Mercantile Law Bar Examination Q & A (1990-2006) contracts.

How do these two theories

differ?
General Principles of SUGGESTED ANSWER:
Under the theory of cognition, the
Mercantile Law acceptance is considered to effectively bind
the offeror only from the time it came to
Commercial Transaction (2003) his knowledge. Under the theory of
What do you understand by the term manifestation, the contract is perfected at
“commercial transaction”? Is it essential the moment when the acceptance is
that at least one party to a contract be a declared or made by the offeree.
merchant in order to consider such a
commercial transaction? (4%)
SUGGESTED ANSWER:
A “Commercial transaction” is defined
as ...... It is not
essential that at least one party to the
commercial transaction be a merchant.
What is essential is that the transaction
evince an intent to engage in commerce or
trade.

Joint Account (2000)

What is a joint account? (2%)
SUGGESTED ANSWER:
A joint account is a transaction of
merchants where other merchants agree to
contribute the amount of capital agreed
upon, and participating in the favorable or
unfavorable results thereof in the
proportion they may determine.

Joint Account vs. Partnership (2000)

Distinguish joint account from partnership.
(3%)
SUGGESTED ANSWER:
The following are the distinctions between
joint account and partnership:
5888 A partnership has a firm name while
a joint account has none and is
conducted in the name of the ostensible
partner.
5889 While a partnership has juridical
personality and may sue or be sued
under its firm name, a joint account has
no juridical personality and can sue or
be sued only in the name of the
ostensible partner.
5890 While a partnership has a common
fund, a joint account has none.
5891 While in a partnership, all general
partners have the right of management,
in a joint account, the ostensible
partner manages its business
operations.
5892 While liquidations of a partnership
may, by agreement, be entrusted to a
partner or partners, in a joint account
liquidation thereof can only be done by
the ostensible partner.

Theory of Cognition vs. Theory of Manifestation (1997)

The Civil Code adopts the theory of
cognition, while the Code of Commerce
generally recognizes the theory of
manifestation, in the perfection of
 Page 12 of 103
Banking Law
Banks: Applicability: Foreign Currency Deposit Act
& Secrecy of Bank Deposits (2005)
Hi Yielding Corporation filed a complaint
against five of its officers for violation of
Section 31 of the Corporation Code. The
corporation claimed that the said officers
were guilty of advancing their personal
interests to the prejudice of
corporation, and that they were grossly
negligent in handling its affairs. Aside from
documents and contracts, the corporation
also submitted in evidence records of the
officers’ U.S. Dollar deposits in several
banks overseas - Boston Bank, Bank of
Switzerland, and Bank of New York.
For their part, the officers filed a criminal
complaint against the directors of Hi
Yielding Corporation for violation of
Republic Act No. 6426, otherwise known as
the Foreign Currency Deposit Act of the
Philippines. The officers alleged that their
bank deposits were illegally disclosed for
want of a court order, and that such
deposits were not even the subject of the
case against them.
0 Will the complaint filed against the
directors of Hi
Yielding Corporation prosper? Explain.
SUGGESTED ANSWER:
No, because the Foreign Currency Deposit
Act (R.A. No. 6426), including its punitive
provisions, refers to foreign currency
deposits accounts constituted within the
Philippines. It has no application at all to
Version 1990-2003 Arranged by SULAW Class 2005
accounts, even though they are banks,
opened and constituted abroad.
23 Was there a violation of the Secrecy of
Bank Deposits Law (Republic Act No.
1405)? Explain.
(5%)
SUGGESTED ANSWER:
No, because the punitive provisions of the
Secrecy of Bank Deposits Law (R.A. No.
1405), including the statutory exemptions
the
provided therein, are not applicable to
FCDU accounts, even when constituted
locally.
(Intengan v. Court of Appeals, G.R. No. 128996,
February 15, 2002)
Banks: Collateral Security (2002)
Andrew is engaged in the business of
building low-cost housing units under
contracts with real estate developers. He
applied for a loan of P3 Million from Ready
Credit Bank (the Bank), which required
Andrew to provide collateral security for it.
Andrew offered to assign to the Bank his
receivables amounting to P4 million from
Home Builders Development Corporation
(the Obligor). The Bank accepted the offer.
Accordingly, Andrew obtained the loan and
he executed a promissory note undertaking
to pay the loan in full in one lump sum on
September 1, 2002, together with interest
thereon at the rate of 20% per annum. At
the same time, Andrew executed a Deed of
Assignment in favor of the Bank assigning
to the Bank his receivables from the
Obligor. The deed of assignment read:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
“I, Andrew Lee, hereby assign, transfer and
convey, absolutely and unconditionally, to
Ready Credit Bank (hereinafter called the
Bank) all of my right, title and interest in
and to my accounts receivable from Home
Builders Development Corporation
(hereinafter called the Obligor) arising
from delivery of housing units with a total
contract price of P4,000,000.00, the
description and contract value of which are
attached hereto as Annex A (hereinafter
called the Receivables).”
“In the event that I shall be unable to pay
my outstanding indebtedness owned to the
Bank, the Bank shall have the right,
without any further formality or act on its
part, to collect the Receivables from the
Obligor and to apply the proceeds thereof
toward payment of my said indebtedness.”
Is CDC's complaint meritorious or not?
Reason briefly.
SUGGESTED ANSWER:
No. CDC's complaint is not meritorious. It
was held in
China Banking Corporation v. Ortega, 49
SCRA 355 (1973)
that peso deposits may be garnished and
the depositary bank can comply with the
order of garnishment without violating the
Law on the Secrecy of Bank Deposits.
Execution is the goal of litigation as it is its
fruit. Garnishment is part of the execution
process. Upon service of the notice of
garnishment on the bank where the
defendant deposited funds, such funds
become part of the subject matter of
litigation.

Andrew failed to pay the loan on its due

date on September 1, 2002. When the Bank
attempted to collect from the Obligor, the
Bank discovered that the latter had already
closed operations and liquidated all its
assets. The Bank sued Andrew for
collection, but Andrew moved to dismiss
the complaint on the ground that the debt
had already been paid by reason of his
execution of the aforesaid Deed of
Assignment which, being absolute and
unconditional, was in essence a dacion en
pago. The Bank opposed the motion,
contending that the Deed of Assignment
was only a security for a loan.
If you were the Judge, how would you
resolve the motion to dismiss filed by
Andrew? Explain (5%)
SUGGESTED ANSWER:
(Since the question is outside the scope
of the Bar Examination, it is
recommended that the candidate be
given full credit of 5%, whatever may be
his answer, and he be given a bonus if
he made an answer in the following
manner:)
The motion to dismiss should be granted.
The simple absolute and unconditional
conveyance embodied in the deed of
assignment would be operative, and the
assignment would constitute essentially a
mode of payment or dacion en pago.

Banks: Secrecy of Bank Deposits; Garnishment (2004)

CDC maintained a savings account with
CBank. On orders of the MM Regional Trial
Court, the Sheriff garnished P50,000 of his
account, to satisfy the judgment in favor of
his creditor, MO. CDC complained that the
garnishment violated the Law on the
Secrecy of Bank Deposits because the
existence of his savings account was
disclosed to the public. (5%)
 Page 13 of 103
Banks; Classifications of Banks (2002)
There are six (6) classes of banks identified
in the General Banking Law of 2000. Name
at least four (4) of them and explain the
distinguishing characteristic or function of
each one. (5%)
SUGGESTED ANSWER:
Any four (4) of the following six (6) classes
of banks identified in the General Banking
Law of 2002, to wit:
23 Universal Banks – These are those
which used to be called expanded
commercial banks and the operations of
which are now primarily governed by
the General Banking Law of 2002. They
can exercise the powers of an
investment house and invest in non-
allied enterprises. They have the
highest capitalization requirement.
24 Commercial Banks – These are
ordinary or regular commercial banks,
as distinguished from a universal bank.
They have a lower capitalization
requirement than universal banks and
cannot exercise the powers of an
investment house and invest in non-
allied enterprises.
25 Thrift Banks – These banks (such as
savings and mortgage banks, stock
savings and loan associations, and
private development banks) may
exercise most of the powers and
functions of a commercial bank except
that they cannot, among others, open
current or check accounts without prior
Monetary Board approval, and they
cannot issue letters of credit. Their
Version 1990-2003 Arranged by SULAW Class 2005
operations are governed primarily by
the Thrift Banks Act of 1995 (RA 7906).
26 Rural Banks – these are those which
are organized primarily to extend loans
and other credit facilities to farmers,
fishermen or farm families, as well as
cooperatives, merchants, and private
and public employees and whose
operations are primarily governed by
the Rural Banks Act of 1992 (RA 7353).
27 Cooperative Banks – these are those
which are organized primarily to
provide financial and credit services to
cooperatives and whose operations are
primarily governed by the Cooperative
Code of the Philippines (RA 6938).
28 Islamic Banks – these are those which
are organized primarily to provide
financial and credit services in a
manner or transaction consistent with
the Islamic Shari’ah. At present, only
the Al Amanah Islamic Investment Bank
of the Philippines has been organized as
an Islamic Bank.
Banks; Conservator vs. Receiver (2006)
Distinguish between the role of a
conservator and that of a receiver of a
bank. (2.5%)
SUGGESTED ANSWER:
The Conservator is appointed for a period
not exceeding one (1) year, to take charge
of the assets, liabilities, and the
management of a bank or a quasi-bank in a
state of continuing inability, or
unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors.
On the other hand, the Receiver is
appointed to manage a bank or quasi-bank
that is unable to pay its liabilities in
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
the ordinary course of business, or has
insufficient realizable assets to meet its
liabilities, or cannot continue in business
without probable losses to its depositors or
creditors; or has willfully violated a final
cease and desist order, involving acts or
transactions amounting to fraud or a
dissipation of the assets of the institution.
The main purpose of the Receiver is to
recommend the rehabilitation or
liquidation of the bank.
Banks; Diligence Required (1992)
Placido, a bank depositor, left his
checkbook on his desk at his house.
Unknown to him, a visitor at the time,
noticing the same, took a check therefrom,
filled it up in the amount of P3,000.00 and
succeeded in encashing the check on the
same day. Placido’s account was thereby
debited in the same amount.
the preparation and issuance of a
manager’s check payable to himself in the
sum of 5 million pesos equivalent to the
amount placed or invested in the bank by a
business acquaintance. He now claims that
he is keeping the funds in trust for the
owner and that he had committed no
violation of the General Banking Act (RA
337, as amended) for which he should be
punished. Do you agree that there has been
no violation of the statute? (3%)
SUGGESTED ANSWER:
No. I do not agree that there is no violation
of the statute (RA 337, as amended). X
violated Sec 85 when he caused the
preparation and issuance of a manager’s
check

Discovering the erroneous debit, Placido

demanded that the bank credit him with a
like amount. The bank refused on the
ground that Placido was negligent in
leaving his checkbook on his desk so that
he could not put up the defense of forgery
or want of authority under the NIL.

The Facts disclose that even to the naked

eye, there were marked differences
between Placido’s signature and the one in
the check forged by the visitor. As between
Placido and the bank, who should bear the
loss? Explain.
SUGGESTED ANSWER:
The bank should bear the loss. A drawee
bank must exercise the highest diligence in
safeguarding the accounts of its client-
depositors. The bank is also charged with
genuineness of the signatures of its current
account holders. But what can be more
striking is that there were marked
differences between Placido’s signature
and the one in the check forged by the
visitor. Certainly, Placido was not negligent
in leaving his checkbook in his own desk
(PNB v Quimpo 158 SCRA 582)

Banks; Insolvency; Prohibited Transactions (2000)

The Monetary Board of the BSP closed
Urban Bank after it encountered crippling
financial difficulties that resulted in a bank
run. X, one of the members of the BOD of
the bank, attended and stayed throughout
the entire meeting of the Board that was
held well in advance of the bank run and
before news had begun to trickle to the
business community about the dire
financial pit the bank had fallen into.
Immediately after the meeting, X caused
 Page 14 of 103
payable to himself in the sum of P5 million.
This is paying out or permitting to be paid
out funds of the bank after the latter
became insolvent. This act is penalized by
fine of not less than P1,000.00 nor more
than P10,000.00 and by imprisonment for
not less than two nor more than ten years.
Banks; Insolvency; Requirements (1997)
Give the basic requirements to be complied
with by the BSP before the Monetary Board
can declare a bank insolvent, order it
closed and forbid it from doing further
business in the Philippines.
SUGGESTED ANSWER:
Before the Monetary Board can declare a
bank insolvent, order it closed and forbid it
from doing further business in the
Philippines, the following basic
requirements must be complied with by the
BSP, to wit:
23 There must be an examination by the
head of the Department of Supervision
or his examiners or agents into the
condition of the bank.
24 The examination discloses that the
condition of the bank is one of
insolvency, or that its continuance in
business would involve probable loss to
creditors or depositors.
25 The head of said Department shall
inform in writing the Monetary Board of
such facts.
26 Upon finding said information or
statement to be true, the Monetary
Board shall appoint a receiver to take
charge of the assets and liabilities of
the bank.
Version 1990-2003 Arranged by SULAW Class 2005
27 Within 60 days, the Monetary Board
shall determine and confirm if the bank
is insolvent, and public interest
requires, to order the liquidation of the
bank.
Banks; Restrictions on Loan Accommodations (2002)
As part of the safeguards against
imprudent banking, the General Banking
Law imposes limits or restrictions on loans
and credit accommodations which may be
extended by banks. Identify at least two (2)
of these limits or restrictions and explain
the rationale of each of them. (5%)
SUGGESTED ANSWER:
Any two (2) of the following limits or
restrictions on loan and credit transactions
which may be extended by banks, as part of
the safeguards against imprudent banking,
to wit:
23 SBL Rules – (i.e., Single Borrower’s
Limit) rules are those promulgated by
the Bangko Sentral ng Pilipinas, upon
the authority of Section 35 of the
General Banking Law of 2000, which
regulate the total amount of loans,
credit accommodations and guarantees
that may be extended by a bank to any
person, partnership, association,
corporation or other entity. The rules
seek to protect a bank from making
excessive loans to a single borrower by
prohibiting it from lending beyond a
specified ceiling.
24 DOSRI Rules – These rules
promulgated by the BSP, upon authority
of Section 5 of the General Banking
Law of 2000, which regulate the
amount of credit accommodations that
a bank may extend to its
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) certificates were gone. MN and OP now
directors, officers, stockholders and claim for damages from SIBANK. Is the
their related interests (thus, DOSRI) . bank liable? Explain briefly. (5%)
SUGGESTED ANSWER:
Generally, a bank’s credit
The bank is liable, based on the decisions
accommodations to its DOSRI must be
of the Supreme Court in CA Agro-Industrial
in the regular course of business and on Development Corp. v. Court of Appeals, 219
terms not less favorable to the bank SCRA 426 (1993) and Sia v. Court of Appeals,
than those offered to non-DOSRI 222 SCRA 24 (1993). In those cases, the
borrowers. Supreme Court ruled that the renting out of
23 No commercial bank shall make any safety deposit boxes is a "special kind of
loan or discount on the security of deposit" wherein the bank is the depositary.
shares of its own capital stock. In the absence of any stipulation
prescribing the degree of diligence
Banks; Restrictions on Loan Accommodations (2006) required, that of a good father of a family is
Pio is the president of Western Bank. His to be
wife applied for a loan with the said bank
to finance an internet cafe. The loan officer Version 1990-2003 Arranged by SULAW Class 2005
told her that her application will not be
approved because the grant of loans to
related interests of bank directors, officers,
and stockholders is prohibited by the
General Banking Law.
Explain whether the loan officer is correct.
(5%)
SUGGESTED ANSWER:
Section 36 of the General Banking Law of
2000 does not entirely prohibit directors or
officers of the bank, directly or indirectly,
from borrowing from the bank. In this case,
Pio is the president of Western Bank, which
makes him an officer, director and
stockholder of the said bank. The General
Banking Law provides for additional
restrictions to the bank before it can lend to
its directors or officers. A written approval of
the majority vote of all the directors of the
bank, excluding the director concerned, is
required. Furthermore, such dealings must
be upon terms not less favorable to the bank
than those offered to others (Section 1326,
Central Bank's "Manual of Regulations for
Banks and Other Financial Intermediaries,
cited in Ranioso v. CA, G.R. No. 117416,
December 8, 2000). A violation of this
provision will cause his or her position to be
declared vacant and the erring director or
officer subjected to the penal provisions of
the New Central Bank Act.

Banks; Safety Deposit Box; Liability

MN and OP rented a safety deposit box at
SIBANK. The parties signed a contract of
lease with the conditions that: the bank is
not a depository of the contents of the safe
and has neither the possession nor control
of the same; the bank assumed no interest
in said contents and assumes no liability in
connection therewith. The safety deposit
box had two keyholes: one for the guard
key which remained with the bank; and the
other for the renters' key. The box can be
opened only with the use of both keys.
The renters deposited certificates of title in
the box. But later, they discovered that the
 Page 15 of 103 23 In disclosing Rudy's bank accounts to
observed by the depositary. Any stipulation the AMLC, did the bank violate any law?
exempting the depositary from any liability (2.5%)
arising from the loss of the thing deposited SUGGESTED ANSWER:
would be void for being contrary to law and No, the bank did not violate any law. The
public policy. The deposit box is located in bank being specified as a "covered
the bank premises and is under the institution" under the Anti-Money
absolute control of the bank. Laundering Law, is obliged to report to the
AMLC covered and suspicious transactions,
Banks; Secrecy of Bank Deposit; AMLC (2006) without thereby violating any law. This is
Rudy is jobless but is reputed to be a one of the exceptions to the Secrecy of
jueteng operator. He has never been Bank Deposit Act.
charged or convicted of any crime. He
maintains several bank accounts and has
purchased 5 houses and lots for his
children from the Luansing Realty, Inc.
Since he does not have any visible job, the Version 1990-2006 Updated by Dondee
company reported his purchases to the
Anti-Money Laundering Council (AMLC).
Thereafter, AMLC charged him with
violation of the Anti-Money Laundering
Law. Upon request of the AMLC, the bank
disclosed to it Rudy's bank deposits
amounting to P100 Million. Subsequently,
he was charged in court for violation of the
Anti-Money Laundering Law.
23 Can Rudy move to dismiss the case
on the ground that he has no criminal
record? (2.5%)
SUGGESTED ANSWER:
No. Under the Anti-Money Laundering Law,
Rudy would be guilty of a "money
laundering crime" committed when the
proceeds of an "unlawful activity," like
jueteng operations, are made to appear as
having originated from legitimate sources.
The money laundering crime is separate
from the unlawful activity of being a
jueteng operator, and requires no previous
conviction for the unlawful activity (See
also Sec. 3, Anti-Money Laundering Act of
2001).

23 To raise funds for his defense, Rudy

sold the houses and lots to a friend. Can
Luansing Realty, Inc. be compelled to
transfer to the buyer ownership of the
houses and lots? (2.5%)
SUGGESTED ANSWER:
Luansing Realty, Inc. is a real estate
company, hence it is not a covered
institution under Section 3 of the Anti-
Money Laundering Act. Only banking
institutions, insurance companies,
securities dealers and brokers, pre-need
companies and other entities administering
or otherwise dealing in currency,
commodities or financial derivatives are
covered institutions. Hence, Luansing
Realty, Inc. may not use the Anti-Money
Laundering Act to refuse to transfer to the
buyer ownership of the houses and lots.
Mercantile Law Bar Examination Q & A (1990-2006) 32 When the State exercises/invokes its
23 Supposing the titles of the houses and Police Power.
lots are in possession of the Luansing (NOTA BENE: It is suggested that any 6
of the above be given full credit)
Realty, Inc., is it under obligation to deliver
the titles to Rudy? (2.5%) Banks; Secrecy of Bank Deposits (1990)
SUGGESTED ANSWER:
Yes, it has an obligation to deliver titles to Manosa, a newspaper columnist, while
Rudy. As Luansing Realty, Inc. is not a making a deposit in a bank, overheard a
covered institution under Section 3 of the pretty bank teller informing a co-employee
Anti-Money Laundering Act, it may not that Gigi, a well known public official, has
invoke this law to refuse delivery of the just a few hundred pesos in her bank
titles to Rudy. account and that her next check will in all
probability bounce. Manosa wrote this
Banks; Secrecy of Bank Deposit; Exceptions (2006) information in his newspaper column.
Under Republic Act No.1405 (The Bank Thus, Gigi
Secrecy Law), bank deposits are
considered absolutely confidential and may
not be examined, inquired or looked into by
any person, government official, bureau or
office. What are the exceptions? (5%)
SUGGESTED ANSWER:
The exceptions to the Bank Secrecy Law
are the following:
23 Special or general examination of a
bank, authorized by the Bangko
Sentral ng Pilipinas' Monetary Board,
in connection with a bank fraud or
serious irregularity.
24 Examination by an independent
Auditor, hired by the Bank and for the
Bank's exclusive use.
25 Disclosure with the Depositor's
written permission.
23 In case of Impeachment.
24 In cases of Bribery or dereliction
of duty by a Public Officer, upon
order of a competent court.
25 In cases of money
deposited/invested which, in
turn, is the subject of Litigation,
upon order of a competent
Court.
26 DOSRI Loans: Loans with their Banks
of Bank Directors, Officers,
Stockholders and related interests.
23 Loans in excess of 5% of the
Bank's Capital & Surplus
24 The Borrower waived his right
as regards the Secrecy of Bank
Deposits
27 Violation of the Anti-Graft and Corrupt
Practices Act.
28 Coup d' etat Law (RA 6968, Oct
24,1990).
29 BIR Commissioner's authority to verify
a decedent's Gross Estate and a
taxpayer's request for a compromise
agreement due to incapacity to pay his
tax liability.
30 Foreign Currency Deposits by foreign
lenders & investors under PDs 1034.
31 Violations of the Anti-Money
Laundering Law.
 Page 16 of 103
filed a complaint with the City Fiscal of
Manila for unlawfully disclosing
information about her bank account.
23 Will the said suit prosper? Explain your
answer.
24 Supposing that Gigi is charged with
unlawfully acquiring wealth under RA 1379
and that the fiscal issued a subpoena duces
tecum for the records of the bank account
of Gigi. May Gigi validly oppose the said
issuance on the ground that the same
violates the law on secrecy of bank
deposits? Explain your answer.
SUGGESTED ANSWER:
23 The Secrecy of Bank Deposits Act
prohibits, subject to its exclusionary
clauses, any person from examining,
inquiring or looking into all deposits of
whatever nature with banks or banking
institutions in the Philippines which by law
are declared “absolutely confidential” in
nature. Manosa who merely overheard
what appeared to be a vague remark of a
Bank employee to a co-employee and
writing the same in his newspaper column
is neither the inquiry nor disclosure
contemplated by law.
ALTERNATIVE ANSWER:
23 The complaint against Manosa will not
prosper because merely writing a vague
remark of a Bank employee to a co-
employee is not the disclosure
contemplated by law. If anyone should be
liable, it will be the bank employee who
disclosed the information.
SUGGESTED ANSWER:
23 Among the instances excepted from
the coverage of the Secrecy of Bank
Deposits Act are Anti-graft cases. Hence
Version 1990-2003 Arranged by SULAW Class 2005
Gigi may not validly oppose the issuance of
a subpoena duces tecum for the bank
records on her.
Banks; Secrecy of Bank Deposits (1991)
The law (RA 6832) creating a Commission
to conduct a Thorough Fact-Finding
Investigation of the Failed Coup d’etat of
Dec 1989, Recommend Measures to
Prevent the Occurrence of Similar
Attempts At a Violent Seizure of Power and
for Other Purposes, provides that the
Commission may ask the Monetary Board
to disclose information on and/or to grant
authority to examine any bank deposits,
trust or investment funds, or banking
transactions in the name of and/or utilized
by a person, natural or juridical, under
investigation by the Commission, in any
bank or banking institution in the
Philippines, when the Commission has
reasonable ground to believe that said
deposits, trust or investment funds, or
banking transactions have been used in
support or in furtherance of the objectives
of the said coup d’etat. Does the above
provision not violate the Law on Secrecy of
Bank Deposits (RA 1405)?
SUGGESTED ANSWER:
The Law on Secrecy of Bank Deposits is
itself merely a statutory enactment, and it
may, therefore, be modified, or amended
(such as by providing further exceptions
therefrom), or even repealed, expressly or
impliedly, by a subsequent law. The Secrecy
of Bank Deposits Act did not amount to a
contract between the depositors and
depository banks within the meaning of the
non-impairment clause of the Constitution.
Even if it did, the police power of the State
is superior to the non-
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
impairment clause. RA 6832, creating a Miguel moved to quash the subpoenas
commission to conduct an investigation of arguing that they violate the Secrecy of
the failed 1989 coup d’etat and to Bank Deposits Law. In addition, he
recommend measures to prevent similar contends that the subpoenas are in the
attempts to seize power is a valid exercise nature of “fishing expedition” or “general
of police power. warrants” and are constitutionally
impermissible with respect to private
Banks; Secrecy of Bank Deposits (1992) individuals who are not under investigation.
Socorro received $10,000 from a foreign Is Miguel’s contention tenable?
SUGGESTED ANSWER:
bank although she was entitled only to
No. Miguel’s contention is not tenable. The
$1,000.00. In an apparent plan to conceal
inquiry into illegally acquired property
the erroneously sent amount, she opened a
extends to cases where such property is
dollar account with her local bank,
concealed by being held by or recorded in
deposited the $10,000 and issued 4 checks
the
in the amount of $2,000 and 1 check for
$1,000 each payable to different
individuals who deposited the same in their
respective dollar accounts with different
local banks.

The sender bank then brought a civil suit

before the RTC for the recovery of the
erroneously sent amount. In the course of
the trial, the sender presented testimonies
of bank officials to show that the funds
were, in fact, deposited in a bank by
Socorro and paid out to several persons,
who participated in the concealment and
dissipation of the amount that Socorro had
erroneously received.

Socorro moved to strike out said

testimonies from the record invoking the
law on secrecy of bank deposits. If you
were the Judge, would you issue an order
to strike them out? Why?
SUGGESTED ANSWER:
I will not strike out the testimonies from
the record. The testimonies of bank
officials indicating where the questioned
dollar accounts were opened in depositing
misappropriated sums must be considered
as likewise involved in litigation – one
which is among the excepted cases under
the Secrecy of Bank Deposits Act (Melon
Bank v Magsino 190 SCRA 633)

Banks; Secrecy of Bank Deposits (1994)

Miguel, a special customs agent is charged
before the Ombudsman with having
acquired property out of proportion to his
salary, in violation of the Anti-Graft and
Corrupt Practices Act. The Ombudsman
issued a subpoena duces tecum to the
Banco de Cinco commanding its
representative to furnish the Ombudsman
records of transactions by or in the name of
Miguel, his wife and children. A second
subpoena was issued expanding the first by
including the production of records of
friends of Miguel in said bank and in all its
branches and extension offices, specifically
naming them.

Page 17 of 103
name of other persons. To sustain Miguel’s
theory and restrict the inquiry only to
property held by or in the name of the
government official would make available
to persons in government who illegally
acquire property an easy means of evading
prosecution. All they have to do would be
to simply place the property in the name of
persons other than their spouses and
children (Banco Filipino Savings vs. Purisima
161 scra 576; Sec 8 Anti-Graft Law as amended
by BP 195)
Banks; Secrecy of Bank Deposits (1995)
Michael withdrew without authority funds
of the partnership in the amounts of
P500th and US$50th for services he claims
he rendered for the benefit of the
partnership. He deposited the P500th in his
personal peso current account with
Prosperity Bank and the US$50th in his
personal foreign currency savings account
with Eastern Bank.
The partnership instituted an action in
court against Michael, Prosperity, and
Eastern to compel Michael to return the
subject funds to the partnership and
pending litigation to order both banks to
disallow any withdrawal from his accounts.
At the initial hearing of the case the court
ordered Prosperity to produce the records
of Michael’s peso current account, and
Eastern to produce the records of his
foreign currency savings account.
Can the court compel Prosperity and
Eastern to disclose the bank deposits of
Michael? Discuss fully.
Version 1990-2003 Arranged by SULAW Class 2005
SUGGESTED ANSWER:
Yes, as far as the peso account is
concerned. Sec 2 of RA 1405 allows the
disclosure of bank deposits in case where
the money deposited is the subject matter
of litigation. Since the case filed against
Michael is aimed at recovering the amount
he withdrew from the funds of the
partnership, which amount he allegedly
deposited in his account, a disclosure of his
bank deposits would be proper.
No, with respect to the foreign currency
account. Under the Foreign Currency Law,
the exemption to the prohibition against
disclosure of information concerning bank
deposits is the written consent of the
depositor.
Banks; Secrecy of Bank Deposits (1998)
1998 (20) An insurance company is deluded
into releasing a check to A for P35th to pay
for Treasury Bills (T-bills) which A claims to
be en route on board an armored truck
from a government bank. The check is
delivered to A who deposits it to his
account with XYZ Bank before the
insurance company realizes it is a scam.
Upon such realization, the insurance
company files an action against A for
recovery of the amount defrauded and
obtains a writ of preliminary attachment. In
addition to the writ, the Bank is also served
a subpoena to examine the account records
of A. The Bank declines to provide any
information in response to the writ and
moves to quash the subpoena invoking
secrecy of bank
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
deposits under RA 1405, as amended. Can
the Bank justifiably invoke RA 1405 and a)
not respond to the writ and b) quash the
subpoena for examination? (5%)
SUGGESTED ANSWER:
Yes. Whether the transaction is considered
a sale or money placement does not make
the money “subject matter of litigation”
within the meaning of Sec 2 of RA 1405
which prohibits the disclosure or inquiry
into bank deposit except “in cases where
the money deposited or invested is the
subject matter of litigation” nor will it
matter whether the money was “swindled.”
Which of the following may not be among
the exceptions:
23 In cases of impeachment.
24 In cases involving bribery
25 In cases involving BIR inquiry.
26 In cases of anti-graft and corrupt
practices.
27 In cases where the money involved is
the subject of
litigation.
Explain your answer or choice briefly. (5%)
SUGGESTED ANSWER:

Banks; Secrecy of Bank Deposits (2000)

GP is a suspected jueteng lord who is
rumored to be enjoying police and military
protection. The envy of many drug lords
who had not escaped the dragnet of the
law, GP was summoned to a hearing of the
Committee on Racketeering and Other
Syndicated Crimes of the House of
Representatives, which was conducting a
congressional investigation “in aid of
legislation” on the involvement of police
and military personnel, and possibly even
of local government officials, in the illegal
activities of suspected gambling and drug
lords. Subpoenaed to attend the
investigation were officers of certain
identified banks with a directive to them to
bring the records and documents of bank
deposits of individuals mentioned in the
subpoenas, among them GP. GP and the
banks opposed the production of the banks’
records of deposits on the ground that no
such inquiry is allowed under the Law on
Secrecy of Bank Deposits (RA 1405 as
amended). Is the opposition of GP and the
banks valid? Explain.
SUGGESTED ANSWER:
Yes. The opposition is valid. GP is not a
public official. The investigation does not
involve one of the exceptions to the
prohibition against disclosure of any
information concerning bank deposits
under the Law on Secrecy of Bank
Deposits. The Committee conducting the
investigation is not a competent court or
the Ombudsman authorized under the law
to issue a subpoena for the production of
the bank record involving such disclosure.

Banks; Secrecy of Bank Deposits; Exceptions (2004)

The Law on Secrecy of Bank Deposits
provides that all deposits of whatever
nature with banks or banking institutions
are absolutely confidential in nature and
may not be examined, inquired or looked
into by any person, government official,
bureau or office. However, the law provides
exceptions in certain instances.
 Page 18 of 103
Under Section 6(F) of the National Internal
Revenue Code, the Commissioner of Internal
Revenue can inquire into the deposits of a
decedent for the purpose of determining the
gross estate of such decedent. Apart from this
case, a BIR inquiry into bank deposits cannot
be made. Thus, exception 3 may not always
be applicable.
Turning to exception 4, an inquiry into
bank deposits is possible only in
prosecutions for unexplained wealth under
the Anti-Graft and Corrupt Practices Act,
according to the Supreme Court in the
cases of Philippine National Bank v. Gancayco,
15 SCRA 91 (1965) and Banco Filipino Savings
and Mortgage Bank v. Purisima, 161 SCRA 576
(1988). However, all other cases of anti
-graft and corrupt practices will not
warrant an inquiry into bank deposits.
Thus, exception 4 may not always be
applicable. Like any other exception, it
must be interpreted strictly.
Exceptions 1, 2 and 5, on the other hand,
are provided expressly in the Law on
Secrecy of Bank Depositors. They are
available to depositors at all times.
Banks; Secrecy of Bank Deposits; Garnishment (2001)
The Law on Secrecy of Bank Deposits,
otherwise known as RA 1405, is intended
to encourage people to deposit their money
in banking institutions and also to
discourage private hoarding so that the
same may be properly utilized by banks to
assist in the economic development of the
country. Is a notice of garnishment served
Version 1990-2003 Arranged by SULAW Class 2005
on a bank at the instance of a creditor of a
depositor covered by the said law? State
the reason(s) for your answer. (5%)
SUGGESTED ANSWER:
No. The notice of garnishment served on a
bank at the instance of a creditor is not
covered by the Law on Secrecy of Bank
Deposits. Garnishment is just a part of the
process of execution. The moment a notice
of garnishment is served on a bank and
there exists a deposit by the judgment
debtor, the bank is directly accountable to
the sheriff, for the benefit of the judgment
creditor, for the whole amount of the
deposit. In such event, the amount of the
deposit becomes, in effect, a subject of the
litigation.
BSP; Receivership; Jurisdiction (1992)
Family Bank was placed under statutory
receivership and subsequently ordered
liquidated by the Central Bank (CB) due to
fraud and irregularities in its lending
operations which rendered it insolvent.
Judicial proceedings for liquidation were
thereafter commenced by the CB before
the RTC. Family Bank opposed the petition.
Shortly thereafter, Family Bank filed in the
same court a special civil action against the
CB seeking to enjoin and dismiss the
liquidation proceeding on the ground of
grave abuse of discretion by the CB. The
court poised to:
23restrain the CB from closing Family
Bank; and 2) authorize Family Bank to
withdraw money from its deposits during
the pendency of the case. If you were the
Judge, would you issue such orders? Why?
SUGGESTED ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) The BSP shall provide policy directions in
No. The RTC has no authority to restrain the areas of money, banking and credit. It
the monetary board of the BSP from shall have supervision over the operations
statutory authority to undertake of banks and exercise such regulatory
receivership and ultimate liquidation of a powers as provided in the Central Bank Act
bank. Any opposition to such an action and other pertinent laws over the
could be made to the court itself where operations of finance companies and non-
assistance is sought. The action of the RTC bank financial institutions performing
where the proceeding is pending appeal quasi-banking functions, such as quasi-
have to be made in the Court of Appeals. banks and institutions performing similar
functions.
Legal Tender (2000)
After many years of shopping in the Metro The primary objective of the BSP is to
Manila area, housewife HW has developed maintain price stability conducive to a
the sound habit of making cash purchases balanced and sustainable growth
only, none on credit. In one shopping trip to
Mega Mall, she got the shock of her
shopping life for the first time, a store’s
smart salesgirl refused to accept her coins
in payment for a purchase worth not more
than one hundred pesos. HW was paying
seventy pesos in 25-centavo coins and
twenty five pesos in 10 centavo coins.
Strange as it may seem, the salesgirl told
HW that her coins were not “legal tender.”
Do you agree with the salesgirl in respect
of her understanding of “legal tender?”
Explain (2%)
SUGGESTED ANSWER:
No. The salesgirl’s understanding that
coins are not legal tender is not correct.
Coins are legal tender in amounts not
exceeding fifty pesos for denominations
from twenty five centavos and above, and
in amounts not exceeding twenty pesos for
denominations ten centavos and less.

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

An employee of a large manufacturing firm
earns a salary which is just a bit more than
what he needs for a comfortable living. He
is thus able to still maintain a P10,000
savings account, a P20,000 checking
account, a P30,000 money market
placement and a P40,000 trust fund in a
medium-size commercial bank.
23 State which of the four accounts are
deemed insured by the PDIC.
24 State which of the above accounts are
covered by
the Law on Secrecy of Bank Deposits.
SUGGESTED ANSWER:
23 The P10th savings account and the
P20th checking account are deemed
insured by the PDIC.
24 The P10th savings account and the
P20th checking account are covered by
the Law on Secrecy of Bank Deposits.

Responsibilities & Objectives of BSP (1998)

What are the responsibilities and primary
objectives of the BSP? (5%)
SUGGESTED ANSWER:
 Page 19 of 103
of the economy. It shall promote and
maintain monetary stability and
convertibility of the Peso.
Truth in Lending Act (1991)
Dana Gianina purchased on a 36 month
installment basis the latest model of the
Nissan Sentra Sedan car from the Jobel
Cars Inc. In addition to the advertised
selling price, the latter imposed finance
charges consisting of interests, fees and
service charges. It did not, however, submit
to Dana a written statement setting forth
therein the information required by the
Truth in Lending Act (RA 3765).
Nevertheless, the conditional deed of sale
which the parties executed mentioned that
the total amount indicated therein included
such finance charges.
23 Has there been substantial compliance
of the aforesaid Act?
24 If your answer to the foregoing
question is in the negative, what is the
effect of the violation on the contract?
25 In the event of a violation of the Act,
what remedies
may be availed of by Dana?
SUGGESTED ANSWER:
23 There was no substantial compliance
with the Truth in Lending Act. The law
provides that the creditor must make a
full disclosure of the credit lost. The
statement that the total amount due
includes the principal and the financial
charges, without specifying the
amounts due on each portion thereof
would be insufficient and unacceptable.
Version 1990-2003 Arranged by SULAW Class 2005
24 A violation of the Truth in Lending Act
will not adversely affect the validity of
the contract itself.
25 It would allow Dana to refuse payment
of financial charges or, if already paid,
to recover the same. Dana may also
initiate criminal charges against the
creditor.
ALTERNATIVE ANSWER:
23 (Per Atty Jomby Paras if u read the
provisions closely) Under the Truth in
Lending Act, said financial charges are
valid, and Dana may not refuse payment
thereof. Only criminal charges may be
initiated against the creditor.
Truth in Lending Act (2000)
Embassy Appliances sells home theater
components that are designed and
customized as entertainment centers for
consumers within the medium-to-high price
bracket. Most, if not all, of these packages
are sold on installment basis, usually by
means of credit cards allowing a maximum
of 36 equal monthly payments. Preferred
credit cards of this type are those issued by
banks, which regularly hold mall wide sales
blitzes participated in by appliance
retailers like Embassy Appliances. You are
a buyer of a home theater center at
Embassy Appliances. The salesclerk who is
attending to you simply swipes your credit
card on the electronic approval machine
(which momentarily prints out your charge
slip since you have unlimited credit), tears
the slip from the machine, hands the same
over to you for your signature, and
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
without more, proceeds to arrange the
delivery and installation of your new home
theater system. You know you will receive a
statement on your credit card purchases
from the bank containing an option to pay
only a minimum amount, which is usually
1/36 of the total price you were charged for
your purchase. Did Embassy Appliances
comply with the provisions of the Truth in
Lending Act (RA 3765)?
SUGGESTED ANSWER:
There is no need for Embassy Appliances to
comply with the Truth in Lending Act. The
transaction is not a sale on installment
basis. Embassy Appliances is a seller on
cash basis. It is the credit card company
which allows the buyer to enjoy the
privilege of paying the price on installment
basis.
Bulk Sales Law; Covered Transactions (2000)
Company X, engaged in the business of
manufacturing car parts and accessories,
operates a factory with equipment,
machinery and tools for this purpose. The
manufactured goods are sold wholesale to
distributors and dealers throughout the
Philippines. Company X was among the
business entities adversely hit by the 1997
Asian business crisis. Its sales dropped
with the decline in car sales and its
operating costs escalated, while its creditor
banks and other financial institutions
tightened

Bulk Sales Law

Bulk Sales Law; Covered Transactions (1994)
Stanrus Inc a department store with outlets
in Makati, Mandaluyong, and Quezon City,
is contemplating to refurbish and renovate
its Makati store in order to introduce the
most modern and state of the art
equipment in merchandise display. To carry
out its plan, it intends to sell ALL of the
existing fixtures and equipment (display
cases, wall decorations, furniture,
counters, etc.) to Crossroads Department
Store. Thereafter, it will buy and install
new fixtures and equipment and continue
operations. Crossroads wants to know from
you as counsel:
23 Whether the intended sale is “bulk
sale.”
24 How can it protect itself from future
claims of
creditors of Stanrus.
SUGGESTED ANSWER:
23 Yes. The sale involves all fixtures
and equipment, not in the ordinary course
of trade and the regular prosecution of
business of Stanrus, Inc. (Sec 2 Act 3952,
as amended)

24 Crossroads should require from Stanrus

Inc. submission of a written waiver of the
Bulk Sales Law by the creditors as shown
by verified statements or to comply with
the requirements of the Bulk Sales Law,
that is, the seller must notify his creditors
of the terms and conditions of the sale, and
also, before receiving from the vendee any
part of the purchase price, deliver to such
vendee a written sworn statement of the
names and addresses of all his creditors
together with the amount of indebtedness
due to each (Sec 2 Act 3952, amended)
 Page 20 of 103
their loan portfolios. Company X was faced
with the dismal choice of either suspending
its operations or selling its business. It
chose the latter. Having struck a deal with
Company Z, a more viable entity engaged
in the same business, Company X sold its
entire business to the former without much
fanfare or any form of publicity. In fact,
evidence exists that the transaction was
furtively entered into to avoid the prying
eyes of Company X’s creditors. The creditor
banks and other financial institutions sued
Company X for violation of the Bulk Sales
Law. Decide. (5%)
SUGGESTED ANSWER:
Company X violated the Bulk Sales Law
when it sold its entire business to Company
Z furtively to avoid the prying eyes of its
creditors. Its manufactured goods are sold
wholesale to distributors and dealers. The
sale of all or substantially all of its stocks,
not in the ordinary course of business,
constitutes bulk sale. The transaction being
a bulk sale, entering into such transaction
without complying with the requirements
of the Bulk Sales Law, Company X violated
said law.
Bulk Sales Law; Covered Transactions (2006)
Pursuant to a writ of execution issued by
the Regional Trial Court in "Express Bank
v. Don Rubio," the sheriff levied and sold at
public auction 8 photocopying machines of
Don Rubio. Is the sheriff's sale covered by
the Bulk Sales Law? (5%)
SUGGESTED ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
No. The sale by sheriff at public sale is not
a sale by a merchant. Section 8 of the Bulk
Sales Law itself provides that it has no
application to executors, administrators,
receivers, assignees in insolvency, or public
officers, acting under process. The Bulk
Sales Law only applies to the sale or
encumbrance of a merchant of goods,
merchandise or commodity done "in bulk"
as defined by the Law itself.
Bulk Sales Law; Exclusions (1993)
In the annual meeting of XYZ Corporation,
the stockholders unanimously adopted a
resolution proposed by the BOD to sell
substantially all the fixtures and equipment
used in and about its business. The
President of the Corporation approached
you and asked for legal assistance to effect
the sale.
23 What steps should you take so that the
sale may be valid?
24 What are the two instances when the
sale, transfer, mortgage or assignment
of stock of goods, wares, merchandise,
provision, or materials otherwise than
in the ordinary course of trade and the
regular prosecution of the business of
the vendor are not
deemed to be a sale or transfer in bulk?
SUGGESTED ANSWER:
23The requirements of the Bulk Sales Law
must be complied with. The seller delivers
to the purchaser a list of his creditors and
the purchaser in turn notifies such
creditors of the proposed sale at a
stipulated time in advance.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) what must be done by the parties so as to
23 If the sale and transfer is made a) comply with the law?
SUGGESTED ANSWER:
by the vendor, mortgagor, transferor or
Yes. This is a sale of the stock of goods,
assignor who produces and delivers a
fixtures and entire business, not in the
written waiver of the provisions of the Bulk
ordinary course of business or trade of the
Sales Law from his creditors as shown by
vendor. Before receiving from the vendee
verified statement; and b) by a vendor,
any part of the purchase price, the vendor
mortgagor, transferor or assignor who is an
must deliver to such vendee a written
executor, administrator, receiver, assignee
statement, duly sworn, of the names and
in insolvency, or public officer acting under
addresses of all creditors to whom said
judicial process, the sale or transfer is not
vendor may be indebted, together with the
covered by the Bulk Sales Law.
amount of
Bulk Sales Law; Obligation of the Vendor (1995)
House of Pizza (Pizza) is the owner and
operator of a nationwide chain of pizza
outlets. House of Liquor (Liquor) is a
retailer of all kinds of liquor.

House of Foods (Foods) has offered to

purchase all of the outlets, equipment,
fixtures and furniture of Pizza. Foods also
offered to purchase from Liquor all of its
moderately priced stock constituting 50%
of its total inventory.

Both Pizza and Liquor have creditors. What

legal requirements must Pizza and Liquor
comply with in order for Foods to
consummate the transactions? Discuss
fully.
SUGGESTED ANSWER:
Pizza and Liquor must prepare an affidavit
stating the names of all their creditors,
their addresses, the amounts of their
credits and their respective maturities.
Pizza and Liquor must submit said affidavit
to Foods which, in turn, should notify the
creditors about the transaction which is
about to be concluded with Pizza and
Liquor.
ALTERNATIVE ANSWER:
As far as Liquor is concerned, it must prepare
an affidavit stating the names of all its
creditors, their addresses, the amounts of
their credits and their respective maturities.
It must submit said affidavit to its buyer, who
in turn, should notify the creditors about the
transaction which is about to be concluded
with his seller.

But as far as Pizza is concerned, it is not

covered by the Bulk Sales Law. So Foods
can consummate the transaction without
doing anything.

