M, a law

T, being the warehouseman with a lien on the goods Z, being a purchaser for value of the warehouse receipt X, being Y’s judgment creditor Y, being the owner of the goods

was passed a month before the sale that prohibits and declares void any agreement to sell gecko in the country. If X acquired the note in good faith and for value, may he enforce payment on it? No, since the law declared void the

contract

on

which

the

promissory note was founded.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 168 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since it was not X who bought

his creditor, Y, to whom he owed Php1

the gecko.

million. Y now wants to collect and satisfy X's debt through the Php1 million on the

Yes, since he is a holder in due

check. May he validly do so?

course of a note which is distinct Yes, since the indorsement to Y is

from the sale of gecko.

for Php1 Million. Yes, since he is a holder in due course and P and M were not aware

No, since Z is not a party to the loan

of the law that prohibited the sale of

between X and Y.

gecko. No, since X is merely an agent of P authorized A to sign a bill of exchange in

Z, his only right being to collect.

his (P’s) name. The bill reads: "Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P)." The bill was drawn on P. B indorsed the bill to C, C to D, and D to E. May E treat the bill as a promissory note? No,

because

Yes, since X owed Y Php1 Million. X Shipping, Co., insured its vessel MV Don Teodoro

for Php100

Million with

ABC

Insurance, Co. through T, an agent of X Shipping. During a voyage, the vessel

the

instrument

is

payable to order and has been indorsed several times.

accidentally

caught

fire

and

suffered

damages estimated at Php80 Million. T personally informed ABC Insurance that X Shipping was abandoning the ship. Later,

and

ABC insurance denied X Shipping’s claim

drawee are one and the same

for loss on the ground that a notice of

person.

abandonment

Yes,

because

the

drawer

through

its

agent

was

improper. Is ABC Insurance right? No, because the instrument is a bill of exchange.

Yes, since X Shipping should have ratified its agent’s action.

Yes, because A was only an agent of P.

No,

since

T,

as

agent

of

X

Shipping who procured the Z wrote out an instrument that states: "Pay to X the amount of Php1 Million for collection only. Signed, Z." X indorsed it to “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 169 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

insurance, can also give notice of

is sufficient that he was declared

abandonment for his principal.

no longer a member of the board.

Yes, since only the agent of X

Yes, since the provisions of the

Shipping

Corporation Code applies as well to

relayed

the

fact

of

government-owned and controlled

abandonment.

corporations. No, since in the first place, the damage was more than ¾ of the

No, since the board has the power to

ship's value.

oust him even without the new law.

A law was passed disqualifying former

002-38-0001 G, a grocery goods supplier,

members of Congress from sitting in the

sold 100 sacks of rice to H who promised to

Board of Directors of government-owned or

pay once he has sold all the rice. H

controlled corporations. Because of this,

meantime delivered the goods to W, a

the Board of Directors of ABC Corp., a

warehouseman, who issued a warehouse

government-owned

controlled

receipt. Without the knowledge of G and W,

a

former

H negotiated the receipt to P who acquired

Congressman, from continuing to sit as one

it in good faith and for value. P then

of

however,

claimed the goods from W, who released

insisting that under the Corporation Code

them. After the rice was loaded on a ship

members of the board of directors of

bound for Manila, G invokes his right to

corporations may only be removed by vote

stop the goods in transit due to his unpaid

of

lien. Who has a better right to the rice?

corporation, its

and

disqualified

members.

stockholders

C

C,

objected,

holding

2/3

of

its

outstanding capital stock in a regular or special meeting called for that purpose. Is C

P, since he has superior rights as a purchaser for value and in good

correct?

faith. Yes, since the new law cannot be applied to members of the board of

P, regardless of whether or not he is

directors already elected prior to its

a purchaser for value and in good

passage.

faith.

No,

since

the

disqualification

takes effect by operation of law, it

G, since as an unpaid seller, he has the right of stoppage in transitu.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 170 of 173

Mercantile Law Q&As (2007-2013)

W,

since

it

appears

[email protected] JayArhSals

that

the

A bill of exchange states on its face: "One

warehouse charges have not been

(1) month after sight, pay to the order of

paid.

Mr.

R

the

amount

of

Php50,000.00,

chargeable to the account of Mr. S. Signed, In a signature by procuration, the principal

Mr. T." Mr. S, the drawee, accepted the bill

is bound only in case the agent acted

upon presentment by writing on it the

within the actual limits of his authority.

words "I shall pay Php30,000.00 three (3)

The signature of the agent in such a case

months after sight." May he accept under

operates as notice that he has

such terms, which varies the command in

a qualified authority to sign. a limited authority to sign. a special authority to sign. full authority to sign. In return for the 20 years of faithful service of X as a househelper to Y, the latter promised to pay Php100,000.00 to X’s heirs if he (X) dies in an accident by fire. X agreed. Is this an insurance contract? Yes, since all the elements of an insurance contract are present. Yes, since X’ services may be regarded as the consideration. No, since Y actually made a conditional donation in X’s favor.

the bill of exchange? Yes,

since

a

drawee

accepts

according to the tenor of his acceptance. No, since, once he accepts, a drawee is liable according to the tenor of the bill. Yes, provided the drawer and payee agree to the acceptance. No, since he is bound as drawee to accept the bill according to its tenor. May the indorsee of a promissory note indorsed to him "for deposit" file a suit against the indorser? Yes,

as

long

as

the

indorser

received value for the restrictive indorsement.

No, since it is in fact an innominate contract between X and Y.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 171 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

Yes, as long as the indorser received

Yes, because there was breach of

value

implied warranty.

for

the

conditional

indorsement. No, because there was no intent to Yes, whether or not the indorser

breach an implied warranty.

received value for the conditional Yes, because it relates to a material

indorsement.

representation. Yes, whether or not the indorser received value for the restrictive

No, because there was only

indorsement.

representation of intention.

X issued a check in favor of his creditor, Y.

The

It reads: " Pay to Y the amount of Seven

Transport Co., a public utility, provides for

Thousand Hundred Pesos (Php700,000.00).

ten (10) members in its Board of Directors.

Signed,

What is the prescribed minimum number of

X".

What

amount

should

be

construed as true in such a case?

Articles

of

Incorporation

of

ABC

Filipino citizens in its Board?

Php700,000.00.

10

Php700.00.

6

Php7,000.00.

7

Php700,100.00.

5

Shipowner X, in applying for a marine

P

authorized

A

to

sign

a

negotiable

insurance policy from ABC, Co., stated that

instrument in his (P’s) name. It reads: "Pay

his vessel usually sails middle of August

to B or order the sum of Php1 million.

and with normally 100 tons of cargo. It

Signed, A (for and in behalf of P)." The

turned out later that the vessel departed on

instrument shows that it was drawn on P.

the first week of September and with only

B then indorsed to C, C to D, and D to E. E

10 tons of cargo. Will this avoid the policy

then treated it as a bill of exchange. Is

that was issued?

presentment for acceptance necessary in this case?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 172 of 173

Mercantile Law Q&As (2007-2013)

[email protected] JayArhSals

No, since the drawer and drawee

References:

are the same person. ¾ Answers

to

Bar

Examination

No, since the bill is non-negotiable,

Questions by the UP LAW COMPLEX

the drawer and drawee being the

(2007, 2009, 2010)

same person. Yes, since the bill is payable to order, presentment is required for acceptance.

UP LAW REVIEW PHILIPPINE ASSOCIATION OF LAW SCHOOLS (2008)

Yes, in order to hold all persons

lawphil.net

liable on the bill. The corporate term of a stock corporation is that which is stated in its Articles of Incorporation.

It

may

be

extended

or

shortened by an amendment of the Articles when approved by majority of its Board of Directors and: approved and ratified by at least 2/3 of all stockholders. approved by at least 2/3 of the stockholders

representing

the

outstanding capital stock. ratified by at least 2/3 of all stockholders. ratified by at least 2/3 of the stockholders

representing

the

outstanding capital stock.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

Page 173 of 173

Page !1of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

I. Carlo and Bianca met in the La Boracay festivities. Immediately, they fell in love with each other and got married soon after. They have been cohabiting blissfully as husband and wife, but they did not have any offspring. As the years passed by, Carlo decided to take out an insurance on Bianca’slife for P1,000,000.00 with him (Carlo) as sole beneficiary, given that he did not have a steady source of income and he always depended on Bianca both emotionally and financially. During the term of the insurance, Bianca died of what appeared to bea mysterious cause so that Carlo immediately requested for an autopsy tobe conducted. It was established that Bianca died of a natural cause. More than that, it was also established that Bianca was a transgender all along – a fact unknown to Carlo. Can Carlo claim the insurance benefit? (5%) SUGGESTED ANSWERS Yes, Carlo can claim the insurance benefit. He had insurable interest on Bianca’s life under Section 10 (b) of the Insurance Code as the problem states that Carlo “always depended on Bianca both emotionally and financially”. The insurable interest upon the life of another under the aforesaid provision need not be based on kinship or legal obligation to give support (see Alvendia, The Law of Insurance in the Philippines, 1968 ed., p. 42; Martin, Commentaries and Jurisprudence on the Philippine Commercial Laws, vol. 2, 1986 ed., p. 21). The fact that their marriage may be void is irrelevant.

Page !2of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW II.

Bong bought 300 bags of rice from Ben for P300,000.00. As payment, Bong indorsed to Bena Bank of the Philippine Islands (BPI) check issued by Baby in the amount of P300,000.00. Upon presentment for payment, the BPI check was dishonored because Baby’s account from which it was drawn has been closed. To replace the dishonored check, Bong indorsed a crossed Development Bank of the Philippines (DBP) check issued also by Baby for P300,000.00. Again, the check was dishonored because of insufficient funds. Ben sued Bong and Baby on the dishonored BPI check. Bong interposed the defense that the BPI check was discharged by novation when Ben accepted the crossed DBP check as replacement for the BPI check. Bong cited Section 119 of the Negotiable Instruments Law

which provides that a negotiable instrument is discharged "by any other act which will discharge a simple contractfor the payment of money." Is Bong correct? (4%) SUGGESTED ANSWERS Bong is not correct. His claim that the BPI check was discharged by novation when Ben accepted the crossed DBP check as replacement for the BPI check is unmeritorious. Ben’s acceptance of the DBP check, which replaced the dishonored BPI check, did not result in novation as there was no express agreement to establish that Bong was already discharged from the liability to pay Ben the amount of P300,000.00 as payment for the 300 bags of rice. Novation is never presumed. There must be an express intention to novate. In fact, when the DBP check was delivered to Ben, the same was also indorsed by Bong which shows Bong’s recognition of the existing obligation to Ben to pay P214,000.00 subject of the replaced BPI check. Moreover, Ben’s acceptance of the DBP check did not result in any incompatibility, since the two checks – BPI and DBP checks – were precisely for the purpose of paying the amount of P214,000.00, i.e. the credit obtained from the purchase of the 300 bags of rice from Ben. Indeed, there was no substantial change in the object or principal condition of the obligation of Bong as the indorser of the check to pay the amount of P214,000.00. It would appear that Ben accepted the DBP check to give Bong the chance to pay his obligation. (Salazar vs J.Y. Brothers Marketing Corporation, (2010))

Page !3of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

III. Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a petition for voluntary rehabilitation must be approved by: (1%) a majority vote of the Board of Directors and authorized by the vote of the stockholders representing at least a majority of the outstanding capital stock a majority vote of the Board of Directors and authorized by the vote of the stockholders representing at least two-thirds of the outstanding capital stock two-thirds vote of the Board of Directors and authorized by the vote of the stockholders representing at least a majority of the outstanding capital stock two-thirds vote of the Board of Directors and authorized by the vote of the stockholders representing at least two-thirds of the outstanding capital stock

RECOMMENDATION: This MCQ is outside the coverage of the 2014 Mercantile Law Bar Examination as the 2014 Syllabus for Mercantile Law prepared by the SC did not include the FRIA. It is recommended that all examinees be given full credit whether they gave any answer or not. a majority vote of the Board of Directors and authorized by the vote of the stockholders representing at least a majority of the outstanding capital stock

Page !4of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW IV.

DC is a unit owner of Medici Condominium located in Pasig City. On September 7, 2011, Medici Condominium Corp. (Medici) demanded from DC payment for alleged unpaid association dues and assessments amounting toP195,000.00. DC disputed the claim, saying that he paid all dues as shown by the fact that he was previously elected as Director and President of Medici. Medici, on the other hand, claimed that DC’s obligation was a carry-over of his obligations to the condominium developer, Medici Construction Corporation. Consequently, DCwas prevented from exercising his right to vote and be voted for during the 2011 election of Medici’s Board of Directors. This prompted DC to file a complaint for damages before the Special Commercial Court of Pasig City. Medici filed a motion to dismiss on the ground that the court has no jurisdiction over the intra-corporate dispute which the Housing and Land Use Regulatory Board (HLURB) has exclusive jurisdiction over. Is Medici correct? (4%) SUGGESTED ANSWER Medici is correct. Using the relationship test and the nature of the controversy test, it is indubitable that the controversy involves intra-corporate issues. The facts of the problem indicate that there was a dispute as to the liability of DC for condominium dues, as well as the right to DC to “to vote and be voted for during the 2011 election of Medici’s Board of Directors”. Accordingly, jurisdiction is with the Special Commercial Court of Pasig City, not with the Housing and Land Use Regulatory Board (Medical Plaza Makati Condominium Corp. vs Cullen, (2013) V. A corporation organized under the Corporation Code commences to have corporate existence and juridical personality and is deemed incorporated: (1%) from the date the application for incorporation is filed with the Securities and Exchange Commission (SEC) from the date the SEC issues a certificate of incorporation under its official seal thirty (30) days after the date the application for incorporation is filed with the SEC thirty (30) days after the datethe SEC issues a certificate of incorporation under its official seal SUGGESTED ANSWER from the date the SEC issues a certificate of incorporation under its official seal. (Sec 19, Corporation Code)

Page !5of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

VI. On May 26, 2014, Jess insured with Jack Insurance (Jack) his 2014 Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for one year. On July 1, 2014, Jess’ car was unlawfully taken. Hence, he immediately reported the theft to the Traffic Management Command (TMC) of the Philippine National Police (PNP), which made Jess accomplish a complaint sheet as part of its procedure. In the complaint sheet, Jess alleged that a certain Ric Silat(Silat) took possession of the subject vehicle to add accessories and improvements thereon. However, Silat failed to return the subject vehicle within the agreed 3-day period. As a result, Jess notified Jack of his claim for reimbursement of the value of the lost vehicle under the insurance policy. Jack refused to pay claiming that there is no theft as Jess gave Silat lawful possession of the car. Is Jack correct? (4%)

SUGGESTED ANSWER Jack Insurance is not correct. Ric Silat was merely given physical possession of the car. He did not have juridical possession over the same. It is also apparent that the taking by Silat of the car of Jess is without the consent or authority of the latter. Thus, the act of Silat in depriving Jess of his car, soon after the transfer of physical possession of the same to him, constitutes theft under the insurance policy that is compesable. (Paramount Insurance vs Spouse Remondeulaz (2012)

Page !6of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW VII.

Jinggy went to Kluwer University(KU) in Germany for his doctorate degree (Ph.D.). He completed his degree with the highest honors in the shortest time. When he came back, he decided to set-up his own graduate school in his hometown in Zamboanga. After seeking free legal advice from his high-flying lawyer-friends, he learned that the Philippines follows the territoriality principle in trademark law, i.e., trademark rights are acquired through valid registration in accordance with the law. Forth with, Jinggy named his school the Kluwer Graduate School of Business of Mindanao and immediately secured registration with the Bureau of

Trademarks. KU did not like the unauthorized use of its name by its top alumnus no less. KU sought your help. What advice can you give KU? (4%) SUGGESTED ANSWER I can advise KU to file a petition to cancel the registration of the name “Kluwer” Graduate School of Business of Mindanao” (“KGSBM”) with the Bureau of Trademarks. The petition could be anchored on the following facts: Kluwer University is the owner of the name “Kluwer.” Jinggy registered the trademark in bad faith. He came to know of the trademark because he went to Kluwer University in Germany for his doctorate degree. KU is the owner of the name “Kluwer” and has the sole right to register the same. Foreign marks that are not registered are still accorded protection against infringement and/or unfair competition under the Paris Convention for the Protection of Industrial Property. Both the Philippines and Germany are signatories to the Paris Convention. Under the said Convention, the trademark of a national or signatory to the Paris Convention is entitled to its protection in other countries that are also signatories to the Convention without need of registering the trademark. The petition could also be based on the fact, if it were proven by KU that “Kluwer” is a wellknown mark and entitled to protection as KU and KGSBM belong to the same class of services, i.e. Class 41 (education and entertainment). KU must also prove that a competent authority of the Philippines has designated “Kluwer” to be well known internationally and in the Philippines. Finally, the petition could also be based on the fact, if it were proven by KU, that “Kluwer” is a trade name that KU has adopted and used before its use and registration by Jinggy. (Ecole de Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs Renaud Cointreau & Cie and Le Cordon Bleu Int’s (2013)

Page !7of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

VIII. As a rule, an insurance contract is consensual and voluntary. The exception is in the case of: (1%) (A)

Inland Marine Insurance

(B)

Industrial Life Insurance

(C)

Motor Vehicle Liability Insurance

(D)

Life Insurance

SUGGESTED ANSWER (C) Motor Vehicle Liability Insurance Note: The correct term to use in (C) is compulsory motor vehicle liability insurance” (Chapter VI, Insurance Code) rather than “motor vehicle liability insurance.”

