2001 PRE-WEEK REVIEW NOTES

MERCANTILE LAW1

HOW TO USE THESE NOTES:

These notes in the form of textual materials and representative review q
uestions were specially prepared by Prof. Domondon for the exclusive use of stu
dents who attended the lectures he conducted from 20-23 August 2001 sponsored by
PRIMUS Management Unlimited Services, Inc., held at the Asian Social Institute,
Inc. Other reviewees he has personally authorized may also use these Notes. R
eviewees attending the 2002 Ateneo Bar Review are authorized to use these Notes.
The purpose of these Notes is to test the student s ability to answer hypo
thetical and previous bar questions based on basic concepts as well as on select
ed cases decided by the Supreme Court up to December, 2000. The questions are r
epresentative of probable questions that may be asked in the 2001 Bar Examinatio
ns in Mercantile Law. There is an expanded treatment of the provisions of the S
ecurities Regulation Code (R.A. No. 8799) which shall be referred to as SRC, and
the Implementing Rules and Regulations of the Securities Regulation Code to be
referred to as SRC Rules. This is so because the published review materials hav
e not yet included this subject. The author believes that there would only be tw
o basic questions asked under the SRC and the SRC Rules.
It is recommended that the reader should cover the suggested answers whi
le reading the questions. This would force him or her to recall the applicable
law and jurisprudence. If reader has time, the answers should be written on a
grade school notebook using the sign pen intended to be used during the actual
examinations. Each question should be answered only within a span of nine (9) m
inutes. Afterwards, check your answers referring to the suggested answers.
DO NOT MEMORIZE the suggested answers. They were purposely made to be l
engthy to serve as explanatory devices. This is so because you do not have time
anymore to refer back to your review materials. Take time to read the notes and
comments as questions may be drawn from these areas instead of from the questio
ns shown on these notes. If you still could not understand the concepts after re
ading these notes, then refer to your review materials.
The materials are arranged in accordance with the coverage of the examin
ations. The actual bar questions may not be arranged in this sequence
If pressed for time the reader should read only those which are marked w
ith triple asterisks ***, but be sure to read and answer all the questions.
WARNING:
These materials are copyrighted and no part may be reproduced in any for
m or any means, electronic or mechanical, including photocopying without the wri
tten permission of the author. These materials are authorized for the reproduct
ion and use only of bar candidates who have attended the lectures conducted by
Prof. Domondon for PRIMUS Management Unlimited Services, Inc., and reviewees he
has personally authorized. Unauthorized users shall not be prosecuted but SHALL
BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR for steali
ng the intellectual property of the author.
Only copies with the manual signature of Prof. Domondon, or his authoriz
ed representative on this page, are considered authorized copies. Holders of au
thorized copies are requested not to lend their copies for xeroxing.
(1) CODE OF COMMERCE
(a) Merchants and Commercial Transactions . Articles 1 to 63.
1. What is meant by the theory of manifestation ?
SUGGESTED ANSWER: A theory in the perfection of contracts which recogniz
es that the contract is perfected at the time when the acceptance is made by the
offeree.
2. Miguel is above twenty-one years of age, not subject to the authority
of his father or mother, and has the free disposition of his property. He has
a 2001 Mercedes Benz, a 2000 Porche and a 2000 Ford Expedition. He sold the Mer
cedes Benz to Leon, mortgages the Porche to Mia, and delivers the Ford Expediti
on to Mara for sale to other persons. (a) Is Miguel a merchant ? (b) Are the
transactions civil or commercial ? (c) What particular law or provisions woul
d govern such transactions ?
SUGGESTED ANSWERS: (a) Miguel is not a merchant. Although he has lega
l capacity, there is no showing that he is habitually engaged in commerce. (Art.
1, Code of Commerce). While it is true that he has had three (3) transactions,
there is no legal presumption yet of habituality. This is so because he has no
t announced his intention to engage in commerce or to open an establishment whic
h has for its object some commercial operation, through circulars, newspapers, h
andbills, posters exhibited to the public, or in any other manner whatsoever. (
Art. 3, Code of Commerce).
(b), (c) The transactions are not commercial in nature because the acts
are not contained in the provisions of the Code of Commerce but those of the Ci
vil Code. The sale is governed by the Civil Code provisions on sale, that of th
e chattel mortgage by the provisions of the Civil Code and the Chattel Mortgage
Law (Act 1508, as amended), and the delivery of the Ford Expedition for sale is
governed by the Civil Code provisions on agency.
3. Pocholo, of legal age and otherwise qualified to engage in business s
eeks your advice on the books he should keep should he decide to engage in busin
ess. (a) What books should he keep and what should these books contain ? (b)
Supposing that Pocholo, together with others decide to form a corporation which
will engage in business. What books should the corporation keep and maintain ?
SUGGESTED ANSWER:
(a) Pocholo should keep
1) a book of inventories and balances, which show all his assets and liab
ilities including the difference between said assets and liabilities;
2) a journal, a ledger,
3) a book or books for copies of letters and telegrams, and
4) other books which may be required by special laws (Arts. 33, 37 Code o
f Commerce), like those required under the National Internal Revenue Code, the C
orporation Code and the Securities Regulation Code.
(b) The corporation, formed by Pocholo with others, is required to keep
the same books as described above. In addition the corporation is required to
keep
1) a book or books of minutes, in which shall be entered all resolutions
referring to the progress and operations of the entity, approved at general meet
ings or at least of the board of directors (Art. 33, Code of Commerce).
It is also required to keep
2) a book of all meetings, as well as
3) a stock and transfer book. (Sec. 74, Corporation Code).
(b) Letters of Credit under the Code of Commerce (Articles 567 to 572,
inclusive)
4. What are the three distinct and independent contracts in a letter of
credit ?
 SUGGESTED ANSWER: The three distinct and independent contracts are:
a. The contract of sale between the buyer and the seller;
b. The contract of the buyer with the issuing bank, and
c. The letter of credit proper in which the bank promises to pay the se
ller pursuant to the terms and conditions stated therein. (Keng Hua Paper Produc
ts Co., Inc. v. Court of Appeals, et al., 286 SCRA 257)
NOTES AND COMMENTS:
a. Liability of a confirming bank distinguished from a notifying bank.
A confirming bank adds its credit to the letter of credit and therefore is liab
le if the opening importer fails to pay the exporter while a notifying bank bein
g merely one who gives advice as to the existence does not incur any such liabi
lity.
(i) Bulk Sales Law (Act 3952)
***5. X is the sole proprietor of a store engaged in the business of trad
ing auto spare parts, both wholesale and retail. Scared by what he perceived as
the political and economic instability besetting country, he decided to emigrat
e to Canada with his entire family. He liquidated all his assets including his a
uto spare parts business lock stock and barrel to his compadre for US$1,500,000.00
which he planned to reinvest in Canada. Is he covered by the provisions of the
Bulk Sales Law ? In the affirmative, what must be done by the parties so as to
comply with the law ?
SUGGESTED ANSWER: Yes. A sales is considered as a sales in bulk under
the Bulk Sales Act if it is a:
a. Sale, transfer, or disposition is other than in the ordinary course of
business;
b. Sale of all or substantially all of the business; and
c. Sale of all or substantially all of the fixtures and equipments.
Since the sale is covered by the Bulk Sales Law, he must comply with the
following requirements in order to make the sale valid:
a. Seller s affidavit listing all the names of the creditors, the nature an
d amount of credits due them;
b. Seller prepares an inventory of the stocks to be sold and informs all
the creditors ten (10) days before the sale or the projected sale in bulk; and
c. Nos. a & b are registered with the Bureau of Domestic Trade.
NOTES AND COMMENTS:
*** a. When a sale IS NOT considered bulk sale under the Bulk Sales Law:
1) When the sale, transfer or disposition is in the ordinary course of bu
siness;
2) When there is a waiver of the provisions of the Bulk Sales Law of all
the creditors;
3) When the sale, transfer or disposition is by virtue of a judicial ord
er.
b. Purpose of Bulk Sales Law. To prevent secret or fraudulent sale of
the business, which could lead to its closure, to the detriment of the creditors
.
*** c. Effects of failure to observe the requirements:
1) The sale is null and void;
2) The purchaser holds the property he bought in trust for the
seller;
3) The purchaser is liable to the seller s creditors for properties he boug
ht and already disposed of by him; and
4) The purchaser has the right to demand from the seller the return of th
e purchase price plus damages.
6. The shares of stock of Aldrin, Inc., engaged in the wholesale of pap
er products, is owned 100% by Justin. He decided to sell all of his shares of s
tock to James and Jerome. Is this a sale in bulk subject to the Bulk Sales Act
? Explain briefly.
SUGGESTED ANSWER: No, because the transaction is a sale of the shares o
f stock and not of the business which would result to detriment of the creditors
. The business still continues and the creditors may proceed against the same c
orporation which owed them. There was merely a change in ownership of the busin
ess.
(ii) The Warehouse Receipts Law (Act 2137 in relation to the General Bon
ded Warehouse Act, Act 3893)
7. XYZ Warehouse, Inc. issued five (5) warehouse receipts (quedans) for
sugar to Mia Therese Merchandising. which were substantially in the form and c
ontains the terms prescribed for negotiable warehouse receipts by Section 2 of A
ct No. 2137. The five (5) quedans were subsequently negotiated and endorsed by
Mia Therese to Ma. Regina who used these quedans as security for loans obtained
from Joy Banking Corporation in the amount of P35 million. The quedans were end
orsed by Ma. Regina to Joy Bank.
Upon failure of Ma. Regina to pay Joy Bank the Bank now demanded from XY
Z Warehouse, Inc. the released to it of the sugar covered by the five (5) quedan
s. XYZ refused claiming ownership because the check payment made by Mia Therese
of the sugar covered by the five (5) quedans bounced. After XYZ s claim of owner
ship was dismissed, it now refuses to release the sugar until Joy Bank pays stor
age fees. Is XYZ justified in refusing to release the sugar until the storage fe
es are paid ?
SUGGESTED ANSWER: Yes. A warehouseman shall have a lien on goods depos
ited for all lawful charges for storage and preservation of the goods (Sec. 27,
Warehouse Receipts Law). A warehouseman need not deliver until the lien is sati
sfied (Sec. 31, Warehouse Receipts Law) and in accordance with Sec. 29 of the Wa
rehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering
possession thereof.
In this case, XYZ s claim for storage fees was incompatible with its claim
of ownership hence it could not have waived its right to storage fees. (Philip
pine National Bank, v. Judge Se, Jr., et al., G.R. No. 119231, prom. April 18, 1
996)
NOTES AND COMMENTS:
a. Warehouse receipt, defined. A warehouse receipt is a written acknow
ledgment by the warehouseman that he has received goods from the depositor and h
olds the same in trust for him.
***b. Non-negotiable warehouse receipt. defined. A receipt in which it
is stated that the goods received will be delivered to the depositor or to any o
ther specified person. (Sec. 4, The Warehouse Receipts Law.)
A non-negotiable receipt shall have plainly placed upon its face by the
issuing warehouseman, non-negotiable or not negotiable.
Upon failure to do so, a holder who purchased it for value supposing it
to be negotiable, may, at his option treat such receipt as imposing upon the war
ehouseman the same liabilities he would have incurred had the receipt been negot
iable. (Sec. 7, The Warehouse Receipts Law.)
c. Negotiable warehouse receipt, defined. A receipt in which it is sta
ted that the goods received will be delivered to the bearer or to the order of a
ny person named in such receipt. (Sec. 5, The Warehouse Receipts Law)
***8. Patrick deposited with Warehouse Company for safekeeping 10,000
bags of cement. Warehouse Company issued a receipt expressly providing that th
e goods be delivered to the order of said Patrick.
A month after, Paolo, one of Patrick s creditors obtained judgment against
Patrick for P50,000.00. Acting upon a writ of execution the sheriff proceede
d to levy on the cement and directed Warehouse Company to deliver to him the de
posited cement.
a. What advice will you give Warehouse Company ? Explain your answer b
riefly.
 b. Assuming that a week prior to the levy, Patrick sold the receipt to
Roberto on the basis of which, Roberto filed a claim with the sheriff. Would R
oberto, the buyer of the receipt, have better rights to the cement than Paolo,
the creditor ? Explain your answers briefly.
SUGGESTED ANSWERS:
a. I would advice the Warehouse Company not to deliver the goods to the
sheriff, otherwise it may be held liable for conversion. It should deliver onl
y to Patrick, the person who deposited the goods and upon presentation of the wa
rehouse receipt.
b. Yes, because Roberto would be a person who has stepped into the sho
es of Patrick who made the deposit.
NOTES AND COMMENTS:
*** a. Instances where warehousemen bound or obligated to deliver. A w
arehouseman, in the absence of some lawful excuse provided by Act No. 2137, The
Warehouse Receipts Law, is bound to deliver the goods upon a demand made either
by the holder of a receipt for the goods or by the depositor; if such demand is
accompanied with:
1) An offer to satisfy warehouseman s lien;
2) An offer to surrender the receipt, if negotiable, with such indorsemen
ts as would be necessary for the negotiation of the receipt; and
3) A readiness and willingness to sign, when the goods are delivered, an
acknowledgment that they have been delivered, if such signature is requested by
the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compli
ance with a demand by the holder or depositor so accompanied, the burden shall b
e upon the warehouseman to establish the existence of a lawful excuse for such r
efusal. (Sec. 8, WRL)
If the above are not present , then the warehouse could legally refuse t
o make delivery. These are the defenses a warehouseman could use to justify his
REFUSAL to deliver.
*** b. Justification of warehouseman in making delivery. A warehousema
n is justified in delivering the goods to one who is:
1) The person lawfully entitled to the possession of the goods, or his ag
ent;
2) A person who is either himself entitled to delivery by the terms of th
e non-negotiable receipt issued for the goods, or who has written authority from
the person so entitled either indorsed upon the receipt or written upon anothe
r paper; or
3) A person in possession of a negotiable receipt by the terms of which t
he goods are deliverable to him or order, or to the bearer, or which has been in
dorsed to him or in blank by the person to whom delivery was promised by the ter
ms of the receipt or by his mediate or immediate indorser. (Sec. 9, WRL)
These may be used by the warehouseman to defend himself WHY HE DELIVERED
.
***c. Warehouse liable for conversion If he delivers without a valid i
ndorsement the goods covered by a negotiable warehouse receipt deliverable to th
e depositor or his order.
***d. Instances where liable for conversion even with indorsement or au
thority: The warehouseman is also liable even with indorsement or with authorit
y , he is likewise liable, if prior to delivery he had either:
1) been requested, by or on behalf of the person lawfully entitled to a r
ight of property or possession in the goods, not to make such delivery; or
2) Had information that the delivery about to be made was to one not lawf
ully entitled to the possession of the goods. (Sec. 10, WRL)
(iii) Presidential Decree 115 on Trust Receipts
***9. Herminio opened a letter of credit with the Bank of Philippine Is
lands for the importation of certain equipment. He failed to pay and also faile
d to deliver the equipment despite demand. He now assails the constitutionality
 of P.D. No. 115, the Trust Receipts Law on the ground that it constitutions imp
risonment for non-payment of a debt. Rule on his contention.
SUGGESTED ANSWER: Contention is bereft of merit. P.D. No. 115, is a dec
laration by the legislative authority to make the act punishable under its autho
rity to prescribe certain acts as pernicious and inimical to public welfare unde
r the exercise of police power. (Tiomico v. Court of Appeals, et al., G.R. No.
122539, prom. March 4, 1999)
NOTES AND COMMENTS:
a. Trust receipt, defined. A trust receipt is considered as a security t
ransaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of mer
chandise who may not be able to acquire credit except through utilization, as co
llateral, of the merchandise imported or purchased. The goods are held as secur
ity by the lending institution for the loan obligation.
A letter of credit-trust receipt arrangement is endowed with its own dis
tinctive features and characteristics.. Under that set-up, a bank extends a loa
n covered by the letter of credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan feature represented by th
e letter of credit, and a security feature which is in the covering trust receip
t. (Nacu vs. Court of Appeals, et al., G.R. 108638, prom. March 11, 1994)
Further, a trust receipt is a document in which is expressed a security
transaction whereunder the lender, having no prior title to the goods on which t
he loan is to be given and not having possession which remains in the borrower,
lends his money to the borrower on security of the goods which the borrower is p
rivileged to sell clear of the lien with an agreement to pay all or part of the
proceeds of the sale to the lender. It is a security agreement pursuant to whic
h a bank acquires a security interest in the goods. It secures an indebtedness an
d there can be no such thing as security interest that secures no obligation.
Clearly, a trust receipt partakes of the nature of a security transactio
n. It could never be a mere additional or side document. Otherwise, a party to
a trust receipt agreement could easily renege on its obligation thereunder, und
ermining the importance and defeating with impunity the purpose of such an indis
pensable tool in commercial transactions. (Ching v. Court of Appeals, et al., G
.R. No. 110844, prom. April 27, 2000)
b. Violation of Trust Receipts Law is criminal in character. Return of
the goods if unsold merely extinguishes the entrustee s criminal liability. He i
s still civilly liable for the unpaid loan. (Vintola v. IBAA, 159 SCRA 140)
(2) NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)
***10. What are the requisites of a negotiable instrument ?
SUGGESTED ANSWER: An instrument to be negotiable must conform to the fo
llowing requirements:
a. It must be in writing and signed by the maker or drawer;
b. It must contain an unconditional promise or order to pay a sum certa
in in money;
c. It must be payable to order to bearer;
d. Where the instrument is addressed to a drawee, he must be named or o
therwise indicated therein with reasonable certainty. (Sec. 1, N.I.L.)
NOTES AND COMMENTS:
*** ANALYTICAL STEPS FOR SOLVING PROBLEMS INVOLVING NEGOTIABILITY OF INSTR
UMENTS. NOTE: This area is one of the most popular areas under Negotiable Inst
ruments Law. The bar candidate should master the analytical steps:
a. Look for the DATE:
1) If dated. The date is prima facie the true date of the instrument. Negotiab
ility is not affected.
2) If ante-dated or post-dated. Negotiability
not affected UNLESS ante-dated or post-dated for fraudulent purpose.
3) No date. Negotiable character not affected. 4) If no
date, true date may be inserted.
a) If instrument payable at fixed period after
date
(1) Wrong date is inserted
(a) No effect on instrument, if
if holder in due course
(b) Instrument invalid, if not
holder in due course
b. Look for SIGNATURE of maker (PN) or drawer (BE).
1) If no signature, not negotiable.
2) If signed, negotiable.
c. Look for UNCONDITIONAL PROMISE (PN) or UNCONDITIONAL ORDER (BE). If p
resent, negotiable
1) Conditional and not negotiable, if promise or order
depends upon:
a) A future event which may or may not happen
b) A past event unknown to the parties
2) Conditional and not negotiable if promise or order to pay
out of a particular fund.
Example: "Pay B or order P10,000.00 out of my money in your hands." Not negoti
able because it is conditional being payable out of a particular fund and no oth
er.
3) Unconditional and negotiable even if indicates a particular
fund out of which reimbursement is to be made or particular account to be debite
d.
Example: "Pay B or order P10,000.00 and reimburse yourself out of my money in
your hands." Negotiable because there is no condition as to source of funds on
ly with respect to reimbursement which occurs after the instrument is paid.
4) Unconditional and negotiable if dependent upon a future
event which is certain to happen even if time of happening is not known.
5) Unconditional and negotiable even if statement of the
transaction is given.
Example: "I promise to pay B or order P1,000,000.00 in payment of the house I b
ought from him on March 17, 1999."
6) Conditional and not negotiable because qualified.
Example: "I promise to pay B or order P1,000, 000.00 subject to the terms and c
onditions of the March 17, 1999 Deed of Sale for the sale of his house."
d. Is the sum CERTAIN IN MONEY ? If so, negotiable
1) Not negotiable, if not in money.
Example: "I promise to pay B or order the equivalent of P50,000.00 in carabao
s."
2) Negotiable even if holder has election require something
to be done in lieu of money.
Example: "To C: Pay to B or order P50,000.00 or 50 cavans of rice at the opt
ion of the holder."
3) If at the option of the drawer, not negotiable because it is
conditional.
e. Is the instrument payable ON DEMAND or AT A FIXED OR DETERMINABLE FU
TURE TIME ? If so, negotiable.
1) If not, not negotiable.
2) Not negotiable, if payable on contingency. Happening
of the event does not cure the defect.
Example: "Pay to B or order P100,000.00, two (2) days
after he passes the Bar."
Negotiable:
3) Payable on demand and negotiable when expressed to be
payable on demand, at sight or presentation, no time for
payment is expressed on the instrument, or when the
instrument is overdue.
4) Payable at a determinable future time and negotiable if
payable at a fixed period after date or sight, on or before
 a fixed or determinable future time specified therein, or on or before a fixed
period after occurrence of a certain event though happening be uncertain.
f. Is the instrument payable TO ORDER or BEARER ?
If so, then negotiable. If not, not negotiable.
g. If the instrument is addressed to a drawee, is he
named or otherwise indicated on the instrument with reasonable certainty ? If s
o negotiable. If not, not negotiable.
*** SUMMARY OF VARIOUS SITUATIONS INVOLVING NEGOTIABLE INSTRUMENTS. Another
area that the reader should master:
SUMMARY OF SITUATIONS
a. Incomplete instrument
1) Delivered
a) With forgery and alteration
b) Without forgery and alteration
2) Not delivered
a) With forgery and alteration
b) Without forgery and alteration
a. Complete instrument
1) Delivered
a) With forgery and alteration
b) Without forgery and alteration
2) Not delivered
a) With forgery and alteration
b) Without forgery and alteration
*** INCOMPLETE INSTRUMENT BUT DELIVERED.
a. Holder has prima facie authority to fill up blanks
1) Signature on blank paper delivered by signatory with intention of making it a
negotiable instrument, prima facie authority to fill it up for any amount.
2) Party prior to completion bound if filled up
a) In accordance with authority
b) Within reasonable time
b. Irrespective of compliance with no. 2) above prior parties still bound but o
nly to holder in due course.
c. The rules apply whether the instrument is a promissory note or bill
of exchange, whether payable to bearer or order.
*** ILLUSTRATIVE PROBLEMS: INCOMPLETE BUT DELIVERED INSTRUMENTS.
10-A. Meg issued a negotiable promissory note to Leon authorizing Leon to
fill up the amount in blank up to P10,000.00. Leon however, filled it up to P2
5,000.00.
Could Leon collect P25,000.00 from Meg ?
SUGGESTED ANSWER: No, because the instrument was not strictly filled up i
n accordance with the authority given.
Supposing in the above problem, Leon negotiated the instrument to Mara w
ho knows that Meg's instructions was for Leon to fill it up to P10,000.00 only.
Could Mara collect P25,000.00 from Meg ?
SUGGESTED ANSWER: No, because Mara is not a holder in due course. She kn
ew of the instrument's infirmity when the instrument was negotiated to her. Meg
could interpose the personal defense of want of authority.
Supposing further, in the above problem, that Mara did not know of the lac
k of authority, may Mara collect the P25,000.00 from Meg ?
SUGGESTED ANSWER: Yes, because Mara is a holder in due course, she not be
ing aware of any infirmity in the instrument at the time she took it. She may t
hus enforce it as if it had been filled up strictly in accordance with the autho
rity given and within a reasonable time. There is likewise conclusive presumpti
on of delivery.
 11. Ana a very busy businessperson does not have time to sign checks one
by one. So, she signs several checks in blank and instructs Beth, her personal
assistant, to safekeep the checks and fill them out when and as required to pay
her accounts as they fall due. Beth fills out one of the checks by placing her
name as payee, fills in the amount of P50,000.00, endorses and delivers the chec
k to Carlos who accepts it in good faith as payment for goods sold to Beth. Ana
learns of the dishonesty foisted upon her by Beth. Ana was able to instruct th
e Bank in time to dishonor the check. When Carlos encashes the check, it is dis
honored.
Can Carlos hold Ana liable for the P50,000.00 value of the check ? Expl
ain briefly.
SUGGESTED ANSWER: Yes, assuming that the Carlos gave notice of dishonor t
o Ana. This is a case of an incomplete instrument but delivered as it was entru
sted to Beth, Ana s personal assistant. This is so because Carlos is a holder in
due course who does not have any knowledge of the extent of authority given to B
eth, that the check is for the payments of Ana s account only.
Moreover under the doctrine of comparative negligence, as between Ana and
Carlos, both innocent parties, it was the negligence of Ana in entrusting the ch
eck to Beth which is the proximate cause of the loss.
*** INCOMPLETE INSTRUMENT NOT DELIVERED.
a. Completed and delivered with authority, valid.
b. Completed and delivered without authority
1) Valid against party whose signature was placed after delivery like indorser.
Reason: Indorser warrants the instrument is in all respect what it purports to
be.
2) Not valid against party whose signature was placed before delivery, if not a
holder in due course. Reason: Delivery is essential to validity. However, with
respect to a holder in due course, there is prima facie presumption of delivery
which may be rebutted.
c. Rules apply whether
1) Promissory note or bill of exchange
2) Payable to bearer or order
3) With or without forgery and material alteration.
*** ILLUSTRATIVE PROBLEMS: INCOMPLETE NOT DELIVERED INSTRUMENT.
12. Pocholo signed a blank check and kept it in his safe. This was stole
n by Edwin who filled in the amount and placed a fictitious person as payee sign
ed the name of the payee and indorsed the same to Paolo, Paolo to Patrick, Patri
ck to Sally, Sally to Jeddah, Jeddah to Rhia. All of the subsequent indorsers a
s well as the holder were all holders in due course.
