2007 bar questions and suggested answers (MERCANTILE LAW)

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Labels: Bar Examination

Mercantile Law
I.
(10%)

issued

check

Reason

for

P1M

which

briefly

a.

Can

the

he

used

in

check

to

pay

(a),

be

for

killing

his

(b)

considered

political

enemy.

and

(c).

negotiable

instrument?

Yes, the check can be considered a negotiable instrument. In ascertaining the character of the instrument, the primordial
and only consideration is its compliance with Section 1 of the Negotiable Instruments Law. Since the problem states that
a check has been issues, we presume that it has all the other terms mandated under Section 1, and if it was issued
payable

b.

Does

to

order

have

or

cause

of

bearer,

action

then

against

it

in

case

is

of

negotiable

dishonor

by

the

instrument.

drawee

bank?

No, S does not have a cause of action against R in case of dishonor by the drawee bank. There is still an underlying
contractual relationship between S and R, evidenced by the check, and needs a valid consideration to support it. Under
Section 28 of the Negotiable Instruments Law, such illegality of consideration is a defense against immediate parties but
not against a holder in due course (i.e., personal defense). The consideration for the issuance of the check, as between S
and

R,

is

void

involving

as

it

does

the

killing

of

the

political

enemy

of

R.

c. If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily liable by T?
R may be held secondarily liable by T. T enjoys the presumption being a holder in due course because every holder is
deemed prima facie to be a holder in due course. (Section 59, Negotiable Instruments Law), especially since he took the
check in good faith and for value. Section 57 of the Negotiable Instruments Law states , A holder in due course holds the
instrument free from any defect of title of prior parties and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

II.
(10%)

Alex deposited goods for which Billy, warehouseman, issued a negotiable warehouse receipt wherein the goods were
deliverable to Alex or order. Alex negotiated the receipt to Caloy. Thereafter, Dario, a creditor secured judgment
against

a.

Alex

To

and

whom

served

should

notice

the

of

levy

over

warehouseman

the

deliver

goods

the

on

goods

the

warehouseman.

upon

demand?

The warehouseman should deliver the goods to Caloy. The goods cannot be attached by garnishment or otherwise, or
levied upon, unless the receipt be first surrendered to the warehouseman, or its negotiation is enjoined. (Section 25,
Warehouse

Receipts

Law)

b. Would you answer be the same if the warehouseman issued a non-negotiable warehouse receipt? Reason briefly.
No. The non-negotiable warehouse receipt does not confer upon the transferee the direct obligation of the
warehouseman to hold possession of the goods for him. (Section 42, Warehouse Receipts Law). In such case, the law
provides that when a non-negotiable warehouse receipt is transferred to Caloy, he only gets such title to the goods as
Alex had and also a right to notify the warehouseman to hold the goods for Caloys account. Prior to such notice, Caloys
claim can be defeated by a levy of execution upon the goods by a creditor of Alex.

III.
(5%)

Diana and Piolo are famous personalities in showbusiness who kept their love affair secret. They use a special
instant messaging service which allows them to see one another's typing on their own screen as each letter key is
pressed. When Greg, the controller of the service facility, found out their identities, he kept a copy of all the
messages Diana and Piolo sent each other and published them. Is Greg liable for copyright infringement? Reason
briefly.

Yes, Greg is guilty of copyright infringement. The instant messages of Diana and Piolo are deemed to constitute letters
(Section 172.1[d], Intellectual Property Code) which are protected by the sole fact of their creation irrespective of their
mode or form of expression, as well as their content, quality, and purpose. (Section 172.2[d], Intellectual Property
Code). For copyright to exist, it must be found in a tangible medium, usually in written form, which is fulfilled by the
instant messages. Under the Electronic Commerce Act, whenever the law requires certain contracts or acts to be in
writing to be valid and enforceable, then such requirement is deemed fulfilled when they are in the form of an electronic
document. The instant messages are deemed to be in writing under the Electronic Commerce Act for they are in digital
form or constitute electronic documents.

IV.
(10%)

Alfredo took out a policy to insure his commercial building against fire. The broker for the insurance company
agreed to give a 15-day credit within which to pay the insurance premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable on May 30, 2006. On May 28, 2006, a fire broke out and destroyed
the

a.

building

owned

May

by

Alfredo.Reason

Alfredo

briefly

recover

on

in

(a),

the

(b)

and

insurance

(c).

policy?