Page !8of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

IX. On February 21, 2013, Barrack entered into a contract of insurance with Matino Insurance Company (Matino) involving a motor vehicle. The policy obligates Matino to pay Barrack the amount of Six Hundred Thousand Pesos (P600,000.00) in case of loss or damage to said

vehicle during the period covered, which is from February 26, 2013 to February 26, 2014. On April 16, 2013, at about 9:00 a.m., Barrack instructed his driver, JJ, to bring the motor vehicle to a near by auto shop for tune-up. However, JJno longer returned and despite diligent efforts to locate the said vehicle, the efforts proved futile. Resultantly, Barrack promptly notified Matino of the said loss and demanded payment of the insurance proceeds of P600,000.00. In a letter dated July 5, 2013. Matino denied the claim, reasoning as stated in the contract that "the company shall not be liable for any malicious damage caused by the insured, any member of his family or by a person in the insured’s service. Is Matino correct in denying the claim? (4%) SUGGESTED ANSWER Matino Insurance is not correct in denying the claim. The loss of the motor vehicle is not excluded under the insurance policy as the loss was due to theft, not malicious damage. The malicious damage” clause under the policy is not applicable but rather the “theft” clause. Thus, the provision under the policy that “the company shall not be liable for any malicious damage caused by the insured, any member of his family or by a person in the insured’s service” is not applicable. (Alpha Insurance and Surety Co vs Castor (2003) X. A person is said to have an insurable interest in the subject matter insured where he has a relation or connection with, or concern in it that he will derive pecuniary benefit or advantage from its preservation. Which among the following subject matters is not considered insurable? (1%) (A)

A partner in a firm on its future profits

(B)

A general creditor on debtor’s property

(C)

A judgment creditor on debtor’s property

(D)

A mortgage creditor on debtor’s mortgaged property

SUGGESTED ANSWER (B) A general creditor on debtor’s property

Page !9of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

XI. PA Assurance (PA) was incorporated in 1980 to engage in the sale of pre-need educational plans. It sold open-ended educational plans which guaranteed the payment of tuition and other fees to planholders irrespective of the cost at the time of availment. Italso engaged in the sale of fixed value plans which guaranteed the payment of a pre-determined amount to planholders. In 1982, PAwas among the country’s top corporations. However, it subsequently suffered financial difficulties.

On September 8, 2005, PA filed a Petition for Corporate Rehabilitation before the Regional Trial Court (RTC) of Makati City. On October 17, 2005, ten (10) plan holders filed an Opposition and Motion to Exclude Planholders from Stay Order on the ground that planholders are not creditors as they (planholders) have a trust relationship with PA. Are the planholders correct? (4%) SUGGESTED ANSWER ? RECOMMENDATION: ? XII. To constitute a quorum for the transaction of corporate business, only a majority of the number of Board of Directors is required: (1%) (A)

as fixed by the corporate by-laws

(B)

as fixed in the articles of incorporation

(C)

actually serving in the board

actually serving in the board but constituting a quorum SUGGESTED ANSWER (B) as fixed in the articles of incorporation

Page !10 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

XIII. Pursuant to its By-Laws, Soei Corporation’s Board of Directors created an Executive Committee to manage the affairs of the corporation in between board meetings. The Board

of Directors appointed the following members of the Executive Committee: the President, Sarah L; the Vice President, Jane L; and, a third member from the board, Juan Riles. On December 1, 2013, the Executive Committee, with Sarah L and Jane L present, met and decided on the following matters: Purchase of a delivery van for use in the corporation’s retail business; 2.

Declaration and approval of the 13th month bonus;

Purchase of an office condominium unit at the Fort; and 4.

Declaration of P10.00 per share cash dividend. Are the actions of the Executive Committee valid? (4%)

SUGGESTED ANSWER All the actions taken by the Executive Committee in the problem are not valid. The Executive Committee was not properly created and, therefore, its acts are invalid. Section 35 of the Corporation Code requires that at least three members of an Executive Committee be directors of the corporation. In the problem, only Member Sarah L (who is a director as she is the President) and Member Juan Riles (who is clearly identified in the problem as a director) are directors of Soci Corporation. Member Jane L is no identified as a director. As the Executive Committee in the problem was not properly created it could not act at all as the minimum

quorum would be three. As stated earlier, the Executive Committee lacks one qualified member. If the Executive Committee were properly organized and a quorum were present, all the actions taken by the Executive Committee in the problem, except the declaration of P 10.00 per share cash dividend, would have been valid. The distribution of cash dividends to the shareholders may not be delegated by the Board of Directors to the Executive Committee pursuant to Section 35 of the Corporation Code.

Page !11 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XIV.

On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a face value ofP5,000,000.00 from RN Insurance Company (RN), with his wife Tina Marcial(Tina) as sole beneficiary. On the same day, Danny issued an undated check to RN for the full amount of the premium. On October 1, 2013, RN issued the policy covering Danny’s life insurance. On October 5, 2013, Dannymet a tragic accident and died. Tina claimed the insurance benefit, but RN was quick to deny the claim because at the time of Danny’s death, the check was not yet encashed and therefore the premium remained unpaid. Is RN correct? Will your answer be the same if the check is dated October 15, 2013? (4%) SUGGESTED ANSWERS To the first question RN Insurance is not correct. The facts of the case show that Danny procured insurance on his life on September 25, 2013, with his wife Tina as beneficiary, and that on the same day, i.e. September 25, 2013, he issued an undated check to RN for the full amount of the premium. Since the undated check was issued to RN on September 25, 2013, it will be considered dated as of the same day, i.e. September 25, 2013 pursuant to Section 17(c) of the Negotiable Instruments Law. The facts also show that RN Insurance issued the policy on Danny’s life on October 1, 2013 and that Danny died in an accident on October 5, 2013. RN Insurance denied that claim of Tina because at the time of Danny’s death, the check was not yet encashed and, therefore, the premium remained unpaid. Presumably, RN Insurance is relying on the second paragraph of Article 1249 of the Civil Code which states that the “delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.” Whose fault was it that the check was not encashed? Certainly not Danny or Tina. RN Insurance had the check as early as September 25, 2013 and could have encashed the check before the death of Danny on October 5, 2013. The problem did not indicate that there was any problem with the check, e.g. that it was not adequately funded. RN Insurance was at fault and Tina should not be denied the proceeds of the policy. (See the case of Malayan Insurance Co., Inc. vs Arnaldo (1987), where the Court held that the insurer could no longer claim forfeiture of the insured’s right because it held the check used to pay the premium on a fire insurance policy for an unreasonable time; see also the comments of Justice Jose C. Vitug (ret.) in his book, Commercial Laws and Jurisprudence, 2006 Vol 1., p. 250, that “payment x x x by means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming

Page !12 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

an availability of funds thereof, would be sufficient even if it remains uncashed at the time of the loss. The subsequent effects of encashment (or impairment by the fault of the creditor) or of legal compensation under Articles 1278-1279, in relation to Article 1249 of the Civil Code, would retroact to the date of the mercantile instrument and its acceptance by the creditor.” To the second question My answer would not be the same if the check were dated October 15, 2013. This answer assumes that Danny was the one who dated the check and, therefore what he issued was a postdated check. The payment of a promissory note or a postdated check at a stated maturity subsequent to the loss, assuming that there was no estoppel (e.g. written acknowledgment of the receipt of premium), is insufficient to put the insurance into effect. (Vitug, Commercial Laws and Jurisprudence, 2006, Vol 1 p 250) If it were RN Insurance who dated the check October 15, 2013, then my answer would be the same as my answer to the first question. XV. A, B, C, D, and Ewere members of the 2003-2004 Board of Directors of FLP Corporation. At the election for the 2004-2005 Board of Directors, not one of them was elected. They filed in court a derivative suit on behalf of FLP Corporation against the newly-elected members of the Board of Directors. They questioned the validity of the election as it was allegedly marred by lack of quorum, and prayed for the nullification of the said election. The 2004-2005 Board of Directorsmoved to dismiss the complaint because the derivative suit is not proper. Decide. (4%) SUGGESTED ANSWER The position taken by the 2004-2005 Board of Directors is correct. The derivative suit is not proper. The members of the 03-04 BOD of FLP Corporation are the injured parties, not FLP Corporation, as their rights to vote and to be voted upon were directly affected by the election of the new set of directors (Legaspi Towers 300, Inc. et. al. vs Muer, et al (2012) XVI. In intellectual property cases, fraudulent intent is not an element of the cause of action except in cases involving: (1%) (A)

trademark infringement

(B)

copyright infringement

(C)

patent infringement

(D)

unfair competition

SUGGESTED ANSWER (D) unfair competition

Page !13 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XVII.

On December 1, 2010, Kore A Corporationshipped from South Korea to LT Corporation in Manila some 300,000 sheets of high-grade special steel. The shipment was insured against all risks by NA Insurance(NA). The carrying vessel arrived at the Portof Manila on January 10, 2011. When the shipment was discharged, it was noted that 25,000 sheets were damaged and in bad order. The entire shipment was turned over to the custody of ATI, the arrastre operator, on January 21, 2011 for storage and safekeeping, pending its withdrawal by the consignee’s authorized customs broker, RVM. On January 26 and 29, 2011, the subject shipment was withdrawn by RVM from the custody of ATI. On January 29, 2011, prior to the withdrawal of the last batch of the shipment, a joint inspection of the cargo was conducted per the Request for Bad Order Survey (RBO) dated

January 28, 2011. The examination report showed that 30,000 sheets of steel were damaged and in bad order. NA Insurance paid LT Corporationthe amount of P30,000,000.00 for the 30,000 sheets that were damaged, as shown in the Subrogation Receipt dated January 13, 2013. Thereafter, NA Insurance demanded reparation against ATI for the goods damaged in its custody, in the amount of P5,000,00.00. ATI refused to pay claiming that the claim was already barred by

the statute of limitations. ATI alleged that the Carriage of Goods by Sea Act (COGSA) applies in this case since the goods were shipped from a foreign port to the Philippines. NA Insurance claims that the COGSA does not apply, since ATIis not a shipper or carrier. Who is correct? (5%) SUGGESTED ANSWER NA Insurance is correct. The COGSA applies only to carriers or ships. A “carrier”, under Section 1(a) of the COGSA, “includes the owner or the charterer who enters into a contract of carriage with a shipper”, while a “ship” is defined under Section 1(d) as “any vessel used for the COGSA.” The COGSA does not apply to ATI as it is neither a “carrier” nor a “ship”, much less a “shipper”. It is simply an arrastre operator. Moreover, the COGSA does not mention that an arrastre operator may invoke the prescriptive period of one year; hence, it does not cover the arrastre operator. (Insurance Co. of North America vs Asian Terminals, Inc., (2012)

Page !14 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XVIII.

Skechers Corporation sued Inter-Pacific for trademark infringement, claiming that InterPacificused Skechers’ registered "S" logo mark on Inter-Pacific’s shoe products without its consent. Skechers has registered the trademark "SKECHERS" and the trademark "S" (with an oval design) with the Intellectual Property Office (IPO). In its complaint, Skechers points out the following similarities: the color scheme of the blue, white and gray utilized by Skechers. Even the design and "wave-like" pattern of the mid-sole and outer sole of Inter Pacific’s shoes are very similar to Skechers’ shoes, if not exact patterns thereof. On the side of Inter-Pacific’s shoes, near the upper part, appears the stylized "S" placed in the exact location as that of the stylized "S" the Skechers shoes. On top of the "tongue" of both shoes, appears the stylized "S" in practically the same location and size. In its defense, Inter-Pacific claims that under the Holistic Test, the following dissimilarities are present: the mark "S" found in Strong shoes is not enclosed in an "oval design"; the word "Strong" is conspicuously placed at the backside and insoles; the hang tags labels attached to the shoes bear

the word "Strong" for Inter-Pacific and "Skechers U.S.A." for Skechers; and, Strong shoes are modestly priced compared to the costs of Skechers shoes. Under the foregoing circumstances, which is the proper test to be applied – Holistic or Dominancy Test? Decide. (4%) SUGGESTED ANSWER Considering the facts given and the arguments of the parties, the dominancy test is the proper test to apply. Thus, the appropriation and use of the letter “S” by Inter-Pacific on its rubber shoes constitutes an infringement of the trademark of Skechers. The essential element of infringement under the Intellectual Property Code is that the infringing mark is likely to cause confusion. In determining similarity and likelihood of confusion, jurisprudence has developed tests – Dominancy Test and Holistic Test. The Dominancy Test focuses on the similarity of the prevalent or dominant features of the competing trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public. Duplication or imitation is not necessary; neither is it required that the mark sought to be registered suggest an effort to imitate. Given more consideration are the aural and visual impressions created by the marks on the buyers of goods, giving little weight to factors like prices, quality, sales outlets, and market segments.

In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. The discerning eye of the observer must focus not only on the predominant words, but also on the other features appearing on both labels so that the observer may draw conclusion on whether one is confusingly similar to the other. Relative to the question on confusion of marks and trade names, jurisprudence has noted two (w) types of confusion, viz: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other; and (2) confusion of business (source or origin confusion), where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party, is such as might reasonably be assumed to originate with the

Page !15 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

registrant of an earlier product, and the public would then be deceived either into that belief or into the belief that there is some connection between the two parties, though inexistent. Applying the Dominancy Test to the problem, we find that the use of the stylized “S” by InterPacific in its Strong rubber shoes infringes on the mark already registred by Skechers with the IPO. While it is undisputed that stylized “S” of Skechers is within an oval design, the dominant feature of the trademark is the stylized “S”, as it is precisely the stylized “S” which catches the eye of the purchaser. Thus, even if Inter-Pacific did not use an oval design, the mere fact that it used the same stylized “S”, the same being the dominant feature of the trademark of Skechers, already constitutes infringement under the Dominancy Test. (Skechers, USA Inc. vs Inter Pacific Industrial Trading Corp., et al (2006)

XIX. Guetze and his wife have three (3) children: Neymar, 25, who is now based in Rio de Janeiro, Brazil; Muelter, 23, who has migrated to Munich, Germany; and James, 21, who resides in Bogota, Colombia. Neymar and Muelter have since renounced their Philippine citizenship in favor of their country of residence. Nearing 70 years old, Guetze decided to incorporate his business in Binondo, Manila. He asked his wife and three (3) children to act as incorporators with one (1) share of stock each, while he owned 999,996 shares of the 1,000,000 shares of the capital stock. (6%) Assuming all other requirements are met, should the Securities and Exchange Commission (SEC) accept or reject the Articles of Incorporation? Why? Being the control freak and micro-manager that he is, Guetze asked you – his astute legal adviser – if he can serve as Chairman of the Board of Directors, as

President, and as General Manager of the corporation, all at the same time. Please advise Guetze. Assuming the corporation has beenproperly registered, may the Articles of Incorporation now beamended to reduce the number of directors to two (2) – Guetze and his wife– to reflect the real owners of the shares of stock? SUGGESTED ANSWERS The SEC should reject the Articles of Incorporation. Only two of the incorporators are resident of the Philippines. Section 10 of the Corporation Code requires that a majority of the incorporators be residents of the Philippines. Guetze can serve as Chairman of the Board of Directors, and President and General Manager of the corporation, all at the same time. This is allowed by, and is not covered by the prohibition in, Section 25 of the Corporation Code. The AOI may not be amended to reduce that number of directors to two. Under Section 14 of the Corporation Code, the number of directors shall not be less than five.

Page !16 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XX.

On May 13, 1996, PAM, Inc. obtained a P15,000,000.00 fire insurance policy from Ilocano Insurance covering its machineries and equipment effective for one (1) yearor until May 14, 1997. The policy expressly stated that the insured properties were located at "Sanyo Precision Phils. Building, Phase III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite." Before its expiration, the policy was renewed on "as is" basis for another year or until May 13, 1998. The subject properties were later transferred to Pace Factory also in PEZA. On October 12, 1997, during the effectivity of the renewed policy, a fire broke out at the Pace Factory which totally burned the insured properties. The policy forbade the removal of the insured properties unless sanctioned by Ilocano. Condition 9(c) of the policy provides that "the insurance ceases to attach as regards the property affected unless the insured, before the occurrence of any loss or damage, obtains the sanction of the company signified by endorsement upon the policy x x x (c) if the property insured is removed to any building or place other than in that which is herein stated to be insured." PAM claims that it has substantially complied with notifying Ilocano through its sister company, the RBC, which, in fact, referred PAM to Ilocano for the insurance coverage. Is Ilocano liable under the policy? (4%) SUGGESTED ANSWERS Ilocano Insurance is not liable under the policy. By the clear and express condition in the renewal policy, the removal of the insured property to any building or place required the consent of Ilocano. Any transfer effected by PAM, Inc. without Ilocano’s consent (as is the case here) would free the latter from any liability. (Malayan Insurance Company vs PAPCO (2013) XXI. On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Ilocos Bankers Life Insurance Corporation (Ilocos Life) designating Creencia Aban(Aban), her niece, as her beneficiary. Ilocos Life issued Policy No. 747, with a face value of P100,000.00, in Sotero’s favor on August 30, 1993, after the requisite medical examination and payment of the premium. On April 10, 1996, Sotero died. Aban filed a claim for the insurance proceeds on July 9, 1996. Ilocos Life conducted an investigation into the claim and came out withthe following findings: Soterodid not personally apply for insurance coverage, as she was illiterate. 2.

Soterowas sickly since 1990.

Soterodid not have the financial capability to pay the premium on the policy. 4.

Soterodid not sign the application for insurance.

Aban was the one who filed the insurance application and designated herself as the beneficiary.