Bulk Sales Law; Obligation of the Vendor (1997)

The sole proprietor of a medium-size
grocery shop, engaged in both wholesale
and retail transactions, sells the entire
business “lock, stock and barrel” because
of his plan to emigrate abroad with his
family. Is he covered by the provisions of
the Bulk Sales Law? In the affirmative,
 Page 21 of 103
indebtedness due or owing, on account of
the goods, fixtures or business subject
matter of the bulk sale.
Bulk Sales Law; Obligation of the Vendor (2001)
A is a merchant engaged in the sale of a
variety of goods and merchandise. Because
of the economic crisis, he incurred
indebtedness to X, Y and Z. Thereafter, A
sold to B all the stock of goods and
merchandise.
23 What steps should A undertake to effect
a valid sale
in bulk of his goods to B. (2%).
SUGGESTED ANSWER:
A must prepare an affidavit stating the
names of all his creditors, in this case, X, Y,
and Z, their addresses, the amount of their
credits and their maturity. A should give
the affidavit to B who, in turn, should
furnish a copy to each creditor and notify
the creditors that there is a proposed bulk
sale in order to enable the latter to protect
their interests.
23 Suppose A submitted a false statement
on the schedule of his creditors. What is
the effect of such
false statement as to Vendee B. (2%)
SUGGESTED ANSWER:
If the vendee does not have knowledge of
the falsity of the schedule, the sale is valid.
However, if the vendee has knowledge of
such falsity, the sale is void because he is in
bad faith.
23 What is the right of creditors X, Y, and Z
if A failed to comply with the
procedure/steps required by law
Version 1990-2003 Arranged by SULAW Class 2005
under question letter (a) hereof? (1%)
SUGGESTED ANSWER:
The recourse of X, Y, and Z is to question
the validity of the sale from A to B so as to
recover the goods and merchandise to
satisfy their credits.
Consumer Protection Law
Metric System Law (1994)
Angelene is a customer of Meralco Electric
Company (MECO). Because of the abrupt
rise in electricity rates, Angelene
complained with MECO insisting that she
should be charged the former rates.
However, Angelene did not tender any
payment.
When MECO’s employees served the first
48-hour notice of disconnection, Angelene
protested. MECO, however, did not
implement the 48-hour notice of
disconnection. Instead, its employees
examined Angelene’s electric meter,
changed the same, and installed another.
Still, Angelene, made no tender of payment.
MECO served a second 48-hour notice of
disconnection on June 22, 1984. It gave
Angelene until 5 pm of June 25, 1984
within which to pay. As no payment had
been made, MECO cut Angelene’s electric
service on June 28, 1984. Angelene
contends that the 48-hour written notice of
disconnection rule cannot be invoked by
MECO
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) No, there is no binding contract for the 5,000
when there is a bona fide and just dispute bags of fertilizer. First, the facts do not
as to the amount due as her electric indicate that Rodman, the President of TF Co,
consumption rate. Is Angelene’s contention was authorized by the BOD to enter into the
valid? said contract or that he was empowered to do
SUGGESTED ANSWER: so under some provision of the by-laws of TF
No. Angelene’s only legal recourse in this Co. The facts do not also indicate that
case was to pay the electric bill under Rodman has been clothed with the apparent
protest. Her failure to do so justified MECO power to execute the contract or agreements
to cut the electric service (Ceniza v CA 218 S similar to it. Second, TF Co has specifically
290) informed Gregorio that it has not ratified the
contract for the sale of 5,000 bags of fertilizer
and that the delivery to
Corporation Law
BOD: Election of Aliens as members (2005)
A Korean national joined a corporation
which is engaged in the furniture
manufacturing business. He was elected to
the Board of Directors. To complement its
furniture manufacturing business, the
corporation also engaged in the logging
business. With the additional logging
activity, can the Korean national still be a
member of the Board of Directors? Explain.
(3%)
SUGGESTED ANSWER:
Yes, just as long as sixty percent (60%) of
the Board of Directors are Filipinos.
Corporations that are sixty percent (60%)
owned by Filipinos can engage in the
business of exploration, development and
utilization of natural resources. (Art. XII,
Sec. 2, 1987 Constitution) The election of
aliens as members of the Board Of
Directors engaging in partially-nationalized
activities is allowed in proportion to their
allowable participation or share in the
capital of such entities. (Sec. 2-A, Anti-
Dummy Law) Nothing in the facts shows
that more than forty percent (40%) of the
Board of Directors are foreigners.

BOD; Capacity of Directors (1996)

Rodman, the President of TF Co, wrote a
letter to Gregorio, offering to sell to the
latter 5,000 bags of fertilizer at P100 per
bag. Gregorio signed his conformity to the
letter-offer, and paid a down-payment of
P50th. A few days later, the Corporate
Secretary of TF informed Gregorio of the
decision of their BOD not to ratify the
letter offer. However, since Gregorio had
already paid the down-payment, TF
delivered 500 bags of fertilizer which
Gregorio accepted. TF made it clear that
the delivery should be considered an
entirely new transaction. Thereafter,
Gregorio sought enforcement of the letter-
offer.
Is there a binding contract for the 5,000
bags of fertilizer? Explain.
SUGGESTED ANSWER:
 Page 22 of 103
Gregorio of 500 bags, which Gregorio
accepted, is an entirely new transaction.
(Yao Ka Sin Trading v CA GR 53820 June 15,
1992 209s763)
BOD; Compensation (1991)
After many difficult years, which called for
sacrifices on the part of the company’s
directors, ABC Manufacturing Inc was
finally earning substantial profits. Thus, the
President proposed to the BOD that the
directors be paid a bonus equivalent to
15% of the company’s net income before
tax during the preceding year. The
President’s proposal was unanimously
approved by the BOD. A stockholder of
ABC questioned the bonus. Does he have
grounds to object?
SUGGESTED ANSWER:
Yes, the stockholder as a valid and legal
ground to object to the payment to the
directors of a bonus equivalent to 15% of
the company’s net income. The law
provides that the total annual
compensation of the directors, in the
preceding year, cannot exceed 10% of the
company’s net income before income tax
(Sec 30 Corp Code).
BOD; Conflict of Interest (1994)
ABC Pigger Inc is engaged in raising and
selling hogs in the local market. Mr. De
Dios, one of its directors while traveling
abroad, met a leather goods manufacturer
who was interested in buying pig skins
from the Philippines. Mr De Dios set up a
separate company and started exporting
pig skins to his foreign contact but the pig
Version 1990-2003 Arranged by SULAW Class 2005
skins exported were not sourced from ABC.
His fellow directors in ABC complained
that he should have given this business to
ABC. How would you decide on this
matter?
SUGGESTED ANSWER:
I would decide in favor of Mr De Dios. ABC
is engaged in raising and selling hogs in
the local market. The company that Mr De
Dios had set up was to engage, as it did, in
the export of pigs skins. There is thus no
conflict of interest between Mr. De Dios
and ABC Pigger Inc so as to make the case
fall within the conflict of interest situation
under the law (Sec 34 Corp Code)
Observation: The term “conflict of
interest” is susceptible to varied views
and interpretations.
BOD; Interlocking Directors (1995)
Chito Santos is a director of both Platinum
Corporation and Kwik Silver Corporation.
He owns 1% of the outstanding capital
stock of Platinum and 40T of Kwik.
Platinum plans to enter into a contract with
Kwik that will make both companies earn
very substantial profits. The contract is
presented at the respective board meetings
of Platinum and Kwik.
23 In order that the contract will not be
voidable, what conditions will have to be
complied with? Explain.
24 If these conditions are not met, how
may this contract be ratified? Explain.
SUGGESTED ANSWER:
23 At the meeting of the BOD of
Platinum to approve the contract, Chito
would have to make sure that
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) 0 That the presence of Raphael, the
0 his presence as director at the owner of A Ent, in the meeting of the
meeting is not necessary to BOD at which the agreement was
constitute a quorum for such approved was not necessary to
meeting; constitute a quorum for such meeting;
1 his vote is not necessary for the 1 That the vote of Raphael was not
approval of the contract; and necessary for the approval of the
2 the contract is fair and reasonable agreement;
under the circumstances. 2 That the agreement is fair and
reasonable under the circumstances
At the meeting of the BOD of Kwik to (Sec 32 Corp Code)
approve the contract, Chito would have to
make sure that - By-Laws; Validity; limiting qualifications of
there is no fraud involved; and BOD members (1998)
the contract is fair and reasonable
under the circumstances.
SUGGESTED ANSWER:
0 If the conditions relating to the quorum
and required number of votes are not met,
the contract must be ratified by the vote of
stockholders representing at least 2/3 of
the outstanding capital stock in a meeting
called for the purpose. Furthermore, the
adverse interest of Chito in the contract
must be disclosed and the contract is fair
and reasonable. (Secs. 32 and 33, BP 68)

BOD; Interlocking Directors (1996)

Leonardo is the Chairman and President,
while Raphael is a Director of NT
Corporation. On one occasion, NT Co,
represented by Leonardo and A Ent, a
single proprietorship owned by Raphael,
entered into a dealership agreement
whereby NT Co appointed A Ent as
exclusive distributor of its products in
Northern Luzon. Is the dealership
agreement valid? Explain.
SUGGESTED ANSWER:
The dealership agreement is voidable at
the option of NT Co inasmuch as the facts
do not indicate that the same was approved
by the BOD of NT Co before it was signed
or, assuming such approval, that it was
approved under the following conditions:
0 That the presence of Raphael, the
owner of A Ent, in the meeting of the
BOD at which the agreement was
approved was not necessary to
constitute a quorum for such meeting;
1 That the vote of Raphael was not
necessary for the approval of the
agreement;
2 That the agreement is fair and
reasonable under the
circumstances (Sec 32 Corp Code)
ALTERNATIVE ANSWER:
The dealership agreement is valid upon the
assumption that the same was approved by
the BOD of NT Co before it was signed and
that such approval was made under the
following conditions:
 Page 23 of 103
The BOD of X Co, acting on a standing
authority of the stockholders to amend the
by-laws, amended its by-laws so as to
disqualify any of its stockholders who is
also a stockholder and director of a
competitor from being elected to its BOD.
Y, a stockholder holding sufficient assets to
assure him of a seat in the BOD, filed a
petition with the SEC for a declaration of
nullity of the amended by-laws. He alleged
among other things that as a stockholder,
he had acquired rights inherent in stock
ownership such as the right to vote and be
voted upon in the election of directors. Is
the stockholder’s petition tenable? (5%)
SUGGESTED ANSWER:
No. There is no vested right of a
stockholder to be elected as director. When
a person buys stock in a corporation he
does so with the knowledge that its affairs
are dominated by a majority of the
stockholders. To this extent, the
stockholder parted with his personal right
to regulate the disposition of his property
which he invested in the capital stock of
the corporation and surrendered it to the
will of the majority of his fellow
incorporators or stockholders.
Corporations have the power to make by-
laws declaring a person employed in the
service of a rival company to be ineligible
for the Corporation’s BOD. An amendment
which renders a director ineligible, or if
elected, subjects him to removal, if he is
also a director in a corporation whose
business is in competition with or is
Version 1990-2003 Arranged by SULAW Class 2005
antagonistic to the other corporation is
valid.
By-Laws; Validity; limiting qualifications of
BOD members (2000)
At the annual stockholders’ meeting of MS
Corporation, the stockholders unanimously
passed a resolution authorizing the Board
of Directors to amend the corporate by-
laws so as to disqualify any stockholder
who is also a director or stockholder of a
competing business from being elected to
the Board of Directors of MS Corporation.
The by-laws were accordingly amended.
GK, a stockholder of MS Corporation and a
majority stockholder of a competitor,
sought election to the Board of Directors of
MS Corporation. His nomination was
denied on the ground that he was ineligible
to run for the position. Seeking a
nullification of the offending
disqualification provision, GK consults you
about its validity under the Corporation
Code of the Phils. What would your legal
advice be? (3%)
SUGGESTED ANSWER:
The provision in the amended by-laws
disqualifying any stockholder who is also a
director or stockholder of a competing
business from being elected to the Board of
Directors of MS Corp is valid. The
corporation is empowered to adopt a code
of by-laws for its government not
inconsistent with the Corp Code. Such
disqualifying provision is not inconsistent
with the Corp Code.
By-Laws; Validity; limiting qualifications of
BOD members (2001)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Is a by-law provision of X Corporation
“rendering ineligible or if elected, subject
to removal, a director if he is also a
director in a corporation whose business is
in competition with or is antagonistic to
said corporation” valid and legal? State
your reasons. (5%).
SUGGESTED ANSWER:
Yes, the by-law provision is valid. It is the
right of a corporation to protect itself
against possible harm and prejudice that
may be caused by its competitors. The
position of director is highly sensitive and
confidential. To say the least, to allow a
person, who is a director in a corporation
whose business is in competition with or is
antagonistic to X Corporation, to become
also a director in X Corporation would be
harboring a conflict of interest which is
harmful to the latter (Gokongwei Jr v SEC 89
S 336 (1979); 97 S 78 (1980)).
Close Corporations; Deadlocks (1995)
Robert, Rey and Ben executed a joint
venture agreement to form a close
corporation under the Corp Code the
outstanding capital stock of which the
three of them would equally own. They also
provided therein that any corporate act
would need the vote of 70% of the
outstanding capital stock. The terms of the
agreement were accordingly implemented
and the corresponding close corporation
was incorporated. After 3 years, Robert,
Rey and Ben could not agree on the
business in

By-Laws; Validity; limiting qualifications of

BOD members (2003)
To prevent the entry of Marlo Enriquez,
whom it considered as one antagonistic to
its interests, into its Board of Directors,
Bayan Corporation amended its articles of
incorporation and by-laws to add certain
qualifications of stockholders to be elected
as members of its Board of Directors. When
presented for approval at a meeting of its
stockholders duly called for the purpose,
the amendments were overwhelmingly
ratified. Marlo Enriquez brought suits
against Bayan Corporation to question the
amendments. Would the action prosper?
Why? (4%)
SUGGESTED ANSWER:
(per Dondee) The SC reiterated in the case
of SMC vs. SEC decided in April 11, 1979,
that it is recognized by all authorities that
'every corporation has the inherent power
to adopt by-laws 'for its internal
government, and to regulate the conduct
and prescribe the rights and duties of its
members towards itself and among
themselves in reference to the
management of its affairs.'" At common
law, the rule was "that the power to make
and adopt by-laws was inherent in every
corporation as one of its necessary and
inseparable legal incidents. And it is settled
throughout the United States that in the
absence of positive legislative provisions
limiting it, every private corporation has
this inherent power as one of its necessary
and inseparable legal incidents,
independent of any specific enabling
provision in its charter or in general law,
such power of self-government being
essential to enable the corporation to
accomplish the purposes of its creation."
 Page 24 of 103
which to invest the funds of the
corporation. Robert wants the deadlock
broken.
0 What are the remedies available to
Robert under the Corp code to break the
deadlock? Explain.
1 Are there any remedies to prevent the
paralyzation of the business available to
Robert under PD 902-A while the petition
to break the deadlock is pending litigation?
Explain.
SUGGESTED ANSWER:
0 Robert can petition the SEC to arbitrate
the dispute, with such powers as provided
in Sec 104 of the Corp Code.
1 The SEC can appoint a rehabilitation
receiver or a management committee.
Closed Corporation; Restriction; Transfer of
shares (1994)
Rafael inherited from his uncle 10,000
shares of Sta. Ana Corporation, a close
corporation. The shares have a par value of
P10.00 per share. Rafael notified Sta. Ana
that he was selling his shares at P70.00 per
share. There being no takers among the
stockholders, Rafael sold the same to his
cousin Vicente (who is not a stockholder)
for P700,000.
The Corporate Secretary refused to
transfer the shares in Vicente’s name in the
corporate books because Alberto, one of
the stockholders, opposed the transfer on
the ground that the same violated the by-
laws. Alberto offered to buy the shares at
Version 1990-2003 Arranged by SULAW Class 2005
P12.50 per share, as fixed by the by-laws or
a total price of P125,000 only.
While the by-laws of Sta. Ana provides that
the right of first refusal can be exercised
“at a price not exceeding 25% more than
the par value of such shares, the Articles of
Incorporation simply provides that the
stockholders of record “shall have
preferential right to purchase said shares.”
It is silent as to pricing.
Is Rafael bound by the pricing proviso
under the by-laws of Sta. Ana Corporation?
SUGGESTED ANSWER:
Yes. In a close corporation, the restriction
as to the transfer of shares has to be
stated/ annotated in the Articles of
Incorporation, the By-Laws and the
certificate of stock. This serves as notice to
the person dealing with such shares like
Rafael in this case. With such notice, he is
bound by the pricing stated in the By-laws.
ALTERNATIVE ANSWER:
No, Rafael is not bound by the pricing
proviso under the By-laws of Sta Ana
Corporation. Under the corporation law,
the restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as well as
in the certificate of stock, otherwise, the
same shall not be binding on any purchaser
thereof in good faith. Moreover the
restriction shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder with
such reasonable term or period stated
therein.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) dismiss, arguing that the SEC has no
Here, limiting the price to be paid, when jurisdiction over cases of illegal dismissal,
the right of first refusal is exercised, to not and has no power to award damages.
more than 25% par value, without any Should the motion to dismiss be granted?
qualification whatsoever, is not in the Explain.
articles. It is merely stated in the By-laws. SUGGESTED ANSWER:
Therefore such limitation shall not be As of 2006, the applicable rule is that there
binding on the purchaser. (GoSock & Sons & is a TRANSFERRED JURISDICTION under
Sy Gui Huat Inc v IAC 19 Feb 87 Min Res) Sec. 5.2 of the SRC, the Commission’s
jurisdiction over all cases enumerated
Controversy; Intra-Corporate (1994) under PD 902-A sec. 5 has been transferred
Because of disagreement with the BOD and to the Courts of general jurisdiction or the
a threat by the BOD to expel her for appropriate REGIONAL TRIAL COURT.
misconduct and inefficiency, Carissa
offered in writing to resign as President Controversy; Intra-Corporate (1996)
and member of the BOD, and to sell to the
company all her shares therein for
P300,000.00 Her offer to resign was
“effective as soon as my shares are fully
paid.” At its meeting, the BOD accepted
Carissa’s resignation, approved her offer to
sell back her shares of stock to the
company, and promised to buy the stocks
on a staggered basis. Carissa was informed
of the BOD Resolution in a letter-
agreement to which she affixed her
consent. The Company’s new President
singed the promissory note. After payment
P100,000 the company defaulted in paying
the balance of P200,000.

Carissa wants to sue the Company to

collect the balance. If you were retained by
Carissa as her lawyer, where will you file
the suit? A) Labor Arbiter; b) RTC; or c)
SEC?
SUGGESTED ANSWER:
The RTC has jurisdiction over this case
which involves intra-corporate controversy.
As of 2006, the applicable rule is that there
is a TRANSFERRED JURISDICTION under
Sec. 5.2 of the SRC, the Commission’s
jurisdiction over all cases enumerated
under PD 902-A sec. 5 has been transferred
to the Courts of general jurisdiction or the
appropriate Regional Trial Court.

Controversy; Intra-Corporate (1996)

In 1970, Magno joined AMD Co as a Junior
Accountant. He steadily rose from the
ranks until he became AMD’s Executive VP.
Subsequently, however because of his
involvement in certain anomalies, the AMD
BOD considered him resigned from the
company due to loss of confidence.

Aggrieved, Magno filed a complaint in the

SEC questioning the validity of his
termination, and seeking reinstatement to
his former position, with backwages,
vacation and sick leave benefits, 13th
month pay and Christmas bonus, plus
moral and exemplary damages, attorney’s
fees and costs. AMD filed a motion to
 Page 25 of 103
Jennifer and Gabriel owned the controlling
stocks in MFF Co and CLO Inc, both family
corporations. Due to serious
disagreements, Jennifer assigned all her
shares in MFF to Gabriel, while Gabriel
assigned all his shares in CLO to Jennifer.
Subsequently, Jennifer and CLO filed a
complaint against Gabriel and MFF in the
SEC seeking to recover the corporate
records and funds of CLO which Gabriel
allegedly refused to turn over, and which
remained in the offices of MFF.
Is there an intra-corporate controversy in
this case?
SUGGESTED ANSWER:
Yes, there is an intra -corporate
controversy in this case. The fact that,
when the complaint against Gabriel and
MFF was filed with the SEC (per 2006,
RTC’s Jurisdiction), Jennifer and CLO were
no longer stockholders of MFF did not
divest the SEC (per 2006, RTC’s
Jurisdiction) of its jurisdiction over the case
inasmuch as Jennifer was a former
stockholder of MFF and the controversy
arose out of this relation. (SEC v CA GR
93832 Aug 23 91; 201s124)
Controversy; Intra-Corporate (2006)
What is an intra-corporate
controversy? (8%)
SUGGESTED ANSWER:
An intra-corporate controversy is a conflict
between stockholders, members or
partners and the corporation, association
or partnership regarding the regulation of
the corporation. The controversy must
arise out of intra-corporate or partnership
relations of the parties; or between such
corporation, partnership or association and
the State insofar as it concerns their
Version 1990-2003 Arranged by SULAW Class 2005
individual franchises. It is further required
that the dispute be intrinsically connected
with the regulation of the corporation
(Speed
Distributing Corp., et al. v. Court of Appeals, et
al, G.R. No. 149351, March 17, 2004; Intestate
Estate of Alexander T.Tyv. Court of Appeals,
G.R. No. 112872, April 19, 2001).
Is the Securities and Exchange
Commission the venue for actions
involving intra-corporate
controversies? (2%)
SUGGESTED ANSWER:
No, pursuant to Subsection 5.2 of the
Securities Regu-lation Code, the quasi-
judicial jurisdiction of the Securities and
Exchange Commission to hear corporate
cases, including intra-corporate
controversies, under Section 5 of Pres.
Decree No. 902-A, has been expressly
transferred to the designated Regional
Trial Court. Pursuant to a memorandum
circular issued by the Supreme Court, only
particularly designated RTC special
commercial courts in each judicial region
have original and exclusive jurisdiction
over such cases (See Intestate Estate of
Alexander T. Ty v. Court of Appeals, G.R. No.
112872, April 19, 2001).
Controversy; Intra-corporate; Jurisdiction (1997)
Juan was a stockholder of X Co. He owned
a total of 500 shares evidenced by Cert of
Stock No 1001. He sold the shares to
Pedro. After getting paid, Juan indorsed
and delivered said Certificate of Stock No
1001 to Pedro. The following day, Juan went
to the offices of the corporation and
claimed that his Certificate of Stock No
1001 was lost and that, despite diligent
efforts, the certificate could
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
not be located. The formalities prescribed
by law for the replacement of the “lost”
certificate were complied with. Eventually
X Co issued in substitution of the “lost”
certificate, Cert of Stock No 2002. Juan
forthwith transferred for valuable
consideration the new certificate to Jose
who knew nothing of the previous sale to
Pedro. In time, the corporation was
confronted with the conflicting claims of
Jose and Pedro. The BOD of X Co invited
you to enlighten them on these questions;
viz:
0 If a suit were to be initiated in order to
resolve the controversy between Pedro
and Jose, should the matter be
submitted to the SEC or to the regular
courts?
1 Between Jose and Pedro, whom should
the corporation so recognize as the
rightful stockholder?
Yes, provided the approval of stockholders
representing two-thirds (2/3) of the
outstanding capital stock is obtained.
Although the facts indicate that the
consultancy work has already been
"rendered" constituting "previously
contracted debt," under Section 39 of the
Corporation Code, the pre-emptive rights
of existing stockholders need not be
respected "in payment of a previously
contracted debt," but only with the
indicated stockholders' approval. Under
Section 62 of the Corporation Code,
consideration for the issuance of

How would you respond to the above

queries?
SUGGESTED ANSWER:
The matter should be submitted to the
regular courts – specifically in the Regional
Trial Court where the principal office of the
corporation is located. The controversy
between Pedro and Jose is not an intra-
corporate controversy.

If there is no over-issuance of shares

resulting from the two-transactions of Juan,
the corporation should recognize both
Pedro and Jose as rightful stockholders.
This is without prejudice to the right of the
corporation to claim against Juan for the
value of the shares which Juan sold to Jose.

Corporation Sole; Definition (2004)

What is a corporation sole?
SUGGESTED ANSWER:
Section 110 of the Corporation Code
defines a "corporation sole" as one formed
for the purpose of administering and
managing, as trustee, the affairs, property
and temporalities of any religious
denomination, sect or church. It is formed
by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of
such religious denomination, sect or
church.

Corporation: Issuance of shares of stock to pay for

the services (2005)
Janice rendered some consultancy work for
XYZ Corporation. Her compensation
included shares of stock therein. Can XYZ
Corporation issue shares of stock to pay for
the services of Janice as its consultant?
Discuss your answer. (2%)
SUGGESTED ANSWER:
 Page 26 of 103
stock may include labor performed for or
services actually rendered to the
corporation.
Corporation: Right of Repurchase of Shares; Trust
Fund Doctrine (2005)
Under what conditions may a stock
corporation acquire its own shares? (2%)
SUGGESTED ANSWER:
In line with the trust fund doctrine that
generally renders it unlawful for the
corporation to return assets to the
stockholders representing capital, a
corporation may acquire its own shares
only when there exists in the books
unrestricted retained earnings to cover the
repurchase of shares. The purpose of the
repurchase of shares must be a legitimate
business purpose of the corporation, such
as to:
0ELIMINATE fractional shares arising out
of stock dividends;
1COLLECT or COMPROMISE an
indebtedness to the corporation arising
out of unpaid subscription in a
delinquency sale;
2to PURCHASE delinquent shares sold
during the sale; and
3to PAY dissenting or withdrawing
stockholders entitled to such payment
under the Corporation Code. (Sees. 41
and 82, Corporation Code)
Corporation: Sole Proprietorship (2004)
YKS Trading filed a complaint for specific
performance with damages against PWC
Corporation for failure to deliver cement
ordered by plaintiff. In its answer, PWC
Version 1990-2003 Arranged by SULAW Class 2005
denied liability on the ground, inter alia,
that YKS has no personality to sue, not
being incorporated, and that the President
of PWC was not authorized to enter into a
contract with plaintiff by the PWC Board of
Directors, hence the contract is ultra vires.
YKS Trading replied that it is a sole
proprietorship owned by YKS, and that the
President of PWC had made it appear in
several letters presented in evidence that
he had authority to sign contracts on behalf
of the Board of Directors of PWC. Will the
suit prosper or not? Reason briefly. (5%)
SUGGESTED ANSWER:
Yes the suit will prosper. As a sole
proprietorship, the proprietor of YKS
Trading has the capacity to act and the
personality to sue PWC. It is not necessary
for YKS Trading to be incorporated before
it can sue. On the other hand, PWC is
estopped from asserting that its President
had no authority to enter into the contract,
considering that, in several of PWC's
letters, it had clothed its President with
apparent authority to deal with YKS
Trading.
Corporation; Articles of Incorporation (1990)
The articles of incorporation to be
registered in the SEC contained the
following provisions --
23 “First Article. The name of the
corporation shall be Toho Marketing
Company.”
24 “Third Article. The principal office of
such corporation shall be located in Region
III, in such municipality therein as its
Board of Directors may designate.”
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
23 “Seventh Article. The capital stock
of the corporation is One Million Pesos
(P1,000,000) Philippine Currency.”
What are your comments and suggested
changes to the proposed articles?
SUGGESTED ANSWER:
23 On the First Article, I would suggest
that the corporate name indicate the
fact of incorporation by using either
“Toho Marketing Corporation” or “Toh
Marketing Company, Incorporated.”
24 The Third Article should indicate the
City or the Municipality and the
Province in the Philippines, and not
merely the region or as its BOD may
later designate, to be its place of
principal office.
conducted by the vendor, mortgagor,
transferor, or assignor. This is exactly what
happened in the case at bar.
23 Can Divine Corporation sell the
aforesaid items to its competitor, Top
Grade Fashion Corporation? What are
the requirements to validly sell the
items?
Explain.
SUGGESTED ANSWER:
For such a transaction to be valid, it
requires not only the favorable resolution
of the Board of Directors of Divine
Corporation, but also the ratificatory vote
of

25 The Seventh Article must additionally

point out the number of shares into
which the capital stock is divided, as
well as the par value thereof or a
statement that said stock or a portion
thereof are without par value. (Sec 14
& 15 Corp Code)

Corporation; Bulk Sales Law (2005)

Divine Corporation is engaged in the
manufacture of garments for export. In the
course of its business, it was able to obtain
loans from individuals and financing
institutions. However, due to the drop in
the demand for garments in the
international market, Divine Corporation
could not meet its obligations. It decided to
sell all its equipment such as sewing
machines, perma-press machines, high
speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and
materials to Top Grade Fashion
Corporation, its competitor. (5%)
23 How would you classify the transaction?
SUGGESTED ANSWER:
The transactions would constitute a sale of
"substantially all of the assets of Divine
Corporation complying with the test under
Sec. 40 of the Corporation Code, the
transactions not being "in the ordinary
course of business," and one "thereby the
corporation would be rendered incapable
of continuing the business or
accomplishing the purpose for which it was
incorporated."
ALTERNATIVE ANSWER:
It is a sale and transfer in bulk in
contemplation of the Bulk Sales Law.
Under Sec. 2 of the Bulk Sales Law, a bulk
sale includes any sale, transfer, mortgage,
or assignment of all, or substantially all, of
the business or trade theretofore

Page 27 of 103
stockholders representing at least two-
thirds (2/3) of the outstanding capital
stock, as mandated under Sec. 40 of the
Corporation Code. The sale would be void
in case of failure to meet the twin
approvals. (Islamic Directorate of the
Philippines v. Court of Appeals,
117897, May 14, 1997)
ALTERNATIVE ANSWER:
Divine Corporation can sell the items to its
competitor, Top Grade Fashion
Corporation. However, Divine Corporation
must comply with Sections 3, 4 and 5 of the
Bulk Sales Law, namely: (1) deliver sworn
statement of the names and addresses of
all the creditors to whom the vendor or
mortgagor may be indebted together with
the amount of indebtedness due or owing
to each of the said creditors; (2) apply the
purchase or mortgage money to the pro-
rata payment of bona fide claims of the
creditors; and (3) make a full detailed
inventory of the stock of goods, wares,
merchandise, provisions or materials, in
bulk, and notify every creditor at least ten
(10) days before transferring possession.
23 How would you protect the interests of
the creditors
of Divine Corporation?
SUGGESTED ANSWER:
Considering that Divine Corporation has
entered a de facto stage of dissolution with
the ceasing of its operations, I would
invoke on behalf of the creditors the
protection under Sec. 122 of the
Corporation Code, that the proceeds of the
sale should first be applied towards the
settlement of the obligations of the
corporation, before any amount can be paid
to the stockholders.
Version 1990-2003 Arranged by SULAW Class 2005
ALTERNATIVE ANSWER:
Under the Bulk Sales Law, if the proceeds
are not; applied proportionately towards
the settlement of the accounts of the
corporate debts, to have the sale of the
subject matters to Top Grade Fashion
Corp., as being "fraudulent and void" and
G.R. No. obtain satisfaction from the properties
which are deemed to still be owned by
Divine Corporation in spite of delivery to
the buyer. The creditors can collect on the
credit against Divine Corporation, and if it
cannot pay, the creditors can apply for
attachment on the property fraudulently
sold. (See People v. Mapoy, G.R. No. 48836,
September 21, 1942)
23 In case Divine Corporation violated the
law, what remedies are available to Top
Grade Fashion
Corporation against Divine
Corporation?
SUGGESTED ANSWER:
If the sale by Divine Corporation did not
obtain the required two-thirds (2/3) vote of
the outstanding capital stock, then the
transaction is void. (Islamic Directorate of the
Philippines v. Court of Appeals, G.R. No,
117897, May 14, 1997) Top Grade Fashion
Corporation can have the purchase
declared void and recover the purchase
price paid, as well as damages against the
directors and officers who undertook the
transaction in violation of the law.
ALTERNATIVE ANSWER:
For violation of the Bulk Sales Law, the
principal officers of the Divine Corporation
can be held criminally liable. In addition,
Top Grade can sue Divine Corporation for
damages. Violation of the Bulk Sales Law
would render such a sale fraudulent and
void. Since Top Grade would be compelled
to return the goods to Divine Corporation,
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Top Grade can compel Divine Corporation
to return the purchase price and pay
damages.
Corporation; By-laws (2001)
Suppose that the by-laws of X Corp, a
mining firm provides that “The directors
shall be relieved from all liability for any
contract entered into by the corporation
with any firm in which the directors may be
interested.” Thus, director A acquired
claims which overlapped with X’s claims
and were necessary for the development
and operation of X’s mining properties.
23 Is the by-law provision valid? Why?
(3%)
24 What happens if director A is able to
consummate his mining claims over and
above that of the
corporation’s claims? (2%)
SUGGESTED ANSWER:
5888 No. It is in violation of Section 32 of
the Corp Code.
association by amending the articles of
incorporation.
23 Could this be legally done? Why? (3%)
24 Would your answer be the same if at
the inception,
X Company is a non-stock corporation?
Why? (2%)
SUGGESTED ANSWER:
23 Yes, it can be legally done. In
converting the stock corporation to a non-
stock corporation by a mere amendment of
the articles of incorporation, the stock
corporation is not distributing any of its
assets to the stockholders. On the contrary,
the stockholders are deemed to have
waived their right to share in the profits of
the corporation which is a gain not a loss to
the corporation.

5889 A should account to the corporation

for the profits which he realized from the
transaction. He grabbed the business
opportunity from the corporation. (Section
34, Corp Code)

Corporation; Commencement; Corporate

Existence (2003)
256⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⸀ĀᜀĀᜀĀᜀĀᜀĀᜀĀ
ᜀĀᜀĀᜀĀĀȀ⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⤀ĀᜀĀᜀ
ĀᜀĀᜀĀᜀĀᜀĀᜀ When does a corporation
acquire corporate
existence?
SUGGESTED ANSWER:

0 CBY & Co., Inc., registered with the

Securities and Exchange Commission
its articles of incorporation. It failed,
however, for one reason or another, to
have its by-laws filed with, and
registered by, the Commission. It
nevertheless transacted and did
business as a corporation for sometime.
A suit was commenced by its minority
stockholders assailing the continued
existence of CBY & Co., Inc., because of
the non-adoption and registration of its
by-laws.
Would the action prosper? Why? (6%)
SUGGESTED ANSWER:

Corporation; Conversion of Stock Corporation (2001)

X company is a stock corporation
composed of the Reyes family engaged in
the real estate business. Because of the
regional crisis, the stockholders decided to
convert their stock corporation into a
charitable non-stock and non-profit
 Page 28 of 103
23 No, my answer will not be the same.
In a non-stock corporation, the members
are not entitled to share in the profits of
the corporation because all present and
future profits belong to the corporation. In
converting the non-stock corporation to a
stock corporation by a mere amendment of
the Articles of Incorporation, the non-stock
corporation is deemed to have distributed
an asset of the corporation – i.e. its profits,
among its members, without a prior
dissolution of the corporation. Under Sec
122, the non-stock corporation must be
dissolved first.
(Observation: The question is rather vague
more particularly question 1b. The question
does not specify that the conversion is from a
non-stock corporation to a stock corporation.
The candidate is likely to be confused
because of the words “if at the inception, X
Co is a nonstock corporation.” Hence, any
answer along the same line should be treated
with liberality)
Corporation; De Facto Corporation (1994)
A corporation was created by a special law.
Later, the law creating it was declared
invalid. May such corporation claim to be a
de facto corporation?
SUGGESTED ANSWER:
No. A private corporation may be created
only under the Corporation Code. Only
public corporations may be created under
special law.
Where a private corporation is created
under a special law, there is no attempt at
a valid incorporation. Such corporation
cannot claim a de facto status.
Version 1990-2003 Arranged by SULAW Class 2005
Corporation; Dissolution; Methods of Liquidation
(2001) X Corporation shortened its corporate
life by amending its Articles of
Incorporation. It has no debts but owns a
prime property located in Quezon City.
How would the said property be liquidated
among the five stockholders of said
corporation? Discuss two methods of
liquidation. (5%)
SUGGESTED ANSWER:
The prime property of X Corporation can
be liquidated among the five stockholders
after the property has been conveyed by
the corporation to the five stockholders, by
dividing or partitioning it among
themselves in any two of the following
ways:
23 by PHYSICAL DIVISION or
PARTITION based on the proportion of the
values of their stockholdings; or
24 SELLING THE PROPERTY to a third
person and dividing the proceeds among
the five stockholders in proportion to their
stockholdings; or
25 after the determination of the value
of the property, by ASSIGNING or
TRANSFERRING THE PROPERTY to one
stockholder with the obligation on the part
of said stockholder to pay the other four
stockholders the amount/s in proportion to
the value of the stockholding of each.
Corporation; Incorporation; Requirements (2006)
What is the minimum and maximum
number of in-corporators required to
incorporate a stock corporation?
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Is this also the same minimum and
maximum number of directors required in
a stock corporation? (2.5%)
SUGGESTED ANSWER:
Under Section 10 of the Corporation Code,
any number of natural persons not less
than five (5) but not more than fifteen (15),
all of legal age and a majority of whom are
residents of the Philippines, may form a
private corporation for any lawful purpose.
records regarding the deposit of the
paid-up capital;
30 Registration Sheet;
Corporation; Meetings; BOD & Stockholders (1993)
Under the Articles of Incorporation of
Manila Industrial Corp, its principal place
of business shall be in Pasig, MM. The
principal corporate offices are at the
Ortigas

This is the same minimum and maximum

number of directors required in a stock
corporation under Section 14(6) of the
Corporation Code.

Corporation; Incorporation; Residency Requirements

(2006)
Must all incorporators and directors be
residents of the Philippines? (2.5%)
SUGGESTED ANSWER:
Not all directors and incorporators need to
be residents of the Philippines. Under
Section 10 of the Corporation Code, only a
majority of the incorporators need to be
residents of the Philippines. As provided in
Section 23 of the same Code, only a
majority of the members of the Board of
Directors need to be residents of the
Philippines.

Corporation; Incorporation; Requisites (2002)

You have been asked to incorporate a new
company to be called FSB Savings &
Mortgage Bank, Inc. List the documents
that you must submit to the Securities and
Exchange Commission (SEC) to obtain a
certificate of incorporation for FSB Savings
& Mortgage Bank, Inc. (5%)
SUGGESTED ANSWER:
The documents to be submitted to the
Securities and Exchange Commission
(SEC) to incorporate a new company to be
called FSB Savings & Mortgage Bank, Inc.,
to obtain the certificate of incorporation for
said company, are:
23 Articles of Incorporation
24 Treasurer’s Affidavit;
25 Certificate of Authority from the
Monetary Board of the BSP;
26 Verification slip from the records of the
SEC whether or not the proposed name
has already been adopted by another
corporation, partnership or association;
27 Letter undertaking to change the
proposed name if already adopted by
another corporation, partnership or
association;
28 Bank certificate of deposit concerning
the paid-up capital;
29 Letter authorizing the SEC or Monetary
Board or its duly authorized
representative to examine the bank
 Page 29 of 103
Center, Pasig, MM while its factory
processing leather products, is in Manila.
The corporation holds its annual
stockholders’ meeting at the Manila Hotel
in Manila and its BOD meeting at a hotel in
Makati MM. The by-laws are silent as to
the place of meetings of the stockholders
and directors.
23 Who shall preside at the meeting of the
directors?
24 Can Ting, a stockholder, who did not
attend the stockholders’ annual
meeting in Manila, question the validity
of the corporate resolutions passed at
such meeting?
25 Can the same stockholder question the
validity of the resolutions adopted by
the BOD at the meeting
held in Makati?
SUGGESTED ANSWER:
23 The President presides over the meeting
of the directors, if there is no position of
Chairman provided in the By-Laws. If there
is the position of Chairman provided in the
By-Laws, the Chairman presides over the
meeting of the Directors (Sec 54 Corp
Code)
24 No. The law provides that the
annual stockholders’ meeting shall be held
in the city or municipality where the
principal office of the Corporation is
located. For this purpose, the law also
provides that Metro Manila is considered a
city or municipality. Since the principal
place of business of MIC is Pasig, MM, the
holding of the annual stockholders meeting
in Manila is proper. (Sec 51 Corp)
Version 1990-2003 Arranged by SULAW Class 2005
25 No. The law allows the BOD to hold
its meeting anywhere in the Philippines.
The holding of the BOD meeting in Makati
was proper and the validity of the
resolutions adopted by the Board in that
meeting cannot be questioned. (Sec 53
Corp code)
Corporation; Nationality of Corporation (1998)
What is the nationality of a corporation
organized and incorporated under the laws
of a foreign country, but owned 100% by
Filipinos? (2%)
SUGGESTED ANSWER:
Under the control test of corporate
nationality, this foreign corporation is of
Filipino Nationality. Where there are
grounds for piercing the veil of corporate
entity, that is, disregarding the fiction, the
corporation will follow the nationality of the
controlling members or stockholders, since
the corporation will then be considered as
one and the same.
Corporation; Non-Stock Corporation (1993)
The AB Memorial Foundation was
incorporated as a non-profit, non-stock
corporation in order to establish and
maintain a library and museum in honor of
the deceased parents of the incorporators.
Its Articles of Incorporation provided for a
board of trustees composed of 5
incorporators, which authorized to admit
new members. The Articles of
Incorporation also allow the foundation to
receive donations from members. As of Jan
30, 1993, 60 members had been admitted
by the BOT.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
23 Can the Foundation use the funds
donated to it by its members for purchase
of food and medicine for distribution to the
victims of the Pinatubo eruption?
24 Can the Foundation operate a
specialty restaurant that caters to the general
public in order to augment its funds?
25 One of the original trustees died and
the other two resigned because they
immigrated to the US. How will the
vacancies in the BOT be filled?
SUGGESTED ANSWER:
23Yes, (Sec 36(9) of the Corp Code) as long
as the amount of donation is reasonable.
the manufacture of cement and may,
therefore, be considered reasonably
necessary to accomplish the primary
purpose of Stikki. In such case, only the
approval of the BOD would be necessary
(Sec 42 BP 68)
ALTERNATIVE ANSWER:
23The majority vote of the BOD is
necessary. The investment in a) a power
plant project, b) a concrete road project,
and c) quarry operations of limestone used
in the manufacture of cement, is within the
express or implied power of the
corporation, or at least the same is

24 If the purposes of the corporation

are limited to the establishment and
maintenance of the library and museum as
stated in the problem, the foundation
cannot operate a specialty restaurant that
caters to the general public. In such case,
the action of the foundation will be ultra
vires.
ALTERNATIVE ANSWER:
23 If the act of the corporation is justified
by the secondary purpose of the
corporation which includes the act of
operating a restaurant, the foundation will
be within its power to do so.

24 Since there are only 2 of the

members of the BOT remaining and there
is no quorum, the vacancies will have to be
filled up in a special meeting of the
members (sec 29 Corp)

Corporation; Power to Invest Corporate Funds for

other Purpose (1995)
Stikki Cement Co was organized primarily
for cement manufacturing. Anticipating
substantial profits, its President proposed
that Stikki invest in a) a power plant
project, b) a concrete road project, and c)
quarry operations for limestone in the
manufacture of cement.
23 What corporate approvals or votes are
needed for the proposed investments?
Explain.
24 Describe the procedure in securing
these approvals.
SUGGESTED ANSWER:
23 Unless the power plant and the
concrete road project are reasonable
necessary to the manufacture of cement by
Stikki (and they do not appear to be so),
then the approval of said projects by a
majority of the BOD and the ratification of
such approval by the stockholders
representing at least 2/3 of the outstanding
capital stock would be necessary.

As for the quarry operations for limestone,

the same is an indispensable ingredient in
 Page 30 of 103
incidental to, or necessary for the existence
of the corporation.
SUGGESTED ANSWER:
2. a) The procedure in securing the
approval of the BOD is as follows:
23 a notice of the BOD should be sent to
all the directors. The notice should
state the purpose of the meeting.
24 At the meeting, each of the project
should be approved by a majority of the
BOD (not merely a majority of those
present at the meeting)
2.b) The procedure in securing the
approval of the stockholders is as follows:
23 Written notice of the proposed
investment and the time and place of
the stockholders’ meeting should be
sent to each stockholder at his place of
residence as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally.
24 At the meeting, each of the projects
should be approved by the stockholders
representing at least 2/3 of the
outstanding capital stock. (Sec 42 BP
68)
Corporation; Power to Invest Corporate Funds in
another Corporation (1996)
When may a corporation invest its funds in
another corporation or business or for any
other purposes?
SUGGESTED ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
A corporation may invest its funds in
another corporation or business or for any
other purpose other than the primary
purpose for which it was organized when
the said investment is approved by a
majority of the BOD and such approval is
ratified by the stockholders representing at
least 2/3 of the outstanding capital stock.
Written notice of the proposed investment
and the date, time and place of the
stockholders’ meeting at which such
proposal will be taken up must be sent to
each stockholder. (Sec 42 Corp Code)
Corporation; Recovery of Moral Damages (1998)
In a complaint filed against XYZ
Corporation, Luzon Trading Corporation
alleged that its President & General
Manager, who is also a stockholder,
suffered mental anguish, fright, social
humiliation and serious anxiety as a result
of the tortuous acts of XYZ Corporation.
In its counterclaim, XYZ Co claimed to have
suffered moral damages due to besmirched
reputation or goodwill as a result of Luzon
Trading Co’s complaint.
23 May Luzon Trading Co recover
damages based on the allegations of the
complaint? (2%)
24 May XYZ Co recover moral damages?
(3%)
SUGGESTED ANSWER:
No. A corporation, being an artificial
person which has no feelings, emotions or
senses, and which cannot experience
physical suffering or mental anguish, is not
entitled to moral damages.
ALTERNATIVE ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Seldon ordered “Stop Payment” of the
Yes. When a juridical person has a good check issued to Shamron.
reputation that is debased, resulting in
social humiliation, moral damages may be Shamron sued Turtle and Dick Seldon.
awarded. Moreover, goodwill can be Shamron obtained a favorable judgment
considered an asset of the corporation. holding co-defendants Turtle and Dick
Seldon jointly and severally liable.
TAKE NOTE: In the case of FBN Inc. vs Comment on the decision of the trial court.
AMEC, January 17, 2005, the SC ruled Discuss fully.
SUGGESTED ANSWER:
that;
The trial court erred in holding Dick
FBNI contends that AMEC is not entitled to
Seldon, President and GM of Turtle, jointly
moral damages because it is a corporation.
and severally liable with Turtle. In issuing
A juridical person is generally not entitled the check issued to Shamron and,
to moral damages because, unlike a natural thereafter,
person, it cannot experience physical
suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or
moral shock. The Court of Appeals cites
Mambulao Lumber Co. v. PNB, et al. to
justify the award of moral damages.
However, the Court's statement in
Mambulao that "a corporation may have a
good reputation which, if besmirched, may
also be a ground for the award of moral
damages" is an obiter dictum.

Nevertheless, AMEC's claim for moral

damages falls under item 7 of Article 2219
of the Civil Code. This provision expressly
authorizes the recovery of moral damages
in cases of libel, slander or any other form
of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical
person such as a corporation can validly
complain for libel or any other form of
defamation and claim for moral damages.

Moreover, where the broadcast is libelous

per se, the law implies damages. In such a
case, evidence of an honest mistake or the
want of character or reputation of the party
libeled goes only in mitigation of damages.
Neither in such a case is the plaintiff
required to introduce evidence of actual
damages as a condition precedent to the
recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC
is entitled to moral damages.

