Suggested Answers to Bar Exam Questions

2008 on Mercantile Law

on 10:15 AM in Bar Exams
0
DISCLAIMER: Please verify correctness of answers using
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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.