2014 BAR EXAMINATIONS COMMERCIAL LAW

Page !17 of !25

For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16, 1997, but refunded the premium paid on the policy. (6%) May Sotero validly designate her niece as beneficiary? May the incontestability period set in even in cases of fraud as alleged in this case? Is Aban entitled to claim the proceeds under the policy? SUGGESTED ANSWERS Yes, Sotero may validly designate her niece as beneficiary. The same is not prohibited under the Insurance Code or any other law pertinent to the problem. Yes, the incontestability period applies even in cases of fraud as claimed in this problem. Note that the findings are those of the insurer and these were made in an investigation conducted unilaterally by the insurer more than 3 years after the policy was taken out by Sotero. These findings may very well be dismissed as self-serving considering the incontestability clause set out in Sec. 48 of the Insurance Code. Sec. 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of insurance proceeds occasioned by allegations of fraud,

concealment, or misrepresentation by insurers, claims which may no longer be set up after the two-year period expires as ordained under the law. Thus, the self-regulating feature of Sec. 48 lies in the fact that both the insurer and the insured are given the assurance that any dishonest scheme to obtain life insurance would be exposed, and attempts at unduly denying a claim would be struck down. Life insurance policies that pass the statutory two-year period are essentially treated as legitimate and beyond question, and the individuals who wield them are made secure by the thought that they will be paid promptly upon claim. In this manner, Sec. 48 contributes to the stability of the insurance industry. Sec. 48 prevents a situation where the insurer knowingly continues to accept annual premium payments on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus, instead of conducting at the first instance an investigation into the circumstances surrounding the issuance of the insurance policy which would have timely exposed the supposed flaws and irregularities attending it as it now professes, Ilocos Life appears to have turned a blind eye and opted instead to continue collecting collected the premiums and devoted the same to its own profit. It cannot now deny the claim when it is called to account. Sec. 48 must be applied to it with full force and effect. Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that the inevitable may be put off for years – or even decades – by the pendency of these unnecessary court cases. In the meantime, they benefit from

Page !18 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

collecting the interest and/or returns on both the premiums previously paid by the insured and the insurance proceeds which should otherwise go to their beneficiaries. The business of insurance is a highly regulated commercial activity in the country, and is imbued with public interest. An insurance contract is a contract of adhesion that must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the former’s interest (Manila Bankers Life Insurance Corp vs Aban (2013) Yes, Aban is entitled to claim the proceeds under the policy as beneficiary for the same reasons adduced in (B) above. XXII. Paul George Pua (Pua) filed a complaint for a sum of money against the spouses Benito and Caroline James (Spouses James). In the complaint, Pua prayed that the defendants pay Pua the amount of P8,500,000.00, covered by a check. Pua asserts that defendants owed him a sum of money way back in 1988 for which the Spouses James gave him several checks. These checks, however, had all been dishonored and Pua has not been paid the amount of the loan plus the agreed interest. In 1996, the Spouses James approached Pua to get the computation of their liability including the 2% compounded interest. After bargaining to lower the amount of their liability, the Spouses James gave Puaa postdated check bearing the discounted amount of P8,500,000.00. Like the 1988 checks, the drawee bank likewise dishonored this check. To prove his allegations, Pua submitted the original copies of the 17 checks issued by Caroline in 1988 and the check issued in 1996, Manila trust Check No. 750. The Spouses James, on the other hand, completely denied the existence of the debt asserting that they had never approached Pua to borrow money in 1988 or in 1996. They assert, instead, that Pua is simply acting at the instance of his sister, Lilian, to file a false charge against them using a check left to fund a gambling business previously operated by Lilian and Caroline. Decide. (5%) SUGGESTED ANSWER I will decide in favor of Pua and against the Spouses James. A check is evidence of indebtedness and proof of an obligation. It can be used in lieu of and for the same purpose as a promissory note. In other words, a check functions more than a promissory note since it not only contains an undertaking to pay an amount of money but is an order addressed to a bank and partakes of a representation that the drawer has funds on deposit against which the check is drawn, sufficient to ensure payment upon its presentation to the bank. A check, the entries of which are in writing, could prove a loan transaction. Thus, under the NIL, every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party for value. (Pua vs Spouse Benito Tiong (2013)

Page 19! of 25!

2014 BAR EXAMINATIONS COMMERCIAL LAW

XXIII. What vote is needed to consider every decision to be a valid corporate act? (1%) (A)

a majority of the directors present at the meeting

(B)

two-thirds of the directors present at the meeting

a majority of the directors present at the meeting at which there is a quorum two-thirds of the directors present at the meeting at which there is a quorum

a majority of the directors present at the meeting at which there is a quorum (Sec 25, Corporation Code)

Page !20 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XXIV.

A criminal complaint for violation of B.P. 22 was filed by Foton Motors (Foton), an entity engaged in the business of car dealership, against Pura Felipe (Pura) with the Office of the City Prosecutor of Quezon City. The Office found probable cause to indict Pura and filed an information before the Metropolitan Trial Court (MeTC) of Quezon City, for her issuance of a postdated check in the amount of P1,020,000.00 which was subsequently dishonored upon presentment due to "Stop Payment."

Pura issued the check because her son, Freddie, attracted by a huge discount of P220,000.00, purchased a Foton Blizzard 4x2 from Foton. The term of the transaction was Cash-on-Delivery and no downpayment was required. The car was delivered on May 14, 1997, but Freddie failed to pay upon delivery. Despite non-payment, Freddie took possession of the vehicle. Pura was eventually acquitted of the charge of violating B.P. 22 but was found civilly liable for the amount of the check plus legal interest. Pura appealed the decision as regards the civil liability, claiming that there was no privity of contract between Foton and Pura. No civil liability could be adjudged against her because of her acquittal from the criminal charge. It was Freddie who was civilly liable to Foton, Pura claimed. Pura added that she could not be an accommodation party either because she only came in after Freddie failed to pay the purchase price, or six (6)

months after the execution of the contract between Foton and Freddie. Her liability was limited to her act of issuing a worthless check, but by her acquittal in the criminal charge, there was no more basis for her to be held civilly liable to Foton. Pura’s act of issuing the subject check did not, by itself, assume the obligation of Freddie to Foton or automatically make her a party to the contract. Is Pura liable? (5%) SUGGESTED ANSWER Pura is liable to Foton Motors because it sold a car to her son and was a holder for value of the check issued in its favor by Pura. Any person criminally liable for felony is also civilly liable. Thus , her acquittal in the criminal charge does not carry with it extinction of her civil liability unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. (People vs Maniego (1987) More specifically, Pura is liable as an accommodation party. Under Sec. 29 of the NIL, an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. Pura’s liability existed although Pura issued the check after the delivery of the car. Under Sec. 25 of the NIL, and antecedent or pre-existing debt constitutes value and is deemed such whether the instrument is payable on demand or at a future time.

Page !21 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XXV.

In an action for collection of a sum of money, the Regional Trial Court (RTC) of Makati City issued a decision finding D-Securities, Inc. liable to Rehouse Corporation for P10,000,000.00. Subsequently, the writ of execution was issued but returned unsatisfied because D-Securities had no more assets to satisfy the judgment. Rehouse moved for an Alias Writ of Execution against Fairfield Bank (FB), the parent company of D-Securities. FB opposed the motion on the grounds that it is a separate entity and that it was never made a party to the case. The RTC granted the motion and issued the Alias Writ of Execution. In its Resolution, the RTC relied on the following facts: 499,995 out of the 500,000 outstanding shares of stocks of D-Securities are owned by FB; FB had actual knowledge of the subject matter of litigation as the lawyers who represented D-Securities are also the lawyers of FB. As an alter ego, there is no need for a finding of fraud or illegality before the doctrine of piercing the veil of corporate fiction can be applied. The RTC ratiocinated that being one and the same entity in the eyes of the law, the service of summons upon D-Securities has bestowed jurisdiction over both the parent and wholly-owned subsidiary. Is the RTC correct? (4%) SUGGESTED ANSWER The RTC is not correct. As FB is a separate entity and was never made a party to the case, the judgment sought to be enforced against D-Securities cannot be made against its parent company, FB. Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements:

control of the corporation by the stockholder or parent corporation, (2) fraud or fundamental unfairness imposed on the plaintiff, and (3) harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of all these elements in the problem prevents the piercing of the corporate veil. The absence of any one of these elements prevents piercing the corporate veil. In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Hence, all three elements should concur for the doctrine to be applicable. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Neither is the existence of interlocking directors, corporate officers and shareholders enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations/ To justify treating the sole stockholder or holding company as responsible, it is not enough that the subsidiary is so organized and controlled as to make it “merely an instrumentality, conduit or adjunct” of its stockholders. It must further appear that to recognize their separate entities would aid in the consummation of a wrong. Control, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil. Such fraudulent intent is lacking in this case (Pacific Rehouse Corporation vs CA (2014)

Page !22 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XXVI.

DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB) secured by a real estate mortgage over a 63,380-square-meter land situated in Cabanatuan City. Due to the Asian Economic Crisis, DMP experienced liquidity problems disenabling it from paying its loan on time. For that reason, NB sought the extra judicial foreclosure of the said mortgage by filing a petition for sale on June 30, 2003. On September 4, 2003, the mortgaged property was sold at public auction, which was eventually awarded to NBas the highest bidder. That same day, the Sheriff executed a Certificate of Sale in favor of NB. On October 21, 2003, DMP filed a Petition for Rehabilitation before the Regional Trial Court (RTC). Pursuant to this, a Stay Order was issued by the RTC on October 27, 2003. On the other hand, NB caused the recording of the Sheriff’s Certificate of Sale on December 3, 2003 with the Register of Deeds of Cabanatuan City. NB executed an Affidavit of Consolidation of Ownership and had the same annotated on the title of DMP. Consequently, the Register of Deeds cancelled DMP’s title and issued a new title in the name of NB on December 10, 2003. NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance of Writ of Possession before the RTC of Cabanatuan City. After hearing, the RTC issued on September 6, 2004 an Order directing the Issuance of the Writ of Possession, which was issued on October 4, 2004. DMP claims that all subsequent actions pertaining to the Cabanatuan property should have been held in abeyance after the Stay Order was issued by the rehabilitation court. Is DMP correct? (4%) SUGGESTED ANSWER DMP is not correct. Since the foreclosure of DMP’s mortgage and the issuance of the certificate of sale in NB’s favor were done prior to the appointment of a Rehabilitation Receiver and the Stay Order, all the actions taken with respect to the foreclosed mortgage property which were subsequent to the issuance of the Stay Order were not affected by the Stay Order. Thus, after the redemption period expired without DMP redeeming the foreclosed property, NB becomes the absolute owner of the property and it was within its right to ask for the consolidation of title and the issuance of new title in its name as a consequence of ownership; thus, it is entitled to the possession and enjoyment of the property (Equitable PCI Bank vs DNG Realty and Development Corp. (2010)

Page !23 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

XXVII. ELP Insurance, Inc. issued Marine Policy No. 888 in favor of FCL Corp. to insure the shipment of 132 bundles of electric copper cathodes against all risks. Subsequently, the cargoes were shipped on board the vessel "M/V Menchu" from Leyte to Pier 10, North Harbor, Manila. Upon arrival, FCL Corp. engaged the services of CGM, Inc. for the release and withdrawal of the cargoes from the pier and the subsequent delivery to its warehouses/plants in Valenzuela City. The goods were loaded on board twelve (12) trucks owned by CGM, Inc., driven by its employed drivers and accompanied by its employed truck helpers. Of the twelve (12) trucks en routeto Valenzuela City, only eleven (11) reached the destination. One (1) truck, loaded with eleven (11) bundles of copper cathodes, failed to deliver its cargo. Because of this incident, FCL Corp. filed with ELP Insurance, Inc. a claim for insurance indemnity in the amount of P1,500,000.00. After the requisite investigation and adjustment, ELP Insurance, Inc. paid FCL Corp. the amount of P1,350,000.00 as insurance indemnity.

ELP Insurance, Inc., thereafter, filed a complaint for damages against CGM, Inc. before the Regional Trial Court (RTC), seeking reimbursement of the amount it had paid to FCL Corp. for the loss of the subject cargo. CGM, Inc. denied the claim on the basis that it is not privy to the contract entered into by and between FCL Corp. and ELP Insurance, Inc., and hence, it is not liable therefor. If you are the judge, how will you decide the case? (4%) SUGGESTED ANSWER I will decide the case in favor of ELP Insurance. Even if CGM, Inc. is not privy to the contract between FCL Corp. and ELP Insurance, it is still liable for the loss of the subject cargo. Art. 2207 of the Civil Code states if the plaintiff’s property has been insured and he has received indemnity from the insurance company for injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrong-doer or the person who has violated the contract, which in this case is CGM. Since ELP Insurance is subrogated to the rights of FCL Corporation to the extent of the amount it paid to the latter under the marine insurance contract, it has the right to seek reimbursement from CGM, Inc, for breach of contract and/or tort (Loadmasters Customs Services, Inc. vs Glodel Brokerage Corporation and R & B Insurance Corp (2011)

Page !24 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW XXVIII.

Which of the following instruments is negotiable if all the other requirements of negotiability are met? (1%) A promissory note with promise to pay out of the U.S. Dollar account of the maker in XYZ Bank A promissory note which designates the U.S. Dollar currency in which payment is to be made A promissory note which contains in addition a promise to paint the portrait of the bearer A promissory note made payable to the order of Jose Cruz or Josefa Cruz SUGGESTED ANSWER A promissory note which designates the U.S. Dollar currency in which payment is to be made or (D) A promissory note made payable to the order of Jose Cruz or Josefa Cruz

Page !25 of !25

2014 BAR EXAMINATIONS COMMERCIAL LAW

XXIX. KKis from Bangkok, Thailand. She studies medicine in the Pontifical University of Santo Tomas (UST). She learned that the same foreign books prescribed in UST are 40-50%

cheaper in Bangkok. So she ordered 50 copies of each book for herself and her classmates and sold the books at 20% less than the price in the Philippines. XX, the exclusive licensed publisher of the books in the Philippines, sued KK for copyright infringement. Decide. (4%) SUGGESTED ANSWER is liable for infringement of copyright. XX, as exclusive licensed publisher, is entitled, within the scope of the license, to all the rights and remedies that the licensor has with respect to the copyright (Sec. 180, of IPC) The importation by KK of 50 copies of each foreign book prescribed in UST and selling them locally at 20% less than their respective prices in the Philippines is subject to the doctrine of fair use set out in Sec. 185.1 of the IPC. The factors to be considered in determining whether the us made of a work is fair use shall include: The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational; purposes; The nature of the copyrighted work; The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and The effect of the use upon the potential market for or value of the copyrighted work. Applying the above-listed factors to the problem, KK’s importation of the books and their sale locally clearly show the unfairness of her use of the books, particularly the adverse effect of her price discounting on the business of XX. ---oo0ooo---

!"#$ &'( )*'+,-'.,/-0

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

RST >$#% STU @, (3 - H-0-6192 0;I?2B2 N:;?> 92<6 78 A5?7:;3 62@737:83 >95> 5 B585E2?L3 @92@D 73 E::6 53 @539H ' B585E2?L3 @92@D 73 5 @92@D 6?5J8 =K >92 =58D 5E5783> 7>32 73 622B26 I?2O5@@2I>26 =K >92 =58D C?:B >92 B:B28> :C 733;58@2H .92 @92@D =2@:B23 >92 I?7B5?K :=<7E5>7:8 :C >92 =58D J97@9 733;23 7> 586 @:83>7>;>23 7>3 J? 7>>28 I?:B732 >: I5KH &K 733;78E 7>4 >92 =58D 78 2CC2@> @:BB7>3 7>3 >:>5< ?23:;? @234 78>2E?7>K 586 9:8:? =29786 >92 @92@DH K '-0 G3

$78<9 7F %PP1-D3C ULW >$#% LRXY (091<0-9/70-D $7$#% SR[Y !19<7E-05 -0. '<839 $7HP-0B G3 $2/75C Z# &7, R\U[SUC

&7G1HE1< U[C UXR] %D91<0-9/G1 -03:1< +585E2?L3 @92@D 73 8:> <2E5< >2862? =2@5;32 ;862? '?>7@<2 #!PQ :C >92 N7A7< N:624 @92@D3 6: 8:> I?:6;@2 >92 2CC2@> :C I5KB28> ;8>7< 28@53926 :? >9?:;E9 >92 C5;<> :C >92 @?267>:?4 >927? A5<;2 953 =228 7BI57?26H +:?2:A2?4

;862? >92 N28>?5< &58D >92 62=>:? @58 8:> @:BI2< >92 @?267>:?

