Commercial Law Compilation Bar Q&a 1990-2017 PDF

COMPILATION OF THE
COMMERCIAL LAW
(MERCANTILE LAW) BAR
EXAMINATIONS
QUESTIONS AND
SUGGESTED ANSWERS
(1990-2017)
*I do not own any of the materials I’ve compiled in this pdf file. It’s all found in the
internet, just have the patience to look for it since it’s scattered. Giving credits to the
authors of these materials. So sharing all of it for free to all my fellow law students. - Bek
MATERIALS COMPILED:
1)1990-2013 -> Philippine Bar Exams Mercantile

Law-Questions and Answers 1990-2013 -> https://
www.academia.edu/26079349/
Philippine_Bar_Exams_Mercantile_Law-
Questions_and_Answers_1990-2013
2) 2014 -> 2014 Bar Exams Suggested Answers ->
https://www.scribd.com/document/354434183/2014-
Bar-Exams-Suggested-Answers
3) 2015 -> https://edoc.site/2015-bar-q-mercantile-
lawdocx-pdf-free.html
4) 2016 -> COMMERCIAL-LAW-2016-BQA.DOCX -
> https://edoc.site/commercial-law-2016-bqadocx-pdf-
free.html
5) 2017 -> https://edoc.site/bar-commercial-
law-2017docx-3-pdf-free.html
Mercantile Law Bar Examination Q & A (1990-2006) Page 1 of 103
ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
MERCANTILE LAW
ARRANGED BY TOPIC
(1990 – 2006)
E dited and Arranged by:
Silliman University
College of Law Batch 2005
Updated by:
Dondee
D’ BAR-Retake 2007
From the ANSWERS TO BAR EXAMINATION QUESTIONS by

the UP LAW COMPLEX & PHILIPPINE ASSOCIATION OF LAW
SCHOOLS 2005
June 27, 2007
Version 1990-2003 Arranged by SULAW Class 2005 Version 1990-2006 U pdated by Dondee
FOREWARD
This work is not intended for sale or commerce. This work is freeware. It may be
freely copied and distributed. It is primarily intended for all those who desire to have
a deeper understanding of the issues touched by the Philippine Bar Examinations and
its trend. It is specially intended for law students from the provinces who, very often,
are recipients of deliberately distorted notes from other unscrupulous law schools and
students. Share to others this work and you will be richly rewarded by God in heaven.
It is also very good karma.
We would like to seek the indulgence of the reader for some Bar Questions which are
improperly classified under a topic and for some topics which are improperly or
ignorantly phrased, for the authors are just Bar Reviewees who have prepared this
work while reviewing for the Bar Exams under time constraints and within their
limited knowledge of the law. We would like to seek the reader’s indulgence for a lot
of typographical errors in this work.
The Authors
July 26, 2005
Updated:
June 27, 2007
TABLE OF CONTENTS
General Principles of Mercantile Law..............................................................................12
0 408H
Commercial Transaction (2003)

1H 12
409H
Joint Account (2000)

2H 12
410H
Joint Account vs. Partnership (2000)

3H 12
41H
Theory of Cognition vs. Theory of Manifestation (1997)

4H 12
412H
Banking Law...........................................................................................................................12
5H 413H
Banks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits (2005)
6H 12
41H
Banks: Collateral Security (2002)

7H 12
415H
Banks: Secrecy of Bank Deposits; Garnishment (2004)

8H 13
416H
Banks; Classifications of Banks (2002)

9H 13
417H
Banks; Conservator vs. Receiver (2006)

10H 13
418H
Banks; Diligence Required (1992)

1H 14
419H
Banks; Insolvency; Prohibited Transactions (2000)

12H 14
420H
Banks; Insolvency; Requirements (1997)

13H 14
421H
Banks; Restrictions on Loan Accommodations (2002)

14H 14
42H
Banks; Restrictions on Loan Accommodations (2006)

15H 15
423H
Banks; Safety Deposit Box; Liability

16H 15
42H
Banks; Secrecy of Bank Deposit; AMLC (2006)

17H 15
425H
Banks; Secrecy of Bank Deposit; Exceptions (2006)

18H 16
426H
Banks; Secrecy of Bank Deposits (1990)

19H 16
427H

20H 16
428H

21H 17
429H

2H 17
430H

23H 17
431H

24H 17
432H

25H 18
43H
Banks; Secrecy of Bank Deposits; Exceptions (2004)

26H 18
43H
Banks; Secrecy of Bank Deposits; Garnishment (2001)

27H 18
435H
BSP; Receivership; Jurisdiction (1992)

28H 18
436H
Legal Tender (2000)

29H 19
437H
PDIC Law vs. Secrecy of Bank Deposits Act (1997)

30H 19
438H
Responsibilities & Objectives of BSP (1998)

31H 19
439H
Truth in Lending Act (1991)

32H 19
40H

3H 19
41H
Bulk Sales Law ......................................................................................................................20

34H 42H
Bulk Sales Law; Covered Transactions (1994)

35H 20
43H

36H 20
4H

37H 20
45H
Bulk Sales Law; Exclusions (1993)

38H 20
46H
Bulk Sales Law; Obligation of the Vendor (1995)

39H 21
47H

40H 21
48H

41H 21
49H
Consumer Protection Law ..................................................................................................21

42H 450H
Metric System Law (1994)

43H 21
451H
Corporation Law.................................................................................................................... 22
4H 452H
BOD: Election of Aliens as members (2005)

45H 22
453H
BOD; Capacity of Directors (1996)

46H 22
45H
BOD; Compensation (1991)

47H 22
45H
BOD; Conflict of Interest (1994)

48H 22
456H
BOD; Interlocking Directors (1995)

49H 22
457H

50H 23
458H
By-Laws; Validity; limiting qualifications of BOD members (1998)

51H 23
459H

52H 23
460H

53H 23
461H

54H 24
462H
Close Corporations; Deadlocks (1995)

5H 24
463H
Closed Corporation; Restriction; Transfer of shares (1994)

56H 24
46H
Controversy; Intra-Corporate (1994)

57H 25
465H

58H 25
46H

59H 25
467H

60H 25
468H
Controversy; Intra-corporate; Jurisdiction (1997)

61H 25
469H
Corporation Sole; Definition (2004)

62H 26
470H
Corporation: Issuance of shares of stock to pay for the services (2005)

63H 26
471H
Corporation: Right of Repurchase of Shares; Trust Fund Doctrine (2005)

64H 26
472H
Corporation: Sole Proprietorship (2004)

65H 26
473H
Corporation; Articles of Incorporation (1990)

6H 26
47H
Corporation; Bulk Sales Law (2005)

67H 27
475H
Corporation; By-laws (2001)

68H 28
476H
Corporation; Commencement; Corporate Existence (2003)

69H 28
47H
Corporation; Conversion of Stock Corporation (2001)

70H 28
478H
Corporation; De Facto Corporation (1994)

71H 28
479H
Corporation; Dissolution; Methods of Liquidation (2001)

72H 28
480H
Corporation; Incorporation; Requirements (2006)

73H 28
481H
Corporation; Incorporation; Requisites (2002)

74H 29
482H
Corporation; Meetings; BOD & Stockholders (1993)

75H 29
483H
Corporation; Nationality of Corporation (1998)

76H 29
48H
Corporation; Non-Stock Corporation (1993)

7H 29
485H
Corporation; Power to Invest Corporate Funds for other Purpose (1995)

78H 30
486H
Corporation; Power to Invest Corporate Funds in another Corporation (1996)

79H 30
487H
Corporation; Recovery of Moral Damages (1998)

80H 30
48H
Corporation; Separate Juridical Personality (1995)

81H 31
489H

82H 31
490H

83H 31
491H

84H 31
492H

85H 32
493H

86H 32
49H
Corporation; Set-Off; Unpaid Subscription (1994)

87H 32
495H
Corporation; Stock Corporation (2001)

8H 32
496H
Corporation; Validity of Corporate Acts (1998)

89H 33
497H

90H 33
498H
Corporation; Voluntary Dissolution (2002)

91H 33
49H
Corporation; Voting Trust Agreement (1992)

92H 33
50H
Derivative Suit: Requisites (2004)
93H 34
501H
Derivative Suit: Watered Stock (1993)

94H 34
502H
Derivative Suit; Close Corporation; Corporate Opportunity (2005)

95H 34
503H
Derivative Suit; Minority Stockholder (2003)

96H 35
504H
Distinction: De facto Corporation vs. Corporation by Estoppel (2004)

97H 35
50H
Distinction: Dividends vs. Profit: Cash Dividend vs. Stock Dividend (2005)
98H 35
506H
Distinction; Private vs. Public Corporation (2004)

9H 35
507H
Distinction; Stock vs. Non-Stock Corporation (2004)

10H 36
508H
Dividends: Declaration of Dividends (2005)

10H 36
509H
Dividends: Sources of Dividends; Trust Fund Doctrine (2005)

102H 36
510H
Dividends; Declaration of Dividends (1990)

103H 36
51H

104H 36
512H

105H 36
513H
Dividends; Right; Managing Corporation (1991)

106H 37
514H
Doctrine of Corporate Opportunity (2005)

107H 37
51H
Effect: Expiration of Corporate Term (2004)

108H 37
516H
Effects; Merger of Corporations (1999)

109H 37
517H
Effects; Winding Up Period of a Corporation (1997)

10H 38
518H

1H 38
519H
Foreign Corporation; “Doing Business” in the Philippines (1998)

12H 38
520H
Foreign Corporation; “Doing Business” in the Philippines; Acts or Activities (2002)

13H 38
521H
Foreign Corporation; “Doing Business” in the Philippines; Test (2002)

14H 39
52H
Joint Venture; Corporation (1996)

15H 39
523H
Liabilities; BOD; Corporate Acts (1996)

16H 39
524H
Liabilities; Stockholders, Directors, Officers (1997)

17H 39
52H
Piercing the Corporate Veil (1994)

18H 39
526H

19H 40
527H

120H 40
528H

12H 40
529H

12H 40
530H
Pre-emptive Right (2001)

123H 40
531H
Pre-Emptive Right vs. Appraisal Right (1999)

124H 41
532H
SEC; Jurisdiction; Transferred Jurisdiction (1996)

125H 41
53H
Stockholder; Delinquent; Unpaid Subscription (1997)

126H 41
534H
Stockholders: Preemptive Right (2004)

127H 42
53H
Stockholders; Appraisal Right (2003)

128H 42
536H
Stockholders; Removal of Officers & BOD (2001)

129H 42
537H
Stockholders; Removal; Minority Director (1991)

130H 42
538H
Stockholders; Rights (1996)

13H 42
539H
Stockholders; Voting Power of Stockholders (1990)

132H 42
540H
Stocks; Increase of Capital Stock (2001)

13H 42
541H
Stocks; Sale, Transfer of Certificates of Stock (1996)

134H 43
542H

135H 43
543H

136H 43
54H
Trust Fund Doctrine (1992)

137H 43
54H
Trust Fund Doctrine; Intra-Corporate Controversy (1991)

138H 43
546H
Credit Transactions ..............................................................................................................44

139H 547H
Chattel Mortgage vs. After-Incurred Obligations (1991)

140H 44
548H
Chattel Mortgage vs. After-Incurred Obligations (1999)
14H 44
549H
Chattel Mortgage; Foreclosure (1997)

142H 44
50H
Chattel Mortgage; Ownership of Thing Mortgaged (1990)

143H 45
51H
Credit Transactions (1999)

14H 45
52H
Mortgage (1999)
145H 45
53H
Mortgage vs. Levy (2003)

146H 46
54H
Mortgage; Extrajudicial Foreclose (2006)

147H 46
5H
Mortgage; Foreclosure (2003)

148H 46
56H
Mortgage; Foreclosure (2003)

149H 46
57H
Mortgage; Foreclosure of Improvements (1999)

150H 46
58H
Mortgage; Foreclosure; Effect of mere taking by creditor-mortgagor of property (1992)

15H 47
59H
Mortgage; Redemption Period; Foreclosed Property (2002)

152H 47
560H
Mortgage; Remedies (2003)

153H 48
561H
Preference of Credits (2002)

154H 48
562H
Promissory Note: Liability (2001)

15H 48
563H
Remedies; Available to Mortgagee-Creditor (1996)

156H 48
564H
Remedies; Available to Mortgagee-Creditor (2001)

157H 49
56H
Remedies; Secured Debt (1991)

158H 49
56H
Insurance Law........................................................................................................................ 49
159H 567H
Beneficiary: Effects: Irrevocable Beneficiary (2005)

160H 49
568H
Beneficiary: Rights; Irrevocable Beneficiary (2005)

16H 50
569H
Beneficiary; Life Insurance; Prohibited Beneficiaries (1998)

162H 50
570H
Concealment; Material Concealment (2001)

163H 50
571H
Concealment; Material Concealment: Incontestability Clause (1994)

164H 50
572H

165H 50
573H

16H 51
574H
Concealment; Material Concealment; Incontestability Clause (1991)

167H 51
57H
Concealment; Material Concealment; Incontestability Clause (1998)

168H 51
576H
Insurable Interest: Bank Deposit (2000)

169H 51
57H
Insurable Interest: Public Enemy (2000)

170H 52
578H
Insurable Interest: Separate Insurable Interest (1999)

17H 52
579H
Insurable Interest; Equitable Interest (1991)

172H 52
580H
Insurable Interest; Life vs. Property Insurance (1997)

173H 52
581H

174H 52
582H

175H 53
583H
Insurable Interest; Property Insurance (1994)

176H 53
584H

17H 53
58H
Insurance; Cash & Carry Basis (2003)

178H 53
586H
Insurance; Co-Insurance vs. Re-Insurance (1994)

179H 53
587H
Insurance; Double Insurance (2005)

180H 54
58H
Insurance; Double Insurance; effect (1993)

18H 54
589H
Insurance; Effects; Payment of Premiums by Installment (2006)

182H 54
590H
Insurance; Life Insurance; Assignment of Policy (1991)

183H 54
591H
Insurance; Perfection of Insurance Contracts (2003)

184H 54
592H
Insurance; Property Insurance; Prescription of Claims (1996)

185H 54
593H
Insurance; Return of Premiums (2000)

186H 55
594H
Insured; Accident Policy (2004)

187H 55
59H
Insured; Accident vs. Suicide (1990)

18H 55
596H
189H 56
597H

190H 56
598H
Insurer: Effects: Several Insurers (2005)

19H 56
59H
Insurer; 3rd Party Liability (1996)

192H 56
60H
Insurer; 3rd Party Liability (2000)

193H 57
601H
Insurer; 3rd Party Liability; No Fault Indemnity (1994)

194H 57
602H
Insurer; 3rd Party Liability; Quitclaim (1994)

195H 57
603H
Insurer; Authorized Driver Clause (1991)

196H 57
604H
Insurer; Authorized Driver Clause (2003)

197H 57
605H
Insurer; Authorized Driver Clause; vehicle is stolen (1993)

198H 58
60H
Insurer; Group Insurance; Employer-Policy Holder (2000)

19H 58
607H
Insurer; Liability of the Insurers (1990)

20H 58
608H
Loss: Actual Total Loss (1996)

201H 59
609H
Loss: Constructive Total Loss (2005)

20H 59
610H
Loss: Total Loss Only (1992)

203H 59
61H
Marine Insurance; Implied Warranties (2000)

204H 60
612H
Marine Insurance; Peril of the Ship vs. Peril of the Sea (1998)
205H 60
613H
Mutual Insurance Company; Nature & Definition (2006)

206H 60
614H
Intellectual Property .............................................................................................................60

207H 615H
Copyright (1995)
208H 60
61H
Copyright; Commissioned Artist (1995)

209H 60
617H

210H 60
618H
Copyright; Infringement (1994)

21H 60
619H

21H 61
620H

213H 61
621H

214H 61
62H
Copyright; Photocopy; when allowed (1998)

215H 61
623H
Infringement vs. Unfair Competition (1996)

216H 61
624H
Infringement vs. Unfair Competition (2003)

217H 61
625H
Infringement; Jurisdiction (2003)

218H 61
62H
Patent; Non-Patentable Inventions (2006)

219H 61
627H
Patents: Gas-Saving Device: first to file rule (2005)

20H 62
628H
Patents: Infringement; Remedies & Defenses (1993)

21H 62
629H
Patents; Infringement (1992)

2H 62
630H
Patents; Rights over the Invention (1990)

23H 63
631H
Trademark (1990)
24H 63
632H
Trademark (1994)
25H 63
63H
Trademark, Test of Dominancy (1996)

26H 63
634H
Trademark; Infringement (1991)

27H 63
635H
Trademark; Test of Dominancy (1996)

28H 64
63H
Tradename: International Affiliation (2005)

29H 64
637H
Insolvency & Corporate Recovery ...................................................................................64

230H 638H
Insolvency vs. Suspension of Payment (1998)

231H 64
639H
Insolvency: Voluntary Insolvency (2005)

23H 64
640H
Insolvency; Assets vs. Liabilities (1998)

23H 65
641H
Insolvency; Assignees (1996)

234H 65
642H
Insolvency; Effect; Declaration of Insolvency (1991)

235H 65
643H
Insolvency; Fraudulent Payment (2002)
236H 65
64H
Insolvency; Jurisdiction; Sole Proprietorship (1990)

237H 66
645H
Insolvency; obligations that survive (1997)

238H 66
64H
Insolvency; Voluntary Insolvency Proceeding (1991)

239H 66
647H
Insolvency; Voluntary vs. Involuntary Solvency (1995)

240H 66
648H
Law on Corporate Recovery (2003)

241H 67
649H
Rehabilitation; Stay Order (2006)

24H 67
650H
Suspension of Payment vs. Insolvency (1995)

243H 67
651H
Suspension of Payments vs. Stay Order (2003)

24H 67
652H
Suspension of Payments; Rehabilitation Receiver (1999)

245H 67
653H
Suspension of Payments; Remedies (2003)

246H 68
654H
Letters of Credit .................................................................................................................... 68

247H 65H
Letter of Credit: Mortgage (2005)

248H 68
65H
Letter of Credit; Certification from Consignee (1993)

249H 68
657H
Letters of Credit; Liability of a confirming and notifying bank (1994)

250H 69
658H
Letters of Credit; Liability of a Notifying Bank (2003)

251H 69
659H
Letters of Credit; Three Distinct Contract Relationships (2002)

25H 69
60H
Maritime Commerce ............................................................................................................. 69

253H 61H
Average; Particular Average vs. General Average (2003)

254H 69
62H
Bottomry (1994)
25H 70
63H
Carriage of Goods: Deviation: Liability (2005)

256H 70
64H
Carriage of Goods; Deviation; When Proper (2005)

257H 70
65H
Carriage of Goods; Exercise Extraordinary Diligence (2005)

258H 70
6H
Charter Party (1991)

259H 70
67H
Charter Party (2004)

260H 71
68H
COGSA: Prescription of Claims/Actions (2004)

261H 71
69H
COGSA; Prescription of Claims (1992)

26H 71
670H
COGSA; Prescription of Claims (2000)

263H 72
671H
COGSA; Prescriptive Period (1995)

264H 72
672H
Doctrine of Inscrutable Fault (1995)

265H 72
673H

26H 72
674H

267H 72
675H
Limited Liability Rule (1994)

268H 72
67H

269H 72
67H

270H 72
678H

271H 73
679H
Limited Liability Rule; Doctrine of Inscrutable Fault (1991)

27H 73
680H
Limited Liability Rule; General Average Loss (2000)

273H 73
681H
Limited Liability Rule; General Average Loss (2000)

274H 73
682H
Nationalized Activities or Undertakings ........................................................................ 74

275H 683H
Nationalized Activities or Undertakings (1993)

276H 74
684H

27H 74
685H

278H 75
68H
Retail Trade Law (1990)

279H 75
687H

280H 75
68H

281H 75
689H
28H 76
690H

283H 76
691H

284H 76
692H
Retail Trade Law; Consignment (1991)

285H 76
693H
Negotiable Instruments Law ..............................................................................................76

286H 694H
Bond: Cash Bond vs. Surety Bond (2004)

287H 76 695H
Checks: Crossed Checks (2005)

28H 77 69H
Checks: Crossed Checks vs. Cancelled Checks (2004)

289H 77 697H
Checks; Crossed Check (1991)

290H 77 698H

291H 77 69H

29H 78 70H

293H 78 701H

294H 78 702H
Checks; Effect; Acceptance by the drawee bank (1998)

295H 78 703H
Checks; Effects; Alterations; Prescriptive Period (1996)

296H 78 704H
Checks; Forged Check; Effects (2006)

297H 79 705H
Checks; Liability; Drawee Bank (1995)

298H 80 706H
Checks; Material Alterations; Liability (1999)

29H 80 70H
Checks; Presentment (1994)

30H 80 708H

301H 80 709H
Checks; Validity; Waiver of Bank’s liability for negligence (1991)

302H 80 710H
Defenses; Forgery (2004)

30H 81 71H
Forgery; Liabilities; Prior & Subsequent Parties (1990)

304H 81 712H
Forgery; Liabilities; Prior & Subsequent Parties (1995)

305H 81 713H
Incomplete & Delivered (2004)

306H 82 714H
Incomplete and Delivered (2005)

307H 82 715H
Incomplete Instruments; Incomplete Delivered Instruments vs. Incomplete Undelivered Instrument (2006) 82
308H 716H
Indorser: Irregular Indorser vs. General Indorser (2005)

309H 82 71H
Negotiability (1993)
310H 82 718H
31H 83 719H
Negotiability; Holder in Due Course (1992)

312H 83 720H
Negotiability; Requisites (2000)

31H 83 721H
Negotiable Instrument: Ambiguous Instruments (1998)

314H 84 72H
Negotiable Instrument: Definition & Characteristics (2005)

315H 84 723H
Negotiable Instrument: Identification (2005)

316H 84 724H
Negotiable Instrument: Negotiable Document vs. Negotiable Instrument (2005)

317H 85 725H
Negotiable Instrument; Negotiability (1997)

318H 85 726H
Negotiable Instruments; Bearer Instrument (1998)

319H 85 72H
Negotiable Instruments; Bearer Instruments (1997)

320H 85 728H
Negotiable Instruments; bearer instruments; liabilities of maker and indorsers (2001)

321H 85 729H
Negotiable Instruments; incomplete and undelivered instruments; holder in due course (2000)
32H 86 730H
Negotiable Instruments; Incomplete Delivered Instruments; Comparative Negligence (1997)

32H 86 731H
Negotiable Instruments; kinds of negotiable instrument; words of negotiability (2002)

324H 86 732H
Negotiable Instruments; Requisites (1996)

325H 87 73H
Notice Dishonor (1996)

326H 87 734H
Parties; Accommodation Party (1990)

327H 87 735H

328H 87 736H

329H 87 73H
30H 87
738H

31H 88
739H

32H 88
740H

3H 88
741H
Parties; Holder in Due Course (1993)

34H 88
742H

35H 88
743H

36H 88
74H

37H 89
745H
Parties; Holder in Due Course; Indorsement in blank (2002)

38H 89
746H
Place of Payment (2000)

39H 89
74H
Public Service Law ............................................................................................................... 89

340H 748H
Certificate of public Convenience (1998)

341H 89
749H
Certificate of Public Convenience; inseparability of certificate and vessel (1992)

342H 90
750H
Certificate of Public Convenience; Requirements (1995)

34H 90
751H
Powers of the Public Service Commission (1993)

34H 90
752H
Public utilities (2000)

345H 90
753H
Revocation of Certificate (1993)

346H 91
754H
Revocation of Certificate (1993)

347H 91
75H
Securities Regulation .......................................................................................................... 91

348H 756H
Insider (2004)
349H 91
75H
Insider Trading (1995)

350H 91
758H
Insider Trading; Manipulative Practices (1994)

351H 92
759H
Manipulative Practices (2001)

352H 92
760H
Securities Regulation Code; Purpose (1998)

35H 92
761H
Securities; Definition (1996)

354H 92
762H
Securities; Selling of Securities; Meaning (2002)

35H 92
763H
Tender Offer (2002)

356H 93
764H
Transportation Law .............................................................................................................. 93

357H 765H
Boundary System (2005)

358H 93
76H
Carriage; Breach of Contract; Presumption of Negligence (1990)

359H 93
76H
Carriage; Breach of Contract; Presumption of Negligence (1997)

360H 93
768H
Carriage; Fortuitous Event (1995)

361H 93
769H
Carriage; Liability; Lost Baggage or Acts of Passengers (1997)

362H 94
70H
Carriage; Prohibited & Valid Stipulations (2002)

36H 94
71H
Carriage; Valuation of Damaged Cargo (1993)

364H 94
72H
Common Carrier (1996)

365H 94
73H
Common Carrier; Breach of Contract; Damages (2003)

36H 94
74H
Common Carrier; Defenses (2002)

367H 95
75H
Common Carrier; Defenses; Fortuitous Events (1994)

368H 95
76H
Common Carrier; Defenses; Limitation of Liability (1998)

369H 95
7H
Common Carrier; Defenses; Limitation of Liability (2001)

370H 95
78H
Common Carrier; Duration of Liability (1996)

371H 95
79H
Common Carrier; Duty to Examine Baggages; Railway and Airline (1992)

372H 96
780H
Common Carrier; Test (1996)

37H 96
781H
Common Carriers; Defenses (1996)

374H 96
782H
Common Carriers; Liability for Loss (1991)

375H 96
783H
Common vs. Private Carrier; Defenses (2002)
376H 97
784H
Kabit System (2005)

37H 97
785H
Kabit System; Agent of the Registered Owner (2005)

378H 97
786H
Maritime Commerce; Bareboat (2003)

379H 97
78H
Prior Operator Rule (2003)

380H 97
78H
Registered Owner; Conclusive Presumption (1990)

381H 98
789H
Trans-Shipment; Bill of Lading; binding contract (1993)

382H 98
790H
Trust Receipts Law...............................................................................................................98

38H 791H
Trust Receipts Law; Acts & Omissions; Covered (2006)

384H 98
792H
Trust Receipts Law; Liability for estafa (1991)

385H 99
793H
Trust Receipts Law; Liability for Estafa (1997)

386H 99
794H
Trusts Receipt Law (2003)

387H 99
795H
Usury Law ...............................................................................................................................99

38H 796H
Usury Law (199)

389H 99
79H
Warehouse Receipts Law .................................................................................................100

390H 798H
Bill of Lading (1998)

391H 100
79H
Delivery of Goods; Requisites (1998)

392H 100
80H
Delivery of the Goods (1991)

39H 100
801H
Garnishment or Attachment of Goods (1999)

394H 100
802H
Negotiable Documents of Title (1992)

395H 100
803H
Ownership of Goods Stored (1992)

396H 101
804H
Right to the Goods (2005)

397H 101
805H
Unpaid Seller; Negotiation of the Receipt (1993)

398H 101
806H
Validity of stipulations excusing warehouseman from negligence (2000)

39H 101
807H
Miscellaneous ......................................................................................................................102
40H 80H
Energy Regulatory Commission: Jurisdiction & Power (2004)

401H 102
809H
Four ACID Problems of Philippine Judiciary (2006)

402H 102
810H
Government Deregulation vs. Privatization of an Industry (2004)

403H 102
81H
Political Law; WTO (1999)

40H 102
812H
Power of the State: Regulating of Domestic Trade (2004)

405H 103
813H
Tariff and Customs Code: Violation of Customs Laws (2004)