May Rhia proceed against Pocholo in case of dishonor by the drawee bank ?
SUGGESTED ANSWER: No, because there was no valid delivery which is essent
ial to the validity of the instrument.
Under the same set of facts, if Pocholo as well as the drawee bank dishon
ors the check, may Rhia proceed against Jeddah ?
SUGGESTED ANSWER: Yes, because Jeddah as an indorser warrants that the in
strument is what it purports to be and if it is dishonored and necessary proceed
ings for dishonor taken, she shall pay the holder, Rhia.
Under the same set of facts, in case of dishonor by the drawee bank and/o
r Pocholo and the other indorsers, is Edwin liable ?
SUGGESTED ANSWER: Yes, because he was responsible for the theft, the fill
ing up and subsequent negotiation of the instrument.
Supposing under the same set of facts, that the drawee bank upon presentat
ion by Rhia encashed the check and Pocholo now sues the bank, what defenses may
the drawee bank raise against Pocholo ?
SUGGESTED ANSWER:
a. Rhia is a holder in due course, therefore there is a prima facie showi
ng of delivery which Pocholo must now rebut with proof of non-delivery.
 b. Negligence on Pocholo's part which resulted in the loss of the check.
c. Good faith on the part of the bank. It's obligation is to deliver on
a genuine signature of Pocholo. It is not obligated to know the signature of th
e payee as in this case, the payee did not encash the check, hence no way of ide
ntifying.
d. As between two innocent parties, the one who made possible the loss sh
ould be liable. Here Pocholo made possible the loss as he signed the blank chec
k knowing fully well that if stolen, it could be negotiated. Furthermore, Pocho
lo should have immediately advised the bank to stop payment.
e. Under the above problem, if the incomplete check was delivered by Poch
olo to Edwin for safekeeping, there is valid delivery.
NOTE: The reader should solve the problem as if there is an incomplete bu
t delivered instrument,
13. Rochelle left her friend and classmate Lora inside her car. Lora sto
le a blank check which she found in Rochelle's car, forged Rochelle's signature
and encashed the same with the Union Bank (the drawee-depository). Is the bank
liable despite allegations that Rochelle was negligent ?
SUGGESTEDANSWER: Yes. Reasons:
a. Under the circumstances, Rochelle could not be considered negligent as
she could not have expected that Lora would remove a check from her checkbook.
He had no reason to suspect that a classmate and friend would breach her trust.
b. A bank is bound to know the signatures of its clients and if it pays o
n a forged check, it is considered as having paid out of its own funds.
*** COMPLETE AND DELIVERED INSTRUMENT.
a. Without forgery and alteration, all parties bound.
b. With forged indorsement and/or alteration
1) Order instruments
a) Order promissory note
(1) Prior parties not bound.
Reason: Forged signature wholly inoperative unless estoppel sets in, then prior
parties bound.
(2) Subsequent parties bound
Reason: Bound on warranties of indorsers unless otherwise specified
(a) Whether or not holder in due course
(b) Only forged signature is inoperative
b) Order bill of exchange
(1) Drawee cannot charge
drawer's account
(a) If charged drawer has right to recover
(2) Drawer has no right against collecting bank
(3) Drawee can recover from collecting bank
(4) Collecting bank bears loss
(a) Can recover from person it paid
(5) Payee can recover from
(a) Drawer
(b) Collecting bank
(c) Payee cannot recover from drawee
(6) Drawer not liable to the collecting bank
2) Bearer instruments
a) Bearer promissory note
(1) Prior parties liable
(2) Forged signatory not liable to party not holder in due course
b) Bearer bill of exchange
(1) Drawee bank liable
*** ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED INDORSEMENT OF PROMISSIOR
Y NOTE PAYABLE TO ORDER.
 14. Dennis makes a promissory note payable to the order of Kay, who indor
ses it to Micky. Somehow, Freddie obtains possession of the note and forging t
he signature of Micky endorses it to Angelo who then indorses it to Bea. State
the rights and liabilities of the parties.
SUGGESTED ANSWER: Micky whose indorsement is forged and the parties prior
to him including the maker, Dennis and the payee, Kay cannot be held liable to t
he holder Bea, whether or not she is a holder in due course. Reasons:
a. An order note can be negotiated only by indorsement completed by deliv
ery. A forged indorsement is wholly inoperative and does not transfer any right
s.
b. No right to retain the note, give discharge therefore, or enforce paym
ent could be acquired under a forged indorsement.
c. Since the predecessor of the holder obtained the note by fraudulent an
d unlawful means, then there are no rights that are transferred.
d. Angelo is liable to Bea because of Angelo's warranties as a general in
dorser that the instrument is what it purports to be and that he shall pay in ca
se of dishonor.
*** ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED INDORSEMENT OF BILL OF E
XCHANGE PAYABLE TO ORDER.
15. Tina issued a check to Nellie or order as the payee with Eastern Bank
as the drawee. Fidel fraudulently obtains the check and forges Nellie's signat
ure. Fidel then deposits it in Daya Bank (Collecting Bank). Western Bank indor
ses the check to Eastern Bank through the clearing house. Fidel then withdraws
from Daya Bank, the proceeds of the check.
What are the rights of the parties ?
SUGGESTED ANSWER:
a. Drawer's account (Tina''s) cannot be charged (debited, deducted, subtract
ed or reduced) by the drawee (Eastern Bank), for the amount paid, and if her acc
ount is charged, Tina can recover from Eastern Bank.
Reason: The depository (drawee Eastern Bank) owes to the depositor (drawer T
ina), an absolute and contractual duty to pay the check only to the person to wh
om made payable or upon his genuine indorsement.
The drawer authorizes and directs the drawee to pay only to the payee or to t
he order of the payee not to another.
b. Drawee (Eastern Bank's) defenses: Drawer, Tina is precluded from raising
the defense of forgery due to estoppel on account of negligence, for example, if
the payee Nellie advised Tina of the loss, but she (Tina) did not inform Easter
n Bank.
c. Drawer (Tina) has no right to recover from the collecting bank (Daya Bank
). Reasons:
a) Duty of collecting bank to exercise care in collecting is true only to the p
urported payee.
b) The drawer does not suffer any damage caused by the
collecting bank as he can recover from the drawee bank which has no right to cha
rge the drawer's account.
d) Drawee bank (Eastern Bank) can recover from the collecting bank (Daya
Bank).
Reason: Since the check passed through the clearing house, the collecting ba
nk (Daya Bank) must have indorsed the check to the drawee bank (Eastern Bank), t
herefore it is liable on an indorser's warranty of genuineness and liability to
pay in case of dishonor.
e) Collecting bank (Daya Bank) bears the loss but it can recover from the pe
rson to whom it paid the check, Fidel.
f) The payee (Nellie) can still recover from the drawer (Tina). Reason: She
still retained her claim as it was not extinguished.
Exception: The payee (Nellie) cannot recover if the check was impaired throu
gh her fault.
g) The payee (Nellie) can recover from the collecting bank (Daya Bank).
 Reason: Possession of the forged instrument is unlawful and money collected
is held in trust for rightful owners. (Note: This is on the assumption that, t
he drawer's account was charged by the drawee bank, otherwise the drawer would b
e unjustly enriched)
h) The payee (Nellie) cannot recover from the drawee bank (Eastern Bank). Rea
son: There is no privity of contract.
i. Drawer (Tina) is not liable to the collecting bank (Daya Bank). Reaso
n: There is no privity of contract between Tina and Daya Bank.
*** ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED INDORSEMENT OF PROMISSOR
Y NOTE PAYABLE TO BEARER. OR OF BEARER BILL OF EXCHANGE.
16. Nini makes a promissory note payable to bearer. The bearer negotiate
s the note to Amboy by mere delivery thence to Raymond, thence to Bunny, thence
to Nellie. The instrument was lost and George who found the note placed a signa
ture purporting that of Nellie and negotiates the note to Lina by mere delivery
such that Lina is a holder in due course.
May Lina proceed against Nini, Raymond, Bunny and Nellie ?
SUGGESTED ANSWER: Yes. Reason: Forged indorsement is not necessary to
the title of the holder, Lina, because the instrument is a bearer instrument tha
t passes title by mere delivery.
Supposing Lina is not a holder in due course may prior parties be held lia
ble ?
SUGGESTED ANSWER: Yes, but not against Nellie whose signature was forged.
Reason: Estoppel.
*** COMPLETE BUT NOT DELIVERED INSTRUMENT.
a. Delivery completes the contract
1) Between immediate and remote parties
2) Delivery effectual
b. If under authority
1) To a holder in due course
a) Valid delivery presumed
b) Prior parties bound
2) If delivery conditional
a) Prior parties not bound
17. A. Francisco Realty and Development Corporation (AFRDC) represented b
y its president Adelia as well as Herby Commercial and Construction Corporation
(HCCC) represented by its president Jaime entered into a contract with GSIS fo
r the construction of housing units and land development. GSIS partially paid o
n the contract the amount of P500,000.00. Jaime discovered that from the GSIS
payment Adelia had received and signed seven checks of various dates and amounts
drawn against IBAA and payable to HCCC for completed and delivered work under t
he contract. Adelia forged Jaime s signature without his knowledge or consent, at
the dorsal portion of the said checks to make it appear that HCCC had indorsed
the checks, and then deposited the checks in her IBAA savings account. Adelia n
ow claims that she was authorized to sign Jaime s name on the check by virtue of a
Certification executed by Jaime in her favor giving her authority to collect al
l the receivables of HCCC from GSIS, including the questioned checks. Will the
defense prosper ?
SUGGESTED ANSWER: No. Where any person is under obligation to indorse in
a representative capacity, he may indorse in such terms as to negative personal
liability. An agent, when so signing, should indicate that he is merely signin
g in behalf of the principal and must disclose the name of his principal; otherw
ise he shall be held personally liable.
Even assuming that Adelia was authorized by HCCC to sign Jaime s name, sti
ll, Adelia, did not indorse the instrument in accordance with law. Instead of s
igning Jaime s name, Adelia should have signed her own name and expressly indicate
d that she was signing as an agent of HCCC. (Francisco v. Court of Appeals, et
al., G.R. No. 116320, prom. November 29, 1999)
18. On June 19, 1985, Triumph Lumber Corporation opened a current accou
nt deposit with Security Bank and authorized withdrawals on the basis of any of
three signatures of Triumph s president, treasurer and general manager appearing o
n the specimen signature cards.
On March 23, 1987, Triumph discovered that the door of its office was forc
ed open, including that of the filing cabinet where its savings account passbook
, check booklets and other bank documents were kept. This was not reported to t
he police, neither was Solid Bank advised. On the same day of the burglary, Tri
umph made three separate deposits totaling P374,554.10, and immediately after sa
id deposits, three (3) Triumph checks totaling P300,000.00 were successively pre
sented to Solid Bank for encashment. These were given due course following the s
tandard bank procedure for verification of the check signatures and regularity o
f other particulars of the said check.
Triumph now claims that due to Solid Bank s gross and inexcusable negligen
ce in determining the forgery of the drawer s signatures, the three checks which w
ere all drawn against its current account were encashed by unauthorized persons.
It then demanded that Solid Bank credits back its account the value of the ch
ecks it claimed were wrongfully encashed. Rebuffed in its demand, Triumph sues
Solid Bank. Will the suit prosper ?
SUGGESTED ANSWER: No. The loss resulted from Triumph s negligence. Unde
r the above circumstances a prudent and reasonable man would have gone over the
check booklets after the burglary and have discovered that three checks were mis
sing. The bank would have been then immediately advised. (Security Bank & Trus
t Company v. Triumph Lumber and Construction Corporation, G.R. No. 126696, prom.
January 21, 1999)
NOTES AND COMMENTS: The above cited case was decided as shown above bec
ause of Triumph s failure to prove forgery. It is the author s view that had Triump
h been able to prove forgery, the bank would have been liable as shown by the fo
llowing discussion.
a. Checks with forged indorsements should be differentiated from checks b
earing forged signatures of the drawer. (Associated Bank v. Court of Appeals, e
t al., and its companion case Philippine National Bank v. Court of Appeals, et
al., 252 SCRA 620)
b. Effect of forged signature. When a signature is forged or made withou
t authority of the person whose signature it purports to be, it is wholly inoper
ative, and no right to retain the instrument, or to give a discharge therefor, o
r to enforce payment against any party thereto, can be acquired through or under
such signature unless the party against whom it is sought to enforce such righ
t is precluded from setting up the forgery or want of authority. (Sec. 23, Neg
otiable Instruments Law)
Sec. 23 does not avoid the instrument but only the forged signature. Th
us, a forged indorsement does not operate as the payee s indorsement.
A person may be bound under a forged signature. it he is precluded from
setting up the forgery or want of authority. Parties who warrant or admit the g
enuineness of the signature in question and those who, by their acts, silence or
negligence are estopped from setting up the defense of forgery are precluded fr
om using this defense. Indorsers, persons negotiating by deliver and acceptors
are warrantors of the genuineness of the signatures on the instrument.
In bearer instruments, the signature of the payee or holder is not neces
sary to pass title to the instrument. Hence, when the indorsement is a forgery,
only the person whose signature is forged can raised the defense of forgery eve
n against a holder in due course. (Associated Bank v. Court of Appeals, et al.,
supra)
c. Effects of a forged indorsement on an instrument payable to order.
1) Where the instrument is payable to order at the time of the forgery, t
he signature of the rightful holder is essential to transfer title to the same i
nstrument. When the holder s indorsement is forged all parties prior to the forge
ry may raise the real defense of forgery against all parties subsequent thereto.
 2) An indorser of an order instrument warrants that the instrument is genu
ine and in all respects what it purports to be; that he has good title to it; th
at all prior parties had capacity to contract; and that the instrument is at the
time of his indorsement valid and subsisting. He cannot interpose the defense t
hat signatures prior to him are forged.
3) A collecting bank where a check is deposited and which indorses the ch
eck upon presentment with the drawee bank is a gnarl indorser which warrants the
genuineness of the instrument. So, even if the indorsement on the check deposi
ted by the bank s client is forged, the collecting bank is bound by its warranties
as an indorser and cannot set up the defense of forgery as against the drawee b
ank.
Since a forged indorsement is inoperative, the collecting bank had no righ
t to be paid by the drawee bank. The collecting bank must necessarily return th
e money to the drawee bank because it was paid wrongfully.
This liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if it was not negligent, it would still be lia
ble to the drawee bank because of his indorsement.
4) The collecting bank or last endorser generally suffers the loss becaus
e it has the duty to ascertain the genuineness of all prior endorsements conside
ring that the act of presenting the check for payment to the drawee is an assert
ion that the party making the presentment had done its duty to ascertain the gen
uineness of the endorsements.
5) Moreover, the collecting bank is made liable because it is privy to th
e depositor who negotiated the check. The bank knows him, his address and histo
ry because he is a client. It has taken a risk on the deposit. The bank is als
o in a better position to detect forgery, fraud or irregularity in the endorseme
nt.
6) The drawee bank is not similarly situated as the collecting bank becau
se the drawee bank makes no warranty as to the genuineness of the endorsements.
The drawee bank s duty is but to verify the genuineness of the drawer s signature a
nd not of the endorsement because the drawer is its client.
The drawee bank is under strict liability to pay the check to the order of
the payee. The drawer s instructions are reflected on the face and by the terms
of the check.
Payment under a forged endorsement is not to the drawer s order. When the d
rawee bank pays a person other than the payee, it does not comply with the terms
of the check and violates its duty to charge its customer s (the drawer s) account
only for properly payable items.
Where the drawee bank did not pay a holder or other person entitled to rec
eive payment, it has no right to reimbursement from the drawer.
The general rule then is that the drawee bank may not debit the drawer s acc
ount and is not entitled to indemnification from the drawer. The risk of loss m
ust perforce fall on the drawee bank.
7) The chain of liability does not end with the drawee bank. While the d
rawee bank may not debit the drawer s account, it may generally pass liability bac
k through the collection chain to the party who took from the forger and. of cou
rse, to the forger himself, if available.
The drawee bank can seek reimbursement or a return of the amount it paid f
rom the presentor/collecting bank or person. Eventually, the loss falls on the
party who took the check from the forger (the collecting bank), or on the forger
himself. Hence, the drawee bank can recover the amount paid on the check beari
ng the forged endorsement from the collecting bank.
8) A drawee bank has the duty to promptly inform the presentor/collecting
bank of the forgery upon discovery. If the drawee bank delays in informing the
presentor/collecting bank of the forgery, thereby depriving said presentor/coll
ecting bank of the right to recover from the forger, the drawee bank is deemed n
egligent and can no longer recover from the presentor/collecting bank.
9) If the drawee bank can prove a failure by the customer/drawer to exerc
ise ordinary care that substantially contributed to the making of the forged si
gnature, the drawer is precluded from asserting the forgery as a defense.
 If at the same time the drawee bank was also negligent to the point of sub
stantially contributing to the loss, then such loss from the forgery can be appo
rtioned between the negligent drawer and the negligent bank. (Associated Bank,
supra)
d. 24-hour rule deleted since 1980. Under Section 4 (c) of C.B. Circul
ar No. 580, items bearing a forged endorsement shall be returned within twenty-f
our (24) hours after discovery of the forgery but in no event beyond the period
fixed or provided by law for filing of a legal action by the returning bank.
The Central Bank Circular was in force for all banks until June 1980 whe
n the Philippine Clearing House Corporation (PCHC) was set up and commenced oper
ations. Section 23 of the PCHC Rules deleted the requirement that items bearing
a forged endorsement should be returned within twenty-four (24) hours. (Associ
ated Bank, supra)
e. Effects where the drawer s signature was forged. The drawer can recover
from the drawee bank. No drawee bank has the right to pay a forged check. If
it does, it shall have to recredit the amount of the check to the amount of the
drawer. The liability chain ends with the drawee bank whose responsibility it i
s to know the drawer s signature since the latter is its customer. (Associated Ba
nk, supra)
19. A check with serial number 7-3666-223-3, dated August 7, 1999 in th
e amount of P97,650.00 was issued by "A" to "X" Marketing drawn against DE Bank
. the check clearly shows the name of "A" printed on its face. On August 11, 1
999, "X" Marketing a client of "R" Bank deposited the questioned check in its
savings account in said bank. In turn, "R" Bank deposited the check with "Y" B
ank which, in turn sent the check to DE Bank for clearing.
DE Bank cleared the check as good and thereafter, "Y" Bank credited "R"
Bank s account for the amount stated in the check. However, on August 30, 1999,
DE Bank returned the check to "Y" Bank and debited its account for the amount co
vered by the check because there was a material alternation of the check s number.
"Y" Bank in turn debited "R" Bank s account, and sent the check back to DE Bank.
DE Bank however returned the check to "Y" Bank.
"R" Bank could not debit "X" Marketing s account which was already closed.
Was the alteration of the serial number of the check a material alteration aff
ecting the negotiability of the check ?
SUGGESTED ANSWER: No, the alteration of the serial number is immaterial
or innocent alteration. The aforementioned alteration did not change the relati
ons between the parties. the name of the drawer and the drawee were not altered
. The intended payee was the same. The sum of money due to the payee remained
the same.
An innocent alteration (generally, changes on items other than those req
uired to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a s
tranger) will not avoid the instrument, but the holder may enforce it only accor
ding to its original tenor. (Vitug cited in Philippine National Bank v. Court of
Appeals, et al., 256 SCRA 491)
NOTES AND COMMENTS:
a. Material alteration. An alteration is said to be material if it alt
ers the effect of the instrument. It means an unauthorized change in an instrum
ent that purports to modify in any respect the obligation of a party or an unaut
horized addition of words or numbers or other change to an incomplete instrument
relating to he obligation of a party. In other words, a material alteration is
one which changes the items which are required to be stated under Section 1 of
the Negotiable Instruments Law. (Philippine National Bank v. Court of Appeals,
et al., 256 SCRA 491)
b. The salary check of a government officer or employee does not belong t
o him before it is physically delivered to him. Until that time the check belon
gs to the government.
Under Sec. 16 of the Negotiable Instruments Law, every contract on a neg
otiable instrument is incomplete and revocable until delivery of the instrument
for the purpose of giving effect thereto. As ordinarily understood, delivery me
ans the transfer of the possession of the instrument by the maker or drawer with
intent to transfer title to the payee and recognize him as the holder thereof.
(De la Victoria vs. Burgos, et al., 245 SCRA 374)
20. The XYZ Bank is willing to lend to your client the sum of P1,500,00
0.00 payable in five (5) years with interest at 12% per annum secured only by a
surety bond.
Suppose the bank requires your client to secure the signature of a perso
n who is well-known to it before your client s promissory note can be accepted, wh
at do you call that person and what are his liabilities ?
SUGGESTED ANSWER: He is an accomodation party and he is liable on the i
nstrument.
NOTES AND COMMENTS:
*** a. Accomodation party. One who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the pu
rpose 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 ta
king the instrument knew him to be only an accomodation party. (Sec. 29, N.I.L.
)
b. Ambiguous negotiable instruments. Where a negotiable instrument is
so ambiguous that there is doubt whether it is a bill or a note, the holder may
treat it either as a bill of exchange or a promissory note at his election.
21. On various occasions Remedios, a sari-sari store owner purchased fr
om Monrico Mart various merchandise, and paid for them with checks issued by Ar
turo and signed at the back by Remedios. When presented for payment these check
s were dishonored because the drawer' account was already closed. Both Arturo an
d Remedios were acquitted of estafa. May Remedios be held liable for the amount
of the checks ?
SUGGESTED ANSWER: Yes. Where a signature is so placed upon a negotiab
le instrument that it is not clear in what capacity the person making the same i
ntended to sign, she is deemed to be an indorser.
Thus, as an indorser, Remedios engages that upon due presentment, the ch
ecks are to be accepted or paid, or both, as the case may be and if dishonored a
nd the necessary proceedings are taken, she will pay the amount thereof to the h
older Monrico Mart. (Sapiera v. Court of Appeals, et al., G.R. No. 128927, prom
. September 14, 1999)
NOTES AND COMMENTS:
a. Check. A bill of exchange drawn on a bank payable on demand. (Bata
an Cigar and Cigarette Factory, Inc. vs. Court of Appeals, et al. 230 SCRA 643;
Moran vs. Court of Appeals, et al., 230 SCRA 799)
*** b. Check distinguished from bill of exchange. A check, as distinguis
hed from an ordinary bill of exchange, is supposed to be drawn against a previou
s deposit of funds for it is ordinarily intended for immediate payment. A bank
is under no obligation to make part payment on a check up to only the amount of
the drawer s fund. (Moran, supra)
There is an element of certainty or assurance in an ordinary check that
it will be paid upon presentation that is why it is perceived as a substitute f
or currency in commercial and financial transactions. (Tan vs. Court of Appeals
, et al., 239 SCRA 310)
22. On July 13, 1999, Tocino Products Corporation (TPC), a firm engaged
in the manufacture of longganisa, engaged one of its suppliers Mr. B. A. Boy, t
o deliver 5,000 kilos of carabeef, starting October 1999. TPC issued two (2) cr
ossed postdated checks both dated March 21, 2000. Check no. 12345 in the amount
of P200,000.00 and check no. 891011 in the amount of P250,000.00, in payment of
the 5,000 kilos of carabeef.
Relying on Mr. Boy s representation that he would complete delivery within
three months from December 1999, TPC agreed to purchase an additional 7,000 kil
os of carabeef despite Mr. Boy s failure to deliver. Again TPC issued two (2) pos
tdated crossed checks, check no. 456789 amounting to P430,000.00 payable on Marc
h 5, 2000, and check no. 101112 amounting to P430,000.00 payable on March 7, 200
0.
Mr. Boy sold all the four checks at a discount to Indian Forex, Inc. As
a result of Mr. Boy s failure to deliver the meat, TPC issued stop order payments
on all the four checks on March 1, 2000.
Could Indian Forex, Inc. recover from TPC, the value of the four checks
? Why ?
SUGGESTED ANSWER: No, because Indian Forex, Inc. is not a holder in due
course. The crossing of the checks should have put Indian on inquiry and upon
it devolves the duty to ascertain Mr. Boy s title to the check or his possession.
Failing in this respect, Indian is guilty of gross negligence and as such is n
ot a holder in due course.
It could recover from Mr. Boy, its immediate indorser.
NOTES AND COMMENTS:
a. Kinds of checks. There are different kinds of checks among which are
: Memorandum check, cashier s check, traveller s check and crossed check.
*** b. Crossed check. A check is a bill of exchange drawn on a bank pa
yable on demand..
Crossed check is one where two parallel lines are drawn across its face
or across a corner thereof. It may be crossed generally or specially. a check
is crossed specially when the name of a particular banker or a company is writt
en between the parallel lines drawn. It is crossed generally when only the word
s and company are written or nothing is written between the parallel lines. It ma
y be issued so that presentment can be made only by a bank.
*** c. Effects of crossing a check:
1) The check may not be encashed but only deposited in the bank;
2) The check may be negotiated only once - to one who has an account with
a bank; and
3) The act of crossing the check serves as a warning to the holder that th
e check has been issued for a definite purpose, otherwise stated the holder is n
ot a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs. Court
of Appeals, et al., 230 SCRA 643)
*** d. Holder in due course. Sec. 52 of the Negotiable Instruments Law st
ates that a holder in due course is a holder who has taken the instrument under
the following conditions:
1) That it is complete and regular upon its face;
2) That he became a holder of it before it was overdue, and without notice
that it had been previously dishonored if such was the fact;
3) That he took it in good faith and for value; d) That at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it
Sec. 59 of the same law further states that every holder is deemed prim
a facie a holder in due course. However, when it is shown that the title of any
person who has negotiated the instrument was defective, the burden is on the ho
lder to prove that he or some other person under whom he claims, acquired the ti
tle as holder in due course.