'@>4 >:

5@@2I> @92@D3 78 I5KB28> :C 5 62=> J92>92? I;=<7@ :? I?7A5>2 R '? >7@<2 S" :C (' TS$U V $, +210 4-0 B78 9<1-9 - E/DD 7F 1^42-061 -3 - P<7H/337?25>26 53 5 I?:B733:?K 8:>2 78 >92 C:<<:J78E 783>58@23H #H .92 6?5J22 73 5 C7@>7>7:;3 I2?3:8 :? 5 I2?3:8 8:> 95A78E >92 @5I5@7>K >:

@:8>?5@>X !H .92 6?5J2? 586 >92 6?5J22 5?2 :82 586 >92 35B2 I2?3:8H UHY92?2 >92 783>?;B28> 73 3: 5B=7E;:;3 >95> >92?2 73 5 6:;=> 53 >: J92>92? >92 783>?;B28> 73 5 =7<< :? 5 8:>24 >92 9:<62? B5K >?25> 7> 27>92? 53 5 =7<< :? 8:>24 5> >92 :I>7:8 :C >92 9:<62?H R 02@>7:83 #U" 586 #T :C >92 -2E:>75=<2 ,83>?;B28>3 Z5J

((, %, &7G1991 1091<1. /097 - 4709<-49 F7< 921 P8<42-31 7F 41<9-/0 7FF/41 38PPD/13, '21 677.3 :1<1 32/PP1., +2/D1 /0 9<-03/9C 921 677.3 :1<1 / 038<1. EB &7G1991, _713 321 2-G1 -0 /038<-ED1 /091<139 7G1< 921 677.3 1G10 E1F7<1 .1D/G1>2 953 58 783;?5=<2 78>2?23> 78 >92 E::63H .92 @:8>? 5@> :C 35<2 J53 526 586 -:A2>>2 5@G;7?26 78>2?23> >92?2:8 5<>9:;E9 >92 E::63 95A2 K2> >: =2 62<7A2?26H @, +/DD -0 /038<-041 P7D/4B E1 E/0./06 1G10 /F 921 P<1H/8H /3 80P-/.I +2-9 /F /9 :1<1 P-<9/-DDB P-/.I KLMN '3 5 E282?5< ?;<24 >92 783;?58@2 I:<7@K 73 8:> A5<76 586 =78678E ;8<233 >92 I?2B7;B >92?2:C 953 =228 I576H .973 73 >92 @539 586 @5??K ?;<2 ;862? >92 ,83;?58@2 N:62H [?2B7;B 73 >92 @:83762?5>7:8 C:? >92 ;862?>5D78E :C >92 783;?2? >: 7862B87CK >92 783;?26 5E5783> 5 3I2@7C726 I2?77:834 9:J2A2?4 :82 :C >92B 73 J928 >92?2 73 58 5E?22B28> 5<<:J78E >92 783;?26 >: I5K >92 I?2B7;B 78 783>5<3 586 I5?>75< I5KB28> 953 =228 B562 5> >92 >7B2 :C >92 <:33H K !-5-9/ '834-0B $70.7H/0/8H

$7$#% ][L

(((, %, _/34833 921 92<11`F7D. 42-<-491< 7F - E/DD 7F D-./06, KLMN =7<< :C <5678E 73 @:83762?26 5 ?2@27I> C:? >92 E::63 397II26 >: >92 @:BB:8 @5??72?H ,> 5<3: 32?A23 53 >92 @:8>?5@> =K J97@9 >9?22 I5?>7234 85B292 397II2?4 >92 @5??72? 586 >92 @:837E822 ;862?>5D2 3I2@7C7@ ? 23I:837=7<7>723 586 533;B26 3>7I;<5>26 :=<7E5>7:83H .97?64 7> 73 >92 2A7628@2 :C >92 2W73>28@2 :C >92 @:8>?5@> :C @5??75E2 I?:A7678E C:? >92 >2?B3 586 @:867>7:83 >92?2:C K a106 b8- O-P1< O<7.8493

G3 $78<9 7F %PP1-D3C UT[ >$#% US\, @, +2-9 /3 - cJ-370 4D-831d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

=:;86 >: @5??K >92 I53328E2?3 35C2 @58 I?:A7624 ;378E >92 ;>B:3> 67<7E28@2 :C A2?K @5;>7:;3 I2?3:83 J7>9 5 6;2 ?2E5?6 C:? 5<< >92 @7?@;B3>58@23 K %<9/4D1 R\SS 7F 921 $/G/D $7.1 N

,_H %, !-/01 _10C (04, 7P101. -0 /<<1G74-ED1 D1991< 7F 4<1./9 :/92 ;-/< f @-05C /0 4700149/70 :/92 !-/01 _10C (04,V3 /HP7<9-9/70 7F 3P-<1 P-<93 F7< /93 91^9/D1 H/DD3, '21 /HP7<91. P-<93 :1<1 <1D1-31. 97 !-/01 _10C (04, -F91< / 9 1^14891. - 9<839 <141/P9 /0 F-G7< 7F ;-/< @-05, +210 !-/01 _10C (04, :-3 80-ED1 97 P-B /93 7ED/6-9/70 80.1< 921 9<839 <141/P9C ;-/< @-05 381. !-/01 _10C (04, F7< 139-F- 80.1< 921 '<839 #141/P93 )-:, '21 478<9C 27: ./3H/331. 921 38/9, +-3 921 ./3H/33-D e839/F/1.I +2B 7< :2B 079I KLMN .92 673B7335< :C >92 @:BI<578> C:? 23>5C5 73 ^;3>7C726H M862? ?2@28> ^;?73I?;628@24 >92 0;I?2B2 N:;?> 92<6 >95> >?5835@>7:83 ?2C2??26 >: 78 ? 2<5>7:8 >: >?;3> ?2@27I>3 B57892 28>?;3>2? D82J 2A28 =2C:?2 >92 2W2@;>7:8 :C >92 5<<2E26 >?;3> ?2@27I> 5E?22B28> >95> >92 E::63 3;=^2@> :C >92 >?;3> ?2@27I> J2?2 82A2? 78>28626 =K >92 28>?;3>22 C:? ?235<2 :? C:? >92 B58;C5@>;?2 :C 7>2B3 >: =2 3:<64 >92 5E? 22B28> 73 8:> 5 >?;3> ?2@27I> >?5835@>7:8 =;> 5 37BI<2 <:584 8:>J7>93>58678E >92 <5=2973 @5324 >92 :=^2@> :C >92 >?;3> ? 2@27I>4 3I5?2 I5?>3 C:? >2W>7<2 B7<<3 4 J2?2 C:? >92 ;32 :C >92 28>?;3>22 586 82A2? 78>28626 C:? 35<2H '3 3;@94 >92 >?5835@>7:8 73 5 37BI<2 <:58H &6 G3 O17PD1 7F 921 O2/D/PP/013C Z# &7, R\LWXSC %P
@, +/DD 921 P92 <:33 :C >92 E::634 6:@;B28>3 :? 783>?;B28>3 J97@9 5?2 >92 3;=^2@> :C 5 >?;3> ?2@27I> I28678E >927? 673I:37>7:84 7??23I2@>7A2 :C J92>92? :? 8:> 7> J53 6;2 >: >92 C5;<> :? 82E<7E28@2 :C >92 28>?;3>224 395<< 8:> 2W>78E;739 >92 28>?;3>22L3 :=<7E5>7:8 >: >92 28>?;3>2? C:? >92 A5<;2 >92?2:CH

'<3:4 J97<2 >92 28>?;3>2? 73 B562 >: 5II25? 53 :J82? :C >92 E::63 @:A2?26

=K >92 >?;3> ?2@27I>4 3;@9 :J82?397I 73 :87:8 >: 28958@2 >92 28>?;3>2?L3 32@;?7>K 78>2?23> :A2? >92 E::63H >149/70 RX 7F O_ RRSY #73--G/063 -0. '<839 $7HP-0BC ][U >$#% TT _H 'H % 39-0.EB D1991< 7F 4<1./9 :-3 /3381. EB %@$ @-05 97 3148<1 921 7ED/69/70 7F i $7HP-0B 97 h $7HP-0B, j0.1< 921 39-0.EB D1991< 7F 4<1./9C /F 921<1 /3 F-/D8<1 70 921 P-<9 7F i $7HP-0B 97 P18E31?8109DBC h $7HP-0B 38EH/991. 97 %@$ @-05 - 41<9/F/4-91 7F .1F8D9 079:/9239-0./06 921 F-49 92-9 i $7HP-0B :-3 079 /0 .1F-8D9, $-0 %@$ @-05 <1F831 97 2707< 921 41<9/F/4-91 7F .1F-8D9I "^PD-/0, KLMN -:H M862? >92 6:@>?782 :C 7862I28628@2 78 5 <2>>2? :C @?267>4 >92 :=<7E5>7:8 :C >92 733;78E =58D >: I5K >92 =282C7@75?K 73 673>78@> 586 7862I28628> C?:B >92 B578 586 :?7E785>78E @:8>?5@> ;862?92 <2>>2? :C @?267>H 0;@9 :=<7E5>7:8 >: I5K 6:23 8:> 62I286 :8 >92 C; :? 8:8OC; :C >92 :?7E785>78E @:8>? 5@>H ,> 5?7323 ;I:8 >2862? :C >92 3>7I;<5>26 6:@;B28>3 ;862? >92 <2>>2? :C @?267>H , 8 >92 I?2328> @5324 >92 >2862? :C >92 @2?>7C7@5>2 :C 62C5;<> 28>7><23 1 >: I5KB28> ;862? >92 3>586=K <2>>2? :C @?267> 8:>J7>93>58678E >92 C5@> >95> * N:BI58K J53 8:> 78 62C5;<>H .973 73 J7>9:;> I?2^;67@2 >: >92 ?7E9> :C * N:BI58K >: I?:@226 5E5783> 1 N:BI58K ;862? >92 <5J :8 @:8>?5@>3 586 65B5E23H (038D-< @-05 7F %3/- -0. %H1
(091$#% ]SX, %D91<0-9/G1 -03:1< , M862? >92 C?5;6 2W@2I>7:8 I?78@7I<24 >92 =282C7@75?K B5K =2 28^:7826 C?:B @:<<2@>78E :8 >92 <2>>2? :C @?267> 78 @532 :C C?5;6;<28> 5=;32 :C @?267>H .92 733;58@2 :C 5 @2?>7C7@5>2 :C 62C5;<> 623I7>2 >92 C5@> >95> * @:BI58K 73 8:> 78 62C5;<> @:83>7>;>23 C?5;6;<28> 5=;32 :C @?267>H '<-03F/1D. O2/D/PP/013 G3

)8g70 bB.<7 $7$#% LX\,

&H(3 921 j0/F792 0;I?2B2 N:;?> 92<6 >95> >92 :=32?A58@2 :C >92 M87C:?B N;3>:B3 586 [? 5@>7@2 78 >92 [97<7II7823 73 ^;3>7C726 =K '?>7@<2 ! :C >92 N:62 :C N:BB2?@2 J97@9 28;8@75>23 >95> 78 >92 5=328@2 :C 58K I5?>7@;<5? I?:A737:8 78 >92 N:62 :C N:BB2?@24 @:BB2?@75< >?5835@>7:8 395<< =2 E:A2?826 =K ;35E2 586 @;3>:B3 E282?5<
_1 #10B ;-E$#% USL _,H %, _"; $7:@D @:?I:?5>7:83 5?2 I?:97=7>26 C?:B ?2>57878E 3;?I<;3 I?:C7>3 78 2W@233 :C #""` :C >927? I576O78 @5I7>5< 3>:@D 2W@2I> 5B:8E :>92?34 J928 >92 @:?I:?5>7:8 73 I?:97=7>26 ;862? 58K <:58 5E?22B28> J7>9 58K C7858@75< 783>7>;>7:8 :? @?267>:?X J92>92? <:@5< :? C:?27E84 C?:B 62@<5?78E 67A762863 J7>9:;> >92 @:8328> :C >92 @?267>:? 586 3;@9 @:8328> 953 8:> =228 32@;?26H R 02@>7:8 PU :C >92 N:?I:?5>7:8 N:62 V

@, +2-9 /3 c:-91<1. 39745d -0. :2-9 /3 921 D16-D 47031?81041 7F 921 /338041 7F 3842 39745I KLMN Y5>2?26 3>:@D3 5?2 3>:@D3 733;26 C:? 5 @:83762?5>7:8 <233 >958 7>3 I5? :? 733;26 A5<;2 :? C:? 5 @:83762?5>7:8 78 58K C:?B :>92? >958 @5394 A5<;26 78 2W@233 :C 7>3 C57? A5<;2H '8K 67?2@>:? :? :CC7@2? :C 5 @:?I:?5>7:8 @:8328>78E >: >92 733;58@2 :C J5>2?26 3>:@D3 :? J9:4 95A78E D8:J<26E2 >92?2:C4 6:23 8:> C:?>9J7>9 2WI?233 973 :=^2@>7:8 78 J?7>78E 586 C7<2 >92 35B2 J7>9 >92 @:?I:?5>2 32@?2>5?K 395<< =2 3:<765?79 >92 3>:@D9:<62? @:8@2?826 >: >92 @:?I:?5>7:8 586 7>3 @? 267>:?3 C:? >92 67CC2?28@2 =2>J228 >92 C57?

A5<;2 ?2@27A26 5> >92 >7B2 :C 733;58@2 :C >92 3>:@D 586 >92 I5? :? 733;26

A5<;2 :C >92 35B2H >149/70 [S 7F 921 $7
KLMN .92 62C2832 73 8:> >285=<2H .92 B2?2 5@> :C 2WI:?>78E C?:B :82L3 :J8 @:;8>? K4 J7>9:;> 6:78E 58K 3I2@7C7@ @:BB2?@75< 5@> J7>978 >92 >2??7>:?K :C >92 7BI:?>78E @:;8>?K @58 8:> =2 622B26 53 6:78E =;378233 78 >92 7BI:?>78E @:;8>?KH .9;34 >92 C:?27E8 @:BI58K B5K 3;2 78 >92 [97<7II7823 623I7>2 <5@D :C <7@2832 >: 6: =;378233 78 >92 [97<7II7823H K @, k-0 l8/.10

@<73 )9., k3 Z'k) !-08F-498$#% ULL @, _1F/01m R, _74992 6:@>?782 :C 5II5?28> 5;>9:?7>K4 >92 @:?I:?5>7:8 J7<< =2 23>:II26 C?:B 628K78E >92 5E28>L3 5;>9:?7>K 7C 7> D8:J78E3 :82 :C 7>3 :CC7@2?3 :? 58K :>92? 5E28> >: 5@> J7>978 >92 3@:I2 :C 58 5II5?28> 5;>9:?7>K 586 7> 9:<63 97B :;> >: >92 I;=<7@ 53 I:3323378E >92 I:J2? >: 6: >9:32 5@>3H %.G-041 O-P1< $7
U,

'<839 F80. .74992 >?;3> C;86 6:@>?782 3;=3@?7I>7:83 >: >92 @5I7>5< 3>:@D :C 5 @:?I:?5>7:8 @:83>7>;>2 5 C;86 >: J97@9 >92 @?267>:?3 95A2 >92 ?7E9> >: <::D C:? 35>73C5@>7:8 :C >927? @<57B3H .92 3@:I2 :C >92 6:@>?782 28@:BI53323 8:> :892 @5I7>5< 3>:@D =;> 5<3: :>92? I?:I2?>K 586 5332>3 E282?5<K 53 5 >?;3> C;86 C:? >92 I5KB28>

:C @:?I:?5>2 62=>3 b-DD1B G3 O$#% R

_,,,H %, @-H F/D1. -0 -49/70 97 10e7/0 >& $7HP-0BV3 @7-<. 7F _/<1497<3 F<7H 31DD/06 - P-<41D 7F D-0. <16/391<1. /0 921 478E31?8109DBC 921 47"$ .8 73 8:> @:??2@>H '8 5@>7:8 >: =2 ?2@:E87a26 53 5 3>:@D9:<62?

586 >: 783I2@> @:?I:?5>2 6:@;B28>3 73 58 78>?5O@:?I:?5>2 673I;>2 J97@9 6:23 8:> @:83>7>;>2 5 @:8>78;5>7:8 :C =;378233H .92 6733:<;>7:8 :C >92 @:?I:?5>7:8 37BI3 7> C?:B @:8>78;78E 7>3 =;378233H +:?2:A2?4 ;862? 02@>7:8 #P$ :C >92 N:?I:?5>7:8 N:624 8: ? 7E9> :? ?2B26K 78 C5A:? :C :? 5E5783> 58K @:?I:?5>7:84 7>3 3>:@D9:<62?34 B2B=2?34 67?2@>:?3 586 :CC7@2?3 395<< =2 ? 2B:A26 :? 7BI57?26 =K >92 3;=32G;28> 6733:<;>7:8 :C >92 @:?I:?5>7:8H .92 6733:<;>7:8 6:23 8:> 5;>:B5>7@5< >92 I5?>723 78>: 3>? 58E2?3 :? @958E2 >927? 78>?5 @:?I:?5>2 ?2<5>7:8397IH-27>92? 6:23 7> >2?B785>2 2W73>78E @5;323 :C 5@>7:8 J97@9 5?:32 =2@5;32 :C >92

@:?I:?5>2 >723 :C >92 I5?>723H .92 @5;32 :C 5@>7:8 78A:?5O @:?I:?5>2 @:8>?:A2?3K ?2B5783 586 B;3> =2 C7<26 53 58 78>?5O @:?I:?5>2 673I;>2 623I7>2 >92 3;=32G;28> 6733:<;>7:8 :C >92 @:?I:?5>7:8H %68/<<1 G3 ;Q@ n\C (04, Z# 07, R\X\\XC J-08-
EN ;78< B1-<3 D-91& $7HP-0B F/D13 -0 -49/70 -6-/039 @-H 97 <147G1< 477:8 @588:> I?:3I2? =2@5;32 >92 @:?I:?5>7:8 953 8: B:?2 <2E5< @5I5@7>K >: 3;2 5C>2? >9?22 K25?3 C?:B 7>3 6733:<;>7:8H %D-E-06 _1G1D7PH109 $714814892 0(N 32@;?7>723 395<< 8:> =2 3:<6 :? :CC2?26 >: =2 3:<6

>: >92 I;=<7@ J7>978 >92 [97<7II7823 ;8<233 >92 32@;?7>723 5?2 ? 2E73>2?26 J7>9 586 5II?:A26 =K >92 02@;?7>723 586 )W@958E2 N:BB7337:8H [;=<7@ B2583 !" :? B:?2 78A28>:?3H .92 C5@> >95> >92 32@;?7>723 J2?2 3:<6 6;?78E 5 #$ B:8>9 I2?7:6 73 7BB5>2?7592 35<2 :C 32@;?7>723 >: <233 >958 !" 78A23>:?3 7C 6:82 6;? 78E 5 #! B:8>9 I2?7:6 73 58 2W2BI> >?5835@>7:8 ;862? >92 02@;?7>723 (2E;<5>7:8 N:62H @, >148148
.92 ?5>7:85<2 C:? >92 2W2BI>7:8 73 >95> >92 I;=<7@ 73 5BI2@>26 2A28 J7>9:;> >92 ?2E73>?5>7:8 :C >92 32@;?7>723 >: =2 733;26 =K >92 E:A2?8B28> 378@2 >92 E:A2?8B28> 73 I?23;B26 >: =2 5<J5K3 3:H

$, +2B /3 921 >148723 (2E;<5>7:8 N:62 73 @5<<26 5 b >?;>9 78 32@;?7>723 <5J b =2@5;32 7> ? 2G;7?23 >92 733;2? >: B5D2 C;<< 586 C57? 673@<:3;?2 :C 78C:?B5>7:8 5=:;> 32@;?7>723 =278E 3:<6 :? :CC2?26 >: =2 3:<6 J7>978 >92 [97<7II7823 586 I285<7a23 B587I;<5>7A2 586 C?5;6;<28> 5@>34 62A7@23 586 3@92B23H