Corporation; Separate Juridical Personality (1995)

Ronald Sham doing business under the
name of SHAMRON Machineries
(Shamron) sold to Turtle Mercantile
(Turtle) a diesel farm tractor. In payment,
Turtle’s President and Manager Dick
Seldon issued a check for P50th in favor of
Shamron. A week later, Turtle sold the
tractor to Briccio Industries (Briccio) for
P60th. Briccio discovered that the engine
of the tractor was reconditioned so he
refused to pay Turtle. As a result, Dick
 Page 31 of 103
stopping payment thereof, Seldon was
acting in his capacity as an officer of
Turtle. He was not acting in his personal
capacity. Furthermore, no facts have been
provided which would indicate that the
action of Seldon was dictated by an intent
to defraud Shamron by himself or in
collusion with Turtle. Having acted in what
he considered as his duty as an officer of
the corporation, Seldon should not be held
personally liable.
Corporation; Separate Juridical Personality (1996)
PR Co owns a beach resort with several
cottages. Jaime, the President of PR,
occupied one of the cottages for residential
purposes. After Jaime’s term expired, PR
wanted to recover possession of the
cottage. Jaime refused to surrender the
cottage, contending that as a stockholder
and former President, he has a right to
possess and enjoy the properties of the
corporation. Is Jaime’s contention correct?
Explain.
SUGGESTED ANSWER:
Jaime’s contention is not correct. Jaime
may own shares of stock in PR Corp but
such ownership does not entitle him to the
possession of any specific property of the
corporation or a definite portion thereof.
Neither is he a co-owner of corporate
property. Properties registered in the name
of the corporation are owned by it as an
entity separate and distinct from its
stockholders.
Stockholders like Jaime only own shares of
stock in the corporation. Such shares of
Version 1990-2003 Arranged by SULAW Class 2005
stock do not represent specific corporate
property. (Rebecca Boyer-Roxas v CA GR
100866 Jul 14, 92 211s470)
Corporation; Separate Juridical Personality (1996)
Richard owns 90% of the shares of the
capital stock of GOM Co. On one occasion,
GOM represented by Richard as President
and General Manager executed a contract
to sell a subdivision lot in favor of Tomas.
For failure of GOM to develop the
subdivision, Tomas filed an action for
rescission and damages against GOM and
Richard. Will the action prosper? Explain.
SUGGESTED ANSWER:
The action may prosper against GOM but
definitely not against Richard. Richard has
a legal personality separate and distinct
from that of GOM. If he singed the contract
to sell, he did so as the President and
General Manager of GOM and not in his
personal capacity. Mere ownership by
Richard of 90% of the capital stock of GOM
is not of itself sufficient ground to
disregard his separate legal personality
absent a showing, for example that he
acted maliciously or in bad faith (EPG Const
Co v CA GR 103372 Jn 22,92 210s230)
Corporation; Separate Juridical Personality (1999)
As a result of perennial business losses, a
corporation’s net worth has been wiped
out. In fact, it is now in negative territory.
Nonetheless, the stockholders did not like
to give up. Creditor-banks, however, do not
share the confidence of the stockholders
and refuse to grant more loans.
23 What tools are available to the
stockholders to replenish capital? (3%)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
But the suit against Y will not prosper. Y, as
23 Assuming that the corporation
continues to operate even with depleted president and general manager, and also
capital, would the stockholders or the stockholder of Marulas Creative
managers be solidarily liable for the Technology, Inc., has a legal personality
obligations incurred by the separate and distinct from that of the
corporation? Explain. corporation. The liability of the corporation
(3%) is that of the corporation and not that of its
SUGGESTED ANSWER: officers and stockholders who are not liable
23 In the face of the refusal of the for corporate liabilities.
creditor-banks to grant more loans, the
following are tools available to the Corporation; Separate Juridical Personality (2000)
stockholders to replenish capital, to wit: Nine individuals formed a private
additional subscription to shares of corporation pursuant to the provisions of
stock of the corporation by the Corporation Code of the
stockholders or by investors;
advances by the stockholders to the
corporation;
payment of unpaid subscription by
the
stockholders.
SUGGESTED ANSWER:
23 No. As a general rule, the stockholders
or the managers cannot be held solidarily
liable for the obligations incurred by the
corporation. The corporation has a
separate and distinct personality from that
of the stockholders or managers. The latter
are presumed to be acting in good faith in
continuing the operation of the
corporation. The obligations incurred by
the corporation are those of the
corporation which alone is liable therefor.
However, when the corporation is already
insolvent, the directors and officers
become trustees of the business and assets
of the corporation for the benefit of the
creditors and are liable for negligence or
mismanagement.

Corporation; Separate Juridical Personality (2000)

Marulas Creative Technology Inc., an e-
business enterprise engaged in the
manufacture of computer media
accessories; rents an office and store space
at a commercial building owned by X.
Being a start-up company, Marulas enjoyed
some leniency in its rent payments; but
after three years, X put a stop to it and
asked Marulas president and general
manager, Y, who is a stockholder, to pay the
back rentals amounting to a hundred
thousand pesos or to vacate the premises
at the end of the month. Marulas neither
paid its debt nor vacated the premises. X
sued Marulas and Y for collection of the
unpaid rentals, plus interest and costs of
litigation. Will the suit prosper against X?
Against Y? (5%)
SUGGESTED ANSWER:
Yes, the suit will prosper against Marulas.
It is the one renting the office and store
space, as lessee, from the owner of the
building, X, as lessor.
 Page 32 of 103
Philippines (BP 68). Incorporator S was
elected director and president – general
manager. Part of his emolument is a Ford
Expedition, which the corporation owns.
After a few years, S lost his corporate
positions but he refused to return the
motor vehicle claiming that as a indeed there had been a call for the unpaid
stockholder with a substantial equity share,
he owns that portion of the corporate
assets now in his possession. Is the
contention of S valid? Explain (5%)
SUGGESTED ANSWER:
No. The contention of S is not valid. The
Ford Expedition is owned by the
corporation. The corporation has a legal
personality separate and distinct from that
of its stockholder. What the corporation
owns is its own property and not the
property of any stockholder even how
substantial the equity share that
stockholder owns.
Corporation; Set-Off; Unpaid Subscription (1994)
Victor was employed in MAIA Corporation.
He subscribed to 1,500 shares of the
corporation at P100 per share or a total of
P150,000. He made an initial down
payment of P37,500.00. He was appointed
President and General Manager. Because
of his disagreement with the BOD, he
resigned and demanded payment of his
unpaid salaries, his cost of living
allowance, his bonus, and reimbursement
of his gasoline and representation
expenses.
MAIA Corporation admits that it owed
Victor P40,000. but told him that this will
be applied to the unpaid balance of his
subscription in the amount of P100,000.00
Version 1990-2003 Arranged by SULAW Class 2005
There was no call or notice for the payment
of the unpaid subscription. Victor
questioned the set-off.
23 May MAIA set-off the unpaid
subscription with victor’s claim for
salaries?
24 Would your answer be the same if
subscription?
SUGGESTED ANSWER:
23 No. MAIA cannot setoff the unpaid
subscription with Victor’s claim for
salaries. The unpaid subscription is not yet
due as there is no call.
24 Yes. The reason is that Victor is entitled
to the payment of his salaries which MAIA
has no right to withhold in payment of
unpaid subscription. To do so would violate
Labor Laws (Apodaco v NLRC 172 S 442)
Corporation; Stock Corporation (2001)
“XY” is a recreational club which was
organized to operate a golf course for its
members with an original authorized
capital stock of P100M. The articles of
incorporation nor the by-laws did not
provide for distribution of dividends
although there is a provision that after its
dissolution, the assets shall be given to a
charitable corporation. Is “XY” a stock
corporation? Give reasons for your answer?
(5%)
SUGGESTED ANSWER:
XY is a stock corporation because it is
organized as a stock corporation and there
is no prohibition in its Articles of
Incorporation or its by -laws for it to
declare dividends. When a corporation is
organized as a stock corporation and its
articles of Incorporation or By-Laws
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) whereby the latter would supply the
are silent, the corporation is deemed to corporation with its meat and poultry
have the power to declare dividends under requirements.
SUGGESTED ANSWER:
Sec 43. Since it has the power to declare
Voidable – A contract of the corporation
dividends, XY is a stock corporation.
with one or more of its directors or trustees
The provision of the Articles of or officers is voidable, at the option of such
Incorporation that at dissolution the assets corporation (Sec 32, Corporation Code).
of the corporation shall be given to a The Board of Directors of XL Foods
charitable corporation does not prohibit
Corporation declared and paid cash
the corporation from declaring dividends
dividends without approval of the
before dissolution.
stockholders.
Corporation; Validity of Corporate Acts (1998)
The stockholders of People Power Inc (PPI)
approved two resolutions in a special
stockholders’ meeting:
23 Resolution increasing the
authorized capital stock of PPI; and
24 Resolution authorizing the BOD to
issue, for cash payment, the new shares
from the proposed capital stock increase
in favor of outside investors who are non-
stockholders.

The foregoing resolutions were approved

by stockholders representing 99% of the
total outstanding capital stock. The sole
dissenter was Jimmy Morato who owned
1% of the stock.
23 Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting stockholder?
(3%)
24 What remedies, if any, are available
to Morato? (2%)
SUGGESTED ANSWER:
23 No. The resolutions are not binding on
the corporation and its stockholders
including Jimmy Morato. While these
resolutions were approved by the
stockholders, the directors’ approval,
which is required by law in such case, does
not exist.

24 Jimmy Morato can petition the SEC

(Now RTC) to declare the 2 resolutions, as
well as any and all actions taken by the
BOD thereunder, null and void.

Corporation; Validity of Corporate Acts (2002)

Which of the following corporate acts are
valid, void, or voidable? Indicate your
answer by writing the paragraph number
of the query, followed by your
corresponding answer as “Valid,” “Void,” or
“Voidable,” as the case may be. If your
answer is “Void,” explain your answer. In
case of a “Voidable” answer, specify what
conditions must be present or complied
with to make the corporate act valid. (5%)
XL Foods Corporation, which is engaged in
the fast-food business, entered into a
contract with its President Jose Cruz,
 Page 33 of 103
SUGGESTED ANSWER:
Valid
XL Foods Corporation guaranteed the loan
of its
sister company XL Meat Products, Inc.
SUGGESTED ANSWER:
Void – This is an ultra vires act on part of
XL Foods Corporation, and is not one of the
powers provided for in Sec. 36 of the
Corporation Code.
Corporation; Voluntary Dissolution (2002)
Name three (3) methods by which a stock
corporation may be voluntarily dissolved.
Explain each method. (5%)
SUGGESTED ANSWER:
The three (3) methods by which a stock
corporation may be voluntarily dissolved
are:
Voluntary Dissolution where no creditors
are affected. This is done by a majority
vote of the directors, and resolution of
at least 2/3 vote of stockholders,
submitted to the Securities and
Exchange Commission.
Voluntary dissolution where creditors are
affected. This is done by a petition for
dissolution which must be filed with the
Securities and Exchange Commission,
signed by a majority of the members of
the board of directors, verified by the
president or secretary, and upon
affirmative vote of stockholders
representing at least 2/3 of the
outstanding capital stock.
Version 1990-2003 Arranged by SULAW Class 2005
Dissolution by shortening of the corporate
term. This is done by amendment of the
articles of incorporation.
Corporation; Voting Trust Agreement (1992)
A distressed company executed a voting
trust agreement for a period of three years
over 60% of its outstanding paid up shares
in favor of a bank to whom it was indebted,
with the Bank named as trustee.
Additionally, the Company mortgaged all its
properties to the Bank. Because of the
insolvency of the Company, the Bank
foreclosed the mortgaged properties, and
as the highest bidder, acquired said
properties and assets of the Company.
The three-year period prescribed in the
Voting Trust Agreement having expired, the
company demanded the turn-over and
transfer of all its assets and properties,
including the management and operation of
the Company, claiming that under the
Voting Trust Agreement, the Bank was
constituted as trustee of the management
and operations of the Company.
Does the demand of the Company tally with
the concept of a Voting Trust Agreement?
Explain briefly.
SUGGESTED ANSWER:
The demand of the company does not tally
with the concept of a Voting Trust
Agreement. The Voting Trust Agreement
merely conveys to the trustee the right to
vote the shares of grantor/s. The
consequence of foreclosure of the
mortgaged properties would be alien to the
Voting Trust Agreement and its effects.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) 198 SCRA 73 (1991) that to grant to the
corporation concerned the right of
NOTE: (per D ondee) The law sim ply provides thata voting withdrawing or dismissing the suit, at the
trust agreem ent is an agreem ent in writing whereby one or m instance of the majority stockholders and
ore stockholders of a corporation consentto transferhis or
theirshares to a trustee in orderto vestin the lattervoting or other
directors who themselves are the persons
rights pertaining to said shares for a period not exceeding five alleged to have
years upon the fulfillm entof statutory conditions and such other
term s and conditions specified in the agreem ent. The five
year-period m ay be extended in cases where the voting trust is
executed pursuant to a loan agreem entwhereby the period is
m ade contingentupon full paym entof the loan.

Undersection 59 of the C orporation C ode, supra, a voting trust

agreem ent m ay confer upon a trustee not only the
stockholder's voting rights butalso otherrights pertaining to his
shares as long as the voting trustagreem entis notentered "for
the purpose of circum venting the law againstm onopolies and
illegalcom binations in restraintof trade orused forpurposes of
fraud." (section 59, 5th paragraph of the C orporation C ode).
Thus, the traditional concept of a voting trust agreem ent prim
arily intended to single out a stockholder's rightto vote
from his other rights as such and m ade irrevocabl for a
lim ited duration m ay in practice becom e a legal device
whereby a transfer of the stockholders shares is effected
subjectto the specific provision of the voting trustagreem ent.

The execution of a voting trust agreem ent, therefore, m ay

creat a dichotom y between the equitable or beneficial
ownership of the corporate shares of a stockholder, on the one
hand, and the legaltitle thereto on the other hand. (Lee vs. CA,
Feb. 4, 1992)

Derivative Suit: Requisites (2004)

AA, a minority stockholder, filed a suit
against BB, CC, DD, and EE, the holders of
majority shares of MOP Corporation, for
alleged misappropriation of corporate
funds. The complaint averred, inter alia,
that MOP Corporation is the corporation in
whose behalf and for whose benefit the
derivative suit is brought. In their capacity
as members of the Board of Directors, the
majority stockholders adopted a resolution
authorizing MOP Corporation to withdraw
the suit. Pursuant to said resolution, the
corporate counsel filed a Motion to Dismiss
in the name of the MOP Corporation.
Should the motion be granted or denied?
Reason briefly. (5%)
SUGGESTED ANSWER:
No. All the requisites for a valid derivative
suit exist in this case.
First, AA was exempt from exhausting his
remedies within the corporation, and did
not have to make a demand on the Board of
Directors for the latter to sue. Here, such a
demand would be futile, since the directors
who comprise the majority (namely, BB,
CC, DD and EE) are the ones guilty of the
wrong complained of.

Second, AA appears to be stockholder at

the time the alleged misappropriation of
corporate funds.

Third, the suit is brought on behalf and for

the benefit of MOP Corporation. In this
connection, it was held in Conmart (Phils.)
Inc. v. Securities and Exchange Commission,
 Page 34 of 103
committed the breach of trust against the
interests of the corporation would be to
emasculate the right of minority
stockholders to seek redress for the
corporation. Filing such action as a
derivative suit even by a lone stockholder is
one of the protections extended by law to
minority stockholders against abuses of the
majority.
Derivative Suit: Watered Stock (1993)
A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10,
1991, when he was given one share by
another stockholder to qualify him as a
director. A was not re-elected director in
the July 1, 1992 annual meeting but he
continued to be a registered shareholder of
PREC.
When he was still a director, A discovered
that on Jan 5, 1991, PREC issued free of
charge 10,000 shares to X a lawyer who
assisted in a court case involving PREC.
Can A now bring an action in the name of
the corporation to question the issuance
of the shares to X without receiving any
payment?
Can X question the right of A to sue him in
behalf of the corporation on the ground
that A has only one share in his name?
Cannot the shares issued to X be considered
as
watered stock?
SUGGESTED ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
As a general rule, A cannot bring a
derivative suit in the name of the
corporation concerning an act that took
place before he became a stockholder.
However, if the act complained of is a
continuing one, A may do so.
No. In a derivative suit, the action is
instituted/ brought in the name of a
corporation and reliefs are prayed for
therein for the corporation, by a minority
stockholder. The law does not qualify the
term “minority” in terms of the number of
shares owned by a stockholder bringing the
action in behalf of the corporation. (SMC v
Khan 176 SCRA 448)
No. WATERED SHARES are those sold by
the corporation for less than the par/book
value. In the instant case, it will depend
upon the value of services rendered in
relation to the total par value of the shares.
Derivative Suit; Close Corporation;
Corporate Opportunity (2005)
Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation
formed to run the Patio Cafe, an al fresco
coffee shop in Makati City. In 2000, Patio
Cafe began experiencing financial reverses,
consequently, some of the checks it issued
to its beverage distributors and employees
bounced.
In October 2003, Schiera informed Malyn
that she found a location for a second cafe
in Taguig City. Malyn objected because of
the dire financial condition of the
corporation.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Sometime in April 2004, Malyn learned
about Fort Patio Cafe located in Taguig City
and that its development was undertaken
by a new corporation known as Fort Patio,
Inc., where both Schiera and Jaz are
directors. Malyn also found that Schiera
and Jaz, on behalf of Patio Investments, had
obtained a loan of P500,000.00 from
PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by
the assets of Patio Investments and
personally guaranteed by Schiera and Jaz.
Yes, for in spite of the dissolution of any
corporation, it remains a juridical person
for purpose of dissolution for three years
from the date of dissolution, precisely one
of the purposes is to allow the winding-up
of its affairs, including the termination of
pending suits.
Derivative Suit; Minority Stockholder (2003)
Gina Sevilla, a minority stockholder of
Bayan Corporation, felt that various
investments of the company’s capital were
ultra vires if not, indeed, made in violation
of law. She filed a derivative suit seeking to

Malyn then filed a corporate derivative

action before the Regional Trial Court of
Makati City against Schiera and Jaz,
alleging that the two directors had
breached their fiduciary duties by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio
Cafe. (5%)
Did Schiera and Jaz violate the
principle of
corporate opportunity? Explain.
SUGGESTED ANSWER:
Yes. Although Malyn refused the business
before, nevertheless, using the resources
and credit standing of the company,
Schiera and Jaz clearly demonstrated that
the business could have been successfully
pursued in the name of the close
corporation. More importantly, Schiera and
Jaz are guilty of diverting the resources of
the close corporation to another entity,
equivalent to fraud and bad faith.

Was it proper for Malyn to file a derivative

suit with
a prayer for injunctive relief? Explain.
SUGGESTED ANSWER:
Although it is a close corporation,
nevertheless the principles of separate
juridical personality still apply. The
business of the corporation is still separate
and distinct from the proprietary interests
of its stockholders and directors.
Consequently, since the business
opportunity and the resource's used
pertain to the close corporation, the
standing to sue and to recover remains
with the close corporation and not with
Malyn. Therefore, it is still necessary to file
a derivative suit on behalf of the close
corporation, although the proceedings
would be governed under the Interim Rules
of Procedure for Intra-Corporate Disputes.

Assuming that a derivative suit is proper; may

the action continue if the corporation is
dissolved during
the pendency of the suit? Explain.
SUGGESTED ANSWER:
 Page 35 of 103
nullify the questioned investments. Would
her action prosper? Why?
SUGGESTED ANSWER:
Yes, she is already a stockholder at the
time the alleged misappropriation of
corporate funds. And that filing such action
as a derivative suit even by a lone
stockholder is one of the protections
extended by law to minority stockholders
against abuses of the majority.
Nevertheless, Gina must first exhaust any
administrative remedies before her suit be
consider in court.
Distinction: De facto Corporation vs. Corporation
by Estoppel (2004)
Is there a difference between a de facto
corporation and a corporation by estoppel?
Explain briefly. (2%)
SUGGESTED ANSWER:
A DE FACTO CORPORATION is one which
actually exists for all practical purposes as
a corporation but which has no legal right
to corporate existence as against the State.
It is essential to the existence of a de facto
corporation that there be (1) a valid law
under which a corporation might be
incorporated, (2) a bona fide attempt to
organize as a corporation under such law,
and
actual use or exercise in good faith of
corporate powers conferred upon it by law.
A CORPORATION BY ESTOPPEL exists
when persons assume to act as a
corporation knowing it to be without
authority to do so. In this case, those
Version 1990-2003 Arranged by SULAW Class 2005
persons will be liable as general partners
for all debts, liabilities and damages
incurred or arising as a result of their
actions.
Distinction: Dividends vs. Profit: Cash Dividend vs.
Stock Dividend (2005)
Distinguish dividend from profit; cash
dividend from stock dividend. (2%)
SUGGESTED ANSWER:
PROFITS are residual amounts
representing return of capital after
deducting all corporate costs and expenses
from revenues. The accumulated profits,
from year to year, represent the corporate
retained earnings from which the dividends
can be declared.
CASH DIVIDENDS represent an actual
distribution of accumulated profits to the
stockholders as a return on their
investments. Declaration of cash dividends
requires only the approval of the majority
of the Board of Directors in a proper
resolution.
STOCK DIVIDENDS are simply transfers of
retained earnings to capital stock, thereby
increasing the number of shares of stocks
of each stockholder with no required cash
contribution. A two-thirds vote of the
stockholders, coupled with a majority vote
of the Board of Directors, is needed to
declare stock dividends.
Distinction; Private vs. Public Corporation (2004)
Distinguish clearly a private corporation
from a public corporation
SUGGESTED ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
A PRIVATE CORPORATION is one formed
for some private purpose, benefit or end,
while a PUBLIC CORPORATION is formed
for the government of a portion of the State
for the general good or welfare. The true
test is the purpose of the corporation. If the
corporation is created for political or public
purpose connected with the administration
of government, then it is a public
corporation. If not, it is a private
corporation although the whole or
substantially the whole interest in
the corporation belongs to the State. A
public corporation is created by special
legislation or act of Congress. A private
corporation must be organized under the
Corporation Code.
dividends would have to be sourced from
the capital stock. This is illegal. It violates
the "TRUST FUND DOCTRINE" that
provides that the capital stock of the
corporation is a trust fund to be kept intact
during the life of the corporation for the
benefit of the creditors of the corporation.
(Commissioner of Internal- Revenue v. Court of
Appeal®, G.R. No. 108576, January 20, 1999;
Boman Environmental Development Corp. v.
Court of Appeals, G.R. No. 77860, November
22, 1988; and Steinberg v. Velasco, G.R. No.
30460, March 12,1929)

Distinction; Stock vs. Non-Stock Corporation (2004)

Distinguish clearly a stock corporation
from a non-stock corporation.
SUGGESTED ANSWER:
A stock corporation is one that has capital
stock divided into shares and is authorized
to distribute to the holders of such shares
dividends or allotments of the surplus
profits on the basis of the shares held. All
other corporations are non-stock
corporations.

Dividends: Declaration of Dividends (2005)

Under what circumstances may a
corporation declare dividends? (2%)'
SUGGESTED ANSWER:
No form of dividends can be declared and
paid by the corporation except from
unrestricted retained earnings appearing
on its books. Dividends must be paid in
amounts proportional to all stockholders on
the basis of outstanding stock held by
them. Cash or property dividends, can be
declared from such unrestricted retained
earnings by a proper resolution of the
Board of Directors. Stock dividends,
however, must be declared by a proper
resolution of the Board of Directors from
existing unrestricted retained earnings and
ratified by stockholders representing at
least two-thirds (2/8) of the outstanding
capital stock of the corporation, obtained in
a meeting duly called for the purpose. (Sec.
43, Corporation Code)

Dividends: Sources of Dividends; Trust Fund

Doctrine (2005)
From what funds are cash and stock
dividends sourced? Explain why. (2%)
SUGGESTED ANSWER:
All cash and stock dividends are always
paid out of the unrestricted retained
earnings (also called surplus profit) of the
corporation. If the corporation has no
unrestricted retained earnings, the
 Page 36 of 103
Dividends; Declaration of Dividends (1990)
At least 2/3 of the stockholders of Solar
Corporation, meeting upon the
recommendation of the BOD, declared a 50%
stock dividend during their annual meeting.
The notice of the annual stockholders’
meeting did not mention anything about a
stock dividend declaration. The matter was
taken up only under the item “other
business” in the agenda of the meeting. C.K.
Senwa, a stockholder, who received his copy
of the notice but did not attend the meeting,
subsequently learned about the 50% stock
dividend declaration. He desires to have the
stock dividend declaration cancelled and set
aside, and wishes to retain your services as a
lawyer for the purpose. Will you accept the
case? Discuss with reasons.
SUGGESTED ANSWER:
I will not accept the case. Sec 43 of the
Corp Code states that no stock dividend
shall be issued without the approval of the
stockholders representing not less than 2/3
of the outstanding capital stock at a
regular or special meeting duly called for
that purpose. Conformably with Sec 50 of
the Corp Code, a written notice of the
holding of the regular meeting sent to the
shareholders will suffice. The notice itself
specified the said subject matter.
ALTERNATIVE ANSWER:
Yes, I will accept the case. The problem
does not indicate that there is action by the
BOD which is also necessary for the
declaration of 50% stock dividend.
Dividends; Declaration of Dividends (1991)
Version 1990-2003 Arranged by SULAW Class 2005
During the annual stockholders meeting,
Riza, a stockholder proposed to the body
that a part of the corporation’s unreserved
earned surplus be capitalized and stock
dividends be distributed to the
stockholders, arguing that as owners of the
company, the stockholders, by a majority
vote, can do anything. As chairman of the
meeting, how would you rule on the motion
to declare stock dividends?
SUGGESTED ANSWER:
As the chairman of the meeting, I would
rule against the motion considering that a
declaration of stock dividends should
initially be taken by the BOD and
thereafter to be concurred in by a 2/3 vote
of the stockholders (Sec 43 Corp Code).
There is no prohibition, however, against
the stockholders’ resolving to recommend
to the BOD that it consider a declaration of
stock dividends for concurrence thereafter
by the stockholders.
Dividends; Declaration of Dividends (2001)
For the past three years of its commercial
operation, X, an oil company, has been
earning tremendously in excess of 100% of
the corporation’s paid-in capital. All of the
stockholders have been claiming that they
share in the profits of the corporation by
way of dividends but the Board of Directors
failed to lift its finger.
Is Corporation X guilty of violating a law? If
in the affirmative, state the basis (2%)
SUGGESTED ANSWER:
Corporation X is guilty of violating Section
43 of the Corp Code. This provision
prohibits stock corporations
Version 1990-2006 Updated by Dondee
 SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
In brief, the doctrine disqualifies a director,
from retaining surplus profits in excess of
trustee or officer from appropriating for his
100% of their paid-in capital.
personal benefit a transaction or
Are there instances when a corporation opportunity that pertains to the
shall not be held liable for not declaring corporation, and which under the duty of
loyalty he should first bring to the
dividends? (3%)
SUGGESTED ANSWER:
corporation for its use or exploitation.
The instances when a corporation shall not
The doctrine of corporate opportunity is an
be held liable for not declaring dividends
are: enforcement of the duty of loyalty of
when justified by definite corporate corporate directors and officers. When a
expansion projects or programs director, trustee or officer attempts to
approved by the BOD; or acquire or

when the corporation is prohibited under

any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends
without its or his consent, and such
consent has not yet been secured; or

when it can be clearly shown that such

retention is necessary under special
circumstances obtaining in the
corporation, such as when there is need
for special reserve for probable
contingencies.

Dividends; Right; Managing Corporation (1991)

ABC Management Inc. presented to the
DEF Mining Co, the draft of its proposed
Management Contract. As an incentive,
ABC included in the terms of compensation
that ABC would be entitled to 10% of any
stock dividend which DEF may declare
during the lifetime of the Management
Contract. Would you approve of such
provision? If not, what would you suggest
as an alternative?
SUGGESTED ANSWER:
I would not approve a proposed stipulation
in the management contract that the
managing corporation, as an additional
compensation to it, should be entitled to
10% of any stock dividend that may be
declared. Stockholders are the only ones
entitled to receive stock dividends (Nielsen
& Co v Lepanto Mining 26 s 569) I would add
that the unsubscribed capital stock of a
corporation may only be issued for cash or
property or for services already rendered
constituting a demandable debt (Sec 62
Corp Code). As an alternative, I would
suggest that the managing corporation
should instead be given a net profit
participation and, if it later so desires, to
then convert the amount that may be due
thereby to equity or shares of stock at no
less than the par value thereof.

Doctrine of Corporate Opportunity (2005)

Briefly discuss the doctrine of corporate
opportunity. (2%)
 Page 37 of 103
acquires, in violation of his duty, an interest
adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, he shall be liable as a trustee
for the corporation and must account for
the profits which otherwise would have
accrued to the corporation. Equity imposes
liability upon him not to deal for his own
benefit. (Sec. 31, Corporation Code)
Under Sec. 34 of the Corporation Code
where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least two-thirds (2/8) of the
outstanding capital stock.
Effect: Expiration of Corporate Term (2004)
XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real
estate for a term of 20 years, renewable for
another 20 years, provided that XYZ's
corporate term is extended in accordance
with law. Four years after the term of XYZ
Corporation expired, but still within the
period allowed by the lease contract for the
extension of the lease period, XYZ Corp.
notified ABC, Inc., that it is exercising the
option to extend the lease. ABC, Inc.,
objected to the proposed extension,
arguing that since the corporate life of XYZ
Corp. had expired, it could no longer opt to
renew the lease. XYZ Corp. countered that
Version 1990-2003 Arranged by SULAW Class 2005
withstanding the lapse of its corporate term
it still has the right to renew the lease
because no quo warranto proceedings for
involuntary dissolution of XYZ Corp. has
been instituted by the Office of the Solicitor
General.
Is the contention of XYZ Corp. meritorious?
Explain briefly. (5%)
SUGGESTED ANSWER:
XYZ Corporation's contention is not
meritorious. Based on the ruling of the
Supreme Court in Philippine National Bank
vs. CFI of Rizal, 209 SCRA (1992). XYZ Corp.
was dissolved ipso facto upon the
expiration of its original term. It ceased to
be a body corporate for the purpose of
continuing the business for which it was
organized, except only for purposes
connected with its winding up or
liquidation. Extending the lease is not an
act to wind up or liquidate XYZ Corp.'s
affairs. It is contrary to the idea of winding
up the affairs of the corporation.
Effects; Merger of Corporations (1999)
Two corporations agreed to merge. They
then executed an agreement specifying the
surviving corporation and the absorbed
corporation. Under the agreement of
merger dated November 5, 1998, the
surviving corporation acquired all the
rights, properties and liabilities of the
absorbed corporation.
What would happen to the absorbed
corporation? Must the absorbed
corporation undertake dissolution and
the winding up procedures? Explain
your answer. (3%)
SUGGESTED ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) the corporate liquidation is not yet over,
No. There is no need for the absorbed how, if at all, can a final settlement of the
corporation to undertake dissolution and corporate affairs be made?
SUGGESTED ANSWER:
winding up procedure. As a result of the
The liquidation can continue with the
merger, the absorbed corporation is
winding up. The members of the BOD can
automatically dissolved and its assets and
continue with the winding of the corporate
liabilities are acquired and assumed by the
affairs until final liquidation. They can act
surviving corporation.
as trustees or receivers for this purpose.
Pending approval of the merger by the SEC,
Effects; Winding Up Period of a Corporation (2000)
may the surviving corporation already
institute suits to collect all receivables The SEC approved the amendment of the
due to the absorbed corporation from Articles of Incorporation of GHQ Corp
its customers? Explain your answer. shortening its corporate life to only 25
(3%) years in accordance with Sec 120 of the
SUGGESTED ANSWER: Corp
No. The merger does not become effective
until and unless approved by the SEC.
Before approval by the SEC of the merger,
the surviving corporation has no legal
personality with respect to receivables due
to the absorbed corporation.

A case was filed against a customer to

collect on the promissory note issued by
him after the date of the merger
agreement. The customer raised the
defense that while the receivables as of
the date of the merger agreement was
transferred to the surviving
corporation, those receivables which
were created after the merger
agreement remained to be owned by
the absorbed corporation. These
receivables would be distributed to the
stockholders conformably with the
dissolution and liquidation procedures
under the New Corporation Code?
Discuss the merits of this argument.
(3%)
SUGGESTED ANSWER:
Whether the receivable was incurred by
the absorbed corporation before or after
the merger agreement, or before or after
the approval thereof by the SEC, the said
receivable would still belong to the
surviving corporation under Sec 80 of the
Corp. Code which does not make any
distinction as to the assets and liabilities of
the absorbed corporation that the surviving
corporation would inherit.

Effects; Winding Up Period of a Corporation (1997)

The corporation, once dissolved, thereafter
continues to be a body corporate for three
years for purposes of prosecuting and
defending suits by and against it and of
enabling it to settle and close its affairs,
culminating in the final disposition and
distribution of its remaining assets. If the 3
year extended life expires without a trustee
or receiver being designated by the
corporation within that period and by that
time (expiry of the 3 year extended term),
 Page 38 of 103
Code. As shortened, the corporation
continued its business operations until May
30, 1997, the last day of its corporate
existence. Prior to said date, there were a
number of pending civil actions, of varying
nature but mostly money claims filed by
creditors, none of which was expected to
be completed or resolved within five years
from May 30, 1997.
If the creditors had sought your
professional help at that time about
whether or not their cases could be
pursued beyond May 30, 1997, what would
have been your advice? (2%)
SUGGESTED ANSWER:
The cases can be pursued even beyond
May 30, 1997, the last day of the corporate
existence of GHQ Corp. The Corporation is
not actually dissolved upon the expiration
of its corporate term. There is still the
period for liquidation or winding up.
NOTE: U nder Section 122 of the C orporation C ode, a
corporation whose corporate existence is term inated in any m
anner continues to be a body corporate for three (3) years
afterits dissolution forpurposes of prosecuting and defending
suits by and againstitand to enabl itto settle and close its
affairs, culm inating in the disposition and distribution of its rem
aining assets. Itm ay, during the three-yearterm , appointa
trustee ora receiverwho m ay actbeyond thatperiod.
The term ination of the life of a corporate entity does notby
itself cause the extinction or dim inution of the rights and
liabilities of such entity. 27 If the three-yearextended life has
expired without a trustee or receiver having been expressly
designated by the corporation, within thatperiod, the board of
directors (or trustees) itself, m ay be perm itted to so continue
Version 1990-2003 Arranged by SULAW Class 2005
as "trustees" by legal im plication to com plet the corporate
liquidation. (PEPSI-COLA PHILIPPINES, INC., vs. THE
COURT OF APPEALS, [G.R. No. 145855. November 24,
2004.])
Foreign Corporation; “Doing Business” in
the Philippines (1998)
When is a foreign corporation deemed to
be “doing business in the Philippines?”
(3%)
SUGGESTED ANSWER:
A foreign corporation is deemed to be
“doing business in the Philippines” if it is
continuing the body or substance of the
business or enterprise for which it was
organized.
It is the intention of an entity to continue
the body of its business in the country. The
grant and extension of 90-day credit terms
of a foreign corporation to a domestic
corporation for every purchase shows an
intention to continue transacting with the
latter.
Foreign Corporation; “Doing Business” in
the Philippines; Acts or Activities (2002)
Give at least three (3) examples of the acts
or activities that are specifically identified
under our foreign investment laws as
constituting “doing business” in the
Philippines (3%)
SUGGESTED ANSWER:
Any three (3) of the following acts or
activities constitute “doing business” in the
Philippines under our foreign investment
laws:
Soliciting orders
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Opening offices by whatever name
Participating in the management,
supervision or control of any domestic
entity
Entering into service contracts
Appointing representatives or distributors,
operating under the control of the
foreign entity, who is domiciled in the
Philippines or who stays in the country
for a period or periods totaling at least
180 days in any calendar year.
interest of the corporation resulting in
damages to the corporation, its
stockholders or other persons;
When he consents to the issuance of
watered stocks or who, having
knowledge thereof, does not forthwith
file with the corporate secretary his
written objection thereto;
When he agrees to hold himself personally
and solidarily liable with the
corporation; or

Foreign Corporation; “Doing Business” in

the Philippines; Test (2002)
What is the legal test for determining if an
unlicensed foreign corporation is doing
business in the Philippines? (2%)
SUGGESTED ANSWER:
The test is whether or not the unlicensed
foreign corporation has performed an act
or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance
of acts or works, or the exercise of some of
the functions normally incident to, and in
progressive prosecution of, commercial
gain or of the purpose and object of the
business corporation.

Joint Venture; Corporation (1996)

May a corporation enter into a joint
venture?
SUGGESTED ANSWER:
A corporation may enter into a joint
venture. However, inasmuch as the term
‘joint venture’ has no precise legal
definition, it may take various forms. It
could take the form of a simple pooling of
resources (not involving incorporation)
between two or more corporations for a
specific project, purpose or undertaking, or
for a limited time. It may involve the
creation of a more formal structure and,
hence, the formation of a corporation. If
the joint venture would involve the creation
of a partnership, as the term is understood
under the Civil Code, then a corporation
cannot be a party to it.

Liabilities; BOD; Corporate Acts (1996)

When may a corporate director, trustee, or
officer be held personally liable with the
corporation?
SUGGESTED ANSWER:
A corporate director, trustee or officer may
be held personally liable with the
corporation under the following (Delpher Trades Corp v
circumstances: SCRA
When he assents to a patently unlawful act existence
of the corporation;
When he acts in bad faith or with gross
negligence in directing the affairs of the
corporation, or in conflict with the
 Page 39 of 103
When he is made, by a specific provision of
law, to personally answer for the
corporate action. (Tramat Mercantile Inc
v CA GR 111008, Nov 7, 94 238s14)
Liabilities; Stockholders, Directors, Officers (1997)
A, B, and C are shareholders of XYZ Co. A
has an unpaid subscription of P100th, B’s
shares are fully paid up, while C owns only
nominal but fully paid up shares and is a
director and officer. XYZ becomes
insolvent, and it is established that the
insolvency is the result of fraudulent
practices within the company. If you were
counsel for a creditor of XYZ, would you
advise legal action against A, B, and C?
SUGGESTED ANSWER:
As to A—an action can be brought against
A for P100th which is the amount of unpaid
subscription. Since the corporation is
insolvent, the limit of the stockholder’s
liability to the creditor is only up to the
extent of his unpaid subscription.
As to B—there is no cause of action against
B because he has already fully paid for his
subscription. As stated earlier, the limit of
the stockholder’s liability to the creditor of
the corporation, when the latter becomes
insolvent, is the extent of his subscription.
As to C—an action can be filed against C,
not as stockholder because he has already
paid up the shares, but in his capacity as
director and officer because of the
corporation’s insolvency being the result of
fraudulent practices within the company.
Directors are liable jointly and severally for
Version 1990-2003 Arranged by SULAW Class 2005
damages sustained by the corporation,
stockholders or other persons resulting
from gross negligence or bad faith in
directing the affairs of the corporation.
(Sec 31 Corp Code)
Piercing the Corporate Veil (1994)
Mr. Pablo, a rich merchant in his early
forties, was a defendant in a lawsuit which
could subject him to substantial damages.
A year before the court rendered judgment,
Pablo sought his lawyer’s advice on how to
plan his estate to avoid taxes. His lawyer
suggested that he should form a
corporation with himself, his wife and his
children (all students and still unemployed)
as stockholders and then transfer all his
assets and liabilities to this corporation. Mr
Pablo followed the recommendation of his
lawyer. 1 year later, the court rendered
judgment against Pablo and the plaintiff
sought to enforce this judgment. The
sheriff, however, could not locate any
property in the name of Pablo and therefore
returned the writ of execution unsatisfied.
What remedy, if any, is available to the
plaintiff?
SUGGESTED ANSWER:
The plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction which can be invoked when a corporation is formed or used
in avoiding a just obligation. While it is true that a family corporation may be organized to pursue an estate tax; planning, which is not per se
illegal or unlawful
the factual settings, however,
indicate the
a lawsuit that could subject Pablo to a
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
substantial amount of damages. It would
thus be difficult for Pablo to convincingly
assert that the incorporation of the family
corporation was intended merely as a case
of “estate tax planning.” (Tan Boon Bee v
Jarencio 41337 30June88)
Piercing the Corporate Veil (1996)
E Co sold its assets to M Inc after
complying with the requirements of the
Bulk Sales Law. Subsequently, one of the
creditors of E Co tried to collect the
amount due it, but found out that E Co had
no more assets left. The creditor then sued
M Inc on the theory that M Inc is a mere
Corporation (CIR v Norton & Harrison Co 11 S
714 (1964))
Piercing the Corporate Veil (2004)
How does one pierce the veil of corporate
fiction?
SUGGESTED ANSWER:
The veil of corporate fiction may be pierced
by proving in court that the notion of legal
entity is being used to defeat public
convenience, justify wrong, protect fraud,
or defend crime or the entity is just an
instrument or alter ego or adjunct of
another entity or person.
Piercing the Corporate Veil (2006)
407H407H

alter ego of E Co.

Will the suit prosper? Explain.
SUGGESTED ANSWER:
The suit will not prosper. The sale by E Co
of its assets to M Inc does not result in the
transfer of the liabilities of the latter to,
nor in the assumption thereof by, the
former. The facts given do not indicate that
such transfer or assumption took place or
was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co
of its assets is a sale of its property. It does
not involve the sale of the shares of stock
of the corporation belonging to its
stockholders. There is therefore no merger
or consolidation that took place. E Co
continues to exist and remains liable to the
creditor.

Piercing the Corporate Veil (2001)

Plaintiffs filed a collection action against X
Corporation. Upon execution of the court’s
decision, X Corporation was found to be
without assets. Thereafter plaintiffs filed an
action against its present and past
stockholder Y Corporation which owned
substantially all of the stocks of X
Corporation. The two corporations have the
same board of directors and Y Corporation
financed the operations of X Corporation.
May Y Corporation be held liable for the
debts of X Corporation? Why? (5%)
SUGGESTED ANSWER:
Yes, Y Corporation may be held liable for
the debts of X Corporation. The doctrine of
piercing the veil of corporation fiction
applies to this case. The two corporations
have the same board of directors and Y
Corporation owned substantially all of the
stocks of X Corporation, which facts justify
the conclusion that the latter is merely an
extension of the personality of the former,
and that the former controls the policies of
the latter. Added to this is the fact that Y
Corporation controls the finances of X
Corporation which is merely an adjunct,
business conduit or alter ego of Y
 Page 40 of 103
What is the doctrine of "piercing the veil of
corporate entity?" Explain.
SUGGESTED ANSWER:
The doctrine of "piercing the veil of
corporate entity," is the doctrine that
allows the courts to look behind the
separate juridical personality of a
corporation and treat the corporation as an
association of persons and thereby make
the individual actors personally liable for
corporate liabilities. The fiction of
corporate identity is disregarded and the
individuals comprising it can be treated
identically. The stockholders can be held
directly liable for corporate obligations,
even to the extent of their personal assets
(Concept Builders v. NLRC, Marabe, et al,
G.R. No. 108734, May 29, 1996).
To what circumstances
doctrine apply? (2.5%)
The doctrine is applicable when the notion
of legal entity is used to —
Defeat public convenience.
Justify wrong.
Protect fraud.
Defend crime (PNB v. Andrada Electric, G.R.
No. 142936, April 17, 2002).
Shield a violation of the proscription
against forum shopping (First
Philippine International Bank v. Court of
Appeals, G.R. No. 137537, January 24,
1996).
Work inequities among members of the
corporation internally, involving no
rights of the public or third persons
(Secosa v. Heirs ofErwin Suarez
Francisco, G.R. No. 156104, June 29,
2004).
Version 1990-2003 Arranged by SULAW Class 2005
Evade the lawful obligations of the
corporation like a judgment credit
(Sibagat Timber Corp. v. Garcia, G.R. No.
112546, December 11, 1992).
Escape liability arising from a debt (Arcilla
v. Court of Appeals, G.R. No. 88113,
October 23, 1992).
Avoid inclusion of corporate assets as part
of the estate of the decedent (Cease v.
Court of Appeals, G.R. No. L-35861,
October 18, 1979).
To promote or to shield unfair
objectives
(Villanueva v. Adre, G.R. No. 80863, April
27, 1989).
Pre-emptive Right (2001)
Suppose that X Corporation has already
issued the 1000 originally authorized
shares of the corporation so that its BOD
and stockholders wish to increase X’s
will the authorized capital stock. After complying
with the requirements of the law on
increase of capital stock, X issued an
additional 1000 shares of the same value.
Assume that the stockholder A presently
holds 200 out of the 1000 original shares.
Would A have a pre-emptive right to 200 of
the new issue of 1000 shares? Why? (3%)
When should stockholder A exercise the
pre-emptive
right? (2%)
SUGGESTED ANSWER:
Yes, A would have a pre-emptive right to 200
of the new issue of 1000 shares. A is a
stockholder of record holding 200 shares in X
Corpo. According to the Corp Code, each
stockholder has the pre-emptive right to all
issues of shares made by the corporation in
proportion to
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) b. Yes, Mr. X has preemptive right over the
the number of shares he holds on record in 50,000 preferred shares because they were
the corporation. not offered before by the corporation for
subscription.
Pre-emptive right must be exercised in
SUGGESTED ANSWER:
accordance with the Articles of
Incorporation or the By-Laws. When the c. The shares will be offered to existing
stockholders, who are entitled to
Articles of Incorporation and the By-Laws
preemptive right, at a price fixed by the
are silent, the BOD may fix a reasonable
BOD, which shall not be less than the par
time within which the stockholders may
value of such shares.
exercise the right.

Pre-Emptive Right vs. Appraisal Right (1999)

ABC Corporation has an authorized capital
stock of P1M divided into 50,000 common
shares and 50,000 preferred shares. At its
inception, the Corporation offered for
subscription all the common shares.
However, only 40,000 shares were
subscribed. Recently, the directors thought
of raising additional capital and decided to
offer to the public all the authorized shares
of the Corporation at their market value.
Would Mr. X, a stockholder holding 4,000
shares, have pre-emptive rights to the
remaining 10,000 shares? (2%)
Would Mr. X have pre-emptive rights to the
50,000 preferred shares? (2%)
Assuming that the existing stockholders
are entitled to pre-emptive rights, at
what price will the shares be offered?
(2%)
Assuming a stockholder disagrees with the
issuance of new shares and the pricing
for the shares, may the stockholder
invoke his appraisal rights and demand
payment for his shareholdings? (2%)
SUGGESTED ANSWER:
a. Yes. Mr. X, a stockholder holding 4,000
shares, has pre-emptive right to the
remaining 10,000 shares. All stockholders
of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective
shareholdings.
ALTERNATIVE ANSWER.
a. No, Mr X does not have pre-emptive
right over the remaining 10,000 shares
because these shares have already been
offered at incorporation and he chose not
to subscribe to them. He, therefore, has
waived his right thereto and the
corporation may offer them to anyone.