406H 103
814H
General Principles of Banking Law
Mercantile Law Banks: Applicability: Foreign Currency Deposit Act &
Secrecy of Bank Deposits (2005)
Hi Yielding Corporation filed a complaint against five of
Commercial Transaction (2003) its officers for violation of Section 31 of the Corporation
What do you understand by the term “commercial Code. The corporation claimed that the said officers were
transaction”? Is it essential that at least one party to a guilty of advancing their personal interests to the
contract be a merchant in order to consider such a prejudice of the corporation, and that they were grossly
commercial transaction? (4%) negligent in handling its affairs. Aside from documents
SUGGESTED ANSWER:
and contracts, the corporation also submitted in evidence
A “Commercial transaction” is defined as ...... It is not
records of the officers’ U.S. Dollar deposits in several
essential that at least one party to the commercial
banks overseas - Boston Bank, Bank of Switzerland, and
transaction be a merchant. What is essential is that the
Bank of New York.
transaction evince an intent to engage in commerce or
trade.
For their part, the officers filed a criminal complaint
against the directors of Hi Yielding Corporation for
Joint Account (2000) violation of Republic Act No. 6426, otherwise known as
What is a joint account? (2%) the Foreign Currency Deposit Act of the Philippines.
SUGGESTED ANSWER:
A joint account is a transaction of merchants where other The officers alleged that their bank deposits were illegally
merchants agree to contribute the amount of capital disclosed for want of a court order, and that such
agreed upon, and participating in the favorable or deposits were not even the subject of the case against
unfavorable results thereof in the proportion they may them.
determine. a) Will the complaint filed against the directors of Hi
Yielding Corporation prosper? Explain.
SUGGESTED ANSWER:
Joint Account vs. Partnership (2000) No, because the Foreign Currency Deposit Act (R.A. No.
Distinguish joint account from partnership. (3%) 6426), including its punitive provisions, refers to foreign
SUGGESTED ANSWER:
The following are the distinctions between joint account currency deposits accounts constituted within the
and partnership: Philippines. It has no application at all to accounts, even
(1) A partnership has a firm name while a joint account though they are banks, opened and constituted abroad.
has none and is conducted in the name of the
ostensible partner. b) Was there a violation of the Secrecy of Bank
(2) While a partnership has juridical personality and may Deposits Law (Republic Act No. 1405)? Explain.
sue or be sued under its firm name, a joint account (5%)
SUGGESTED ANSWER:
has no juridical personality and can sue or be sued
No, because the punitive provisions of the Secrecy of
only in the name of the ostensible partner.
Bank Deposits Law (R.A. No. 1405), including the
(3) While a partnership has a common fund, a joint
statutory exemptions provided therein, are not applicable
account has none.
to FCDU accounts, even when constituted locally.
(4) While in a partnership, all general partners have the
(Intengan v. Court of Appeals, G.R. No. 128996, February 15,
right of management, in a joint account, the 2002)
ostensible partner manages its business operations.
(5) While liquidations of a partnership may, by Banks: Collateral Security (2002)
agreement, be entrusted to a partner or partners, in a Andrew is engaged in the business of building low-cost
joint account liquidation thereof can only be done by housing units under contracts with real estate developers.
the ostensible partner. He applied for a loan of P3 Million from Ready Credit
Bank (the Bank), which required Andrew to provide
Theory of Cognition vs. Theory of Manifestation (1997) collateral security for it. Andrew offered to assign to the
The Civil Code adopts the theory of cognition, while the Bank his receivables amounting to P4 million from
Code of Commerce generally recognizes the theory of Home Builders Development Corporation (the Obligor).
manifestation, in the perfection of contracts. How do The Bank accepted the offer. Accordingly, Andrew
these two theories differ? obtained the loan and he executed a promissory note
SUGGESTED ANSWER:
undertaking to pay the loan in full in one lump sum on
Under the theory of cognition, the acceptance is
September 1, 2002, together with interest thereon at the
considered to effectively bind the offeror only from the
rate of 20% per annum. At the same time, Andrew
time it came to his knowledge. Under the theory of
executed a Deed of Assignment in favor of the Bank
manifestation, the contract is perfected at the moment
assigning to the Bank his receivables from the Obligor.
when the acceptance is declared or made by the offeree.
The deed of assignment read:
“I, Andrew Lee, hereby assign, transfer and convey,
absolutely and unconditionally, to Ready Credit Bank Banks; Classifications of Banks (2002)
(hereinafter called the Bank) all of my right, title and There are six (6) classes of banks identified in the
interest in and to my accounts receivable from Home General Banking Law of 2000. Name at least four (4) of
Builders Development Corporation (hereinafter called them and explain the distinguishing characteristic or
the Obligor) arising from delivery of housing units with a function of each one. (5%)
total contract price of P4,000,000.00, the description and SUGGESTED ANSWER:
contract value of which are attached hereto as Annex A Any four (4) of the following six (6) classes of banks
(hereinafter called the Receivables).” identified in the General Banking Law of 2002, to wit:
1. Universal Banks – These are those which used to
“In the event that I shall be unable to pay my be called expanded commercial banks and the
outstanding indebtedness owned to the Bank, the Bank operations of which are now primarily governed by
shall have the right, without any further formality or act the General Banking Law of 2002. They can exercise
on its part, to collect the Receivables from the Obligor the powers of an investment house and invest in
and to apply the proceeds thereof toward payment of my non-allied enterprises. They have the highest
said indebtedness.” capitalization requirement.
2. Commercial Banks – These are ordinary or regular
Andrew failed to pay the loan on its due date on commercial banks, as distinguished from a universal
September 1, 2002. When the Bank attempted to collect bank. They have a lower capitalization requirement
from the Obligor, the Bank discovered that the latter had than universal banks and cannot exercise the powers
already closed operations and liquidated all its assets. The of an investment house and invest in non-allied
Bank sued Andrew for collection, but Andrew moved to enterprises.
dismiss the complaint on the ground that the debt had 3. Thrift Banks – These banks (such as savings and
already been paid by reason of his execution of the mortgage banks, stock savings and loan associations,
aforesaid Deed of Assignment which, being absolute and and private development banks) may exercise most
unconditional, was in essence a dacion en pago. The of the powers and functions of a commercial bank
Bank opposed the motion, contending that the Deed of except that they cannot, among others, open current
Assignment was only a security for a loan. or check accounts without prior Monetary Board
If you were the Judge, how would you resolve the approval, and they cannot issue letters of credit.
motion to dismiss filed by Andrew? Explain (5%) Their operations are governed primarily by the
SUGGESTED ANSWER: Thrift Banks Act of 1995 (RA 7906).
(Since the question is outside the scope of the Bar 4. Rural Banks – these are those which are organized
Examination, it is recommended that the candidate be given primarily to extend loans and other credit facilities to
full credit of 5%, whatever may be his answer, and he be given
farmers, fishermen or farm families, as well as
a bonus if he made an answer in the following manner:)
cooperatives, merchants, and private and public
The motion to dismiss should be granted. The simple
employees and whose operations are primarily
absolute and unconditional conveyance embodied in the
governed by the Rural Banks Act of 1992 (RA 7353).
deed of assignment would be operative, and the
5. Cooperative Banks – these are those which are
assignment would constitute essentially a mode of
organized primarily to provide financial and credit
payment or dacion en pago.
services to cooperatives and whose operations are
primarily governed by the Cooperative Code of the
Banks: Secrecy of Bank Deposits; Garnishment (2004) Philippines (RA 6938).
CDC maintained a savings account with CBank. On 6. Islamic Banks – these are those which are
orders of the MM Regional Trial Court, the Sheriff organized primarily to provide financial and credit
garnished P50,000 of his account, to satisfy the judgment services in a manner or transaction consistent with
in favor of his creditor, MO. CDC complained that the the Islamic Shari’ah. At present, only the Al Amanah
garnishment violated the Law on the Secrecy of Bank Islamic Investment Bank of the Philippines has been
Deposits because the existence of his savings account organized as an Islamic Bank.
was disclosed to the public. (5%)
Is CDC's complaint meritorious or not? Reason briefly.
SUGGESTED ANSWER:
Banks; Conservator vs. Receiver (2006)
No. CDC's complaint is not meritorious. It was held in Distinguish between the role of a conservator and that of
China Banking Corporation v. Ortega, 49 SCRA 355 (1973) a receiver of a bank. (2.5%)
SUGGESTED ANSWER:
that peso deposits may be garnished and the depositary
The Conservator is appointed for a period not exceeding
bank can comply with the order of garnishment without
one (1) year, to take charge of the assets, liabilities, and
violating the Law on the Secrecy of Bank Deposits.
the management of a bank or a quasi-bank in a state of
Execution is the goal of litigation as it is its fruit.
continuing inability, or unwillingness to maintain a
Garnishment is part of the execution process. Upon
condition of liquidity deemed adequate to protect the
service of the notice of garnishment on the bank where
interest of depositors and creditors.
the defendant deposited funds, such funds become part
On the other hand, the Receiver is appointed to manage
of the subject matter of litigation.
a bank or quasi-bank that is unable to pay its liabilities in
the ordinary course of business, or has insufficient payable to himself in the sum of P5 million. This is
realizable assets to meet its liabilities, or cannot continue paying out or permitting to be paid out funds of the bank
in business without probable losses to its depositors or after the latter became insolvent. This act is penalized by
creditors; or has willfully violated a final cease and desist fine of not less than P1,000.00 nor more than P10,000.00
order, involving acts or transactions amounting to fraud and by imprisonment for not less than two nor more
or a dissipation of the assets of the institution. The main than ten years.
purpose of the Receiver is to recommend the
rehabilitation or liquidation of the bank. Banks; Insolvency; Requirements (1997)
Give the basic requirements to be complied with by the
Banks; Diligence Required (1992) BSP before the Monetary Board can declare a bank
Placido, a bank depositor, left his checkbook on his desk insolvent, order it closed and forbid it from doing further
at his house. Unknown to him, a visitor at the time, business in the Philippines.
noticing the same, took a check therefrom, filled it up in SUGGESTED ANSWER:
the amount of P3,000.00 and succeeded in encashing the Before the Monetary Board can declare a bank insolvent,
check on the same day. Placido’s account was thereby order it closed and forbid it from doing further business
debited in the same amount. in the Philippines, the following basic requirements must
be complied with by the BSP, to wit:
Discovering the erroneous debit, Placido demanded that 1. There must be an examination by the head of the
the bank credit him with a like amount. The bank refused Department of Supervision or his examiners or
on the ground that Placido was negligent in leaving his agents into the condition of the bank.
checkbook on his desk so that he could not put up the 2. The examination discloses that the condition of the
defense of forgery or want of authority under the NIL. bank is one of insolvency, or that its continuance in
business would involve probable loss to creditors or
The Facts disclose that even to the naked eye, there were depositors.
marked differences between Placido’s signature and the 3. The head of said Department shall inform in writing
one in the check forged by the visitor. As between the Monetary Board of such facts.
Placido and the bank, who should bear the loss? Explain. 4. Upon finding said information or statement to be
SUGGESTED ANSWER: true, the Monetary Board shall appoint a receiver to
The bank should bear the loss. A drawee bank must take charge of the assets and liabilities of the bank.
exercise the highest diligence in safeguarding the 5. Within 60 days, the Monetary Board shall determine
accounts of its client-depositors. The bank is also and confirm if the bank is insolvent, and public
charged with genuineness of the signatures of its current interest requires, to order the liquidation of the
account holders. But what can be more striking is that bank.
there were marked differences between Placido’s
signature and the one in the check forged by the visitor. Banks; Restrictions on Loan Accommodations (2002)
Certainly, Placido was not negligent in leaving his As part of the safeguards against imprudent banking, the
checkbook in his own desk (PNB v Quimpo 158 SCRA General Banking Law imposes limits or restrictions on
582) loans and credit accommodations which may be
extended by banks. Identify at least two (2) of these
Banks; Insolvency; Prohibited Transactions (2000) limits or restrictions and explain the rationale of each of
The Monetary Board of the BSP closed Urban Bank after them. (5%)
it encountered crippling financial difficulties that resulted SUGGESTED ANSWER:
in a bank run. X, one of the members of the BOD of the Any two (2) of the following limits or restrictions on loan
bank, attended and stayed throughout the entire meeting and credit transactions which may be extended by banks,
of the Board that was held well in advance of the bank as part of the safeguards against imprudent banking, to
run and before news had begun to trickle to the business wit:
community about the dire financial pit the bank had 1. SBL Rules – (i.e., Single Borrower’s Limit) rules are
fallen into. Immediately after the meeting, X caused the those promulgated by the Bangko Sentral ng
preparation and issuance of a manager’s check payable to Pilipinas, upon the authority of Section 35 of the
himself in the sum of 5 million pesos equivalent to the General Banking Law of 2000, which regulate the
amount placed or invested in the bank by a business total amount of loans, credit accommodations and
acquaintance. He now claims that he is keeping the funds guarantees that may be extended by a bank to any
in trust for the owner and that he had committed no person, partnership, association, corporation or
violation of the General Banking Act (RA 337, as other entity. The rules seek to protect a bank from
amended) for which he should be punished. Do you making excessive loans to a single borrower by
agree that there has been no violation of the statute? prohibiting it from lending beyond a specified
(3%) ceiling.
SUGGESTED ANSWER: 2. DOSRI Rules – These rules promulgated by the
No. I do not agree that there is no violation of the statute BSP, upon authority of Section 5 of the General
(RA 337, as amended). X violated Sec 85 when he caused Banking Law of 2000, which regulate the amount of
the preparation and issuance of a manager’s check credit accommodations that a bank may extend to its
directors, officers, stockholders and their related observed by the depositary. Any stipulation exempting
interests (thus, DOSRI). Generally, a bank’s credit the depositary from any liability arising from the loss of
accommodations to its DOSRI must be in the the thing deposited would be void for being contrary to
regular course of business and on terms not less law and public policy. The deposit box is located in the
favorable to the bank than those offered to non- bank premises and is under the absolute control of the
DOSRI borrowers. bank.
3. No commercial bank shall make any loan or
discount on the security of shares of its own capital Banks; Secrecy of Bank Deposit; AMLC (2006)
stock. Rudy is jobless but is reputed to be a jueteng operator.
He has never been charged or convicted of any crime. He
Banks; Restrictions on Loan Accommodations (2006) maintains several bank accounts and has purchased 5
Pio is the president of Western Bank. His wife applied houses and lots for his children from the Luansing
for a loan with the said bank to finance an internet cafe. Realty, Inc. Since he does not have any visible job, the
The loan officer told her that her application will not be company reported his purchases to the Anti-Money
approved because the grant of loans to related interests Laundering Council (AMLC). Thereafter, AMLC charged
of bank directors, officers, and stockholders is prohibited him with violation of the Anti-Money Laundering Law.
by the General Banking Law. Upon request of the AMLC, the bank disclosed to it
Explain whether the loan officer is correct. (5%) Rudy's bank deposits amounting to P100 Million.
SUGGESTED ANSWER: Subsequently, he was charged in court for violation of
Section 36 of the General Banking Law of 2000 does not the Anti-Money Laundering Law.
entirely prohibit directors or officers of the bank, directly 1. Can Rudy move to dismiss the case on the ground that
or indirectly, from borrowing from the bank. In this case, he has no criminal record? (2.5%)
Pio is the president of Western Bank, which makes him SUGGESTED ANSWER:
an officer, director and stockholder of the said bank. The No. Under the Anti-Money Laundering Law, Rudy
General Banking Law provides for additional restrictions would be guilty of a "money laundering crime"
to the bank before it can lend to its directors or officers. committed when the proceeds of an "unlawful activity,"
A written approval of the majority vote of all the like jueteng operations, are made to appear as having
directors of the bank, excluding the director concerned, originated from legitimate sources. The money
is required. Furthermore, such dealings must be upon laundering crime is separate from the unlawful activity of
terms not less favorable to the bank than those offered to being a jueteng operator, and requires no previous
others (Section 1326, Central Bank's "Manual of Regulations conviction for the unlawful activity (See also Sec. 3, Anti-
for Banks and Other Financial Intermediaries, cited in Ranioso v. Money Laundering Act of 2001).
CA, G.R. No. 117416, December 8, 2000). A violation of
this provision will cause his or her position to be declared 2. To raise funds for his defense, Rudy sold the houses
vacant and the erring director or officer subjected to the and lots to a friend. Can Luansing Realty, Inc. be
penal provisions of the New Central Bank Act. compelled to transfer to the buyer ownership of the
houses and lots? (2.5%)
Banks; Safety Deposit Box; Liability SUGGESTED ANSWER:
MN and OP rented a safety deposit box at SIBANK. Luansing Realty, Inc. is a real estate company, hence it is
The parties signed a contract of lease with the conditions not a covered institution under Section 3 of the Anti-
that: the bank is not a depository of the contents of the Money Laundering Act. Only banking institutions,
safe and has neither the possession nor control of the insurance companies, securities dealers and brokers, pre-
same; the bank assumed no interest in said contents and need companies and other entities administering or
assumes no liability in connection therewith. The safety otherwise dealing in currency, commodities or financial
deposit box had two keyholes: one for the guard key derivatives are covered institutions. Hence, Luansing
which remained with the bank; and the other for the Realty, Inc. may not use the Anti-Money Laundering Act
renters' key. The box can be opened only with the use of to refuse to transfer to the buyer ownership of the
both keys. houses and lots.
The renters deposited certificates of title in the box. But
later, they discovered that the certificates were gone. MN 3. In disclosing Rudy's bank accounts to the AMLC,
and OP now claim for damages from SIBANK. Is the did the bank violate any law? (2.5%)
bank liable? Explain briefly. (5%) SUGGESTED ANSWER:
SUGGESTED ANSWER: No, the bank did not violate any law. The bank being
The bank is liable, based on the decisions of the Supreme specified as a "covered institution" under the Anti-
Court in CA Agro-Industrial Development Corp. v. Court of Appeals, Money Laundering Law, is obliged to report to the
219 SCRA 426 (1993) and Sia v. Court of Appeals, 222 SCRA 24 AMLC covered and suspicious transactions, without
(1993). In those cases, the Supreme Court ruled that the thereby violating any law. This is one of the exceptions to
renting out of safety deposit boxes is a "special kind of the Secrecy of Bank Deposit Act.
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
4. Supposing the titles of the houses and lots are in filed a complaint with the City Fiscal of Manila for
possession of the Luansing Realty, Inc., is it under unlawfully disclosing information about her bank
obligation to deliver the titles to Rudy? (2.5%) account.
SUGGESTED ANSWER: a) Will the said suit prosper? Explain your answer.
Yes, it has an obligation to deliver titles to Rudy. As
Luansing Realty, Inc. is not a covered institution under b) Supposing that Gigi is charged with unlawfully
Section 3 of the Anti-Money Laundering Act, it may not acquiring wealth under RA 1379 and that the fiscal issued
invoke this law to refuse delivery of the titles to Rudy. a subpoena duces tecum for the records of the bank account
of Gigi. May Gigi validly oppose the said issuance on the
Banks; Secrecy of Bank Deposit; Exceptions (2006) ground that the same violates the law on secrecy of bank
Under Republic Act No.1405 (The Bank Secrecy Law), deposits? Explain your answer.
bank deposits are considered absolutely confidential and SUGGESTED ANSWER:
may not be examined, inquired or looked into by any a) The Secrecy of Bank Deposits Act prohibits, subject to
person, government official, bureau or office. its exclusionary clauses, any person from examining,
What are the exceptions? (5%) inquiring or looking into all deposits of whatever nature
SUGGESTED ANSWER: with banks or banking institutions in the Philippines
The exceptions to the Bank Secrecy Law are the which by law are declared “absolutely confidential” in
following: nature. Manosa who merely overheard what appeared to
1. Special or general examination of a bank, be a vague remark of a Bank employee to a co-employee
authorized by the Bangko Sentral ng Pilipinas' and writing the same in his newspaper column is neither
Monetary Board, in connection with a bank fraud the inquiry nor disclosure contemplated by law.
or serious irregularity. ALTERNATIVE ANSWER:
2. Examination by an independent Auditor, hired by a) The complaint against Manosa will not prosper
the Bank and for the Bank's exclusive use. because merely writing a vague remark of a Bank
3. Disclosure with the Depositor's written employee to a co-employee is not the disclosure
permission. contemplated by law. If anyone should be liable, it will be
a. In case of Impeachment. the bank employee who disclosed the information.
b. In cases of Bribery or dereliction of duty by SUGGESTED ANSWER:
a Public Officer, upon order of a b) Among the instances excepted from the coverage of
competent court. the Secrecy of Bank Deposits Act are Anti-graft cases.
c. In cases of money deposited/invested Hence Gigi may not validly oppose the issuance of a
which, in turn, is the subject of Litigation, subpoena duces tecum for the bank records on her.
upon order of a competent Court.
4. DOSRI Loans: Loans with their Banks of Bank Banks; Secrecy of Bank Deposits (1991)
Directors, Officers, Stockholders and related The law (RA 6832) creating a Commission to conduct a
interests. Thorough Fact-Finding Investigation of the Failed Coup
a. Loans in excess of 5% of the Bank's d’etat of Dec 1989, Recommend Measures to Prevent the
Capital & Surplus Occurrence of Similar Attempts At a Violent Seizure of
b. The Borrower waived his right as regards Power and for Other Purposes, provides that the
the Secrecy of Bank Deposits Commission may ask the Monetary Board to disclose
5. Violation of the Anti-Graft and Corrupt Practices information on and/or to grant authority to examine any
Act. bank deposits, trust or investment funds, or banking
6. Coup d' etat Law (RA 6968, Oct 24,1990). transactions in the name of and/or utilized by a person,
7. BIR Commissioner's authority to verify a natural or juridical, under investigation by the
decedent's Gross Estate and a taxpayer's request Commission, in any bank or banking institution in the
for a compromise agreement due to incapacity to Philippines, when the Commission has reasonable
pay his tax liability. ground to believe that said deposits, trust or investment
8. Foreign Currency Deposits by foreign lenders & funds, or banking transactions have been used in support
investors under PDs 1034. or in furtherance of the objectives of the said coup d’etat.
9. Violations of the Anti-Money Laundering Law. Does the above provision not violate the Law on Secrecy
10. When the State exercises/invokes its Police Power. of Bank Deposits (RA 1405)?
(NOTA BENE: It is suggested that any 6 of the above be SUGGESTED ANSWER:
given full credit) The Law on Secrecy of Bank Deposits is itself merely a
statutory enactment, and it may, therefore, be modified,
Banks; Secrecy of Bank Deposits (1990) or amended (such as by providing further exceptions
Manosa, a newspaper columnist, while making a deposit therefrom), or even repealed, expressly or impliedly, by a
in a bank, overheard a pretty bank teller informing a co- subsequent law. The Secrecy of Bank Deposits Act did
employee that Gigi, a well known public official, has just not amount to a contract between the depositors and
a few hundred pesos in her bank account and that her depository banks within the meaning of the non-
next check will in all probability bounce. Manosa wrote impairment clause of the Constitution. Even if it did, the
this information in his newspaper column. Thus, Gigi police power of the State is superior to the non-
impairment clause. RA 6832, creating a commission to name of other persons. To sustain Miguel’s theory and
conduct an investigation of the failed 1989 coup d’etat restrict the inquiry only to property held by or in the
and to recommend measures to prevent similar attempts name of the government official would make available to
to seize power is a valid exercise of police power. persons in government who illegally acquire property an
easy means of evading prosecution. All they have to do
Banks; Secrecy of Bank Deposits (1992) would be to simply place the property in the name of
Socorro received $10,000 from a foreign bank although persons other than their spouses and children (Banco
she was entitled only to $1,000.00. In an apparent plan to Filipino Savings vs. Purisima 161 scra 576; Sec 8 Anti-Graft Law as
conceal the erroneously sent amount, she opened a dollar amended by BP 195)
account with her local bank, deposited the $10,000 and
issued 4 checks in the amount of $2,000 and 1 check for Banks; Secrecy of Bank Deposits (1995)
$1,000 each payable to different individuals who Michael withdrew without authority funds of the
deposited the same in their respective dollar accounts partnership in the amounts of P500th and US$50th for
with different local banks. services he claims he rendered for the benefit of the
partnership. He deposited the P500th in his personal
The sender bank then brought a civil suit before the RTC peso current account with Prosperity Bank and the
for the recovery of the erroneously sent amount. In the US$50th in his personal foreign currency savings account
course of the trial, the sender presented testimonies of with Eastern Bank.
bank officials to show that the funds were, in fact,
deposited in a bank by Socorro and paid out to several The partnership instituted an action in court against
persons, who participated in the concealment and Michael, Prosperity, and Eastern to compel Michael to
dissipation of the amount that Socorro had erroneously return the subject funds to the partnership and pending
received. litigation to order both banks to disallow any withdrawal
from his accounts.
Socorro moved to strike out said testimonies from the
record invoking the law on secrecy of bank deposits. If At the initial hearing of the case the court ordered
you were the Judge, would you issue an order to strike Prosperity to produce the records of Michael’s peso
them out? Why? current account, and Eastern to produce the records of
SUGGESTED ANSWER: his foreign currency savings account.
I will not strike out the testimonies from the record. The
testimonies of bank officials indicating where the Can the court compel Prosperity and Eastern to disclose
questioned dollar accounts were opened in depositing the bank deposits of Michael? Discuss fully.
misappropriated sums must be considered as likewise SUGGESTED ANSWER:
involved in litigation – one which is among the excepted Yes, as far as the peso account is concerned. Sec 2 of RA
cases under the Secrecy of Bank Deposits Act (Melon 1405 allows the disclosure of bank deposits in case where
Bank v Magsino 190 SCRA 633) the money deposited is the subject matter of litigation.
Since the case filed against Michael is aimed at recovering
Banks; Secrecy of Bank Deposits (1994) the amount he withdrew from the funds of the
Miguel, a special customs agent is charged before the partnership, which amount he allegedly deposited in his
Ombudsman with having acquired property out of account, a disclosure of his bank deposits would be
proportion to his salary, in violation of the Anti-Graft proper.
and Corrupt Practices Act. The Ombudsman issued a
subpoena duces tecum to the Banco de Cinco commanding No, with respect to the foreign currency account. Under
its representative to furnish the Ombudsman records of the Foreign Currency Law, the exemption to the
transactions by or in the name of Miguel, his wife and prohibition against disclosure of information concerning
children. A second subpoena was issued expanding the bank deposits is the written consent of the depositor.
first by including the production of records of friends of
Miguel in said bank and in all its branches and extension Banks; Secrecy of Bank Deposits (1998)
offices, specifically naming them. 1998 (20) An insurance company is deluded into
releasing a check to A for P35th to pay for Treasury Bills
Miguel moved to quash the subpoenas arguing that they (T-bills) which A claims to be en route on board an
violate the Secrecy of Bank Deposits Law. In addition, he armored truck from a government bank. The check is
contends that the subpoenas are in the nature of “fishing delivered to A who deposits it to his account with XYZ
expedition” or “general warrants” and are Bank before the insurance company realizes it is a scam.
constitutionally impermissible with respect to private Upon such realization, the insurance company files an
individuals who are not under investigation. action against A for recovery of the amount defrauded
Is Miguel’s contention tenable? and obtains a writ of preliminary attachment. In addition
SUGGESTED ANSWER: to the writ, the Bank is also served a subpoena to
No. Miguel’s contention is not tenable. The inquiry into examine the account records of A. The Bank declines to
illegally acquired property extends to cases where such provide any information in response to the writ and
property is concealed by being held by or recorded in the moves to quash the subpoena invoking secrecy of bank
deposits under RA 1405, as amended. Can the Bank Under Section 6(F) of the National Internal Revenue
justifiably invoke RA 1405 and a) not respond to the writ Code, the Commissioner of Internal Revenue can inquire
and b) quash the subpoena for examination? (5%) into the deposits of a decedent for the purpose of
SUGGESTED ANSWER: determining the gross estate of such decedent. Apart
Yes. Whether the transaction is considered a sale or from this case, a BIR inquiry into bank deposits cannot
money placement does not make the money “subject be made. Thus, exception 3 may not always be applicable.
matter of litigation” within the meaning of Sec 2 of RA
1405 which prohibits the disclosure or inquiry into bank Turning to exception 4, an inquiry into bank deposits is
deposit except “in cases where the money deposited or possible only in prosecutions for unexplained wealth
invested is the subject matter of litigation” nor will it under the Anti-Graft and Corrupt Practices Act,
matter whether the money was “swindled.” according to the Supreme Court in the cases of Philippine
National Bank v. Gancayco, 15 SCRA 91 (1965) and Banco Filipino
Banks; Secrecy of Bank Deposits (2000) Savings and Mortgage Bank v. Purisima, 161 SCRA 576 (1988).
GP is a suspected jueteng lord who is rumored to be However, all other cases of anti-graft and corrupt
enjoying police and military protection. The envy of practices will not warrant an inquiry into bank deposits.
many drug lords who had not escaped the dragnet of the Thus, exception 4 may not always be applicable. Like any
law, GP was summoned to a hearing of the Committee other exception, it must be interpreted strictly.
on Racketeering and Other Syndicated Crimes of the
House of Representatives, which was conducting a Exceptions 1, 2 and 5, on the other hand, are provided
congressional investigation “in aid of legislation” on the expressly in the Law on Secrecy of Bank Depositors.
involvement of police and military personnel, and They are available to depositors at all times.
possibly even of local government officials, in the illegal
activities of suspected gambling and drug lords. Banks; Secrecy of Bank Deposits; Garnishment (2001)
Subpoenaed to attend the investigation were officers of The Law on Secrecy of Bank Deposits, otherwise known
certain identified banks with a directive to them to bring as RA 1405, is intended to encourage people to deposit
the records and documents of bank deposits of their money in banking institutions and also to
individuals mentioned in the subpoenas, among them discourage private hoarding so that the same may be
GP. GP and the banks opposed the production of the properly utilized by banks to assist in the economic
banks’ records of deposits on the ground that no such development of the country. Is a notice of garnishment
inquiry is allowed under the Law on Secrecy of Bank served on a bank at the instance of a creditor of a
Deposits (RA 1405 as amended). Is the opposition of GP depositor covered by the said law? State the reason(s) for
and the banks valid? Explain. your answer. (5%)
SUGGESTED ANSWER: SUGGESTED ANSWER:
Yes. The opposition is valid. GP is not a public official. No. The notice of garnishment served on a bank at the
The investigation does not involve one of the exceptions instance of a creditor is not covered by the Law on
to the prohibition against disclosure of any information Secrecy of Bank Deposits. Garnishment is just a part of
concerning bank deposits under the Law on Secrecy of the process of execution. The moment a notice of
Bank Deposits. The Committee conducting the garnishment is served on a bank and there exists a
investigation is not a competent court or the deposit by the judgment debtor, the bank is directly
Ombudsman authorized under the law to issue a accountable to the sheriff, for the benefit of the
subpoena for the production of the bank record judgment creditor, for the whole amount of the deposit.
involving such disclosure. In such event, the amount of the deposit becomes, in
effect, a subject of the litigation.
Banks; Secrecy of Bank Deposits; Exceptions (2004)
The Law on Secrecy of Bank Deposits provides that all BSP; Receivership; Jurisdiction (1992)
deposits of whatever nature with banks or banking Family Bank was placed under statutory receivership and
institutions are absolutely confidential in nature and may subsequently ordered liquidated by the Central Bank
not be examined, inquired or looked into by any person, (CB) due to fraud and irregularities in its lending
government official, bureau or office. However, the law operations which rendered it insolvent. Judicial
provides exceptions in certain instances. proceedings for liquidation were thereafter commenced
Which of the following may not be among the by the CB before the RTC. Family Bank opposed the
exceptions: petition.
1. In cases of impeachment. Shortly thereafter, Family Bank filed in the same court a
2. In cases involving bribery special civil action against the CB seeking to enjoin and
3. In cases involving BIR inquiry. dismiss the liquidation proceeding on the ground of
4. In cases of anti-graft and corrupt practices. grave abuse of discretion by the CB. The court poised to:
5. In cases where the money involved is the subject of 1) restrain the CB from closing Family Bank; and 2)
litigation. authorize Family Bank to withdraw money from its
Explain your answer or choice briefly. (5%) deposits during the pendency of the case. If you were the
SUGGESTED ANSWER: Judge, would you issue such orders? Why?
SUGGESTED ANSWER:
No. The RTC has no authority to restrain the monetary of the economy. It shall promote and maintain monetary
board of the BSP from statutory authority to undertake stability and convertibility of the Peso.
receivership and ultimate liquidation of a bank. Any
opposition to such an action could be made to the court Truth in Lending Act (1991)
itself where assistance is sought. The action of the RTC Dana Gianina purchased on a 36 month installment basis
where the proceeding is pending appeal have to be made the latest model of the Nissan Sentra Sedan car from the
in the Court of Appeals. Jobel Cars Inc. In addition to the advertised selling price,
the latter imposed finance charges consisting of interests,
Legal Tender (2000) fees and service charges. It did not, however, submit to
After many years of shopping in the Metro Manila area, Dana a written statement setting forth therein the
housewife HW has developed the sound habit of making information required by the Truth in Lending Act (RA
cash purchases only, none on credit. In one shopping trip 3765). Nevertheless, the conditional deed of sale which
to Mega Mall, she got the shock of her shopping life for the parties executed mentioned that the total amount
the first time, a store’s smart salesgirl refused to accept indicated therein included such finance charges.
her coins in payment for a purchase worth not more than a. Has there been substantial compliance of the
one hundred pesos. HW was paying seventy pesos in 25- aforesaid Act?
centavo coins and twenty five pesos in 10 centavo coins. b. If your answer to the foregoing question is in the
Strange as it may seem, the salesgirl told HW that her negative, what is the effect of the violation on the
coins were not “legal tender.” Do you agree with the contract?
salesgirl in respect of her understanding of “legal c. In the event of a violation of the Act, what remedies
tender?” Explain (2%) may be availed of by Dana?
No. The salesgirl’s understanding that coins are not legal a) There was no substantial compliance with the Truth
tender is not correct. Coins are legal tender in amounts in Lending Act. The law provides that the creditor
not exceeding fifty pesos for denominations from twenty must make a full disclosure of the credit lost. The
five centavos and above, and in amounts not exceeding statement that the total amount due includes the
twenty pesos for denominations ten centavos and less. principal and the financial charges, without
specifying the amounts due on each portion thereof
PDIC Law vs. Secrecy of Bank Deposits Act (1997) would be insufficient and unacceptable.
An employee of a large manufacturing firm earns a salary
which is just a bit more than what he needs for a b) A violation of the Truth in Lending Act will not
comfortable living. He is thus able to still maintain a adversely affect the validity of the contract itself.
P10,000 savings account, a P20,000 checking account, a
P30,000 money market placement and a P40,000 trust c) It would allow Dana to refuse payment of financial
fund in a medium-size commercial bank. charges or, if already paid, to recover the same. Dana
a) State which of the four accounts are deemed insured may also initiate criminal charges against the
by the PDIC. creditor.
b) State which of the above accounts are covered by
the Law on Secrecy of Bank Deposits. ALTERNATIVE ANSWER:
SUGGESTED ANSWER: c) (Per Atty Jomby Paras if u read the provisions closely)
a) The P10th savings account and the P20th checking Under the Truth in Lending Act, said financial charges
account are deemed insured by the PDIC. are valid, and Dana may not refuse payment thereof.
b) The P10th savings account and the P20th checking Only criminal charges may be initiated against the
account are covered by the Law on Secrecy of Bank creditor.
Deposits.
Responsibilities & Objectives of BSP (1998) Embassy Appliances sells home theater components that
What are the responsibilities and primary objectives of are designed and customized as entertainment centers for
the BSP? (5%) consumers within the medium-to-high price bracket.
SUGGESTED ANSWER: Most, if not all, of these packages are sold on installment
The BSP shall provide policy directions in the areas of basis, usually by means of credit cards allowing a
money, banking and credit. It shall have supervision over maximum of 36 equal monthly payments. Preferred
the operations of banks and exercise such regulatory credit cards of this type are those issued by banks, which
powers as provided in the Central Bank Act and other regularly hold mall wide sales blitzes participated in by
pertinent laws over the operations of finance companies appliance retailers like Embassy Appliances. You are a
and non-bank financial institutions performing quasi- buyer of a home theater center at Embassy Appliances.
banking functions, such as quasi-banks and institutions The salesclerk who is attending to you simply swipes
performing similar functions. your credit card on the electronic approval machine
(which momentarily prints out your charge slip since you
The primary objective of the BSP is to maintain price have unlimited credit), tears the slip from the machine,
stability conducive to a balanced and sustainable growth hands the same over to you for your signature, and
without more, proceeds to arrange the delivery and their loan portfolios. Company X was faced with the
installation of your new home theater system. You know dismal choice of either suspending its operations or
you will receive a statement on your credit card purchases selling its business. It chose the latter. Having struck a
from the bank containing an option to pay only a deal with Company Z, a more viable entity engaged in
minimum amount, which is usually 1/36 of the total the same business, Company X sold its entire business to
price you were charged for your purchase. Did Embassy the former without much fanfare or any form of
Appliances comply with the provisions of the Truth in publicity. In fact, evidence exists that the transaction was
Lending Act (RA 3765)? furtively entered into to avoid the prying eyes of
SUGGESTED ANSWER: Company X’s creditors. The creditor banks and other
There is no need for Embassy Appliances to comply with financial institutions sued Company X for violation of
the Truth in Lending Act. The transaction is not a sale on the Bulk Sales Law. Decide. (5%)
installment basis. Embassy Appliances is a seller on cash SUGGESTED ANSWER:
basis. It is the credit card company which allows the Company X violated the Bulk Sales Law when it sold its
buyer to enjoy the privilege of paying the price on entire business to Company Z furtively to avoid the
installment basis. 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
Bulk Sales Law course of business, constitutes bulk sale. The transaction
being a bulk sale, entering into such transaction without
Bulk Sales Law; Covered Transactions (1994) complying with the requirements of the Bulk Sales Law,
Stanrus Inc a department store with outlets in Makati, Company X violated said law.
Mandaluyong, and Quezon City, is contemplating to
refurbish and renovate its Makati store in order to Bulk Sales Law; Covered Transactions (2006)
introduce the most modern and state of the art Pursuant to a writ of execution issued by the Regional
equipment in merchandise display. To carry out its plan, Trial Court in "Express Bank v. Don Rubio," the sheriff
it intends to sell ALL of the existing fixtures and levied and sold at public auction 8 photocopying
equipment (display cases, wall decorations, furniture, machines of Don Rubio. Is the sheriff's sale covered by
counters, etc.) to Crossroads Department Store. the Bulk Sales Law? (5%)
Thereafter, it will buy and install new fixtures and SUGGESTED ANSWER:
equipment and continue operations. Crossroads wants to No. The sale by sheriff at public sale is not a sale by a
know from you as counsel: merchant. Section 8 of the Bulk Sales Law itself provides
1) Whether the intended sale is “bulk sale.” that it has no application to executors, administrators,
2) How can it protect itself from future claims of receivers, assignees in insolvency, or public officers,
creditors of Stanrus. acting under process. The Bulk Sales Law only applies to
SUGGESTED ANSWER: the sale or encumbrance of a merchant of goods,
1) Yes. The sale involves all fixtures and equipment, not merchandise or commodity done "in bulk" as defined by
in the ordinary course of trade and the regular the Law itself.
prosecution of business of Stanrus, Inc. (Sec 2 Act 3952,
as amended) Bulk Sales Law; Exclusions (1993)
In the annual meeting of XYZ Corporation, the
2) Crossroads should require from Stanrus Inc. stockholders unanimously adopted a resolution proposed
submission of a written waiver of the Bulk Sales Law by by the BOD to sell substantially all the fixtures and
the creditors as shown by verified statements or to equipment used in and about its business. The President
comply with the requirements of the Bulk Sales Law, that of the Corporation approached you and asked for legal
is, the seller must notify his creditors of the terms and assistance to effect the sale.
conditions of the sale, and also, before receiving from the 1) What steps should you take so that the sale may be
vendee any part of the purchase price, deliver to such valid?
vendee a written sworn statement of the names and 2) What are the two instances when the sale, transfer,
addresses of all his creditors together with the amount of mortgage or assignment of stock of goods, wares,
indebtedness due to each (Sec 2 Act 3952, amended) merchandise, provision, or materials otherwise than
in the ordinary course of trade and the regular
Bulk Sales Law; Covered Transactions (2000) prosecution of the business of the vendor are not
Company X, engaged in the business of manufacturing deemed to be a sale or transfer in bulk?
car parts and accessories, operates a factory with SUGGESTED ANSWER:
equipment, machinery and tools for this purpose. The 1) The requirements of the Bulk Sales Law must be
manufactured goods are sold wholesale to distributors complied with. The seller delivers to the purchaser a list
and dealers throughout the Philippines. Company X was of his creditors and the purchaser in turn notifies such
among the business entities adversely hit by the 1997 creditors of the proposed sale at a stipulated time in
Asian business crisis. Its sales dropped with the decline in advance.
car sales and its operating costs escalated, while its
creditor banks and other financial institutions tightened
2) If the sale and transfer is made a) by the vendor, indebtedness due or owing, on account of the goods,
mortgagor, transferor or assignor who produces and fixtures or business subject matter of the bulk sale.
delivers a written waiver of the provisions of the Bulk
Sales Law from his creditors as shown by verified Bulk Sales Law; Obligation of the Vendor (2001)
statement; and b) by a vendor, mortgagor, transferor or A is a merchant engaged in the sale of a variety of goods
assignor who is an executor, administrator, receiver, and merchandise. Because of the economic crisis, he
assignee in insolvency, or public officer acting under incurred indebtedness to X, Y and Z. Thereafter, A sold
judicial process, the sale or transfer is not covered by the to B all the stock of goods and merchandise.
Bulk Sales Law. a) What steps should A undertake to effect a valid sale
in bulk of his goods to B. (2%).
Bulk Sales Law; Obligation of the Vendor (1995) SUGGESTED ANSWER:
House of Pizza (Pizza) is the owner and operator of a A must prepare an affidavit stating the names of all his
nationwide chain of pizza outlets. House of Liquor creditors, in this case, X, Y, and Z, their addresses, the
(Liquor) is a retailer of all kinds of liquor. amount of their credits and their maturity. A should give
the affidavit to B who, in turn, should furnish a copy to
House of Foods (Foods) has offered to purchase all of each creditor and notify the creditors that there is a
the outlets, equipment, fixtures and furniture of Pizza. proposed bulk sale in order to enable the latter to protect
Foods also offered to purchase from Liquor all of its their interests.
moderately priced stock constituting 50% of its total
inventory. b) Suppose A submitted a false statement on the
schedule of his creditors. What is the effect of such
Both Pizza and Liquor have creditors. What legal false statement as to Vendee B. (2%)
requirements must Pizza and Liquor comply with in SUGGESTED ANSWER:
order for Foods to consummate the transactions? If the vendee does not have knowledge of the falsity of
Discuss fully. the schedule, the sale is valid. However, if the vendee has
SUGGESTED ANSWER: knowledge of such falsity, the sale is void because he is in
Pizza and Liquor must prepare an affidavit stating the bad faith.
names of all their creditors, their addresses, the amounts
of their credits and their respective maturities. Pizza and c) What is the right of creditors X, Y, and Z if A failed
Liquor must submit said affidavit to Foods which, in to comply with the procedure/steps required by law
turn, should notify the creditors about the transaction under question letter (a) hereof? (1%)
which is about to be concluded with Pizza and Liquor. SUGGESTED ANSWER:
ALTERNATIVE ANSWER: The recourse of X, Y, and Z is to question the validity of
As far as Liquor is concerned, it must prepare an affidavit the sale from A to B so as to recover the goods and
stating the names of all its creditors, their addresses, the merchandise to satisfy their credits.
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 Consumer Protection Law
about to be concluded with his seller.
But as far as Pizza is concerned, it is not covered by the Metric System Law (1994)
Bulk Sales Law. So Foods can consummate the Angelene is a customer of Meralco Electric Company
transaction without doing anything. (MECO). Because of the abrupt rise in electricity rates,
Angelene complained with MECO insisting that she
Bulk Sales Law; Obligation of the Vendor (1997) should be charged the former rates. However, Angelene
The sole proprietor of a medium-size grocery shop, did not tender any payment.
engaged in both wholesale and retail transactions, sells
the entire business “lock, stock and barrel” because of his When MECO’s employees served the first 48-hour
plan to emigrate abroad with his family. Is he covered by notice of disconnection, Angelene protested. MECO,
the provisions of the Bulk Sales Law? In the affirmative, however, did not implement the 48-hour notice of
what must be done by the parties so as to comply with disconnection. Instead, its employees examined
the law? Angelene’s electric meter, changed the same, and
SUGGESTED ANSWER: installed another. Still, Angelene, made no tender of
Yes. This is a sale of the stock of goods, fixtures and payment.
entire business, not in the ordinary course of business or
trade of the vendor. Before receiving from the vendee MECO served a second 48-hour notice of disconnection
any part of the purchase price, the vendor must deliver to on June 22, 1984. It gave Angelene until 5 pm of June 25,
such vendee a written statement, duly sworn, of the 1984 within which to pay. As no payment had been
names and addresses of all creditors to whom said made, MECO cut Angelene’s electric service on June 28,
vendor may be indebted, together with the amount of 1984. Angelene contends that the 48-hour written notice
of disconnection rule cannot be invoked by MECO
when there is a bona fide and just dispute as to the Gregorio of 500 bags, which Gregorio accepted, is an
amount due as her electric consumption rate. entirely new transaction. (Yao Ka Sin Trading v CA GR 53820
Is Angelene’s contention valid? June 15, 1992 209s763)
SUGGESTED ANSWER:
No. Angelene’s only legal recourse in this case was to pay BOD; Compensation (1991)
the electric bill under protest. Her failure to do so After many difficult years, which called for sacrifices on
justified MECO to cut the electric service (Ceniza v CA 218 the part of the company’s directors, ABC Manufacturing
S 290) 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
Corporation Law income before tax during the preceding year. The
President’s proposal was unanimously approved by the
BOD. A stockholder of ABC questioned the bonus.
BOD: Election of Aliens as members (2005) Does he have grounds to object?
A Korean national joined a corporation which is engaged SUGGESTED ANSWER:
in the furniture manufacturing business. He was elected Yes, the stockholder as a valid and legal ground to object
to the Board of Directors. To complement its furniture to the payment to the directors of a bonus equivalent to
manufacturing business, the corporation also engaged in 15% of the company’s net income. The law provides that
the logging business. With the additional logging activity, the total annual compensation of the directors, in the
can the Korean national still be a member of the Board preceding year, cannot exceed 10% of the company’s net
of Directors? Explain. (3%) income before income tax (Sec 30 Corp Code).
SUGGESTED ANSWER:
Yes, just as long as sixty percent (60%) of the Board of
BOD; Conflict of Interest (1994)
Directors are Filipinos. Corporations that are sixty
ABC Pigger Inc is engaged in raising and selling hogs in
percent (60%) owned by Filipinos can engage in the
the local market. Mr. De Dios, one of its directors while
business of exploration, development and utilization of
traveling abroad, met a leather goods manufacturer who
natural resources. (Art. XII, Sec. 2, 1987 Constitution)
was interested in buying pig skins from the Philippines.
The election of aliens as members of the Board Of
Mr De Dios set up a separate company and started
Directors engaging in partially-nationalized activities is
exporting pig skins to his foreign contact but the pig
allowed in proportion to their allowable participation or
skins exported were not sourced from ABC. His fellow
share in the capital of such entities. (Sec. 2-A, Anti-
directors in ABC complained that he should have given
Dummy Law) Nothing in the facts shows that more than
this business to ABC. How would you decide on this
forty percent (40%) of the Board of Directors are
matter?
foreigners. SUGGESTED ANSWER:
I would decide in favor of Mr De Dios. ABC is engaged
BOD; Capacity of Directors (1996) in raising and selling hogs in the local market. The
Rodman, the President of TF Co, wrote a letter to company that Mr De Dios had set up was to engage, as it
Gregorio, offering to sell to the latter 5,000 bags of did, in the export of pigs skins. There is thus no conflict
fertilizer at P100 per bag. Gregorio signed his conformity of interest between Mr. De Dios and ABC Pigger Inc so
to the letter-offer, and paid a down-payment of P50th. A as to make the case fall within the conflict of interest
few days later, the Corporate Secretary of TF informed situation under the law (Sec 34 Corp Code)
Gregorio of the decision of their BOD not to ratify the Observation: The term “conflict of interest” is susceptible to
letter offer. However, since Gregorio had already paid varied views and interpretations.
the down-payment, TF delivered 500 bags of fertilizer
which Gregorio accepted. TF made it clear that the BOD; Interlocking Directors (1995)
delivery should be considered an entirely new Chito Santos is a director of both Platinum Corporation
transaction. Thereafter, Gregorio sought enforcement of and Kwik Silver Corporation. He owns 1% of the
the letter-offer. outstanding capital stock of Platinum and 40T of Kwik.
Is there a binding contract for the 5,000 bags of Platinum plans to enter into a contract with Kwik that
fertilizer? Explain. will make both companies earn very substantial profits.
SUGGESTED ANSWER: The contract is presented at the respective board
No, there is no binding contract for the 5,000 bags of meetings of Platinum and Kwik.
fertilizer. First, the facts do not indicate that Rodman, the 1. In order that the contract will not be voidable, what
President of TF Co, was authorized by the BOD to enter conditions will have to be complied with? Explain.
into the said contract or that he was empowered to do so
under some provision of the by-laws of TF Co. The facts 2. If these conditions are not met, how may this contract
do not also indicate that Rodman has been clothed with be ratified? Explain.
the apparent power to execute the contract or SUGGESTED ANSWER:
agreements similar to it. Second, TF Co has specifically 1. At the meeting of the BOD of Platinum to approve
informed Gregorio that it has not ratified the contract for the contract, Chito would have to make sure that
the sale of 5,000 bags of fertilizer and that the delivery to
a) his presence as director at the meeting is not The BOD of X Co, acting on a standing authority of the
necessary to constitute a quorum for such stockholders to amend the by-laws, amended its by-laws
meeting; so as to disqualify any of its stockholders who is also a
b) his vote is not necessary for the approval of the stockholder and director of a competitor from being
contract; and elected to its BOD.
c) the contract is fair and reasonable under the
circumstances. Y, a stockholder holding sufficient assets to assure him
of a seat in the BOD, filed a petition with the SEC for a
At the meeting of the BOD of Kwik to approve the declaration of nullity of the amended by-laws. He alleged
contract, Chito would have to make sure that - among other things that as a stockholder, he had
a) there is no fraud involved; and acquired rights inherent in stock ownership such as the
b) the contract is fair and reasonable under the right to vote and be voted upon in the election of
circumstances. directors. Is the stockholder’s petition tenable? (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER: No. There is no vested right of a stockholder to be
2. If the conditions relating to the quorum and required elected as director. When a person buys stock in a
number of votes are not met, the contract must be corporation he does so with the knowledge that its affairs
ratified by the vote of stockholders representing at least are dominated by a majority of the stockholders. To this
2/3 of the outstanding capital stock in a meeting called extent, the stockholder parted with his personal right to
for the purpose. Furthermore, the adverse interest of regulate the disposition of his property which he invested
Chito in the contract must be disclosed and the contract in the capital stock of the corporation and surrendered it
is fair and reasonable. (Secs. 32 and 33, BP 68) to the will of the majority of his fellow incorporators or
stockholders.
Leonardo is the Chairman and President, while Raphael Corporations have the power to make by-laws declaring a
is a Director of NT Corporation. On one occasion, NT person employed in the service of a rival company to be
Co, represented by Leonardo and A Ent, a single ineligible for the Corporation’s BOD. An amendment
proprietorship owned by Raphael, entered into a which renders a director ineligible, or if elected, subjects
dealership agreement whereby NT Co appointed A Ent him to removal, if he is also a director in a corporation
as exclusive distributor of its products in Northern whose business is in competition with or is antagonistic
Luzon. Is the dealership agreement valid? Explain. to the other corporation is valid.
SUGGESTED ANSWER:
The dealership agreement is voidable at the option of NT
By-Laws; Validity; limiting qualifications of BOD
Co inasmuch as the facts do not indicate that the same
members (2000)
was approved by the BOD of NT Co before it was
At the annual stockholders’ meeting of MS Corporation,
signed or, assuming such approval, that it was approved
the stockholders unanimously passed a resolution
under the following conditions:
authorizing the Board of Directors to amend the
1) That the presence of Raphael, the owner of A Ent,
corporate by-laws so as to disqualify any stockholder
in the meeting of the BOD at which the agreement
who is also a director or stockholder of a competing
was approved was not necessary to constitute a
business from being elected to the Board of Directors of
quorum for such meeting;
MS Corporation. The by-laws were accordingly amended.
2) That the vote of Raphael was not necessary for the
GK, a stockholder of MS Corporation and a majority
approval of the agreement;
stockholder of a competitor, sought election to the Board
3) That the agreement is fair and reasonable under the
of Directors of MS Corporation. His nomination was
circumstances (Sec 32 Corp Code)
ALTERNATIVE ANSWER:
denied on the ground that he was ineligible to run for the
The dealership agreement is valid upon the assumption position. Seeking a nullification of the offending
that the same was approved by the BOD of NT Co disqualification provision, GK consults you about its
before it was signed and that such approval was made validity under the Corporation Code of the Phils. What
under the following conditions: would your legal advice be? (3%)
SUGGESTED ANSWER:
1) That the presence of Raphael, the owner of A Ent,
The provision in the amended by-laws disqualifying any
in the meeting of the BOD at which the agreement
stockholder who is also a director or stockholder of a
was approved was not necessary to constitute a
competing business from being elected to the Board of
quorum for such meeting;
Directors of MS Corp is valid. The corporation is
2) That the vote of Raphael was not necessary for the
empowered to adopt a code of by-laws for its
approval of the agreement;
government not inconsistent with the Corp Code. Such
3) That the agreement is fair and reasonable under the
disqualifying provision is not inconsistent with the Corp
circumstances (Sec 32 Corp Code)
Code.
members (1998)
members (2001)
Is a by-law provision of X Corporation “rendering which to invest the funds of the corporation. Robert
ineligible or if elected, subject to removal, a director if he wants the deadlock broken.
is also a director in a corporation whose business is in 1. What are the remedies available to Robert under the
competition with or is antagonistic to said corporation” Corp code to break the deadlock? Explain.
valid and legal? State your reasons. (5%). 2. Are there any remedies to prevent the paralyzation of
SUGGESTED ANSWER: the business available to Robert under PD 902-A while
Yes, the by-law provision is valid. It is the right of a the petition to break the deadlock is pending litigation?
corporation to protect itself against possible harm and Explain.
prejudice that may be caused by its competitors. The SUGGESTED ANSWER:
position of director is highly sensitive and confidential. 1. Robert can petition the SEC to arbitrate the dispute,
To say the least, to allow a person, who is a director in a with such powers as provided in Sec 104 of the Corp
corporation whose business is in competition with or is Code.
antagonistic to X Corporation, to become also a director 2. The SEC can appoint a rehabilitation receiver or a
in X Corporation would be harboring a conflict of management committee.
interest which is harmful to the latter (Gokongwei Jr v SEC
89 S 336 (1979); 97 S 78 (1980)). Closed Corporation; Restriction; Transfer of shares
(1994)
By-Laws; Validity; limiting qualifications of BOD Rafael inherited from his uncle 10,000 shares of Sta. Ana
members (2003) Corporation, a close corporation. The shares have a par
To prevent the entry of Marlo Enriquez, whom it value of P10.00 per share. Rafael notified Sta. Ana that
considered as one antagonistic to its interests, into its he was selling his shares at P70.00 per share. There being
Board of Directors, Bayan Corporation amended its no takers among the stockholders, Rafael sold the same
articles of incorporation and by-laws to add certain to his cousin Vicente (who is not a stockholder) for
qualifications of stockholders to be elected as members P700,000.
of its Board of Directors. When presented for approval
at a meeting of its stockholders duly called for the The Corporate Secretary refused to transfer the shares in
purpose, the amendments were overwhelmingly ratified. Vicente’s name in the corporate books because Alberto,
Marlo Enriquez brought suits against Bayan Corporation one of the stockholders, opposed the transfer on the
to question the amendments. Would the action prosper? ground that the same violated the by-laws. Alberto
Why? (4%) offered to buy the shares at P12.50 per share, as fixed by
SUGGESTED ANSWER: the by-laws or a total price of P125,000 only.
(per Dondee) The SC reiterated in the case of SMC vs. SEC
decided in April 11, 1979, that it is recognized by all While the by-laws of Sta. Ana provides that the right of
authorities that 'every corporation has the inherent power first refusal can be exercised “at a price not exceeding
to adopt by-laws 'for its internal government, and to 25% more than the par value of such shares, the Articles
regulate the conduct and prescribe the rights and duties of Incorporation simply provides that the stockholders
of its members towards itself and among themselves in of record “shall have preferential right to purchase said
reference to the management of its affairs.'" At common shares.” It is silent as to pricing.
law, the rule was "that the power to make and adopt by-
laws was inherent in every corporation as one of its Is Rafael bound by the pricing proviso under the by-laws
necessary and inseparable legal incidents. And it is settled of Sta. Ana Corporation?
throughout the United States that in the absence of SUGGESTED ANSWER:
positive legislative provisions limiting it, every private Yes. In a close corporation, the restriction as to the
corporation has this inherent power as one of its transfer of shares has to be stated/ annotated in the
necessary and inseparable legal incidents, independent of Articles of Incorporation, the By-Laws and the certificate
any specific enabling provision in its charter or in general of stock. This serves as notice to the person dealing with
law, such power of self-government being essential to such shares like Rafael in this case. With such notice, he
enable the corporation to accomplish the purposes of its is bound by the pricing stated in the By-laws.
creation." ALTERNATIVE ANSWER:
No, Rafael is not bound by the pricing proviso under the
Close Corporations; Deadlocks (1995) By-laws of Sta Ana Corporation. Under the corporation
Robert, Rey and Ben executed a joint venture agreement law, the restrictions on the right to transfer shares must
to form a close corporation under the Corp Code the appear in the articles of incorporation and in the by-laws
outstanding capital stock of which the three of them as well as in the certificate of stock, otherwise, the same
would equally own. They also provided therein that any shall not be binding on any purchaser thereof in good
corporate act would need the vote of 70% of the faith. Moreover the restriction shall not be more onerous
outstanding capital stock. The terms of the agreement than granting the existing stockholders or the
were accordingly implemented and the corresponding corporation the option to purchase the shares of the
close corporation was incorporated. After 3 years, transferring stockholder with such reasonable term or
Robert, Rey and Ben could not agree on the business in period stated therein.
Here, limiting the price to be paid, when the right of first Jennifer and Gabriel owned the controlling stocks in
refusal is exercised, to not more than 25% par value, MFF Co and CLO Inc, both family corporations. Due to
without any qualification whatsoever, is not in the serious disagreements, Jennifer assigned all her shares in
articles. It is merely stated in the By-laws. Therefore such MFF to Gabriel, while Gabriel assigned all his shares in
limitation shall not be binding on the purchaser. (GoSock CLO to Jennifer. Subsequently, Jennifer and CLO filed a
& Sons & Sy Gui Huat Inc v IAC 19 Feb 87 Min Res) complaint against Gabriel and MFF in the SEC seeking
to recover the corporate records and funds of CLO
Controversy; Intra-Corporate (1994) which Gabriel allegedly refused to turn over, and which
Because of disagreement with the BOD and a threat by remained in the offices of MFF.
the BOD to expel her for misconduct and inefficiency, Is there an intra-corporate controversy in this case?
Carissa offered in writing to resign as President and SUGGESTED ANSWER:
member of the BOD, and to sell to the company all her Yes, there is an intra-corporate controversy in this case.
shares therein for P300,000.00 Her offer to resign was The fact that, when the complaint against Gabriel and
“effective as soon as my shares are fully paid.” At its MFF was filed with the SEC (per 2006, RTC’s
meeting, the BOD accepted Carissa’s resignation, Jurisdiction), Jennifer and CLO were no longer
approved her offer to sell back her shares of stock to the stockholders of MFF did not divest the SEC (per 2006,
company, and promised to buy the stocks on a staggered RTC’s Jurisdiction) of its jurisdiction over the case
basis. Carissa was informed of the BOD Resolution in a inasmuch as Jennifer was a former stockholder of MFF
letter-agreement to which she affixed her consent. The and the controversy arose out of this relation. (SEC v CA
Company’s new President singed the promissory note. GR 93832 Aug 23 91; 201s124)
After payment P100,000 the company defaulted in paying
the balance of P200,000. Controversy; Intra-Corporate (2006)
What is an intra-corporate controversy? (8%)
Carissa wants to sue the Company to collect the balance. SUGGESTED ANSWER:
If you were retained by Carissa as her lawyer, where will An intra-corporate controversy is a conflict between
you file the suit? A) Labor Arbiter; b) RTC; or c) SEC? stockholders, members or partners and the corporation,
SUGGESTED ANSWER: association or partnership regarding the regulation of the
The RTC has jurisdiction over this case which involves corporation. The controversy must arise out of intra-
intra-corporate controversy. As of 2006, the applicable corporate or partnership relations of the parties; or
rule is that there is a TRANSFERRED JURISDICTION between such corporation, partnership or association and
under Sec. 5.2 of the SRC, the Commission’s jurisdiction the State insofar as it concerns their individual franchises.
over all cases enumerated under PD 902-A sec. 5 has It is further required that the dispute be intrinsically
been transferred to the Courts of general jurisdiction or connected with the regulation of the corporation (Speed
the appropriate Regional Trial Court. 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).
In 1970, Magno joined AMD Co as a Junior Accountant. Is the Securities and Exchange Commission the
He steadily rose from the ranks until he became AMD’s venue for actions involving intra-corporate
Executive VP. Subsequently, however because of his controversies? (2%)
involvement in certain anomalies, the AMD BOD SUGGESTED ANSWER:
considered him resigned from the company due to loss No, pursuant to Subsection 5.2 of the Securities Regu-
of confidence. lation Code, the quasi-judicial jurisdiction of the
Securities and Exchange Commission to hear corporate
Aggrieved, Magno filed a complaint in the SEC cases, including intra-corporate controversies, under
questioning the validity of his termination, and seeking Section 5 of Pres. Decree No. 902-A, has been expressly
reinstatement to his former position, with backwages, transferred to the designated Regional Trial Court.
vacation and sick leave benefits, 13th month pay and Pursuant to a memorandum circular issued by the
Christmas bonus, plus moral and exemplary damages, Supreme Court, only particularly designated RTC special
attorney’s fees and costs. AMD filed a motion to dismiss, commercial courts in each judicial region have original
arguing that the SEC has no jurisdiction over cases of and exclusive jurisdiction over such cases (See Intestate
illegal dismissal, and has no power to award damages. Estate of Alexander T. Ty v. Court of Appeals, G.R. No. 112872,
Should the motion to dismiss be granted? Explain. April 19, 2001).
SUGGESTED ANSWER:
As of 2006, the applicable rule is that there is a Controversy; Intra-corporate; Jurisdiction (1997)
TRANSFERRED JURISDICTION under Sec. 5.2 of Juan was a stockholder of X Co. He owned a total of 500
the SRC, the Commission’s jurisdiction over all cases shares evidenced by Cert of Stock No 1001. He sold the
enumerated under PD 902-A sec. 5 has been transferred shares to Pedro. After getting paid, Juan indorsed and
to the Courts of general jurisdiction or the appropriate delivered said Certificate of Stock No 1001 to Pedro. The
REGIONAL TRIAL COURT. following day, Juan went to the offices of the corporation
and claimed that his Certificate of Stock No 1001 was
Controversy; Intra-Corporate (1996) lost and that, despite diligent efforts, the certificate could
not be located. The formalities prescribed by law for the stock may include labor performed for or services
replacement of the “lost” certificate were complied with. actually rendered to the corporation.
Eventually X Co issued in substitution of the “lost”
certificate, Cert of Stock No 2002. Juan forthwith Corporation: Right of Repurchase of Shares; Trust Fund
transferred for valuable consideration the new certificate Doctrine (2005)
to Jose who knew nothing of the previous sale to Pedro. Under what conditions may a stock corporation acquire
In time, the corporation was confronted with the its own shares? (2%)
conflicting claims of Jose and Pedro. The BOD of X Co SUGGESTED ANSWER:
invited you to enlighten them on these questions; viz: In line with the trust fund doctrine that generally renders
a) If a suit were to be initiated in order to resolve the it unlawful for the corporation to return assets to the
controversy between Pedro and Jose, should the stockholders representing capital, a corporation may
matter be submitted to the SEC or to the regular acquire its own shares only when there exists in the books
courts? unrestricted retained earnings to cover the repurchase of shares. The
b) Between Jose and Pedro, whom should the purpose of the repurchase of shares must be a legitimate
corporation so recognize as the rightful stockholder? business purpose of the corporation, such as to:
1. ELIMINATE fractional shares arising out of stock
How would you respond to the above queries? dividends;
SUGGESTED ANSWER: 2. COLLECT or COMPROMISE an indebtedness to
a) The matter should be submitted to the regular courts – the corporation arising out of unpaid subscription in
specifically in the Regional Trial Court where the a delinquency sale;
principal office of the corporation is located. The 3. to PURCHASE delinquent shares sold during the
controversy between Pedro and Jose is not an intra- sale; and
corporate controversy. 4. to PAY dissenting or withdrawing stockholders
entitled to such payment under the Corporation
b) If there is no over-issuance of shares resulting from Code. (Sees. 41 and 82, Corporation Code)
the two-transactions of Juan, the corporation should
recognize both Pedro and Jose as rightful stockholders. Corporation: Sole Proprietorship (2004)
This is without prejudice to the right of the corporation YKS Trading filed a complaint for specific performance
to claim against Juan for the value of the shares which with damages against PWC Corporation for failure to
Juan sold to Jose. deliver cement ordered by plaintiff. In its answer, PWC
denied liability on the ground, inter alia, that YKS has no
Corporation Sole; Definition (2004) personality to sue, not being incorporated, and that the
What is a corporation sole? President of PWC was not authorized to enter into a
SUGGESTED ANSWER: contract with plaintiff by the PWC Board of Directors,
Section 110 of the Corporation Code defines a hence the contract is ultra vires. YKS Trading replied
"corporation sole" as one formed for the purpose of that it is a sole proprietorship owned by YKS, and that
administering and managing, as trustee, the affairs, the President of PWC had made it appear in several
property and temporalities of any religious denomination, letters presented in evidence that he had authority to sign
sect or church. It is formed by the chief archbishop, contracts on behalf of the Board of Directors of PWC.
bishop, priest, minister, rabbi or other presiding elder of Will the suit prosper or not? Reason briefly. (5%)
such religious denomination, sect or church. SUGGESTED ANSWER:
Yes the suit will prosper. As a sole proprietorship,
Corporation: Issuance of shares of stock to pay for the the proprietor of YKS Trading has the capacity to act
services (2005) and the personality to sue PWC. It is not necessary for
Janice rendered some consultancy work for XYZ YKS Trading to be incorporated before it can sue. On
Corporation. Her compensation included shares of stock the other hand, PWC is estopped from asserting that its
therein. Can XYZ Corporation issue shares of stock to President had no authority to enter into the contract,
pay for the services of Janice as its consultant? Discuss considering that, in several of PWC's letters, it had
your answer. (2%) clothed its President with apparent authority to deal with
SUGGESTED ANSWER: YKS Trading.
Yes, provided the approval of stockholders representing
two-thirds (2/3) of the outstanding capital stock is Corporation; Articles of Incorporation (1990)
obtained. Although the facts indicate that the consultancy The articles of incorporation to be registered in the SEC
work has already been "rendered" constituting contained the following provisions --
"previously contracted debt," under Section 39 of the a) “First Article. The name of the corporation shall be
Corporation Code, the pre-emptive rights of existing Toho Marketing Company.”
stockholders need not be respected "in payment of a
previously contracted debt," but only with the indicated b) “Third Article. The principal office of such
stockholders' approval. Under Section 62 of the corporation shall be located in Region III, in such
Corporation Code, consideration for the issuance of municipality therein as its Board of Directors may
designate.”
stockholders representing at least two-thirds (2/3) of the
c) “Seventh Article. The capital stock of the corporation outstanding capital stock, as mandated under Sec. 40 of
is One Million Pesos (P1,000,000) Philippine Currency.” the Corporation Code. The sale would be void in case of
failure to meet the twin approvals. (Islamic Directorate of the
What are your comments and suggested changes to the Philippines v. Court of Appeals, G.R. No. 117897, May 14, 1997)
proposed articles? ALTERNATIVE ANSWER:
SUGGESTED ANSWER: Divine Corporation can sell the items to its competitor,
a) On the First Article, I would suggest that the Top Grade Fashion Corporation. However, Divine
corporate name indicate the fact of incorporation by Corporation must comply with Sections 3, 4 and 5 of the
using either “Toho Marketing Corporation” or “Toh Bulk Sales Law, namely: (1) deliver sworn statement of
Marketing Company, Incorporated.” the names and addresses of all the creditors to whom the
vendor or mortgagor may be indebted together with the
b) The Third Article should indicate the City or the amount of indebtedness due or owing to each of the said
Municipality and the Province in the Philippines, and creditors; (2) apply the purchase or mortgage money to
not merely the region or as its BOD may later the pro-rata payment of bona fide claims of the creditors;
designate, to be its place of principal office. and (3) make a full detailed inventory of the stock of
goods, wares, merchandise, provisions or materials, in
c) The Seventh Article must additionally point out the bulk, and notify every creditor at least ten (10) days
number of shares into which the capital stock is before transferring possession.
divided, as well as the par value thereof or a
statement that said stock or a portion thereof are 3) How would you protect the interests of the creditors
without par value. (Sec 14 & 15 Corp Code) of Divine Corporation?
SUGGESTED ANSWER:
Corporation; Bulk Sales Law (2005) Considering that Divine Corporation has entered a de
Divine Corporation is engaged in the manufacture of facto stage of dissolution with the ceasing of its
garments for export. In the course of its business, it was operations, I would invoke on behalf of the creditors the
able to obtain loans from individuals and financing protection under Sec. 122 of the Corporation Code, that
institutions. However, due to the drop in the demand for the proceeds of the sale should first be applied towards
garments in the international market, Divine Corporation the settlement of the obligations of the corporation,
could not meet its obligations. It decided to sell all its before any amount can be paid to the stockholders.
ALTERNATIVE ANSWER:
equipment such as sewing machines, perma-press
Under the Bulk Sales Law, if the proceeds are not;
machines, high speed sewers, cutting tables, ironing
applied proportionately towards the settlement of the
tables, etc., as well as its supplies and materials to Top
accounts of the corporate debts, to have the sale of the
Grade Fashion Corporation, its competitor. (5%)
subject matters to Top Grade Fashion Corp., as being
1) How would you classify the transaction?
SUGGESTED ANSWER:
"fraudulent and void" and obtain satisfaction from the
The transactions would constitute a sale of "substantially properties which are deemed to still be owned by Divine
all of the assets of Divine Corporation complying with Corporation in spite of delivery to the buyer. The
the test under Sec. 40 of the Corporation Code, the creditors can collect on the credit against Divine
transactions not being "in the ordinary course of Corporation, and if it cannot pay, the creditors can apply
business," and one "thereby the corporation would be for attachment on the property fraudulently sold. (See
rendered incapable of continuing the business or People v. Mapoy, G.R. No. 48836, September 21, 1942)
accomplishing the purpose for which it was
incorporated." 4) In case Divine Corporation violated the law, what
ALTERNATIVE ANSWER: remedies are available to Top Grade Fashion
It is a sale and transfer in bulk in contemplation of the Corporation against Divine Corporation?
Bulk Sales Law. Under Sec. 2 of the Bulk Sales Law, a SUGGESTED ANSWER:
bulk sale includes any sale, transfer, mortgage, or If the sale by Divine Corporation did not obtain the
assignment of all, or substantially all, of the business or required two-thirds (2/3) vote of the outstanding capital
trade theretofore conducted by the vendor, mortgagor, stock, then the transaction is void. (Islamic Directorate of the
Philippines v. Court of Appeals, G.R. No, 117897, May 14, 1997)
transferor, or assignor. This is exactly what happened in
Top Grade Fashion Corporation can have the purchase
the case at bar.
declared void and recover the purchase price paid, as well
as damages against the directors and officers who
2) Can Divine Corporation sell the aforesaid items to
undertook the transaction in violation of the law.
its competitor, Top Grade Fashion Corporation? ALTERNATIVE ANSWER:
What are the requirements to validly sell the items? For violation of the Bulk Sales Law, the principal officers
Explain. of the Divine Corporation can be held criminally liable.
SUGGESTED ANSWER:
In addition, Top Grade can sue Divine Corporation for
For such a transaction to be valid, it requires not only the
damages. Violation of the Bulk Sales Law would render
favorable resolution of the Board of Directors of Divine
such a sale fraudulent and void. Since Top Grade would
Corporation, but also the ratificatory vote of
be compelled to return the goods to Divine Corporation,
Top Grade can compel Divine Corporation to return the
purchase price and pay damages. b) No, my answer will not be the same. In a non-stock
corporation, the members are not entitled to share in the
Corporation; By-laws (2001) profits of the corporation because all present and future
Suppose that the by-laws of X Corp, a mining firm profits belong to the corporation. In converting the non-
provides that “The directors shall be relieved from all stock corporation to a stock corporation by a mere
liability for any contract entered into by the corporation amendment of the Articles of Incorporation, the non-
with any firm in which the directors may be interested.” stock corporation is deemed to have distributed an asset
Thus, director A acquired claims which overlapped with of the corporation – i.e. its profits, among its members,
X’s claims and were necessary for the development and without a prior dissolution of the corporation. Under Sec
operation of X’s mining properties. 122, the non-stock corporation must be dissolved first.
a) Is the by-law provision valid? Why? (3%)
b) What happens if director A is able to consummate (Observation: The question is rather vague more particularly question
1b. The question does not specify that the conversion is from a non-
his mining claims over and above that of the stock corporation to a stock corporation. The candidate is likely to be
corporation’s claims? (2%) confused because of the words “if at the inception, X Co is a nonstock
SUGGESTED ANSWER: corporation.” Hence, any answer along the same line should be treated
a) No. It is in violation of Section 32 of the Corp Code. with liberality)
b) A should account to the corporation for the profits Corporation; De Facto Corporation (1994)
which he realized from the transaction. He grabbed the A corporation was created by a special law. Later, the law
business opportunity from the corporation. (Section 34, creating it was declared invalid. May such corporation
Corp Code) claim to be a de facto corporation?
SUGGESTED ANSWER:
Corporation; Commencement; Corporate Existence No. A private corporation may be created only under the
(2003) Corporation Code. Only public corporations may be
1. When does a corporation acquire corporate created under special law.
existence?
SUGGESTED ANSWER: Where a private corporation is created under a special
law, there is no attempt at a valid incorporation. Such
2. CBY & Co., Inc., registered with the Securities and corporation cannot claim a de facto status.
Exchange Commission its articles of incorporation.
It failed, however, for one reason or another, to Corporation; Dissolution; Methods of Liquidation (2001)
have its by-laws filed with, and registered by, the X Corporation shortened its corporate life by amending
Commission. It nevertheless transacted and did its Articles of Incorporation. It has no debts but owns a
business as a corporation for sometime. A suit was prime property located in Quezon City. How would the
commenced by its minority stockholders assailing said property be liquidated among the five stockholders
the continued existence of CBY & Co., Inc., because of said corporation? Discuss two methods of liquidation.
of the non-adoption and registration of its by-laws. (5%)
Would the action prosper? Why? (6%) SUGGESTED ANSWER:
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
Corporation; Conversion of Stock Corporation (2001) dividing or partitioning it among themselves in any two
X company is a stock corporation composed of the of the following ways:
Reyes family engaged in the real estate business. Because 1) by PHYSICAL DIVISION or PARTITION based on
of the regional crisis, the stockholders decided to convert the proportion of the values of their stockholdings; or
their stock corporation into a charitable non-stock and
non-profit association by amending the articles of 2) SELLING THE PROPERTY to a third person and
incorporation. dividing the proceeds among the five stockholders in
a) Could this be legally done? Why? (3%) proportion to their stockholdings; or
b) Would your answer be the same if at the inception,
X Company is a non-stock corporation? Why? (2%) 3) after the determination of the value of the property, by
SUGGESTED ANSWER: ASSIGNING or TRANSFERRING THE PROPERTY
a) Yes, it can be legally done. In converting the stock to one stockholder with the obligation on the part of said
corporation to a non-stock corporation by a mere stockholder to pay the other four stockholders the
amendment of the articles of incorporation, the stock amount/s in proportion to the value of the stockholding
corporation is not distributing any of its assets to the of each.
stockholders. On the contrary, the stockholders are
deemed to have waived their right to share in the profits Corporation; Incorporation; Requirements (2006)
of the corporation which is a gain not a loss to the What is the minimum and maximum number of in-
corporation. corporators required to incorporate a stock corporation?
Is this also the same minimum and maximum number of Center, Pasig, MM while its factory processing leather
directors required in a stock corporation? (2.5%) products, is in Manila. The corporation holds its annual
SUGGESTED ANSWER: stockholders’ meeting at the Manila Hotel in Manila and
Under Section 10 of the Corporation Code, any number its BOD meeting at a hotel in Makati MM. The by-laws
of natural persons not less than five (5) but not more are silent as to the place of meetings of the stockholders
than fifteen (15), all of legal age and a majority of whom and directors.
are residents of the Philippines, may form a private 1) Who shall preside at the meeting of the directors?
corporation for any lawful purpose. 2) Can Ting, a stockholder, who did not attend the
stockholders’ annual meeting in Manila, question the
This is the same minimum and maximum number of validity of the corporate resolutions passed at such
directors required in a stock corporation under Section meeting?
14(6) of the Corporation Code. 3) Can the same stockholder question the validity of
the resolutions adopted by the BOD at the meeting
Corporation; Incorporation; Residency Requirements held in Makati?
(2006) SUGGESTED ANSWER:
Must all incorporators and directors be residents of the 1) The President presides over the meeting of the
Philippines? (2.5%) directors, if there is no position of Chairman provided in
SUGGESTED ANSWER: the By-Laws. If there is the position of Chairman
Not all directors and incorporators need to be residents provided in the By-Laws, the Chairman presides over the
of the Philippines. Under Section 10 of the Corporation meeting of the Directors (Sec 54 Corp Code)
Code, only a majority of the incorporators need to be
residents of the Philippines. As provided in Section 23 of 2) No. The law provides that the annual stockholders’
the same Code, only a majority of the members of the meeting shall be held in the city or municipality where
Board of Directors need to be residents of the the principal office of the Corporation is located. For this
Philippines. purpose, the law also provides that Metro Manila is
considered a city or municipality. Since the principal
Corporation; Incorporation; Requisites (2002) place of business of MIC is Pasig, MM, the holding of
You have been asked to incorporate a new company to the annual stockholders meeting in Manila is proper. (Sec
be called FSB Savings & Mortgage Bank, Inc. List the 51 Corp)
documents that you must submit to the Securities and
Exchange Commission (SEC) to obtain a certificate of 3) No. The law allows the BOD to hold its meeting
incorporation for FSB Savings & Mortgage Bank, Inc. anywhere in the Philippines. The holding of the BOD
(5%) meeting in Makati was proper and the validity of the
SUGGESTED ANSWER: resolutions adopted by the Board in that meeting cannot
The documents to be submitted to the Securities and be questioned. (Sec 53 Corp code)
Exchange Commission (SEC) to incorporate a new
company to be called FSB Savings & Mortgage Bank, Corporation; Nationality of Corporation (1998)
Inc., to obtain the certificate of incorporation for said What is the nationality of a corporation organized and
company, are: incorporated under the laws of a foreign country, but
1) Articles of Incorporation owned 100% by Filipinos? (2%)
2) Treasurer’s Affidavit; SUGGESTED ANSWER:
3) Certificate of Authority from the Monetary Board of Under the control test of corporate nationality, this
the BSP; foreign corporation is of Filipino Nationality. Where
4) Verification slip from the records of the SEC there are grounds for piercing the veil of corporate entity,
whether or not the proposed name has already been that is, disregarding the fiction, the corporation will
adopted by another corporation, partnership or follow the nationality of the controlling members or
association; stockholders, since the corporation will then be
5) Letter undertaking to change the proposed name if considered as one and the same.
already adopted by another corporation, partnership
or association; Corporation; Non-Stock Corporation (1993)
6) Bank certificate of deposit concerning the paid-up The AB Memorial Foundation was incorporated as a
capital; non-profit, non-stock corporation in order to establish
7) Letter authorizing the SEC or Monetary Board or its and maintain a library and museum in honor of the
duly authorized representative to examine the bank deceased parents of the incorporators. Its Articles of
records regarding the deposit of the paid-up capital; Incorporation provided for a board of trustees composed
8) Registration Sheet; of 5 incorporators, which authorized to admit new
members. The Articles of Incorporation also allow the
Corporation; Meetings; BOD & Stockholders (1993) foundation to receive donations from members. As of
Under the Articles of Incorporation of Manila Industrial Jan 30, 1993, 60 members had been admitted by the
Corp, its principal place of business shall be in Pasig, BOT.
MM. The principal corporate offices are at the Ortigas
1) Can the Foundation use the funds donated to it by its incidental to, or necessary for the existence of the
members for purchase of food and medicine for corporation.
distribution to the victims of the Pinatubo eruption?
2) Can the Foundation operate a specialty restaurant that SUGGESTED ANSWER:
caters to the general public in order to augment its funds? 2.a) The procedure in securing the approval of the BOD
3) One of the original trustees died and the other two is as follows:
resigned because they immigrated to the US. How will a. a notice of the BOD should be sent to all the
the vacancies in the BOT be filled? directors. The notice should state the purpose of the
SUGGESTED ANSWER: meeting.
1) Yes, (Sec 36(9) of the Corp Code) as long as the b. At the meeting, each of the project should be
amount of donation is reasonable. approved by a majority of the BOD (not merely a
majority of those present at the meeting)
2) If the purposes of the corporation are limited to the
establishment and maintenance of the library and 2.b) The procedure in securing the approval of the
museum as stated in the problem, the foundation cannot stockholders is as follows:
operate a specialty restaurant that caters to the general a. Written notice of the proposed investment and the
public. In such case, the action of the foundation will be time and place of the stockholders’ meeting should
ultra vires. be sent to each stockholder at his place of residence
ALTERNATIVE ANSWER: as shown on the books of the corporation and
2) If the act of the corporation is justified by the deposited to the addressee in the post office with
secondary purpose of the corporation which includes the postage prepaid, or served personally.
act of operating a restaurant, the foundation will be b. At the meeting, each of the projects should be
within its power to do so. approved by the stockholders representing at least
2/3 of the outstanding capital stock. (Sec 42 BP 68)
3) Since there are only 2 of the members of the BOT
remaining and there is no quorum, the vacancies will Corporation; Power to Invest Corporate Funds in another
have to be filled up in a special meeting of the members Corporation (1996)
(sec 29 Corp) When may a corporation invest its funds in another
corporation or business or for any other purposes?
Corporation; Power to Invest Corporate Funds for other SUGGESTED ANSWER:
Purpose (1995) A corporation may invest its funds in another
Stikki Cement Co was organized primarily for cement corporation or business or for any other purpose other
manufacturing. Anticipating substantial profits, its than the primary purpose for which it was organized
President proposed that Stikki invest in a) a power plant when the said investment is approved by a majority of
project, b) a concrete road project, and c) quarry the BOD and such approval is ratified by the
operations for limestone in the manufacture of cement. stockholders representing at least 2/3 of the outstanding
1) What corporate approvals or votes are needed for capital stock. Written notice of the proposed investment
the proposed investments? Explain. and the date, time and place of the stockholders’ meeting
2) Describe the procedure in securing these approvals. at which such proposal will be taken up must be sent to
SUGGESTED ANSWER: each stockholder. (Sec 42 Corp Code)
1. Unless the power plant and the concrete road project
are reasonable necessary to the manufacture of cement Corporation; Recovery of Moral Damages (1998)
by Stikki (and they do not appear to be so), then the In a complaint filed against XYZ Corporation, Luzon
approval of said projects by a majority of the BOD and Trading Corporation alleged that its President & General
the ratification of such approval by the stockholders Manager, who is also a stockholder, suffered mental
representing at least 2/3 of the outstanding capital stock anguish, fright, social humiliation and serious anxiety as a
would be necessary. result of the tortuous acts of XYZ Corporation.
As for the quarry operations for limestone, the same is an In its counterclaim, XYZ Co claimed to have suffered
indispensable ingredient in the manufacture of cement moral damages due to besmirched reputation or goodwill
and may, therefore, be considered reasonably necessary as a result of Luzon Trading Co’s complaint.
to accomplish the primary purpose of Stikki. In such 1) May Luzon Trading Co recover damages based on
case, only the approval of the BOD would be necessary the allegations of the complaint? (2%)
(Sec 42 BP 68) 2) May XYZ Co recover moral damages? (3%)
ALTERNATIVE ANSWER: SUGGESTED ANSWER:
1. The majority vote of the BOD is necessary. The No. A corporation, being an artificial person which has
investment in a) a power plant project, b) a concrete road no feelings, emotions or senses, and which cannot
project, and c) quarry operations of limestone used in the experience physical suffering or mental anguish, is not
manufacture of cement, is within the express or implied entitled to moral damages.
power of the corporation, or at least the same is ALTERNATIVE ANSWER:
Yes. When a juridical person has a good reputation that stopping payment thereof, Seldon was acting in his
is debased, resulting in social humiliation, moral damages capacity as an officer of Turtle. He was not acting in his
may be awarded. Moreover, goodwill can be considered personal capacity. Furthermore, no facts have been
an asset of the corporation. provided which would indicate that the action of Seldon
was dictated by an intent to defraud Shamron by himself
TAKE NOTE: In the case of FBN Inc. vs AMEC, or in collusion with Turtle. Having acted in what he
January 17, 2005, the SC ruled that; considered as his duty as an officer of the corporation,
FBNI contends that AMEC is not entitled to moral Seldon should not be held personally liable.
damages because it is a corporation.
A juridical person is generally not entitled to moral PR Co owns a beach resort with several cottages. Jaime,
damages because, unlike a natural person, it cannot the President of PR, occupied one of the cottages for
experience physical suffering or such sentiments as residential purposes. After Jaime’s term expired, PR
wounded feelings, serious anxiety, mental anguish or wanted to recover possession of the cottage. Jaime
moral shock. The Court of Appeals cites Mambulao refused to surrender the cottage, contending that as a
Lumber Co. v. PNB, et al. to justify the award of moral stockholder and former President, he has a right to
damages. However, the Court's statement in Mambulao possess and enjoy the properties of the corporation.
that "a corporation may have a good reputation which, if Is Jaime’s contention correct? Explain.
besmirched, may also be a ground for the award of moral SUGGESTED ANSWER:
damages" is an obiter dictum. Jaime’s contention is not correct. Jaime may own shares
of stock in PR Corp but such ownership does not entitle
Nevertheless, AMEC's claim for moral damages falls him to the possession of any specific property of the
under item 7 of Article 2219 of the Civil Code. This corporation or a definite portion thereof. Neither is he a
provision expressly authorizes the recovery of moral co-owner of corporate property. Properties registered in
damages in cases of libel, slander or any other form of the name of the corporation are owned by it as an entity
defamation. Article 2219(7) does not qualify whether the separate and distinct from its stockholders.
plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly Stockholders like Jaime only own shares of stock in the
complain for libel or any other form of defamation and corporation. Such shares of stock do not represent
claim for moral damages. specific corporate property. (Rebecca Boyer-Roxas v CA GR
100866 Jul 14, 92 211s470)
Moreover, where the broadcast is libelous per se, the law
implies damages. In such a case, evidence of an honest Corporation; Separate Juridical Personality (1996)
mistake or the want of character or reputation of the Richard owns 90% of the shares of the capital stock of
party libeled goes only in mitigation of damages. Neither GOM Co. On one occasion, GOM represented by
in such a case is the plaintiff required to introduce Richard as President and General Manager executed a
evidence of actual damages as a condition precedent to contract to sell a subdivision lot in favor of Tomas. For
the recovery of some damages. In this case, the failure of GOM to develop the subdivision, Tomas filed
broadcasts are libelous per se. Thus, AMEC is entitled to an action for rescission and damages against GOM and
moral damages. 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
Ronald Sham doing business under the name of
and distinct from that of GOM. If he singed the contract
SHAMRON Machineries (Shamron) sold to Turtle
to sell, he did so as the President and General Manager
Mercantile (Turtle) a diesel farm tractor. In payment,
of GOM and not in his personal capacity. Mere
Turtle’s President and Manager Dick Seldon issued a
ownership by Richard of 90% of the capital stock of
check for P50th in favor of Shamron. A week later,
GOM is not of itself sufficient ground to disregard his
Turtle sold the tractor to Briccio Industries (Briccio) for
separate legal personality absent a showing, for example
P60th. Briccio discovered that the engine of the tractor
that he acted maliciously or in bad faith (EPG Const Co v
was reconditioned so he refused to pay Turtle. As a
CA GR 103372 Jn 22,92 210s230)
result, Dick Seldon ordered “Stop Payment” of the check
issued to Shamron.
As a result of perennial business losses, a corporation’s
Shamron sued Turtle and Dick Seldon. Shamron
net worth has been wiped out. In fact, it is now in
obtained a favorable judgment holding co-defendants
negative territory. Nonetheless, the stockholders did not
Turtle and Dick Seldon jointly and severally liable.
like to give up. Creditor-banks, however, do not share
Comment on the decision of the trial court. Discuss fully.
SUGGESTED ANSWER:
the confidence of the stockholders and refuse to grant
The trial court erred in holding Dick Seldon, President more loans.
and GM of Turtle, jointly and severally liable with Turtle. a) What tools are available to the stockholders to
In issuing the check issued to Shamron and, thereafter, replenish capital? (3%)
b) Assuming that the corporation continues to operate Philippines (BP 68). Incorporator S was elected director
even with depleted capital, would the stockholders and president – general manager. Part of his emolument
or the managers be solidarily liable for the is a Ford Expedition, which the corporation owns. After
obligations incurred by the corporation? Explain. a few years, S lost his corporate positions but he refused
(3%) to return the motor vehicle claiming that as a stockholder
SUGGESTED ANSWER: with a substantial equity share, he owns that portion of
a) In the face of the refusal of the creditor-banks to grant the corporate assets now in his possession. Is the
more loans, the following are tools available to the contention of S valid? Explain (5%)
stockholders to replenish capital, to wit: SUGGESTED ANSWER:
1) additional subscription to shares of stock of the No. The contention of S is not valid. The Ford
corporation by stockholders or by investors; Expedition is owned by the corporation. The corporation
2) advances by the stockholders to the has a legal personality separate and distinct from that of
corporation; its stockholder. What the corporation owns is its own
3) payment of unpaid subscription by the property and not the property of any stockholder even
stockholders. how substantial the equity share that stockholder owns.
SUGGESTED ANSWER:
b) No. As a general rule, the stockholders or the Corporation; Set-Off; Unpaid Subscription (1994)
managers cannot be held solidarily liable for the Victor was employed in MAIA Corporation. He
obligations incurred by the corporation. The corporation subscribed to 1,500 shares of the corporation at P100 per
has a separate and distinct personality from that of the share or a total of P150,000. He made an initial down
stockholders or managers. The latter are presumed to be payment of P37,500.00. He was appointed President and
acting in good faith in continuing the operation of the General Manager. Because of his disagreement with the
corporation. The obligations incurred by the corporation BOD, he resigned and demanded payment of his unpaid
are those of the corporation which alone is liable salaries, his cost of living allowance, his bonus, and
therefor. However, when the corporation is already reimbursement of his gasoline and representation
insolvent, the directors and officers become trustees of expenses.
the business and assets of the corporation for the benefit
of the creditors and are liable for negligence or MAIA Corporation admits that it owed Victor P40,000.
mismanagement. but told him that this will be applied to the unpaid
balance of his subscription in the amount of P100,000.00
Corporation; Separate Juridical Personality (2000) There was no call or notice for the payment of the
Marulas Creative Technology Inc., an e-business unpaid subscription. Victor questioned the set-off.
enterprise engaged in the manufacture of computer 1) May MAIA set-off the unpaid subscription with
media accessories; rents an office and store space at a victor’s claim for salaries?
commercial building owned by X. Being a start-up 2) Would your answer be the same if indeed there had
company, Marulas enjoyed some leniency in its rent been a call for the unpaid subscription?
payments; but after three years, X put a stop to it and SUGGESTED ANSWER:
asked Marulas president and general manager, Y, who is a 1) No. MAIA cannot setoff the unpaid subscription with
stockholder, to pay the back rentals amounting to a Victor’s claim for salaries. The unpaid subscription is not
hundred thousand pesos or to vacate the premises at the yet due as there is no call.
end of the month. Marulas neither paid its debt nor
vacated the premises. X sued Marulas and Y for 2) Yes. The reason is that Victor is entitled to the
collection of the unpaid rentals, plus interest and costs of payment of his salaries which MAIA has no right to
litigation. Will the suit prosper against X? Against Y? withhold in payment of unpaid subscription. To do so
(5%) would violate Labor Laws (Apodaco v NLRC 172 S 442)
SUGGESTED ANSWER:
Yes, the suit will prosper against Marulas. It is the one Corporation; Stock Corporation (2001)
renting the office and store space, as lessee, from the “XY” is a recreational club which was organized to
owner of the building, X, as lessor. operate a golf course for its members with an original
authorized capital stock of P100M. The articles of
But the suit against Y will not prosper. Y, as president incorporation nor the by-laws did not provide for
and general manager, and also stockholder of Marulas distribution of dividends although there is a provision
Creative Technology, Inc., has a legal personality separate that after its dissolution, the assets shall be given to a
and distinct from that of the corporation. The liability of charitable corporation. Is “XY” a stock corporation?
the corporation is that of the corporation and not that of Give reasons for your answer? (5%)
its officers and stockholders who are not liable for SUGGESTED ANSWER:
corporate liabilities. XY is a stock corporation because it is organized as a
stock corporation and there is no prohibition in its
Corporation; Separate Juridical Personality (2000) Articles of Incorporation or its by-laws for it to declare
Nine individuals formed a private corporation pursuant dividends. When a corporation is organized as a stock
to the provisions of the Corporation Code of the corporation and its articles of Incorporation or By-Laws
are silent, the corporation is deemed to have the power SUGGESTED ANSWER:
to declare dividends under Sec 43. Since it has the power Valid
to declare dividends, XY is a stock corporation.
3) XL Foods Corporation guaranteed the loan of its
The provision of the Articles of Incorporation that at sister company XL Meat Products, Inc.
dissolution the assets of the corporation shall be given to SUGGESTED ANSWER:
a charitable corporation does not prohibit the Void – This is an ultra vires act on part of XL Foods
corporation from declaring dividends before dissolution. Corporation, and is not one of the powers provided for
in Sec. 36 of the Corporation Code.
The stockholders of People Power Inc (PPI) approved Corporation; Voluntary Dissolution (2002)
two resolutions in a special stockholders’ meeting: Name three (3) methods by which a stock corporation
a) Resolution increasing the authorized capital stock of may be voluntarily dissolved. Explain each method. (5%)
SUGGESTED ANSWER:
PPI; and
The three (3) methods by which a stock corporation may
b) Resolution authorizing the BOD to issue, for cash
be voluntarily dissolved are:
payment, the new shares from the proposed capital
1) Voluntary Dissolution where no creditors are
stock increase in favor of outside investors who are
affected. This is done by a majority vote of the
non-stockholders.
directors, and resolution of at least 2/3 vote of
stockholders, submitted to the Securities and
The foregoing resolutions were approved by
Exchange Commission.
stockholders representing 99% of the total outstanding
2) Voluntary dissolution where creditors are affected.
capital stock. The sole dissenter was Jimmy Morato who
This is done by a petition for dissolution which must
owned 1% of the stock.
be filed with the Securities and Exchange
1. Are the resolutions binding on the corporation and its
Commission, signed by a majority of the members
stockholders including Jimmy Morato, the dissenting
of the board of directors, verified by the president or
stockholder? (3%)
secretary, and upon affirmative vote of stockholders
2. What remedies, if any, are available to Morato? (2%)
SUGGESTED ANSWER:
representing at least 2/3 of the outstanding capital
1. No. The resolutions are not binding on the stock.
corporation and its stockholders including Jimmy 3) Dissolution by shortening of the corporate term.
Morato. While these resolutions were approved by the This is done by amendment of the articles of
stockholders, the directors’ approval, which is required incorporation.
by law in such case, does not exist.
Corporation; Voting Trust Agreement (1992)
2. Jimmy Morato can petition the SEC (Now RTC) to A distressed company executed a voting trust agreement
declare the 2 resolutions, as well as any and all actions for a period of three years over 60% of its outstanding
taken by the BOD thereunder, null and void. 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
Which of the following corporate acts are valid, void, or
foreclosed the mortgaged properties, and as the highest
voidable? Indicate your answer by writing the paragraph
bidder, acquired said properties and assets of the
number of the query, followed by your corresponding
Company.
answer as “Valid,” “Void,” or “Voidable,” as the case
may be. If your answer is “Void,” explain your answer. In
The three-year period prescribed in the Voting Trust
case of a “Voidable” answer, specify what conditions
Agreement having expired, the company demanded the
must be present or complied with to make the corporate
turn-over and transfer of all its assets and properties,
act valid. (5%)
including the management and operation of the
1) XL Foods Corporation, which is engaged in the fast-
Company, claiming that under the Voting Trust
food business, entered into a contract with its
Agreement, the Bank was constituted as trustee of the
President Jose Cruz, whereby the latter would supply
management and operations of the Company.
the corporation with its meat and poultry
requirements.
SUGGESTED ANSWER:
Does the demand of the Company tally with the concept
Voidable – A contract of the corporation with one or of a Voting Trust Agreement? Explain briefly.
SUGGESTED ANSWER:
more of its directors or trustees or officers is voidable, at
The demand of the company does not tally with the
the option of such corporation (Sec 32, Corporation
concept of a Voting Trust Agreement. The Voting Trust
Code).
Agreement merely conveys to the trustee the right to
vote the shares of grantor/s. The consequence of
2) The Board of Directors of XL Foods Corporation
foreclosure of the mortgaged properties would be alien
declared and paid cash dividends without approval
to the Voting Trust Agreement and its effects.
of the stockholders.
committed the breach of trust against the interests of the
NOTE: (per D ondee) The law sim ply provides that a voting corporation would be to emasculate the right of minority
trust agreem ent is an agreem ent in writing whereby one or stockholders to seek redress for the corporation. Filing
m ore stockholders of a corporation consentto transfer his or
their shares to a trustee in order to vestin the latter voting or such action as a derivative suit even by a lone stockholder
other rights pertaining to said shares for a period not is one of the protections extended by law to minority
exceeding five years upon the fulfillm entof statutory conditions stockholders against abuses of the majority.
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
Derivative Suit: Watered Stock (1993)
agreem ent whereby the period is m ade contingent upon full A became a stockholder of Prime Real Estate
paym entofthe loan. Corporation (PREC) on July 10, 1991, when he was
given one share by another stockholder to qualify him as
U ndersection 59 of the C orporation C ode, supra, a voting trust a director. A was not re-elected director in the July 1,
agreem ent m ay confer upon a trustee not only the
stockholder's voting rights butalso otherrights pertaining to his 1992 annual meeting but he continued to be a registered
shares as long as the voting trustagreem entis notentered "for shareholder of PREC.
the purpose of circum venting the law againstm onopolies and
illegal com binations in restraintof trade or used for purposes When he was still a director, A discovered that on Jan 5,
of fraud." (section 59, 5th paragraph of the C orporation C ode).
Thus, the traditional concept of a voting trust agreem ent
1991, PREC issued free of charge 10,000 shares to X a
prim arily intended to single out a stockholder's right to vote lawyer who assisted in a court case involving PREC.
from his other rights as such and m ade irrevocable for a 1) Can A now bring an action in the name of the
lim ited duration m ay in practice becom e a legal device corporation to question the issuance of the shares to
whereby a transfer of the stockholders shares is effected X without receiving any payment?
subjectto the specific provision ofthe voting trustagreem ent.
The execution of a voting trust agreem ent, therefore, m ay 2) Can X question the right of A to sue him in behalf
create a dichotom y between the equitable or beneficial of the corporation on the ground that A has only
ownership of the corporate shares of a stockholder, on the one one share in his name?
hand, and the legal title thereto on the other hand. (Lee vs.
CA, Feb. 4, 1992)
3) Cannot the shares issued to X be considered as
Derivative Suit: Requisites (2004) watered stock?
SUGGESTED ANSWER:
AA, a minority stockholder, filed a suit against BB, CC,
1) As a general rule, A cannot bring a derivative suit in
DD, and EE, the holders of majority shares of MOP
the name of the corporation concerning an act that took
Corporation, for alleged misappropriation of corporate
place before he became a stockholder. However, if the
funds. The complaint averred, inter alia, that MOP
act complained of is a continuing one, A may do so.
Corporation is the corporation in whose behalf and for
whose benefit the derivative suit is brought. In their
2) No. In a derivative suit, the action is instituted/
capacity as members of the Board of Directors, the
brought in the name of a corporation and reliefs are
majority stockholders adopted a resolution authorizing
prayed for therein for the corporation, by a minority
MOP Corporation to withdraw the suit. Pursuant to said
stockholder. The law does not qualify the term
resolution, the corporate counsel filed a Motion to
“minority” in terms of the number of shares owned by a
Dismiss in the name of the MOP Corporation. Should
stockholder bringing the action in behalf of the
the motion be granted or denied? Reason briefly. (5%)
SUGGESTED ANSWER:
corporation. (SMC v Khan 176 SCRA 448)
No. All the requisites for a valid derivative suit exist in
this case. 3) No. WATERED SHARES are those sold by the
First, AA was exempt from exhausting his remedies corporation for less than the par/book value. In the
within the corporation, and did not have to make a instant case, it will depend upon the value of services
demand on the Board of Directors for the latter to sue. rendered in relation to the total par value of the shares.
Here, such a demand would be futile, since the directors
who comprise the majority (namely, BB, CC, DD and Derivative Suit; Close Corporation; Corporate
EE) are the ones guilty of the wrong complained of. Opportunity (2005)
Malyn, Schiera and Jaz are the directors of Patio
Second, AA appears to be stockholder at the time the Investments, a close corporation formed to run the Patio
alleged misappropriation of corporate funds. Cafe, an al fresco coffee shop in Makati City. In 2000,
Patio Cafe began experiencing financial reverses,
Third, the suit is brought on behalf and for the benefit of consequently, some of the checks it issued to its beverage
MOP Corporation. In this connection, it was held in distributors and employees bounced.
Conmart (Phils.) Inc. v. Securities and Exchange Commission, 198
SCRA 73 (1991) that to grant to the corporation In October 2003, Schiera informed Malyn that she found
concerned the right of withdrawing or dismissing the a location for a second cafe in Taguig City. Malyn
suit, at the instance of the majority stockholders and objected because of the dire financial condition of the
directors who themselves are the persons alleged to have corporation.
nullify the questioned investments. Would her action
Sometime in April 2004, Malyn learned about Fort Patio prosper? Why?
Cafe located in Taguig City and that its development was SUGGESTED ANSWER:
undertaken by a new corporation known as Fort Patio, Yes, she is already a stockholder at the time the alleged
Inc., where both Schiera and Jaz are directors. Malyn also misappropriation of corporate funds. And that filing such
found that Schiera and Jaz, on behalf of Patio action as a derivative suit even by a lone stockholder is
Investments, had obtained a loan of P500,000.00 from one of the protections extended by law to minority
PBCom Bank, for the purpose of opening Fort Patio stockholders against abuses of the majority. Nevertheless,
Cafe. This loan was secured by the assets of Patio Gina must first exhaust any administrative remedies
Investments and personally guaranteed by Schiera and before her suit be consider in court.
Jaz.
Distinction: De facto Corporation vs. Corporation by
Malyn then filed a corporate derivative action before the Estoppel (2004)
Regional Trial Court of Makati City against Schiera and Is there a difference between a de facto corporation and
Jaz, alleging that the two directors had breached their a corporation by estoppel? Explain briefly. (2%)
fiduciary duties by misappropriating money and assets of SUGGESTED ANSWER:
Patio Investments in the operation of Fort Patio Cafe. A DE FACTO CORPORATION is one which actually
(5%) exists for all practical purposes as a corporation but
1) Did Schiera and Jaz violate the principle of which has no legal right to corporate existence as against
corporate opportunity? Explain. the State. It is essential to the existence of a de facto
SUGGESTED ANSWER: corporation that there be (1) a valid law under which a
Yes. Although Malyn refused the business before, corporation might be incorporated, (2) a bona fide
nevertheless, using the resources and credit standing of attempt to organize as a corporation under such law, and
the company, Schiera and Jaz clearly demonstrated that (3) actual use or exercise in good faith of corporate
the business could have been successfully pursued in the powers conferred upon it by law.
name of the close corporation. More importantly, Schiera
and Jaz are guilty of diverting the resources of the close A CORPORATION BY ESTOPPEL exists when
corporation to another entity, equivalent to fraud and persons assume to act as a corporation knowing it to be
bad faith. without authority to do so. In this case, those persons
will be liable as general partners for all debts, liabilities
2) Was it proper for Malyn to file a derivative suit with and damages incurred or arising as a result of their
a prayer for injunctive relief? Explain. actions.
SUGGESTED ANSWER:
Although it is a close corporation, nevertheless the Distinction: Dividends vs. Profit: Cash Dividend vs.
principles of separate juridical personality still apply. The Stock Dividend (2005)
business of the corporation is still separate and distinct Distinguish dividend from profit; cash dividend from
from the proprietary interests of its stockholders and stock dividend. (2%)
directors. Consequently, since the business opportunity SUGGESTED ANSWER:
and the resource's used pertain to the close corporation, PROFITS are residual amounts representing return of
the standing to sue and to recover remains with the close capital after deducting all corporate costs and expenses
corporation and not with Malyn. Therefore, it is still from revenues. The accumulated profits, from year to
necessary to file a derivative suit on behalf of the close year, represent the corporate retained earnings from
corporation, although the proceedings would be which the dividends can be declared.
governed under the Interim Rules of Procedure for Intra-
Corporate Disputes. CASH DIVIDENDS represent an actual distribution of
accumulated profits to the stockholders as a return on
3) Assuming that a derivative suit is proper; may the their investments. Declaration of cash dividends requires
action continue if the corporation is dissolved during only the approval of the majority of the Board of
the pendency of the suit? Explain. Directors in a proper resolution.
SUGGESTED ANSWER:
Yes, for in spite of the dissolution of any corporation, it STOCK DIVIDENDS are simply transfers of retained
remains a juridical person for purpose of dissolution for earnings to capital stock, thereby increasing the number
three years from the date of dissolution, precisely one of of shares of stocks of each stockholder with no required
the purposes is to allow the winding-up of its affairs, cash contribution. A two-thirds vote of the stockholders,
including the termination of pending suits. coupled with a majority vote of the Board of Directors, is
needed to declare stock dividends.
Derivative Suit; Minority Stockholder (2003)
Gina Sevilla, a minority stockholder of Bayan Distinction; Private vs. Public Corporation (2004)
Corporation, felt that various investments of the Distinguish clearly a private corporation from a public
company’s capital were ultra vires if not, indeed, made in corporation
violation of law. She filed a derivative suit seeking to SUGGESTED ANSWER:
A PRIVATE CORPORATION is one formed for some
private purpose, benefit or end, while a PUBLIC Dividends; Declaration of Dividends (1990)
CORPORATION is formed for the government of a At least 2/3 of the stockholders of Solar Corporation,
portion of the State for the general good or welfare. The meeting upon the recommendation of the BOD, declared
true test is the purpose of the corporation. If the a 50% stock dividend during their annual meeting. The
corporation is created for political or public purpose notice of the annual stockholders’ meeting did not
connected with the administration of government, then it mention anything about a stock dividend declaration.
is a public corporation. If not, it is a private corporation The matter was taken up only under the item “other
although the whole or substantially the whole interest in business” in the agenda of the meeting. C.K. Senwa, a
the corporation belongs to the State. A public stockholder, who received his copy of the notice but did
corporation is created by special legislation or act of not attend the meeting, subsequently learned about the
Congress. A private corporation must be organized 50% stock dividend declaration. He desires to have the
under the Corporation Code. stock dividend declaration cancelled and set aside, and
wishes to retain your services as a lawyer for the purpose.
Distinction; Stock vs. Non-Stock Corporation (2004) Will you accept the case? Discuss with reasons.
Distinguish clearly a stock corporation from a non-stock SUGGESTED ANSWER:
corporation. I will not accept the case. Sec 43 of the Corp Code states
SUGGESTED ANSWER: that no stock dividend shall be issued without the
A stock corporation is one that has capital stock divided approval of the stockholders representing not less than
into shares and is authorized to distribute to the holders 2/3 of the outstanding capital stock at a regular or special
of such shares dividends or allotments of the surplus meeting duly called for that purpose. Conformably with
profits on the basis of the shares held. All other Sec 50 of the Corp Code, a written notice of the holding
corporations are non-stock corporations. of the regular meeting sent to the shareholders will
suffice. The notice itself specified the said subject matter.
Dividends: Declaration of Dividends (2005) ALTERNATIVE ANSWER:
Under what circumstances may a corporation declare Yes, I will accept the case. The problem does not indicate
dividends? (2%)' that there is action by the BOD which is also necessary
SUGGESTED ANSWER: for the declaration of 50% stock dividend.
No form of dividends can be declared and paid by the
corporation except from unrestricted retained earnings Dividends; Declaration of Dividends (1991)
appearing on its books. Dividends must be paid in During the annual stockholders meeting, Riza, a
amounts proportional to all stockholders on the basis of stockholder proposed to the body that a part of the
outstanding stock held by them. Cash or property corporation’s unreserved earned surplus be capitalized
dividends, can be declared from such unrestricted and stock dividends be distributed to the stockholders,
retained earnings by a proper resolution of the Board of arguing that as owners of the company, the stockholders,
Directors. Stock dividends, however, must be declared by by a majority vote, can do anything. As chairman of the
a proper resolution of the Board of Directors from meeting, how would you rule on the motion to declare
existing unrestricted retained earnings and ratified by stock dividends?
stockholders representing at least two-thirds (2/8) of the SUGGESTED ANSWER:
outstanding capital stock of the corporation, obtained in As the chairman of the meeting, I would rule against the
a meeting duly called for the purpose. (Sec. 43, motion considering that a declaration of stock dividends
Corporation Code) should initially be taken by the BOD and thereafter to be
concurred in by a 2/3 vote of the stockholders (Sec 43
Dividends: Sources of Dividends; Trust Fund Doctrine Corp Code). There is no prohibition, however, against
(2005) the stockholders’ resolving to recommend to the BOD
From what funds are cash and stock dividends sourced? that it consider a declaration of stock dividends for
Explain why. (2%) concurrence thereafter by the stockholders.
SUGGESTED ANSWER:
All cash and stock dividends are always paid out of the Dividends; Declaration of Dividends (2001)
unrestricted retained earnings (also called surplus profit) For the past three years of its commercial operation, X,
of the corporation. If the corporation has no unrestricted an oil company, has been earning tremendously in excess
retained earnings, the dividends would have to be of 100% of the corporation’s paid-in capital. All of the
sourced from the capital stock. This is illegal. It violates stockholders have been claiming that they share in the
the "TRUST FUND DOCTRINE" that provides that profits of the corporation by way of dividends but the
the capital stock of the corporation is a trust fund to be Board of Directors failed to lift its finger.
kept intact during the life of the corporation for the a) Is Corporation X guilty of violating a law? If in the
benefit of the creditors of the corporation. (Commissioner of affirmative, state the basis (2%)
Internal- Revenue v. Court of Appeal®, G.R. No. 108576, January 20, SUGGESTED ANSWER:
1999; Boman Environmental Development Corp. v. Court of Appeals, Corporation X is guilty of violating Section 43 of the
G.R. No. 77860, November 22, 1988; and Steinberg v. Velasco, G.R. Corp Code. This provision prohibits stock corporations
No. 30460, March 12,1929)
from retaining surplus profits in excess of 100% of their acquires, in violation of his duty, an interest adverse to
paid-in capital. the corporation in respect of any matter which has been
reposed in him in confidence, he shall be liable as a
b) Are there instances when a corporation shall not be trustee for the corporation and must account for the
held liable for not declaring dividends? (3%) profits which otherwise would have accrued to the
SUGGESTED ANSWER: corporation. Equity imposes liability upon him not to
The instances when a corporation shall not be held liable deal for his own benefit. (Sec. 31, Corporation Code)
for not declaring dividends are:
1) when justified by definite corporate expansion Under Sec. 34 of the Corporation Code where a director,
projects or programs approved by the BOD; or by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation,
2) when the corporation is prohibited under any loan thereby obtaining profits to the prejudice of such
agreement with any financial institution or creditor, corporation, he must account to the latter for all such
whether local or foreign, from declaring dividends profits by refunding the same, unless his act has been
without its or his consent, and such consent has not ratified by a vote of the stockholders owning or
yet been secured; or representing at least two-thirds (2/8) of the outstanding
capital stock.
3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in Effect: Expiration of Corporate Term (2004)
the corporation, such as when there is need for XYZ Corporation entered into a contract of lease with
special reserve for probable contingencies. ABC, Inc., over a piece of real estate for a term of 20
years, renewable for another 20 years, provided that
Dividends; Right; Managing Corporation (1991) XYZ's corporate term is extended in accordance with
ABC Management Inc. presented to the DEF Mining law. Four years after the term of XYZ Corporation
Co, the draft of its proposed Management Contract. As expired, but still within the period allowed by the lease
an incentive, ABC included in the terms of compensation contract for the extension of the lease period, XYZ
that ABC would be entitled to 10% of any stock dividend Corp. notified ABC, Inc., that it is exercising the option
which DEF may declare during the lifetime of the to extend the lease. ABC, Inc., objected to the proposed
Management Contract. Would you approve of such extension, arguing that since the corporate life of XYZ
provision? If not, what would you suggest as an Corp. had expired, it could no longer opt to renew the
alternative? lease. XYZ Corp. countered that withstanding the lapse
SUGGESTED ANSWER: of its corporate term it still has the right to renew the
I would not approve a proposed stipulation in the lease because no quo warranto proceedings for
management contract that the managing corporation, as involuntary dissolution of XYZ Corp. has been instituted
an additional compensation to it, should be entitled to by the Office of the Solicitor General.
10% of any stock dividend that may be declared. Is the contention of XYZ Corp. meritorious? Explain
Stockholders are the only ones entitled to receive stock briefly. (5%)
dividends (Nielsen & Co v Lepanto Mining 26 s 569) I would SUGGESTED ANSWER:
add that the unsubscribed capital stock of a corporation XYZ Corporation's contention is not meritorious. Based
may only be issued for cash or property or for services on the ruling of the Supreme Court in Philippine National
already rendered constituting a demandable debt (Sec 62 Bank vs. CFI of Rizal, 209 SCRA (1992). XYZ Corp. was
Corp Code). As an alternative, I would suggest that the dissolved ipso facto upon the expiration of its original
managing corporation should instead be given a net term. It ceased to be a body corporate for the purpose of
profit participation and, if it later so desires, to then continuing the business for which it was organized,
convert the amount that may be due thereby to equity or except only for purposes connected with its winding up
shares of stock at no less than the par value thereof. or liquidation. Extending the lease is not an act to wind
up or liquidate XYZ Corp.'s affairs. It is contrary to the
Doctrine of Corporate Opportunity (2005) idea of winding up the affairs of the corporation.
Briefly discuss the doctrine of corporate opportunity.
(2%) Effects; Merger of Corporations (1999)
SUGGESTED ANSWER: Two corporations agreed to merge. They then executed
In brief, the doctrine disqualifies a director, trustee or an agreement specifying the surviving corporation and
officer from appropriating for his personal benefit a the absorbed corporation. Under the agreement of
transaction or opportunity that pertains to the merger dated November 5, 1998, the surviving
corporation, and which under the duty of loyalty he corporation acquired all the rights, properties and
should first bring to the corporation for its use or liabilities of the absorbed corporation.
exploitation. 1) What would happen to the absorbed corporation?
Must the absorbed corporation undertake
The doctrine of corporate opportunity is an enforcement dissolution and the winding up procedures? Explain
of the duty of loyalty of corporate directors and officers. your answer. (3%)
When a director, trustee or officer attempts to acquire or SUGGESTED ANSWER:
No. There is no need for the absorbed corporation to Code. As shortened, the corporation continued its
undertake dissolution and winding up procedure. As a business operations until May 30, 1997, the last day of its
result of the merger, the absorbed corporation is corporate existence. Prior to said date, there were a
automatically dissolved and its assets and liabilities are number of pending civil actions, of varying nature but
acquired and assumed by the surviving corporation. mostly money claims filed by creditors, none of which
was expected to be completed or resolved within five
2) Pending approval of the merger by the SEC, may the years from May 30, 1997.
surviving corporation already institute suits to collect
all receivables due to the absorbed corporation from If the creditors had sought your professional help at that
its customers? Explain your answer. (3%) time about whether or not their cases could be pursued
SUGGESTED ANSWER: beyond May 30, 1997, what would have been your
No. The merger does not become effective until and advice? (2%)
unless approved by the SEC. Before approval by the SEC SUGGESTED ANSWER:
of the merger, the surviving corporation has no legal The cases can be pursued even beyond May 30, 1997, the
personality with respect to receivables due to the last day of the corporate existence of GHQ Corp. The
absorbed corporation. Corporation is not actually dissolved upon the expiration
of its corporate term. There is still the period for
3) A case was filed against a customer to collect on the liquidation or winding up.
promissory note issued by him after the date of the
merger agreement. The customer raised the defense NOTE: U nder Section 122 of the C orporation C ode, a
that while the receivables as of the date of the corporation whose corporate existence is term inated in any
m anner continues to be a body corporate for three (3) years
merger agreement was transferred to the surviving after its dissolution for purposes of prosecuting and defending
corporation, those receivables which were created suits by and againstitand to enable itto settle and close its
after the merger agreement remained to be owned affairs, culm inating in the disposition and distribution of its
by the absorbed corporation. These receivables rem aining assets. Itm ay, during the three-yearterm , appointa
trustee ora receiverwho m ay actbeyond thatperiod.
would be distributed to the stockholders
conformably with the dissolution and liquidation The term ination of the life of a corporate entity does not by
procedures under the New Corporation Code? itself cause the extinction or dim inution of the rights and
Discuss the merits of this argument. (3%) liabilities of such entity. 27 If the three-year extended life has
SUGGESTED ANSWER: expired without a trustee or receiver having been expressly
Whether the receivable was incurred by the absorbed designated by the corporation, within thatperiod, the board of
directors (or trustees) itself, m ay be perm itted to so continue
corporation before or after the merger agreement, or as "trustees" by legal im plication to com plete the corporate
before or after the approval thereof by the SEC, the said liquidation. (PEPSI-COLA PHILIPPINES, INC., vs. THE
receivable would still belong to the surviving corporation COURT OF APPEALS, [G.R. No. 145855. November 24,
under Sec 80 of the Corp. Code which does not make 2004.])
any distinction as to the assets and liabilities of the
absorbed corporation that the surviving corporation Foreign Corporation; “Doing Business” in the
would inherit. Philippines (1998)
When is a foreign corporation deemed to be “doing
Effects; Winding Up Period of a Corporation (1997) business in the Philippines?” (3%)
SUGGESTED ANSWER:
The corporation, once dissolved, thereafter continues to
be a body corporate for three years for purposes of A foreign corporation is deemed to be “doing business in
prosecuting and defending suits by and against it and of the Philippines” if it is continuing the body or substance
enabling it to settle and close its affairs, culminating in of the business or enterprise for which it was organized.
the final disposition and distribution of its remaining It is the intention of an entity to continue the body of its
assets. If the 3 year extended life expires without a trustee business in the country. The grant and extension of 90-
or receiver being designated by the corporation within day credit terms of a foreign corporation to a domestic
that period and by that time (expiry of the 3 year corporation for every purchase shows an intention to
extended term), the corporate liquidation is not yet over, continue transacting with the latter.
how, if at all, can a final settlement of the corporate
affairs be made? Foreign Corporation; “Doing Business” in the
SUGGESTED ANSWER: Philippines; Acts or Activities (2002)
The liquidation can continue with the winding up. The Give at least three (3) examples of the acts or activities
members of the BOD can continue with the winding of that are specifically identified under our foreign
the corporate affairs until final liquidation. They can act investment laws as constituting “doing business” in the
as trustees or receivers for this purpose. Philippines (3%)
SUGGESTED ANSWER:
Any three (3) of the following acts or activities constitute
The SEC approved the amendment of the Articles of “doing business” in the Philippines under our foreign
Incorporation of GHQ Corp shortening its corporate life investment laws:
to only 25 years in accordance with Sec 120 of the Corp 1. Soliciting orders
2. Opening offices by whatever name 5) When he is made, by a specific provision of law, to
3. Participating in the management, supervision or personally answer for the corporate action. (Tramat
control of any domestic entity Mercantile Inc v CA GR 111008, Nov 7, 94 238s14)
4. Entering into service contracts
5. Appointing representatives or distributors, operating Liabilities; Stockholders, Directors, Officers (1997)
under the control of the foreign entity, who is A, B, and C are shareholders of XYZ Co. A has an
domiciled in the Philippines or who stays in the unpaid subscription of P100th, B’s shares are fully paid
country for a period or periods totaling at least 180 up, while C owns only nominal but fully paid up shares
days in any calendar year. and is a director and officer. XYZ becomes insolvent,
and it is established that the insolvency is the result of
Foreign Corporation; “Doing Business” in the fraudulent practices within the company. If you were
Philippines; Test (2002) counsel for a creditor of XYZ, would you advise legal
What is the legal test for determining if an unlicensed action against A, B, and C?
foreign corporation is doing business in the Philippines? SUGGESTED ANSWER:
(2%) a) As to A—an action can be brought against A for
SUGGESTED ANSWER: P100th which is the amount of unpaid subscription.
The test is whether or not the unlicensed foreign Since the corporation is insolvent, the limit of the
corporation has performed an act or acts that imply a stockholder’s liability to the creditor is only up to the
continuity of commercial dealings or arrangements, and extent of his unpaid subscription.
contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally b) As to B—there is no cause of action against B
incident to, and in progressive prosecution of, because he has already fully paid for his subscription. As
commercial gain or of the purpose and object of the stated earlier, the limit of the stockholder’s liability to the
business corporation. creditor of the corporation, when the latter becomes
insolvent, is the extent of his subscription.
Joint Venture; Corporation (1996)
May a corporation enter into a joint venture? c) As to C—an action can be filed against C, not as
SUGGESTED ANSWER: stockholder because he has already paid up the shares,
A corporation may enter into a joint venture. However, but in his capacity as director and officer because of the
inasmuch as the term ‘joint venture’ has no precise legal corporation’s insolvency being the result of fraudulent
definition, it may take various forms. It could take the practices within the company. Directors are liable jointly
form of a simple pooling of resources (not involving and severally for damages sustained by the corporation,
incorporation) between two or more corporations for a stockholders or other persons resulting from gross
specific project, purpose or undertaking, or for a limited negligence or bad faith in directing the affairs of the
time. It may involve the creation of a more formal corporation. (Sec 31 Corp Code)
structure and, hence, the formation of a corporation. If
the joint venture would involve the creation of a Piercing the Corporate Veil (1994)
partnership, as the term is understood under the Civil Mr. Pablo, a rich merchant in his early forties, was a
Code, then a corporation cannot be a party to it. defendant in a lawsuit which could subject him to
substantial damages. A year before the court rendered
Liabilities; BOD; Corporate Acts (1996) judgment, Pablo sought his lawyer’s advice on how to
When may a corporate director, trustee, or officer be plan his estate to avoid taxes. His lawyer suggested that
held personally liable with the corporation? he should form a corporation with himself, his wife and
SUGGESTED ANSWER: his children (all students and still unemployed) as
A corporate director, trustee or officer may be held stockholders and then transfer all his assets and liabilities
personally liable with the corporation under the following to this corporation. Mr Pablo followed the
circumstances: recommendation of his lawyer. 1 year later, the court
1) When he assents to a patently unlawful act of the rendered judgment against Pablo and the plaintiff sought
corporation; to enforce this judgment. The sheriff, however, could not
2) When he acts in bad faith or with gross negligence in locate any property in the name of Pablo and therefore
directing the affairs of the corporation, or in conflict returned the writ of execution unsatisfied. What remedy,
with the interest of the corporation resulting in if any, is available to the plaintiff?
damages to the corporation, its stockholders or SUGGESTED ANSWER:
other persons; The plaintiff can avail himself of the doctrine of piercing
3) When he consents to the issuance of watered stocks the veil of corporate fiction which can be invoked when
or who, having knowledge thereof, does not a corporation is formed or used in avoiding a just
forthwith file with the corporate secretary his written obligation. While it is true that a family corporation may
objection thereto; be organized to pursue an estate tax; planning, which is
4) When he agrees to hold himself personally and not per se illegal or unlawful (Delpher Trades Corp v IAC 157
solidarily liable with the corporation; or SCRA 349) the factual settings, however, indicate the
existence of a lawsuit that could subject Pablo to a
substantial amount of damages. It would thus be difficult What is the doctrine of "piercing the veil of corporate
for Pablo to convincingly assert that the incorporation of entity?" Explain.
the family corporation was intended merely as a case of SUGGESTED ANSWER:
“estate tax planning.” (Tan Boon Bee v Jarencio 41337 30June88) The doctrine of "piercing the veil of corporate entity," is
the doctrine that allows the courts to look behind the
Piercing the Corporate Veil (1996) separate juridical personality of a corporation and treat
E Co sold its assets to M Inc after complying with the the corporation as an association of persons and thereby
requirements of the Bulk Sales Law. Subsequently, one of make the individual actors personally liable for corporate
the creditors of E Co tried to collect the amount due it, liabilities. The fiction of corporate identity is disregarded
but found out that E Co had no more assets left. The and the individuals comprising it can be treated
creditor then sued M Inc on the theory that M Inc is a identically. The stockholders can be held directly liable
mere alter ego of E Co. for corporate obligations, even to the extent of their
Will the suit prosper? Explain. personal assets (Concept Builders v. NLRC, Marabe, et al,
SUGGESTED ANSWER: G.R. No. 108734, May 29, 1996).
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 To what circumstances will the doctrine apply?
of the latter to, nor in the assumption thereof by, the (2.5%)
former. The facts given do not indicate that such transfer The doctrine is applicable when the notion of legal entity
or assumption took place or was stipulated upon by the is used to —
parties in their agreement. Furthermore, the sale by E Co 1) Defeat public convenience.
of its assets is a sale of its property. It does not involve 2) Justify wrong.
the sale of the shares of stock of the corporation 3) Protect fraud.
belonging to its stockholders. There is therefore no 4) Defend crime (PNB v. Andrada Electric, G.R. No.
merger or consolidation that took place. E Co continues 142936, April 17, 2002).
to exist and remains liable to the creditor. 5) Shield a violation of the proscription against forum
shopping (First Philippine International Bank v. Court of
Piercing the Corporate Veil (2001) Appeals, G.R. No. 137537, January 24, 1996).
Plaintiffs filed a collection action against X Corporation. 6) Work inequities among members of the
Upon execution of the court’s decision, X Corporation corporation internally, involving no rights of the
was found to be without assets. Thereafter plaintiffs filed public or third persons (Secosa v. Heirs ofErwin Suarez
an action against its present and past stockholder Y Francisco, G.R. No. 156104, June 29, 2004).
Corporation which owned substantially all of the stocks 7) Evade the lawful obligations of the corporation
of X Corporation. The two corporations have the same like a judgment credit (Sibagat Timber Corp. v. Garcia,
board of directors and Y Corporation financed the G.R. No. 112546, December 11, 1992).
operations of X Corporation. May Y Corporation be held 8) Escape liability arising from a debt (Arcilla v. Court of
Appeals, G.R. No. 88113, October 23, 1992).
liable for the debts of X Corporation? Why? (5%)
SUGGESTED ANSWER: 9) Avoid inclusion of corporate assets as part of the
Yes, Y Corporation may be held liable for the debts of X estate of the decedent (Cease v. Court of Appeals, G.R.
Corporation. The doctrine of piercing the veil of No. L-35861, October 18, 1979).
corporation fiction applies to this case. The two 10) To promote or to shield unfair objectives
(Villanueva v. Adre, G.R. No. 80863, April 27, 1989).
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 Pre-emptive Right (2001)
latter is merely an extension of the personality of the Suppose that X Corporation has already issued the 1000
former, and that the former controls the policies of the originally authorized shares of the corporation so that its
latter. Added to this is the fact that Y Corporation BOD and stockholders wish to increase X’s authorized
controls the finances of X Corporation which is merely capital stock. After complying with the requirements of
an adjunct, business conduit or alter ego of Y the law on increase of capital stock, X issued an
Corporation (CIR v Norton & Harrison Co 11 S 714 (1964)) additional 1000 shares of the same value.
a) Assume that the stockholder A presently holds 200 out
Piercing the Corporate Veil (2004) of the 1000 original shares. Would A have a pre-emptive
How does one pierce the veil of corporate fiction? right to 200 of the new issue of 1000 shares? Why? (3%)
SUGGESTED ANSWER:
The veil of corporate fiction may be pierced by proving b) When should stockholder A exercise the pre-emptive
in court that the notion of legal entity is being used to right? (2%)
defeat public convenience, justify wrong, protect fraud, SUGGESTED ANSWER:
or defend crime or the entity is just an instrument or alter a) Yes, A would have a pre-emptive right to 200 of the
ego or adjunct of another entity or person. new issue of 1000 shares. A is a stockholder of record
holding 200 shares in X Corpo. According to the Corp
Piercing the Corporate Veil (2006) Code, each stockholder has the pre-emptive right to all
issues of shares made by the corporation in proportion to
407H
the number of shares he holds on record in the SUGGESTED ANSWER:
corporation. d. No, the stockholder may not exercise appraisal right
because the matter that he dissented from is not one of
b) Pre-emptive right must be exercised in accordance those where right of appraisal is available under the
with the Articles of Incorporation or the By-Laws. When corporation code.
the Articles of Incorporation and the By-Laws are silent,
the BOD may fix a reasonable time within which the SEC; Jurisdiction; Transferred Jurisdiction (1996)
stockholders may exercise the right. What is the original and exclusive jurisdiction of the
SEC?
Pre-Emptive Right vs. Appraisal Right (1999) SUGGESTED ANSWER:
ABC Corporation has an authorized capital stock of P1M The SEC has original and exclusive jurisdiction over
divided into 50,000 common shares and 50,000 preferred cases involving:
shares. At its inception, the Corporation offered for a) Devices or schemes amounting to fraud and
subscription all the common shares. However, only misrepresentation;
40,000 shares were subscribed. Recently, the directors b) Controversies arising out of intra-corporate or
thought of raising additional capital and decided to offer partnership relations;
to the public all the authorized shares of the Corporation c) Controversies in the election or appointment of
at their market value. directors, officers, etc;
a) Would Mr. X, a stockholder holding 4,000 shares, d) Petitions to be declared in a state of suspension of
have pre-emptive rights to the remaining 10,000 payments (Sec 5 PD 902-A)
shares? (2%)
b) Would Mr. X have pre-emptive rights to the 50,000 TAKE NOTE: The RTC has jurisdiction over the cases
preferred shares? (2%) which involves intra-corporate controversy. As of 2006,
c) Assuming that the existing stockholders are entitled the applicable rule is that there is a TRANSFERRED
to pre-emptive rights, at what price will the shares be JURISDICTION under Sec. 5.2 of the SRC, the
offered? (2%) Commission’s jurisdiction over all cases enumerated
d) Assuming a stockholder disagrees with the issuance under PD 902-A sec. 5 has been transferred to the
of new shares and the pricing for the shares, may the Courts of general jurisdiction or the appropriate Regional
stockholder invoke his appraisal rights and demand Trial Court.
payment for his shareholdings? (2%)
SUGGESTED ANSWER: Stockholder; Delinquent; Unpaid Subscription (1997)
a. Yes. Mr. X, a stockholder holding 4,000 shares, has The BOD of a corporation, by a vote of ten in favor of
pre-emptive right to the remaining 10,000 shares. All one against, declared due and payable all unpaid
stockholders of a stock corporation shall enjoy pre- subscription to the capital stock. The lone dissenting
emptive right to subscribe to all issues or disposition of director failed to pay on due date, i.e., 19 Sept 1997, his
shares of any class, in proportion to their respective unpaid subscription. Other than the shares wherein he
shareholdings. was unable to complete payment, he did not own any
ALTERNATIVE ANSWER. share in the corporation. On 23 Sept 1997, he was
a. No, Mr X does not have pre-emptive right over the informed by the BOD that, unless due payment is
remaining 10,000 shares because these shares have meanwhile received, he:
already been offered at incorporation and he chose not to a) could no longer serve as a director of the
subscribe to them. He, therefore, has waived his right corporation forthwith:
thereto and the corporation may offer them to anyone. b) would not be entitled to the cash and stock
dividends which were declared and payable on 24
SUGGESTED ANSWER: Sep 1997; and
b. Yes. Mr. X would have pre-emptive rights to the c) could not vote in the stockholders meeting
50,000 preferred shares. All stockholders of a stock scheduled to take place on 26 Sept 1997.
corporation shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any class, in Was the action of the BOD on each of the foregoing
proportion to their respective shareholdings. matters valid?
ALTERNATIVE ANSWER: SUGGESTED ANSWER:
b. Yes, Mr. X has preemptive right over the 50,000 a) No. The period of 30 days within which the
preferred shares because they were not offered before by stockholder can pay the unpaid subscription had not yet
the corporation for subscription. expired.
SUGGESTED ANSWER: b) No. The delinquency did not deprive the stockholder
c. The shares will be offered to existing stockholders, of his right to receive dividends declared. However, the
who are entitled to preemptive right, at a price fixed by cash dividend declared may be applied by the corporation
the BOD, which shall not be less than the par value of to the unpaid subscription. (Sec 71 Corp Code)
such shares.
c) No. The period of 30 days within which the the majority stockholders can always muster a 2/3 vote,
stockholder can pay the unpaid subscription had not yet would you allow the majority stockholders to remove the
expired. one director representing the minority?
SUGGESTED ANSWER:
Stockholders: Preemptive Right (2004) No. I will not allow the majority stockholders to remove
The Board of Directors of ABC, Inc., a domestic the director. While the stockholders may, by a 2/3 vote,
corporation, passed a resolution authorizing additional remove a director, the law also provides, however, that
issuance of shares of stocks without notice nor approval his right may not, without just cause, be exercised so as
of the stockholders. DX, a stockholder, objected to the to deprive the minority of representation in the BOD (Sec
issuance, contending that it violated his right of pre- 28 Corp code; Gov’t vs Agoncillo 50p348)
emption to the unissued shares. Is his contention
tenable? Explain briefly. (5%) Stockholders; Rights (1996)
SUGGESTED ANSWER: What are the rights of a stockholder?
Yes. DX's contention is tenable. Under Section 39 of the SUGGESTED ANSWER:
Corporation Code, all stockholders of ABC, Inc. enjoy The rights of a stockholder are as follows:
preemptive right to subscribe to all issues of shares of 1) The right to vote, including the right to appoint a
any class, including the reissuance of treasury shares in proxy;
proportion to their respective shareholdings. 2) The right to share in the profits of the corporation,
including the right to declare stock dividends;
3) The right to a proportionate share of the assets of
Stockholders; Appraisal Right (2003)
In what instances may the right of appraisal be availed of the corporation upon liquidation;
under the Corporation Code? 4) The right of appraisal;
SUGGESTED ANSWER: 5) The pre-emptive right to shares;
SECTION 81. Instances of Appraisal Right. — Any 6) The right to inspect corporate books and records;
stockholder of a corporation shall have the right to 7) The right to elect directors;
dissent and demand payment of the fair value of his 8) Such other rights as may contractually be granted to
shares in the following instances: the stockholders by the corporation or by special
1. In case any amendment to the articles of law.
incorporation has the effect of changing or
restricting the rights of any stockholders or class of Stockholders; Voting Power of Stockholders (1990)
shares, or of authorizing preferences in any respect Mercy subscribed to 1,000 shares of stock of Rosario
superior to those of outstanding shares of any class, Corporation. She paid 25% of said subscription. During
or of extending or shortening the term of corporate the stockholders’ meeting, can Mercy vote all her
existence; subscribed shares? Explain.
2. In case of sale, lease, exchange, transfer, mortgage, SUGGESTED ANSWER:
pledge or other disposition of all or substantially all Yes, Mercy can vote all her subscribed shares. Section 72
of the corporate property and assets as provided in of the Corporation Code states that holders of
the Code; and subscribed shares not fully paid which are not delinquent
3. In case of merger or consolidation. (n) shall have all the rights of a stockholder.
Stockholders; Removal of Officers & BOD (2001) Stocks; Increase of Capital Stock (2001)
In 1999, Corporation A passed a board resolution Suppose X Corporation has an authorized capital stock
removing X from his position as manager of said of P1M divided into 100,000 shares of stock with par
corporation. The by-laws of A corporation provides that value of P10 each.
the officers are the president, vice-president, treasurer a) Give two ways whereby said authorized capital stock
and secretary. Upon complaint filed with the SEC, it held may be increased to about P1.5M. (3%)
that a manager could be removed by mere resolution of b) Give three practical reasons for a corporation to
the board of directors. On motion for reconsideration, X increase its capital stock (2%)
SUGGESTED ANSWER:
alleged that he could only be removed by the affirmative a) Two ways of increasing the Authorized Capital Stock
vote of the stockholders representing 2/3 of the of X corporation to P1.5M are:
outstanding capital stock. Is X’s contention legally 1) Increase the number of shares from 100,000 to
tenable. Why? (5%) 150,000 shares with the same par value of
SUGGESTED ANSWER:
No. Stockholders’ approval is necessary only for the P10.00 each.
removal of the members of the BOD. For the removal of 2) Increase par value of 100,000 shares to P15.00
a corporate officer or employee, the vote of the BOD is each.
sufficient for the purpose.
b) Three practical reasons for a corporation to increase
its capital stock are:
Stockholders; Removal; Minority Director (1991)
Assuming that the minority block of the XYZ 1) to generate more working capital;
Corporation is able to elect only 1 director and therefore,
2) to have more shares with which to pay for the children. They then brought the deed of assignment to
acquisition of more assets like acquisition of the proper corporate officers for registration with the
company car, stocks, house, machinery or request for the transfer in the corporation's stock and
business; and transfer books of the assigned shares, the cancellation of
3) to have extra share with which to cover or meet the stock certificates in PX's name, and the issuance of
the requirement for declaration of stock new stock certificates in the names of his wife and his
dividend. children as the new owners. The officers of the
Corporation denied the request on the ground that
Stocks; Sale, Transfer of Certificates of Stock (1996) another heir is contesting the validity of the deed of
Arnold has in his name 1,000 shares of the capital stock assignment. May the Corporation be compelled by
of ABC Co as evidenced by a stock certificate. Arnold mandamus to register the shares of stock in the names of
delivered the stock certificate to Steven who now claims the assignees? Explain briefly. (5%)
to be the real owner of the shares, having paid for SUGGESTED ANSWER:
Arnold’s subscription. ABC refused to recognize and Yes. The corporation may be compelled by mandamus to
register Steven’s ownership. register the shares of stock in the name of the assignee.
Is the refusal justified? Explain. The only legal limitation imposed by Section 63 of the
SUGGESTED ANSWER: Corporation Code is when the Corporation holds any
ABC’s refusal to recognize and register Steven’s unpaid claim against the shares intended to be
ownership is justified. The facts indicate that the stock transferred. The alleged claim of another heir of PX is
certificate for the 1,000 shares in question is in the name not sufficient to deny the issuance of new certificates of
of Arnold. Although the certificate was delivered by stock to his wife and children. It would be otherwise if
Arnold to Steven, the facts do not indicate that the the transferee's title to the shares has no prima facie
certificate was duly endorsed by Arnold at the time it was validity or is uncertain.
delivered to Steven or that the procedure for the effective
transfer of shares of stock set out in the by-laws of ABC Trust Fund Doctrine (1992)
Co, if any, was observed. Since the certificate was not A Corporation executed a promissory note binding itself
endorsed in favor of Steven (or anybody else for that to pay its President/Director, who had tendered his
matter), the only conclusion could be no other than that resignation, a certain sum in payment of the latter’s
the shares in question still belong to Arnold. (Razon v IAC shares and interests in the company. The corporation
GR 74306 Mar 16,92 207s234) defaulted in paying the full amount so that said former
President filed suit for collection of the balance before
Stocks; Sale, Transfer of Certificates of Stock (2001) the SEC.
A is the registered owner of Stock Certificate No. a) Under what conditions is a stock corporation
000011. He entrusted the possession of said certificate to empowered to acquire its own shares?
his best friend B who borrowed the said endorsed b) Is the arrangement between the corporation and its
certificate to support B’s application for passport (or for President covered by the trust fund doctrine? Explain
a purpose other than transfer). But B sold the certificate your answers briefly.
to X, a bona fide purchaser who relied on the endorsed SUGGESTED ANSWER:
certificates and believed him to be the owner thereof. a) A stock corporation may only acquire its own shares
a) Can A claim the shares of stock from X? Explain (3%) of stock if the trust fund doctrine is not impaired. This is
b) Would your answer be the same if A lost the stock to say, for instance, that it may purchase its own shares
certificate in question or if it was stolen from him? (2%) of stock by utilizing merely its surplus profits over and
SUGGESTED ANSWER: above the subscribed capital of the corporation.
a) No. Assuming that the shares were already transferred ALTERNATIVE ANSWER:
to B, A cannot claim the shares of stock from X. The a) (an answer enumerating the instances or cases under
certificate of stock covering said shares have been duly the Corporation Code where the Corp allows the
endorsed by A and entrusted by him to B. By his said acquisition of shares such as in the stockholder’s exercise
acts, A is now estopped from claiming said shares from of appraisal right, failure of bids in the sale of delinquent
X, a bona fide purchaser who relied on the endorsement shares, etc.)
by A of the certificate of stock.
SUGGESTED ANSWER:
b) Yes. In the case where the certificate of stock was lost b) The arrangement between the corporation and its
or stole from A, A has a right to claim the certificate of President to the extent that it calls for the payment of the
stock from the thief who has no right or title to the same. latter’s shares is covered by the trust fund doctrine. The
“One who has lost any movable or has been unlawfully only exceptions from the trust fund doctrine are the
deprived thereof, may recover it from the person in redemption of redeemable shares and, in the case of
possession of the same.” (Art 559 NCC) close corporation, when there should be a deadlock and
the SEC orders the payment of the appraised value of a
Stocks; Sale, Transfer of Certificates of Stock (2004) stockholder’s share.
Four months before his death, PX assigned 100 shares of
stock registered in his name in favor of his wife and his Trust Fund Doctrine; Intra-Corporate Controversy (1991)
On December 6, 1988, A, an incorporator and the
General Manager of the Paje Multi Farms Co, resigned as Chattel Mortgage vs. After-Incurred Obligations (1999)
GM and sold to the corporation his shares of stocks in On December 1, 1996, Borrower executed a chattel
the corporation for P300th, the book value thereof, mortgage in favor of the Bank to secure a loan of P3M.
payable as follows: a) P100th as down payment; b) In due time the loan was paid.
P100th on or before 31 July1989; and c) the remaining On December 1, 1997, Borrower obtained another loan
balance of P100th on or before 30 Sep 1989. A for P2M which the Bank granted under the same security
promissory note, with an acceleration clause, was as that which secured the first loan.
executed by the corporation for the unpaid balance.
For the second loan, Borrower merely delivered a
The corporation failed to pay the first installment on due promissory note; no new chattel mortgage agreement was
date. A then sued Paje on the promissory note in the executed as the parties relied on a provision in the 1996
RTC. chattel mortgage agreement which included future debts
a) Does the court have jurisdiction over the case? as among the obligations secured by the mortgage. The
b) Would your answer be the same if A instead sold his provision reads:
shares to his friend Mabel and the latter filed a case with “In case the Mortgagor executes subsequent
the RTC against the corporation to compel it to register promissory note or notes either as a renewal, as an
the sale and to issue new certificates of stock in her extension, or as a new loan, this mortgage shall also
name? stand as security for the payment of said promissory
SUGGESTED ANSWER: note or notes without necessity of executing a new
a) The RTC has jurisdiction over the case. The SC said contract and this mortgage shall have the same force
that a corporation may only buy its own shares of stock if and effect as if the said promissory note or notes were
it has enough surplus profits therefore. existing on date hereof.”
b) My answer would be the same. An action to compel a As Borrower failed to pay the second loan, the Bank
corporation to register a sale and to issue new certificates proceeded to foreclose the Chattel Mortgage.Borrower
of stock is itself an intra-corporate matter that exclusively sued the Bank claiming that the mortgage was no longer
lies with the RTC. in force. Borrower claimed that a fresh chattel mortgage
should have been executed when the second loan was
TAKE NOTE: The RTC has jurisdiction over the cases granted.
which involves intra-corporate controversy. As of 2006, a) Decide the case and ratiocinate. (4%)
the applicable rule is that there is a TRANSFERRED b) Suppose the chattel mortgage was not registered,
JURISDICTION under Sec. 5.2 of the SRC, the would its validity and effectiveness be impaired?
Commission’s jurisdiction over all cases enumerated Explain. (4%)
under PD 902-A sec. 5 has been transferred to the SUGGESTED ANSWER:
Courts of general jurisdiction or the appropriate Regional a. The foreclosure of the chattel mortgage regarding the
Trial Court. 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
Credit Transactions 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
Chattel Mortgage vs. After-Incurred Obligations (1991) obligation not being specified in the affidavit, is not
To secure the payment of an earlier loan of P20,000 as secured by mortgage.
well as subsequent loans which her friend Noreen, would
extend to her, Karen executed in favor of Noreen a b. Yes. The chattel mortgage is not valid as against any
chattel mortgage over her (Karen) car. person, except the mortgagor, his executors and
Is the mortgage valid? administrators.
SUGGESTED ANSWER:
A chattel mortgage cannot effectively secure after-
incurred obligations. While a stipulation to include after-
Ritz bought a new car on installments which provided
incurred obligations in a chattel mortgage is itself not
for an acceleration clause in the event of default. To
invalid, the obligation cannot, however, be deemed
secure payment of the unpaid installments, as and when
automatically secured by that mortgage until after a new
due, he constituted two chattel mortgages, i.e., one over
chattel mortgage or an addendum to the original chattel
his very old car and the other covering the new car that
mortgage is executed to cover the obligation after it has
he had just bought as aforesaid, on installments. After
been actually incurred. Accordingly, unless such
Ritz defaulted on three installments, the seller-mortgagee
supplements are made, the chattel mortgage in the
foreclosed on the old car. The proceeds of the
problem given would be deemed to secure only the loan
foreclosure were not enough to satisfy the due obligation;
of P20,000 (Sec 5 Act 1505; Belgian Catholic Missionaries v
Magallanes Press 49p647)
hence, he similarly sought to foreclose on the new car.
Would the seller-mortgagee be legally justified in situated as well as the LTO where the vehicle is
foreclosing on this second chattel mortgage? registered. (Sec 4 Chattel Mortgage Law)
SUGGESTED ANSWER:
No. The two mortgages were executed to secure the Credit Transactions (1999)
payment of the unpaid installments for the purchase of a Various buyers of lots in a subdivision brought actions to
new car. When the mortgage on the old car was compel either or both the developer and the bank to
foreclosed, the seller-mortgagee is deemed to have lease and deliver free and clear the titles to their
renounced all other rights. A foreclosure of additional respective lots.
property, that is, the new car covered by the second
mortgage would be a nullity. The problem arose because notwithstanding prior sales
mostly on installments – made by the developer to
Chattel Mortgage; Ownership of Thing Mortgaged (1990) buyers, developer had mortgaged the whole subdivision
Zonee, who lives in Bulacan, bought a 1988 model to a commercial bank. The mortgage was duly executed
Toyota Corolla sedan on July 1, 1989 from Anadelaida, and registered with the appropriate governmental
who lives in Quezon City, for P300th, paying P150th as agencies. However, as the lot buyers were completely
downpayment and promising to pay the balance in 3 unaware of the mortgage lien of the bank, they religiously
equal quarterly installments beginning October 1, 1989. paid the installments due under their sale contracts.
Anadelaida executed a deed of sale of the vehicle in favor
of Zonee and, to secure the unpaid balance of the As the developer failed to pay its loan, the mortgage was
purchase price, had Zonee execute a deed of chattel foreclosed and the whole subdivision was acquired by the
mortgage on the vehicle in Anadelaida’s favor. bank as the highest bidder.
a) May the bank dispossess prior purchasers of
Ten days after the execution of the abovementioned individual lots or, alternatively, require them to pay
documents, Zonee had the car transferred and registered again for the paid lots? Discuss (3%)
in her name. Contemporaneously, Anadelaida had the b) What are the rights of the bank vis-à-vis those
chattel mortgage on the car registered in the Chattel buyers with remaining unpaid installments? Discuss.
Mortgage Registry of the Office of the Register of Deeds (3%)
of Quezon City. Recommendation: Since the subject matter of these
two (2) questions is not included within the scope of
In Sep 1989, Zonee sold the sedan to Jimbo without the Bar Questions in Mercantile Law, as it is within
telling the latter that the car was mortgaged to Civil Law, it is suggested that whatever answer is
Anadelaida. When Zonee failed to pay the first given by the examinee, or the lack of answer should
installment on October 1, 1989, Anadelaida went to see be given full credit. If the examinee gives a good
Zonee and discovered that the latter had sold the car to answer, he should be given additional credit.
Jimbo.
a) Jimbo refused to give up the car on the ground that SUGGESTED ANSWER:
the chattel mortgage executed by Zonee in favor of a. No. The bank may not dispossess the prior purchasers
Anadelaida is not valid because it was executed before of the individual lots, much less require them to pay for
the car was registered in Zonee’s name, i.e., before Zonee the said lots. The bank has to respect the rights of the
became the registered owner of the car. Is the said prior purchasers of the individual lots. The purchasers
argument meritorious? Explain your answer. have the option to pay the installments of the mortgagee.
b) Jimbo also argued that even if the chattel mortgage is b. The bank has to respect the rights of the buyers with
valid, it cannot affect him because it was not properly remaining unpaid installments. The purchaser has the
registered with the government offices where it should be option to pay the installments to the mortgagee who
registered. What government office is Jimbo referring to? should apply the payments to the mortgage indebtedness.
SUGGESTED ANSWER: Mortgage (1999)

