NEGOTIABLE INSTRUMENTS LAW

BAR QUESTION COMPILATIONS

1. X issued an order promissory note payable to Y for P1,000,000.00 due on August 31, 2013. The
following are the order of special endorsements: Y to Z; Z to A; A to B and B to C. D the authorized agent
of C, presented the note for payment on the maturity date but X refused to pay. If D notifies C but he failed
to notify B within 24 hours, can C after receipt of the notice of dishonor, be allowed to notify B within 24
hours verbally or in writing without his signature? Explain your answer with legal basis.

2. V also known as MR. BIGOTE to the public issued a bearer promissory note in favor of Z for
P1,000,000.00 due on February 14, 2014. He signed the note as Mr. Bigote. The following are the order of
special indorsement Z to A, then A to B then B to C who in turn indorsed the note back to Mr. Bigote
before the maturity date. Mr. Bigote renegotiated by special indorsement the note to D, then D to E, E to F,
then F to G. If the signature of E was forged, who are liable to G? Explain your answer with legal basis.

3. P, through sweet talk, convinced M to execute a mortgage over his parcel of land in his favor. Instead of
a real estate mortgage, P prepared a promissory note in his favor payable to order for P1,000,000.00 due
on April 30, 2013. Before its maturity date, P indorsed the note A, then A to B and B to C, holder in due
course. C presented the note for payment to M but he refused to pay. If C failed to give notice B, A and P,
who will be liable to C? Explain your answer with legal basis.

4. X has a checking account from PNB. He issued and delivered the check to M for P1,000,000.00 dated
May 30, 2013. M presented the check for acceptance which PNB did, and later on paid M. If the signature
of X was forged by Z, to whom can PNB recover, if it can? Explain your answer with legal basis.

5. Supposing in problem no. 4, instead of presenting the check for acceptance and payment to PNB, M
deposited the same to his account at Metrobank which guaranteed all indorsements, if the signature of X
was forged, who between the acceptor (PNB) and indorser (Metrobank) will suffer the loss.

6. The bill of exchange is addressed to X ordering the latter to pay to the order of Y for P1,000,000.00 and
signed by Z on May 30, 2013. The order of special indorsements are as follows: Y to A, A to B, B to C and
then C to D, holder in due course. When D presented the bill for acceptance, X refused to accept but upon
call of Z, X later accepted the bill. When D presented the bill for payment, X dishonored it, prompting Z to
call back X who was firm on his stand not to pay. Upon learning of the dishonor, B although not notified by
D, he pleaded to D to strike his indorsement which D did. In this case, who will be liable to D. Explain your
answer with legal basis.

7. In an effort to get more money on an order promissory note issued by M, P, the payee-holder, altered
the amount from P100,000.00 to P1,000,000.00. P indorsed the note to A, then A to B and B to C. if C is
not a holder in due course, how much can C recover and from whom he can recover. Explain your answer
with legal basis.

8. P induced M to issue an order promissory note in his favor. P indorsed the note to A, then A to B, then B
to C and C to D. At the time of the inducement, C was present but was not a party to the inducement. If D
knows of the fact of the inducement made by P to M, to whom can D recover. Explain your answer with
legal basis.

9. M issued an order negotiable promissory note to P. In the promissory note, M indicated that Notice of
Dishonor is waived. The following are the order of special indorsements: P to A, then A to B, B to C and C to
D. When B made his indorsement, he indicated that he waived notice of dishonor. Because D was able to
read Bs waiver, he did not notify C. Who are liable to D, if M made a partial payment to the holder over the
objection of the indorsers who were not notified? Explain your answer with legal basis.

10. M left an unsigned promissory note payable to the order of P with the amount left in blank. M and P had
a transaction involving the sale of Ps lot with the consideration of P100,000.00. Although, the unsigned
promissory note did not indicate on their sale transaction, P forged the signature of M and filled up the
amount of P1,000,000.00. The order of special indorsement are as follows: P to A, then A to B, B to C and C
to D, holder in due course. To whom can D recover? Explain your answer with legal basis.

11. M made a promissory note payable to bearer for P1,000,000.00. He issued this note to N who
negotiated the note to O by mere delivery. O on the hand, made a special indorsement to P. Q who took
the note without the knowledge of O, forged the signature of P, and indorse the note to R. The latter
indorsed the note to S, by special indorsement who is a holder in due course. In case S strikes the
indorsement of P, will M be liable to S? Explain your answer with legal basis. Will answer be the same if the
promissory note is an order instrument, and all indorsements are by special indorsement with the
signature of P being forged by Q, who will be liable to S? Explain your answer with legal basis.

12. Without a date and place of issue, X issued an order negotiable promissory note to Y and authorized
the latter to fill up the amount in blank with his loan amount in the sum of P10,000,000 with interest at
1.5% per month . However, Y filled it up for P100,000,000 in violation of the instruction and placed an
issue date antedating it for six months from actual date of issue and delivery. Question:
 a)When the due date arrives, and Y present the promissory note for payment, can he recover from
X? Explain your answer with legal basis.

b) Supposing Y indorses the note to A for value but who has no knowledge of the acts made by Y,
how much can A recover from X, if he can? Explain your answer with legal basis

13. Y, the drawee of a bill of exchange payable to order on May 31, 2008 drawn by X, in the amount of
P100,000 in favor of Z, dishonored the bill. Before the dishonor, the bill was indorsed by Z to A, a
minor, who in turn indorsed it to B, then B to C who knows of the minority of A, and then he indorsed
the bill to D, the present holder. If notice of dishonor was timely and properly given, who are liable to
D? Explain your answer with legal basis.

14. On December 5, 2013, A induces B by fraud to make a promissory note payable on February 5, 2014 to
the order of A in the sum of P5,000,000. A indorses the note to C who did not know of the inducement
by B. Since C needed money, he indorses it to D who knew of the inducement of A. Question:

a) Who is liable to D? Explain your answer with legal basis.

b) If the inducement by B was that a deed of sale for his car was to be signed by A, and instead the
promissory note above was signed by A, who are liable to D? Explain your answer with legal
basis.

15. M issued a promissory note payable to the order of P for P100,000 due on May 31, 2014. P indorses the
note to A but As signature was forged by B who thereafter indorses the note to C, a holder in due
course. Who is liable to C? Explain your answer with legal basis.

16. A made a promissory note payable to bearer for P1,000,000.00. He issued this note to B who
negotiated the note to C by mere delivery. C, on the other hand, made a special indorsement to D. X who
took the note without the knowledge of D, forged the signature of D, and indorsed the note to Y. The latter
indorsed the note to Z, by special indorsement who is a holder in due course. Question:

a) Who are liable to Z? Answer with legal basis.

b) Supposing the note is an order instrument, and B and all subsequent indorsements are made
through special indorsements, who are liable to Z? Explain your answer with legal basis.

17. August 31, 2014 is the maturity date of an order promissory note payable to Y for P1,000,000.00
issued by X. The following are the order of special endorsements: Y to Z; Z to A; A to B and B to C. If C did
not make a presentment for payment to x on the maturity date, who will be liable to him? Explain your
answer with legal basis. Follow up question, supposing C makes presentment for payment on the due date
to X but failed to notify B on the fact of dishonor, however, he was able to notify A, who are liable to C?
Explain your answer with legal basis.

18. On March 1, 2014, Industech General Services Inc. issued a crossed check in the amount of P300,000
postdated March 31, 2014 in favor of A Company. Upon receipt of the check the latter have it discounted
with B Company. To whom can B Company recover on the check, if it can? Explain your answer with legal
basis

19. Z presented a forged check for P1,000,000 to PBB from the checking account of X payable to M. He
issued and delivered the check to M dated May 30, 2013. PBB paid M but later on discovered that the
signature of X was forged by Z. To whom can PBB recover, if it can? Follow up question, if the check before
the payment by PBB, was indorsed by PNB as collecting bank, who between PBB and PNB will shoulder the
loss? Explain your answer with legal basis.