SUGGESTED ANSWER:
b. Yes. Mr. X would have pre-emptive rights
to the 50,000 preferred shares. All
stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class,
in proportion to their respective
shareholdings.
ALTERNATIVE ANSWER:
 Page 41 of 103
SUGGESTED ANSWER:
d. No, the stockholder may not exercise
appraisal right because the matter that he
dissented from is not one of those where
right of appraisal is available under the
corporation code.
SEC; Jurisdiction; Transferred Jurisdiction (1996)
What is the original and exclusive
jurisdiction of the SEC?
SUGGESTED ANSWER:
The SEC has original and exclusive
jurisdiction over cases involving:
Devices or schemes amounting to fraud
and misrepresentation;
Controversies arising out of intra-
corporate or partnership relations;
Controversies in the election or
appointment of directors, officers, etc;
Petitions to be declared in a state of
suspension of payments (Sec 5 PD 902-
A)
TAKE NOTE: The RTC has jurisdiction over the
cases which involves intra-corporate
controversy. As of 2006, the applicable rule
is that there is a TRANSFERRED
JURISDICTION under Sec. 5.2 of the SRC,
the Commission’s jurisdiction over all cases
enumerated under PD 902-A sec. 5 has
been transferred to the Courts of general
jurisdiction or the appropriate Regional
Trial Court.
Version 1990-2003 Arranged by SULAW Class 2005
Stockholder; Delinquent; Unpaid Subscription (1997)
The BOD of a corporation, by a vote of ten
in favor of one against, declared due and
payable all unpaid subscription to the
capital stock. The lone dissenting director
failed to pay on due date, i.e., 19 Sept
1997, his unpaid subscription. Other than
the shares wherein he was unable to
complete payment, he did not own any
share in the corporation. On 23 Sept 1997,
he was informed by the BOD that, unless
due payment is meanwhile received, he:
could no longer serve as a director of the
corporation forthwith:
would not be entitled to the cash and stock
dividends which were declared and
payable on 24 Sep 1997; and
could not vote in the stockholders meeting
scheduled to take place on 26 Sept
1997.
Was the action of the BOD on each of the
foregoing matters valid?
SUGGESTED ANSWER:
No. The period of 30 days within which the
stockholder can pay the unpaid
subscription had not yet expired.
No. The delinquency did not deprive the
stockholder of his right to receive dividends
declared. However, the cash dividend
declared may be applied by the corporation
to the unpaid subscription. (Sec 71 Corp
Code)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) stock. Is X’s contention legally tenable.
No. The period of 30 days within which the Why? (5%)
SUGGESTED ANSWER:
stockholder can pay the unpaid
No. Stockholders’ approval is necessary
subscription had not yet expired.
only for the removal of the members of the
Stockholders: Preemptive Right (2004) BOD. For the removal of a corporate officer
The Board of Directors of ABC, Inc., a or employee, the vote of the BOD is
domestic corporation, passed a resolution sufficient for the purpose.
authorizing additional issuance of shares of Stockholders; Removal; Minority Director (1991)
stocks without notice nor approval of the Assuming that the minority block of the
stockholders. DX, a stockholder, objected
XYZ Corporation is able to elect only 1
to the issuance, contending that it violated
director and therefore,
his right of pre-emption to the unissued
shares. Is his contention tenable? Explain
briefly. (5%)
SUGGESTED ANSWER:
Yes. DX's contention is tenable. Under
Section 39 of the Corporation Code, all
stockholders of ABC, Inc. enjoy preemptive
right to subscribe to all issues of shares of
any class, including the reissuance of
treasury shares in proportion to their
respective shareholdings.

Stockholders; Appraisal Right (2003)

In what instances may the right of
appraisal be availed of under the
Corporation Code?
SUGGESTED ANSWER:
SECTION 81. Instances of Appraisal Right.
— Any stockholder of a corporation shall
have the right to dissent and demand
payment of the fair value of his shares in
the following instances:
In case any amendment to the articles of
incorporation has the effect of changing
or restricting the rights of any
stockholders or class of shares, or of
authorizing preferences in any respect
superior to those of outstanding shares
of any class, or of extending or
shortening the term of corporate
existence;
In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition
of all or substantially all of the
corporate property and assets as
provided in the Code; and
In case of merger or consolidation. (n)

Stockholders; Removal of Officers & BOD (2001)

In 1999, Corporation A passed a board
resolution removing X from his position as
manager of said corporation. The by-laws
of A corporation provides that the officers
are the president, vice-president, treasurer
and secretary. Upon complaint filed with
the SEC, it held that a manager could be
removed by mere resolution of the board of
directors. On motion for reconsideration, X
alleged that he could only be removed by
the affirmative vote of the stockholders
representing 2/3 of the outstanding capital
 Page 42 of 103
the majority stockholders can always
muster a 2/3 vote, would you allow the
majority stockholders to remove the one
director representing the minority?
SUGGESTED ANSWER:
No. I will not allow the majority
stockholders to remove the director. While
the stockholders may, by a 2/3 vote, remove
a director, the law also provides, however,
that his right may not, without just cause,
be exercised so as to deprive the minority
of representation in the BOD (Sec 28 Corp
code; Gov’t vs Agoncillo 50p348)
Stockholders; Rights (1996)
What are the rights of a stockholder?
SUGGESTED ANSWER:
The rights of a stockholder are as follows:
The right to vote, including the right to
appoint a proxy;
The right to share in the profits of the
corporation, including the right to
declare stock dividends;
The right to a proportionate share of the
assets of the corporation upon
liquidation;
The right of appraisal;
The pre-emptive right to shares;
The right to inspect corporate books and
records;
The right to elect directors;
Such other rights as may contractually be
granted to the stockholders by the
corporation or by special law.
Version 1990-2003 Arranged by SULAW Class 2005
Stockholders; Voting Power of Stockholders (1990)
Mercy subscribed to 1,000 shares of stock
of Rosario Corporation. She paid 25% of
said subscription. During the stockholders’
meeting, can Mercy vote all her subscribed
shares? Explain.
SUGGESTED ANSWER:
Yes, Mercy can vote all her subscribed
shares. Section 72 of the Corporation Code
states that holders of subscribed shares not
fully paid which are not delinquent shall
have all the rights of a stockholder.
Stocks; Increase of Capital Stock (2001)
Suppose X Corporation has an authorized
capital stock of P1M divided into 100,000
shares of stock with par value of P10 each.
Give two ways whereby said authorized
capital stock may be increased to about
P1.5M. (3%)
Give three practical reasons for a
corporation to
increase its capital stock (2%)
SUGGESTED ANSWER:
Two ways of increasing the Authorized
Capital Stock of X corporation to P1.5M
are:
Increase the number of shares from
100,000 to 150,000 shares with the
same par value of P10.00 each.
Increase par value of 100,000 shares to
P15.00 each.
Three practical reasons for a corporation to
increase its capital stock are:
to generate more working capital;
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
to have more shares with which to pay
for the acquisition of more assets
like acquisition of company car,
stocks, house, machinery or
business; and
to have extra share with which to cover
or meet the requirement for
declaration of stock dividend.
Yes. In the case where the certificate of
stock was lost or stole from A, A has a right
to claim the certificate of stock from the
thief who has no right or title to the same.
“One who has lost any movable or has been
unlawfully deprived thereof, may recover it
from the person in possession of the same.”
(Art 559 NCC)

Stocks; Sale, Transfer of Certificates of Stock (1996) Stocks; Sale, Transfer of Certificates of Stock (2004)
Arnold has in his name 1,000 shares of the Four months before his death, PX assigned
capital stock of ABC Co as evidenced by a 100 shares of stock registered in his name
stock certificate. Arnold delivered the stock in favor of his wife and his
certificate to Steven who now claims to be
the real owner of the shares, having paid
for Arnold’s subscription. ABC refused to
recognize and register Steven’s ownership.
Is the refusal justified? Explain.
SUGGESTED ANSWER:
ABC’s refusal to recognize and register
Steven’s ownership is justified. The facts
indicate that the stock certificate for the
1,000 shares in question is in the name of
Arnold. Although the certificate was
delivered by Arnold to Steven, the facts do
not indicate that the certificate was duly
endorsed by Arnold at the time it was
delivered to Steven or that the procedure
for the effective transfer of shares of stock
set out in the by-laws of ABC Co, if any, was
observed. Since the certificate was not
endorsed in favor of Steven (or anybody
else for that matter), the only conclusion
could be no other than that the shares in
question still belong to Arnold. (Razon v IAC
GR 74306 Mar 16,92 207s234)

Stocks; Sale, Transfer of Certificates of Stock (2001)

A is the registered owner of Stock
Certificate No. 000011. He entrusted the
possession of said certificate to his best
friend B who borrowed the said endorsed
certificate to support B’s application for
passport (or for a purpose other than
transfer). But B sold the certificate to X, a
bona fide purchaser who relied on the
endorsed certificates and believed him to
be the owner thereof.
Can A claim the shares of stock from X?
Explain (3%)
Would your answer be the same if A lost the
stock
certificate in question or if it was stolen
from him? (2%)
SUGGESTED ANSWER:
No. Assuming that the shares were already
transferred to B, A cannot claim the shares
of stock from X. The certificate of stock
covering said shares have been duly
endorsed by A and entrusted by him to B.
By his said acts, A is now estopped from
claiming said shares from X, a bona fide
purchaser who relied on the endorsement
by A of the certificate of stock.
 Page 43 of 103
children. They then brought the deed of
assignment to the proper corporate officers
for registration with the request for the
transfer in the corporation's stock and
transfer books of the assigned shares, the
cancellation of the stock certificates in PX's
name, and the issuance of new stock
certificates in the names of his wife and his
children as the new owners. The officers of
the Corporation denied the request on the
ground that another heir is contesting the
validity of the deed of assignment. May the
Corporation be compelled by mandamus to
register the shares of stock in the names of
the assignees? Explain briefly. (5%)
SUGGESTED ANSWER:
Yes. The corporation may be compelled by
mandamus to register the shares of stock in
the name of the assignee. The only legal
limitation imposed by Section 63 of the
Corporation Code is when the Corporation
holds any unpaid claim against the shares
intended to be transferred. The alleged
claim of another heir of PX is not sufficient
to deny the issuance of new certificates of
stock to his wife and children. It would be
otherwise if the transferee's title to the
shares has no prima facie validity or is
uncertain.
Trust Fund Doctrine (1992)
A Corporation executed a promissory note
binding itself to pay its President/Director,
who had tendered his resignation, a certain
sum in payment of the latter’s shares and
interests in the company. The corporation
defaulted in paying the full amount so that
Version 1990-2003 Arranged by SULAW Class 2005
said former President filed suit for
collection of the balance before the SEC.
Under what conditions is a stock
corporation empowered to acquire its own
shares?
Is the arrangement between the
corporation and its President covered by
the trust fund doctrine? Explain
your answers briefly.
SUGGESTED ANSWER:
A stock corporation may only acquire its
own shares of stock if the trust fund
doctrine is not impaired. This is to say, for
instance, that it may purchase its own
shares of stock by utilizing merely its
surplus profits over and above the
subscribed capital of the corporation.
ALTERNATIVE ANSWER:
(an answer enumerating the instances or
cases under the Corporation Code where
the Corp allows the acquisition of shares
such as in the stockholder’s exercise of
appraisal right, failure of bids in the sale of
delinquent shares, etc.)
SUGGESTED ANSWER:
The arrangement between the corporation
and its President to the extent that it calls
for the payment of the latter’s shares is
covered by the trust fund doctrine. The
only exceptions from the trust fund
doctrine are the redemption of redeemable
shares and, in the case of close
corporation, when there should be a
deadlock and the SEC orders the payment
of the appraised value of a stockholder’s
share.
Trust Fund Doctrine; Intra-Corporate Controversy
(1991)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
On December 6, 1988, A, an incorporator
and the General Manager of the Paje Multi
Farms Co, resigned as GM and sold to the
corporation his shares of stocks in the
corporation for P300th, the book value
thereof, payable as follows: a) P100th as
down payment; b) P100th on or before 31
July1989; and c) the remaining balance of
P100th on or before 30 Sep 1989. A
promissory note, with an acceleration
clause, was executed by the corporation for
the unpaid balance.
be deemed automatically secured by that
mortgage until after a new chattel
mortgage or an addendum to the original
chattel mortgage is executed to cover the
obligation after it has been actually
incurred. Accordingly, unless such
supplements are made, the chattel
mortgage in the problem given would be
deemed to secure only the loan of P20,000
(Sec 5 Act 1505; Belgian Catholic Missionaries
v Magallanes Press 49p647)

The corporation failed to pay the first

installment on due date. A then sued Paje
on the promissory note in the RTC.
Does the court have jurisdiction over the
case?
Would your answer be the same if A instead
sold his shares to his friend Mabel and the
latter filed a case with the RTC against the
corporation to compel it to register the sale
and to issue new certificates of stock in her
name?
SUGGESTED ANSWER:
The RTC has jurisdiction over the case. The
SC said that a corporation may only buy its
own shares of stock if it has enough
surplus profits therefore.

My answer would be the same. An action to

compel a corporation to register a sale and
to issue new certificates of stock is itself an
intra-corporate matter that exclusively lies
with the RTC.

TAKE NOTE: The RTC has jurisdiction over the

cases which involves intra-corporate
controversy. As of 2006, the applicable rule
is that there is a TRANSFERRED
JURISDICTION under Sec. 5.2 of the SRC,
the Commission’s jurisdiction over all cases
enumerated under PD 902-A sec. 5 has
been transferred to the Courts of general
jurisdiction or the appropriate Regional
Trial Court.

Credit Transactions
Chattel Mortgage vs. After-Incurred Obligations (1991)
To secure the payment of an earlier loan of
P20,000 as well as subsequent loans which
her friend Noreen, would extend to her,
Karen executed in favor of Noreen a
chattel mortgage over her (Karen) car. Is
the mortgage valid?
SUGGESTED ANSWER:
A chattel mortgage cannot effectively
secure after-incurred obligations. While a
stipulation to include after-incurred
obligations in a chattel mortgage is itself
not invalid, the obligation cannot, however,
 Page 44 of 103
Chattel Mortgage vs. After-Incurred Obligations (1999)
On December 1, 1996, Borrower executed
a chattel mortgage in favor of the Bank to
secure a loan of P3M. In due time the loan
was paid.
On December 1, 1997, Borrower obtained
another loan for P2M which the Bank
granted under the same security as that
which secured the first loan.
For the second loan, Borrower merely
delivered a promissory note; no new
chattel mortgage agreement was executed
as the parties relied on a provision in the
1996 chattel mortgage agreement which
included future debts as among the
obligations secured by the mortgage. The
provision reads:
“In case the Mortgagor executes
subsequent promissory note or notes
either as a renewal, as an extension, or as
a new loan, this mortgage shall also stand
as security for the payment of said
promissory note or notes without
necessity of executing a new contract and
this mortgage shall have the same force
and effect as if the said promissory note
or notes were existing on date hereof.”
As Borrower failed to pay the second loan,
the Bank proceeded to foreclose the
Chattel Mortgage.Borrower sued the Bank
claiming that the mortgage was no longer
in force. Borrower claimed that a fresh
chattel mortgage should have been
executed when the second loan was
granted.
Version 1990-2003 Arranged by SULAW Class 2005
Decide the case and ratiocinate. (4%)
Suppose the chattel mortgage was not
registered, would its validity and
effectiveness be impaired?
Explain. (4%)
SUGGESTED ANSWER:
a. The foreclosure of the chattel mortgage
regarding the second loan is not valid. A
chattel mortgage cannot validly secure
after incurred obligations. The affidavit of
good faith required under the chattel
mortgage law expressly provides that “the
foregoing mortgage is made for securing
the obligation specified in the conditions
hereof, and for no other purpose.” The
after-incurred obligation not being
specified in the affidavit, is not secured by
mortgage.
b. Yes. The chattel mortgage is not valid as
against any person, except the mortgagor,
his executors and administrators.
Chattel Mortgage; Foreclosure (1997)
Ritz bought a new car on installments
which provided for an acceleration clause
in the event of default. To secure payment
of the unpaid installments, as and when
due, he constituted two chattel mortgages,
i.e., one over his very old car and the other
covering the new car that he had just
bought as aforesaid, on installments. After
Ritz defaulted on three installments, the
seller-mortgagee foreclosed on the old car.
The proceeds of the foreclosure were not
enough to satisfy the due obligation; hence,
he similarly sought to foreclose on the new
car.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Would the seller-mortgagee be legally
justified in foreclosing on this second
chattel mortgage?
SUGGESTED ANSWER:
No. The two mortgages were executed to
secure the payment of the unpaid
installments for the purchase of a new car.
When the mortgage on the old car was
foreclosed, the seller-mortgagee is deemed
to have renounced all other rights. A
foreclosure of additional property, that is,
the new car covered by the second
mortgage would be a nullity.
vest that ownership in the buyer. The
execution of the chattel mortgage by the
buyer in favor of the seller, in fact, can
demonstrate the vesting of such ownership
to the mortgagor.
Jimbo was referring to the Register of
Deeds of Bulacan where Zonee was a
resident. The Chattel Mortgage Law
requires the registration to be made in the
Office of the Register of Deeds of the
province where the mortgagor resides and
also in which the property is

Chattel Mortgage; Ownership of Thing Mortgaged

(1990) Zonee, who lives in Bulacan, bought a
1988 model Toyota Corolla sedan on July 1,
1989 from Anadelaida, who lives in Quezon
City, for P300th, paying P150th as
downpayment and promising to pay the
balance in 3 equal quarterly installments
beginning October 1, 1989. Anadelaida
executed a deed of sale of the vehicle in
favor of Zonee and, to secure the unpaid
balance of the purchase price, had Zonee
execute a deed of chattel mortgage on the
vehicle in Anadelaida’s favor.

Ten days after the execution of the

abovementioned documents, Zonee had the
car transferred and registered in her name.
Contemporaneously, Anadelaida had the
chattel mortgage on the car registered in
the Chattel Mortgage Registry of the Office
of the Register of Deeds of Quezon City.

In Sep 1989, Zonee sold the sedan to Jimbo

without telling the latter that the car was
mortgaged to Anadelaida. When Zonee
failed to pay the first installment on
October 1, 1989, Anadelaida went to see
Zonee and discovered that the latter had
sold the car to Jimbo.
Jimbo refused to give up the car on the
ground that the chattel mortgage executed
by Zonee in favor of Anadelaida is not valid
because it was executed before the car was
registered in Zonee’s name, i.e., before
Zonee became the registered owner of the
car. Is the said argument meritorious?
Explain your answer.

Jimbo also argued that even if the chattel

mortgage is valid, it cannot affect him
because it was not properly registered with
the government offices where it should be
registered. What government office is Jimbo
referring to?

SUGGESTED ANSWER:
Jimbo’s argument is not meritorious. Zonee
became the owner of the property upon
delivery; registration is not essential to
 Page 45 of 103
situated as well as the LTO where the
vehicle is registered. (Sec 4 Chattel
Mortgage Law)
Credit Transactions (1999)
Various buyers of lots in a subdivision
brought actions to compel either or both
the developer and the bank to lease and
deliver free and clear the titles to their
respective lots.
The problem arose because
notwithstanding prior sales mostly on
installments – made by the developer to
buyers, developer had mortgaged the
whole subdivision to a commercial bank.
The mortgage was duly executed and
registered with the appropriate
governmental agencies. However, as the lot
buyers were completely unaware of the
mortgage lien of the bank, they religiously
paid the installments due under their sale
contracts.
As the developer failed to pay its loan, the
mortgage was foreclosed and the whole
subdivision was acquired by the bank as
the highest bidder.
May the bank dispossess prior purchasers
of individual lots or, alternatively,
require them to pay again for the paid
lots? Discuss (3%)
What are the rights of the bank vis-à-vis
those buyers with remaining unpaid
installments? Discuss. (3%)
Recommendation: Since the subject
matter of these two (2) questions is not
included within the scope of the Bar
Version 1990-2003 Arranged by SULAW Class 2005
Questions in Mercantile Law, as it is
within Civil Law, it is suggested that
whatever answer is given by the
examinee, or the lack of answer should
be given full credit. If the examinee
gives a good answer, he should be given
additional credit.
SUGGESTED ANSWER:
a. No. The bank may not dispossess the
prior purchasers of the individual lots,
much less require them to pay for the said
lots. The bank has to respect the rights of
the prior purchasers of the individual lots.
The purchasers have the option to pay the
installments of the mortgagee.
b. The bank has to respect the rights of the
buyers with remaining unpaid installments.
The purchaser has the option to pay the
installments to the mortgagee who should
apply the payments to the mortgage
indebtedness.
Mortgage (1999)
Debtor purchased a parcel of land from a
realty company payable in five yearly
installments. Under the contract of sale,
title to the lot would be transferred upon
full payment of the purchase price.
But even before full payment, debtor
constructed a house on the lot. Sometime
thereafter, debtor mortgaged the house to
secure his obligation arising from the
issuance of a bond needed in the conduct of
his business. The mortgage was duly
registered with the proper chattel
mortgage registry.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Five years later after completing payment
of the purchase price, debtor obtained title
to the lot. And even as the chattel
mortgage on the house was still subsisting,
debtor mortgaged to a bank the lot and
improvement thereon to secure a loan. This
real estate mortgage was duly registered
and annotated at the back of the title.
Due to business reverses, debtor failed to
pay his creditors. The chattel mortgage
was foreclosed when the debtor failed to
reimburse the surety company for
payments made on the bond. In the
foreclosure sale, the surety company was
awarded the house as the highest bidder.
rights of third parties such as the lending
investor despite registration of the chattel
mortgage.
No. The chattel mortgage over the house
which was foreclosed did not affect the
rights of third parties like the lending
investor. Since the third parties are not
bound by the chattel mortgage, they are
not also bound by any enforcement of its
provisions. The foreclosure of such chattel
mortgage did not bolster or add anything
to the position of the surety company.
Mortgage vs. Levy (2003)

Only after the foreclosure sale did the

surety company learn of the real estate
mortgage in favor of the lending investor
on the lot and the improvement thereon.
Immediately, it filed a complaint praying
for the exclusion of the house from the real
estate mortgage. It was submitted that as
the chattel mortgage was executed and
registered ahead, it was superior to the
real estate mortgage.

On the suggestion that a chattel mortgage

on a house- a real property- was a nullity,
the surety company countered that when
the chattel mortgage was executed, debtor
was not yet the owner of the lot on which
the house was built. Accordingly, the house
was a personal property and a proper
subject of a chattel mortgage.
a. Discuss the validity of the position taken
by the surety company. (3%)
b. Who has a better claim to the house, the
surety company or the lending investor?
Explain (3%)
c. Would the position of the surety
company be bolstered by the fact that it
acquired title in a foreclosure sale
conducted by the Provincial Sheriff.
Explain (3%)
SUGGESTED ANSWER:
The house is always a real property even
though it was constructed on a land not
belonging to the builder. However, the
parties may treat it as a personal property
and constitute a chattel mortgage thereon.
Such mortgage shall be valid and binding
but only on the parties. It will not bind or
affect third parties.

The lending investor has a better claim to

the house. The real estate mortgage
covering the house and lot was duly
registered and binds the parties and third
persons. On the other hand, the chattel
mortgage on the house securing the credit
of the surety company did not affect the
 Page 46 of 103
To pay for her loan obtained from Stela,
Liza constituted in Stela’s favor a chattel
mortgage over an electric generator. Cecil,
a creditor of Liza, levied on attachment the
generator. Stela filed a third party claim.
Cecil opposed the claim. Rule on their
conflicting claims.
SUGGESTED ANSWER:
Mortgage; Extrajudicial Foreclose (2006)
A real estate mortgage may be foreclosed
judicially or extrajudicially. In what
instance may a mortgagee extrajudicially
foreclose a real estate mortgage? (5%)
SUGGESTED ANSWER:
When a sale is made under a special power
inserted or attached to any real-estate
mortgage, thereafter given as security for
the payment of money or the fulfillment of
any other obligation, then the mortgagee
may extrajudicially foreclose the real estate
mortgage (Sec. 1, Act No. 3135, as
amended).
Mortgage; Foreclosure (2003)
May the sale at public auction by a bank of
a property mortgaged to it be nullified
because the price was extremely low?
Why?
SUGGESTED ANSWER:
Mortgage; Foreclosure (2003)
Because of failure of Janette and Jeanne to
pay their loan to X Bank, the latter
foreclosed on the mortgage constituted on
their property which was put up by them as
security for the payment of the loan. The
price paid for the property at the
foreclosure sale was not enough to
Version 1990-2003 Arranged by SULAW Class 2005
liquidate the obligation. The bank sued for
deficiency. In their answer, Janette and
Jeanne did not deny the existence of the
loan nor the fact of their default. They,
however, interposed the defenses that the
price at the auction was extremely low and
that their loan, despite the loan documents,
was a long-term loan which had not yet
matured. If you were the judge, how would
you rule on the case? Why? (6%)
SUGGESTED ANSWER:
Mortgage; Foreclosure of Improvements (1999)
Borrower obtained a loan against the
security of a mortgage on a parcel of land.
While the mortgage was subsisting,
borrower leased for fifty years the
mortgaged property to Land Development
Company (LDC). The mortgagee was duly
advised of the lease. Thereafter, LDC
constructed on the mortgaged property an
office condominium.
Borrower defaulted on his loan and
mortgagee foreclosed the mortgage. At the
foreclosure sale, the mortgagee was
awarded the property as the highest
bidder. The corresponding Certificate of
Sale was executed and after the lapse of
one year, title was consolidated in the
name of mortgagee.
Mortgagee then applied with the RTC for
the issuance of a writ of possession not
only over the land but also the
condominium building. The mortgagee
contended that the mortgage included all
accessions, improvements and accessories
found on the mortgaged property.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
LDC countered that it had built on the
mortgaged property with the prior
knowledge of mortgagee which had
received formal notice of the lease.
How would you resolve the dispute
between the mortgagee and LDC? (3%)
Is the mortgagee entitled to the lease
rentals due from LDC under the lease
agreement? (3%)
Recommendation: Since the subject
matter of these two
questions is not included within the
scope of the Bar Questions in
Mercantile Law, as it is within Civil Law,
it is suggested that whatever answer is
given by the examinee, or the lack of
answer should be given full credit. If the
examinee gives a good answer, he
should be given additional credit.
a. Assuming that the office condominium
was duly constituted under the
Condominium Law, before LDC could
validly constitute the same as a
condominium, it should cause to be
recorded in the register of deeds of the
province or city where the land is situated
an enabling or master deed showing,
among others, a certificate of the
registered owner and of all registered
holders of any lien or encumbrance on the
property that they consent to the
registration of the deed. (Sec 4. RA 4726).
If the mortgagee gave its consent thereto,
then LDC should prevail. If no consent was
given, the condominium was included in
the mortgage.
SUGGESTED ANSWER:

SUGGESTED ANSWER:
a. The mortgagee has a better right than
LDC. The mortgage extends to the
improvements introduced on the land, with
the declarations, amplifications, and
limitations established by law, whether the
estate remains in the possession of the
mortgagor or passes into the hands of a
third person (Art 2127 NCC). The notice
given by LDC to the mortgagee was not
enough to remove the building from
coverage of the mortgage considering that
the building was built after the mortgage
was constituted and the notice was only as
regards the lease and not as to the
construction of the building. Since the
mortgagee was informed of the lease and
did not object to it, the mortgagee became
bound by the terms of the lease when it
acquired the property as the highest
bidder. Hence, the mortgagee steps into
the shoes of the mortgagor and acquires
the rights of the lessor under Art 1768 of
the NCC. This provision gives the lessor the
right to appropriate the condominium
building but after paying the lessee half of
the value of the building at that time.
Should the lessor refuse to reimburse said
amount, the lessee may remove the
improvement even though the land will
suffer damage thereby.
1st Alternative Answer:
a. The mortgagee has a better right to the
building. Under Art 2127 of the NCC, the
mortgage extends to all improvements on
the mortgaged property regardless of who
and when the improvements were
introduced. LDC cannot complain
otherwise, because it knew that the
property it was leasing was mortgaged
when it built the condominium.
2nd alternative Answer:
 Page 47 of 103
b. The lease rentals belong to the
mortgagor. However, the mortgage extends
to rentals not yet received when the
obligation becomes due and the mortgagee
may ran after the said rentals for the
payment of the mortgage debt.
Mortgage; Foreclosure; Effect of mere taking by
creditor-mortgagor of property (1992)
X & Co obtained a loan from a local bank in
the amount of P500th, mortgaging as
security therefore its real property.
Subsequently, the company applied with
the same bank for a Letter of Credit (LC)
for $200th in favor of a foreign bank to
cover the importation of machinery. To
guarantee payment of the obligation under
the LC, the company and its President and
Treasurer executed a surety agreement in
the local bank’s favor.
The machinery arrived and was released to
the company under a trust receipt
agreement. As the company defaulted in
the payment of its obligations, the bank
took possession of the imported machinery.
At the same time, it sought to foreclose the
mortgaged property and to hold the
company as well as its President and
Treasurer, liable under the Surety
Agreement.
Did the taking of possession of the
machinery by the bank result in the 1) full
payment of the obligations of the company
Version 1990-2003 Arranged by SULAW Class 2005
and its officers, and 2) foreclosure of the
mortgage?
SUGGESTED ANSWER:
The taking of possession of the machinery
by the bank did not result in full payment of
the obligations owing from the company
and its officers. The taking of such
possession must be considered merely as a
measure in order to protect or further
safeguard the bank’s security interest.
Dacion en pago can only be considered as
having taken place when a creditor accepts
and appropriates the ownership of the
goods in payment of a due obligation.
(PNB v Pineda 197 s 1)
The mere taking of possession of
mortgaged assets does not amount to
foreclosure. Foreclosure requires a sale at
public auction. The foreclosure, therefore,
has not as yet been effected.
Mortgage; Redemption Period; Foreclosed
Property (2002)
Primetime Corporation (the Borrower)
obtained a P10 Million, five-year term loan
from Universal Bank (the Bank) in 1996. As
security for the loan and as required by the
Bank, the Borrower gave the following
collateral security in favor of the Bank:
a real estate mortgage over the land and
building owned by the Borrower and
located in Quezon City;
the joint and several promissory note of Pr.
Primo Timbol, the President of the
Borrower; and
a real estate mortgage over the residential
house and lot owned by Mr. Timbol, also
located in Quezon City.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) sold to Edzo on credit amounting to
Because of business reverses, neither the P300,000.
Borrower nor Mr. Timbol was able to pay Handyman Garage – for mechanical repairs
the loan. In June 2001, the Bank (parts and service) performed on Edzo’s
extrajudicially foreclosed the two real company car amounting to P10,000.
estate mortgages, with the Bank as the Joselyn Reyes – former employee of Edzo
only bidder in the foreclosure sale. On who sued Edzo for unlawful termination
September 16, 2001, the certificates of sale of employment and was able to obtain a
of the two properties in favor of the Bank final judgment against Edzo for
were registered with the Register of Deeds P100,000.
of Quezon City. Bureau of Internal Revenue – for unpaid
value-added taxes amounting to
Ten months later, both the Borrower and P30,000.
Mr. Timbol were able to raise sufficient
funds to redeem their respective properties
from the Bank, but the Bank refused to
permit redemption on the ground that the
period for redemption had already expired,
so that the Bank now has absolute
ownership of both properties. The
Borrower and Mr. Timbol came to you
today, September 15, 2002, to find out if
the position of the Bank is correct. What
would be your answer? State your reasons
(5%).

SUGGESTED ANSWER:
With respect to the real estate mortgage
over the land and building owned by
the Borrower, Primetime Corporation, a
juridical body, the period of redemption
is only three (3) months, which period
already expired.

As to the real estate mortgage over the

residential house and lot owned by Mr.
Timbol, the period of redemption is one
(1) year from the date of registration of
the certificate of sale, which period has
not yet expired in this case.

Mortgage; Remedies (2003)

Carmakers, Inc., sold a motor vehicle on
installment basis to Chari Paredes. The
transaction was reflected on a promissory
note executed by Chari in favor of
Carmakers. The note was secured by a
mortgage over the car. Contemporaneous
with the execution of the note and the
mortgage deed, Carmakers, Inc., assigned
the instruments sans recourse to
Adelantado Finance Corporation. Chari
defaulted in her obligations. Could
Adelantado Finance corporation take
action against both Carmakers Inc., and
Chari? Why? (6%)
SUGGESTED ANSWER:
Preference of Credits (2002)
As of June 1, 2002, Edzo Systems
Corporation (Edzo)
was indebted to the following creditors:
Ace Equipment Supplies – for various
personal computers and accessories
 Page 48 of 103
Integrity Bank – which granted Edzo a loan
in 2001 in the amount of P500,000. The
loan was not secured by any asset of
Edzo, but it was guaranteed
unconditionally and solidarily by Edzo’s
President and controlling stockholder,
Eduardo Z. Ong, as accommodation
surety.
The loan due to Integrity Bank fell due on
June 15, 2002. Despite pleas for extension
of payment by Edzo, the bank demanded
immediate payment. Because the bank
threatened to proceed against the surety,
Eduardo Z. Ong, Edzo decided to pay up all
its obligations to Integrity Bank. On June
20, 2002, Edzo paid to Integrity Bank the
full principal amount of P500,000, plus
accrued interests amounting to P55,000. As
a result, Edzo had hardly any cash left for
operations and decided to close its
business. After paying the unpaid salaries
of its employees, Edzo filed a petition for
insolvency on July 1, 2002.
How would you, as judge in the insolvency
proceedings, rank the respective credits or
claims of the five (5) creditors mentioned
above in terms of preference or priority
against each other? (5%)
SUGGESTED ANSWER:
The claim of Handyman Garage for
P10,000 has a specific lien on the car
repaired.
The remaining four (4) claims have
preference or priority against each other in
the following order:
Version 1990-2003 Arranged by SULAW Class 2005
No. 4 – claim of the BIR for unpaid value
added taxes
No. 3 – claim of Joselyn Reyes for Unlawful
termination
No. 1 – claim of Ace equipment Supplies as
an unpaid seller; and
No. 5 – claim of Integrity Bank.
Promissory Note: Liability (2001)
X, Y and Z signed a promissory note in
favor of A stating: “We promise to pay A on
December 31, 2001 the sum of P5,000.00”
When the note fell due, A sued X and Y who
put up the defense that A should have
impleaded Z. Is the defense valid? Why?
(5%)
SUGGESTED ANSWER:
The defense is not valid. The liability of X,
Y, and Z under the promissory note is joint.
Such being the case, Z is not an
indispensable party. The fact that A did not
implead Z will not prevent A from
collecting the proportionate share of X and
Y in the payment of the loan.
(Observation: Even if the liability of
X, Y, and Z is solidary, the defense
would still not be valid)
Remedies; Available to Mortgagee-Creditor (1996)
Finding a 24-month payment plan
attractive, Anjo purchased a Tamaraw FX
from Toyota QC. He paid a down-payment
of P100th and obtained financing for the
balance from IOU Co. He executed a
chattel mortgage
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) principal obligation while the mortgage
over the vehicle in favor of IOU. When Anjo securing the same is merely an accessory
defaulted, IOU foreclosed the chattel to said loan obligation. The collection of the
mortgage, and sought to recover the loan and the foreclosure of the mortgage
deficiency. securing said loan constitute one and the
May IOU still recover the deficiency? same cause of action. The filing of the
Explain. collection case bars the subsequent filing of
SUGGESTED ANSWER: the foreclosure proceedings.
IOU may no longer recover the deficiency.
Under Art 1484 of the NCC, in a contract of Remedies; Secured Debt (1991)
sale of personal property the price of which To secure the payment of his loan of
is payable in installments, the vendor may, P200th, A executed in favor of the Angeles
among several options, foreclose the Banking Co in 1 document, a real estate
chattel mortgage on the thing sold, if one mortgage over 3 lots registered in his name
has been constituted, should the vendee’s and a chattel mortgage over his 3 cars and
failure to pay cover two or more 1 Isuzu cargo truck.
installments. In such case, however, the
vendor shall have no further action against
the purchaser to recover any unpaid
balance of the price and any agreement to
the contrary is void. While the given facts
did not explicitly state that Anjo’s failure to
pay covered 2 or more installments, this
may safely be presumed because the right
of IOU Co to foreclose the chattel mortgage
under the circumstances is premised on
Anjo’s failure to pay 2 or more
installments. The foreclosure would not
have been valid if it were not so. (The given
facts did not also state explicitly whether
Anjo’s default was a payment default or a
default arising from a breach of a negative
pledge or breach of a warranty. In such
case, however, IOU Company would not
have been able to foreclose the chattel
mortgage validly as such foreclosure,
under the circumstances contemplated by
the law, could only be effected for a
payment default covering two or more
installments) (Luis Ridad v Filipinas
Investment and Finance Co GR L-39806
Jan27,83 120s246)

Remedies; Available to Mortgagee-Creditor (2001)

Debtor “A” issued a promissory note in the
amount of P10M in favor of commercial
bank Y secured by mortgage of his
properties worth P30M. When A failed to
pay his indebtedness, despite demands
made by bank Y, the latter instituted a
collection suit to enforce payment of the
P10M account. Subsequently, bank Y also
filed foreclosure proceedings against A for
security given for the account. If you were
the judge, how would you resolve the two
cases? (5%)
SUGGESTED ANSWER:
The case for collection will be allowed to
proceed. But the foreclosure proceedings
have to be dismissed. In instituting
foreclosure proceedings, after filing a
collection case involving the same account
or transaction, bank Y is guilty of splitting
a cause of action. The loan of P10M is the
 Page 49 of 103
Upon his failure to pay the loan on due
date, the bank foreclosed the mortgage on
the 3 lots, which were subsequently sold
for only P99th at the foreclosure sale.
Thereafter, the bank filed an ordinary
action for the collection of the deficiency. A
contended that the mortgage contract he
executed was indivisible and consequently,
the bank had no legal right to foreclose
only the real estate mortgage and leave out
the chattel mortgage, and then sue him for
a supposed deficiency judgment.
If you were the Judge, would you sustain
the contention of A?
SUGGESTED ANSWER:
If I were the Judge, I would dismiss the
action as being premature since the proper
remedy would be to complete the
foreclosure of the mortgages and only
thereafter can there by an action for
collection of any deficiency. In Caltex v IAC
(GR 74730, 25 Aug 89), the remedies on a
secured debt, said the court, are either an
action to collect or to foreclose a contract
of real security. These remedies are
alternative remedies, although an action
for any deficiency is not precluded, subject
to certain exceptions such as those stated
in Art 1484 of the Civil Code, by a
foreclosure on the mortgages. While the
factual settings in the case of Suria v IAC
(30 June 87) are not similar to the facts
given in the problem, the SC implied that
foreclosure as a remedy in secured
obligations must first be availed of by a
creditor in preference to other remedies
that might also be invoked by him.
ALTERNATIVE ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
The indivisibility of a contract of real
security, such as a real estate mortgage or
a chattel mortgage, only means that a
division or a partial payment of a secured
obligation does not warrant a
corresponding division or proportionate
reduction of the security given. A creditor
in such secured debts may pursue the
remedy of foreclosure, in part or in full, or
file an ordinary action for collection on any
amount due. A favorable judgment can
warrant an issuance of a writ of execution
on any property, not exempt from
execution, belonging to the judgment
debtor. There should be no legal obstacle
for a creditor to waive, in full or in part, his
right to foreclosure on contracts of real
security.
Insurance Law
Beneficiary: Effects: Irrevocable Beneficiary (2005)
What are the effects of an irrevocable
designation of a beneficiary under the
Insurance Code? Explain. (2%)
SUGGESTED ANSWER:
The irrevocable designation gives the
beneficiary a vested right over Life
Insurance. The Insured cannot act to divest
the irrevocable beneficiary, in whole or in
part, without the beneficiary's consent. To
be specific:
The beneficiary designated in a life
insurance contract cannot be changed
without the consent of the beneficiary
because he has a vested interest in the
policy (Philamlife v. Pineda, G.R. No. 54216,
July 19,
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
1989, citing Gcrcio v. Sun Life, G.R. No.
23703, September 28, 1925; and Go v.
Redfern, G.R. No. 47705, April 25, 1841);
Neither can the Insured take the cash
surrender value, assign or even borrow
on said policy without the beneficiary's
consent (Nario v. Philamlife, G.R. No.
22796, June 26, 1967);
The Insured cannot add another beneficiary
because that would reduce the amount
which the first beneficiary may recover
and therefore adversely affect his
vested right (Go v. Redfem, G.R. No.
47705, April 25, 1941);
designated beneficiary therein. The widow,
Cynthia, also filed a claim as the legal wife.
To whom should the proceeds of the
insurance policy be awarded? (5%)
SUGGESTED ANSWER:
The proceeds of the insurance policy shall
be awarded to the ESTATE of Juan de la
Cruz. Purita, the common-law-wife, is
disqualified as the beneficiary of the
deceased because of illicit relation between
the deceased and Purita, the designated
beneficiary. Due to such illicit

Unless the policy allows, the Insured

cannot even designate another
beneficiary should the original
beneficiary predecease him. His estate
acquires the beneficiary's vested right
upon his death; and

The Insured cannot allow his creditors to

attach or execute on the policy.
(Philamlife v. Pineda, G.R. No. 54216, July
19, 1989)

Beneficiary: Rights; Irrevocable Beneficiary (2005)

Jacob obtained a life insurance policy for
P1 Million designating irrevocably Diwata,
a friend, as his beneficiary. Jacob, however,
changed his mind and wants Yob and Jojo,
his other friends, to be included as
beneficiaries considering that the proceeds
of the policy are sufficient for the three
friends. Can Jacob still add Yob and Jojo as
his beneficiaries? Explain. (2%)
SUGGESTED ANSWER:
No, Jacob can no longer add Yob and Jojo
as his beneficiaries in addition to Diwata.
As the irrevocable beneficiary, Diwata has
acquired a-vested right over Jacob's life
insurance policy. Any additional
beneficiaries will reduce the amount which
Diwata, as the first beneficiary, may
recover, which will adversely affect her
vested right. (Go v. Redfern, G.R. No.
47705, April 25, 1941)

Beneficiary; Life Insurance; Prohibited

Beneficiaries (1998)
Juan de la Cruz was issued Policy No. 8888
of the Midland Life Insurance Co on a
whole life plan for P20,000 on August 19,
1989. Juan is married to Cynthia with
whom he has three legitimate children. He,
however, designated Purita, his common-
law wife, as the revocable beneficiary. Juan
referred to Purita in his application and
policy as the legal wife.
3 years later, Juan died. Purita filed her
claim for the proceeds of the policy as the
 Page 50 of 103
relation, Purita cannot be a donee of the
deceased.
Hence, she cannot also be his beneficiary.
Concealment; Material Concealment (2001)
A applied for a non-medical life insurance.
The insured did not inform the insurer that
one week prior to his application for
insurance, he was examined and confined
at St. Luke’s Hospital where he was
diagnosed for lung cancer. The insured
soon thereafter died in a plane crash. Is the
insurer liable considering that the fact
concealed had no bearing with the cause of
death of the insured? Why? (5%)
SUGGESTED ANSWER:
No. The concealed fact is material to the
approval and issuance of the insurance
policy. It is well settled that the insured
need not die of the disease he failed to
disclose to the insurer. It is sufficient that
his nondisclosure misled the insurer in
forming his estimate of the risks of the
proposed insurance policy or in making
inquiries.
Concealment; Material Concealment:
Incontestability Clause (1994)
On September 23, 1990, Tan took a life
insurance policy from Philam. The policy
was issued on November 6, 1990. He died
on April 26, 1992 of hepatoma. The
insurance company denied the
beneficiaries’ claim and rescinded the
policy by reason of alleged
misrepresentation and concealment of
material facts made by Tan in his
application. It returned the premiums paid.
Version 1990-2003 Arranged by SULAW Class 2005
The beneficiaries contend that the
company had no right to rescind the
contract as rescission must be done
“during the lifetime” of the insured within
two years and prior to the commencement
of the action.
Is the contention of the beneficiaries
tenable?
SUGGESTED ANSWER:
No. The incontestability clause does not
apply. The insured dies within less than two
years from the issuance of the policy on
September 23, 1990. The insured died on
April 26, 1992, or less than 2 years from
September 23, 1990.
The right of the insurer to rescind is only
lost if the beneficiary has commenced an
action on the policy. There is no such action
in this case. (Tan v CA 174 s 143)
Concealment; Material Concealment:
Incontestability Clause (1996)
Juan procured a “non-medical” life
insurance from Good Life Insurance. He
designated his wife, Petra, as the
beneficiary. Earlier, in his application in
response to the question as to whether or
not he had ever been hospitalized, he
answered in the negative. He forgot to
mention his confinement at the Kidney
Hospital.
After Juan died in a plane crash, Petra filed
a claim with Good Life. Discovering Juan’s
previous hospitalization, Good Life rejected
Petra’s claim on the ground of concealment
and misrepresentation. Petra sued Good
Life, invoking good faith on part of Juan.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) whether or not to accept the application for
Will Petra’s suit prosper? Explain. insurance and to require the medical
SUGGESTED ANSWER: examination of the insured.
No, Petra’s suit will not prosper (assuming
that the policy of life insurance has been in However, if the incontestability clause
force for a period of less than 2 years from which applies to the insurance policy
the date of its issue). The matters which covering the life of the insured had been in
Juan failed to disclose was material and force for 2 years from issuance thereof, the
relevant to the approval and issuance of insurance company would not be justified
the insurance policy. They would have in denying the claim for proceeds of the
affected Good Life’s action on his insurance and in returning the premium
application, either by approving it with the paid. In that case, the insurer cannot prove
corresponding adjustment for a higher the policy void ab initio or rescindible by
premium or rejecting the same. Moreover, reason of fraudulent concealment or
a disclosure may have warranted a medical misrepresentation of the insured.
examination of Juan by Good Life in order
for it to reasonably assess the risk involved
in accepting the application. In any case,
good faith is no defense in concealment.
The waiver of a medical examination in the
‘non-medical’ life insurance from Good Life
makes it even more necessary that Juan
supply complete information about his
previous hospitalization for such
information constitutes an important factor
which Good Life takes into consideration in
deciding whether to issue the policy or not.
(See Sunlife Assurance Co of Canada v CA GR
105135, June 22, 1995 245 s 268)

If the policy of life insurance has been in

force for a period of 2 years or more from
the date of its issue (on which point the
given facts are vague) then Good Life can
no longer prove that the policy is void ab
initio or is rescindible by reason of the
fraudulent concealment or
misrepresentation of Juan ( Sec 48 Ins
Code)

Concealment; Material Concealment:

Incontestability Clause (1997)
The assured answers “No” to the question
in the application for a life policy: “Are you
suffering from any form of heart illness?”
In fact, the assured has been a heart
patient for many years. On 7 Sep 1991, the
assured is killed in a plane crash. The
insurance company denies the claim for
insurance proceeds and returns the
premiums paid.
Is the decision of the insurance company
justified?
SUGGESTED ANSWER:
Assuming that the incontestability clause
does not apply because the policy has not
been in force for 2 years, from the date of
issue, during the lifetime of the insured,
the decision of the insurance company not
to pay is justified. There was fraudulent
concealment. It is not material that the
insured died of a different cause than the
fact concealed. The fact concealed, that is
heart ailment, is material to the
determination by the insurance company
 Page 51 of 103
Concealment; Material Concealment;
Incontestability Clause (1991)
Atty Roberto took out a life insurance
policy from the Dana Ins Co (DIC) on 1 Sep
1989. On 31 Aug 1990, Roberto died. DIC
refused to pay his beneficiaries because it
discovered that Robert had misrepresented
certain material facts in his application.
The beneficiaries sued on the basis that
DIC can contest the validity of the
insurance policy only within 2 years from
the date of issue and during the lifetime of
the insured. Decide the case.
SUGGESTED ANSWER:
I would rule in favor of the insurance
company. The incontestability clause,
applies only if the policy had been in effect
for at least 2 years. The 2 year period is
counted from the time the insurance
becomes effective until the death of the
insured and not thereafter (Tan v CA GR
48044 29Jun1989)
ALTERNATIVE ANSWER:
I would rule in favor of the insurance
company. Although an insurer may not
rescind the contract on ground of
misrepresentation after an action is
commenced for recovery under the policy,
the insurer is not precluded from invoking
the ground of misrepresentation as a
defense in the action for recovery. This is
alright since the bar problem is not
covered yet by the incontestability clause.
Concealment; Material Concealment;
Incontestability Clause (1998)
Version 1990-2003 Arranged by SULAW Class 2005
Renato was issued a life insurance policy
on January 2, 1990. He concealed the fact
that 3 years prior to the issuance of his life
insurance policy, he had been seeing a
doctor about his heart ailment.
On March 1, 1992, Renato died of heart
failure. May the heirs file a claim on the
proceeds of the life insurance policy of
Renato? (5%)
SUGGESTED ANSWER:
Yes. The life insurance policy in question
was issued on January 9, 1990. More than 2
years had elapsed when Renato, the
insured, died on March 1, 1992. The
incontestability clause applies.
INCONTESTABILITY CLAUSE
The insurer has two years from the date of
issuance of the insurance contract or of its
last reinstatement within which to contest
the policy, whether or not, the insured still
lives within such period. After two years,
the defenses of concealment or
misrepresentation, no matter how patent or
well founded, no longer lie.
Insurable Interest: Bank Deposit (2000)
BD has a bank deposit of half a million
pesos. Since the limit of the insurance
coverage of the Philippine Deposit
Insurance Corp (PDIC) (RA 3591) is only
one tenth of BD’s deposit, he would like
some protection for the excess by taking
out an insurance against all risks or
contingencies of loss arising from any
unsound or unsafe banking practices
including unforeseen adverse effects of
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
the continuing crisis involving the banking
and financial sector in the Asian region.
Does BD have an insurable interest within
the meaning of the Insurance Code of the
Philippines (PD1460)? (2%)
SUGGESTED ANSWER:
Yes. BD has insurable interest in his bank
deposit. In case of loss of said deposit,
more particularly to the extent of the
amount in excess of the limit covered by
the PDIC Act, PBD will be damnified. He
will suffer pecuniary loss of P300,000.00,
that is, his bank deposit of half a million
pesos minus P200,000.00 which is the
maximum amount recoverable from the
PDIC.
Suppose you are the Judge, how much
would you allow the businessman and
the creditor to recover
from their respective insurers. Explain
(3%)
SUGGESTED ANSWER:
Yes. The businessman, as owner, and the
creditor, as mortgagee, have separate
insurable interests in the same stocks-in-
trade. Each may insure such interest to
protect his own separate interest.
The contention of First Insurance that
double insurance is contrary to law is
untenable. There is no law providing that
double insurance is illegal per se.