a) Jimbo’s argument is not meritorious. Zonee became Debtor purchased a parcel of land from a realty company
the owner of the property upon delivery; registration is payable in five yearly installments. Under the contract of
not essential to vest that ownership in the buyer. The sale, title to the lot would be transferred upon full
execution of the chattel mortgage by the buyer in favor payment of the purchase price.
of the seller, in fact, can demonstrate the vesting of such
ownership to the mortgagor. But even before full payment, debtor constructed a
house on the lot. Sometime thereafter, debtor mortgaged
b) Jimbo was referring to the Register of Deeds of the house to secure his obligation arising from the
Bulacan where Zonee was a resident. The Chattel issuance of a bond needed in the conduct of his business.
Mortgage Law requires the registration to be made in the The mortgage was duly registered with the proper chattel
Office of the Register of Deeds of the province where mortgage registry.
the mortgagor resides and also in which the property is
Five years later after completing payment of the purchase To pay for her loan obtained from Stela, Liza constituted
price, debtor obtained title to the lot. And even as the in Stela’s favor a chattel mortgage over an electric
chattel mortgage on the house was still subsisting, debtor generator. Cecil, a creditor of Liza, levied on attachment
mortgaged to a bank the lot and improvement thereon to the generator. Stela filed a third party claim. Cecil
secure a loan. This real estate mortgage was duly opposed the claim. Rule on their conflicting claims.
registered and annotated at the back of the title. SUGGESTED ANSWER:
Due to business reverses, debtor failed to pay his Mortgage; Extrajudicial Foreclose (2006)
creditors. The chattel mortgage was foreclosed when the A real estate mortgage may be foreclosed judicially or
debtor failed to reimburse the surety company for extrajudicially. In what instance may a mortgagee
payments made on the bond. In the foreclosure sale, the extrajudicially foreclose a real estate mortgage? (5%)
surety company was awarded the house as the highest SUGGESTED ANSWER:
bidder. When a sale is made under a special power inserted or
attached to any real-estate mortgage, thereafter given as
Only after the foreclosure sale did the surety company security for the payment of money or the fulfillment of
learn of the real estate mortgage in favor of the lending any other obligation, then the mortgagee may
investor on the lot and the improvement thereon. extrajudicially foreclose the real estate mortgage (Sec. 1,
Immediately, it filed a complaint praying for the Act No. 3135, as amended).
exclusion of the house from the real estate mortgage. It Mortgage; Foreclosure (2003)
was submitted that as the chattel mortgage was executed May the sale at public auction by a bank of a property
and registered ahead, it was superior to the real estate mortgaged to it be nullified because the price was
mortgage. extremely low? Why?
SUGGESTED ANSWER:
On the suggestion that a chattel mortgage on a house- a

real property- was a nullity, the surety company Mortgage; Foreclosure (2003)
Because of failure of Janette and Jeanne to pay their loan
countered that when the chattel mortgage was executed,
to X Bank, the latter foreclosed on the mortgage
debtor was not yet the owner of the lot on which the
constituted on their property which was put up by them
house was built. Accordingly, the house was a personal
as security for the payment of the loan. The price paid
property and a proper subject of a chattel mortgage.
for the property at the foreclosure sale was not enough to
a. Discuss the validity of the position taken by the surety
liquidate the obligation. The bank sued for deficiency. In
company. (3%)
their answer, Janette and Jeanne did not deny the
b. Who has a better claim to the house, the surety
existence of the loan nor the fact of their default. They,
company or the lending investor? Explain (3%)
however, interposed the defenses that the price at the
c. Would the position of the surety company be bolstered
auction was extremely low and that their loan, despite the
by the fact that it acquired title in a foreclosure sale
loan documents, was a long-term loan which had not yet
conducted by the Provincial Sheriff. Explain (3%)
SUGGESTED ANSWER:
matured. If you were the judge, how would you rule on
a) The house is always a real property even though it was the case? Why? (6%)
SUGGESTED ANSWER:
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 Mortgage; Foreclosure of Improvements (1999)
Borrower obtained a loan against the security of a
shall be valid and binding but only on the parties. It will
mortgage on a parcel of land. While the mortgage was
not bind or affect third parties.
subsisting, borrower leased for fifty years the mortgaged
property to Land Development Company (LDC). The
b) The lending investor has a better claim to the house.
mortgagee was duly advised of the lease. Thereafter,
The real estate mortgage covering the house and lot was
LDC constructed on the mortgaged property an office
duly registered and binds the parties and third persons.
condominium.
On the other hand, the chattel mortgage on the house
securing the credit of the surety company did not affect
Borrower defaulted on his loan and mortgagee foreclosed
the rights of third parties such as the lending investor
the mortgage. At the foreclosure sale, the mortgagee was
despite registration of the chattel mortgage.
awarded the property as the highest bidder. The
corresponding Certificate of Sale was executed and after
c) No. The chattel mortgage over the house which was
the lapse of one year, title was consolidated in the name
foreclosed did not affect the rights of third parties like
of mortgagee.
the lending investor. Since the third parties are not
bound by the chattel mortgage, they are not also bound
Mortgagee then applied with the RTC for the issuance of
by any enforcement of its provisions. The foreclosure of
a writ of possession not only over the land but also the
such chattel mortgage did not bolster or add anything to
condominium building. The mortgagee contended that
the position of the surety company.
the mortgage included all accessions, improvements and
accessories found on the mortgaged property.
Mortgage vs. Levy (2003)
b. The lease rentals belong to the mortgagor. However,
LDC countered that it had built on the mortgaged the mortgage extends to rentals not yet received when
property with the prior knowledge of mortgagee which the obligation becomes due and the mortgagee may ran
had received formal notice of the lease. after the said rentals for the payment of the mortgage
a) How would you resolve the dispute between the debt.
mortgagee and LDC? (3%)
b) Is the mortgagee entitled to the lease rentals due Mortgage; Foreclosure; Effect of mere taking by creditor-
from LDC under the lease agreement? (3%) mortgagor of property (1992)
Recommendation: Since the subject matter of these two X & Co obtained a loan from a local bank in the amount
(2) questions is not included within the scope of the Bar of P500th, mortgaging as security therefore its real
Questions in Mercantile Law, as it is within Civil Law, it is property. Subsequently, the company applied with the
suggested that whatever answer is given by the examinee, or the
same bank for a Letter of Credit (LC) for $200th in favor
lack of answer should be given full credit. If the examinee gives
a good answer, he should be given additional credit. of a foreign bank to cover the importation of machinery.
To guarantee payment of the obligation under the LC,
SUGGESTED ANSWER: the company and its President and Treasurer executed a
a. The mortgagee has a better right than LDC. The surety agreement in the local bank’s favor.
mortgage extends to the improvements introduced on
the land, with the declarations, amplifications, and The machinery arrived and was released to the company
limitations established by law, whether the estate remains under a trust receipt agreement. As the company
in the possession of the mortgagor or passes into the defaulted in the payment of its obligations, the bank took
hands of a third person (Art 2127 NCC). The notice possession of the imported machinery. At the same time,
given by LDC to the mortgagee was not enough to it sought to foreclose the mortgaged property and to
remove the building from coverage of the mortgage hold the company as well as its President and Treasurer,
considering that the building was built after the mortgage liable under the Surety Agreement.
was constituted and the notice was only as regards the
lease and not as to the construction of the building. Since Did the taking of possession of the machinery by the
the mortgagee was informed of the lease and did not bank result in the 1) full payment of the obligations of
object to it, the mortgagee became bound by the terms of the company and its officers, and 2) foreclosure of the
the lease when it acquired the property as the highest mortgage?
bidder. Hence, the mortgagee steps into the shoes of the SUGGESTED ANSWER:
mortgagor and acquires the rights of the lessor under Art 1) The taking of possession of the machinery by the bank
1768 of the NCC. This provision gives the lessor the did not result in full payment of the obligations owing
right to appropriate the condominium building but after from the company and its officers. The taking of such
paying the lessee half of the value of the building at that possession must be considered merely as a measure in
time. Should the lessor refuse to reimburse said amount, order to protect or further safeguard the bank’s security
the lessee may remove the improvement even though the interest. Dacion en pago can only be considered as having
land will suffer damage thereby. taken place when a creditor accepts and appropriates the
1st Alternative Answer: ownership of the goods in payment of a due obligation.
a. The mortgagee has a better right to the building. Under (PNB v Pineda 197 s 1)
Art 2127 of the NCC, the mortgage extends to all
improvements on the mortgaged property regardless of 2) The mere taking of possession of mortgaged assets
who and when the improvements were introduced. LDC does not amount to foreclosure. Foreclosure requires a
cannot complain otherwise, because it knew that the sale at public auction. The foreclosure, therefore, has not
property it was leasing was mortgaged when it built the as yet been effected.
condominium.
2nd alternative Answer: Mortgage; Redemption Period; Foreclosed Property
a. Assuming that the office condominium was duly (2002)
constituted under the Condominium Law, before LDC Primetime Corporation (the Borrower) obtained a P10
could validly constitute the same as a condominium, it Million, five-year term loan from Universal Bank (the
should cause to be recorded in the register of deeds of Bank) in 1996. As security for the loan and as required by
the province or city where the land is situated an enabling the Bank, the Borrower gave the following collateral
or master deed showing, among others, a certificate of security in favor of the Bank:
the registered owner and of all registered holders of any 1) a real estate mortgage over the land and building
lien or encumbrance on the property that they consent to owned by the Borrower and located in Quezon City;
the registration of the deed. (Sec 4. RA 4726). If the 2) the joint and several promissory note of Pr. Primo
mortgagee gave its consent thereto, then LDC should Timbol, the President of the Borrower; and
prevail. If no consent was given, the condominium was 3) a real estate mortgage over the residential house and
included in the mortgage. lot owned by Mr. Timbol, also located in Quezon
City.
SUGGESTED ANSWER:
Because of business reverses, neither the Borrower nor (5) Integrity Bank – which granted Edzo a loan in 2001
Mr. Timbol was able to pay the loan. In June 2001, the in the amount of P500,000. The loan was not
Bank extrajudicially foreclosed the two real estate secured by any asset of Edzo, but it was guaranteed
mortgages, with the Bank as the only bidder in the unconditionally and solidarily by Edzo’s President
foreclosure sale. On September 16, 2001, the certificates and controlling stockholder, Eduardo Z. Ong, as
of sale of the two properties in favor of the Bank were accommodation surety.
registered with the Register of Deeds of Quezon City.
The loan due to Integrity Bank fell due on June 15, 2002.
Ten months later, both the Borrower and Mr. Timbol Despite pleas for extension of payment by Edzo, the
were able to raise sufficient funds to redeem their bank demanded immediate payment. Because the bank
respective properties from the Bank, but the Bank threatened to proceed against the surety, Eduardo Z.
refused to permit redemption on the ground that the Ong, Edzo decided to pay up all its obligations to
period for redemption had already expired, so that the Integrity Bank. On June 20, 2002, Edzo paid to Integrity
Bank now has absolute ownership of both properties. Bank the full principal amount of P500,000, plus accrued
The Borrower and Mr. Timbol came to you today, interests amounting to P55,000. As a result, Edzo had
September 15, 2002, to find out if the position of the hardly any cash left for operations and decided to close
Bank is correct. What would be your answer? State your its business. After paying the unpaid salaries of its
reasons (5%). employees, Edzo filed a petition for insolvency on July 1,
2002.
SUGGESTED ANSWER:
1. With respect to the real estate mortgage over the How would you, as judge in the insolvency proceedings,
land and building owned by the Borrower, rank the respective credits or claims of the five (5)
Primetime Corporation, a juridical body, the period creditors mentioned above in terms of preference or
of redemption is only three (3) months, which priority against each other? (5%)
period already expired. SUGGESTED ANSWER:
The claim of Handyman Garage for P10,000 has a
2. As to the real estate mortgage over the residential specific lien on the car repaired.
house and lot owned by Mr. Timbol, the period of
redemption is one (1) year from the date of The remaining four (4) claims have preference or priority
registration of the certificate of sale, which period against each other in the following order:
has not yet expired in this case. (1) No. 4 – claim of the BIR for unpaid value added
taxes
(2) No. 3 – claim of Joselyn Reyes for Unlawful
Mortgage; Remedies (2003) termination
Carmakers, Inc., sold a motor vehicle on installment (3) No. 1 – claim of Ace equipment Supplies as an
basis to Chari Paredes. The transaction was reflected on a unpaid seller; and
promissory note executed by Chari in favor of (4) No. 5 – claim of Integrity Bank.
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 Promissory Note: Liability (2001)
instruments sans recourse to Adelantado Finance X, Y and Z signed a promissory note in favor of A
Corporation. Chari defaulted in her obligations. Could stating: “We promise to pay A on December 31, 2001 the
Adelantado Finance corporation take action against both sum of P5,000.00” When the note fell due, A sued X and
Carmakers Inc., and Chari? Why? (6%) Y who put up the defense that A should have impleaded
SUGGESTED ANSWER: Z. Is the defense valid? Why? (5%)
Preference of Credits (2002) SUGGESTED ANSWER:
As of June 1, 2002, Edzo Systems Corporation (Edzo) The defense is not valid. The liability of X, Y, and Z
was indebted to the following creditors: under the promissory note is joint. Such being the case,
(1) Ace Equipment Supplies – for various personal Z is not an indispensable party. The fact that A did not
computers and accessories sold to Edzo on credit implead Z will not prevent A from collecting the
amounting to P300,000. proportionate share of X and Y in the payment of the
(2) Handyman Garage – for mechanical repairs (parts loan.
and service) performed on Edzo’s company car (Observation: Even if the liability of X, Y, and Z is
amounting to P10,000. solidary, the defense would still not be valid)
(3) 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 Remedies; Available to Mortgagee-Creditor (1996)
P100,000. Finding a 24-month payment plan attractive, Anjo
(4) Bureau of Internal Revenue – for unpaid value- purchased a Tamaraw FX from Toyota QC. He paid a
added taxes amounting to P30,000. down-payment of P100th and obtained financing for the
balance from IOU Co. He executed a chattel mortgage
over the vehicle in favor of IOU. When Anjo defaulted, Upon his failure to pay the loan on due date, the bank
IOU foreclosed the chattel mortgage, and sought to foreclosed the mortgage on the 3 lots, which were
recover the deficiency. subsequently sold for only P99th at the foreclosure sale.
May IOU still recover the deficiency? Explain. Thereafter, the bank filed an ordinary action for the
SUGGESTED ANSWER: collection of the deficiency. A contended that the
IOU may no longer recover the deficiency. Under Art mortgage contract he executed was indivisible and
1484 of the NCC, in a contract of sale of personal consequently, the bank had no legal right to foreclose
property the price of which is payable in installments, the only the real estate mortgage and leave out the chattel
vendor may, among several options, foreclose the chattel mortgage, and then sue him for a supposed deficiency
mortgage on the thing sold, if one has been constituted, judgment.
should the vendee’s failure to pay cover two or more If you were the Judge, would you sustain the contention
installments. In such case, however, the vendor shall of A?
have no further action against the purchaser to recover SUGGESTED ANSWER:
any unpaid balance of the price and any agreement to the If I were the Judge, I would dismiss the action as being
contrary is void. While the given facts did not explicitly premature since the proper remedy would be to complete
state that Anjo’s failure to pay covered 2 or more the foreclosure of the mortgages and only thereafter can
installments, this may safely be presumed because the there by an action for collection of any deficiency. In
right of IOU Co to foreclose the chattel mortgage under Caltex v IAC (GR 74730, 25 Aug 89), the remedies on a
the circumstances is premised on Anjo’s failure to pay 2 secured debt, said the court, are either an action to collect
or more installments. The foreclosure would not have or to foreclose a contract of real security. These remedies
been valid if it were not so. (The given facts did not also are alternative remedies, although an action for any
state explicitly whether Anjo’s default was a payment deficiency is not precluded, subject to certain exceptions
default or a default arising from a breach of a negative such as those stated in Art 1484 of the Civil Code, by a
pledge or breach of a warranty. In such case, however, foreclosure on the mortgages. While the factual settings
IOU Company would not have been able to foreclose the in the case of Suria v IAC (30 June 87) are not similar to the
chattel mortgage validly as such foreclosure, under the facts given in the problem, the SC implied that
circumstances contemplated by the law, could only be foreclosure as a remedy in secured obligations must first
effected for a payment default covering two or more be availed of by a creditor in preference to other
installments) (Luis Ridad v Filipinas Investment and Finance remedies that might also be invoked by him.
Co GR L-39806 Jan27,83 120s246) ALTERNATIVE ANSWER:
The indivisibility of a contract of real security, such as a
Remedies; Available to Mortgagee-Creditor (2001) real estate mortgage or a chattel mortgage, only means
Debtor “A” issued a promissory note in the amount of that a division or a partial payment of a secured
P10M in favor of commercial bank Y secured by obligation does not warrant a corresponding division or
mortgage of his properties worth P30M. When A failed proportionate reduction of the security given. A creditor
to pay his indebtedness, despite demands made by bank in such secured debts may pursue the remedy of
Y, the latter instituted a collection suit to enforce foreclosure, in part or in full, or file an ordinary action
payment of the P10M account. Subsequently, bank Y for collection on any amount due. A favorable judgment
also filed foreclosure proceedings against A for security can warrant an issuance of a writ of execution on any
given for the account. If you were the judge, how would property, not exempt from execution, belonging to the
you resolve the two cases? (5%) judgment debtor. There should be no legal obstacle for a
SUGGESTED ANSWER: creditor to waive, in full or in part, his right to
The case for collection will be allowed to proceed. But foreclosure on contracts of real security.
the foreclosure proceedings have to be dismissed. In
instituting foreclosure proceedings, after filing a
collection case involving the same account or transaction, Insurance Law
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 Beneficiary: Effects: Irrevocable Beneficiary (2005)
obligation. The collection of the loan and the foreclosure What are the effects of an irrevocable designation of a
of the mortgage securing said loan constitute one and the beneficiary under the Insurance Code? Explain. (2%)
SUGGESTED ANSWER:
same cause of action. The filing of the collection case
The irrevocable designation gives the beneficiary a vested
bars the subsequent filing of the foreclosure proceedings.
right over Life Insurance. The Insured cannot act to
divest the irrevocable beneficiary, in whole or in part,
Remedies; Secured Debt (1991)
without the beneficiary's consent.
To secure the payment of his loan of P200th, A executed
To be specific:
in favor of the Angeles Banking Co in 1 document, a real
(1) The beneficiary designated in a life insurance
estate mortgage over 3 lots registered in his name and a
contract cannot be changed without the consent of
chattel mortgage over his 3 cars and 1 Isuzu cargo truck.
the beneficiary because he has a vested interest in
the policy (Philamlife v. Pineda, G.R. No. 54216, July 19,
1989, citing Gcrcio v. Sun Life, G.R. No. 23703, September 28, relation, Purita cannot be a donee of the deceased.
1925; and Go v. Redfern, G.R. No. 47705, April 25, 1841); Hence, she cannot also be his beneficiary.
(2) Neither can the Insured take the cash surrender Concealment; Material Concealment (2001)
value, assign or even borrow on said policy without A applied for a non-medical life insurance. The insured
the beneficiary's consent (Nario v. Philamlife, G.R. No. did not inform the insurer that one week prior to his
22796, June 26, 1967); application for insurance, he was examined and confined
at St. Luke’s Hospital where he was diagnosed for lung
(3) The Insured cannot add another beneficiary because cancer. The insured soon thereafter died in a plane crash.
that would reduce the amount which the first Is the insurer liable considering that the fact concealed
beneficiary may recover and therefore adversely had no bearing with the cause of death of the insured?
affect his vested right (Go v. Redfem, G.R. No. 47705, Why? (5%)
April 25, 1941); SUGGESTED ANSWER:
No. The concealed fact is material to the approval and
(4) Unless the policy allows, the Insured cannot even issuance of the insurance policy. It is well settled that the
designate another beneficiary should the original insured need not die of the disease he failed to disclose to
beneficiary predecease him. His estate acquires the the insurer. It is sufficient that his nondisclosure misled
beneficiary's vested right upon his death; and the insurer in forming his estimate of the risks of the
proposed insurance policy or in making inquiries.
(5) The Insured cannot allow his creditors to attach or
execute on the policy. (Philamlife v. Pineda, G.R. No. Concealment; Material Concealment: Incontestability
54216, July 19, 1989)
Clause (1994)
On September 23, 1990, Tan took a life insurance policy
Beneficiary: Rights; Irrevocable Beneficiary (2005) from Philam. The policy was issued on November 6,
Jacob obtained a life insurance policy for P1 Million 1990. He died on April 26, 1992 of hepatoma. The
designating irrevocably Diwata, a friend, as his insurance company denied the beneficiaries’ claim and
beneficiary. Jacob, however, changed his mind and wants rescinded the policy by reason of alleged
Yob and Jojo, his other friends, to be included as misrepresentation and concealment of material facts
beneficiaries considering that the proceeds of the policy made by Tan in his application. It returned the premiums
are sufficient for the three friends. Can Jacob still add paid.
Yob and Jojo as his beneficiaries? Explain. (2%)
SUGGESTED ANSWER:
The beneficiaries contend that the company had no right
No, Jacob can no longer add Yob and Jojo as his
to rescind the contract as rescission must be done
beneficiaries in addition to Diwata. As the irrevocable
“during the lifetime” of the insured within two years and
beneficiary, Diwata has acquired a-vested right over
prior to the commencement of the action.
Jacob's life insurance policy. Any additional beneficiaries
Is the contention of the beneficiaries tenable?
will reduce the amount which Diwata, as the first SUGGESTED ANSWER:
beneficiary, may recover, which will adversely affect her No. The incontestability clause does not apply. The
vested right. (Go v. Redfern, G.R. No. 47705, April 25, insured dies within less than two years from the issuance
1941) of the policy on September 23, 1990. The insured died
on April 26, 1992, or less than 2 years from September
Beneficiary; Life Insurance; Prohibited Beneficiaries 23, 1990.
(1998)
Juan de la Cruz was issued Policy No. 8888 of the The right of the insurer to rescind is only lost if the
Midland Life Insurance Co on a whole life plan for beneficiary has commenced an action on the policy.
P20,000 on August 19, 1989. Juan is married to Cynthia There is no such action in this case. (Tan v CA 174 s 143)
with whom he has three legitimate children. He,
however, designated Purita, his common-law wife, as the Concealment; Material Concealment: Incontestability
revocable beneficiary. Juan referred to Purita in his Clause (1996)
application and policy as the legal wife. Juan procured a “non-medical” life insurance from Good
3 years later, Juan died. Purita filed her claim for the Life Insurance. He designated his wife, Petra, as the
proceeds of the policy as the designated beneficiary beneficiary. Earlier, in his application in response to the
therein. The widow, Cynthia, also filed a claim as the question as to whether or not he had ever been
legal wife. To whom should the proceeds of the hospitalized, he answered in the negative. He forgot to
insurance policy be awarded? (5%) mention his confinement at the Kidney Hospital.
SUGGESTED ANSWER:
The proceeds of the insurance policy shall be awarded to
After Juan died in a plane crash, Petra filed a claim with
the ESTATE of Juan de la Cruz. Purita, the common-
Good Life. Discovering Juan’s previous hospitalization,
law-wife, is disqualified as the beneficiary of the deceased
Good Life rejected Petra’s claim on the ground of
because of illicit relation between the deceased and
concealment and misrepresentation. Petra sued Good
Purita, the designated beneficiary. Due to such illicit
Life, invoking good faith on part of Juan.
Will Petra’s suit prosper? Explain.
SUGGESTED ANSWER: Concealment; Material Concealment; Incontestability
No, Petra’s suit will not prosper (assuming that the policy Clause (1991)
of life insurance has been in force for a period of less Atty Roberto took out a life insurance policy from the
than 2 years from the date of its issue). The matters Dana Ins Co (DIC) on 1 Sep 1989. On 31 Aug 1990,
which Juan failed to disclose was material and relevant to Roberto died. DIC refused to pay his beneficiaries
the approval and issuance of the insurance policy. They because it discovered that Robert had misrepresented
would have affected Good Life’s action on his certain material facts in his application. The beneficiaries
application, either by approving it with the corresponding sued on the basis that DIC can contest the validity of the
adjustment for a higher premium or rejecting the same. insurance policy only within 2 years from the date of
Moreover, a disclosure may have warranted a medical issue and during the lifetime of the insured. Decide the
examination of Juan by Good Life in order for it to case.
reasonably assess the risk involved in accepting the SUGGESTED ANSWER:
application. In any case, good faith is no defense in I would rule in favor of the insurance company. The
concealment. The waiver of a medical examination in the incontestability clause, applies only if the policy had been
‘non-medical’ life insurance from Good Life makes it in effect for at least 2 years. The 2 year period is counted
even more necessary that Juan supply complete from the time the insurance becomes effective until the
information about his previous hospitalization for such death of the insured and not thereafter (Tan v CA GR
information constitutes an important factor which Good 48044 29Jun1989)
Life takes into consideration in deciding whether to issue ALTERNATIVE ANSWER:
the policy or not. (See Sunlife Assurance Co of Canada v CA GR I would rule in favor of the insurance company.
105135, June 22, 1995 245 s 268) Although an insurer may not rescind the contract on
ground of misrepresentation after an action is
If the policy of life insurance has been in force for a commenced for recovery under the policy, the insurer is
period of 2 years or more from the date of its issue (on not precluded from invoking the ground of
which point the given facts are vague) then Good Life misrepresentation as a defense in the action for recovery.
can no longer prove that the policy is void ab initio or is This is alright since the bar problem is not covered yet by
rescindible by reason of the fraudulent concealment or the incontestability clause.
misrepresentation of Juan ( Sec 48 Ins Code)
Concealment; Material Concealment; Incontestability
Clause (1997) Renato was issued a life insurance policy on January 2,
The assured answers “No” to the question in the 1990. He concealed the fact that 3 years prior to the
application for a life policy: “Are you suffering from any issuance of his life insurance policy, he had been seeing a
form of heart illness?” In fact, the assured has been a doctor about his heart ailment.
heart patient for many years. On 7 Sep 1991, the assured
is killed in a plane crash. The insurance company denies On March 1, 1992, Renato died of heart failure. May the
the claim for insurance proceeds and returns the heirs file a claim on the proceeds of the life insurance
premiums paid. policy of Renato? (5%)
Is the decision of the insurance company justified? SUGGESTED ANSWER:
SUGGESTED ANSWER: Yes. The life insurance policy in question was issued on
Assuming that the incontestability clause does not apply January 9, 1990. More than 2 years had elapsed when
because the policy has not been in force for 2 years, from Renato, the insured, died on March 1, 1992. The
the date of issue, during the lifetime of the insured, the incontestability clause applies.
decision of the insurance company not to pay is justified.
There was fraudulent concealment. It is not material that INCONTESTABILITY CLAUSE
the insured died of a different cause than the fact The insurer has two years from the date of issuance of
concealed. The fact concealed, that is heart ailment, is the insurance contract or of its last reinstatement within
material to the determination by the insurance company which to contest the policy, whether or not, the insured
whether or not to accept the application for insurance still lives within such period. After two years, the
and to require the medical examination of the insured. defenses of concealment or misrepresentation, no matter
how patent or well founded, no longer lie.
However, if the incontestability clause which applies to
the insurance policy covering the life of the insured had Insurable Interest: Bank Deposit (2000)
been in force for 2 years from issuance thereof, the BD has a bank deposit of half a million pesos. Since the
insurance company would not be justified in denying the limit of the insurance coverage of the Philippine Deposit
claim for proceeds of the insurance and in returning the Insurance Corp (PDIC) (RA 3591) is only one tenth of
premium paid. In that case, the insurer cannot prove the BD’s deposit, he would like some protection for the
policy void ab initio or rescindible by reason of excess by taking out an insurance against all risks or
fraudulent concealment or misrepresentation of the contingencies of loss arising from any unsound or unsafe
insured. banking practices including unforeseen adverse effects of
the continuing crisis involving the banking and financial Moreover, in the problem at hand, there is no double
sector in the Asian region. Does BD have an insurable insurance because the insured with the First Insurance is
interest within the meaning of the Insurance Code of the different from the insured with the Second Insurance
Philippines (PD1460)? (2%) Company. The same is true with respect to the interests
SUGGESTED ANSWER: insured in the two policies.
Yes. BD has insurable interest in his bank deposit. In
case of loss of said deposit, more particularly to the c) As Judge, I would allow the businessman to recover
extent of the amount in excess of the limit covered by his total loss of P5M representing the full value of his
the PDIC Act, PBD will be damnified. He will suffer goods which were lost through fire. As to the creditor, I
pecuniary loss of P300,000.00, that is, his bank deposit of would allow him to recover the amount to the extent of
half a million pesos minus P200,000.00 which is the or equivalent to the value of the credit he extended to the
maximum amount recoverable from the PDIC. businessman for the stocks-in-trade which were
mortgaged by the businessman.
Insurable Interest: Public Enemy (2000)
May a member of the MILF or its breakaway group, the Insurable Interest; Equitable Interest (1991)
Abu Sayyaf, be insured with a company licensed to do A piece of machinery was shipped to Mr Pablo on the
business under the Insurance Code of the Phils (PD basis of C&F Manila. Pablo insured said machinery with
1460)? Explain. (3%) the Talaga Merchants Ins Co (Tamic) for loss or damage
SUGGESTED ANSWER: during the voyage. The vessel sank en route to Manila.
A member of the MILF or the Abu Sayyaf may be Pablo then filed a claim with Tamic which was denied for
insured with a company licensed to do business under the reason that prior to deliver, Pablo had no insurable
the Insurance Code of the Phils. What is prohibited to be interest. Decide the case.
insured is a public enemy. A public enemy is a citizen or SUGGESTED ANSWER:
national of a country with which the Philippines is at war. Pablo had an existing insurable interest on the piece of
Such member of the MILF or the Abu Sayyaf is not a machinery he bought. The purchase of goods under a
citizen or national of another country, but of the perfected contract of sale already vests equitable interest
Philippines. on the property in favor of the buyer even while it is
pending delivery (Filipino Merchants Ins Co v CA GR 85144
Insurable Interest: Separate Insurable Interest (1999) 28Nov1989)
A businessman in the grocery business obtained from
First Insurance an insurance policy for P5M to fully Insurable Interest; Life vs. Property Insurance (1997)
cover his stocks-in-trade from the risk of fire. a) A obtains a fire insurance on his house and as a
generous gesture names his neighbor as the
Three months thereafter, a fire of accidental origin broke beneficiary. If A’s house is destroyed by fire, can B
out and completely destroyed the grocery including his successfully claim against the policy?
stocks-in-trade. This prompted the businessman to file b) A obtains insurance over his life and names his
with First Insurance a claim for five million pesos neighbor B the beneficiary because of A’s secret love
representing the full value of his goods. for B. If A dies, can B successfully claim against the
policy?
First Insurance denied the claim because it discovered SUGGESTED ANSWER:
that at the time of the loss, the stocks-in-trade were a) No. In property insurance, the beneficiary must have
mortgaged to a creditor who likewise obtained from insurable interest in the property insured. (Sec 18 Ins
Second Insurance Company fire insurance coverage for Code). B does not have insurable interest in the house
the stocks at their full value of P5M. insured.
a) May the businessman and the creditor obtain
separate insurance coverages over the same stocks- b) Yes. In life insurance, it is not required that the
in-trade? Explain (3%) beneficiary must have insurable interest in the life of the
b) First Insurance refused to pay claiming that double insured. It was the insured himself who took the policy
insurance is contrary to law. Is this contention on his own life.
tenable? (3%)
c) Suppose you are the Judge, how much would you Insurable Interest; Life vs. Property Insurance (2000)
allow the businessman and the creditor to recover IS, an elderly bachelor with no known relatives, obtained
from their respective insurers. Explain (3%) life insurance coverage for P250,000.00 from Starbrite
SUGGESTED ANSWER: Insurance Corporation, an entity licensed to engage in
a) Yes. The businessman, as owner, and the creditor, as the insurable business under the Insurance Code of the
mortgagee, have separate insurable interests in the same Philippines (PD1460). He also insured his residential
stocks-in-trade. Each may insure such interest to protect house for twice that amount within the same
his own separate interest. corporation. He immediately assigned all his rights to the
b) The contention of First Insurance that double insurance proceeds to BX, a friend-companion living
insurance is contrary to law is untenable. There is no law with him. Three years later, IS died in a fire that gutted
providing that double insurance is illegal per se. his insured house two days after he had sold it. There is
no evidence of suicide or arson or involvement of BX in On March 19, 1993, a fire razed the building to the
these events. BX demanded payment of the insurance ground. Garapal Insurance refused to make good its
proceeds from the two policies, the premiums for which obligation to Benjie under the insurance contract.
IS had been faithfully paying during all the time he was 1) Is Garapal Insurance legally justified in refusing
alive. Starbrite refused payment, contending that BX had payment to Benjie?
no insurable interest and therefore was not entitled to 2) Is Nat entitled to collect on the insurance policy?
receive the proceeds from IS’s insurance coverage on his SUGGESTED ANSWER:
life and also on his property. Is Starbrite’s contention 1)Yes. At the time of the loss, Benjie was no longer the
valid? Explain? (5%) owner of the property insured as he failed to redeem the
SUGGESTED ANSWER: property. The law requires in property insurance that a
Starbrite is correct with respect to the insurance coverage person can recover the proceeds of the policy if he has
on the property of IS. The beneficiary in the property insurable interest at the time of the issuance of the policy
insurance policy or the assignee thereof must have and also at the time when the loss occurs. At the time of
insurable interest in the property insured. BX, a mere fire, Benjie no longer had insurable interest in the
friend-companion of IS, has no insurable interest in the property insured.
residential house of IS. BX is not entitled to receive the
proceeds from IS’s insurance on his property. 2) No. While at the time of the loss he had insurable
interest in the building, as he was the owner thereof, Nat
As to the insurance coverage on the life of IS, BX is did not have any interest in the policy. There was no
entitled to receive the proceeds. There is no requirement automatic transfer clause in the policy that would give
that BX should have insurable interest in the life of IS. It him such interest in the policy.
was IS himself who took the insurance on his own life.
Insurable Interest; Life vs. Property Insurance (2002) JQ, owner of a condominium unit, insured the same
Distinguish insurable interest in property insurance from against fire with the XYZ Insurance Co., and made the
insurable interest in life insurance. (5%) loss payable to his brother, MLQ. In case of loss by fire
SUGGESTED ANSWER: of the said condominium unit, who may recover on the
a) In property insurance, the expectation of benefit fire insurance policy? State the reason(s) for your answer.
must have a legal basis. In life insurance, the (5%)
expectation of benefit to be derived from the SUGGESTED ANSWER:
continued existence of a life need not have any legal JQ can recover on the fire insurance policy for the loss of
basis. said condominium unit. He has the insurable interest as
owner-insured. As beneficiary in the fire insurance policy,
b) In property insurance, the actual value of the interest MLQ cannot recover on the fire insurance policy. For
therein is the limit of the insurance that can validly the beneficiary to recover on the fire or property
be placed thereon. In life insurance, there is no limit insurance policy, it is required that he must have
to the amount of insurance that may be taken upon insurable interest in the property insured. In this case,
life. MLQ does not have insurable interest in the
condominium unit.
c) In property insurance, an interest insured must exist
when the insurance takes effect and when the loss Insurance; Cash & Carry Basis (2003)
occurs but need not exist in the meantime. In life What is meant by “cash and carry” in the business of
insurance, it is enough that insurable interest exists insurance?
at the time when the contract is made but it need SUGGESTED ANSWER:
not exist at the time of loss.
Insurance; Co-Insurance vs. Re-Insurance (1994)
Insurable Interest; Property Insurance (1994) Distinguish co-insurance from re-insurance.
In a civil suit, the Court ordered Benjie to pay Nat SUGGESTED ANSWER:
P500,000.00. To execute the judgment, the sheriff levied CO-INSURANCE is the percentage in the value of the
upon Benjie’s registered property (a parcel of land and insured property which the insured himself assumes or
the building thereon),and sold the same at public auction undertakes to act as insurer to the extent of the
to Nat, the highest bidder. The latter, on March 18, 1992, deficiency in the insurance of the insured property. In
registered with the Register of Deeds the certificate of case of loss or damage, the insurer will be liable only for
sale issued to him by the sheriff. Meanwhile, on January such proportion of the loss or damage as the amount of
27, 1993, Benjie insured with Garapal Insurance for insurance bears to the designated percentage of the full
P1,000,000.00 the same building that was sold at public value of the property insured.
auction to Nat. Benjie failed to redeem the property by
March 18, 1993. 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
reinsurance is an insurance against liability which the Yes, when insured and insurer have agreed to the
original insurer may incur in favor of the original insured. payment of premium by installments and partial payment
has been made at the time of loss, then the insurer
Insurance; Double Insurance (2005) becomes liable. When the car loss happened on the 5th
When does double insurance exist? (2%) month, the six months agreed period of payment had not
SUGGESTED ANSWER: yet elapsed (UCPB General Insurance v. Masagana Telamart, G.R.
Under Section 93 of the Insurance Code, there is double No. 137172, April 4, 2001). Francis can recover from
insurance when there is over-insurance with two or more Peninsula Insurance Company, but the latter has the right
companies, covering the same property, the same to deduct the amount of unpaid premium from the
insurable interest and the same risk. Double insurance insurance proceeds.
exists where the same person is insured by several
insurers separately in respect of the same subject matter Insurance; Life Insurance; Assignment of Policy (1991)
and interests. (Geagonia v. Court of Appeals, G.R. No. 114427, The policy of insurance upon his life, with a face value of
February 6, 1995) P100th was assigned by Jose, a married man with 2
legitimate children, to his nephew Y as security for a loan
Insurance; Double Insurance; effect (1993) of P50th. He did not give the insurer any written notice
Julie and Alma formed a business partnership. Under the of such assignment despite the explicit provision to that
business name Pino Shop, the partnership engaged in a effect in the policy. Jose died. Upon the claim on the
sale of construction materials. Julie insured the stocks in policy by the assignee, the insurer refused to pay on the
trade of Pino Shop with WGC Insurance Co for P350th. ground that it was not notified of the assignment. Upon
Subsequently, she again got an insurance contract with the other hand, the heirs of Jose contended that Y is not
RSI for P1m and then from EIC for P200th. A fire of entitled to any amount under the policy because the
unknown origin gutted the store of the partnership. Julie assignment without due notice to the insurer was void.
filed her claims with the three insurance companies. Resolve the issues.
However, her claims were denied separately for breach of SUGGESTED ANSWER:
policy condition which required the insured to give A life insurance is assignable. A provision, however, in
notice of any insurance effected covering the stocks in the policy stating that written notice of such an
trade. Julie went to court and contended that she should assignment should be given to the insurer is valid (Secs
not be blamed for the omission, alleging that the 181-182 Ins Code). The failure of the notice of
insurance agents for WGC, RSI and EIC knew of the assignment would thus preclude the assignee from
existence of the additional insurance coverages and that claiming rights under the policy. The failure of notice did
she was not informed about the requirement that such not, however, avoid the policy; hence, upon the death of
other or additional insurance should be stated in the Jose, the proceeds would, in the absence of a designated
policy. beneficiary, go to the estate of the insured. The estate, in
Is the contention of Julie tenable? Explain. turn, would be liable for the loan of P50,000 owing in
May she recover on her fire insurance policies? Explain. favor of Y.
SUGGESTED ANSWER:
1) No. An insured is required to disclose the other Insurance; Perfection of Insurance Contracts (2003)
insurances covering the subject matter of the insurance Josie Gatbonton obtained from Warranty Insurance
being applied for. (New Life Ent v CA 207 s 669) Corporation a comprehensive motor vehicle insurance to
cover her brand new automobile. She paid, and the
2) No, because she is guilty of violation of a warranty/ insurer accepted payment in check. Before the check
condition. could be encashed, Josie was involved in a motor vehicle
accident where her car became a total wreck. She sought
Insurance; Effects; Payment of Premiums by Installment payment from the insurer. Could the insurer be made
(2006) liable under the insurance coverage? (6%)
The Peninsula Insurance Company offered to insure SUGGESTED ANSWER:
Francis' brand new car against all risks in the sum of PI (per Dondee) Yes, because there was a perfected contract
Million for 1 year. The policy was issued with the of insurance the moment there is a meeting of the minds
premium fixed at 160,000.00 payable in 6 months. with respect to the object and the cause of payment. The
Francis only paid the first two months installments. payment of check is a valid payment unless upon
Despite demands, he failed to pay the subsequent encashment the check bounced.
installments. Five months after the issuance of the policy,
the vehicle was carnapped. Francis filed with the Insurance; Property Insurance; Prescription of Claims
insurance company a claim for its value. However, the (1996)
company denied his claim on the ground that he failed to Robin insured his building against fire with EFG
pay the premium resulting in the cancellation of the Assurance. The insurance policy contained the usual
policy. stipulation that any action or suit must be filed within
Can Francis recover from the Peninsula Insurance one year after the rejection of the claim.
Company? (5%)
SUGGESTED ANSWER:
After his building burned down, Robin filed his claim for son, BOY, injured 3 children of POS, a neighbor, who
fire loss with EFG. On Feb 28, 1994, EFG denied sued SAM for damages. SAM's lawyer was ATT, who
Robin’s claim. On April 3, 1994, Robin sought was paid for his services by the insurer for reporting
reconsideration of the denial, but EFG reiterated its periodically on the case to CNI. In one report, ATT
position. On March 20, 1995, Robin commenced judicial disclosed to CNI that after his investigations, he found
action against EFG. the injuries to the 3 children not accidental but
Should Robin’s action be given due course? Explain. intentional.
SUGGESTED ANSWER:
No, Robin’s action should not be given due course. Is SAM lost the case in court, and POS was awarded one
filing of the request for reconsideration did not suspend million pesos in damages which he sought to collect from
the running of the prescriptive period of one year the insurer. But CNI used ATTs report to deny the claim
stipulated in the insurance policy. Thus, when robin on the ground that the injuries to POS's 3 children were
commenced judicial action against EFG Assurance on intentional, hence excluded from the policy's coverage.
March 20, 1995, his ability to do so had already POS countered that CNI was estopped from using ATTs
prescribed. The one-year period is counted from Feb 28, report because it was unethical for ATT to provide
1994 when EFG denied Robin’s claim, not from the date prejudicial information against his client to the insurer,
(presumably after April 3, 1994) when EFG reiterated its CNI.
position denying Robin’s claim. The reason for this rule Who should prevail: the claimant, POS; or the insurer,
is to insure that claims against insurance companies are CNI? Decide with reasons briefly. (5%)
promptly settled and that insurance suits are brought by SUGGESTED ANSWER:
the insured while the evidence as to the origin and cause CNI is not estopped from using ATT's report, because
of the destruction has not yet disappeared. (See Sun Ins CNI, in the first place, commissioned it and paid ATT
Office Ltd v CA gr 89741, Mar 13 91 195s193) for it. On the other hand, ATT has no conflict of interest
because SAM and CNI are on the same side — their
Insurance; Return of Premiums (2000) interests being congruent with each other, namely, to
Name at least three instances when an insured is entitled oppose POS's claim. It cannot be said that ATT has used
to a return of the premium paid. the information to the disadvantage or prejudice of SAM.
SUGGESTED ANSWER:
Three instances when an insured is entitled to a return of However, in Finman General Assurance Corp. v. Court of Appeals,
premium paid are: 213 SCRA 493 (1992), it was explained that there is no
1. To the WHOLE PREMIUM, if no part of his "accident" in the context of an accident policy, if it is the
interest in the thing insured be exposed to any of the natural result of the insured's voluntary act,
perils insured against. unaccompanied by anything unforeseen except the injury.
There is no accident when a deliberate act is performed,
2. Where the insurance is made for a definite period of unless some additional and unforeseen happening occurs
time and the insured surrenders his policy, to such that brings about the injury. This element of
portion of the premium as corresponds with the deliberateness is not clearly shown from the facts of the
unexpired time at a pro rata rate, unless a short case, especially considering the fact that BOY is a minor,
period rate has been agreed upon and appears on the and the injured parties are also children. Accordingly, it is
face of the policy, after deducting from the whole possible that CNI may not prosper. ATT's report is not
premium any claim for loss or damage under the conclusive on POS or the court.
policy which has previously accrued.
3. When the contract is voidable on account of the Luis was the holder of an accident insurance policy
fraud or misrepresentation of the insurer or of his effective Nov 1, 1988 to Oct 31, 1989. At a boxing
agent or on account of facts the existence of which contest held on Jan 1, 1989 and sponsored by his
the insured was ignorant without his fault; or when, employer, he slipped and was hit on the fact by his
by any default of the insured other than actual fraud, opponent so he fell and his head hit one of the posts of
the insurer never incurred any liability under the the boxing ring. He was rendered unconscious and was
policy. dead on arrival at the hospital due to “intra-cranial
hemorrhage.”
ALTERNATIVE INSTANCE:
In case of an over insurance by several insurers, the
Can his father who is a beneficiary under said insurance
insured is entitled to a ratable return of the premium,
policy successfully claim indemnity from the insurance
proportioned to the amount by which the aggregate sum
company? Explain.
insured in all the policies exceeds the insurable value of SUGGESTED ANSWER:
the thing at risk. Yes, the father who is a beneficiary under the accidental
insurance can successfully claim indemnity for the death
Insured; Accident Policy (2004) of the insured. Clearly, the proximate cause of death was
CNI insure SAM under a homeowner's policy against the boxing contest. Death sustained in a boxing contest
claims for accidental injuries by neighbors. SAM's minor is an accident. (De la Cruz v Capital Ins & Surety Co 17s559)
or willful exposure to needless peril which are excepted
Insured; Accident vs. Suicide (1993) risks. The insured’s act was purely an act of negligence
S Insurance Co issued a personal accident policy to Bob which is covered by the policy and for which the insured
Tan with a face value of P500th. In the evening of Sep 5, got the insurance for his protection. In fact, he removed
1992, after his birthday party, Tan was in a happy mood the magazine from the gun and when he pointed the gun
but not drunk. He was playing with his hand gun, from to his temple he did so because he thought that it was
which he previously removed the magazine. As his safe for him to do so. He did so to assure his sister that
secretary was watching television, he stood in front of the gun was harmless. There is none in the policy that
her and pointed the gun at her. She pushed it aside and would relieve the insurer of liability for the death of the
said that it may be loaded. He assured her that it was not insured since the death was an accident.
and then pointed it at his temple. The next moment,
there was an explosion and Tan slumped to the floor Insurer: Effects: Several Insurers (2005)
lifeless. What is the nature of the liability of the several insurers
in double insurance? Explain. (2%)
The wife of the deceased sought payment on the policy SUGGESTED ANSWER:
but her claim was rejected. The insurance company The nature of the liability of the several insurers in
agreed that there was no suicide. However, it was the double insurance is that each insurer is bound to the
submission of the insurance company that there was no contribute ratably to the loss in proportion to the amount
accident. In support thereof, it contended a) that there for which he is liable under his contract as provided for
was no accident when a deliberate act was performed by Sec 94 of ICP par. The ratable contribution of each of
unless some additional, unexpected, independent and each insurer will be determined based on the following
unforeseen happening occur which produces or brings formula: AMOUNT OF POLICY divided by TOTAL
about the injury or death; and b) that the insured willfully INSURANCE TAKEN multiplied by LOSS =
exposed himself to needless peril and thus removed LIABILITY OF THE INSURER.
himself from the coverage of the insurance policy. Are ALTERNATIVE ANSWER:
the two contentions of the insurance company tenable? Each insurer is bound, as between himself and other
Explain. insurers, to contribute ratably to the loss in proportion to
SUGGESTED ANSWER: the amount for which he is liable under his contract. (Sec.
No. These two contentions are not tenable. The insurer 94, Insurance Code)
is liable for injury or death even due to the insured’s
gross negligence. The fact that the insured removed the Insurer; 3rd Party Liability (1996)
magazine from the hand gun means that the insured did While driving his car along EDSA, Cesar sideswiped
not willfully expose himself to needless peril. At most, Roberto, causing injuries to the latter, Roberto sued
the insured is only guilty of negligence (Sun Ins v CA 211 s Cesar and the third party liability insurer for damages
554) and/or insurance proceeds. The insurance company
moved to dismiss the complaint, contending that the
Insured; Accident vs. Suicide (1995) liability of Cesar has not yet been determined with
Sun-Moon Insurance issued a Personal Accident Policy finality.
to Henry Dy with a face value of P500th. A provision in a) Is the contention of the insurer correct? Explain.
the policy states that “the company shall not be liable in b) May the insurer be held liable with Cesar?
respect of “bodily injury’ consequent upon the insured SUGGESTED ANSWER:
person attempting to commit suicide or willfully No, the contention of the insurer is not correct. There is
exposing himself to needless peril except in an attempt to no need to wait for the decision of the court determining
save human life.” Six months later Henry Dy died of a Cesar’s liability with finality before the third party liability
bullet wound in his head. Investigation showed that one insurer could be sued. The occurrence of the injury to
evening Henry was in a happy mood although he was not Roberto immediately gave rise to the liability of the
drunk. He was playing with his handgun from which he insurer under its policy. In other words, where an
had previously removed its magazine. He pointed the insurance policy insures directly against liability, the
gun at his sister who got scared. He assured her it was insurer’s liability accrues immediately upon the
not loaded. He then pointed the gun at his temple and occurrence of the injury or event upon which the liability
pulled the trigger. The gun fired and Henry slumped on depends (Sherman Shafer v Judge RTC Olongapo City Branch 75 GR
the floor. l-78848, Nov 14 88 167s386)
Henry’s wife Beverly, as the designated beneficiary, The insurer cannot be held solidarily liable with Cesar.
sought to collect under the policy. Sun-Moon Insurance The liability of the insurer is based on contract while that
rejected her claim on the ground that the death of Henry of Cesar is based on tort. If the insurer were solidarily
was not accidental. Beverly sued the insurer. liable with Cesar, it could be made to pay more than the
Decide and Discuss fully. amount stated in the policy. This would, however, be
SUGGESTED ANSWER: contrary to the principles underlying insurance contracts.
Beverly can recover the proceeds of the policy from the On the other hand, if the insurer were solidarily liable
insurer. The death of the insured was not due to suicide with Cesar and it is made to pay only up to the amount
stated in the insurance policy, the principles underlying Luz P4,500 for the damage to the car as evidenced by a
solidary obligations would be violated. (Malayan Ins Co v CA release of claim executed by Luz discharging Raul.
GR L-36413 Sep 26, 88 165s536; Figuracion vda de Maglana v
Consolacion GR 60506 Aug 6, 92 212s268) So Cala demanded reimbursement from Luz, who
refused to pay, saying that the total damage to the car
Insurer; 3rd Party Liability (2000) was P9,500.00 Since Cala paid P5,000 only, Luz contends
X was riding a suburban utility vehicle (SUV) covered by that she was entitled to go after Raul to claim the
a comprehensive motor vehicle liability insurance additional P4,500.00
(CMVLI) underwritten by FastPay Insurance Company 1) Is Cala, as subrogee of Luz, entitled to reimbursement
when it collided with a speeding bus owned by RM from Raul?
Travel Inc. The collision resulted in serious injuries to X; 2) May Cala recover what it has paid Luz?
Y, a passenger of the bus; and Z, a pedestrian waiting for SUGGESTED ANSWER:
a ride at the scene of the collision. The police report 1) No. Luz executed a release in favor of Raul (Manila
established that the bus was the offending vehicle. The Mahogany Mfg Corp v CA GR 52756, 12 Oct 1987)
bus had CMVLI policy issued by Dragon Ins Co. X, Y,
and Z jointly sued RM Travel and Dragon Ins for 2) Yes. Cala lost its right against Raul because of the
indemnity under the Insurance Code of the Phils release executed by Luz. Since the release was made
(PD1460). The lower court applied the “no fault” without the consent of Cala, Cala may recover the
indemnity policy of the statute, dismissed the suit against amount of P5,000 form Luz (Manila Mahogany Mfg Corp v CA
RM Travel, and ordered Dragon Ins to pay indemnity to GR 52756, 12 Oct 1987).
all three plaintiffs. Do you agree with the court’s
judgment? Explain (2%) Insurer; Authorized Driver Clause (1991)
SUGGESTED ANSWER: Sheryl insured her newly acquired car, a Nissan Maxima
No. The cause of action of Y is based on the contract of against any loss or damage for P50th and against 3rd
carriage, while that of X and Z is based on torts. The party liability for P20th with the XYZ Ins Co. Under the
court should not have dismissed the suit against RM policy, the car must be driven only by an authorized
Travel. The court should have ordered Dragon Ins to pay driver who is either: 1) the insured, or 2) any person
each of X, Y , and Z to the extent of the insurance driving on the insured’s order or with his permission:
coverage, but whatever amount is agreed upon in the provided that the person driving is permitted in
policy should be answered first by RM Travel and the accordance with the licensing or other laws or regulations
succeeding amount should be paid by Dragon Insurance to drive the motor vehicle and is not disqualified from
up to the amount of the insurance coverage. The excess driving such motor vehicle by order of a court.
of the claims of X, Y, and Z, over and above such
insurance coverage, if any, should be answered or paid by During the effectivity of the policy, the car, then driven
RM Travel. by Sheryl herself, who had no driver’s license, met an
accident and was extensively damaged. The estimated
Insurer; 3rd Party Liability; No Fault Indemnity (1994) cost of repair was P40th. Sheryl immediately notified
What is your understanding of a “no fault indemnity” XYZ, but the latter refused to pay on the policy alleging
clause found in an insurance policy? that Sheryl violated the terms thereof when she drove it
SUGGESTED ANSWER: without a driver’s license. Is the insurer correct?
Under the “NO FAULT INDEMNITY” clause, any SUGGESTED ANSWER:
claim for death or injury of any passenger or third party The insurer was not correct in denying the claim since
shall be paid without the necessity of proving fault or the proviso “that the person driving is permitted in
negligence of any kind. The indemnity in respect of any accordance with the licensing, etc.” qualified only a
one person shall not exceed P5,000.00, provided they are person driving the vehicle other than the insured at the
under oath, the following proofs shall be sufficient: time of the accident (Palermo v Pyramid Ins Co GR 36480 31
1. police report of the accident; and May 88)
2. death certificate and evidence sufficient to establish ALTERNATIVE ANSWER:
the proper payee; or The insurer is correct. The clause “authorized driver” in
3. medical report and evidence of medical or hospital the policy evidently applies to both the insured and any
disbursement in respect of which refund is claimed. other person driving the vehicle at the time of the
4. Claim may be made against one motor vehicle only. accident. The term “authorized driver” should be
construed as a person who is authorized by law to driver
Insurer; 3rd Party Liability; Quitclaim (1994) the vehicle (Peza v Alikpala 160s31)
Raul’s truck bumped the car owned by Luz. The car was
insured by Cala Insurance. For the damage caused, Cala Insurer; Authorized Driver Clause (2003)
paid Luz P5,000.00 in amicable settlement. Luz executed Rick de la Cruz insured his passenger jeepney with
a release of claim, subrogating Cala to all her rights Asiatic Insurers, Inc. The policy provided that the
against Raul. When Cala demanded reimbursement from authorized driver of the vehicle should have a valid and
Raul, the latter refused saying that he had already paid existing driver’s license. The passenger jeepney of Rick
de la Cruz which was at the time driven by Jay Cruz,
figured in an accident resulting in the death of a unpaid balance on the promissory note should be paid
passenger. At the time of the accident, Jay Cruz was and not only the installments due and payable before the
licensed to drive but it was confiscated by an LTO agent loss of the car.
who issued him a Traffic Violation Report (TVR) just
minutes before the accident. Could Asiatic Insurers, Inc., Insurer; Group Insurance; Employer-Policy Holder (2000)
be made liable under its policy? Why? (6%) X company procured a group accident insurance policy
SUGGESTED ANSWER: for its construction employees variously assigned to its
Asiatic Insurers, Inc., should be made liable under the provincial infrastructure projects. Y Insurance Company
policy. The fact that the driver was merely holding a TVR underwrote the coverage, the premiums of which were
does not violate the condition that the driver should have paid for entirely by X Company without any employee
a valid and existing driver’s license. contributions. While the policy was in effect, five of the
covered employees perished at sea on their way to their
Besides, such a condition should be disregarded because provincial assignments. Their wives sued Y Insurance
what is involved is a passenger jeepney, and what is Company for payment of death benefits under the policy.
involved here is not own damage insurance but third While the suit was pending, the wives signed a power of
party liability where the injured party is a third party not attorney designating X Company executive, PJ, as their
privy to the contract of insurance. authorized representative to enter into a settlement with
the insurance company. When a settlement was reached,
Insurer; Authorized Driver Clause; vehicle is stolen PJ instructed the insurance company to issue the
(1993) settlement check to the order of X Company, which will
HL insured his brand new car with P Ins Co for undertake the payment to the individual claimants of
comprehensive coverage wherein the insurance company their respective shares. PJ misappropriated the settlement
undertook to indemnify him against loss or damage to amount and the wives pursued their case against Y
the car a) by accidental collision ... b) by fire, external Insurance Co. Will the suit prosper? Explain (3%)
explosion, burglary, or theft, and c) malicious act. SUGGESTED ANSWER:
Yes. The suit will prosper. Y Ins Co is liable. X Co,
After a month, the car was carnapped while parked in the through its executive, PJ, acted as agent of Y Ins Co. The
parking space in front of the Intercontinental Hotel in latter is thus bound by the misconduct of its agent. It is
Makati. HL’s wife who was driving said car before it was the usual practice in the group insurance business that
carnapped reported immediately the incident to various the employer-policy holder is the agent of the insurer.
government agencies in compliance with the insurance
requirements. Insurer; Liability of the Insurers (1990)
a) Suppose that Fortune owns a house valued at P600th
Because the car could not be recovered, HL filed a claim and insured the same against fire with 3 insurance
for the loss of the car with the insurance company but it companies as follows:
was denied on the ground that his wife who was driving X – P400th
the car when it was carnapped was in the possession of Y – P200th
an expired driver’s license, a violation of the “authorized Z – P600th
driver” clause of the insurance company.
1) May the insurance company be held liable to In the absence of any stipulation in the policies from
indemnify HL for the loss of the insured vehicle? which insurance company or companies may Fortune
Explain. recover in case fire should destroy his house completely?
2) Supposing that the car was brought by HL on SUGGESTED ANSWER:
installment basis and there were installments due Fortune may recover from the insurers in such order as
and payable before the loss of the car as well as he may select up to their concurrent liability (Sec 94 Ins
installments not yet payable. Because of the loss of Code)
the car, the vendor demanded from HL the unpaid
balance of the promissory note. HL resisted the Valued Policy
demand and claimed that he was only liable for the b) If each of the fire insurance policies obtained by
installments due and payable before the loss of the Fortune in the problem (a) is a valued policy and the
car but no longer liable for other installments not yet value of his house was fixed in each of the policies at
due at the time of the loss of the car. Decide. P1m, how much would Fortune recover from X if he has
SUGGESTED ANSWER: already obtained full payment on the insurance policies
1) Yes. The car was lost due to theft. What applies in this issued by Y and Z?
case is the “theft” clause, and not the “authorized driver” SUGGESTED ANSWER:
clause. It is immaterial that HL’s wife was driving the car Fortune may still recover only the balance of P200,000
with an expired driver’s license at the time it was from X insurance company since the insured may only
carnapped. (Perla Compania de Seguros v CA 208 s 487) recover up to the extent of his loss.
ALTERNATIVE:
2) The promissory note is not affected by whatever
befalls the subject matter of the accessory contract. The
Having already obtained full payment on the insurance hired professionals to afloat the vessel for P900,000.00.
policies issued by Y and Z, Fortune may no longer When re-floated, the vessel needed repairs estimated at
recover from X insurance policy. P2,000,000.00. The insurance company refused to pay
the claim of the ship owner, stating that there was “no
Open Policy constructive total loss.”
c) If each of the policies obtained by Fortune in the a) Was there “constructive total loss” to entitle the ship
problem (a) above is an open policy and it was owner to recover from the insurance company?
immediately determined after the fire that the value of Explain.
Fortune’s house was P2.4m, how much may he collect b) Was it proper for the ship owner to send a notice of
from X,Y and Z? abandonment to the insurance company? Explain.
SUGGESTED ANSWER: (5%)
In an open policy, the insured may recover his total loss SUGGESTED ANSWER:
up to the amount of the insurance cover. Thus, the No, there was no "constructive total loss" because the
extent of recovery would be P400th from X, P200th vessel was refloated and the costs of refloating plus the
from Y, and P600th from Z. needed repairs (P 2.9 Million) will not be more than
three-fourths of the value of the vessel. A constructive
d) In problem (a), what is the extent of the liability of the total loss is one which gives to a person insured a right to
insurance companies among themselves? abandon. (Sec, 131, Insurance Code) There would have
SUGGESTED ANSWER: been a constructive total loss had the vessel MN Pearly
In problem (a), the insurance companies among Shells suffer loss or needed refloating and repairs of
themselves would be liable, viz: more than the required three-fourths of its value, i.e.,
X – 4/12 of P600th = P200th more than P30.0 Million (Sec. 139, Insurance Code, cited in
Y – 2/12 of P600th = P100th Oriental Assurance v. Court of Appeals and Panama Saw Mill, G.R.
Z – 6/12 of P600th = P300th No. 94052, August 9, 1991)
e) Supposing in problem (a) above, Fortune was able to However, the insurance company shall pay for the total
collect from both Y and Z, may he keep the entire costs of refloating and needed repairs (P2.9 Million).
amount he was able to collect from the said 2 insurance
companies? c) Was it proper for the ship owner to send a notice of
SUGGESTED ANSWER: abandonment to the insurance company? Explain.
No, he can only be indemnified for his loss, not profit SUGGESTED ANSWER:
thereby; hence he must return P200th of the P800th he No, it was not proper for the ship owner to send a notice
was able to collect. of abandonment to the insurance company because
abandonment can only be availed of when, in a marine
Loss: Actual Total Loss (1996) insurance contract, the amount to be expended to
RC Corporation purchased rice from Thailand, which it recover the vessel would have been more than three-
intended to sell locally. Due to stormy weather, the ship fourths of its value. Vessel MN Pearly Shells needed only
carrying the rice became submerged in sea water, and P2.9 Million, which does not meet the required three-
with it the rice cargo. When the cargo arrived in Manila, fourths of its value to merit abandonment. (Section 139,
RC filed a claim for total loss with the insurer, because Insurance Code, cited in Oriental Assurance v. Court of Appeals
the rice was no longer fit for human consumption. and Panama Saiv Mill, G.R. No. 94052, August 9, 1991)
Admittedly, the rice could still be used as animal feed. Is
RC’s claim for total loss justified? Explain. Loss: Total Loss Only (1992)
SUGGESTED ANSWER: An insurance company issued a marine insurance policy
Yes, RC’s claim for total loss is justified. The rice, which covering a shipment by sea from Mindoro to Batangas of
was imported from Thailand for sale locally, is obviously 1,000 pieces of Mindoro garden stones against “total loss
intended for consumption by the public. The complete only.” The stones were loaded in two lighters, the first
physical destruction of the rice is not essential to with 600 pieces and the second with 400 pieces. Because
constitute an actual total loss. Such a loss exists in this of rough seas, damage was caused the second lighter
case since the rice, having been soaked in sea water and resulting in the loss of 325 out of the 400 pieces. The
thereby rendered unfit for human consumption, has owner of the shipment filed claims against the insurance
become totally useless for the purpose for which it was company on the ground of constructive total loss
imported (Pan Malayan Ins Co v CA gr 95070 Sep 5, 1991) inasmuch as more than ¾ of the value of the stones had
been lost in one of the lighters.
Loss: Constructive Total Loss (2005) Is the insurance company liable under its policy? Why?
M/V Pearly Shells, a passenger and cargo vessel, was SUGGESTED ANSWER:
insured for P40,000,000.00 against “constructive total The insurance company is not liable under its policy
loss.” Due to a typhoon, it sank near Palawan. Luckily, covering against “total loss only” the shipment of 1,000
there were no casualties, only injured passengers. The pieces of Mindoro garden stones. There is no
ship owner sent a notice of abandonment of his interest constructive total loss that can claimed since the ¾ rule is
over the vessel to the insurance company which then to be computed on the total 1,000 pieces of Mindoro
garden stones covered by the single policy coverage (see a. to print, reprint, publish, copy, distribute, multiply,
Oriental Assurance Co v CA 200 s 459) sell and make photographs, photo engravings, and
pictorial illustrations of the works;
Marine Insurance; Implied Warranties (2000)
What warranties are implied in marine insurance? b. to make any translation or other version or extracts
SUGGESTED ANSWER: or arrangements or adaptation thereof; to dramatize
The following warranties are implied in marine insurance: if it be a non-dramatic work; to convert it into a
1) That the ship is seaworthy to make the voyage non-dramatic work if it be a drama; to complete or
and/or to take in certain cargoes execute it if it be a model or design;
2) That the ship shall not deviate from the voyage
insured; c. to exhibit, perform, represent, produce or reproduce
3) That the ship shall carry the necessary documents to the work in any manner or by any method whatever
show nationality or neutrality and that it will not for profit or otherwise; if not reproduced in copies
carry any document which will cast reasonable for sale, to sell any manuscripts or any record
suspicion thereon; whatsoever thereof;
4) That the ship shall not carry contraband, especially if
it is making a voyage through belligerent waters. d. to make any other use or disposition of the work
consistent with the laws of the land
Marine Insurance; Peril of the Ship vs. Peril of the Sea
(1998) Copyright; Commissioned Artist (1995)
A marine insurance policy on a cargo states that “the Solid Investment House commissioned Mon Blanco and
insurer shall be liable for losses incident to perils of the his son Steve, both noted artists, to paint a mural for the
sea.” During the voyage, seawater entered the Main Lobby of the new building of Solid for a contract
compartment where the cargo was stored due to the price of P2m.
defective drainpipe of the ship. The insured filed an a) who owns the mural? Explain
action on the policy for recovery of the damages caused b) Who owns the copyright of the mural? Explain.
to the cargo. May the insured recover damages? (5%) SUGGESTED ANSWER:
SUGGESTED ANSWER: a) Solid owns the mural. Solid was the one who
No. The proximate cause of the damage to the cargo commissioned the artists to do the work and paid for the
insured was the defective drainpipe of the ship. This is work in the sum of P2m
peril of the ship, and not peril of the sea. The defect in
the drainpipe was the result of the ordinary use of the b)Unless there is a stipulation to the contrary in the
ship. To recover under a marine insurance policy, the contract, the copyright shall belong in joint ownership to
proximate cause of the loss or damage must be peril of Solid and Mon and Steve.
the sea.
Mutual Insurance Company; Nature & Definition (2006) BR and CT are noted artists whose paintings are highly
What is a mutual insurance company or association? prized by collectors. Dr. DL commissioned them to paint
SUGGESTED ANSWER: a mural at the main lobby of his new hospital for
A mutual life insurance corporation is a cooperative that children. Both agreed to collaborate on the project for a
promotes the welfare of its own members, with the total fee of two million pesos to be equally divided
money collected from among themselves and solely for between them. It was also agreed that Dr. DL had to
their own protection and not for profit. Members are provide all the materials for the painting and pay for the
both the insurer and insured. A mutual life insurance wages of technicians and laborers needed for the work
company has no capital stock and relies solely upon its on the project.
contributions or premiums to meet unexpected losses,
contingencies and expenses (Republic v. Sunlife, G.R. No Assume that the project is completed and both BR and
158085, October 14, 2005). 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?
Intellectual Property Why? Explain. (5%)
SUGGESTED ANSWER:
Under Section 178.4 of the Intellectual Property Code, in
Copyright (1995) case of commissioned work, the creator (in the absence
What intellectual property rights are protected by of a written stipulation to the contrary) owns the
copyright? copyright, but the work itself belongs to the person who
SUGGESTED ANSWER:
Sec 5 of PD 49 provides that Copyright shall consist in commissioned its creation. Accordingly, the mural
the exclusive right: belongs to DL. However, BR and CT own the copyright,
since there is no stipulation to the contrary.
The Victoria Hotel chain reproduces videotapes, Liza cannot be held liable for infringement of copyright
distributes the copies thereof to its hotels and makes since under the Intellectual Property Code, one of the
them available to hotel guests for viewing in the hotel limitations to the copyright is the making of quotations
guest rooms. It charges a separate nominal fee for the use from a published work for purpose of any judicial
of the videotape player. proceedings or for giving of professorial advice by legal
1) Can the Victoria Hotel be enjoined for infringing practitioner, provided that the source and name of the
copyrights and held liable for damages? author are identified (See Section 184.1[k] of the
2) Would it make any difference if Victoria Hotel does Intellectual Property Code of the Philippines).
not charge any fee for the use of the videotape?
SUGGESTED ANSWER: Copyright; Photocopy; when allowed (1998)
1) Yes. Victoria Hotel has no right to use such video May a person have photocopies of some pages of the
tapes in its hotel business without the consent of the book of Professor Rosario made without violating the
creator/ owner of the copyright. copyright law? (3%)
SUGGESTED ANSWER:
2) No. The use of the videotapes is for business and not Yes. The private reproduction of a published work in a
merely for home consumption. (Filipino Society of Composers, single copy, where the reproduction is made by a natural
Authors Publishers v Tan 148 s 461; pd 1988) person exclusively for research and private study, is
permitted, without the authorization of the owner of the
Copyright; Infringement (1997) copyright in the work.
In an action for damages on account of an infringement
of a copyright, the defendant (the alleged pirate) raised Infringement vs. Unfair Competition (1996)
the defense that he was unaware that what he had copied What is the distinction between infringement and unfair
was a copyright material. Would this defense be valid? competition?
No. An intention to pirate is not an element of The distinction between infringement (presumably
infringement. Hence, an honest intention is no defense trademark) and unfair competition are as follows:
to an action for infringement. 1) Infringement of trademark is the unauthorized use
ALTERNATIVE ANSWER: of a trademark, whereas unfair competition is the
Yes. The owner of the copyright must make others aware passing off of one’s goods as those of another;
that the material in question is under or covered by a
copyright. This is done by the giving of such notice at a 2) Fraudulent intent is unnecessary in infringement of
prominent portion of the copyright material. When the trademark, whereas fraudulent intent is essential in
alleged pirate is thus made aware thereof, his act of unfair competition;
pirating the copy material will constitute infringement.
3) The prior registration of the trademark is a
Copyright; Infringement (1998) prerequisite to an action for infringement of
Juan Xavier wrote and published a story similar to an trademark, whereas registration of the trademark is
unpublished copyrighted story of Manoling Santiago. It not necessary in unfair competition. (Del Monte Corp v
was, however, conclusively proven that Juan Xavier was CA 78325 Jan 25,90 181s410)
not aware that the story of Manoling Santiago was
protected by copyright. Manoling Santiago sued Juan Infringement vs. Unfair Competition (2003)
Xavier for infringement of copyright. Is Juan Xavier In what way is an infringement of a trademark similar to
liable? (2%) that which pertains to unfair competition?
Yes. Juan Xavier is liable for infringement of copyright.
It is not necessary that Juan Xavier is aware that the story Infringement; Jurisdiction (2003)
of Manoling Santiago was protected by copyright. The K-9 Corporation, a foreign corporation alleging itself to
work of Manoling Santiago is protected at the time of its be the registered owner of trademark “K-9” and logo
creation. “K”, filed an Inter Partes case with the Intellectual
Property Office against Kanin Corporation for the
Copyright; Infringement (2006) cancellation of the latter’s mark “K-9” and logo “K.”
In a written legal opinion for a client on the difference During the pendency of the case before the IPO, Kanin
between apprenticeship and learnership, Liza quoted Corporation brought suit against K-9 Corporation before
without permission a labor law expert's comment the RTC for infringement and damages. Could the action
appearing in his book entitled "Annotations on the Labor before the RTC prosper? Why?
Code." SUGGESTED ANSWER:
Can the labor law expert hold Liza liable for infringement
of copyright for quoting a portion of his book without Patent; Non-Patentable Inventions (2006)
his permission? (5%) Supposing Albert Einstein were alive today and he filed
SUGGESTED ANSWER: with the Intellectual Property Office (IPO) an application
for patent for his theory of relativity expressed in the
formula E=mc2. The IPO disapproved Einstein's invention did not fall within their regular duties. What
application on the ground that his theory of relativity is prevails is the provision of the Intellectual Property Code
not patentable. that holds that the invention belongs to the employee, if
Is the IPO's action correct? (5%) the inventive activity is not a part of his regular duties,
SUGGESTED ANSWER: even if he uses the time, facilities and materials of the
Yes, the IPO is correct because under the Intellectual employer.
Property Code, discoveries, scientific theories and
mathematical methods, are classified to be as "non- Patents: Infringement; Remedies & Defenses (1993)
patentable inventions." Eintein's theory of relativity falls Ferdie is a patent owner of a certain invention. He
within the category of being a non-patentable "scientific discovered that his invention is being infringed by
theory." Johann.
1) What are the remedies available to Ferdie against
Patents: Gas-Saving Device: first to file rule (2005) Johann?
Cezar works in a car manufacturing company owned by 2) If you were the lawyer of Johann in the infringement
Joab. Cezar is quite innovative and loves to tinker with suit, what are the defenses that your client can assert?
things. With the materials and parts of the car, he was SUGGESTED ANSWER:
able to invent a gas-saving device that will enable cars to 1) The following remedies are available to Ferdie against
consume less gas. Francis, a co-worker, saw how Cezar Johann.
created the device and likewise, came up with a similar a. seize and destroy
gadget, also using scrap materials and spare parts of the b. injunction
company. Thereafter, Francis filed an application for c. damages in such amount may have been
registration of his device with the Bureau of Patents. obtained from the use of the invention if
Eighteen months later, Cezar filed his application for the properly transacted which can be more than
registration of his device with the Bureau of Patents. what the infringer (Johann ) received.
d. Attorney’s fees and cost
1) Is the gas-saving device patentable? Explain.
SUGGESTED ANSWER: 2) These are the defenses that can be asserted in an
Yes, the gas-saving device is patentable because it infringement suit:
provides a technical solution to a problem in a field of a. Patent is invalid (Sec 45 RA 165, as amended)
human activity. It is new and involves an inventive step, b. Patent is not new or patentable
and certainly industrially applicable. It therefore fulfills c. Specification of the invention does not comply
the requisites mandated by the intellectual Property Code with Sec 14
for what is patentable. d. Patent was issued not to the true and actual
inventor, designer or author of the utility model
2) Assuming that it is patentable, who is entitled to the or the plaintiff did not derive his rights from the
patent? What, if any, is the remedy of the losing true and actual inventor, designer or author of
party? the utility model (Sec 28 RA 165 as amended)
SUGGESTED ANSWER:
Cezar is entitled to the patent because he was the real Patents; Infringement (1992)
inventor. Francis, copying from the work of Cezar, In an action for infringement of patent, the alleged
cannot claim the essential criteria of an inventor, who infringer defended himself by stating 1) that the patent
must possess essential elements of novelty, originality issued by the Patent Office was not really an invention
and precedence to be entitled to protection. which was patentable; 2) that he had no intent to infringe
Nevertheless, under the "first to file rule," Francis so that there was no actionable case for infringement;
application would have to be given priority. Cezar, and 3) that there was no exact duplication of the
however, has within three months from the decision, to patentee’s existing patent but only a minor improvement.
have it cancelled as the rightful inventor; or within one With those defenses, would you exempt the alleged
year from publication, to file an action to prove his violator from liability? Why?
priority to the invention, which has been taken from him SUGGESTED ANSWER:
and fraudulently registered by Francis. I would not exempt the alleged violator from liability for
the following reasons:
3) Supposing Joab got wind of the inventions of his 1) A patent once issued by the Patent Office raises a
employees and also laid claim to the patents, presumption that the article is patentable; it can,
asserting that Cezar and Francis were using his however be shown otherwise (Sec 45 RA 165). A
materials and company time in making the devices, mere statement or allegation is not enough to
will his claim prevail over those of his employees? destroy that presumption. (Aquas v de Leon 30 Jan 82 L-
Explain. 32160)
SUGGESTED ANSWER:
No, Joab's claim cannot prevail over those of his 2) An intention to infringe is not necessary nor an
employees. In the first place, Joab did not commission element in a case for infringement of a patent.
any of the two employees to invent the device, and its
3) There is no need of exact duplication of the deception could be rather remote. Since it cannot really
patentee’s existing patent such as when the be said that physicians can be so easily deceived by such
improvement made by another is merely minor trademark as “Axilon,” it may be hard to expect an
(Frank v Benito, 51p713). To be independently opposition thereto to succeed.
patentable, an improvement of an existing patented ANOTHER ANSWER:
invention must be a major improvement (Aquas v de The application for registration of Turbo Corporation
Leon L-32160 30Jan82) may be contested. The factual settings do not indicate
that there had been prior use for at least 2 months of the
Patents; Rights over the Invention (1990) trademark “Axilon.”
Cheche invented a device that can convert rainwater into
automobile fuel. She asked Macon, a lawyer, to assist in Trademark (1994)
getting her invention patented. Macon suggested that Laberge, Inc., manufactures and markets after-shave
they form a corporation with other friends and have the lotion, shaving cream, deodorant, talcum powder and
corporation apply for the patent, 80% of the shares of toilet soap, using the trademark “PRUT”, which is
stock thereof to be subscribed by Cheche and 5% by registered with the Phil Patent Office. Laberge does not
Macon. The corporation was formed and the patent manufacture briefs and underwear and these items are
application was filed. However, Cheche died 3 months not specified in the certificate of registration.
later of a heart attack.
JG who manufactures briefs and underwear, wants to
Franco, the estranged husband of Cheche, contested the know whether, under our laws, he can use and register
application of the corporation and filed his own patent the trademark “PRUTE” for his merchandise. What is
application as the sole surviving heir of Cheche. Decide your advice?
the issue with reasons. SUGGESTED ANSWER:
SUGGESTED ANSWER: Yes. The trademark registered in the name of Laberge
The estranged husband of Checke cannot successfully Inc covers only after-shave lotion, shaving cream,
contest the application. The right over inventions accrue deodorant, talcum powder and toilet soap. It does not
from the moment of creation and as a right it can cover briefs and underwear.
lawfully be assigned. Once the title thereto is vested in
the transferee, the latter has the right to apply for its The limit of the trademark is stated in the certificate
registration. The estranged husband of Cheche, if not issued to Laberge Inc. It does not include briefs and
disqualified to inherit, merely would succeed to the underwear which are different products protected by
interest of Cheche. Larberge’s trademark.
Note: An examinee who answers on the basis of the issue of
validity of the transfer of patent as a valid consideration for JG can register the trademark “PRUTE” to cover its
subscription of the shares of stocks should be given due credit. briefs and underwear (Faberge Inc v IAC 215 s 316)
Trademark (1990) Trademark, Test of Dominancy (1996)