The disadvantage of a holder who is not a holder in due course is that t
he instrument is subject to defenses as if it were non-negotiable. (Bataan Ciga
r and Cigarette Factory, Inc. vs. Court of Appeals, et al., 230 SCRA 643)
e. Cashier s check. It is a primary obligation of the issuing bank and a
ccepted in advance by its mere issuance and, by its peculiar character and gener
al use in the commercial world is regarded substantially to be as good as the mo
ney which it represents. (Tan vs. Court of Appeals, et al., 239 SCRA 310)
23. On April 25, 1991, Vicente invested in CIFC, a quasi-banking instit
ution engaged in money market operations, the amount of P500,000.00 to mature a
fter one month with interest at the rate of 20.5% for 32 days. Upon maturity CI
FC issued a check of P514,390.94 in favor of Vicente representing the proceeds o
f his matured investment plus interest. When the check was deposited, BPI disho
nored it with the annotations Subject to Investigation, and took custody of the ch
eck pending investigation of several counterfeit checks drawn against CIFC s check
ing account to trace the perpetrators of the forgery.
CIFC now asserts that since BPI accepted the check, it becomes primaril
y liable for its payment. Consequently, when BPI offset the value of the check
against its losses from the forged checks the check was deemed paid. Furthermo
re CIFC anchors its arguments of payment on Sc. 137 of the Negotiable Instrument
s Law which states that, Where a drawee to whom a bill is delivered for acceptanc
e destroys the same, or refuses within twenty-four hours after such delivery or
such other period as the holder may allow, to return the bill accepted or non-ac
cepted to the holder, he will be deemed to have accepted the same. Was there effe
ctive payment to Vicente ?
SUGGESTED ANSWER: No. It is clear that a money market transaction is o
ne of loan, which should have been paid for in cash. The delivery of a check p
roduces only payment when it has been encashed or when through the fault of the
creditor it has been impaired. A check is merely a substitute for money. (Cebu
International Finance Corporation v. Court of Appeals, et al., G.R. No. 123031,
prom. October 12, 1999)
24. When is notice of dishonor not required to be given to drawer ?
SUGGESTED ANSWER:
a. Where the drawer and the drawee are the same person;
b. When the drawee is a fictitious person or a person not having capaci
ty to contract;
c. When the drawer is the person to whom the instrument is presented fo
r payment;
d. Where the drawer has no right to expect or require that the drawee o
r acceptor will honor the instrument;
e. Where the drawer has countermanded payment. (Sec. 114, N.I.L.)
(3) Insurance Code (P.D. 1460)
***25. Jeremiah was a most valued employee of Fortune Manufacturing Cor
poration for the past twenty years. He was insured by his employer with itself a
s the beneficiary. A company owned house at Dasmarinas Village was furnished f
or his use which was insured with the owner as the beneficiary. Both of the poli
cies were up to December 31, 2001.
On June 15, 2001 Jeremiah retired from the company. As part of his reti
rement package, the title of the house at Dasmarinas Village was transferred to
Jeremiah's name. On July 4, 2001, the house was burned resulting to Jeremiah's
death.
Who could recover on the insurance policies ? Explain.
SUGGESTED ANSWER: Nobody could recover on the insurance policy covering
the house. Fortune could not recover on the policy covering the house because it
did not have any insurable interest at the time of the loss on July 4,2001. Th
is is so because the ownership was already transferred to Jeremiah. However ther
e is no showing in the problem of any change in the insurance in Jeremiah s favor
so his heirs could not also recover on the policy.
Fortune could recover on the policy covering Jeremiah's life because ins
urable interest on life need not exist at the time of the death.
NOTES AND COMMENTS:
a. Insurable interest is required for a person who insures the life of
another. Every person has an insurable interest in the life and health:
1) Of himself, of his spouse and of his children;
2) Of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
3) Of any person under a legal obligation to him for he payment of money,
or respecting property or service, of which death or illness might delay or pre
vent the performance; and
4) Of any person upon whose life any estate or interest vested in him dep
ends. (Sec. 10, Insurance Code)
b. Purpose for requirement of insurable interest in life. To remove the
temptation of insuring a person's life and then killing him to recover the insur
ance proceeds.
*** c. Insurable interest in life should exist at the time of taking an
d NOT necessarily at the time of death.
d. Insurable interest in property is required for a person who secures
property insurance. Every interest in property, whether real or personal, or an
y relation thereto or liability in respect thereof of such nature that a contemp
lated peril might directly damnify the insured. (Sec. 13, Insurance Code)
*** e. Insurable interest in property must exist at the time of taking
AND at the time of loss.
*** f. Insurable interest in life distinguished from insurable interes
t in property.
1) In insurable interest in life must exist at the time of taking and ne
ed not exist at the time of death WHILE insurable interest in property must exis
t both at the time of taking and time of loss.
2) The beneficiary need not have an insurable interest in the life of the
insured WHILE the beneficiary in property insurance should have an insurable in
terest in the property insured both at the time of insurance and at the time of
loss.
26. On September 7, 1998, Marion insured her own life naming her boyfri
end Jeffrey as her irrevocable beneficiary. The insurance company's physician c
onducted a physical examination but was not able to detect the fact that Marion
was already in the advance stage of cancer. In good faith Marion did not disclos
e the fact that she previously consulted an oncologist because after the medical
consultation, numerous fortune tellers predicted that she will not die of cance
r. On September 2, 2000 while Marion was on her way to De La Salle University t
o take the Bar exams she was run over by a bulldozer which caused her death on t
he spot. Jeffrey now claims the life insurance proceeds. Decide.
SUGGESTED ANSWER: Jeffrey could not recover. There was concealment, whi
ch is a neglect to communicate that which a party knows and ought to communicate
. The matter concealed was material and relevant to the approval and issuance o
f the policy, it having probable and reasonable influence upon the insurer s formi
ng an estimate of the disadvantages of the proposed contract.
Good faith is not a defense to concealment, as materiality of the inform
ation withheld does not depend on the state of mind of the insured nor on the ac
tual or physical events which ensue.
It is settled that the insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that the non-disclosure misled th
e insurer in forming his estimates on the risks of the proposed insurance policy
or in making inquiries. (Sunlife Assurance Company of Canada vs. Court of Appe
als, et al., 245 SCRA 268)
In the above problem, the incontestability clause does not find applicat
ion because the two year period has not yet lapsed.
Supposing under the above set of facts that the insurance was secured o
n August 31, 1998, would your answer be the same ?
SUGGESTED ANSWER: No. Since the policy is two years old, the incontest
ability clause has already set in which defeats the concealment.
NOTES AND COMMENTS:
*** a. Incontestability clause. After a policy of life insurance made
payable on the death of the insured shall have been in force during the lifetime
of the insured for a period of two years from the date of its issue or its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentations of th
e insured or his agent. (2nd par., Sec. 48, Insurance Code)
Would it make any difference in your answers to the above if Marion was
married to Francis ? What about if it was Jeffrey who was married to Daniela ?
 SUGGESTED ANSWER: Under the above circumstances if Marion and Jeffrey w
ere married to persons other than themselves, then there could be no recovery on
the insurance policy of Marion. Jeffrey could not be a donee because of the i
llicit relationship hence cannot be a beneficiary in life insurance.
NOTES AND COMMENTS:
Concealment defined. A neglect to communicate that which a party knows
and ought to communicate. (Sec. 26, Insurance Code)
Note that if the party does not know he is sick, there is no concealment
.
27. GOYU applied for credit facilities and accommodations with Rizal Ba
nk. As security for its credit facilities with Rizal Bank, GOYU executed two re
al estate mortgages and two chattel mortgages in favor of Rizal Bank, with were
registered with the Registry of Deeds. Under the four mortgages, GOYU committed
itself to insure the mortgaged property with MICO, an insurance company approve
d by Rizal Bank, and subsequently to endorse and deliver the insurance policies
to Rizal Bank. Alchester, MICO s underwriter, from whom GOYU secured the insuranc
e prepared the indorsements but it turned out that the endorsements do not bear
the signature of any officer of GOYU.
Who could recover on the insurance claim ?
SUGGESTED ANSWER: Rizal Bank could recover up to the extent of its inte
rest on the mortgage.
While it is settled that a mortgagor and a mortgagee have separate and
distinct insurable interests in the same mortgaged property, such that each one
of them may insure the same property for his own sole benefit, the intention of
the parties should govern. In the case at bar the endorsements made in favor o
f Rizal Bank, clearly indicate that Rizal Bank is truly the entity for whose ben
efit the policies were clearly intended. (Rizal Commercial Banking Corporation,
et al., v. Court of Appeals, et al., and companion cases. 289 SCRA 1292)
28. Lara obtained a loan of P500,000.00 from Angelina and as security she
mortgaged her house worth P750,000.00 to Angelina. Lara insured the house agai
nst fire for P750,000.00 with Croft Insurance with the policy stating that any o
ther insurances shall be declared otherwise all benefits under the policy shall
be forfeited. Angelina likewise insured the house, also against fire with Raide
r Insurance in the amount of P500,000. The insurance policy also contained an ot
her insurance clause. Both Lara and Angelina did not advise their respective ins
urers of the existence of the other insurances.
While both of the insurance policies were in force the house was burned.
a) Both insurance companies now disclaim responsibility because of the vio
lation of the other insurance clause. Could they legally do so ?
b) In case, both Lara and Angelina could recover, how much would be the ex
tent of their respective liabilities ?
c) Could Lara refuse to pay her obligation of P500,000.00 considering tha
t the house was already burned ? Reason out your answers.
SUGGESTED ANSWERS:
a. No. There is no violation of the other insurance clause where the mo
rtgagor and the mortgagee took separate insurances, in violation of the other ins
urance clause because their insurable interest is different. (Geagonia vs. Court
of Appeals, et al., 241 SCRA 152)
b. Lara could recover P750,000.00 and Angelina, P500,000.00, the extent
of their respective insurable interests. For reasons see above.
c. No. Raider Insurance takes the place of Angelina. In other words it
is subrogated to the interest of Angelina.
NOTES AND COMMENTS:
a. Other insurance prohibition clause. An insurance policy contains the f
ollowing clause: The insured shall give notice to the Company of any insurance o
r insurances already effected, or which may subsequently be effected covering an
y of the property or properties hereby insured unless such notice be given and t
he particulars be stated therein before the occurrence of the loss otherwise all
benefits under the policy shall be deemed forfeited.
The condition is a provision which invariably appears in fire insurance
policies and is intended to prevent an increase in the moral hazard. It is comm
only known as the additional or other insurance clause and has been upheld as valid
and as a warranty that no other insurance exists.
b. Effect of non-disclosure. The non-disclosure of the two insurances wo
uld not be fatal to recovery. (Geagonia vs. Court of Appeals, et al., 241 SCRA
152) This same effect also applies to the concept of double insurance.
c. The rationale behind the inclusion of other insurance clause in fire p
olicies is to prevent over-insurance and thus avert the perpetration of fraud.
When a property owner obtains insurance policies from two or more insurers in a
total amount that exceeds the property s value, the insured may have an inducement
to destroy the property for the purpose of collecting the insurance. The publi
c as well as the insurer is interested in preventing as situation in which a fir
e would be profitable to the insured.
d. Effect of violation. The violation of the other insurance clause woul
d avoid the policy. Exception: The other insurance must be upon the same subject
matter, the same interest therein, and the same risk. There is no violation wh
ere the mortgagor and the mortgagee took separate insurances, in violation of th
e other insurance clause because their insurable interest is different. (Geagonia
vs. Court of Appeals, et al., 241 SCRA 152)
e. Double insurance. A double insurance exists where the same person is
insured by several insurers separately in respect of the same subject and intere
st. The insurable interests of a mortgagor and a mortgagee on the mortgaged pol
icy are separate and distinct hence there is no double insurance if the mortgago
r and the mortgagee take out separate insurances.
f. Effect of non-disclosure. The non-disclosure of the two insurances wo
uld not be fatal to recovery. (Geagonia vs. Court of Appeals, et al., 241 SCRA
152) This effect also applies to the concept of the other insurance prohibitio
n.
g. Subrogation. If the plaintiff s property has been insured, and he has r
eceived indemnity from the insurance company for the injury or loss arising our
of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person wh
o violated he contract. (Article 2207, Civil Code)
The right of subrogation is not dependent upon, nor does it grow out of,
any privity of contract or upon written assignment of claim. It accrues simply
upon payment of the insurance claim by the insurer. (Coastwise Lighterage Corp
oration vs. Court of Appeals, et al., 245 SCRA 796)
29. Grepalife and DBP entered into a contract of group life insurance w
ith Grepalife agreeing to insure the lives of eligible housing loan mortgagors o
f DBP. On November 11, 1983, Dr. Leuterio, a housing debtor of DBP, applied for
membership in the group life insurance plan. In his application. Dr. Leuterio
stated that he never had high blood pressure, cancer, etc., and that to the best
of his knowledge, he was in good health.
Thus, on November 15, 1983, Grepalife issued the certificate on Dr. Leuter
io s insurance coverage to the extent of his DBP mortage indebtedness of P86,200.0
0. The policy state that upon receipt of proof of debtor s death during the terms
of the insurance, a death benefit in the amount of P86,000.00 shall be paid. In
the event of the debtor s death before his indebtedness with the creditor shall h
ave been fully paid, an amount to pay the outstanding indebtedness shall first b
e paid to the Creditor and the balance of the sum assured, if there is any shall
then be paid to the beneficiary/ies designated by the debtor. In August 6, 1984
, Dr. Leuterio died due to massive cerebral hemorrhage. DBP submitted a claim, on
the mortgage redemption insurance but it was denied by Grepalife on the ground of
non-disclosure that Dr. Leuterio was suffering from hypertension, the cause of
his death.
As a result of the non-payment insurance claim, which would have resulte
d to a full payment of the mortgage debt to DBP, DBP then foreclosed on the prop
erty.
Upon being sued by Dr. Leuterio s heirs for the insurance proceeds Grepal
ife now raises, the defense of concealment of Dr. Leuterio s being hypertensive, a
nd no showing of the exact amount of Dr. Leuterio s outstanding indebtedness to DB
P at the time of his death.
Could Dr. Leuterio s heirs recover ? State your reasons.
SUGGESTED ANSWER: Yes. Concealment of the state of health of the insur
ed mortgagor as basis for refusing payment of insurance claims should be establi
shed by sufficient proof of the real state of health of the insured.
The insurance taken was a life insurance policy which is a valued policy
. Unless the interest of the person insured is susceptible of exact pecuniary e
stimation, the measure of indemnity under a policy of insurance upon life or hea
lth is the sum fixed in the policy, in this case P86,200.00.
Since DBP has already foreclosed on the residential lot in satisfaction
of Dr. Leuterio s outstanding loan, the insurance proceeds shall inure to the bene
fit of the heirs of Dr. Leuterio. DBP should not unjustly enrich itself by coll
ecting the insurance proceeds after it has foreclosed the property. (Great Pac
ific Life Assurance Corporation v. Court of Appeals, et al., G.R. No. 113899, pr
om. October 13, 1999)
NOTES AND COMMENTS:
a. Insurable interest in mortgaged properties in mortgage redemption ins
urance. The rationale of a group insurance policy of mortgagors, otherwise known
as the mortgage redemption insurance, is a device for the protection of both the
mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of contract
so that in the event of the unexpected demise of the mortgagor during the subsi
stence of the mortgage debt, the proceeds from such insurance will be applied to
the payment of the mortgage debt, thereby relieving the heirs of the mortgagor
from paying the obligation.
In a similar vein, ample protection is given to the mortgagor so that in
the event of his death, the mortgage obligation will be extinguished by the app
lication of the insurance proceeds to the mortgage indebtedness.
Consequently, where the mortgagor pays the insurance premium under the g
roup insurance policy, making the loss payable to the mortgagee, the insurance i
s on the mortgagor s interest, and the mortgagor continues to be a party to the co
ntract. In this type of insurance, the mortgagee is simply an appointee of the
insurance fund, such loss payable clause does not make the mortgagee a party to
the contract.
This could be seen from the provisions of Section 8 of the Insurance Cod
e, which reads: Unless the policy provides, where a mortgagor of property effect
s insurance in his own name providing that the loss shall be payable to the mort
gagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed
to be upon the interest of the mortgagor, who does not cease to be a party to th
e original contract, and any act of his, prior to the loss, which would otherwis
e avoid the insurance, will have the same effect, although the property is In th
e hands of the mortgagee, but any act which, under the contract of insurance, is
to be performed by the mortgagor, may be performed by the mortgagee therein nam
ed, with the same effect as if it had been performed by the mortgagor. (Great Pac
ific Life Assurance Corporation v. Court of Appeals, et al., G.R. No. 113899, pr
om. October 13, 1999
*** b. Insurable in mortgaged properties. The mortgagor has an insurab
le interest in the full value of the mortgaged property irrespective of the amou
nt for which it is mortgaged.
The mortgagee has an insurable interest only up to the extent of the cre
dit he has granted to the mortgagor.
*** c. Mortgaged properties. The mortgagor and the mortgagee have each
an independent insurable interest on the property and both interests may be cov
ered by one policy or each may take out a separate policy covering his interest,
wither at the same time or at separate times.
 The mortgagor s insurable interest covers the full value of the mortgaged pr
operty, even though the mortgage debt is equivalent to the full value of the pro
perty,
The mortgagee s insurable interest is to the extent of the debt, since the p
roperty is relied upon as security thereof, and in insuring he is not insuring t
he property but his interest or lien thereon. His insurable interest is prima f
acie the value mortgaged and extends only to the amount of the debt, not exceedi
ng the value of the mortgaged property, Thus, separate insurances covering diff
erent insurable interests may be obtained by the mortgagor and the mortgagee, an
d this would not violate the other insurance clause in the policy. (Geagonia vs. C
ourt of Appeals, et al., 241 SCRA 152)
*** d. Effect of change of interest in property. Any change unaccompan
ied by a change in insurance suspends the insurance until the interest in the th
ing and the insurance is vested in the same person. (Sec. 20, Insurance Code)
30. What damages may be recovered in marine insurance ?
SUGGESTED ANSWER: Recovery could be made only if the damage was caused by
perils of the sea not by perils of the ship. Defects of the ship are perils o
f the ship.
31. What is meant by actual total loss in marine insurance ?
SUGGESTED ANSWER: An actual total loss for insurance purposes is caused b
y:
a. A total destruction of the thing insured;
b. The irretrievable loss of thing by sinking or by being broken up;
c. Any damage to the thing which renders it valueless to the owner for
the purpose for which he held it; or
d. Any other event which effectively deprives the owner of the possessi
on, at the port of destination, of the thing insured. (Sec. 130, Insurance Code
)
NOTES AND COMMENTS:
a. Constructive total loss in marine insurance. One which gives to a p
erson a right to abandon. (Sec. 131, Insurance Code)
b. Instances where there is a constructive total loss of the thing insu
red which would entitle an insured to abandon in marine insurance:
1) If more than three-fourths of its value is actually lost or would hav
e to be expended to recover it from the peril;
2) If it is injured to such an extent as to reduce its value more than th
ree-fourths;
3) If the thing insured, is a ship and the contemplated voyage cannot be
lawfully performed without incurring either an expense to the insured of more th
an three-fourths the value of the thing abandoned or a risk which a prudent man
would not take under the circumstances; or
4) If the thing insured, being cargo or freightage, and the voyage cannot
be performed nor another ship procured by the master, within a reasonable time
and with reasonable diligence, to forward the cargo, without incurring the like
expense or risk. But freightage cannot in any case be abandoned unless the ship
is also abandoned. (Sec. 139, Insurance Code)
32. On April 15, 1991, UCPB General Insurance Co., Inc. issued five (5)
insurance policies covering Masagana Telemart, Inc. s various properties against
fire, for the period May 22, 1991 to May 22, 1992. In March UCPB decided not to
renew the policies after its expiration on May 22, 1992, and informed Masagana s
broker, Zuellig Insurance Brokers, Inc. On April 6, 1992, UCPB gave written not
ice to Masagana of the non-renewal of the policies at the address stated in the
policies. On June 13, 1992, fire razed Masagana s property covered by the three i
nsurance policies issued by UCPB.
On July 13, 1992, Masagana presented to UCPB s cashier five (5) manager s ch
ecks representing premium for the renewal of the policies from May 22, 1992 to M
ay 22, 1993. On July 14, 1992 Masagana filed with UCPB its formal claim for ind
emnification of the insured property razed by fire. No notice of loss was filed
by Masagana under the policies prior to July 14, 1992.
On the same day, July 14, 1992, UCPB returned to Masagana the five (5) m
anager s checks that it tendered, and at the same time rejected Masagana s claim for
the reasons (a) that the policies have expired, and (b) that the fire occurre
d on June 13, 1992 before Masagana s tender of premium payment.
Could Masagana recover ?
SUGGESTED ANSWER: No. The insurance law provides that, no non-life ins
urance is valid unless the premiums are actually paid. Any agreement to the con
trary is void. The parties may not agree expressly or impliedly on the extensio
n of credit or time to pay the premium and consider the policy binding before ac
tual payment. (UCPB General Insurance Co., v. Masagana Telamart, Inc., G.R. No.
137172, prom. June 15, 1999)
NOTES AND COMMENTS: Notwithstanding any agreement to the contrary, no pol
icy 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 lif
e or an industrial life policy whenever the grace period provision applies. (2n
d sentence, Sec. 77, Insurance Code)
Please compare no. 32 ABOVE, the UCPB case with the case of American Home
Assurance, no. 33, BELOW.
33. In 1990 Antonio obtained a fire insurance from American Home Assuranc
e Company the stock in trade of his business, Moonlight Enterprises. The insura
nce was due to expire on 25 March 1990. On 5 April 1990, Antonio issued a chec
k in the amount of P2,983.50 to American s agent James as payment for the renewal
of the policy. In turn, James delivered to Antonio Renewal Certificate No. 0009
9047.
On 6 April 1990, Moonlight Enterprises was completely razed by fire with a
total estimated loss of between P 4 million to P 5 million. The check was dra
wn against a Manila bank and deposited in American s Cagayan de Oro bank account.
The corresponding official receipt was issued on 10 April 1990. Subsequently,
a new insurance policy, Policy No. 206-4234498-7 , was issued, whereby American
undertook to indemnify Antonio for any damage or loss arising from fire up to
P200,000.00 for the period 25 March 1990 to 25 March 1991.
Antonio then filed an insurance claim with American and four other co-insu
rers, namely: Pioneer, Prudential, Filipino and Domestic. American denied the c
laim raising the issue that there was no existing insurance contract as a result
of non-payment of the premium. It also contends that assuming the existence of
a contract, that Antonio violated several provisions of the contract, among oth
ers, failure to notify American of any insurance already effected to cover the i
nsured goods.
Could Antonio recover ?
SUGGESTED ANSWER: Yes. There was payment. The renewal certificate issu
ed to Antonio contained the acknowledgment that the premium had been paid. The
check drawn by Antonio in American s favor and delivered to its agent was honored
when presented and American forthwith issued its official receipt. Section 306
of the Insurance Code provides that any insurance company which delivers a poli
cy or contract of insurance to an insurance agent or broker shall be deemed to h
ave authorized such agent or broker to receive on its behalf payments of premium
s.
Sec. 78 of the same Code explicitly provides, An acknowledgment in a poli
cy 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 stipulati
on therein that it shall not be binding until the premium is actually paid.
Section. 78 establishes a legal fiction of payment and should be interpr
eted as an exception to Section 77. (American Home Assurance Company v. Chua, G
.R. No. 1304421, prom. June 28, 1999)
***34. In 1980, Primitivo was insured with BF Lifeman Insurance Corpora
tion for P20,000.00. On October 20, 1987, he applied for an additional insuranc
e coverage of P50,000.00. His wife paid P2,075.00 as premiums to the agent who
issued a receipt indicating that the amount was merely a deposit . The application
form was lost, so Primitivo accomplished another one. On November 1, 1987, he
underwent a physical examination which he passed.
As is the procedure, all of Primitivo s papers were then sent to the Manil
a office of BF Lifeman Insurance Corporation which received the papers on Novemb
er 27, 1987. On December 2, 1987, the insurer then approved the policy and issu
ed the corresponding policy not knowing that in the meantime, Primitivo drowned
and died on November 25, 1987.
The insurer now disclaims liability on the additional P50,000.00 coverag
e because of failure to comply with the following requisites stated in the appli
cation form for the perfection of the contract of insurance: There shall be no co
ntract of insurance unless and until a policy is issued on this application and
that the said policy shall not take effect until the premium has been paid and t
he policy delivered to and accepted by me/us in person while I/We, am/are in goo
d health.
Is Primitivo s beneficiary entitled to the proceeds additional P50,000.00
additional insurance which amounts to P150,000.00 in view of a triple indemnity
rider on the policy? Explain briefly.
SUGGESTED ANSWER. Primitivo s beneficiary is not entitled to the insuran
ce proceeds for the following reasons:
a. The filing of the insurance application, payment of the premium, and
submission to the insurer, were all subject to the acceptance of the insurer.
There was no acceptance by the insurance as of the date when Primitivo died on N
ovember 25, 1987.