Insurable Interest: Public Enemy (2000)

May a member of the MILF or its
breakaway group, the Abu Sayyaf, be
insured with a company licensed to do
business under the Insurance Code of the
Phils (PD 1460)? Explain. (3%)
SUGGESTED ANSWER:
A member of the MILF or the Abu Sayyaf
may be insured with a company licensed to
do business under the Insurance Code of
the Phils. What is prohibited to be insured
is a public enemy. A public enemy is a
citizen or national of a country with which
the Philippines is at war. Such member of
the MILF or the Abu Sayyaf is not a citizen
or national of another country, but of the
Philippines.

Insurable Interest: Separate Insurable Interest (1999)

A businessman in the grocery business
obtained from First Insurance an insurance
policy for P5M to fully cover his stocks-in-
trade from the risk of fire.

Three months thereafter, a fire of

accidental origin broke out and completely
destroyed the grocery including his stocks-
in-trade. This prompted the businessman to
file with First Insurance a claim for five
million pesos representing the full value of
his goods.

First Insurance denied the claim because it

discovered that at the time of the loss, the
stocks-in-trade were mortgaged to a
creditor who likewise obtained from
Second Insurance Company fire insurance
coverage for the stocks at their full value of
P5M.
May the businessman and the creditor
obtain separate insurance coverages
over the same stocks-in-trade? Explain
(3%)
First Insurance refused to pay claiming
that double insurance is contrary to
law. Is this contention tenable? (3%)
 Page 52 of 103
Moreover, in the problem at hand, there is
no double insurance because the insured
with the First Insurance is different from
the insured with the Second Insurance
Company. The same is true with respect to
the interests insured in the two policies.
As Judge, I would allow the businessman to
recover his total loss of P5M representing
the full value of his goods which were lost
through fire. As to the creditor, I would
allow him to recover the amount to the
extent of or equivalent to the value of the
credit he extended to the businessman for
the stocks-in-trade which were mortgaged
by the businessman.
Insurable Interest; Equitable Interest (1991)
A piece of machinery was shipped to Mr
Pablo on the basis of C&F Manila. Pablo
insured said machinery with the Talaga
Merchants Ins Co (Tamic) for loss or
damage during the voyage. The vessel sank
en route to Manila. Pablo then filed a claim
with Tamic which was denied for the
reason that prior to deliver, Pablo had no
insurable interest. Decide the case.
SUGGESTED ANSWER:
Pablo had an existing insurable interest on
the piece of machinery he bought. The
purchase of goods under a perfected
contract of sale already vests equitable
interest on the property in favor of the
buyer even while it is pending delivery
(Filipino Merchants Ins Co v CA GR 85144
28Nov1989)
Insurable Interest; Life vs. Property Insurance (1997)
Version 1990-2003 Arranged by SULAW Class 2005
A obtains a fire insurance on his house and
as a generous gesture names his
neighbor as the beneficiary. If A’s house
is destroyed by fire, can B successfully
claim against the policy?
A obtains insurance over his life and names
his neighbor B the beneficiary because
of A’s secret love for B. If A dies, can B
successfully claim against the
policy?
SUGGESTED ANSWER:
No. In property insurance, the beneficiary
must have insurable interest in the
property insured. (Sec 18 Ins Code). B does
not have insurable interest in the house
insured.
Yes. In life insurance, it is not required that
the beneficiary must have insurable
interest in the life of the insured. It was the
insured himself who took the policy on his
own life.
Insurable Interest; Life vs. Property Insurance (2000)
IS, an elderly bachelor with no known
relatives, obtained life insurance coverage
for P250,000.00 from Starbrite Insurance
Corporation, an entity licensed to engage
in the insurable business under the
Insurance Code of the Philippines
(PD1460). He also insured his residential
house for twice that amount within the
same corporation. He immediately
assigned all his rights to the insurance
proceeds to BX, a friend-companion living
with him. Three years later, IS died in a fire
that gutted his insured house two days
after he had sold it. There is
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) registered property (a parcel of land and
no evidence of suicide or arson or the building thereon),and sold the same at
involvement of BX in these events. BX public auction to Nat, the highest bidder.
demanded payment of the insurance The latter, on March 18, 1992, registered
proceeds from the two policies, the with the Register of Deeds the certificate of
premiums for which IS had been faithfully sale issued to him by the sheriff.
paying during all the time he was alive. Meanwhile, on January 27, 1993, Benjie
Starbrite refused payment, contending that insured with Garapal Insurance for
BX had no insurable interest and therefore P1,000,000.00 the same building that was
was not entitled to receive the proceeds sold at public auction to Nat. Benjie failed
from IS’s insurance coverage on his life to redeem the property by March 18, 1993.
and also on his property. Is Starbrite’s
contention valid? Explain? (5%)
SUGGESTED ANSWER:
Starbrite is correct with respect to the
insurance coverage on the property of IS.
The beneficiary in the property insurance
policy or the assignee thereof must have
insurable interest in the property insured.
BX, a mere friend-companion of IS, has no
insurable interest in the residential house
of IS. BX is not entitled to receive the
proceeds from IS’s insurance on his
property.

As to the insurance coverage on the life of

IS, BX is entitled to receive the proceeds.
There is no requirement that BX should
have insurable interest in the life of IS. It
was IS himself who took the insurance on
his own life.

Insurable Interest; Life vs. Property Insurance (2002)

Distinguish insurable interest in property
insurance from insurable interest in life
insurance. (5%)
SUGGESTED ANSWER:
In property insurance, the expectation of
benefit must have a legal basis. In life
insurance, the expectation of benefit to
be derived from the continued
existence of a life need not have any
legal basis.

In property insurance, the actual value of

the interest therein is the limit of the
insurance that can validly be placed
thereon. In life insurance, there is no
limit to the amount of insurance that
may be taken upon life.

In property insurance, an interest insured

must exist when the insurance takes
effect and when the loss occurs but
need not exist in the meantime. In life
insurance, it is enough that insurable
interest exists at the time when the
contract is made but it need not exist at
the time of loss.

Insurable Interest; Property Insurance (1994)

In a civil suit, the Court ordered Benjie to
pay Nat P500,000.00. To execute the
judgment, the sheriff levied upon Benjie’s
 Page 53 of 103
On March 19, 1993, a fire razed the
building to the ground. Garapal Insurance
refused to make good its obligation to
Benjie under the insurance contract.
Is Garapal Insurance legally justified in
refusing payment to Benjie?
Is Nat entitled to collect on the insurance
policy?
SUGGESTED ANSWER:
1)Yes. At the time of the loss, Benjie was no
longer the owner of the property insured as
he failed to redeem the property. The law
requires in property insurance that a
person can recover the proceeds of the
policy if he has insurable interest at the
time of the issuance of the policy and also
at the time when the loss occurs. At the
time of fire, Benjie no longer had insurable
interest in the property insured.
No. While at the time of the loss he had
insurable interest in the building, as he
was the owner thereof, Nat did not have
any interest in the policy. There was no
automatic transfer clause in the policy that
would give him such interest in the policy.
Insurable Interest; Property Insurance (2001)
JQ, owner of a condominium unit, insured
the same against fire with the XYZ
Insurance Co., and made the loss payable
to his brother, MLQ. In case of loss by fire
of the said condominium unit, who may
recover on the fire insurance policy? State
the reason(s) for your answer. (5%)
SUGGESTED ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
JQ can recover on the fire insurance policy
for the loss of said condominium unit. He
has the insurable interest as owner-
insured. As beneficiary in the fire insurance
policy, MLQ cannot recover on the fire
insurance policy. For the beneficiary to
recover on the fire or property insurance
policy, it is required that he must have
insurable interest in the property insured.
In this case, MLQ does not have insurable
interest in the condominium unit.
Insurance; Cash & Carry Basis (2003)
What is meant by “cash and carry” in the
business of insurance?
SUGGESTED ANSWER:
Insurance; Co-Insurance vs. Re-Insurance (1994)
Distinguish co-insurance from re-insurance.
SUGGESTED ANSWER:
CO-INSURANCE is the percentage in the
value of the insured property which the
insured himself assumes or undertakes to
act as insurer to the extent of the
deficiency in the insurance of the insured
property. In case of loss or damage, the
insurer will be liable only for such
proportion of the loss or damage as the
amount of insurance bears to the
designated percentage of the full value of
the property insured.
REINSURANCE is where the insurer
procures a third party, called the reinsurer,
to insure him against liability by reason of
such original insurance. Basically, a
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
reinsurance is an insurance against liability
which the original insurer may incur in
favor of the original insured.
Insurance; Double Insurance (2005)
When does double insurance exist? (2%)
SUGGESTED ANSWER:
Under Section 93 of the Insurance Code,
there is double insurance when there is
over-insurance with two or more
companies, covering the same property, the
same insurable interest and the same risk.
Double insurance exists where the same
person is insured by several insurers
separately in respect of the same subject
matter and interests. (Geagonia v. Court of
Appeals, G.R. No. 114427, February 6, 1995)
pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with
the insurance company a claim for its
value. However, the company denied his
claim on the ground that he failed to pay
the premium resulting in the cancellation
of the policy.
Can Francis recover from the Peninsula
Insurance Company? (5%)
SUGGESTED ANSWER:

Insurance; Double Insurance; effect (1993)

Julie and Alma formed a business
partnership. Under the business name Pino
Shop, the partnership engaged in a sale of
construction materials. Julie insured the
stocks in trade of Pino Shop with WGC
Insurance Co for P350th. Subsequently, she
again got an insurance contract with RSI
for P1m and then from EIC for P200th. A
fire of unknown origin gutted the store of
the partnership. Julie filed her claims with
the three insurance companies. However,
her claims were denied separately for
breach of policy condition which required
the insured to give notice of any insurance
effected covering the stocks in trade. Julie
went to court and contended that she
should not be blamed for the omission,
alleging that the insurance agents for
WGC, RSI and EIC knew of the existence of
the additional insurance coverages and
that she was not informed about the
requirement that such other or additional
insurance should be stated in the policy.
Is the contention of Julie tenable? Explain.
May she recover on her fire insurance
policies? Explain.
SUGGESTED ANSWER:
No. An insured is required to disclose the
other insurances covering the subject
matter of the insurance being applied for.
(New Life Ent v CA 207 s 669)

No, because she is guilty of violation of a

warranty/ condition.

Insurance; Effects; Payment of Premiums by

Installment (2006)
The Peninsula Insurance Company offered
to insure Francis' brand new car against all
risks in the sum of PI Million for 1 year.
The policy was issued with the premium
fixed at 160,000.00 payable in 6 months.
Francis only paid the first two months
installments. Despite demands, he failed to
 Page 54 of 103
Yes, when insured and insurer have agreed
to the payment of premium by installments
and partial payment has been made at the
time of loss, then the insurer becomes
liable. When the car loss happened on the
5th month, the six months agreed period of
payment had not yet elapsed (UCPB General
Insurance v. Masagana Telamart, G.R. No.
137172, April 4, 2001). Francis can recover
from Peninsula Insurance Company, but the
latter has the right to deduct the amount of
unpaid premium from the insurance
proceeds.
Insurance; Life Insurance; Assignment of Policy (1991)
The policy of insurance upon his life, with a
face value of P100th was assigned by Jose,
a married man with 2 legitimate children,
to his nephew Y as security for a loan of
P50th. He did not give the insurer any
written notice of such assignment despite
the explicit provision to that effect in the
policy. Jose died. Upon the claim on the
policy by the assignee, the insurer refused
to pay on the ground that it was not
notified of the assignment. Upon the other
hand, the heirs of Jose contended that Y is
not entitled to any amount under the policy
because the assignment without due notice
to the insurer was void. Resolve the issues.
SUGGESTED ANSWER:
A life insurance is assignable. A provision,
however, in the policy stating that written
notice of such an assignment should be
given to the insurer is valid (Secs 181-182
Ins Code). The failure of the notice of
Version 1990-2003 Arranged by SULAW Class 2005
assignment would thus preclude the
assignee from claiming rights under the
policy. The failure of notice did not,
however, avoid the policy; hence, upon the
death of Jose, the proceeds would, in the
absence of a designated beneficiary, go to
the estate of the insured. The estate, in
turn, would be liable for the loan of
P50,000 owing in favor of Y.
Insurance; Perfection of Insurance Contracts (2003)
Josie Gatbonton obtained from Warranty
Insurance Corporation a comprehensive
motor vehicle insurance to cover her brand
new automobile. She paid, and the insurer
accepted payment in check. Before the
check could be encashed, Josie was
involved in a motor vehicle accident where
her car became a total wreck. She sought
payment from the insurer. Could the
insurer be made liable under the insurance
coverage? (6%)
SUGGESTED ANSWER:
(per Dondee) Yes, because there was a
perfected contract of insurance the
moment there is a meeting of the minds
with respect to the object and the cause of
payment. The payment of check is a valid
payment unless upon encashment the
check bounced.
Insurance; Property Insurance; Prescription of
Claims (1996)
Robin insured his building against fire with
EFG Assurance. The insurance policy
contained the usual stipulation that any
action or suit must be filed within one year
after the rejection of the claim.
Version 1990-2006 Updated by Dondee
 ALTERNATIVE INSTANCE:
Mercantile Law Bar Examination Q & A (1990-2006)
After his building burned down, Robin filed In case of an over insurance by several
his claim for fire loss with EFG. On Feb 28, insurers, the insured is entitled to a ratable
1994, EFG denied Robin’s claim. On April return of the premium, proportioned to the
3, 1994, Robin sought reconsideration of amount by which the aggregate sum
the denial, but EFG reiterated its position. insured in all the policies exceeds the
On March 20, 1995, Robin commenced insurable value of the thing at risk.
judicial action against EFG.
Insured; Accident Policy (2004)
Should Robin’s action be given due course?
Explain. CNI insure SAM under a homeowner's
SUGGESTED ANSWER: policy against claims for accidental injuries
No, Robin’s action should not be given due by neighbors. SAM's minor
course. Is filing of the request for
reconsideration did not suspend the Version 1990-2003 Arranged by SULAW Class 2005
running of the prescriptive period of one
year stipulated in the insurance policy.
Thus, when robin commenced judicial
action against EFG Assurance on March
20, 1995, his ability to do so had already
prescribed. The one-year period is counted
from Feb 28, 1994 when EFG denied
Robin’s claim, not from the date
(presumably after April 3, 1994) when EFG
reiterated its position denying Robin’s
claim. The reason for this rule is to insure
that claims against insurance companies
are promptly settled and that insurance
suits are brought by the insured while the
evidence as to the origin and cause of the However,
destruction has not yet disappeared. (See
Sun Ins Office Ltd v CA gr 89741, Mar 13 91
195s193)

Insurance; Return of Premiums (2000)

Name at least three instances when an
insured is entitled to a return of the
premium paid.
SUGGESTED ANSWER:
Three instances when an insured is entitled
to a return of premium paid are:
To the WHOLE PREMIUM, if no part of his
interest in the thing insured be exposed
to any of the perils insured against.

Where the insurance is made for a definite

period of time and the insured
surrenders his policy, to such portion of
the premium as corresponds with the
unexpired time at a pro rata rate,
unless a short period rate has been
agreed upon and appears on the face of
the policy, after deducting from the
whole premium any claim for loss or
damage under the policy which has
previously accrued.

When the contract is voidable on account

of the fraud or misrepresentation of the
insurer or of his agent or on account of
facts the existence of which the insured
was ignorant without his fault; or when,
by any default of the insured other than
actual fraud, the insurer never incurred
any liability under the policy.
 Page 55 of 103
Can his father who is a beneficiary under
son, BOY, injured 3 children of POS, a
neighbor, who sued SAM for damages. said insurance policy successfully claim
SAM's lawyer was ATT, who was paid for indemnity from the insurance company?
his services by the insurer for reporting Explain.
SUGGESTED ANSWER:
periodically on the case to CNI. In one
Yes, the father who is a beneficiary under
report, ATT disclosed to CNI that after his
the accidental insurance can successfully
investigations, he found the injuries to the
claim indemnity for the death of the
3 children not accidental but intentional.
insured. Clearly, the proximate cause of
SAM lost the case in court, and POS was death was the boxing contest. Death
awarded one million pesos in damages sustained in a boxing contest is an
which he sought to collect from the insurer. accident. (De la Cruz v Capital Ins & Surety Co
17s559)
But CNI used ATTs report to deny the claim
on the ground that the injuries to POS's 3 Version 1990-2006 Updated by Dondee
children were intentional, hence excluded
from the policy's coverage. POS countered
that CNI was estopped from using ATTs
report because it was unethical for ATT to
provide prejudicial information against his
client to the insurer, CNI.
Who should prevail: the claimant, POS; or
the insurer, CNI? Decide with reasons
briefly. (5%)
SUGGESTED ANSWER:
CNI is not estopped from using ATT's report,
because CNI, in the first place, commissioned
it and paid ATT for it. On the other hand, ATT
has no conflict of interest because SAM and
CNI are on the same side — their interests
being congruent with each other, namely, to
oppose POS's claim. It cannot be said that
ATT has used the information to the
disadvantage or prejudice of SAM.

Finman General Assurance Corp. v.

Court of Appeals, 213 SCRA 493 (1992), it was
explained that there is no "accident" in the
context of an accident policy, if it is the
natural result of the insured's voluntary
act, unaccompanied by anything
unforeseen except the injury. There is no
accident when a deliberate act is
performed, unless some additional and
unforeseen happening occurs that brings
about the injury. This element of
deliberateness is not clearly shown from
the facts of the case, especially considering
the fact that BOY is a minor, and the
injured parties are also children.
Accordingly, it is possible that CNI may not
prosper. ATT's report is not conclusive on
POS or the court.

Insured; Accident vs. Suicide (1990)

Luis was the holder of an accident
insurance policy effective Nov 1, 1988 to
Oct 31, 1989. At a boxing contest held on
Jan 1, 1989 and sponsored by his employer,
he slipped and was hit on the fact by his
opponent so he fell and his head hit one of
the posts of the boxing ring. He was
rendered unconscious and was dead on
arrival at the hospital due to “intra-cranial
hemorrhage.”
Mercantile Law Bar Examination Q & A (1990-2006)
Insured; Accident vs. Suicide (1993)
S Insurance Co issued a personal accident
policy to Bob Tan with a face value of
P500th. In the evening of Sep 5, 1992, after
his birthday party, Tan was in a happy
mood but not drunk. He was playing with
his hand gun, from which he previously
removed the magazine. As his secretary
was watching television, he stood in front
of her and pointed the gun at her. She
pushed it aside and said that it may be
loaded. He assured her that it was not and
then pointed it at his temple. The next
moment, there was an explosion and Tan
slumped to the floor lifeless.
gun at his temple and pulled the trigger.
The gun fired and Henry slumped on the
floor.
Henry’s wife Beverly, as the designated
beneficiary, sought to collect under the
policy. Sun-Moon Insurance rejected her
claim on the ground that the death of
Henry was not accidental. Beverly sued the
insurer. Decide and Discuss fully.
SUGGESTED ANSWER:
Beverly can recover the proceeds of the
policy from the insurer. The death of the
insured was not due to suicide

The wife of the deceased sought payment

on the policy but her claim was rejected.
The insurance company agreed that there
was no suicide. However, it was the
submission of the insurance company that
there was no accident. In support thereof,
it contended a) that there was no accident
when a deliberate act was performed
unless some additional, unexpected,
independent and unforeseen happening
occur which produces or brings about the
injury or death; and b) that the insured
willfully exposed himself to needless peril
and thus removed himself from the
coverage of the insurance policy. Are the
two contentions of the insurance company
tenable? Explain.
SUGGESTED ANSWER:
No. These two contentions are not tenable.
The insurer is liable for injury or death
even due to the insured’s gross negligence.
The fact that the insured removed the
magazine from the hand gun means that
the insured did not willfully expose himself
to needless peril. At most, the insured is
only guilty of negligence (Sun Ins v CA 211 s
554)

Insured; Accident vs. Suicide (1995)

Sun-Moon Insurance issued a Personal
Accident Policy to Henry Dy with a face
value of P500th. A provision in the policy
states that “the company shall not be liable
in respect of “bodily injury’ consequent
upon the insured person attempting to
commit suicide or willfully exposing himself
to needless peril except in an attempt to
save human life.” Six months later Henry
Dy died of a bullet wound in his head.
Investigation showed that one evening
Henry was in a happy mood although he
was not drunk. He was playing with his
handgun from which he had previously
removed its magazine. He pointed the gun
at his sister who got scared. He assured
her it was not loaded. He then pointed the
 Page 56 of 103
or willful exposure to needless peril which
are excepted risks. The insured’s act was
purely an act of negligence which is
covered by the policy and for which the
insured got the insurance for his
protection. In fact, he removed the
magazine from the gun and when he
pointed the gun to his temple he did so
because he thought that it was safe for him
to do so. He did so to assure his sister that
the gun was harmless. There is none in the
policy that would relieve the insurer of
liability for the death of the insured since
the death was an accident.
Insurer: Effects: Several Insurers (2005)
What is the nature of the liability of the
several insurers in double insurance?
Explain. (2%)
SUGGESTED ANSWER:
The nature of the liability of the several
insurers in double insurance is that each
insurer is bound to the contribute ratably
to the loss in proportion to the amount for
which he is liable under his contract as
provided for by Sec 94 of ICP par. The
ratable contribution of each of each insurer
will be determined based on the following
formula: AMOUNT OF POLICY divided by
TOTAL INSURANCE TAKEN multiplied by
LOSS = LIABILITY OF THE INSURER.
ALTERNATIVE ANSWER:
Each insurer is bound, as between himself
and other insurers, to contribute ratably to
the loss in proportion to the amount for
which he is liable under his contract. (Sec.
94, Insurance Code)
Version 1990-2003 Arranged by SULAW Class 2005
Insurer; 3rd Party Liability (1996)
While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the
latter, Roberto sued Cesar and the third
party liability insurer for damages and/or
insurance proceeds. The insurance
company moved to dismiss the complaint,
contending that the liability of Cesar has
not yet been determined with finality.
Is the contention of the insurer correct?
Explain.
May the insurer be held liable with Cesar?
SUGGESTED ANSWER:
No, the contention of the insurer is not
correct. There is no need to wait for the
decision of the court determining Cesar’s
liability with finality before the third party
liability insurer could be sued. The
occurrence of the injury to Roberto
immediately gave rise to the liability of the
insurer under its policy. In other words,
where an insurance policy insures directly
against liability, the insurer’s liability
accrues immediately upon the occurrence
of the injury or event upon which the
liability depends (Sherman Shafer v Judge
RTC Olongapo City Branch 75 GR l-78848, Nov
14 88 167s386)
The insurer cannot be held solidarily liable
with Cesar. The liability of the insurer is
based on contract while that of Cesar is
based on tort. If the insurer were solidarily
liable with Cesar, it could be made to pay
more than the amount stated in the policy.
This would, however, be contrary to the
principles underlying insurance contracts.
On the other hand, if the insurer were
solidarily liable with Cesar and it is made
to pay only up to the amount
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) medical report and evidence of medical or
stated in the insurance policy, the hospital disbursement in respect of
principles underlying solidary obligations which refund is claimed.
would be violated. (Malayan Ins Co v CA GR Claim may be made against one motor
L-36413 Sep 26, 88 165s536; Figuracion vda de vehicle only.
Maglana v Consolacion GR 60506 Aug 6, 92
212s268) Insurer; 3rd Party Liability; Quitclaim (1994)
Raul’s truck bumped the car owned by Luz.
Insurer; 3rd Party Liability (2000) The car was insured by Cala Insurance. For
X was riding a suburban utility vehicle the damage caused, Cala paid Luz
(SUV) covered by a comprehensive motor P5,000.00 in amicable settlement. Luz
vehicle liability insurance (CMVLI) executed a release of claim, subrogating
underwritten by FastPay Insurance Cala to all her rights against Raul. When
Company when it collided with a speeding Cala demanded reimbursement from Raul,
bus owned by RM Travel Inc. The collision the latter refused saying that he had
resulted in serious injuries to X; Y, a already paid
passenger of the bus; and Z, a pedestrian
waiting for a ride at the scene of the
collision. The police report established that
the bus was the offending vehicle. The bus
had CMVLI policy issued by Dragon Ins Co.
X, Y, and Z jointly sued RM Travel and
Dragon Ins for indemnity under the
Insurance Code of the Phils (PD1460). The
lower court applied the “no fault”
indemnity policy of the statute, dismissed
the suit against RM Travel, and ordered
Dragon Ins to pay indemnity to all three
plaintiffs. Do you agree with the court’s
judgment? Explain (2%)
SUGGESTED ANSWER:
No. The cause of action of Y is based on the
contract of carriage, while that of X and Z
is based on torts. The court should not have
dismissed the suit against RM Travel. The
court should have ordered Dragon Ins to
pay each of X, Y , and Z to the extent of the
insurance coverage, but whatever amount
is agreed upon in the policy should be
answered first by RM Travel and the
succeeding amount should be paid by
Dragon Insurance up to the amount of the
insurance coverage. The excess of the
claims of X, Y, and Z, over and above such
insurance coverage, if any, should be
answered or paid by RM Travel.

Insurer; 3rd Party Liability; No Fault Indemnity (1994)

What is your understanding of a “no fault
indemnity” clause found in an insurance
policy?
SUGGESTED ANSWER:
Under the “NO FAULT INDEMNITY”
clause, any claim for death or injury of any
passenger or third party shall be paid
without the necessity of proving fault or
negligence of any kind. The indemnity in
respect of any one person shall not exceed
P5,000.00, provided they are under oath,
the following proofs shall be sufficient:
police report of the accident; and
death certificate and evidence sufficient to
establish the proper payee; or
 Page 57 of 103
Luz P4,500 for the damage to the car as
evidenced by a release of claim executed
by Luz discharging Raul.
So Cala demanded reimbursement from
Luz, who refused to pay, saying that the
total damage to the car was P9,500.00
Since Cala paid P5,000 only, Luz contends
that she was entitled to go after Raul to
claim the additional P4,500.00
Is Cala, as subrogee of Luz, entitled to
reimbursement from Raul?
May Cala recover what it has paid Luz?
SUGGESTED ANSWER:
No. Luz executed a release in favor of Raul
(Manila Mahogany Mfg Corp v CA GR 52756, 12
Oct 1987)
Yes. Cala lost its right against Raul because
of the release executed by Luz. Since the
release was made without the consent of
Cala, Cala may recover the amount of
P5,000 form Luz (Manila Mahogany Mfg Corp
v CA GR 52756, 12 Oct 1987).
Insurer; Authorized Driver Clause (1991)
Sheryl insured her newly acquired car, a
Nissan Maxima against any loss or damage
for P50th and against 3rd party liability for
P20th with the XYZ Ins Co. Under the
policy, the car must be driven only by an
authorized driver who is either: 1) the
insured, or 2) any person driving on the
insured’s order or with his permission:
provided that the person driving is
permitted in accordance with the licensing
or other laws or regulations to drive the
motor vehicle and is not disqualified from
Version 1990-2003 Arranged by SULAW Class 2005
driving such motor vehicle by order of a
court.
During the effectivity of the policy, the car,
then driven by Sheryl herself, who had no
driver’s license, met an accident and was
extensively damaged. The estimated cost of
repair was P40th. Sheryl immediately
notified XYZ, but the latter refused to pay
on the policy alleging that Sheryl violated
the terms thereof when she drove it
without a driver’s license. Is the insurer
correct?
SUGGESTED ANSWER:
The insurer was not correct in denying the
claim since the proviso “that the person
driving is permitted in accordance with the
licensing, etc.” qualified only a person
driving the vehicle other than the insured
at the time of the accident (Palermo v
Pyramid Ins Co GR 36480 31 May 88)
ALTERNATIVE ANSWER:
The insurer is correct. The clause
“authorized driver” in the policy evidently
applies to both the insured and any other
person driving the vehicle at the time of the
accident. The term “authorized driver”
should be construed as a person who is
authorized by law to driver the vehicle
(Peza v Alikpala 160s31)
Insurer; Authorized Driver Clause (2003)
Rick de la Cruz insured his passenger
jeepney with Asiatic Insurers, Inc. The
policy provided that the authorized driver
of the vehicle should have a valid and
existing driver’s license. The passenger
jeepney of Rick de la Cruz which was at the
time driven by Jay Cruz,
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
figured in an accident resulting in the
death of a passenger. At the time of the
accident, Jay Cruz was licensed to drive but
it was confiscated by an LTO agent who
issued him a Traffic Violation Report (TVR)
just minutes before the accident. Could
Asiatic Insurers, Inc., be made liable under
its policy? Why? (6%)
SUGGESTED ANSWER:
Asiatic Insurers, Inc., should be made
liable under the policy. The fact that the
driver was merely holding a TVR does not
violate the condition that the driver should
have a valid and existing driver’s license.
Besides, such a condition should be
disregarded because what is involved is a
passenger jeepney, and what is involved
here is not own damage insurance but third
party liability where the injured party is a
third party not privy to the contract of
insurance.
loss of the car but no longer liable for
other installments not yet
due at the time of the loss of the car.
Decide.
SUGGESTED ANSWER:
Yes. The car was lost due to theft. What
applies in this case is the “theft” clause,
and not the “authorized driver” clause. It is
immaterial that HL’s wife was driving the
car with an expired driver’s license at the
time it was carnapped. (Perla Compania de
Seguros v CA 208 s 487)
The promissory note is not affected by
whatever befalls the subject matter of the
accessory contract. The

Insurer; Authorized Driver Clause; vehicle is

stolen (1993)
HL insured his brand new car with P Ins Co
for comprehensive coverage wherein the
insurance company undertook to indemnify
him against loss or damage to the car a) by
accidental collision ... b) by fire, external
explosion, burglary, or theft, and c)
malicious act.

After a month, the car was carnapped while

parked in the parking space in front of the
Intercontinental Hotel in Makati. HL’s wife
who was driving said car before it was
carnapped reported immediately the
incident to various government agencies in
compliance with the insurance
requirements.

Because the car could not be recovered,

HL filed a claim for the loss of the car with
the insurance company but it was denied
on the ground that his wife who was
driving the car when it was carnapped was
in the possession of an expired driver’s
license, a violation of the “authorized
driver” clause of the insurance company.
May the insurance company be held liable
to indemnify HL for the loss of the
insured vehicle? Explain.
Supposing that the car was brought by HL
on installment basis and there were
installments due and payable before the
loss of the car as well as installments
not yet payable. Because of the loss of
the car, the vendor demanded from HL
the unpaid balance of the promissory
note. HL resisted the demand and
claimed that he was only liable for the
installments due and payable before the
 Page 58 of 103
unpaid balance on the promissory note
should be paid and not only the
installments due and payable before the
loss of the car.
Insurer; Group Insurance; Employer-Policy Holder
(2000) X company procured a group accident
insurance policy for its construction
employees variously assigned to its
provincial infrastructure projects. Y Y
Insurance Company underwrote the
coverage, the premiums of which were paid
for entirely by X Company without any
employee contributions. While the policy
was in effect, five of the covered employees
perished at sea on their way to their
provincial assignments. Their wives sued Y
Insurance Company for payment of death
benefits under the policy. While the suit
was pending, the wives signed a power of
attorney designating X Company executive,
PJ, as their authorized representative to
enter into a settlement with the insurance
company. When a settlement was reached,
PJ instructed the insurance company to
issue the settlement check to the order of X
Company, which will undertake the
payment to the individual claimants of their
respective shares. PJ misappropriated the
settlement amount and the wives pursued
their case against Y Insurance Co. Will the
suit prosper? Explain (3%)
SUGGESTED ANSWER:
Yes. The suit will prosper. Y Ins Co is liable.
X Co, through its executive, PJ, acted as
agent of Y Ins Co. The latter is thus bound
by the misconduct of its agent. It is the
Version 1990-2003 Arranged by SULAW Class 2005
usual practice in the group insurance
business that the employer-policy holder is
the agent of the insurer.
Insurer; Liability of the Insurers (1990)
Suppose that Fortune owns a house valued
at P600th and insured the same against fire
with 3 insurance companies as follows:
X –
P400th
–
P200th
Z –
P600th
In the absence of any stipulation in the
policies from which insurance company or
companies may Fortune recover in case fire
should destroy his house completely?
SUGGESTED ANSWER:
Fortune may recover from the insurers in
such order as he may select up to their
concurrent liability (Sec 94 Ins Code)
Valued Policy
If each of the fire insurance policies
obtained by Fortune in the problem (a) is a
valued policy and the value of his house
was fixed in each of the policies at P1m,
how much would Fortune recover from X if
he has already obtained full payment on
the insurance policies issued by Y and Z?
SUGGESTED ANSWER:
Fortune may still recover only the balance
of P200,000 from X insurance company
since the insured may only recover up to
the extent of his loss.
ALTERNATIVE:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) imported (Pan Malayan Ins Co v CA gr 95070
Having already obtained full payment on Sep 5, 1991)
the insurance policies issued by Y and Z, Loss: Constructive Total Loss (2005)
Fortune may no longer recover from X
M/V Pearly Shells, a passenger and cargo
insurance policy.
vessel, was insured for P40,000,000.00
Open Policy against “constructive total loss.” Due to a
If each of the policies obtained by Fortune typhoon, it sank near Palawan. Luckily,
in the problem (a) above is an open policy there were no casualties, only injured
and it was immediately determined after passengers. The ship owner sent a notice of
the fire that the value of Fortune’s house abandonment of his interest over the vessel
was P2.4m, how much may he collect from to the insurance company which then
X,Y and Z?
SUGGESTED ANSWER:
In an open policy, the insured may recover
his total loss up to the amount of the
insurance cover. Thus, the extent of
recovery would be P400th from X, P200th
from Y, and P600th from Z.

In problem (a), what is the extent of the

liability of the insurance companies among
themselves?
SUGGESTED ANSWER:
In problem (a), the insurance companies
among themselves would be liable, viz: X –
4/12 of P600th = P200th
Y – 2/12 of P600th = P100th
Z – 6/12 of P600th = P300th

Supposing in problem (a) above, Fortune

was able to collect from both Y and Z, may
he keep the entire amount he was able to
collect from the said 2 insurance
companies?
SUGGESTED ANSWER:
No, he can only be indemnified for his loss,
not profit thereby; hence he must return
P200th of the P800th he was able to
collect.

Loss: Actual Total Loss (1996)

RC Corporation purchased rice from
Thailand, which it intended to sell locally.
Due to stormy weather, the ship carrying
the rice became submerged in sea water,
and with it the rice cargo. When the cargo
arrived in Manila, RC filed a claim for total
loss with the insurer, because the rice was
no longer fit for human consumption.
Admittedly, the rice could still be used as
animal feed. Is RC’s claim for total loss
justified? Explain.
SUGGESTED ANSWER:
Yes, RC’s claim for total loss is justified.
The rice, which was imported from
Thailand for sale locally, is obviously
intended for consumption by the public.
The complete physical destruction of the
rice is not essential to constitute an actual
total loss. Such a loss exists in this case
since the rice, having been soaked in sea
water and thereby rendered unfit for
human consumption, has become totally
useless for the purpose for which it was
 Page 59 of 103
hired professionals to afloat the vessel for
P900,000.00. When re-floated, the vessel
needed repairs estimated at P2,000,000.00.
The insurance company refused to pay the
claim of the ship owner, stating that there
was “no constructive total loss.”
Was there “constructive total loss” to
entitle the ship owner to recover from
the insurance company? Explain.
Was it proper for the ship owner to send a
notice of abandonment to the insurance
company? Explain.
(5%)
SUGGESTED ANSWER:
No, there was no "constructive total loss"
because the vessel was refloated and the
costs of refloating plus the needed repairs
(P 2.9 Million) will not be more than three-
fourths of the value of the vessel. A
constructive total loss is one which gives to
a person insured a right to abandon. (Sec,
131, Insurance Code) There would have
been a constructive total loss had the
vessel MN Pearly Shells suffer loss or
needed refloating and repairs of more than
the required three-fourths of its value, i.e.,
more than P30.0 Million (Sec. 139, Insurance
Code, cited in Oriental Assurance v. Court of
Appeals and Panama Saw Mill, G.R. No. 94052,
August 9, 1991)
However, the insurance company shall pay
for the total costs of refloating and needed
repairs (P2.9 Million).
Was it proper for the ship owner to send a
notice of
abandonment to the insurance
company? Explain.
SUGGESTED ANSWER:
Version 1990-2003 Arranged by SULAW Class 2005
No, it was not proper for the ship owner to
send a notice of abandonment to the
insurance company because abandonment
can only be availed of when, in a marine
insurance contract, the amount to be
expended to recover the vessel would have
been more than three-fourths of its value.
Vessel MN Pearly Shells needed only P2.9
Million, which does not meet the required
three-fourths of its value to merit
abandonment. (Section 139, Insurance
Code, cited in Oriental Assurance v. Court of
Appeals and Panama Saiv Mill, G.R. No. 94052,
August 9, 1991)
Loss: Total Loss Only (1992)
An insurance company issued a marine
insurance policy covering a shipment by
sea from Mindoro to Batangas of 1,000
pieces of Mindoro garden stones against
“total loss only.” The stones were loaded in
two lighters, the first with 600 pieces and
the second with 400 pieces. Because of
rough seas, damage was caused the second
lighter resulting in the loss of 325 out of
the 400 pieces. The owner of the shipment
filed claims against the insurance company
on the ground of constructive total loss
inasmuch as more than ¾ of the value of
the stones had been lost in one of the
lighters.
Is the insurance company liable under its
policy? Why?
SUGGESTED ANSWER:
The insurance company is not liable under
its policy covering against “total loss only”
the shipment of 1,000 pieces of Mindoro
garden stones. There is no constructive
total loss that can claimed since the ¾ rule
is to be computed on the total 1,000 pieces
of Mindoro
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
garden stones covered by the single policy Copyright (1995)
coverage (see What intellectual property rights are
Oriental Assurance Co v CA 200 s 459)
protected by copyright?
SUGGESTED ANSWER:
Marine Insurance; Implied Warranties (2000)
Sec 5 of PD 49 provides that Copyright
What warranties are implied in marine
shall consist in the exclusive right:
insurance?
SUGGESTED ANSWER:
The following warranties are implied in
marine insurance:
That the ship is seaworthy to make the
voyage and/or to take in certain cargoes
That the ship shall not deviate from the
voyage insured;
That the ship shall carry the necessary
documents to show nationality or
neutrality and that it will not carry any
document which will cast reasonable
suspicion thereon;
That the ship shall not carry contraband,
especially if it is making a voyage
through belligerent waters.

Marine Insurance; Peril of the Ship vs. Peril of the

Sea (1998)
A marine insurance policy on a cargo states
that “the insurer shall be liable for losses
incident to perils of the sea.” During the
voyage, seawater entered the compartment
where the cargo was stored due to the
defective drainpipe of the ship. The insured
filed an action on the policy for recovery of
the damages caused to the cargo. May the
insured recover damages? (5%)
SUGGESTED ANSWER:
No. The proximate cause of the damage to
the cargo insured was the defective
drainpipe of the ship. This is peril of the
ship, and not peril of the sea. The defect in
the drainpipe was the result of the ordinary
use of the ship. To recover under a marine
insurance policy, the proximate cause of
the loss or damage must be peril of the sea.

Mutual Insurance Company; Nature & Definition (2006)

What is a mutual insurance company or
association?
SUGGESTED ANSWER:
A mutual life insurance corporation is a
cooperative that promotes the welfare of
its own members, with the money collected
from among themselves and solely for their
own protection and not for profit. Members
are both the insurer and insured. A mutual
life insurance company has no capital stock
and relies solely upon its contributions or
premiums to meet unexpected losses,
contingencies and expenses (Republic v.
Sunlife, G.R. No 158085, October 14,
2005).

Intellectual Property
 Page 60 of 103
to print, reprint, publish, copy, distribute,
multiply, sell and make photographs,
photo engravings, and pictorial
illustrations of the works;
to make any translation or other version or
extracts or arrangements or adaptation
thereof; to dramatize if it be a non-
dramatic work; to convert it into a non-
dramatic work if it be a drama; to
complete or execute it if it be a model
or design;
to exhibit, perform, represent, produce or
reproduce the work in any manner or
by any method whatever for profit or
otherwise; if not reproduced in copies
for sale, to sell any manuscripts or any
record whatsoever thereof;
to make any other use or disposition of the
work consistent with the laws of the
land
Copyright; Commissioned Artist (1995)
Solid Investment House commissioned Mon
Blanco and his son Steve, both noted
artists, to paint a mural for the Main Lobby
of the new building of Solid for a contract
price of P2m.
who owns the mural? Explain
Who owns the copyright of the mural?
Explain.
SUGGESTED ANSWER:
Solid owns the mural. Solid was the one
who commissioned the artists to do the
work and paid for the work in the sum of
P2m
Version 1990-2003 Arranged by SULAW Class 2005
b)Unless there is a stipulation to the
contrary in the contract, the copyright shall
belong in joint ownership to Solid and Mon
and Steve.
Copyright; Commissioned Artist (2004)
BR and CT are noted artists whose
paintings are highly prized by collectors.
Dr. DL commissioned them to paint a mural
at the main lobby of his new hospital for
children. Both agreed to collaborate on the
project for a total fee of two million pesos
to be equally divided between them. It was
also agreed that Dr. DL had to provide all
the materials for the painting and pay for
the wages of technicians and laborers
needed for the work on the project.
Assume that the project is completed and
both BR and CT are fully paid the amount
of P2M as artists' fee by DL. Under the law
on intellectual property, who will own the
mural? Who will own the copyright in the
mural? Why? Explain. (5%)
SUGGESTED ANSWER:
Under Section 178.4 of the Intellectual
Property Code, in case of commissioned
work, the creator (in the absence of a
written stipulation to the contrary) owns
the copyright, but the work itself belongs
to the person who commissioned its
creation. Accordingly, the mural belongs to
DL. However, BR and CT own the
copyright, since there is no stipulation to
the contrary.
Copyright; Infringement (1994)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) In a written legal opinion for a client on the
The Victoria Hotel chain reproduces difference between apprenticeship and
videotapes, distributes the copies thereof learnership, Liza quoted without
to its hotels and makes them available to permission a labor law expert's comment
hotel guests for viewing in the hotel guest appearing in his book entitled "Annotations
rooms. It charges a separate nominal fee on the Labor Code."
for the use of the videotape player. Can the labor law expert hold Liza liable
Can the Victoria Hotel be enjoined for for infringement of copyright for quoting a
infringing copyrights and held liable for portion of his book without his permission?
damages? (5%)
SUGGESTED ANSWER:
Would it make any difference if Victoria
Hotel does not charge any fee for the use
of the videotape?
SUGGESTED ANSWER:
Yes. Victoria Hotel has no right to use such
video tapes in its hotel business without
the consent of the creator/ owner of the
copyright.

No. The use of the videotapes is for

business and not merely for home
consumption. (Filipino Society of Composers,
Authors Publishers v Tan 148 s 461; pd 1988)

Copyright; Infringement (1997)

In an action for damages on account of an
infringement of a copyright, the defendant
(the alleged pirate) raised the defense that
he was unaware that what he had copied
was a copyright material. Would this
defense be valid?
SUGGESTED ANSWER:
No. An intention to pirate is not an element
of infringement. Hence, an honest intention
is no defense to an action for infringement.
ALTERNATIVE ANSWER:
Yes. The owner of the copyright must make
others aware that the material in question
is under or covered by a copyright. This is
done by the giving of such notice at a
prominent portion of the copyright
material. When the alleged pirate is thus
made aware thereof, his act of pirating the
copy material will constitute infringement.

Copyright; Infringement (1998)

Juan Xavier wrote and published a story
similar to an unpublished copyrighted story
of Manoling Santiago. It was, however,
conclusively proven that Juan Xavier was
not aware that the story of Manoling
Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for
infringement of copyright. Is Juan Xavier
liable? (2%)
SUGGESTED ANSWER:
Yes. Juan Xavier is liable for infringement
of copyright. It is not necessary that Juan
Xavier is aware that the story of Manoling
Santiago was protected by copyright. The
work of Manoling Santiago is protected at
the time of its creation.