In 1988, the Food and Drug Administration approved What is the “test of dominancy?”
the labels submitted by Turbo Corporation for its new SUGGESTED ANSWER:
drug brand name, “Axilon.” Turbo is now applying with The test of dominancy requires that if the competing
the Bureau of Patents, Trademarks and Technology trademark contains the main or essential features of
Transfer for the registration of said brand name. It was another and confusion and deception is likely to result,
subsequently confirmed that “Accilonne” is a generic infringement takes place. Duplication or imitation is not
term for a class of anti-fungal drugs and is used as such necessary; not is it necessary that the infringing label
by the medical profession and the pharmaceutical should suggest an effort to imitate. Similarity in size,
industry, and that it is used as a generic chemical name in form and color, while relevant, is not conclusive. (Asia
various scientific and professional publications. A Brewery v CA GR 103543 Jul5,93 224s437)
competing drug manufacturer asks you to contest the
registration of the brand name “Axilon” by Turbo. Trademark; Infringement (1991)
What will you advice be? Sony is a registered trademark for TV, stereo, radio,
SUGGESTED ANSWER: cameras, betamax and other electronic products. A local
The application for registration by Turbo Corporation company, Best Manufacturing Inc produced electric fans
may be contested. The Trademark Law would not allow which it sold under the trademark Sony without the
the registration of a trademark which, when applied to or consent of Sony. Sony sued Best Manufacturing for
used in connection with his products, is merely infringement. Decide the case.
descriptive or deceptively misdescriptive of them. SUGGESTED ANSWER:
Confusion can result from the use of “Axilon” as the There is no infringement. In order that a case for
generic product itself. infringement of trademark can prosper, the products on
ALTERNATIVE ANSWER: which the trademark is used must be of the same kind.
Medical drugs may be procured only upon prescription The electric fans produced by Best Manufacturing cannot
made by a duly licensed physician. The possibility of
be said to be similar to such products as TV, stereo and the law are conferred by the fact of registration and not
radio sets or cameras or betamax products of Sony. by use. Although Shangrila Corporation's parent had
ALTERNATIVE ANSWER: used the tradename and logo long before, the protection
There is infringement. If the owner of a trademark which of the laws will be for S Development Corporation
manufactures certain types of goods could reasonably be because it was the first entity to register the intellectual
expected to engage in the manufacture of another properties.
product using the same trademark, another party who
uses the trademark for that product can be held liable for How does the international affiliation of Shangrila
using that trademark. Using this standard, infringement Corporation affect the outcome of the dispute?
exists because Sony can be reasonably expected to use Explain. (5%)
such trademark on electric fans. SUGGESTED ANSWER:
The international affiliation of Shangrila Corporation
Trademark; Test of Dominancy (1996) may be critical in the event that its affiliates or parent
N Corporation manufactures rubber shoes under the company abroad had registered in a foreign jurisdiction
trademark “Jordann” which hit the Phil market in 1985, the tradename and the logo. A well-known mark and
and registered its trademark with the Bureau of Patents, tradename is subject to protection under Treaty of Paris
Trademarks and Technology (BPTTT) in 1990. PK for the Protection of Intellectual Property to which the
Company also manufactures rubber shoes with the Philippines is a member.
trademark “Javorski” which it registered with BPTTT in
1978.
Insolvency & Corporate
In 1992, PK Co adopted and copied the design of N
Corporation’s “Jordann” rubber shoes, both as to shape Recovery
and color, but retained the trademark “Javorski” on its
products. Insolvency vs. Suspension of Payment (1998)
Distinguish insolvency from suspension of payments.
May PK Company be held liable to N Co? Explain. (3%)
PK Co may be liable for unfairly competing against N a) In insolvency, the liabilities of the debtor are more
Co. By copying the design, shape and color of N than his assets, while in suspension of payments,
Corporation’s “Jordann” rubber shoes and using the assets of the debtor are more than his liabilities.
same in its rubber shoes trademarked “Javorski,” PK is
obviously trying to pass off its shoes for those of N. It is b) In insolvency, the assets of the debtor are to be
of no moment that he trademark “Javorski” was converted into cash for distribution among his
registered ahead of the trademark “Jordann.” Priority in creditors, while in suspension of payments, the
registration is not material in an action for unfair debtor is only asking for time within which to
competition as distinguished from an action for convert his frozen assets into liquid cash with which
infringement of trademark. The basis of an action for to pay his obligations when the latter fall due.
unfair competition is confusing and misleading similarity
in general appearance, not similarity of trademarks Insolvency: Voluntary Insolvency (2005)
(Converse Rubber Co v Jacinto Rubber & Plastics Co GR 27425 and
Aaron, a well-known architect, is suffering from financial
30505, Apr28,80 97s158)
reverses. He has four creditors with a total claim of P26
Million. Despite his intention to pay these obligations, his
Tradename: International Affiliation (2005)
current assets are insufficient to cover all of them. His
S Development Corporation sued Shangrila Corporation
creditors are about to sue him. Consequently, he was
for using the “S” logo and the tradename “Shangrila”.
constrained to file a petition for insolvency. (5%)
The former claims that it was the first to register the logo
a) Since Aaron was merely forced by circumstances to
and the tradename in the Philippines and that it had been
petition the court to declare him insolvent, can the
using the same in its restaurant business. Shangrila
judge properly treat the petition as one for
Corporation counters that it is an affiliate of an
involuntary insolvency? Explain.
international organization which has been using such SUGGESTED ANSWER:
logo and tradename “Shangrila” for over 20 years. No. This is a case for voluntary insolvency because this
However, Shangrila Corporation registered the was filed by an insolvent debtor owing debts exceeding
tradename and logo in the Philippines only after the suit the amount of P1,000.00 under Section 14 of the
was filed. Insolvency Law. Under Section 20 of the Insolvency
Law, the petition must be filed by three or more
Which of the two corporations has a better right to use creditors. In the case at bar, it is Aaron, the debtor, who
the logo and the tradename? Explain. filed the insolvency proceedings.
SUGGESTED ANSWER:
S Development Corporation has a better right to use the
logo and the tradename, since the protective benefits of
b) If Aaron is declared an insolvent by the court, what petition. In the meantime, the case filed by Vicente
would be the effect, if any, of such declaration on proceeded and resulted in a judgment award in favor of
his creditors? Explain. Vicente.
SUGGESTED ANSWER: May the judgment obtained by Vicente be enforced
A declaration by the court that the petitioner is insolvent independently of the insolvency proceedings? Explain.
will have the following effects: SUGGESTED ANSWER:
1) The sheriff shall take possession of all assets of The judgment obtained by Vicente can be enforced
the debtor until the appointment of a receiver independently of the insolvency proceedings. Under Sec
or assignee; 32 of the Insolvency Law, the assignment to the assignee
2) Payment to the debtor of any debts due to him of all the real and personal property, estate and effects of
and the delivery to the debtor of any property the debtor made by the clerk of the court shall vacate and
belonging to him, and the transfer of any set aside any judgment entered in any action commenced
property by him are forbidden; with 30 days immediately prior to the commencement of
3) All civil proceedings pending against the insolvency proceedings. In this case, however, the action
insolvent shall be stayed; and filed by Vicente against Carlito was commenced by
4) Mortgages and pledges are not affected by the Vicente not later than June 16, 1995 (the facts on this
order declaring a person insolvent. (Sec. 59, point are not clear) when Vicente obtained a writ of
Insolvency Law) preliminary attachment against Carlito or more than 30
days before the petition for involuntary insolvency was
c) Assuming that, Aaron has guarantors for his debts, filed against Carlito by his other creditors. (i.e. on July 29,
are the guarantors released from their obligations 1995) (Radiola-Toshiba Phil v IAC GR 75222 July18,91 199s373)
once Aaron is discharged from his debts? Explain.
SUGGESTED ANSWER: Insolvency; Effect; Declaration of Insolvency (1991)
No, precisely under the principle of excussion, the What are the effects of a judgment in insolvency in
liability of the guarantors arises only after the exhaustion Voluntary Insolvency cases?
of the assets of the principal obligor. The effect of SUGGESTED ANSWER:
discharge merely confirms exhaustion of the assets of the The adjudication or declaration of insolvency by the
obligor available to his creditors. court, after hearing or default, shall have the following
ALTERNATIVE ANSWER: effects:
Yes. Article 2076 of the Civil Code provides: The a) Forbid the payment to the debtor of any debt due to
obligation of the guarantor is extinguished at the same him and the delivery to him of any property
time as that of the debtor, and for the same causes as all belonging to him;
other obligations. b) Forbid the transfer of any property by him; and
c) Stay of all civil proceedings against the insolvent but
d) What remedies are available to the guarantors in case foreclosure may be allowed (Secs 18 & 24
they are made to pay the creditors? Explain. Insolvency Law)
SUGGESTED ANSWER:
Under Article 2081, the guarantor may set up against the
Insolvency; Fraudulent Payment (2002)
creditor all the defenses that pertain to the principal As of June 1, 2002, Edzo Systems Corporation (Edzo)
debtor. The discharge obtained by Aaron on the principal was indebted to the following creditors:
obligation can now be used as a defense by the a) Ace Equipment Supplies – for various personal
guarantors against the creditors. The guarantors are also computers and accessories sold to Edzo on credit
entitled to indemnity under Article 2066 of the Civil amounting to P300,000.
Code. b) Handyman Garage – for mechanical repairs (parts
Insolvency; Assets vs. Liabilities (1998) and service) performed on Edzo’s company car
Horacio opened a coffee shop using money borrowed amounting to P10,000.
from financial institutions. After 3 months, Horacio left c) Joselyn Reyes – former employee of Edzo who sued
for the US with the intent of defrauding his creditors. Edzo for unlawful termination of employment and
While his liabilities are worth P1.2m, his assets, however was able to obtain a final judgment against Edzo for
are worth P1.5m. May Horacio be declared insolvent? P100,000.
(2%) d) Bureau of Internal Revenue – for unpaid value-
SUGGESTED ANSWER:
No. Horacio may not be declared insolvent. His assets added taxes amounting to P30,000.
worth P1.5m are more than his liabilities worth P1.2m. e) 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
Insolvency; Assignees (1996)
On June 16, 1995, Vicente obtained a writ of preliminary unconditionally and solidarily by Edzo’s President
attachment against Carlito. The levy on Carlito’s property and controlling stockholder, Eduardo Z. Ong, as
occurred on June 25, 1995. On July 29, 1995, another accommodation surety.
creditor filed a petition for involuntary insolvency against
Carlito. The insolvency court gave due course to the 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 An insolvent debtor, after lawful discharge following an
threatened to proceed against the surety, Eduardo Z. adjudication of insolvency, is released from, generally, all
Ong, Edzo decided to pay up all its obligations to debts, claims, liabilities and demands which are or have
Integrity Bank. On June 20, 2002, Edzo paid to Integrity been proved against his estate. Give 5 obligations of the
Bank the full principal amount of P500,000, plus accrued insolvent debtor to survive.
interests amounting to P55,000. As a result, Edzo had SUGGESTED ANSWER:
hardly any cash left for operations and decided to close The 5 obligations of the insolvent debtor that survive are
its business. After paying the unpaid salaries of its as follows:
employees, Edzo filed a petition for insolvency on July 1, 1. Taxes and assessments due the government, national
2002. or local;
2. Obligations arising from embezzlement or fraud;
In the insolvency proceedings in court, the assignee in 3. Obligation of any person liable with the insolvent
insolvency sought to invalidate the payment made by debtor for the same debt, either as a solidary co-
Edzo to Integrity Bank for being a fraudulent transfer debtor, surety, guarantor, partner, indorser or
because it was made within 30 days before the filing of otherwise.
the insolvency petition. In defense, Integrity Bank 4. Alimony or claim for support; and
asserted that the payment to it was for a legitimate debt 5. Debts not provable against the estate (such as after-
that was not covered by the prohibition because it was “a incurred obligations) of, or not included in the
valuable pecuniary consideration made in good faith,” schedule submitted by, the insolvent debtor.
thus falling within the exception specified in the
Insolvency Law. Insolvency; Voluntary Insolvency Proceeding (1991)
As judge in the pending insolvency case, how would you Is the issuance of an order, declaring a petition in a
decide the respective contentions of the assignee in Voluntary Insolvency proceeding insolvent, mandatory
insolvency and of Integrity Bank? Explain (5%) upon the court?
The contention of the assignee in insolvency is correct. Assuming that the petition was in due form and
The payment made by Edzo to Integrity Bank was a substance and that the assets of the petitioner are less
fraudulent preference or payment, being made within than his liabilities, the court must adjudicate the
thirty (30) days before the filing of the insolvency insolvency (Sec 18 Insolvency Law)
petition.
Insolvency; Voluntary vs. Involuntary Solvency (1995)
Insolvency; Jurisdiction; Sole Proprietorship (1990) Distinguish between voluntary insolvency and
One day Jerry Haw, doing business under the name involuntary insolvency.
Starlight Enterprise, a sole proprietorship, finds himself SUGGESTED ANSWER:
short on cash and unable to pay his debts as they fall due In voluntary insolvency, it is the debtor himself who files
although he has sufficient property to cover such debts. the petition for insolvency, while in involuntary
He asks you, as his retained counsel, for advice on the insolvency, at least 3 creditors are the ones who file the
following queries: petition for insolvency against the insolvent debtor.
ALTERNATIVE ANSWER:
a) Should he file a petition with the SEC to be declared in
The following are the distinctions:
a state of suspension of payments in view of the said
1. In involuntary insolvency, 3 or more creditors are
financial condition he faces? Explain your answer.
required, whereas in voluntary insolvency, one
b) Should he sell profit participation certificates to his 10
creditor may be sufficient;
brothers and sisters in order to raise cash for his
2. In involuntary insolvency, the creditors must be
business? Explain.
SUGGESTED ANSWER:
residents of the Philippines, whose credits or
a) I would counsel Jerry to file the Petition for demand accrued in the Philippines, and none of the
Suspension of Payment with the ordinary courts, rather creditors has become a creditor by assignment
than the SEC. SEC’s jurisdiction over such cases is within 30 days prior to the filing of the petition,
confined only to petitions filed by corporations and whereas in voluntary insolvency, these are not
partnerships under its regulatory powers. required.
3. In involuntary insolvency, the debtor must have
b) Instead of selling profit participation certificates, I done any of the acts of insolvency as enumerated by
would urge Jerry to enter into a partnership or to Sec 20, whereas in voluntary insolvency, the debtor
incorporate in order to raise cash for his business. must not have done any of said acts.
ALTERNATIVE ANSWER: 4. In involuntary insolvency, the amount of
b) Jerry may sell profit participation certificates to his indebtedness must not be less than P1,000 whereas
brothers and sisters without registering the same with the in voluntary insolvency, it must exceed P1,000.
SEC because his sale is an exempted transaction being 5. In involuntary insolvency, the petition must be
isolated and not a sale to the public. accompanied by a bond, whereas such is not
required in voluntary insolvency.
Insolvency; obligations that survive (1997)
Law on Corporate Recovery (2003) 1. In suspension of payments, the debtor has sufficient
X Corporation applied for its rehabilitation and property to cover all his debts but foresees the
submitted a rehabilitation plan which called for the entry impossibility of meeting them when they
by it into a joint venture agreement with Y Corporation. respectively fall due, whereas, in insolvency, the
Under the agreement, Y Corporation was to lend to X debtor does not have sufficient property to pay all
Corporation its credit facilities with certain banks to his debts in full;
obtain funds not only to operate X Corporation but also 2. In suspension of payments, the purpose is to
for a part thereof in the amount of P1 million as initial suspend or delay payment of debts which remain
deposit in a sinking fund to be augmented annually in unaffected although a postponement of payment is
amounts equivalent to 10% of the yearly income from its declared, whereas, in insolvency, the object is to
operation of the business of X Corporation. From this obtain discharge from all debts and liability;
fund the creditors of X Corporation were to be paid 3. In suspension of payments, no limit for the amount
annually, starting from the second year of operations, of indebtedness is required, whereas, in insolvency,
with the entire indebtedness to be liquidated in 15 years. the debts must exceed P1,000 in case of voluntary
The creditors of X Corporation objected to the plan insolvency, or must not be less than P1,000 in case
because Y Corporation would be taking over the of involuntary insolvency.
business and assets of X Corporation. Could the court
approve the plan despite the objections of the creditors Suspension of Payments vs. Stay Order (2003)
of X Corporation and could the creditors be compelled Distinguish the stay order in corporate rehabilitation
to follow the plan? Could Y Corporation, in managing from a declaration in a state of suspension of payments?
the business of X Corporation in the meantime, be (4%)
deemed to have taken-over X Corporation itself? (6%) SUGGESTED ANSWER:
SUGGESTED ANSWER:
Suspension of Payments; Rehabilitation Receiver (1999)
Rehabilitation; Stay Order (2006) Debtor Corporation and its principal stockholders filed
The Blue Star Corporation filed with the Regional Trial with the Securities and Exchange Commission (SEC) a
Court a petition for rehabilitation on the ground that it petition for rehabilitation and declaration of a state of
foresaw the impossibility of paying its obligations as they suspension of payments under PD 902-A. The objective
fall due. Finding the petition sufficient in form and was for SEC to take control of the corporation and all its
substance, the court issued an Order appointing a assets and liabilities, earnings and operations, and to
rehabilitation receiver and staying the enforcement of all determine the feasibility of continuing operations and
claims against the corporation. rehabilitating the company for the benefit of investors
What is the rationale for the Stay Order? (5%) and creditors.
SUGGESTED ANSWER:
The purpose of the stay order is intended to give the Generally, the unsecured creditors had manifested
management committee or rehabilitation receiver the willingness to cooperate with Debtor Corporation. The
leeway to make the business viable again, without having secured creditors, however, expressed serious objections
to divert attention and resources to litigation in various and reservations.
fora (Philippine Airlines v. Spouses Kurangking, et al, G.R. No.
146698, September 24, 2002; BF Homes, Inc. v. Court of Appeals, First Bank had already initiated judicial foreclosure
G.R. Nos. 76879 & 77143, October 3, 1990; Rubberworld [Phils.] proceedings on the mortgage constituted on the factory
Inc. v. NLRC, G.R. No. 126773, April 14, 1999; Sobrejuanite v.
of Debtor Corporation.
ASB Dev. Corp., G.R. No. 165675, September 30, 2005). It also
prevents a creditor from obtaining an advantage or
Second Bank had already initiated foreclosure
preference over another with respect to actions against
proceedings on a third-party mortgage constituted on
the corporation (Finasia Investments and Finance Corp v. Court of
certain assets of the principal stockholders.
Appeals, G. R. No. 107002, October 7,1994).
Third Bank had already filed a suit against the principal
stockholders who had held themselves liable jointly and
Suspension of Payment vs. Insolvency (1995) severally for the loans of Debtor Corporation with said
Distinguish between suspension of payments and
Bank.
insolvency.
SUGGESTED ANSWER:
In suspension of payments, the debtor is not insolvent. After hearing, the SEC directed the appointment of a
He only needs time within which to convert his asset/s rehabilitation receiver and ordered the suspension of all
into cash with which to pay his obligations when they fall actions and claims against the Debtor corporation as well
due. In the case of insolvency, the debtor is insolvent, as against the principal stockholders.
that is, his assets are less than his liabilities. a) Discuss the validity of the SEC order or suspension?
ALTERNATIVE ANSWER: (2%)
The following are the distinctions:
b) Discuss the effects of the SEC order of suspension rehabilitation in accordance with a rehabilitation plan
on the judicial foreclosure proceedings initiated by approved by the SEC.
First Bank. (2%)
c) Would the order of suspension have any effect on SUGGESTED ANSWER:
the foreclosure proceedings initiated by Second f. To preserve the assets of the Debtor Corporation, the
Bank? Explain (2%) receiver may take custody of, and control over, all the
d) Would the order of suspension have any effect on existing assets and property of the corporation; evaluate
the suit filed by Third Bank? Explain. (2%) existing assets and liabilities, earnings and operations of
e) What are the legal consequences of a rehabilitation the corporation; and determine the best way to salvage
receivership? (2%) and protect the interest of the investors and creditors.
f) What measures may the receiver take to preserve the
assets of Debtor Corporation? (2%) Suspension of Payments; Remedies (2003)
When is the remedy of declaration in a state of
SUGGESTED ANSWER: suspension of payments available to a corporation?
a. The SEC order of suspension of payment is valid with SUGGESTED ANSWER:
respect to the debtor corporation, but not with respect to (per dondee) This remedy is available to a corporation
the principal stockholders. The SEC has jurisdiction to when it experiences inability to pay one's debts and
declare suspension of payments with respect to liabilities, and where the petitioning corporation either:
corporations, partnership or associations, but not with 1. has sufficient property to cover all its debts but
respect to individuals. foresees the impossibility of meeting them when
they fall due (solvent but illiquid) or
SUGGESTED ANSWER: 2. has no sufficient property (insolvent) but is under
b. The SEC order of suspension of payment suspended the management of a rehabilitation receiver or a
the judicial proceedings initiated by the First Bank. management committee, the applicable law is P.D.
According to the Supreme Court in a line of cases, the No. 902-A pursuant to Sec. 5 par.
suspension order applies to secured creditors and to the
action to enforce the security against the corporation
regardless of the stage thereof. Letters of Credit
SUGGESTED ANSWER:
c. The order of suspension of payments suspended the Letter of Credit: Mortgage (2005)
foreclosure proceedings initiated by the Second Bank. Ricardo mortgaged his fishpond to AC Bank to secure a
While the foreclosure is against the property of a third P1 Million loan. In a separate transaction, he opened a
party, it is in reality an action to collect the principal letter of credit with the same bank for $500,000.00 in
obligation owned by the corporation. During the time favor of HS Bank, a foreign bank, to purchase outboard
that the payment of the principal obligation is suspended, motors. Likewise, Ricardo executed a Surety Agreement
the debtor corporation is considered to be not in default in favor of AC Bank.
and, therefore, even the right to enforce the security,
whether owned by the debtor-corporation or of a third The outboard motors arrived and were delivered to
party, has not yet arisen. Ricardo, but he was not able to pay the purchase price
ALTERNATIVE ANSWER: thereof.
c. The suspension order does not apply to a third party a) Can AC Bank take possession of the outboard motors?
mortgage because in such a case, the credit is not yet Why?
being enforced against the corporation but against the b) Can AC Bank also foreclose the mortgage over the
third party mortgagor’s property. fishpond? Explain. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER: a) No, for AC Bank has no legal standing, much less a
d. For the same reason as in (c), the order of suspension lien, on the outboard motors. Insofar as AC Bank is
of payments suspended the suit filed by Third Bank concerned, it has privity with the person of Ricardo
against the principal stockholders. under the Surety Agreement, and a lien on the
ALTERNATIVE ANSWER:
d. The action against the principal stockholders’ surety in fishpond based on the real estate mortgage
favor of the corporation is not suspended as it is not an constituted therein.
action against the corporation but against the
stockholders whose personality is separate from that of b) Yes, but only to enforce payment of the principal
the corporation. loan of P1million secured by the real estate mortgage
on the fishpond
SUGGESTED ANSWER:
e. Under PD 902A, the appointment of a rehabilitation
receiver will suspend all actions for claims against the Letter of Credit; Certification from Consignee (1993)
corporation and the corporation will be placed under
BV agreed to sell to AC, a Ship and Merchandise Broker, SUGGESTED ANSWER:
2,500 cubic meters of logs at $27 per cubic meter FOB. It incurs no liability unless it is also the negotiating bank
After inspecting the logs, CD issued a purchase order.
b) Bravo Bank received from Cisco Bank by registered
On the arrangements made upon instruction of the mail an irrevocable letter of credit issued by Delta
consignee, H&T Corporation of LA, California, the SP Bank for the account of Y Company in the amount
Bank of LA issued an irrevocable letter of credit available of US$10,000,000 to cover the sale of canned fruit
at sight in favor of BV for the total purchase price of the juices. The beneficiary of the letter of credit was X
logs. The letter of credit was mailed to FE Bank with the Corporation which later on partially availed itself of
instruction “to forward it to the beneficiary.” The letter the letter of credit by submitting to Bravo Bank all
of credit provided that the draft to be drawn is on SP documents relative to the shipment of the cans of
Bank and that it be accompanied by, among other things, fruit juices. Bravo Bank paid X Corporation for its
a certification from AC, stating that the logs have been partial availment. Later, however, it refused further
approved prior shipment in accordance with the terms availment because of suspicions of fraud being
and conditions of the purchase order. practiced upon it and, instead , sued X Corporation
to recover what it had paid the latter. How would
Before loading on the vessel chartered by AC, the logs you rule if you were the judge to decide the
were inspected by custom inspectors and representatives controversy? (6%)
of the Bureau of Forestry, who certified to the good SUGGESTED ANSWER:
condition and exportability of the logs. After the loading
was completed, the Chief Mate of the vessel issued a Letters of Credit; Three Distinct Contract Relationships
mate receipt of the cargo which stated that the logs are in (2002)
good condition. However, AC refused to issue the Explain the three (3) distinct but intertwined contract
required certification in the letter of credit. Because of relationships that are indispensable in a letter of credit
the absence of certification, FE Bank refused to advance transaction.
SUGGESTED ANSWER:
payment on the letter of credit.
The three (3) distinct but intertwined contract
1) May Fe Bank be held liable under the letter of credit?
relationships that are indispensable in a letter of credit
Explain.
transaction are:
2) Under the facts above, the seller, BV, argued that FE
1) Between the applicant/buyer/importer and the
Bank, by accepting the obligation to notify him that the
beneficiary/seller/exporter – The
irrevocable letter of credit has been transmitted to it on
applicant/buyer/importer is the one who procures
his behalf, has confirmed the letter of credit.
the letter of credit and obliges himself to reimburse
Consequently, FE Bank is liable under the letter of credit.
the issuing bank upon receipt of the documents of
Is the argument tenable? Explain.
SUGGESTED ANSWER:
title, while the beneficiary/seller/exporter is the one
1) No. The letter of credit provides as a condition a who in compliance with the contract of sale ships
certification of AC. Without such certification, there is the goods to the buyer and delivers the documents
no obligation on the part of FE Bank to advance of title and draft to the issuing bank to recover
payment of the letter of credit. (Feati Bank v CA 196 S 576) payment for the goods. Their relationship is
governed by the contract of sale.
2) No. FE Bank may have confirmed the letter of credit
when it notified BV, that an irrevocable letter of credit 2) Between the issuing bank and the
has been transmitted to it on its behalf. But the beneficiary/seller/exporter – The issuing bank is the
conditions in the letter of credit must first be complied one that issues the letter of credit and undertakes to
with, namely that the draft be accompanied by a pay the seller upon receipt of the draft and proper
certification from AC. Further, confirmation of a letter of documents of title and to surrender the documents
credit must be expressed. (Feati Bank v CA 196 s 576) to the buyer upon reimbursement. Their relationship
is governed by the terms of the letter of credit issued
Letters of Credit; Liability of a confirming and notifying by the bank.
bank (1994)
In letters of credit in banking transactions, distinguish the 3) Between the issuing bank and the
liability of a confirming bank from a notifying bank. applicant/buyer/importer – Their relationship is
SUGGESTED ANSWER: governed by the terms of the application and
In case anything wrong happens to the letter of credit, a agreement for the issuance of the letter of credit by
confirming bank incurs liability for the amount of the the bank.
letter of credit, while a notifying bank does not incur any
liability.
Maritime Commerce
Letters of Credit; Liability of a Notifying Bank (2003)
a) What liability, if any is incurred by an advising or Average; Particular Average vs. General Average (2003)
notifying bank in a letter of credit transaction?
M/V Ilog de Manila with a cargo of 500 tons of iron ore The insurance company should bear the loss to the cargo
left the Port of Zamboanga City bound for Manila. For because the deviation of the vessel was proper in order to
one reason or another, M/V Ilog de Manila hit a avoid a peril, which was the strong typhoon. The running
submerged obstacle causing it to sink along with its out of provisions was a direct consequence of the proper
cargo. A salvor, Salvador, Inc., was contracted to refloat deviation in order to avoid the peril of the typhoon.
the vessel for P1 Million. What kind of average was the ALTERNATIVE ANSWER:
refloating fee of P1 million, and for whose account The owner of the cargo bears the loss because in the case
should it be? Why? (4%) at bar, they stayed too long at the island, making it an
SUGGESTED ANSWER: improper deviation. Every deviation not specified in Sec.
Particular Average. The owner of the vessel shall 124 is improper. (Sec. 125, Insurance Code)
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 Carriage of Goods; Deviation; When Proper (2005)
the common benefit (Art. 809, and are, therefore, to be Under what circumstances can a vessel properly proceed
borne only by the owner of the property which gave rise to a port other than its port of destination? Explain. (4%)
to the same (Art. 810) while general or gross averages SUGGESTED ANSWER:
include "all the damages and expenses which are Deviation is proper:
deliberately caused in order to save the vessel, its cargo, a) when caused by circumstances over which neither
or both at the same time, from a real and known risk" the master nor the owner of the ship has any
(Art. 811). Being for the common benefit, gross averages control;
are to be borne by the owners of the articles saved (Art. b) when necessary to comply with a warranty or avoid a
812). In the present case there is no proof that the vessel peril, whether or not the peril is insured against;
had to be put afloat to save it from an imminent danger. c) when made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
Bottomry (1994) d) when in good faith, for the purpose of saving human
Gigi obtained a loan from Jojo Corporation, payable in life, or relieving another vessel in distress. (Sec. 124,
installments. Gigi executed a chattel mortgage in favor of Insurance Code)
Jojo whereby she transferred “in favor of Jojo, its
successors and assigns, all her title, rights ... to a vessel of Carriage of Goods; Exercise Extraordinary Diligence
which Gigi is the absolute owner.” The chattel mortgage (2005)
was registered with the Philippine Coast Guard pursuant Star Shipping Lines accepted 100 cartons of sardines
to PD 1521. Gigi defaulted and had a total accountability from Master to be delivered to 555 Company in Manila.
of P3M. But Jojo could not foreclose the mortgage on Only 88 cartons were delivered, however, these were in
the vessel because it sank during a typhoon. bad condition. 555 Company claimed from Star Shipping
Meanwhile, Lutang Corporation which rendered salvage Lines the value of the missing goods, as well as the
services for refloating the vessel sued Gigi. damaged goods. Star Shipping Lines refused because the
Whose lien should be given preference, that of Jojo or former failed to present a bill of lading. Resolve with
Lutang? reasons the claim of 555 Company. (4%)
Lutang Corporation’s lien should be given preference. The claim of 555 Company is meritorious, even if it fails
The lien of Jojo by virtue of a loan of bottomry was to present a bill of lading. Although a bill of lading is the
extinguished when the vessel sank. Under such loan on best evidence of the contract of carriage for cargo,
bottomry Jojo acted not only as creditor but also as nevertheless such contract can exist even without a bill of
insurer. Jojo’s right to recover the amount of the loan is lading. Like any other contract, a contract of carriage is a
predicated on the safe arrival of the vessel at the port of meeting of minds that gives rise to an obligation on the
destination. The right was lost when the vessel sank (Sec part of the carrier to transport the goods. Jurisprudence
17 PD 1521) has held that the moment the carrier receives the cargo
for transport, then its duty to exercise extraordinary
Carriage of Goods: Deviation: Liability (2005) diligence arises. (Cia. Maritima v. Insurance Co. of North America,
On a clear weather, M/V Sundo, carrying insured cargo, G.R. No. L-18965, October 30, 1964; Negre v. Cabahug Shipping &
left the port of Manila bound for Cebu. While at sea, the Co., G.R. No. L-19609, April 29, 1966)
ALTERNATIVE ANSWER:
vessel encountered a strong typhoon forcing the captain
Star Shipping Lines can refuse to honor 555 Company's
to steer the vessel to the nearest island where it stayed for
claim for the missing and damaged goods. The Bill of
seven days. The vessel ran out of provisions for its
Lading is the document of title that legally establishes the
passengers. Consequently, the vessel proceeded to Leyte
ownership of 555 Company over said goods. 555 needs
to replenish its supplies.
to present the Bill of Lading to legally claim said goods.
(National Union Fire Insurance of Pittsburg v. Stolt-Nielaen, G.R. No.
Assuming that the cargo was damaged because of such 87958, April 26, 1990)
deviation, who between the insurance company and the
owner of the cargo bears the loss? Explain. Charter Party (1991)
SUGGESTED ANSWER:
The Saad Dev Co enters into a voyage charter with XYZ AA entered into a contract with BB thru CC to transport
over the latter’s vessel, the MV LadyLove. Before the ladies' wear from Manila to France with transhipment at
Saad could load it, XYZ sold Lady Love to Oslob Taiwan. Somehow the goods were not loaded at Taiwan
Maritime Co which decided to load it for its own on time. Hence, when the goods arrived in France, they
account. arrived "off-season" and AA was paid only for one-half
a) May XYZ Shipping Co validly ask for the rescission of the value by the buyer. AA claimed damages from the
the charter party? If so, can Saad recover damages? To shipping company and its agent. The defense of the
what extent? respondents was prescription. Considering that the ladies'
b) If Oslob did not load it for its own account, is it wear suffered "loss of value," as claimed by AA, should
bound by the charter party? the prescriptive period be one year under the Carriage of
c) Explain the meaning of “owner pro hac vice of the Goods by Sea Act, or ten years under the Civil Code?
vessel.” In what kind of charter party does this obtain? Explain briefly. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER: The applicable prescriptive period is ten years under the
a) XYZ may ask for the rescission of the charter party if, Civil Code. The one-year prescriptive period under the
as in this case, it sold the vessel before the charterer has Carriage of Goods by Sea Act applies in cases of loss or
begun to load the vessel and the purchaser loads it for his damages to the cargo. The term "loss" as interpreted by
own account. Saad may recover damages to the extent of the Supreme Court in Mitsui O.S.K. Lines Ltd. v. Court of
its losses (Art 689 Code of Commerce) Appeals, 287 SCRA 366 (1998), contemplates a situation
where no delivery at all was made by the carrier of the
b) If Oslob did not load Lady Love for its own account, goods because the same had perished or gone out of
it would be bound by the charter party, but XYZ would commerce deteriorated or decayed while in transit. In the
have to indemnify Oslob if it was not informed of the present case, the shipment of ladies' wear was actually
Charter Party at the time of sale. (Art 689 Code of delivered. The "loss of value" is not the total loss
Commerce) contemplated by the Carriage of Goods by Sea Act.
c) The term “Owner Pro Hac Vice of the Vessel,” is COGSA; Prescription of Claims (1992)
generally understood to be the charterer of the vessel in A local consignee sought to enforce judicially a claim
the case of bareboat or demise charter (Litonjua Shipping Co against the carrier for loss of a shipment of drums of
v National Seamen’s Board GR 51910 10Aug1989) lubricating oil from Japan under the Carriage of Goods
by Sea Act (COGSA) after the carrier had rejected its
Charter Party (2004) demand. The carrier pleaded in its Answer the
Under a charter party, XXO Trading Company shipped affirmative defense of prescription under the provisions
sugar to Coca-Cola Company through SS Negros of said Act inasmuch as the suit was brought by the
Shipping Corp., insured by Capitol Insurance Company. consignee after one (1) year from the delivery of the
The cargo arrived but with shortages. Coca-Cola goods. In turn, the consignee contended that the period
demanded from Capitol Insurance Co. P500.000 in of prescription was suspended by the written extrajudicial
settlement for XXO Trading. The MM Regional Trial demand it had made against the carrier within the one-
Court, where the civil suit was filed, "absolved the year period, pursuant to Article 1155 of the Civil Code
insurance company, declaring that under the Code of providing that the prescription of actions is interrupted
Commerce, the shipping agent is civilly liable for when there is a written extrajudicial demand by the
damages in favor of third persons due to the conduct of creditors.
the carrier's captain, and the stipulation in the charter a) Has the action in fact prescribed? Why?
party exempting the owner from liability is not against b) If the consignee’s action were predicated on
public policy. Coca-Cola appealed. Will its appeal misdelivery or conversion of the goods, would your
prosper? Reason briefly. (5%) answer be the same? Explain briefly.
No. The appeal of Coca-Cola will not prosper. Under a) The action taken by the local consignee has, in fact,
Article 587 of the Code of Commerce, the shipping agent prescribed. The period of one year under the Carriage of
is civilly liable for damages in favor of third persons due Goods by Sea Act (COGSA) is not interrupted by a
to the conduct of the carrier's captain, and the shipping written extrajudicial demand. The provisions of Art 1155
agent can exempt himself therefrom only by abandoning of the NCC merely apply to prescriptive periods
the vessel with all his equipment and the freight he may provided for in said Code and not to special laws such as
have earned during the voyage. On the other hand, COGSA except when otherwise provided. (Dole v Maritime
assuming there is bareboat charter, the stipulation in the Co 148 s 118).
charter party exempting the owner from liability is not
against public policy because the public at large is not b) If the consignee’s action were predicated on
involved (Home Insurance Co. v. American Steamship Agencies, Inc., misdelivery or conversion of goods, the provisions of the
23 SCRA25 (1968). COGSA would be inapplicable. In these cases, the NCC
prescriptive periods, including Art 1155 of the NCC will
COGSA: Prescription of Claims/Actions (2004) apply (Ang v Compania Maritama 133 s 600)
SUGGESTED ANSWER:
COGSA; Prescription of Claims (2000) Under the “doctrine of inscrutable fault,” where fault is
RC imported computer motherboards from the United established but it cannot be determined which of the two
States and had them shipped to Manila aboard an ocean- vessels were at fault, both shall be deemed to have been
going cargo ship owned by BC Shipping Company. at fault.
When the cargo arrived at Manila seaport and delivered
to RC, the crate appeared intact; but upon inspection of Doctrine of Inscrutable Fault (1998)
the contents, RC discovered that the items inside had all A severe typhoon was raging when the vessel SS
been badly damaged. He did not file any notice of Masdaam collided with MV Princes. It is conceded that
damage or anything with anyone, least of all with BC the typhoon was the major cause of the collision,
Shipping Company. What he did was to proceed directly although there was a very strong possibility that it could
to your office to consult you about whether he should have been avoided if the captain of SS Masdaam was not
have given a notice of damage and how long a time he drunk and the captain of the MV Princes was not asleep
had to initiate a suit under the provisions of the Carriage at the time of collisions.
of Goods by Sea Act (CA 65). What would your advice Who should bear the damages to the vessels and their
be? (2%) cargoes? (5%)
My advice would be that RC should give notice of the The shipowners of SS Masdaam and MV Princess shall
damage sustained by the cargo within 3 days and that he each bear their respective loss of vessels. For the losses
has to file the suit to recover the damage sustained by the and damages suffered by their cargoes both shipowners
cargo within one year from the date of the delivery of the are solidarily liable.
cargo to him.
COGSA; Prescriptive Period (1995) Toni, a copra dealer, loaded 1000 sacks of copra on
What is the prescriptive period for actions involving lost board the vessel MV Tonichi (a common carrier engaged
or damaged cargo under the Carriage of Goods by Sea in coastwise trade owned by Ichi) for shipment from
Act? Puerto Galera to Manila. The cargo did not reach Manila
SUGGESTED ANSWER: because the vessel capsized and sank with all its cargo.
ONE YEAR after the delivery of the goods or the date
when the goods should have been delivered (Sec 3(6), When Toni sued Ichi for damages based on breach of
COGSA) contract, the latter invoked the “limited liability rule.”
1) What do you understand of the “rule” invoked by
Doctrine of Inscrutable Fault (1995) Ichi?
1. 2 vessels coming from the opposite directions collided 2) Are there exceptions to the “limited liability rule”?
with each other due to fault imputable to both. What are SUGGESTED ANSWER:
the liabilities of the two vessels with respect to the 1) By “limited liability rule” is meant that the liability of a
damage caused to them and their cargoes? Explain. shipowner for damages in case of loss is limited to the
value of the vessel involved. His other properties cannot
2. If it cannot be determined which of the two vessels be reached by the parties entitled to damages.
was at fault resulting in the collision, which party should
bear the damage caused to the vessels and the cargoes? 2) Yes. When the ship owner of the vessel involved is
Explain. guilty of negligence, the “limited liability rule” does not
apply. In such case, the ship owner is liable to the full
3. Which party should bear the damage to the vessels and extent of the damages sustained by the aggrieved parties
the cargoes if the cause of the collision was a fortuitous (Mecenas v CA 180 s 83)
event? Explain.
SUGGESTED ANSWER: Explain the doctrine in Maritime accidents – The
1. Each vessel must bear its own damage. Both of them Doctrine of Limited Liability
were at fault. (Art 827, Code of Commerce) SUGGESTED ANSWER:
Under the “doctrine of limited liability” the exclusively
2. Each of them should bear their respective damages. real and hypothecary nature of maritime law operates to
Since it cannot be determined as to which vessel is at limit the liability of the shipowner to the value of the
fault. This is the doctrine of “inscrutable fault.” vessel, earned freightage and proceeds of the insurance.
However, such doctrine does not apply if the shipowner
3. No party shall be held liable since the cause of the and the captain are guilty of negligence.
collision is fortuitous event. The carrier is not an insurer.
Thinking that the impending typhoon was still 24 hours
Explain the doctrine in Maritime accidents – Doctrine of away, MV Pioneer left port to sail for Leyte. That was a
Inscrutable Fault miscalculation of the typhoon signals by both the ship-
owner and the captain as the typhoon came earlier and Claro already sighted Manila on its radar screen. Manila
overtook the vessel. The vessel sank and a number of had no radar equipment. As for speed, Don Claro was
passengers disappeared with it. twice as fast as Manila.
Relatives of the missing passengers claimed damages At the time of the collision, Manila failed to follow Rule
against the shipowner. The shipowner set up the defense 19 of the International Rules of the Road which requires
that under the doctrine of limited liability, his liability was 2 vessels meeting head on to change their course by each
co-extensive with his interest in the vessel. As the vessel vessel steering to starboard (right) so that each vessel
was totally lost, his liability had also been extinguished. may pass on the port side (left) of the other. Manila
a. How will you advice the claimants? Discuss the signaled that it would turn to the port side and steered
doctrine of limited liability in maritime law. (3%) accordingly, thus resulting in the collision. Don Claro’s
b. Assuming that the vessel was insured, may the captain was off-duty and was having a drink at the ship’s
claimants go after the insurance proceeds? (3%) bar at the time of the collision.
SUGGESTED ANSWER: a) Who would you hold liable for the collision?
a. Under the doctrine of limited liability in maritime law, b) If Don Claro was at fault, may the heirs of the
the liability of the shipowner arising from the operation passengers who died and the owners of the cargoes
of a ship is confined to the vessel, equipment, and recover damages from the owner of said vessel?
freight, or insurance, if any, so that if the shipowner SUGGESTED ANSWER:
abandoned the ship, equipment, and freight, his liability is I can hold the 2 vessels liable. In the problem given,
extinguished. However, the doctrine of limited liability whether on the basis of the factual settings or under the
does not apply when the shipowner or captain is guilty of doctrine of inscrutable fault, both vessels can be said to
negligence. have been guilty of negligence. The liability of the 2
carriers for the death or injury of passengers and for the
b. Yes. In case of a lost vessel, the claimants may go after loss of or damage to the goods arising from the collision
the proceeds of the insurance covering the vessel. is solidary. Neither carrier may invoke the doctrine of last
clear chance which can only be relevant, if at all, between
Limited Liability Rule (2000) the two vessels but not on the claims made by passengers
MV Mariposa, one of five passenger ships owned by or shippers (Litonjua Shipping v National Seamen Board GR 51910
Marina Navigation Co, sank off the coast of Mindoro 10Aug1989)
while en route to Iloilo City. More than 200 passengers SUGGESTED ANSWER:
perished in the disaster. Evidence showed that the ship Yes, but subject to the doctrine of limited liability. The
captain ignored typhoon bulletins issued by Pag-asa doctrine is to the effect that the liability of the
during the 24-hour period immediately prior to the shipowners would only be to the extent of any remaining
vessel’s departure from Manila. The bulletins warned all value of the vessel, proceeds of insurance, if any, and
types of sea crafts to avoid the typhoon’s expected path earned freightage. Given the factual settings, the
near Mindoro. To make matters worse, he took more shipowner himself was not guilty of negligence and,
load than was allowed for the ship’s rated capacity. Sued therefore, the doctrine can well apply (Amparo de los Santos v
for damages by the victim’s surviving relatives, Marina CA 186 s 69)
Nav Co contended 1) that its liability, if any, had been
extinguished with the sinking of MV Mariposa; and 2) Limited Liability Rule; General Average Loss (2000)
that assuming it had not been so extinguished, such X Shipping Company spent almost a fortune in refitting
liability should be limited to the loss of the cargo. Are and repairing its luxury passenger vessel, the MV Marina,
these contentions meritorious in the context of which plied the inter-island routes of the company from
applicable provisions of the Code of Commerce? (3%) La Union in the north to Davao City in the south. The
SUGGESTED ANSWER: MV Marina met an untimely fate during its post-repair
Yes. The contentions of Marina Nav Co are meritorious. voyage. It sank off the coast of Zambales while en route
The captain of MV Mariposa is guilty of negligence in to La Union from Manila. The investigation showed that
ignoring the typhoon bulletins issued by PAGASA and in the captain alone was negligent. There were no casualties
overloading the vessel. But only the captain of the vessel in that disaster. Faced with a claim for the payment of
MV Mariposa is guilty of negligence. The ship owner is the refitting and repair, X Shipping company asserted
not. Therefore, the ship owner can invoke the doctrine exemption from liability on the basis of the hypothecary
of limited liability. or limited liability rule under Article 587 of the Code of
Commerce. Is X Shipping Company’s assertion valid?
Limited Liability Rule; Doctrine of Inscrutable Fault Explain (3%).
SUGGESTED ANSWER:
(1991)
In a collision between M/T Manila, a tanker, and M/V No. The assertion of X Shipping Company is not valid.
Don Claro, an inter-island vessel, Don Claro sank and The total destruction of the vessel does not affect the
many of its passengers drowned and died. All its cargoes liability of the ship owner for repairs on the vessel
were lost. The collision occurred at nighttime but the sea completed before its loss.
was calm, the weather fair and visibility was good. Prior
to the collision and while still 4 nautical miles apart, Don Limited Liability Rule; General Average Loss (2000)
MV SuperFast, a passenger-cargo vessel owned by SF and also the fact that A does not have the means and
Shipping Company plying the inter-island routes, was on resources to invest P500th in the security agency.
its way to Zamboanga City from the Manila port when it ALTERNATIVE ANSWER:
accidentally, and without fault or negligence of anyone 1) The prosecutor may establish the fact that the P500th
on the ship, hit a huge floating object. The accident would constitute a major investment and yet A is not
caused damage to the vessel and loss of an accompanying even elected member of the BOD or one of the officers.
crated cargo of passenger PR. In order to lighten the Furthermore, it may also be shown that A does not even
vessel and save it from sinking and in order to avoid risk have the means to raise the amount of P500th and that
of damage to or loss of the rest of the shipped items the officers or majority of the directors are foreigners.
(none of which was located on the deck), some had to be
jettisoned. SF Shipping had the vessel repaired at its port SUGGESTED ANSWER:
of destination. SF Shipping thereafter filed a complaint 2) No. The mere fact of being a common law wife of a
demanding all the other cargo owners to share in the foreigner does not bring her within the ambit of the
total repair costs incurred by the company and in the Anti-Dummy Law.
ALTERNATIVE ANSWER:
value of the lost and jettisoned cargoes. In answer to the 2) Yes. Being a common law wife, it can be presumed
complaint, the shippers’ sole contention was that, under that she is the one running the business, which raises a
the Code of Commerce, each damaged party should bear prima facie presumption of violation of the Anti-dummy
its or his own damage and those that did not suffer any Law, (RA 6084).
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:
Celeste, a domestic corporation wholly owned by Filipino
No. The shippers’ contention is not valid. The owners of citizens, is engaged in trading and operates as general
the cargo jettisoned, to save the vessel from sinking and contractor. It buys and resells the products of Matilde, a
to save the rest of the cargoes, are entitled to domestic corporation, 90% of whose capital stock is
contribution. The jettisoning of said cargoes constitute owned by aliens. All of Matilde’s goods are made in the
general average loss which entitles the owners thereof to Philippines from materials found or produced in the
contribution from the owner of the vessel and also from Philippines.
the owners of the cargoes saved. On the other hand, ECQ Integrated is a 100% Filipino
owned corporation and manufacturer of asbestos
SF Shipping is not entitled to contribution/ products.
reimbursement for the costs of repairs on the vessel from Celeste and ECQ took part in a public bidding
the shippers. 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
Nationalized Activities or supply its asbestos pipes to Celeste. ECQ sought to
nullify the award in favor of Celeste.
Undertakings
1) Is Celeste barred under the Flag Law from taking part
in biddings to supply the government?
Nationalized Activities or Undertakings (1993) 2) Did Celeste and Matilde violate the Anti-Dummy
1) A invested P500th in a security agency on October 30, Law?
1990. He was charged with being a dummy of his friend, 3) Did Celeste and Matilde violate the Retail Trade
a foreigner. If you were the prosecutor, what evidence Nationalization Law? Explain.
can you present to prove violation of the Anti-Dummy
Law? SUGGESTED ANSWER:
2) Juana de la Cruz, a common law wife of a foreigner 1) No. The materials offered in the bids submitted are
wrested the control of a television firm. At the instance made in the Philippines from articles produced or grown
of the minority group of the firm, she was charged with in the Philippines, and the bidder, Celeste, is a domestic
violation of the Anti-Dummy Law. May she be convicted entity. The Flag Law does not apply. It can be invoked
by the mere fact that she is a common law wife of a only against a bidder who is not a domestic entity, or
foreigner? Explain. against a domestic entity who offers imported materials.
SUGGESTED ANSWER:
1) A allows or permits the use or exploitation or 2) No, since Celeste is merely a dealer of Matilde and not
enjoyment of a right, privilege or business, the exercise or an alter ego of the latter. Celeste buys and sells on its
enjoyment of which is expressly reserved by the own account the products of Matilde.
Constitution or the laws to citizens of the Philippines, by
the foreigner not possessing the requisites prescribed by 3) Matilde did not violate the Retail Trade Law since it
the Constitution or the laws of the Philippines. The does not sell its products to consumers, but to dealers
prosecutor should prove the above elements of the crime who resell them. Neither did Celeste violate the Retail
Trade Law since, in the first place, it is not prohibited to
engage in retail trade. Besides, Matilde’s sale of the requires 60% Filipino holding in land corporate
asbestos products to Celeste, being wholesale, the ownership.
transaction is not covered by the Retail Trade Law
(Asbestos Integrated v Peralta 155 S 213) c) The Anti-dummy Law allows board representation to
the extent of actual and permissible foreign investments
Nationalized Activities or Undertakings (1995) in corporations. Accordingly, the President of Acme may
Global KL Malaysia, a 100% Malaysian owned no sit in the BOD of the department store corporation
corporation, desires to build a hotel beach resort in Samal but can do so in the realty corporation.
Island, Davao City, to take advantage of the increased
traffic of tourists and boost the tourism industry of the d) The Treasurer of Acme may not hold that position
Philippines. either in the department store corporation or in the realty
1. Assuming that Global has US$100M to invest in a corporation since the Anti-Dummy Law prohibits the
hotel beach resort in the Philippines, may it be allowed to employment of aliens in such nationalized areas of
acquire the land on which to build the resort? If so, business except those that call for highly technical
under what terms and conditions may Global acquire the qualifications.
land? Discuss fully.
2. May Global be allowed to manage the hotel beach
resort? Explain. Retail Trade Law (1991)
3. May Global be allowed to operate restaurants within Is the Filipino common-law wife of a foreigner barred
the hotel beach resort? Explain. from engaging in the retail business?
1. Global can secure a lease on the land. As a corporation A Filipino common-law wife of a foreigner is not barred
with a Malaysian nationality, Global cannot own the land. from engaging in retail business. On the assumption that
she acts for and in her own behalf, and absent a violation
2. Yes, Global can manage the hotel beach resort. There of the Anti-Dummy Law which prohibits a foreigner
is no law prohibiting it from managing the resort. from being either the real proprietor or an employee of a
person engaged in the retail trade, she would be violating
3. Global may be allowed to operate restaurants within the Retail Trade Act.
the beach resort. This is part of the operation of the ALTERNATIVE ANSWER:
resort. An engagement by a wife (including common-law
relationships) of a foreigner in the retail trade business,
Retail Trade Law (1990) raises the presumption that she has violated the Anti-
Acme Trading Co Inc, a trading company wholly owned Dummy Law. Hence, the wife is barred from engaging in
by foreign stockholders, was persuaded by Paulo Alva, a the retail trade business.
Filipino, to invest in 20% of the outstanding shares of
stock of a corporation he is forming which will engage in Retail Trade Law (1992)
the department store business (the “department store A Cooperative purchased from Y Co on installments a
corporation”). Paulo also urged Acme to invest in 40% rice mill and made a down payment therefore. As security
of the outstanding shares of stock of the realty for the payment of the balance, the Cooperative executed
corporation he is putting up to own the land on which a chattel mortgage in favor of Y Corporation. Y Co in
the department store will be built (the “realty turn assigned its rights to the chattel mortgage to Z Co a
corporation”). 5% foreign owned company doing business in the
a) May Acme invest in the said department store Philippines. The cooperative thereafter made installment
corporation? Explain your answer. payments to Z Co.
b) May Acme invest in the realty corporation? Discuss.
c) May the President of Acme, a foreigner, sit in the Because the Cooperative was unable to meet its
BOD of the said department store corporation? May obligations in full, Z Co filed against it a court suit for
he be a director of the realty corporation? Discuss. collection. The Coop resisted contending that Z Co was
d) May the Treasurer of Acme, another foreigner, illegally engaged in the retail trade business for having
occupy the same position in the said department sold a consumer good as opposed to a producer item.
store corporation? May he be the treasurer of the The Coop also alleged that Z had violated the Anti-
said realty corporation? Explain. Dummy Law.
SUGGESTED ANSWER: Is Z guilty of violating the Retail Trade Law and the
a) Acme may not invest in the department store Anti-Dummy Law? Why?
corporation since the Retail Trade Act allows, in the case SUGGESTED ANSWER:
of corporations, only 100% Filipino owned companies to Z Co is not guilty of violating the Retail Trade Law and
engage in retail trade. the Anti-Dummy Law. The term RETAIL under the
Retail Trade Act requires that the seller must be
b) Acme may invest in the realty corporation, on the habitually engaged in selling to the general public
assumption that the balance of 60% of ownership of the consumption goods. By consumption goods are meant
latter corporation, is Filipino owned since the law merely “personal, family and household” purposes. A Rice Mill
does not fall under the category. Neither does it appear backup in the processing of goods, c) factories, and d) its
that Z is habitually engaged in selling to the general own employees.
public that commodity. Since there is no violation of the Is EL engaged in retail trade? Explain.
Retail Trade Law, there would likewise by no violation of SUGGESTED ANSWER:
the Anti-Dummy Law. The sale by EL of generators to government offices,
agricultural enterprises and factories are outside the
Retail Trade Law (1993) scope of the term “retail business” and may, therefore, be
A foreign firm is engaged in the business of made by the said corporation. However, sales of
manufacturing and selling rubber products to dealers generators by EL to its own employees constitute retail
who in turn sell them to others. It also sells directly to sales and are proscribed. Under the amendment to the
agricultural enterprises, automotive assembly plants, Retail Trade Law introduced by PD 714, the term “retail
public utilities which buy them in large bulk, and to its business” shall not include a manufacturer (such as EL)
officers and employees. selling to industrial and commercial users or consumers
1) Is there violation of the Retail Trade Law? Explain. who use the products bought by them to render service
2) May said firm operate a canteen inside the premises of to the general public (eg government offices) and/or to
its plant exclusively for its officials and employees produce or manufacture goods which are in turn sold by
without violating the Retail Trade Act? Explain. them (eg agricultural enterprises and factories). (Goodyear
SUGGESTED ANSWER: Tires v Reyes Sr Gr 30063, Jly 2, 83 123s273).
1) On the assumption that the foreign firm is doing
business in the Philippines, the sale to the dealers of Retail Trade Law; Consignment (1991)
agricultural enterprises, automotive assembly plants, and ABC Manufacturing Inc, a company wholly owned by
public utilities is wholesale and, therefore, not in foreign nationals, manufactures typewriters which ABC
violation of the Retail Trade Act (BF Goodrich v Reyes 121 s distributes to the general public in 2 ways:
363) 1. ABC consigns its typewriters to independent dealers
who in turn sell them to the public; and,
2) Yes. The operation of the canteen inside the premises 2. Through individuals, who are not employees of
exclusively for its officers and employees, would amount ABC, and who are paid strictly on a commission
to an input in the manufacturing process and, therefore, basis for each sale.
does not violate the Retail Trade Act. Do these arrangements violate the Retail Trade Law?
Retail Trade Law (1996) SUGGESTED ANSWER:

With a capital of P2th Maria operates a stall at a public a) The first arrangement would not be in violation of the
market. She manufactures soap that she sells to the Retail Trade Law. The law applies only when the sale is
general public. Her common law husband, MaLee, who direct to the general public. A dealer buys and sells for
has a pending petition for naturalization, occasionally and in his own behalf and, therefore, the sale to the
finances the purchase of goods for resale, and assists in general public is made by the dealer and not by the
the management of the business. manufacturer (Marsman & Co v First Coconut Control Co
Is there a violation of the Retail Trade Law? Explain. GR39841 20June1988)
SUGGESTED ANSWER: ALTERNATIVE ANSWER:
No, there is no violation of the Retail Trade Law. Maria a) The first arrangement violates the Retail Trade Law
is a manufacturer who sells to the general public, through because when ABC “consigned” the typewriters, the
her stall in the public market, the soap which she transaction was one of consignment sale. In consignment
manufactures. Inasmuch as her capital does not exceed sale, an agency relationship is created so it is as if ABC
P5th (it is only P2th) then she is considered under Sec 4a sells directly to the public through its agents.
of the Retail Trade Law as not engaged in the “retail SUGGESTED ANSWER:
business.” Inasmuch as Maria’s business is not a “retail b) The second arrangement would be violative of the
business,” then the requirement in Sec 1 of the Retail Retail Trade Law, since the sale is done through
Trade Law that only Philippine nationals shall engage, individuals being paid strictly on a commission basis. The
directly, or indirectly, in the retail business is inapplicable. said individuals would then be acting merely as agents of
For this reason, the participation of Ma Lee, Maria’s the manufacturer. Sales, therefore, made by such agents
common Law husband, in the management of the are deemed direct sales by the manufacturer.
business would not be a violation of the Retail Trade ALTERNATIVE ANSWER:
Law in relation to the Anti-Dummy Law. b) The 2nd arrangement is not violative of the Retail
Trade Law because typewriters are not consumption
Retail Trade Law (1996) goods or goods for personal, household and family use.
EL Inc, a domestic corporation with foreign equity,
manufactures electric generators, and sells them to the
following customers: a) government offices which use Negotiable Instruments Law
the generators during brownouts to render public service,
b) agricultural enterprises which utilize the generators as Bond: Cash Bond vs. Surety Bond (2004)
Distinguish clearly cash bond from surety bond.
SUGGESTED ANSWER: Civil Code and other laws of general application can still
A SURETY BOND is issued by a surety or insurance apply suppletorily.
company in favor of a designated beneficiary, pursuant to ALTERNATIVE ANSWER:
which such company acts as a surety to the debtor or The dismissal by the court was correct. A check whether
obligor of such beneficiary. A CASH BOND is a security or not post-dated or crossed, is still a negotiable
in the form of cash established by a guarantor or surety instrument and unless Pablo is a general indorser, which
to secure the obligation of another. is not expressed in the factual settings, he cannot be held
liable for the dishonor of the instrument. In State Investment
Checks: Crossed Checks (2005) House v IAC (GR 72764 13Jul1989), the court did not go so
What is a crossed check? What are the effects of crossing far as to hold that the fact of crossing would render the
a check? Explain. instrument non-negotiable.
A Crossed Check under accepted banking practice, In State Investment House v IAC (GR 72764 13Jul1989), the SC
crossing a check is done by writing two parallel lines considered a crossed check as subjecting a subsequent
diagonally on the left top portion of the checks. The holder thereof to the contractual covenants of the payor
crossing is special where the name of the bank or a and the payee. If such were the case, then the instrument
business institution is written between the two parallel is not one which can still be said to contain an
lines, which means that the drawee should pay only with unconditional promise to pay or order a sum certain in
the intervention of that company. money. In the transfer of non-negotiable credits by
assignment, the transferor does not assume liability for
Effects of Crossed Checks the fault of the debtor or obligor. Accordingly the court’s
1) The check may not be encashed but only deposited decision was correct.
in the bank. ALTERNATIVE ANSWER:
2) The check may be negotiated only once—to one Yes. The check is crossed. It should have forewarned Mr.
who has an account with a bank. Noble that it was issued for a specific purpose. Hence,
3) The act of crossing the check serves as a warning to Mr Noble could not be a holder in due course. He is
the holder that the check has been issued for a subject to the personal defense of breach of trust/
definite purpose, so that he must inquire if he has agreement by Mr. Pablo. Such defense is available in
received the check pursuant to that purpose; favor of Mr Carlos against Mr Noble.
otherwise, he is not a holder in due course.
Checks: Crossed Checks vs. Cancelled Checks (2004) Po Press issued in favor of Jose a postdated crossed
Distinguish clearly (1) crossed checks from cancelled check, in payment of newsprint which Jose promised to
checks; deliver. Jose sold and negotiated the check to Excel Inc.
SUGGESTED ANSWER: at a discount. Excel did not ask Jose the purpose of
A crossed check is one with two parallel lines drawn crossing the check. Since Jose failed to deliver the
diagonally across its face or across a corner thereof. On newsprint, Po ordered the drawee bank to stop payment
the other hand, a cancelled check is one marked or on the check.
stamped "paid" and/or "cancelled" by or on behalf of a Efforts of Excel to collect from Po failed. Excel wants to
drawee bank to indicate payment thereof. know from you as counsel:
1) What are the effects of crossing a check?
Checks; Crossed Check (1991) 2) Whether as second indorser and holder of the
Mr Pablo sought to borrow P200th from Mr Carlos. crossed check, is it a holder in due course?
Carlos agreed to loan the amount in the form of a post- 3) Whether Po’s defense of lack of consideration as
dated check which was crossed (i.e. 2 parallel lines against Jose is also available as against Excel?
diagonally drawn on the top left portion of the check).
Before the due date of the check, Pablo discounted it SUGGESTED ANSWER:
with Noble On due date, Noble deposited the check with 1) The effects of crossing a check are:
his bank. The check was dishonored. Noble sued Pablo. a. The check is for deposit only in the account of
The court dismissed Noble’s complaint. Was the court’s the payee
decision correct? b. The check may be indorsed only once in favor
SUGGESTED ANSWER: of a person who has an account with a bank
The court’s decision was incorrect. Pablo and Carlos, c. The check is issued for a specific purpose and
being immediate parties to the instrument, are governed the person who takes it not in accordance with
by the rules of privity. Given the factual circumstances of said purpose does not become a holder in due
the problem, Pablo has no valid excuse from denying course and is not entitled to payment
liability, (State investment House v IAC GR 72764 13July1989). thereunder.
Pablo undoubtedly had benefited in the transaction. To
hold otherwise would also contravene the basic rules of 2) No. It is a crossed check and Excel did not take it in
unjust enrichment. Even in negotiable instruments, the accordance with the purpose for which the check was
issued. Failure on its part to inquire as to said purpose,
prevented Excel from becoming a holder in due course,
as such failure or refusal constituted bad faith. On April 1, 1996, Pentium stopped payment of the check
for failure of CD Bytes to deliver the computer. Thus,
3) Yes. Not being a holder in due course, Excel is subject when Fund House deposited the check, the drawee bank
to the personal defense which Po Press can set up against dishonored it.
Jose (State Investment House v IAC 175 S 310)
If Fund House files a complaint against Pentium and CD
Checks; Crossed Check (1995) Bytes for the payment of the dishonored check, will the
On Oct 12, 1993, Chelsea Straights, a corp engaged in complaint prosper? Explain.
the manufacture of cigarettes, ordered from Moises 2,000 SUGGESTED ANSWER::
bales of tobacco. Chelsea issued to Moises two crossed The complaint filed by Fund House against Pentium will
checks postdated 15 Mar 94 and 15 Apr 94 in full not prosper but the one against CD Bytes will. Fund
payment therefor. On 19 Jan 94 Moises sold to Dragon House is not a holder in due course and, therefore,
Investment House at a discount the two checks drawn by Pentium can raise the defense of failure of consideration
Chelsea in his favor. against it. The check in question was issued by Pentium
Moises failed to deliver the bales of tobacco as agreed to pay for a computer that it ordered from CD Bytes.
despite Chelsea’s demand. Consequently, on 1 Mar 94 The computer not having been delivered, there was a
Chelsea issued a “stop payment” order on the 2 checks failure of consideration. The check discounted with Fund
issued to Moises. Dragon, claiming to be a holder in due House by CD Bytes is a crossed check and this should
course, filed a complaint for collection against Chelsea have put Fund House on inquiry. It should have
for the value of the checks. ascertained the title of CD Bytes to the check or the
Rule on the complaint of Dragon. Give your legal basis. nature of the latter’s possession. Failing in this respect,
SUGGESTED ANSWER: Fund House is deemed guilty of gross negligence
Dragon cannot collect from Chelsea. The instruments are amounting to legal absence of good faith and, thus, not a
crossed checks which were intended to pay for the 2,000 holder in due course. Fund House can collect from CD
bales of tobacco to be delivered to Moises. It was Bytes as the latter was the immediate indorser of the
therefore the obligation of Dragon to inquire as to the check. (See Bataan Cigar and Cigarette Factory v CA et al 230 s 643
purpose of the issuance of the 2 crossed checks before GR 93048 Mar 3, 94)
causing them to be discounted. Failure on its part to
make such inquiry, which resulted in its bad faith, Checks; Effect; Acceptance by the drawee bank (1998)
Dragon cannot claim to be a holder in due course. X draws a check against his current account with the
Moreover, the checks were sold, not endorsed, by him to Ortigas branch of Bonifacio Bank in favor of B.
Dragon which did not become a holder in due course. Although X does not have sufficient funds, the bank
Not being a holder in due course, Dragon is subject to honors the check when it is presented for payment.
the personal defense on the part of Chelsea concerning Apparently, X has conspired with the bank’s bookkeeper
the breach of trust on the part of Moises Lim in not so that his ledger card would show that he still has
complying with his obligation to deliver the 2000 bales of sufficient funds.
tobacco.
The bank files an action for recovery of the amount paid
Checks; Crossed Check (1996) to B because the check presented has no sufficient funds.
What are the effects of crossing a check? Decide the case (5%)
The effects of crossing a check are as follows: The bank cannot recover the amount paid to B for the
a. The check may not be encashed but only deposited check. When the bank honored the check, it became an
in a bank; acceptor. As acceptor, the bank became primarily and
b. The check may be negotiated only once to one who directly liable to the payee/holder B.
has an account with a bank;
c. The act of crossing a check serves as a warning to The recourse of the bank should be against X and its
the holder thereof that the check has been issued for bookkeeper who conspired to make X’s ledger show that
a definite purpose so that the holder must inquire if he has sufficient funds.
he has received the check pursuant to that purpose, ALTERNATIVE ANSWER:
otherwise he is not a holder in due course (See Bataan The bank can recover from B. This is solutio indebiti
Cigar and Cigarette Factory, Inc. v CA GR 93048, Mar 3, 1994; because there is payment by the bank to B when such
230 s 643) payment is not due. The check issued by X to B as payee
had no sufficient funds.
On March 1, 1996, Pentium Company ordered a Checks; Effects; Alterations; Prescriptive Period (1996)
computer from CD Bytes, and issued a crossed check in William issued to Albert a check for P10,000 drawn on
the amount of P30,000 post-dated Mar 31, 1996. Upon XM Bank. Albert altered the amount of the check to
receipt of the check, CD Bytes discounted the check with P210,000 and deposited the check to his account with
Fund House. ND Bank. When ND Bank presented the check for
payment through the Clearing House, XM Bank honored drawee-bank bears the loss (BPI Family Bank v. Buenaventura,
it. Thereafter, Albert withdrew the P210,000 and closed G.R. No. 148196, September 30, 2005). A drawee-bank paying
his account. on a forged check must be considered as paying out of its
funds and cannot charge the amount to the drawer
When the check was returned to him after a month, (Samsung Construction Co. Phils, v. Far East Bank, G.R. No.
William discovered the alteration. XM Bank recredited 129015, August 13, 2004). If the drawee-bank has charged
P210,000 to William’s current account, and sought drawer's account, the latter can recover such amount
reimbursement from ND Bank. ND Bank refused, from the drawee-bank (Associated Bank v. Court of Appeals,
claiming that XM Bank failed to return the altered check G.R. No. 107382, January 31, 1996; Bank of P. I. v. Case Montessori
to it within 24 hour clearing period. Internationale, G.R. No. 149454, May 28, 2004).
Who, as between, XM Bank and ND Bank, should bear
the loss? Explain. However, the drawer may be precluded or estopped from
SUGGESTED ANSWER: setting up the defense of forgery as against the drawee-
ND Bank should bear the loss if XM Bank returned the bank, when it is shown that the drawer himself had been
altered check to ND Bank within twenty four hours after guilty of gross negligence as to have facilitated the
its discovery of the alteration. Under the given facts, forgery (Metropolitan Waterworks v. Court of Appeals, G.R. No. L-
William discovered the alteration when the altered check 62943, 143 SCRA 20, July 14, 1986).
was returned to him after a month. It may safely be (NOTA BENE: The question does not qualify the term
assumed that William immediately advised XM Bank of "forged check". An answer addressing the liabilities of a
such fact and that the latter promptly notified ND Bank drawer should be deemed sufficient. Answers addressing
liabilities of parties should likewise be given full credit)
thereafter. Central Bank Circular No. 9, as amended, on
which the decisions of the Supreme Court in Hongkong &
Drawee Bank versus Collecting Bank — When the
Shanghai Banking Corp v People’s Bank & Trust Co and
signature of the drawer is forged, as between the drawee-
Republic Bank vs CA were based was expressly cancelled
bank and collecting bank, the drawee-bank sustains the
and superseded by CB No 317 dated Dec 23 1970. The
loss, since the collecting bank does not guarantee the
latter was in turn amended by CB Circular No 580, dated
signature of the drawer. The payment of the check by the
Sept 19, 1977. As to altered checks, the new rules provide
drawee bank constitutes the proximate negligence since it
that the drawee bank can still return them even after 4:00
has the duty to know the signature of its client-drawer.
pm of the next day provided it does so within 24 hours (Philippine National Bank v. Court of Appeals, G.R. No. L-26001,
from discovery of the alteration but in no event beyond October 29, 1968).
the period fixed or provided by law for filing of a legal
action by the returning bank against the bank sending the (b) Forged Payee's Signature: When drawee-bank pays
same. Assuming that the relationship between the drawee the forged check, it must be considered as paying out of
bank and the collecting bank is evidenced by some its funds and cannot charge the amount so paid to the
written document, the prescriptive period would be 10 account of the depositor. In such case, the bank becomes
years. (Campos, NIL 5th ed 454-455) liable since its primary duty is to verify the authenticity of
ALTERNATIVE ANSWER:
the payee's signature (Traders Royal Bank v. Radio Philippines
XM Bank should bear the loss. When the drawee bank Network, G.R. No. 138510, October 10, 2002; Westmont Bank v.
(XM Bank) failed to return the altered check to the Ong, G.R. No. 132560, January 30, 2002).
collecting bank (ND Bank) within the 24 hour clearing
period provided in Sec 4c of CB Circular 9, dated Feb 17, (c) Forged Indorsement:
1949, the latter is absolved from liability. (See HSBC v • Drawer's account cannot be charged, and if
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)
charged, he can recover from the drawee-bank
(Associated Bank v. Court of Appeals, G.R. No. 107382
January 31,1996).
Checks; Forged Check; Effects (2006) • Drawer has no cause of action against collecting
Discuss the legal consequences when a bank honors a bank, since the duty of collecting bank is only to
forged check. (5%) the payee. A collecting bank is not guilty of
SUGGESTED ANSWER:
The legal consequences when a bank honors a forged negligence over a forged indorsement on checks
check are as follows: for it has no way of ascertaining the authority of
(a) When Drawer's Signature is Forged: Drawee-bank the endorsement and when it caused the checks
by accepting the check cannot set up the defense of to pass through the clearing house before
forgery, because by accepting the instrument, the drawee allowing withdrawal of the proceeds thereof
(Manila Lighter Transportation, Inc. v. Court of Appeals,
bank admits the genuineness of signature of drawer (BPI
G.R. No. 50373, February 15, 1990). On the other
Family Bank vs. Buenaventura G.R. No. 148196, September 30, 2005;
Section 23, Negotiable Instruments Law). hand, a collecting bank which endorses a check
bearing a forged endorsement and presents it to
Unless a forgery is attributable to the fault or negligence the drawee bank guarantees all prior
of the drawer himself, the remedy of the drawee-bank is endorsements including the forged
against the party responsible for the forgery. Otherwise, endorsement itself and should be held liable
therefor (Traders Royal Bank v. RPN, G.R. No. alteration of the instrument. The serial number is not
138510, October 10, 2002). material to the negotiability of the instrument.
• Drawee-bank can recover from the collecting
bank (Great Eastern Life Ins. Co. v. Hongkong & b. Yes. As a general rule, the drawee is not liable under
Shanghai Bank, G.R. No. 18657, August 23,1922) the check because there is no privity of contract between
because even if the indorsement on the check XYZ Marketing, as payee, and ABC Bank as the drawee
deposited by the bank's client is forged, bank. However, if the action taken by the bank is an
collecting bank is bound by its warranties as an abuse of right which caused damage not only to the
indorser and cannot set up defense of forgery as issuer of the check but also to the payee, the payee has a
against drawee bank (Associated Bank v. Court of cause of action under quasi-delict.
Appeals, G.R. No. 107382, January 31, 1996).
Checks; Liability; Drawee Bank (1995) Gemma drew a check on September 13, 1990. The
Mario Guzman issued to Honesto Santos a check for holder presented the check to the drawee bank only on
P50th as payment for a 2nd hand car. Without the March 5, 1994. The bank dishonored the check on the
knowledge of Mario, Honesto changed the amount to same date. After dishonor by the drawee bank, the holder
P150th which alteration could not be detected by the gave a formal notice of dishonor to Gemma through a
naked eye. Honesto deposited the altered check with letter dated April 27, 1994.
Shure Bank which forwarded the same to Progressive 1) What is meant by “unreasonable time” as applied to
Bank for payment. Progressive Bank without noticing the presentment?
alteration paid the check, debiting P150th from the 2) Is Gemma liable to the holder?
account of Mario. Honesto withdrew the amount of SUGGESTED ANSWER:
P15th from Shure Bank and disappeared. After receiving 1) As applied to presentment for payment, “reasonable
his bank statement, Mario discovered the alteration and time: is meant not more than 6 months from the date of
demanded restitution from Progressive Bank. issue. Beyond said period, it is “unreasonable time” and
Discuss fully the rights and the liabilities of the parties the check becomes stale.
concerned.
SUGGESTED ANSWER: 2) No. Aside form the check being already stale, Gemma
The demand of Mario for restitution of the amount of is also discharged form liability under the check, being a
P150,000 to his account is tenable. Progressive Bank has drawer and a person whose liability is secondary, this is
no right to deduct said amount from Mario’s account due to the giving of the notice of dishonor beyond the
since the order of Mario is different. Moreover, period allowed by law. The giving of notice of dishonor
Progressive Bank is liable for the negligence of its on April 27, 1994 is more than one (1) month from
employees in not noticing the alteration which, though it March 5, 1994 when the check was dishonored. Since it is
cannot be detected by the naked eye, could be detected not shown that Gemma and the holder resided in the
by a magnifying instrument used by tellers. same place, the period within which to give notice of
dishonor must be the same time that the notice would
As between Progressive Bank and Shure Bank, it is the reach Gemma if sent by mail. (NIL Sec 103 & 104; Far
former that should bear the loss. Progressive Bank failed East Realty Investment Inc v CA 166 S 256)
to notify Shure Bank that there was something wrong ALTERNATIVE ANSWER:
with the check within the clearing hour rule of 24 hours. 2) Gemma can still be liable under the original contract
for the consideration of which the check was issued.
Checks; Material Alterations; Liability (1999)
A check for P50,000.00 was drawn against drawee bank Checks; Presentment (2003)
and made payable to XYZ Marketing or order. The A bank issues its own check. May the holder hold the
check was deposited with payee’s account at ABC Bank bank liable thereunder if he fails to –
which then sent the check for clearing to drawee bank. • prove presentment for payment, or
Drawee bank refused to honor the check on ground that • present the bill to the drawee for acceptance?
the serial number thereof had been altered. Explain your answers. (4%)
XYZ marketing sued drawee bank. SUGGESTED ANSWER:
a. Is it proper for the drawee bank to dishonor the
check for the reason that it had been altered?
Explain (2%)
b. In instant suit, drawee bank contended that XYZ Checks; Validity; Waiver of Bank’s liability for
Marketing as payee could not sue the drawee bank as negligence (1991)
there was no privity between then. Drawee theorized Mr. Lim issued a check drawn against BPI Bank in favor
that there was no basis to make it liable for the of Mr Yu as payment of certain shares of stock which he
check. Is this contention correct? Explain. (3%) purchased. On the same day that he issued the check to
SUGGESTED ANSWER:
Yu, Lim ordered BPI to stop payment. Per standard
a. No. The serial number is not a material particular of
banking practice, Lim was made to sign a waiver of BPI’s
the check. Its alteration does not constitute material
liability in the event that it should pay Yu through e) May Pablo recover from either Mario or Jose?
oversight or inadvertence. Despite the stop order by Lim,
BPI nevertheless paid Yu upon presentation of the SUGGESTED ANSWER:
check. Lim sued BPI for paying against his order. Decide a) Camilo may not enforce said promissory note against
the case. Mario and Jose. The promissory note at the time of
SUGGESTED ANSWER: forgery being payable to order, the signature of Pablo
In the event that Mr. Lim, in fact, had sufficient legal was essential for the instrument to pass title to
reasons to issue the stop payment order, he may sue BPI subsequent parties. A forged signature was inoperative
for paying against his order. The waiver executed by Mr (Sec 23 NIL). Accordingly, the parties before the forgery
Lim did not mean that it need not exercise due diligence are not juridically related to parties after the forgery to
to protect the interest of its account holder. It is not allow such enforcement.
amiss to state that the drawee, unless the instrument has
earlier been accepted by it, is not bound to honor b) Camilo may not go against Pablo, the latter not having
payment to the holder of the check that thereby excludes indorsed the instrument.
it from any liability if it were to comply with its stop
payment order (Sec 61 NIL) c) Camilo may enforce the instrument against Julian
ALTERNATIVE ANSWER: because of his special indorsement to Camilo, thereby
1991 6b) BPI would not be liable to Mr Lim. Mr Lim and making him secondarily liable, both being parties after
BPI are governed by their own agreement. The waiver the forgery.
executed by Mr Lim, neither being one of future fraud or
gross negligence, would be valid. The problem does not d) Julian, in turn, may enforce the instrument against Bert
indicate the existence of fraud or gross negligence on the who, by his forgery, has rendered himself primarily liable.
part of BPI so as to warrant liability on its part.
e) Pablo preserves his right to recover from either Mario
Defenses; Forgery (2004) or Jose who remain parties juridically related to him.
CX maintained a checking account with UBANK, Makati Mario is still considered primarily liable to Pablo. Pablo
Branch. One of his checks in a stub of fifty was missing. may, in case of dishonor, go after Jose who, by his special
Later, he discovered that Ms. DY forged his signature indorsement, is secondarily liable.
and succeeded to encash P15,000 from another branch Note: It is possible that an answer might distinguish
of the bank. DY was able to encash the check when ET, between blank and special indorsements of prior parties
a friend, guaranteed due execution, saying that she was a which can thereby materially alter the above suggested
holder in due course. answers. The problem did not clearly indicate the kind of
Can CX recover the money from the bank? Reason indorsements made.
briefly. (5%)
SUGGESTED ANSWER: Forgery; Liabilities; Prior & Subsequent Parties (1995)
Yes, CX can recover from the bank. Under Section 23 of Alex issued a negotiable PN (promissory note) payable to
the Negotiable Instruments Law, forgery is a real Benito or order in payment of certain goods. Benito
defense. The forged check is wholly inoperative in indorsed the PN to Celso in payment of an existing
relation to CX. CX cannot be held liable thereon by obligation. Later Alex found the goods to be defective.
anyone, not even by a holder in due course. Under a While in Celso’s possession the PN was stolen by Dennis
forged signature of the drawer, there is no valid who forged Celso’s signature and discounted it with
instrument that would give rise to a contract which can Edgar, a money lender who did not make inquiries about
be the basis or source of liability on the part of the the PN. Edgar indorsed the PN to Felix, a holder in due
drawer. The drawee bank has no right or authority to course. When Felix demanded payment of the PN from
touch the drawer's funds deposited with the drawee Alex the latter refused to pay. Dennis could no longer be
bank. located.
1. What are the rights of Felix, if any, against Alex,
Forgery; Liabilities; Prior & Subsequent Parties (1990) Benito, Celso and Edgar? Explain
Jose loaned Mario some money and, to evidence his 2. Does Celso have any right against Alex, Benito and
indebtedness, Mario executed and delivered to Jose a Felix? Explain.
promissory note payable to his order. SUGGESTED ANSWER:
1. Felix has no right to claim against Alex, Benito and
Jose endorsed the note to Pablo. Bert fraudulently Celso who are parties prior to the forgery of Celso’s
obtained the note from Pablo and endorsed it to Julian signature by Dennis. Parties to an instrument who are
by forging Pablo’s signature. Julian endorsed the note to such prior to the forgery cannot be held liable by any
Camilo. party who became such at or subsequent to the forgery.
a) May Camilo enforce the said promissory note against However, Edgar, who became a party to the instrument
Mario and Jose? subsequent to the forgery and who indorsed the same to
b) May Camilo go against Pablo? Felix, can be held liable by the latter.
c) May Camilo enforce said note against Julian?
d) Against whom can Julian have the right of recourse?
2. Celso has the right to collect from Alex and Benito. delivered it to Marie. She accepted the check in good
Celso is a party subsequent to the two. However, Celso faith as payment for goods she delivered to Ruth.
has no right to claim against Felix who is a party Eventually, Ruth regretted what she did and apologized
subsequent to Celso (Sec 60 and 66 NIL) to Jun. Immediately he directed the drawee bank to
dishonor the check. When Marie encashed the check, it
Incomplete & Delivered (2004) was dishonored.
AX, a businessman, was preparing for a business trip 1. Is Jun liable to Marie? (5%)
abroad. As he usually did in the past, he signed several SUGGESTED ANSWER:
checks in blank and entrusted them to his secretary with Yes. This covers the delivery of an incomplete instru-
instruction to safeguard them and fill them out only ment, under Section 14 of the Negotiable Instruments
when required to pay accounts during his absence. OB, Law, which provides that there was prima facie authority
his secretary, filled out one of the checks by placing her on the part of Ruth to fill-up any of the material
name as the payee. She filled out the amount, endorsed particulars thereof. Having done so, and when it is first
and delivered the check to KC, who accepted it in good completed before it is negotiated to a holder in due
faith for payment of gems that KC sold to OB. Later, course like Marie, it is valid for all purposes, and Marie
OB told AX of what she did with regrets. AX timely may enforce it within a reasonable time, as if it had been
directed the bank to dishonor the check. Could AX be filled up strictly in accordance with the authority given.
held liable to KC? Answer and reason briefly. (5%)
SUGGESTED ANSWER: 2. Supposing the check was stolen while in Ruth's pos-
Yes. AX could be held liable to KC. This is a case of an session and a thief filled the blank check, endorsed and
incomplete check, which has been delivered. Under delivered it to Marie in payment for the goods he
Section 14 of the Negotiable Instruments Law, KC, as a purchased from her, is Jun liable to Marie if the check is
holder in due course, can enforce payment of the check dishonored? (5%)
as if it had been filled up strictly in accordance with the
authority given by AX to OB and within a reasonable SUGGESTED ANSWER:
time. No. Even though Marie is a holder in due course, this is
an incomplete and undelivered instrument, covered by
Incomplete and Delivered (2005) Section 15 of the Negotiable Instruments Law. Where an
Brad was in desperate need of money to pay his debt to incomplete instrument has not been delivered, it will not,
Pete, a loan shark. Pete threatened to take Brad’s life if he if completed and negotiated without authority, be a valid
failed to pay. Brad and Pete went to see Señorita Isobel, contract in the hands of any holder, as against any
Brad’s rich cousin, and asked her if she could sign a person, including Jun, whose signature was placed
promissory note in his favor in the amount of P10,000.00 thereon before delivery. Such defense is a real defense
to pay Pete. Fearing that Pete would kill Brad, Señorita even against a holder in due course, available to a party
Isobel acceded to the request. She affixed her signature like Jun whose signature appeared prior to delivery.
on a piece of paper with the assurance of Brad that he
will just fill it up later. Brad then filled up the blank Indorser: Irregular Indorser vs. General Indorser (2005)
paper, making a promissory note for the amount of Distinguish an irregular indorser from a general indorser.
P100,000.00. He then indorsed and delivered the same to (3%)
Pete, who accepted the note as payment of the debt. SUGGESTED ANSWER:
Irregular Indorser is not a party to the instrument but he
What defense or defenses can Señorita Isobel set up places his signature in blank before delivery. He is not a
against Pete? Explain. (3%) party but he becomes one because of his signature in the
SUGGESTED ANSWER: instrument. Because his signature he is considered an
The defense (personal defense) which Señorita Isobel can indorser and he is liable to the parties in the instrument.
set up against Pete is that the amount of P100,000.00 is
not in accordance with the authority given to her to Brad While, a General Indorser warrants that the instrument is
(in the presence of Pete) and that Pete was not a holder genuine, that he has a good title to it, that all prior parties
in due course for acting in bad faith when accepted the had capacity to contract; that the instrument at the time
note as payment despite his knowledge that it was only of the indorsement is valid and subsisting; and that on
10,000.00 that was allowed by Señorita Isobel during due presentment, the instrument will be accepted or paid
their meeting with Brad. or both accepted and paid according to its tenor, and that
if it is dishonored, he will pay if the necessary
Incomplete Instruments; Incomplete Delivered proceedings for dishonor are made.
Instruments vs. Incomplete Undelivered Instrument
(2006) Negotiability (1993)
Jun was about to leave for a business trip. As his usual Discuss the negotiability or non-negotiability of the
practice, he signed several blank checks. He instructed following notes
Ruth, his secretary, to fill them as payment for his
obligations. Ruth filled one check with her name as 1) Manila, September 1, 1993
payee, placed P30,000.00 thereon, endorsed and
P2,500.00 b) Paragraph 2 – negotiability is “NOT AFFECTED”
I promise to pay Pedro San Juan or order the sum of The interest is to be computed at a particular time
P2,500. and is determinable. It does not make the sum
uncertain or the promise conditional.
(Sgd.) Noel Castro c) Paragraph 3 – negotiability is “AFFECTED.”
Giving the maker the option renders the promise
2) Manila, June 3, 1993 conditional
d) Paragraph 4 – negotiability is “NOT AFFECTED.”
P10,000.00 Giving the option to the holder does not make the
For value received, I promise to pay Sergio Dee or order promise conditional.
the sum of P10,000.00 in five (5) installments, with the
first installment payable on October 5, 1993 and the Negotiability; Holder in Due Course (1992)
other installments on or before the fifth day of the Perla brought a motor car payable on installments from
succeeding month or thereafter. Automotive Company for P250th. She made a down
payment of P50th and executed a promissory note for
(Sgd.) Lito Villa the balance. The company subsequently indorsed the
note to Reliable Finance Corporation which financed the
SUGGESTED ANSWER: purchase. The promissory note read:
The promissory note is negotiable as it complies with Sec “For value received, I promised to pay Automotive
1, NIL. Company or order at its office in Legaspi City, the sum
• Firstly, it is in writing and signed by the maker, Noel of P200,000.00 with interest at twelve (12%) percent per
Castro. annum, payable in equal installments of P20,000.00
• Secondly, the promise is unconditional to pay a sum monthly for ten (10) months starting October 21, 1991.
certain in money, that is, P2,500.00
• Thirdly, it is payable on demand as no date of Manila September 21, 1991.
maturity is specified.
• Fourth, it is payable to order. (sgd) Perla
The promissory note is negotiable. All the requirements Pay to the order of Reliable Finance Corporation.
of Sec 1 NIL are complied with. The sum to be paid is Automotive Company
still certain despite that the sum is to be paid by
installments (Sec 2b NIL) By: (Sgd) Manager
Negotiability (2002) Because Perla defaulted in the payment of her