The conditions imposed by the insurer for the protection of the contract i
s not a potestative or facultative condition, but is a suspensive one whereby t
he acquisition of rights depends upon the happening of an event which constitute
s the condition. In this case, the suspensive condition was the policy must hav
e been delivered and accepted by the applicant while he is in good health. Ther
e was non-fulfillment of the condition, however, inasmuch as the applicant was a
lready dead at the time the policy was issued. Hence, the non-fulfillment of th
e condition resulted in the non-perfection of the contract.
b) A contract of insurance, like other contracts, must be assented to b
y both parties either in person or by their agents. So long as an application f
or insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract. The contract, to be binding from the date of appli
cation, must have been a completed contract, one that leaves nothing to be done,
nothing to be completed, nothing to be passed upon, or determined, before it sh
all take effect. There can be no contract of insurance unless the minds of the
parties have net in agreement.
c) The insurer cannot be held for gross negligence. It should be noted
that an application is a mere offer which requires the overt act of the insurer
for it to ripen into a contract. Delay in acting on the application does not c
onstitute acceptance even though the insured has forwarded his first premium wit
h his application. The corporation may not be penalized for the delay in the pr
ocessing of the application papers. (Perez v. Court of Appeals, et al., G.R. No
. 11239, prom. January 28, 2000)
NOTES AND COMMENTS;
a. When insurance contract perfected. Contract of insurance is perfected
where there is an offer to be covered and the insurance has accepted the offer
absolutely.
b. Requisites for a contract of insurance. Insurance is a contract whe
reby, for a stipulated consideration, one party undertakes to compensate the oth
er for loss on a specified subject by specified perils.
A contract, on the other hand, is a meeting of the minds between two perso
ns whereby one binds himself, with respect to the other to give something or to
render some service.
Under Article 1318 of the Civil Code, there is no contract unless the foll
owing requisites concur:
 (1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon t
he thing and the cause which are to constitute the contract. The offer must be
certain and the acceptance absolute. (Perez v. Court of Appeals, et al., G.R. No
. 11239, prom. January 28, 2000)
35. A collision between a truck driven by Guillermo owned by the Natio
nal Food Authority (NFA) and a public utility Tamaraw FX owned and operated by V
ictor resulted to the death of five persons and injury to ten others, all of who
m were passengers of the FX. Several cases were filed against Guillermo, NFA and
GSIS, NFA s insurer of the truck for death and injuries, Victor as well as his in
surer. It was found that Guillermo s negligence was he proximate cause of the acc
ident. NFA, Guillermo, GSIS and the insurer of the FX were required to pay joi
ntly and severally the heirs of the deceased passengers.
May the insurer be impleaded directly by the victims or their heirs ? I
f so, could they be held solidarily liable ? Explain your answers.
SUGGESTED ANSWER: Yes. It is now established that the injured or the h
eirs of the victims of a vehicular accident may sue directly the insurer of the
vehicle. This is so because common carriers are required to secure the Compulso
ry Motor Vehicle Liability Insurance (CMVLI).
Although the victims or their heirs may proceed directly against the insur
er for indemnity, the third party liability is only up to the extent of the insu
rance policy and those required by law.
While it is true that where the insurance contract provides for indemnit
y against liability to third persons, and such third persons can directly sue th
e insurer, the direct liability of the indemnity contracts against third party l
iability does not mean that the insurer can be held liable in solidum with the i
nsured and/or the other parties found at fault.
This is so because the liability of the insurer is based on contract; th
at of the insured carrier or vehicle owner is based upon tort. The liability of
the insurer therefore, being primary, is not dependent on the recovery of judgm
ent from the judgment insured. (Government Service Insurance System v. Court of
Appeals, et al., G.R. No. 101439, prom. June 21, 1999)
36. What is no fault insurance and what is the proof required in these
cases ?
SUGGESED ANSWER: No need to prove fault or negligence of any kind in orde
r of recover. Proofs of loss shall be sufficient to substantiate the claim, amo
ng which include
a. Police report of accident;
b. Death certificate and evidence sufficient to establish the p
roper payee; or medical report and evidence of medical or hospital disbursement
in respect of which refund is claimed. (Sec. 378, Insurance Code)
NOTES AND COMMENTS:
a. Conditions for availment:
1) Only for claims for death or injury of any passenger or third party.
It does not include property damage;
2) Total indemnity in respect of one person shall not exceed P5,000.00;
3) Claim may be made against one motor vehicle only. In the case of an o
ccupant if a vehicle, claim shall lie against the insurer of the vehicle in whic
h the occupant is riding, mounting or dismounting from. In any other case, clai
m shall be against the insurer of the directly offending vehicle. In all cases,
the right of the party paying the claim to recover against the owner of the veh
icle responsible for the accident shall be maintained. (Sec. 378, Insurance Cod
e)
37. Prescriptive period of one (1) year from rejection of claim stated in
 policy for filing suit not suspended by request for reconsideration of claim de
nial. (Sun Insurance v. Court of Appeals, et al., 195 SCRA 193)
38. Joseph Chua bought and imported from Taipei 50 metric tons of Dical
cium Phospate, Feed Grade. These were contained in 1,250 bags shipped to the Ph
ilippines and insured by First Insurance Co., against all risks at the port of o
rigin under a Marine Policy with the notation, Claim, if any, payable in U.S. Cur
rency at Manila, and stamped at the lower left side of the policy as Claim Agent, S
mith, Bell and Co.
As a result of damages suffered, Joseph brought suit against Smith, Bell
as a result of its refusal to pay claiming to be a mere settling or claim agent
because it has not even taken part in the contract of insurance. May Smith, Be
ll be held liable ? Explain.
SUGGESTED ANSWER: No. As a settling agent acting within the scope of i
ts authority, Smith, Bell cannot be held personally liable and/or solidarily lia
ble for the obligations of its disclosed principal merely because there is alleg
edly a need for a speedy settlement of the claim.
Smith, Bell could not be held liable because there is no privity of cont
ract between it and Joseph, the insured.
There is solidary liability only when the obligation expressly so state
s or when the law or the nature of the obligation requires solidarity. Furtherm
ore, Sec. 190 of the Insurance Code clarifies the role of the resident agent of
a foreign insurance company to be merely the representative tasked to receive le
gal processes on behalf of its principal and not to answer personally for any in
surance claims. (Smith, Bell & Co., Inc. v. Court of Appeals, et al., 267 SCRA
530)
39. Distinguish one from the other: concealment, representation and wa
rranty as used in insurance.
SUGGESTED ANSWER:
a. Inclusion in contract: The facts concealed are not part of the cont
ract; representations are mere collateral inducements to the contract; those war
ranted are part of the contract.
b. Nature of statements: Concealment is neglect to communicate; repres
entations oral or written statement; warranties may be express or implied.
c. Extent: The facts concealed must be material; so also with represe
ntations, while warranties are conclusively presumed material.
d. Consequences: Concealment vitiates the contract and entitles the in
surer to rescind, even if the death or loss was die to a cause not at all relate
d to the concealed matter; if the representation is false on a material point,
the injured party is entitled to rescind from the time when the representation
becomes false; upon breach of a warranty the insurer has the right to rescind.
40. On March 13, 1980, Rizal Surety & Insurance Company issued Fire Ins
urance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. for P 1,500,
000.00 which amount was increased to P1,500,000.00 for the period August 14, 198
0 to March 13, 1981. The coverage of the policy reads, included among others th
ose, xxx contained and/or stored during the coverage of this Policy in the premis
es occupied by them forming part of the buildings situated within own Compound x
xx.
On January 12, 1980, fire broke out in the compound of Transworld. It
razed the middle portion of its four-span building and partly gutted the left an
d right sections thereof. A two-storey building that was behind the four-span b
uilding where fun and amusement machines and spare parts were stored, was also d
estroyed by the fire. Rizal now refuses to pay contending that the fire insuran
ce policy covered only the contents of the four-span building, and not the damag
e caused on the two-storey annex building.
Is the contention correct ?
SUGGESTED ANSWER: No. Rizal is liable for the damage caused on the two
-storey building.
 The two storey-building was already existing when the fires insurance po
licy contract was entered into. Rizal should have specifically excluded said tw
o-storey building from the coverage of the fire insurance if minded to exclude t
he same, but it did not. It went on to provide such fire insurance policy which
covers the products, raw materials and supplies stored in the premises of Transwo
rld which was an integral part of the four-span building. (Rizal Surety & Insur
ance Company v. Court of Appeals, et al., prom. July 18, 2000)
NOTES AND COMMENTS:
a. Interpretation of insurance contracts. A stipulation as to the cover
age of the fire insurance policy which has created doubt should be resolved agai
nst the insurer whose lawyer or managers would have drafted the fire insurance p
olicy. This is in accord with the provisions of Article 1377 of the New Civil C
ode which provides that, The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity. (Rizal Surety & I
nsurance Company v. Court of Appeals, et al., prom. July 18, 2000)

Philippine Deposit Insurance Corporation Act (R.A. 3591), as amended by

P.D. No. 1937 and R.A. No. 7400
41. Horace maintains a P10,000.00 savings account, a P20,000.00 checkin
g account, a P30,000.00 money market placement and a P40,000.00 trust fund in a
medium size commercial bank.
State which of the four accounts are deemed insured by the Philippine De
posit Insurance Corporation.
SUGGESTED ANSWER: The P10,000.00 savings account and the P20,000.00 che
cking account are deemed insured by the Philippine Deposit Insurance Corporation
.
NOTES AND COMMENTS: Accounts covered by PDIC up to P100,000.00 irrespec
tive of the nature and character of the deposit.
(4) Transportation Laws
(a) Common Carriers (New Civil Code, Arts. 1732 to 1766)
(b) Commercial Contracts for Transportation Overland (Code of Commerce
Arts. 349 to 379)
42. Christine charters a vessel owned and operated by Star Shipping Co
., a common carrier, for the purpose of transporting two generators to Cebu. Sta
r Shipping s employees negligently stowed the two generators by failing to properl
y lash and secure them in the vessel s hold. During the trip, a strong wind hits t
he vessel, causing severe damages to the generators which slid in the hold and h
it each other.
When sued for damages Star Shipping cites a stipulation in the charter a
greement exempting the company from liability for loss or damage a rising from t
he negligence of its agents. Christine countered by stating that the aforementi
oned stipulation is against public policy and therefore, null and void.
Is the stipulation valid ? Would you hold the shipping company liable ?
SUGGESTED ANSWER: Yes. The stipulation is valid, hence the shipping com
pany is not liable.
The prohibition against exempting a carrier from liability as a result o
f the acts or omissions of its employees is applicable only to common carriers.
A common carrier undertaking to carry a special cargo or chartered to a special
person becomes a private carrier hence not subject to the above prohibition. (H
ome Insurance Co., v. American Steamship Agencies, 23 SCRA 24)
43. Loadstar received, from a single consignee, on board its M/V Cherok
ee lawanit hardwood, tile wood assemblies and apitong mouldings with a total val
ue of P6,067,178.00, and insured for the same amount with MIC against various ri
sks, including total loss by total loss of the vessel. It likewise carried passen
gers. The vessel, in turn was insured by PGAI for P4 million. On 20 November
1984, the vessel sank off Limasawa Island, allegedly as a result of a typhoon, r
esulting to total loss of the vessel and the cargo. Evidence shows that the win
d condition in the area where the vessel sank was moderate. The consignee made
a claim with Loadstar which was ignored. MIC then paid the consignee and the l
atter signed a subrogation receipt.
MIC then filed suit against both Loadstar and PGAI. Loadstar raises the
defense that it is not a common carrier because it does not have a CPCN, that t
here was only one shipper consignee for a special cargo.
It likewise posits the application of the limited liability theory, and th
at the claim was barred by prescription. Rule on the contentions.
SUGGESTED ANSWER: Loadstar is a common carrier. it is not necessary th
at the carrier be issued a certificate of public convenience, and this public ch
aracter is not altered by the fact that the carriage of the goods in question wa
s periodic, occasional, episodic or unscheduled.
The records do not disclose that M/V Cherokee on the date in question, u
ndertook to carry a special cargo or was chartered to a special person only. Th
ere was no charter party. Further, the bare fact that the vessel was carrying
a particular type of cargo for one shipper, which appears to be purely coincide
ntal, is not reason enough to convert the vessel from a common carrier to a priv
ate carrier, especially where, as in this case, it was shown that the vessel was
also carrying passengers.
The doctrine of limited liability does not apply where there was neglige
nce on the part of the vessel owner or agent. Loadstar was at fault or negligen
t in not maintaining a seaworthy vessel and in having allowed its vessel to sai
l despite knowledge of an approaching typhoon. In any event, it did not sink be
cause of any storm that may be deemed as force majeure, inasmuch as the wind con
dition in the area where it sank was determined to be moderate.
Prescription has not yet set in. Neither the Civil Code nor the Code o
f Commerce states a specific period on the matter, hence the COGSA which provide
s for a one-year period of limitation on claims for loss of, or damage to, cargo
es sustained during transit, may be applied suppletorily to the case at bar. (Lo
adstar Shipping Co., Inc. v. Court of Appeals, et al., G.R. No. 131621, prom. Se
ptember 28, 1999)
NOTES AND COMMENTS:
*** a. Common carrier. A person, corporation, firm or association enga
ged in the business of carrying OR transporting passengers or goods or both, by
land, water of air for compensation, offering its services to the public. (Art
. 1732, Civil Code)
It is not necessary for a transport company to have a certificate of pub
lic convenience and necessity before it could be considered as a common carrier.
(De Guzman v. Court of Appeals, et al., 168 SCRA 612)
b. No distinction between principal business and sideline offering of ser
vice to public. Art. 1732 of the Civil Code makes no distinction between one wh
ose principal business activity is the carrying of persons or goods or both, and
one who does such carrying only as an ancillary activity (in local idiom, as a s
ideline ) It carefully avoids making any distinction between a person or enterpri
se offering transportation service on a regular or scheduled basis and one offe
ring such service on an occasional, episodic or unscheduled basis. Neither does
it distinguish between a carrier offering its services to the general public, i.e
., the general community or population, and one who offers services or solicits
business only from a narrow segment of the general population. (Loadstar Shippi
ng Co., Inc. v. Court of Appeals, et al., G.R. No. 131621, prom. September 28, 1
999)
c. Common carrier ceases to be common carrier if chartered and becomes
a private carrier.
d. Bill of lading defined. A written acknowledgment of the receipt of go
ods and an agreement to transport and to deliver them at a specified place to a
person named therein or on his order.
 *** e. Two-fold character of "bill of lading."
1) It is a receipt of the goods shipped; and
2) It is a contract by which three parties, namely, the shipper, the carr
ier and the consignee undertake specific responsibilities and assume stipulated
obligations. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et al., 28
6 SCRA 257)
Once delivered and accepted it constitutes a contract of carriage even t
hough not signed. REASON: There is actual and constructive notice of the cont
ents giving rise to the presumption that the same was a perfected and binding co
ntract.
*** f. Three kinds of stipulations made in bills of lading regarding l
iability.
The first is one exempting the carrier from any and all liability for loss
or damage occasioned by its own negligence.
The second is one providing for an unqualified limitation of such liabilit
y to an agreed valuation.
The third is one limiting the liability of the carrier to an agreed valuat
ion unless the shipper declares a higher value and pays a higher rate of freight
. According to an almost uniform weight of authority, the first and second kind
s of stipulations are invalid as being contrary to public policy, but the third
is valid and enforceable. (Loadstar Shipping Co., Inc. v. Court of Appeals, et a
l., G.R. No. 131621, prom. September 28, 1999)
*** g. Stipulations considered unreasonable, unjust and contrary to public
policy:
1) That the goods are transported at the risk of the owner or s
hipper;
2) That the common carrier will not be liable for any loss, destruction
, or deterioratio
c. Where timely filing of formal claim dispensed with. Where the failure
to file the formal claim within the prescriptive period contemplated in the air
waybill was largely due to the carrier s own doing, the consequence of which canno
t , in all fairness, be attributed to the passenger, the same is to be dispensed
with. Thus, it was not the passenger s fault that the letter of demand for damag
es could only be filed, after months of exasperating follow-up of the claim. If
there was any failure to file the formal claim within the prescriptive period,
this was largely because of the carrier s own doing, the consequences of which can
not, in all fairness, be attributed to the passenger.
Even if the claim for damages was conditioned on the timely filing of a
formal claim, under Article 1186 of the Civil Code (The condition shall be deeme
d fulfilled when the obligor voluntarily prevents its fulfillment.), that condit
ion was deemed fulfilled considering that the collective action of the carrier s p
ersonnel in tossing around the claim and leaving it unresolved for an indefinite
period of time was tantamount to voluntarily preventing its fulfillment. On grou
nds of equity, the filing of the baggage freight claim, which sufficiently infor
med the carrier of the damage sustained by the cargo, constituted substantial co
mpliance with the requirement of the contract for the filing of a formal claim.
(Philippine Airlines, Inc., v. Court of Appeals, et al., 255 SCRA 48)
d. Carrier s liability for actual, moral and exemplary damages and attorn
ey s fees. The unexplained cause of damage to the cargo constitutes gross careles
sness or negligence which by itself justifies the award of damages. The unprofe
ssional indifference of the carrier s personnel despite full and actual knowledge
of the damage to the cargo, just to be exculpated from liability on pure technic
ality and bureaucratic subterfuge, smacks of willful misconduct and insensitivit
y to their customer s plight tantamount to bad faith and renders unquestionable th
e carrier s liability for damages. (Philippine Airlines, Inc. v. Court of Appeals,
et al., 255 SCRA 48)
50. Pasahero, a paying passenger, boarded a Victory Liner bus bound for
Olongapo. He chose a seat at the front near the bus driver. Pasahero told the
bus driver that he had valuable items in his bag which was placed near his fee
t. Since he had not slept 24 hours, he requested the driver to keep an eye on t
he bag should be doze off during the trip.
a. While Pasahero was asleep, another passenger took the bag away and a
lighted at Guagua, Pampanga. is Victory Liner liable to Pasahero ? Explain.
b. Supposing that two armed men staged a hold-up while the bus was spee
ding along the North Expressway. One of them pointed a gun a Pasahero and stole
not only his bag, but his wallet as well. Is Victory Liner liable to Pasahero
? Explain.
c. There have been incidents of unknown persons throwing stones at pass
ing vehicles from the overpasses in the North Expressway. While the bus was tra
versing the superhighway, a stone hurled from the Sto. Domingo overpass smashed
the front windshield and hit Pasahero in the face. Pasahero lost an eye and suf
fered other injuries. Can Pasahero hold the bus company liable for damages ? E
xplain. (Bar: 1993)
SUGGESTED ANSWERS:
a. Yes, because the responsibility of common carriers in the case of lo
ss or damage to hand carried baggage is governed by the rule on necessary deposi
ts.
b. No. The hold-up is a force majeure under the rule on necessary depo
sits, .because of the use of arms hence the bus company would not be liable.
c. Yes. Victory Liner did not exercise utmost diligence. Considering t
he fore knowledge of stone-throwing incidents, it should have undertaken the nec
essary precautions to avoid injury to its paying passengers, like Pasahero.
NOTES AND COMENTS:
The act of a thief or robber, who has entered the hotel is not deemed fo
rce majeure, unless it is done with the use of arms or through an irresistible f
orce. (Art. 2001, Civil Code)
51. Sam boarded a passenger bus. Another passenger, Ed, brought a ga
llon of gasoline placed in a plastic bag into the same bus where Sam was ridin
g. The gasoline ignited and exploded causing injury to Sam who filed a civil s
uit for damages against the bus company claiming that Ed should have been subjec
ted to inspection by the conductor.
The bus company disclaimed liability resulting from the explosion conten
ding that it was unaware of the contents of the plastic bag and invoking the rig
ht of Ed to privacy.
Should the bus company be held liable for damages A?
SUGGESTED ANSWER: Yes, for breach of the contract of carriage. The bus
company is presumed to have been at fault unless it observed extraordinary dili
gence. It is bound to carry Sam safely as far as human care and foresight provi
de. It is clear that the gasoline should have smelled considering that it was
placed only in a plastic bag and would have been noticed by the railway employee
s and kept in a safe place.
NOTES AND COMMENTS: U.P. Law Center suggests that in overland transport
ation the common carrier is not bound nor empowered to make an examination of th
e contents of packages or bags, particularly those handcarried by passengers.
a. Duty of common carrier. A common carrier is bound to carry the pass
engers safely as far as human care and foresight can provide, using the utmost d
iligence of very cautious persons, with a due regard for all the circumstances.
(Art. 1755, Civil Code)
b. Presumption of fault. In case of death of or injuries to passengers
, common carriers are presumed to have been at fault or to have acted negligent
ly, unless they prove that they observed extraordinary diligence as prescribed i
n articles 1733 and 1755. (Art. 1756, Civil Code)
c. Degree of care. Common carriers, from the nature of their business
and for reasons of public policy, are bound to observe extraordinary diligence i
n the vigilance over the goods and for the safety of the passengers transported
by them, according to all the circumstances of each case. (1st par., Art. 1733,
Civil Code)
 If it were an airline company involved in the above problem, would your
answer be the same ? Explain your answer briefly.
SUGGESTED ANSWER: Yes. The same reasons would be advanced as in the ab
ove answer.
Furthermore, in the case of air carriers, it is not lawful to carry flam
mable materials in passenger aircraft, and airline companies may open and invest
igate suspicious packages and cargoes. (R.A. No. 6235)
52. What is the nature of the relationship between a consignee and arra
stre operator ?
SUGGESTED ANSWER: It is akin to that existing between the consignee or o
wner of shipped goods and the common carrier, or that between a depositor and a
warehouseman.
Thus, the arrastre operator should observe the same degree of diligence re
quired of a common carrier and a warehouseman as enunciated under Article 1733 o
f the Civil Code and Section 3 (b) of the Warehouse Receipts Law respectively.
Being the custodian of the goods discharged from a vessel, an arrastre operator s
duty is to take good care of the goods and turn them over to the party entitled
to their possession.
In the performance of its job, an arrastre operator is bound by the mana
gement contract it had executed with the Bureau of Customs. However, a manageme
nt contract which is a sort of a stipulation pour autrui within the meaning of A
rticle 1311 of the Civil Code, is also binding on a consignee because it is inco
rporated in the gate pass and delivery receipt which must be presented by the co
nsignee before delivery can be effected to it. Indeed, upon taking delivery of
the cargo, a consignee tacitly accepts the provisions of the management contract
, including those which are intended to limit the liability of one of the contra
cting parties, the arrastre operator.
Consequently, the provision of the management contract which limits the
arrastre operator s liability finds application where there is no showing of a dec
laration by the consignee of a higher valuation by showing the invoice of the go
ods entrusted and the payment of higher arrastre fees. (Summa Insurance Corpora
tion v. Court of Appeals, et al., 253 SCRA 175)
(c) Maritime Commerce (Code of Commerce, Arts. 573 to 736; also Arts. 5
80-584 of Code of Commerce, as superseded by R.A. 6106; Arts. 806 to 845 of the
Code of Commerce); Paragraph 6 of Section 3 of Carriage of Goods by Sea Act (Co
m. Act 65)
***53. On December 19, 1987, motor tanker MT Vector left Limay, Bataan
enroute for Masbate loaded with petroleum products shipped by Caltex. On Decemb
er 20, 1987, the passenger ship MV Dona Paz owned and operated by Sulpicio Lines
, Inc, left the port of Tacloban headed for Manila with a complement of 59 crew
and 1,493 manifested passengers.
On December 20, 1987 the two vessels collided in the open sea. All the
crew members of Dona Paz died, and of the estimated 4,000 passengers (unmanifest
ed), only 24 survived. Two survived from MT Vector. The issues are whether Ca
ltex, Inc, the charterer of MT Vector is liable to the passengers, and whether S
ulpicio Lines is the one liable for the passengers.
SUGGESTED ANSWER: No. Caltex as the charterer has no liability for dama
ges under Philippine Maritime laws. It should be Sulpicio Lines who should be l
iable for the death of the passengers.
The respective rights and duties of a shipper and the carrier depends no
t on whether the carrier is public or private but on whether the contract of car
riage is a bill of lading or equivalent shipping documents on the one hand, or a
charter party or similar contract on the other.
Caltex and Vector entered into a contract of affreightment, also known a
s a voyage charter. If the charter is a contract of affreightment, which leaves
the general owner in possession of the ship as owner for the voyage, the rights
and the responsibilities of ownership rest on the owner. The charterer is free
from liability to third persons in respect of the ship. (Caltex (Philippines), I
nc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166, prom. September 30, 1999)
On the other hand, Sulpicio Lines being a common carrier is liable for a
ctual and compensatory damages under Article 2206 in relation to Article 1764 of
the Civil Code for deaths of its passengers caused by the breach of the contrac
t of carriage, which has been increased to P50,000.00.
The general rule is that moral damages are not recovered in culpa contra
ctual except when the presence of bad faith was proven. However, in breach of c
ontract of carriage, moral damages may be recovered when it results in the death
of a passenger.
Article 2232 of the Civil Code gives the Court the discretion to grant e
xemplary damages in breach of contract when the defendant acted in a wanton, fra
udulent and reckless manner. The Supreme Court took judicial notice of the drea
dful regularity with which grievous Maritime disasters occur in our waters with
massive loss of life. One of the ends of law and public policy , of special imp
ortance in an archipelagic state like the Philippines, is the safe and reliable
carriage of people and goods by sea. To achieve this end, an instrument may be
used which is the grant of exemplary damages by the Court. (Sulpicio Lines, Inc
., vs. Court of Appeals, et al.,246 SCRA 299)
NOTES AND COMMENTS:
a. Charter party, defined. A charter party is a contract by which an ent
ire ship, or some principal part thereof, is let by the owner to another person
for a specified time or use. (Caltex (Philippines), Inc. v. Sulpicio Lines, Inc.