Copyright; Infringement (2006)

 Page 61 of 103
Liza cannot be held liable for infringement
of copyright since under the Intellectual
Property Code, one of the limitations to the
copyright is the making of quotations from
a published work for purpose of any
judicial proceedings or for giving of
professorial advice by legal practitioner,
provided that the source and name of the
author are identified (See Section 184.1[k]
of the Intellectual Property Code of the
Philippines).
Copyright; Photocopy; when allowed (1998)
May a person have photocopies of some
pages of the book of Professor Rosario
made without violating the copyright law?
(3%)
SUGGESTED ANSWER:
Yes. The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study,
is permitted, without the authorization of
the owner of the copyright in the work.
Infringement vs. Unfair Competition (1996)
What is the distinction between
infringement and unfair competition?
SUGGESTED ANSWER:
The distinction between infringement
(presumably trademark) and unfair
competition are as follows:
Infringement of trademark is the
unauthorized use of a trademark,
whereas unfair competition is the
passing off of one’s goods as those of
another;
Version 1990-2003 Arranged by SULAW Class 2005
Fraudulent intent is unnecessary in
infringement of trademark, whereas
fraudulent intent is essential in unfair
competition;
The prior registration of the trademark is a
prerequisite to an action for
infringement of trademark, whereas
registration of the trademark is not
necessary in unfair competition. (Del
Monte Corp v CA 78325 Jan 25,90 181s410)
Infringement vs. Unfair Competition (2003)
In what way is an infringement of a
trademark similar to that which pertains to
unfair competition?
SUGGESTED ANSWER:
Infringement; Jurisdiction (2003)
K-9 Corporation, a foreign corporation
alleging itself to be the registered owner of
trademark “K-9” and logo “K”, filed an Inter
Partes case with the Intellectual Property
Office against Kanin Corporation for the
cancellation of the latter’s mark “K-9” and
logo “K.” During the pendency of the case
before the IPO, Kanin Corporation brought
suit against K-9 Corporation before the RTC
for infringement and damages. Could the
action before the RTC prosper? Why?
SUGGESTED ANSWER:
Patent; Non-Patentable Inventions (2006)
Supposing Albert Einstein were alive today
and he filed with the Intellectual Property
Office (IPO) an application for patent for
his theory of relativity expressed in the
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
formula E=mc2. The IPO disapproved
Einstein's application on the ground that
his theory of relativity is not patentable.
Is the IPO's action correct? (5%)
SUGGESTED ANSWER:
Yes, the IPO is correct because under the
Intellectual Property Code, discoveries,
scientific theories and mathematical
methods, are classified to be as "non-
patentable inventions." Eintein's theory of
relativity falls within the category of being
a non-patentable "scientific theory."
Supposing Joab got wind of the inventions
of his employees and also laid claim to
the patents, asserting that Cezar and
Francis were using his materials and
company time in making the devices,
will his claim prevail over those of his
employees?
Explain.
SUGGESTED ANSWER:
No, Joab's claim cannot prevail over those
of his employees. In the first place, Joab did
not commission any of the two employees
to invent the device, and its

Patents: Gas-Saving Device: first to file rule (2005)

Cezar works in a car manufacturing
company owned by Joab. Cezar is quite
innovative and loves to tinker with things.
With the materials and parts of the car, he
was able to invent a gas-saving device that
will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar
created the device and likewise, came up
with a similar gadget, also using scrap
materials and spare parts of the company.
Thereafter, Francis filed an application for
registration of his device with the Bureau
of Patents. Eighteen months later, Cezar
filed his application for the registration of
his device with the Bureau of Patents.

Is the gas-saving device patentable?

Explain.
SUGGESTED ANSWER:
Yes, the gas-saving device is patentable
because it provides a technical solution to
a problem in a field of human activity. It is
new and involves an inventive step, and
certainly industrially applicable. It
therefore fulfills the requisites mandated
by the intellectual Property Code for what
is patentable.

Assuming that it is patentable, who is

entitled to the patent? What, if any, is
the remedy of the losing
party?
SUGGESTED ANSWER:
Cezar is entitled to the patent because he
was the real inventor. Francis, copying
from the work of Cezar, cannot claim the
essential criteria of an inventor, who must
possess essential elements of novelty,
originality and precedence to be entitled to
protection. Nevertheless, under the "first to
file rule," Francis application would have to
be given priority. Cezar, however, has
within three months from the decision, to
have it cancelled as the rightful inventor;
or within one year from publication, to file
an action to prove his priority to the
invention, which has been taken from him
and fraudulently registered by Francis.
 Page 62 of 103
invention did not fall within their regular
duties. What prevails is the provision of the
Intellectual Property Code that holds that
the invention belongs to the employee, if
the inventive activity is not a part of his
regular duties, even if he uses the time,
facilities and materials of the employer.
Patents: Infringement; Remedies & Defenses (1993)
Ferdie is a patent owner of a certain
invention. He discovered that his invention
is being infringed by Johann.
What are the remedies available to Ferdie
against Johann?
If you were the lawyer of Johann in the
infringement suit, what are the defenses
that your client can assert?
SUGGESTED ANSWER:
The following remedies are available to
Ferdie against Johann.
seize and destroy
injunction
damages in such amount may have
been obtained from the use of the
invention if properly transacted
which can be more than what the
infringer (Johann ) received.
Attorney’s fees and cost
These are the defenses that can be
asserted in an infringement suit:
Patent is invalid (Sec 45 RA 165, as
amended)
Patent is not new or patentable
Version 1990-2003 Arranged by SULAW Class 2005
Specification of the invention does not
comply with Sec 14
Patent was issued not to the true and
actual inventor, designer or author of
the utility model or the plaintiff did
not derive his rights from the true and
actual inventor, designer or author of
the utility model (Sec 28 RA 165 as
amended)
Patents; Infringement (1992)
In an action for infringement of patent, the
alleged infringer defended himself by
stating 1) that the patent issued by the
Patent Office was not really an invention
which was patentable; 2) that he had no
intent to infringe so that there was no
actionable case for infringement; and 3)
that there was no exact duplication of the
patentee’s existing patent but only a minor
improvement. With those defenses, would
you exempt the alleged violator from
liability? Why?
SUGGESTED ANSWER:
I would not exempt the alleged violator
from liability for the following reasons:
A patent once issued by the Patent Office
raises a presumption that the article is
patentable; it can, however be shown
otherwise (Sec 45 RA 165). A mere
statement or allegation is not enough to
destroy that presumption. (Aquas v de
Leon 30 Jan 82 L-32160)
An intention to infringe is not necessary
nor an element in a case for
infringement of a patent.
Version 1990-2006 Updated by Dondee
 SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
The application for registration by Turbo
There is no need of exact duplication of the
Corporation may be contested. The
patentee’s existing patent such as when
Trademark Law would not allow the
the improvement made by another is
registration of a trademark which, when
merely minor
applied to or used in connection with his
(Frank v Benito, 51p713). To be
products, is merely descriptive or
independently patentable, an
deceptively misdescriptive of them.
improvement of an existing patented
Confusion can result from the use of
invention must be a major improvement
(Aquas v de Leon L-32160 30Jan82) “Axilon” as the generic product itself.
ALTERNATIVE ANSWER:
Patents; Rights over the Invention (1990) Medical drugs may be procured only upon
prescription made by a duly licensed
Cheche invented a device that can convert
rainwater into automobile fuel. She asked physician. The possibility of
Macon, a lawyer, to assist in getting her
invention patented. Macon suggested that
they form a corporation with other friends
and have the corporation apply for the
patent, 80% of the shares of stock thereof
to be subscribed by Cheche and 5% by
Macon. The corporation was formed and
the patent application was filed. However,
Cheche died 3 months later of a heart
attack.

Franco, the estranged husband of Cheche,

contested the application of the
corporation and filed his own patent
application as the sole surviving heir of
Cheche. Decide the issue with reasons.
SUGGESTED ANSWER:
The estranged husband of Checke cannot
successfully contest the application. The
right over inventions accrue from the
moment of creation and as a right it can
lawfully be assigned. Once the title thereto
is vested in the transferee, the latter has
the right to apply for its registration. The
estranged husband of Cheche, if not
disqualified to inherit, merely would
succeed to the interest of Cheche.
Note: An examinee who answers on the
basis of the issue of validity of the
transfer of patent as a valid
consideration for subscription of the
shares of stocks should be given due
credit.

Trademark (1990)
In 1988, the Food and Drug Administration
approved the labels submitted by Turbo
Corporation for its new drug brand name,
“Axilon.” Turbo is now applying with the
Bureau of Patents, Trademarks and
Technology Transfer for the registration of
said brand name. It was subsequently
confirmed that “Accilonne” is a generic
term for a class of anti-fungal drugs and is
used as such by the medical profession and
the pharmaceutical industry, and that it is
used as a generic chemical name in various
scientific and professional publications. A
competing drug manufacturer asks you to
contest the registration of the brand name
“Axilon” by Turbo. What will you advice be?
 Page 63 of 103
deception could be rather remote. Since it
cannot really be said that physicians can be
so easily deceived by such trademark as
“Axilon,” it may be hard to expect an
opposition thereto to succeed.
ANOTHER ANSWER:
The application for registration of Turbo
Corporation may be contested. The factual
settings do not indicate that there had
been prior use for at least 2 months of the
trademark “Axilon.”
Trademark (1994)
Laberge, Inc., manufactures and markets
after-shave lotion, shaving cream,
deodorant, talcum powder and toilet soap,
using the trademark “PRUT”, which is
registered with the Phil Patent Office.
Laberge does not manufacture briefs and
underwear and these items are not
specified in the certificate of registration.
JG who manufactures briefs and
underwear, wants to know whether, under
our laws, he can use and register the
trademark “PRUTE” for his merchandise.
What is your advice?
SUGGESTED ANSWER:
Yes. The trademark registered in the name
of Laberge Inc covers only after-shave
lotion, shaving cream, deodorant, talcum
powder and toilet soap. It does not cover
briefs and underwear.
The limit of the trademark is stated in the
certificate issued to Laberge Inc. It does
not include briefs and underwear which
Version 1990-2003 Arranged by SULAW Class 2005
are different products protected by
Larberge’s trademark.
JG can register the trademark “PRUTE” to
cover its briefs and underwear (Faberge Inc
v IAC 215 s 316)
Trademark, Test of Dominancy (1996)
What is the “test of dominancy?”
SUGGESTED ANSWER:
The test of dominancy requires that if the
competing trademark contains the main or
essential features of another and confusion
and deception is likely to result,
infringement takes place. Duplication or
imitation is not necessary; not is it
necessary that the infringing label should
suggest an effort to imitate. Similarity in
size, form and color, while relevant, is not
conclusive. (Asia Brewery v CA GR 103543
Jul5,93 224s437)
Trademark; Infringement (1991)
Sony is a registered trademark for TV,
stereo, radio, cameras, betamax and other
electronic products. A local company, Best
Manufacturing Inc produced electric fans
which it sold under the trademark Sony
without the consent of Sony. Sony sued
Best Manufacturing for infringement.
Decide the case.
SUGGESTED ANSWER:
There is no infringement. In order that a
case for infringement of trademark can
prosper, the products on which the
trademark is used must be of the same
kind. The electric fans produced by Best
Manufacturing cannot
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
be said to be similar to such products as
TV, stereo and radio sets or cameras or
betamax products of Sony.
ALTERNATIVE ANSWER:
There is infringement. If the owner of a
trademark which manufactures certain
types of goods could reasonably be
expected to engage in the manufacture of
another product using the same trademark,
another party who uses the trademark for
that product can be held liable for using
that trademark. Using this standard,
infringement exists because Sony can be
reasonably expected to use such trademark
on electric fans.
that it is an affiliate of an international
organization which has been using such
logo and tradename “Shangrila” for over
20 years. However, Shangrila Corporation
registered the tradename and logo in the
Philippines only after the suit was filed.
Which of the two corporations has a better
right to use the logo and the tradename?
Explain.
SUGGESTED ANSWER:
S Development Corporation has a better
right to use the logo and the tradename,
since the protective benefits of

Trademark; Test of Dominancy (1996)

N Corporation manufactures rubber shoes
under the trademark “Jordann” which hit
the Phil market in 1985, and registered its
trademark with the Bureau of Patents,
Trademarks and Technology (BPTTT) in
1990. PK Company also manufactures
rubber shoes with the trademark “Javorski”
which it registered with BPTTT in 1978.

In 1992, PK Co adopted and copied the

design of N Corporation’s “Jordann” rubber
shoes, both as to shape and color, but
retained the trademark “Javorski” on its
products.

May PK Company be held liable to N Co?

Explain.
SUGGESTED ANSWER:
PK Co may be liable for unfairly competing
against N Co. By copying the design, shape
and color of N Corporation’s “Jordann”
rubber shoes and using the same in its
rubber shoes trademarked “Javorski,” PK is
obviously trying to pass off its shoes for
those of N. It is of no moment that he
trademark “Javorski” was registered ahead
of the trademark “Jordann.” Priority in
registration is not material in an action for
unfair competition as distinguished from an
action for infringement of trademark. The
basis of an action for unfair competition is
confusing and misleading similarity in
general appearance, not similarity of
trademarks
(Converse Rubber Co v Jacinto Rubber &
Plastics Co GR 27425 and 30505, Apr28,80
97s158)

Tradename: International Affiliation (2005)

S Development Corporation sued Shangrila
Corporation for using the “S” logo and the
tradename “Shangrila”. The former claims
that it was the first to register the logo and
the tradename in the Philippines and that it
had been using the same in its restaurant
business. Shangrila Corporation counters
 Page 64 of 103
the law are conferred by the fact of
registration and not by use. Although
Shangrila Corporation's parent had used
the tradename and logo long before, the
protection of the laws will be for S
Development Corporation because it was
the first entity to register the intellectual
properties.
How does the international affiliation
of Shangrila Corporation affect the
outcome of the dispute? Explain. (5%)
SUGGESTED ANSWER:
The international affiliation of Shangrila
Corporation may be critical in the event
that its affiliates or parent company abroad
had registered in a foreign jurisdiction the
tradename and the logo. A well-known
mark and tradename is subject to
protection under Treaty of Paris for the
Protection of Intellectual Property to which
the Philippines is a member.
Insolvency & Corporate
Recovery
Insolvency vs. Suspension of Payment (1998)
Distinguish insolvency from suspension of
payments. (3%)
SUGGESTED ANSWER:
In insolvency, the liabilities of the debtor
are more than his assets, while in
Version 1990-2003 Arranged by SULAW Class 2005
suspension of payments, assets of the
debtor are more than his liabilities.
In insolvency, the assets of the debtor are
to be converted into cash for
distribution among his creditors, while
in suspension of payments, the debtor
is only asking for time within which to
convert his frozen assets into liquid
cash with which to pay his obligations
when the latter fall due.
Insolvency: Voluntary Insolvency (2005)
Aaron, a well-known architect, is suffering
from financial reverses. He has four
creditors with a total claim of P26 Million.
Despite his intention to pay these
obligations, his current assets are
insufficient to cover all of them. His
creditors are about to sue him.
Consequently, he was constrained to file a
petition for insolvency. (5%)
Since Aaron was merely forced by
circumstances to petition the court to
declare him insolvent, can the judge
properly treat the petition as one for
involuntary insolvency? Explain.
SUGGESTED ANSWER:
No. This is a case for voluntary insolvency
because this was filed by an insolvent
debtor owing debts exceeding the amount
of P1,000.00 under Section 14 of the
Insolvency Law. Under Section 20 of the
Insolvency Law, the petition must be filed
by three or more creditors. In the case at
bar, it is Aaron, the debtor, who filed the
insolvency proceedings.
Version 1990-2006 Updated by Dondee
 SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
No. Horacio may not be declared insolvent.
If Aaron is declared an insolvent by the
His assets worth P1.5m are more than his
court, what would be the effect, if any,
of such declaration on liabilities worth P1.2m.
his creditors? Explain. Insolvency; Assignees (1996)
SUGGESTED ANSWER:
A declaration by the court that the On June 16, 1995, Vicente obtained a writ
petitioner is insolvent will have the of preliminary attachment against Carlito.
following effects: The levy on Carlito’s property occurred on
The sheriff shall take possession of all June 25, 1995. On July 29, 1995, another
assets of the debtor until the creditor filed a petition for involuntary
appointment of a receiver or insolvency against Carlito. The insolvency
assignee; court gave due course to the
Payment to the debtor of any debts due
to him and the delivery to the
debtor of any property belonging to
him, and the transfer of any
property by him are forbidden;
All civil proceedings pending against
the insolvent shall be stayed; and
Mortgages and pledges are not affected
by the order declaring a person
insolvent. (Sec. 59, Insolvency Law)

Assuming that, Aaron has guarantors for

his debts, are the guarantors released
from their obligations once Aaron is
discharged from his debts? Explain.
SUGGESTED ANSWER:
No, precisely under the principle of
excussion, the liability of the guarantors
arises only after the exhaustion of the
assets of the principal obligor. The effect of
discharge merely confirms exhaustion of
the assets of the obligor available to his
creditors.
ALTERNATIVE ANSWER:
Yes. Article 2076 of the Civil Code
provides: The obligation of the guarantor is
extinguished at the same time as that of
the debtor, and for the same causes as all
other obligations.

What remedies are available to the

guarantors in case
they are made to pay the creditors?
Explain.
SUGGESTED ANSWER:
Under Article 2081, the guarantor may set
up against the creditor all the defenses that
pertain to the principal debtor. The
discharge obtained by Aaron on the
principal obligation can now be used as a
defense by the guarantors against the
creditors. The guarantors are also entitled
to indemnity under Article 2066 of the Civil
Code.
Insolvency; Assets vs. Liabilities (1998)
Horacio opened a coffee shop using money
borrowed from financial institutions. After
3 months, Horacio left for the US with the
intent of defrauding his creditors. While his
liabilities are worth P1.2m, his assets,
however are worth P1.5m. May Horacio be
declared insolvent? (2%)
 Page 65 of 103
petition. In the meantime, the case filed by
Vicente proceeded and resulted in a
judgment award in favor of Vicente.
May the judgment obtained by Vicente be
enforced independently of the insolvency
proceedings? Explain.
SUGGESTED ANSWER:
The judgment obtained by Vicente can be
enforced independently of the insolvency
proceedings. Under Sec 32 of the
Insolvency Law, the assignment to the
assignee of all the real and personal
property, estate and effects of the debtor
made by the clerk of the court shall vacate
and set aside any judgment entered in any
action commenced with 30 days
immediately prior to the commencement of
insolvency proceedings. In this case,
however, the action filed by Vicente against
Carlito was commenced by Vicente not
later than June 16, 1995 (the facts on this
point are not clear) when Vicente obtained
a writ of preliminary attachment against
Carlito or more than 30 days before the
petition for involuntary insolvency was filed
against Carlito by his other creditors. (i.e.
on July 29, 1995) (Radiola-Toshiba Phil v IAC
GR 75222 July18,91 199s373)
Insolvency; Effect; Declaration of Insolvency (1991)
What are the effects of a judgment in
insolvency in Voluntary Insolvency cases?
SUGGESTED ANSWER:
The adjudication or declaration of
insolvency by the court, after hearing or
default, shall have the following effects:
Forbid the payment to the debtor of any
debt due to him and the delivery to him
of any property belonging to him;
Version 1990-2003 Arranged by SULAW Class 2005
Forbid the transfer of any property by him;
and
Stay of all civil proceedings against the
insolvent but foreclosure may be
allowed (Secs 18 & 24 Insolvency Law)
Insolvency; Fraudulent Payment (2002)
As of June 1, 2002, Edzo Systems
Corporation (Edzo)
was indebted to the following creditors:
Ace Equipment Supplies – for various
personal computers and accessories
sold to Edzo on credit amounting to
P300,000.
Handyman Garage – for mechanical repairs
(parts and service) performed on Edzo’s
company car amounting to P10,000.
Joselyn Reyes – former employee of Edzo
who sued Edzo for unlawful termination
of employment and was able to obtain a
final judgment against Edzo for
P100,000.
Bureau of Internal Revenue – for unpaid
value-added taxes amounting to
P30,000.
Integrity Bank – which granted Edzo a loan
in 2001 in the amount of P500,000. The
loan was not secured by any asset of
Edzo, but it was guaranteed
unconditionally and solidarily by Edzo’s
President and controlling stockholder,
Eduardo Z. Ong, as accommodation
surety.
The loan due to Integrity Bank fell due on
June 15, 2002. Despite pleas for extension
of payment by Edzo, the
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Instead of selling profit participation
bank demanded immediate payment. certificates, I would urge Jerry to enter into
Because the bank threatened to proceed a partnership or to
against the surety, Eduardo Z. Ong, Edzo incorporate in order to raise cash for his
decided to pay up all its obligations to business.
Integrity Bank. On June 20, 2002, Edzo ALTERNATIVE ANSWER:
paid to Integrity Bank the full principal Jerry may sell profit participation
amount of P500,000, plus accrued interests certificates to his brothers and sisters
amounting to P55,000. As a result, Edzo without registering the same with the SEC
had hardly any cash left for operations and because his sale is an exempted
decided to close its business. After paying transaction being isolated and not a sale to
the unpaid salaries of its employees, Edzo the public.
filed a petition for insolvency on July 1,
Insolvency; obligations that survive (1997)
2002.

In the insolvency proceedings in court, the

assignee in insolvency sought to invalidate
the payment made by Edzo to Integrity
Bank for being a fraudulent transfer
because it was made within 30 days before
the filing of the insolvency petition. In
defense, Integrity Bank asserted that the
payment to it was for a legitimate debt that
was not covered by the prohibition because
it was “a valuable pecuniary consideration
made in good faith,” thus falling within the
exception specified in the Insolvency Law.
As judge in the pending insolvency case,
how would you decide the respective
contentions of the assignee in insolvency
and of Integrity Bank? Explain (5%)
SUGGESTED ANSWER:
The contention of the assignee in
insolvency is correct. The payment made
by Edzo to Integrity Bank was a fraudulent
preference or payment, being made within
thirty (30) days before the filing of the
insolvency petition.

Insolvency; Jurisdiction; Sole Proprietorship (1990)

One day Jerry Haw, doing business under
the name Starlight Enterprise, a sole
proprietorship, finds himself short on cash
and unable to pay his debts as they fall due
although he has sufficient property to cover
such debts. He asks you, as his retained
counsel, for advice on the following
queries:
Should he file a petition with the SEC to be
declared in a state of suspension of
payments in view of the said financial
condition he faces? Explain your answer.
Should he sell profit participation
certificates to his 10 brothers and sisters in
order to raise cash for his
business? Explain.
SUGGESTED ANSWER:
I would counsel Jerry to file the Petition for
Suspension of Payment with the ordinary
courts, rather than the SEC. SEC’s
jurisdiction over such cases is confined
only to petitions filed by corporations and
partnerships under its regulatory powers.
 Page 66 of 103
An insolvent debtor, after lawful discharge
following an adjudication of insolvency, is
released from, generally, all debts, claims,
liabilities and demands which are or have
been proved against his estate. Give 5
obligations of the insolvent debtor to
survive.
SUGGESTED ANSWER:
The 5 obligations of the insolvent debtor
that survive are as follows:
Taxes and assessments due the
government, national or local;
Obligations arising from embezzlement or
fraud;
Obligation of any person liable with the
insolvent debtor for the same debt,
either as a solidary co-debtor, surety,
guarantor, partner, indorser or
otherwise.
Alimony or claim for support; and
Debts not provable against the estate (such
as after-incurred obligations) of, or not
included in the schedule submitted by,
the insolvent debtor.
Insolvency; Voluntary Insolvency Proceeding (1991)
Is the issuance of an order, declaring a
petition in a Voluntary Insolvency
proceeding insolvent, mandatory upon the
court?
SUGGESTED ANSWER:
Assuming that the petition was in due form
and substance and that the assets of the
petitioner are less than his liabilities, the
court must adjudicate the insolvency (Sec
18 Insolvency Law)
Version 1990-2003 Arranged by SULAW Class 2005
Insolvency; Voluntary vs. Involuntary Solvency (1995)
Distinguish between voluntary insolvency
and involuntary insolvency.
SUGGESTED ANSWER:
In voluntary insolvency, it is the debtor
himself who files the petition for
insolvency, while in involuntary insolvency,
at least 3 creditors are the ones who file
the petition for insolvency against the
insolvent debtor.
ALTERNATIVE ANSWER:
The following are the distinctions:
In involuntary insolvency, 3 or more
creditors are required, whereas in
voluntary insolvency, one creditor may
be sufficient;
In involuntary insolvency, the creditors
must be residents of the Philippines,
whose credits or demand accrued in the
Philippines, and none of the creditors
has become a creditor by assignment
within 30 days prior to the filing of the
petition, whereas in voluntary
insolvency, these are not required.
In involuntary insolvency, the debtor must
have done any of the acts of insolvency
as enumerated by Sec 20, whereas in
voluntary insolvency, the debtor must
not have done any of said acts.
In involuntary insolvency, the amount of
indebtedness must not be less than
P1,000 whereas in voluntary insolvency,
it must exceed P1,000.
In involuntary insolvency, the petition must
be accompanied by a bond, whereas
such is not required in voluntary
insolvency.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Suspension of Payment vs. Insolvency (1995)
Law on Corporate Recovery (2003) Distinguish between suspension of
X Corporation applied for its rehabilitation payments and insolvency.
SUGGESTED ANSWER:
and submitted a rehabilitation plan which
In suspension of payments, the debtor is
called for the entry by it into a joint
not insolvent. He only needs time within
venture agreement with Y Corporation.
which to convert his asset/s into cash with
Under the agreement, Y Corporation was to
which to pay his obligations when they fall
lend to X Corporation its credit facilities
due. In the case of insolvency, the debtor is
with certain banks to obtain funds not only
insolvent, that is, his assets are less than
to operate X Corporation but also for a part
his liabilities.
thereof in the amount of P1 million as ALTERNATIVE ANSWER:
initial deposit in a sinking fund to be The following are the distinctions:
augmented annually in amounts equivalent
to 10% of the yearly income from its
operation of the business of X Corporation.
From this fund the creditors of X
Corporation were to be paid annually,
starting from the second year of
operations, with the entire indebtedness to
be liquidated in 15 years. The creditors of
X Corporation objected to the plan because
Y Corporation would be taking over the
business and assets of X Corporation.
Could the court approve the plan despite
the objections of the creditors of X
Corporation and could the creditors be
compelled to follow the plan? Could Y
Corporation, in managing the business of X
Corporation in the meantime, be deemed to
have taken-over X Corporation itself? (6%)
SUGGESTED ANSWER:

Rehabilitation; Stay Order (2006)

The Blue Star Corporation filed with the
Regional Trial Court a petition for
rehabilitation on the ground that it foresaw
the impossibility of paying its obligations as
they fall due. Finding the petition sufficient
in form and substance, the court issued an
Order appointing a rehabilitation receiver
and staying the enforcement of all claims
against the corporation.
What is the rationale for the Stay
Order? (5%)
SUGGESTED ANSWER:
The purpose of the stay order is intended
to give the management committee or
rehabilitation receiver the leeway to make
the business viable again, without having
to divert attention and resources to
litigation in various fora (Philippine Airlines
v. Spouses Kurangking, et al, G.R. No. 146698,
September 24, 2002; BF Homes, Inc. v. Court of
Appeals, G.R. Nos. 76879 & 77143, October 3,
1990; Rubberworld [Phils.] Inc. v. NLRC, G.R.
No. 126773, April 14, 1999; Sobrejuanite v. ASB
Dev. Corp., G.R. No. 165675, September 30,
2005). It also prevents a creditor from
obtaining an advantage or preference over
another with respect to actions against the
corporation (Finasia Investments and Finance
Corp v. Court of Appeals, G. R. No. 107002,
October 7,1994).
 Page 67 of 103
In suspension of payments, the debtor has
sufficient property to cover all his debts
but foresees the impossibility of
meeting them when they respectively
fall due, whereas, in insolvency, the
debtor does not have sufficient property
to pay all his debts in full;
In suspension of payments, the purpose is
to suspend or delay payment of debts
which remain unaffected although a
postponement of payment is declared,
whereas, in insolvency, the object is to
obtain discharge from all debts and
liability;
In suspension of payments, no limit for the
amount of indebtedness is required,
whereas, in insolvency, the debts must
exceed P1,000 in case of voluntary
insolvency, or must not be less than
P1,000 in case of involuntary
insolvency.
Suspension of Payments vs. Stay Order (2003)
Distinguish the stay order in corporate
rehabilitation from a declaration in a state
of suspension of payments? (4%)
SUGGESTED ANSWER:
Suspension of Payments; Rehabilitation Receiver
(1999)
Debtor Corporation and its principal
stockholders filed with the Securities and
Exchange Commission (SEC) a petition for
rehabilitation and declaration of a state of
suspension of payments under PD 902-A.
Version 1990-2003 Arranged by SULAW Class 2005
The objective was for SEC to take control of
the corporation and all its assets and
liabilities, earnings and operations, and to
determine the feasibility of continuing
operations and rehabilitating the company
for the benefit of investors and creditors.
Generally, the unsecured creditors had
manifested willingness to cooperate with
Debtor Corporation. The secured creditors,
however, expressed serious objections and
reservations.
First Bank had already initiated judicial
foreclosure proceedings on the mortgage
constituted on the factory of Debtor
Corporation.
Second Bank had already initiated
foreclosure proceedings on a third-party
mortgage constituted on certain assets of
the principal stockholders.
Third Bank had already filed a suit against
the principal stockholders who had held
themselves liable jointly and severally for
the loans of Debtor Corporation with said
Bank.
After hearing, the SEC directed the
appointment of a rehabilitation receiver
and ordered the suspension of all actions
and claims against the Debtor corporation
as well as against the principal
stockholders.
Discuss the validity of the SEC order or
suspension? (2%)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) d. The action against the principal
Discuss the effects of the SEC order of stockholders’ surety in favor of the
suspension on the judicial foreclosure corporation is not suspended as it is not an
proceedings initiated by First Bank. action against the corporation but against
(2%) the stockholders whose personality is
Would the order of suspension have any separate from that of the corporation.
effect on the foreclosure proceedings SUGGESTED ANSWER:
initiated by Second Bank? Explain (2%)
e. Under PD 902A, the appointment of a
Would the order of suspension have any
rehabilitation receiver will suspend all
effect on the suit filed by Third Bank?
actions for claims against the corporation
Explain. (2%)
and the corporation will be placed under
What are the legal consequences of a
rehabilitation receivership? (2%)
What measures may the receiver take to
preserve the assets of Debtor
Corporation? (2%)
SUGGESTED ANSWER:
a. The SEC order of suspension of payment
is valid with respect to the debtor
corporation, but not with respect to the
principal stockholders. The SEC has
jurisdiction to declare suspension of
payments with respect to corporations,
partnership or associations, but not with
respect to individuals.
SUGGESTED ANSWER:
b. The SEC order of suspension of payment
suspended the judicial proceedings
initiated by the First Bank. According to
the Supreme Court in a line of cases, the
suspension order applies to secured
creditors and to the action to enforce the
security against the corporation regardless
of the stage thereof.
SUGGESTED ANSWER:
c. The order of suspension of payments
suspended the foreclosure proceedings
initiated by the Second Bank. While the
foreclosure is against the property of a
third party, it is in reality an action to
collect the principal obligation owned by
the corporation. During the time that the
payment of the principal obligation is
suspended, the debtor corporation is
considered to be not in default and,
therefore, even the right to enforce the
security, whether owned by the debtor-
corporation or of a third party, has not yet
arisen.
ALTERNATIVE ANSWER:
c. The suspension order does not apply to a
third party mortgage because in such a
case, the credit is not yet being enforced
against the corporation but against the
third party mortgagor’s property.
SUGGESTED ANSWER:
d. For the same reason as in (c), the order
of suspension of payments suspended the
suit filed by Third Bank against the
principal stockholders.
ALTERNATIVE ANSWER:
 Page 68 of 103
rehabilitation in accordance with
rehabilitation plan approved by the SEC.
SUGGESTED ANSWER:
f. To preserve the assets of the Debtor
Corporation, the receiver may take custody
of, and control over, all the existing assets
and property of the corporation; evaluate
existing assets and liabilities, earnings and
operations of the corporation; and
determine the best way to salvage and
protect the interest of the investors and
creditors.
Suspension of Payments; Remedies (2003)
When is the remedy of declaration in a
state of suspension of payments available
to a corporation?
SUGGESTED ANSWER:
(per dondee) This remedy is available to a
corporation when it experiences inability to
pay one's debts and liabilities, and where
the petitioning corporation either:
has sufficient property to cover all its debts
but foresees the impossibility of
meeting them when they fall due
(solvent but illiquid) or
has no sufficient property (insolvent) but is
under the management of a
rehabilitation receiver or a
management committee, the applicable
law is P.D. No. 902-A pursuant to Sec. 5
par.
Letters of Credit
Version 1990-2003 Arranged by SULAW Class 2005
a Letter of Credit: Mortgage (2005)
Ricardo mortgaged his fishpond to AC Bank
to secure a P1 Million loan. In a separate
transaction, he opened a letter of credit
with the same bank for $500,000.00 in
favor of HS Bank, a foreign bank, to
purchase outboard motors. Likewise,
Ricardo executed a Surety Agreement in
favor of AC Bank.
The outboard motors arrived and were
delivered to Ricardo, but he was not able to
pay the purchase price thereof.
Can AC Bank take possession of the
outboard motors? Why?
Can AC Bank also foreclose the mortgage
over the
fishpond? Explain. (5%)
SUGGESTED ANSWER:
No, for AC Bank has no legal standing,
much less a lien, on the outboard
motors. Insofar as AC Bank is
concerned, it has privity with the
person of Ricardo under the Surety
Agreement, and a lien on the fishpond
based on the real estate mortgage
constituted therein.
Yes, but only to enforce payment of the
principal loan of P1million secured by
the real estate mortgage on the
fishpond
Letter of Credit; Certification from Consignee (1993)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Letters of Credit; Liability of a confirming and
BV agreed to sell to AC, a Ship and
Merchandise Broker, 2,500 cubic meters of notifying bank (1994)
logs at $27 per cubic meter FOB. After In letters of credit in banking transactions,
distinguish the liability of a confirming
inspecting the logs, CD issued a purchase
bank from a notifying bank.
order. SUGGESTED ANSWER:
In case anything wrong happens to the
On the arrangements made upon
letter of credit, a confirming bank incurs
instruction of the consignee, H&T
liability for the amount of the letter of
Corporation of LA, California, the SP Bank
credit, while a notifying bank does not
of LA issued an irrevocable letter of credit
incur any liability.
available at sight in favor of BV for the
total purchase price of the logs. The letter Letters of Credit; Liability of a Notifying Bank (2003)
of credit was mailed to FE Bank with the What liability, if any is incurred by an
instruction “to forward it to the advising or notifying bank in a letter of
beneficiary.” The letter of credit provided credit transaction?
that the draft to be drawn is on SP Bank
and that it be accompanied by, among
other things, a certification from AC,
stating that the logs have been approved
prior shipment in accordance with the
terms and conditions of the purchase order.

Before loading on the vessel chartered by

AC, the logs were inspected by custom
inspectors and representatives of the
Bureau of Forestry, who certified to the
good condition and exportability of the
logs. After the loading was completed, the
Chief Mate of the vessel issued a mate
receipt of the cargo which stated that the
logs are in good condition. However, AC
refused to issue the required certification
in the letter of credit. Because of the
absence of certification, FE Bank refused to
advance payment on the letter of credit.
May Fe Bank be held liable under the letter
of credit? Explain.
Under the facts above, the seller, BV,
argued that FE Bank, by accepting the
obligation to notify him that the irrevocable
letter of credit has been transmitted to it
on his behalf, has confirmed the letter of
credit. Consequently, FE Bank is liable
under the letter of credit. Is the argument
tenable? Explain.
SUGGESTED ANSWER:
No. The letter of credit provides as a
condition a certification of AC. Without
such certification, there is no obligation on
the part of FE Bank to advance payment of
the letter of credit. (Feati Bank v CA 196 S
576)

No. FE Bank may have confirmed the letter

of credit when it notified BV, that an
irrevocable letter of credit has been
transmitted to it on its behalf. But the
conditions in the letter of credit must first
be complied with, namely that the draft be
accompanied by a certification from AC.
Further, confirmation of a letter of credit
must be expressed. (Feati Bank v CA 196 s
576)
 Page 69 of 103
SUGGESTED ANSWER:
It incurs no liability unless it is also the
negotiating bank
Bravo Bank received from Cisco Bank by
registered mail an irrevocable letter of
credit issued by Delta Bank for the
account of Y Company in the amount of
US$10,000,000 to cover the sale of
canned fruit juices. The beneficiary of
the letter of credit was X Corporation
which later on partially availed itself of
the letter of credit by submitting to
Bravo Bank all documents relative to
the shipment of the cans of fruit juices.
Bravo Bank paid X Corporation for its
partial availment. Later, however, it
refused further availment because of
suspicions of fraud being practiced
upon it and, instead , sued X
Corporation to recover what it had paid
the latter. How would you rule if you
were the judge to decide the
controversy? (6%)
SUGGESTED ANSWER:
Letters of Credit; Three Distinct Contract
Relationships (2002)
Explain the three (3) distinct but
intertwined contract relationships that are
indispensable in a letter of credit
transaction.
SUGGESTED ANSWER:
The three (3) distinct but intertwined
contract relationships that are
indispensable in a letter of credit
transaction are:
Version 1990-2003 Arranged by SULAW Class 2005
Between the applicant/buyer/importer
and the
beneficiary/seller/exporter – The
applicant/buyer/importer is the one who
procures the letter of credit and obliges
himself to reimburse the issuing bank
upon receipt of the documents of title,
while the beneficiary/seller/exporter is
the one who in compliance with the
contract of sale ships the goods to the
buyer and delivers the documents of
title and draft to the issuing bank to
recover payment for the goods. Their
relationship is governed by the contract
of sale.
Between the issuing bank and the
beneficiary/seller/exporter – The issuing
bank is the one that issues the letter of
credit and undertakes to pay the seller
upon receipt of the draft and proper
documents of title and to surrender the
documents to the buyer upon
reimbursement. Their relationship is
governed by the terms of the letter of
credit issued by the bank.
Between the issuing bank and the
applicant/buyer/importer – Their
relationship is governed by the terms of
the application and agreement for the
issuance of the letter of credit by the
bank.
Maritime Commerce
Average; Particular Average vs. General Average
(2003)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) On a clear weather, M/V Sundo, carrying
M/V Ilog de Manila with a cargo of 500 insured cargo, left the port of Manila
tons of iron ore left the Port of Zamboanga bound for Cebu. While at sea, the vessel
City bound for Manila. For one reason or encountered a strong typhoon forcing the
another, M/V Ilog de Manila hit a captain to steer the vessel to the nearest
submerged obstacle causing it to sink island where it stayed for seven days. The
along with its cargo. A salvor, Salvador, vessel ran out of provisions for its
Inc., was contracted to refloat the vessel passengers. Consequently, the vessel
for P1 Million. What kind of average was proceeded to Leyte to replenish its
the refloating fee of P1 million, and for supplies.
whose account should it be? Why? (4%)
SUGGESTED ANSWER: Assuming that the cargo was damaged
Particular Average. The owner of the vessel because of such deviation, who between
shall shoulder the average. Generally the insurance company and the owner of
speaking, simple or particular averages the cargo bears the loss? Explain.
include all expenses and damages caused SUGGESTED ANSWER:
to the vessel or cargo which have not
inured to the common benefit (Art. 809,
and are, therefore, to be borne only by the
owner of the property which gave rise to
the same (Art. 810) while general or gross
averages include "all the damages and
expenses which are deliberately caused in
order to save the vessel, its cargo, or both
at the same time, from a real and known
risk" (Art. 811). Being for the common
benefit, gross averages are to be borne by
the owners of the articles saved (Art. 812).
In the present case there is no proof that
the vessel had to be put afloat to save it
from an imminent danger.

Bottomry (1994)
Gigi obtained a loan from Jojo Corporation,
payable in installments. Gigi executed a
chattel mortgage in favor of Jojo whereby
she transferred “in favor of Jojo, its
successors and assigns, all her title,
rights ... to a vessel of which Gigi is the
absolute owner.” The chattel mortgage was
registered with the Philippine Coast Guard
pursuant to PD 1521. Gigi defaulted and
had a total accountability of P3M. But Jojo
could not foreclose the mortgage on the
vessel because it sank during a typhoon.
Meanwhile, Lutang Corporation which
rendered salvage services for refloating the
vessel sued Gigi.
Whose lien should be given preference,
that of Jojo or Lutang?
SUGGESTED ANSWER:
Lutang Corporation’s lien should be given
preference. The lien of Jojo by virtue of a
loan of bottomry was extinguished when
the vessel sank. Under such loan on
bottomry Jojo acted not only as creditor but
also as insurer. Jojo’s right to recover the
amount of the loan is predicated on the
safe arrival of the vessel at the port of
destination. The right was lost when the
vessel sank (Sec 17 PD 1521)

Carriage of Goods: Deviation: Liability (2005)

 Page 70 of 103
The insurance company should bear the loss
to the cargo because the deviation of the
vessel was proper in order to avoid a peril,
which was the strong typhoon. The running
out of provisions was a direct consequence of
the proper deviation in order to avoid the
peril of the typhoon.
ALTERNATIVE ANSWER:
The owner of the cargo bears the loss
because in the case at bar, they stayed too
long at the island, making it an improper
deviation. Every deviation not specified in
Sec. 124 is improper. (Sec. 125, Insurance
Code)
Carriage of Goods; Deviation; When Proper (2005)
Under what circumstances can a vessel
properly proceed to a port other than its
port of destination? Explain. (4%)
SUGGESTED ANSWER:
Deviation is proper:
when caused by circumstances over which
neither the master nor the owner of the
ship has any control;
when necessary to comply with a warranty
or avoid a peril, whether or not the
peril is insured against;
when made in good faith, and upon
reasonable grounds of belief in its
necessity to avoid a peril; or
when in good faith, for the purpose of
saving human life, or relieving another
vessel in distress. (Sec. 124, Insurance
Code)
Carriage of Goods; Exercise Extraordinary
Diligence (2005)
Version 1990-2003 Arranged by SULAW Class 2005
Star Shipping Lines accepted 100 cartons
of sardines from Master to be delivered to
555 Company in Manila. Only 88 cartons
were delivered, however, these were in bad
condition. 555 Company claimed from Star
Shipping Lines the value of the missing
goods, as well as the damaged goods. Star
Shipping Lines refused because the former
failed to present a bill of lading. Resolve
with reasons the claim of 555 Company.
(4%)
SUGGESTED ANSWER:
The claim of 555 Company is meritorious,
even if it fails to present a bill of lading.
Although a bill of lading is the best
evidence of the contract of carriage for
cargo, nevertheless such contract can exist
even without a bill of lading. Like any other
contract, a contract of carriage is a
meeting of minds that gives rise to an
obligation on the part of the carrier to
transport the goods. Jurisprudence has
held that the moment the carrier receives
the cargo for transport, then its duty to
exercise extraordinary diligence arises.
(Cia. Maritima v. Insurance Co. of North
America, G.R. No. L-18965, October 30, 1964;
Negre v. Cabahug Shipping & Co., G.R. No. L-
19609, April 29, 1966)
ALTERNATIVE ANSWER:
Star Shipping Lines can refuse to honor
555 Company's claim for the missing and
damaged goods. The Bill of Lading is the
document of title that legally establishes
the ownership of 555 Company over said
goods. 555 needs to present the Bill of
Lading to legally claim said goods.
(National Union Fire Insurance of Pittsburg v.
Stolt-Nielaen, G.R. No. 87958, April 26, 1990)
Charter Party (1991)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) and the shipping agent can exempt himself
The Saad Dev Co enters into a voyage therefrom only by abandoning the vessel
charter with XYZ over the latter’s vessel, with all his equipment and the freight he
the MV LadyLove. Before the Saad could may have earned during the voyage. On the
load it, XYZ sold Lady Love to Oslob other hand, assuming there is bareboat
Maritime Co which decided to load it for its charter, the stipulation in the charter party
own account. exempting the owner from liability is not
against public policy because the public at
May XYZ Shipping Co validly ask for the
large is not involved (Home Insurance Co. v.
rescission of the charter party? If so, can
American Steamship Agencies, Inc., 23 SCRA25
Saad recover damages? To what extent? (1968).
If Oslob did not load it for its own account,
is it bound by the charter party? COGSA: Prescription of Claims/Actions (2004)
Explain the meaning of “owner pro hac vice
of the vessel.” In what kind of charter party Version 1990-2003 Arranged by SULAW Class 2005
does this obtain?
SUGGESTED ANSWER:
XYZ may ask for the rescission of the
charter party if, as in this case, it sold the
vessel before the charterer has begun to
load the vessel and the purchaser loads it
for his own account. Saad may recover
damages to the extent of its losses (Art 689
Code of Commerce)

If Oslob did not load Lady Love for its own

account, it would be bound by the charter
party, but XYZ would have to indemnify
Oslob if it was not informed of the Charter
Party at the time of sale. (Art 689 Code of
Commerce)

The term “Owner Pro Hac Vice of the

Vessel,” is generally understood to be the
charterer of the vessel in the case of
bareboat or demise charter (Litonjua
Shipping Co v National Seamen’s Board GR
51910 10Aug1989)

Charter Party (2004)

Under a charter party, XXO Trading
Company shipped sugar to Coca-Cola
Company through SS Negros Shipping
Corp., insured by Capitol Insurance
Company. The cargo arrived but with
shortages. Coca-Cola demanded from
Capitol Insurance Co. P500.000 in
settlement for XXO Trading. The MM
Regional Trial Court, where the civil suit
was filed, "absolved the insurance
company, declaring that under the Code of
Commerce, the shipping agent is civilly
liable for damages in favor of third persons
due to the conduct of the carrier's captain,
and the stipulation in the charter party
exempting the owner from liability is not
against public policy. Coca-Cola appealed.
Will its appeal prosper? Reason briefly.
(5%)
SUGGESTED ANSWER:
No. The appeal of Coca-Cola will not
prosper. Under Article 587 of the Code of
Commerce, the shipping agent is civilly
liable for damages in favor of third persons
due to the conduct of the carrier's captain,
 Page 71 of 103 year under the Carriage of Goods by Sea
entered into a contract with BB thru CC to Act (COGSA) is not interrupted by a written
transport ladies' wear from Manila to extrajudicial demand. The provisions of Art
France with transhipment at Taiwan. 1155 of the NCC merely apply to
Somehow the goods were not loaded at prescriptive periods provided for in said
Taiwan on time. Hence, when the goods Code and not to special laws such as
arrived in France, they arrived "off-season" COGSA except when otherwise provided.
and AA was paid only for one-half the value (Dole v Maritime Co 148 s 118).
by the buyer. AA claimed damages from the
If the consignee’s action were predicated
shipping company and its agent. The
on misdelivery or conversion of goods, the
defense of the respondents was
provisions of the COGSA would be
prescription. Considering that the ladies'
wear suffered "loss of value," as claimed by inapplicable. In these cases, the NCC
AA, should the prescriptive period be one prescriptive periods, including Art 1155 of
year under the Carriage of Goods by Sea the NCC will apply (Ang v Compania
Act, or ten years under the Civil Code? Maritama 133 s 600)
Explain briefly. (5%)
SUGGESTED ANSWER: Version 1990-2006 Updated by Dondee
The applicable prescriptive period is ten
years under the Civil Code. The one-year
prescriptive period under the Carriage of
Goods by Sea Act applies in cases of loss or
damages to the cargo. The term "loss" as
interpreted by the Supreme Court in Mitsui
O.S.K. Lines Ltd. v. Court of Appeals, 287 SCRA
366 (1998), contemplates a situation where
no delivery at all was made by the carrier
of the goods because the same had
perished or gone out of commerce
deteriorated or decayed while in transit. In
the present case, the shipment of ladies'
wear was actually delivered. The "loss of
value" is not the total loss contemplated by
the Carriage of Goods by Sea Act.