Which of the following stipulations or features of a installments, Reliable Finance Corporation initiated a
promissory note (PN) affect or do not affect its case against her for a sum of money. Perla argued that
negotiability, assuming that the PN is otherwise the promissory note is merely an assignment of credit, a
negotiable? Indicate your answer by writing the non-negotiable instrument open to all defenses available
paragraph number of the stipulation or feature of the PN to the assignor and, therefore, Reliable Finance
as shown below and your corresponding answer, either Corporation is not a holder in due course.
“Affected” or “Not affected.” Explain (5%). a) Is the promissory note a mere assignment of credit or
a negotiable instrument? Why?
a) The date of the PN is “February 30, 2002.” b) Is Reliable Finance Corp a holder in due course?
b) The PN bears interest payable on the last day of Explain briefly.
SUGGESTED ANSWER:
each calendar quarter at a rate equal to five percent
a) The promissory note in the problem is a negotiable
(5%) above the then prevailing 91-day Treasury Bill
instrument, being in compliance with the provisions of
rate as published at the beginning of such calendar
Sec 1 NIL. Neither the fact that the payable sum is to be
quarter.
paid with interest nor that the maturities are in stated
c) The PN gives the maker the option to make
installments renders uncertain the amount payable (Sec 2
payment either in money or in quantity of palay or
NIL)
equivalent value.
d) The PN gives the holder the option either to require
b) Yes, Reliable Finance Corporation is a holder in due
payment in money or to require the maker to serve
course given the factual settings. Said corporation
as the bodyguard or escort of the holder for 30 days.
apparently took the promissory note for value, and there
SUGGESTED ANSWER:
are no indications that it acquired it in bad faith (Sec 52
a) Paragraph 1 – negotiability is “NOT AFFECTED.” NIL see Salas v CA 181 s 296)
The date is not one of the requirements for
negotiability. Negotiability; Requisites (2000)
a) MP bought a used cell phone from JR. JR preferred Negotiable Instrument: Definition & Characteristics
cash but MP is a friend so JR accepted MR’s promissory (2005)
note for P10,000. JR thought of converting the note into What is a negotiable instrument? Give the characteristics
cash by endorsing it to his brother KR. The promissory of a negotiable instrument. (2%)
note is a piece of paper with the following hand-printed SUGGESTED ANSWER:
notation: “MP WILL PAY JR TEN THOUSAND Negotiable Instrument is a written contract for the
PESOS IN PAYMENT FOR HIS CELLPHONE 1 payment of money which is intended as a substitute for
WEEK FROM TODAY.” Below this notation MP’s money and passes from one person to another as money,
signature with “8/1/00” next to it, indicating the date of in such a manner as to give a holder in due course the
the promissory note. When JR presented MP’s note to right to hold the instrument free from defenses available
KR, the latter said it was not a negotiable instrument to prior parties. Such instrument must comply with Sec. 1
under the law and so could not be a valid substitute for of the Negotiable Instrument Law to be considered
cash. JR took the opposite view, insisting on the note’s negotiable.
negotiability. You are asked to referee. Which of the
opposing views is correct? The characteristics of a negotiable instrument are;
1) Negotiability - That quality or attribute whereby a
b) TH is an indorsee of a promissory note that simply bill, note or check passes or may pass from hand to
states: “PAY TO JUAN TAN OR ORDER 400 hand, similar to money, so as to give the holder in
PESOS.” The note has no date, no place of payment and due course the right to hold the instrument and
no consideration mentioned. It was signed by MK and collect the sum payable for himself free from
written under his letterhead specifying the address, which defenses.
happens to be his residence. TH accepted the promissory
note as payment for services rendered to SH, who in turn 2) Accumulation of Secondary Contracts as they are
received the note from Juan Tan as payment for a transferred from one person to another.
prepaid cell phone card worth 450 pesos. The payee
acknowledged having received the note on August 1, Negotiable Instrument: Identification (2005)
2000. A Bar reviewee had told TH, who happens to be State and explain whether the following are negotiable
your friend, that TH is not a holder in due course under instruments under the Negotiable Instruments Law: (5%)
Article 52 of the Negotiable Instruments Law (Act 2031) 1) Postal Money Order;
and therefore does not enjoy the rights and protection 2) A certificate of time deposit which states “This is to
under the statute. TH asks for our advice specifically in certify that bearer has deposited in this bank the sum
connection with the note being undated and not of FOUR THOUSAND PESOS (P4,000.00) only,
mentioning a place of payment and any consideration. repayable to the depositor 200 days after date.”
What would your advice be? (2%). 3) Letters of credit;
4) Warehouse receipts;
SUGGESTED ANSWER: 5) Treasury warrants payable from a specific fund.
a) KR is right. The promissory note is not negotiable. It
is not issued to order or bearer. There is no word of SUGGESTED ANSWER:
negotiability containing therein. It is not issued in 1) Postal Money Order – Non-Negotiable as it is
accordance with Section 1 of the Negotiable Instruments governed by postal rules and regulation which may
Law be inconsistent with the NIL and it can only be
negotiated once.
b) The fact that the instrument is undated and does not
mention the place of payment does not militate against 2) A certificate of time deposit which states “This is to
its being negotiable. The date and place of payment are certify that bearer has deposited in this bank the sum
not material particulars required to make an instrument of FOUR THOUSAND PESOS (P4,000.00) only,
negotiable. repayable to the depositor 200 days after date.” –
Non-Negotiable as it does not comply with the
The fact that no mention is made of any consideration is requisites of Sec. 1 of NIL
not material. Consideration is presumed.
3) Letters of credit - Non-Negotiable
Negotiable Instrument: Ambiguous Instruments (1998)
How do you treat a negotiable instrument that is so 4) Warehouse receipts - Non-Negotiable for the same
ambiguous that there is doubt whether it is a bill or a as Bill of Lading it merely represents good, not
note? (5%) money.
SUGGESTED ANSWER:
1. Where a negotiable instrument is so ambiguous that 5) Treasury warrants payable from a specific fund -
there is doubt whether it is a bill or a note, the holder Non-Negotiable being payable out of a particular
may treat it either as a bill of exchange or a promissory fund.
note at his election.
Negotiable Instrument: Negotiable Document vs. latter became a holder thereof. As such holder, Napoleon
Negotiable Instrument (2005) can proceed against Richard Clinton.
Distinguish a negotiable document from a negotiable
instrument. (2%) Negotiable Instruments; Bearer Instruments (1997)
SUGGESTED ANSWER: A delivers a bearer instrument to B. B then specially
Negotiable Instrument have requisites of Sec. 1 of the indorses it to C and C later indorses it in blank to D. E
NIL, a holder of this instrument have right of recourse steals the instrument from D and, forging the signature
against intermediate parties who are secondarily liable, of D, succeeds in “negotiating” it to F who acquires the
Holder in due course may have rights better than instrument in good faith and for value.
transferor, its subject is money and the Instrument itself a) If, for any reason, the drawee bank refuses to honor
is property of value. the check, can F enforce the instrument against the
drawer?
On the other hand, negotiable document does not b) In case of the dishonor of the check by both the
contain requisites of Sec. 1 of NIL, it has no secondary drawee and the drawer, can F hold any of B, C and D
liability of intermediate parties, transferee merely steps liable secondarily on the instrument?
into the shoes of the transferor, its subject are goods and SUGGESTED ANSWER:
the instrument is merely evidence of title; thing of value a) Yes. The instrument was payable to bearer as it was a
are the goods mentioned in the document. bearer instrument. It could be negotiated by mere
delivery despite the presence of special indorsements.
Negotiable Instrument; Negotiability (1997) The forged signature is unnecessary to presume the
Can a bill of exchange or a promissory note qualify as a juridical relation between or among the parties prior to
negotiable instrument if – the forgery and the parties after the forgery. The only
a. it is not dated; or party who can raise the defense of forgery against a
b. the day and the month, but not the year of its holder in due course is the person whose signature is
maturity, is given; or forged.
c. it is payable to “cash”’ or
d. it names two alternative drawees b) Only B and C can be held liable by F. The instrument
at the time of the forgery was payable to bearer, being a
SUGGESTED ANSWER: bearer instrument. Moreover, the instrument was
a) Yes. Date is not a material particular required by Sec 1 indorsed in blank by C to D. D, whose signature was
NIL for the negotiability of an instrument. forged by E cannot be held liable by F.
b) No. The time for payment is not determinable in this Negotiable Instruments; bearer instruments; liabilities of
case. The year is not stated. maker and indorsers (2001)
A issued a promissory note payable to B or bearer. A
c) Yes. Sec 9d NIL makes the instrument payable to delivered the note to B. B indorsed the note to C. C
bearer because the name of the payee does not purport placed the note in his drawer, which was stolen by the
to be the name of any person. janitor X. X indorsed the note to D by forging C’s
signature. D indorsed the note to E who in turn delivered
d) A bill may not be addressed to two or more drawees in the note to F, a holder in due course, without
the alternative or in succession, to be negotiable (Sec 128 indorsement. Discuss the individual liabilities to F of A,
NIL). To do so makes the order conditional. B and C. (5%)
SUGGESTED ANSWER:
Negotiable Instruments; Bearer Instrument (1998) A is liable to F. As the maker of the promissory note, A
Richard Clinton makes a promissory note payable to is directly or primarily liable to F, who is a holder in due
bearer and delivers the same to Aurora Page. Aurora course. Despite the presence of the special indorsements
Page, however, endorses it to X in this manner: on the note, these do not detract from the fact that a
“Payable to X. Signed: Aurora Page.” bearer instrument, like the promissory note in question,
is always negotiable by mere delivery, until it is indorsed
Later, X, without endorsing the promissory note, restrictively “For Deposit Only.”
transfers and delivers the same to Napoleon. The note is
subsequently dishonored by Richard Clinton. May B, as a general indorser, is liable to F secondarily, and
Napoleon proceed against Richard Clinton for the note? warrants that the instrument is genuine and in all respects
(5%) what it purports to be; that he has good title to it; that all
SUGGESTED ANSWER: prior parties had capacity to contract; that he has no
Yes. Richard Clinton is liable to Napoleon under the knowledge of any fact which would impair the validity of
promissory note. The note made by Richard Clinton is a the instrument or render it valueless; that at the time of
bearer instrument. Despite special indorsement made by his indorsement, the instrument is valid and subsisting;
Aurora Page thereon, the note remained a bearer and that on due presentment, it shall be accepted or paid,
instrument and can be negotiated by mere delivery. When or both, according to its tenor, and that if it be
X delivered and transferred the note to Napoleon, the dishonored and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the A, single proprietor of a business concern, is about to
holder, or to any subsequent indorser who may be leave for a business trip and, as he so often does on these
compelled to pay. occasions, signs several checks in blank. He instructs B,
his secretary, to safekeep the checks and fill them out
C is not liable to F since the latter cannot trace his title to when and as required to pay accounts during his absence.
the former. The signature of C in the supposed B fills out one of the checks by placing her name as
indorsement by him to D was forged by X. C can raise payee, fills in the amount, endorses and delivers the
the defense of forgery since it was his signature that was check to C who accepts it in good faith as payment for
forged. goods sold to B. B regrets her action and tells A what she
ALTERNATIVE ANSWER: did. A directs the Bank in time to dishonor the check.
As a general endorser, B is secondarily liable to F. C is When C encashes the check, it is dishonored.
liable to F since it is due to the negligence of C in placing Can A be held liable to C?
the note in his drawer that enabled X to steal the same SUGGESTED ANSWER:
and forge the signature of C relative to the indorsement Yes, A can be held liable to C, assuming that the latter
in favor of D. As between C and F who are both gave notice of dishonor to A. This is a case of an
innocent parties, it is C whose negligence is the incomplete instrument but delivered as it was entrusted
proximate cause of the loss. Hence C should suffer the to B, the secretary of A. Moreover, under the doctrine of
loss. comparative negligence, as between A and C, both
innocent parties, it was the negligence of A in entrusting
Negotiable Instruments; incomplete and undelivered the check to B which is the proximate cause of the loss.
instruments; holder in due course (2000)
PN makes a promissory note for P5,000.00, but leaves Negotiable Instruments; kinds of negotiable instrument;
the name of the payee in blank because he wanted to words of negotiability (2002)
verify its correct spelling first. He mindlessly left the note A. Define the following: (1) a negotiable promissory
on top of his desk at the end of the workday. When he note, (2) a bill of exchange and (3) a check. (3%)
returned the following morning, the note was missing. It
turned up later when X presented it to PN for payment. B. You are Pedro Cruz. Draft the appropriate contract
Before X, T, who turned out to have filched the note language for (1) your negotiable promissory note and (2)
from PN’s office, had endorsed the note after inserting your check, each containing the essential elements of a
his own name in the blank space as the payee. PN negotiable instrument (2%)
dishonored the note, contending that he did not
authorize its completion and delivery. But X said he had SUGGESTED ANSWER:
no participation in, or knowledge about, the pilferage and A. (1) A negotiable promissory note is an unconditional
alteration of the note and therefore he enjoys the rights promise in writing made by one person to another,
of a holder in due course under the Negotiable signed by the maker, engaging to pay on demand or at a
Instruments Law. Who is correct and why? (3%) fixed or determinable future time, a sum certain in
money to order or bearer.
b) Can the payee in a promissory note be a “holder in
due course” within the meaning of the Negotiable (2) A bill of exchange is an unconditional order in writing
Instruments Law (Act 2031)? Explain your answer. (2%) addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to
SUGGESTED ANSWER: pay on demand or at a fixed or determinable future time
a) PN is right. The instrument is incomplete and a sum certain in money to order or to bearer.
undelivered. It did not create any contract that would
bind PN to an obligation to pay the amount thereof. (3) A check is a bill of exchange drawn on a bank payable
on demand.
b) A payee in a promissory note cannot be a “holder in
due course” within the meaning of the Negotiable B. (1) Negotiable promissory note -
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 “September 15, 2002
promissory note.
ALTERNATIVE ANSWER: “For value received, I hereby promise to pay Juan Santos
b) A payee can be a “holder in due course.” A holder is or order the sum of TEN THOUSAND PESOS
defined as the payee or indorsee of the instrument who is (P10,000) thirty (30) days from date hereof.
in possession of it. Every holder is deemed prima facie to
be a holder in due course.
(Signed) Pedro Cruz
Negotiable Instruments; Incomplete Delivered
Instruments; Comparative Negligence (1997) to: Philippine National Bank
Escolta, Manila Branch”
Commercial Banking Co. The By-laws of Saad requires
Negotiable Instruments; Requisites (1996) that checks issued by it must be signed by the President
What are the requisites of a negotiable instrument? and the Treasurer or the Vice-President. Since the
SUGGESTED ANSWER: Treasurer was absent, C requested the Vice-President to
The requisites of a negotiable instrument are as follows: co-sign the check, which the latter reluctantly did. The
a) It must be in writing and signed by the maker or check was delivered to B. The check was dishonored
drawer; upon presentment on due date for insufficiency of funds.
b) It must contain an unconditional promise or order a) Is Saad liable on the check as an accommodation
to pay a sum certain in money; party?
c) It must be payable to order or to bearer; and b) If it is not, who then, under the above facts, is/are the
d) Where the instrument is addressed to a drawee, he accommodation party?
must be named or otherwise indicated therein with SUGGESTED ANSWER:
reasonable certainty. (Sec 1 NIL) a.) Saad is not liable on the check as an accommodation
party. The act of the corporation in accommodating a
Notice Dishonor (1996) friend of the President, is ultra vires (Crisologo-Jose v CA GR
When is notice of dishonor not required to be given to 80599, 15Sep1989). While it may be legally possible for the
the drawer? corporation, whose business is to provide financial
SUGGESTED ANSWER: accommodations in the ordinary course of business, such
Notice of dishonor is not required to be given to the as one given by a financing company to be an
drawer in any of the following cases: accommodation party, this situation, however, is not the
a) Where the drawer and drawee are the same person; case in the bar problem.
b) When the drawee is a fictitious person or a person
not having capacity to contract; b) Considering that both the President and Vice-
c) When the drawer is the person to whom the President were signatories to the accommodation, they
instrument is presented for payment; themselves can be subject to the liabilities of
d) Where the drawer has no right to expect or require accommodation parties to the instrument in their
that the drawee or acceptor will honor the personal capacity (Crisologo-Jose v CA 15Sep1989)
instrument;
e) Where the drawer has countermanded payment (Sec Parties; Accommodation Party (1996)
114 NIL) Nora applied for a loan of P100th with BUR Bank. By
way of accommodation, Nora’s sister, Vilma, executed a
Parties; Accommodation Party (1990) promissory note in favor of BUR Bank. When Nora
To accommodate Carmen, maker of a promissory note, defaulted, BUR Bank sued Vilma, despite its knowledge
Jorge signed as indorser thereon, and the instrument was that Vilma received no part of the loan.
negotiated to Raffy, a holder for value. At the time Raffy May Vilma be held liable? Explain.
took the instrument, he knew Jorge to be an SUGGESTED ANSWER:
accomodation party only. When the promissory note was Yes, Vilma may be held liable. Vilma is an
not paid, and Raffy discovered that Carmen had no accommodation party. As such, she is liable on the
funds, he sued Jorge. Jorge pleads in defense the fact that instrument to a holder for value such as BUR Bank. This
he had endorsed the instrument without receiving value is true even if BUR Bank was aware at the time it took
therefor, and the further fact that Raffy knew that at the the instrument that Vilma is merely an accommodation
time he took the instrument Jorge had not received any party and received no part of the loan (See Sec 29, NIL;
value or consideration of any kind for his indorsement. Eulalio Prudencio v CA GR L-34539, Jul 14, 86 143 s 7)
Is Jorge liable? Discuss.
SUGGESTED ANSWER: Parties; Accommodation Party (1998)
Yes. Jorge is liable. Sec 29 of the NIL provides that an For the purpose of lending his name without receiving
accommodation party is liable on the instrument to a value therefore, Pedro makes a note for P20,000 payable
holder for value, notwithstanding the holder at the time to the order of X who in turn negotiates it to Y, the latter
of taking said instrument knew him to be only an knowing that Pedro is not a party for value.
accommodation party. This is the nature or the essence 1. May Y recover from Pedro if the latter interposes the
of accommodation. absence of consideration? (3%)
2. Supposing under the same facts, Pedro pays the said
Parties; Accommodation Party (1991) P20,000 may he recover the same amount from X? (2%)
On June 1, 1990, A obtained a loan of P100th from B,
payable not later than 20Dec1990. B required A to issue SUGGESTED ANSWER:
him a check for that amount to be dated 20Dec1990. 1. Yes. Y can recover from Pedro. Pedro is an
Since he does not have any checking account, A, with the accommodation party. Absence of consideration is in the
knowledge of B, requested his friend, C, President of nature of an accommodation. Defense of absence of
Saad Banking Corp (Saad) to accommodate him. C consideration cannot be validly interposed by
agreed, he signed a check for the aforesaid amount dated accommodation party against a holder in due course.
20Dec 1990, drawn against Saad’s account with the ABC
2. If Pedro pays the said P20,000 to Y, Pedro can recover YES! Dagul is an accommodation party because in the
the amount from X. X is the accommodated party or the case at bar, he is essentially, a person who signs as maker
party ultimately liable for the instrument. Pedro is only an without receiving any consideration, signs as an
accommodation party. Otherwise, it would be unjust accommodation party merely for the purpose of lending
enrichment on the part of X if he is not to pay Pedro. the credit of his name. And as an accommodation party
he cannot set up lack of consideration against any holder,
Parties; Accommodation Party (2003) even as to one who is not a holder in due course.
Susan Kawada borrowed P500,000 from XYZ Bank
which required her, together with Rose Reyes who did Parties; Holder in Due Course (1993)
not receive any amount from the bank, to execute a Larry issued a negotiable promissory note to Evelyn and
promissory note payable to the bank, or its order on authorized the latter to fill up the amount in blank with
stated maturities. The note was executed as so agreed. his loan account in the sum of P1,000. However, Evelyn
What kind of liability was incurred by Rose, that of an inserted P5,000 in violation of the instruction. She
accommodation party or that of a solidary debtor? negotiated the note to Julie who had knowledge of the
Explain. (4%) infirmity. Julie in turn negotiated said note to Devi for
SUGGESTED ANSWER: value and who had no knowledge of the infirmity.
(per Dondee) Rose may be held liable. Rose is an 1) Can Devi enforce the note against Larry and if she
accommodation party. Absence of consideration is in the can, for how much? Explain.
nature of an accommodation. Defense of absence of 2) Supposing Devi endorses the note to Baby for value
consideration cannot be validly interposed by but who has knowledge of the infirmity, can the latter
accommodation party against a holder in due course. enforce the note against Larry?
SUGGESTED ANSWER:
Parties; Accommodation Party (2003) 1) Yes, Devi can enforce the negotiable promissory note
Juan Sy purchased from “A” Appliance Center one against Larry in the amount of P5,000. Devi is a holder in
generator set on installment with chattel mortgage in due course and the breach of trust committed by Evelyn
favor of the vendor. After getting hold of the generator cannot be set up by Larry against Devi because it is a
set, Juan Sy immediately sold it without consent of the personal defense. As a holder in due course, Devi is not
vendor. Juan Sy was criminally charged with estafa. subject to such personal defense.
To settle the case extra judicially, Juan Sy paid the sum of 2) Yes. Baby is not a holder in due course because she
P20,000 and for the balance of P5,000.00 he executed a has knowledge of the breach of trust committed by
promissory note for said amount with Ben Lopez as an Evelyn against Larry which is just a personal defense. But
accommodation party. Juan Sy failed to pay the balance. having taken the instrument from Devi, a holder in due
1) What is the liability of Ben Lopez as an course, Baby has all the rights of a holder in due course.
accommodation party? Explain. Baby did not participate in the breach of trust committed
2) What is the liability of Juan Sy? by Evelyn who filled the blank but filled up the
SUGGESTED ANSWER: instrument with P5,000 instead of P1,000 as instructed by
1) Ben Lopez, as an accommodation party, is liable as Larry (Sec 58 NIL)
maker to the holder up to the sum of P5,000 even if he
did not receive any consideration for the promissory Parties; Holder in Due Course (1996)
note. This is the nature of accommodation. But Ben What constitutes a holder in due course?
Lopez can ask for reimbursement from Juan Sy, the SUGGESTED ANSWER:
accommodation party. A holder in due course is one who has taken the
instrument under the following conditions:
2) Juan Sy is liable to the extent of P5,000 in the hands of 1. That it is complete and regular upon its face;
a holder in due course (Sec 14 NIL). If Ben Lopez paid 2. That he became holder of it before it was overdue
the promissory note, Juan Sy has the obligation to and without notice that it had been previously
reimburse Ben Lopez for the amount paid. If Juan Sy dishonored, if such was the fact;
pays directly to the holder of the promissory note, or he 3. That he took it in good faith and for value;
pays Ben Lopez for the reimbursement of the payment 4. That at the time it was negotiated to him, he had no
by the latter to the holder, the instrument is discharged. notice of any infirmity in the instrument or defect in
the title of the person negotiating it. (Sec 52, NIL)
Dagul has a business arrangement with Facundo. The Parties; Holder in Due Course (1996)
latter would lend money to another, through Dagul, 1996 2.2) Eva issued to Imelda a check in the amount of
whose name would appear in the promissory note as the P50th post-dated Sep 30, 1995, as security for a diamond
lender. Dagul would then immediately indorse the note ring to be sold on commission. On Sep 15, 1995, Imelda
to Facundo. Is Dagul an accommodation party? Explain. negotiated the check to MT investment which paid the
(2%) amount of P40th to her.
SUGGESTED ANSWER: Eva failed to sell the ring, so she returned it to Imelda on
Sep 19, 1995. Unable to retrieve her check, Eva withdrew
her funds from the drawee bank. Thus, when MT gave him the note in payment for two cavans of rice. AB
Investment presented the check for payment, the drawee therefore paid GH P1,00 on the same date. On
bank dishonored it. Later on, when MT Investment sued September 15, 2002, EF discovered that the note of AB
her, Eva raised the defense of absence of consideration, was not in his possession and he went to AB. It was then
the check having been issued merely as security for the that EF found out that AB had already made payment on
ring that she could not sell. the note. Can EF still claim payment from AB? Why?
Does Eva have a valid defense? Explain. (3%)
SUGGESTED ANSWER: B. As a sequel to the same facts narrated above, EF, out
No. Eva does not have a valid defense. First, MT of pity for AB who had already paid P1,000.00 to GH,
Investment is a holder in due course and, as such, holds decided to forgive AB and instead go after CD who
the postdated check free from any defect of title of prior indorsed the note in blank to him. Is CD still liable to EF
parties and from defenses available to prior parties by virtue of the indorsement in blank? Why? (2%)
among themselves. Eva can invoke the defense of
absence of consideration against MT Investment only if SUGGESTED ANSWER:
the latter was privy to the purpose for which the checks A. No. EF cannot claim payment from AB. EF is not a
were issued and, therefore, not a holder in due course. holder of the promissory note. To make the presentment
Second, it is not a ground for the discharge of the post- for payment, it is necessary to exhibit the instrument,
dated check as against a holder in due course that it was which EF cannot do because he is not in possession
issued merely as security. The only grounds for the thereof.
discharge of negotiable instruments are those set forth in
Sec 119 of the NIL and none of those grounds are B. No, because CD negotiated the instrument by
available to Eva. The latter may not unilaterally discharge delivery.
herself from her liability by the mere expediency of
withdrawing her funds from the drawee bank. (State Place of Payment (2000)
Investments v CA GR 101163, Jan 11, 93 217s32). PN is the holder of a negotiable promissory note within
the meaning of the Negotiable Instruments Law (Act
Parties; Holder in Due Course (1998) 2031). The note was originally issued by RP to XL as
X makes a promissory note for P10,000 payable to A, a payee. XL indorsed the note to PN for goods bought by
minor, to help him buy school books. A endorses the XL. The note mentions the place of payment on the
note to B for value, who in turn endorses the note to C. specified maturity date as the office of the corporate
C knows A is a minor. If C sues X on the note, can X set secretary of PX Bank during banking hours. ON maturity
up the defenses of minority and lack of consideration? date, RP was at the aforesaid office ready to pay the note
(3%) but PN did not show up. What PN later did was to sue
SUGGESTED ANSWER: XL for the face value of the note, plus interest and costs.
Yes. C is not a holder in due course. The promissory Will the suit prosper? Explain. (5%)
note is not a negotiable instrument as it does not contain SUGGESTED ANSWER:
any word of negotiability, that is, order or bear, or words Yes. The suit will prosper as far as the face value of the
of similar meaning or import. Not being a holder in due note is concerned, but not with respect to the interest
course, C is to subject such personal defenses of minority due subsequent to the maturity of the note and the costs
and lack of consideration. C is a mere assignee who is of collection. RP was ready and willing to pay the note at
subject to all defenses. the specified place of payment on the specified maturity
ALTERNATIVE ANSWER: date, but PN did not show up. PN lost his right to
X cannot set up the defense of the minority of A. recover the interest due subsequent to the maturity of the
Defense of minority is available to the minor only. Such note and the costs of collection.
defense is not available to X.
X cannot set up the defense against C. Lack of Public Service Law

consideration is a personal defense which is only
available between immediate parties or against parties Certificate of public Convenience (1998)
who are not holders in due course. C’s knowledge that A The Batong Bakal Corporation filed with the Board of
is a minor does not prevent C from being a holder in due Energy an application for a Certificate of Public
course. C took the promissory note from a holder for Convenience for the purpose of supplying electric power
value, B. and lights to the factory and its employees living within
the compound. The application was opposed by the
Parties; Holder in Due Course; Indorsement in blank Bulacan Electric Corporation contending that the Batong
(2002) Bakal Corporation has not secured a franchise to operate
A. AB issued a promissory note for P1,000 payable to and maintain an electric plant.
CD or his order on September 15, 2002. CD indorsed Is the opposition’s contention correct? (5%)
the note in blank and delivered the same to EF. GH stole SUGGESTED ANSWER:
the note from EF and on September 14, 2002 presented No. A certificate of public convenience may be granted
it to AB for payment. When asked by AB, GH said CD to Batong Bakal Corporation, though not possessing a
legislative franchise, if it meets all the other requirements. who had a certificate of public convenience to operate
There is nothing in the law nor the Constitution, which auto-trucks with fixed routes from certain towns in
indicates that a legislative franchise is necessary or Bulacan and Rizal to Manila and within Manila. Firstly,
required for an entity to operate as supplier of electric he claimed that the ordinance was null and void because,
power and light to its factory and its employees living among other things, it in effect amends his certificate of
within the compound. public convenience, a thing which only the Public Service
Commission can do under Sec 16 (m) of the Public
Certificate of Public Convenience; inseparability of Service Act. Under said section, the Commission is
certificate and vessel (1992) empowered to amend, modify, or revoke a certificate of
Antonio was granted a Certificate of Public Convenience public convenience after notice and hearing. Secondly, he
(CPC) in 1986 to operate a ferry between Mindoro and contended that even if the ordinance was valid, it is only
Batangas using the motor vessel “MV Lotus.” He the Commission which can require compliance with its
stopped operations in 1988 due to unserviceability of the provisions under Sec 17 (j) of said Act and since the
vessel. implementation of the ordinance was without sanction or
In 1989, Basilio was granted a CPC for the same route. approval of the Commission, its enforcement was
After a few months, he discovered that Carlos was unauthorized and illegal.
operating on his route under Antonio’s CPC. Because 1) May the reliance of X on Section 16 (m) of the Public
Basilio filed a complaint for illegal operations with the Service Act be sustained? Explain.
Maritime Industry Authority, Antonio and Carlos jointly 2) Was X correct in his contention that under Section 17
filed an application for sale and transfer of Antonio’s (j) of the Public Service Act it is only the Commissioner
CPC and substitution of the vessel “MV Lotus” with which can require compliance with the provisions of the
another owned by Carlos. ordinance? Explain.
Should Antonio’s and Carlos’ joint application be SUGGESTED ANSWER:
approved? Giver your reasons. 1) No. The power vested in the Public Service
SUGGESTED ANSWER: Commission under Sec 16m is subordinate to the
The joint application of Antonio and Carlos for the sale authority of the City of Manila under Sec 18 (hh) of its
and transfer of Antonio’s CPC and substitution of the revised charter to superintend, regulate or control the
vessel MV Lotus with another vessel owned by the streets of the city of Manila. (Lagman v City of Manila 17
transferee should not be approved. The certificate of s 579)
public convenience and MV Lotus are inseparable. The 2) No. The powers conferred by law upon the Public
unserviceability of the vessel covered by the certificate Service Commission were not designed to deny or
had likewise rendered ineffective the certificate itself, and supersede the regulatory power of local governments
the holder thereof may not legally transfer the same to over motor traffic in the streets subject to their control.
another. (Cohon v CA 188 s 719). (Lagman v City of Manila 17 s 579)
Certificate of Public Convenience; Requirements (1995) Public utilities (2000)

What requirements must be met before a certificate of WWW Communications Inc. is an e-commerce company
public convenience may be granted under the Public whose present business activity is limited to providing its
Service Act? clients with all types of information technology hardware.
SUGGESTED ANSWER: It plans to re-focus its corporate direction of gradually
The following are the requirements for the granting of a converting itself into a full convergence organization.
certificate of public convenience, to wit: Towards this objective, the company has been
a) The applicant must be a citizen of the Philippines, or aggressively acquiring telecommunications businesses
a corporation, co-partnership or association and broadcast media enterprises, and consolidating their
organized under the laws of the Philippines and at corporate structures. The ultimate plan is to have only
least 60% of the stock of paid-up capital of which two organizations: one to own the facilities of the
must belong to citizens of the Philippines. (Sec 16a, combined businesses and to develop and produce
CA 146, as amended) content materials, and another to operate the facilities
b) The applicant must prove public necessity. and provide mass media and commercial
c) The applicant must prove that the operation of the telecommunications services. WWW Communications
public service proposed and the authorization to do will be the flagship entity which will own the facilities of
business will promote the public interest in a proper the conglomerate and provide content to the other new
and suitable manner. (Sec 16a CA 146 as amended) corporation which, in turn, will operate those facilities
d) The applicant must be financially capable of and provide the services. WWW Communications seeks
undertaking the proposed service and meeting the your professional advice on whether or not its
responsibilities incident to its operation. reorganized business activity would be considered a
public utility requiring a franchise or certificate or any
Powers of the Public Service Commission (1993) other form of authorization from the government. What
The City of Manila passed an ordinance banning will be your advice? Explain (5%)
provincial buses from the city. The ordinance was
challenged as invalid under the Public Service Act by X SUGGESTED ANSWER:
The reorganized business activity of WWW course of her work the plans of WIC. By herself and thru
Communications Inc. would not be considered a public associates, she purchased DOP stocks available at the
utility requiring a franchise or certificate or any other stock exchange priced at P20 per share. When WIC's
form of authorization from the government. It owns the tender offer was announced, DOP stocks jumped to P30
facilities, but does not operate them. per share. Thus OB earned a sizable profit. Is OB liable
for breach and misuse of confidential or insider
Revocation of Certificate (1993) information gained from her employment? Is she also
1) Robert is a holder of a certificate of public liable for damages to sellers or buyers with whom she
convenience to operate a taxicab service in Manila and traded? If so, what is the measure of such damages?
suburbs. One evening, one of his taxicab units was Explain briefly. (5%)
boarded by three robbers as they escaped after staging a SUGGESTED ANSWER:
hold-up. Because of said incident, the LTFRB revoked OB is an insider (as defined in Subsection 3.8(3) of the
the certificate of public convenience of Robert on the Securities Regulation Code) since she is an employee of
ground that said operator failed to render safe, proper the Bank, the financial adviser of DOP, and this
and adequate service as required under Sec 19a of the relationship gives her access to material information
Public Service Act. about the issuer (DOP) and the latter's securities (shares),
a) Was the revocation of the certificate of public which information is not generally available to the public.
convenience of Robert justified? Explain. Accordingly, OB is guilty of insider trading under Section
b) When can the Commission (Board) exercise its power 27 of the Securities Regulation Code, which requires
to suspend or revoke certificate of public convenience? disclosure when trading in securities.
SUGGESTED ANSWER:
1a) No. A single hold-up incident which does not link OB is also liable for damages to sellers or buyers with
Robert’s taxicab cannot be construed that he rendered a whom she traded. Under Subsection 63.1 of the
service that is unsafe, inadequate and improper (Manzanal Securities Regulation Code, the damages awarded could
v Ausejo 164 s 36) be an amount not exceeding triple the amount of the
transaction plus actual damages. Exemplary damages may
1b) Under Sec 19a of the Public Service Act, the also be awarded in case of bad faith, fraud, malevolence
Commission (Board) can suspend or revoke a certificate or wantonness in the violation of the Securities
of public convenience when the operator fails to provide Regulation Code or its implementing rules. The court is
a service that is safe, proper or adequate, and refuses to also authorized to award attorney's fees not exceeding
render any service which can be reasonably demanded 30% of the award.
and furnished.
Revocation of Certificate (1993) Insider Trading (1995)

Pepay, a holder of a certificate of public convenience, Under the Revised Securities Act, it is unlawful for an
failed to register to the complete number of units insider to sell or buy a security of the issuer if he knows a
required by her certificate. However, she tried to justify fact of special significance with respect to the issuer or
such failure by the accidents that allegedly befell her, the security that is not generally available, without
claiming that she was so shocked and burdened by the disclosing such fact to the other party.
successive accidents and misfortunes that she did not 3.a) What does the term “insider” mean as used in the
know what she was doing, she was confused and thrown Revised Securities act?
off tangent momentarily, although she always had the 3.b) When is a fact considered to be “of special
money and financial ability to buy new trucks and repair significance” under the same Act?
the destroyed one. Are the reasons given by Pepay 3.c) What are the liabilities of a person who violates the
sufficient grounds to excuse her from completing units? pertinent provisions of the Revised Securities Act
Explain. regarding the unfair use of inside information?
No. The reasons given by Pepay are not sufficient 3a. “Insider” means 1) the issuer, 2) a director or officer
grounds to excuse her from completing her units. The of, or a person controlling, controlled by, or under
same could be undertaken by her children or by other common control with, the issuer, 3) a person whose
authorized representatives (Sec 16n Pub Serv Act; Halili relationship or former relationship to the issuer gives or
v Herras 10 s 769) 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
Securities Regulation insiders with knowledge that the person from whom he
learns the fact is such an insider (Sec 30b, RSA)
Insider (2004)
Ms. OB was employed in MAS Investment Bank. WIC, a 3b. It is one which, in addition to being material, would
medical drug company, retained the Bank to assess be likely to affect the market price of a security to a
whether it is desirable to make a tender offer for DOP significant extent on being made generally available, or
company, a drug manufacturer. OB overheard in the one which a reasonable person would consider especially
important under the circumstances in determining his A connives with B by which A will offer for sale some of
course of action in the light of such factors as the degree his securities and B will buy them at a certain fixed price,
of its specificity, the extent of its difference from with the understanding that although there would be an
information generally available previously, and its nature apparent sale, A will retain the beneficial ownership
and reliability. (Sec. 30c, RSA) thereof.
a) Is the arrangement lawful? (3%)
3c. The person may be liable to 1) a fine of not less than b) If the sale materializes, what is it called? (2%)
P5th nor more than P500th or 2) imprisonment of not SUGGESTED ANSWER:
less than 7 years nor more than 21 years, 3) or both such a) No. The arrangement is not lawful. It is an artificial
fine and imprisonment in the discretion of the court. manipulation of the price of securities. This is prohibited
by the Securities Regulation Code.
If the person is a corporation, partnership, association or b) If the sale materializes, it is called a wash sale or
other juridical entity, the penalty shall be imposed upon simulated sale.
the officers of the corporation, etc. responsible for the
violation. And if such an officer is an alien, he shall, in Securities Regulation Code; Purpose (1998)
addition to the penalties prescribed, be deported without What is the principal purpose of laws and regulations
further proceedings after service of sentence. (Sec 56 governing securities in the Philippines? (2%)
RSA) SUGGESTED ANSWER:
The principal purpose of laws and regulations governing
Insider Trading; Manipulative Practices (1994) securities in the Philippines is to protect the public
1) Give a case where a person who is not an issuing against the nefarious practices of unscrupulous brokers
corporation, director or officer thereof, or a person and salesmen in selling securities.
controlling, controlled by or under common control with
the issuing corporation, is also considered an “insider.” Securities; Definition (1996)
2) In Securities Law, what is a “shortswing” transaction. Define securities
SUGGESTED ANSWER:
3) In “insider trading,” what is a “fact of special
Stocks, bonds notes, convertible debentures, warrants or
significance”?
SUGGESTED ANSWER:
other documents that represent a share in a company or
1) It may be a case where a person, whose relationship or a debt owned by a company or government entity.
former relationship to the issuer gives or gave him access Evidences of obligations to pay money or of rights to
to a fact of special significance about the issuer or the participate in earnings and distribution of corporate
security that is not generally available, or a person, who assets. Instruments giving to their legal holders rights to
learns such a fact from any of the insiders, with money or other property; they are therefore instruments
knowledge that the person from whom he learns the fact, which have intrinsic value and are recognized and used
is such an insider (Sec 30, par (b) Rev Securities Act) as such in the regular channels of commerce.
(Note: Sec 2a of the Revised Securities Act does not really
define the term ‘securities.’)
2) A “shortswing” is a transaction where a person buys
securities and sells or disposes of the same within a
Securities; Selling of Securities; Meaning (2002)
period of six (6) months.
ALTERNATIVE ANSWER:
2002 (18) Equity Online Corporation (EOL), a New
2) It is a purchase by any person for the issuer or any York corporation, has a securities brokerage service on
person controlling, controlled by, or under common the Internet after obtaining all requisite U.S. licenses and
control with the issuer, or a purchase subject to the permits to do so. EOL’s website (www.eonline..com),
control of the issuer or any such person, resulting in which is hosted by a server in Florida, enables Internet
beneficial ownership of more than 10% of any class of users to trade on-line in securities listed in the various
shares (Sec 32 R Sec Act) stock exchanges in the U.S. EOL buys and sells U.S.
listed securities for the accounts of its clients all over the
3) In “insider trading,” a “fact of special significance” is, world, who convey their buy and sell instructions to
in addition to being material, such fact as would likely, on EOL through the Internet. EOL has no offices,
being made generally available, to affect the market price employees or representatives outside the U.S. The
of a security to a significant extent, or which a reasonable website has icons for many countries, including an icon
person would consider as especially important under the “For Filipino Traders” containing the day’s prices of U.S.
circumstances in determining his course of action in the listed securities expressed in U.S. dollars and their
light of such factors as the degree of its specificity, the Philippine peso equivalent. Grace Gonzales, a resident of
extent of its difference from information generally Makati, is a regular customer of the website and has been
available previously, and its nature and reliability (Sec 30 purchasing and selling securities through EOL with the
par c RSecAct) use of her American Express credit card. Grace has never
traveled outside the Philippines. After a series of
Manipulative Practices (2001) erroneous stock picks, she had incurred a net
Suppose A is the owner of several inactive securities. To indebtedness of US$30,000. with EOL, at which time she
create an appearance of active trading for such securities, cancelled her American Express credit card. After a
number of demand letters sent to Grace, all of them passenger, Pietro. The heirs of Pietro sued Yellow Cab
unanswered, EOL, through a Makati law firm, filed a Company for damages, but the latter refused to pay the
complaint for collection against Grace with the Regional heirs, insisting that it is not liable because Baldo is not its
Trial Court of Makati. Grace, through her lawyer, filed a employee. Resolve with reasons. (2%)
motion to dismiss on the ground that EOL (a) was doing SUGGESTED ANSWER:
business in the Philippines without a license and was Yellow Cab Company shall be liable with Baldo, on a
therefore barred from bringing suit and (b) violated the solidary basis, for the death of passenger Pietro. Baldo is
Securities Regulation Code by selling or offering to sell an employee of Yellow Cab under the boundary system.
securities within the Philippines without registering the As such, the death of passenger Pietro is breach of
securities with the Philippine SEC and thus came to contract of carriage, making both the common carrier
court “with unclean hands.” EOL opposed the motion to Yellow Cab and its employee, Baldo, solidarily liable.
dismiss, contending that it had never established a (Hernandez v. Dolor, G.R, No. 160286, July 30, 2004)
physical presence in the Philippines, and that all of the
activities related to plaintiffs trading in U.S. securities all Carriage; Breach of Contract; Presumption of
transpired outside the Philippines. If you are the judge, Negligence (1990)
decide the motion to dismiss by ruling on the respective Peter so hailed a taxicab owned and operated by Jimmy
contentions of the parties on the basis of the facts Cheng and driven by Hermie Cortez. Peter asked Cortez
presented above. (10%) to take him to his office in Malate. On the way to Malate,
SUGGESTED ANSWER: the taxicab collided with a passenger jeepney, as a result
The grounds of the motion to dismiss are both of which Peter was injured, i.e., he fractured his left leg.
untenable. EOL is not doing business in the Philippines, Peter sued Jimmy for damages, based upon a contract of
and it did not violate the Securites Act, because it was carriage, and Peter won. Jimmy wanted to challenge the
not selling securities in the country. decision before the SC on the ground that the trial court
erred in not making an express finding as to whether or
The contention of EOL is correct, because it never did not Jimmy was responsible for the collision and, hence,
any business in the Philippines. All its transactions in civilly liable to Peter. He went to see you for advice.
question were consummated outside the Philippines. What will you tell him? Explain.
SUGGESTED ANSWER:
Tender Offer (2002) I will counsel Jimmy to desist from challenging the
2002 (6) decision. The action of Peter being based on culpa
A. What is a tender offer? contractual, the carrier’s negligence is presumed upon the
B. In what instances is a tender offer required to be breach of contract. The burden of proof instead would
made? lie on Jimmy to establish that despite an exercise of
SUGGESTED ANSWER: utmost diligence the collision could not have been
A. Tender offer is a publicly announced intention of a avoided.
person acting alone or in concert with other persons to
acquire equity securities of a public company. It may also Carriage; Breach of Contract; Presumption of
be defined as a method of taking over a company by Negligence (1997)
asking stockholders to sell their shares at a price higher In a court case involving claims for damages arising from
than the current market price and on a particular date. death and injury of bus passengers, counsel for the bus
operator files a demurrer to evidence arguing that the
B. Instances where tender offer is required to be made: complaint should be dismissed because the plaintiffs did
a) The person intends to acquire 15% or more of not submit any evidence that the operator or its
the equity share of a public company pursuant employees were negligent. If you were the judge, would
to an agreement made between or among the you dismiss the complaint?
person and one or more sellers. SUGGESTED ANSWER:
b) The person intends to acquire 30% or more of No. In the carriage of passengers, the failure of the
the equity shares of a public company within a common carrier to bring the passengers safely to their
period of 12 months. destination immediately raises the presumption that such
c) The person intends to acquire equity shares of a failure is attributable to the carrier’s fault or negligence.
public company that would result in ownership In the case at bar, the fact of death and injury of the bus
of more than 50% of the said shares. 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
Transportation Law made that the carrier failed to exercise extraordinary
diligence as required by law.
Boundary System (2005) Carriage; Fortuitous Event (1995)

Baldo is a driver of Yellow Cab Company under the M. Dizon Trucking entered into a hauling contract with
boundary system. While cruising along the South Fairgoods Co whereby the former bound itself to haul
Expressway, Baldo’s cab figured in a collision, killing his the latter’s 2000 sacks of Soya bean meal from Manila
Port Area to Calamba, Laguna. To carry out faithfully its 1. The stipulation is considered unreasonable, unjust
obligation Dizon subcontracted with Enrico Reyes the and contrary to public policy under Article 1745 of
delivery of 400 sacks of the Soya bean meal. Aside from the Civil Code.
the driver, three male employees of Reyes rode on the 2. The stipulation limiting the carrier’s liability to the
truck with the cargo. While the truck was on its way to value of the goods appearing in the bill of lading
Laguna two strangers suddenly stopped the truck and unless the shipper or owner declares a higher value,
hijacked the cargo. Investigation by the police disclosed is expressly recognized in Article 1749 of the Civil
that one of the hijackers was armed with a bladed Code.
weapon while the other was unarmed. For failure to
deliver the 400 sacks, Fairgoods sued Dizon for damages. Carriage; Valuation of Damaged Cargo (1993)
Dizon in turn set up a 3rd party complaint against Reyes A shipped thirteen pieces of luggage through LG Airlines
which the latter registered on the ground that the loss from Teheran to Manila as evidenced by LG Air Waybill
was due to force majeure. which disclosed that the actual gross weight of the
Did the hijacking constitute force majeure to exculpate luggage was 180 kg. Z did not declare an inventory of the
Reyes from any liability to Dizon? Discuss fully. contents or the value of the 13 pieces of luggage. After
SUGGESTED ANSWER: the said pieces of luggage arrived in Manila, the
No. The hijacking in this case cannot be considered force consignee was able to claim from the cargo broker only
majeure. Only one of the two hijackers was armed with a 12 pieces, with a total weight of 174 kg. X advised the
bladed weapon. As against the 4 male employees of airline of the loss of one of the 13 pieces of luggage and
Reyes, 2 hijackers, with only one of them being armed of the contents thereof. Efforts of the airline to trace the
with a bladed weapon, cannot be considered force missing luggage were fruitless. Since the airline failed to
majeure. The hijackers did not act with grave or comply with the demand of X to produce the missing
irresistible threat, violence or force. luggage, X filed an action for breach of contract with
damages against LG Airlines. In its answer, LG Airlines
Carriage; Liability; Lost Baggage or Acts of Passengers alleged that the Warsaw Convention which limits the
(1997) liability of the carrier, if any, with respect to cargo to a
1997 (15) Antonio, a paying passenger, boarded a bus sum of $20 per kilo or $9.07 per pound, unless a higher
bound for Batangas City. He chose a seat at the front value is declared in advance and additional charges are
row, near the bus driver, and told the bus driver that he paid by the passenger and the conditions of the contract
had valuable items in his hand carried bag which he then as set forth in the air waybill, expressly subject the
placed beside the driver’s seat. Not having slept for 24 contract of the carriage of cargo to the Warsaw
hours, he requested the driver to keep an eye on the bag Convention. May the allegation of LG Airlines be
should he doze off during the trip. While Antonio was sustained? Explain.
asleep, another passenger took the bag away and alighted SUGGESTED ANSWER:
at Calamba, Laguna. Could the common carrier be held Yes. Unless the contents of a cargo are declared or the
liable by Antonio for the loss? contents of a lost luggage are proved by the satisfactory
SUGGESTED ANSWER: evidence other than the self-serving declaration of one
Yes. Ordinarily, the common carrier is not liable for acts party, the contract should be enforced as it is the only
of other passengers. But the common carrier cannot reasonable basis to arrive at a just award. The passenger
relieve itself from liability if the common carrier’s or shipper is bound by the terms of the passenger ticket
employees could have prevented the act or omission by or the waybill. (Panama v Rapadas 209 s 67)
exercising due diligence. In this case, the passenger asked
the driver to keep an eye on the bag which was placed Common Carrier (1996)
beside the driver’s seat. If the driver exercised due Define a common carrier?
diligence, he could have prevented the loss of the bag. SUGGESTED ANSWER:
A common carrier is a person, corporation, firm or
Carriage; Prohibited & Valid Stipulations (2002) association engaged in the business of carrying or
Discuss whether or not the following stipulations in a transporting passengers or goods or both, by land, water
contract of carriage of a common carrier are valid: or air for compensation, offering its services to the public
1. a stipulation limiting the sum that may be recovered (Art 1732, Civil Code)
by the shipper or owner to 90% of the value of the
goods in case of loss due to theft. Common Carrier; Breach of Contract; Damages (2003)
2. a stipulation that in the event of loss, destruction or Vivian Martin was booked by PAL, which acted as a
deterioration of goods on account of the defective ticketing agent of Far East Airlines, for a round trip flight
condition of the vehicle used in the contract of on the latter’s aircraft, from Manila-Hongkong-Manila.
carriage, the carrier’s liability is limited to the value The ticket was cut by an employee of PAL. The ticket
of the goods appearing in the bill of lading unless showed that Vivian was scheduled to leave Manila at 5:30
the shipper or owner declares a higher value (5%) p.m. on 05 January 2002 aboard Far East’s Flight F007.
SUGGESTED ANSWER: 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
turned out that the ticket was inadvertently cut and X did not declare a greater value despite the fact that the
wrongly worded. PAL employees manning the airport’s clerk had called his attention to the stipulation in the
ground services nevertheless scheduled her to fly two ticket. Decide the case (5%)
hours later aboard their plane. She agreed and arrived in SUGGESTED ANSWER:
Hongkong safely. The aircraft used by Far East Airlines Even if he did not sign the ticket, X is bound by the
developed engine trouble, and did not make it to stipulation that any claim for loss cannot exceed P250 for
Hongkong but returned to Manila. Vivian sued both each luggage. He did not declare a higher value. X is
airlines, PAL and Far East, for damages because of her entitled to P500 for the two luggages lost.
having unable to take the Far East flight. Could either or
both airlines be held liable to Vivian? Why? (6%) Common Carrier; Defenses; Limitation of Liability (2001)
SUGGESTED ANSWER: Suppose A was riding on an airplane of a common
(per dondee) No, there was breach of contract and that carrier when the accident happened and A suffered
she was accommodated well with the assistance of PAL serious injuries. In an action by A against the common
employees to take the flight without undue delay. carrier, the latter claimed that
1) there was a stipulation in the ticket issued to A
Common Carrier; Defenses (2002) absolutely exempting the carrier from liability from the
Why is the defense of due diligence in the selection and passenger’s death or injuries ad notices were posted by
supervision of an employee not available to a common the common carrier dispensing with the extraordinary
carrier? (2%) diligence of the carrier, and
SUGGESTED ANSWER: 2) A was given a discount on his plane fare thereby
The defense of due diligence in the selection and reducing the liability of the common carrier with respect
supervision of an employee is not available to a common to A in particular.
carrier because the degree of diligence required of a a) Are those valid defenses? (1%)
common carrier is not the diligence of a good father of a b) What are the defenses available to any common carrier
family but extraordinary diligence, i.e., diligence of the to limit or exempt it from liability? (4%)
greatest skill and utmost foresight. SUGGESTED ANSWER:
a) No. These are not valid defenses because they are
Common Carrier; Defenses; Fortuitous Events (1994) contrary to law as they are in violation of the
Marites, a paying bus passenger, was hit above her left extraordinary diligence required of common carriers.
eye by a stone hurled at the bus by an unidentified (Article 1757, 1758 New Civil Code)
bystander as the bus was speeding through the National
Highway. The bus owner’s personnel lost no time in b) The defenses available to any common carrier to limit
bringing Marites to the provincial hospital where she was or exempt it from liability are:
confined and treated. 1. observance of extraordinary diligence,
Marites wants to sue the bus company for damages and 2. or the proximate cause of the incident is a
seeks your advice whether she can legally hold the bus fortuitous event or force majeure,
company liable. What will you advise her? 3. act or omission of the shipper or owner of the
SUGGESTED ANSWER: goods,
Marites can not legally hold the bus company liable. 4. the character of the goods or defects in the
There is no showing that any such incident previously packing or in the containers, and
happened so as to impose an obligation on part of the 5. order or act of competent public authority,
personnel of the bus company to warn the passengers without the common carrier being guilty of
and to take the necessary precaution. Such hurling of a even simple negligence (Article 1734, NCC).
stone constitutes fortuitous event in this case. The bus
company is not an insurer. (Pilapil v CA 180 s 346) Common Carrier; Duration of Liability (1996)
A bus of GL Transit on its way to Davao stopped to
Common Carrier; Defenses; Limitation of Liability (1998) enable a passenger to alight. At that moment, Santiago,
X took a plane from Manila bound for Davao via Cebu who had been waiting for a ride, boarded the bus.
where there was a change of planes. X arrived in Davao However, the bus driver failed to notice Santiago who
safely but to his dismay, his two suitcases were left was still standing on the bus platform, and stepped on
behind in Cebu. The airline company assured X that the the accelerator. Because of the sudden motion, Santiago
suitcases would come in the next flight but they never slipped and fell down suffering serious injuries.
did. May Santiago hold GL Transit liable for breach of
X claimed P2,000 for the loss of both suitcases, but the contract of carriage? Explain.
airline was willing to pay only P500 because the airline SUGGESTED ANSWER:
ticket stipulated that unless a higher value was declared, Santiago may hold GL Transit liable for breach of
any claim for loss cannot exceed P250 for each piece of contract of carriage. It was the duty of the driver, when
luggage. X reasoned out that he did not sign the he stopped the bus, to do no act that would have the
stipulation and in fact had not even read it. 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
person who wants to ride the same to signal his intention On one occasion, Reynaldo contracted AM to transport
to board. A public utility bus, once it stops, is in effect for a fee, 100 sacks of rice from Manila to Tarlac.
making a continuous offer to bus riders. It is the duty of However, AM failed to deliver the cargo, because its
common carriers of passengers to stop their conveyances truck was hijacked when the driver stopped in Bulacan to
for a reasonable length of time in order to afford visit his girlfriend.
passengers an opportunity to board and enter, and they a) May Reynaldo hold AM liable as a common
are liable for injuries suffered by boarding passengers carrier?
resulting from the sudden starting up or jerking of their b) May AM set up the hijacking as a defense to
conveyances while they are doing so. Santiago, by defeat Reynaldo’s claim?
stepping and standing on the platform of the bus, is SUGGESTED ANSWER:
already considered a passenger and is entitled to all the a) Reynaldo may hold AM Trucking liable as a common
rights and protection pertaining to a contract of carriage. carrier. The facts that AM Trucking operates only two
(Dangwa Trans Co v CA 95582 Oct 7,91 202s574) trucks for hire on a selective basis, caters only to a few
customers, does not make regular or scheduled trips, and
Common Carrier; Duty to Examine Baggages; Railway does not have a certificate of public convenience are of
and Airline (1992) no moment as
Marino was a passenger on a train. Another passenger, • the law does not distinguish between one whose
Juancho, had taken a gallon of gasoline placed in a plastic principal business activity is the carrying of persons
bag into the same coach where Marino was riding. The or goods or both and anyone who does such
gasoline ignited and exploded causing injury to Marino carrying only as an ancillary activity,
who filed a civil suit for damages against the railway
company claiming that Juancho should have been • the law avoids making any distinction between a
subjected to inspection by its conductor. person or enterprise offering transportation service
The railway company disclaimed liability resulting from on a regular or scheduled basis and one offering
the explosion contending that it was unaware of the such service on an occasional, episodic or
contents of the plastic bag and invoking the right of unscheduled basis, and
Juancho to privacy.
a) Should the railway company be held liable for • the law refrains from making a distinction between a
damages? carrier offering its services to the general public and
b) If it were an airline company involved, would your one who offers services or solicits business only
answer be the same? Explain briefly. from a narrow segment of the general population
SUGGESTED ANSWER: (Pedro de Guzman v CA L-47822 Dec 22,88 168s612)
a) No. The railway company is not liable for damages. In
overland transportation, the common carrier is not SUGGESTED ANSWER:
bound nor empowered to make an examination on the b) AM Trucking may not set up the hijacking as a
contents of packages or bags, particularly those defense to defeat Reynaldo’s claim as the facts given do
handcarried by passengers. not indicate that the same was attended by the use of
grave or irresistible threat, violence, or force. It would
b) If it were an airline company, the common carrier appear that the truck was left unattended by its driver
should be made liable. In case of air carriers, it is not and was taken while he was visiting his girlfriend. (Pedro de
lawful to carry flammable materials in passenger aircrafts, Guzman v CA L-47822 Dec 22,88 168 scra 612).
and airline companies may open and investigate
suspicious packages and cargoes (RA 6235) Common Carriers; Liability for Loss (1991)
Alejandor Camaling of Alegria, Cebu, is engaged in
Common Carrier; Test (1996) buying copra, charcoal, firewood, and used bottles and in
What is the test for determining whether or not one is a reselling them in Cebu City. He uses 2 big Isuzu trucks
common carrier? for the purpose; however, he has no certificate of public
SUGGESTED ANSWER: convenience or franchise to do business as a common
The test for determining whether or not one is a carrier. On the return trips to Alegria, he loads his trucks
common carrier is whether the person or entity, for some with various merchandise of other merchants in Alegria
business purpose and with general or limited clientele, and the neighboring municipalities of Badian and
offers the service of carrying or transporting passengers Ginatilan. He charges them freight rates much lower than
or goods or both for compensation. the regular rates. In one of the return trips, which left
Cebu City at 8:30 p.m. 1 cargo truck was loaded with
Common Carriers; Defenses (1996) several boxes of sardines, valued at P100th, belonging to
1) AM Trucking, a small company, operates two trucks one of his customers, Pedro Rabor. While passing the
for hire on selective basis. It caters only to a few zigzag road between Carcar and Barili, Cebu, which is
customers, and its trucks do not make regular or midway between Cebu City and Alegria, the truck was
scheduled trips. It does not even have a certificate of hijacked by 3 armed men who took all the boxes of
public convenience.
sardines and kidnapped the driver and his helper, policy and therefore void and inexistent. (Art. 1409[1],
releasing them in Cebu City only 2 days later. Civil Code)
Pedro Rabor sought to recover from Alejandro the value Kabit System; Agent of the Registered Owner (2005)
of the sardines. The latter contends that he is not liable Procopio purchased an Isuzu passenger jeepney from
therefore because he is not a common carrier under the Enteng, a holder of a certificate of public convenience
Civil Code and, even granting for the sake of argument for the operation of public utility vehicle plying the
that he is, he is not liable for the occurrence of the loss as Calamba-Los Baños route. While Procopio continued
it was due to a cause beyond his control. offering the jeepney for public transport services, he did
If you were the judge, would you sustain the contention not have the registration of the vehicle transferred in his
of Alejandro? name. Neither did he secure for himself a certificate of
SUGGESTED ANSWER: public convenience for its operation. Thus, per the
If I were the Judge, I would hold Alejandro as having records of the Land Transportation Franchising and
engaged as a common carrier. A person who offers his Regulatory Board, Enteng remained its registered owner
services to carry passengers or goods for a fee is a and operator. One day, while the jeepney was traveling
common carrier regardless of whether he has a certificate southbound, it collided with a ten-wheeler truck owned
of public convenience or not, whether it is his main by Emmanuel. The driver of the truck admitted
business or incidental to such business, whether it is responsibility for the accident, explaining that the truck
scheduled or unscheduled service, and whether he offers lost its brakes.
his services to the general public or to a limited few (De
Guzman v CA GR 47822 27Dec1988) Procopio sued Emmanuel for damages, but the latter
moved to dismiss the case on the ground that Procopio is
I will however, sustain the contention of Alejandro that not the real party in interest since he is not the registered
he is not liable for the loss of the goods. A common owner of the jeepney.
carrier is not an insurer of the cargo. If it can be Resolve the motion with reasons. (3%)
established that the loss, despite the exercise of SUGGESTED ANSWER:
extraordinary diligence, could not have been avoided, The motion to dismiss should be denied because
liability does not ensue against the carrier. The hijacking Procopio, as the real owner of the jeepney, is the real
by 3 armed men of the truck used by Alejandro is one of party in interest. Procopio falls under the Kabit system.
such cases (De Guzman v CA GR 47822 27Dec1988). However, the legal restriction as regards the Kabit system
does not apply in this case because the public at large is
Common vs. Private Carrier; Defenses (2002) not deceived nor involved. (Lim v. Court of Appeals, G.R.
Name two (2) characteristics which differentiate a No. 125817, January 16, 2002, citing Baliwag Transit v. Court
common carrier from a private carrier. (3%). of Appeals, G.R. No. 57493, January 7, 1987)
SUGGESTED ANSWER:
Two (2) characteristics that differentiate a common In any event, Procoprio is deemed to be "the agent" of
carrier from a private carrier are: the registered owner. (First Malayan Leasing v. Court of
1. A common carrier offers its service to the public; a Appeals, G.R. No. 91378, June 9,1992; and "F" Transit Co.,
private carrier does not. Inc. v. NLRC, G.R. Nos, 88195-96, January 27, 1994)
2. A common carrier is required to observe Maritime Commerce; Bareboat (2003)
extraordinary diligence; a private carrier is not so For the transportation of its cargo from the Port of
required. Manila to the Port of Kobe, Japan, Osawa & Co.,
chartered “bareboat” M/V Ilog of Karagatan
Kabit System (2005) Corporation. M/V Ilog met a sea accident resulting in
Discuss the “kabit system” in land transportation and its the loss of the cargo and the death of some of the
legal consequences. (2%) seamen manning the vessel. Who should bear the loss of
SUGGESTED ANSWER:
the cargo and the death of the seamen? Why? (4%)
The kabit system is an arrangement where a person SUGGESTED ANSWER:
granted a certificate of public convenience allows other (per Dondee) Osawa and Co. shall bear the loss because
persons to operate their motor vehicles under his license, under a demise or bareboat charter, the charterer (Osawa
for a fee or percentage of their earnings (Lim v. Court of & Co.) mans the vessel with his own people and
Appeals and Gonzalez, G.R, No. 125817, January 16, 2002, citing becomes, in effect, the owner for the voyage or service
Baliwag Trannit v. Court of Appeals, G.R. No. 57493, January 7,
stipulated, subject to liability for damages caused by
1987) The law enjoining the kabit system aims to identify
negligence.
the person responsible for an accident in order to protect
the riding public. The policy has no force when the
Prior Operator Rule (2003)
public at large is neither deceived nor involved.
Bayan Bus Lines had been operating satisfactorily a bus
service over the route Manila to Tarlac and vice versa via
The law does not penalize the parties to a kabit
the McArthur Highway. With the upgrading of the new
agreement. But the kabit system is contrary to public
North Expressway, Bayan Bus Lines service became
seemingly inadequate despite its efforts of improving the “received for shipment” and contained an entry
same. Pasok Transportation, Inc., now applies for the indicating transshipment in Hongkong. The President of
issuance to it by the Land Transportation Franchising JRT personally received and signed the bill of lading and
and Regulatory Board of a certificate of public despite the entries, he delivered the corresponding check
convenience for the same Manila-Tarlac-Manila route. in payment of the freight.
Could Bayan Bus Lines, Inc., invoke the “prior operator” The shipment was delivered at the port of discharge but
rules against Pasok Transportation, Inc.? Why? (6%) the buyer refused to accept the anahaw fans because
SUGGESTED ANSWER: there was no on-board bill of lading, and there was
(per Dondee) No, Bayan Bus Lines, Inc., cannot invoke transshipment since the goods were transferred in
the “prior operator” rules against Pasok Transportation, Hongkong from MV Pacific, the feeder vessel, to MV
Inc. because such “Prior or Old Operator Rule” under Oriental, a mother vessel. JRT argued that the same
the Public Service Act only applies as a policy of the law cannot be considered transshipment because both vessels
of the Public Service Commission to issue a certificate of belong to the same shipping company.
public convenience to a second operator when prior 1) Was there transshipment? Explain
operator is rendering sufficient, adequate and satisfactory 2) JRT further argued that assuming that there was
service, and who in all things and respects is complying transshipment, it cannot be deemed to have agreed
with the rule and regulation of the Commission. In the thereto even if it signed the bill of lading containing such
facts of the case at bar, Bayan Bus Lines service became entry because it was made known to the shipping lines
seemingly inadequate despite its efforts of improving the from the start that transshipment was prohibited under
same. Hence, in the interest of providing efficient public the letter of credit and that, therefore, it had no intention
transport services, the use of the 'prior operator' and the to allow transshipment of the subject cargo. Is the
'priority of filing' rules shall is untenable n this case. argument tenable? Reason.
SUGGESTED ANSWER:
Registered Owner; Conclusive Presumption (1990) 1) Yes. Transshipment is the act of taking cargo out of
Johnny owns a Sarao jeepney. He asked his neighbor Van one ship and loading it in another. It is immaterial
if he could operate the said jeepney under Van’s whether or not the same person, firm, or entity owns the
certificate of public convenience. Van agreed and, two vessels. (Magellan v CA 201 s 102)
accordingly, Johnny registered his jeepney under Van
name. 2) No. JRT is bound by the terms of the bill of lading
On June 10, 1990, one of the passenger jeepneys when it accepted the bill of lading with full knowledge of
operated by Van bumped Tomas. Tomas was injured and its contents which included transshipment in Hongkong.
in due time, he filed a complaint for damages against Van Acceptance under such circumstances makes the bill of
and his driver for the injuries he suffered. The court lading a binding contract. (Magellan v Ca 201 s 102)
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.
Trust Receipts Law
The Sheriff levied on the jeepney belonging to Johnny Trust Receipts Law; Acts & Omissions; Covered (2006)
What acts or omissions are penalized under the
but registered in the name of Van. Johnny filed a 3rd
Trust Receipts Law? (2.5%)
party claim with the Sheriff alleging ownership of the SUGGESTED ANSWER:
jeepney levied upon and stating that the jeepney was The Trust Receipts Law (P.D. No. 115) declares the fail-
registered in the name of Van merely to enable Johnny to ure to turn over goods or proceeds realized from sale
make use of Van’s certificate of public convenience. thereof, as a criminal offense under Art. 315(l)(b) of
May the Sheriff proceed with the public auction of Revised Penal Code. The law is violated whenever the
Johnny’s jeepney. Discuss with reasons. entrustee or person to whom trust receipts were issued
SUGGESTED ANSWER:
fails to: (a) return the goods covered by the trust receipts;
Yes, the Sheriff may proceed with the auction sale of
or (b) return the proceeds of the sale of said goods
Johnny’s jeepney. In contemplation of law as regards the
(Metropolitan Bank v. Tonda, G.R. No. 134436, August 16, 2000).
public and third persons, the vehicle is considered the
property of the registered operator (Santos v Sibug 104 S 520) Is lack of intent to defraud a bar to the prosecution
of these acts or omissions? (2.5%)
Trans-Shipment; Bill of Lading; binding contract (1993) SUGGESTED ANSWER:
JRT Inc entered into a contract with C Co of Japan to No. The Trust Receipts Law is violated whenever the
export anahaw fans valued at $23,000. As payment entrustee fails to: (1) turn over the proceeds of the sale of
thereof, a letter of credit was issued to JRT by the buyer. the goods, or (2) return the goods covered by the trust
The letter of credit required the issuance of an on-board receipts if the goods are not sold. The mere failure to
bill of lading and prohibited the transshipment. The account or return gives rise to the crime which is malum
President of JRT then contracted a shipping agent to ship prohibitum. There is no requirement to prove intent to
the anahaw fans through O Containers Lines, specifying defraud (Ching v. Secretary of Justice, G.R. No. 164317, February 6,
the requirements of the letter of credit. However, the bill 2006; Colinares v. Court of Appeals, G.R. No. 90828, September 5,
of lading issued by the shipping lines bore the notation 2000; Ong v. Court of Appeals, G.R. No. 119858, April 29, 2003).
Trusts Receipt Law (2003)
Trust Receipts Law; Liability for estafa (1991) PB & Co., Inc., a manufacturer of steel and steel
Mr. Noble, as the President of ABC Trading Inc products, imported certain raw materials for use by it in
executed a trust receipt in favor of BPI Bank to secure the manufacture of its products. The importation was
the importation by his company of certain goods. After effected through a trust receipt arrangement with AB
release and sale of the imported goods, the proceeds Banking corporation. When it applied for the issuance by
from the sale were not turned over to BPI. Would BPI AB Banking Corporation of a letter of credit, PB & Co.,
be justified in filing a case for estafa against Noble? Inc., did not make any representation to the bank that it
SUGGESTED ANSWER: would be selling what it had imported. It failed to pay the
BPI would be justified in filing a case for estafa under bank. When demand was made upon it to account for
PD 115 against Noble. The fact that the trust receipt was the importation, to return the articles, or to turn-over the
issued in favor of a bank, instead of a seller, to secure the proceeds of the sale thereof to the bank, PB & Co., Inc.,
importation of the goods did not preclude the application also failed. The bank sued PB & Co.’s President who was
of the Trust Receipt Law. (PD 115) Under the law, any the signatory of the trust receipt for estafa. The President
officer or employee of a corporation responsible for the put up the defense that he could not be made liable
violation of a trust receipt is subject to the penal liability because there was no deceit resulting in the violation of
thereunder (Sia v People 166s655) the trust receipt. He also submitted that there was no
ALTERNATIVE ANSWER: violation of the trust receipt because the raw materials
The filing of a case for estafa under the penal provisions were not sold but used by the corporation in the
of the RPC would not be justified. It has been held in Sia manufacture of its products. Would those defenses be
v People (161 s 655) that corporate officers and directors sustainable? Why? (6%)
are not criminally liable for a violation of said Code. 2 SUGGESTED ANSWER:
conditions are required before a corporate officer may be No, the defenses are not sustainable. The lack of deceit
criminally liable for an offense committed by the should not be sustained because the mere failure to
corporation; viz: account for the importation, or return the articles
1. There must be a specific provision of law constitutes the abuse of confidence in the crime of estafa.
mandating a corporation to act or not to act; The fact that the goods aren’t sold but are used in the
and manufacture of its products is immaterial because a
violation of the trust receipts law happened when it failed
2. There must be an explicit statement in the law to account for the goods or return them to the Bank
itself that, in case of such violation by a upon demand.
corporation, the officers and directors thereof
are to be personally and criminally liable Usury Law
therefore.
Usury Law (199)
These conditions are not met in the penal provisions of Borrower obtained a loan from a money lending
the RPC on trust receipts. enterprise for which he issued a promissory note
undertaking to pay at the end of a period of 30 days the
Trust Receipts Law; Liability for Estafa (1997) principal plus interest at the rate 5.5% per month plus
A buys goods from a foreign supplier using his credit line 2% per annum as service charge.
with a bank to pay for the goods. Upon arrival of the
goods at the pier, the bank requires A to sign a trust On maturity of the loan, borrower failed to pay the
receipt before A is allowed to take delivery of the goods. principal debt as well as the stipulated interest and service
The trust receipt contains the usual language. A disposes charge. Hence, he was sued.
of the goods and receives payment but does not pay the 1. How would you dispose of the issues raised by
bank. The bank files a criminal action against A for the borrower?
violation of the Trust Receipts Law. A asserts that the 2. That the stipulated interest rate is excessive and
trust receipt is only to secure his debt and that a criminal unconscionable? (3%)
action cannot lie against him because that would be 3. Is the interest rate usurious? (3%)
violative of his constitutional right against
“imprisonment for nonpayment of a debt.” Is he correct? Recommendation: Since the subject matter of these two (2) questions
SUGGESTED ANSWER: is not included within the scope of the Bar Questions in Mercantile
No. Violation of a trust receipt is criminal as it is Law, it is suggested that whatever answer is given by the examinee,
punished as estafa under Art 315 of the RPC. There is a or the lack of answer should be given full credit. If the examinee gives
a good answer, he should be given additional credit.
public policy involved which is to assure the entruster the
reimbursement of the amount advanced or the balance
SUGGESTED ANSWER:
thereof for the goods subject of the trust receipt. The a. The rate of interest of 5.5% per month is excessive and
execution of the trust receipt or the use thereof promotes unconscionable.
the smooth flow of commerce as it helps the importer or
buyer of the goods covered thereby.
b. The interest cannot be considered usurious. The Usury 3. and readiness and willingness to sign when the
Law has been suspended in its application, and the goods are delivered if so requested by the
interest rates are made “floating.” warehouseman (Sec 8 Warehouse Receipts Law).
Garnishment or Attachment of Goods (1999)