, et al., G.R. No. 131166, prom. September 30, 1999)
b. Kinds of charter party agreement.
1) Demise or bareboat. The charterer mans the vessel with his own people
and becomes, in effect, the owner for the voyage of service stipulated, subject
to liability for damages caused by negligence.
2) Time charter,
3) Voyage charter. The parties into a voyage charter retains the charact
er of the vessel as a common carrier.
A charter party agreement does not turn a common carrier into a private on
e. (Caltex (Philippines), Inc. v. Sulpicio Lines, Inc., et al., G.R. No. 131166,
prom. September 30, 1999)
c. Contract of affreightment, defined. A contract of affreightment is on
e by which the owner of as ship or other vessel lets the whole or part of her to
a merchant or other person for the conveyance of goods, on a particular voyage,
in consideration of the payment of freight. (Caltex (Philippines), Inc. v. Sulp
icio Lines, Inc., et al., G.R. No. 131166, prom. September 30, 1999)
d. Kinds of contract of affreightment. A contract of affreightment may
be either
1) Time charter, wherein the leased vessel is leased to the charterer for
a fixed period of time, or
2) Voyage charter, wherein the ship is leased for a single voyage.
In both cases, the charter party provides for the hire of the vessel only,
either for a determinate period of time or for a single or consecutive voyage,
the ship owner to supply the ship s store, pay for the wages of the master of the
crew, defray the expenses for the maintenance of the ship.
*** e. Distinction between two kinds of charter parties (i.e. bareboat or
demise) and contract of affreightment (voyage charter)
1) Control of vessel. Under demise or bareboat, the charterer will gener
ally be regarded as the owner for the voyage or service stipulated. The charter
er mans the vessel with his own people and becomes the owner pro hac vice. The o
wner must completely and exclusively relinquish possession, command and navigati
on to the charterer. Under a contract of affreightment, the general owner retai
ns possession, command and navigation of the ship, the charterer merely having u
se of the space in the vessel in return for his payment of the charter hire.
2) Liability. Under demise or bareboat charter, the charterer is liable
to others for damages. Under a contract of affreightment,, the owner remains as
carrier and must answer for any breach of duty as to the care, loading and unlo
ading of the cargo.
Although a charter party may transform a common carrier into a private one
, the same however is not true in a contract of affreightment on account of the
distinctions between the two. (Coastwise Lighterage Corporation v,. Court of Ap
peals, et al., 245 SCRA 706)
f. Zones of time in collision:
1) First Zone, which covers all the time up to the moment when the risk
of collision begins.
2) Second Zone, which covers the time between the moment when the risk of
collision begins and the moment when it becomes a practical certainty.
3) Third Zone, which covers the time when the collision is certain and th
e time of impact.
g. Doctrine of inscrutable fault. Where fault is established but it cann
ot be determined which of the two vessels was at fault, both shall be deemed to
be at fault.
h. Collision caused by storm results to both vessels bearing own loss.
This despite both of the captains were negligent.
54. What does general average or gross average include ?
SUGGESTED ANSWER: General or gross average includes all damages and expens
es which are deliberately caused in order to save the vessel, its cargo, or both
at the same time, from a real and known risk.
Where the formalities prescribed under Articles 813 and 814 of the Code
of Commerce in order to incur the expenses and cause the damage corresponding to
gross average were not complied with the carrier cannot claim for contribution
from the consignees for additional freight and salvage charges. (Philippine Hom
e Assurance Corp. v. Court of Appeals, et al., 257 SCRA 649)
***55. What is meant by the doctrine of limited liability or real and h
ypothecary nature of maritime law ? When are he instances where this doctrine d
oes not find any application ?
SUGGESTED ANSWER: The liability of the ship owner or ship agent arising
from the operation of a ship (in the transportation of goods and passengers) is
confined to the vessel, equipment, and freight, or insurance, if any, so that i
f ship owner or ship agent abandons the ship, equipment and freight, as well as
insurance, his liability would be extinguished, just as well if
Is PETRON a public utility ? Why?
SUGGESTED ANSWER: No. A public utility under the Constitution and the Pub
lic Service Act is one organized for hire or compensation to serve the public, whi
ch is given the right to demand its service. PETRON is not engaged in oil refin
ing for hire and compensation to process the oil of other parties.
Likewise, the activities considered as public utility under Section 7 of R
.A. No. 387 refer only to petroleum which is indigenous to the Philippines. Hen
ce, the refining of petroleum products sourced from abroad as is done by PETRON
is not within the contemplation of the law. (Bagatsing v. Committee on Privatiz
ation, 241 SCRA 334))
61. Is EDSA LRT III, a public utility, such that EDSA LRT Corporation,
Ltd., a foreign corporation could not own it ?
SUGGESTED ANSWER: No. What constitutes a public utility is not their own
ership but their use to serve the public. While a franchise is needed to operat
e these facilities to serve the public, they do not by themselves constitute a p
ublic utility.
The Constitution, in no uncertain terms, requires a franchise for the op
eration of a public utility. However, it does not require a franchise before on
e can own the facilities needed to operate a public utility so long as it does n
ot operate them to serve the public.
In law, there is a clear distinction between the operation of a public uti
lity and the "ownership" of the facilities and equipment used to serve the publi
c.
 The right to operate a public utility may exist independently and separa
tely from the ownership of the facilities thereof. One can own said facilities
without operating them as a public utility or conversely, one may operate a publ
ic utility without owning the facilities used to serve the public. The devotion
of property to serve the public may be done by the owner or by the person in co
ntrol thereof who may not necessarily be the owner thereof.
The dichotomy between the operation of a public utility and the ownershi
p of the facilities used to serve the public can be very well appreciated when w
e consider the transportation industry. Enfranchised airline and shipping compa
nies may lease their aircraft and vessels instead of owning them themselves. (T
atad, et al., v. Garcia, Jr., et al., 243 SCRA 436)
NOTES AND COMMENTS:
a. Build-operate-transfer (BOT). One where the contractor undertakes t
he construction and financing of an infrastructure facility, and operates and ma
intains the same. The contractor operates the facility for a fixed period duri
ng which it may recover its expenses and investment in the project plus a reason
able rate of return thereon. After the expiration of the agreed term, the contr
actor transfers the ownership and operation of the project to the government. T
he owner of the infrastructure facility must comply with the citizenship require
ment of the Constitution on the operation of a public utility. (Tatad, et al.,
v. Garcia,. Jr., et al., 243 SCRA 436)
b. Build-and-transfer (BT). The contractor undertakes the construction
and financing of the facility, but after completion, the ownership and operatio
n thereof are turned over to the government. The government, in turn, shall pay
the contractor the total investment on the project in addition to a reasonable
rate of return. This arrangement may be employed in the construction of any inf
rastructure project including critical facilities which for security or strategi
c reasons, must be operated directly by the government. Filipino ownership is n
ot required. (Tatad, et al., v. Garcia, Jr., et al., 243 SCRA 436)
c. Distinctions between BOT and BT:
a. BOT contractor operates; BT government operates.
b. BOT compliance with citizenship requirement; BT no.
62. Is an international gateway facility (IGF) a telephone system ?
SUGGESTED ANSWER: No. It is not. An IGF system which would mediate betwe
en a domestic telephone system and the transmitting and carrying facilities of a
n international carrier. It will permit messages originating from a person usin
g PLDT s domestic telephone system to enter the transmitting and carrying faciliti
es of an international carrier and as well allow messages incoming from abroad t
hrough the international carrier s carrying facilities to enter the domestic syste
m. (Philippine Long Distance Telephone Company v. NTC, et al., 241 SCRA 486)
NOTES AND COMMENTS:
a. Telecommunications. Communication over distance making no limiting r
eference to the means or mode of such communication.
When the statutory text speaks of messages , there should be no distinction
between voice or oral and data or ,non-voice messages or transmissions. Voice
messages do not travel via wires (cables whether submarine or underground or, ae
rial) or any other media qua voice (i.e., as sound waves); voice transmissions,
exactly like data (or non-voice) messages, travel in the form of electronic impu
lses through cables (or any other media) and are simply converted at the point o
f reception or destination into other forms visually or audibly perceptible by h
uman beings (Philippine Long Distance Telephone Company v. NTC, et al., 241 SCRA
486)
63. What is the effect of failure to get approval of sale or mortgage o
f franchise ?
SUGGESTED ANSWER :In operating a truck without the transfer thereof having
been approved by the Public Service Commission (now LTFRB), the transferee acte
d merely as agent of the registered owner and should be responsible to him (the
registered owner) for any damages he may cause the latter through his negligence
. ( Y Transit Co., Inc. vs. NLRC, et al., G.R. 88195-96, January 27, 1994, Third D
ivision) REASON: Since a franchise is personal in nature any transfer or lease
thereof should be notified to the Public Service Commission (LTFRB) so that the
latter may take proper safeguards to protect the interest of the public.
Of course it follows that if there are any damage caused to the general
public the registered owner is directly answerable and not the unregistered tran
sferee.
(5) Corporation Law
(a) The Corporation Code (BP Blg. 68)
***64. Could a corporation recover moral damages ?
SUGGESTED ANSWER:. A corporation could not recover moral damages arising f
rom physical suffering because a corporation being an artificial person has no f
eelings, emotions or senses, hence it cannot experience physical suffering or me
ntal anguish.
However, a corporation can recover moral damages. arising from damage to
its reputation because it has a good reputation that could be debased, resultin
g to social humiliation. A corporation's good will is an asset which could suff
er injury.
65. What are the tests of corporate nationality ?
SUGGESTED ANSWER: The tests are the nationality theory and the theory of
incorporation. Under the nationality theory the citizenship of the stockholders
determines nationality irrespective of the place of incorporation. Under the th
eory of incorporation, lace of incorporation determines nationality irrespective
of nationality of stockholders.
66. When is the veil of corporate fiction pierced ?
SUGGESTED ANSWER: a. When the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime or when a corporatio
n is the mere alter ego or business conduit of a person. To disregard the separ
ate juridical personality of a corporation, the wrong-doing must be clearly and
convincingly, established. It cannot be presumed. ( Yu, et al vs. NLRC, et al.
, G.R.. Nos. 111810-11, June 16, 1995, Third Division)
b. When the fiction is used as a means of perpetrating a fraud or an ille
gal act or as a vehicle for the evasion of an existing obligation, the circumven
tion of statutes, the achievement or perfection of a monopoly or generally the p
erpetration of knavery or crime, the veil with which the law covers and isolate
s the corporation from the members or stockholders who composed it will be lifte
d to allow for its consideration merely as an aggregation of individuals.
c. To avoid a judgment credit; to avoid inclusion of corporate assets
as part of the estate of a decedent; to avoid liability arising from debt; whe
n made use as a shield to perpetrate fraud and/or confuse legitimate issues; or
to promote unfair objectives or otherwise to shield them. (First Philippine Int
ernational Bank, et al., v. Court of Appeals, G.R. No. 115849, January 24, 1996,
Third Division citing various cases)
d. When the corporate fiction is used as a shield to further an end sub
versive of justice; or for purposes that could not have been intended by the law
that created it; or to defeat public convenience, justify wrong, protect fraud,
or defend crime; or to perpetuate deception; or as an alter ego, adjunct or bus
iness conduit for the sole benefit of the stockholders. (ARB Construction Co. I
nc., et al., v. Court of Appeals, et al.,, G.R. No. 126554, prom. May 31, 2000)
e. Two entities cannot be deemed separate and distinct where there is a
showing that one is merely the continuation of the other, as where the second co
rporation merely continued the operations of the first corporation under the sam
e owners, the same business venture, at the same address, and even continued to
hire the same employees. (Avon Dale Garments, Inc. vs. NLRC, et al., G.R. No. 11
7932, July 20, 1995, Third Division)
 f. The corporate mask may be lifted and the corporate veil may be pierc
ed when a corporation is just but the alter ego of a person or of another corpor
ation. Where badges of fraud exist, where public convenience is defeated; where
a wrong is sought to be justified, the corporate fiction or the notion of legal
entity should come to naught. (Lim v. Court of Appeals, et al., G.R. No. 124715
, prom. January 24, 2000)
NOTES AND COMMENTS:
a. Corporate fiction. Rudimentary is the rule that a corporation is
invested by law with a personality distinct and separate from its stockholders o
r members. In the same vein, a corporation by legal fiction and convenience is
an entity shielded by a protective mantle and imbued with a character alien to t
he persons comprising it. It may not generally be held liable for that of the pe
rsons composing it. It may not be held liable for the personal indebtedness of
its stockholders of those of the entities connected with it. (Lim v. Court of A
ppeals, et al., G.R. No. 124715, prom. January 24, 2000)
***b. Tests in determining whether to pierce veil of corporate personal
ity.
1) Control, not mere majority or complete stock control, but complete dom
ination, not only of the finances, but of policy and business practice in respec
t to the transaction attacked so that the corporate entity as to this transactio
n had at the time no separate mind, will or existence of its own;
2) Such control must have been used by the defendant to commit fraud or w
rong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff s legal right;
3) The aforesaid control and breach of duty must proximately prevent pierc
ing the corporate veil.
Moreover, to disregard the separate juridical personality of a corporation, the
wrong-doing must be clearly and convincingly established. It cannot be presumed
. (Lim v. Court of Appeals, et al., G.R. No. 124715, prom. January 24, 2000)
*** c. Where no disregard of corporate personality. Mere ownership by
a single stockholder or by another corporation of all or nearly all of the capit
al stock of a corporation is not of itself sufficient ground for disregarding th
e separate corporate personality. (Sunio v. NLRC, 127 SCRA 390,397-398 cited in
Santos v. NLRC, et al., G.R. No. 101699, March 13, 1996; Lim v. Court of Appeal
s, et al., G.R. No. 124715, prom. January 24, 2000)
67. What is the effect of a change in corporate name ?
SUGGESTED ANSWER: It does not make a new corporation, whether effected by
a special act or under a general law, it has no effect on the identity of the c
orporation, or on its property, rights, or liabilities. (Avon Dale Garments, In
c. vs. NLRC, et al., G.R. No. 117932, July 20, 1995, Third Division)
68. Define an ultra vires act.
SUGGESTED ANSWER: It is an act which refers to
a. one which is not within the corporate powers conferred by the Corporat
ion Code or articles of incorporation
b. or not necessary or incidental in the exercise of the powers so confer
red. (Lopez Realty, Inc., et al., vs. Fontecha, et al., G.R. No. 76801, August
11, 1995, Second Division)
Providing gratuity pay for its employees is one of the express powers of
the corporation under the Corporation Code. (Ibid.)
NOTES AND COMMENTS:
a. Consequences of ultra vires acts. An act of a corporation which is
either illegal or outside of express, implied or incidental powers as so provide
d by law or the charter would be void under Article 5 of the Civil Code.
The act is not susceptible to ratification, and an unauthorized act (if
within corporate powers) of the board or a corporate officer, would only be unen
forceable conformably with Article 1403 of the Civil Code. (Rural Bank of Milao
r, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, prom. February 8, 2000)
 ***69. What is capital ? How is it differentiated with subscribed capi
tal and stock dividends ? What is meant by the trust fund doctrine ?
SUGGESTED ANSWER: Capital refers to the value of the property or assets
of a corporation.
The subscribed capital is the total amount of the capital that persons (
subscribers or shareholders) have agreed to take and pay for, which need not nec
essarily be, and can be more than, the par value of the shares. In fine, it is
the amount that the corporation receives, inclusive of the premiums if any, in c
onsideration of the original issuance of the shares.
In the case of stock dividends, it is the amount that the corporation tr
ansfers from its surplus profit account to its capital account. It is the same
amount that can loosely be termed as the trust fund of the corporation.
The trust fund doctrine considers this subscribed capital as a trust fund
for the payment of the debts of the corporation, to which the creditors may look
for satisfaction. Until the liquidation of the corporation, no part of the sub
scribed capital may be returned or released to the stockholder (except in the re
demption of redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments cannot be co
ndoned or remitted; nor an the corporation buy its own shares using the subscrib
ed capital as the consideration therefore. (National Telecommunications Commiss
ion v. Court of Appeals, et al., G.R. No. 127937, prom. July 28, 1999)
Another variation of the trust fund doctrine posits that any distribution
of corporate assets as a consequence of corporate liquidation are considered as
held in trust by the recipient stockholder for the benefit of the creditors of t
he corportion.
***70. State the rights of a stockholder.
SUGGESTED ANSWER:
a. To vote, including the right to appoint a proxy;
b. To share in the profits of the corporation including the right to de
clare stock dividends, but an unpaid subscriber does not have a right to stock d
ividends;
c. To a proportionate share in the assets of the corporation upon liqui
dation;
d. The right of appraisal;
e. The preemptive right to shares;
f. To inspect corporate books and records;
g. To elect directors and to be elected as such;
h. Such other rights as may contractually be granted to the stockholder
s by the corporation or by special law.
NOTES AND COMMENTS:
*** a. Stockholders of unpaid subscriptions have all the above rights o
f stockholders including right to vote. However, if already declared delinquen
t, and the call for the unpaid subscription is issued with the expiration of the
delinquent subscriber loses all of the above rights.
71. Corporate mergers take effect after SEC approval. (Associated Bank
v. Court of Appeals, et al., G.R. No. 123793, prom. June 29, 1998)

72. What is meant by the doctrine of corporate opportunity ?

SUGGESTED ANSWER: Corporation could prohibit by rules election of directo
r of competitor.
NOTES AND COMMENTS:
*** a. Disloyalty of director. Where a director by virtue of his office,
acquires for himself a business opportunity which should belong to the corporat
ion thereby obtaining profits to corporation s prejudice. PENALTY: Director mus
t account to the corporation for such profits by refunding the same even if he r
isked his own funds in the venture. WHEN NO REFUND: If the act is ratified by
2/3 vote of outstanding capital stock.
73. Who is an independent director ?
SUGGESTED ANSWER: An independent director means a person who, apart from
his fees and shareholdings, in independent of management and free from any busi
ness or other relationship which could, or could reasonably be perceived to, mat
erially interfere with his exercise of independent judgment in carrying our his
responsibilities as a director in any corporation required to make periodic repo
rts to the SEC. (SRC Rule 38.1)
NOTES AND COMMENTS:
An independent director includes among others a person who:
a. Is not a director or officer of the corporation or of its related co
mpanies or any of its substantial shareholders (other than as an independent dir
ector of any of the foregoing);
b. Is not a substantial shareholder of the corporation or its related c
ompanies or any of its substantial shareholders;
c. Is not a relative of any director, officer or substantial shareholde
r of the corporation, any of its related companies or any of its substantial sha
reholders. For this purpose, relatives includes spouse, parent, child, brother,
sister, and the spouse of such child, brother or sister;
d. Is not acting as a nominee or representative of any director or subs
tantial shareholder of the corporation, any of its related companies or any of i
ts substantial shareholders;
e. Has not been employed in any executive capacity by that public compa
ny, any of its related companies or by any of its substantial shareholders withi
n the last five (5) years;
f. Is not retained as professional adviser, by that public company, an
y of its related companies or any of its substantial shareholders within the las
t five (5) years;
g) Is not retained as professional adviser, by that public company, any
of its related companies or by any of its substantial shareholders, either pers
onally or through his firm; or
h) Has not engaged and does not engage in any transaction with the corp
oration or with any of its related companies or with any of its substantial shar
eholders, whether by himself or with other persons or through a firm of which he
is a partner or a company of which he is a director or substantial shareholder,
other than transactions which are conducted at arms length and are immaterial.
(SRC Rule 38.1)
74. What are the conditions for a corporation to invest its funds in an
other corporation or business or for any other purpose than that stated in its p
rimary purpose ?
SUGGESTED ANSWER:
a. Approval by a majority of the Board of Directors;
b. Said approval is ratified by two-thirds of the stockholders represen
ting the outstanding capital stock;
c. Written notice of the proposed investment and the date, time and pla
ce of the stockholders' meeting at which such proposal will be taken up must be
sent to each stockholder. (Sec. 42, Corporation Code)
If the investment is in accord with the principal purposes only the appr
oval of the Board of Directors is required.
75. On August 6, 1997, the Court of Appeals resolved to deny due course
to a Petition for Certiorari filed by BA Savings Bank, on the ground that the Ce
rtification on anti-forum shopping incorporated in the petition was signed not b
y the duly authorized representative of the petitioner as required under Supreme
Court Circular No. 28-91, but by its counsel, in contravention of said circular
x x x.
A Motion for Reconsideration was subsequently filed by BA Savings Bank w
hich attached a Corporate Secretary s Certificate, dated August 14, 1997 which sho
wed that a May 21, 1997 Resolution authorized its lawyers to represent it in any
action or proceeding before any court, tribunal or agency; and to sign, execute
and deliver the Certificate of Non-forum Shopping, among others.
May the corporate lawyers execute the Certificate of Non-forum shopping
? Explain briefly.
SUGGESTED ANSWER: Yes. The Board Resolution was sufficient to vest such
persons with the authority to bind the corporation and was specific enough as to
the acts they were empowered to do. (BA Savings Bank v. Sia, et al., G.R. No.
131214, prom. July 27, 2000)
NOTES AND COMMENTS:
a. A corporation acts through its board, officers or agents. A corporati
on exercises the powers expressly conferred on it by the Corporation Code and th
ose that are implied by or are incidental to its existence, through its board of
directors and/or its duly authorized officers and agents. Physical acts, like
signing of documents, can be performed only by natural persons duly authorized f
or the purpose by corporate bylaws or by specific act of the board of directors.
All acts within the powers of a corporation may be performed by agents of
its selection; and except so far as limitations or restrictions which may be imp
osed by special charter, by-law, or statutory provisions, the same general princ
iples of law which govern the relation of agency for a natural person govern the
officer or agent of a corporation, of whatever status or rank, in respect to hi
s power to act for the corporation; and agents once appointed, or members acting
in their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons. (BA Savings Bank v. Sia, et al.,
G.R. No. 131214, prom. July 27, 2000)
b. Corporate officers may bind the corporation. Corporate officers may a
ct on such matters as may be authorized either expressly by the Bylaws or Board
Resolutions or impliedly as such as by general practice or policy or as are impl
ied by express powers. When officers are allowed to act in particular cases, th
eir acts conformably therewith can bind the company. Hence, a corporate officer
entrusted with general management and control of the business has the implied a
uthority to act or contract for the corporation which may be necessary or approp
riate to conduct the ordinary business. (Rural Bank of Milaor, Camarines Sur v.
Ocfemia, et al., G.R. No. 137686, prom. February 8, 2000)
c. When acts of corporate officers DO NOT bind the corporation. If the a
ct of corporate officers comes within corporate powers but it is not done withou
t any express or implied authority therefor from the by-laws, board resolutions
or corporate practices, such an act does not bind the corporation. (Rural Bank o
f Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, prom. February 8, 2
000)
This is specially true where the party with whom the corporate officer con
tract is aware of the latter s limits of powers, in which case as far as the corpo
ration is concerned, the unauthorized act is declared void under Article 1898 of
the Civil Code, although susceptible to ratification by the corporate principal
. This is so because any person dealing with corporate boards and officers may
be said to be charged with the knowledge that the latter can only act within the
ir respective limits of power, and he is put to notice accordingly. Thus, it wo
uld generally behoove such a person to look into the extent of the authority of
corporate agents since the onus would ordinarily be with him. (Ibid.)
d. When UNAUTHORIZED acts of corporate officers BIND the corporation.
1) If ratified. The Board, acting within its competence, may ratify the
unauthorized act of the corporate officer. (Rural Bank of Milaor, Camarines Sur
v. Ocfemia, et al., G.R. No. 137686, prom. February 8, 2000)
An action of the board of directors during a meeting, which was illegal fo
r lack of notice, may be ratified either expressly, by the action of the directo
rs in a subsequent legal meeting, or impliedly by the corporation s subsequent cou
rse of conduct. (Lopez Realty, Inc., et al. vs. Fontencha, et al., G.R. No. 768
01, August 11, 1995, Second Division)
2) Under estoppel. So, too, a corporation may be held in estoppel from d
enying as against innocent third persons the authority of its officers or agents
 who have been clothed by it with ostensible or apparent authority. (Rural Bank
of Milaor, Camarines Sur v. Ocfemia, et al., G.R. No. 137686, prom. February 8,
2000)
In both of the above instances the act must not be an ultra vires act.
In order to be ratified or enforceable under estoppel, the unauthorized act of t
he corporate officer musst be within the authorized corporate powers. Otherwise
, the act if ultra vires would be void an not be the source of any rights and ob
ligations. Of course, damages may be awarded to the aggrieved party if the corp
oration or the corporate officer misled the other party into believing that the
act is a valid corporate act. Do not forget that there is a distinction between
a valid corporate act but the officer is not authorized to bind the corporation
, from one where the act is not a valid corporate act, and neither is the office
r authorized to bind the corporation. In the last instance, there is no corpora
te liability.