COGSA; Prescription of Claims (1992)

A local consignee sought to enforce
judicially a claim against the carrier for
loss of a shipment of drums of lubricating
oil from Japan under the Carriage of Goods
by Sea Act (COGSA) after the carrier had
rejected its demand. The carrier pleaded in
its Answer the affirmative defense of
prescription under the provisions of said
Act inasmuch as the suit was brought by
the consignee after one (1) year from the
delivery of the goods. In turn, the
consignee contended that the period of
prescription was suspended by the written
extrajudicial demand it had made against
the carrier within the one-year period,
pursuant to Article 1155 of the Civil Code
providing that the prescription of actions is
interrupted when there is a written
extrajudicial demand by the creditors.

Has the action in fact prescribed? Why?

If the consignee’s action were predicated
on misdelivery or conversion of the goods,
would your
answer be the same? Explain briefly.
SUGGESTED ANSWER:
The action taken by the local consignee
has, in fact, prescribed. The period of one
Mercantile Law Bar Examination Q & A (1990-2006)
No party shall be held liable since the
COGSA; Prescription of Claims (2000) cause of the collision is fortuitous event.
RC imported computer motherboards from The carrier is not an insurer.
the United States and had them shipped to
Manila aboard an ocean-going cargo ship Doctrine of Inscrutable Fault (1997)
owned by BC Shipping Company. When the Explain the doctrine in Maritime accidents
cargo arrived at Manila seaport and – Doctrine of Inscrutable Fault
delivered to RC, the crate appeared intact;
but upon inspection of the contents, RC
discovered that the items inside had all
been badly damaged. He did not file any
notice of damage or anything with anyone,
least of all with BC Shipping Company.
What he did was to proceed directly to your
office to consult you about whether he
should have given a notice of damage and
how long a time he had to initiate a suit
under the provisions of the Carriage of
Goods by Sea Act (CA 65). What would
your advice be? (2%)
SUGGESTED ANSWER:
My advice would be that RC should give
notice of the damage sustained by the
cargo within 3 days and that he has to file
the suit to recover the damage sustained
by the cargo within one year from the date
of the delivery of the cargo to him.

COGSA; Prescriptive Period (1995)

What is the prescriptive period for actions
involving lost or damaged cargo under the
Carriage of Goods by Sea Act?
SUGGESTED ANSWER:
ONE YEAR after the delivery of the goods
or the date when the goods should have
been delivered (Sec 3(6), COGSA)

Doctrine of Inscrutable Fault (1995)

2 vessels coming from the opposite
directions collided with each other due to
fault imputable to both. What are the
liabilities of the two vessels with respect to
the damage caused to them and their
cargoes? Explain.

If it cannot be determined which of the two

vessels was at fault resulting in the
collision, which party should bear the
damage caused to the vessels and the
cargoes? Explain.

Which party should bear the damage to the

vessels and the cargoes if the cause of the
collision was a fortuitous event? Explain.
SUGGESTED ANSWER:
Each vessel must bear its own damage.
Both of them were at fault. (Art 827, Code
of Commerce)

Each of them should bear their respective

damages. Since it cannot be determined as
to which vessel is at fault. This is the
doctrine of “inscrutable fault.”
 Page 72 of 103
SUGGESTED ANSWER:
Under the “doctrine of inscrutable fault,”
where fault is established but it cannot be
determined which of the two vessels were
at fault, both shall be deemed to have been
at fault.
Doctrine of Inscrutable Fault (1998)
A severe typhoon was raging when the
vessel SS Masdaam collided with MV
Princes. It is conceded that the typhoon
was the major cause of the collision,
although there was a very strong possibility
that it could have been avoided if the
captain of SS Masdaam was not drunk and
the captain of the MV Princes was not
asleep at the time of collisions.
Who should bear the damages to the
vessels and their cargoes? (5%)
SUGGESTED ANSWER:
The shipowners of SS Masdaam and MV
Princess shall each bear their respective
loss of vessels. For the losses and damages
suffered by their cargoes both shipowners
are solidarily liable.
Limited Liability Rule (1994)
Toni, a copra dealer, loaded 1000 sacks of
copra on board the vessel MV Tonichi (a
common carrier engaged in coastwise
trade owned by Ichi) for shipment from
Puerto Galera to Manila. The cargo did not
reach Manila because the vessel capsized
and sank with all its cargo.
When Toni sued Ichi for damages based on
breach of contract, the latter invoked the
“limited liability rule.”
Version 1990-2003 Arranged by SULAW Class 2005
What do you understand of the “rule”
invoked by Ichi?
Are there exceptions to the “limited
liability rule”?
SUGGESTED ANSWER:
By “limited liability rule” is meant that the
liability of a shipowner for damages in case
of loss is limited to the value of the vessel
involved. His other properties cannot be
reached by the parties entitled to damages.
Yes. When the ship owner of the vessel
involved is guilty of negligence, the
“limited liability rule” does not apply. In
such case, the ship owner is liable to the
full extent of the damages sustained by the
aggrieved parties
(Mecenas v CA 180 s 83)
Limited Liability Rule (1997)
Explain the doctrine in Maritime accidents
– The Doctrine of Limited Liability
SUGGESTED ANSWER:
Under the “doctrine of limited liability” 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 the
insurance. However, such doctrine does not
apply if the shipowner and the captain are
guilty of negligence.
Limited Liability Rule (1999)
Thinking that the impending typhoon was
still 24 hours away, MV Pioneer left port to
sail for Leyte. That was a miscalculation of
the typhoon signals by both the ship-
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Yes. The contentions of Marina Nav Co are
owner and the captain as the typhoon came meritorious. The captain of MV Mariposa is
earlier and overtook the vessel. The vessel guilty of negligence in ignoring the typhoon
sank and a number of passengers bulletins issued by PAGASA and in
disappeared with it. overloading the vessel. But only the captain
of the vessel MV Mariposa is guilty of
Relatives of the missing passengers negligence. The ship owner is not.
claimed damages Therefore, the ship owner can invoke the
against the shipowner. The shipowner set doctrine of limited liability.
up the defense
that under the doctrine of limited liability, Limited Liability Rule; Doctrine of Inscrutable
his liability was Fault (1991)
co-extensive with his interest in the vessel. In a collision between M/T Manila, a tanker,
As the vessel and M/V Don Claro, an inter-island vessel,
was totally lost, his liability had also been Don Claro sank and many of its passengers
extinguished. drowned and died. All its cargoes were lost.
a. How will you advice the claimants? The collision occurred at nighttime but the
Discuss the sea was calm, the weather fair and visibility
doctrine of limited liability in maritime law. was good. Prior to the collision and while
(3%) still 4 nautical miles apart, Don
b. Assuming that the vessel was insured,
may the claimants go after the insurance
proceeds? (3%)
SUGGESTED ANSWER:
a. Under the doctrine of limited liability in
maritime law, the liability of the shipowner
arising from the operation of a ship is
confined to the vessel, equipment, and
freight, or insurance, if any, so that if the
shipowner abandoned the ship, equipment,
and freight, his liability is extinguished.
However, the doctrine of limited liability
does not apply when the shipowner or
captain is guilty of negligence.

b. Yes. In case of a lost vessel, the

claimants may go after the proceeds of the
insurance covering the vessel.

Limited Liability Rule (2000)

MV Mariposa, one of five passenger ships
owned by Marina Navigation Co, sank off
the coast of Mindoro while en route to
Iloilo City. More than 200 passengers
perished in the disaster. Evidence showed
that the ship captain ignored typhoon
bulletins issued by Pag-asa during the 24-
hour period immediately prior to the
vessel’s departure from Manila. The
bulletins warned all types of sea crafts to
avoid the typhoon’s expected path near
Mindoro. To make matters worse, he took
more load than was allowed for the ship’s
rated capacity. Sued for damages by the
victim’s surviving relatives, Marina Nav Co
contended 1) that its liability, if any, had
been extinguished with the sinking of MV
Mariposa; and 2) that assuming it had not
been so extinguished, such liability should
be limited to the loss of the cargo. Are
these contentions meritorious in the
context of applicable provisions of the Code
of Commerce? (3%)
SUGGESTED ANSWER:
 Page 73 of 103
Claro already sighted Manila on its radar
screen. Manila had no radar equipment. As
for speed, Don Claro was twice as fast as
Manila.
At the time of the collision, Manila failed to
follow Rule 19 of the International Rules of
the Road which requires 2 vessels meeting
head on to change their course by each
vessel steering to starboard (right) so that
each vessel may pass on the port side (left)
of the other. Manila signaled that it would
turn to the port side and steered
accordingly, thus resulting in the collision.
Don Claro’s captain was off-duty and was
having a drink at the ship’s bar at the time
of the collision.
Who would you hold liable for the collision?
If Don Claro was at fault, may the heirs of
the passengers who died and the
owners of the cargoes
recover damages from the owner of
said vessel?
SUGGESTED ANSWER:
I can hold the 2 vessels liable. In the
problem given, whether on the basis of the
factual settings or under the doctrine of
inscrutable fault, both vessels can be said
to have been guilty of negligence. The
liability of the 2 carriers for the death or
injury of passengers and for the loss of or
damage to the goods arising from the
collision is solidary. Neither carrier may
invoke the doctrine of last clear chance
which can only be relevant, if at all,
between the two vessels but not on the
claims made by passengers or shippers
(Litonjua Shipping v National Seamen Board GR
51910 10Aug1989)
Version 1990-2003 Arranged by SULAW Class 2005
SUGGESTED ANSWER:
Yes, but subject to the doctrine of limited
liability. The doctrine is to the effect that
the liability of the shipowners would only
be to the extent of any remaining value of
the vessel, proceeds of insurance, if any,
and earned freightage. Given the factual
settings, the shipowner himself was not
guilty of negligence and, therefore, the
doctrine can well apply (Amparo de los
Santos v CA 186 s 69)
Limited Liability Rule; General Average Loss (2000)
X Shipping Company spent almost a
fortune in refitting and repairing its luxury
passenger vessel, the MV Marina, which
plied the inter-island routes of the company
from La Union in the north to Davao City in
the south. The MV Marina met an untimely
fate during its post-repair voyage. It sank
off the coast of Zambales while en route to
La Union from Manila. The investigation
showed that the captain alone was
negligent. There were no casualties in that
disaster. Faced with a claim for the
payment of the refitting and repair, X
Shipping company asserted exemption from
liability on the basis of the hypothecary or
limited liability rule under Article 587 of
the Code of Commerce. Is X Shipping
Company’s assertion valid? Explain (3%).
SUGGESTED ANSWER:
No. The assertion of X Shipping Company is
not valid. The total destruction of the vessel
does not affect the liability of the ship
owner for repairs on the vessel completed
before its loss.
Limited Liability Rule; General Average Loss (2000)
Version 1990-2006 Updated by Dondee
 SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
A allows or permits the use or exploitation
MV SuperFast, a passenger-cargo vessel
or enjoyment of a right, privilege or
owned by SF Shipping Company plying the
inter-island routes, was on its way to business, the exercise or enjoyment of
Zamboanga City from the Manila port which is expressly reserved by the
when it accidentally, and without fault or Constitution or the laws to citizens of the
negligence of anyone on the ship, hit a Philippines, by the foreigner not possessing
huge floating object. The accident caused the requisites prescribed by the
damage to the vessel and loss of an Constitution or the laws of the Philippines.
accompanying crated cargo of passenger The prosecutor should prove the above
PR. In order to lighten the vessel and save elements of the crime
it from sinking and in order to avoid risk of
damage to or loss of the rest of the shipped
items (none of which was located on the
deck), some had to be jettisoned. SF
Shipping had the vessel repaired at its port
of destination. SF Shipping thereafter filed
a complaint demanding all the other cargo
owners to share in the total repair costs
incurred by the company and in the value
of the lost and jettisoned cargoes. In
answer to the complaint, the shippers’ sole
contention was that, under the Code of
Commerce, each damaged party should
bear its or his own damage and those that
did not suffer any loss or damage were not
obligated to make any contribution in favor
of those who did. Is the shippers’
contention valid? Explain (2%)
SUGGESTED ANSWER:
No. The shippers’ contention is not valid.
The owners of the cargo jettisoned, to save
the vessel from sinking and to save the rest
of the cargoes, are entitled to contribution.
The jettisoning of said cargoes constitute
general average loss which entitles the
owners thereof to contribution from the
owner of the vessel and also from the
owners of the cargoes saved.

SF Shipping is not entitled to contribution/

reimbursement for the costs of repairs on
the vessel from the shippers.

Nationalized Activities or
Undertakings
Nationalized Activities or Undertakings (1993)
A invested P500th in a security agency on
October 30, 1990. He was charged with
being a dummy of his friend, a foreigner. If
you were the prosecutor, what evidence
can you present to prove violation of the
Anti-Dummy Law?
Juana de la Cruz, a common law wife of a
foreigner wrested the control of a
television firm. At the instance of the
minority group of the firm, she was
charged with violation of the Anti-Dummy
Law. May she be convicted by the mere fact
that she is a common law wife of a
foreigner? Explain.
 Page 74 of 103
and also the fact that A does not have the
means and resources to invest P500th in
the security agency.
ALTERNATIVE ANSWER:
The prosecutor may establish the fact that
the P500th would constitute a major
investment and yet A is not even elected
member of the BOD or one of the officers.
Furthermore, it may also be shown that A
does not even have the means to raise the
amount of P500th and that the officers or
majority of the directors are foreigners.
SUGGESTED ANSWER:
No. The mere fact of being a common law
wife of a foreigner does not bring her
within the ambit of the Anti-Dummy Law.
ALTERNATIVE ANSWER:
Yes. Being a common law wife, it can be
presumed that she is the one running the
business, which raises a prima facie
presumption of violation of the Anti-dummy
Law, (RA 6084).
Nationalized Activities or Undertakings (1994)
Celeste, a domestic corporation wholly
owned by Filipino citizens, is engaged in
trading and operates as general contractor.
It buys and resells the products of Matilde,
a domestic corporation, 90% of whose
capital stock is owned by aliens. All of
Matilde’s goods are made in the Philippines
from materials found or produced in the
Philippines.
On the other hand, ECQ Integrated is a
100% Filipino owned corporation and
manufacturer of asbestos products.
Version 1990-2003 Arranged by SULAW Class 2005
Celeste and ECQ took part in a public
bidding conducted by MWSS for its
asbestos pipe requirements. Celeste won
the bid, having offered 13% lower than that
offered by ECQ; and MWSS awarded the
contract to supply its asbestos pipes to
Celeste. ECQ sought to nullify the award in
favor of Celeste.
Is Celeste barred under the Flag Law from
taking part in biddings to supply the
government?
Did Celeste and Matilde violate the Anti-
Dummy Law?
Did Celeste and Matilde violate the Retail
Trade Nationalization Law? Explain.
SUGGESTED ANSWER:
No. The materials offered in the bids
submitted are made in the Philippines from
articles produced or grown in the
Philippines, and the bidder, Celeste, is a
domestic entity. The Flag Law does not
apply. It can be invoked only against a
bidder who is not a domestic entity, or
against a domestic entity who offers
imported materials.
No, since Celeste is merely a dealer of
Matilde and not an alter ego of the latter.
Celeste buys and sells on its own account
the products of Matilde.
Matilde did not violate the Retail Trade
Law since it does not sell its products to
consumers, but to dealers who resell them.
Neither did Celeste violate the Retail Trade
Law since, in the first place, it is not
prohibited to
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) said realty corporation? Explain.
SUGGESTED ANSWER:
engage in retail trade. Besides, Matilde’s
Acme may not invest in the department
sale of the asbestos products to Celeste,
store corporation since the Retail Trade Act
being wholesale, the transaction is not
allows, in the case of corporations, only
covered by the Retail Trade Law
100% Filipino owned companies to engage
(Asbestos Integrated v Peralta 155 S 213)
in retail trade.
Nationalized Activities or Undertakings (1995)
Acme may invest in the realty corporation,
Global KL Malaysia, a 100% Malaysian
on the assumption that the balance of 60%
owned corporation, desires to build a hotel
beach resort in Samal Island, Davao City, to of ownership of the latter corporation, is
take advantage of the increased traffic of Filipino owned since the law merely
tourists and boost the tourism industry of
the Philippines.
Assuming that Global has US$100M to
invest in a hotel beach resort in the
Philippines, may it be allowed to acquire
the land on which to build the resort? If so,
under what terms and conditions may
Global acquire the land? Discuss fully.
May Global be allowed to manage the hotel
beach resort? Explain.
May Global be allowed to operate
restaurants within the hotel beach resort?
Explain.
SUGGESTED ANSWER:
Global can secure a lease on the land. As a
corporation with a Malaysian nationality,
Global cannot own the land.

Yes, Global can manage the hotel beach

resort. There is no law prohibiting it from
managing the resort.

Global may be allowed to operate

restaurants within the beach resort. This is
part of the operation of the resort.

Retail Trade Law (1990)

Acme Trading Co Inc, a trading company
wholly owned by foreign stockholders, was
persuaded by Paulo Alva, a Filipino, to
invest in 20% of the outstanding shares of
stock of a corporation he is forming which
will engage in the department store
business (the “department store
corporation”). Paulo also urged Acme to
invest in 40% of the outstanding shares of
stock of the realty corporation he is putting
up to own the land on which the
department store will be built (the “realty
corporation”).
May Acme invest in the said department
store corporation? Explain your answer.
May Acme invest in the realty corporation?
Discuss.
May the President of Acme, a foreigner, sit
in the BOD of the said department store
corporation? May he be a director of
the realty corporation? Discuss.
May the Treasurer of Acme, another
foreigner, occupy the same position in
the said department store corporation?
May he be the treasurer of the
 Page 75 of 103
requires 60% Filipino holding in land
corporate ownership.
The Anti-dummy Law allows board
representation to the extent of actual and
permissible foreign investments in
corporations. Accordingly, the President of
Acme may no sit in the BOD of the
department store corporation but can do so
in the realty corporation.
The Treasurer of Acme may not hold that
position either in the department store
corporation or in the realty corporation
since the Anti-Dummy Law prohibits the
employment of aliens in such nationalized
areas of business except those that call for
highly technical qualifications.
Retail Trade Law (1991)
Is the Filipino common-law wife of a
foreigner barred from engaging in the
retail business?
SUGGESTED ANSWER:
A Filipino common-law wife of a foreigner
is not barred from engaging in retail
business. On the assumption that she acts
for and in her own behalf, and absent a
violation of the Anti-Dummy Law which
prohibits a foreigner from being either the
real proprietor or an employee of a person
engaged in the retail trade, she would be
violating the Retail Trade Act.
ALTERNATIVE ANSWER:
An engagement by a wife (including
common-law relationships) of a foreigner in
Version 1990-2003 Arranged by SULAW Class 2005
the retail trade business, raises the
presumption that she has violated the Anti-
Dummy Law. Hence, the wife is barred
from engaging in the retail trade business.
Retail Trade Law (1992)
A Cooperative purchased from Y Co on
installments a rice mill and made a down
payment therefore. As security for the
payment of the balance, the Cooperative
executed a chattel mortgage in favor of Y
Corporation. Y Co in turn assigned its
rights to the chattel mortgage to Z Co a 5%
foreign owned company doing business in
the Philippines. The cooperative thereafter
made installment payments to Z Co.
Because the Cooperative was unable to
meet its obligations in full, Z Co filed
against it a court suit for collection. The
Coop resisted contending that Z Co was
illegally engaged in the retail trade
business for having sold a consumer good
as opposed to a producer item. The Coop
also alleged that Z had violated the Anti-
Dummy Law.
Is Z guilty of violating the Retail Trade Law
and the Anti-Dummy Law? Why?
SUGGESTED ANSWER:
Z Co is not guilty of violating the Retail
Trade Law and the Anti-Dummy Law. The
term RETAIL under the Retail Trade Act
requires that the seller must be habitually
engaged in selling to the general public
consumption goods. By consumption goods
are meant “personal, family and
household” purposes. A Rice Mill
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) the participation of Ma Lee, Maria’s
does not fall under the category. Neither common Law husband, in the management
does it appear that Z is habitually engaged of the business would not be a violation of
in selling to the general public that the Retail Trade Law in relation to the Anti-
commodity. Since there is no violation of Dummy Law.
the Retail Trade Law, there would likewise
by no violation of the Anti-Dummy Law. Retail Trade Law (1996)
EL Inc, a domestic corporation with foreign
Retail Trade Law (1993) equity, manufactures electric generators,
A foreign firm is engaged in the business of and sells them to the following customers:
manufacturing and selling rubber products a) government offices which use the
to dealers who in turn sell them to others. generators during brownouts to render
It also sells directly to agricultural public service, b) agricultural enterprises
enterprises, automotive assembly plants, which utilize the generators as
public utilities which buy them in large
bulk, and to its officers and employees.
Is there violation of the Retail Trade Law?
Explain.
May said firm operate a canteen inside the
premises of its plant exclusively for its
officials and employees without violating
the Retail Trade Act? Explain.
SUGGESTED ANSWER:
On the assumption that the foreign firm is
doing business in the Philippines, the sale
to the dealers of agricultural enterprises,
automotive assembly plants, and public
utilities is wholesale and, therefore, not in
violation of the Retail Trade Act (BF
Goodrich v Reyes 121 s

Yes. The operation of the canteen inside the

premises exclusively for its officers and
employees, would amount to an input in the
manufacturing process and, therefore, does
not violate the Retail Trade Act.

Retail Trade Law (1996)

With a capital of P2th Maria operates a
stall at a public market. She manufactures
soap that she sells to the general public.
Her common law husband, MaLee, who has
a pending petition for naturalization,
occasionally finances the purchase of goods
for resale, and assists in the management
of the business.
Is there a violation of the Retail Trade
Law? Explain.
SUGGESTED ANSWER:
No, there is no violation of the Retail Trade
Law. Maria is a manufacturer who sells to
the general public, through her stall in the
public market, the soap which she
manufactures. Inasmuch as her capital
does not exceed P5th (it is only P2th) then
she is considered under Sec 4a of the
Retail Trade Law as not engaged in the
“retail business.” Inasmuch as Maria’s
business is not a “retail business,” then the
requirement in Sec 1 of the Retail Trade
Law that only Philippine nationals shall
engage, directly, or indirectly, in the retail
business is inapplicable. For this reason,
 Page 76 of 103
backup in the processing of goods, c)
factories, and d) its own employees.
Is EL engaged in retail trade? Explain.
SUGGESTED ANSWER:
The sale by EL of generators to
government offices, agricultural
enterprises and factories are outside the
scope of the term “retail business” and
may, therefore, be made by the said
corporation. However, sales of generators
by EL to its own employees constitute retail
sales and are proscribed. Under the
amendment to the Retail Trade Law
introduced by PD 714, the term “retail
business” shall not include a manufacturer
(such as EL) selling to industrial and
commercial users or consumers who use
the products bought by them to render
service to the general public (eg
government offices) and/or to produce or
manufacture goods which are in turn sold
by them (eg agricultural enterprises and
factories). (Goodyear Tires v Reyes Sr Gr
30063, Jly 2, 83 123s273).
Retail Trade Law; Consignment (1991)
ABC Manufacturing Inc, a company wholly
owned by foreign nationals, manufactures
typewriters which ABC distributes to the
general public in 2 ways:
ABC consigns its typewriters to
independent dealers who in turn sell
them to the public; and,
Through individuals, who are not
employees of ABC, and who are paid
strictly on a commission
basis for each sale.
Do these arrangements violate the Retail
Trade Law?
Version 1990-2003 Arranged by SULAW Class 2005
SUGGESTED ANSWER:
The first arrangement would not be in
violation of the Retail Trade Law. The law
applies only when the sale is direct to the
general public. A dealer buys and sells for
and in his own behalf and, therefore, the
sale to the general public is made by the
dealer and not by the manufacturer
(Marsman & Co v First Coconut Control Co
GR39841 20June1988)
ALTERNATIVE ANSWER:
The first arrangement violates the Retail
Trade Law because when ABC “consigned”
the typewriters, the transaction was one of
consignment sale. In consignment sale, an
agency relationship is created so it is as if
ABC sells directly to the public through its
agents.
SUGGESTED ANSWER:
The second arrangement would be violative
of the Retail Trade Law, since the sale is
done through individuals being paid strictly
on a commission basis. The said individuals
would then be acting merely as agents of
the manufacturer. Sales, therefore, made
by such agents are deemed direct sales by
the manufacturer.
ALTERNATIVE ANSWER:
The 2nd arrangement is not violative of the
Retail Trade Law because typewriters are
not consumption goods or goods for
personal, household and family use.
Negotiable Instruments Law
Bond: Cash Bond vs. Surety Bond (2004)
Distinguish clearly cash bond from
surety bond.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) The court’s decision was incorrect. Pablo
SUGGESTED ANSWER: and Carlos, being immediate parties to the
A SURETY BOND is issued by a surety or instrument, are governed by the rules of
insurance company in favor of a designated privity. Given the factual circumstances of
beneficiary, pursuant to which such the problem, Pablo has no valid excuse
company acts as a surety to the debtor or from denying liability, (State investment
obligor of such beneficiary. A CASH BOND House v IAC GR 72764 13July1989). Pablo
is a security in the form of cash established undoubtedly had benefited in the
by a guarantor or surety to secure the transaction. To hold otherwise would also
obligation of another. contravene the basic rules of unjust
enrichment. Even in negotiable
Checks: Crossed Checks (2005) instruments, the
What is a crossed check? What are the
effects of crossing a check? Explain.
SUGGESTED ANSWER:
A Crossed Check under accepted banking
practice, crossing a check is done by
writing two parallel lines diagonally on the
left top portion of the checks. The crossing
is special where the name of the bank or a
business institution is written between the
two parallel lines, which means that the
drawee should pay only with the
intervention of that company.

Effects of Crossed Checks

The check may not be encashed but only
deposited in the bank.
The check may be negotiated only once—to
one who has an account with a bank.
The act of crossing the check serves as a
warning to the holder that the check
has been issued for a definite purpose,
so that he must inquire if he has
received the check pursuant to that
purpose; otherwise, he is not a holder
in due course.

Checks: Crossed Checks vs. Cancelled Checks (2004)

Distinguish clearly (1) crossed checks from
cancelled checks;
SUGGESTED ANSWER:
A crossed check is one with two parallel
lines drawn diagonally across its face or
across a corner thereof. On the other hand,
a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on
behalf of a drawee bank to indicate
payment thereof.

Checks; Crossed Check (1991)

Mr Pablo sought to borrow P200th from Mr
Carlos. Carlos agreed to loan the amount in
the form of a post-dated check which was
crossed (i.e. 2 parallel lines diagonally
drawn on the top left portion of the check).
Before the due date of the check, Pablo
discounted it with Noble On due date,
Noble deposited the check with his bank.
The check was dishonored. Noble sued
Pablo. The court dismissed Noble’s
complaint. Was the court’s decision
correct?
SUGGESTED ANSWER:
 Page 77 of 103
Civil Code and other laws of general
application can still apply suppletorily.
ALTERNATIVE ANSWER:
The dismissal by the court was correct. A
check whether or not post-dated or
crossed, is still a negotiable instrument and
unless Pablo is a general indorser, which is
not expressed in the factual settings, he
cannot be held liable for the dishonor of the
instrument. In State Investment House v IAC
(GR 72764 13Jul1989) , the court did not go so
far as to hold that the fact of crossing
would render the instrument non-
negotiable.
ALTERNATIVE ANSWER:
In State Investment House v IAC (GR 72764
13Jul1989), the SC considered a crossed
check as subjecting a subsequent holder
thereof to the contractual covenants of the
payor and the payee. If such were the case,
then the instrument is not one which can
still be said to contain an unconditional
promise to pay or order a sum certain in
money. In the transfer of non-negotiable
credits by assignment, the transferor does
not assume liability for the fault of the
debtor or obligor. Accordingly the court’s
decision was correct.
ALTERNATIVE ANSWER:
Yes. The check is crossed. It should have
forewarned Mr. Noble that it was issued for
a specific purpose. Hence, Mr Noble could
not be a holder in due course. He is subject
to the personal defense of breach of trust/
agreement by Mr. Pablo. Such defense is
available in favor of Mr Carlos against Mr
Noble.
Version 1990-2003 Arranged by SULAW Class 2005
Checks; Crossed Check (1994)
Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint
which Jose promised to deliver. Jose sold
and negotiated the check to Excel Inc. at a
discount. Excel did not ask Jose the
purpose of crossing the check. Since Jose
failed to deliver the newsprint, Po ordered
the drawee bank to stop payment on the
check.
Efforts of Excel to collect from Po failed.
Excel wants to know from you as counsel:
What are the effects of crossing a check?
Whether as second indorser and holder of
the crossed check, is it a holder in due
course?
Whether Po’s defense of lack of
consideration as against Jose is also
available as against Excel?
SUGGESTED ANSWER:
The effects of crossing a check are:
The check is for deposit only in the
account of the payee
The check may be indorsed only once in
favor of a person who has an
account with a bank
The check is issued for a specific
purpose and the person who takes it
not in accordance with said purpose
does not become a holder in due
course and is not entitled to
payment thereunder.
No. It is a crossed check and Excel did not
take it in accordance with the purpose for
which the check was issued. Failure on its
part to inquire as to said purpose,
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) if he has received the check pursuant to
prevented Excel from becoming a holder in that purpose, otherwise he is not a
due course, as such failure or refusal holder in due course (See Bataan Cigar
and Cigarette Factory, Inc. v CA GR 93048,
constituted bad faith. Mar 3, 1994; 230 s 643)
Yes. Not being a holder in due course, Checks; Crossed Check (1996)
Excel is subject to the personal defense
On March 1, 1996, Pentium Company
which Po Press can set up against Jose ordered a computer from CD Bytes, and
(State Investment House v IAC 175 S 310)
issued a crossed check in the amount of
Checks; Crossed Check (1995) P30,000 post-dated Mar 31, 1996. Upon
receipt of the check, CD Bytes discounted
On Oct 12, 1993, Chelsea Straights, a corp
the check with Fund House.
engaged in the manufacture of cigarettes,
ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two
crossed checks postdated 15 Mar 94 and
15 Apr 94 in full payment therefor. On 19
Jan 94 Moises sold to Dragon Investment
House at a discount the two checks drawn
by Chelsea in his favor.
Moises failed to deliver the bales of
tobacco as agreed despite Chelsea’s
demand. Consequently, on 1 Mar 94
Chelsea issued a “stop payment” order on
the 2 checks issued to Moises. Dragon,
claiming to be a holder in due course, filed
a complaint for collection against Chelsea
for the value of the checks.
Rule on the complaint of Dragon. Give your
legal basis.
SUGGESTED ANSWER:
Dragon cannot collect from Chelsea. The
instruments are crossed checks which were
intended to pay for the 2,000 bales of
tobacco to be delivered to Moises. It was
therefore the obligation of Dragon to
inquire as to the purpose of the issuance of
the 2 crossed checks before causing them
to be discounted. Failure on its part to
make such inquiry, which resulted in its
bad faith, Dragon cannot claim to be a
holder in due course. Moreover, the checks
were sold, not endorsed, by him to Dragon
which did not become a holder in due
course. Not being a holder in due course,
Dragon is subject to the personal defense
on the part of Chelsea concerning the
breach of trust on the part of Moises Lim in
not complying with his obligation to deliver
the 2000 bales of tobacco.

Checks; Crossed Check (1996)

What are the effects of crossing a check?
SUGGESTED ANSWER:
The effects of crossing a check are as
follows:
The check may not be encashed but only
deposited in a bank;
The check may be negotiated only once to
one who has an account with a bank;
The act of crossing a check serves as a
warning to the holder thereof that the
check has been issued for a definite
purpose so that the holder must inquire
 Page 78 of 103
On April 1, 1996, Pentium stopped payment
of the check for failure of CD Bytes to
deliver the computer. Thus, when Fund
House deposited the check, the drawee
bank dishonored it.
If Fund House files a complaint against
Pentium and CD Bytes for the payment of
the dishonored check, will the complaint
prosper? Explain.
SUGGESTED ANSWER: :
The complaint filed by Fund House against
Pentium will not prosper but the one
against CD Bytes will. Fund House is not a
holder in due course and, therefore,
Pentium can raise the defense of failure of
consideration against it. The check in
question was issued by Pentium to pay for a
computer that it ordered from CD Bytes.
The computer not having been delivered,
there was a failure of consideration. The
check discounted with Fund House by CD
Bytes is a crossed check and this should
have put Fund House on inquiry. It should
have ascertained the title of CD Bytes to
the check or the nature of the latter’s
possession. Failing in this respect, Fund
House is deemed guilty of gross negligence
amounting to legal absence of good faith
and, thus, not a holder in due course. Fund
House can collect from CD Bytes as the
latter was the immediate indorser of the
check. (See Bataan Cigar and Cigarette Factory
v CA et al 230 s 643 GR 93048 Mar 3, 94)
Checks; Effect; Acceptance by the drawee bank (1998)
X draws a check against his current
Version 1990-2003 Arranged by SULAW Class 2005
account with the Ortigas branch of
Bonifacio Bank in favor of B. Although X
does not have sufficient funds, the bank
honors the check when it is presented for
payment. Apparently, X has conspired with
the bank’s 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 (5%)
SUGGESTED ANSWER:
The bank cannot recover the amount paid
to B for the check. When the bank honored
the check, it became an acceptor. As
acceptor, the bank became primarily and
directly liable to the payee/holder B.
The recourse of the bank should be against
X and its bookkeeper who conspired to
make X’s ledger show that he has sufficient
funds.
ALTERNATIVE ANSWER:
The bank can recover from B. This is
solutio indebiti because there is payment
by the bank to B when such payment is not
due. The check issued by X to B as payee
had no sufficient funds.
Checks; Effects; Alterations; Prescriptive Period (1996)
William issued to Albert a check for
P10,000 drawn on XM Bank. Albert altered
the amount of the check to P210,000 and
deposited the check to his account with ND
Bank. When ND Bank presented the check
for
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) The legal consequences when a bank
payment through the Clearing House, XM honors a forged check are as follows:
Bank honored it. Thereafter, Albert When Drawer's Signature is Forged:
withdrew the P210,000 and closed his Drawee-bank by accepting the check
account. cannot set up the defense of forgery,
because by accepting the instrument, the
When the check was returned to him after drawee bank admits the genuineness of
a month, William discovered the alteration. signature of drawer (BPI Family Bank vs.
XM Bank recredited P210,000 to William’s Buenaventura G.R. No. 148196, September 30,
2005; Section 23, Negotiable Instruments Law).
current account, and sought
reimbursement from ND Bank. ND Bank Unless a forgery is attributable to the fault
refused, claiming that XM Bank failed to or negligence of the drawer himself, the
return the altered check to it within 24 remedy of the drawee-bank is against the
hour clearing period. party responsible for the forgery.
Who, as between, XM Bank and ND Bank, Otherwise,
should bear the loss? Explain.
SUGGESTED ANSWER:
ND Bank should bear the loss if XM Bank
returned the altered check to ND Bank
within twenty four hours after its discovery
of the alteration. Under the given facts,
William discovered the alteration when the
altered check was returned to him after a
month. It may safely be assumed that
William immediately advised XM Bank of
such fact and that the latter promptly
notified ND Bank thereafter. Central Bank
Circular No. 9, as amended, on which the
decisions of the Supreme Court in
Hongkong & Shanghai Banking Corp v
People’s Bank & Trust Co and Republic
Bank vs CA were based was expressly
cancelled and superseded by CB No 317
dated Dec 23 1970. The latter was in turn
amended by CB Circular No 580, dated
Sept 19, 1977. As to altered checks, the
new rules provide that the drawee bank
can still return them even after 4:00 pm of
the next day provided it does so within 24
hours from discovery of the alteration but
in no event beyond the period fixed or
provided by law for filing of a legal action
by the returning bank against the bank
sending the same. Assuming that the
relationship between the drawee bank and
the collecting bank is evidenced by some
written document, the prescriptive period
would be 10 years. (Campos, NIL 5th ed
454-455)
ALTERNATIVE ANSWER:
XM Bank should bear the loss. When the
drawee bank (XM Bank) failed to return the
altered check to the collecting bank (ND
Bank) within the 24 hour clearing period
provided in Sec 4c of CB Circular 9, dated
Feb 17, 1949, the latter is absolved from
liability. (See HSBC v PB&T Co GR L-28226
Sep 30 1970; 35 s 140; also Rep Bank v CA GR
42725 Apr 22, 1991 196 s 100)

Checks; Forged Check; Effects (2006)

Discuss the legal consequences when a
bank honors a forged check. (5%)
SUGGESTED ANSWER:
 Page 79 of 103
drawee-bank bears the loss (BPI Family
Bank v. Buenaventura, G.R. No. 148196,
September 30, 2005). A drawee-bank paying
on a forged check must be considered as
paying out of its funds and cannot charge
the amount to the drawer
(Samsung Construction Co. Phils, v. Far East
Bank, G.R. No. 129015, August 13, 2004). If the
drawee-bank has charged drawer's
account, the latter can recover such
amount from the drawee-bank (Associated
Bank v. Court of Appeals, G.R. No. 107382,
January 31, 1996; Bank of P. I. v. Case
Montessori Internationale, G.R. No. 149454,
May 28, 2004).
However, the drawer may be precluded or
estopped from setting up the defense of
forgery as against the drawee-bank, when
it is shown that the drawer himself had
been guilty of gross negligence as to have
facilitated the forgery (Metropolitan
Waterworks v. Court of Appeals, G.R. No. L-
62943, 143 SCRA 20, July 14, 1986).
(NOTA BENE: The question does not
qualify the term "forged check". An
answer addressing the liabilities of a
drawer should be deemed sufficient.
Answers addressing liabilities of parties
should likewise be given full credit)
Drawee Bank versus Collecting Bank —
When the signature of the drawer is
forged, as between the drawee-bank and
collecting bank, the drawee-bank sustains
the loss, since the collecting bank does not
guarantee the signature of the drawer. The
payment of the check by the drawee bank
constitutes the proximate negligence since
it has the duty to know the signature of its
client-drawer.
Version 1990-2003 Arranged by SULAW Class 2005
(Philippine National Bank v. Court of Appeals,
G.R. No. L-26001, October 29, 1968).
Forged Payee's Signature: When drawee-
bank pays the forged check, it must be
considered as paying out of its funds and
cannot charge the amount so paid to the
account of the depositor. In such case, the
bank becomes liable since its primary duty
is to verify the authenticity of the payee's
signature (Traders Royal Bank v. Radio
Philippines Network, G.R. No. 138510, October
10, 2002; Westmont Bank v. Ong, G.R. No.
132560, January 30, 2002).
Forged Indorsement:
Drawer's account cannot be charged,
and if charged, he can recover from
the drawee-bank
(Associated Bank v. Court of Appeals,
G.R. No. 107382 January 31,1996).
Drawer has no cause of action against
collecting bank, since the duty of
collecting bank is only to the payee.
A collecting bank is not guilty of
negligence over a forged
indorsement on checks for it has no
way of ascertaining the authority of
the endorsement and when it caused
the checks to pass through the
clearing house before allowing
withdrawal of the proceeds thereof
(Manila Lighter Transportation, Inc. v.
Court of Appeals, G.R. No. 50373,
February 15, 1990). On the other
hand, a collecting bank which
endorses a check bearing a forged
endorsement and presents it to the
drawee bank guarantees all prior
endorsements including the forged
endorsement itself and should be
held liable
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Drawee bank refused to honor the check on
therefor (Traders Royal Bank v. ground that the serial number thereof had
RPN, G.R. No. been altered. XYZ marketing sued drawee
138510, October 10, 2002). bank.
Drawee-bank can recover from the Is it proper for the drawee bank to
collecting bank (Great Eastern Life dishonor the check for the reason that
Ins. Co. v. Hongkong & Shanghai Bank, it had been altered? Explain (2%)
G.R. No. 18657, August 23,1922) In instant suit, drawee bank contended that
because even if the indorsement on XYZ Marketing as payee could not sue
the check deposited by the bank's the drawee bank as there was no privity
client is forged, collecting bank is between then. Drawee theorized that
bound by its warranties as an there was no basis to make it liable for
indorser and cannot set up defense the
of forgery as against drawee bank check. Is this contention correct?
(Associated Bank v. Court of Appeals, Explain. (3%)
G.R. No. 107382, January 31, 1996). SUGGESTED ANSWER:
a. No. The serial number is not a material
Checks; Liability; Drawee Bank (1995) particular of the check. Its alteration does
Mario Guzman issued to Honesto Santos a not constitute material
check for P50th as payment for a 2nd hand
car. Without the knowledge of Mario,
Honesto changed the amount to P150th
which alteration could not be detected by
the naked eye. Honesto deposited the
altered check with Shure Bank which
forwarded the same to Progressive Bank
for payment. Progressive Bank without
noticing the alteration paid the check,
debiting P150th from the account of Mario.
Honesto withdrew the amount of P15th
from Shure Bank and disappeared. After
receiving his bank statement, Mario
discovered the alteration and demanded
restitution from Progressive Bank.
Discuss fully the rights and the liabilities of
the parties concerned.
SUGGESTED ANSWER:
The demand of Mario for restitution of the
amount of P150,000 to his account is
tenable. Progressive Bank has no right to
deduct said amount from Mario’s account
since the order of Mario is different.
Moreover, Progressive Bank is liable for the
negligence of its employees in not noticing
the alteration which, though it cannot be
detected by the naked eye, could be
detected by a magnifying instrument used
by tellers.

As between Progressive Bank and Shure

Bank, it is the former that should bear the
loss. Progressive Bank failed to notify
Shure Bank that there was something
wrong with the check within the clearing
hour rule of 24 hours.

Checks; Material Alterations; Liability (1999)

A check for P50,000.00 was drawn against
drawee bank and made payable to XYZ
Marketing or order. The check was
deposited with payee’s account at ABC
Bank which then sent the check for
clearing to drawee bank.
 Page 80 of 103
alteration of the instrument. The serial
number is not material to the negotiability
of the instrument.
b. Yes. As a general rule, the drawee is not
liable under the check because there is no
privity of contract between XYZ Marketing,
as payee, and ABC Bank as the drawee
bank. However, if the action taken by the
bank is an abuse of right which caused
damage not only to the issuer of the check
but also to the payee, the payee has a
cause of action under quasi-delict.
Checks; Presentment (1994)
Gemma drew a check on September 13,
1990. The holder presented the check to
the drawee bank only on March 5, 1994.
The bank dishonored the check on the
same date. After dishonor by the drawee
bank, the holder gave a formal notice of
dishonor to Gemma through a letter dated
April 27, 1994.
What is meant by “unreasonable time” as
applied to presentment?
Is Gemma liable to the holder?
SUGGESTED ANSWER:
As applied to presentment for payment,
“reasonable time: is meant not more than 6
months from the date of issue. Beyond said
period, it is “unreasonable time” and the
check becomes stale.
No. Aside form the check being already
stale, Gemma is also discharged form
liability under the check, being a drawer
and a person whose liability is secondary,
Version 1990-2003 Arranged by SULAW Class 2005
this is due to the giving of the notice of
dishonor beyond the period allowed by law.
The giving of notice of dishonor on April
27, 1994 is more than one (1) month from
March 5, 1994 when the check was
dishonored. Since it is not shown that
Gemma and the holder resided in the same
place, the period within which to give
notice of dishonor must be the same time
that the notice would reach Gemma if sent
by mail. (NIL Sec 103 & 104; Far East
Realty Investment Inc v CA 166 S 256)
ALTERNATIVE ANSWER:
Gemma can still be liable under the
original contract for the consideration of
which the check was issued.
Checks; Presentment (2003)
A bank issues its own check. May the
holder hold the bank liable thereunder if he
fails to –
prove presentment for payment, or
present the bill to the drawee for
acceptance? Explain your answers.
(4%)
SUGGESTED ANSWER:
Checks; Validity; Waiver of Bank’s liability
for negligence (1991)
Mr. Lim issued a check drawn against BPI
Bank in favor of Mr Yu as payment of
certain shares of stock which he
purchased. On the same day that he issued
the check to Yu, Lim ordered BPI to stop
payment. Per standard banking practice,
Lim was made to sign a waiver of BPI’s
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Jose endorsed the note to Pablo. Bert
liability in the event that it should pay Yu fraudulently obtained the note from Pablo
through oversight or inadvertence. Despite and endorsed it to Julian by forging Pablo’s
the stop order by Lim, BPI nevertheless signature. Julian endorsed the note to
paid Yu upon presentation of the check. Camilo.
Lim sued BPI for paying against his order. May Camilo enforce the said promissory
Decide the case. note against Mario and Jose?
SUGGESTED ANSWER: May Camilo go against Pablo?
In the event that Mr. Lim, in fact, had May Camilo enforce said note against
sufficient legal reasons to issue the stop Julian?
payment order, he may sue BPI for paying Against whom can Julian have the right of
against his order. The waiver executed by recourse?
Mr Lim did not mean that it need not
exercise due diligence to protect the
interest of its account holder. It is not
amiss to state that the drawee, unless the
instrument has earlier been accepted by it,
is not bound to honor payment to the
holder of the check that thereby excludes it
from any liability if it were to comply with
its stop payment order (Sec 61 NIL)
ALTERNATIVE ANSWER:
1991 6b) BPI would not be liable to Mr
Lim. Mr Lim and BPI are governed by their
own agreement. The waiver executed by
Mr Lim, neither being one of future fraud
or gross negligence, would be valid. The
problem does not indicate the existence of
fraud or gross negligence on the part of
BPI so as to warrant liability on its part.

Defenses; Forgery (2004)

CX maintained a checking account with
UBANK, Makati Branch. One of his checks
in a stub of fifty was missing. Later, he
discovered that Ms. DY forged his
signature and succeeded to encash
P15,000 from another branch of the bank.
DY was able to encash the check when ET,
a friend, guaranteed due execution, saying
that she was a holder in due course.
Can CX recover the money from the bank?
Reason briefly. (5%)
SUGGESTED ANSWER:
Yes, CX can recover from the bank. Under
Section 23 of the Negotiable Instruments
Law, forgery is a real defense. The forged
check is wholly inoperative in relation to
CX. CX cannot be held liable thereon by
anyone, not even by a holder in due course.
Under a forged signature of the drawer,
there is no valid instrument that would give
rise to a contract which can be the basis or
source of liability on the part of the drawer.
The drawee bank has no right or authority
to touch the drawer's funds deposited with
the drawee bank.