20. X draws a bill for P1,000,000, addressed to W, payable to order in favor of Y due on December 31,
2013. When presented for acceptance, W dishonored the same, and so Y, protested the bill. B, a stranger,
offered to accept for the honor of X but her acceptance was refused by Y. Question:

a) If B insists, and goes to court to compel Y to accept, how would you decide the case, if you are the
judge? Explain your answer with legal basis.
b) Supposing, while the case was still pending, Y accepted the payment of A, is the bill discharged?
Explain your answer with legal basis.

Bar Questions in Negotiable Instrument

Summary of Bar Examination Cases
MERCANTILE LAW REVIEW
Negotiable Instruments Law

GENERAL PRINCIPLES

A. THEORY

01. What are the requisites of a negotiable instruments? [1953, 1954, 1964, 1968, 1989, 1991, 1996, Bar
Examinations].
02. What constitutes a holder in due course? [1996, Bar Examinations].
03. Can a bill of exchange or a promissory note qualify as a negotiable instrument if -
a.It is not dated; or
b.The date and the month, but not the year of its maturity is given; or
c.It is payable to cash; or
d.It names two alternative drawees [1997, Bar Examinations].
04. A promissory note reads as follows: I promise to pay Gabriela Silangan P1,000.00 three years after the
unconditional withdrawal of the U.S. of its military bases in the Philippines. Discuss the negotiability or
non-negotiability of the note above [1966 Bar Examinations].
05. Can the payee in a promissory note be a holder in due course within the meaning of the Negotiable
Instruments Law? [2000 Bar Examinations].
06. How do you treat a negotiable instrument that is so ambiguous that there is a doubt whether it is a bill
or a note? [1999, Bar Examinations].
07. When a signature is so placed upon a negotiable instrument that it is not clear in what capacity the
person making the same intended to sign, what is his liability? [1946, Bar Examinations].
08. When a negotiable instrument contains the words I promise to pay and is signed by two or more
persons, what is their liability, joint or solidary? Explain [1946, Bar Examinations].

B. TESTS OF NEGOTIABILITY

09. MP bought a used cellphone from JR. JR preferred cash but MP is a friend so JR accepted MPs
promissory note for P10,000.00. JR though of converting the note into cash by indorsing it to his brother
KR. The promissory note is a piece of paper with the following hand-printed notation: MP WILL PAY JR
P10,000.00 IN PAYMENT FOR HIS CELLPHONE ONE WEEK FROM TODAY. Below this notation is MPs
signature with 8/1/00 next to it, indicating the date of the promissory note. When JR presented MPs note
to KR, the latter said it was not a negotiable instrument under the law and so could not be a valid cash
substitute. JR took the opposite view, insisting on the notes negotiability. You are asked to referee . Which
of the opposing views is correct? Explain [2000 Bar Examinations].

10. Perla bought a motor car payable in installments from Automotic Company for P250,000.00 with a
P50,000.00 downpayment. She executed a promissory note for the balance which reads:

For value received, I promise to pay Automotive Company or order at its office in Legaspi City, the sum of
P200,000.00 with interest at 12% per annum, payable in equal installments of P20,000.00 for ten (10)
months starting 21 October 2002.
SGD Perla
Manila, 21 September 2002

Automotive Company subsequently indorsed the note to Reliable Finance Corporation which financed the
purchase. Perla defaulted in the payment of her installments. Is the above promissory note a negotiable
instrument? Explain [1992 Bar Examinations].

11. Romeo had P100,000.00 in his current account at Matatag Banking Corporation. Romeo learned that
his enemy had hired a contract killer to liquidate him. Fearful of his life, he mailed to his fiance, Juliet, a
check for his P100,000.00 in the bank. The check was payable to Juliet or order and was accompanied by a
letter stating that he was giving her his money out of his great love for her and because something would
happen to him anytime now. Juliet presented the check for payment but the bank refused to honor it. Does
Juliet have any right of action against the bank? Because of the humiliation she suffered from the bank,
Juliet broke off her engagement with Romeo. Does Romeo have a right of action against the bank? Explain
[1986 Bar Examination].

12. Explain whether or not the following instrument is negotiable.

P1,000.00 Manila, October 5, 1970

I acknowledge to have received from Jose Cruz one thousand pesos (P1,000.00) which I promise to pay on
demand or in five months from date with one percent interest per month payable within the first five days
of every month. If the interest is not paid when due, then both principal and interest shall become due at
the option of the holder.
SGD: Pedro Garcia
[1970 Bar Examination].

13. For value received, X executed a promissory note in favor of Y for P10,000.00 agreeing to pay interest
thereon but without specifying the rate thereof. Can Y collect interest on the note? Why? Explain [1964 Bar
Examination].

DEFENSES

C. FAILURE/ABSENCE OF CONSIDERATION

14. In payment of canned goods he had purchased, Pedro Flores of Cabanatuan drew a check upon PNB for
P1,000.00 payable to the order of Veraz and Co., the seller in Manila. He sent the check without recourse
to Juan Santos. The latter indorsed it in blank, for consideration, to Pablo Reyes, who, in turn, sold it for
P800.00, by delivery to Antonio Gomez. The canned goods were never forwarded to Flores. Gomez
presented the check to the bank, but payment was refused because Reyes had not put his name on it. Is
the bank right in so refusing? Why? If Gomez gave due notice to Veraz and Co., may he recover from the
latter? May Gomez recover from Santos? Why? May he recover from Reyes? Why? [1968 Bar Examination].

15. Eva issued to Imelda a check in the amount of P50,000.00 post-dated September 19, as security for a
diamond ring to be sold on commission. On September 15, Imelda negotiated the check to MT Investment
which paid the amount of P40,000.00 to her. Eva failed to sell the ring, so she returned it to Imelda on
September 19. Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus, when
MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT
Investment sued her, Eva raised the defense of absence of consideration, the check having been issued
merely as security for the ring that she could not sell. Does Eva have a valid defense? Explain [1996, Bar
Examination].

16. A and B executed and delivered to C a promissory note which reads: I promise to pay C or bearer the
sum of P2,000.00 with interest at 12% per annum on or before June 30, 1960. Manila, February 1, 1969.
SGD A and B. Two months later, for value received, C delivered to D the aforesaid note with the
indorsement: Pay to D; and on April 15, 1969, the said note was indorsed in blank by D and delivered to
X, without consideration. Upon As refusal to pay despite demand, X filed an action to collect from A the
total amount of the promissory note, with 12% interest per annum from February 1, 1969, and the costs.
As defenses are that the note is null and void because the same was issued to pay a gambling debt and
that in any event, his liability cannot exceed more than one-half of the amount due. Are As defenses
valid? Is X entitled to the whole amount of the note? Explain. [1969 Bar Examination].

17. For the purpose of lending his name without receiving value therefor, Pedro makes a note for
P20,000.00 payable to the order of X who in turn negotiates it to Y, the latter knowing that Pedro is not a
party for value. May Y recover from Pedro if the latter imterposes absence of consideration? Supposing
under the same facts, Pedro pays the said P20,000.00, may he recover the same amount from X? Explain
[1998 Bar Examination].

18. Nora applied for a loan of P100,000.00 with BUR Bank. By way of accommodation, Noras sister, Vilma,
executed a promissory note in favor of BUR Bank. When Nora defaulted, BUR Bank sued Vilma, despite its
knowledge that Vilma received no part of the loan. May Vilma be held liable? Explain [1996 Bar
Examination].