*H !<, -0. !<3, #1B13 /0G1391. 921/< 2-<.`1-<01. 3-G/063 /0 3148"$ /0 G/7D-9/70 7F 921 >148"$ 92-9 2-3 P1487:8 39:;<6 =2 628726H N7A7< 3;7>3 C5<<78E ;862? >92 0(N R <7D2 <75=7<7>K C:? 32<<78E ;8?2E73>2?26 32@;?7>723 V 5?2 ;862? >92 2W@<;37A2 :? 7E785< ^;?7367@>7:8 :C >92 (.N 586 928@24 8226 8:> =2 C7?3> C7<26 =2C:?2 >92 0)N ;8<7D2 @?7B785< @53234 J92?278 >92 <5>>2? =:6K 2W2?@7323 I?7B5?K ^;? 7367@>7:8H O8- G3 $/9/E-05C Z# 07, RTXX[]C >1P91HE1< R[C UXRL

*,H %, +2B /3 921 @-0657 >109<-D 06 O/D/P/0-3 4703/.1<1. - D10.1< 7F D-39 <137<9I

KUMN ,> 73 @:83762?26 >92 <2862? :C <53> ?23:?> =2@5;32 7> <2863 >: =58D3 586 37B7<5? 783>7>;>7:83 ;862? C7858@75< 673>?233 J928 >92K 95A2 8: :>92? B2583

>: ?5732 C;863H @, _/39/068/32 - 47031
@:832?A5>:? 73 5II:78>26 7C 5 =58D :? G;537O=58D 73 78 5 3>5>2 :C @:8>78;78E 785=7<7>K :? ;8J7<<78E8233 >: B578>578 5 @:867>7:8 :C <7G;767>K 622B26 562G;5>2 >: I?:>2@> >92 78>2?23> :C @?267>:?3 586 62I:37>:?3H .92 @:832?A5>:? 395<< >5D2 @95?E2 :C >92 5332>3 586 <75=7<7>723 :C >92 =58D 586 2W2?@732 B585E2B28> 586 2W2?@732 :>92? I:J2?3 >: ?23>:?2 >92 =58DL3 A75=7<7>KH .92 @:832?A5>:?397I 395<< 8:> 2W@226 :82 K25?H ?2@27A2? 73 5II:78>26 E282?5<92 ?25<7a5=<2 A5<;2 :C >92 =58DL3 5332>3 53 62>2?B7826 =K &0[ 73 <233 >958 7>3 <75=7<7>723H .92 ?2@27A2? 395<< >5D2 @95?E2 :C >92 5332>3 586 <75=7<7>723 :C >92 783>7>;>7:8 586 56B7873>2? >92 35B2 C:? >92 =282C7> :C 7>3 @?267>:?3H .92 ?2@27A2? 395<< 62>2?B782 J7>978 Q" 65K3 J92>92? >92 =58D @58 =2 ?295=7<7>5>264 :>92?J7324 92 395<< ?2@:BB286 >92 @<:3;?2 :C >92 783>7>;>7:8H

$, +2-9 /3 /03/.1< 9<-./06I KUMN ,83762? >?5678E 73 >92 =;K78E :? 32<<78E =K 32@;?7>723 =K 58 783762? J97<2 78 >92 I:332337:8 :C 5 B5>2?75< 8:8OI;=<7@ 78C:?B5>7:8H

*,,H %, #-BH70. /0G1391. 2/3 H701B /0 31488E31?8109DBC 921 @8<1-8 7F (091<0-D #1G1081 -351. 2/3 E-05 97 ./34D731 2/3 /0G139H1093, b/3 E-05 <1F831. 921 <1?8139 F7< ./34D738<1 70 921 6<780. 92-9 921 /0G139H1093 -<1 470F/.109/D 80.1< 921 >14<14B 7F @-05 _1P73/93 )-: K#1P8ED/4 %49 &7, R]XSC -3 -H10.1.N, (3 921 E-05V3 <1F83-D e839/F/1.I _1F10. B78< -03:1<, KUMN

,> 73 ^;3>7C726H M862? (' #P"$4 78A23>B28> 78 =:863 733;26 =K >92 [97<7II782 E:A2?8B28> 5?2 5<3: 5=3:<;>275< 586 B5K 8:> =2 2W5B78264 78G;7?26 :? <::D26 78>: =K 58K I2?3:84 E:A2?8B28> :CC7@75<4 =;?25; :? :CC7@2 35A2 C:? >92 2W@2I>7:83 I?:A7626 =K <5JH -:82 :C >92 2W@2I>7:83 5II92 I?2328> @532HH @, ;/<39 @-05 <141/G1. -0 7<.1< 7F 6-<0/32H109 7G1< - 4D/109V3 P137 -0. .7DD-<

.1P73/93 /0 ;/<39 @-05, >278D. ;/<39 @-05 47HPDB :/92 92-9 7<.1
F7?3> &58D 39:;<6 @:BI9 >92 :?62? :C E5?8739B28> :A2? 5 @<728>L3 I23: 62I:37>3 =2@5;32 >92?2 73 8:>978E 78 (' #P"$ >95> I<5@23 =58D 62I:37>3 =2K:86 >92 ?25@9 :C ^;6EB28> @?267>:?H '86 >92 673@<:3;?2 :C 78C:?B5>7:8 :8 =58D 62I:37>3 I;?3;58> >: >92 J?7> :C E5?8739B28> 73 :85< >: >92 2W2@;>7:8 I?:@233H O$(@ G3 $78<9 7F %PP1-D3 RWL >$#% ]SU,

.92 6:<<5? 62I:37>34 9:J2A2?4 5?2 2W2BI> C?:B E5?8739B28> :? @:;? > :?62? ;862? >92 F:?27E8 N;??28@K '@> R (' SP!S VH .9;34 >92 =58D 39:;<6 8:> @:BI9 >973 I5?> :C >92 E5?8739B28>H

*,,,H %, % 47HH1<4/-D E-05 :-093 97 -4?8/<1 32-<13 /0 - 41H109 H-08F-498 5@G;7?2 395?23 78 5 @2B28> B58;C5@>;? 78E @:BI58K =2@5;32 5 @:BB2?@75< =58D @58 :8 78 >92 2G;7>K :C 5<<726 ;862?>5D78E34 B25878E4 ;862?>5D78E3 ?2<5>26 >: =58D78EH R 02@>7:8 U" :C (' cTQ# V @, % 478<9 F780. 921 /091<139 42-<61. EB - E-05 -3 1^4133/G1 -0. 8047034/70-ED1 -0. 39<845 .7:0 921 4709<-498-D 39/P8D-9/70 70 / 091<139, (F B78 :1<1 921 e8.61C :2-9 :78D. B78 /HP731 -3 921 -PPD/4ED1 /091<139 <-91I >9-91 B78< D16-D E-3/3, KUMN , J7<< 7BI:32 <2E5< ?5>2 :C 78>2?23> J97@9 73 @;??28> 5> S` I2? 588;B

$, +2-9 /3 921 3/06D1 E7<<7:192 378E<2 =:??:J2?L3 <7B7>4 >92 >:>5< 5B:;8> :C <:5834 @?267> 5@@:BB:65>7:83 586 E;5?58>22 >95> >92 =58D B5K 2W>286 >: 58K I2?3:8 395<< 8:> 2W@226 !$` :C >92 =58DL3 82> J:?>9H Y97<2 >92 <5J 32>3 >92 @27<78E 5> !"` :C >92 =58DL3 82>J:?>94 7> 5<3: 2BI:J2?3 >92 &0[ >: B:67CK >92 @27<78EH .92 @;??28> 0&Z 53 32> =K &0[ 73 !$` :C >92 &58DL3 82> J:?>9H

*,_H

%, _/FF1<109/-91 9<-.1H-<5C 47PB: 62C787>7:8 d 5H .?562B5?D 73 58K A737=<2 37E8 @5I5=<2 :C 673>78E;73978E E::63

=HN:IK?7E9> 73 58 78@:?I:?25< ?7E9> E?58>26 =K 3>5>;>2 >: >92 5;>9:? :? @?25>:? :C :?7E785< <7>2?5?K 586 5?>73>7@ J:?D3 J92?2=K 92 73 78A23>26 C:? 5 <7B7>26 I2?7:6 :C >7B2 J7>9 >92 ? 7E9> @5??K :;>4 5;>9:?7a2 586 I?2A28> >92 ?2I?:6;@>7:84 673>? 7=;>7:84 >?583C:?B5>7:84 ?28>5<4 I;=<7@ I2?C:?B58@2 586 :>92? C:?B3 :C @:BB;87@5>7:8 :C 973 J:?D >: >92 I;=<7@H @H[5>28> 73 58K >2@987@5< 3:<;>7:8 :C 58K I?:=<2B 78 58K C72<6 :C 9;B58 5@>7A7>K J97@9 73 82J4 ?2G;7?23 58 78A28>7A2 3>2I 586 786;3>?75<
!H '3 >: :=^2@> 5H .92 :=^2@> :C >?562B5?D 5?2 E::63 =H .92 :=^2@> :C @:IK?7E9> 5?2 :?7E785< <7>2?5?K 586 5? >73>7@ J:?D3 @H .92 :=^2@> :C I5>28> 73 78A28>7:8 UH '3 >: >2?B 5H .92 >2?B :C >?562B5?D 73 >28 K25?3 =H .92 >2?B :C @:IK?7E9> 73 E282?5<2?B :C I5>28> 73 !" K25?3 C?:B 5II<7@5>7:8 PH '3 >: 9:J 5@G;7?26 5H .?562B5?D 73 5@G;7?26 >9?:;E9 ?2E73>?5>7:8 586 ;32 =H N:IK?7E9> 73 5@G;7?26 C?:B >92 B:B28> :C @?25>7:8 @H [5>28> 73 5@G;7?26 >9?:;E9 5II<7@5>7:8 J7>9 >92 ,[/

@, +2-9 /3 921 .74992 6:@>?782 :C 2G;7A5<28>34 78C?78E2B28> :C I5>28> :@@;?3 J928 5 62A7@2 5II?:I?75>23 5 I?7:? 78A28>7:8 =K 78@:?I:?5>78E 7>3 788:A5>7A2 @:8@2I> 586 5<=27> J7>9 3:B2 B:67C7@5>7:83 586 @958E2 I2?C:?B3 >92 35B2 C;8@>7:8 78 3;=3>58>75<92 35B2 J5K >: 5@972A2 >92 35B2 ?23;<>H Z7./013

G3 $78<9 7F %PP1-D3C UU[ >$#% LLT

$, (0 :2-9 :-B3 :78D. - 4-31 F7< /0F :C >?562B5?D4 I?7:? ?2E73>?5>7:8 :C >92 >? 562B5?D 73 5 I?2?2G;737>2 >: >92 5@>7:8 J92?253 78 ;8C57? @:BI2>7>7:8 >?562B5?D ?2E73>?5>7:8 73 8:> 82@2335?K !H .?562B5?D 78C?78E2B28> 73 >92 ;85;>9:?7a26 ;32 :C >92 ?2E73>2?26 >?562B5?D J97<2 ;8C57? @:BI2>7>7:8 73 >92 I53378E :CC :82L3 E::63 53 >9:32 :C 58:>92? UH,8 78C?78E2B28> :C >?562B5?D4 C?5;6;<28> 78>28> 73 ;882@2335?K J92?253 78 ;8C57? @:BI2>7>7:8 C?5;6;<28> 78>28> 73 23328>75< R e22 N:?I:?5>7:8 A3 N:;?> :C 'II25<34 #c# 0N(' P#" V *_H $b"&C (04,C - '-/:-0131 47HP-0BC /3 - H-08F-498<1< 7F 9/<13 :/92 921 H-<5 )/629 h1-<, ;<7H UXXW 97 UXR]C $D-<5 "09192 I?2A7:;3 ?2G;7?2B28> :C I?::C :C 5@>;5< ;32 I?7:? >: >92 C7<78E :C 58 5II<7@5>7:8 C:? ?2E73>?5>7:8 :C 5 B5?D4 I?::C :C I?7:? 586 @:8>78;:;3 ;32 73 82@2335?K >: 23>5=<739 :J82?397I :C >?562B5?DH 0;@9 :J82?397I :C >92 >?562B5?D @:8C2?3 >92 ?7E9> >: ?2E73>2? >92 >?562B5?DH 078@2 N928 :J83 >92 >?562B5?D 53 2A7628@26 =K 7>3 5@>;5< 586 @:8>78;:;3 ;32 I?7:? >: >92 N<5?D )8>2?I?73234 >928 7> 73 >92 :82 28>7><26 >: >92 ?2E73>?5>7:8 :C >92 >?562B5?DH .92 C5@> >95> N<5?D J53 >92 C7?3> :82 >: ;32 >92 B5?D 92?2 78 >92 [97<7II7823 J7<< 8:> B5>>2?H N928L3 I?7:? 5@>;5< ;32 :C >92 >?562B5?D 2A28 78 58:>92? @:;8>?K =5?3 N<5?D C?:B 5II92 ?2E73>?5>7:8 :C >92 35B2 >?562B5?DH

'<3:4 5 B2?2 673>?7=;>:? 6:23 8:> :J8 >92 >?562B5?D >: >92 E::63 92 673>?7=;>23 586 973 ?7E9> :A2? >92 >?562B5?D @58 8:> I?2A57< :A2? >92 :J82?H ",h (0.839-D13 G3, >2/10 _-< "D149
*_,H %, A0 921 -09/`H701B D-80.1?5835@>7:8 ?2I:?> 78A:?5835@>7:8f3 78 @539 :? :>92? 2G;7A5<28> B:82>5?K 783>?;B28> 78A::>5< 5B:;8> 78 2W@233 :C $""D J7>978 :82 =58D78E 65K J97<2 3;3I7@7:8 >? 5835@>7:8 ?2I:?> 78A:?5835@>7:83 J7>9 @:A2?26 783>7>;>7:83 ?2E5?6<233 :C >92 5B:;8>3 78A:92 3;3I7@7:;3 @7?@;B3>58@23 28;B2?5>26 =K <5JH U, _713 921 %09/`!701B )-80.19:?7>K >: C?22a2 62I:37>3 73 <:6E26 J7>9 586 =5326 ;I:8 >92 :?62? :C >92 N:;?> :C 'II25<3H R 02@>7:8 #" :C (' Q#S" 53 5B28626 V

&H /8 C:?27E8 78A23>B28>3d R, % F7<1/60 47HP-0B 2-3 - ./39B28> :C 5 673>?7=;>:? 78 >92 [97<7II7823 73 8:> 3;CC7@728> >: @:83>7>;>2 6:78E =;378233 ;8<233 7> 73 ;862? >92 C;<< @:8>?:< :C >92 C:?27E8 @:?I:?5>7:8H ,C >92 673>?7=;>:? 73 58 7862I28628> 28>7>K 6:78E =;378233 C:? 7>3 :J8 85B2 586 5@@:;8>4 >92 <5>>2? @58 8:> =2 @:83762?26 53 6:78E

=;378233H >911D $-31 G3 _13/60 (091<0-9/70-D >1D149/70C Z# &7 R\RWWSC %P 73 5 @:83762?26 5 [97<7II782 85>7:85< 53 <:8E 53 7> 73 ? 2E73>2?26 53 6:78E =;378233 78 >92 [97<7II7823 ;862? >92 N:?I:?5>7:8 N:62 R 02@>7:8 # :C (' T"P!4 53 5B28626 =K 02@>7:8 # :C (' c#TQ V

O :::/::: O

2016 BAR EXAMINATIONS MERCANTILE LAW I What does "doing business in the Philippines" under the Foreign Investments Act of 1991 mean? (5%) Under the Foreign Investments Act of 1991 of Section 3(d) “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; II Jason is the proud owner of a newly-built house worth PS million. As a protection against any possible loss or damage to his house, Jason applied for a fire insurance policy thereon with Shure Insurance Corporation (Shure) on October 11, 2016 and paid the premium in cash. It took the company a week to approve Jason's application. On October 18, 2016, Shure mailed the approved policy to Jason which the latter received five days later. However, Jason's house had been razed by fire which transpired a day before his receipt of the approved policy. Jason filed a written claim with Shure under the insurance policy. Shure prays for the denial of the claim on the ground that the theory of cognition applies to contracts of insurance. Decide Jason's claim with reasons. (5%) Answer (1): Jason cannot recover on the insurance policy since he had no knowledge of the insurer's acceptance of his application before his house (insured property) was razed by fire. An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. What is being followed in insurance contracts is what is known as the “cognition theory”. In Enriquez vs. Sun Life Assurance Co., the contract for a life annuity in was not perfected because it has not been proved satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.

1 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

In the case at bar, the policy was received by Jason only a day after the occurrence of the insured risk. There was no perfected contract of fire insurance yet. Thus, Jason's claim under said policy should be denied.

Answer (2): Jason written claim with Shure under the insurance policy will prosper, Fire insurance policy was paid in cash to Shure Insurance Corporation on October 11, 2016 and the contract was perfected on October 18, 2016 with receipt of the approved policy. Section 77. “An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.” Article 78 of the Insurance Code “An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid“ What is being followed in insurance contracts is what is known as the “cognition theory” Thus, “an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge”.(Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269 Essential elements of the general rule pertaining to the mailing and delivery of mail matter as announced by the American courts, namely, when a letter or other mail matter is addressed and mailed with postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will not be presumed to have been received by the addressee unless it is shown that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

Cognition theory applies only to life and health insurance and not to property and liability insurance.