Warehouse Receipts Law A Warehouse Company received for safekeeping 1000
bags of rice from a merchant. To evidence the
transaction, the Warehouse Company issued a receipt
Bill of Lading (1998) expressly providing that the goods be delivered to the
1. What do you understand by a “bill of lading?” (2%) order of said merchant.
2. Explain the two-fold character of a “bill of lading.” A month after, a creditor obtained judgment against the
(3%) said merchant for a sum of money. The sheriff
SUGGESTED ANSWER:
proceeded to levy on the rice and directed the Warehouse
1. A bill of lading may be defined as a written
Company to deliver to him the deposited rice.
acknowledgement of the receipt of goods and an
agreement to transport and to deliver them at a specified
a. What advice will you give the Warehouse Company?
place to a person named therein or on his order.
Explain (2%)
b. Assuming that a week prior to the levy, the receipt was
2. A bill of lading has a two-fold character, namely, a) it is
sold to a rice mill on the basis of which it filed a claim
a receipt of the goods to be transported; and b) it
with the sheriff. Would the rice mill have better rights to
constitutes a contract of carriage of the goods.
the rice than the creditor? Explain your answer. (2%)
SUGGESTED ANSWER:
Delivery of Goods; Requisites (1998) a. The 1000 bags of rice were delivered to the Warehouse
Luzon Warehousing Co received from Pedro 200 cavans Company by a merchant, and a negotiable receipt was
of rice for deposit in its warehouse for which a issued therefor. The rice cannot thereafter, while in the
negotiable receipt was issued. While the goods were possession of the Warehouse Company, be attached by
stored in said warehouse, Cicero obtained a judgment garnishment or otherwise, or be levied upon under an
against Pedro for the recover of a sum of money. The execution unless the receipt be first surrendered to the
sheriff proceeded to levy upon the goods on a writ of warehouseman, or its negotiation enjoined. The
execution and directed the warehouseman to deliver the Warehouse Company cannot be compelled to deliver the
goods. Is the warehouseman under obligation to comply actual possession of the rice until the receipt is
with the sheriffs order? (5%) surrendered to it or impounded by the court.
SUGGESTED ANSWER:
No. There was a valid negotiable receipt as there was a
b. Yes. The rice mill, as a holder for value of the receipt,
valid delivery of 200 cavans of rice for deposit. In such
has a better right to the rice than the creditor. It is the
case, the warehouseman (LWC) is not obliged to deliver
rice mill that can surrender the receipt which is in its
the 200 cavans of rice deposited to any person, except to
possession and can comply with the other requirements
the one who can comply with sec 8 of the Warehouse
which will oblige the warehouseman to deliver the rice,
Receipts Law, namely:
namely, to sign a receipt for the delivery of the rice, and
1. surrender the receipt of which he is a holder;
to pay the warehouseman’s liens and fees and other
2. willing to sign a receipt for the delivery of the
charges.
goods; and
3. pays the warehouseman’s liens that is, his fees
Negotiable Documents of Title (1992)
and advances, if any.
For a cargo of machinery shipped from abroad to a sugar
central in Dumaguete, Negros Oriental, the Bill of
The sheriff cannot comply with these requisites especially
Lading (B/L) stipulated “to shipper’s order,” with notice
the first, as he is not the holder of the receipt.
of arrival to be addressed to the Central. The cargo
arrived at its destination and was released to the Central
Delivery of the Goods (1991) without surrender of the B/L on the basis of the latter’s
When is a warehouseman bound to deliver the goods,
undertaking to hold the carrier free and harmless from
upon a demand made either by the holder of a receipt for
any liability.
the goods or by the depositor?
SUGGESTED ANSWER:
The warehouseman is bound to deliver the goods upon Subsequently, a Bank to whom the central was indebted,
demand made either by the holder of the receipt for the claimed the cargo and presented the original of the B/L
goods or by the depositor if the demand is accompanied stating that the Central had failed to settle its obligations
by with the Bank.
1. an offer to satisfy the warehouseman’s lien,
2. an offer to surrender the receipt, if negotiable, with Was there misdelivery by the carrier to the sugar central
such indorsements as would be necessary for the considering the non-surrender of the B/L? Why?
SUGGESTED ANSWER:
negotiation thereof,
There was no misdelivery by the carrier since the cargo SN Warehouse can file an INTERPLEADER to compel
was considered consigned to the Sugar central per the EJ and Melchor to litigate against each other for the
“Shipper’s Order” (Eastern Shipping Lines v CA 190 s ownership of the goods. Sec. 17 of the Warehouse
512) Receipts Law states, "If more than one person claims the
ALTERNATIVE ANSWER: title or possession of the goods, the warehouse may,
There was misdelivery. The B/L was a negotiable either as a defense to an action brought against him for
document of title because it was to the “Shipper’s non-delivery of the goods or as an original suit,
Order.” Hence, the common carrier should have whichever is appropriate, require all known claimants to
delivered the cargo to the Central only upon surrender of interplead."
the B/L. The non-surrender of the B/L will make it
liable to holders in due course. Unpaid Seller; Negotiation of the Receipt (1993)
A purchased from S 150 cavans of palay on credit. A
Ownership of Goods Stored (1992) deposited the palay in W’s warehouse. W issued to A a
To guarantee the payment of a loan obtained from a negotiable warehouse receipt in the name of A.
bank, Raul pledged 500 bales of tobacco deposited in a Thereafter, A negotiated the receipt to B who purchased
warehouse to said bank and endorsed in blank the the said receipt for value and in good faith.
warehouse receipt. Before Raul could pay for the loan, 1) Who has a better right to the deposit, S, the unpaid
the tobacco disappeared from the warehouse. vendor or b, the purchaser of the receipt for value and in
Who should bear the loss – the pledgor or the bank? good faith? Why?
Why? 2) When can the warehouseman be obliged to deliver the
SUGGESTED ANSWER: palay to A?
The pledgor should bear the loss. In the pledge of a SUGGESTED ANSWER:
warehouse receipt the ownership of the goods remain 1) B has a better right than S. The right of the unpaid
with depositor or his transferee. Any contract or real seller, S, to the goods was defeated by the act of A in
security, among them a pledge, does not amount to or endorsing the receipt to B.
result in an assumption of risk of loss by the creditor.
The Warehouse Receipts Law did not deviate from this 2) The warehouseman can be obliged to deliver the palay
rule. 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
Right to the Goods (2005) with Sec 8 of the Warehouse Receipts Law.
Jojo deposited several cartons of goods with SN
Warehouse Corporation. The corresponding warehouse Validity of stipulations excusing warehouseman from
receipt was issued to the order of Jojo. He endorsed the negligence (2000)
warehouse receipt to EJ who paid the value of the goods S stored hardware materials in the bonded warehouse of
deposited. Before EJ could withdraw the goods, Melchor W, a licensed warehouseman under the General Bonded
informed SN Warehouse Corporation that the goods Warehouse Law (Act 3893 as amended). W issued the
belonged to him and were taken by Jojo without his corresponding warehouse receipt in the form he
consent. Melchor wants to get the goods, but EJ also ordinarily uses for such purpose in the course of his
wants to withdraw the same. (5%) business. All the essential terms required under Section 2
• Who has a better right to the goods? Why? of the Warehouse Receipts Law (Act 2137 as amended)
SUGGESTED ANSWER: are embodied in the form. In addition, the receipt issued
EJ has a better right to the goods, being covered by a to S contains a stipulation that W would not be
negotiable document of title, namely the warehouse responsible for the loss of all or any portion of the
receipts issued to the "order of Jojo." Under the Sales hardware materials covered by the receipt even if such
provisions of the Civil Code on negotiable documents of loss is caused by the negligence of W or his
title, and under the provisions of the Warehouse Receipts representatives or employees. S endorsed and negotiated
Law, when goods deposited with the bailee are covered the warehouse receipt to B, who demanded delivery of
by a negotiable document of title, the endorsement and the goods. W could not deliver because the goods were
delivery of the document transfers ownership of the nowhere to be found in his warehouse. He claims he is
goods to the transferee. By operation of law, the not liable because of the free-from-liability clause
transferee obtains the direct obligation of the bailee to stipulated in the receipt. Do you agree with W’s
hold the goods in his name." (Art. 1513, Civil Code; contention? Explain. (5%)
Section 41, Warehouse Receipts Law) Since EJ is the SUGGESTED ANSWER:
holder of the warehouse receipt, he has the better right to No. I do not agree with the contention of W. The
the goods. SN Warehouse is obliged to hold the goods in stipulation that W would not be responsible for the loss
his name. of all or any portion of the hardware materials covered
by the receipt even if such loss is caused by the
• If SN Warehouse Corporation is uncertain as to who negligence of W or his representative or employees is
is entitled to the property, what is the proper void. The law requires that a warehouseman should
recourse of the corporation? Explain. exercise due diligence in the care and custody of the
SUGGESTED ANSWER: things deposited in his warehouse.
2. The Chief Justice also said that the judiciary must
"safeguard the liberty" and "nurture the prosperity" of
Miscellaneous our people. Explain this philosophy. Cite Decisions of
the Supreme Court implementing each of these twin
beacons of the Chief Justice. (2.5%)
Energy Regulatory Commission: Jurisdiction & Power SUGGESTED ANSWER:
(2004) The Chief Justice's philosophy "Safeguarding Liberty,
CG, acustomer, sued MERALCO in the MM Regional Nurturing Prosperity" embodies the Supreme Court's
Trial Court to disclose the basis of the computation of approach in decision-making in the exercise of its
the purchased power adjustment (PPA). The trial court constitutional power of judicial review which provides: In
ruled it had no jurisdiction over the case because, as cases involving liberty, the scales of justice should weight
contended by the defendant, the customer not only heavily against government and in favor of the poor, the
demanded a breakdown of MERALCO's bill with respect oppressed, the marginalized, the dispossessed and the
to PPA but questioned as well the imposition of the weak; and that laws and action that restrict fundamental
PPA, a matter to be decided by the Board of Energy, the rights come to the court "with a heavy presumption
regulatory agency which should also have jurisdiction against their constitutional validity. On the other hand, as
over the instant suit. Is the trial court's ruling correct or a general rule, the Supreme Court must adopt a
not? Reason briefly. (5%) deferential or respectful attitude towards actions taken by
SUGGESTED ANSWER: the governmental agencies that have primary
The trial court's ruling is correct. As held in Manila responsibility for the economic development of the
Electric Company v. Court of Appeals, 271SCRA 417 country; and only when an act has been clearly made or
(1997), the Board of Energy had the power to regulate executed with grave abuse of discretion does the Court
and fix power rates to be charged by franchised electric get involved in policy issues.
utilities like MERALCO. In fact pursuant to Executive
Order No. 478 (April 17, 1998), this power has been Decisions implementing the "safeguarding of liberty" in-
transferred to the Energy Regulatory Board (now the clude those involving the constitutionality of Presidential
Energy Regulatory Commission). Under Section 43(u) of Proclamation No. 1017 (David v. Arroyo, G.R. No. 171390,
the Electric Power Industry Reform Act of 2001, the May 3, 2006); the validity of Calibrated Pre-emptive Response
Energy Regulatory Commission has original and (CPR) and B.P. Big. 880 or the Public Assembly Act (Bayan v.
exclusive jurisdiction over all cases contesting power Ermita, G.R. No. 169848, April 25, 2006); and the legality of
rates. Executive Order No. 464 and the President's exercise of Execu-
tive Privilege (Senate of the Philippines v. Ermita, G.R. No.
Four ACID Problems of Philippine Judiciary (2006) 169777, April 20, 2006).
In several policy addresses extensively covered by media
since his appointment on December 21, 2005, Chief On the other hand, cases that relate to "nurturing the
Justice Artemio V. Panganiban vowed to leave a judiciary prosperity" of the people include the question the
characterized by "four Ins" and to focus in solving the constitutionality of the Mining Law (La Bugal-B'Laan v.
"four ACID" problems that corrode the administration Ramos, G.R. No. 127882, Dec. 1, 2004) and the WTO
of justice in our country. Agreement (Tanada v. Angara, G.R. 118295, May 2,1997).
Explain this "four Ins" and "four ACID" problems. Government Deregulation vs. Privatization of an Industry
SUGGESTED ANSWER:
(2004)
Upon assuming his office, Chief Justice Panganiban What is the difference between government deregulation
vowed to lead a judiciary characterized by the "four Ins:" and the privatization of an industry? Explain briefly. (2%)
Integrity, Independence, Industry and Intelligence; one SUGGESTED ANSWER:
that is morally courageous to resist influence, Government deregulation is the relaxation or removal of
interference, indifference and insolence. He envisions a regulatory constraints on firms or individuals, with a view
judiciary that is impervious to the plague of undue to promoting competition and market-oriented
influence brought about by kinship, relationship, approaches toward pricing, output, entry, and other
friendship and fellowship. He calls on the judiciary to related economic decisions.
battle the "Four ACID" problems corroding our justice
system: (1) limited access to justice by the poor; (2) Privatization of an industry refers to the transfer of
corruption; (3) incompetence; and (4) delay in the ownership and control by the government of assets,
delivery of quality judgments. The judicial department firms and operations in an industry to private investors.
should discharge its functions with transparency,
accountability and dignity. Political Law; WTO (1999)
(NOTA BENE: It is respectfully Government plans to impose an additional duty on
suggested that all Bar Candidates
imported sugar on top of the current tariff rate. The
receive a 2.5% bonus for the above
question regardless of the answer) 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
this additional duty, the current low price of sugar in the equal protection of law clause of the Constitution.
world market will surely pull the domestic price to levels Fourth, there is no impairment of due process here
lower than the cost to producer domestic sugar – a because violators of the law will be punished only after
situation that could spell the demise of the Phil sugar "proper trial." Fifth, the issue of "just compensation"
industry. does not arise, because the property of Mrs. BC is not
a) Discuss the validity of this proposal to impose an being expropriated. On the contrary, as a citizen of LVM,
additional levy on imported sugar (3%) Mrs. BC is freely allowed to engage in domestic timber
b) Would the proposal be consistent with the tenets of trade in LVM.
the World Trade Organization (WTO)? (3%)
Tariff and Customs Code: Violation of Customs Laws
Recommendation: Since the subject matter of these (2004)
two (2) questions is not included within the scope of The Collector of Customs ordered the seizure and
the Bar Questions in Mercantile Law, it is suggested forfeiture of new electronic appliances shipped by TON
that whatever answer is given by the examinee, or the
Corp. from Hongkong for violation of customs laws
lack of answer should be given full credit. If the
examinee gives a good answer, he should be given because they were falsely declared as used office
additional credit. equipment and then undervalued for purposes of
customs duties. TON filed a complaint before the MM
SUGGESTED ANSWER: Regional Trial Court for replevin, alleging that the
a) The proposal to impose an additional duty on Customs officials erred in the classification and valuation
imported sugar on top of the current tariff rate is valid, of its shipment, as well as in the issuance of the warrant
not being prohibited by the Constitution. It would enable of seizure. The Collector moved to dismiss the suit for
producers to realize reasonable profits, and would allow lack of jurisdiction on the part of the trial court. Should
the sugar industry of the country to survive. the Collector's motion be granted or denied? Reason
briefly. (5%)
b) No. The proposal would not be consistent with the SUGGESTED ANSWER:
tenets of the WTO which call for the liberalization of The Collector's motion should be granted. Under Section
trade. However, such proposal may be acceptable within 602(g) of the Tariff and Customs Code, the Bureau of
the allowable period under the WTO for adjustment of Customs has exclusive original jurisdiction over seizure
the local industry 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
Power of the State: Regulating of Domestic Trade (2004) whatever answer made by the candidate should be
In its exercise of police power and business regulation, given full credit.)
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
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com 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
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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.
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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
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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
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
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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
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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
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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
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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
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General Principles establishment which has for its object

some commercial operation. “ Text
Presumption: Habitually Engaging in messages may qualify to be equivalent to
Commerce (2009) electronic documents.
No.V. Cecilio is planning to put up a Banking Law

grocery store in the subdivision where he
and his family reside. To promote this Banks; Bank Deposits vs. Deposit
proposed business venture, he told his wife Substitutes (2010)
and three children to send out promotional
No.II. (C) Differentiate ―bank deposits‖ from
text messages to all the residents in the
―deposit substitutes.‖ (2%)
subdivision. Cecilio’s family members did
SUGGESTED ANSWER:
as instructed, and succeeded in reaching,
Bank deposits are funds obtained by a
through text messages, more than 80% of
bank from the public which are relent by
the residents in the subdivision.
such bank to its own borrowers. Deposit
substitutes are alternative forms of
Is Cecilio habitually engaged in commerce
obtaining funds from the public, other
even if the grocery store has yet to be
than deposits, through the issuance,
established? Explain your answer. (3%)
endorsement, or acceptance of debt
instruments for the own account of the
SUGGESTED ANSWER:
borrower, for the purpose of relending or
Yes. Even if the grocery store has yet to
purchasing of receivables and other
be established, Cecilio already habitually
obligations. These instruments may
engaged in commerce, when per his
include, but need not be limited to,
instruction the members of his family
banker’s acceptances, promissory notes,
contacted more than 80% the residents
participations, certificates of assignment
of the subdivision where they reside.
and similar instruments with recourse,
According to Article 3 of the Code of
and repurchase agreements (Section 95,
Commerce, “legal presumption of
Rep. Act No. 7653, “The New Central
habitually engaging in commerce shall
Bank Act”).
exist from the moment the person who
intends to engage therein announces
(D) Why are banks required to maintain
through circulars, newspapers, handbills,
reserves against their deposits and deposit
posters exhibited to the public, or in any
substitutes? State one of three purposes for
other manner whatsoever an
these reserves. (2%)
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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 their deposits and deposit and lessee.
substitutes will suffice:
(1) One of the purposes of the (B) Is a stipulation in the contract for the
requirement to maintain bank reserves use of a safety deposit box relieving the
is to control the volume of money bank of liability in connection with the use
created by the credit operations of the thereof valid? (2%).
banking system (Section 94 of the New SUGGESTED ANSWER:
Central Bank Act); The stipulation relieving the bank of
(2) It is to enable the banks to answer liability in connection with the use of
any withdrawal; the safety deposit box is void as it is
(3) To help Government to finance its against law and public policy (CA Agro-
operation; Industrial Development Corp. v. Court of
(4) To help the Government control Appeals, supra).
money supply.
Banks; Deposit: Safety Deposit Box,

Banks; Money Laundering: Predicate
Relationship from Banks (2010)
Crimes (2007)
No.II. (A) How do you characterize the legal
No.X. Name at least five predicate crimes to
relationship between a commercial bank
money laundering. (5%)
and its safety deposit box client? (20%)
SUGGESTED ANWERS: SUGGESTED ANSWER:
The Relationship between a commercial
Any five of the following are predicate
bank and its safety deposit box client is
crimes to money laundering:
that of a bailee and a bailor, the
bailment being for hire and mutual (1) Kidnapping for ransom under Article
benefit (Sia v. Court of Appeals, 222 267 of Act No.3815, otherwise known as
SCRA 24 (1993); CA Agro-Industrial the Revised Penal Code, as amended;
Development Corp. v. Court of Appeals,
219 SCRA 426(1993)). (2) Sections 3,4,5,7,8 and 9 of Article
Two of Republic Act No. 6425, as
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amended, otherwise known as the (11) Violations under Republic Act No.
Dangerous Drugs Act of 1972; 8792, otherwise known as the Electronic
Commerce Act of 2000
(3) Section 3 paragraphs B,C,E,G,H and I
of Republic Act No. 3019, as amended; (12) Hijacking and other violations under
otherwise known as the Anti-graft and Republic Act No 6235;destructive arson
Corrupt Practices Act; and murder, as defined under the
Revised Penal Code, as amended,
(4) Plunder under Republic Act No. 7080, including those perpetrated by terrorist
as amended; against non-combatant persons and
(5) Robbery and extortion under Articles similar targets;
294,295,296,299,300,301 and 302 of the
Revised Penal Code, as amended; (13) Fraudulent practices and other
violations under Republic Act No. 8799,
(6) Jueteng and Masiao punished as otherwise known as the securities
illegal gambling under Presidential Regulation Code of 2000
Decree No. 1602;
(14) Felonies or offenses of a similar
nature those are punishable under the
(7) Piracy on the high seas under the
penal laws of other countries. (Sec 3,
Revised Penal Code, as amended and
Anti-Money Laundering Act of 2001).
Presidential Decree No. 532;
(8) 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
(9) 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.
(10) 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
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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
facts and the chronology of events relative
Does RED Corporation still have the right
to the problems that beset MPBC rural
to redeem the property as of September 14,
bank branches. The report concluded that
2007? Reason briefly. (5%)
the bank branches were unable to pay their
SUGGESTED ANSWER: liabilities as they fell due, and could not

possibly continue in business without
No, RED Corporation has lost its right to
incurring substantial losses to its
redeem the property. Juridical persons
depositors and creditors.
whose property is sold pursuant to an
extrajudicial foreclosure, shall have the
(A) May the Monetary Board order the
right to redeem the property until
closure of the MPBC rural banks relying
registration of the certificate of sale with
only on the SED Report, without need of an
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
to take any of the actions enumerated
under Sec. 30, Republic Act No. 7653,
Banks; Insolvency; Actions of the otherwise known as the New Central
Monetary Board (2009) Bank Act, leading to the receivership
and liquidation of a bank or quasi-bank.
No.VIII. Maharlikang Pilipino Banking
There is no requirement that an
Corporation (MPBC) operates several
examination be first conducted before a
branches of Maharlikang Pilipino Rural
banking institution may be placed under
Bank in Eastern Visayas. Almost all the
receivership ( Rural Bank of Buhi v.
branch managers are close relatives of the
Court of Appeals, 162 SCRA 288 (1988)).
members of the Board of Directors of the
corporation. Many undeserving relatives of
(B) If MPBC hires you as lawyer because the
the branch managers were granted loans.
Monetary Board has forbidden it from
In time, the branches could not settle their
carrying on its business due to its
obligations to depositors and creditors.
imminent insolvency, what action will you
institute to question the Monetary Board’s
Receiving reports of these irregularities, the
order? Explain. (3%)]
Supervising and Examining Department
Page 12 of 173
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
No.VIII. Due to growing financial
stockholders of record representing the
difficulties, Z Bank was unable to finish
majority of the capital stock within ten
construction of its 21-storey building on a
(10) days from receipt by the board of
prime lot located in Makati City. Inevitably,
directors of MPBC of the order directing
the Bangko Sentral ordered the closure of Z
receivership, liquidation or
Bank and consequently placed it under
conservatorship (Sec. 30, par. (2), R.A.
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
(A) Is the act of the President valid? Why or
time deposit; P50,000 in current account;
why not?
P1 million in a trust account and P3 million
in money market placement. Under the SUGGESTED ANSWER:
Philippine Deposit Insurance Corporation
No, the bank president’s act is not valid.
Act, how much could Manuel recover?
He had no authority to enter into the
Explain. (2%)
financing agreement. Z Bank was ordered
SUGGESTED ANSWER:
closed and placed under receivership.
Manuel can recover P500, 000.00,
Control over the properties of Z Bank
because this is the total of his savings
passed to the receiver. The appointment
deposit, time deposit and current
of a receiver operates to suspend the
account (Section 4(g) of Republic Act No.
authority of the bank and its officers
3591, as amended). The trust account
over the bank’s assets and properties,
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such authority being reposed in the False. During the receivership, the
receiver (Abacus Real Estate assets and properties of the corporation
Development Center, Inc. v. Manila are being gathered for conversion into
Banking Corporation, 455 SCRA 97 cash in preparation for distribution to
(2005)). creditors. Granting new loans and
accepting new deposits would constitute
(B) Will a suit to enforce the exclusive right
doing business for the bank in the
of the investors to purchase the property
ordinary course of business which is
prosper? Reason briefly.
contrary to the purpose and nature of a
SUGGESTED ANSWER: receivership proceeding.
No, the exclusive options granted to the

investors, having been entered into by
Banks; Secrecy of Bank Deposit; AMLC
one without authority to do so, is
(2013)
unenforceable. The bank, therefore,
cannot be compelled to sell the property. No.III. From his first term in 2007,
Under Section 30 of Republic Act No. Congressman Abner has been endorsing his
7653, New Central Bank Act, the pork barrel allocations to Twin Rivers in
properties of Z Bank should be exchange for a commission of 40% of the
administered for the benefit of its face value of the allocation. Twin Rivers is a
creditors. The property in question can non-governmental organization whose
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
pork barrel checks, Twin Rivers does not
appear to have done anything on the
endorsed projects and Congressman Abner
likewise does not appear to have bothered
Banks; Receivership; Prohibited
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).
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Anti-Money Laundering Council (Anti-

Based 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 and other transactions
involving the congressman’s bank
accounts. No.I. (B) If the Ombudsman is convinced
As counsel for BDP, would you advise the that there is a violation of law after
bank to comply with the order? (8%) investigating a complaint alleging illicit
SUGGESTED ANSWER: bank deposits of public officer, the
I shall advise Banco de Plata not to Ombudsman may order the bank
comply with the order of the Anti-Money concerned to allow in camera inspection of
Laundering Council. It cannot inquire bank records and documents.
into the deposits of Congressman Abner,
regardless of currency, without a bank SUGGESTED ANSWER:
inquiry order from a competent court, False. The Bank Secretary Law prohibits
because crimes involved are 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 and other violations of court or when the deposit is the subject
Republic Act No. 6235, destructive of litigation. Investigation by the
arson, murder, and terrorism and Ombudsman is not considered as a
conspiracy to commit terrorism (Section pending litigation to allow the
11 of Anti-Money Laundering Act). examination of the bank records and
documents (Marquez v. Desierto, 359
The Anti-Money Laundering Council SCRA 772 (2001)).
cannot order Banco de Plata to hold all
withdrawals and other 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
Page 15 of 173
Banks; Single Borrower’s Limit; not release any part of the collateral by
Collateral Security (2008) the amount of reduction.
No.XIX. Industry Bank, which has a net

The collateral is a single commercial lot
worth of P1 Billion, extended a loan to
in the Fort, covered by a single title and
Celestial Properties Inc. amounting to P270
beings essentially indivisible in
Million. The loan was secured by a
character, the mortgage cannot be
mortgage over a vast commercial lot in the
“partially released.” Besides, since a real
Fort Bonifacio Global City, appraised at
estate mortgage cannot be “partially
P350 Million. After audit, the Banko Sentral
released.” Besides, since a real estate
ng Pilipinas gave notice that the loan to
mortgage is merely a collateral contract,
Celestial Properties exceeded the single
it can be enforced only to the amount of
borrower’s limit of 25% of the bank’s net
the loan; and the moment the loan
worth under a recent BSP Circular. In light
exposure is reduced, then automatically,
of other previous similar violations of the
reduction of the collateral coverage of
credit limit requirement, the BSP advised
the real estate mortgage follows.
Industry Bank to reduce the amount of the
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, Banks; Types of Banks (2010)
Celestial Properties countered that the
No.I. Briefly describe the ff. types of banks;
bank should first release a part of the
(2% each)
collateral worth P50 Million. Industry Bank
rejected the counter-proposal, and referred
(A) Universal bank
the matter to you as counsel. How would
SUGGESTED ANSWER:
you advise Industry Bank to proceed, with
A universal bank is a commercial bank
its best interests in mind? (5%)
with 2 additional powers, namely: (1) the
SUGGESTED ANSWER:
power of an investment house and (2)
With a net worth of P1.0 Billion, the the power to invest in non-allied
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”).
with to reduce the loan of Celestial
properties by P20.0 Million, but should (B) Commercial bank
Page 16 of 173
SUGGESTED ANSWER: enterprises and individuals (Section 3

A commercial bank is a bank that can: (a), Rep. Act No. 7906 “Thrift Banks Act
(1) accept drafts; (2) issue letters of of 1995”).
credit; (3) discount and negotiate
promissory notes, drafts, bills of (D) Rural bank
exchange, and other evidence of debt; (4) SUGGESTED ANSWER:
accept or create demand deposits; (5) A rural bank is one established to
receive other types of deposits, as well provide credit facilities to farmers and
as deposit substitutes; (6) buy and sell merchants or their cooperatives and, in
foreign exchange, as well as gold or general to the people of the rural
silver bullion; (7) acquire marketable communities (Section 3, Rep. Act No.
bonds and other debts securities; and (8) 7353, “The Rural Banks Act of 1992”).
extend credit, subject to such rules
promulgated by the Monetary Board (E) Cooperative bank
(Section 29, Rep. Act No. 8791, “The SUGGESTED ANSWER:
General Banking Law of 2000”). A cooperative bank is organized under
the Cooperative Code to provide
(C) Thrift bank financial and credit services to
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 (Section 100, Rep. Act
accumulating the savings of depositors No.6938, “The Cooperative Code of the
and investing them in outlets Philippines”).
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 long-
No.XI. (A) A loan agreement which provides
term financing, to business engaged in
that the debtor shall pay interest at the rate
agriculture, services, industry and
determined by the bank’s branch manager
housing; and (3) providing diversified
violates the disclosure requirement of the
financial and allied services for its
Truth in Lending Act.
chosen market and constituencies
SUGGESTED ANSWER:
specially for small and medium
Page 17 of 173
True. This contrary to the duty of the Manila outlet constitutes only one-third
creditor to disclose in detail the of its total business and, therefore, it
interests, charges and other 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 chain with outlets in 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 fixtures and other assets to its
competitor.
(B) If instead of selling its Manila outlet,
Venezia merely mortgages its assets there,
(A) Venezia’s Manila outlet constitutes one-
would it need to comply with the
third of its total business. Should it comply
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:
answer to A above, Venezia need not
Venezia need not comply with the
comply with the requirements of the
requirements of the Bulk Sales Law as its
Bulk Sales Law. The second type of bulk
Page 18 of 173
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%)
(C) What are the legal consequences of a SUGGESTED ANSWER:
failure to comply with the requirements of I will advice the receiver that the Bulk
the 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, mortgage, or assignment under judicial process. In this case, the
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,
Bulk Sales Law; Covered Transactions
000, or both such imprisonment and fine
(2007)
in the discretion of the court (Section
11, Bulk Sales Law). 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
and about its manufacturing business and
No.XIV. XXX Corporation (XXX) and its
to sink the proceeds of the sale for the
sister company, YYY Corporation (YYY), are
expansion of its cargo transport
both under judicial receivership. The
services.(5%)
receiver has the option to sell or
substantially all of the properties of YYY to (A) 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
SUGGESTED ANSWER:
under the Corporation Code have to be
complied with. No. the transaction is not covered by the
provisions of the Bulk sales law, Bulk
Page 19 of 173
sales law applies only to retail Bulk Sales Law; Validity (2009)
merchants, traders and dealers. It does
No.I. (C) Even if the seller and the buyer in
not apply to manufacturers. X
a sale in bulk violate the Bulk Sales Law,
Corporation is engaged in the
the sale would still be valid.
manufacturing business (Development
SUGGESTED ANSWER:
bank of the Phil. V. Judge of the
False. When the Bulk Sales Law is
Regional Trial Court of manial86 O.G.
violated, the sale is null and void. When
1137 (1987)).
the provisions of the said law have not
ALTERNATIVE ANSWER: been complied with, the sale is
considered as being “fraudulent and
YES, the transaction is covered by the
void” and even when coupled with
Bulk Sales Law because it involves the
delivery, the title over the goods does
sale of substantially all the equipment
not transfer to the buyer. However, the
used in the business of X corporation
civil liabilities arising from the
(Sec. 2 Bulk sales law)
transaction remain enforceable between
the parties thereto.
(B) How would X Corporation effect a valid

sale?
Corporation Law
SUGGESTED ANSWER:
BOD; Conflict of Interest; Ratification
To effect a valid sale. X corporation (2008)
must prepare an affidavit stating the
names of all its creditors, their No.XII. Pedro was 70% of the subscribed
addresses, the amount of their credits capital stock of a company which owns an
and their maturities. X 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

their services to the office building. Are the
service contracts valid? Explain. (4%)
SUGGESTED ANSWER:
Page 20 of 173
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 BOD; Qualifications (2012)
to execute them on behalf of said
company. No.VI. X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino
On the other hand, if the contracts were
residing in Quezon City, Philippines. Z is a
duly approved by the Board of Directors
resident alien residing in Makati City. GGG
of the office building company with
Corporation is a domestic corporation -
Paolo duly designated as company
40% owned by foreigners and 60% owned
representative, they would nevertheless
by Filipinos, with T as authorized
be voided at the option of the company.
representative. CCC Corporation is a
Under Sec. 32 of the Corporation Code.
foreign corporation registered with the
“A contract of the corporation with one
Philippine Securities and Exchange
or more of its directors or trustees or
Commission. KKK Corporation is a
officers is voidable at the option of such
domestic corporation (100%) Filipino
corporation, unless all the following
owned. S is a Filipino, 16 years of age, arid
conditions are present,” (a) if Paolo as a
the daughter of Y.
director in the board meeting in which
the contracts were approved was not (A) 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
Page 21 of 173
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
(B) 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 of the capital stock of the
SUGGESTED ANSWER:
corporation (Sec.23, Corporation Code).
Some of the differences are as follows:

(D) Who are qualified to act as Treasurer of
first, all the incorporators are required
the company? (2%)
to sign and acknowledge the Articles of
Incorporation while the subscribers, as SUGGESTED ANSWER:
such, are not subject to the same
requirement; second, the incorporators The Corporation Code does not impose
could be either natural or juridical any nationality or residency requirement
persons; and third, the number of in respect of the Treasurer. Any such
incorporators cannot exceed fifteen requirement or any other reasonable
while the number of subscribers could be requirement may be adopted by the
more than fifteen (subject 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 (e.g., the Anti-
Dummy Law which applies to all
(C) Who are qualified to become members of nationalized businesses). Accordingly,
the board of directors of the corporation? anybody with the qualifications required
(2%) under the by-laws of the corporation or
under the law(s) governing the business
SUGGESTED ANSWER:
of the corporation, could be elected
Treasurer by the Board of Directors.
X,Y,Z and T could be directors (subject
Note, however, that the Treasurer could
to the residency requirement mentioned
not be the President at the same time
in (a) above and any nationality
(Sec. 25, Corporation Code).
Page 22 of 173
(E) Who can be appointed Corporate Corporation automatically dissolve or

Secretary? (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 the existence of the former. A
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 terminate its corporate existence
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 least two thirds of the total
T are all of legal age and otherwise have the outstanding capital stock, as well as the
capacity to enter into contracts.] separate approval by the Monetary
Board.
Corporation; Dissolution (2012) (B) What are the legal requirements in order
that a corporation may be dissolved? (5%)
No.X. AAA Corporation is a bank. The
operations of AAA Corporation as a bank SUGGESTED ANSWERS:
was not doing well. So, to avert any bank

A corporation may be dissolved
run, AAA Corporation, with the approval of
voluntarily under Section 118 (where no
the Monetary Board, sold all its assets and
creditors are affected) or under Section
liabilities to BBB Banking Corporation
119 (where creditors are affected), or by
which includes all deposit accounts. In
shortening of the corporate term under
effect then, BBB Corporation will service all
Section 120, or involuntarily by the SEC
deposits of all depositors of AAA
under Section 122, all of the Corporation
Corporation.
Code. Dissolution under Section 118,119
(A) Will the sale of all assets and liabilities and 120 require the same corporate
of AAA Corporation to BBB Banking approvals stated in (a) above.
Page 23 of 173
Note that the SEC also has the authority (B) May the composition of the board of
under Section 6 of PD 902-A to revoke directors of the National Power Corporation
the certificate of registration of a (NPC) be validly reduced to three (3)?
corporation upon any of the grounds Explain your answer fully. (2%)
provided by law, including the SUGGESTED ANSWER:
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 National Power
Corporation; Formation; Enactment of a Corporation (NPC is a chartered
Law (2008) government corporation, not governed

by the general 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 of Directors of private
creating a private corporation. What
corporations shall not have less than 5
provision of the Constitution precludes the
members. The provisions of the
passage of such a law? (3%)
Corporation Code are applicable to
SUGGESTED ANSWER:
government corporations only in a
Under Sec. 16, Art. XII of the 1987 suppletory manner.
Constitution, Congress cannot, except

by general law, provide for the
formation, organization, or regulation of
private corporations. It is only
Corporation; Sole Proprietorship (2010)
government owned or controlled
corporations that may be created or No.IX. Your client Dianne approaches you
established through special charters. for legal advice on putting up a medium-
Consequently, it has been held that a sized restaurant business that will
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 the Constitution (NDC v. 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
producing meat products profitably and is
Page 24 of 173
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
(A) Briefly explain to your client what you restaurant business.
see as the legal advantages and
disadvantages of using a separate (B) If you advise your client to use a
corporation, a single proprietorship, or a corporation, what officer positions must the
branch of an existing corporation for the corporation at least have?(2%)
proposed restaurant business. (3%) SUGGESTED ANSWER:
SUGGESTED ANSWER: The corporation must have at least five
If Dianne will set up a separate directors (Section 14 of the Corporation
corporation, her liability 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).
absence of showing that there is a
ground to disregard its separate juridical (C) What particular qualifications, if any,
personality. If she were to operate a are 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 of the capital stock of the
corporation require a great deal of paper corporation, which must be recorded in
work and record-keeping. This is not the his name on the books of the
situation in the case of a single corporation, and a majority of the
proprietorship. directors must be residents of the
Philippines (Section 25 of the
If Dianne will form a separate 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
Page 25 of 173
Derivative Suit; Expiration of Term SUGGESTED ANSWER:

(2013) The remaining directors cannot elect
new directors to fill in the two
No.VIII. In the November 2010 stockholders
vacancies. The board of directors may
meeting of Greenville Corporation, eight (8)
fill up vacancy only if the ground is not
directors were elected to the board. The
due to expiration of term, removal or
directors assumed their posts in January
increase in the number of board seats. In
2011. Since no stockholders meeting was
this case, the term of the two directors
held in November 2011, the eight directors
expired after one year. They hold-over
served in a holdover capacity and thus
period is not part of their term. The
continued discharging their powers.
vacancies should be filled up by election
by the stockholders (Valle Verde Country
In June 2012, two (2) of Greenville
Club, Inc. v. Africa, 598 SCRA 202,
Corporation’s directors - Director A and
2009).
Director B – resigned from the board.
Relying on Section 29 of the Corporation
The derivative suit was improper. In a
Code, the remaining six (6) directors elected
derivative suit, the corporation, not the
two (2) new directors to fill in the vacancy
individual stockholder, must be the
caused by the resignation of Directors A
aggrieved party and that the stockholder
and B.
is suing on behalf of the corporation.
What stockholder X is asserting is his
Stockholder X questioned the election of the
individual right as a stockholder to elect
new directors, initially, through a letter-
the two directors. The case partakes
complaint addressed to the board, and later
more of an election contest under the
(when his letter-complaint went unheeded),
rules on intra-corporate controversy
through a derivative suit filed with the
(Legaspi Towers 300, Inc. v. Muer, 673
court. He claimed that he vacancy in the
SCRA 453, 2012).
board should be filled up by the vote of the
stockholders of Greenville Corporation.
Greenville Corporation’s directors defended
the legality of their action, claiming as well
that Stockholder X’s derivative suit was Derivative Suit; Jurisdiction (2009)
improper.
No.II. Atlantis Realty Corporation (ARC), a
local firm engaged in real estate
Rule on the issues raised. (8%)
development, plans to sell one of its prime
Page 26 of 173
assets—a three-hectare land 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 a stockholder against other
firm. The resolution also called for a special stockholders who are officers and
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
filed in the Regional Trial 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 (C) Will the suit prosper? Why or why not?
enjoin the board of directors and the (3%)
stockholders from approving the sale. SUGGESTED ANSWER:
No. The suit will not prosper. There is no
(A) Can Atty. Edric, who owns only one requisite demand on the officers and
share in the company, initiate a derivative directors concerned. There is, therefore,
suit? Why or why not? (2%) no exhaustion of administrative
SUGGESTED ANSWER remedies.
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; Declaration of Dividends
protect the interest of the corporation
(2009)
against illegal or disadvantageous act/s
of its officers or directors, the people No.I. (D) Dividends on shares of stocks can
who are supposed to protect the only be declared out of unrestricted
corporation (Pascual v. Del Zaz Orozco, retained earnings of the corporation.
19 Phil. 82 (1991)). SUGGESTED ANSWER:
True. Dividends on shares of stock of a
(B) If such a suit is commenced, would it corporation, whether cash dividend or
constitute an intra-corporate dispute? If so, stock dividend, can be validly declared
only out of unrestricted retained
Page 27 of 173
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
to use its capital to make said payments
Dividends; Declaration of Dividends
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 issued to Paterno eight such redemption, the option and
hundred preferred shares with the ff. terms: 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]).
ff. rights, preferences, qualifications, and

limitations, to wit:
(1) The right to receive a quarterly

dividend of One per Centum cumulative and
participating; Dividends; Declaration of Dividends
(2) These shares may be redeemed, (2008)
by drawing of lots, at any time after two
No.XIV. Ace Cruz subscribed to 100,000
years from date of issue, at the option of the
shares of stock of JP Development
Corporation; xxx
Corporation, which ahs a par value of P1
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.
(A) For how many shares is Ace Cruz
(3%)
entitled to be paid cash dividends? Expalin.
SUGGESTED ANSWER:
(2%)
Page 28 of 173
SUGGESTED ANSWER: (B) On December 1, 2008, can Ace Cruz

compel JP Development Corporation to
Ace Cruz is entitled to be paid each cash
issue to him the stock certificate
dividends to the entire 100,1000 shares
corresponding to the P25,000 paid by him?
subscribed, and not only to the paid-up
(2%)
portion thereof. The legal character of
SUGGESTED ANSWER:
being a “stockholder,” and therefore the
entitlement to all the rights of a 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 stock corporation may declare expense, if any is due, has been paid. A
dividends out of the 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 divided into portions. The
stock-holders on the basis of outstanding stockholder is not entitled to a
stock held by them” on not on the basis Certificate of Stock until he has
on what stocks have been paid. remitted the full 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. F, the general manager,
including the right to receive dividends. entered into a supply contract with an
But any cash dividends due on American firm. The contract was duly
delinquent stock shall first be applied to approved by the Board of 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-
Page 29 of 173
delivery of the promised supplies, the consented to the non-delivery of the

American firm incurred damages. The promised 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
(A) The members of the Board of Directors excuse or favorably explain the action of
individually, because they approved the F.
transaction? (2%)
(D) Explain the rules on liabilities of a
SUGGESTED ANSWERS: corporation for the act of its corporate
officers and the liabilities of the corporate
No. In approving the transaction, the
officers and Board of Directors of a
directors were not acting their personal
corporation acting in behalf of the
capacities but rather in behalf of XYZ
corporation. (4%)
Corporation exercising the powers of the
corporation and conduction its business 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 incorporation and by-laws of the
corporation, the laws and regulations
Yes. The Board approved the supply
governing the business of, or otherwise
contract and the General Manager
applicable to, the corporation, and, in
entered into the contract, both of them
the case of officers, the resolutions
acting on behalf of the XYZ Corporation.
approved by the Board of Directors.
(C) F, the general manager, personally,

As the directors have a personality
because the non-delivery was with his
separate from that of the corporation,
knowledge and consent? (2%)
they would be personally liable only if
SUGGESTED ANSWERS: 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
Page 30 of 173
directing the affairs of the corporation, SUGGESTED ANSWER:

or when they acquire any personal or
I would sue Nelson, as the person who
pecuniary interest in conflict with their
owned and controlled Sonnel
duty as directors, which acts result in
Contruction Company, under the
damages to the corporation, its
doctrine of “piercing the veil of
stockholders or other persons, when
corporate fiction.” Although a
they agree to hold themselves personally
corporation has a juridical personality
and solidarily liable with the
separate and distinct from that of its
corporation, or when they are made, by a
stockholders, when the corporation is
specific provision of law, to personally
used merely as an alter ego or controlled
answer for the corporate action. (Sec.
for the benefit of a stockholder, or when
31, Corporation Code).
it is necessary to render justice, then
the courts have the right to pierce the
veil of corporate fiction to hold the
controlling stockholder-officer
Piercing the Corporate Veil (2008) personally liable for the corporate tort or
wrong committed.
No.X. Nelson owned and controlled Sonnel
Construction Company. Acting for the
The contractor should also be held liable,
company, Nelson contracted the
since being an independent contractor it
construction of a building. Without first
is liable for the fault or negligence of its
installing a protective net atop the
people.
sidewalks adjoining the construction site,
the company proceeded with the
(B) If you were the counsel for Sonnel
construction work. One day a heavy piece
Construction, how would you defend your
of lumber fell from the building. It smashed
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
cannot be held liable for damages
a result.
because there was no fraud or negligence
(A) Assume that the company had no more
by its officers in undertaking the project
account and property in its name. As
for the construction of the building or
counsel for the heirs of the victim, whom
the selection of a construction company.
will you sue for damages, and what theory
Since a contractor is not an agent of
will you adopt? (3%)
Page 31 of 173
Sonnel Construction, the latter cannot Stock and Transfer Book (2009)
be held liable for the contractor’s
No.XVIII. (C) What is a stock and transfer
negligence. I would also argue that
book? (1%)
piercing the veil of corporate fiction is a
SUGGESTED ANSWER:
remedy of last resort and cannot be
A Stock and transfer book is a book
availed of without clear evidence
which records all stocks in the name of
showing fraud or disrespect of the
the stockholders alphabetically
separate juridical personality of the
arranged; the installments paid or
corporation. Mere control of equity has
unpaid on all stocks for which
not been considered as sufficient basis
subscription has been made and the date
for piercing the veil.
of payment of any installment, a
statement of every alienation, sale or
(C) Could the heirs hold the taxicab owner transfer of stock made, the date thereof,
and driver liable? Explain. (2%) and by and to whom made; and such
SUGGESTED ANSWER: other entries as the by-laws may
prescribe (Section 74, Corporation Code).
Yes, the taxicab company can be liable
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,
No.VII. In a stockholders meeting, S
the cab driver was violating a traffic
dissented from the corporate act converting
regulation. Under Art. 2185 of Civil
preferred voting shares to non-voting
Code, it is presumed that a person
shares. Thereafter, S submitted his
driving a motor vehicle has been
certificates of stock for notation that his
negligent if at time of mishap he was
shares are dissenting. The next day, S
violating a traffic regulation, such as
transferred his shares are dissenting. The
when he was driving on the wrong side of
next day, S transferred his shares to T to
the road (Mallari, Sr. v. CA, G.R. No.
whom new certificates were issued. Now, T
128607, 31 January 2000).
demands from the corporation the payment
of the value of his shares. (10%)
Page 32 of 173
(A) What is the meaning of a stockholder’s

appraisal right?
Stockholders; Contractual Relationship;
Quorum (2009)
SUGGESTED ANSWER:
Appraisal right is the right of No.XVIII. Triple a Corporation (Triple A) was
stockholder, who dissents from 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 to withdraw from 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.
form certain corporate acts involving
fundamental changes in the corporate (A) In 1982, Juancho, the sole heir of one of
structure (Section 81, Corporation the original incorporators filed a petition
Code). with the Securities and Exchange
Commission (SEC) for the registration of his
(B) Can T exercise the right of appraisal? property rights over 120 founder’s shares
Reason briefly? and 12 common shares. The petition was
SUGGESTED ANSWER: supported by a copy of the Articles of
No, T cannot exercise the right of Incorporation indicating the incorporator’s
appraisal in this case. When S initial capital stock subscription. Will the
transferred his shares to T and T was petition be granted? Why or why not? (3%)
issued new stock certificates, the SUGGESTED ANSWER:
appraisal right of S ceased, and T Yes. The articles of Incorporation define
acquired all the rights of a regular the charter of the corporation and the
stockholder. The transfer of shares from contractual relationship between the
S to T constitutes an abandonment of State and the Corporation, the State and
the appraisal right of S. All the T the stockholders, and between the
acquired from the issuance of new stock corporation and the stockholders. Its
certificated was the rights of a regular contents are thus binding upon both the
stockholders (Section 86, Corporation corporation and the stockholders,
Code). conferring on Juancho a clear right to
have his stockholding recorded (Lanuza
Page 33 of 173
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
(B) 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 shares. A suit was filed
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. This includes the 33 the company would now exceed the 40%
common shares reflected in the stock foreign equity limit allowed under the
and transfer book, there being no Constitution the for public utilities.
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 (Section 52 in Relation to SUGGESTED ANSWER:
Section 137 of corporation Code; Lanuza The holding of Bernard Fleet equivalent
v. court of Appeals, 454 SCRA 54 to the outstanding common shares is
(2005)). illegal. His holdings of preferred shares
should not exceed 40%. Since the
constitutional requirement of 60%
Filipino ownership of the capital of
public utilities applies not only to voting
Stockholders; Preferred Shares (2013)
control but also to beneficial ownership
No.X. Bell Philippines, Inc. (BelPhil) is a of the corporation, it should also apply
public utility company, duly incorporated to the preferred shares. Preferred shares
and registered with the Securities and are also entitled to vote in certain
Exchange Commission. Its authorized corporated matters. (Gamboa v. Teves,
capital stock consists of voting common 682 SCRA 397, 2012) The state shall
shares and non-voting preferred shares, develop a self-reliant and independent
Page 34 of 173
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 (A) 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 stock, properties and 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 set out in its articles of
corporate creditors. Stated simply, the incorporation, the act is deemed to be
trust fund doctrine states that all funds ultra vires.
received by the corporation in payment

of the shares of stock shall be held in (B) 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 into a contract without the
used to buy back the issued shares of ratificatory vote of the stockholders in
stock except only in instances those instances where the Corporation
specifically allowed by the Corporation Code so Requires such ratificatory vote,
Code (Boman Environmental such as when the corporation is made to
Development Corporation v. Court of invest in another corporation or engage
Appeals, 167 SCRA 540 [1988]). in a business which is not in pursuit of

its primary purpose, the board resolution
not ratified by stockholders owning or
representing at least two-thirds of the
Ultra Vires Acts (2009)
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.
Page 35 of 173
to nullify the foreclosure and the

(C) the corporate officers mortgages, raising the following issues:
SUGGESTED ANSWER:
When a corporate officer enters into a (A) The execution of only one Affidavit of
contract on behalf of the corporation Good Faith for both mortgages invalidated
without having been so expressly or the 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
bind third parties (Philippine Refining v.
Credit Transaction
Jarque, 61 Phil. 229 (1935)).
(B) The mortgage on the shares of stocks
No.III. Armando, a resident of Manila,
should have been registered in the office of
borrowed P3-million from Bernardo,
the Register of Deeds of Manila where he
offering as security his 500 shares of stock
resides, as well as in the stock and transfer
worth P1.5-million in Xerxes Corporation,
book of Xerxes Corporation. (3%)
and his 2007BMW sedan, valued at P2-
million. The mortgage on the shares of
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
Deeds of Makati City where the
of Good Faith, covering both mortgages.
corporation has its principal office and
also in the Register of Deeds of Manila
Armando defaulted on the payment of his
where the mortgagor resides (Chua Guan
obligation; thus, Bernardo foreclosed on the
v. Samahang Magsasaka, Inc., 62 Phil.
two chattel mortgages. Armando filed suit
472 (1935)). Registration of chattel
Page 36 of 173
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, and has no application to but the car was bidded for P6,000 only. Al
mortgages and other forms 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
motion to dismiss claiming that Bob should
(C) Assume that Bernardo 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:
public sale should be 1-million short of
Bob has the legal right to file a collection
Armando’s total obligation, can Bernardo
suit for a sum of money in lieu of
recover the deficiency? Why or why not?
foreclosing on the chattel mortgage. It
(2%)
has been ruled that a c chattel mortgage
is a security arrangement to support a
SUGGESTED ANSWER:
primary contract (Serra v. Rodriguez,
Yes. Bernardo can recover the
G.R. no. L-25546, 22 April 1974). Since
deficiency. Chattels are given as mere
the chattel mortgage is only a collateral
security, and not as payment or pledge
contract prerogative to choose which of
(CuH ada v. Drilon, 432 SCRA 618
the remedies available to pursue.
(2004)).
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
Page 37 of 173
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 to secure future
advancements are valid and legal
contracts, and the amounts named as
consideration in said contracts do not
limit the amount for which the mortgage
Mortgage; Extrajudicial Foreclosure;
may stand as security if from the four
Blanket Mortgage & Damage Clause
corners of the instrument the intent to
(2012)
secure future and other indebtedness
can be gathered. (Prudential Bank v.
No.VIII. X obtained a Php10Million loan
Alviar, G.R. No. 150197, 28 July 2005)
from BBB Banking Corporation. The loan is
secured by Real Estate Mortgage on his
(B) What is the meaning of a "dragnet
vacation house in Tagaytay City. The
clause" in a Deed of Real Estate Mortgage?
original Deed of Real Estate Mortgage for
Under what circumstances will the "dragnet
the Php10Million was duly registered. The
clause" be applicable? ( 5%)
Deed of Real Estate Mortgage also provides
that "The mortgagor also agrees that this SUGGESTED ANSWERS:
mortgage will secure the payment 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 extrajudicial foreclosure to trap fish or game. It is also known in
proceedings. American jurisprudence as a “blanket
mortgage clause” or an “anaconda
(A) Will the extrajudicial foreclosure prosper clause.” A mortgage with a dragnet
considering that the additional Php5Million clause enables the parties to provide
was not covered by the registration? (5%) continuous dealings, the nature or
extent of which may not be known or
SUGGESTED ANSWERS:
anticipated at the time, and they avoid
the expense and inconvenience of
Page 38 of 173
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 documents, thereby 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.

The loan secured from SSS Bank fell due
The “dragnet clause” may not apply to and X defaulted.
other loans extended by the mortgagee
to the mortgagor for which other (A) 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%)
Court adopted the “reliance on the

SUGGESTED ANSWER:
security test” to the effect that “when
the mortgagor takes another loan [from BBB Bank, as junior mortgagee, would
the mortgage] for which another security have a right to redeem the foreclosed
was given, it could not be inferred that property, together with X, his successors
such loan was made in reliance solely on in interest, any judicial or judgement
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 be for the other loans not Act 3135)
separately collateralized and for any

(B) If the value of the Baguio property is
amount not covered by the new security
less than the amount of loan, what would
for the new loan.
be the recourse of SSS Bank? BBB Bank?
(2%)
SUGGESTED ANSWER:
Page 39 of 173
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 BBB Bank but fully paid his loan from
Bank could file an ordinary action to SSS Bank, BBB Bank could now foreclose
collect its loan from X. if it does so, it the mortgaged property as it would be
would be deemed to have waived its the only remaining mortgagee of the
mortgage lien. If the judgement in the same.
action to collect is favorable to BBB
Bank, and it becomes final and (E) Does X have any legal remedy after the
executory , BBB Bank could enforce the foreclosure in the event that later on he has
said judgement by execution. It could the money to pay for the loan? (1%)
even levy execution execution on the

SUGGESTED ANSWER:
same mortgaged property, but it would
not have priority over the latter. (Caltex
Yes, X could redeem the property within
Philippines v. IAC, et al., G.R. No. 74730,
one (1) year from the date of registration
August 25,1989)
of the sheriff’s certificate of foreclosure
sale.
(C) If the value of the property is more that
the amount of the loan, who will benefit
(F) If SSS Bank and BBB Bank abandon
from the excess value of the property? (2%)
their rights under the real estate mortgage,
is there any legal recourse available to
SUGGESTED ANSWER:
them? (1%)
If the value of the property is more that

SUGGESTED ANSWER:
the amount of the loan, the excess could
benefit and be claimed by BBB Bank, any
SSS Bank and BBB Bank could each file
judicial or judgement creditor of X, any
an ordinary action to collect its loan
other junior mortgagee, and X.
from X.
(D) If X defaulted with its loan in favor of

BBB Bank but fully paid his loan with SSS
Bank, can BBB Bank foreclose the real Mortgage; Foreclosure (2010)
mortgage executed in its favor? (2%)

No.III. Ozamis Paper Corporation secured
loans from ABC Universal Bank in the
SUGGESTED ANSWER:
aggregate principal amount of P100 million,
evidenced by several promissory notes, and
Page 40 of 173
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 (C) Can the bank foreclose on the pledged
real estate mortgage over certain parcels of shares of Marquez and recover the
land owned by Marquez. deficiency from the corporation? Explain.
(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
(A) 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
Insolvency & Corporate
the proceeds of the sale are insufficient
to pay the debt, the mortgagee has the Recovery
right to sue for the deficiency (Suico
Insolvency; Preferred Claims (2007)
Rattan and Buri Interiors, Inc. v. Court
of Appeals, 490 SCRA 560 (2006)). No.XIII. (A) What are the preferred claims
that shall be satisfied first from the assets
(B) If the bank opts to file an action for of an insolvent corporation? (10%)
collection against the corporation, can it
SUGGESTED ANSWER:
afterwards institute a real action to
foreclose the mortgage? Explain (2%) Under the Insolvency law necessary
SUGGESTED ANSWER: funeral expenses of the debtor is the
No, the bank can no longer file an action most preferred claim. However, this is an
to foreclose the real estate mortgage. insolvent corporation, thus, claims shall
When it filed a collection case, it was be paid in the ff. order:
deemed to have abandoned the real
estate mortgage (Bank of America, NT (1) Debts due for personal services
rendered the insolvent by employees,
Page 41 of 173
laborers, or domestic servants Philippine Islands (Section 50,

immediately preceding the Insolvency Law).
commencement of proceeding in
insolvency; (B) How shall the remaining non-preferred
creditors share in the estate of the insolvent
(2) Compensation due the laborers or corporation above?
their dependents under the provisions of SUGGESTED ANSWER:
act numbered thirty-four hundred and The remaining non-preferred creditors,
twenty-eight, known as the workmen’s whose debts are duly proved and
Compensation Act, as amended by Act allowed, shall be entitled to share pro-
Numbered Thirty-eight hundred and rata in the assets, without priority or
twelve, and under the provisions of Act preference whatsoever (Section 49,
Numbered Eighteen hundred and Insolvency Law; Article 2251, Civil
seventy-four, known as the Employees’ Code).
Liability Act, and of other laws providing
for payment of indemnity for damages in
cases of labor accidents;
Rehabilitation; Proceeding;
(3) Legal expenses, and expenses Rehabilitation & Insolvency (2012)
incurred in the administration of the
No.XVIII. (A) Can be distressed corporation
insolvent’s estate for the common
file a petition for corporation rehabilitation
interest of the creditors, when properly
after the dismissal of its earlier petition for
authorized and approved by the court;
insolvency? Why? (2%)
SUGGESTED ANSWER:
(4) Debts, taxes, and assessments due
the Insular Government; Yes, when a distressed corporation’s
petition for insolvency has been
(5) Debts, taxes, and assessments due to dismissed, it can only mean that it still
any province or provinces of the possesses more than enough assets to
Philippine Islands; cover all its liabilities, and consequently,
it can still be “rehabilitated” (PAL v.
(6) Debts, taxes, and assessments due to Zamora, G.R. No. 166996, 06 February
any municipality or municipalities of the 2007, and Sec. 5[d], Securities
Regulation Act).
Page 42 of 173
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 where the has been denied rehabilitation, the SEC
corporation**possesses sufficient may declare a corporation insolvent as
property to cover all its debts but an incident and in continuation of its
foresees the impossibility of meeting already acquired jurisdiction over
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 Procedure for Corporate
is under the management of a Rehabilitation.
rehabilitation receiver or management
committee created pursuant to this Sec. 27, Rule 4 of the Interim Rules
Decree.” state that, “the court shall upon motion,
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 proceeding to
one who is “Any debtor who foresees the insolvency/dissolution.” In other words,
impossibility of meeting its debts when a different petition for insolvency
they respectively fall due,” which means proceedings fall with the general
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 minimum that the debtor is original and exclusive jurisdiction of
“rehabilitable” thus: “the manner by RTC special Commercial Courts.
which the debtor may be rehabilitated
and how such rehabilitation may benefit (C) Explain the key phrase ―equality is
the general body of creditors, employees equity‖ in corporate rehabilitation
and stock holders. proceedings. (2%)
SUGGESTED ANSWER:
(B) Can the corporation file a petition for
The principle of “equality in equity”
rehabilitation first, and after it is dismissed
means that when a corporation is placed
file a petition foR insolvency? Why? (2%)
under the control of a court-appointed
SUGGESTED ANSWER:
rehabilitation receiver, then “all the
Page 43 of 173
creditors should stand on equal footing. (A) Can XYC Company still be able to draw
Not anyone of them should be given any on 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
SUGGESTED ANSWER:
precisely the reason for the suspension
of all pending claims against the Yes, As an exception to a Stay or
corporation under receivership” Suspension Order included in a
(Sobrejuanite v. ASB Dev. Corp., G.R. No. Commencement Order issued pursuant
165675, 30 September 2005: 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

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
superseded by the FRIA, Section 7(b) of
Rehabilitation with the Court. An Order
the Supreme Court Rules of Procedure
was issued by the Court, (1) staying
on Corporate Rehabilitation (2008)
enforcement of all claims, whether money
provides that a stay order shall not cover
or otherwise against ABC Company, its
claims against letters of credit and
guarantors and sureties not solidarily liable
similar security arrangements issued by
with the company; and (2) prohibiting ABC
a third party to secure the payment of
Company from making payments of its
the debtor’s obligations. This was the
liabilities, outstanding as of the date of the
basis of the decision in the case of
filing of the Petition. XYC Company is a
Metropolitan Waterworks and Sewerage
holder of an irrevocable Standby Letter of
System v. Hon. Reynaldo B. Daway, et al.
Credit which was previously procured by
(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.
Page 44 of 173
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 a life insurance from SOS insurance policy effective Nov, 6, 2008.
Insurance Corp. for P1 Million with Gemma Benny named his children as his
Rivera, his adopted daughter, as the beneficiaries. On April 6, 2010, Benny died
beneficiary. Antonio Rivera died on March 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 diabetes and hypertension, and that he had
reasons.(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 insurance company correctly
willfully bringing about the death of the rescinded the policy because of
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 of said insurance, if not was suffering from diabetes,
otherwise disqualified. Thus, the hypertension, and 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).
Page 45 of 173
Insurable Interest; Building Destroyed by Globe & Rutgers Fire Insurance

Fire (2010) Company, 57 Phil. 576 (1932)). Second,
fire insurance policies contain a
No.X. To secure a loan of P10 million, Mario
warranty that the insured will not store
mortgaged his building to Armando. In
hazardous materials within the insured
accordance with the loan arrangements,
premises. Mario breached this warranty
Mario had the building insured with First
when he stored inflammable materials in
Insurance Company for P10 million,
the building. (Young v. Midland Textile
designating Armando as the beneficiary.
Insurance Company, 30 Phil. 617
Armando also took an insurance of the
(1915)).These two factors exonerate First
building upon his own interest with Second
Insurance Company from liability to
Insurance Company for P5 million.
Armando as mortgagee even though it
The building was totally destroyed by fire, a
was Mario who committed them (Section
peril insured against under both insurance
8 of the Insurance Code).
policies. It was subsequent determined that
the fire had been intentionally started by
(B) What happens to the P10 million debt of
Mario and that in violation of the loan
Mario to Armando? Explain. (3%)
agreement, he had been storing
SUGGESTED ANSWER:
inflammable materials in the building.
Since Armando would have collected P5
million from Second Insurance
(A) How much, if any, can Armando recover
Company, this amount should be
from either or both insurance companies?
considered as partial payment of the
(2%)
loan. Armando can only collect the
SUGGESTED ANSWER:
balance of P5 million (Panlileo v. Cosio,
Armando can receive P5 million from
supra). Second Insurance Company can
Second Insurance Company. As
recover from Mario the amount of P5
mortgagee, he had an insurable interest
million it paid, because it became
in the building (Panlileo v. Cosio, 97
subrogated to the rights of Armando
Phil. 919 (1955)). Armando cannot
(Panlileo v. Cosio, supra).
collect anything from First Insurance
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.
Page 46 of 173
Insurance; Double Insurance, Validity SUGGESTED ANSWER:

(2012)
Yes. If X obtained an open policy then
No.V X borrowed from CCC Bank. She she could claim an amount
mortgaged her house and lot in favor of the corresponding to the extent of the
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
occurred, but not to exceed the face
(A) 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
agreed upon valuation of the house.
No, there is no double insurance. Double
insurance exists where the same person
As for CCC Bank, it could claim an
is insured by several insurers separately
amount corresponding to the extent of
with respect to the same subject and
the damage but not to exceed the
interest. (Sec. 93, Insurance Code)
amount of the loan it extended to X or
so much thereof as may remain unpaid.
(B) Is this legally valid? Explain your
answer. (3%)
SUGGESTED ANSWER:
Yes, X and CCC Bank can both insure the Insurance; Perfection of Insurance
house as they have different insurable Contracts (2009)
interest therein. X, the borrower

No.IV. Antarctica Life Assurance
mortgagor, has an insurable interest in
Corporation (ALAC) publicly offered a
the house being the owner thereof while
specially designed insurance policy covering
CCC Bank, the lender, also has an
persons between the ages of 50 to 75 who
insurable interest in the house as
may be afflicted with serious and
mortgagee thereof.
debilitating illnesses. Quirico applied for
insurance coverage, stating that he was
(C) In case of damage, can X and CCC Bank
already 80 years old. Nonetheless, ALAC
separately claim for the insurance
approved his application.
proceeds? (4%)
Page 47 of 173
Quirico then requested ALAC for the

issuance of a cover note while he was trying The cover note is a receipt whereby the
to raise funds to pay the 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.
(A) Can ALAC validly deny the claim on the

ground that the insurance coverage, as
publicly offered, was available only to
Insurance; Property Insurance;
persons 50 to 75 years of age? Why or why
Assignments (2009)
not? (2%)
No.XIII. Ciriaco leased a commercial

SUGGESTED ANSWER: apartment from Supreme Building
No. By approving the application of Corporation (SBC). One of the provisions of
Quirino who disclosed that he was 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
from raising such defense of age of the against fire the chattels, merchandise,
insured. textiles, goods and effects placed at any
stall or store or space in the leased
(B) Did ALAC’s issuance of a cover note premises without first obtaining the written
result in the perfection of an insurance consent of the LESSOR. If the LESSEE
contract between Quirico and ALAC? obtains fire insurance coverage without the
Explain. (3%) 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 Notwithstanding the stipulation in the
of insurance. In that case, it is only 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.
Page 48 of 173
amount of P500, 000 with First United

Insurance Corporation (FUIC). On April 5, 2010, the car was involved in an
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, the drawee bank
damaging Ciriaco’s merchandise. Having returned Enrique’s check with the notation
learned of the insurance earlier procured by ―Insurance funds.‖ Upon notification,
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.
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%)
Ciriaco is entitled to receive 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,
2010, for insufficiency of funds. The
check was honored only after Enrique
deposited additional funds with the
bank. Hence, it did not produce the
Insurance; Property Insurance; Late
effect of payment (Vitug, Commercial
Payment of Premiums (2010)
Laws and Jurisprudence, Vol. I, p.250).
No.XI. Enrique obtained from Seguro

Insurance Company a comprehensive ALTERNATIVE ANSWER:
motor vehicle insurance to cover his top of Yes. The insurer is liable. The insurance
the line Aston martin. The policy was policy was issued. In effect, there was a
issued on March 31, 2010 and, on even grant of credit for the payment of the
date, Enrique paid the premium with a premium. The insurer can deduct the
personal check postdated April 6, 2010.
Page 49 of 173
amount of the check from the proceeds (B) Would your answer in (a) be the same if
of the insurance. it 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, recovery under the insurance
of Premiums by Check (2007)
contract is allowed if the cause of the
No.IV. Alfredo took out a policy to insure 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 credit within which pay the of the loss (Section 86, Insurance Code
insurance premium. Upon delivery of the of the Philippines).
policy on May 15, 2006, Alfredo issued a

postdated check payable on May 30, 2006. (C) If the fire was found to have been
On May 28, 2006, a fire broke out and caused by Alfredo’s own negligence, can he
destroyed the building owned by Alfredo. still recover on the policy?
(10%)
Reason briefly in (a), (b) and (c).
(A) May Alfredo recover on the insurance

policy? SUGGESTED ANSWER:
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 which was accepted by the Insurance Code of The Philippines).
insurer, bearing a date prior to the loss,

would be sufficient. The subsequent
effects of encashment retroact to the
date of the check (UCPB General
Insurance Co., Inc. v. Masagana
Telamart, Inc., 356 SCRA 307 [2001]).
Page 50 of 173
Insurance; Property Insurance; Payment St. Peter Manufacturing Company is

of Premiums even after Loss (2013) entitled to recover for the loss from
stable Insurance Company. Stable
No.VII. Stable Insurance Co. (SIC) and St.
Insurance Company granted a credit
Peter Manufacturing Co. (SPMC) have had a
term to pay the premiums. This is not
long-standing insurance relationship with
against the law, because the standing
each other; SPMC secures the
business practice of allowing St. Peter
comprehensive fire insurance on its plant
Manufacturing Company to pay the
and facilities from SIC. The standing
premiums after 60 or 90 days, was relied
business practice between them has been
upon in good faith by SPMC. Stable
to allow SPMC a credit period of 90 days
Insurance Company is in estoppels
from the renewal of the policy with which to
(UCPB General Insurance Company, Inc.
pay the premium.
v. Masagana Telemart, Inc. 356 SCRA
307, 2001).
Soon after the new policy was issued and
before premium payments could be made, a
fire gutted the covered plant and facilities to
Insurer: Effects: Several Insurers (2008)
the ground. The day after the fire, SPMC
issued a manager’s check to SIC for the fire No.VII. Terrazas de Patio Verde, a
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 fire with three (3) insurance
companies for the following amounts:
SIC responded by issuing its own
Northern Insurance Corp. – P20 Million
manager’s check for the amount of the
premiums SPMC had paid, and denied Southern Insurance Corp. – P30 Million
SPMC’s claim on the ground that under the
―cash and carry‖ principle governing fire Eastern Insurance Corp. – P50 Million
insurance, no coverage existed at the time

(A) Is the owner’s taking of insurance for
the fire occurred because the insurance
the building with three (3) insurers valid?
premium had not been paid.
Discuss. (3%)
Is SPMC entitled to recover for the loss form
SUGGESTED ANSWER:
SIC? (8%)
Taking out insurance covering the same
SUGGESTED ANSWER:
property, same insurable interest and
same risk with three insurance
Page 51 of 173
companies is “double insurance,” insurance Corp. is liable to the extent of

recognized under Sec. 93 of 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, 28 June 1999, the court Insurance) – 40% (Northern Insurance).
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
with other insurers. Agreements: Technology Transfer
Agreements; Requisites & Prohibitions
(B) The Building was totally razed by fire. If (2010)
the owner decides to claim from Eastern
No.VI. (A) What contractual stipulations are
Insurance Corp. only P50 Million, will the
required in all technology transfer
claim prosper? Explain. (2%)
agreements? (2%)
SUGGESTED ANSWER:
Insured can recover from Eastern SUGGESTED ANSWER:

Insurance Corp. up to the extent of his The following stipulations are required
loss. However, Eastern may refuse to pay in all technology transfer agreements:
if the policy contains an “other
insurance clause” stipulating that non- (1) The laws of the Philippines shall
disclosure of double insurance will avoid govern its interpretation and in the
the policy (Geagonia v. Country Bankers event of litigation, the venue shall be
Insurance, G.R. No. 114427, 06 February the proper court in the place where the
1995.) As there is no indication of a licensee has its principal office;
contractual prohibition on double or
other insurance, all insurance contracts (2) Continued access to improvements in
over the building are deemed valid and techniques and processes related to the
enforceable. technology shall be made available
during the period of the technology
The law prohibits double or over-
transfer arrangement;
recovery, not double insurance. Since
Eastern insured the property up 50% of
(3) In case it shall provide for
the total coverage, it is liable for only
arbitration, the Procedure of Arbitration
50% of the total actual loss. Eastern
Page 52 of 173
of the Arbitration Law of the Philippines

or the Arbitration Rules of the United
Article of Commerce; As Trademark,
Nations Commission on International
Patent & Copyright (2010)
Trade Law or the Rules of Arbitration of
the International Chamber of Commerce No.VI. (C) Can an article of commerce serve
(ICC) shall apply and the venue 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%)
SUGGESTED ANSWER:
(4) The Philippine taxes on all payments A stamped or marked container of goods
relating to the technology transfer can 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 or model for articles of
(B) Enumerate three stipulations that are manufacturer can be copyrighted
prohibited in technology transfer (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
(1) Those that contain restrictions industrial design (Subsections 113.1 and
regarding the volume and structure of 172.1 of the Intellectual Code). Thus, a
production; container of goods which has an original
ornamental design can be registered as
(2) Those that prohibit the use of trademark, can be copyrighted, and can
competitive technologies in a non- be registered as an industrial design.
exclusive agreement; and
ALTERNATIVE ANSWER:
It is entirely possible for an article of
(3) Those that establish a full or partial
commerce to bear a registered
purchase option in favor of the licensor
trademark, be protected by a patent and
(Subsections 87.3, 87.4 and 87.5 of the
have most, or some part of it
Intellectual Property Code).
copyrighted. A book is a good example.
The name of the publisher or the
Page 53 of 173
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 (2013) copyright upon him. The registration is

merely for the purpose of completing the
No.IV. Ruby is a fine arts student in a
records of the National Library. (Section
university. He stays in a boarding house
191 of the Intellectual Property Code).
with Bernie as his roommate. During his
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 Copyright; Commissioned Artist (2008)
Jam – on display at the university cafeteria.
No.XVI. In 1999, Mocha warn, an American
The cafeteria operator said he purchased the
musician, had a bit rap single called Warm
painting from Bernie who represented
Warm Honey which he himself composed
himself as its painter and owner
and performed. The single was produced by
a California record company, Galactic
Rudy and the cafeteria operator immediately
Records. Many notice that some passages
confronted Bernie. While admitting that he
from Warm Warm Honey sounded eerily
did not do the painting,. Bernie claimed
similar to parts of Under Hassle, a 1978 hit
ownership of its copyright since he had
song by the British rock and Majesty. A
already registered it in his name with the
copyright infringement suit was filed in the
National Library as provided in the
United States against Mocha Warm by
Intellectual Property Code.
Majesty. It was later settled out of court,
with Majesty receiving attribution as co-
Who owns the copyright to the painting?
author of Warm Warm Honey as well as a
Explain (8%).
share in the royalties.
SUGGESTED ANSWER.
Rudy owns the copyright to the painting
By 2002, Moeha Warm was nearing
because he was the one who actually
bankruptcy and he sold his economic rights
created it. (Section 178.1 of the
Page 54 of 173
over Warm Warm Honey to Galactic In the case of Mocha Warm and Majesty,
Records for $10,000. 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 his death, and although he was
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 work shall 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
(A) Who are the parties or entities entitled work should properly be credited.
to be credited as author of the remixed
Warm Warm Honey? Reason out your (B) Who are the particular parties or
answers. (3%) entities who exercise copyright over the
SUGGESTED ANSWER: remixed Warm Warm Honey? Explain. (3%)
SUGGESTED ANSWER:
The parties entitled to be credited as
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
Page 55 of 173
Films, it commissioned the remixed Eloise may publish the columns without
work. securing authorization from New Media
Enterprises. Under Sec. 172 of the
Intellectual Property Code, original
intellectual creations in the literary and
artistic domain are protected from the
Copyright; Commissioned Work (2008)
moment of their creation and shall
No.XV. Eloise, an accomplished writer, was include those in periodicals and
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 newspaper of 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.
after some slight editing, were printed in

the newspaper. However, Diario de Manila (B) Assume that New Media Enterprises
proved unprofitable and closed only after plans to publish Eloise’s columns in its own
two months. Due to the minimal amounts anthology entitled, ―The Best of Diario de
involved, Eloise chose not to pursue any Manila‖ Eloise wants to prevent the
claim for payment from the newspaper, publication of her columns in that
which was owned by New Media anthology since she was never paid by the
Enterprises. newspaper. Name one irrefutable legal

argument Eloise could cite to enjoin New
Three years later, Eloise was planning to Media Enterprises from including her
publish an anthology of her works, and columns in its anthology. (2%)
wanted to include the three columns that SUGGESTED ANSWER:
appeared in the Diario de Manila in her

Under the IPC, the copyright or
anthology She asks for you legal advice:
economic rights to the columns she
authored pertains only to Eloise. She can
(A) Does Eloise have to secure authorization
invoke the right to either “authorize or
from New Media Enterprises to be able to
prevent” reproduction of the work,
publish her Diario de Manila columns in
including the public distribution of the
her own anthology? Explain fully. (4%)
original and each copy of the work “by
SUGGESTED ANSWER:
Page 56 of 173
sale or other forms of 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).