19. Santos purchased Veras car for P50,000.00. Not having enough cash on hand, Santos offered to pay in
check. Vera refused to accept the check unless it is indorsed by Reyes, their mutual friend. Reyes indorsed
Santos check and Vera, knowing that Reyes had not received any value for indorsing the check, accepted
it. The next day, Vera presented the check to the drawee bank for payment. Payment was refused for lack
of funds. Vera gave notice of dishonor to Reyes, but Reyes refused to pay, saying that he indorsed merely
as a friend. Is Reyes liable to Vera? In the event Reyes voluntarily pays Vera, does Reyes have the right to
recover from Santos? Explain [1985 Bar Examination].

D. INCOMPLETE DELIVERED INSTRUMENT

20. Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in
blank with his loan account in the sum of P1,000.00. However, Evelyn inserted P5,000.00 in violation of the
instruction. She negotiated the note to Julie who had knowledge of the infirmity. Julie, in turn, negotiated
said note to Devi for value and who had no knowledge of the infirmity. Can Devi enforce the note against
Larry, and if she can, for how much? Supposing Devi indorses the note to Baby for value but who has
knowledge of the infirmity, can the latter enforce the note against Larry? Explain [1993 Bar Examination].
21. Maria issued a negotiable promissory note and authorized Pilar to fill-up the amount in blank up to
P2,000.00. However, Pilar filled it up to P4,000.00 and negotiated the note to Pepe. For what amounts are
Maria and Pilar liable to Pepe? Explain [1972 Bar Examinations].

E. INCOMPLETE UNDELIVERED INSTRUMENT

22. PN makes a promissory note for P5,000.00, but leaves the name of the payee in blank because he
wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the
workday. When he returned the following morning, the note was missing. It turned up later when X
presented it to PN for payment. Before X, T, who turned out to have filched the note from PNs office, had
endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note,
contending that he did not authorize its completion and delivery. But X said he had no participation in, or
knowledge about, the pilferage and alteration of the note and therefore he enjoys the rights of a holder in
due course under the Negotiable Instruments Law. Who is correct and why? [2000 Bar Examination].

23. Jose makes a negotiable note payable to bearer with the amount in blank and delivers it to Karen for
safekeeping. Marina fills up the note for P20,000.00 and negotiates it to Adriano, a holder in due course. If
you were Jose and Adriano presented to you the note for payment, what defense or defenses are you going
to interpose to negate liability on the instrument? Explain [1981 Bar Examinations].
24. A entrusted to B, his secretary, a blank check drawn on X bank, signed by him, with instructions to fill
up the check in favor of D for the amount of P1,000.00 and to thereafter deliver the said check to D. In
breach of trust, B filled up the check by writing the name of E, and the amount of P2,000.00 on the check
and delivered the same to E, who accepted it in payment of certain goods sold by E to B. Before E could
encash the check, A learned of the misdeed of B and issued a stop-payment order to X bank as a result of
which X bank refused to honor the check presented to it by E. Can E now hold X bank and A liable? Reason
[1971 Bar Examinations].

25. Jose Reyes signed a blank check, and in his hasted to attend a party, left the check on top of his
executive desk in his office. Later, Nazareno forced the door to Reyes office and stole the blank check.
Nazareno immediately filled in the amount of P50,000.00 and a fictitious name as payee on the said check.
Nazareno then endorsed the check in the payees name and passed it to Roldan. Thereafter, Roldan
endorsed the check to Dantes. Can Dantes enforce the check against Jose Reyes? If Dantes is a holder in
due course, will your answer be the same? [1985 Bar Examinations].

26. A signed a blank check which he inadvertently left at his desk at his Escolta Office. The same was later
stolen by B, who filled in the amount of P22,300.00 and a fictitious name as payee. B then endorsed the
check in the payees name and passed the check to C; thereafter C passed it to D; then D to E; and E to F.
Can F enforce the instrument against A? Suppose that F is a holder in due course, what will be your
answer? Can F enforce the instrument against B? Against C. Give reasons [1978 Bar Examinations].

F. FORGERY

27. A delivers a bearer instrument to B. B then specially indorses it to C, and C later indorses it in blank to
D. E steals the instrument from D and, forging the signature of D, succeeds in negotiating it to F who
acquires the instrument in good faith and for value. If, for any reason, the drawee bank refuses to honor
the check, can F enforce the instrument against the drawer? In case of the dishonor of the check by both
the drawee and the drawer, can F hold any of B, C and D liable secondarily on the instrument? [1997 Bar
Examinations].

28. Juan makes a promissory note payable to his order, signing Pedros name thereon as maker without
Pedros knowledge and consent. Juan then indorses the note to Jose, who, in turn, indorses it to Carlos
under circumstances which make Carlos a holder in due course. May Carlos enforce the note against
Pedro? And if the note is dishonored by Pedro, may Carlos hold Juan and Jose liable on their respective
indorsements? Reason out your answers [1989 Bar Examinations].

29. Juan makes a promissory note payable to the order of Pedro, who indorses it to Jose. Somehow,
Roberto obtains possession of the note and, forging the signature of Jose, indorses it to Amado. Amado
then indorses the note to Nilo, the holder. State the rights and liabilities of the parties [1984 Bar
Examinations].
30. A makes a negotiable promissory note payable to B or bearer. A delivers the note to B. B indorses the
note to C. C places the note in his wallet, which was stolen by X, who, finding the note, indorses it to D by
forcing Cs signature. D indorses the note to E, who in turn, delivers the note to F, a holder in due course,
without indorsement. What are the liabilities of A, B and C to F. Explain briefly [1981 Bar Examinations].

31. Juan de la Cruz signs a promissory note payable to Pedro Lim or bearer, and delivers it personally to
Pedro Lim. The latter somehow misplaces the said note and Carlos Ros finds the note lying around the
corridor of the building. Carlos Ros endorses the promissory note to Juana Bond, for value, by forging the
signature of Pedro Lim. May Juana Bond hold Juan de la Cruz liable on the note? Explain [1980 Bar
Examinations].

32. Fernando forged the name of Daniel, manager of a Trading Company, as the drawer of a check. The
Bank of Philippine Islands, the drawee bank, did not detect the forgery and paid the amount. May the bank
charge the amount paid against the account of the alleged drawer? Explain [1977 Bar Examinations].

G. FRAUD

33. A succeeded in making B affix his signature on a check without Bs knowing that it was a check. At the
time of signing, the check was complete in all respects. A intended to cash the check the following
morning, but that night, it was stolen by C who succeeded in negotiating the same to D, a holder in due
course. D cashed the check the following morning. B refused to have the amount of the check deducted
from his bank deposit. Who may properly be charged with the amount of the check? Explain your answer
[1961 Bar Examinations].

34. A induces B by fraud to make a promissory note payable on demand to the order of A in the sum of
P5,000.00. Can A file an action successfully against the maker B for the amount of the note? Reasons.
Going further, A transfers the note to C who pays P5,000.00 therefor and acquires the note under
circumstances that make him (C) as holder in due course. Can C file an action successfully against B, the
maker of the note, for the amount of the note? What defense/defenses can B interpose? Explain [1978 Bar
Examinations].

H. MATERIAL ALTERATION

35. A check for P50,000.00 was drawn against drawee bank and made payable to XYZ Marketing or order.
The check was deposited with payees account at ABC Bank which then sent the check for clearing to
drawee bank. Drawee bank refused to honor the check on the ground that the serial number thereof had
been altered. XYZ Marketing sued drawee bank. Is it proper for the drawee bank to dishonor the check for
the reason that it had been altered? In instant suit, drawee bank contended that XYZ Marketing as payee
could not sue the drawee bank as there was no privity between them. Drawee theorized that there was no
basis to make it liable for the check. Is this contention correct? Explain [1999 Bar Examinations].