2 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

III ABC Appliances Corporation (ABC) is a domestic corporation engaged in the production and sale of televisions and other appliances. YYY Engineers, a Taiwanese company, is the manufacturer of televisions and other appliances from whom ABC actually purchases appliances. From 2000, when ABC started doing business with YYY, it has been using the mark "TTubes" in the Philippines for the television units that were bought from YYY. In 2015, YYY filed a trademark application for "TTubes." Later, ABC also filed its application. Both claim the right over the trademark "TTubes" for television products. YYY relies on the principle of "first to file" while ABC invokes the "doctrine of prior use." Does the fact that YYY filed its application ahead of ABC mean that YYY has the prior right over the trademark? Explain briefly. (2.5o/o) Does the prior registration also mean a conclusive assumption that YYY Engineers is in fact the owner of the trademark "TTubes?" Briefly explain your answer. (2.5%) No. RA 8293 espouses the first-to-file rule as stated under Sec. 123.1(d) which states: Section Registrability. - 123.1. A mark cannot be registered if it: x x x x (d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion. Under this provision, the registration of a mark is prevented with the filing of an earlier application for registration. This must not, however, be interpreted to mean that ownership should be based upon an earlier filing date. While RA 8293 removed the previous requirement of proof of actual use prior to the filing of an application for registration of a mark, proof of prior and continuous use is necessary to establish ownership of a mark. Such ownership constitutes sufficient evidence to oppose the registration of a mark. Once application has commenced, it is imperative that actual use of the mark in commerce takes. Otherwise, such mark is open to cancellation proceedings from any third party who may be minded to do so or motu propio by the Director of Trademarks. b. NO. As aptly stated by the Court in Shangri-la International Hotel Management, Ltd. v. Developers Group of Companies, Inc.:[37] G.R. No. 159938 , March 31, 2006. Registration, without more, does not confer upon the registrant an absolute right to the registered mark. The certificate of registration is merely a prima facie proof that the registrant is the owner of the registered mark or trade name. Evidence of prior and continuous use of the mark or trade name by another can overcome the presumptive ownership of the registrant and may very well entitle the former to be declared owner in an appropriate case. x x x x Ownership of a mark or trade name may be acquired not necessarily by 3 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

registration but by adoption and use in trade or commerce. As between actual use of a mark without registration, and registration of the mark without actual use thereof, the former prevails over the latter. For a rule widely accepted and firmly entrenched, because it has come down through the years, is that actual use in commerce or business is a prerequisite to the acquisition of the right of ownership. x x x x By itself, registration is not a mode of acquiring ownership. When the applicant is not the owner of the trademark being applied for, he has no right to apply for registration of the same. Registration merely creates a prima facie presumption of the validity of the registration, of the registrants ownership of the trademark and of the exclusive right to the use thereof. Such presumption, just like the presumptive regularity in the performance of official functions, is rebuttable and must give way to evidence to the contrary. IV X's "MINI-ME" burgers are bestsellers in the country. Its "MINI-ME" logo, which bears the color blue, is a registered mark and has been so since the year 2010. Y, a competitor of X, has her own burger which she named "ME-TOO" and her logo thereon is printed in bluish-green. When X sued Y for trademark infringement, the trial court ruled in favor of the plaintiff by applying the Holistic Test. The court held that Y infringed on X's mark since the dissimilarities between the two marks are too trifling and frivolous such that Y's "ME-TOO," when compared to X's "MINIME," will likely cause confusion among consumers. Is the application of the Holistic Test correct? ( 5%) Yes, Holistic Test is correct.

The Holistic Test entails a consideration of the entirety of the marks as applied to the products, including labels and packaging, in determining confusing similarity. The scrutinizing eye of the observer must focus not only on the predominant words but also on the other features appearing in both labels so that a conclusion may be drawn as to whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2) types of confusion, viz: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other; and (2) confusion of business (source or origin confusion), where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party, is such as might reasonably be assumed to originate with the registrant of an earlier product, and the public would then be deceived either into that belief or into the belief that there is some connection between the two parties, though in existent. 4 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Answer:

No. The application by the court of the holistic test is not correct. In determining likelihood of confusion, jurisprudence has developed two tests, the dominancy test and the holistic test.

The dominancy test focuses on the similarity of the prevalent features of the competing trademarks that might cause confusion. Under this test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments. In contrast, the holistic test requires the court to consider the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. In the case of Co Tiong Sa v. Director of Patents,the Court ruled: xxx It has been consistently held that the question of infringement of a trademark is to be determined by the test of dominancy. Similarity in size, form and color, while relevant, is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. (G. Heilman Brewing Co. vs. Independent Brewing Co., 191 F., 489, 495, citing Eagle White Lead Co. vs. Pflugh (CC) 180 Fed. 579). The question at issue in cases of infringement of trademarks is whether the use of the marks involved would be likely to cause confusion or mistakes in the mind of the public or deceive purchasers. (Auburn Rubber Corporation vs. Honover Rubber Co., 107 F. 2d 588; xxx) (Emphasis supplied

v MS Brewery Corporation (MS) is a manufacturer and distributor of the popular beer "MS Lite." It faces stiff competition from BA Brewery Corporation (BA) whose sales of its own beer product, "BA Lighter," has soared to new heights. Meanwhile, sales of the "MS Lite" decreased considerably. The distribution and marketing personnel of MS later discovered that BA has stored thousands of empty bottles of "MS Lite" manufactured by MS in one of its warehouses. MS filed a suit for unfair competition against BA before the Regional Trial Court (RTC). Finding a connection between the dwindling sales of MS and the increased sales of BA, the RTC ruled that BA resorted to acts of unfair competition to the detriment of MS. Is the RTC correct? Explain. (5%)

5 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

NO. in the case of G.R. No. 154491

November 14, 2008

COCA-COLA BOTTLERS, PHILS., INC. (CCBPI), Naga Plant, petitioner, vs. QUINTIN J. GOMEZ, a.k.a. "KIT" GOMEZ and DANILO E. GALICIA, a.k.a. "DANNY GALICIA",respondents.

We do not agree with the petitioner's expansive interpretation of Section 168.3 (c). "Unfair competition," previously defined in Philippine jurisprudence in relation with R.A. No. 166 and Articles 188 and 189 of the Revised Penal Code, is now covered by Section 168 of the IP Code as this Code has expressly repealed R.A. No. 165 and R.A. No. 166, and Articles 188 and 189 of the Revised Penal Code. Articles 168.1 and 168.2, as quoted above, provide the concept and general rule on the definition of unfair competition. The law does not thereby cover every unfair act committed in the course of business; it covers only acts characterized by " deception or any other means contrary to good faith" in the passing off of goods and services as those of another who has established goodwill in relation with these goods or services, or any other act calculated to produce the same result. From jurisprudence, unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. It formulated the "true test" of unfair competition: whether the acts of defendant are such as are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions which prevail in the particular trade to which the controversy relates. 13 One of the essential requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must be shown before the right to recover can exist. 14 The advent of the IP Code has not significantly changed these rulings as they are fully in accord with what Section 168 of the Code in its entirety provides. Deception, passing off and fraud upon the public are still the key elements that must be present for unfair competition to exist. We hold that it is not. Hoarding as defined by the petitioner is not even an act within the contemplation of the IP Code NO. The RTC is not correct. Unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. It formulated the true test of unfair competition: whether the acts of defendant are such as are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions which prevail in the particular trade to which the controversy relates. One of the essential requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must be shown before the right to recover can exist. The advent of the IP Code has not significantly changed these rulings as they are fully in accord with what Section 168 of the Code in its entirety provides. 6 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Deception, passing off and fraud upon the public are still the key elements that must be present for unfair competition to exist. Hoarding - as defined and charged by MS does not fall within the coverage of the IP. It does not relate to any patent, trademark, trade name or service mark that BA have invaded, intruded into or used without proper authority from the MS. Nor BA alleged to be fraudulently passing off their products or services as those of the MS. The BA was not also alleged to be undertaking any representation or misrepresentation that would confuse or tend to confuse the goods of MS with those of BA, or vice versa. What in fact MS alleges is an act foreign to the Code, to the concepts it embodies and to the acts it regulates; as alleged, hoarding inflicts unfairness by seeking to limit the oppositions sales by depriving it of the bottles it can use for these sales. VI Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It modified the design of the bulkhead of the deck of the ship to accommodate more passengers. The ship sunk with its passengers in Tablas Strait due to heavy rains brought by the monsoon. The heirs of the passengers sued Nautica for its liability as a common carrier based on the reconfiguration of the bulkhead which may have compromised the stability of the ship. Nautica raised the defense that the monsoon is a fortuitous event and, at most, its liability is prescribed by the Limited Liability Rule. Decide with reasons. ( 5%) Nautica Shipping Lines liability is prescribed by the Limited Liability Rule: If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows: The real and hypothecary nature of the liability of the ship owner or agent embodied in the provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing conditions of the maritime trade and sea voyages during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions and to encourage ship building and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if any, so that if the ship owner or agent abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946])

7 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Without the principle of limited liability, a ship owner and investor in maritime commerce would run the risk of being ruined by the bad faith or negligence of his captain , and the apprehension of this would be fatal to the interest of navigation.” Yangco vs. Lasema, supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the liability of the agents to the actual value of the vessel and the freight money, and (2) the right to retain the cargo and the embargo and detention of the vessel even in cases where the ordinary civil law would not allow more than a personal action against the debtor or person liable. It will be observed that these rights are correlative, and naturally so, because if the agent can exempt himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of risking his whole fortune in the business, it is also just that his maritime creditor may for any reason attach the vessel itself to secure his claim without waiting for a settlement of his rights by a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death to a passenger is due either to the fault of the ship owner, or to the concurring negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen’s compensation claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show that the loss of the cargo was due to the fault of the private respondent as shipowners, or to their concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the “real and hypothecary nature” of liability under maritime law, these provisions would not have any effect on the principle of limited liability for ship owners or ship agents. As was expounded by this Court:

In arriving at this conclusion, the fact is not ignored that the ill fated, Nautica, as a vessel engaged in interisland trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the exclusively ‘real and hypothecary nature of maritime law operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. (Yangco vs. Laserila, et al., supra). 8 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Moreover, Article 1766 of the Civil Code provides: Art. 1766. In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws. In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the Code of Commerce and other special laws are applied. Since the Civil Code contains no provisions regulating liability of ship owners or agents in the event of total loss or destruction of the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that govern in this case.

Article 587 of the Code of Commerce provides: Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipment and the freight it may have earned during the voyage.” In sum, it will have to be held that since the ship agent’s or ship owner’s liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being present, the liability of private respondents for the loss of the cargo of copra must be deemed to have been extinguished. There is no showing that the vessel was insured in this case.

Answer (2)

Nautica Shipping Lines liability is prescribed by the Limited Liability Rule: If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra). The rationale therefor has been explained as follows: The real and hypothecary nature of the liability of the ship owner or agent embodied in the provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing conditions of the maritime trade and sea voyages during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions and to encourage ship building and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if 9 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

any, so that if the ship owner or agent abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946]) Without the principle of limited liability, a ship owner and investor in maritime commerce would run the risk of being ruined by the bad faith or negligence of his captain, and the apprehension of this would be fatal to the interest of navigation.” Yangco vs. Lasema, supra). As evidence of this real nature of the maritime law we have (1) the limitation of the liability of the agents to the actual value of the vessel and the freight money, and (2) the right to retain the cargo and the embargo and detention of the vessel even in cases where the ordinary civil law would not allow more than a personal action against the debtor or person liable. It will be observed that these rights are correlative, and naturally so, because if the agent can exempt himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of risking his whole fortune in the business, it is also just that his maritime creditor may for any reason attach the vessel itself to secure his claim without waiting for a settlement of his rights by a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]). The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death to a passenger is due either to the fault of the ship owner, or to the concurring negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen’s compensation claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show that the loss of the cargo was due to the fault of the private respondent as shipowners, or to their concurrent negligence with the captain of the vessel. What about the provisions of the Civil Code on common carriers? Considering the “real and hypothecary nature” of liability under maritime law, these provisions would not have any effect on the principle of limited liability for ship owners or ship agents. As was expounded by this Court: In arriving at this conclusion, the fact is not ignored that the illfated, Nautica, as a vessel engaged in interisland trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the exclusively ‘real and hypothecary nature of maritime law operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. (Yangco vs. Laserila, et al., supra). Moreover, Article 1766 of the Civil Code provides: 10 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Art. 1766. In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws. In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the Code of Commerce and other special laws are applied. Since the Civil Code contains no provisions regulating liability of ship owners or agents in the event of total loss or destruction of the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that govern in this case. Article 587 of the Code of Commerce provides: Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipment and the freight it may have earned during the voyage.” In sum, it will have to be held that since the ship agent’s or ship owner’s liability is merely coextensive with his interest in the vessel such that a total loss thereof results in its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being present, the liability of private respondents for the loss of the cargo of copra must be deemed to have been extinguished. There is no showing that the vessel was insured in this case.

VII A railroad track of the Philippine National Railway (PNR) is located near a busy intersection of Puyat Avenue and Osmefia Highway. One afternoon, the intersection was heavily congested, as usual. Juan, the driver of a public utility jeepney (PUJ), drove onto the railroad tracks but could go no farther because of the heavy traffic at the intersection. After the jeepney stopped right on the railroad track, it was hit and overturned by a PNR train, resulting in the death of Kim, a passenger of the PUJ, and injuries to Juan and his other passengers. Juan, the injured passengers and Kim's family sued the PNR for damages for its negligence. It was established that the steel pole barrier before the track was broken, and that the PNR had the last clear chance of avoiding the accident. On the other hand, the PNR raised the defense that the track is for the exclusive use of the train and that motorists are aware that it is negligence per se to stop their vehicles on the tracks. Decide the case and explain. (5%) I will rule in favor of PNR. The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear 11 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29] Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence.

We do not apply the doctrine of last clear chance to the present case. It cannot be expected for a train to avoid the jeepney since it can only go one way trailing the railings. Moreover, the rail road is exclusive the PNR and the jeepney should not have stopped right in the rail road. The jeepney failed to observe extraordinary diligence.

Alternative Answer: G.R. No. 70547 January 22, 1993 PHILIPPINE NATIONAL RAILWAYS and HONORIO CABARDO, petitioners, vs. INTERMEDIATE APPELLATE COURT, and BALIWAG TRANSIT, INC., respondents. absence of a crossing bar, signal light, flagman or switchman to warn the public of an approaching train constitutes negligence per the pronouncement of this Court in Lilius vs. Manila Railroad Company (59 Phil 758 [1934]).

VIII In 2015, Total Bank (Total) proposed to sell to Royal Bank (Royal) its banking business for P 10 billion consisting of specified assets and liabilities. The parties reached an eventual agreement, which they termed as "Purchase and Assumption (P & A) Agreement," in which Royal would acquire Total's specified assets and liabilities, excluding contingent claims, with the further stipulation that it should be approved by the Bangko Sentral ng Pilipinas (BSP). BSP imposed the condition that Total should place in escrow Pl billion to cover for contingent claims against it. Total complied. After securing the approval of the BSP, the two banks signed the agreement. BSP thereafter issued a circular advising all bank and non-bank intermediaries that effective January 1, 2016, "the banking activities of Total Bank and Royal Bank have been consolidated and the latter has carried out their operations since then." Was there a merger and consolidation of the two banks in point of the Corporation Code? Explain. (2.5%) What is meant by a de facto merger? Discuss. (2.5%) NO. Merger is a re-organization of two or more corporations that results in their consolidating into a single corporation, which is one of the constituent corporations, one disappearing 12 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

or dissolving and the other surviving. To put it another way, merger is the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is or are terminated. The Corporation Code requires the following steps for merger or consolidation: (1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation. (2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders representing two thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected. (3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate officers of each constituent corporation. These take the place of the articles of incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving corporation. (4) Submission of said articles of merger or consolidation to the SEC for approval. (5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before. (6) Issuance of certificate of merger or consolidation. Indubitably, it is clear that no merger took place between Total Bank and Royal Bank as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied with in order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger. Here, Total Bank and Royal Bank remained separate corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked contingent accounts. There was no merger or consolidation but a mere "sale of assets with assumption of liabilities". [b] What is meant by a de facto merger? Discuss. (2.5%) In Bank of Commerce v Radio Philippines Network, citing the book Philippine Corporate Law by Dean Cesar Villanueva, explained that under the Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the target corporation; whereas, the target corporation would end up with basically its only remaining assets being the shares of stock of the acquiring corporation." No de facto merger took place in the present case simply because the Royal Bank owners did not get in exchange for the bank’s assets and liabilities an equivalent value in Total Bank’s shares of stock. Total Bank and Royal Bank agreed with BSP approval to exclude from the sale the TRB’s contingent judicial liabilities. The BSP Circular is not an indication of a de facto merger because what was "consolidated" per the above letter was the banking activities and transactions of Total Bank and Royal Bank, not their corporate existence. The BSP did not remotely suggest a merger of the two corporations. What controls the 13 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

relationship between those corporations cannot be the BSP letter circular, which had been issued without their participation, but the terms of their P & A Agreement that the BSP approved through its Monetary Board and the requirements of law. IX X insured his life for P20 million. X, plays golf and regularly exercises every day, hence is considered in good health. He did not know, however, that his frequent headache is really caused by his being hypertensive. In his application form for a life insurance for himself, he did not put a check to the question if he is suffering from hypertension, believing that because of his active lifestyle, being hypertensive is a remote possibility. While playing golf one day, X collapsed at the fairway and was declared dead on arrival at the hospital. His death certificate stated that X suffered a massive heart attack. Will the beneficiary of X be entitled to the proceeds of the life insurance under the circumstances, despite the non-disclosure that he is hypertensive at the time of application? (2.5%)

If X died in an accident instead of a heart attack, would the fact of X's failure to disclose that he is hypertensive be considered as material information? (2.5%) Yes. The beneficiary of X shall be entitled to the proceeds of the insurance. Section 28 of the Insurance Code provides that each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining. The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. In the case at bar, the insurer failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance. There was no fraudulent intent on the part of the insured. (GREAT PACIFIC LIFE ASSURANCE CORP., vs. COURT OF APPEALS AND MEDARDA V. LEUTERIO) b. Yes. It is a material information. Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has no means of ascertaining. Said Section provides: A neglect to communicate that which a party knows and ought to communicate, is called concealment. Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (The Insurance Code, Sec. 31). The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health. The information which the insured failed to 14 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

disclose were material and relevant to the approval and issuance of the insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application. In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which ensue. Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]). (SUNLIFE ASSURANCE COMPANY OF CANADA vs. The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI)

X After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as drawee. The bill reads: "October 1, 2016. Pay to the order of B the sum of Pl million. To: C (drawee). Signed, A." A then delivered the bill to B who, however, lost it. It turned out that it was stolen by D, B's brother. D lost no time in forging B's signature and negotiated it to E who acquired it for value and in good faith. May E recover on the bill from C, the drawee? Explain. (5%) Yes. E may recover on the bill from C, the drawee; Provided, that C accepts the instrument presented by E. Section 62 of the Negotiable Instruments Law, provides that the acceptor, by accepting the instrument, engages that he will pay it according to the to the tenor of his acceptance and admits: a) the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and b) the existence of the payee and his then capacity to indorse. Upon C’s acceptance of the instrument, he shall automatically be primarily liable to the holder of the instrument even if the drawer’s signature is really forged, because at the time of making his acceptance, he warrants that the drawer’s signature is genuine. Can the cut-off principle apply? XI Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on a titled lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of Directors (Board) that if the arrearages are not paid within thirty (30) days, it will extra-judicially foreclose the mortgage. The Board decided to offer to the members 200 proprietary membership shares, which are treasury shares, at the price of Pl 75,000.00 per share even when the current market value is P200,000.00.