Yes, Alfredo can recover on the insurance policy. Although Section 77 of the Insurance Code provides that in fire
insurance, payment of premium is necessary for validity of the policy (also known as cash and carry provision),
nonetheless, the rule has been modified by the decisions of the Supreme Court after the promulgation of the Insurance
Code. Thus, in UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, April 4, 2001, it was held that the insured
should be allowed to recover on losses sustained even when premium was paid after the fact of loss, provided payment
was received by the insurer during the credit period given to the insured. (See also South Sea Surety v. Court of Appeals,
G.R. No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June 28, 1999) where the Supreme
Court ruled that is the check payment for premium was received by the insurer prior to the loss or within the credit
period,

the

insured

was

allowed

to

recover.

b. Would your answer in (a) be the same if 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?
Yes, recovering under an insurance contract is allowed if the cause of the loss was either the proximate or the immediate
cause as long as an expected peril was not the proximate cause of the loss. (Section 86, Insurance Code of the
Philippines.) The fire being the immediate cause for the loss of the commercial building, would warrant recovery under
the

policy.

c. If the fire was found to have been caused by Alfredo's own negligence, can he still recover on the policy?
Yes, he can still recover. The doctrine of contributory negligence does not in any way apply to rights under a contract of
insurance, unless it is a case of willful act. (Section 87, Insurance Code of the Philippines)

V.
(5%)

C contracted D to renovate his commercial building. D ordered construction materials from E and received delivery
thereof. The following day, C went to F Bank to apply for a loan to pay the construction materials. As security for the
loan, C was made to execute a trust receipt. One year later, after C failed to pay the balance on the loan, F Bank
charged

him

a.

with

violation

What

of

is

the

Trust

Receipts

Trust

Law.

Receipt?

A trust receipt is a security transaction intended to aid financing importers or dealers in merchandise by allowing them to
obtain delivery of the goods under certain covenants. (Section 4, Trust Receipts Law). It is a document executed between
the entrustor and the entrustee, under which the goods are released to the latter who binds himself to hold the goods in
trust, or to sell or dispose of the goods with the obligations to turn over the proceeds to the entrustor to the extent of
the

b.

entrustees

Will

obligation

the

to

case

him,

or

against

if

unsold,

to

prosper?

return

Reason

the

goods.

briefly.

No. It is not covered by the Trust Receipts Law. In Consolidated Bank v. Court of Appeals, G.R. No. 114286, April 19, 2001,
where debtor received goods subject of trust receipt before trust receipt itself was entered into, it was held that the
transaction in question was a simple loan. Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000 held that the
Trust Receipts Law does not seek to enforce payment of loan, rather it punishes dishonesty and abuse of confidence in
handling of money or goods to the prejudice of another regardless of whether the latter is the owner.

VI.
(5%)

Discuss

the

trust

fund

doctrine

The Trust Fund Doctrine refers to the principle that the capital stock, property and other assets of the corporation are
regarded as equity in trust for payment of corporate creditors. This doctrine is the underlying principle in the procedure
for the distribution of capital assets, embodied in Corporation Code, which allows the distribution of corporate capital
only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2)
purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefore are complied with. (Ong Yong v. Tiu, G.R. No.
144476, April 8, 2003)

VII.
(10%)

In a stockholder's meeting, S dissented from the corporate act converting preferred voting shares to non-voting
shares. Thereafter, S submitted his certificates of stock for notation that his shares are dissenting. The next day, S
transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the
payment

a.

of

What

the

is

the

value

meaning

of

of

his

stockholder's

shares.

appraisal

right?

It is the right of a stockholder to withdraw from the corporation and demand in writing, payment of the fair value of his
shares after registering his dissent from certain specified corporate acts involving fundamental changes in corporate
structures provided that the corporation has sufficient unrestricted retained earnings. (Section 81, Commercial Code of
the

b.

Philippines)

Can

exercise

the

right

of

appraisal?

Reason

briefly.

No. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently
cancelled, the rights of the transferor as a dissenting stockholder shall cease and the transferee shall have all the rights
of a regular stockholder. (Section 86, Corporation Code). T cannot exercise the right of appraisal because the certificates
containing the notation of Ss dissent have been canceled. Upon such cancellation, Ss rights as a dissenting stockholder
have ceased. In such a case, a new certificate without notation will be issued to T, who will be treated as a regular
stockholder.

VIII.
(10%)

Due to growing financial difficulties, Z Bank was unable to finish construction of its 21-storey building on a prime lot
located in Makati City. Inevitably, the Bangko Sentral ordered the closure of Z Bank and consequently placed it under
receivership. In a bid to save the bank's property investment, the President of Z Bank entered into a financing
agreement with a group of investors for the completion of the construction of the 21-storey building in exchange for
a

a.

ten

year

lease

and

Is

the

act

of

Alternative

the

the

exclusive

President

option

valid?

to

purchase

Why

or

the

why

building.

not?
Answer:

No, the act of the President is not valid. Receivership is equivalent to an injunction to restrain the bank officers from

intermeddling with the property of the bank in any way. (Villanueva v. CA, G.R. No. 114870, May 26, 1995). More
importantly, under the New Central Bank Act, when a bank had been placed under receivership by the Bangko Sentral ng
Pilipinas, and especially in this case where it has been ordered to be closed, the conservator, or in this case the receiver,
effectively

replaces

the

Board

of

Directors

in

exercising

corporate

Alternative

powers.

Answer:

Under the Corporation Law, the acts of the President do not fall within his apparent authority, and do not bind the
corporation without prior authority of the Board of Directors, which under Section 23 of the Corporation Code is the sole
repository

of

corporate

powers.

b. Will a suit to enforce the exclusive right of the investors to purchase the property prosper? Reason briefly.
The suit will not prosper. The appointment of a receiver operates to suspend the authority of the bank and its directors
and officers over its property and effects, such authority being reposed in the receiver. The receivership is equivalent to
an injunction to restrain the bank officers from intermeddling with the property of the bank in any way. (Abacus Real
Estate Development Center, Inc. v. The Manila Banking Corporation, G.R. No. 162279, April 6, 2005, citing Villanueva v.
Court of Appeals, G.R. No. 114870, May 26, 1995).

IX.
(5%)

On December 4, 2003, RED Corporation executed a real estate mortgage in favor of BLUE Bank. RED Corporation
defaulted in the payment of its loan. Consequently, on June 4, 2004, BLUE Bank extrajudicially foreclosed the
property. Being the highest bidder in the auction sale conducted, the Bank was issued a Certificate of Sale which was
registered on August 4, 2004. Does RED Corporation still have the right to redeem the property as of September 14,
2007?

Reason

briefly.

No. RED corporation has only one (1) year from the auction sale to redeem the property. (Section 6, Act No. 3135; Section
47, General Banking Law of 2000). Instead, RED Corporation allowed three (3) years to lapse. RED Corporation should be
deemed to have waived its right to redeem the property.

X.
(5%)

Name
The

at

least
predicate

five

(5)
crimes

predicate
to

crimes
money

to

money
laundering

laundering.
are:

1.

Kidnapping

2.

Violations

3.

Violations

for

of
of

the

the

ransom;

Dangerous

Anti-Graft

and

Drug

Corrupt

Act;

Practices

Act;

4.

Plunder

5.

Robbery

6.

and

Jueteng

7.

Extortion;

and

Piracy

on

8.

Masiao;

the

high

seas;

Qualified

Theft;

9.

Swindling;

10.

Smuggling;

11.

Violations

of

the

Electronic

Commerce

Act

of

2000;

12. Hijacking, destructive arson, murder, and the other acts of terrorists against non-combatant persons and similar
targets;
13.

Fraudulent

practices

punished

by

the

Securities

Regulation

Code

of

2000;

and

14. Felonies or offenses of a similar nature that are punishable under the penal laws of other countries.

XI.
(10%)

Two vessels figured in a collision along the Straits of Guimaras resulting in considerable loss of cargo. The damaged
vessels were safely conducted to the Port of Iloilo. Passenger A failed to file a maritime protest. B. a non-passenger
but a shipper who suffered damage to his cargo, likewise did not file a maritime protest at all.

a.

What

is

maritime

protest?