36. William issued to Albert a check for P10,000.00 drawn on XM Bank. Albert altered the amount of the
check to P210,000.00 and deposited the check to his account with ND Bank. When ND Bank presented the
check for payment through the Clearing House, XM Bank honored it. Thereafter, Albert withdrew the
amount of P210,000.00 and closed his account. When the check was returned to him after a month,
William discovered the alteration. XM Bank recredited P210,000.00 to Williams current account and sought
reimbursement from ND Bank. ND Bank refused, claiming that XM Bank failed to return the altered check
within the 24 hour clearing period. Who, as between XM Bank and ND Bank, should bear the loss? Explain
[1996 Bar Examinations].

37. In consideration of some goods he bought, A issued to B a personal check in the amount of P280.00
which B altered to P2,800.00 without the knowledge of A. The alteration is not apparent to the naked eye.
B then deposited the altered check in his account with PNB, which released it for clearing. The BPI, the
drawee bank, did not notice the alteration and the check therefore cleared. B was able to withdraw the
P2,800.00, after which, he closed his account. When A received his bank statement and cancelled checks,
he noticed the discrepancy in the amount when he compared the altered check with his check stub. He
immediately notified BPI and demanded a recredit. BPI, in turn, demanded recredit from PNB which cannot
now locate B. Can A compel BPI to recredit his account? If so, how much? Can PNB be compelled to
reimburse BPI of the amount the latter may have recredit to the account of A? Explain [1986 Bar
Examinations].

38. Pedro writes out a check for P1,000.00 in favor of Jose or order against his current account with the
Bank of America. Juan steals the check, erases the name of Jose and superimposes his own name. Juan
deposits the check at Citibank and after clearing, Juan withdraws the amount and absconds. Upon
discovery by Pedro of the material alteration, he lodged a complaint at the Bank of America, who debited
the amount to Pedro. Bank of America demands reimbursement for Citibank which refuses on the ground
that it only acted as an agent for collection. Who bears the loss? Why? [1977 Bar Examinations].

39. Maria issued a negotiable promissory note and authorized Pilar to fill up the amount in blank up to
P2,000.00 only. However, Pilar filled it up to P4,000.00 and negotiated the note to Pepe. For what amount
are Maria and Pilar liable to Pepe? Explain [1972 Bar Examinations].

40. A executed a bill of exchange for P500.00 in favor of B, who altered the amount to P5,000.00 and
presented the bill to the drawee for acceptance. The drawee, not knowing of the alteration which was
neatly done, accepted the bill. Thereafter, N negotiated the bill to C, who now seeks to hold the drawee
liable for P5,000.00. The drawee contends that under the rule on alteration, he can only be liable up to
P500.00. Is the drawees contention tenable? Can the drawee debit the amount of A, and if so, to what
extent? Reasons [1971 Bar Examinations].

I. MINORITY

41. X makes a promissory note for P10,000.00 payable to A, a minor, to help him to buy school books. A
endorses the note to B for value, who in turn endorses the note to C. C knows A is a minor. If C sues X on
the note, can X set up the defenses of minority and lack of consideration? Explain [1998 Bar
Examinations].

42. X, without receiving consideration therefor, makes a promissory note for P500.00 payable to A, a
minor, to help him buy school books. A indorses the note to B, who, in turn, indorses the note to C. C
knows As minority. If C presents the note to X for payment, what are the possible defenses to be
interposed by X? If C sues X on the note, can X set up the defense of minority and lack of consideration?
Explain [1989 Bar Examinations].

WARRANTIES/LIABILITIES

J. ACCEPTOR

43. X draws a check against his current account with Ortigas Branch of Bonifacio Bank in favor of B.
Although X does not have sufficient funds, the bank honors the check when it was presented to payment.
Apparently, X has conspired with the banks bookkeeper so that his ledger card would show that he still
has sufficient funds. The bank files an action for recovery of the amount paid to B because the check
presented has no sufficient funds. Decide the case [1998 Bar Examinations].

K. NEGOTIATOR BY DELIVERY

44. Anna makes a promissory note payable to bearer and delivers it to Bing. In turn, Bing negotiates it by
mere delivery to Carmen, who indorses it specially to Dong. Dong negotiates it by special indorsement to
Emma, who negotiates it to Fe by mere delivery. Anna did not pay. To whom are Bing and Carmen liable? To
whom are Dong and Emma liable? Explain [1988 Bar Examinations].
 L. INDORSERS

45. Alex issued a negotiable promissory note (PN) payable to Benito or order in payment of certain goods.
Benito indorsed the PN to Celso in payment of an existing obligation. Later, Alex found the goods to be
defective. While in Celsos possession, the PN was stolen by Dennis who forged Celsos signature and
discounted it with Edgar, a money lender who did not make inquiries about the PN. Edgar indorsed the PN
to Felix, a holder in due course. When Felix demanded payment of the PN from Alex, the latter refused to
pay. Dennis could no longer be located. What are the rights of Felix, if any, against Alex, Benito, Celso and
Edgar? Explain. Does Celso have any right of action against Alex, Benito and Felix? Explain [1995 Bar
Examinations].
46. A drew a check for P1,000.00 on B, the Bank payable to the order of C and delivered the check to the
latter for value. C indorsed the check in blank and negotiated it to D, who lost it. At Ds request, A ordered
payment stopped by notifying B. The stop payment order was overlooked and the check was paid to E,
who had taken the check, without actual knowledge of the loss, in payment of merchandise sold to a
stranger whom he thought owned the check. D now sues the bank. Decide the case with brief reasons
[1979 Bar Examinations].

INCIDENTS

M. NEGOTIATION

47. Richard Clinton makes a promissory note payable to bearer and deliverrs the same to Autora Page. The
latter, however, endorses it to X in this manner: Payable to X, Signed: Aurora Page. Later, X, without
endorsing the promissory note, transfers and delivers the same to Napoleon. The note is subsequently
dishonored by Richard Clinton. May Napoleon proceed against Richard Clinton for the note? [1998 Bar
Examinations].

48. On November 3, as payment for goods received, A gave to B his check drawn on PNB, Manila. B
thereafter negotiated the check to C. On November 10, C could not encash the check because the Bangko
Sentral had forbidden PNB to do business on grounds of insolvency. Can C hold A liable on the uncashed
check? Can C hold B liable instead on the uncashed check? Explain. If you were B, how would you
negotiate the check to negate future liability thereon? Explain [1987 Bar Examinations].

N. DISHONOR

49. When is notice of dishonor not required to be given to the drawer? [1996, Bar Examinations].

50. A issued a promissory note to B dated January 1, 2002, in the following tenor: I promise to pay to the
order of B P1,000.00 sixty days after date. (Sgd.) A. The note was subsequently negotiated with proper
indorsement by B to C, C to D, and D to E, the holder. When E presented the note for payment to A, the
latter refused to pay. E then gave a notice of dishonor to C only. May E immediately proceed against B, C or
D? What should C do to protect his rights, if any, against A, B and D? Explain [1984 Bar Examinations].

51. X draws a bill of exchange against Y in favor of W for P1,000.00, requesting the drawee to pay on
December 24, 1962. W indorses the instrument to P on September 1 and on September 15 presents it for
acceptance. The bill is dishonored. P promptly sues W for payment. Will the case prosper? Give reasons for
your answer [1963 Bar Examinations].

X corporation entered into a contract with PT Contruction Corp. for the latter to construct and
build a sugar mill within six (6) months. They agreed that in case of delay, PT Construction
Corp. will pay X Corporation P100,000 for every day of delay. To ensure payment of the agreed
amount of damages, PT Construction Corp. secured from Atlantic Bank a confirmed and
irrevocable letter of credit which was accepted by X Corporation in due time. One week before
the expiration of the six (6) month period, PT Construction Corp. requested for an extension of
time to deliver claiming that the delay was due to the fault of X Corporation. A controversy as
to the cause of the delay which involved the workmanship of the building ensued. The
controversy remained unresolved. Despite the controversy, X Corporation presented a claim
against Atlantic Bank by executing a draft against the letter of credit.