The messages that Diana and Piolo
No.III. Diana and Piolo are 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
artistic works under Section 172 of the
instant messaging service which allows
Intellectual Property Code. They are not
them to see one another’s typing on their
letter under Section 172(d).
own screen as each letter key is pressed.
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
Intellectual Property Code). Whether the
sent each other and published them. Is
messages are entitled or not to copyright
Greg liable for copyright infringement?
protection would have to be resolved in
Reason briefly. (5%)
the light of the provision of the
SUGGESTED ANSWER:
Intellectual Property Code.
Yes, Greg is liable for copyright
infringement. Letter are among 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,
of the above suggested answers should be
intellectual Property Code; Columbia
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. Denicola Test (2009)
No.I. (A) The Denicola Test in intellectual

ALTERNATIVE ANSWER
property law states that if design elements
No, Greg is not liable for copyright
of an article reflect a merger of aesthetic
infringement. There is no copyright
and functional considerations, the artistic
Page 57 of 173
aspects of the work cannot be conceptually

separable from the utilitarian aspects; thus, (A) Monaliza filed a complaint against
the article cannot be copyrighted. Valentino damages based on, among other
SUGGESTED ANSWER: grounds, violation of her intellectual
True. Applying the Denicola Test in property rights. Does she have any cause of
Brandir International, Inc. v.Cascade action? Explain. (2%)
Pacific Lumber Co. (834 F. 2d 1142, SUGGESTED ANSWER:
1988 Copr.L.Dec. P26), the United States Monaliza cannot sue Valentino for
Court of Appeals for the Second Circuit violation of her intellectual property
held that if there is any aesthetic rights, because she was not the one who
element which can be separated from took the pictures (Subsection 178.1 of
the utilitarian elements, then the the Intellectual Property Code). She may
aesthetic element may be copyrighted. sue Valentino instead for violation of her
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, Commentaries and
foreign laws or jurisprudence should not Jurisprudence on the Civil Code of the
be asked.) Philippines, Vol. I, 1987 ed., p. 169).
(B) Valentino’s friend Francesco stole the
Infringement; Claims (2010) photographs and duplicated them and sold

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 cannot sue Francesco for
celebrity magazine.
infringement, because he has already
sold the photographs to a magazine
Monaliza found out that Valentino had sold
(Angeles vs. Premier Productions, Inc., 6
the photographs to the magazine, adding
CAR (2s) 159).
insult to injury, uploaded them to his
personal blog on the Internet.
ALTERNATIVE ANSWER:
Page 58 of 173
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 only the photographs to the and went on a world-wide blitz of print
magazine; however, he still retained commercials in which Sonny is shown
some economic rights thereto. Thus, he wearing a Lacoste shirt alongside the
has a cause of action against phrase ―Sonny Bachao just loves Lacoste.‖
infringement against Francesco.
When Sonny sees the Lacoste
(C) 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. (A) For trademark Infringement in the
Philippines because Lacoste International
used his image without his permission:
(2%)
SUGGESTED ANSWER:
Infringement; Trademark, Copyright
Sonny Bachao cannot sue for
(2009)
infringement of trademark. The
No.XV. After disposing of his last opponent photographs showing him wearing a
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 hero-

worshipping fans and hundreds of media (B) For copyright infringement because of
photographers. The following day, a colored the unauthorized use of the published
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 Bachao cannot sue for
every Philippine newspaper. infringement of copyright for the

unauthorized use of the photographs
Page 59 of 173
showing him wearing a Lacoste shirt. Philippines without license to do

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 before our courts or
result of the performance of the regular administrative tribunal (De Joya v.
duties of the photographers (Subsection Marquez, 481 SCRA 376 (2006)).
173.3 (b), Intellectual Property Code
(IPC)).Moreover, the newspaper
publishers authorized the reproduction
of the photographs (Section 177,
Patent: Non-Patentable; Method of
Intellectual Property Code).
Diagnosis & Treatment (2010)
(C) 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: field testing, and novel mental isometric
The complaint for injunction to stop exercises. He comes to you for advice on
Lacoste International from featuring him how he can have his discoveries protected.
in its advertisements will prosper. This 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%)
(D) Can Lacoste International validly invoke SUGGESTED ANSWER:

the defense that it is not a Philippine Dr. Nobel can be protected by a patent
company and, therefore, Philippine courts for the new medicine as it falls within
have no 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 amended). But no protection can be
over it, if it is doing business in the legally extended to him for the method
Philippines. Moreover, under Section 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).
Page 60 of 173
Intellectual Property Code (Section 122

of the Intellectual Property Code).
Trademark; Unfair Competition (2010)
No.XVIII. For years, Y has been engaged in (B) Suppose the shoes are covered by a
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 Property Code). The
Y counters that the trademark MAGIC is importation of a patented product
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 right to prevent its parallel the patent (Subsection 76.1 of the
importation. Intellectual Property Code). X can

prevent the parallel importation of such
(A) Who is correct? Why? (2%) shoes by Y without its authorization.
SUGGESTED ANSWER:
X is correct. His rights under his
exclusive distributorship agreement are
property rights entitled to protection. Letters of Credit
The importation and sale by Y of MAGIC
shoes constitute unfair competition (Yu Independence Principle (2010)
v. Court of Appeals, 217 SCRA 328
No.XVII. The Supreme Court has held that
(1993)). Registration of the trademark is
fraud is an exception to the ―independence
not necessary in case of an action for
principle‖ governing letters of credit.
unfair competition (Del Monte
Explain this principle and give an example
Corporation v. Court of Appeals, 181
of how fraud can be an exception. (3%)
SCRA 410 (1990)).
SUGGESTED ANSWER:
The “independence principle” posits that
ALTERNATIVE ANSWER:
the obligations of the parties to a letter
Y is correct. The rights in a trademark
of credit are independent of the
are acquired through registration made
obligations of the parties to the
validly in accordance with the
Page 61 of 173
underlying transaction. Thus, 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 be paid by the issuing or ABC Company in favor of XYC Company to
confirming bank, notwithstanding the secure performance of certain obligations.
existence of a dispute between the In the light of the Order issued by the
parties to the underlying transaction, Court.
say a contract of sale of goods where the
buyer is not satisfied with the quality of (b) Explain the nature of Letters of Credit as
the goods delivered by the seller. The a financial devise. (5%)
Supreme Court in Transfield Philippines,

SUGGESTED ANSWER:
Inc. v. Luzon Hydro Corporation, 443
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 independence principle. 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 be prevented through a court break the impasse, the buyer may be
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
Page 62 of 173
established, the seller ships the goods to Letter of Credit; Liabilities of a

the buyer and in the process secures the Confirming and Notifying Bank (2008)
required shipping documents or
No.I. X Corporation entered into a contract
documents of title. To get paid, the
with PT Construction Corp. for the latter to
seller executes a draft and present it
construct and build a sugar mill with six (6)
together with the required documents to
months. They agreed that in case of delay,
the issuing bank. The issuing bank
PT Construction Corp. will pay X
redeems draft and pays cast to the seller
Corporation P100,000 for every day of
if it finds that the documents submitted
delay. To ensure payment of the agreed
by the seller conform with what the
amount of damages, PT Construction Corp.
letter of credit requires. The bank then
secured from Atlantic Bank a confirmed
obtains possession of the documents
and irrevocable letter of credit which was
upon paying the seller. The transaction
accepted by X Corporation in due time. One
is completed when the buyer reimburses
week before the expiration of the six (6)
the issuing bank and acquires the
month period, PT Construction Corp.
documents entitling him to the goods.
requested for an extension of time to deliver
Under this arrangement, the seller gets
claiming that the delay was due to the fault
paid only if he delivers the documents of
of X Corporation. A controversy as to the
title over the goods, while the buyer
cause of the delay which involved the
acquires the said documents and control
workmanship of the building ensued. The
over the goods only after reimbursing
controversy remained unresolved. Despite
the bank. (Bank of America NT & SA v.
the controversy, X Corporation presented a
CA, et al., G.R. No. 105395, December
claim against Atlantic Bank by executing a
10,1993) However, letters of credit are
draft against the letter of credit.
also used in non-sale settings where they
serve to reduce the risk of non- (A) Can Atlantic Bank refuse payment due
performance. Generally, letters of credit to the unresolved controversy? Explain.
in non-sale settings have come to be (3%)
known as standby letters of credit. SUGGESTED ANSWER:
(Transfield Philippines, Inc. v. Luzon No, Atlantic Bank cannot refuse payment
Hydro Corporation, et al., G.R. No. to the unresolved controversy between
146717, November 22,2004) the 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
Page 63 of 173
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
(B) Can X Corporation claim directly from of all the persons interested in the
PT Construction Corp.? Explain. (3%) vessel and the cargo (Article 809 of the
SUGGESTED ANSWER: Code of Commerce). General averages
include all damages and expenses which
Yes, X Corporation can claim directly
are deliberately caused to save the
from PT Construction Corp. The
vessel, its cargo, or both at the same
irrevocable letter of credit was merely a
time, from a real and known risk (Article
security arrangement that did not
811 of the Code of Commerce).
replace the main contract between the
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
No.XIII. (B) What is ―barratry‖ in marine
the beneficiary may draw funds up to the
insurance? (2%)
designated amount. It does not mean
SUGGESTED ANSWER:
that a particular sum of money has been
Barratry is any willfull misconduct in the
specifically reserved of held in trust.
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
Court, supra).
Maritime Commerce
Averages: Types (2010)
No.XVI. (B) What are the types of averages

in marine commerce (3%)
SUGGESTED ANSWER:
Page 64 of 173
Carriage of Goods; Deviation; Liability entitles him to compensation or

(2009) indemnification from the shipowner and
the owners of the cargoes saved by the
No.VII. Global Transport Services, Inc.
jettison.
(GTSI) operates a fleet of cargo vessels
plying interisland routes. One of its vessels,
ALTERNATIVE ANSWER:
MV Dona Juana, left the port of Manila for
The jettison resulted to a particular
Cebu laden with,among other goods,
average loss because the damage was due
10,000 television sets consigned to
to the fault of the captain.
Romualdo, a TV retailer in Cebu.
(B) Against whom does Romualdo have a

When the vessel was about ten nautical
cause of action for indemnity of his lost TV
miles away from Manila, the ship captain
sets? Explain. (3%)
heard on the radio that a typhoon which, as
announced by PAG-ASA, was on its way out
SUGGESTED ANSWER;
of the country, had suddenly veered back
Romualdo has a cause of action for his
into Philippine territory, the captain
lost TV sets against the shipowner and
realized that MV Dona Juana would
the owners of the cargoes saved by the
traverse the storm’s path, but decided to
jettison. The jettison of the TV sets
proceed with the voyage. True enough, the
resulted in a general average loss,
vessel sailed into the storm. The captain
entitling Romualdo to indemnity for the
ordered the jettison of the 10, 000 television
lost TV sets.
sets, along with some other cargo, in order
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)
(A) Will you characterize the jettison of
No.XIII. Paulo, the owner of an ocean-going
Romualdo’s TV sets as an average? If so,
vessel, offered to transport the logs of
what kind of an average, and why? If not,
Constantino from Manila to Nagoya.
why not? (3%)
Constantino accepted the offer, not
SUGGESTED ANSWER:
knowing that the vessel was manned by an
The jettison of Romualdo’s TV sets
irresponsible crew with deep-seated
resulted in a general average loss, which
resentments against Paolo, their employer.
Page 65 of 173
(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
dolls aboard a ship in Korea bound for
Constantino tried to collect from the
Manila. With the intention of smuggling
insurance company which denied liability,
one-half of his cargo, he took a bill of lading
given the unworthiness of both the vessel
for only 50 boxes. On the voyage to Manila,
and its crew.
50 boxes were jettisoned to save the more
precious cargo.
Constantino countered that he was not the
owner of the vessel and he could therefore
(A) Is the importer entitled to receive any
not be responsible for conditions about
indemnity for average? Explain. (2%)
which he was innocent.
SUGGESTED ANSWER:
The importer is not entitled to receive
(A) Is the insurance company liable? Why or
any indemnity for average. In order that
why not? (3%)
the goods jettisoned may be included in
SUGGESTED ANSWER:
the general average and the owner be
The insurance company is not liable,
entitled to indemnity, it is necessary
because there is an implied warranty in
that their existence on board be proven
every marine insurance that the ship is
by means of the bill of lading (Article
seaworthy whoever is insuring the cargo,
816 of the Code of Commerce).
whether it be the ship-owner or not.
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
Page 66 of 173
COGSA; Prescription of Claims/Action Liability; Loss; Fortuitous Event (2008)

(2010)
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
AA claimed damages from BB. BB invoked damages against CSC.
prescription as a defense under the
Carriage of Goods by Sea Act Considering (A) 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 prescriptive period in 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 delivered in a damaged 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:
the Civil Code, which provides for a
The common carrier incurs no liability
prescriptive period of ten years in case
for the loss of the cargo during a
of actions based on a written contract
fortuitous event, because the following
(Mitsui O.S.K. Lines Ltd. v. Court of
circumstances were present: (1) the
Appeals, 287 SCRA 366 (1998)).
typhoon was the cause of the cargo loss;
(2) the carrier did not contribute to the
loss; and (3) the carrier exercised
extraordinary diligence in order to
Page 67 of 173
minimize the attendant damage before, the full extent of the claims of the cargo
during and after the typhoon (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).
G.R. No. 113003, 17 October 1997;
Gathalian v. Delim, G.R. No. L-56487, 21 (C) Assume the facts in question (b). Can
October 1991). the heirs of the three (3) crew members who
perished recover from CSC? Explain fully.
Under Art. 587 of Code of Commerce, in (3%)
case of maritime transactions, the SUGGESTED ANSWER:
liability of the owner of the vessel is
Yes, because the crew members died
limited to the vessel itself. Since the
while performing their assigned duties,
vessel of CSC was seaworthy at the time
aggravated by the failure of the ship
it sank, the CSC is not liable to Empire
owner to ensure that the vessel is
under the maritime principle that the
seaworthy. Workmen’s compensation has
obligations of the owner of a vessel are
been classified by jurisprudence as an
hypothecary in nature.
exception to the hypothecary nature of
maritime commerce, Abueg v. San Diego,
(B) Assume the vessel was not seaworthy as
77 Phil. 730 (1948), especially in this
in fact its hull had leaked, causing flooding
case where the vessel was not seaworthy
in the vessel. Will you answer be the same?
at the time it sank.
Explain. (2%)
SUGGESTED ANSWER:
When the vessel is not seaworthy, it is

an exception to the hypothecary
principle in maritime commerce. To Negotiable Instruments Law
limit its liability to the amount of the
Checks: Forged Checks; Liability of
insurance proceeds, the carrier has the
Drawee Bank (2008)
burden of proving that the
No.V. Pancho drew a check to Bong and
unseaworthiness of its vessel was not
Gerard jointly, Bong indorsed the check
due to its fault or negligence. The failure
and also forged Gerard’s indorsement . The
to discharge such a heavy burden
payor bank paid the check and charged
precludes application of the limited
Pancho’s account for the amount of the
liability rule and the carrier is liable to
Page 68 of 173
check. Gerard received nothing from the Checks; Liability; Drawer and Drawee
payment. Bank (2010)
No.VIII. Marlon deposited with LYRIC Bank
(A) Pancho asked the payor bank to recredit
a money market placement of P1 million for
his account. Should the bank comply?
tern of 31 days. On Maturity date, one
Explain fully. (3%)
claiming to be Marlon called up the LYRIC
SUGGESTED ANSWER:
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 Marlon, was deposited in Ingrid’s

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
endorsement is not to the drawer’s lack of endorsement guaranteed.‖
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
market placement and discovers the
(B) Based on the facts, was Pancho as
foregoing transactions.
drawer discharged on the instrument?
Why? (2%)
Marlon thereupon sues LYRIC Bank which
SUGGESTED ANSWER:
in turn files a third-party complaint against
No. The payee Gerard can recover as he YAMAHA Bank. Discuss the respective
still retains his claim on the debt of rights and liabilities of the banks. (5%)
Pancho.
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
Page 69 of 173
him has not been paid. Lyric Bank still the ASSIGNOR unconditionally and
has the obligation to pay him. irrevocably agrees to pay the same,
assuming the liability to pay by way of
Since Yamaha Bank indorsed the check penalty, three percent of the total amount
bearing the forged indorsement of unpaid, for the period of delay until the
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 stopped,‖ ―account under
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 checks, and demanding
Wan, 549 SCRA 504 (2008)). payment of the loan. Because Gaudencio
did not pay, BFC filed a collection suit.
In his defense, Gaudencio contended that

Checks; Notice of Dishonor (2009) (a) BFC did not give timely notice of
No.XII. Gaudencio, a store owner, obtained dishonor (of the checks); and (b)
a P1-million loan from Bathala Financing considering that the checks were duly
Corporation (BFC). As security, Gaudencio indorsed, BfC should proceed against the
executed a ―Deed of Assignment of drawers and the indorsers of the checks.
Receivables.‖ Assigning fifteen checks
received from various customers who Are Gaudencio’s defenses tenable? Explain.
bought merchandise from his store. The (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,
Page 70 of 173
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
(2008)). Explain each requirement of negotiability
present or absent in the instrument. (8%)
SUGGESTED ANSWER:
The instrument contains a promise to
Forgery; Liabilities; Drawee Bank (2009) pay and was signed by the maker,
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).
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 the sun in the west in the evening and
may 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).
No.I. Antonio issued the following The Instrument contains a promise to
instrument: pay a sum certain in money,
August 10, 2013 P100,000.00 (Section (b) of Negotiable
Makati City 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 (Section 4(a) of Negotiable
(P100,000.00) from my BPI Acct. No. 1234 Instruments Law).
if, by this due date, the sun still sets in the
west to usher in the evening and rises in
Page 71 of 173
The instrument is not payable to order there are no 90-day treasury bills
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 specify whether the so-called
“interest rate” is that established at the
Negotiability (2012) primary market (where new T-bills are

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
(A) I promise to pay A or bearer conventionally quoted in terms of their
Php100,000.00 from my inheritance which discount rate, rather than their interest
I will get after the death of my father. (2%) rate. They do not pay any interest
directly; instead, they are sold at a
SUGGESTED ANSWER:
discount of their face value and this
“earn” by selling at face value upon
Not negotiable. There is no
maturity. (See, among other,
unconditional promise to pay a sum
www.treasury.gov.ph/govsec/aboutsec.h
certain in money (Sec. 1 [b], NIL) as the
tml)
promise is to pay the amount out of a
particular fund, i.e., the inheritance
(C) I promise to pay A or bearer the sum of
from the father of the promisor(Sec. 3,
Php100,000 if A passes the 2012 bar
NIL).
exams. (2%)
(B) I promise to pay A or bearer Php100,000

SUGGESTED ANSWER:
plus the interest rate of ninety (90) – day
treasury bills. (2%) Not negotiable. The promise to pay is
subject to a condition, i.e., that A will
SUGGESTED ANSWER:
pass the 2012 bar exams (Sec.1[b],NIL).
Not negotiable. There is no

(D) I promise to pay A or bearer the sum of
Php100.000 on or before December 30,
certain in money. The promise to pay
2012. (2%)
“the interest rate of ninety (90)-day
treasury bills” is vague because, first, SUGGESTED ANSWER:
Page 72 of 173
Negotiable. It conforms fully with the constitute a defect of title (Section 55,
requirements of negotiability under Negotiable Instruments Law).
Section 1, NIL.
(B) Does S have a cause of action against R
(E) I promise to pay A or bearer the sum of in case of dishonor by the drawee bank?
Php100,000. (2%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
No, s does not have a cause of action
against R in case of dishonor of the
Negotiable. It conforms fully with the
check by the drawee bank. S is not a
requirements of negotiability under
holder in due course, thus, R can raise
Section 1,NIL. It is payable on demand
the defense that the check was issued
because the note does not express a time
for an illegal consideration (Section 58,
for its payment(Sec.7[b], NIL).
Negotiable Instruments Law).
(C) It S negotiated the check to T, who

accepted it in good faith and for value, may
Negotiable Instruments; Illicit/Illegal R be held 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
(A) 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:
check fre from the defect of title of S
Yes, the check can be considered a
(Section 57, Negotiable Instrumets Law).
negotiable instrument even if it was
issued to pay S to kill his political
enemy. The validity of the consideration
is not one of the requisites of a
negotiable instruments (Section 1,
Negotiable Instruments Law.) it merely
Page 73 of 173
Negotiable Instruments; Illicit/Illegal No. the illicit cause or consideration

Consideration; Lawful Dishonor (2009) does not adversely affect the
negotiability of the bill, especially in the
No.VI. Lorenzo drew a bill of exchange in
hands of a holder in due course. Under
the amount of P100, 000.00 payable to
Sec. 1 of the Negotiable Instruments law,
Barbara or order, with his wife, Diana, as
the bill of exchange is a negotiable
drawee. At the time the bill was drawn.
instrument. Every negotiable instrument
Diana was unaware that Barbara is
is deemed prima facie to have been
Lorenzo’s paramour.
issued for valuable consideration, and
every person whose signature appears
Barbara then negotiated the bill to her
thereon is deemed to have become a
sister, Elena, who paid for it for value, and
party thereto for value (Sec. 24,
who did not know who Lorenzo was. On
due date, Elena presented the bill to Diana
for payment, but the latter promptly
dishonored the instrument because, by
then, Diana had already learned of her
husband’s dalliance. Negotiable Instruments: Incomplete,
Delivered; Doctrine: Comparative
(A) Was the bill lawfully dishonored by Negligence (2008)
Diana? Explain. (3%)
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
instructed deliver it to XY Bank. Instead ,
No, the bill was not lawfully dishonored
the officer intending to defraud the
by Diana. Elena, to whom the instrument
Corporation, filled up the check by making
was negotiated, was a holder in due
himself as the payee and delivered it to XY
course inasmuch as she paid value
Bank for deposit to his personal account.
therefore in good faith.
XY Bank debited AB Corporation’s account.
AB Corporation came to know of the
(B) Does the illicit cause or consideration
officer’s fraudulent act after he absconded.
adversely affect the negotiability of the bill?
AB Corporation asked XY Bank to recredit
Explain. (3%)
its amount. XY Bank refused.
SUGGESTED ANSWER:
Page 74 of 173
(A) 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
and not a condition. The dying of the
The filling up by the officer of his name
dog is a day which is certain to come.
as payee does not constitute forgery, and
Therefore, the order to pay is
contemplates a mechanically incomplete
unconditional, in compliance with
but delivered instrument. Under Sec. 14
Section 1 of the Negotiable Instruments
of the NIL, in order to enforce an
Law (NIL).
incomplete but delivered instrument
against a prior party, it must be filled-up
(Note: This answers presumes that there
strictly in accordance with the authority
is a drawee)
given. The doctrine of comparative
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.
No.III. X borrowed money from Y in the
(B) How would you decide the case? amount of Php1Million and as payment,
Explain. (2%) issued a check. Y then indorsed the check
SUGGESTED ANSWER: to his sister Z for no consideration. When Z

deposited the check to her account, the
I would fin AB Corp. liable for its check was dishonored for insufficiency of
negligence in delivering an incomplete funds.
instrument to XY Bank (Sec. 14, NIL).
(A) Is Z a holder in due course? Explain
your answer. (5%)
SUGGESTED ANSWER:
Negotiable Instruments: Subject to a
Term (2009) Z is not a holder in due course. She did
not give any valuable consideration for
No.XI. (D) A document, dated July 15, 2009
the check. To be a holder in due course,
that reads: ―Pay to X or order the sum of
the holder must have taken the check in
Page 75 of 173
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:
(B) Who is liable on the check. The drawer
or the indorser? Explain your answer. (5%) In the following cases, a prior party may
hold a subsequent party liable: (1) where
SUGGESTED ANSWER: an instrument is negotiated back to a
prior party, and he reissues and further
X, the drawer, will be liable. As the
negotiates the same, he is entitled to en
drawer, X engaged that on due
force payment against a subsequent
presentment the check would be paid
party who qualifies as an intervening
according to its tenor and that if it is
party to whom the prior party is not
dishonored and he is given notice of
personally liable; and (2) in the case of
dishonor, he will pay the amount to the
an accommodation party arrangement,
holder (Sec. 61, NIL). No notice of
where the accommodation party may
dishonor need be given to X if he is
recover from the party accommodated,
aware that he has insufficient funds in
even when the latter is a subsequent
his account. Under Section 114(d) of the
party (Sec. 29, NIL).
Negotiable Instruments Law, notice of
dishonor is not required to be given to (B) How does the ―shelter principle‖
the drawer where he has no right to embodied in the Negotiable Instruments
expect that the drawee will honor the Law operate to give the rights of a holder-
instrument. Z cannot hold Y, the in-dine course to a holder who does not
endorser, liable as the latter can raise have the status of a holder-in-due course?
the defense that there was no valuable Briefly explain. (2%)
consideration for the endorsement of the SUGGESTED ANSWER:
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 who derives his title from a holder in due
Liable (2008) 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.
Page 76 of 173
Securities Regulation While working with Atty. Buenexito on

another file, he accidentally gave you the
Howey Test (2009) Coco Products file containing the
company’s planned corporate financial
No.XI. (C) The Howey Test states that there
rehabilitation. While you knew you had the
is an investment contract when a person
wrong file, your curiosity prevailed and you
invests money in a common enterprise and
browsed through the file before returning it.
is led to expect profits primarily from the
Thus, you learned that a petition for
efforts of others.
financial rehabilitation is imminent, as the
SUGGESTED ANSWER:
company could no longer meet its
The Howey Test requires a transaction,
obligations as they fell due.
contract, or scheme whereby a person
makes an investment of money in a
Soon After, you mother is rushed to the
common enterprise with the expectation
hospital for an emergency operation, and
of profits to be derived solely, not
you have to raise money for her hospital
primarily from the efforts of others
bills. An immediate option for you is to sell
(Power Homes Unlimited Corp. v. SEC,
your Coco Products shares. The sale would
546 SCRA 567 (2008)).
be very timely because the price of the
company’s stocks are still high.
Would you sell the shares to raise the
Insider Trading (2013) needed 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 sale of the shares does not
with unique products derived from constitute insider trading. 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 from him. He just
Coco Products stocks even before you accidentally gave the wrong file (Section
become a lawyer. 3.8 of Securities Regulation Code).
Page 77 of 173
It would be unethical to sell the shares. (A) What provision of the Securities
Rule 1.01 of the Code of Professional Regulation Code (SRC) did they violate, if
Responsibility provide, “A lawyer shall any ? Explain. (4%)
not engage in unlawful, dishonest, SUGGESTED ANSWER:
immoral or deceitful conduct.”
The directors and key officers of the
company violated the prohibition against
A lawyer should not only refrain from
insider trading under Sec. 27 of the
performing unlawful acts. He should also
Securities Regulation Code, which
desist from engaging in unfair deceitful
declares it unlawful for an “insider”
conduct to conceal from the buyer of the
(which includes directors and officers of
shares the planned corporate
a publicly listed company) to sell or buy
rehabilitation.
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 disclosure proceedings. The
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.
so that it could quietly and cheaply acquire

neighboring land and secure mining rights (B) Assuming that the employees of the
to the land. Between the discovery and its establishment handling the printing work of
disclosure of the information to the Grand Gas Corporation saw the exploration
Securities and Exchange Commission, all reports which were mistakenly sent to their
the directors and key officers of 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:
The employees are liable for violation of

the prohibition against insider trading.
They fall within the definition of
Page 78 of 173
“insider”. Subsection 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, (3) with expectation of
significance about Issuer or the security profits, (4) primarily from the efforts of
that is not generally available.” others (Power Homes Unlimited
Corporation v. Securities and Exchange
Commission, 546 SCRA 567 (2008)).
(B) What procedure must be followed under

Investment Contract; Procedure (2010)
the Securities Regulation Code to authorize
No.IV. Andante Really, a marketing the sale or offer for sale or distribution of
company that promotes and facilitates sales an investment contract? (2%)
of real property through leverage marketing,

solicits investors who are required to be a SUGGESTED ANSWER:
Business Center Owner (BCO) by paying an Before the investment contract is sold or
enrollment fee of S250. The BCO is then offered for sale or distribution to the
entitled to recruit two other investors who public in the Philippines, it should be
pay S250 each. The BCO receives S90 from registered with the Securities and
the S250 paid by each of his recruits and is Exchange Commission in accordance
credited a certain amount for payments with Section 8 of the Securities
made by investors through the initial efforts Regulation Code (Power Homes
of his Business Center. Once the Unlimited Corporation v. Securities and
accumulated amount reaches S5, 000, the Exchange Commission, 546 SCRA 567
same is used as down payment for the real (2008)).
property chosen by the BCO.

(C) What are the legal consequences of
(A) Does this multi-level marketing scheme failure to follow this procedure? (2%)
constitute an ―investment contract‖ under SUGGESTED ANSWER:
the Securities Regulation Code? Define an The failure to follow the procedure has
―investment contract.‖ (2%) criminal consequences (i.e., upon
SUGGESTED ANSWER: conviction, a fine 50,000 to 5 million
Yes. The multi-level marketing pesos and / or imprisonment of 7 to 21
constitutes an “investment contract” years). It carries also civil liabilities in
Page 79 of 173
that the purchaser can recover from the market price (Section 48, Securities
seller (i) the consideration paid with Regulation Code).
interest thereon, less the amount of any
income received on the purchased The purpose of the Margin Trading Rule
securities, upon the tender of such is to prevent excessive use of credit for
securities, or (ii) damages if the the purchase of securities. It is a counter
purchaser no longer owns such securities to a broker’s desire to generate more
(Sections 57 and 73, Securities sales by encouraging clients to but
Regulation Code). Furthermore, the securities on credit (Carolina Industries,
Securities and Exchange 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. What are the so-called exempt

Margin Trading Rule (2009)
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 Section 9 of the Securities
Under the Margin Trading Rule, no Regulation Code, the so-called exempt
registered broker or dealer, or member of securities are:
an exchange shall extend credit on any
security an amount greater than (A) Those issued or guaranteed by the
whichever is higher of: government of the Philippines or any of
its political subdivisions or agencies;
(a) 65 percent of the current market
price of the security, or (B) Those issued or guaranteed by the
government of any foreign country with
(b) 100 percent of the lowest market which the Philippines has diplomatic
price of the security during the relation, or any other state on the basis
preceding 36 calendar months, but not of reciprocity, although the SEC may
more than 75 percent of the current
Page 80 of 173
require compliance with the form and authorized to sell securities, including
content of disclosures; timeshares.
(C) Those issued by the receiver or by On March 30, 1998, Leon and Carina wrote
the trustee in a bankruptcy duly PPR rescinding their purchase agreement
approved by the proper adjudicatory and demanding the refund of the amount
board; they paid because the Palacio Del Boracay
timeshare was sold to them by PPR without
(D) Those involving the sale or transfer the requisite license or authority from the
which is bylaw, under the regulation of SEC. PPR contended that the grant of the
the OIC, HLURB, BIR; and SEC authority had the effect of ratifying the
purchase agreement (with Leon and Carina)
(E) Those issued by banks, except its of Oct.6, 1996.
own shares.
Is the contention of PPR correct? Explain
(Note: It is suggested that any two of the (3%)
above exempt securities should be SUGGESTED ANSWER:
considered as enough answer to the The contention of PPR is not correct. It
question.) is settled that no securities shall be sold
or offered for sale or distribution in the
Philippines without a registration duly
filed and approved by the Commission.
Corporate registration is one of the
Securities; Selling of Securities (2009)
requirements under Sec. 8of batas
No.XVII. Philippine Palaces Realty (PPR) pambansa Blg. 178 (timeshare Realty
had been representing itself as a registered Corporation v. Lao, 544 SCRA 254
broker of securities, duly authorized by the (2008)).
Securities and Exchange Commission

(SEC). On October6, 1996, PPR sold to ALTERNATIVE ANSWER:
spouses Leon and Carina one timeshare of No. Such contention is not correct. Sale
Palacio del Boracay for US S7, 500.00. or offer to sell securities which are not
However, its Registration Statement became exempt securities or which do not arise
effective only on Feb.11, 1998 after the SEC out of exempt transactions, and,
issued a resolution declaring that PPR was therefore, requiring registration, is

unlawful as such act is violative of the
Page 81 of 173
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.
Tender Offer (2010) Under the Securities Regulations Code

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
transaction or a series of transaction
stockholders, ABC which owns 60% of the
during 12-month period, or (ii) even if
shares of stock, and XYZ; which owns 17%.
any acquisition is less than 35%
ABC in turns is owned to the extent of
threshold but the result thereof is the
21.13% by Acme, Inc.; 29.69% by Golden
ownership of more than 51% of the total
Boy Inc.; 9% by XYZ; and the rest by
outstanding shares of a public company.
individual stockholders.
The mandatory offer rule also applies to
None of the parties is a publicly-listed
share acquisition meeting the threshold,
company.
which is done at the level of the holding
XYZ now proposes to buy Acme’s and
or Parent Corporation controlling a
Golden Boy’s shares in ABC, which would
public company (Cemco Holding, Inc. v.
give it, direct control of ABC and indirect
National Life Insurance Company of the
control of Union Mines.
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%)
of P60 million pesos with 210
SUGGESTED ANSWER
stockholders holding at least 100 shares
Yes, the proposed acquisition is subject
each. A public company is defined as a
to mandatory tender offer rule. A tender
corporation listed on the stock
offer is publicly announced intention by
exchange, or a corporation with assets
a person (acting alone or in concert with
exceeding 50 million pesos and with 200
other persons) to acquire shares of a
or more stockholders at least 200 of
public company. A tender offer is meant
them holding not less than 100 shares of
to protect minority stockholders against
such corporation.
Page 82 of 173
train and that it was not guilty of

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
CRI is liable for death of Ricardo Santos
collectively, the two acquisitions total
because it failed to exercise
only 50%. However, when the
extraordinary diligence (LRTA v. Navidad
acquisitions are added to XYZ’s existing
G.R. No. 145804, 06 February 2003). The
shares in Union Mines, they meet the
contract of carriage began when the
more- than -51% thresholds for
passenger purchased his ticket and
mandatory tender offer.
proceeded to the designated loading
facilities to board the train (Dangwa
Transp. Co., Inc. v. Court of Appeals,
G.R. No. 95582, 07 October 1991), CRI is
also liable for all persons in its employ
Transportation Law
(Caltex Philippines, Inc. v. Sulpicio
Carriage; Breach of Contract Lines, Inc., G.R. No. 131166, 30
September 1999).
No.VIII. City Railways, Inc. (CRI) provides
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 Carriage; Breach of Contract; Cause of
unloading facilities to board the train. Action; Defenses (2009)
Ricardo Santos purchased a ticket for
No.XIX. One of the passenger buses owned
Calamba and entered the station. While
by Continental Transit Corporation (CTC),
waiting, he had an altercation with the
plying its usual route figured in a collision
security guard of CRI leading to a fistfight.
with another bus owned by Universal
Ricardo Santos fell on the railway just as a
Transport, Inc. (UTI). Among those injured
train was entering the station. Ricardo
inside the CTC bus were: Romeo, a stow
Santos was run over by the train. He died.
away: Samuel, a pickpocket then in the act
of robbing his seatmate when the collision
In the action for damages filed by the heirs
occurred; Teresita, the bus driver’s mistress
of Ricardo Santos, CRI interposed lack of
who usually accompanied the driver on his
cause of action, contending that the mishap
occurred before Ricardo Santos boarded the
Page 83 of 173
trips for free; and Uriel, holder of a free (B) Do Romeo, Samuel, Teresita, and Uriel
riding pass he won in a raffle held by CTC. have a cause of action for damages against
(A) Will a suit for breach of contract of UTI? Explain. (3%)
carriage filed by Romeo, Samuel, Teresita, SUGGESTED ANSWER:
and Uriel against CTC prosper? Explain. Romeo, Samuel, Teresita and Uriel may
(3%) sue UtI on the basis of quasi-delict since
they have no pre-existing contractual
SUGGESTED ANSWER: relationship with UTI. They may allege
Romeo cannot sue for breach of contract that the collision was due to the
of carriage. A stowaway like Romeo, Who negligence of driver of UTI and UTI was
secures passage by fraud, is not a negligent in the selection and
passenger (Vda. De nueca v. Manial supervision of its driver (Articles 2176
Railroad Company, 13 C.A. R. 49(1968)). and 2180, New Civil Code).
Samuel and Teresita cannot sue for (C) What, if any, are the valid defenses that
breach of contract of carriage. The CTC and UTI can raise in the respective
Elements in the definition of a passenger actions against them? Explain. (3%)
are: an undertaking of a person to travel SUGGESTED ANSWER:
in the conveyance provided by the With respect to Romeo, Samuel and
carrier and an acceptance by the carrier Teresita, since there was no pre-existing
of the person as a passenger. (14 Am Jur contractual relationship between them
2d, Carriers, So. 714,p. 164). Samuel did and CTC, CTC can raise the defense that
not board the bus to be transported but it exercised the due diligence of a good
to commit robbery. Teresita did not father of a family in the selection and
board the bus to be transported but to supervision of its driver (Article 2180,
accompany the driver while he was New Civil Code).
performing his work.
Uriel can sue for breach of contract. He It can raise the same defense against
was a passenger although he was being Uriel if there is a stipulation that
transported gratuitously, because he won exempts it from liability for simple
a free riding pass in a raffle held by CTC negligence, but not for willful acts or
(Article 1753, New Civil Code). gross negligence (Article 1758, New Civil
Code).
Page 84 of 173
CTC can also raise against all the de Oro airport; the pilot miscalculated the
plaintiffs the defense that the collision plane’s approach and undershot the
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.
fortuitous event, because there was no
concurrent negligence on the part of its Of the ten who died, one was a passenger
own driver (Ampang 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
who hitched a free ride to Cagayan de Oro
CTC can also raise against Samuel the and who was not in the passenger manifest.
defense that he was engaged in 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
group. In your case conference, the
Carriage; Breach of Contract;
following questions came up:
Presumption of Negligence (2013)
No.IX. Fil-Asia Flight 916 was on a (A) Explain the causes of action legally
scheduled passenger flight from Manila possible under the given facts against the
when it crashed as it landed at the Cagayan airline and the Pilots; whom will you
Page 85 of 173
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 imprudence resulting in
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 extraordinary
diligence in transporting the passengers Since the airline employee was being
safety from their point of embarkation transported gratuitously, Fil-Asia Air was
to 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,
A complaint based on a quasi-delict can 1958).
be 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
Maritime Protest (2007)
supervision of the pilots (Article 2180,
Civil Code). No.XI. Two vessels figured in a collision
along the Straits of Guimaras resulting in
A third cause of action may be a criminal considerable loss of cargo. The damaged
prosecution for reckless imprudence vessels were safely conducted to the Port of
resulting in homicide against two pilots. 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%)
(B) How will you handle the cases of the (A) What is a maritime protest?
passenger run over the ambulance and the

SUGGESTED ANSWER:
airline employee allowed to hitch a free ride
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 or made known before a
damages, because a passenger was run competent authority at the point of
Page 86 of 173
accident or the first port of arrival if in Trust Receipts Law

the Philippines or the Philippine consul
in a foreign country (Article 835, Code of Trust Receipt (2007)
Commerce; Goro v. William Lines, Inc., 3
No.V. C contracted D to renovate his
CAR 1(1963)).
commercial building. D ordered
construction materials from E and received
(B) Can A and B successfully maintain an
delivery thereof. The following day, C went
action to recover losses and damages
to F Bank to apply for loan to pay for the
arising from the collision? Reason briefly
construction materials. As security for the
SUGGESTED ANSWER: loan, C was made to execute a trust receipt.
One year later, after C failed to pay the
B, the shipper, can successfully maintain
balance of the loan, F Bank charged him
an action to recover losses and damages
with violation of the Trust Receipts Law.
arising from the collision
(5%)
notwithstanding his failure to file a
maritime protest since the filing thereof
(A) What is a Trust Receipt?
is required only on the part of A, who
SUGGESTED ANSWER:
being a passenger of the vessel at the
A Trust Receipt is a written or printed
time of the collision, was expected to
document signed by the entrustee in
know the circumstances of the collision.
favor of the entruster containing terms
A’s failure to file a maritime protest will
and conditions substantially complying
therefore prevent him from successfully
with the provision of the Trust Receipts
maintaining an action to recover his
Law, whereby the bank as entruster
losses and damages (Art. 836, Code of
releases the goods to the possession of
Commerce)
the entrustee but retains ownership
ALTERNATIVE ANSWER: thereof while the entrustee may sell the

goods and apply the proceeds for the full
A can maintain an action to recover payment of his liability to the bank
damages if he was not in a condition to (Section 3(j), Trust Receipts Law).
make known his wishes. B can maintain
an action to recover damages since he (B) Will the case against C prosper? Reason
was not on board the vessel (Article 836, briefly.
Code of Commerce). SUGGESTED ANSWER:
Page 87 of 173
No, the case against C will not prosper, No, Tom Cruz’s obligation to pay the
Since C received the Construction loan covered by the trust receipts to XYZ
material from E Before the trust receipt Bank remains, A “Trust receipt” is
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 for the loan. This is Bank appearing as the owner of the
inconsistent with a trust 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
1990, and PNB v. Pineda, G.R. No.
46658, 13 May 1991). The loss of the
goods covered by the trust receipts
cannot extinguish the principal
Trust Receipt; Security for a Loan (2008)
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
Trust Receipts Law; Liability for Estafa
where his store was located. On the way,
(2013)
armed robbers took from Tom Cruz the
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
Page 88 of 173
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 the parties denominated the
who were laid off as he reduced his transaction as one of trust receipt
operations. (Colinares vs. Court of Appels, 339 SCRA
609, 2000; Consolidated Bank and Trust
When the extend loan period expired Corporation v. CA, SCRA 671, 2001).
without any significant payment 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
Trust Receipts Law; Violation
against Delano. The bank is contemplating
Committed by a Corporation (2012)
the filing of estafa pursuant to the
provisions of Pres. Decree No. 115 (Trust
No.II. CCC Car, Inc. obtained a loan from
Receipts Law) to force Delano to tum in at
BBB Bank, which fund was used to import
least the proceeds of the sale of the iron
ten (10) units of Mercedes Benz S class
pellets.
vehicles. Upon arrival of the vehicles and
before release of said vehicles to CCC Car,
Would you, as bank counsel and as an
Inc., X and Y, the President and Treasurer,
officer of the court, advise the bank to
respectively, of CCC Car, Inc. signed the
proceed with its contemplated action? (8%)
Trust Receipt to cover the value of the ten
(10) units of Mercedes Benz S class vehicles
SUGGESTED ANSWER:
after which, the vehicles were all delivered
to the Car display room of CCC Car, Inc.
I will not advise BDP Bank to file a
Sale of the vehicles were slow, and it took a
criminal case for estafa against Delano.
month to dispose of the ten (10) units. CCC
Delano received the iron pellets he
Car, Inc. wanted to be in business and to
imported one year before the trust
save on various documentations required
receipt was executed. As held by the
by the bank, decided that instead of turning
Supreme Court, where the execution of a
over the proceeds of the sales, CCC Car,
trust of a trust receipt agreement was
Inc. used the proceeds to buy another ten
made after the goods covered by it had
(10) units of BMW 3 series.
been purchased by and delivered to the
entrustee and the latter as a
Page 89 of 173
(A) 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 intrust for BBB Bank, as exist without a principal contract, i.e., the
entruster, and turn over the same to application for the letter of credit.]
BBB Bank to the extent of the amount
owing to the latter or as appears in the
trust receipt (Sec. 9(2), Trust Receipt
Warehouse Receipts Law
Law).
Warehouse Receipt: Surrendering of

(B) Will the corporate officers of CCC Car,
Possession; Lien (2009)
Inc. be held liable under the
circumstances? Explain your answer. (5%) No.XI. (B) Under the Warehouse loses his
lien upon the goods when he surrenders
SUGGESTED ANSWER: possession thereof.
SUGGESTED ANSWER:
Yes, particularly the President and the
True. A lien is dependent on possession.
Treasurer of CCC Car, Inc. who both
When a warehouseman surrenders
signed the trust receipts in the problem.
possession, he thereby loses his lien on
Section 13 of the Trust Receipt Law(PD
the goods over which hi no longer has
115) provides that if the violation or
possession (Sec.29 (a), Warehouse
offense is committed by a corporation,
Receipts Law).
partnership, association, or other
juridical entity, the penalty provided for
in the law shall be imposed upon the
Negotiable Instrument; Delivery of Goods
directors, officers, employees or other
(2007)
officials or persons therein responsible
for the offense, without prejudice to the No.II. Alex deposited goods for which Billy,
civil liabilities arising from the criminal a warehousemen, issued a negotiable
offense. warehouse receipt wherein the good were
deliverable to Alex or order. Alex negotiated
the receipt TC Caloy. Thereafter, Dario a
Page 90 of 173
creditor, secured judgment against Alex

and served notice of levy over the goods on
the warehouseman.
(A) 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,
(B) 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).
Page 91 of 173
MULTIPLE CHOICE equivalent to a lawful pledge of the shares

of stock.
QUESTIONS (MCQ)
SUGGESTED ANSWER:
2013 Mercantile Law Exam
(D) Yes, because the execution of the
MCQ (October 20, 2013) Deed of Assignment of Shares of Stock is
equivalent to a lawful pledge of the
I. Claude, the registered stock holder of shares of stock (Lopez v. Court of
1,000 shares in ABC Corp., pledged the Appeals, 114 SCRA 617).
shares to Conrad by endorsement in blank
of the covering stock certificates and, I.(2) After Claude defaulted on the loan,
execution of a Deed of Assignment of Conrad sought to have the shares
Shares of Stock, intended as collateral for a registered in his name In the books of the
loan of P 1.0 Million that was also corporation. If you are the Corporate
supported by a separate promissory note. Secretary of ABC Corporation, would you
register the shares in the name of
I.(A) Under these facts, is there a valid Conrad without any written instruction
pledge of the shares of stock to Conrad? from Claude? (1%)
(1%)
(A) Yes, since the endorsement and delivery

(A) No, because shares of stock are of the certificates of stock executed by
intangible personal properties whose Claude constitute the legal authority to
possession cannot be delivered and, hence, cancel the shares in his name and to place
cannot be the subject of a pledge. them in Conrad’s name.
(B) No, because the pledge of shares of (B) Yes, since the execution of the Deed of
stock requires double registration with 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. (C) No, because corporate officers can only
(C) Yes, because endorsement and delivery take direct instructions from the registered
of the certificates of stock is equivalent to owners on the proper disposition of shares
the transfer of possession of the covered registered in their names.
shares to the pledgee. (D) No, because the corporation has a
(D) Yes, because the execution of the Deed primary lien on the shares covering the
of Assignment of Shares of Stock is unpaid subscription.
Page 92 of 173
SUGGESTED ANSWER: (A) The ―Filipino First Policy‖

None of the answer is correct. The (B) The ―Foreign Investment Positive Lists‖
pledge must be foreclosed. (Article 2112, concept
Civil Code) Conrad cannot just (C) The ―Foreign Investment Negative Lists‖
appropriate the shares of stock (Article concept
2088, Civil Code). (D) The ―Control Test‖ concept
(E) All of the above.
NOTE: (D) could have been the correct
answer if the facts stated that there are SUGGESTED ANSWER:
unpaid subscriptions because under (C) The “Foreign Investment Negative
Section 63 of the Corporation Code, the Lists” 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?
II. A foreign delegation of businessmen and
investment bankers called on your law firm You replied that the definition of
to discuss the possibilities of investing in “Philippine national” under FIA ’91
various projects in the Philippines, and covers .(1%)
wanted your thoughts on certain issues
regarding foreign investment in the (A) domestic partnerships wholly composed
Philippines. of Filipino citizens
(B) domestic corporations 60% of whose
II.(1) The delegation has been told about capital stock, outstanding and entitled to
the Foreign Investment Act of 1991, as vote, are owned and held by Filipino
amended (FIA ’91), and they asked what citizens
exactly is the law’s essential thrust (C) foreign corporations considered as doing
regarding foreign investment in Philippine business in the Philippines under the
business and industries. Corporation Code, 100% of whose capital
stock, outstanding and entitled to vote, are
You replied that FIA ’91 essentially wholly-owned by Filipino citizens
reflects . (1%)
Page 93 of 173
(C) All of the above, because the law (D) Exports consistently at least 60% of its
considers the juridical personality, whether goods or services produced, and can sell
domestic or foreign, as a mere medium; the goods or services to the domestic market
test of nationally is on the individual who (E) None of the above.
control the medium
(D) None of the above, because the term SUGGESTED ANSWER:
Philippine national can only cover (E) None of the above.
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

(D) 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) 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 (B) An advertising corporation, up to 100%
―export oriented enterprises‖ and you were equity
asked exactly what the term covers. (C) A commercial bank, up to 60% equity
(D) A jeepney manufacturing corporation,
You replies that an ―export oriented up to 100% equity
enterprise ”under FIA ’91 is an enterprise (E) A real estate development corporation,
that .(1%) up to 60% equity
(A) 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
(B) exports consistently at least 40% of its (Section 7 of Foreign Investment Act)
goods or services, and sells at least 60% of
the rest to the domestic market
(C) exports consistently at least 60% of the III. Dennis subscribed to 10,000 shares of
goods or services produced, and sell at least XYZ Corporation with a par value of P100
40% of the rest to the domestic market. per share. However, he paid only 25% of the
Page 94 of 173
subscription or P250,000.00 No call has (D) ABC Corp. may redeem the shares at
been made on the unpaid subscription. the 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 at the annual meeting of the to cover its debts.
stockholders of XYZ? (1%) (E) All of the above are incorrect.
(A) 10,000 shares SUGGESTED ANSWER:

(B) 2,500 shares (D) ABC Corp. may redeem the shares at
(C) 100 shares the end of 10 years without need for
(D) 0 shares unrestricted earnings provided that,
(E) None of the above. after the redemption, there are sufficient
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 Dennis who appeared
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
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
(A) ABC Corp. would need unrestricted Brian’s clinic after Brian, a doctor, treated
retained earnings to be able to redeem the her.
shares.
(B) 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.
(C) Holders of redeemable shares enjoy a (A) Yes, Brian is a HIDC because he was the
preference over creditors. payee of the check and he received it for
services rendered.
Page 95 of 173
(B) Yes, Brian is a HIDC because he did not (A) Gawsengsit Corp. is doing business in
need to go behind the check that was the Philippines and requires a license from
payable to him. the Securities and Exchange Commission
(C) No, Brian is not a HIDC because Dennis (SEC).
issued the check only as evidence of good (B) Gawsengsit Corp. is not doing business
faith and interest in buying the car. in the Philippines by its mere investment in
(D) No, Brian is not a HIDC because Brian a Philippine corporation and does not need
should have been placed on notice: the a license from the SEC
check was crossed in his favor and Arnold (C) Gawsengsit Corp. has to appoint a
was not the drawer. resident agent in the Philippines.
(E) No, Brian is not a HIDC because the (D) Gawsengsit Corp. cannot elect directors
requisite consideration to Dennis was not in Bumblebee Corp.
present. (E) All the above choices are incorrect.

(D) No, Brian is not a HIDC because Brian (B) Gawsengsit Corp. is not doing
should have been placed on notice: the business in the Philippines by its mere
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%)
directors of Bumblebee Corp., all of whom
are Singaporeans and officers of (A) Run after the directors and officers of
Gawsengsit Corp. ABC Corp. to collect the deficiency tax and
their liability will be solidary.
Choose the correct statement relating to (B) Run after the stockholders of ABC Corp.
Gawsengsit Corp. (1%) and their liability will be joint
(C) Run after the stockholders of ABC Corp.
and their liability will be solidary
Page 96 of 173
(D) Run after the unpaid subscriptions still (Rosario Textile Mills Corporation v.
due to ABC Corp., if any Home Bankers Savings and Trust
(E) None of the above choices is correct. Company, 462 SCRA 88, 2005)
SUGGESTED ANSWER: IX. A Bank may acquire real property

(D) Run after the unpaid subscriptions . (1%)
still due to ABC Corp., if any (A) By purchase at a public sale of
(Halley v. Printwell, 648 SCRA 116, properties levied to satisfy tax
2011). delinquencies
(B) By purchase from a real estate
VIII. Anton imported perfumes from corporation in the ordinary course of the
Taiwan and these were released to him bank’s business
by the bank under a trust receipt. While (C) Through dacion en pago in satisfaction
the perfumes were in Anton’s warehouse, of a debt in favor of the bank
thieves broke in and stole all of them. (D) In exchange for the purchase of shares
of stocks of the bank
Who will shoulder the lossof the stolen (E) All of the above.
perfumes? (1%) (F) None of the above.
(A) The loss of the perfumes will be borne SUGGESTED ANSWER:

by the bank in whose behalf the perfumes (B) By purchase from a real estate
were held in trust. corporation in the ordinary course of the
(B) Anton will bear the loss. bank’s business; or
(C) The exporter can hold both the bank (C) Through dacion en pago in
and Anton liable for the loss. satisfaction of a debt in favor of the
(D) The exporter form whom Anton bought bank; or
the perfumes will bear the loss. (D) in exchange for the purchase of
(E) No one bears the loss for an unforeseen shares of stocks of the bank.
event. (Section 36 (7) and 62 (2) of the
Corporation Code)
SUGGESTED ANSWER: (Section 52 of the General Banking Law)
(B) Anton will bear the loss.
(Section 10 of the Trust Receipts Law) X. Under the Anti-Money Laundering Act, a
depositor’s bank account may be frozen.
(1%)
Page 97 of 173
(A) By the bank when the account is the Auto Mo, Ayos Ko is a . (1%)
subject of a suspicious or covered
transaction report (A) De jure corporation
(B) By the Anti-Money Laundering Council (B) De facto corporation
(AMLC) when the account belongs to a (C) Corporation by estoppels
person already convicted of money (D) General partnership
laundering (E) None of the above.
(C) By the Regional Trial Court, upon ex
parte motion by the AMLC, in a criminal SUGGESTED ANSWER:
prosecution for money laundering pending NOTE: The last sentence of the given
before it. problem is unclear as to whether the
(D) By the Court of Appeals motu proprio in term “latter” refers to Enrico or to the
an appeal from a judgment of conviction of incorporators. As such, it is necessary to
a criminal charge for money laundering. qualify the answer depending on the
(E) In none of the above. meaning given to the term “latter”
(C) Corporation by estoppels
SUGGESTED ANSWER:
(E) In none of the above. If the term “latter” refers to the
(Section 10 of the Anti-Money incorporators, the correct answer is C
Laundering Act) (Section 20 and 21 of the Corporation
Code).
XI. Unknown to the other four proponents,
Enrico (who had been given the task of (E) None of the above.
attending to the Articles of Incorporation of If the term “latter” refers to Enrico, the
the proposed corporation, Auto Mo, Ayos correct answer is E (Sections 20 and 21
Ko) misappropriated the filing fees and of the Corporation Code).
never filed the Articles of Incorporation with
the Securities and Exchange Commission XII. Preferred shares cannot vote on the
(SEC). Instead, he prepared and presented proposal . (1%)
to the proposed incorporators a falsified
SEC certificate approving the Articles. (A) To include other corporate officers in the
Relying on the falsifies SEC certificate, the corporation’s by-laws
latter began assuming and discharging (B) To issue corporate bonds
corporate powers. (C) To shorten the corporate term
Page 98 of 173
(D) All of the above Is the policy valid and binding? (1%)
(E) None of the above.
(A) Yes, the policy is valid and binding
SUGGESTED ANSWER: because Aurelia has an insurable interest
(E) None of the above. on the life of Kaddafy Benjelani.
(B) 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. This will require the (C) Yes, the policy is valid and binding
amendment of the by-laws, and as such, because it has been in force for more than
preferred shares shall be allowed to two years.
vote. (D) No, the policy is not valid and binding
Under letter (B), to issue corporate bonds since the spouses’ estrangement removed
– Such corporate bonds are construed as Aurelia’s insurable interest in Benjelani’s
bonded indebtedness, then preferred life.
shares shall be allowed to vote. (E) None of the above.
Under letter (C), to shorten the corporate
term, - Under Section 6 of the SUGGESTED ANSWER”
Corporation Code, preferred shares shall (A) 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 The policy is valid. Aurelia had insurable
No. 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 Insurance Code). Kaddafy Benjelani is
head. not a public enemy, because he is not a
national of an enemy country (Filipinas
Worried about the future of their family, Compañia de Sejunos v. Christern,
Kaddafy Benjelani’s estranged wife, Aurelia, Huefeld & Company, Inc., 89 Phil. 54,
secured in December 2010 a life insurance 1951).
policy on his life and designated herself as
the beneficiary.
Page 99 of 173
XIV. Muebles Classico, Inc. (MC), a Manila- (B) Deny STI’s claim. The Stay Order covers
based furniture shop, purchased hardwood all claims against the debtor and binds all
lumber from Surigao Timber, Inc. (STI), a its 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 (C) Grant STI’s claim. The letter of credit is
letter of credit with Baco de Plata (BDP). not a claim against the debtor under
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.
(D) Deny STI’s claim. If the bank disregards
In The meantime, MC- which had been the Stay Order, it may be subject to
undergoing financial reverses = filed a contempt by the rehabilitation court. STI
petition for corporate rehabilitation. The should file its claim with the rehabilitation
rehabilitation court issued a Stay Order to court.
stay the enforcement of all claims against (E) File an action for interpleader to resolve
MC. the parties’ competing claims
After shipping the lumber, STI went to BDP, SUGGESTED ANSWER:

presented the shipping documents, and (C) Grant SIT’s claim. The letter of credit
demanded payment of the letter of credit is not a claim against the debtor under
opened in its favor. MC, on the other hand, rehabilitation. But against the bank
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,
Philippines , through one of the vessels of
(A) Grant STI’s claim, Under the Worthsell Shippers, Inc., an American
―Independence Principle,‖ the bank deals corporation. En route to Cebu City, the
only with the documents and not the vessel had two stops, first in Hong Kong,
underlying circumstances; hence, the and second, in Manila.
presentation of the letter of credit is
sufficient. XV.(1) While traveling from Tokyo to Hong
Kong, the goods were damaged.
Page 100 of 173
SUGGESTED ANSWER:
What law will govern? (1%) (D) Yes, provided he files the complaint
within 1 year from delivery.
(A) Japanese law (Section 3 (6) of Carriage of Goods by Sea
(B) Hong Kong law Act; Belgian Overseas Chartering
(C) Chinese law &Shipping N.V. v. Philippine First
(D) Philippine law Insurance Company, Inc., 383 SCRA 23,
(E) American law 2002)
SUGGESTED ANSWER:
(A) Philippine law
(Article 1753, Civil Code)
(Eastern Shipping Lines, Inc. v.
Intermediate Appellate Court, G.R. No. L-
69044, 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%)
(A) No, the failure to file a claim with the

carrier is a condition precedent for
recovery.
(B) Yes, provided he files the complaint with
10 years from delivery.
(C) Yes, provided he files the complaint with
10 years from discovery of the damage.
(D) Yes, provided he files the complaint
within 1 year from delivery.
(E) Yes, provided he files the complaint with
1 year from discovery of the damage.
Page 101 of 173
2012 Mercantile Law Exam serves to reduce the risk of non-

performance is called -
MCQ (October 21, 2012) a. irrevocable letter of credit;
b. standby letter of credit;
1. Letters of Credit are financial
c. confirmed letter of credit;
devices in commercial transactions
d. None of the above.
which will ensure that the seller of
the goods is sure to be paid when he SUGGESTED ANSWER:
parts with the goods and the buyer
of the goods gets control of the b. standby letter of credit;
goods upon payment. Which
statement is most accurate?
a. The use of the Letter of
3. At the instance of CCC Corporation,
Credit serves to reduce the
AAA Bank issued an irrevocable
risk of nonpayment of the
Letter of Credit in favor of BBB
purchase price in a sale
Corporation. The terms of the
transaction.
irrevocable Letter of Credit state
b. The Letters of Credit can
that the beneficiary must presfmt
only be used exclusively in a
certain documents including a copy
sales transaction.
of the Bill of Lading of the
c. The Letters of Credit are
importation for the bank to release
issued for the benefit of the
the funds. BBB Corporation could
seller only.
not find the original copy of the Bill
d. (a), (b) and (c) are all correct.
of Lading so it instead presented to
SUGGESTED ANSWER: the bank a xerox copy of the Bill of

Lading. Would you advise the bank
a. The use of the Letter of Credit to allow the drawdown on theLetter
serves to reduce the risk of of Credit?
nonpayment of the purchase price a. No, because the rule of
in a sale transaction. strict compliance in
commercial transactions
involving letters of credit,
requiring documents set as
2. Letter of Credit which is used in
conditions for the release
non-sale transaction, where it
of the fund ,has to be
Page 102 of 173
strictly corn plied with or 4. AAA Carmakers opened an

else funds will not be irrevocable Letter of Credit with BBB
released. Banking Corporation with CCC Cars
b. Yes, because an irrevocable Corporation as beneficiary. The,
letter of credit means that irrevocable Letter of Credit was
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 claimed by 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
c. Yes, because the issuing and some parts were missing. As a
bank can always justify to consequence, AAA Carmakers
CCC Corporation that xerox instructed BBB Banking
copies are considered as Corporation not to allow drawdown
faithful reproduction of the on the Letter of Credit. Is this legally
original copies. possible?
d. Yes, because the issuing a. No, because under the
bank really has no discretion "Independence Principle",
to determine whether the conditions 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: the condition of the goods
subject of the importation.
a. No, because the rule of strict
b. Yes, because the acceptance
compliance in commercial
by the importer of the goods
transactions involving letters of
subject of importation is
credit, requiring documents set as
material for the drawdown of
conditions for the release of
the Letter of Credit.
the FUND ,has to be strictly corn
c. 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
Page 103 of 173
in the contract between the b. Assign the warehouse receipt

seller and the buyer. to Z to transfer ownership of
d. No, because what was the goods.
opened was an irrevocable c. Negotiate the warehouse
letter of credit and not a receipt by specifically
confirmed letter of credit. indorsing it to Z.
d. The warehouse receipt in
SUGGESTED ANSWER: this case is non-negotiable.
a. No, because under the SUGGESTED ANSWER:

"Independence Principle",
conditions for the drawdown on a. No, because under the
the Letters of Credit are based "Independence 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.
5. 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 receipt, acknowledges
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 warehouse receipt covering the
wanted to use the warehouse receipt goods if -
as payment of his debt in favor of Z. a. the warehouse receipt
How can the ownership of the goods covering the goods is not
covered by the warehouse receipt be presented.
transferred? b. the lien of the
a. Negotiate the warehouse warehouseman is not
receipt by just delivering satisfied.
the warehouse receipt to Z.
Page 104 of 173
c. the said holder 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
d. 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?
a. Yes, because X's failure to
d. All of the above.
turn over the proceeds to
the bank is a violation of
the Trust Receipt Law.
7. The legal remedy of the b. 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 an action for the trust receipt was signed,
interpleader. the ownership of the goods
b. give the goods to the first one was already with X.
who first presented the c. Yes, because violation of
warehouse receipt. Trust Receipt Law is mala
c. use his discretion as to who prohibita, intention is
he believes has the prior irrelevant.
right. d. No, because X has a valid
d. keep the goods and reason not to deliver the
appropriate them to himself. proceeds to BBB Banking
Corporation.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
a. file an action for interpleader.
a. Yes, because X's failure to turn
8. BBB Banking Corporation issued a over the proceeds to the BANK is
Letter of Credit in the amount of a 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
Page 105 of 173
c. Yes, because violation of Trust payment under the Trust

Receipt Law is mala prohibita, Receipts Law.
intention is irrelevant. c. X can be held criminally
liable under the Trust
Recommendation in respect of MCQ #8: Receipts Law regardless of
the purpose or intention
It is recommended that examinees be
for the use of the proceeds.
given full credit for whatever answer they
d. X cannot be held criminally
gave as there are two possible correct
liable because the underlying
answers of equal value: (a) and (c).
obligation is one of simple
loan.
SUGGESTED ANSWER:
9. X secured a loan from BBB Bank to
pay for the importation of some
c. X can be held criminally liable
dried fruits. Upon arrival of the
under the Trust Receipts Law
goods consisting of dried fruits
regardless of the purpose or
imported by X but before delivery to
intention for the use of the
him, a trust receipt was executed by
proceeds.
X to cover the transfer of the dried
fruits to his possession. The dried
fruits were so saleable but instead of
turning over the proceeds of the 10. 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 documents for certain
was sick of cancer of the bone. importations of the company. In the
Which statement is most accurate? event of failure to deliver the
a. 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 a. The criminal liability will not
reason. attach to X as President
b. Fraud or deceit is a because of separate juridical
necessary element to hold X personality.
criminally liable for non - b. For violation of Trust
Receipts Law, the law
Page 106 of 173
specifically provides for who bears the risk of the

the imposition of penalty loss;
upon directors I officers of d. the party who acquires
the corporation. security interest in the
c. The officer will not be held goods.
criminally accountable
because he is just signing SUGGESTED ANSWER:
the trust receipt for and in

b. the person to whom goods
behalf of the corporation.
are delivered for sale and
d. The officer of the corporation
who bears the risk of the
will be held liable provided it
loss;
is clear that the officer
concerned participated in the
decision not to pay.
12. Which phrase best completes the

SUGGESTED ANSWER:
statement - In accordance with the
Trust Receipt Law, purchasers of
b. For violation of Trust
the goods from the Entrustee will:
Receipts Law, the law
specifically provides for
a. get the goods only as a
the imposition of penalty
collateral;
upon directors I officers of
b. not get good title to the
the corporation.
goods;
c. only get security interest
over the goods;
11. Who is the Entrustee in a Trust d. get good title to the goods.
Receipt arrangement?
SUGGESTED ANSWER:
a. the owner of the goods;

d. get good title to the goods.
b. the one who holds the
goods and receives the
proceeds from the sale of
the goods; 13. X acted as an accommodation party
c. the person to whom goods in signing as a maker of a
are delivered for sale and promissory note. Which phrase best
Page 107 of 173
completes the 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 is with the
a. for as long as the holder does maker.
not know that X is only an c. The promissory note is an
accommodation party. invalid instrument because
b. even though the holder there is more than one form
knew all along that X is of payment.
only an accommodation d. The promissory note can be
party. negotiated by way of delivery.
c. for as long as X did not
receive any consideration for SUGGESTED ANSWER:
acting as accommodation
party. b. The promissory note is non-
d. provided X received negotiable because the option as
consideration for acting as to which form of payment is with
accommodation party. the maker.
SUGGESTED ANSWER: 15. X issued a promissory note which

states "I promise to pay Y or bearer
b. even though the holder the amount of HK$50,000 on or
knew all along that X is before December 30, 2013." Is the
only an accommodation promissory note negotiable?
party. a. No, the promissory note
becomes invalid because the
14. X issued a promissory note which amount is in foreign
states, "I promise to pay Y or order currency.
Php100,000.00 or one (1) unit Volvo b. Yes, the promissory note is
Sedan." Which statement is most negotiable even though the
accurate? amount is stated in foreign
a. The promissory note is currency.
negotiable because the forms c. No, the promissory note is
of payment are clearly not negotiable because the
stated. amount is in foreign
currency.
Page 108 of 173
d. Yes, the promissory note is a. Z can encash the check even

negotiable because the Hong though Y did not indorse the check.
Kong dollar is a known
foreign currency in the 17. A stale check is a check -
Philippines. a. that cannot anymore be

paid although the
SUGGESTED ANSWER: underlying obligation still
exists.
b. Yes. The promissory note is b. that cannot anymore be paid
negotiable even though the and the underlying
amount is stated in foreign obligation under the check is
currency. also extinguished.
c. that can still be negotiated or
16. X delivered a check issued by him
indorsed so that whoever is
and payable to the order of CASH to
the holder can
Y in payment for certain obligations
d. which has not been
incurred by X in favor of Y. Y then
presented for payment within
delivered the check to Z in payment
a period of thirty (30) days.
for certain obligations. Which
statement is most accurate? SUGGESTED ANSWER:
a. Z can encash the check
even though Y did not a. that cannot anymore be paid
indorse the check. although the underlying obligation still
b. Z cannot encash the check exists.
for lacking in proper
endorsement. 18. In payment for his debt in favor of
c. Y is the only one liable X, Y gave X a Manager's Check in
because he was the one who the amount of Php100,000 dated
delivered the check to Z. May 30, 2012. Which phrase best
d. The negotiation is not valid completes the statement - A
because the check is an Manager's Check:
instrument payable to order. a. is a check issued by a

manager of a bank for his
SUGGESTED ANSWER: own account.
b. is a check issued by a
manager of a bank in the
Page 109 of 173
name of the bank against a. negotiation can be made by

the bank itself for the delivery only.
account of the bank.
c. is like any ordinary check 20. 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?
a. Z cannot claim payment
SUGGESTED ANSWER: from X on the basis of the
promissory note because it is
b. Is a check issued by a manager
marked non-negotiable.
of a bank in the name of the bank
b. Z can claim payment from
against the bank itself for the
X even though it is marked
account of the bank.
non-negotiable.
c. Z can claim payment from Y
because under the
statement -- A check which is
Negotiable Instrument Law,
payable to bearer is a bearer
negotiation and assignment
instrument and:
is one and the same.
a. negotiation can be made by
d. Z can claim payment from Y
delivery only;
only because he was the
b. negotiation must be by
endorser of the promissory
written indorsement;
note.
c. negotiation must be by
specific indorsement;
SUGGESTED ANSWER:
d. negotiation must be by
indorsement and delivery. b. Z can claim payment from X
even though it is marked non-negotiable.
SUGGESTED ANSWER:
Page 110 of 173
21. Negotiable instruments are used as b. The drawee bank can recover
substitutes for money, which means from X, because he is the
- drawer even though his
a. that they can be considered signature was forged.
legal tender. c. The drawee bank is
b. that when negotiated, they estopped from denying the
can be used to pay genuineness of the
indebtedness. signature of the X, the
c. that at all times the delivery drawer of the check.
of the instrument is d. The drawee bank can recover
equivalent to delivery of the from Y because as endorser
cash. he warrants the genuineness
d. that at all times negotiation of the signature.
of the instruments requires
proper indorsement. SUGGESTED ANSWER:
SUGGESTED ANSWER: c. The drawee bank is estopped

from denying the genuineness of
b. That when negotiated, they can the signature of the X, the drawer
be used to pay indebtedness. of the check.
23. A issued a check in the amount of

Php20,000 payable to B. B endorsed
22. The signature of X was forged as the check but only to the extent of
drawer of a check. The check was Php1 0,000. Which statement is
deposited in the account of Y and most accurate?
when deposited was accepted by a. The partial indorsement is
AAA Bank, the drawee bank. not a valid indorsement,
Subsequently, AAA Bank found out although will result in the
that the signature of X was actually assignment of that part.
forged. Which statement is most b. The partial indorsement will
accurate? invalidate the whole
a. The drawee bank can recover instrument.
from Y, because the check c. The endorsee will be
was deposited in his considered as a holder in
account. due course.
Page 111 of 173
d. The partial indorsement is SUGGESTED ANSWER:

valid indorsement up to the
extent of the Php10,000. a. a bill of exhchange
SUGGESTED ANSWER: 26. A check was issued to Tiger Woods.

But what was written as payee is
a. The partial indorsement is not the word "Tiger Woods". To validly
a valid indorsement, although will endorse the check -
result in the assignment of the a. Tiger Woods must sign his
part. real name.
b. Tiger Woods must sign both
24. A promissory note which does not his real name and assumed
have the words "or order" or "or name.
bearer" will render the promissory c. Tiger Woods can sign his
note non-negotiable, and therefore - assumed name.
a. it will render the maker not d. the check has become non-
liable; negotiable.
b. the note can still be assigned
and the maker made liable; SUGGESTED ANSWER:
c. the holder can become
holder in due course; a. Tiger Woods can sign his
d. the promissory note can assumed name.
just be delivered and the

maker will still be liable.
27. Y, as President of and in behalf of

SUGGESTED ANSWER:
AAA Corporation, as a way to
d. the note can still be assigned accommodate X, one of its
and the marker made liable stockholders, endorsed the check

issued by X. Which statement is
25. A check is - most acurate?
a. a bill of exchange; a. It is an ultra vires act.
b. the same as a promissory b. It is a valid indorsement.
note; c. The corporation will be held
c. is drawn by a maker; liable to any holder in due
d. a non-negotiable instrument. course.
Page 112 of 173
d. It is an invalid indorsement. a. the sum expressed in words will

prevail over the one expressed in
SUGGESTED ANSWER: numbers.
a. it is an ultra vires act. 29. A promissory note which is undated

b. it is a valid indorsement. is presumed to be -
a. dated as of the date of
Recommendation in respect of MCQ #27:
issue;
b. dated as of the date of the
It is recommended that examinees be given
first indorsement;
full credit for whatever answer they gave as
c. promissory note is invalid
there are two possible correct answers of
because there is no date;
equal value: (a) which is supported by the
d. dated on due date.
case of Jose v. CA, et al., G.R. No. 80599,
September 15,1989, and (b) which is
SUGGESTED ANSWER:
supported by Section 22 of the Negotiable
Instrument Law. a. dated as of the date of issue
28. In a negotiable instrument, when 30. An insurance contract is an aleatory

the sum is expressed both in contract, which means that -
numbers and in words and there is a. the insurer will pay the
discrepancy between the words and insured equivalent to the
the numbers - amount of the premium paid.
a. the sum expressed in b. the obligation of the
words will prevail over the insurer is to pay depending
one expressed in numbers. upon the happening of an
b. the sum expressed in uncertain future event.
numbers will prevail over the c. the insured pays a fixed
one expressed in words. premium for the duration of
c. the instrument becomes void the policy period and the
because of the discrepancy. amount of the premiums
d. this will render the paid to the insurer is not
instrument invalid. necessarily the same amount
as what the insured will get
SUGGESTED ANSWER:
upon the happening of an
uncertain future event.
Page 113 of 173
d. the obligation of the insurer b. are to be constructed liberally

is to pay depending upon 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,
SUGGESTED ANSWER: 32. X is the common law wife of Y. Y

loves X so much that he took out a
b. the obligation of the insurer is life insurance on his own life and
to pay depending upon the happening of made her the sole beneficiary. Y did
an uncertain future event. this to ensure that X will be
financially comfortable when he is
31. An Insurance Contract is a contract
gone. Upon the death of Y, -
of adhesion, which means that in
a. X as sole beneficiary under
resolving ambiguities in the
the life insurance policy on
provision of the insurance contract,
the life of Y will be entitled
-
to the proceeds of the life
a. the general rule is that, the
insurance.
insurance contract is to be
b. despite the designation of X
interpreted strictly in
as the sole beneficiary, the
accordance with what is
proceeds of the life insurance
written in the contract.
will go to the estate of Y.
b. are to be construed
c. the proceeds of the life
liberally in favor of the
insurance will go to the
insured and strictly against
compulsory heirs of Y.
the insurer who drafted the
d. the proceeds of the life
insurance policy.
insurance will be divided
c. are to be construed strictly
equally amongst X and the
against the insured and
compulsory heirs of Y.
liberally in favor of the
insurer. SUGGESTED ANSWER:
d. if there is an ambiguity in
the insurance contract, this a. X as sole beneficiary under the
will invalidate the contract. life insurance policy on the life of Y will
be entitled to the proceeds of the life
SUGGESTED ANSWER: insurance.
Page 114 of 173
33. X, in January 30, 2009, or two (2) d. The life insurance is valid
years before reaching the age of 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 SUGGESTED ANSWER:

c. the life insurance policy is valid
a. The insurer will be liable.
provided the beneficiary is his estate or
b. The insurer will not be liable.
his parents, or spouse or child.
c. The state of sanity of the
insured is relevant in cases
35. The "incontestability clause" in a
of suicide in order to hold
Life Insurance Policy means ---
the insurer liable.
a. that life insurance proceeds
d. The state of sanity of the
cannot be claimed two (2)
insured is irrelevant in cases
years after the death of the
of suicide in order to hold
insured.
the insurer liable.
b. that two (2) years after
date of issuance or
SUGGESTED ANSWER:
reinstatement of the life
a. the insurer will be liable. insurance policy, the

insurer cannot anymore
34. X, a minor, contracted an insurance prove that the policy is
on his own life. Which statement is void ab initio or
most accurate? rescindable by reason of
a. The life insurance policy is fraudulent concealment or
void ab initio. misrepresentation of the
b. The life insurance is valid insured.
provided it is with the c. that the insured can still
consent of the beneficiary. claim from the insurance
c. The life insurance policy is policy after two (2) years
valid provided the even though premium is not
beneficiary is his estate or paid.
his parents, or spouse or d. that the insured can only
child. claim proceeds in a life
Page 115 of 173
insurance· policy two (2) b. existing at the time of

years after death. perfection and at the time of loss for
property
SUGGESTED ANSWER:
37. 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 policy the insurer 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 the policy to the bank.
fraudulent concealment or However, the Deed of Real Estate
misrepresentation of the insured. Mortgage has· an express provision
which says that the insurance policy
36. For both the Life Insurance and
is also endorsed with the signing of
Property Insurance, the insurable
the REM. Will this be sufficient?
interest is required to be -
a. No, insurance policy must
a. existing at the time of
be expressly endorsed to
perfection of the contract
the bank so that the bank
and at the time of loss.
will have a right in the
b. existing at the time of
proceeds of such insurance
perfection and at the time
in the event of loss.
of loss for property
b. The express provision
insurance but only at the
contained in the Deed of Real
time of perfection for life
Estate Mortgage to the effect
insurance.
that the policy is also
c. existing at the time of
endorsed is sufficient.
perfection for property
c. Endorsement of Insurance
insurance but for life
Policy in any form is not
insurance both at the time of
legally allowed.
perfection and at the time of
d. Endorsement of the
loss.
Insurance Policy must be in
d. existing at the time of
a formal document to be
perfection only.
valid.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
Page 116 of 173
a. No, insurance policy must be 39. X insured the building she owns
expressly endorsed to the bank so that with two (2) insurance companies
the bank will have a right in the for the same amount. In case of
proceeds of such insurance in the event damage, -
of loss. a. X can not claim from any of
the two (2) insurers because
38. X is a passenger of a jeepney for hire with the double insurance,
being driven by Y. The jeepney the insurance coverage
collided with another passenger becomes automatically void.
jeepney being driven by Z who was b. the two (2) insurers will be
driving recklessly. As a result of the solidarily liable to the extent
collision, X suffered injuries. Both of the loss.
passenger jeepneys are covered by c. the two (2) insurers will be
Comprehensive Motor Vehicular proportionately liable.
Insurance Coverage. If X wants to d. X can choose who he wants
claim under the "no fault indemnity to claim against.
clause", his claim will lie -
a. against the insurer of the SUGGESTED ANSWER:
jeepney being driven by Z
who was the one at fault. d. X can choose who he wants to
b. the claim shall lie against claim against.
the insurer of the

40. When X insured his building, X
passenger jeepney driven
indicated in the application that it is
by Y because X was his
a residential building, but actually
passenger.
the building was being used as a
c. X has a choice against whom
warehouse for some hazardous
he wants to make his claim.
materials. What is the effect on the
insurance policy, i f any?
SUGGESTED ANSWER: a. The insurance policy can be

cancelled because of the
b. the claim shall lie against the change in the use.
insurer of the passenger jeepney driven b. The insurance policy will
by Y because X was his passenger. automatically be changed.
c. The insurance policy need
not be changed.
Page 117 of 173
d. The insurance policy is fixed over the house and lot was
regardless of the change in already transferred.
the use. d. Y will be the one entitled to
the proceeds because he now
Recommendation in respect of MCQ #40: owns the partially burnt
house and lot.
full credit for whatever answer they gave as SUGGESTED ANSWER:
the question is unclear. What is clear is that
there was misrepresentation on the part of X b. 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 42. X, while driving his Toyota Altis,
of the insurer. tried to cross the railway tract of

Philippine (xxx line 2 unread text
41. X owned a house and lot. X insured xxx) approached BlumentrittAvenida
the house. The house got burned. Ext., applied its horn as a warning
Then he sold the partially burnt to all the vehicles that might be
house and the lot to Y. Which crossing the railway tract, but there
statement is most accurate? was really nobody manning the
a. X is not anymore entitled to crossing. X was listening to his lpod
the proceeds of the touch, hence, he did not hear the
insurance policy because he sound of the horn of the train and
already sold the partially so his car was hit by the train. As a
burnt house and lot. result of the accident, X suffered
b. X is still entitled to the some injuries and his car was totally
proceeds of the insurance destroyed as a result of the impact.
policy because what is Is PNR liable?
material is that at the time a. PNR is not liable because X
of the loss, X is the owner should have known that he
of the house and lot. was crossing a place
c. No one is entitled to the designated as crossing for
proceeds because ownership
Page 118 of 173
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 public a duty of company can show that
exercising a reasonable when they hired X, they did
degree of care to avoid injury the right selection process.
to person and property at b. The bus company cannot be
railroad crossings which held liable because what X
means a flagman or a did is not part of his
watchman should have been responsrbility.
posted to warn the public at c. The bus company is liable
all times. because common carriers
c. PNR is not liable because it are liable for the
blew its horn when it was negligence or willful act of
about to cross the railway its employees even though
along BlumentrittAvenida they acted beyond the
Ext. scope of their
d. PNR is not liable because X responsibility.
was negligent, for listening to d. The bus company is not
his lpod touch while driving. liable because there is no
way that the bus company
SUGGESTED ANSWER: can anticipate the act of X.
a. PNR is not liable because X SUGGESTED ANSWER:

should have known that he was crossing
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 negligence or wilful act of its
employees even though they acted
43. The AAA Bus Company picks up beyond the scope of their responsibility.
passengers along EDSA. X, the
conductor, while on board the bus, 44. X is a trader of school supplies in
drew his gun and randomly shot the Calapan, Oriental Mindoro. To bring
passengers inside. As a result, Y, a the school supplies to Calapan, it
passenger, was shot and died has to be transported by a vessel.
Page 119 of 173
Because there 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 not be found. Which
shipping company was not able to statement is most accurate?
issue the Bill of Lading. So, on a. PAL is liable for the loss of
board, the Ship Captain issued the checked- in luggage
instead a "shipping receipt" to X under the provisions of the
indicating the two (2) boxes of Warsaw Convention on Air
school supplies being part of the Transport.
cargo of the vessel. Which phrase b. PAL is liable for the loss only
therefore, is the most accurate? if the baggage check
a. the owner of the vessel is not expressly states that the
liable because no bill of airline shall be liable in case
lading was issued to X of loss.
hence, no contract of c. PAL cannot be held liable
carriage was perfected. because that is the risk that
b. it is possible to have a a passenger takes when she
contract of carriage of checks- in her baggage.
cargo even without a bill of d. PAL can only be held liable if
lading, and the "shipping it can be proven that PAL
receipt" would be was negligent.
sufficient.
c. the only acceptable SUGGESTED ANSWER:
document of title is a Bill of

a. PAL is liable for the loss of the
Lading.
checked-in-luggage under the provisions
of the Warsaw Convention on Air
SUGGESTED ANSWER: Transport.
b. it is possible to have a contract 46. X owns a passenger jeepney covered
of carriage of cargo even wiht by Certificate of Public Convenience.