A maritime protest is a written confirmation that must be formally lodged before a competent authority, by the captain
or master of the innocent vessel, which has figured in a collision or shipwreck, within 25 hours upon arrival at the nearest
port, failure of which bars recovery for loss or damage, no matter how meritorious the claim may be. (Article 835, Code
of

Commerce)

b. Can A and B successfully maintain an action to recover losses and damages arising from the collision? Reason
briefly.
A, being a passenger, cannot maintain the action to recover losses without a prior protest. B can recover because the lack
of protest will not prejudice such actions to recover damage caused to persons or cargo whose owners were not on board
the vessel at the time of collision. (Article 836, Code of Commerce).

XII.
(5%)

Seeking to streamline its operations and to bail out its losing ventures, the stockholders of X Corporation
unanimously adopted a proposal to sell substantially all of the machineries and equipment used in and out its
manufacturing business and to sink the proceeds of the sale for the expansion of its cargo transport services.

a.

Would

the

transaction

be

covered

by

the

provisions

of

the

Bulk

Sales

Alternative

Law?
Answer:

Under a decision of the Court of Appeals (People v. Wong, G.R. No. 9776-R, March 26, 1954), it was held that the
transaction can not be covered by the Bulk Sales Law, which only covers merchants who are engaged in the sale of goods
and merchandise. A manufacturing concern is not considered to be a merchant business, more so when it is pursued as
part

of

another

service

business,

in

this

case

the

cargo

transport

Alternative

services.

Answer:

When it comes to the sale of all or substantially all of the machineries and equipment, which under the Bulk Sales Law is
separate type of bulk sale apart from the sale of goods or merchandise in the ordinary course of business, such
transactions

b.

are

How

still

would

covered

by

Corporation

the

Bulk

effect

Sales

valid

Alternative

Law.

sale?
Answer:

X Corporation must comply with Sections 3, 4 and 5 of the Bulk Sales Law, namely: (1) deliver sworn statement of the
names and addresses of all the creditors to whom the vendor or mortgagor may be indebted together with the amount of
indebtedness due or owing to each of the said creditors; (2) apply the purchase or mortgage money to the pro-rata
payment of bona fide claims of the creditors and (3) make full detailed history of the stock of goods, wares ,
merchandise, provisions or materials, in bulk, and notify every creditor at least ten (10) days before transferring
possession.

Alternative

Answer:

Important corporate acts or contracts must be pursued under the direction of the Board of Directors is embodied in
Section 23 of the Corporation Code. Even the sale of all or substantially all of its assets requires the prior approval of the
board of directors and the ratification of stockholders owning or representing at least two-thirds (2/3) of its outstanding
capital

stock

(Section

40,

Corporation

Code

of

the

Philippines)

Under the Bulk Sales Law, X Corporations should either: (a) get the waiver of all its creditors as required under the Bulk
Sales Law; or (b) if such waiver cannot be obtained, comply with the requirements under the Bulk Sales Law to prepare
and give copy of the sworn certification not only of the assets being disposed of, but also the proper listing of the existing
creditors of X Corporation, and thereafter to apply the proceeds of the sale proportionately to all the listed creditors.
Otherwise, the sale may be vulnerable to being challenged to be fraudulent and void under the Bulk Sales Law. (Islamic
Directorate of the Philippines v. Court of Appeals, G.R. No. 117897, May 14, 1997).

XIII.
(10%)

a. What are the preferred claims that shall be satisfied first from the assets of an insolvent corporation?

After debtors assets have been liquidated, unless a composition has been agreed upon by the debtors creditors, debtors
obligation
1.

Article

2.
3.
4.

shall

be

2241

New

Article
Preferred
Article

2245

paid
Civil

2242
claims

under

Civil

New

in
Code

following

Specific

Specific

Article
Code

the

2244
Common

order:

movable

immovable

credits

In

the
shall

property
order

be

property.

paid

named.
pro-rata.

N.B. A comprehensive answer for XIII (A) would impose an unreasonable memorization of the codal provisions.

b. How shall the remaining non-preferred creditors share in the estate of the insolvent corporation above?
The remaining credits do not enjoin any preference. Hence, these creditors shall be paid pro-rata. (Articles 2244 and
2251[2], Civil Code)

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