1. Can Atlantic Bank refuse payment due to the unresolved controversy? Explain. (3%)
2. Can X Corporation claim directly from PT Construction Corp.? Explain. (3%)
SUGGESTED ANSWER:

1. No, Atlantic Bank cannot refuse payment.

Under the independence principle of letters of credit, the issuing bank is obliged to pay a draft drawn by
the beneficiary upon tender of the required documents without need of examining the main contract, the
letter of credit being an independent undertaking by the bank.

In the given case, the unresolved controversy as to the cause of the delay in the main contract does not in
 any way affect Atlantic Bank's obligation under the letter of credit. This is especially true since the letter of
credit is designated as irrevocable, which, thus, makes definite the bank's undertaking to pay.

Hence, considering that all the required documents have been tendered by X Corporation, Atlantic Bank
cannot validly refuse to pay.

2. Yes, X Corporation may directly claim from PT Construction Corp.

Under the Civil Code, which is suppletory to the Code of Commerce, a contract, once perfected binds the
parties not only to the fulfillment of what has been stipulated but also to all the consequences which
according to their nature may be in keeping with good faith, usage and law.

A careful perusal of the contract between X Corporationand PT Construction Corp. reveals the intention of
the parties to make the letter of credit answerable for damages occasioned by the latter's delay. At the
same time, there is no showing that this is the only remedy available to X Corporation.

Hence, a claim against the letter of credit is merely an alternative recourse and does not in any way
prevent X Corporation from claiming directly against PT Construction Corp. (Transfield Phils. Inc. vs. Luzon
Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)
II

Tom Cruz obtained a loan of P 1 Million from XYZ Bank to finance his purchase of 5,000 bags of
fertilizer. He executed a trust receipt in favor of XYZ Bank over the 5,000 bags of fertilizer.
Tom Cruz withdrew the 5,000 bags from the warehouse to be transported to Lucena City where
his store was located. On the way, armed robbers took from Tom Cruz the 5,000 bags of
fertilizer. Tom Cruz now claims that his obligation to pay the loan to XYZ Bank is extinguished
because the loss was not due to his fault. Is Tom Cruz correct? Explain. (4%)

SUGGESTED ANSWER:

No, Tom Cruz is not correct.

Under the Trust Receipts Law, the entrustee is liable for loss of the goods whether or not he is negligent.
Moreover, in a trust receipt transaction where a loan feature is involved, the obligation for the loan is not
extinguished until such loan is paid.

In the present case, the fact that the stealing of the goods was not Tom Cruz' fault does not exculpate him
from liability. This is especially true since the goods subject of the trust receipt transaction serves only as
security for the payment of the loan. The loss of the security did not impair XYZ Bank's title to the goods,
which can only be extinguished once Tom Cruz pays the advancement made.

Hence, it is not correct for Tom Cruz to avoid liability under the trust receipt on the premise that the goods
are lost without his fault.
III
1. As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior
party liable but not vice-versa. Give two (2) instances where a prior party may hold a
subsequent party liable. (2%)
2. How does the "shelter principle" embodied in the Negotiable Instruments Law operate
to give the rights of a holder-in-due course to a holder who does not have the status of a
holder-in-due course? Briefly explain. (2%)
SUGGESTED ANSWER:

1. The following are two (2) instances where a prior party may hold a subsequent party liable:

o When the subsequent party is guilty of fraud as in the case of the author of the forgery who is liable
not only to the person whose signature he forged but also to all other parties prejudiced by his forgery
o When the subsequent party is an accommodated party, the accommodating party, even though a
prior party, may hold him liable
2. Under the "shelter principle," the holder-in-due course, by negotiating the instrument, to a party not a
holder-in-due course, transfers all his rights as such holder to the latter, who thus acquires the right to
enforce the instrument as if he was a holder-in-due course. However, this principle presupposes that the
"sheltered" holder is not a party to any fraud or illegality impairing the validity of the instrument.
IV

AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB
Corporation who was instructed to deliver it to XY Bank. Instead, the officer, intending to
defraud the Corporation, filled up the check by making himself as the payee and delivered it to
XY Bank for deposit to his personal account. AB Corporation came to know of the officer's
fraudulent act after he absconded. AB Corporation asked XY Bank to recredit its amount. XY
Bank refused.

1. If you were the judge, what issues would you consider relevant to resolve the case?
Explain (3%)
2. How would you decide the case? Explain. (2%)
SUGGESTED ANSWER:

1. If I were the judge, I would consider the following issues as relevant to the case:

o Whether or not AB Corporation is negligent

o If so, whether or not such negligence is the proximate cause
o Whether or not there is contributory negligence on the part of XY Bank
2. AB Corporation must bear the loss.

The Negotiable Instruments Law provides that where an instrument is wanting in any material
particular,the person in possession thereof has prima facie authority to complete it by filling up the blanks
therein. This rule is founded upon the principle that where one of two persons must suffer by the bad faith
of another, the loss must fall upon the one who first reposed confidence and made it possible for the loss
to occur.

Applying said principle to the case at bar, although AB Corporation cannot necessarily be faulted for
placing confidence on its own officer, the fact remains that such act is the proximate cause of the loss.
Moreover, there is no showing that XY Bank is likewise negligent. By the very nature of negotiable
instruments, one is not obligated to inquire beyond what appears on its face.

Hence, as between the drawer AB Corporation and drawee XY Bank, the former bears the loss.
V

Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check and also forged
Gerard's endorsement. The payor bank paid the check and charged Pancho's account for the
amount of the check. Gerard received nothing from the payment.

1. Pancho asked the payor bank to recredit his account. Should the bank comply? Explain
fully. (3%)
2. Based on the facts, was Pancho as drawer discharged on the instrument? Why?(2%)
SUGGESTED ANSWER:

1. Yes, the payor bank should comply.

Basic is the rule that if the payee's indorsement is forged, the drawee bank cannot debit the drawer's
account and the drawee bank shall bear the loss.

In the case at bar, it was the indorsement of Gerard, one of the joint payees, which was forged. In the first
place, the payor bank had no right to pay the check due to such forgery. In the second place, the fiduciary
nature of their relationship requires the bank to treat the accounts of its depositors with meticulous care.
By paying the check where the payee's signature is forged, the bank is obviously wanting in that degree of
care required by the nature of its functions.

Hence, the payor bank is obliged to recredit Pancho's account.

2. Yes, Pancho was discharged.

Under the Negotiable Instruments Law, a person secondarily liable may be discharged by any act which
discharges the instrument. One of the acts that discharges the instrument is payment made in due course
by or in behalf of the principal debtor. The same law provides that payment in due course is one made at
or after maturity to the holder in good faith and without notice that title is defective.

The facts of the case reveal that payment by payor bank to Bong is one made in due course, it being made
at or after maturity to the holder (Bong) in good faith and without notice that his title is defective.

Such being the case, the negotiable instrument is discharged, which in turn discharges Pancho, as drawer,
from his secondary liability.
VI

On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1
Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died on
March 4, 2005 and in the police investigation, it was ascertained that Gemma Rivera
participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid
liability by setting up as a defense the participation of Gemma Rivera in the killing of Antonio
Rivera? Discuss with reasons. (4%)

SUGGESTED ANSWER:

No, SOS Insurance Corp. cannot avoid liability by setting up as defense the participation of Gemma Rivera
in the killing of Antonio Rivera.
 Although the Insurance Code provides that the interest of the beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the
death of the insured, the same law also provides that in such an event, the nearest relative of the insured
shall receive the proceeds of said insurance if not otherwise disqualified.