***e. Instances when corporate director, trustee or officer may be held p
ersonally liable to the corporation:
1) When he assents to a patently unlawful act of the corporatio
n;
2) When he acts in bad faith or with gross negligence in directing the
affairs of the corporation, or in conflict with the interest of the corporation
resulting in damages to the corporation, its stockholders or other persons;
3) When he consents to the issuance of watered stocks or who, having know
ledge thereof, does not forthwith file with the corporate secretary his written
objection thereto;
4) When he agrees to hold himself personally and solidarily lia
ble with the corporation; or
5) When he is made, by a specific provision of law, to personal
ly answer for the corporate action. (FCY Construction Group, Inc., et al. v. Co
urt of Appeals, et al., G.R. No. 123358, prom. February 1, 2000 citing Tramat Me
rcantile, Inc. et al., v. Court of Appeals, et al., 238 SCRA 14)
f. When corporate officers liable. The general rule is that officers o
f a corporation are not personally liable for their official acts unless it is s
hown that they have exceeded their authority. (ARB Construction Co., Inc., et
al., v. Court of Appeals, et al., G.R. No. 126554, prom. May 31, 2000)
76. Are contracts entered into by a corporation with its directors, tr
ustees, or officers valid ?
SUGGESTED ANSWER: The general rule is that a contract entered into by a
corporation with its directors, trustees, or officers is voidable at corporation
's option.
NOTES AND COMMENTS:
***a. The following are the instances where such contracts entered by a c
orporation with its directors, trustees, or officers are valid:
1) That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a quorum for suc
h meeting;
2) That the vote of such director or trustee was not necessary for the ap
proval of the contract;
3) That the contract is fair and reasonable under the circumstances; and
4) That in the case of an officer, the contract has been previously autho
rized by the board. (Sec. 32, Corporation Code)
Where any of the first two conditions is absent, in the case of a contra
ct with a director or trustee, such contract may be ratified by the vote of two-
thirds (2/3) of the stock outstanding, or of two-thirds (2/3) of the stockholder
s present in a meeting called for the purpose: Provided, That full disclosure o
f the adverse interest of the trustee or director involved is made at such meeti
ng, provided further that the contract is fair and reasonable under the circumst
ances. (Ibid.)
77. Dico is the registered owner of Proprietary Ownership Certificate
 (POC) No. 0668 in the Cebu Country Club. Subsequently, he resigned as propriet
ary member of said club, which resignation was duly entered in the minutes of th
e meeting of the Club s Board of Directors. Dico then transferred the DOC to Garc
ia.
In a case filed by the spouses Atinon against Dico, the prevailing spouses
levied on the DOC and a schedule for public auction was set. Garcia then cla
imed that the DOC was his. He further alleged that Dico is the manager of his (
Garcia s) business, and that the DOC was merely used by Dico in order to assist hi
m in entertaining clients.
Who has a better right to the DOC, the spouses Atinon or Garcia? Explain.
SUGGESTED ANSWER: The spouses Atinon have a better right. The tran
sfer was not recorded in the corporate books, hence it does not bind other parti
es. (Garcia v. Jomoaud, et al., G.R. No. 133969, prom. January 26, 2000)
NOTES AND COMMENTS:
a. The operative act which determines ownership of shares of stocks. The
transfer of shares of stocks in corporate books require indorsement on the share
s. If not so indorsed, presumption is that person whose name appears thereon is
the owner. (Razon v. Intermediate Appellate Court, 207 SCRA 234)
***b. Requirements for the issuance of a formal certificate of stock.
1) The certificates must be signed by the president or vice-president, co
untersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation. A mere typewritten statement advising a stockholder of the ex
tent of his ownership in a corporation without qualification and/or authenticat
ion cannot be considered as a formal certificate of stock.
2) Delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never detached fr
om the stock books although blanks therein are properly filled up of the person
whose name is inserted therein has no control over the books of the company.
3) The par value, as to par value shares, or the full subscription as to
no par value shares, must first be fully paid.
4) The original certificate must be surrendered where the person requesti
ng the issuance of a certificate is a transferee from a stockholder. (Bitong v.
Court of Appeals, et al., 291 SCRA 503)
Stock issued without authority and in violation of law is void and confe
rs no rights on the person to whom it is issued and subjects him to no liabiliti
es. Where there is an inherent lack of power in the corporation to issue the st
ock, neither the corporation nor the person to whom the stock is issued is estop
ped to question its validity since an estoppel cannot operate to create stock wh
ich under the law cannot have existence. (Bitong v. Court of Appeals, et al., 2
81 SCRA 503)
*** c. Requirements for valid transfer of stocks:
1) There must be a deliver of the stock certificate;
2) The certificate must be endorsed by the owner or his attorney-in-fac
t or other persons legally authorized to make the transfer; and
3) To be valid against third parties, the transfer must be recorded in th
e books of the corporation.
The rule is that the endorsement of the certificate of stock by the owner
or his attorney-in-fact or any other person legally authorized to make the trans
fer shall be sufficient to effect the transfer of shares only if the same is cou
pled with delivery. The delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the ne
w transferee. (Bitong, v. Court of Appeals, et al., 281 SCRA 503)
***d. Reason why attachment prevails over unrecorded transfer. Sec. 63
of the Corporation Code is explicit in its provisions that No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the transactio
n, the date of the transfer, the number of the certificate or certificates and t
he number of shares transferred.
The true meaning of the language is, and the obvious intention of the le
gislature in using it was, that all transfers of shares should be entered, as he
re required, on the books of the corporation. And it is equally clear that all
transfers of shares be so entered are invalid as to attaching or execution credi
tors of the assignors, as well as to the corporation and to subsequent purchaser
s in good faith, and, indeed, as to all persons interested, except the parties t
o such transfers. All transfers not so entered on the books of the corporation
are absolutely void; not because they are without notice or fraudulent in law or
fact, but because they are made so void by statute. (Garcia v. Jomouad, et al.
, G.R. No. 133969, prom. January 26, 2000 citing Uson v. Diosomito)
***78. Distinguish cash dividends from stock dividends.
SUGGESTED ANSWER:
a. Cash dividends withdraw assets from the corporation in the form of c
ash (money) and near cash WHILE stock dividends do not;
b. In cash dividends, money is received by the stockholders WHILE in st
ock dividends shares of stock of the corporation are received;
c. Cash dividends may be declared by the Board alone WHILE stock dividen
d declaration requires the approval of at least two-thirds (2/3) of the outstand
ing capital stock entitled to vote.
NOTES AND COMMENTS:
a. Similarities between cash dividends and stock dividends:
1) Both must be declared from unrestricted surplus.
2) Both must be declared by the Board of Directors.
b. Dividend declaration may be revoked if the same was irregularly decl
ared, such as when the same is violative of the trust fund doctrine.
Otherwise it can no longer be revoked once the right thereto has already
vested in the stockholders. Stated otherwise, revocation may be had prior to t
he declaration of cash dividends and for stock dividends prior to the issuance.

***80. Litton Mills, Inc. (Litton) entered into an agreement with Empir
e Sales Philippines Corporation, as local agent of Gelhaar Uniform Company (Gelh
aar), a corporation organized under the laws of the United States, whereby Litto
n agreed to supply Gelhaar 7,770 dozens of soccer jerseys. Considering this sin
gle transaction, is Gelhaar doing business in the Philippines?
SUGGESTED ANSWER: Yes. It is not really the fact that there is only a
single act done that is material to the consideration of whether a foreign corpo
ration is doing business in the Philippines. Where a single act or transaction
of a foreign corporation is not merely incidental or casual but is of such chara
cter as distinctly to indicate a purpose on the part of the foreign corporation
to do other business in the state, such act will be considered as constituting d
oing business.
Gelhaar s act in purchasing soccer jerseys to be within the ordinary cours
e of business of the company considering that it was engaged in the manufacture
of uniforms. The acts noted above are of such a character as to indicate a purp
ose to do business. (Litton Mills, Inc. v. Court of Appeals, et al., G.R. No. 9
4980, May 15, 1996)
NOTES AND COMMENTS:
a. Doing business. There is no general rule or governing principle ;la
id down as to what constitutes doing or engaging in or transacting business in the Ph
lippines.
Each case must be judged in the light of its peculiar circumstances. Thus
, it has often been held that a single act or transaction may be considered as do
ing business when a corporation performs acts for which it was created or exercis
es some of the functions for which it was organized. The amount or volume of th
e business is of no moment, for even a singular act cannot be merely incidental
or casual if it indicates the foreign corporation s intention to do business. (Hu
tchinson Ports Philippines Limited v. Subic Bay Metropolitan authority, et al.,
G.R. No. 131367, prom. August 31, 2000)
Examples:
 1) A foreign corporation performing acts pursuant to its primary purpose
and functions as regional/area headquarters for its home office is clearly doing
business in this country. (Georg Grotjahn GMBH & Co. vs. Isnani, et al., 235 S
CRA 216)
2) Participating in the bidding process constitutes doing business because
it shows the foreign corporation s intention to engage in business here. The bidd
ing for the concession contract is but an exercise of the corporation s reason for
creation or existence. Thus, it has been held that a foreign company invited to
bid for IBRD and ADB international projects in the Philippines will be consider
ed as doing business in the Philippines for which a license is required. In this
regard, it is the performance by a foreign corporation of the acts for which it
was created, regardless of volume of business, that determines whether a foreig
n corporation needs a license or not. (Hutchinson Ports Philippines Limited v. S
ubic Bay Metropolitan authority, et al., G.R. No. 131367, prom. August 31, 2000)
80-A On 25 May 1995, a Lease and Development Agreement was executed by
UIG and SBMA under which UIG shall lease from petitioner SBMA the Binictican Gol
f Course and appurtenant facilities thereto to be transformed into a world class
18-hole golf course, golf club/resort, commercial tourism and residential cente
r. The contract in pertinent part contains pre-termination clauses. On 7 March
1997, SBMA sent a letter to UIG declaring the latter in default of its contrac
tual obligations to SBMA under Section 22.1 of the lease and Development Agreeme
nt and required it to show cause why SBMA should not pre-terminate the agreemen
t. UIG then paid the rental arrearages but the other obligations remained unsa
tisfied.
On 8 September 1997, a letter of pre-termination was served by SBMA requir
ing UIG to vacate the premises. On 12 September 1997, SBMA served the formal n
otice of closure of Subic Bay Golf Course and took over possession of the subjec
t premises. On even date, UIG filed a complaint against SBMA for Injunction and
Damages with prayer for a writ of temporary restraining order and writ of prelimi
nary injunction.
Does UIG have the capacity to sue?
SUGGESTED ANSWER; Yes. SBMA is estopped from questioning the capacity to
sue of UIG. In entering into the LDA with UIG, SBMA effectively recognized its
personality and capacity to institute the suit before the trial court.
It is common ploy of defaulting local companies which are sued by unlicens
ed foreign companies not engaged in business in the Philippines to invoke lack o
f capacity to sue. (Subic Bay Metropolitan Authority, et al., v. Universal Inte
rnational Group of Taiwan, et al., G.R. No. 131680, prom. September 14, 2000)
This doctrine of estoppel was initiated as early as 1924 in Asia Banking C
orporation v. Standard Products and reiterated in Georg Grotjohn GMBH v. Isnani
and Communication Materials and Design v. CA.
NOTES AND COMMENTS;
a. General rule: Unlicensed foreign non-resident corporations cannot fil
e suits in the Philippines. Section 133 of the Corporation Code specifically pr
ovides that, No foreign corporation transacting business in the Philippines with
out a license, or its successors or assigns, shall be permitted to maintain or i
ntervene in any action, suit or proceeding in any court or administrative agency
of the Philippines, but such corporation may be sued or proceeded against befor
e Philippine courts or administrative tribunals on any valid cause of action rec
ognized under Philippine laws.
b. However, foreign corporations not licensed to do business in the Phili
ppines may exercise the right to file an action in Philippine courts on an isola
ted transaction. (New York Marine Managers, Inc. vs. Court of Appeals, G.R. 111
837, October 24, 1995)
c. The purpose for requiring foreign firms to obtain license. The primary
purpose of the license requirement is to compel a foreign corporation desiring
to do business within the Philippines to submit itself to the jurisdiction of th
e courts of the state and to enable the government to exercise jurisdiction over
them for the regulation of their activities in this country.
 If a foreign corporation operates a business in the Philippines without a
license, and thus does not submit itself to the Philippine laws, it is only just
that said foreign corporation be not allowed to invoke them in our courts when
the need arises. It must register with the SEC and appoint an agent for service
of process. Without such license, it cannot institute a suit in the Philippines
(Hutchinson Ports Philippines Limited v. Subic Bay Metropolitan Authority, et a
l., G.R. No. 131367, prom. August 31, 2000)
d. Exception or instance where licensing requirement not applied. Requi
rement for foreign corporations to secure license was never intended to favor do
mestic corporations who enter into solitary transactions with unwary foreign fir
ms and then repudiate their obligations simply because the latter are not licens
ed to do business in this country. (National Sugar Trading Corporation, et al.,
vs. Court of Appeals, et al., G.R. No. 110910, July 17, 1995, First Division)
After contracting with a foreign corporation, a domestic firm is estopped
from denying the former s capacity to sue. Hence, in Merrill Lynch Futures v. CA,
the Supreme Court ruled that, The rule is that a party is estopped to challeng
e the personality of a corporation after having acknowledged the same by enterin
g unto a contract with it. And the doctrine of estoppel to deny corporate existe
nce applies to foreign as well as domestic corporations, One who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its exi
stence and capacity. The principle will be applied to prevent a person contract
ing with a foreign corporation from later taking advantage of its noncompliance
with the statutes, chiefly in cases where such person has received the benefits
of the contract. x x x (Subic Bay Metropolitan Authority, et al., v. Universal In
ternational Group of Taiwan, et al., G.R. No. 131680, prom. September 14, 2000)
81. What act is constitutive of a dissolution of a corporation ?
SUGGESTED ANSWER: The mere filing of the Articles of Dissolution with the
Securities and Exchange Commission, without more, is not enough to support the c
onclusion that actual dissolution of an entity took place. For example, there m
ust be a showing that there was indeed an actual closure and cessation of operat
ions. (Avon Dale Garments, Inc., vs. NLRC, et al., G.R. No. 117932, July 20, 19
95, Third Division)
NOTES AND COMMENTS:
*** a. Three (3) year period after dissolution. A corporation continue
s to be a body corporate for three (3) years after its dissolution for purposes
of prosecuting and defending suits by and against it and for enabling it to sett
le and close its affairs, culminating in the disposition and distribution of its
remaining assets. It may, during the three (3) year term, appoint a trustee or
a receiver who may act beyond that period.
The termination of the life of a juridical entity does not by itself cau
se extinction or diminution of the rights and liabilities of such entity., nor t
hose of its owners and creditors.
If the three-year extended life has expired without a trustee or receive
r having been expressly designated by the corporation within that period,, the b
oard of directors (or trustees) itself, may be permitted to continue as trustees b
y legal implication to complete the corporate liquidation. Still in the absence
of a board of directors or trustees, those having any pecuniary interest in the
assets, including not only the shareholders but likewise the creditors of the c
orporation, acting for and its behalf, might make proper representations with th
e Securities and Exchange Commission, which has primary and sufficient broad jur
isdiction in matters of this nature, for working out a final settlement of the c
orporate concerns. (Clemente, et al., vs. Court of Appeals, et al., G.R. No. 82
407, March 27, 1995, Third Division)
*** b. Grounds for involuntary dissolution of a corporation under quo w
arranto proceedings:
1) When the Corporation has offended against a provision or an act for it
s creation or renewal;
2) When it has forfeited its privileges and franchises by non-use;
3) When it has committed or omitted an act which amounts to a surrender o
f its corporate rights, privilege or franchises;
4) When it misused a right, privilege or franchise conferred upon it by l
aw, or when it has exercised a right, privilege or franchise in contravention of
law. (Philippine National Bank vs. CFI, etc., 209 SCRA 294)
82. What is the cumulative rule ?
SUGGESTED ANSWER: One candidate may be given as many votes as the number
of directors to be elected multiplied by the number of shares or distribute und
er the same principle among as many candidates as the voter shall see fit, PROVI
DED: the total number of votes cast shall not exceed the number of shares shown
on the books multiplied by the whole numbers of directors to be voted.
b. The Securities Regulation Code (R.A. No. 8799)
Exclude: Rules on Corporate Rehabilitation
***83. What is the state policy that impelled the enactment of the Secu
rities Regulation Code ?
SUGGESTED ANSWER: The State policy that impelled the enactment of the
Securities Regulation Code
a. To establish a socially conscious, free market that regulates itself,
b. Encourage the widest participation of ownership in enterprises,
c. Enhance the democratization of wealth,
d. Promote the development of the capital market,
e. Protect investors,
f. Ensure full and fair disclosure about securities,
g. Minimize if not totally eliminate insider trading and other fraudulent
or manipulative devices and practices which create distortions in the free marke
t. (Sec. 2, SRC)
NOTES AND COMMENTS: The above discussion may be used to answer the ques
tions What is the principal purpose of laws and regulations governing securities
in the Philippines ? and What are the main purposes of the Securities Regulat
ion Code ?
***84. What are the powers and functions of the Securities and Exchange
Commission ?
SUGGESTED ANSWER: The Commission shall have the powers and functions pr
ovided by the Securities Regulation Code, Presidential Decree No. 902-A, the Cor
poration Code, the Investment Houses Law, the Financing Company Act and other ex
isting laws. Pursuant thereto, the Commission shall have, among others, the fol
lowing powers and functions:
a) Have jurisdiction and supervision over all corporations, partnership
s or associations who are the grantees of primary franchises and/or a license or
permit issued by the Government.
b) Formulate policies and recommendations on issues concerning the Secu
rities market, advise Congress and other government agencies on all aspects of t
he securities market and propose legislation and amendments thereto;
c) Approve, reject, suspend, revoke or require amendments to registrati
on statements, and registration and licensing applications;
d) Regulate, investigate or supervise the activities of persons to ensu
re compliance;
e) Supervise, monitor, suspend or take over the activities of exchanges
, clearing agencies and other SROs;
f) Impose sanctions for the violation of laws and the rules, regulati
ons and orders issued pursuant thereto;
g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules
, regulations and orders;
h) Enlist the aid and support of and/or deputize any and all enforcemen
t agencies of the Government, civil or military as well as any private instituti
on, corporation, firm, association or person in the implementation of its powers
 and functions under this Code;
i) Issue cease and desist orders to prevent fraud or injury to the inve
sting public;
j) Punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of and penalties prescribed by the Rule
s of Court;
k) Compel the officers of any registered corporation or association to
call meetings of stockholders or members thereof under its supervision;
l) Issue subpoena duces tecum and summon witnesses to appear in any pr
oceedings of the Commission and in appropriate cases, order the examination, sea
rch and seizure of all documents, papers, files and records, tax returns, and bo
oks of accounts of any entity or person under investigation as may be necessary
for the proper disposition of the cases before it, subject to the provisions of
existing laws;
m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnerships or associations, upon
any of the grounds provided by law; and
n) Exercise such other powers as may be provided by law as well as thos
e which may be implied from, or which are necessary or incidental to the carryin
g out of, the express powers granted the Commission to achieve the objectives an
d purposes of these laws. (Sec. 5.1, SRC)
***85. What is the jurisdiction of the SEC over intracorporate controve
rsies ?
SUGGESTED ANSWER: The Commission s jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No 902-A was transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court. (Sec. 5.2 SRC)
86. What are the civil cases involving corporations, partnerships, or a
ssociations relations which fall within the jurisdiction of the regular courts
?
SUGGESTED ANSWER: These are the civil cases involving the following:
a. Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or misrepresentat
ion which may be detrimental to the interest of the public and/or of the stockho
lders, partners, or members of any corporation, partnership, or association;
b. Controversies arising out of intra-corporate, partnership, or associat
ion relations between and among stockholders, members, or associates; and betwee
n, any or all of them and the corporation, partnership, or association of which
they are stockholders, members, or associates, respectively;
c. Controversies in the election or appointment of directors, trustees, o
fficers, or managers of corporations, partnerships, or associations;
d. Derivative suits; and
e. Inspection of corporate books. (Sec. 1, Rule 1, Interim Rules of Proc
edure Governing Intracorporate Controversies under R.A. No. 8799)
87. What are the tests to determine whether a controversy is intracorpo
rate or not ?
SUGGESTED ANSWER: Sec. 5 (b) of P.D. No. 902-A does not define what an
intra-corporate controversy is, but case law has fashioned two tests:
The FIRST test uses the enumeration in Sec. 5 (b) of the relationships to
determine jurisdiction, to wit:
1) Those between and among stockholders and members;
2) Those between and among stockholders and members, on one hand, and the
corporation, on the other hand; and
3) Those between the corporation and the State but only insofar as its fr
anchise or right to exist as an entity is concerned.
The SECOND test, focuses on the nature of the controversy itself. Recent
decisions of the Supreme Court consider not only the subject of their controvers
y but also the status of the parties. (Pascual, et al., v. Court of Appeals, et
 al., G.R. No. 138542, prom. August 25, 2000)
NOTES AND COMMENTS:
a. No corporate relation where a corporate officer holds in trust for ano
ther person his corporate interests. Thus, where a stockholder s properties are b
eing litigated, there would be no corporate relation where it is alleged that up
on the death of the stockholder, his heir became a co-owner of the estate left b
y him including his corporate interests. (Pascual, supra)
b. Supervisory authority of SEC over corporate ends where the property ha
s been completely dissolved. (Pascual, supra)
***88. Explain the concept of a derivative suit.
SUGGESTED ANSWER: An individual is permitted to institute a derivative su
it
a. on behalf of the corporation
b. wherein he holds stock in order
c. to protect or vindicate corporate rights,
d. whenever the officials of the corporation refuse to sue, or are the on
es to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as the nominal party, w
ith the corporation as the real party in interest. (Gamboa v. Victoriano, 90 SC
RA 40, 47 cited in First Philippine International Bank , et al., v. Court of App
eals, et al., G.R. No. 115849, January 24, 1996)
NOTES AND COMMENTS:
a. Nature of derivative suit. Where corporate directors are guilty of a b
reach of trust, not of mere error of judgment or abuse of discretion, and intra-
corporate remedy is futile or useless, a stockholder may institute a suit in beh
alf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders.
The stockholder s right to institute a derivative suit is not based on any e
xpress provision of the Corporation Code but is impliedly recognized when the la
w makes corporate directors or officers liable for damages suffered by the corp
oration and is stockholders for violation of their fiduciary duties.
In effect, the suit is an action for specific performance of an obligation
owed by the corporation to the stockholders to assist its rights of action wher
e the corporation has been put in default by the wrongful refusal of the directo
rs or management to make suitable measures for its protection.
b. Basis of derivative suit. The basis of a stockholder s suit is always o
ne of equity. However, it cannot prosper without first complying with the legal
requirements for its institution, The moist important of these is the bona fid
e ownership by a stockholder of a stock in his own right at the time of the tran
saction complained of which invests him with standing to institute a derivative
action for the benefit of the corporation.
***c. Requisites of a derivative suit. A stockholder or member may bring
an action in the name of a corporation or association, as the case may be, prov
ided, that:
1) He was a stockholder or member at the time the acts or transactions su
bject of the action occurred and at the time the action was filed;
2) He exerted all reasonable efforts, and alleges the same with particula
rity in the complaint, to exhaust all remedies available under the articles of i
ncorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
3) No appraisal rights are available for the act or acts complained of; a
nd
4) The suit is not a nuisance or harassment suit. (Sec. 1, Rule 8, Inter
im Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 879
9)
*** 89. What is a public company ?
SUGGESTED ANSWER: Any corporation
 a) with a class of equity securities listed on an Exchange or
b) with assets in excess of Fifty Million Pesos (P50,000,000.00) and havi
ng two hundred (200) or more holders, at least two hundred (200) of which are ho
lding at least one hundred (100) shares of a class of its equity securities. (S
RC Rule 3.1.i)
*** 90. What is a Self Regulatory Organization or SRO ?
SUGGESTED ANSWER: An organized Exchange, registered clearing agency and
any organization or association registered as an SRO under the provisions of th
e Securities Regulation Code to enforce compliance with relevant provisions of t
he Code and rules and regulations adopted thereunder, and mandated to make and e
nforce its own rules, which have been approved by the Securities and Exchange Co
mmission, by their members and/or participants. (SRC Rule 3.1.j)
91. What is an Exchange ?
SUGGESTED ANSWER: Exchange is an organized market-place or facility tha
t brings together buyers and sellers and executes trades of securities and/or co
mmodities. ( Sec. 3.7 SRC)
92. What is a fraudulent transaction ?
SUGGESTED ANSWER: The purchase of sale of any securities to engage in any
act, transaction, practice, or course of business which operates or would opera
te as a fraud or deceit upon any person.
Fraud here is akin to bad faith which implies a conscious and intentiona
l design to do a wrongful act for a dishonest purpose or moral obliquity; it is
unlike that of the negative idea of negligence in that fraud or bad faith contem
plates a state of mind affirmative operating with furtive objectives. (Securiti
es and Exchange Commission vs. Court of Appeals, et al., G.R. Nos. 106425 & 1064
31-32, July 21, 1995, Third Division)
*** 93. What are considered as manipulative practices relative to secu
rities trading ?