15 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative suit against the members of the Board for breach of trust for selling the shares at P25,000.00, lower than its market value, and asked for the nullification of the sales and the removal of the board members. Peter claims the Club incurred a loss of PS million. The Board presented the defense that in its honest belief any delay in the payment of the arrearages will be prejudicial to the Club as the mortgage on its assets will be foreclosed and the sale at a lower price is the best solution to the problem. Decide the suit and explain. (5%) The suit shall be ruled against Peter. Under the Business Judgment Rule embodied in Sec. 23 of the Corporation Code, it provides that unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the Board of Directors. Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation & courts will not interfere. Furthermore, in order for a derivative suit to prosper, it must be shown with particularity that the Stockholder had exhausted the intra corporate remedies available. In this case, the sale of the shares by the Board of Directors is not shown to have been made in bad faith nor was it in breach of trust of the stockholders. The said act is within the sound business judgment of the Board. Moreover, it was not shown that Peter had exhausted all intra-corporate remedies which is required in a derivative suit. Hence, the derivative suit shall be ruled against Pete for failure to show that the act was made in bad faith and for his failure to exhaust all intra-corporate remedies.

Treasury shares does not have fix value. It is for the board of directors to fix the value of the shares.

XII X owns I 0,000 shares in Z Telecoms Corp. As he is in immediate need of money, he offered to sell all his shares to his friend, Y, at a bargain price. Upon receipt of the purchase price from Y, X proceeded to indorse in blank the certificates of shares and delivered these to Y. The latter then went to the corporate secretary of Z Telecoms Corp. and requested the transfer of the shares in his name. The corporate secretary refused since X merely indorsed the certificates in blank to Y. According to the corporate secretary, the certificates should have been specifically indorsed to the purchaser, Y. Was the corporate secretary justified in declining Y's request? Discuss. ( 5%)

Sec. 63 of the Corporation Code provides xxx Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer xxx. Sec. 34 of the negotiable instruments law further provides that an indorsement in 16 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

blank specifies no indorsee, and an indorsement so indorsed is payable to bearer, and may be negotiated by delivery. In this case, X indorsed in blank the certificate of stock and delivered the same to Y. Hence, there was a valid transfer of stocks to Y, and the corporate secretary is not justified in declining Y’s request. Considered as street certificate considered as quasi-negotiable. XIII C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not public) firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed company. The other principal stockholder in H Corp. is C Corp. which owns 18% of its shares. Meanwhile, the majority stocks in U Corp. are owned by B Corp. and V Corp. at 22% and 30%, respectively. B Corp. and V Corp. later sold their respective shares in U Corp. to C Corp., thereby resulting in the increase of C Corp. 's interest in U Corp., whether direct or indirect, to more than 50%. [a] Explain the Tender Offer Rule under the Securities Regulation Code. (2.5%) Does the Tender Offer Rule apply in this case where there has been an indirect acquisition of the shareholdings in H Corp. by C Corp.? Discuss. (2.5%) Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a corporation which is listed on an exchange, (public corp.) or a corporation with assets exceeding P50, 000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders. Yes. The Supreme Court held that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or any type of acquisition. For the purpose of protecting the minority stockholders of a listed corporation, mandatory tender offer applies whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means such as in this case. It needs computation. CEMCO HOLDINGS, INC., v. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC., G.R. No. 171815 17 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

XIV X, a government official, has a number of bank accounts in T Bank containing millions of pesos. He also opened several trust accounts in the same bank which specifically covered the placement and/or investment of funds. X was later charged with graft and corruption before the Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor filed a motion praying for a court order authorizing it to look into the savings and trust accounts of X in T Bank. X opposed the motion arguing that the trust accounts are not "deposits" under the Law on Secrecy of Bank Deposits (Rep. Act No. 1405). Is the contention of X correct? Explain. (5%) No. The contention of X is not correct. In the case of Ejercito vs. Sandiganbayan, the Supreme Court held that The contention that trust accounts are not covered by the term "deposits," as used in R.A. 1405, by the mere fact that they do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. An examination of the law shows that the term "deposits" used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank. Section 2 of RA 1405 in fact even more clearly shows that the term "deposits" was intended to be understood broadly: SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. The phrase "of whatever nature" proscribes any restrictive interpretation of "deposits." Moreover, it is clear from the immediately quoted provision that, generally, the law applies not only to money which is deposited but also to those which are invested. This further shows that the law was not intended to apply only to "deposits" in the strict sense of the word. Otherwise, there would have been no need to add the phrase "or invested." Clearly in the case at bar, R.A. 1405 is broad enough to cover Trust Accounts. xv ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and other gadgets of value. In order to expand its business and attract investors, it offered to any person who invests at least Pl 00,000.00 a "Promissory Note" where it obligated itself to pay the holder a 50% return on investment within one month. Due to the attractive offer, many individuals invested in the company but not one of them was able to realize any profit after one month. Has ABC Corp. violated any law with its scheme? Explain. ( 5%)

18 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Yes, ABC Corp. violated Securities Regulation Code or R.A. No. 8799. Its business constitutes investment contracts which should be registered with Securities and Exchange Commission before its sale or offer for sale or distribution to the public. The Court held in the case of Power Homes Unlimited Corp. v. SEC that any investment contract covered by the Howey Test must be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent practices. R.A. No. 8799 defines an investment contract as a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits not solely but primarily from the efforts of others. In the case at bar, a person will invest at least P100,000.00 with ABC Corp. with the expectation of profit or return of investment of 50% within a month. Hence, ABC Corp. is engaged in the sale or offer for sale or distribution of investment contracts.

XVI Henry is a board director in XYZ Corporation. For being the "fiscalizer" in the Board, the majority of the board directors want him removed and his shares sold at auction, so he can no longer participate even in the stockholders' meetings. Henry approaches you for advice on whether he can be removed as board director and stockholder even without cause. What is your advice? Explain "amotion" and the procedure in removing a director. (5%) Amotion is the ousting of an o(cer from his or her post in the corporation prior to the end of the term for which the o(cer was appointed or elected, without taking away the person's right to be a member of the corporation. The procedure of removal of directors are: 1. it must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; 2. there must be previous notice to the stockholders or members of the intention to remove;3. the removal must be by a vote of the stockholders representing two-thirds of Outstanding capital stock or two-thirds of its members and; 4. the director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause of removal Removal of shareholders?

XVII PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount ofPl0 million for the purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by P J against such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing, China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in favor of ABC to cover for the value of the ecodoors for its release to PJ. The terms of the Trust Receipt is that any proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the 19 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from Scrap Metal another I 00 pieces of ecodoors but using another bank to issue a new Letter of Credit fully covered by such proceeds. PJ refused to pay the proceeds of the sale of the first set of ecodoors to ABC, claiming that the ecodoors that were delivered were defective. It then instructed ABC not to negotiate the Letter of Credit that was issued in favor of Scrap Metal. Explain what is a "Letter of Credit" as a financial device and a "Trust Receipt" as a security to the Letter of Credit. (2.5%) As counsel of ABC, you are asked for advice on whether or not to grant the instruction of PJ. What will be your advice? (2.5%) In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.[30] The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. x x x. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. As counsel for ABC, I will tell them not to follow the instructions of ABC Company because a trust receipt transaction is independent from the contract of sale. The so-called "independence principle" assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the 20 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.

XVIII B Bank, a large universal bank, regularly extends revolving credit lines to business establishments under what it terms as socially responsible banking and private business partnership relations. All loans that are extended to clients have a common "Escalation Clause," to wit: "B Bank hereby reserves its right to make successive increases in interest rates in accordance with the bank's adopted policies as approved by the Monetary Board; Provided that each successive increase shall be with the written assent of the depositor." X, a regular client of the bank, contends that the "Escalation Clause" is unfair, unconscionable and contrary to law, morals, public policy and customs. Rule on the issue and explain. (2.5%) Escalation clauses are generally valid and do not contravene public policy. They are common in credit agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To prevent any one-sidedness that these clauses may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge Navarro, that there should be a corresponding de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the right to make reasonable increases in interest rates in accordance with bank policies as approved by the Monetary Board; Provided, there shall be corresponding reasonable decreases in interest rates as approved by the Monetary Board." Would this be valid? Explain. (2.5%) Basic is the rule that there can be no contract in its true sense without the mutual assent of the parties. If this consent is absent on the part of one who contracts, the act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, the interest rate is undeniably always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it produces no binding effect. Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of consent on the part of respondents to the modifications in the interest rates, the adjusted rates 21 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan agreement. (PSB vs Spouses Castillo) In short, it should have the consent of the contracting parties--- the bank and the client. De escalation clause Prevailing market rate Consistent with the nature of the contract XIX In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its opposition to the applications for Mineral Production Sharing Agreements (MPSA) of 0 Corp., P Corp., and Q Corp. which were pending before the Panel of Arbitrators (POA) of the Department of Environment and Natural Resources (DENR). The three corporations wanted to undertake exploration and mining activities in the province of Isabela. The oppositor alleged that at least 60% of the capital shareholdings of the applicants are owned by B Corp., a 100% Chinese corporation, in violation of Sec. 2, Art. XII of the Constitution. The applicants countered that they are qualified corporations as defined under the Philippine Mining Act of 1995 and the Foreign Investments Act of 1991 since B Corp. holds only 40% of the capital stocks in each of them and not 60% as alleged by R Corp. The Summary of Significant Accounting Policies statement of B Corp. reveals that the joint venture agreements of B Corp. with Sigma Corp. and Delta Corp. involve the 0 Corp., P Corp., and Q Corp. The ownership of the layered corporations and joint venture agreements show that B Corp. practically exercises control over the 0, P and Q corporations. 0, P and Q corporations contend that the control test should be applied and its MPSA applications granted. On the other hand, R Corp. argues that the "grandfather rule" should be applied. Decide with reasons. (5%) Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens. The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino 22 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

citizens shall be considered as of Philippine nationality,” pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, “if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality,” pertains to the stricter, more stringent grandfather rule. In ending, the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the “grandfather rule.”

XX Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the Bureau of Internal Revenue (BIR) for the company's taxes for the third quarter of 1997. The check was deposited with Bank B, the collecting bank with which the BIR has an account. The check was subsequently cleared and the amount of P500,000.00 was deducted from the company's balance. Thereafter, Company X was notified by the BIR of its non-payment of its unpaid taxes despite the P500,000.00 debit from its account. This prompted the company to seek assistance from the proper authorities to investigate on the matter. The results of the investigation disclosed that unknown then to Company X, its chief accountant Bonifacio Santos is part of a syndicate that devised a scheme to syphon its funds. It was discovered that though deposited, the check was never paid to the BIR but was passed on by Santos to Winston Reyes, Bank B's branch manager and Santos' co-conspirator. Instead of bringing the check to the clearing house, Reyes replaced Check No. 12345 with a worthless check bearing the same amount, and tampered documents to cover his tracks. No amount was then credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the amount therein credited into the accounts of fictitious persons, to be later withdrawn by Santos and Reyes. Company X then sued Bank B for the amount of P500,000.00 representing the amount deducted from its account. Bank B interposed the defense that Company X was guilty of contributory negligence since its confidential employee Santos was an integral part of the scheme to divert the proceeds of Check No. 12345. Is Company X entitled to reimbursement from Bank B, the collecting bank? Explain. ( 5%)

On this point, jurisprudence regarding the imputed negligence of employer in a masterservant relationship is instructive. Since a master may be held for his servants wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable. The 23 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

general rule is that if the master is injured by the negligence of a third person and by the concurring contributory negligence of his own servant or agent, the latters negligence is imputed to his superior and will defeat the superiors action against the third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made. As defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury, and without which the result would not have occurred. It appears that although the employee initiated the transactions attributable to an organized syndicate, their actions were not the proximate cause of encashing the checks payable to the BIR. The degree of the company’s negligence, if any, could not be characterized as the proximate cause of the injury to the parties. As to the preparation of Checks, it was established that these checks were made payable to the BIR. Both were crossed checks. These checks were apparently turned around by company employees, who were acting on their own personal capacity. Given these circumstances, the mere fact that the forgery was committed by a drawerpayors confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession. Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank to ascertain that the check be deposited in payees account only. Therefore, it is the collecting bank which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement all prior indorsements and/or lack of indorsement guaranteed. (PCIB vs CA)

24 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap 2017

Suggested answers to the Merc Bar by Fiscal Rocille Aquino Tambasacan. If you were able to get the last minute materials, the reference question/page is indicated, including the powerpoint slide number. I. Absolute Timber Co. (ATC) has been engaged in the logging business in Isabela. To secure one of its shipments of logs to be transported by Andok Shipping Co., ATC purchased a marine policy with an all-risk provision. Because of a strong typhoon then hitting Northern Luzon, the vessel sank and the shipment of logs was totally lost. ATC filed its claim, but the insurer denied the claim on several grounds, namely: (1) the vessel had not been seaworthy; (2) the vessel’s crew had lacked sufficient training; (3) the improper loading of the logs on only one side of the vessel had led to the tilting of the ship to that side during the stormy voyage; and (4) the extremely bad weather had been a fortuitous event. ATC now seeks your legal advice to know if its claim was sustainable. What is your advice? Explain your answer. (3%) Suggested Answer: The insurance claim is sustainable. An all risk insurance policy covers all causes of conceivable loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured. Since there was no stipulation as to what losses are excluded from the coverage, the insured can recover. The newly restored Ford Mustang muscle car was just released from the car restoration shop to its owner, Seth, an avid sportsman. Given his passion for sailing, he needed to go to a round-the-world voyage with his crew on his brandnew 180-meter yacht. Hearing about his coming voyage, Sean, his bosom friend, asked Seth if he could borrow the car for his next roadshow. Sean, who had been in the business of holding motor shows and promotions, proposed to display the restored car of Seth in major cities of the country. Seth agreed and lent the Ford Mustang to Sean. Seth further expressly allowed Sean to use the car even for his own purposes on special occasions during his absence from the country. Seth and Sean then went together to Bayad Agad Insurance Co. (BAIC) to get separate policies for the car in their respective names. BAIC consults you as its lawyer on whether separate policies could be issued to Seth and Sean in respect of the same car. a. What is insurable interest? (2%) Suggested Answer: There is insurable interest in property when he derives a benefit from its existence or would suffer a loss from its destruction. b. Do Seth and Sean have separate insurable interests? Explain briefly your answer. (3%) Suggested Answer: Only Seth has insurable interest in it. Insurable interest in property consists of either an existing interest, (2) an inchoate interest founded on an existing interest, or (3) an expectancy coupled with an existing interest in that out of which the expectancy arises.

Seth, being the owner, has an existing interest. Sean has no interest in the car as he does not own it, even if he is being benefited by its existence. II. Morgan, a lawyer, received a lot of diving and other water sports equipment as payment of his professional fees by Dennis, his client in a child custody case. Dennis owned a diving and water sports dealership in Anilao, Batangas. Morgan decided to name Dennis as entrustee because he did not have any experience in selling such specialized sports equipment. They executed a trust receipt agreement, with Morgan as entruster and Dennis as entrustee. Before the sports equipment could be sold, a strong typhoon hit Batangas. Anilao and other parts of Batangas experienced power outage. Taking advantage of the total darkness, unidentified thieves destroyed the padlocks of the establishment of Dennis, and carted off the equipment inside. Morgan demanded that Dennis pay the value of the stolen equipment, but the latter refused on the ground that he also had suffered from the effects of the typhoon, and insisted that the cause of the loss was fortuitous event or force majeure. Is the justification of Dennis warranted? Explain your answer. (4%) Suggested Answer: No. The risk of loss in a trust receipt agreement shall be borne by the entrustee, Dennis. Loss of goods, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster. Safe Warehouse, Inc. (Safe) issued on various dates negotiable warehouse receipts to Peter, Paul, and Mary covering certain goods deposited by the latter with the former. Peter, Paul, and Mary then negotiated and endorsed the warehouse receipts to Cyrus, Magnus, and Charles upon payment by the latter of valuable consideration for the warehouse receipts. Cyrus, Magnus, and Charles were not aware of, nor were they parties to any irregularity or infirmity affecting the title or the face of the warehouse receipts. On due dates of the warehouse receipts, Cyrus, Magnus, and Charles demanded that Safe surrender the goods to them. Safe refused because its warehouseman’s claim must first be paid. Cyrus, Magnus, and Charles refused to pay, and insisted that such claim was the liability of Peter, Paul, and Mary. a. What is a warehouseman’s claim? (3%) Suggested Answer: It refers to the warehouseman’s lien, or lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and advertisements of sale. b. Is Safe’s refusal to surrender the goods to Cyrus, Magnus, and Charles legally justified? Explain your answer. (3%) Suggested Answer: Yes. A warehouseman loses his lien upon goods by surrendering possession thereof.