The facts of the case reveal that Gemma Rivera's participation as accessory is only based on the findings
of a police investigation. In other words, there is yet no final judgment of conviction. But assuming
arguendo that a mere police investigation is enough to disqualify Gemma, the fact remains that the law
itself provides that the insurance proceeds shall pertain to the nearest relatives of the insured.

Hence, all premises considered, the insurer cannot therefore escape liability by simply raising the defense
of Gemma's participation as an accessory to the crime.

VII

Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner
insured the building against fire with three (3) insurance companies for the following
amounts: Northern Insurance Corp. - P20 Million Southern Insurance Corp. - P30
Million Eastern Insurance Corp. - P50 Million

1. Is the owner's taking of insurance for the building with three (3) insurers valid? Discuss.
(3%)
2. The building was totally razed by fire. If the owner decides to claim from Eastern
Insurance Corp. only P50 Million, will the claim prosper? Explain. (2%)
SUGGESTED ANSWER:

1. Yes, as a general rule, the owner's taking of insurance for the building with three (3) insurers is
valid. This is a case of double insurance where the same person is insured by several insurers separately
in respect to the same subject and interest.

Under the Insurance Code, such an arrangement is not prohibited per se, although parties may agree upon
an "other insurance" clause, in which case the insured may be prohibited from taking additional insurance
without the insurer's consent.

In the present case, it does not appear that the parties agreed on an other insurance clause. Hence, in the
absence of any showing that such a restriction exists, there is nothing to prevent the insured from taking
another insurance over the same property, subject only to the caveat that he cannot recover more than
the value of his interest in the thing insured.

2. Yes, the claim will prosper.

In case double insurance, the insured has the option to go after any one of the insurers unless the policy
itself provides that insurers contribute ratably to the loss. In either case, he cannot recover more than the
value of his insurable interest.

In the case at bar, the insured, as owner, has an insurable interest up to P50 Million, the value of the
building. That being the case, he can therefore claim the entire P50 Million from Eastern Insurance Corp. In
turn, by the principle of contribution which applies in case of over-insurance due to double insurance,
Eastern Insurance Corp. may require the other insurers to contribute ratably to the loss, considering that
they separately insure the same interest against the same peril.

VIII

City Railways, Inc. (CRI) provides train services, for a fee, to commuters from Manila to
Calamba, Laguna. Commuters are required to purchase tickets and then proceed to designated
loading ang unloading facilities to board the train. Ricardo Santos purchased a ticket for
Calamba and entered the station. While waiting, he had an altercation with the security guard
of CRI leading to a fistfight. Ricardo Santos fell on the railway just as a train was entering the
station. Ricardo Santos was run over by the train. He died. In the action for damages filed by
the heirs of Ricardo Santos, CRI interposed lack of cause of action, contending that the mishap
occurred before Ricardo Santos boarded the train and that it was not guilty of negligence.
Decide.(5%)

SUGGESTED ANSWER:

The contention of CRI is not tenable.

Under the law, the degree of care required of a common carrier is extraordinary diligence or the obligation
to carry the passenger safely as far as human care and foresight can provide, using the utmost diligence
of very cautious persons with due regard to all the consequences. Thus, in case of death or injury to
passengers, the common carrier is presumed negligent and upon him rests the burden of proof of exercise
of extraordinary diligence. The duty to exercise extraordinary diligence attaches from the moment the
person who purchases the ticket from the carrier presents himself at the proper place and in a proper
 manner to be transported.

In the given case, there is no doubt that CRI is a common carrier for the reason that it is engaged in the
business of transporting passengers by land, for compensation, offering its services to the public. As such,
it is required to exercise extraordinary diligence and this responsibility attached from the moment Ricardo
Santos purchased the ticket and entered the station. When Ricardo died while he was within the premises
of CRI, the latter is presumed to be at fault. This is true even if Ricardo has not yet boarded the train, so
long as he has presented himself to the carrier at the proper place and in a proper manner.

Hence, CRI, as a common carrier, is liable to the heirs of Ricardo Santos.

IX

On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping
Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company
(Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to
Debenhams Company. After it indemnified Debenhams, Empire as subrogee filed an action for
damages against CSC.

1. Assume that the vessel was seaworthy. Before departing, the vessel was advised by the
Japanese Meteorological Center that it was safe to travel to its destination. But while at sea,
the vessel received a report of a typhoon moving within its general path. To avoid the
typhoon, the vessel changed its course. However, it was still at the fringe of the typhoon when
it was repeatedly hit by huge waves, foundered and eventually sank. The captain and the crew
were saved except three (3) who perished. Is CSC liable to Empire? What principle of maritime
law is applicable? Explain. (3%)
2. Assume the vessel was not seaworthy as in fact its hull had leaked, causing flooding in
the vessel. Will your answer be the same? Explain. (2%)
3. Assume the facts in question (b). Can the heirs of the three (3) crew members who
perished recover from CSC? Explain fully. (3%)
SUGGESTED ANSWER:

1. No, CSC is not liable to Empire.

The principle of maritime law applicable is the Doctrine of Limited Liability. Under this rule, the exclusively
real and hypothecary nature of maritime law operates to limit the liability of the shipowner to the value of
the vessel, earned freightage and proceeds of insurance if any. Hence, the phrase "NO VESSEL, NO
LIABILITY." Total destruction or sinking of the vessel extinguishes the maritime lien as there is no longer
any res to which it can attach.

This doctrine is applicable in the case because, as the facts reveal, the ship sank and was totally lost. The
exception that the carrier failed to overcome the presumption of negligence is not obtaining as in fact CSC
was able to prove that the ship was seaworthy. Moreover, the loss is due to a typhoon -- a fortuitous event,
which is one of the exempting circumstances when the carrier can avoid liability.

Hence, CSC is not liable under the Doctrine of Limited Liability.

2. No, my answer will not be the same.

While as a rule, the shipowner's liability is limited only to the value of the vessel so that loss of the vessel
operates to extinguish his liability, the same rule has no application when the carrier failed to overcome
the presumption of negligence. Such presumption is only rebutted when the carrier establishes that the
vessel is seaworthy.

According to the facts of the case, the vessel is not seaworthy. Absent this requirement of seaworthiness
of the vessel, CSC has failed to overcome the presumption of negligence.

Hence, the Doctrine of Limited Liability is inapplicable and CSC is liable for the loss.

3. Yes, the heirs of the three (3) crewmembers who perished can recover from CSC. This is because
another exception to the applicability of the Limited Liability Rule is Workmen's Compensation Claims.

However, in this case, the heirs cannot go after CSC directly since their claim based on workmen's
compensation would have be to be filed with the Social Security System (SSS). After paying said claims,
the SSS is subrogated to their rights and is thus entitled to go after CSC. In either case, CSC cannot raise
the defense that its liability is limited to the value of his vessel.
X

Nelson owned and controlled Sonnel Construction Company. Acting for the company, Nelson
contracted the construction of a building. Without first installing a protective net atop the
sidewalks adjoining the construction site, the company proceeded with the construction work.
One day a heavy piece of lumber fell from the building. It smashed a taxicab which at that time
had gone offroad and onto the sidewalk in order to avoid the traffic. The taxicab passenger
 died as a result.

1. Assume that the company had no more account and property in its name. As counsel for
the heirs of the victim, whom will you sue for damages, and what theory will you adopt? (3%)
2. If you were the counsel for Sonnel Construction, how would you defend your client?
What would be your theory? (2%)
3. Could the heirs hold the taxicab owner and driver liable? Explain. (2%)
SUGGESTED ANSWER:

1. As counsel for the heirs of the victim, I will sue Nelson as owner of Sonnel Construction Company using
the Doctrine of Piercing the Veil of Corporate Fiction.