SUGGESTED ANSWER: It shall be unlawful for any person acting for hims
elf or through a dealer or broker, directly or indirectly:
a) To create a false or misleading appearance of active trading in any li
sted security traded in an Exchange or any other trading market:
(i) By effecting any transaction in such security which involves no chang
e in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such secu
rity with the knowledge that a simultaneous order or orders of substantially the
same size, time or prize, for the sale or purchase of any such security, has or
will be entered by or for the same or different parties; or
(iii) By performing similar acts where there is no change in beneficial o
wnership.
b) To effect, alone or with others, a series of transactions in securitie
s that:
(i) Raises their price to induce the purchase of a security, whether of
the same or a different class of the same issuer or of a controlling, controlle
d, or commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of t
he same or a different class, of the same issuer or of a controlling, controlled
, or commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through ma
nipulative devices such as marking the close, painting the tape, squeezing the f
loat, hype and dump, boiler room operations and such other similar devices.
c) To circulate or disseminate information that the price of any security
listed in an Exchange will or is likely to rise or fall because of manipulative
market operations of any one or more persons conducted for the purpose of raisi
ng or depressing the price of the security for the purpose of inducing the purch
ase or sale of such security.
 d) To make false or misleading statement with respect to any material fa
ct, which he knew or had reasonable ground to believe was so false or misleading
, for the purpose of inducing the purchase or sale of any security listed or tra
ded in an Exchange.
e) To effect, either alone or others, any series of transactions for the
purchase and/or sale of any security traded in an Exchange for the purpose of pe
gging, fixing or stabilizing the price of such security; unless otherwise allowe
d by the Securities Regulation Code or by rules of the SEC. (SRC Rule 24.1, a
rrangement and rewording supplied)
*** 94. What are some of the non-exclusive examples of types of prohibi
ted conduct considered as manipulation of stock market prices ? Define each.
SUGGESTED ANSWER:
a. Painting the tape. Engaging in a series of transactions in securiti
es that are reported publicly to give the impression of activity or price moveme
nt in a security. [SRC Rule 24.1 (b) 1.5 (a)]
b. Marking the close. Buying and selling securities at the close of th
e market in an effort to alter the closing price of the security. [SRC Rule 24.1
(b) 1.5 (b)]
c. Improper matched orders. Engaging in transactions where both the bu
y and sell orders are entered at the same time with the same price and quantity
by different but colluding parties. [SRC Rule 24.1 (b) 1.5 (c)]
d. Hype and dump. Engaging in buying activity at increasingly higher p
rices and then selling securities in the market at the higher prices. [SRC Rule
24.1 (b) 1.5 (d)]
e. Wash sales. Engaging in transactions in which there is no genuine c
hange in actual ownership of a security. [SRC Rule 24.1 (b) 1.5 (e)]
f. Squeezing the float. Taking advantage of a shortage of securities i
n the market by controlling the demand side and exploiting market congestion dur
ing such shortages in a way as to create artificial prices. [SRC Rule 24.1 (b) 1
.5 (f)]
g. Disseminating false or misleading market information through media,
including the internet, or any other means to move the price of a security in a
direction that is favorable to a position held or a transaction. [SRC Rule 24.1
(b) 1.5 (g)]
*** 95. Who is an insider ?
SUGGESTED ANSWER:
a. The issuer;
b. A director or officer of, or a person controlling, controlled by, or
under common control with, the issuer,
c. A person whose relationship or former relationship o the issuer give
s or gave him access to a fact of special significance about the issuer or the s
ecurity that is not generally available, or
d. A person who learns such a fact from any of the foregoing insiders w
ith knowledge that the person from whom he learns the fact is such an insider. (
Sec. 3.8, SRC)
96. Who is a promoter ?
SUGGESTED ANSWER: Promoter is a person who, acting alone or with others
, takes initiative in founding and organizing the business or enterprise of the
issuer and receives consideration therefor. ( Sec 3.10 SRC)
97. Who is an underwriter ?
SUGGESTED ANSWER: Underwriter is a person who guarantees on a firm com
mitment and /or declared best effort basis the distribution and sale of securiti
es of any kind by another company. ( Sec. 3.15, SRC)
98. What is a prospectus?
SUGGESTED ANSWER: Prospectus is the document made by or on behalf of an
issuer, underwriter or dealer to sell or offer securities for sale to the public
through a registration statement filed with the Commission. (Sec. 3.11 SRC)
99. Who is a broker?
SUGGESTED ANSWER: Broker is a person engaged in the business of bu
ying and selling securities for the account of others. (Sec. 3.3 SRC)
100. Who is a dealer?
SUGGESTED ANSWER: Dealer means any person who buys and sells securi
ties for his/her own account in the ordinary course of business. (Sec. 3.4 SRC)
101. What is a "fact of special significance" ?
SUGGESTED ANSWER:
a. One which in addition to being material, would be likely to affect th
e market price of a security to a significant extent on being made generally ava
ilable
b. One which a reasonable person would consider especially important un
der the circumstances in determining his course of action in the light of such f
actors as the degree of its specificity, the extent of its difference from infor
mation generally available previously and is nature and reliability.
*** 102. What are securities ?
SUGGESTED ANSWER: These are shares, participation or interests in a cor
poration or in a commercial enterprise or profit-making venture and evidenced by
a certificate, contract, instrument, whether written or electronic in character
. (1st par., Sec. 3.1, SRC)
103. Give examples of securities ?
SUGGESTED ANSWER:
a) Shares of stock, bonds, debentures, notes, evidences of indebte
dness, asset-backed securities;
b) Investment contracts, certificates of interest or participation in a
profit sharing agreement, certificates of deposit for a future subscription;
c) Fractional undivided interests in oil, gas or other mineral rights;
d) Derivatives like option and warrants;
e) Certificates of assignments, certificates of participation, trust ce
rtificates, voting trust certificates or similar instruments;
f) Proprietary or nonproprietary membership certificates in corporation
s; and
g) Other instruments as may in the future be determined by the Commissi
on. (Sec. 3.1 SRC)
104. What are over-the-counter securities ?
These are securities sold without passing through the stock exchange.
NOTES AND COMMENTS: Over-the-counter markets. Markets made or created
for the purchase and sale of securities other than on a stock exchange.
*** 105. What is meant by the registration requirement for securities ?
SUGGESTED ANSWER: The requirement that securities shall not be sold or
offered for sale or distribution within the Philippines, without a registration
statement duly filed with and approved by the SEC. Prior to such sale, informat
ion on the securities, in such form and with such substance as the SEC may presc
ribe, shall be made available to each prospective purchaser. (Sec. 8.1, SRC)
*** 106. What are exempt securities ?
SUGGESTED ANSWER: Those that do not require registration either because th
e law itself exempts them therefrom or the Securities and Exchange Commission fi
nds that the enforcement of the registration requirement is not necessary in the
public interest and for the protection of the investors by reason of the amount
involved or the limited character of the public offering.
 *** 107. Give examples of exempt securities.
SUGGESTED ANSWER:
a) Any security issued or guaranteed by the Government of the Philippines
, or by any political subdivision or agency thereof, or by any person controlled
or supervised by, and acting as an instrumentality of said Government.
b) Any security issued or guaranteed by the government or any country wit
h which the Philippines maintains diplomatic relations, or by any state, provinc
e or political subdivision thereof on the basis of reciprocity: Provided, That t
he Commission may require compliance with the form and content of disclosures th
e Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in bankruptcy duly a
pproved by the proper adjudicatory body.
d) Any security or its derivatives the sale or transfer of which, by law,
is under the supervision and regulation of the Office of the Insurance Commiss
ion, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue.
e) Any security issued by a bank except its own shares of stock. (Sec. 9
.1 SRC)
The Commission may, by rule or regulation after public hearing, add
to the foregoing any class of securities if it finds that the enforcement of th
is Code with respect to such securities is not necessary in the public interest
and for the protection of investors. (Sec. 9.2 SRC)
*** 108. What transactions are exempt ?
SUGGESTED ANSWER: Sale of any security in any of the following transacti
ons:
a) At any judicial sale, or sale by an executor, administrator, guardian
or receiver or trustee in insolvency or bankruptcy.
b) By or for the account of a pledge holder, or mortgagee or any other si
milar lien holder selling or offering for sale or delivery in the ordinary cours
e of business and not for the purpose of avoiding the provisions of this Code, t
o liquidate a bona fide debt, a security pledged in good faith as security for
such debt.
c) An isolated transaction in which any security is sold, offered for sal
e, subscription or delivery by the owner thereof, or by his representative for t
he owner s account, such sale or offer for sale subscription or delivery not being
made in the course of repeated and successive transactions of a like character
by such owner, or on his account by such representative and such owner or repres
entative not being the underwriter of such security.
d) The distribution by a corporation, actively engaged in the business au
thorized by its articles of incorporation, of securities to its stockholders or
other security holders as a stock dividend or other distribution out of surplus.
e) The sale of capital stock of a corporation to its own stockholders exc
lusively, where no commission or other remuneration is paid or given directly or
indirectly in connection with the sale of such capital stock.
f) The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, where the entire mortgage together with all the bon
ds or notes secured thereby are sold to a single purchaser at a single sale.
g) The issue and delivery of any security in exchange for any other secur
ity of the same issuer pursuant to a right of conversion entitling the holder of
the security surrendered in exchange to make such conversion: Provided, That th
e security so surrendered has been registered under this Code or was, when sold,
exempt from the provision of this Code, and that the security issued and delive
red in exchange, if sold at the conversion price, would at the time of such conv
ersion fall within the class of securities entitled to registration under this C
ode. Upon such conversion the par value change shall be deemed the price at whi
ch the securities issued and delivered in such exchange are sold.
h) Broker s transactions, executed upon customer s orders, or any registered
Exchange or other trading market.
i) Subscriptions for shares of the capital stock of a corporation prior t
o the incorporation thereof or in pursuance of an increase in its authorized cap
ital stock under the Corporation Code, when no expense is incurred, or no commis
sion, compensation or remuneration is paid or given in connection with the sale
or disposition of such securities, and only when the purpose for soliciting, giv
ing or taking of such subscription is to comply with the requirements of such la
w as to the percentage of the capital stock of a corporation which should be sub
scribed before it can be registered and duly incorporated, or its authorized cap
ital increased.
j) The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.
k) The sale of securities by an issuer to fewer than twenty (20) persons
in the Philippines during the twelve-month period.
l) The sale of securities to any number of the following qualified buyers
:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of th
e Philippines or any political subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage in trust functions.
(v) Investment company; or
(vi) Such other person as the Commission may by rule determine as quali
fied buyers, on the basis of such factors as financial sophistication, net worth
, knowledge, and experience in financial and business matters, or amount of asse
ts under management. (Sec. 10.1 SRC)
*** 109. What are the grounds for SEC to reject and revoke registration
of securities ?
SUGGESTED ANSWER: If SEC finds that:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of the Securities Regulation Code
, the rules promulgated pursuant thereto, or any order of the SEC of which the i
ssuer has notice in connection with the offering for which a registration statem
ent has been filed;
(iii) Has been or is engaged or is about to engage in fraudulent transact
ions;
(iv) Has made any false or misleading representation of material facts in
any prospectus concerning the issuer or its securities;
(v) Has failed to comply with any requirement that the SEC may impose as
a condition for registration of the security for which the registration statemen
t has been filed; or
(b) The registration statement is on its face incomplete or inaccurate in
any material respect or includes any untrue statement of a material fact or omi
ts to state a material fact required to be stated therein or necessary to make t
he statements therein not misleading; or
(c) The issuer, any officer, director or controlling person of the issuer
, or person performing similar functions, or any underwriter has been convicted,
by a competent judicial or administrative body, upon plea of guilty, or otherwi
se, of an offense involving moral turpitude and/or fraud or is enjoined or restr
ained by the SEC or other competent judicial or administrative body for violatio
ns of securities, commodities, and other related laws. (Sec. 13, SRC arrangemen
t and rewording supplied)
*** 110. What are the grounds for suspension of the registration of sec
urities ?
SUGGESTED ANSWER:
a. The SEC may also suspend the right to sell and offer for sale such sec
urity pending further investigation, by entering an order specifying the grounds
 for such action, and by notifying the issuer, underwriter, dealer or broker kno
wn as participating in such offering.
b. The SEC may also suspend upon a refusal of the issuer upon order of th
e SEC to furnish such further information as may in its judgment be necessary to
enable the SEC to ascertain whether the registration of such security should be
revoked:
1) If at any time, the information contained in the registration stateme
nt filed is or has become
a) misleading,
b) incorrect,
c) inadequate or incomplete in any material respect, or
2) the sale or offering for sale of the security registered thereunder ma
y work or tend to work a fraud,
Upon the issuance of any such order and notification to the issuer, underw
riter, dealer or broker known as participating in such offering, no further offe
r or sale of any such security shall be made until the same is lifted or set asi
de by the Commission. Otherwise, such sale shall be void. (Sec. 15 SRC numberi
ng and arrangement supplied)
111. What is a commodity futures contract ?
SUGGESTED ANSWER: Commodity futures contract means a contract providing
for the making or taking delivery at a prescribed time in the future of a specif
ic quantity and quality of a commodity or the cash value thereof, which is custo
marily offset prior to the delivery date, and includes standardized contracts ha
ving the indicia of commodities futures, commodity options and commodity leverag
e, or margin contracts. ( SRC Rule 11.1.1)
112. What is a commodity ?
SUGGESTED ANSWER: Commodity means any goods, articles, services, righ
ts and interests, including any group or index of any of the foregoing, in which
commodity interests contracts are presently or in the future dealt in. ( SR
C Rule 11.1.2)
113. What is a forward contract in commodity transactions ?
SUGGESTED ANSWER: This is a contract between a buyer and a seller whe
reby the buyer is obligated to take delivery and the seller is obliged to make d
elivery of a fixed amount of an underlying commodity at a pre-determined price a
nd date. Payment in full is due at the time of delivery. ( SRC Rule 11.1.3)
113. What is a derivative ?
SUGGESTED ANSWER: With respect to equity securities a financial instrum
ent, including options and warrants, whose value depends on the interest in or p
erformance of an underlying security, but does not require any investment of pri
ncipal in the underlying security. (SRC Rule 3.1.1.2)
114. What are options ?
SUGGESTED ANSWER: These are contracts that give the buyer the right, bu
t not the obligation, to buy or sell an underlying security at a predetermined p
rice, called the exercise or strike price, on or before a predetermined date, ca
lled the expiry date, which can only be extended in accordance with Exchange rul
es. (SRC Rule 3.1.1.2.a)
115. What is a strike price ?
SUGGESTED ANSWER: The predetermined buying or selling price of an under
lying security under an option. (SRC Rule 3.1.1.2a)
116. What is an expiry date ?
SUGGESTED ANSWER: The predetermined date for buying or selling an under
lying security under an option. (SRC Rule 3.1.1.2a)
 117. What are the different kinds of options ?
SUGGESTED ANSWER: A call option and a put option.
118. What are call options ?
SUGGESTED ANSWER: A contract that gives the buyer the right, but not th
e obligation to buy an underlying security at a predetermined price on or before
a predetermined date. (SRC Rule 3.1.1.2.a.b.)
119. What are put options ?
SUGGESTED ANSWER: A contract that gives the seller the right, but not th
e obligation to sell an underlying security at a predetermined price on or befor
e a predetermined date. (SRC Rule 3.1.1.2.a.b.)
120. What is meant by a straddle ?
SUGGESTED ANSWER: Straddle involves the purchase of an equal number o
f put options and call options on the same underlying security at the same strik
e price and maturity date. Each option may be exercised separately, although th
e combination of options is usually bought and sold as a unit. ( SRC Rule 25.1
.2)
121. What is a block sale ?
SUGGESTED ANSWER: A block sale shall mean a matched trade that does
not go through the automated order matching system of an Exchange trading system
but instead has been pre-arranged by and among the Broker Dealer s clients and is
then entered as a done deal directly into the trading system. ( SRC Rule 30.
2-8.2)
***122. What are Chinese Walls ?
SUGGESTED ANSWER: The proper segregation of functions within a firm
by any Broker Dealer which assumes more than one function whether as a dealer,
adviser, or underwriter, or which engages in market making transactions to preve
nt:
a. the flow of information between the different parts of its organizatio
n which perform each function; and
b. any conflict of interest which may result.
A Broker Dealer shall at all times ensure that its trading functions and b
ack-office settlement functions are properly segregated and shall establish writ
ten procedures to ensure compliance with this Rule. ( SRC Rule 34.1-3, arrangeme
nt supplied)
NOTES AND COMMENTS:
a. Information defined. Information:
1) of a specific nature which has not been made public; and
2) relating to one or more public companies or any securities of a public
company; and
3) which, if it were made public, would likely affect the market price of
the securities. ( SRC Rule 34.1-3)
c. Banking Laws
(i) The New Central Bank Act (R.A. 7653) (Basics)
123. What are the responsibilities of the Bangko Sentral ng Pilipinas ?
SUGGESTED ANSWER:
a. To provide policy directions in the areas of money, banking and cred
it.
b. To supervise operations of banks and exercise such regulatory powers
as provided in the Central Bank Act and other pertinent laws over the operation
s of finance companies and non-bank financial institutions performing quasi-bank
ing transactions, such as quasi-banks and institutions performing similar functi
ons.
 NOTES AND COMMENTS:
*** a. Primary objective of the Bangko Sentral ng Pilipinas. To maintain
price stability conducive to a balanced and sustainable growth of the economy.
It shall also promote and maintain stability and convertibility of the p
eso.
b. The nature of the Bangko Sentral ng Pilipinas. It is the central mo
netary authority that functions and operates as an independent and accountable b
ody corporate in the discharge of its mandated responsibilities concerning money
banking and credit.
While being a government-owned corporation, it enjoys fiscal and adminis
trative autonomy.
c. Corporate powers of the Bangko Sentral ng Pilipinas
1) Adopt, alter and use a corporate seal
2) Enter into contracts
3) Lease or own real and personal property
4) Sell or otherwise dispose of property
5) Sue and be sued
6) Perform all necessary and proper acts
7) Acquire and hold such assets in connection with its operations
8) Incur such liabilities in connection with its operations
9) Compromise, condone or release any claim or settled liability as pre
scribed by Monetary Board
124. What is meant by legal tender ?
SUGGESTED ANSWER: Notes and coins issued by the Bangko Sentral ng Pilip
inas fully guaranteed by the Government of the Republic of the Philippines and a
ccepted for the payment of all debts, both public and private.
NOTES AND COMMENTS:
a. Coins as legal tender: Unless otherwise fixed by the Monetary Board,
coins shall be legal tender in amounts
1) not exceeding P50.00 for denominations of Twenty-five centavos and abo
ve, and in amounts
2) not exceeding P20.00 for denominations of Ten centavos or less. (Sec.
52, New Central Bank Act)
b. Checks not legal tender. Checks representing demand deposits do not
have legal tender power and their acceptance in the payment of debts, both publ
ic and private, is at the option of the creditor, Provided, however, That a chec
k which has been cleared and credited to the account of the creditor shall be eq
uivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account. (Sec. 60, New Central Bank Act)
***125. What are the instruments of Bangko Sentral action in order to a
chieve the primary objective of price stability ?
SUGGESTED ANSWER:
a. In general the Monetary Board shall rely on its moral influence.
b. It may also rely on the powers granted it for the management of mone
tary aggregates like:
1) Operations in gold and foreign exchange
a.) Purchase and sales of gold;
b) Purchase and sales of foreign exchange;
c) Acquisition of inconvertible currencies;
d) Determination of the exchange rate policy of the cou
ntry;
e) Grant and receive loans from foreign banks and other foreign or inte
rnational entities;
2) Use of credit policy
a) Use of rediscounts, discounts, loans and advances
b) Grant emergency loans and advances
3) Engage in open market operations like purchases and sales of securities.
 126. Who is a conservator ?
SUGGESTED ANSWER: The person appointed by the Monetary Board to take ch
arge of the assets, liabilities, and the management of a bank or a quasi-bank wh
ich is in a state of continuing inability or unwillingness to maintain a conditi
on of liquidity deemed adequate to protect the interest of depositors and credit
ors, reorganize the management thereof, collect all monies and debts due said in
stitution, and exercise all powers necessary to restore its viability. (Sec. 29
, New Central Bank Act)
NOTES AND COMMENTS:
a. Powers of bank conservator. While the Central Bank law gives vast a
nd far reaching powers to the conservator of a bank, it must be pointed out that
such powers must be related to the (preservation of) the assets of the bank, (th
e reorganization of) the management thereof and (the restoration of) its viabili
ty. Such powers, enormous and extensive as they are, cannot extend to the post-f
acto repudiation of perfected transactions otherwise they would infringe against
the non-impairment clause of the Constitution.
The bank conservator merely takes the place of the bank s board of directo
rs. What the said board cannot do - such as repudiating a contract validly ente
red into under the doctrine of implied authority - the conservator cannot do eit
her. His authority would be only to bring court actions to assail such contract
s. The power of a conservator to revoke contracts, extends only to those which
under existing law are deemed to be defective- i.e. void, voidable, unenforceabl
e or rescissible. (First Philippine International Bank, et al., v. Court of App
eals, et al., January 24, 1996, Third Division)
b. Liquidation court has jurisdiction to adjudicate all disputed claims
against the insolvent bank. The Monetary Board s order for the liquidation of an
insolvent bank shall be implemented through the filing by the Solicitor General
for the Central Bank of a petition with the Regional Trial Court. Said Court s
hall have jurisdiction to adjudicate all disputed claims against the insolvent b
ank and enforce individual liabilities of the stockholders and do all that is ne
cessary to preserve the assets of such institution and to implement the liquidat
ion plan approved by the Monetary Board.
The rationale behind judicial liquidation is to prevent multiplicity of
actions against the insolvent bank. It is a pragmatic arrangement designed to e
stablish due process and orderliness in the liquidation of the bank, to obviate
the proliferation of litigation and to avoid injustice and arbitrariness. Furth
ermore, it is not necessary that a claim be initially disputed in a court or age
ncy before it is filed with the liquidation court. (Ong v. Court of Appeals, G.
R. No. 112830, February 1, 1996, First Division)
c. Requirements before Monetary Board can declare bank insolvent, close
, or forbid it from doing business in the Philippines:
1) Examination by Department of Supervision on condition of the
bank;
2) Examination shows that the bank is insolvent, or the continuance of
its business would involve probable loss to creditors or depositors;
3) The Department of Supervision reports to the Monetary Board its findin
gs in writing;
4) The Monetary Board determines the veracity of the report and appoints
a receiver to take charge of the bank's assets and liabilities;
5) Within sixty (60) days the Monetary Board shall determine and confirm
if the bank is insolvent. If so, and public interest requires it orders he liqu
idation of the bank.
(ii) General Banking Law of 2000, R.A. No. 8791 (Basics)
127. Canlas and Manosca agreed to do business together. To raise capit
al, Canlas authorized Manosca to mortgage two parcels of land belonging to him a
nd to his wife,
Later, Canlas agreed to sell the parcels to Manosca for a total consider
ation of P850,000.00, P500,000.00 of which is payable within one week and P300,
000.00 to serve as Canlas investment in the business. Canlas then delivered the
titles to Manosca. However, the P460,000.00 check given by Manosca to Canlas as
part of the consideration bounced.
Later with the help of impostors posing as the spouses Canlas, Manosca
was able to mortgage the parcels of land for P100,000.00 to a certain Atty. Magn
o and later for P500,000.00 to the Asian Saving s Bank. It turned out that the Ba
nk did not require the impostors to present a single identification card. The B
ank merely relied upon their representatives on the basis of residence certifica
tes bearing signatures which tended to match the signatures affixed on a previou
s deed of mortgage to a certain Atty. Magno covering the same parcels of land in
question.
For non-payment of the loan, the Bank foreclosed on the mortgaged proper
ty. Canlas contested foreclosure on the ground of Manosca s lack of authority to
constitute the mortgage. On the other hand, the Bank alleged that Canlas was n
egligent in entrusting the owner s TCT to Manosca which provided him with the oppo
rtunity to perpetuate the fraud. Furthermore, on two occasions, Canlas allowed
Manosca to introduce him (Canlas) a Leonardo to the bank employees. Finally, a
fter the loan was finally approved, Canlas accompanied Manosca to the bank when
the loan was released. At that time, a manager s check for P200,000.00 was issued
in the name of Oscar Motorworks which Canlas admits he owns and operates.
Under the above circumstances, is the mortgage null and void, and who sh
all bear the loss?
SUGGESTED ANSWER; The mortgage is null and void and the Bank should be
ar the loss.
The bank did not observe the requisite diligence in ascertaining the ident
ity of the impostors. The degree of diligence required of banks is more than th
at of a good father of a family; in keeping with their responsibility to exercis
e the necessary care and prudence in dealing even on a registered or titled prop
erty. The business of a bank is affected with public interest, holding in trust
the money of the depositors, which bank deposits the bank should guard against
loss due to negligence or bad faith, by reason of which the bank would be denied
the protective mantle of the land registration law, accorded only to purchasers
or mortgagees for value and in good faith. (Canlas, et al., v. Court of Appeal
s, et al., G.R. No. 112160, prom. February 28, 2000)
Assuming that Canlas was negligent in giving Manosca the opportunity to
perpetrate the fraud by entrusting to latter the owner s copy of the transfer cert
ificates of title of subject parcels of land, it cannot be denied that the bank
had the last clear chance to prevent the fraud, by the simple expedient of faith
fully complying with the requirements for banks to ascertain the identity of the
persons transacting with them. (Canlas, et al., v. Court of Appeals, et al.,
G.R. No. 112160, prom. February 28, 2000)
Under the doctrine of last clear chance, which is applicable here, the r
espondent bank must suffer the resulting loss. In essence, the doctrine of last
clear chance is to the effect that where both parties are negligent but the neg
ligent act of one is appreciably later in point of time than that of the other,
or where it is impossible to determine whose fault or negligence brought about t
he occurrence of the incident, the one who had the last clear opportunity to avo
id the impending harm but failed to do so, is chargeable with the consequence ar
ising therefrom. Stated differently, the rule is that the antecedent negligence
of a person does not preclude recovery of damages caused by the supervening neg
ligence of the latter, who had the last fair chance to prevent the impending har
m by the exercise of due diligence. (Canlas, et al., v. Court of Appeals, et al
., G.R. No. 112160, prom. February 28, 2000)
By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduci
ary nature of their relationship. As such, in dealing with its depositors, a ban
k should exercise its functions not only with the diligence of a good father of
a family but it should do so with the highest degree of care. (Bank of the Phil
ippine Islands, v. Court of Appeals, G.R. No. 112392, prom. February 29, 2000)
 128. On September 3, 1987, Napiza deposited in his Foreign Currency Dep
osit Unit (FCDU) Savings Account with the Bank, a Manager s check dated August 17,
1984, payable to cash in the amount of $2,500.00 and duly endorsed by Napiza on
the dorsal side. The owner of the check was a certain Chan whom Napiza accommod
ated for the purpose of clearing the check. Napiza agreed to deliver to Chan a
signed blank withdrawal slip with the understanding that as soon as the check is
cleared, both of them would go to the Bank to withdraw the amount of the check
upon Napiza s presentation to the Bank of his passbook. This is so because, the B
anks rules which are printed on the depositor s passbook requires presentation to t
he Bank of 1) a duly filled-up withdrawal slip, and 2) in all instance wheth
er the withdrawal is made by the depositor personally, or in certain exceptional
instances where the Bank allows it, withdrawal by another person upon the
depositor s written authority duly authenticated. The passbook further shows that
deposits of checks and similar items shall be subject to collection only and cr
edited to the account only upon receipt of the notice of final payment.