III. Data Realty, Inc. (DRI) was engaged in realty development. The family of Matteo owned 100% of the capital stock of DRI. Matteo was also the President and Chairman of the Board of Directors. Other members of Matteo’s family held the major positions in DRI. Because of a nasty takeover fight with D&E Realty Co., Inc. (D&E), another realty developer, for the control of a smaller realty company with vast landholdings, DRI and D&E engaged in an expensive litigation that eventually led to a money judgment being rendered in favor of D&E. Meantime, DRI, facing inability to pay its liabilities as they fall due but still holding substantial assets, filed a petition for voluntary rehabilitation. Trying to beat the consequences of rehabilitation proceedings, D&E moved in the trial court for the issuance of a writ of execution. The trial court also happened to be the rehabilitation court. The writ of execution was issued. Serving the writ of execution, Merto, the court sheriff who had just passed his Credit Transactions subject in law school, garnished Matteo’s bank accounts, and levied his real properties, including his house and lot in Makati. Are the garnishment and levy of Matteo’s assets lawful and proper? Explain your answer. (4%) Suggested Answer: Yes, considering there is no issuance yet of any Commencement Order which necessarily includes a Stay or Suspension Order which results to, among others, suspension of all actions to enforce any judgment, attachment or other provisional remedies against the debtor. Sid used to be the majority stockholder and President of Excellent Corporation (Excellent). When Meridian Co., Inc. (Meridian), a local conglomerate, took over control and ownership of Excellent, it brought along its team of officers. Sid thus became a minority stockholder and a minority member of the Board of Directors. Excellent, being the leading beverage manufacturer in the country, became the monopoly when Meridian’s own beverage business was merged with Excellent’s, thereby making Excellent virtually the only beverage manufacturer in the country. Left out and ignored by the management, Sid became a fiscalizer of sorts, questioning during the Board meetings the direction being pursued by Excellent’s officers. Ultimately, Sid demanded the inspection of the books and other corporate records of Excellent. The management refused to comply, saying that his right as a minority stockholder has been much reduced. State under what conditions may Sid properly assert his right to inspect the books and other corporate records of Excellent. Explain your answer. (3%) Suggested Answer: The following are the valid purposes to justify a demand for inspection: To ascertain the financial condition of the company or the propriety of dividends; the value of the shares of stock for sale or investment; whether there has been mismanagement;

in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; to obtain information in aid of litigation with the corporation or its officers as to corporate transactions. If the right is to be denied on Sid, the burden of proof is upon the corporation to show that the purpose of the shareholder is improper, by way of defense. IV. Procopio, a Director and the CEO of Parisian Hotel Co., Inc. (Parisian), was charged along with other company officials with several counts of estafa in connection with the non-remittance of SSS premiums the company had collected from its employees. During the pendency of the cases, Parisian filed a petition for rehabilitation. The court, finding the petition to be sufficient in form and substance, issued a commencement order together with a stay or suspension order. Citing the commencement order, Procopio and the other officers facing the criminal charges moved to suspend the proceedings in the estafa cases. a. What is a commencement order, and what is the effect of its issuance? Explain your answer. (4%) Suggested Answer: The rehabilitation proceedings formally commences upon issuance of a commencement order. Generally, the same: (1) suspends all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein . Source: Section 16, FRIA, powerpoint slide no. 10 in FRIA, Last Minute/Pre-Week Lecture b. Suppose you are the trial judge, will you grant the motion to suspend of Procopio, et al.? Explain your answer. (4%) Suggested Answer: No. Any criminal action against the individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act. V. Under the Nell Doctrine, so called because it was first pronounced by the Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. State the exceptions to the Nell Doctrine. (4%) Suggested Answer:

Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the transferor except: Where the purchaser expressly or impliedly agrees to assume such debts; Where the transaction amounts to a consolidation or merger of the corporations; Where the purchasing corporation is merely a continuation of the selling corporation (business enterprise transfer); and Where the transaction is entered into fraudulently in order to escape liability for such debts. Santorini Corporation (Santorini) was in dire straits. In order to firm up its financial standing, it agreed to entertain the merger and takeover offer of Proficient Corporation (Proficient), the leading company in their line of business. Erica, the major stockholder of Santorini, strongly opposed the merger and takeover. The matter of the merger and takeover by Proficient was included in the agenda of the next meeting of Santorini’s Board of Directors. However, owing to Erica’s serious illness that required her to seek urgent medical treatment and care in Singapore, she failed to attend the meeting and was consequently unable to cast her vote. The Board of Directors approved the merger and takeover. At the time of the meeting, Santorini had been in the red for a number of years owing to its recurring business losses and reverses. Erica seeks your legal advice regarding her right as a stockholder opposed to the corporate action. Explain your answer. (4%) Suggested Answer: Considering that it is a case of merger, Erica can oppose the same being a stockholder, as action or approval by 2/3 of the outstanding capital stock is required. Under the facts presented, only the Board of Directors had approved the merger. Samito is the President and a Director of Lucky Bank (Lucky), a commercial bank holding its main office in Makati. His brother, Othello, owned a big fishing business based in Malabon. Othello applied for a loan of P50 million with Lucky. Othello followed the ordinary banking procedures in all the stages of the processing of his application. When required, he made the necessary arrangements to guarantee the loan. Thus, in addition to the real estate mortgage, Othello executed a joint and solidary suretyship, issued postdated checks, and submitted all other requirements prescribed by Lucky. When the loan application was about to be approved and the proceeds released, BG Company, a keen competitor of Othello in the fishing industry, wrote to the Board of Directors and the management of Lucky questioning the loan on the ground of conflict of interest due to Samito and Othello being brothers, citing the legal restriction against bank exposure of directors, officers, stockholders or their related interests. (DOSRI). What are the three restrictions imposed by law on DOSRI transactions? (4%) Suggested Answer: These are: (1) ratio of networth to total risk assets. When a loan is secured by realty, the loan should not be more than 75% of appraised value of realty + 60% of appraised value of improvements. If the loan is secured by chattel mortgage and intangibles, the loan should not bemore than 75%; (2) SBL (Single Borrower’s Limit rule) – a single

borrower cannot obtain more than 25% of bank networth, but the amount can be increased by additional 10% if secured by trust receipts, warehouse receipts or shipping documents and (3) DOSRI cannot borrow nor become guarantor for loans except if there is written approval of majority of all directors, excluding DOSRI concerned, except if it is a fringe benefit plan approved by BSP. b. Is BG Company’s opposition based on conflict of interest and violation of the restrictions on DOSRI transactions legally and factually correct? Explain your answer. (4%) Suggested Answer: It depends whether or not there was compliance with the aforementioned requirements. The problem only indicated that Othello followed the normal banking procedures in the processing of his loan, but there were no amounts indicated as reference, save for the P50M loan, as basis for compliance with the loan ceilings. VI. Hortencio owned a modest grocery business in Laguna. Because of the economic downturn, he incurred huge financial liabilities. he remained afloat only because of the properties inherited from his parents who had both come from landed families in Laguna. His main creditor was Puresilver Company (Puresilver), the principal supplier of the merchandise sold in his store. To secure his credit with Puresilver, he executed a real estate mortgage with a dragnet clause involving his family’s assets worth several millions of pesos. Nonetheless, Hortencio, while generally in the black, now faces a situation where he is unable to pay his liabilities as they fall due in the ordinary course of business. What will you advise him to do to resolve his dire financial condition? Explain your answer. (5%) Suggested Answer: He can file a petition for rehabilitation. Corporate rehabilitation contemplates a continuance of business life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency, the purpose being to enable the debtor to gain a new lease on life and allow its creditors to be paid their claims out of its earnings. Though Hortencio is a natural person and not a corporation, rehabilitation is possible considering that FRIA covers an insolvent debtor, whether a natural or juridical one. Wyatt, an internet entrepreneur, engaged in a sideline business of creating computer programs for selected clients on a per project basis and for servicing basic computer problems of his friends and family members. His main job was being an IT consultant at Futurex Co., a local computer company. Because of his ill-advised investments in the stock market and the fraud perpetrated against him by his trusted confidante, Wyatt was already drowning in debt, that is, he had far more liabilities than his entire assets. What legal recourse remained available to Wyatt? Explain your answer. (5%) Suggested Answer: He can apply for voluntary liquidation. It applies when the individual debtor has properties are not sufficient to cover his liabilities, and owing debts exceeding P500,000. Suspension of payments is not feasible considering it applies only if he possesses sufficient property to cover all his debts but foresees the impossibility of

meeting them when they respectively fall due. Here, Wyatt has more liabilities than assets thus voluntary liquidation is the only remedy available to him. VII. Virtucio was a composer of Ilocano songs who has been quite popular in the Ilocos Region. Pascuala is a professor of music in a local university with special focus on indigenous music. When she heard the musical works of Virtucio, she purchased a CD of his works. She copied the CD and sent the second copy to her Music class with instructions for the class to listen to the CD and analyze the works of Virtucio. Did Pascuala thereby infringe Virtucio’s copyright? Explain your answer. (4%) Suggested Answer: No, there is no violation. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including limited number of copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright. Super Biology Corporation (Super Biology) invented and patented a miracle medicine for the cure of AIDS. Being the sole manufacturer, Super Biology sold the medicine at an exorbitant price. Because of the sudden prevalence of AIDS cases in Metro Manila and other urban areas, the Department of Health (DOH) asked Super Biology for a license to produce and sell the AIDS medicine to the public at a substantially lower price. Super Biology, citing the huge costs and expenses incurred for research and development, refused. Assuming you are asked your opinion as the legal consultant of DOH, discuss how you will resolve the matter. (4%) Suggested Answer: A government agency or third person authorized by the government may exploit the invention even without agreement of the patent owner where, among others; (1)The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or (2) In the case of drugs and medicines, there is a national emergency or other circumstance of extreme urgency requiring the use of the invention. Here, the prevalence of AIDS could fall under national emergency. VIII. Flora, a frequent traveller, found a purse concealed between the cushions of a large sofa inside the VIP lounge in NAIA while she was waiting for her flight to be called. Inside the purse was a very valuable diamond-studded necklace. She decided not to turn over the purse to the airport management, and instead to keep it. On her return from her travels, she had a dependable jeweller appraise the necklace, and the latter told her that the necklace was easily worth at least P5 million in the open market. To test the appraisal, she pawned the necklace for P2 million. She then deposited the entire amount in her checking account with Metro Bank. Promptly, Metro Bank reported the transaction to the Anti-Money Laundering Council (AMLC). Given that her appropriation was theft, may Flora be successfully prosecuted for money laundering? Explain briefly your answer. (4%) Suggested Answer:

No, she cannot be prosecuted for money laundering. Under AMLA, the predicate crime or unlawful activity referred to is qualified theft, not plain theft. Prosperous Bank is a domestic bank with head office in Makati. It handles the banking requirements of thousands of clients. The AMLC initiated a discreet investigation of the financial transactions of Lorenzo, a suspected drug trafficker based in Naga City. The intelligence group of the AMLC, in coordination with the counterpart group from the PDEA and the NBI, gathered ample evidence establishing Lorenzo’s unlawful drug activities. The AMLC had probable cause that his deposits and investments in various banks, including Prosperous Bank, were related to money laundering. Accordingly, the AMLC now transmits to Prosperous Bank a formal demand to allow its agent to examine the banking transactions of Lorenzo, but Prosperous Bank refuses the demand. Is Prosperous Bank’s refusal justified? Explain your answer. (4%) Suggested Answer: No, the bank cannot refuse. The AMLC may inquire into deposit or investment with any banking institution when it there is probable cause that the deposits or investments activity. No court order is required if the predicate crime is Drugs Act.

or examine any particular has been established that are related to an unlawful violation of the Dangerous

IX. Alfred issued a check for P1,000 to Benjamin, his friend, as payment for an electronic gadget. The check was drawn against Alfred’s account with Good Bank. Benjamin then indorsed the check specially in favor of Cesar. However, Cesar misplaced the check. Dexter, a dormmate of Cesar, found the check, altered its amount to P91,000 and forged Cesar’s indorsement by way of a blank indorsement in favor of Felix, a known jeweler. Felix then caused the deposit of the check in his account with Solar Bank. As collecting bank, Solar Bank stamped “all previous indorsements guaranteed” on the check. Seeing such stamp of the collecting bank, Good Bank paid the amount of P91,000 on the check. May Good Bank claim reimbursement from Alfred? Explain your answer. (4%) Suggested Answer: The figure being a material alteration, the instrument can be enforced according to its original tenor, which is P1,000 only, on Alfred. However, considering that there was an indorsement by Solar Bank, Good Bank, in case of dishonor of the check by Alfred, can collect from Solar Bank the sum of P91,000. Solar Bank acted as an indorser and thus warrants, among others, the genuineness of the instrument. In 2006, Donald, an American temporarily residing in Cebu City, issued to Rhodora a check for $50,000 drawn against Wells Fargo Bank with offices in San Francisco, California. Rhodora negotiated the check and delivered it to Yaasmin, a Filipina socialite who frequently travelled locally and internationally. Because of her frequent travels, Yaasmin misplaced the check. It was only 11 years later on, in 2017, when she found the check inside a diary kept in her vault in her Hollywood, California house. Discuss and explain the rights of Yaasmin on the check. (4%)

Suggested Answer: The check is considered a stale one already, and Yaasmin cannot expect payment on it. A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, a check must be presented for payment within a reasonable time after its issue. In banking parlance, that is 6 months from issue date. Failure of a payee to encash a check for more than ten years undoubtedly resulted in the check becoming stale. X. Wisconsin Transportation Co., Inc. (WTC) owned and operated an inter-island deluxe bus service plying the Manila-Batangas-Mindoro route. Three friends, namely: Aurelio, Jerome, and Florencio rode on the same WTC bus from Manila bound for Mindoro. Aurelio purchased a ticket for himself. Jerome, being a boyhood friend of the bus driver, was allowed a free ride by agreeing to sit during the trip on a stool placed in the aisle. Florencio, already penniless after spending all of his money on beer the night before, just stole a ride in the bus by hiding in the on-board toilet of the bus. During the trip, the bus collided with another bus coming from the opposite direction. The three friends all suffered serious physical injuries. What are WTC’s liabilities, if any, in favor of Aurelio, Jerome, and Florencio? Explain your answer. (4%) Suggested Answer: In so far as Aurelio is concerned, WTC is liable for his injuries considering common carriers like WTC are presumed to have been at fault, unless it was proven that it observed extraordinary diligence. However, in so far as Jerome is concerned where there was gratuitous carriage, if there was a stipulation limiting WTC’s liability for negligence, that is valid but not for gross negligence. Thus, if there was no stipulation, then the carrier’s liability is the same as that of Aurelio’s, the paying passenger. However, for a stowaway like Florencio, he assumes all the risk attendant to the trip. The carrier then is not liable. XI. TRUE or FALSE – Explain briefly your answer. a. A conviction under the Trust Receipts Law shall bar a prosecution for estafa under the Revised Penal Code. (2%) Suggested Answer: FALSE. Violation of the Trust Receipts Law constitutes estafa. The term capital in relation to public utilities under Sec. 11, Art. XII of the 1987 Constitution refers to the total outstanding capital stock comprising both common and non-voting preferred shares. (2%) Suggested Answer: FALSE. It only refers to those with voting shares. The restrictive application proposed might result to deprivation of capital if there were no Filipino takers.

Forgery is a real defense but may only be raised against a holder not in due course. (2%) Suggested Answer: FALSE. Being a real defense, it can be raised even against a holder in due course. News reports are not copyrightable. (2%) Suggested Answer: FALSE. News reports are copyrightable. It falls under the category of audiovisual works and cinematographic works and works produced by a process analogous to cinematography. News of the day however is not copyrightable. The law on life insurance prohibits double insurance. (2%) Suggested Answer: FALSE. The danger of overinsuring, which is present in double insurance, is not present in life insurance. Insurable interest in life is unlimited. Thus, the same is allowed. XII. Onassis Shipping, Inc. (Onassis) operated passenger vessels and cargo trucks, and offered its services to the general public. In line with its vision and mission to protect the environment, Go-Green Asia (Go -Green), an NGO affiliated with Greenpeace, entered into a contract with Onassis whereby Go-Green would operate with its own crew the M/V Dolphin, an ocean -going passenger vessel of Onassis. While on its way to Palawan carrying Go-Green’s invited guests who were international and local observers desirous of checking certain environmental concerns in the area, the M/V Dolphin encountered high waves and strong winds caused by a typhoon in the West Philippine Sea. The rough seas led to serious physical injuries to some of the guests. Discuss the liabilities of Onassis and Go-Green to the passengers of the M/V Dolphin. Explain briefly your answer. (3%) Suggested Answer: Considering that Go-Green was the one who operated the vessel with its own crew, what was taken then by the parties was a bareboat or demise charter. In a charter by demise or bareboat charter, the whole vessel is let to the charterer with a transfer to him of its entire command and possession and consequent control over its navigation, including the master and the crew, who are his servants. The charterer mans the vessel with his own people and becomes, in effect, the owner for the voyage or service stipulated and hence liable for damages or loss sustained by the goods transported. The concept of owner pro hac vice applies making Go-Green solidarily liable for the injuries.

***END OF EXAMINATION***

November 24, 2017 THE BOARD OF DIRECTORS SCEMPC Supreme Court Manila Gentlemen/Mesademes: The undersigned would like to request for early processing of the Special Loan (EEA 2018). The proceeds of which will be used for the tuition fee of my two children in college and for other personal expenses. Thank you for your usual and kind consideration. Very truly yours,

CARMELITA B. JUANZON Court Stenographer III RTC-Branch 220, Quezon City