As a general rule, the liability of a corporation is separate and distinct from that of the persons comprising
it. However, as an exception to the rule, the veil of corporate fiction may be pierced when the separate
personality of the corporation is used as a shield to avoid a clear legal obligation. In such an event, it is
treated as a mere association of persons upon whom liability attaches.

In the given case, Sonnel Construction Company has a clear legal obligation to the heirs of the victim for
its negligence in not installing a protective net atop the sidewalk before beginning construction. Nelson, as
owner of the company, cannot use the separate entity rule in order to avoid liability. This is especially true
when the company had no more account and property under its name.

2. If I were the counsel of Sonnel Construction, I would raise the defense of due diligence in the selection
and supervision of its employees.

Under the doctrine of vicarious liability of employers, the employer may be relieved of responsibility for
the negligent acts of their employees if they can show that they observed all the diligence of a good father
of a family to prevent damage.

In the given case, Sonnel Construction, as employer, may prove due diligence in the selection and
supervision of its employees by establishing that prior to hiring, it examined them as to their
qualifications, experience and service records and during the course of employment, it formulated
standard operating procedures, monitored their implementation and imposed disciplinary measures for
breaches thereof.

3. Yes, the heirs may hold the taxicab owner and the driver liable.

As regards the taxicab owner, the heirs have two concurrent causes of action based on the vicarious
liability of an employer and based on contractual breach. In the first, the negligence of the driver gives rise
to the presumption of negligence of the taxicab owner as its employer. In the second, there is a contract of
carriage between the taxicab owner and its passenger and the breach thereof by the former gives rise to
the presumption that it failed to exercise extraordinary diligence.

In addition, the heirs also have two concurrent causes of action against the driver. First, they may hold the
driver criminally liable for reckless imprudence resulting in homicide. In which case, the taxicab owner is
also subsidiarily liable in case the driver becomes insolvent. Second, the heirs may likewise sue the driver
for damages based on tort.

All four cases may be pursued separately and simultaneously for they are independent of each other. The
only caveat is that the plaintiff may not recover twice for the same negligent act.
XI
1. Since February 8, 1935, the legislature has not passed even a single law creating a
private corporation. What provision of the Constitution precludes the passage of such a law?
(3%)
2. May the composition of the board of directors of the National Power Corporation (NPC)
be validly reduced to three (3)? Explain your answer fully. (2%)
SUGGESTED ANSWER:

1. Section 16, Article XII of the 1987 Constitution provides that Congress shall not, except by general law,
provide for the formation, organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability.

2. Yes, the composition of the board of directors of the NPC may be validly reduced to three (3).

The NPC is a government-owned or controlled corporation (GOCC) governed by its own charter. The
limitation under the Corporation Code that the number of directors be not less than five (5) but not more
than fifteen (15) does not apply to a GOCCthat has its own charter.
XII

Pedro owns 70% of the subscribed capital stock of a company which owns an office building.
 Paolo and Juan own the remaining stock equally between them. Paolo also owns a security
agency, a janitorial company and a catering business. In behalf of the office building company,
Paolo engaged his companies to render their services to the office building. Are the service
contracts valid? Explain. (4%)

SUGGESTED ANSWER:

Yes, the service contracts are valid.

Under the Corporation Code, contracts entered into by interlocking directors are valid if the interest of the
interlocking director in one corporation is nominal -- that is, less than 20% of the outstanding capital stock
-- and provided that the following conditions are met:

o the presence of such director in the board meeting approving the contract was not necessary to
constitute a quorom
o his vote was not necessary to approve the contract
o the contract is fair and reasonable under the circumstances.
According to the facts of the case, Pedro owns 70% of the stocks, leaving 30% to be divided equally
between Juan and Paolo. This shows that Paolo owns only a nominal interest of 15%.

Hence, provided that all the other conditions are met, Paolo's service contracts with the company are
valid.
XIII

Grand Gas Corporation, a publicity listed company, discover after extensive drilling a rich
deposit of natural gas along the coast of Antique. For five (5) months, the company did not
disclose the discovery so that it could quietly and cheaply acquire neighboring land and secure
mining information. Between the discovery and its disclosure of the information to the
Securities and Exchange Commission, all the directors and key officer of the company bought
shares in the company at very low prices. After the disclosure, the price of the shares went up.
The directors and officers sold their shares at huge profits.

1. What provision of the Securities Regulation Code (SRC) did they violate, if any? Explain.
(4%)
2. Assuming that the employees of the establishment handling the printing work of Grand
Gas Corporation saw the exploration reports which were mistakenly sent to their
establishment together with other materials to be printed. They too bought shares in the
company at low prices and later sold them at huge profits. Will they be liable for violation of
the SRC? Why? (3%)
SUGGESTED ANSWER:

1. The directors and key officers violated the provisions prohibiting insider trading.

Under the Securities Regulation Code, it shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to the issuer or the security that is not
generally available to the public.

In the given case, the directors and key officers are such insiders, they being directors and officers of
Grand Gas Corporation, the issuer. As such, their act of purchasing company shares while in possession of
material non-public information.

Hence, the directors and key officers are guilty of insider trading in violation of the Securities Regulation
Code.

2. Yes, they are liable.

Under the Securities Regulation Code, a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer or security that is not generally available
to the public is likewise an insider.

In the case at bar, it can be readily seen that the employees of the printing company received the material
information through its relationship with Grand Gas Corporation as its printer. They are therefore insiders.
When they purchased the shares while in possession of material non-public information, they committed
insider trading.

Hence, they can be held liable for violation of the Securities Regulation Code.
XIV

Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation, which has a
par value of P1 per share. He paid P25,000 and promised to pay the balance before December
31, 2008. JP Development Corporation declared a cash dividend on October 15, 2008, payable
 on December 1, 2008.

1. For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)
2. On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue to him
the stock certificate corresponding to the P25,000 paid by him? (2%)
SUGGESTED ANSWER:

1. Ace Cruz is entitled to be paid cash dividends for his entire subscribed shares of 100,000.

Under the Corporation Code, holders of subscribed shares not fully paid which are not delinquent shall
have all the rights of a stockholder. This includes the proprietary right of the stockholder to receive
dividends based on his total subscription.

2. No, Ace Cruz cannot compel JP Development Corporation to issue to him the stock certificate.

The Corporation Code provides that no certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in case of delinquent shares) if any is due,
has been paid.
XV

Eloise, an accomplished writer, was hired by Petong to write a bimonthly newspaper column
for Diario de Manila, a newly-established newspaper of which Petong was the editor-in-chief.
Eloise was to be paid P1,000 for each column that was published. In the course of two months,
Eloise submitted three columns which, after some slight editing, were printed in the
newspaper. However, Diario de Manila proved unprofitable and closed only after two months.
Due to the minimal amounts involved, Eloise chose not to pursue any claim for payment from
the newspaper, which was owned by New Media Enterprises.

Three years later, Eloise was planning to publish an anthology of her works, and wanted to
include the three columns that appeared in the Diario de Manila in her anthology. She asks for
your legal advice:

1. Does Eloise have to secure authorization from New Media Enterprises to be able to
publish her Diario de Manila columns in her own anthology? Explain fully. (4%)
2. Assume that New Media Enterprises plans to publish Eloise's columns in its own
anthology entitled, "The Best of Diaro de Manila." Eloise wants to prevent the publication of
her columns in that anthology since she was never paid by the newspaper. Name one
irrefutable legal arguments Eloise could cite to enjoin New Media Enterprises from including
her columns in its anthology. (2%)
SUGGESTED ANSWER:

1. Yes, Eloise has to secure authorization from New Media Enterprise.

In case of a work by an author during and in the course of his employment, the copyright shall belong to
the employer, if the work is the result of his regular duties, even if the employee uses the time, facilities
and materials of the employer.