He allowed Y to use its Certificate of
45. X took Philippine Airlines Flight PR Convenience for a consideration. Y
102 to Los Angeles, USA. She had therefore was operating the
two (2) luggage checked-in and was passenger jeepney under the same
issued two (2) baggage checks. Certificate of Public Convenience
Page 120 of 173
(Kabit System) under the name of X. amount of Php1 ,000 daily under
The passenger jeepney met an the boundary system. This means
accident. Who will be liable? that anything above Php1 ,000
a. Y, the one actually operating would be the earnings of Y. Y,
the jeepney, will be liable to driving recklessly, hit an old lady
the injured party. crossing the street. Which statement
b. X will be the one liable to is most accurate?
the injured party despite a. X as the owner is exempt
the fact that it is Y who is from liability because he was
actually operating the not the one driving.
jeepney, because while the b. X as the owner is exempt
Kabit System is tolerated, from liability because
the public should not be precisely the arrangement is
inconvenienced by the one under the "boundary
arrangement. system".
c. X will not be held liable if he c. X will not be exempt from
can prove that he is not the liability because he
owner anymore. remains to be the
d. Public Policy dictates that registered owner and the
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.
d. Y is the only one liable
SUGGESTED ANSWER: because 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, c. X will not be exempt from
because while the Kabit System is liability because he remains to be the
tolerated, the public should not be registered owner and the boundary
inconvenienced by the arrangement. system will not allow the circumvention
of the law to avoid liability.
47. X owns a fleet of taxicabs. He
operates it through what is known 48. The Articles of Incorporation of AAA
as boundary system. Y drives one of Corporation was approved by the
such taxicabs and pays X a fixed Securities and Exchange
Page 121 of 173
Commission (SEC). After the receipt he signed all the loan

of the Certificate of Approval from documents, because the
the SEC, AAA Corporation decided loan was authorized by the
to immediately start the operation of Board.
its business despite the fact that it c. YYY Bank can choose as to
has no approved By-Laws. What is who it wants to hold liable
the legal status of the AAA for the loan.
Corporation? d. If ZZZ Corporation cannot
a. A de jure corporation; pay, X can be held
b. A de facto corporation; subsidiarity liable.
c. A corporation by estoppel;
d. An unregistered corporation. SUGGESTED ANSWER:
SUGGESTED ANSWER: b. X, as President, cannot be

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
49. X, the President of ZZZ Corporation, was authorized by the Board.
was authorized by the Board of
Directors of ZZZ Corporation to 50. X owns 99% of the capital stock of
obtain a loan from YYY Bank and to SSS Corporation. X also owns 99%
sign documents in behalf of the of 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 date, SSS Corporation
low interest rates. Upon maturity of defaulted. TTT Corporation is
the loan, ZZZ Corporation was financiallyhealthy. Which statement
unable to pay. Which statement is is most accurate?
most accurate? a. X being a controlling owner
a. Because X was personally of SSS Corporation can
acting in behalf of the automatically be held
Corporation, he can be held personally liable for the loan
personally liable. of SSS Corporation.
b. X, as President, cannot be b. TTT Corporation, owned 99%
personally held liable for by X, can automatically be
the obligation of the held liable.
corporation even though
Page 122 of 173
c. SSS Corporation and TTT SUGGESTED ANSWER:

Corporation, although both
are owned by X, are two (2) b. Banks
distinct corporations with

52. Father X, an American priest who
separate juridical
came from New York, registered the
personalities hence, the
Diocese of Bacolod of the Roman
TTT Corporation cannot
Catholic Church which was
automatically be held
incorporated as a corporation sole.
liable for the loan of SSS
There were years when the head of
Corporation.
the Diocese was a Filipino, but there
d. The principle of piercing the
were more years when the heads
veil of corporate fiction can
were foreigners. Today, the head is
be applied in this case.
an American again. Y donated a
SUGGESTED ANSWER: piece of land located in Bacolod City

for use as a school. Which
c. SSS Corporation and TTT statement is most accurate?
corporation, although both are owned by a. The Register of Deeds of
X, are two (2) distinct corporation with Bacolod City can refuse to
the separate juridical personalities register and transfer the title
hence, the TTT Corporation cannot because the present head of
automatically be held liable for the loan the corporation sole is not a
of SSS corporation. Filipino.
b. The nationality of a
51. A corporation generally can issue corporation sole depends
both par value stock and no par upon the nationality of the
value stock. These are all fixed in head at any given time.
the Articles of Incorporation of the c. A corporation sole,
corporation. Which of the following regardless of the
corporations may not be allowed to nationality of the head,
issue no par value shares? can acquire real property
a. Insurance companies; either by sale or donation.
b. Banks; d. A corporation sole is not
c. Trust companies; legally allowed to own real
d. All of the above. property.
Page 123 of 173
SUGGESTED ANSWER: Was the Corporate Secretary

correct?
c. A corporation sole, regardless a. The Corporate Secretary is
of the nationality of the head, can correct because the
acquire real property either by sale or Corporation Code provides
donation. that no certificate of stock
shall be issued to a
53. The number of the Board of
subscriber until the shares
Trustees of a non-stock, non-profit
as subscribed have been
educational institution should be ---
fully paid.
a. five (5) only
b. The Corporate Secretary
b. any number for as long as it
cannot refuse because a
is not less than five (5) and
Stock Certificate can be
no more than eleven (11)
issued corresponding to the
c. any number in multiples of
percentage of shares which
five (5), for as long as it is
were paid.
not less than five (5) and
c. The Corporate Secretary
no more than fifteen (15).
cannot refuse because a
d. not less than five (5) nor
Certificate of Stock can be
more than ten (1 0) in
issued provided it is
multiples of five (5).
indicated in the Certificate
the actual percentage of
SUGGESTED ANSWER:
what has been paid.
c. Any number in multiples of five d. The Corporate Secretary
(5), for as long as it is not less than five cannot refuse because it is
(5) and no more than fifteen (15) his legal duty to issue a
stock certificate
54. 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 of the actual
asked the Corporate Secretary to payment.
issue him the corresponding stock
certificate representing the 50% of SUGGESTED ANSWER:
what he already paid. The Corporate

Secretary of the corporation refused.
Page 124 of 173
a. The Corporate 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 SUGGESTED ANSWER:
shares as subscribed have been fully

b. The effective date of the
paid.
merger is always the date of the approval
55. XXX Corporation and YYY of the Articles of Merger by the SEC.
Corporation have agreed to be

56. AAA Corporation is a wholly owned
merged into one corporation. To
subsidiary of BBB Corporation. To
facilitate the merger, both
support the business of AAA
corporations agreed that the merger
Corporation, BBB Corporation
be made effective on May 31,2012.
agreed to give its corporate
The Securities and Exchange
guarantee to the loan of AAA
Commission (SEC) approved the
Corporation. What is required so
Articles of Merger on June 30, 2012.
that the corporate guarantee will be
valid?
a. The effective date of the
a. It only requires the
merger is May 31, 2012, the
approval of the Board of
date stipulated by the parties
Directors of BBB
as the effective date.
Corporation.
b. The effective date of the
b. The Articles of Incorporation
merger is always the date
must provide such power
of the approval of the
and be approved by the
Articles of Merger by the
Board of Directors.
SEC.
c. Providing corporate
c. The effective date of the
guarantee to another
merger would be the date
corporation is a necessary
approved by the Board of
exercise of power of a
Directors and the
corporation.
stockholders.
d. It would require both the
d. The stockholders and the
approval of the Board of
Board of Directors can set
Directors and the
the effective date of the
stockholders on record.
Page 125 of 173
SUGGESTED ANSWER: b. Classification of shares may be

allowed for as long as it is clearly stated
a. It only requires the approval of as such in the Articles of Incorporation
the Board of Directors of BBB of the Corporation.
Corporation.
58. ABC Corporation declared stock
57. The capital stock of ABC dividends to its stockholders. The
Corporation is divided into common stock dividends were approved by
shares and preferred shares. the 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 redemption of all stock
and ordinary attributes of a share of dividends and to pay the
a corporation. Which statement is shareholdings in cash. Which
most accurate? statement is most accurate?
a. This kind of classification a. 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 b. The redemption of stock
may be allowed for as long dividends may only be
as it is clearly stated as allowed if there are sufficient
such in the Articles of earnings and should not be
Incorporation of the violative of the trust fund
Corporation. doctrine.
c. Classifications of shares is c. The redemption of the shares
mainly for business purpose may be taken from the
to attract investors. existing property and other
d. Classifications of shares may assets of the corporation.
be allowed with the approval d. None of the above.
of the stockholders and the
Board of Directors. Recommendation in respect of MCQ #58:
SUGGESTED ANSWER: It is recommended that examinees be given

full credit for whatever answer they give as
the question is vague. It does not state that
Page 126 of 173
stockholders representing at least two-thirds SUGGESTED ANSWER:

of the outstanding capital stock approved the
declaration of stock dividends. b. Despite the change in
shareholder, there is actually no change
59. 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 which is to include 60. South China Airlines is a foreign
primarily the separation of all airline company. South China
existing employees and the hiring of Airlines tickets are sold in the
new employees. Which statement is Philippines though Philippine
most accurate? Airlines as their general agent.
a. With the change in South China Airlines is not
ownership, in effect there is registered to do business as such
a new juridical entity and with the Philippine Securities and
therefore all employees are Exchange Commission. Which
considered separated. statement is most accurate?
b. Despite the change in a. Although unlicensed to do
shareholder, there is business in the Philippines,
actually no change in the South China Airlines can sue
juridical entity and before the Philippine Courts
therefore existing and can also be sued.
employees can not b. South China Airlines can sue
automatically be but cannot be sued.
considered separated. c. South China Airlines cannot
c. Y, as the new shareholder, sue and cannot be sued also.
has the right to retain only d. South China Airlines can
those employees who in his be sued in Philippine
judgment are qualified. Courts but cannot sue.
d. For as long as the existing

SUGGESTED ANSWER:
employees are given their
separation pay, they can be
d. South China Airlines can be
terminated.
sued in Philippine Courts but cannot
sue.
Page 127 of 173
61. So that ABC Corporation could shares equivalent to their

venture into more projects, it needed existing shareholdings
to raise funds by issuing new shares because the Corporation
to increase its capitalization. X, Y, Z, Code provides that each of
J and G are the five existing the existing stockholders
shareholders of the company. They will have preemptive rights
hold 20% each. How will the to the extent of their
additional shares be divided among existing shareholdings.
the existing shareholders?
a. The existing shareholders
can subscribe to the new
62. If ABC Corporation will increase its
shares equivalent to their
authorized capital stock, the
existing shareholdings
Corporation Code requires -
because the Corporation
a. the approval of the majority
Code provides that each of
of the Board of Directors
the existing stockholders
only.
will have preemptive rights
b. the approval of the majority
to the extent of their
of the stockholders and the
existing shareholdings.
Board of Directors.
b. The existing shareholders'
c. the approval of 2/3 of the
preemptive rights is
shareholders of the
equivalent to the percentage
outstanding capital stock as
that they want.
well as the approval of the
c. Each of the existing
Securities and Exchange
shareholder can exercise
Commission.
their right of first refusal
d. the approval of the majority
against each other.
of the Board of Directors and
d. Preemptive rights and right
approval of the shareholders
of first refusal are one and
holding 2/3 share of the
the same.
outstanding capital stock.
SUGGESTED ANSWER:
Recommendation in respect of MCQ #62:
a. The existing shareholders

can subscribe to the new
full credit for whatever answer they gave as
Page 128 of 173
the question is vague. It does not state that extended. What will happen to the
the increase of the authorized capital stock corporation?
also requires the approval of the SEC. a. The corporation is
dissolved ipso facto.
63. X is a minority stockholder of CCC b. There is a need to pass a
Corporation. Y is a member of the board resolution to formally
Board of Directors of CCC dissolve the corporation.
Corporation and at the same time c. 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 into liquidation.
behalf of the other stockholders, he d. The stockholders must pass
wanted to sue Y. Which statement is a resolution to dissolve the
most accurate? corporation.
a. X can institute a derivative
suit in behalf of himself as a SUGGESTED ANSWER:
stockholder.
b. A derivative suit must be a. The corporation is dissolved
instituted in behalf of the ipso facto.
corporation.
65. The term of one (1) year of the Board
c. Derivative suit is an
of Directors of AAA Corporation
exclusive remedy that X can
expired last February 15, 2012. No
institute.
new election of the Board of
d. Derivative suit is not the
Directors was called, hence, the
remedy in this situation.
existing members of Board continue
SUGGESTED ANSWER: as Directors in hold over capacity.

b. A derivative suit must be a. This is allowed provided
instituted in behalf of the corporation there is a valid and
justifiable reason for not
64. The term GGG Corporation in calling for an election of
accordance with its Articles of the new members of the
Incorporation ended last January Board.
30, 2012. The term was not
Page 129 of 173
b. This is not allowed because of its license to do

the term of the directors business.
must only be for one (1) year. b. There is no more effect in the
c. The positions of the license because anyway at
members of the Board of the time of registration, a
Directors will be resident agent was
automatically declared appointed.
vacant. c. This can be a ground for
d. Acting as members of the suspension only.
Board of Directors in a hold d. This will result in automatic
over capacity must be revocation of its license to do
ratified by the stockholders. business in the Philippines.
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 for an election of the new do business.
members of the Board.
67. The By-laws of ABC Corporation is
66. AAA Corporation is a 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 stockholders. The Corporate
Philippines. As required by 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 Corporation removed its duly recorded in the stock and
Resident Agent and did not appoint transfer book. Which statement is
anyone anymore. Which statement most accurate?
is the most accurate? a. X is a stockholder of ABC
a. This can be a ground for Corporation as of the time
revocation or suspension of meeting of the
stockholders for the
Page 130 of 173
purpose of electing the b. bought shares of XYC

members of the board. Corporation, a sister
b. X is not qualified to elect company of ABC Corporation
members of the board when he learned that XYC
because at the time 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.
stockholder. c. bought shares of ZZZ
c. 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 d. All of the above.
of the board are to be
determined by the By-laws SUGGESTED ANSWER:
alone.
69. The purpose of the "Tender Offer"

SUGGESTED ANSWER:
Rule is to -
a. X is a stockholder of ABC a. ensure an even playing field
Corporation as of the time of meeting of for all shareholders of a
the stockholders for the purpose of company in terms of
election the members of the board opportunity to sell their

shareholdings.
68. X, who is the Executive Vice b. ensure that minority
President of ABC Corporation, a shareholders in a publicly
listed company, can be held liable or listed company are protected
guilty of insider trading if, he - in the sense that they will
a. bought shares of ABC equally have the same
Corporation when it was opportunity as the majority
planning to acquire another shareholders in terms of
company to improve its asset selling their shares.
base, the news of which c. ensure that the shareholders
increased the price of the who would also want to sell
shares in the Stock their shareholdings will have
Exchange.
Page 131 of 173
the opportunity for a better b. the Philippine Stock

price. Exchange;
d. All of the above. c. the Securities and
Exchange Commission;
SUGGESTED ANSWER: d. the Securities and Exchange
Commission and the
Philippine Stock Exchange.
70. Section 38 of The Securities

SUGGESTED ANSWER:
Regulation Code defines an
independent director as a person c. The Securities and Exchange
who must not have a relation with Commission
the corporation which would
interfere with his exercise of 72. The government agency granted
independent judgment in carrying with the power of supervision and
out the responsibilities of a director. examination over banks and non-
To ensure independence therefore, bank financial institutions
he must be - performing quasi-banking functions,
a. nominated and elected by to ensure that the conduct of its
the entire shareholders; business is on a sound financial
b. nominated and elected by basis that will provide continued
the minority shareholders; solvency and liquidity is -
c. nominated and elected by a. The Philippine Deposit
the majority shareholders; Insurance Corporation;
d. appointed by the Board. b. The Bangko Sentral ng
Pilipinas;
SUGGESTED ANSWER: c. The Anti-Money Laundering
Council;
c. Nominated and elected by the
d. The Securities and Exchange
majority shareholders;
Commission.
71. "Securities" issued to the public are

SUGGESTED ANSWER:
required by law to be registered with
- b. The Bangko Sentral ng Pilipinas
a. the Bangko Sentral ng
Pilipinas;
Page 132 of 173
73. X maintains a savings deposit in the b. XYZ Corporation is a quasi-

amount of Php·1 Million with ABC bank.
Bank Corporation. X also has c. XYZ Corporation is an
obtained a loan from ABC Bank Investment Company.
Corporation in the amount of Php1 d. XYZ is none of the above.
Million. In case of default,
a. ABC Bank can set-off the SUGGESTED ANSWER:
loan from the savings

b. XYZ Corporation is quasi-bank.
account being maintained
by X with ABC Bank.
75. XXX Bank Corporation and ZZZ
b. Set-off is not possible
Corporation were merged into XX ZZ
because legal compensation
Bank Corporation. So as not to
is not allowed in banking
create any unnecessary conflict, all
transaction.
the former directors of both banks
c. Deposit accounts are usually
wanted to be appointed /elected as
earmarked for specific
members of the Board of Directors
purpose hence offsetting is
of the merged bank. Each bank
not legally possible.
used to have eleven (11) members of
d. Off -setting is not possible
the board. The maximum number of
because the obligation of X is
directors of the merged bank is -
a "simple loan".
a. 15;
b. 22;
SUGGESTED ANSWER:
c. 21;
a. ABC Bank can set-off the loan d. 11.
from the savings account being

SUGGESTED ANSWER:
maintained by X with ABC bank.
c. 21
74. XYZ Corporation is engaged in
lending funds to small vendors in
76. All senior officers of ABC Bank are
various public markets. To fund the
entitled to obtain a housing loan. X
lending, XYZ Corporation raised
is an Executive Vice President for
funds through borrowings from
Operations of ABC Bank. She
friends and investors. Which
obtained a housing loan with the
a. XYZ Corporation is a bank.
Page 133 of 173
ABC Bank. Which statement is most owned by ABC Holding Company.

accurate? Which statement is most acurate?
a. The housing loan of X a. Buying back the shares by
requires a guarantor from XYZ Bank is absolutely not
somebody who is not allowed.
connected with the bank. b. Buying back the shares
b. The housing loan of X may be allowed provided it
requires the approval of the is with the approval of the
Board of Directors of the Monetary Board and
bank. disposed of within six (6)
c. The housing loan of X, being months.
a benefit for employees, does c. Buying back the shares may
not require (a) but will be allowed provided such
require (b). shares 'will be disposed of
d. The housing loan of X, within ten (1 0) years.
being a benefit for d. Buying back the shares may
employees, will not require be done anytime provided
(a) and (b). the 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
and (b). allowed provided it is with the approval
of the Monetary Board and disposed of
77. ABC Holdings Company, a Hong within six (6) months.
Kong company, owns 10% of XYZ
Bank. Because of the peace and 78. X is being charged for violation of
order situation in the Philippines, Anti-Graft and Corrupt Practices
ABC Holding Company wanted to because he is suspected of having
sell its shareholdings in XYZ Bank. accumulated unexplained wealth. X
Unfortunately, nobody is interested maintains deposit accounts with
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. Can the Court
good idea to buy back the shares issue subpoenas against ABC Bank
Page 134 of 173
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 subpoena Act will apply.
must be specific as to b. An approval from the
which account. Monetary Board is necessary
b. Yes, it is enough that the to open the account.
specific bank is identified. c. Because the deposit is in US
c. No, because the issuance of Dollars, it is covered by the
the subpoena has no real Foreign Currency Deposit
legal basis. Act which allows disclosure
d. Even without a subpoena, only upon the written
information about the permission of the depositor.
deposit accounts of X can be d. Approval from the Court is
submitted to the necessary to order disclosure
Sandiganbayan because it of the account.
will be used in a pending
case. SUGGESTED ANSWER:
SUGGESTED ANSWER: a. The same rules under Secrecy

of Bank deposit Act will apply.
a. Yes, because there is already a
pending case and provided the subpoena 80. X is a depositor of AAA Bank. She
must be specific as to which account. has three (3) deposit accounts all
under her name. One, in checking
79. 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. Philippine Deposit
money in said deposit 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
Philippine Deposit Insurance
Page 135 of 173
Corporation. Which statement is a. In an examination to determine

most accurate? gross estate of a decedent.
a. X can claim a total of
Php500,000 for all the 82. X works as a research computer
three (3) accounts. engineer with the Institute of
b. X can only claim from one (1) Computer Technology, a government
account of Php250,000. agency. When not busy with his
c. X can claim a total of work, but during office hours, he
Php750,000 from all the developed a software program for
three (3) accounts. law firms that will allow efficient
d. X cannot claim anything monitoring of the cases, which
from any of the deposit software program is not at all
accounts. related to his work. Assuming the

program is patentable, who has the
SUGGESTED ANSWER: right over the patent?
a. X;
a. X can claim a total of Php b. Institute of Computer
500,000 for all the three (3) accounts. Technology;
c. Neither X nor the Institute of
81. The Bank Secrecy Law (RA 1405)
Computer Technology can
prohibits disclosing any information
claim patent right over the
about deposit records of an
invention;
individual without court order
d. X and the employer of X will
except -
jointly have the rights over
a. in an examination to
the patent.
determine gross estate of a
decedent. SUGGESTED ANSWER:
b. in an investigation for
violation of Anti-Graft and a. X
Corrupt Practices.
c. in an investigation by the 83. The "test of dominancy" in the Law
Ombudsman. on Trademarks, is a way to
d. in an impeachment determine whether there exists an
proceeding. infringement of a trademark by -
SUGGESTED ANSWER:
Page 136 of 173
a. determining if the use of the b. X can sue Y for

mark has been dominant in infringement because
the market. artistic works are
b. focusing on the similarity protected from moment of
of the prevalent features of creation.
the competing marks c. Works of art need to be
which might create copyrighted also to get
confusion. protection under the law.
c. looking at the mark whether d. Y can use the drawing even
they are similar in size, form though not copyrighted
or color. because it is already a public
d. looking at the mark whether 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 because artistic works are protected
the prevalent features of the competing from moment of creation.
marks which might create confusion.
85. Compulsory Licensing of Inventions
84. X's painting of Madonna and Child which are duly patented may be
was used by her mother to print dispensed with or will be allowed
some personalized gift wrapper. As exploitation even without agreement
part of her mother's efforts to raise of the patent owner under certain
funds for Bantay Bata, the mother circumstances, like national
of X sold the wrapper to friends. Y, emergency, for reason of public
an entrepeneur, liked the painting interest, like national security, etc.
in the wrapper and made many The person who can grant such
copies and sold the same through authority is -
National Bookstore. Which a. the Director General of the
statement is most accurate? Intellectual Property Office;
a. Y can use the painting for b. the Director of Legal
his use because this is not a Affairs of the Intellectual
copyrightable material. Property Office;
c. the owner of the Patent right;
Page 137 of 173
d. any agent of the owner of the a. obligations both past and

Patent right. future;
b. obligations existing at the
SUGGESTED ANSWER: time the mortgage is
constituted;
b. the Director of Legal Affairs of
c. future obligations only;
the Intellectual Property Office;
d. past obligations only.
86. The Fair Use Doctrine allows others

SUGGESTED ANSWER:
to utilize copyrighted works under
certain conditions. The factors to b. obligation existing at the time
consider whether use is fair or not the mortgage is constituted;
would be the purpose and character
of the use, nature of the copyrighted 88. Which phrase best completes the
work, amount and substantiality of statement - A chattel mortgage can
the portions used, and what else? cover:
a. effect of the use upon the a. only property described in
creator of the work. the deed without exception;
b. effect of the use upon the b. can also cover substituted
potential market of the property;
work. c. properties described in the
c. effect of the use upon the deed except in case of
public in general. stock in trade being a
d. effect of the use upon the substitute;
class in which the creator d. after acquired property.
belongs.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
c. properties described in the
b. effect of the use upon the deed except in case of stock in trade
potential market of the work. being a substitute;
87. Which phrase best completes the 89. Which phrase best completes the
statement - A chattel mortgage can statement - The Deed of Chattel
be constituted to secure: mortgage, if not registered with the
Page 138 of 173
Register of Deeds where debtor c. in the Stock and Transfer

resides: Book of the corporation with
a. is not valid, hence not the Corporate Secretary;
binding between the d. with the Register of Deeds
mortgagor and the where the debtor resides
mortgagee; and the principal office of
b. is binding between the the corporation.
mortgagor and the
mortgagee but will not SUGGESTED ANSWER:
affect third party;

d. With the Register of Deeds
c. to be valid between the
where the debtor resides and the
mortgagor and the
principal office of the corporation.
mortgagee, it must be
coupled with the delivery of
the subject matter of the
statement - The affidavit of good
chattel mortgage;
faith in a Deed of Chattel Mortgage
d. is as if a non-existent chattel
is:
mortgage.
a. an oath where the parties
swear that the mortgage is
SUGGESTED ANSWER:
made for the purpose of
b. is binding between the securing the obligations
mortgagor and the mortgagee but will specified and that the
not affect third party. obligation is just and valid;

b. an affidavit, the absence of
90. Which phrase best completes the which will vitiate the
statement - To bind third parties, a mortgage between the
chattel mortgage of shares of stock parties;
must be registered: c. necessary only if the chattel
a. with the Register of Deeds being mortgaged are growing
where the debtor resides; crops;
b. with the Register of Deeds d. a certification from the
where the principal office of mortgagor that he is the
the corporation is; mortgagor of the chattel.
SUGGESTED ANSWER:
Page 139 of 173
a. an oath where then parties SUGGESTED ANSWER:

swear that the mortgage is made for the
purpose of securing the obligations b. the one (1) year period will not
specified and that the obligation is just be interrupted by the filing of the action.
and valid.
93. What is the effect if the. proceeds in
92. X defaulted in his loan with Y. Y an extra-judicial foreclosure sale is
instituted extra-judicial foreclosure not sufficient to pay for the
of the property subject of a real obligation?
estate mortgage that secured the a. the mortgagee can claim
loan. X has one year within which to for deficiency judgment
redeem the property. After the from the debtor.
foreclosure, X filed an action b. the mortgagee can claim for
questioning the validity of the extra- deficiency judgment from the
judicial foreclosure sale. Which mortgagor even though it is a
statement is most accurate? third party mortgage.
a. The one (1) year period c. the mortgagee has no more
within which to redeem will recourse or claim against the
be interrupted by the filing of debtor.
an action questioning the d. the mortgagee cannot claim
validity of the foreclosure. for deficiency judgment from
b. The one (1) year period will the debtor because its an
not be interrupted by the extrajudicial foreclosure.
filing of the action.

SUGGESTED ANSWER:
c. The one (1) year period will
be extended for another year
a. The mortgage can claim for
because of the filing of an
deficiency judgement from the debtor.
action questioning the
validity of the foreclosure 94. X mortgaged her residential house
sale. and lot in favor of ABC Bank. X
d. If the action which questions defaulted in her loan and so the
the validity of the foreclosure bank foreclosed the real estate
prospers, the period will be mortgage on the residential house. Y
interrupted. then bought the residential house
and lot before the expiration of the
Page 140 of 173
redemption period. Can Y now take foreclose if collection is not

possession of the property? enough;
a. No, because it is still c. the creditor can foreclose
covered by the redemption the mortgage and demand
period and the purchaser is collection for any
not yet entitled as a deficiency;
matter of right to take d. None of the above.
possession of the property.
b. Yes, the purchaser is now SUGGESTED ANSWER:
entitled to the possession of

c. the creditor can foreclose the
the house.
mortgage and demand collection for any
c. No, because there is a need
deficiency.
to talk to X to leave the
house.
96. XYZ Corporation bought ten (1 0)
d. No, because Y was not the
units of Honda Civic from CCC
one who foreclosed the
Corporation. ABC Bank granted a
mortgage on the property.
loan to XYC Corporation which
executed a financing agreement
SUGGESTED ANSWER:
which provided for the principal
a. No, because it is still covered amount, the installment payments,
by the redemption period and the the interest rates and the due dates.
purchaser is not yet entitled as a matter On due dates of the installment
of right to take possession of the payments, XYZ Corporation was
property. asked to pay for some handling

charges and other fees which were
95. Which phrase best completes the not mentioned in the Financing
statement - When a debt is secured Agreement. Can XYC Corporation
by a real estate mortgage, upon refuse to pay the same?
default of the debtor: a. No, because handling
a. the only remedy of the charges and other fees are
creditor is to foreclose the usual in certain banking
real estate mortgage; transactions.
b. another remedy is filing an b. Yes, because ABC Bank is
action for collection and then required to provide XYZ
Corporation not only the
Page 141 of 173
amount of the monthly investments with any bank,

installments but also the when the inquiry or
details of the 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, because the Finance bank to ensure compliance
Agreement is a valid with the Anti-Money
document to establish the Laundering Act (AMLA);
existence of the obligation. b. Upon Philippine Deposit
d. Yes, because legally, finance Insurance 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: finding of unsafe or unsound
banking practice;
b. Yes, because ABC Bank is
c. Upon inquiry in cases of
required to provide XYZ
impeachment;
Corporation not only the
d. Upon inquiry by the
amount of the monthly
Commissioner of Internal
installments but also the
Revenue in the event a
details of the finance
taxpayer files an application
charges as required by the
to compromise his tax
Truth in Lending Act.
liabilities on the ground of
financial incapacity.
SUGGESTED ANSWER:
97. Which of the following is an
exception to the secrecy of bank
c. Upon inquiry in cases of
deposits which are in Philippine
impeachment.
Pesos, but NOT an exception to the
secrecy of foreign currency deposits? 98. The Anti-Money Laundering Law is a
law that seeks to prevent money
a. Upon
laundering activities by providing for
BangkoSentralngPilipinas
more transparency in the Philippine
(SSP) inquiry into or
Financial System, hence the
examination of deposits or
Page 142 of 173
following institutions are covered by 100. The main feature of the Foreign
the law, except: Investment Act of 1991 is to introduce
a. bank and any financial the concept of "Negative Lists". Under
institutions; the said law, what is a "Negative List"?
b. pawnshops;
c. casino operators; a. It is a list of business
d. All of the above. activities or enterprises in

the Philippines that
SUGGESTED ANSWER: foreigners are disqualified
to engage in.
c. casino operators b. It is a list of business
activities or enterprises in
99. For purposes of determining
the Philippines that
violation of the prov1s1ons of Anti-
foreigners are qualified to
Money Laundering Law, a
engage in.
transaction is considered as a
c. It is a list of business
"Suspicious Transaction" with
activities or enterprises that
"Covered Institutions" regardless of
are open to foreign
the amount involved, where which
investments provided it is
the following circumstances exist/s?
with the approval of the
a. the amount involved is not
Board of Investment.
commensurate with the
d. It is a list of business
client's business or financial
activities or enterprises that
capacity;
are open to foreign
b. there is no underlying legal
investments provided it is
or trade obligation, purpose
with the approval of the
or economic justification;
Securities and Exchange
c. client is not properly
Commission.
identified;
d. All of the above. SUGGESTED ANSWER:
a. It is a list of business activities or

SUGGESTED ANSWER:
enterprises in the Philippines that
d. all of the above foreigners are disqualified to engage in.
Page 143 of 173
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
liability since its vessel suffered an Php80
(1) P rode a Sentinel Liner bus going to
Million damage, more than the collective
Baguio from Manila. At a stop-over in
value of all lost cargo. Is X Shipping
Tarlac, the bus driver, the conductor, and
correct?
the passengers disembarked for lunch. P
decided, however, to remain in the bus, the (A) Yes, since under that doctrine,
door of which was not locked. At this point, the 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 (B) 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.
(A) Yes, since the carrier's crew (C) Yes, since the extent of the ship’s
did nothing to protect a damage was greater than that of the
passenger who remained in the value of the lost cargo.
bus during the stop-over.
(D) No, since X Shipping neither
(B) No, since the carrier's crew could incurred a total loss nor
not have foreseen the attack. abandoned its ship.
(C) Yes, since the bus is liable for (3) 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
(D) No, since the attack on P took authorize him to sell my house worth Php1
place when the bus was at a stop- Million. Signed, A." Is the note negotiable?
over.
(A) No, because the exercise of the
(2) A cargo ship of X Shipping, Co. ran option to pay lies with A, the
aground off the coast of Cebu during a maker and debtor.
storm and lost all its cargo amounting to
Php50 Million. The ship itself suffered
Page 144 of 173
(B) No, because it authorizes the (D) No, since pre-emptive rights are
sale of collateral securities in case governed by the articles of
the note is not paid at maturity. incorporation.
(C) Yes, because the note is really (5) M makes a promissory note that states:
payable to B or his order, the other "I, 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
(D) Yes, because an election to known that M was bankrupt when M
require something to be done in lieu issued the note. Who would be liable to O?
of payment of money does not affect
negotiability. (A) M and N since they may be
assumed to know of M's bankruptcy
(4) ABC Corp. increased its capital stocks
from Php10 Million to Php15 Million and, in (B) N, being O's immediate
the process, issued 1,000 new shares negotiator of a bearer note
divided into Common Shares "B" and
Common Shares "C." T, a stockholder (C) B, M, and N, being indorsers by
owning 500 shares, insists on buying the delivery of a bearer note
newly issued shares through a right of pre-

(D) B, having known of M's
emption. The company claims, however,
bankruptcy
that its By-laws deny T any right of pre-
emption. Is the corporation correct?
(6) S delivered 10 boxes of cellphones to
Trek Bus Liner, for transport from Manila
(A) No, since the By-Laws cannot
to Ilocos Sur on the following day, for which
deny a shareholder his right of
S paid the freightage. Meanwhile, the boxes
pre-emption.
were stored in the bus liner’s bodega. That
(B) Yes, but the denial of his pre- night, however, a robber broke into the
emptive right extends only to 500 bodega and stole S’s boxes. S sues Trek
shares. Bus Liner for contractual breach but the

latter argues that S has no cause of action
(C) Yes, since the denial of the right based on such breach since the loss
under the By-laws is binding on T. occurred while the goods awaited transport.
Who is correct?
Page 145 of 173
(A) The bus liner since the goods serving as an arm for receiving its
were not lost while being outside orders for pizzas.
transported.
(C) Yes, it is not shown that one
(B) S since the goods were company completely dominates
unconditionally placed with T for the finances, policies, and
transportation. business practices of the other.
(C) S since the freightage for the (D) Yes, since the two companies
goods had been paid. perform two distinct businesses.
(D) The bus liner since the loss was (8) A negotiable instrument can be indorsed
due to a fortuitous event. by way of a restrictive indorsement, which
prohibits further negotiation and
(7) X Corp. operates a call center that constitutes the indorsee as agent of the
received orders for pizzas on behalf of Y indorser. As agent, the indorsee has the
Corp. which operates a chain of pizza right, among others, to
restaurants. The two companies have the
same set of corporate officers. After 2 years, (A) demand payment of the
X Corp. dismissed its call agents for no instrument only.
apparent reason. The agents filed a
collective suit for illegal dismissal against (B) notify the drawer of the payment
both X Corp. and Y Corp. based on the of the instrument.
doctrine of piercing the veil of corporate

(C) receive payment of the
fiction. The latter set up the defense that
instrument.
the agents are in the employ of X Corp.
which is a separate juridical entity. Is this
(D) instruct that payment be made
defense appropriate?
to the drawee.
(A) No, since the doctrine would

(9) Under the Negotiable Instruments Law,
apply, the two companies having the
a signature by procuration operates as a
same set of corporate officers.
notice that the agent has but a limited
authority to sign. Thus, a person who takes
(B) No, the real employer is Y Corp.,
a bill that is drawn, accepted, or indorsed
the pizza company, with X Corp.
by procuration is duty-bound to inquire
into the extent of the agent's authority by:
Page 146 of 173
(A) examining the agent’s special (D) either actual or constructive

power of attorney. receipt.
(B) examining the bill to (12) On X’s failure to pay his loan to ABC
determine the extent of such Bank, the latter foreclosed the Real Estate
authority. Mortgage he executed in its favor. The
auction sale was set for Dec. 1, 2010 with
(C) asking the agent about the the notices of sale published as the law
extent of such authority. required. The sale was, however, cancelled
when Dec. 1, 2010 was declared a holiday
(D) asking the principal about the
and re-scheduled to Jan. 10, 2011 without
extent of such authority.
republication of notice. The auction sale
then proceeded on the new date. Under the
(10) Under the Negotiable Instruments Law,
circumstances, the auction sale is
if the holder has a lien on the instrument
which arises either from a contract or by
(A) rescissible.
implication of law, he would be a holder for
value to the extent of (B) unenforceable.
(A) his successor's interest. (C) void.
(B) his predecessor's interest. (D) voidable.
(C) the lien in his favor. (13) X executed a promissory note with a
face value of Php50,000.00, payable to the
(D) the amount indicated on the
order of Y. Y indorsed the note to Z, to
instrument's face.
whom Y owed Php30,000.00. If X has no
defense at all against Y, for how much may
(11) The liability of a common carrier for the
Z collect from X?
goods it transports begins from the time of
(A) Php20,000.00, as he is a holder

(A) conditional receipt.
for value to the extent of the
(B) constructive receipt. difference between Y's debt and the

value of the note.
(C) actual receipt.
(B) Php30,000.00, as he is a holder
for value to the extent of his lien.
Page 147 of 173
(C) Php50,000.00, but with the (16) 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
(D) None, as Z's remedy is to run then indorsed the note to X (who did not
after his debtor, Y. know about the shabu), and X to Y. Unable
to collect from P, Y then sued X on the note.
(14) Under the Anti-Money Laundering Law,
X set up the defense of illegality of
a covered institution is required to maintain
consideration. Is he correct?
a system of verifying the true identity of
their clients as well as persons purporting (A) No, since X, being a subsequent
to act on behalf of indorser, warrants that the note is
valid and subsisting.
(A) those doing business with such
clients. (B) No, since X, a general indorser,
warrants that the note is valid
(B) unknown principals.
and subsisting.
(C) the covered institution.

(C) Yes, since a void contract does
not give rise to any right.
(D) such clients.
(D) Yes, since the note was born of

(15) It is settled that neither par value nor
an illegal consideration which is a
book value is an accurate indicator of the
real defense.
fair value of a share of stock of a
corporation. As to unpaid subscriptions to
(17) In a contract of carriage, the common
its shares of stock, as they are regarded as
carrier is liable for the injury or death of a
corporate assets, they should be included
passenger resulting from its employee’s
in the
fault although the latter acted beyond the
scope of his authority. This is based on the
(A) capital value.
(A) rule that the carrier has an

(B) book value.
implied duty to transport the
(C) par value. passenger safely.
(D) market value.
Page 148 of 173
(B) rule that the carrier has an (D) in every case even if the majority
express duty to transport the of the members decide otherwise
passenger safely during the elections.
(C) Doctrine of Respondeat Superior. (20) The rule is that the valuation of the
shares of a stockholder who exercises his
(D) rule in culpa aquiliana. appraisal rights is determined as of the day
prior to the date on which the vote was
(18) A holder in due course holds the
taken. This is true -
instrument free from any defect of title of
prior parties and free from defenses (A) regardless of any depreciation
available to prior parties among themselves. or appreciation in the share's fair
An example of such a defense is - value.
(A) fraud in inducement. (B) regardless of any appreciation in

the share's fair value.
(B) duress amounting to forgery.
(C) regardless of any depreciation in

(C) fraud in esse contractus.
the share's fair value.
(D) alteration.
(D) only if there is no appreciation or
depreciation in the share's fair
(19) In elections for the Board of Trustees of
value.
non-stock corporations, members may cast
as many votes as there are trustees to be
(21) T Shipping, Co. insured all of its
elected but may not cast more than one
vessels with R Insurance, Co. The
vote for one candidate. This is true -
insurance policies stated that the insurer
shall answer for all damages due to perils of
(A) unless set aside by the members
the sea. One of the insured's ship, the MV
in plenary session.
Dona Priscilla, ran aground in the Panama
(B) in every case even if the Board of Canal when its engine pipes leaked and the
Trustees resolves otherwise. oil seeped into the cargo compartment. The
leakage was caused by the extensive
(C) unless otherwise provided in mileage that the ship had accumulated.
the Articles of Incorporation or in May the insurer be made to answer for the
the By-laws. damage to the cargo and the ship?
Page 149 of 173
(A) Yes, because the insurance (D) Yes, since X and Y are Z’s
policy covered any or all damage employees.
arising from perils of the sea.
(23) X, Co., a partnership, is composed of A
(B) 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
(C) No, since the proximate cause of you may then insure him?
the damage was the breach of
warranty of seaworthiness of the (A) No one, as there is merely a
ship. partnership contract among A, B
and C.
(D) No, since the proximate cause
of the damage was due to (B) Both B and C, as they are your
ordinary usage of the ship, and partners.
thus not due to a peril of the sea.
(C) Only C, as he is an industrial
(22) X has been a long-time household partner.
helper of Z. X's husband, Y, has also been
Z's long-time driver. May Z insure the lives (D) Only B, as he is a capitalist
of both X and Y with Z as beneficiary? partner.
(A) Yes, since X and Y render (24) X is the holder of an instrument
services to Z. payable to him (X) or his order, with Y as

maker. X then indorsed it as follows:
(B) No, since X and Y have no "Subject to no recourse, pay to Z. Signed,
pecuniary interest on the life of Z X." When Z went to collect from Y, it turned
arising from their employment with out that Y's signature was forged. Z now
him. sues X for collection. Will it prosper?
(C) No, since Z has no pecuniary (A) Yes, because X, as a conditional

interest in the lives of X and Y indorser, warrants that the note is
arising from their employment genuine.
with him.
Page 150 of 173
(B) 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
(C) No, because X made a qualified (A) at the time of the issuance of the
indorsement. policy.
(D) No, because a qualified (B) at any time before the payment
indorsement does not include the of premium.
warranty of genuineness.
(C) at the time of the payment of the
(25) A bill of exchange has T for its drawee, premium.
U as drawer, and F as holder. When F went
to T for presentment, F learned that T is (D) at any time before the policy
only 15 years old. F wants to recover from becomes effective.
U but the latter insists that a notice of

(27) T, the captain of MV Don Alan, while
dishonor must first be made, the
asleep in his cabin, dreamt of an Intensity 8
instrument being a bill of exchange. Is he
earthquake along the path of his ship. On
correct?
waking up, he immediately ordered the ship
(A) Yes, since a notice of dishonor is to return to port. True enough, the
essential to charging the drawer. earthquake and tsunami struck three days
later and his ship was saved. Was the
(B) No, since T can waive the deviation proper?
requirement of notice of dishonor.
(A) Yes, because the deviation was
(C) No, since F can treat U as made in good faith and on a
maker due to the minority of T, reasonable ground for believing that
the drawee. it was necessary to avoid a peril.
(D) Yes, since in a bill of exchange, (B) No, because no reasonable

notice of dishonor is at all times ground for avoiding a peril existed
required. at the time of the deviation.
(26) An insured, who gains knowledge of a (C) No, because T relied merely on
material fact already after the effectivity of his supposed gift of prophecy.
the insurance policy, is not obliged to
Page 151 of 173
(D) Yes, because the deviation took (B) Yes, because it is an original
place based on a reasonable belief of creation.
the captain.
(C) Yes, because it entailed the
(28) X, drawee of a bill of exchange, wrote application of X's intellect.
the words: "Accepted, with promise to make
payment within two days. Signed, X." The (D) No, because it did not entail any
drawer questioned the acceptance as application of X's intellect.
invalid. Is the acceptance valid?

(30) D, debtor of C, wrote a promissory note
(A) Yes, because the acceptance is payable to the order of C. C's brother, M,
in reality a clear assent to the misrepresenting himself as C’s agent,
order of the drawer to pay. obtained the note from D, then negotiated it
to N after forging C's signature. N indorsed
(B) 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?
(C) No, because the acceptance (A) No, since the forgery of C's
must be a clear assent to the order signature results in the discharge of
of the drawer to pay. E.
(D) No, because the document must (B) Yes, since only the forged
not express that the drawee will signature is inoperative and E is
perform his promise within two bound as indorser.
days.
(C) No, since the signature of C, the
(29) X came up with a new way of payee, was forged.
presenting a telephone directory in a mobile
phone, which he dubbed as the "iTel" and (D) Yes, since the signature of C is
which uses lesser time for locating names immaterial, he being the payee.
and telephone numbers. May X have his

(31) A material alteration of an instrument
"iTel" copyrighted in his name?
without the assent of all parties liable
(A) No, because it is a mere thereon results in its avoidance, EXCEPT
system or method. against a
(A) prior indorsee.
Page 152 of 173
(B) subsequent acceptor. (C) No, since the promise to just pay
a sum of money is unclear.
(C) subsequent indorser.
(D) No, since it contains a promise
(D) prior acceptor. to do an act in addition to the
payment of money.
(32) X constituted a chattel mortgage on a
car (valued at Php1 Million pesos) to secure (34) A bank can be placed under
a P500,000.00 loan. For the mortgage to be receivership when, if allowed to continue in
valid, X should have business, its depositors or creditors would
incur
(A) the right to mortgage the car to
the extent of half its value. (A) probable losses
(B) ownership of the car. (B) inevitable losses
(C) unqualified free disposal of his (C) possible losses

car.
(D) a slight chance of losses
(D) registered the car in his name.
(35) EFG Foundation, Inc., a non-profit
(33) B borrowed Php1 million from L and organization, scheduled an election for its
offered to him his BMW car worth Php1 six-member Board of Trustees. X, Y and Z,
Million as collateral. B then executed a who are minority members of the
promissory note that reads: "I, B, promise foundation, wish to exercise cumulative
to pay L or bearer the amount of Php1 voting in order to protect their interest,
Million and to keep my BMW car (loan although the Foundation's Articles and By-
collateral) free from any other laws are silent on the matter. As to each of
encumbrance. Signed, B." Is this note the three, what is the maximum number of
negotiable? votes that he/she can cast?
(A) Yes, since it is payable to bearer. (A) 6
(B) Yes, since it contains an (B) 9

certain in money. (C) 12
Page 153 of 173
(D) 3 law firm’s letterhead and its computer in

preparing the letter. T also requested the
(36) If the drawer and the drawee are the firm’s messenger to deliver the letter to the
same person, the holder may present the publisher. Who owns the copyright to the
instrument for payment without need of a letter?
previous presentment for acceptance. In
such a case, the holder treats it as a (A) T, since he is the original
creator of the contents of the
(A) non-negotiable instrument. letter.
(B) promissory note. (B) Both T and the publisher, one

wrote the letter to the other who has
(C) letter of credit.
possession of it.
(D) check.
(C) The law office since T was an
employee and he wrote it on the
(37) D draws a bill of exchange that states:
firm’s letterhead.
"One month from date, pay to B or his order
Php100,000.00. Signed, D." The drawee
(D) The publisher to whom the letter
named in the bill is E. B negotiated the bill
was sent.
to M, M to N, N to O, and O to P. Due to
non-acceptance and after proceedings for (39) E received goods from T for display and
dishonor were made, P asked O to pay, sale in E's store. E was to turn over to T the
which O did. From whom may O recover? proceeds of any sale and return the ones
unsold. To document their agreement, E
(A) B, being the payee
executed a trust receipt in T’s favor
covering the goods. When E failed to turn
(B) N, as indorser to O
over the proceeds from his sale of the goods
(C) E, being the drawee or return the ones unsold despite demand,
he was charged in court for estafa. E moved
(D) D, being the drawer to dismiss on the ground that his liability is
only civil. Is he correct?
(38) T, an associate attorney in XYZ Law
Office, wrote a newspaper publisher a letter (A) No, since he committed fraud
disputing a columnist’s claim about an when he promised to pay for the
incident in the attorney’s family. T used the goods and did not.
Page 154 of 173
(B) No, since his breach of the (B) principal creditor.

trust receipt agreement subjects
him to both civil and criminal (C) secondary creditor.
liability for estafa.

(D) secondary debtor.
(C) Yes, since E cannot be charged

(42) Upon execution of a trust receipt over
with estafa over goods covered a
goods, the party who is obliged to release
trust receipt.
such goods and who retains security
(D) Yes, since it was merely a interest on those goods, is called the
consignment sale and the buyer

(A) holder.
could not pay.
(B) shipper.
(40) The authorized alteration of a
warehouse receipt which does not change
(C) entrustee.
its tenor renders the warehouseman liable
according to the terms of the receipt (D) entrustor.
(A) in its original tenor if the (43) X, warehouseman, sent a text message
alteration is material. to Y, to whom X had issued a warehouse
receipt for Y's 500 sacks of corn, notifying
(B) in its original tenor.
him of the due date and time to settle the
storage fees. The message stated also that if
(C) as altered if there is fraud.
Y does not settle the warehouse charges
(D) as altered. within 10 days, he will advertise the goods

for sale at a public auction. When Y ignored
(41) Any agreement binding upon the the demand, X sold 100 sacks of corn at a
holder to extend the time of payment or to public auction. For X’s failure to comply
postpone the holder's right to enforce the with the statutory requirement of written
instrument results in the discharge of the notice to satisfy his lien, the sale of the 100
party secondarily liable unless made with sacks of corn is
the latter's consent. This agreement refers
to one which the holder made with the (A) voidable.
(A) principal debtor. (B) rescissible.
Page 155 of 173
(C) unenforceable. (45) A bill of exchange has D as drawer, E

as drawee and F as payee. The bill was then
(D) void. indorsed to G, G to H, and H to I. I, the
current holder presented the bill to E for
(44) On June 1, 2011, X mailed to Y
acceptance. E accepted but, as it later
Insurance, Co. his application for life
turned out, D is a fictitious person. Is E
insurance, with payment for 5 years of
freed from liability?
premium enclosed in it. On July 21, 2011,
the insurance company accepted the (A) No, since by accepting, E
application and mailed, on the same day, admits the existence of the
its acceptance plus the cover note. It drawer.
reached X's residence on August 11, 2011.
But, as it happened, on August 4, 2011, X (B) No, since by accepting, E
figured in a car accident. He died a day warrants that he is solvent.
later. May X's heirs recover on the
insurance policy? (C) Yes, if E was not aware of that
fact at the time of acceptance.
(A) Yes, since under the Cognition
Theory, the insurance contract was (D) Yes, since a bill of exchange with
perfected upon acceptance by the a fictitious drawer is void and
insurer of X's application. inexistent.
(B) No, since there is no privity of (46) Due to his debt to C, D wrote a
contract between the insurer and promissory note which is payable to the
X’s heirs. order of C. C's brother, M, misrepresenting

himself as agent of C, obtained the note
(C) No, since X had no knowledge from D. M then negotiated the note to N
of the insurer's acceptance of his after forging the signature of C. May N
application before he died. enforce the note against D?
(D) Yes, since under the (A) Yes, since D is the principal
Manifestation Theory, the insurance debtor.
contract was perfected upon
acceptance of the insurer of X's (B) No, since the signature of C
application. was forged.
Page 156 of 173
(C) No, since it is C who can enforce earlier than 5 years prior to the
it, the note being payable to the corporation’s expiration date.
order of C.
(C) No, since a corporation can in
(D) Yes, since D, as maker, is fact have a corporate life of 50 years.
primarily liable on the note.
(D) Yes, the amendment to shorten
(47) T Corp. has a corporate term of 20 corporate term cannot be made
years under its Articles of Incorporation or earlier than 5 years prior to the
from June 1, 1980 to June 1, 2000. On corporation’s expiration date.
June 1, 1991 it amended its Articles of
Incorporation to extend its life by 15 years (48) B, while drunk, accepted a passenger
from June 1, 1980 to June 1, 2015. The in his taxicab. B then drove the taxi
SEC approved this amendment. On June 1, recklessly, and inevitably, it crashed into
2011, however, T Corp decided to shorten an electric post, resulting in serious
its term by 1 year or until June 1, 2014. physical injuries to the passengers. The
Both the 1991 and 2011 amendments were latter then filed a suit for tort against B's
approved by majority vote of its Board of operator, A, but A raised the defense of
Directors and ratified in a special meeting having exercised extraordinary diligence in
by its stockholders representing at least the safety of the passenger. Is his defense
2/3 of its outstanding capital stock. The tenable?
SEC, however, disapproved the 2011

(A) Yes, as a common carrier can
amendment on the ground that it cannot be
rebut the presumption of negligence
made earlier than 5 years prior to the
by raising such a defense.
expiration date of the corporate term, which
is June 1, 2014. Is this SEC disapproval
(B) No, as in tort actions, the
correct?
proper defense is due diligence in
the selection and supervision of
(A) No, since the 5-year rule on
the employee by the employer.
amendment of corporate term
applies only to extension, not to
(C) No, as B, the common carrier's
shortening, of term.
employee, was obviously negligent
due to his intoxication.
(B) Yes, any amendment affecting
corporate term cannot be made
Page 157 of 173
(D) Yes, as a common carrier can (B) Php1 Million since he warrants
invoke extraordinary diligence in the that the note is genuine and in all
safety of passengers in tort cases. respects what it purports to be.
(49)X is a director in T Corp. who was (C) Php12 Million since he warrants
elected to a 1-year term on Feb. 1, 2010. his solvency and that he has a good
On April 11, 2010, X resigned and was title to the note.
replaced by R, who assumed as director on
May 17, 2010. On Nov. 21, 2010, R died. S (D) Php12 Million since he
was then elected in his place. Until which warrants that the note is genuine
time should S serve as director? and in all respects what it

purports to be.
(A) April 11, 2011.
(51) X Corp., whose business purpose is to
(B) Feb. 1, 2011. manufacture and sell vehicles, invested its
funds in Y Corp., an investment firm,
(C) May 17, 2011. through a resolution of its Board of
Directors. The investment grew
(D) Nov. 21, 2011.
tremendously on account of Y Corp.'s
excellent business judgment. But a
(50) M, the maker, issued a promissory note
minority stockholder in X Corp. assails the
to P, the payee which states: "I, M, promise
investment as ultra vires. Is he right and, if
to pay P or order the amount of Php1
so, what is the status of the investment?
Million. Signed, M." P negotiated the note
by indorsement to N, then N to O also by
(A) Yes, it is an ultra vires act of the
indorsement, and O to Q, again by
corporation itself but voidable only,
indorsement. But before O indorsed the
subject to stockholders’ ratification.
note to Q, O's wife wrote the figure "2" on
the note after "Php1" without O's (B) Yes, it is an ultra vires act of its
knowledge, making it appear that the note Board of Directors and thus void.
is for Php12 Million. For how much is O
liable to Q? (C) Yes, it is an ultra vires act of
its Board of Directors but voidable
(A) Php1 Million since it is the only, subject to stockholders’
original tenor of the note. ratification.
Page 158 of 173
(D) Yes, it is an ultra vires act of the (B) Yes, since both companies use
corporation itself and, consequently, water in conducting their business.
void.
(C) No, since the companies are
(52) Notice of dishonor is not required to be not engaged in the same line of
made in all cases. One instance where such business.
notice is not necessary is when the indorser
is the one to whom the instrument is (D) No, since the root word "Eagle" is
suppose to be presented for payment. The a generic name not subject to
rationale here is that the indorser registration.
(A) already knows of the dishonor (54) For a constructive total loss to exist in
and it makes no sense to notify marine insurance, it is required that the
him of it. person insured relinquish his interest in

the thing insured. This relinquishment
(B) is bound to make the acceptance must be
in all cases.
(A) actual.
(C) has no reason to expect the
dishonor of the instrument. (B) constructive first and if it fails,
then actual.
(D) must be made to account for all
his actions. (C) either actual or constructive.
(53) "Eagleson Refillers, Co.," a firm that (D) constructive.
sells water to the public, opposes the trade

(55) The Corporation Code sanctions a
name application of "Eagleson Laundry,
contract between two or more corporations
Co.," on the ground that such trade name
which have interlocking directors, provided
tends to deceive trade circles or confuse the
there is no fraud that attends it and it is
public with respect to the water firm’s
fair and reasonable under the
registered trade name. Will the opposition
circumstances. The interest of an
prosper?
interlocking director in one corporation may
(A) Yes, since such use is likely to be either substantial or nominal. It is
deceive or confuse the public. nominal if his interest:
Page 159 of 173
(A) does not exceed 25% of the expressed, explained, illustrated,

outstanding capital stock. or embodied in a work.
(B) exceeds 25% of the outstanding (D) Yes, since Y’s article failed to
capital stock. make any attribution to X.
(C) exceeds 20% of the outstanding (57) In case of disagreement between the
capital stock. corporation and a withdrawing stockholder
who exercises his appraisal right regarding
(D) 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
issue with finality. May the wife of the
(56) X, an amateur astronomer, stumbled
withdrawing stockholder be named to the
upon what appeared to be a massive
threemember group?
volcanic eruption in Jupiter while peering
at the planet through his telescope. The (A) No, the wife of the
following week, X, without notes, presented withdrawing shareholder is not a
a lecture on his findings before the disinterested person.
Association of Astronomers of the
Philippines. To his dismay, he later read an (B) Yes, since she could best protect
article in a science journal written by Y, a her husband's shareholdings.
professional astronomer, repeating exactly
what X discovered without any attribution (C) Yes, since the rules do not
to him. Has Y infringed on X's copyright, if discriminate against wives.
any?
(D) No, since the stockholder himself
(A) No, since X did not reduce his should sit in the three-member
lecture in writing or other material group.
form.
(58) Apart from economic rights, the author
(B) Yes, since the lecture is of a copyright also has moral rights which
considered X’s original work. he may transfer by way of assignment. The

term of these moral rights shall last
(C) No, since no protection
extends to any discovery, even if (A) during the author's lifetime
and for 50 years after his death.
Page 160 of 173
(B) forever. (C) The insured’s formal assignment

of his right to indemnification to the
(C) 50 years from the time the insurer.
author created his work.
(D) The insured’s endorsement of its
(D) during the author's lifetime. claim to the insurer.
(59) Which of the following indorsers (61) X invented a device which, through the
expressly warrants in negotiating an use of noise, can recharge a cellphone
instrument that 1) it is genuine and true; 2) battery. He applied for and was granted a
he has a good title to it; 3) all prior parties patent on his device, effective within the
have capacity to negotiate; and 4) it is valid Philippines. As it turns out, a year before
and subsisting at the time of his the grant of X's patent, Y, also an inventor,
indorsement? invented a similar device which he used in
his cellphone business in Manila. But X
(A) The irregular indorser.
files an injunctive suit against Y to stop him
from using the device on the ground of
(B) The regular indorser.
patent infringement. Will the suit prosper?
(C) The general indorser.

(A) No, since the correct remedy for
(D) The qualified indorser. X is a civil action for damages.
(60) Where the insurer was made to pay the (B) No, since Y is a prior user in
insured for a loss covered by the insurance good faith.
contract, such insurer can run after the

(C) Yes, since X is the first to
third person who caused the loss through
register his device for patent
subrogation. What is the basis for
registration.
conferring the right of subrogation to the
insurer?
(D) Yes, since Y unwittingly used X’s
patented invention.
(A) Their express stipulation in the
contract of insurance.
(62) P, a sales girl in a flower shop at the
Ayala Station of the Metro Rail Transit
(B) The equitable assignment that
(MRT) bought two tokens or tickets, one for
results from the insurer’s
her ride to work and another for her ride
payment of the insured.
Page 161 of 173
home. She got to her flower shop where she (B) 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 (C) without acceptance but the
MRT got into a fight near the flower shop, bill is paid by the drawee.
causing injuries to P in the process. Can P

(D) with acceptance but the bill is
sue the MRT for contractual breach as she
paid by the drawer.
was within the MRT premises where she
would shortly take her ride home?
(64) If an insurance policy prohibits
additional insurance on the property
(A) No, since the incident took place,
insured without the insurer's consent, such
not in an MRT train coach, but at
provision being valid and reasonable, a
the MRT station.
violation by the insured
(B) No, since P had no intention to

(A) reduces the value of the policy.
board an MRT train coach when
the incident occured.
(B) avoids the policy.
(C) Yes, since she already had a

(C) offsets the value of the policy
ticket for her ride home and was in
with the additional insurances’s
the MRTs premises at the time of
value.
the incident.
(D) forfeits premiums already paid.

(D) Yes, since she bought a round
trip ticket and MRT had a duty (65) X found a check on the street, drawn
while she was at its station to keep by Y against ABC Bank, with Z as payee. X
her safe for her return trip. forged Z's signature as an indorser, then
indorsed it personally and delivered it to
(63) Forgery of bills of exchange may be
DEF Bank. The latter, in turn, indorsed it
subdivided into, a) forgery of an
to ABC Bank which charged it to the Y’s
indorsement on the bill and b) forgery of the
account. Y later sued ABC Bank but it set
drawer's signature, which may either be
up the forgery as its defense. Will it
with acceptance by the drawee, or
prosper?
(A) with acceptance but the bill is

(A) No, since the payee's signature
paid by the drawee.
has been forged.
Page 162 of 173
(B) No, since Y’s remedy is to run (A) Yes, but solidarily with Y.
after the forger, X.
(B) Yes, since X’s is deemed to
(C) Yes, since forgery is only a warrant that his land would cover
personal defense. the whole obligation.
(D) Yes, since ABC Bank is bound (C) No, since it is the buyer at the
to know the signature of Y, its auction sale who should answer for
client. the deficiency.
(66) The rule is that no stock dividend shall (D) No, because X is not Z’s
be issued without the approval of debtor.
stockholders representing at least 2/3 of
the outstanding capital stock at a regular or (68) May a publicly listed universal bank
special meeting called for the purpose. As to own 100% of the voting stocks in another
other forms of dividends: universal bank and in a commercial bank?
(A) a mere majority of the entire (A) Yes, if with the permission of the
Board of Directors applies. Bangko Sentral ng Pilipinas.
(B) a mere majority of the quorum (B) No, since it has no power to
of the Board of Directors applies. invest in equities.
(C) a mere majority of the votes of (C) Yes, as there is no prohibition on
stockholders representing the it.
outstanding capital stock applies.

(D) No, since under the law, the
(D) the same rule of 2/3 votes 100% ownership on voting stocks
applies. must be in either bank only.
(67) X, at Y’s request, executed a Real (69) Perils of the ship, under marine
Estate Mortgage (REM) on his (X’s) land to insurance law, refer to loss which in the
secure Y's loan from Z. Z successfully ordinary course of events results from
foreclosed the REM when Y defaulted on

(A) natural and inevitable actions
the loan but half of Y's obligation remained
of the sea.
unpaid. May Z sue X to enforce his right to
the deficiency?
Page 163 of 173
(B) natural and ordinary actions of results in the discharge of the latter. With
the sea. respect to an indorser, the holder's right to
cancel his signature is:
(C) unnatural and inevitable actions
of the sea. (A) without limitation.
(D) unnatural and ordinary actions (B) not limited to the case where the
of the sea. indorsement is necessary to his title.
(70) Under the Intellectual Property Code, (C) limited to the case where the
lectures, sermons, addresses or indorsement is not necessary to
dissertations prepared for oral delivery, his title.
whether or not reduced in writing or other
material forms, are regarded as (D) limited to the case where the
indorsement is necessary to his title.
(A) non-original works.
(73) X, in the hospital for kidney
(B) original works. dysfunction, was about to be discharged
when he met his friend Y. X told Y the
(C) derivative works. reason for his hospitalization. A month
later, X applied for an insurance covering
(D) not subject to protection.
serious illnesses from ABC Insurance, Co.,
where Y was working as Corporate
(71) Can a drawee who accepts a materially
Secretary. Since X had already told Y about
altered check recover from the holder and
his hospitalization, he no longer answered a
the drawer?
question regarding it in the application
(A) No, he cannot recover from form. Would this constitute concealment?
either of them.
(A) Yes, since the previous
(B) Yes from both of them. hospitalization would influence

the insurer in deciding whether to
(C) Yes but only from the drawer. grant X's application.
(D) Yes but only from the holder. (B) No, since Y may be regarded as
ABC’s agent and he already knew of
(72) The rule is that the intentional X’s previous hospitalization.
cancellation of a person secondarily liable
Page 164 of 173
(C) Yes, it would constitute (B) Yes, since as an indorser who is

concealment that amounts to secondarily liable, there must first
misrepresentation on X's part. be presentment for payment and
dishonor by the maker.
(D) No, since the previous illness is
not a material fact to the insurance (C) No, since the absolute rule is
coverage. that there is no need for
presentment for payment and
(74) Several American doctors wanted to set dishonor to hold an indorser liable.
up a group clinic in the Philippines so they
could render modern medical services. If (D) Yes, since the secondary liability
the clinic is to be incorporated under our of Y and Z would only arise after
laws, what is the required foreign equity presentment for payment and
participation in such a corporation? dishonor by the maker.
(A) 40% (76) The Board of Directors of XYZ Corp.

unanimously passed a Resolution
(B) 0% approving the taking of steps that in reality
amounted to willful tax evasion. On
(C) 60%
discovering this, the government filed tax
evasion charges against all the company’s
(D) 70%
members of the board of directors. The
(75) X executed a promissory note in favor directors invoked the defense that they
of Y by way of accommodation. It says: "Pay have no personal liability, being mere
to Y 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

(A) No, since as a rule only natural
Y, the latter countered as indorser that
persons like the members of the
there should have been a presentment first
board of directors can commit
to the maker who dishonors it. Is Y correct?
corporate crimes.
(A) No, since Y is the real debtor

(B) Yes, since it is the corporation
and thus, there is no need for
that did not pay the tax and it has a
presentment for payment and
personality distinct from its
dishonor by the maker.
directors.
Page 165 of 173
(C) Yes, since the directors officially (D) No, since unlike T, he did not
and collectively performed acts that register his own "CROCOS" mark for
are imputable only to the his product.
corporation.
(78) A, the proprietor of a fleet of ten
(D) No, since the law makes taxicabs, decides to adopt, as his business
directors of the corporation name, "A Transport Co., Inc." May this be
solidarily liable for gross allowed?
negligence and bad faith in the
discharge of their duties. (A) No, it would be deceptive since
he is a proprietor, not a
(77) T is the registered trademark owner of corporation.
"CROCOS" which he uses on his ready-to-
wear clothes. Banking on the popularity of (B) No, since "A" is a generic name,
T's trade mark, B came up with his own not suitable for registration.
"CROCOS" mark, which he then used for

(C) 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
(D) Yes, since such name would give
infringement. Is B correct?
his business a corporate identity.
(A) No, since the owner of a well-

(79) T delivers two refrigerators to the
known mark registered in the
warehouse of W who then issues a
Philippines has rights that
negotiable receipt undertaking the delivery
extends even to dissimilar kinds
of the refrigerators to "T or bearer." T
of goods.
entrusted the receipt to B for safekeeping
only. B negotiated it, however, to F who
(B) Yes, since the right of the owner
bought it in good faith and for value. Who is
of a well-known mark registered in
entitled to the delivery of the refrigerators?
the Philippines does not extend to
goods which are not of the same
(A) T, since he is the real owner of
kind.
the refrigerators.
(C) Yes, as B was in bad faith in

(B) F, since he is a purchaser in
coming up with his own "CROCOS"
good faith and for value.
mark.
Page 166 of 173
(C) B, since T entrusted the receipt (C) No, because the voting in the
to him. Board should have been by majority
of a quorum.
(D) W, since he has as a
warehouseman a lien on the goods. (D) Yes since the votes of 2/3 of the
stockholders and majority of the
(80) The Articles of Incorporation must be Board were secured.
accompanied by a Treasurer's Affidavit
certifying under oath, among others, that (82) A group of Malaysians wanted to invest
the total subscription paid is: in the Philippines’ insurance business.
After negotiations, they agreed to organize
(A) not less than P25,000.00. "FIMA Insurance Corp." with a group of
Filipino businessmen. FIMA would have a
(B) not more than P5,000.00.
PhP50 Million paid up capital, PhP40
Million of which would come from the
(C) not less than P5,000.00.
Filipino group. All corporate officers would
(D) not more than P25,000.00. be Filipinos and 8 out of its 10-member
Board of Directors would be Filipinos. Can
(81) In a special meeting called for the FIMA operate an insurance business in the
purpose, 2/3 of the stockholders Philippines?
representing the outstanding capital stock
in X. Co. authorized the company's Board (A) No, since an insurance
of Directors to amend its By-laws. By company must have at least
majority vote, the Board then approved the PhP75 Million paid-up capital.
amendment. Is this amendment valid?

(B) Yes, since there is substantial
(A) No since the stockholders compliance with our nationalization
cannot delegate their right to laws respecting paid-up capital and
amend the By-laws to the Board. Filipino dominated Board of

Directors.
(B) Yes since the majority votes in
the Board was sufficient to amend (C) Yes, since FIMA’s paid up capital
the By-laws. more than meets the country’s

nationalization laws.
Page 167 of 173
(D) No, since an insurance company (85) A promissory note states, on its face: "I,
should be 100% owned by Filipinos. X, promise to pay Y the amount of Php
5,000.00 five days after completion of the
(83) Under the Public Service Act, an on-going construction of my house. Signed,
administrative agency has the power to X." Is the note negotiable?
approve provisionally the rates of public
utilities without a hearing in case of urgent (A) Yes, since it is payable at a fixed
public needs. The exercise of this power is period after the occurrence of a
specified event.
(A) supervisory.
(B) No, since it is payable at a
(B) absolute. fixed period after the occurrence
of an event which may not
(C) discretionary.
happen.
(D) mandatory.
(C) Yes, since it is payable at a fixed
period or determinable future time.
(84) X, creditor of Y, obtained a judgment in
his favor in connection with Y's unpaid loan
(D) No, since it should be payable at
to him. The court's sheriff then levied on
a fixed period before the occurrence
the goods that Y stored in T's warehouse,
of a specified event.
for which the latter issued a warehouse
receipt. A month before the levy, however, Z (86) P sold to M a pair of gecko (tuko) for
bought the warehouse receipt for value. Php50,000.00. M then issued a promissory
Who has a better right over the goods? note to P promising to pay the money
within 90 days. Unknown to P and M, a law
(A) T, being the warehouseman with
was passed a month before the sale that
a lien on the goods
prohibits and declares void any agreement
to sell gecko in the country. If X acquired
(B) Z, being a purchaser for value
the note in good faith and for value, may he
of the warehouse receipt
enforce payment on it?
(C) X, being Y’s judgment creditor

(A) No, since the law declared void
(D) Y, being the owner of the goods the contract on which the
promissory note was founded.
Page 168 of 173
(B) No, since it was not X who his creditor, Y, to whom he owed Php1
bought the gecko. million. Y now wants to collect and satisfy
X's debt through the Php1 million on the
(C) Yes, since he is a holder in due check. May he validly do so?
course of a note which is distinct
from the sale of gecko. (A) Yes, since the indorsement to Y
is for Php1 Million.
(D) Yes, since he is a holder in due
course and P and M were not aware (B) No, since Z is not a party to the
of the law that prohibited the sale of loan between X and Y.
gecko.
(C) No, since X is merely an agent
(87) P authorized A to sign a bill of of Z, his only right being to
exchange in his (P’s) name. The bill reads: collect.
"Pay to B or order the sum of Php1 million.
Signed, A (for and in behalf of P)." The bill (D) Yes, since X owed Y Php1
was drawn on P. B indorsed the bill to C, C Million.
to D, and D to E. May E treat the bill as a

(89) X Shipping, Co., insured its vessel MV
promissory note?
Don Teodoro for Php100 Million with ABC
(A) No, because the instrument is Insurance, Co. through T, an agent of X
payable to order and has been Shipping. During a voyage, the vessel
indorsed several times. accidentally caught fire and suffered

damages estimated at Php80 Million. T
(B) Yes, because the drawer and personally informed ABC Insurance that X
drawee are one and the same Shipping was abandoning the ship. Later,
person. ABC insurance denied X Shipping’s claim
for loss on the ground that a notice of
(C) No, because the instrument is a abandonment through its agent was
bill of exchange. improper. Is ABC Insurance right?
(D) Yes, because A was only an (A) Yes, since X Shipping should
agent of P. have ratified its agent’s action.
(88) Z wrote out an instrument that states: (B) No, since T, as agent of X
"Pay to X the amount of Php1 Million for Shipping who procured the
collection only. Signed, Z." X indorsed it to
Page 169 of 173
insurance, can also give notice of is sufficient that he was declared

abandonment for his principal. no longer a member of the board.
(C) Yes, since only the agent of X (C) Yes, since the provisions of the
Shipping relayed the fact of Corporation Code applies as well to
abandonment. government-owned and controlled
corporations.
(D) No, since in the first place, the
damage was more than ¾ of the (D) No, since the board has the
ship's value. power to oust him even without the
new law.
(90) A law was passed disqualifying former
members of Congress from sitting in the (91) 002-38-0001 G, a grocery goods
Board of Directors of government-owned or supplier, sold 100 sacks of rice to H who
controlled corporations. Because of this, promised to pay once he has sold all the
the Board of Directors of ABC Corp., a rice. H meantime delivered the goods to W,
government-owned and controlled a warehouseman, who issued a warehouse
corporation, disqualified C, a former receipt. Without the knowledge of G and W,
Congressman, from continuing to sit as one H negotiated the receipt to P who acquired
of its members. C objected, however, it in good faith and for value. P then
insisting that under the Corporation Code claimed the goods from W, who released
members of the board of directors of them. After the rice was loaded on a ship
corporations may only be removed by vote bound for Manila, G invokes his right to
of stockholders holding 2/3 of its stop the goods in transit due to his unpaid
outstanding capital stock in a regular or lien. Who has a better right to the rice?
special meeting called for that purpose. Is C
correct? (A) P, since he has superior rights
as a purchaser for value and in
(A) Yes, since the new law cannot be good faith.
applied to members of the board of
directors already elected prior to its (B) P, regardless of whether or not
passage. he is a purchaser for value and in

good faith.
(B) No, since the disqualification
takes effect by operation of law, it (C) G, since as an unpaid seller, he
has the right of stoppage in transitu.
Page 170 of 173
(D) W, since it appears that the (94) A bill of exchange states on its face:
warehouse charges have not been "One (1) month after sight, pay to the order
paid. of Mr. R the amount of Php50,000.00,
chargeable to the account of Mr. S. Signed,
(92) In a signature by procuration, the Mr. T." Mr. S, the drawee, accepted the bill
principal is bound only in case the agent upon presentment by writing on it the
acted within the actual limits of his words "I shall pay Php30,000.00 three (3)
authority. The signature of the agent in months after sight." May he accept under
such a case operates as notice that he has such terms, which varies the command in
the bill of exchange?
(A) a qualified authority to sign.
(A) Yes, since a drawee accepts

(B) a limited authority to sign.
according to the tenor of his
acceptance.
(C) a special authority to sign.
(B) No, since, once he accepts, a

(D) full authority to sign.
drawee is liable according to the
(93) In return for the 20 years of faithful tenor of the bill.
service of X as a househelper to Y, the latter

(C) Yes, provided the drawer and
promised to pay Php100,000.00 to X’s heirs
payee agree to the acceptance.
if he (X) dies in an accident by fire. X
agreed. Is this an insurance contract?
(D) No, since he is bound as drawee
to accept the bill according to its
(A) Yes, since all the elements of an
tenor.
insurance contract are present.
(95) May the indorsee of a promissory note

(B) Yes, since X’ services may be
indorsed to him "for deposit" file a suit
regarded as the consideration.
against the indorser?
(C) No, since Y actually made a

(A) Yes, as long as the indorser
conditional donation in X’s favor.
received value for the restrictive
(D) No, since it is in fact an indorsement.
innominate contract between X and

Y.
Page 171 of 173
(B) Yes, as long as the indorser (A) Yes, because there was breach of
received value for the conditional implied warranty.
indorsement.
(B) No, because there was no intent
(C) Yes, whether or not the indorser to breach an implied warranty.
received value for the conditional
indorsement. (C) Yes, because it relates to a
material representation.
(D) Yes, whether or not the indorser
received value for the restrictive (D) No, because there was only
indorsement. representation of intention.
(96) X issued a check in favor of his (98) The Articles of Incorporation of ABC
creditor, Y. It reads: " Pay to Y the amount Transport Co., a public utility, provides for
of Seven Thousand Hundred Pesos ten (10) members in its Board of Directors.
(Php700,000.00). Signed, X". What amount What is the prescribed minimum number of
should be construed as true in such a Filipino citizens in its Board?
case?
(A) 10
(A) Php700,000.00.
(B) 6
(B) Php700.00.
(C) 7
(C) Php7,000.00.
(D) 5
(D) Php700,100.00.
(99) P authorized A to sign a negotiable
(97) Shipowner X, in applying for a marine instrument in his (P’s) name. It reads: "Pay
insurance policy from ABC, Co., stated that to B or order the sum of Php1 million.
his vessel usually sails middle of August Signed, A (for and in behalf of P)." The
and with normally 100 tons of cargo. It instrument shows that it was drawn on P.
turned out later that the vessel departed on B then indorsed to C, C to D, and D to E. E
the first week of September and with only then treated it as a bill of exchange. Is
10 tons of cargo. Will this avoid the policy presentment for acceptance necessary in
that was issued? this case?
Page 172 of 173
(A) No, since the drawer and References:

drawee are the same person.
Answers to Bar Examination
(B) No, since the bill is non- Questions by the UP LAW COMPLEX
negotiable, the drawer and drawee (2007, 2009, 2010)
being the same person.
UP LAW REVIEW
(C) Yes, since the bill is payable to
order, presentment is required for
PHILIPPINE ASSOCIATION OF LAW
acceptance.
SCHOOLS (2008)
(D) Yes, in order to hold all persons

lawphil.net
liable on the bill.
(100) 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:
(A) approved and ratified by at least

2/3 of all stockholders.
(B) approved by at least 2/3 of the

stockholders representing the
(C) ratified by at least 2/3 of all

stockholders.
(D) ratified by at least 2/3 of the

stockholders representing the
Page 173 of 173
2014 BAR EXAMINATIONS Page 1 of 25
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.
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))
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) 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
(B) 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
(C) 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
(D) 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) 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
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%)
(A) from the date the application for incorporation is filed with the Securities and
Exchange Commission (SEC)
(B) from the date the SEC issues a certificate of incorporation under its official seal
(C) thirty (30) days after the date the application for incorporation is filed with the
SEC
(D) thirty (30) days after the datethe SEC issues a certificate of incorporation under
its official seal
SUGGESTED ANSWER
(B) from the date the SEC issues a certificate of incorporation under its official seal. (Sec
19, Corporation Code)
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)
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 well-
known 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)
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.”
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

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
(D) actually serving in the board but constituting a quorum
SUGGESTED ANSWER
(B) as fixed in the articles of incorporation

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:
1. Purchase of a delivery van for use in the corporation’s retail business;
2. Declaration and approval of the 13th month bonus;
3. 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.
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
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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

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)
COMMERCIAL LAW
XVIII.
Skechers Corporation sued Inter-Pacific for trademark infringement, claiming that Inter-
Pacificused 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
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 Inter-
Pacific 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%)
(A) Assuming all other requirements are met, should the Securities and Exchange
Commission (SEC) accept or reject the Articles of Incorporation? Why?
(B) 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.
(C) 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
(A) 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.
(B) 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.
(C) 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.
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:
1. Soterodid not personally apply for insurance coverage, as she was illiterate.
2. Soterowas sickly since 1990.
3. Soterodid not have the financial capability to pay the premium on the policy.
4. Soterodid not sign the application for insurance.
5. Aban was the one who filed the insurance application and designated herself as
the beneficiary.
COMMERCIAL LAW
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%)
(A) May Sotero validly designate her niece as beneficiary?
(B) May the incontestability period set in even in cases of fraud as alleged in this
case?
(C) Is Aban entitled to claim the proceeds under the policy?
SUGGESTED ANSWERS
(A) 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.
(B) 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
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)
(C) 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)
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
(C) a majority of the directors present at the meeting at which there is a quorum
(D) two-thirds of the directors present at the meeting at which there is a quorum
SUGGESTED ANSWER
(C) a majority of the directors present at the meeting at which there is a quorum (Sec 25,
Corporation Code)
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.
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:
(1) 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)
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)
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)
COMMERCIAL LAW
XXVIII.
Which of the following instruments is negotiable if all the other requirements of negotiability
are met? (1%)
(A) A promissory note with promise to pay out of the U.S. Dollar account of the
maker in XYZ Bank
(B) A promissory note which designates the U.S. Dollar currency in which payment
is to be made
(C) A promissory note which contains in addition a promise to paint the portrait of the
bearer
(D) A promissory note made payable to the order of Jose Cruz or Josefa Cruz
SUGGESTED ANSWER
(B) 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
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
KK. 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:
(a) The purpose and character of the use, including whether such use is of a
commercial nature or is for non-profit educational; purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in relation to the copyrighted work
as a whole; and
(d) 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.
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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
(5) 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

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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.

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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."
[a] 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)
[b] 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%)
a. No.
RA 8293 espouses the first-to-file rule as stated under Sec. 123.1(d) which states: Section
123. 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
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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 pre-
requisite 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 "MINI-
ME," 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.
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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
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%)

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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.

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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])

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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).

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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
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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:

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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.
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
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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."
[a] Was there a merger and consolidation of the two banks in point of the Corporation Code?
Explain. (2.5%)
[b] 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

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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
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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.
[a] 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%)
[b] 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%)
a. 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
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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)
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.

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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

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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%)
[b) 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%)
a) 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.
b) 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

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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%)

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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

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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.
[a] 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%)
[b] 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%)
a. 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.
b. 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
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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."
[a] 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.
[b) 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

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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.
1. De escalation clause
2. Prevailing market rate
3. 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
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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 master-

servant 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
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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 drawer-
payors 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)

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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.
A. 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.
B. 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 brand-
new 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
(1) 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.
A. 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.
B. 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.
A. 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.
B. 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:
a. To ascertain the financial condition of the company or the propriety of dividends;
b. the value of the shares of stock for sale or investment;
c. whether there has been mismanagement;

d. in anticipation of shareholders' meetings to obtain a mailing list of shareholders to
solicit proxies or influence voting;
e. 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.
A. 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:
a. Where the purchaser expressly or impliedly agrees to assume such debts;
b. Where the transaction amounts to a consolidation or merger of the corporations;
c. Where the purchasing corporation is merely a continuation of the selling corporation

(business enterprise transfer); and
d. Where the transaction is entered into fraudulently in order to escape liability for such
debts.
B. 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.
C. 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).
a. 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.
A. 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.
B. 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.
A. 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.
B. 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.
A. 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.
B. 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 or examine any particular
deposit or investment with any banking institution when it has been established that
there is probable cause that the deposits or investments are related to an unlawful
activity. No court order is required if the predicate crime is violation of the Dangerous
Drugs Act.
IX.
A. 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.
B. 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.
b. 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.
c. 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.
d. 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.
e. 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

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COMPILATION OF THE

1)1990-2013 -> Philippine Bar Exams Mercantile

From the ANSWERS TO BAR EXAMINATION QUESTIONS by

June 27, 2007

It is also very good karma.

of typographical errors in this work.

Commercial Transaction (2003)

Joint Account (2000)

Joint Account vs. Partnership (2000)

Theory of Cognition vs. Theory of Manifestation (1997)

Banks: Collateral Security (2002)

Banks: Secrecy of Bank Deposits; Garnishment (2004)

Banks; Classifications of Banks (2002)

Banks; Conservator vs. Receiver (2006)

Banks; Diligence Required (1992)

Banks; Insolvency; Prohibited Transactions (2000)

Banks; Insolvency; Requirements (1997)

Banks; Restrictions on Loan Accommodations (2002)

Banks; Restrictions on Loan Accommodations (2006)

Banks; Safety Deposit Box; Liability

Banks; Secrecy of Bank Deposit; AMLC (2006)

Banks; Secrecy of Bank Deposit; Exceptions (2006)

Banks; Secrecy of Bank Deposits (1990)

Banks; Secrecy of Bank Deposits (1991)

Banks; Secrecy of Bank Deposits (1992)

Banks; Secrecy of Bank Deposits (1994)

Banks; Secrecy of Bank Deposits (1995)

Banks; Secrecy of Bank Deposits (1998)

Banks; Secrecy of Bank Deposits (2000)

Banks; Secrecy of Bank Deposits; Exceptions (2004)

Banks; Secrecy of Bank Deposits; Garnishment (2001)

BSP; Receivership; Jurisdiction (1992)

Legal Tender (2000)

PDIC Law vs. Secrecy of Bank Deposits Act (1997)

Responsibilities & Objectives of BSP (1998)

Truth in Lending Act (1991)

Truth in Lending Act (2000)

Bulk Sales Law ......................................................................................................................20

Bulk Sales Law; Covered Transactions (1994)

Bulk Sales Law; Covered Transactions (2000)

Bulk Sales Law; Covered Transactions (2006)

Bulk Sales Law; Exclusions (1993)

Bulk Sales Law; Obligation of the Vendor (1995)

Bulk Sales Law; Obligation of the Vendor (1997)

Bulk Sales Law; Obligation of the Vendor (2001)

Consumer Protection Law ..................................................................................................21

Metric System Law (1994)

BOD: Election of Aliens as members (2005)

BOD; Capacity of Directors (1996)

BOD; Compensation (1991)

BOD; Conflict of Interest (1994)

BOD; Interlocking Directors (1995)

BOD; Interlocking Directors (1996)

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

By-Laws; Validity; limiting qualifications of BOD members (2000)

By-Laws; Validity; limiting qualifications of BOD members (2001)

By-Laws; Validity; limiting qualifications of BOD members (2003)

Close Corporations; Deadlocks (1995)

Closed Corporation; Restriction; Transfer of shares (1994)

Controversy; Intra-Corporate (1994)

Controversy; Intra-Corporate (1996)

Controversy; Intra-Corporate (1996)

Controversy; Intra-Corporate (2006)