On October 23, 1984, one Gayon, Jr., using the signed blank withdrawal s
lip given by Napiza to Chan, was able to withdraw $2,541.67 from the depositor s a
ccount. Notably, the withdrawal slips shows that the amount was payable to Roma
n and Agnes, and duly initialed by the Bank s branch assistant manager Teresita.
On November 20, 1984, the Bank received a communication from the foreign
bank that the check deposited by Napiza was a counterfeit check. On August 12,
1986, the Bank sued Napiza praying for the return of the amount of P2,500.00 pl
us interest. The Bank asserts that Napiza should be held liable as an indorser
when he affixed his signature at the dorsal side of the check, and that by signi
ng the withdrawal slip, Napiza presented the opportunity for the withdrawal of t
he amount in question.
Is the depositor Napiza liable? Explain briefly.
SUGGESTED ANSWER; No Napiza should not be held liable on the basis of h
is indorsement.
Ordinarily Napiza may be held liable as an indorser of the check or even a
s an accommodation party. However, to hold Napiza liable for the amount of the
check he deposited by the strict application of the law and without considering
the attending circumstances in the case would result in an injustice and in the
erosion of the public trust in the banking system. The interest of justice thus
demands looking into the events that led to the encashment of the check. (Bank
of Philippine Islands v. Court of Appeals, G.R. No. 112392, prom. February 29,
2000)
The Bank was negligent in allowing withdrawal prior to clearance of the
check. By depositing the check with Bank, Napiza was, in a way, merely designat
ing the Bank as the collecting bank. This is in consonance with the rule that a
negotiable instrument such as a check, whether a manager s check or ordinary chec
k, is not legal tender. The collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all prior endor
sements considering that the act of presenting the check for payment to the draw
ee is an assertion that the party making the presentment has done its duty to as
certain the genuineness of the endorsements. The rule finds more meaning in this
case where the check involved is drawn on a foreign bank and therefore collecti
on is more difficult than when the drawee bank is a local one even though the ch
eck in question is a manager' check. (Bank of Philippine Islands v. Court of Ap
peals, G.R. No. 112392, prom. February 29, 2000) It was likewise negligent in
allowing withdrawal despite non-presentation of the passbook.
While it is true that Napiza s having signed a blank withdrawal slip set i
n motion the events that resulted in the withdrawal and encashment of the counte
rfeit check, the negligence of the Bank s personnel was the proximate cause of the
loss that the Bank sustained. Proximate cause, which is determined by a mixed
consideration of logic, common sense, policy and precedent, is that cause, which,
in natural and continuous sequence, unbroken by any efficient intervening cause
, produces the injury, and without which the result would not have occurred. The
proximate cause of the withdrawal and eventual loss of the amount of $2,500.00
on the Bank s part was its personnel s negligence in allowing such withdrawal in dis
regard of its own rules and the clearing requirement in the banking system. In
so doing, the Bank assumed the risk of incurring a loss on account of a forged o
r counterfeit foreign check and hence, it should suffer the resulting damage. (
(Bank of Philippine Islands v. Court of Appeals, G.R. No. 112392, prom. Febru
ary 29, 2000)
129. Leticia opened a savings and current account with Prudential Bank,
with automatic transfer of funds from the savings account to the current accoun
t. On June 1, 1988, she deposited in her savings account a check drawn against
PCIB in the amount of P35,271.60. On June 21, 1988, she had P35,993.48 in her s
aving s account and P776.93 in her current account or a total deposit of P36,770.4
1. Leticia then issued a Prudential Bank check in the amount of P11,500.00 post
dated June 20, 1988 in favor of Belen , who endorsed it to Lhuiller. When the l
atter deposited the check in his account with PCIB, it was dishonored for being
drawn against insufficient funds. When Lhuiller s secretary informed Belen of the
dishonor, the latter told the former to redeposit it.
Surprised by the dishonor, Leticia was told by the officer-in-charge of
the Bank that he had debited P300.00 penalty from her current account for the d
ishonor of the check. Leticia later found out that the amount of P35,271.60 whi
ch she had deposited was credited to her savings account only on June 29, 1998,
or 23 days after she redeposited it. Thus, when Lhuiller redeposited the P11,50
0.00 check on June 24, 1988, it was cleared on June 27, 1988.
Sued for damages, the Bank defends by saying that Leticia did not suffer
any damage as a result of the dishonor. It acted in good faith, and the dishon
or was an honest mistake and the Bank Manager and the other employees profusely
apologized to Leticia for the error. They also offered to make restitution and
apologies to Belen and Lhuiller.
Is the Bank liable?
SUGGESTED ANSWER; Yes. It dishonored the check issued by Leticia who
turned out to have sufficient funds with the Bank. The Bank s negligence was the
result of lack of due care and caution required of managers and employees of a f
irm engaged in so sensitive and demanding business as banking.
A bank is under obligation to treat the accounts of its depositors with m
eticulous care whether such account consists only of a few hundred pesos or of m
illions of pesos. Responsibility arising from negligence in the performance of
every kind of obligation is demandable. While petitioner s negligence in this cas
e may not have been attended with malice and bad faith, nevertheless, it caused
serious anxiety, embarrassment and humiliation. (Prudential Bank v. Court of App
eals, et al., G.R. No. 125536, prom. March 16, 2000 citing Philippine National B
ank v. Court of Appeals, G.R. No. 126152, prom. September 28, 1999)
NOTES AND COMMENTS:
a. Bank is liable for erroneous dishonor of checks. Bank are responsible
for their employees mistakes in dishonor of checks. The fiduciary nature of rel
ationship between banks and depositors demand the award of moral damages for mis
takes committed by the former s employees that result in dishonor of checks.
In Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360,
367 (1990) and Bank of Philippine Islands v. IAC, et al., 206 SCRA 408, 412-413
(1992), Supreme Court had occasion to stress the fiduciary nature of the relati
onship between a bank and its depositors and the extent of diligence expected of
the former in handling the accounts entrusted to its care, thus: In every case,
the depositor expects the bank to treat his account with the utmost fidelity, w
hether such account consists only of a few hundred pesos or of millions. The ba
nk must record every single transaction accurately, down to the last centavo, an
d as promptly as possible. This has to be done if the account is to reflect at
any given time the amount of money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever he directs. A blunde
r on the part of the bank, such as the dishonor of a check without good reason,
can cause the depositor not a little embarrassment if not also financial loss an
d perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and becaus
e of the nature of its functions, the bank is under obligation to treat the acco
unts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. x x x. (Prudential Bank v. Court of Appeals, et
al., G.R. No. 125536, prom. March 16, 2000 citing Simex International (Manila),
Inc. v. Court of Appeals, 183 SCRA 360, 367 (1990) and Bank of Philippine Island
s v. IAC, et al., 206 SCRA 408, 412-413 (1992)
130. What are some of the prohibited transactions of a borrower of a ba
nk ?
SUGGESTED ANSWER:
No borrower of a bank shall:
a) Fraudulently overvalue property offered as security for a loan or other
credit accommodation from the bank;
b) Furnish false or make representation or suppression of material facts
for the purpose of obtaining, renewing, increasing a loan or other credit accomm
odation or extending the period thereof;
c) Attempt to defraud the said bank in the event of a court action to rec
over a loan or other credit accommodation; or
d) Offer any director, officer, employee or agent of a bank any gift, fee
, commission, or any other form of compensation in order to influence such perso
ns into approving a loan or other credit accommodation application. (Sec. 55.2,
R.A. No. 8791)
***131. Distinguish between equity of redemption and the right of redem
ption.
SUGGESTED ANSWER: The equity of redemption is different from and should b
e confused with the right of redemption.
The right of redemption in relation to a mortgage understood in the sense o
f a prerogative to reacquire mortgaged property after registration of the forecl
osure sale exists only in the case of the extrajudicial foreclosure of the mortg
age. No such right is recognized in a judicial foreclosure except only where th
e mortgagee is a bank or banking institution. The period to exercise the right o
f redemption is within one (1) year from the registration of the sheriff s certifi
cate of foreclosure sale.
Where no right of redemption exists in case of a judicial foreclosure beca
use the mortgagee is not a bank or a banking institution, the foreclosure sale w
hen confirmed by an order of the court shall operate to divest the rights of all
parties to the action and to vest their rights in the purchaser. There then ex
ists only what is simply known as the equity of redemption. This is simply the
right of the defendant mortgagor to extinguish the mortgage and retain ownership
of the property by paying the secured debt within the 90-day period after the j
udgment becomes final, in accordance with Rule 68 of the Rules of Court, or even
after the foreclosure sale, but prior to confirmation. (Huerta Alba Resort, Inc
. v. Court of Appeals, et al., G.R. No. 128567, prom. September 1, 2000)
NOTES AND COMMENTS:
a. Right of mortgagor to redeem. In the event of foreclosure by a bank
, whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan or other credit accommodation granted, the mortgagor or d
ebtor whose real property has been sold for the full or partial payment of his o
bligation shall have the right within one year after the sale of the real estate
, to redeem the property by paying the amount due under the mortgage deed with i
nterest thereon at the rate specified in the mortgage, and all the costs and exp
enses incurred by the bank or institution from the sale and custody of said prop
erty less the income derived therefrom.
However, the purchaser at the auction sale concerned whether in a judici
al or extrajudicial foreclosure shall have the right to enter upon and take poss
ession of such property immediately after the date of the confirmation of the au
ction sale and administer the same in accordance with law.
Any petition in court to enjoin or restrain the conduct of foreclosure p
roceedings instituted pursuant to this provision shall be given due course only
upon the filing by the petitioner of a bond in an amount fixed by the court cond
itioned that he will pay all the damages which the bank may suffer by the enjoin
ing or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold p
ursuant to an extrajudicial foreclosure shall have the right to redeem the prope
rty in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which
in no case shall be more than three (3) months after foreclosure, whichever is e
arlier. Owners of property that has been sold in a foreclosure sale prior to th
e effectivity of the General banking Law of 2000 shall retain their redemption r
ights until their expiration. (Sec. 47, R.A. No. 8791, arrangement supplied)
b. Instances when a bank may acquire real estate. Acquisition of rea
l estate by way of satisfaction of claims.- A bank may acquire, hold or convey
real property under the following circumstances:
1) Such as shall be mortgaged to it in good faith by way of security for
debts;
2) Such as shall be conveyed to it in satisfaction of debts previously co
ntracted in the course of its dealings; or
3) Such as it shall purchase at sales under judgments, decrees, mortgages
, or trust deeds held by it and such as it shall purchase to secure debts due it
.
Any other real property acquired or held under the circumstances enumera
ted in the above paragraph shall be disposed of by the bank within a period of f
ive (5) years or as may be prescribed by the Monetary Board; provided, however,
that the bank may, after said period, continue to hold the property for its own
use subject to the limitations on ceilings on investment in real estate. (Sec.
52, R.A. No. 8791)
c. Limitation or ceiling on bank investments in real estate. Any bank m
ay acquire real estate as shall be necessary for its own use in the conduct of i
ts business: provided, however, That the total investment in such real estate an
d improvements thereof, including bank equipment, shall not exceed fifty percent
(50%) of combined capital accounts: provided, further, That the equity investm
ent of a bank in another corporation engaged primarily in real estate shall be c
onsidered as part of the bank s total investment in real estate, unless otherwise
provided by the Monetary Board. (Sec. 51, R.A. No. 8791)
(iii) Law on Secrecy of Bank Deposits (R.A. 1405, as amended)
***132. What are the exceptions or instances when bank deposits may be
inquired into ?
SUGGESTED ANSWER:
a. Where the examination is made in the course of a special or general
examination of a bank and is specifically authorized by the Monetary Board after
being satisfied that there is reasonable ground to believe that a bank fraud or
serious irregularity has been or is being committed and that it is necessary to
look into the deposit to establish such fraud or irregularity;
b. When the examination is made by an independent auditor hired by the
bank to conduct its regular audit provided that the examination is for audit pur
poses only and the results thereof shall be for the exclusive use of the bank;
c. Upon written permission of the depositor;
d. In cases of impeachment,
e. Upon order of a competent court in cases of bribery or dereliction o
f duty of public officials;
f. In cases where the money is deposited or invested is the subject mat
ter of the litigation. (Sec. 2, R.A. No. 1405, as amended by P.D. No. 1792)
g. Where the Bureau of Internal Revenue makes an inquiry into the depos
its of a deceased depositor for the purpose of determining his gross estate;
h. Where there is a BIR inquiry into the deposits of a taxpayer who is
entering into a compromise with the BIR premised upon financial difficulties to
pay.
 i. Inquiry under the Anti-Graft and Corrupt Practices Act into "illegal
ly" or "not legitimately" acquired property.
NOTES AND COMMENTS:
*** a. What is considered as subject to the Law on Secrecy of Bank Depo
sits:
1) All deposits of whatever nature with banks or banking institutions in
the Philippines,
2) including investments in bonds issued by the government of the Philipp
ines, its political subdivisions and its instrumentalities are hereby considered
as of an absolutely confidential nature and may not be examined, inquired or lo
oked into by any person, government official, bureau or office. (Sec. 2, R.A. N
o. 1405)
133. On March 21, 1990 a check for P 1 million was drawn against an acc
ount with Allied Bank payable to Jose Alvarez. The payee deposited the check wi
th Union Bank which credited the amount of P 1 million to the account of Jose.
When Union presented the check for clearing through the Philippine Clearing Hous
e Corporation, a clearing discrepancy was committed by Union Bank s clearing staff
when the amount of P 1 million was erroneously under-coded to P1,000 only.
Union discovered the under-coding only a year later and it notified Alli
ed by way of an automatic debiting of the amount of P999,000.00 from Allied s acco
unt. Allied refused to accept the charge slip since the transaction was complet
ed per Union Bank s original instruction and client s account is now insufficiently
funded.
Union filed a complaint against Allied before the Clearing House for the
recovery of the amount plus interest and other damages. Thereafter Union filed
a petition with the RTC for the examination of the Account with Allied.
May the account be examined ?
SUGGESTED ANSWER: No, its does not fall under any of the exceptions bec
ause it should be the money deposited itself which should be the subject matter of
the litigation. (Union Bank of the Philippines v. Court of Appeals, et al., G.
R. No. 134699, prom. prom. December 23, 1999)
134. The Senate Blue Ribbon Committee acting on a report made by ISAFP
Chief Col. Victor Corpuz, conducted an investigation in aid of legislation on th
e alleged multimillion bank deposits of Sen.. Ping Lacson, a public official wit
h various local banks.
May the Committee subpoena records of the local banks to determine the e
xtent of Sen. Lacson s deposits? Explain.
SUGGESTED ANSWER: No. The Senate Blue Ribbon Committee is not a compet
ent court hearing cases of bribery or dereliction of duty of public officials.
The hearings of the Committee are in aid of legislation.
(6) Other Special Laws
(a) The Chattel Mortgage Law (Act 1508 in relation to Arts. 1484, 1485,
2140 and 2141 of the New Civil Code)
***135. To secure a debt to Y, X, the owner of Supreme Drugstore, execu
ted a chattel mortgage covering the goods contained in the drugstore. The deed
of chattel mortgage provides that all goods, stock-in-trade, furniture and fixtur
es hereafter purchased by the mortgagor shall be included in and covered by the
mortgage.
Upon default by X, Y sought to foreclose the mortgage on the goods then
found in the drugstore, half of which were admittedly acquired after the executi
on of the chattel mortgage.
If you were the lawyer of X, what arguments would you advance to defeat
the foreclosure on the after-acquired property ? If you were the judge, how wou
ld you decide. (Bar: 1984)
SUGGESTED ANSWER: After acquired stocks in trade are not covered by the
 chattel mortgage.
As judge, foreclosure would be allowed. Where stocks in trade are the s
ubject of a chattel mortgage, they could include stocks subsequently purchased t
o replenish those which existed at the execution of the mortgage but are not any
more available because they have been sold in the meantime.
NOTES AND COMMENTS:
a. Insurance on car covered by chattel mortgage. Where the provisions
of the Chattel Mortgage does not authorize the mortgagee to apply previous payme
nts for the car to the insurer, the mortgagee has to send notice to the mortgago
r if it decides to convert any of the previous installments made by the mortgag
or to the payment for the renewal of the insurance. (Servicewide Specialists, I
ncorporated v. Court of Appeals, et al., G.R. No. 110597, May 8, 1996, Second Di
vision)
***b. Foreclosure of chattel mortgage on subject of mortgage precludes
recovery of deficiency if article foreclosed is article purchased and covered by
the chattel mortgage.
If the chattel mortgage is to secure a loan transaction, other than one
involving a purchase, there could be recovery of the deficiency.
(b) Real Estate Mortgage Law (Act 3135, as amended by R.A. 4118
)
(c) The Insolvency Law (Act 1956)
136. What is suspension of payments ?
SUGGESTED ANSWER: The remedy available under the Insolvency law for a n
atural or juridical person who, having sufficient assets to meet his obligations
, foresees the impossibility of meeting them when they fall due, and therefore p
resents a proposal to pay his obligations on dates later than their due dates.
NOTES AND COMMENTS:
*** a. Procedure for suspension of payments. If natural persons are ins
olvent, petition should be filed with the Regional Trial Court.
1) Filing of a petition accompanied by an inventory of assets and a detai
led schedule of obligations, amounts and their due dates;
2) Issue by the court of an order setting the place and date for meeting
of creditors;
3) Publication of the order and service of summons to all creditors liste
d in the petition;
4) Meeting of creditors and approval of debtor s proposal by creditors, at
least 2/3 in number representing 3/5 of all the liabilities;
5) Objections, if any, by the other creditors;
6) Order of the court to implement the agreement..
***b. Insolvency distinguished from suspension of payments.
1) In insolvency, the liabilities of the debtor are more than his assets
WHILE in suspension of payments the assets of the debtor are more than his liabi
lities;
2) In insolvency, the assets of the debtor are to be converted into cash
for distribution among his creditors, WHILE in suspension of payments the debtor
is asking for time within which to convert his properties into cash with which
to pay his creditors as the obligations fall due.
3) In insolvency the purpose is to obtain discharge from all debts and li
ability WHILE in suspension of payments the purpose is to delay payment of debts
which remain unaffected although a postponement of payments is declared.
137. What is voluntary insolvency ?
SUGGESTED ANSWER: A proceeding taken by a debtor, having obligations ex
ceeding P1,000.00 who, with his existing assets cannot meet all of them goes to
the court to have himself be declared as an insolvent.
NOTES AND COMMENTS:
a. Procedure for voluntary insolvency:
 1) Filing of petition accompanied by an inventory of assets and schedule
of liabilities;
2) The court issues an order declaring him as an insolvent;
3) Publication of the order, and service of the order on the creditors
mentioned in the petition;
4) Creditors meet to elect an assignee, to whom are conveyed all the debt
or s assets;
5) Liquidation and payment of creditors;
6) Composition (agreement between debtor and creditor), if agre
ed;
7) Order of discharge of the insolvent.
NOTES AND COMMENTS:
a. The obligations of an insolvent debtor that survives adjudication of
insolvency or claims that could be pursued against a debtor despite his having
been pronounced as insolvent.
1) Taxes and assessments due the government, national or local;
2) Obligations arising from embezzlement or fraud;
3) Obligation of any person liable with the insolvent debtor for the sa
me debt, either as solidary co-debtor, surety, guarantor, partner, indorser or o
therwise;
4) Alimony or claims for support; and
5) Debts not provable against the estate (such as after incurre
d obligations) of, or not included in the schedule submitted by, the insolvent d
ebtor.
b. Involuntary insolvency distinguished from voluntary insolvency.
1) Involuntary three or more creditors are required WHILE for voluntary o
ne creditor may be sufficient;
2) Involuntary, the creditors must be residents of the Philippines whose
credits or demand accrued in the Philippines and none of the creditors has becom
e a creditor by assignment within thirty (30) days prior to the filing of the pe
tition WHILE no such requirements exist for voluntary insolvency;
3) Involuntary, the amount of indebtedness must not be less than P1,000.0
0 WHILE for voluntary, it must exceed P1,000.00;
4) Involuntary, the petition must be accompanied by a bond, WHILE volunta
ry does not require a bond
138. What is involuntary insolvency ?
SUGGESTED ANSWER: A proceeding filed by three or more creditors whose c
redits aggregates not less than P1,000.00, or by a corporation or partnership t
o declare a debtor insolvent because he has committed any one of the acts of ins
olvency enumerated by law.
NOTES AND COMMENTS:
a. Procedure for involuntary insolvency.
1) Filing of petition;
2) Answer of defendant;
3) Trial and order of court adjudging debtor as an insolvent, if suppor
ted by the facts;
4) Publication of the order and service of it on all creditors;
5) Election by creditors of an assignee and conveyance of debtor s assets
to him;
6) Liquidation and payment of creditors;
7) Composition;
8) Discharge of the insolvent.
b. Acts of insolvency which warrants filing of petition for involuntary
insolvency: The debtor:
1) Is departing from the Philippines;
2) Is absent and continued to be absent;
3) Conceals himself from judicial process;
4) Removes or conceals his properties;
5) Allowed his properties to be attached by others;
 6) Confessed or allowed judgment to be taken against him;
7) Allowed judgment by default against him;
8) Allowed property to be taken by legal process to give preference to
certain creditors;
9) Make assignment, gift or sale;
10) In contemplation of insolvency, made payments or gift to
another;
11) Defaulted in payment of obligations for 30 days;
12) Failed after 30 days to surrender money deposited in trus
t with him;
13) Found to have insufficient properties to satisfy a judgme
nt.
(d) Truth in the Lending Act (R.A. 3765),
(As amended by the Consumer Act of 1992)
139. What are required to furnished under the Truth in the Lending Act,
as amended by the Consumer Act of 1992, to a person to whom credit sales is ext
ended ?
SUGGESTED ANSWER: Any creditor shall furnish to each person to whom cre
dit is extended, prior to the consummation of the transaction, a clear statement
in writing setting forth, to the extent applicable and in accordance with rule
s and regulations prescribed by the Monetary Board of the Bangko Sentral ng Pili
pinas, the following information:
1) the cash price or delivered price of the property or service to be a
cquired;
2) the amounts, if any, to be credited as down payment and/or trade-in;
3) the difference between the amounts set forth under clauses (1) and (
2);
4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not incident to the
extension of credit;
5) the total amount to be financed;
6) the finance charge expressed in terms of pesos and centavos; and
7) the percentage that the finance charge bears to the total amount to
be financed expressed as a simple annual rate on the outstanding unpaid balance
of the obligation. ;
8) the effective interest rate;
9) the repayment program; and
10)the default or delinquency charges on late payments.
NOTES AND COMMENTS:
a. Required to furnished under the Truth in the Lending Act, as amended
by the Consumer Act of 1992, to a person to whom consumer loan is extended:
1) the amount of credit extended;
2) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not incident to the
extension of credit;
3) the total amount to be financed;
4) the amount of finance charge expressed in terms of pesos and
centavos;
5) the effective interest rate;
6) the percentage that the finance charge bears to the total amount to
be financed expressed as a simple annual rate on the outstanding unpaid balance
of the obligation. ;
7) the default or delinquency charges on late payments; and
8) the description of the security.
b. Transactions which require the above disclosures:
1) Credit sales;
2) Open consumer credit plan;
3) Consumer loans not open and consumer credit; and
 4) Sale of consumer products on installment basis.
c. Handling charges not reflected on the promissory notes could not be
collected by the bank. Banks are authorized under Central Bank Circular No. 50
4 to collect handling charges. Section 7 of the same Circular, however, provide
s that all banks and non-bank financial intermediaries authorized to engage in q
uasi-banking functions are required to strictly adhere to the provisions of the
Truth in Lending Act and shall make the true and effect cost of borrowing an int
egral part of every loan contract. (Consolidated Bank and Trust Corporation [So
lidbank] vs. Court of Appeals, et al., G.R. No. 91494, July 14, 1995, First Divi
sion)

GOOD LUCK ! ADVANCE CONGRATULATIONS ! SEE YOU IN COURT !

1 Sixth Edition, Copyright 2001 by Abelardo T. Domondon.
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