The facts reveal that Eloise created the works in question during the course of her employment with New
Media Enterprises. Anent the fact that she was specifically hired by Petong to write a bimonthly column,
the said works are the result of her regular duties.

Hence, being a mere employee, Eloise is not the owner of the copyright and must therefore secure the
authority of the real owner before she can publish the works in her own anthology.

2. Eloise can invoke her moral rights in her works.

Although copyright over the works belong to the employer, the author of the work shall, independently of
the economic rights, have moral rights in her works. This includes the right to make alterations to her work
prior to, or withhold it from publication.

In the given case, Eloise as the true author continues to hold moral rights in her works, regardless of the
fact that New Media Enterprises owns the economic rights thereto.

Hence, she may enjoin New Media Enterprises from publishing her columns by invoking her moral rights as
author.
XVI
In 1999, Mocha Warm, an American musician, had a hit rap single called Warm Warm Honey
which he himself composed and performed. The single was produced by a California record
company, Galactic Records. Many noticed that some passages from Warm Warm Honey
sounded eerily similar to parts of Under Hassle, a 1978 hit song by the British rock band
Majesty. A copyright infringement suit was filed in the United States against Mocha Warm by
Majesty. It was later settled out of court, with Majesty receiving attribution as co-author of
 Warm Warm Honey as well as a share in the royalties. By 2002, Mocha Warm was nearing
bankruptcy and he sold his economic rights over Warm Warm Honey to Galactic Records for
$10,000 In 2008, Planet Films a Filipino movie producing company, commissioned DJ Chef Jean,
a Filipino musician, to produce an original re-mix of Warm Warm Honey for use in one of its
latest films, Astig!. DJ Chef Jean remixed Warm Warm Honey with salsa beat and interspersed
as well a recital of a poetic stanza by John Blake, a 17th century Scottish poet. DJ Chef Jean
died shortly after submitting the remixed Warm Warm Honey to Planet Films. Prior to the
release of Astig!, Mocha Warm learns of the remixed Warm Warm Honey and demands that he
be publicity identified as the author of the remixed song in all the CD covers and publicity
releases of Planet Films.

1. Who are the parties or entities entitled to be credited as author of the remixed Warm
Warm Honey? Reason out your answer. (3%)
2. Who are the particular parties or entities who exercise copyright over the remixed Warm
Warm Honey? Explain. (3%)
SUGGESTED ANSWER:

1. The parties or entities entitled to be credited as author of the remixed Warm Warm Honey are the
following:

o Mocha Warm, because as author, he has the moral right of attribution, which exists independently
of any grant of an assignment or license with respect to his economic rights
o Majesty, because as co-author, it is one of the original owners of the copyright and as such has the
right to be credited as author
o DJ Chef Jean, because as an author commissioned to produce a derivative work, he enjoys all the
rights of a copyright holder as though it were a new work, without prejudice to any subsisting copyright
over the original works
2. The parties or entities who exercise copyright over the remixed Warm Warm Honey are the following:

o DJ Chef Jean, as producer, for purposes of exhibition, and also as author commissioned to produce a
derivative work, he also exercises copyright over the work for all other purposes.
o Galactic Records, as owner of a subsisting copyright over the original work
o Majesty, as author of the original work
XVII
On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30, 2008,
secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained
another loan of P10,000 from Bob to be paid on February 15, 2008. he secured this by
executing a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al
failed to pay. Bob foreclosed the chattel mortgage but the car was bidded for P6,000 only. Al
also failed to pay the second loan due on February 15, 2008. Bob filed an action for collection
of sum of money. Al filed a motion to dismiss claiming that Bob should first foreclose the
mortgage on the Honda motorcycle before he can file the action for sum of money. Decide with
reasons. (4%)

SUGGESTED ANSWER:

The motion to dismiss must be denied. Under the Chattel Mortgage Law, the mortgagee has two remedies
in case of default. He may file a collection suit or he may foreclose the chattel mortgage with right to
recover any deficiency. These remedies are alternative and neither one is a condition sine qua non of the
other. In the given case, Bob chose to file an action for collection of sum of money. The law itself provides
for this remedy to the mortgagee and nothing in its language suggests that before such a remedy is
availed of, there must first be foreclosure. Hence, all premises considered, the motion to dismiss is without
merit because foreclosure is not necessary for an action for collection of sum of money.
XVIII
1. Can a distressed corporation file a petition for corporate rehabilitation after the
dismissal of its earlier petition for insolvency? Why? (2%)
2. Can the corporation file a petition for rehabilitation first, and after it is dismissed file a
petition for insolvency? Why? (2%)
3. Explain the key phrase "equality is equity" in corporate rehabilitation proceedings. (2%)
SUGGESTED ANSWER:

1. Yes, a distressed corporation can file a petition for corporate rehabilitation after the dismissal of its
earlier petition for insolvency. This is because a petition for corporate rehabilitation is granted upon
different grounds as a petition for insolvency. It is possible that the petition for insolvency was not granted
because the ground relied upon is insufficient to warrant a declaration of a state of insolvency, but that the
same ground may be obtaining in a petition for corporate rehabilitation.

2. Yes, the corporation can file a petition for corporate rehabilitation first and after it is dismissed, file a
petition for insolvency, for the same reason as above. The grounds relied upon are different. For as long as
the first petition is no longer pending but is already terminated, the second petition based on a ground
incompatible with the first may still be filed.
3. "Equality is equity" means that whenever a distressed corporation asks the Securities and Exchange
Commission for rehabilitation and suspension of payments, preferred creditors may no longer assert
preference, but shall stand in equal footing with other creditors. It is for this reason that during corporate
rehabilitation, all pending claims, whether secured or unsecured, are suspended. However, the preferred
status of secured creditors still remain so that when the corporation is declared insolvent and its assets
are distributed, the secured creditors continue to be preferred over the unsecured ones.
XIX

Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties Inc.
amounting to P270 Million. The loan was secured by a mortgage over a vast commercial lot in
the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Bangko Sentral ng
Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrower's limit
of 25% of the bank's net worth under a recent BSP Circular. In light of other previous similar
violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount
of the loan to Celestial Properties under pain of severe sanctions. When Industry Bank
informed Celestial Properties that it intended to reduce the loan by P50 Million, Celestial
Properties countered that the bank should first release a part of the collateral worth P50
Million. Industry Bank rejected the counter-proposal, and referred the matter to you as
counsel. How would you advise Industry Bank to proceed, with its best interest in mind? (5%)

SUGGESTED ANSWER:

I would advise Industry Bank to release a part of the collateral worth P50 Million.

While it is true that under the Civil Code a mortgage is one and indivisible as to the contracting parties so
that every portion of the property mortgaged is answerable for the whole obligation as soon as it falls due,
the Supreme Court has held that this rule is not applicable to a situation where only a portion of the loan
was released. In such a case, the mortgage on the loan became unenforceable to the extent of the
unreleased portion.

In the case at bar, the loan agreement is for P270 Million. By reducing the amount to P220 Million (or P270
Million less P50 Million), the real estate mortgage over the commercial lot became unenforceable to the
extent of P50 Million and subsists as a security only for P220 Million debt. In other words, in case of default
of Celestial Properties, the mortgage can be foreclosed only to the extent of the P220 Million. (Central
Bank of the Philippines vs. CA, 139 SCRA 46[1985])

Hence, it would be in the best interest of the bank to comply with its client's request since retaining the
entire collateral would not result in any benefit. On the contrary, it might damage its relationship with its
client by refusing to accommodate its request.