Forgery; Liabilities; Prior & Subsequent Parties (1990)

Jose loaned Mario some money and, to
evidence his indebtedness, Mario executed
and delivered to Jose a promissory note
payable to his order.
 Page 81 of 103
e) May Pablo recover from either
Mario or Jose?
SUGGESTED ANSWER:
Camilo may not enforce said promissory
note against Mario and Jose. The
promissory note at the time of forgery
being payable to order, the signature of
Pablo was essential for the instrument to
pass title to subsequent parties. A forged
signature was inoperative (Sec 23 NIL).
Accordingly, the parties before the forgery
are not juridically related to parties after
the forgery to allow such enforcement.
Camilo may not go against Pablo, the latter
not having indorsed the instrument.
Camilo may enforce the instrument against
Julian because of his special indorsement
to Camilo, thereby making him secondarily
liable, both being parties after the forgery.
Julian, in turn, may enforce the instrument
against Bert who, by his forgery, has
rendered himself primarily liable.
Pablo preserves his right to recover from
either Mario or Jose who remain parties
juridically related to him. Mario is still
considered primarily liable to Pablo. Pablo
may, in case of dishonor, go after Jose who,
by his special indorsement, is secondarily
liable.
Note: It is possible that an answer
might distinguish between blank
Version 1990-2003 Arranged by SULAW Class 2005
and special indorsements of prior
parties which can thereby
materially alter the above suggested
answers. The problem did not
clearly indicate the kind of
indorsements made.
Forgery; Liabilities; Prior & Subsequent Parties (1995)
Alex issued a negotiable PN (promissory
note) 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 Celso’s possession the PN was
stolen by Dennis who forged Celso’s
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 against Alex,
Benito and Felix? Explain.
SUGGESTED ANSWER:
Felix has no right to claim against Alex,
Benito and Celso who are parties prior to
the forgery of Celso’s signature by Dennis.
Parties to an instrument who are such prior
to the forgery cannot be held liable by any
party who became such at or subsequent to
the forgery. However, Edgar, who became a
party to the instrument subsequent to the
forgery and who indorsed the same to
Felix, can be held liable by the latter.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) was only 10,000.00 that was allowed by
Celso has the right to collect from Alex and Señorita Isobel during their meeting with
Benito. Celso is a party subsequent to the Brad.
two. However, Celso has no right to claim
Incomplete Instruments; Incomplete Delivered
against Felix who is a party subsequent to
Instruments vs. Incomplete Undelivered
Celso (Sec 60 and 66 NIL)
Instrument (2006)
Incomplete & Delivered (2004) Jun was about to leave for a business trip.
AX, a businessman, was preparing for a As his usual practice, he signed several
business trip abroad. As he usually did in blank checks. He instructed Ruth, his
the past, he signed several checks in blank secretary, to fill them as payment for his
and entrusted them to his secretary with obligations. Ruth filled one check with her
instruction to safeguard them and fill them name as payee, placed P30,000.00 thereon,
out only when required to pay accounts endorsed and
during his absence. OB, his secretary, filled
out one of the checks by placing her name
as the payee. She filled out the amount,
endorsed and delivered the check to KC,
who accepted it in good faith for payment
of gems that KC sold to OB. Later, OB told
AX of what she did with regrets. AX timely
directed the bank to dishonor the check.
Could AX be held liable to KC? Answer and
reason briefly. (5%)
SUGGESTED ANSWER:
Yes. AX could be held liable to KC. This is a
case of an incomplete check, which has
been delivered. Under Section 14 of the
Negotiable Instruments Law, KC, as a
holder in due course, can enforce payment
of the check as if it had been filled up
strictly in accordance with the authority
given by AX to OB and within a reasonable
time.

Incomplete and Delivered (2005)

Brad was in desperate need of money to
pay his debt to Pete, a loan shark. Pete
threatened to take Brad’s life if he failed to
pay. Brad and Pete went to see Señorita
Isobel, Brad’s rich cousin, and asked her if
she could sign a promissory note in his
favor in the amount of P10,000.00 to pay
Pete. Fearing that Pete would kill Brad,
Señorita Isobel acceded to the request. She
affixed her signature on a piece of paper
with the assurance of Brad that he will just
fill it up later. Brad then filled up the blank
paper, making a promissory note for the
amount of P100,000.00. He then indorsed
and delivered the same to Pete, who
accepted the note as payment of the debt.

What defense or defenses can Señorita

Isobel set up against Pete? Explain. (3%)
SUGGESTED ANSWER:
The defense (personal defense) which
Señorita Isobel can set up against Pete is
that the amount of P100,000.00 is not in
accordance with the authority given to her
to Brad (in the presence of Pete) and that
Pete was not a holder in due course for
acting in bad faith when accepted the note
as payment despite his knowledge that it
 Page 82 of 103
delivered it to Marie. She accepted the
check in good faith as payment for goods
she delivered to Ruth. Eventually, Ruth
regretted what she did and apologized to
Jun. Immediately he directed the drawee
bank to dishonor the check. When Marie
encashed the check, it was dishonored.
Is Jun liable to Marie? (5%)
SUGGESTED ANSWER:
Yes. This covers the delivery of an
incomplete instru-ment, under Section 14
of the Negotiable Instruments Law, which
provides that there was prima facie
authority on the part of Ruth to fill-up any
of the material particulars thereof. Having
done so, and when it is first completed
before it is negotiated to a holder in due
course like Marie, it is valid for all
purposes, and Marie may enforce it within
a reasonable time, as if it had been filled up
strictly in accordance with the authority
given.
Supposing the check was stolen while in
Ruth's pos-session and a thief filled the
blank check, endorsed and delivered it to
Marie in payment for the goods he
purchased from her, is Jun liable to Marie if
the check is dishonored? (5%)
SUGGESTED ANSWER:
No. Even though Marie is a holder in due
course, this is an incomplete and
undelivered instrument, covered by Section
15 of the Negotiable Instruments Law.
Where an incomplete instrument has not
been delivered, it will not, if completed and
Version 1990-2003 Arranged by SULAW Class 2005
negotiated without authority, be a valid
contract in the hands of any holder, as
against any person, including Jun, whose
signature was placed thereon before
delivery. Such defense is a real defense
even against a holder in due course,
available to a party like Jun whose
signature appeared prior to delivery.
Indorser: Irregular Indorser vs. General Indorser
(2005) Distinguish an irregular indorser
from a general indorser. (3%)
SUGGESTED ANSWER:
Irregular Indorser is not a party to the
instrument but he places his signature in
blank before delivery. He is not a party but
he becomes one because of his signature in
the instrument. Because his signature he is
considered an indorser and he is liable to
the parties in the instrument.
While, a General Indorser warrants that
the instrument is genuine, that he has a
good title to it, that all prior parties had
capacity to contract; that the instrument at
the time of the indorsement is valid and
subsisting; and that on due presentment,
the instrument will be accepted or paid or
both accepted and paid according to its
tenor, and that if it is dishonored, he will
pay if the necessary proceedings for
dishonor are made.
Negotiability (1993)
Discuss the negotiability or non-
negotiability of the following notes
1) Manila, September 1, 1993
Version 1990-2006 Updated by Dondee

Mercantile Law Bar Examination Q & A (1990-2006)
P2,500.00
I promise to pay Pedro San Juan or order
the sum of P2,500.
SUGGESTED ANSWER:
Paragraph 1 – negotiability is “NOT
AFFECTED.” The date is not one of the
requirements for negotiability.

(Sgd.) Noel Castro

2) Manila, June 3, 1993

P10,000.00
For value received, I promise to pay Sergio
Dee or order the sum of P10,000.00 in five
(5) installments, with the first installment
payable on October 5, 1993 and the other
installments on or before the fifth day of
the succeeding month or thereafter.

(Sgd.) Lito Villa

SUGGESTED ANSWER:
The promissory note is negotiable as it
complies with Sec 1, NIL.
Firstly, it is in writing and signed by the
maker, Noel Castro.
Secondly, the promise is unconditional to
pay a sum certain in money, that is,
P2,500.00
Thirdly, it is payable on demand as no date
of maturity is specified.
Fourth, it is payable to order.

The promissory note is negotiable. All the

requirements of Sec 1 NIL are complied
with. The sum to be paid is still certain
despite that the sum is to be paid by
installments (Sec 2b NIL)

Negotiability (2002)
Which of the following stipulations or
features of a promissory note (PN) affect or
do not affect its negotiability, assuming that
the PN is otherwise negotiable? Indicate
your answer by writing the paragraph
number of the stipulation or feature of the
PN as shown below and your
corresponding answer, either “Affected” or
“Not affected.” Explain (5%).

The date of the PN is “February 30, 2002.”

The PN bears interest payable on the last
day of each calendar quarter at a rate
equal to five percent (5%) above the
then prevailing 91-day Treasury Bill
rate as published at the beginning of
such calendar quarter.
The PN gives the maker the option to make
payment either in money or in quantity
of palay or equivalent value.
The PN gives the holder the option either
to require payment in money or to
require the maker to serve as the
bodyguard or escort of the holder for
30 days.
 Page 83 of 103
Paragraph 2 – negotiability is “NOT
AFFECTED” The interest is to be
computed at a particular time and is
determinable. It does not make the sum
uncertain or the promise conditional.
Paragraph 3 – negotiability is
“AFFECTED.” Giving the maker the
option renders the promise conditional
Paragraph 4 – negotiability is “NOT
AFFECTED.” Giving the option to the
holder does not make the promise
conditional.
Negotiability; Holder in Due Course (1992)
Perla brought a motor car payable on
installments from Automotive Company for
P250th. She made a down payment of
P50th and executed a promissory note for
the balance. The company subsequently
indorsed the note to Reliable Finance
Corporation which financed the purchase.
The promissory note read:
“For value received, I promised to pay
Automotive Company or order at its office
in Legaspi City, the sum of P200,000.00
with interest at twelve (12%) percent per
annum, payable in equal installments of
P20,000.00 monthly for ten (10) months
starting October 21, 1991.
Manila September 21, 1991.
(sgd) Perla
Version 1990-2003 Arranged by SULAW Class 2005
Pay to the order of Reliable Finance
Corporation.
Automotive Company
By: (Sgd) Manager
Because Perla defaulted in the payment of
her installments, Reliable Finance
Corporation initiated a case against her for
a sum of money. Perla argued that the
promissory note is merely an assignment of
credit, a non-negotiable instrument open to
all defenses available to the assignor and,
therefore, Reliable Finance Corporation is
not a holder in due course.
Is the promissory note a mere assignment
of credit or a negotiable instrument? Why?
Is Reliable Finance Corp a holder in due
course?
Explain briefly.
SUGGESTED ANSWER:
The promissory note in the problem is a
negotiable instrument, being in compliance
with the provisions of Sec 1 NIL. Neither
the fact that the payable sum is to be paid
with interest nor that the maturities are in
stated installments renders uncertain the
amount payable (Sec 2 NIL)
Yes, Reliable Finance Corporation is a
holder in due course given the factual
settings. Said corporation apparently took
the promissory note for value, and there
are no indications that it acquired it in bad
faith (Sec 52 NIL see Salas v CA 181 s 296)
Negotiability; Requisites (2000)
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Negotiable Instrument: Ambiguous Instruments (1998)
MP bought a used cell phone from JR. JR How do you treat a negotiable instrument
preferred cash but MP is a friend so JR that is so ambiguous that there is doubt
accepted MR’s promissory note for whether it is a bill or a note? (5%)
P10,000. JR thought of converting the note SUGGESTED ANSWER:
into cash by endorsing it to his brother KR. Where a negotiable instrument is so
The promissory note is a piece of paper ambiguous that there is doubt whether it is
with the following hand-printed notation: a bill or a note, the holder may treat it
“MP WILL PAY JR TEN THOUSAND PESOS either as a bill of exchange or a promissory
IN PAYMENT FOR HIS CELLPHONE 1 note at his election.
WEEK FROM TODAY.” Below this notation
MP’s signature with “8/1/00” next to it,
indicating the date of the promissory note.
When JR presented MP’s note to KR, the
latter said it was not a negotiable
instrument under the law and so could not
be a valid substitute for cash. JR took the
opposite view, insisting on the note’s
negotiability. You are asked to referee.
Which of the opposing views is correct?

TH is an indorsee of a promissory note that

simply states: “PAY TO JUAN TAN OR
ORDER 400 PESOS.” The note has no date,
no place of payment and no consideration
mentioned. It was signed by MK and
written under his letterhead specifying the
address, which happens to be his
residence. TH accepted the promissory
note as payment for services rendered to
SH, who in turn received the note from
Juan Tan as payment for a prepaid cell
phone card worth 450 pesos. The payee
acknowledged having received the note on
August 1, 2000. A Bar reviewee had told
TH, who happens to be your friend, that TH
is not a holder in due course under Article
52 of the Negotiable Instruments Law (Act
2031) and therefore does not enjoy the
rights and protection under the statute. TH
asks for our advice specifically in
connection with the note being undated
and not mentioning a place of payment and
any consideration. What would your advice
be? (2%).
SUGGESTED ANSWER:
KR is right. The promissory note is not
negotiable. It is not issued to order or
bearer. There is no word of negotiability
containing therein. It is not issued in
accordance with Section 1 of the
Negotiable Instruments Law

The fact that the instrument is undated and

does not mention the place of payment
does not militate against its being
negotiable. The date and place of payment
are not material particulars required to
make an instrument negotiable.

The fact that no mention is made of any

consideration is not material.
Consideration is presumed.
 Page 84 of 103
Negotiable Instrument: Definition &
Characteristics (2005)
What is a negotiable instrument? Give the
characteristics of a negotiable instrument.
(2%)
SUGGESTED ANSWER:
Negotiable Instrument is a written contract
for the payment of money which is
intended as a substitute for money and
passes from one person to another as
money, in such a manner as to give a holder
in due course the right to hold the
instrument free from defenses available to
prior parties. Such instrument must comply
with Sec. 1 of the Negotiable Instrument
Law to be considered negotiable.
The characteristics of a negotiable
instrument are;
Negotiability - That quality or attribute
whereby a bill, note or check passes or
may pass from hand to hand, similar to
money, so as to give the holder in due
course the right to hold the instrument
and collect the sum payable for himself
free from defenses.
Accumulation of Secondary Contracts as
they are transferred from one person to
another.
Negotiable Instrument: Identification (2005)
State and explain whether the following
are negotiable instruments under the
Negotiable Instruments Law: (5%)
Version 1990-2003 Arranged by SULAW Class 2005
Postal Money Order;
A certificate of time deposit which states
“This is to certify that bearer has
deposited in this bank the sum of FOUR
THOUSAND PESOS (P4,000.00) only,
repayable to the depositor 200 days
after date.”
Letters of credit;
Warehouse receipts;
Treasury warrants payable from a specific
fund.
SUGGESTED ANSWER:
Postal Money Order – Non-Negotiable as it
is governed by postal rules and
regulation which may be inconsistent
with the NIL and it can only be
negotiated once.
A certificate of time deposit which states
“This is to certify that bearer has
deposited in this bank the sum of FOUR
THOUSAND PESOS (P4,000.00) only,
repayable to the depositor 200 days
after date.” – Non-Negotiable as it does
not comply with the requisites of Sec. 1
of NIL
Letters of credit - Non-Negotiable
Warehouse receipts - Non-Negotiable for
the same as Bill of Lading it merely
represents good, not money.
Treasury warrants payable from a specific
fund - Non-Negotiable being payable
out of a particular fund.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Negotiable Instrument: Negotiable Document vs.
Negotiable Instrument (2005)
Distinguish a negotiable document from a
negotiable instrument. (2%)
SUGGESTED ANSWER:
Negotiable Instrument have requisites of
Sec. 1 of the NIL, a holder of this
instrument have right of recourse against
intermediate parties who are secondarily
liable, Holder in due course may have
rights better than transferor, its subject is
money and the Instrument itself is property
of value.
Napoleon proceed against Richard Clinton
for the note? (5%)
SUGGESTED ANSWER:
Yes. Richard Clinton is liable to Napoleon
under the promissory note. The note made by
Richard Clinton is a bearer instrument.
Despite special indorsement made by Aurora
Page thereon, the note remained a bearer
instrument and can be negotiated by mere
delivery. When X delivered and transferred
the note to Napoleon, the

On the other hand, negotiable document

does not contain requisites of Sec. 1 of
NIL, it has no secondary liability of
intermediate parties, transferee merely
steps into the shoes of the transferor, its
subject are goods and the instrument is
merely evidence of title; thing of value are
the goods mentioned in the document.

Negotiable Instrument; Negotiability (1997)

Can a bill of exchange or a promissory note
qualify as a negotiable instrument if –
it is not dated; or
the day and the month, but not the year of
its maturity, is given; or
it is payable to “cash”’ or
it names two alternative drawees
SUGGESTED ANSWER:
Yes. Date is not a material particular
required by Sec 1 NIL for the negotiability
of an instrument.

No. The time for payment is not

determinable in this case. The year is not
stated.

Yes. Sec 9d NIL makes the instrument

payable to bearer because the name of the
payee does not purport to be the name of
any person.

A bill may not be addressed to two or more

drawees in the alternative or in succession,
to be negotiable (Sec 128 NIL). To do so
makes the order conditional.

Negotiable Instruments; Bearer Instrument (1998)

Richard Clinton makes a promissory note
payable to bearer and delivers the same to
Aurora Page. Aurora Page, 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
 Page 85 of 103
latter became a holder thereof. As such
holder, Napoleon can proceed against
Richard Clinton.
Negotiable Instruments; Bearer Instruments (1997)
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?
SUGGESTED ANSWER:
Yes. The instrument was payable to bearer
as it was a bearer instrument. It could be
negotiated by mere delivery despite the
presence of special indorsements. The
forged signature is unnecessary to
presume the juridical relation between or
among the parties prior to the forgery and
the parties after the forgery. The only party
who can raise the defense of forgery
against a holder in due course is the person
whose signature is forged.
Only B and C can be held liable by F. The
instrument at the time of the forgery was
payable to bearer, being a bearer
instrument. Moreover, the instrument was
indorsed in blank by C to D. D, whose
Version 1990-2003 Arranged by SULAW Class 2005
signature was forged by E cannot be held
liable by F.
Negotiable Instruments; bearer instruments; liabilities
of maker and indorsers (2001)
A issued a promissory note payable to B or
bearer. A delivered the note to B. B
indorsed the note to C. C placed the note in
his drawer, which was stolen by the janitor
X. X indorsed the note to D by forging C’s
signature. D indorsed the note to E who in
turn delivered the note to F, a holder in due
course, without indorsement. Discuss the
individual liabilities to F of A, B and C. (5%)
SUGGESTED ANSWER:
A is liable to F. As the maker of the
promissory note, A is directly or primarily
liable to F, who is a holder in due course.
Despite the presence of the special
indorsements on the note, these do not
detract from the fact that a bearer
instrument, like the promissory note in
question, is always negotiable by mere
delivery, until it is indorsed restrictively
“For Deposit Only.”
B, as a general indorser, is liable to F
secondarily, and warrants that the
instrument is genuine and in all respects
what it purports to be; that he has good
title to it; that all prior parties had capacity
to contract; that he has no knowledge of
any fact which would impair the validity of
the instrument or render it valueless; that
at the time of his indorsement, the
instrument is valid and subsisting; and that
on due presentment, it shall be accepted or
paid, or both, according to its tenor, and
that if it be dishonored and the necessary
proceedings on dishonor
Version 1990-2006 Updated by Dondee
 ALTERNATIVE ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
A payee can be a “holder in due course.” A
be duly taken, he will pay the amount
holder is defined as the payee or indorsee
thereof to the holder, or to any subsequent
of the instrument who is in possession of it.
indorser who may be compelled to pay.
Every holder is deemed prima facie to be a
C is not liable to F since the latter cannot holder in due course.
trace his title to the former. The signature
Negotiable Instruments; Incomplete Delivered
of C in the supposed indorsement by him to
D was forged by X. C can raise the defense Instruments; Comparative Negligence (1997)
of forgery since it was his signature that
was forged.
ALTERNATIVE ANSWER:
As a general endorser, B is secondarily
liable to F. C is liable to F since it is due to
the negligence of C in placing the note in
his drawer that enabled X to steal the same
and forge the signature of C relative to the
indorsement in favor of D. As between C
and F who are both innocent parties, it is C
whose negligence is the proximate cause of
the loss. Hence C should suffer the loss.

Negotiable Instruments; incomplete and undelivered

instruments; holder in due course (2000)
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 PN’s 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? (3%)

Can the payee in a promissory note be a

“holder in due course” within the meaning
of the Negotiable Instruments Law (Act
2031)? Explain your answer. (2%)
SUGGESTED ANSWER:
PN is right. The instrument is incomplete
and undelivered. It did not create any
contract that would bind PN to an
obligation to pay the amount thereof.

A payee in a promissory note cannot be a

“holder in due course” within the meaning
of the Negotiable Instruments Law,
because a payee is an immediate party in
relation to the maker. The payee is subject
to whatever defenses, real of personal,
available to the maker of the
promissory note.
 Page 86 of 103
A, single proprietor of a business concern,
is about to leave for a business trip and, as
he so often does on these occasions, signs
several checks in blank. He instructs B, his
secretary, to safekeep the checks and fill
them out when and as required to pay
accounts during his absence. B fills out one
of the checks by placing her name as
payee, fills in the amount, endorses and
delivers the check to C who accepts it in
good faith as payment for goods sold to B.
B regrets her action and tells A what she
did. A directs the Bank in time to dishonor
the check. When C encashes the check, it is
dishonored. Can A be held liable to C?
SUGGESTED ANSWER:
Yes, A can be held liable to C, assuming
that the latter gave notice of dishonor to A.
This is a case of an incomplete instrument
but delivered as it was entrusted to B, the
secretary of A. Moreover, under the
doctrine of comparative negligence, as
between A and C, both innocent parties, it
was the negligence of A in entrusting the
check to B which is the proximate cause of
the loss.
Negotiable Instruments; kinds of negotiable
instrument; words of negotiability (2002)
A. Define the following: (1) a negotiable
promissory note, (2) a bill of exchange and
(3) a check. (3%)
B. You are Pedro Cruz. Draft the
appropriate contract language for (1) your
negotiable promissory note and (2) your
Version 1990-2003 Arranged by SULAW Class 2005
check, each containing the essential
elements of a negotiable instrument (2%)
SUGGESTED ANSWER:
A. (1) A negotiable promissory note is an
unconditional promise in writing made by
one person to another, signed by the
maker, engaging to pay on demand or at a
fixed or determinable future time, a sum
certain in money to order or bearer.
A bill of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer.
A check is a bill of exchange drawn on a
bank payable on demand.
B. (1) Negotiable promissory note -
“September 15, 2002
“For value received, I hereby promise to
pay Juan Santos or order the sum of TEN
THOUSAND PESOS (P10,000) thirty (30)
days from date hereof.
(Signed) Pedro Cruz
to: Philippine National Bank
Escolta, Manila Branch”
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
Negotiable Instruments; Requisites (1996)
What are the requisites of a negotiable
instrument?
SUGGESTED ANSWER:
The requisites of a negotiable instrument
are as follows:
It must be in writing and signed by the
maker or drawer;
It must contain an unconditional promise
or order to pay a sum certain in money;
It must be payable to order or to bearer;
and
Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable
certainty. (Sec 1 NIL)
Parties; Accommodation Party (1991)
On June 1, 1990, A obtained a loan of
P100th from B, payable not later than
20Dec1990. B required A to issue him a
check for that amount to be dated
20Dec1990. Since he does not have any
checking account, A, with the knowledge of
B, requested his friend, C, President of
Saad Banking Corp (Saad) to accommodate
him. C agreed, he signed a check for the
aforesaid amount dated 20Dec 1990, drawn
against Saad’s account with the ABC

Notice Dishonor (1996)

When is notice of dishonor not required to
be given to the drawer?
SUGGESTED ANSWER:
Notice of dishonor is not required to be
given to the drawer in any of the following
cases:
Where the drawer and drawee are the
same person;
When the drawee is a fictitious person or a
person not having capacity to contract;
When the drawer is the person to whom
the instrument is presented for
payment;
Where the drawer has no right to expect or
require that the drawee or acceptor will
honor the instrument;
Where the drawer has countermanded
payment (Sec 114 NIL)

Parties; Accommodation Party (1990)

To accommodate Carmen, maker of a
promissory note, Jorge signed as indorser
thereon, and the instrument was
negotiated to Raffy, a holder for value. At
the time Raffy took the instrument, he
knew Jorge to be an accomodation party
only. When the promissory note was not
paid, and Raffy discovered that Carmen
had no funds, he sued Jorge. Jorge pleads
in defense the fact that he had endorsed
the instrument without receiving value
therefor, and the further fact that Raffy
knew that at the time he took the
instrument Jorge had not received any
value or consideration of any kind for his
indorsement. Is Jorge liable? Discuss.
SUGGESTED ANSWER:
Yes. Jorge is liable. Sec 29 of the NIL
provides that an accommodation party is
liable on the instrument to a holder for
value, notwithstanding the holder at the
time of taking said instrument knew him to
be only an accommodation party. This is
the nature or the essence of
accommodation.
 Page 87 of 103
Commercial Banking Co. The By-laws of
Saad requires that checks issued by it must
be signed by the President and the
Treasurer or the Vice- President. Since the
Treasurer was absent, C requested the
Vice-President to co-sign the check, which
the latter reluctantly did. The check was
delivered to B. The check was dishonored
upon presentment on due date for
insufficiency of funds.
Is Saad liable on the check as an
accommodation party?
If it is not, who then, under the above facts,
is/are the
accommodation party?
SUGGESTED ANSWER:
a.) Saad is not liable on the check as an
accommodation party. The act of the
corporation in accommodating a friend of
the President, is ultra vires (Crisologo-Jose v
CA GR 80599, 15Sep1989). While it may be
legally possible for the corporation, whose
business is to provide financial
accommodations in the ordinary course of
business, such as one given by a financing
company to be an accommodation party,
this situation, however, is not the case in
the bar problem.
Considering that both the President and
Vice-President were signatories to the
accommodation, they themselves can be
subject to the liabilities of accommodation
parties to the instrument in their personal
capacity (Crisologo-Jose v CA 15Sep1989)
Parties; Accommodation Party (1996)
Version 1990-2003 Arranged by SULAW Class 2005
Nora applied for a loan of P100th with BUR
Bank. By way of accommodation, Nora’s
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.
SUGGESTED ANSWER:
Yes, Vilma may be held liable. Vilma is an
accommodation party. As such, she is liable
on the instrument to a holder for value
such as BUR Bank. This is true even if BUR
Bank was aware at the time it took the
instrument that Vilma is merely an
accommodation party and received no part
of the loan (See Sec 29, NIL; Eulalio Prudencio
v CA GR L-34539, Jul 14, 86 143 s 7)
Parties; Accommodation Party (1998)
For the purpose of lending his name
without receiving value therefore, Pedro
makes a note for P20,000 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
interposes the absence of consideration?
(3%)
Supposing under the same facts, Pedro
pays the said P20,000 may he recover the
same amount from X? (2%)
SUGGESTED ANSWER:
Yes. Y can recover from Pedro. Pedro is an
accommodation party. Absence of
consideration is in the nature of an
accommodation. Defense of absence of
consideration cannot be validly interposed
by accommodation party against a holder in
due course.
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) latter to the holder, the instrument is
If Pedro pays the said P20,000 to Y, Pedro discharged.
can recover the amount from X. X is the
accommodated party or the party Parties; Accommodation Party (2005)
ultimately liable for the instrument. Pedro Dagul has a business arrangement with
is only an accommodation party. Otherwise, Facundo. The latter would lend money to
it would be unjust enrichment on the part another, through Dagul, whose name would
of X if he is not to pay Pedro. appear in the promissory note as the
lender. Dagul would then immediately
Parties; Accommodation Party (2003) indorse the note to Facundo. Is Dagul an
Susan Kawada borrowed P500,000 from accommodation party? Explain. (2%)
SUGGESTED ANSWER:
XYZ Bank which required her, together
with Rose Reyes who did not receive any
amount from the bank, to execute a
promissory note payable to the bank, or its
order on stated maturities. The note was
executed as so agreed. What kind of
liability was incurred by Rose, that of an
accommodation party or that of a solidary
debtor? Explain. (4%)
SUGGESTED ANSWER:
(per Dondee) Rose may be held liable. Rose
is an accommodation party. Absence of
consideration is in the nature of an
accommodation. Defense of absence of
consideration cannot be validly interposed
by accommodation party against a holder
in due course.

Parties; Accommodation Party (2003)

Juan Sy purchased from “A” Appliance
Center one generator set on installment
with chattel mortgage in favor of the
vendor. After getting hold of the generator
set, Juan Sy immediately sold it without
consent of the vendor. Juan Sy was
criminally charged with estafa.

To settle the case extra judicially, Juan Sy

paid the sum of P20,000 and for the
balance of P5,000.00 he executed a
promissory note for said amount with Ben
Lopez as an accommodation party. Juan Sy
failed to pay the balance.
What is the liability of Ben Lopez as an
accommodation party? Explain.
What is the liability of Juan Sy?
SUGGESTED ANSWER:
Ben Lopez, as an accommodation party, is
liable as maker to the holder up to the sum
of P5,000 even if he did not receive any
consideration for the promissory note. This
is the nature of accommodation. But Ben
Lopez can ask for reimbursement from
Juan Sy, the accommodation party.

Juan Sy is liable to the extent of P5,000 in

the hands of a holder in due course (Sec 14
NIL). If Ben Lopez paid the promissory
note, Juan Sy has the obligation to
reimburse Ben Lopez for the amount paid.
If Juan Sy pays directly to the holder of the
promissory note, or he pays Ben Lopez for
the reimbursement of the payment by the
 Page 88 of 103
YES! Dagul is an accommodation party
because in the case at bar, he is essentially,
a person who signs as maker without
receiving any consideration, signs as an
accommodation party merely for the
purpose of lending the credit of his name.
And as an accommodation party he cannot
set up lack of consideration against any
holder, even as to one who is not a holder
in due course.
Parties; Holder in Due Course (1993)
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. However, Evelyn
inserted P5,000 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? Explain.
Supposing Devi endorses the note to Baby
for value but who has knowledge of the
infirmity, can the latter enforce the note
against Larry?
SUGGESTED ANSWER:
Yes, Devi can enforce the negotiable
promissory note against Larry in the
amount of P5,000. Devi is a holder in due
course and the breach of trust committed
by Evelyn cannot be set up by Larry
against Devi because it is a personal
defense. As a holder in due course, Devi is
not subject to such personal defense.
Yes. Baby is not a holder in due course
because she has knowledge of the breach
Version 1990-2003 Arranged by SULAW Class 2005
of trust committed by Evelyn against Larry
which is just a personal defense. But
having taken the instrument from Devi, a
holder in due course, Baby has all the
rights of a holder in due course. Baby did
not participate in the breach of trust
committed by Evelyn who filled the blank
but filled up the instrument with P5,000
instead of P1,000 as instructed by Larry
(Sec 58 NIL)
Parties; Holder in Due Course (1996)
What constitutes a holder in
due course?
SUGGESTED ANSWER:
A holder in due course is one who has
taken the instrument under the following
conditions:
That it is complete and regular upon its
face;
That he became holder of it before it was
overdue and without notice that it had
been previously dishonored, if such was
the fact;
That he took it in good faith and for value;
That at the time it was negotiated to him,
he had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it. (Sec 52, NIL)
Parties; Holder in Due Course (1996)
1996 2.2) Eva issued to Imelda a check in
the amount of P50th post-dated Sep 30,
1995, as security for a diamond ring to be
sold on commission. On Sep 15, 1995,
Imelda negotiated the check to MT
investment which paid the amount of P40th
to her.
Eva failed to sell the ring, so she returned
it to Imelda on Sep 19, 1995. Unable to
retrieve her check, Eva withdrew
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) A is a minor does not prevent C from being
her funds from the drawee bank. Thus, a holder in due course. C took the
when MT Investment presented the check promissory note from a holder for value, B.
for payment, the drawee bank dishonored
it. Later on, when MT Investment sued her, Parties; Holder in Due Course; Indorsement in
Eva raised the defense of absence of blank (2002)
consideration, the check having been A. AB issued a promissory note for P1,000
issued merely as security for the ring that payable to CD or his order on September
she could not sell. 15, 2002. CD indorsed the note in blank
Does Eva have a valid defense? Explain. and delivered the same to EF. GH stole the
SUGGESTED ANSWER: note from EF and on September 14, 2002
No. Eva does not have a valid defense. presented it to AB for payment. When
First, MT Investment is a holder in due asked by AB, GH said CD
course and, as such, holds the postdated
check free from any defect of title of prior
parties and from defenses available to prior
parties among themselves. Eva can invoke
the defense of absence of consideration
against MT Investment only if the latter
was privy to the purpose for which the
checks were issued and, therefore, not a
holder in due course. Second, it is not a
ground for the discharge of the post-dated
check as against a holder in due course
that it was issued merely as security. The
only grounds for the discharge of
negotiable instruments are those set forth
in Sec 119 of the NIL and none of those
grounds are available to Eva. The latter
may not unilaterally discharge herself from
her liability by the mere expediency of
withdrawing her funds from the drawee
bank. (State Investments v CA GR 101163,
Jan 11, 93 217s32).

Parties; Holder in Due Course (1998)

X makes a promissory note for P10,000
payable to A, a minor, to help him 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? (3%)
SUGGESTED ANSWER:
Yes. C is not a holder in due course. The
promissory note is not a negotiable
instrument as it does not contain any word
of negotiability, that is, order or bear, or
words of similar meaning or import. Not
being a holder in due course, C is to
subject such personal defenses of minority
and lack of consideration. C is a mere
assignee who is subject to all defenses.
ALTERNATIVE ANSWER:
X cannot set up the defense of the minority
of A. Defense of minority is available to the
minor only. Such defense is not available to
X.

X cannot set up the defense against C. Lack

of consideration is a personal defense
which is only available between immediate
parties or against parties who are not
holders in due course. C’s knowledge that
 Page 89 of 103
gave him the note in payment for two
cavans of rice. AB therefore paid GH P1,00
on the same date. On September 15, 2002,
EF discovered that the note of AB was not
in his possession and he went to AB. It was
then that EF found out that AB had already
made payment on the note. Can EF still
claim payment from AB? Why? (3%)
B. As a sequel to the same facts narrated
above, EF, out of pity for AB who had
already paid P1,000.00 to GH, decided to
forgive AB and instead go after CD who
indorsed the note in blank to him. Is CD
still liable to EF by virtue of the
indorsement in blank? Why? (2%)
SUGGESTED ANSWER:
A. No. EF cannot claim payment from AB.
EF is not a holder of the promissory note.
To make the presentment for payment, it is
necessary to exhibit the instrument, which
EF cannot do because he is not in
possession thereof.
B. No, because CD negotiated
instrument by delivery.
Place of Payment (2000)
PN is the holder of a negotiable promissory
note within the meaning of the Negotiable
Instruments Law (Act 2031). The note was
originally issued by RP to XL as payee. XL
indorsed the note to PN for goods bought
by XL. The note mentions the place of
payment on the specified maturity date as
the office of the corporate secretary of PX
Version 1990-2003 Arranged by SULAW Class 2005
Bank during banking hours. ON maturity
date, RP was at the aforesaid office ready
to pay the note but PN did not show up.
What PN later did was to sue XL for the
face value of the note, plus interest and
costs. Will the suit prosper? Explain. (5%)
SUGGESTED ANSWER:
Yes. The suit will prosper as far as the face
value of the note is concerned, but not with
respect to the interest due subsequent to
the maturity of the note and the costs of
collection. RP was ready and willing to pay
the note at the specified place of payment
on the specified maturity date, but PN did
not show up. PN lost his right to recover
the interest due subsequent to the maturity
of the note and the costs of collection.
Public Service Law
Certificate of public Convenience (1998)
The Batong Bakal Corporation filed with
the Board of Energy an application for a
Certificate of Public Convenience for the
the purpose of supplying electric power and
lights to the factory and its employees
living within the compound. The application
was opposed by the Bulacan Electric
Corporation contending that the Batong
Bakal Corporation has not secured a
franchise to operate and maintain an
electric plant.
Is the opposition’s contention correct? (5%)
SUGGESTED ANSWER:
No. A certificate of public convenience may
be granted to Batong Bakal Corporation,
though not possessing a
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) The applicant must prove that the
legislative franchise, if it meets all the operation of the public service
other requirements. There is nothing in the proposed and the authorization to do
law nor the Constitution, which indicates business will promote the public
that a legislative franchise is necessary or interest in a proper and suitable
required for an entity to operate as manner. (Sec 16a CA 146 as amended)
supplier of electric power and light to its The applicant must be financially capable
factory and its employees living within the of undertaking the proposed service
compound. and meeting the responsibilities
incident to its operation.
Certificate of Public Convenience; inseparability
of certificate and vessel (1992) Powers of the Public Service Commission (1993)
Antonio was granted a Certificate of Public The City of Manila passed an ordinance
Convenience (CPC) in 1986 to operate a banning provincial buses from the city. The
ferry between Mindoro and Batangas using ordinance was challenged as invalid under
the motor vessel “MV Lotus.” He stopped the Public Service Act by X
operations in 1988 due to unserviceability
of the vessel.
In 1989, Basilio was granted a CPC for the
same route. After a few months, he
discovered that Carlos was operating on
his route under Antonio’s CPC. Because
Basilio filed a complaint for illegal
operations with the Maritime Industry
Authority, Antonio and Carlos jointly filed
an application for sale and transfer of
Antonio’s CPC and substitution of the
vessel “MV Lotus” with another owned by
Carlos.
Should Antonio’s and Carlos’ joint
application be approved? Giver your
reasons.
SUGGESTED ANSWER:
The joint application of Antonio and Carlos
for the sale and transfer of Antonio’s CPC
and substitution of the vessel MV Lotus
with another vessel owned by the
transferee should not be approved. The
certificate of public convenience and MV
Lotus are inseparable. The unserviceability
of the vessel covered by the certificate had
likewise rendered ineffective the certificate
itself, and the holder thereof may not
legally transfer the same to another.
(Cohon v CA 188 s 719).

Certificate of Public Convenience; Requirements

(1995) What requirements must be met
before a certificate of public convenience
may be granted under the Public Service
Act?
SUGGESTED ANSWER:
The following are the requirements for the
granting of a certificate of public
convenience, to wit:
The applicant must be a citizen of the
Philippines, or a corporation, co-
partnership or association organized
under the laws of the Philippines and at
least 60% of the stock of paid-up capital
of which must belong to citizens of the
Philippines. (Sec 16a, CA 146, as
amended)
The applicant must prove public necessity.
 Page 90 of 103
who had a certificate of public convenience
to operate auto-trucks with fixed routes
from certain towns in Bulacan and Rizal to
Manila and within Manila. Firstly, he
claimed that the ordinance was null and
void because, among other things, it in
effect amends his certificate of public
convenience, a thing which only the Public
Service Commission can do under Sec 16
(m) of the Public Service Act. Under said
section, the Commission is empowered to
amend, modify, or revoke a certificate of
public convenience after notice and
hearing. Secondly, he contended that even
if the ordinance was valid, it is only the
Commission which can require compliance
with its provisions under Sec 17 (j) of said
Act and since the implementation of the
ordinance was without sanction or approval
of the Commission, its enforcement was
unauthorized and illegal.
May the reliance of X on Section 16 (m) of
the Public Service Act be sustained?
Explain.
Was X correct in his contention that under
Section 17
(j) of the Public Service Act it is only the
Commissioner which can require
compliance with the provisions of the
ordinance? Explain.
SUGGESTED ANSWER:
No. The power vested in the Public Service
Commission under Sec 16m is subordinate
to the authority of the City of Manila under
Sec 18 (hh) of its revised charter to
superintend, regulate or control the streets
of the city of Manila. (Lagman v City of
Manila 17 s 579)
Version 1990-2003 Arranged by SULAW Class 2005
No. The powers conferred by law upon the
Public Service Commission were not
designed to deny or supersede the
regulatory power of local governments over
motor traffic in the streets subject to their
control. (Lagman v City of Manila 17 s 579)
Public utilities (2000)
Communications Inc. is an e-commerce
company whose present business activity is
limited to providing its clients with all
types of information technology hardware.
It plans to re-focus its corporate direction
of gradually converting itself into a full
convergence organization. Towards this
objective, the company has been
aggressively acquiring telecommunications
businesses and broadcast media
enterprises, and consolidating their
corporate structures. The ultimate plan is
to have only two organizations: one to own
the facilities of the combined businesses
and to develop and produce content
materials, and another to operate the
facilities and provide mass media and
commercial telecommunications services.
WWW Communications will be the flagship
entity which will own the facilities of the
conglomerate and provide content to the
other new corporation which, in turn, will
operate those facilities and provide the
services. WWW Communications seeks
your professional advice on whether or not
its reorganized business activity would be
considered a public utility requiring a
franchise or certificate or any other form of
authorization from the government. What
will be your advice? Explain (5%)
SUGGESTED ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) authorized representatives (Sec 16n Pub
The reorganized business activity of WWW Serv Act; Halili v Herras 10 s 769)
Communications Inc. would not be
considered a public utility requiring a
franchise or certificate or any other form of Securities Regulation
authorization from the government. It owns Insider (2004)
the facilities, but does not operate them. Ms. OB was employed in MAS Investment
Bank. WIC, a medical drug company,
Revocation of Certificate (1993)
retained the Bank to assess whether it is
Robert is a holder of a certificate of public desirable to make a tender offer for DOP
convenience to operate a taxicab service in company, a drug manufacturer. OB
Manila and suburbs. One evening, one of overheard in the
his taxicab units was boarded by three
robbers as they escaped after staging a
hold-up. Because of said incident, the
LTFRB revoked the certificate of public
convenience of Robert on the ground that
said operator failed to render safe, proper
and adequate service as required under
Sec 19a of the Public Service Act.
a) Was the revocation of the certificate of
public convenience of Robert justified?
Explain.
b) When can the Commission (Board)
exercise its power to suspend or revoke
certificate of public convenience?
SUGGESTED ANSWER:
1a) No. A single hold-up incident which
does not link Robert’s taxicab cannot be
construed that he rendered a service that
is unsafe, inadequate and improper
(Manzanal v Ausejo 164 s 36)

1b) Under Sec 19a of the Public Service

Act, the Commission (Board) can suspend
or revoke a certificate of public
convenience when the operator fails to
provide a service that is safe, proper or
adequate, and refuses to render any
service which can be reasonably demanded
and furnished.

Revocation of Certificate (1993)

Pepay, a holder of a certificate of public
convenience, failed to register to the
complete number of units required by her
certificate. However, she tried to justify
such failure by the accidents that allegedly
befell her, claiming that she was so
shocked and burdened by the successive
accidents and misfortunes that she did not
know what she was doing, she was
confused and thrown off tangent
momentarily, although she always had the
money and financial ability to buy new
trucks and repair the destroyed one. Are
the reasons given by Pepay sufficient
grounds to excuse her from completing
units? Explain.
SUGGESTED ANSWER:
No. The reasons given by Pepay are not
sufficient grounds to excuse her from
completing her units. The same could be
undertaken by her children or by other
 Page 91 of 103
course of her work the plans of WIC. By
herself and thru associates, she purchased
DOP stocks available at the stock exchange
priced at P20 per share. When WIC's
tender offer was announced, DOP stocks
jumped to P30 per share. Thus OB earned a
sizable profit. Is OB liable for breach and
misuse of confidential or insider
information gained from her employment?
Is she also liable for damages to sellers or
buyers with whom she traded? If so, what
is the measure of such damages? Explain
briefly. (5%)
SUGGESTED ANSWER:
OB is an insider (as defined in Subsection
3.8(3) of the Securities Regulation Code)
since she is an employee of the Bank, the
financial adviser of DOP, and this
relationship gives her access to material
information about the issuer (DOP) and the
latter's securities (shares), which
information is not generally available to the
public. Accordingly, OB is guilty of insider
trading under Section 27 of the Securities
Regulation Code, which requires disclosure
when trading in securities.
OB is also liable for damages to sellers or
buyers with whom she traded. Under
Subsection 63.1 of the Securities
Regulation Code, the damages awarded
could be an amount not exceeding triple
the amount of the transaction plus actual
damages. Exemplary damages may also be
awarded in case of bad faith, fraud,
malevolence or wantonness in the violation
of the Securities Regulation Code or its
implementing rules. The court is also
Version 1990-2003 Arranged by SULAW Class 2005
authorized to award attorney's fees not
exceeding 30% of the award.
Insider Trading (1995)
Under the Revised Securities Act, it is
unlawful for an insider to sell or buy a
security of the issuer if he knows a fact of
special significance with respect to the
issuer or the security that is not generally
available, without disclosing such fact to
the other party.
3.a) What does the term “insider” mean as
used in the Revised Securities act?
3.b) When is a fact considered to be “of
special significance” under the same Act?
3.c) What are the liabilities of a person who
violates the pertinent provisions of the
Revised Securities Act regarding the unfair
use of inside information?
SUGGESTED ANSWER:
3a. “Insider” means 1) the issuer, 2) a
director or officer of, or a person
controlling, controlled by, or under
common control with, the issuer, 3) a
person whose relationship or former
relationship to the issuer gives or gave him
access to a fact of special significance
about the issuer or the security that is not
generally available, or 4) a person who
learns such a fact from any of the foregoing
insiders with knowledge that the person
from whom he learns the fact is such an
insider (Sec 30b, RSA)
3b. It is one which, in addition to being
material, would be likely to affect the
market price of a security to a significant
extent on being made generally available,
or one which a reasonable person would
consider especially
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
important under the circumstances in
determining his course of action in the
light of such factors as the degree of its
specificity, the extent of its difference from
information generally available previously,
and its nature and reliability. (Sec. 30c,
RSA)
3c. The person may be liable to 1) a fine of
not less than P5th nor more than P500th or
2) imprisonment of not less than 7 years
nor more than 21 years, 3) or both such
fine and imprisonment in the discretion of
the court.
If the person is a corporation, partnership,
association or other juridical entity, the
penalty shall be imposed upon the officers
of the corporation, etc. responsible for the
violation. And if such an officer is an alien,
he shall, in addition to the penalties
prescribed, be deported without further
proceedings after service of sentence. (Sec
56 RSA)
material, such fact as would likely, on being
made generally available, to affect the
market price of a security to a significant
extent, or which a reasonable person would
consider as especially important under the
circumstances in determining his course of
action in the light of such factors as the
degree of its specificity, the extent of its
difference from information generally
available previously, and its nature and
reliability (Sec 30 par c RSecAct)
Manipulative Practices (2001)
Suppose A is the owner of several inactive
securities. To create an appearance of
active trading for such securities,

Insider Trading; Manipulative Practices (1994)

Give a case where a person who is not an
issuing corporation, director or officer
thereof, or a person controlling, controlled
by or under common control with the
issuing corporation, is also considered an
“insider.”
In Securities Law, what is a “shortswing”
transaction.
In “insider trading,” what is a “fact of
special significance”?
SUGGESTED ANSWER:
It may be a case where a person, whose
relationship or former relationship to the
issuer gives or gave him access to a fact of
special significance about the issuer or the
security that is not generally available, or a
person, who learns such a fact from any of
the insiders, with knowledge that the
person from whom he learns the fact, is
such an insider (Sec 30, par (b) Rev
Securities Act)

A “shortswing” is a transaction where a

person buys securities and sells or disposes
of the same within a period of six (6)
months.
ALTERNATIVE ANSWER:
It is a purchase by any person for the
issuer or any person controlling, controlled
by, or under common control with the
issuer, or a purchase subject to the control
of the issuer or any such person, resulting
in beneficial ownership of more than 10%
of any class of shares (Sec 32 R Sec Act)

In “insider trading,” a “fact of special

significance” is, in addition to being
 Page 92 of 103
A connives with B by which A will offer for
sale some of his securities and B will buy
them at a certain fixed price, with the
understanding that although there would
be an apparent sale, A will retain the
beneficial ownership thereof.
Is the arrangement lawful? (3%)
If the sale materializes, what is it called?
(2%)
SUGGESTED ANSWER:
No. The arrangement is not lawful. It is an
artificial manipulation of the price of
securities. This is prohibited by the
Securities Regulation Code.
If the sale materializes, it is called a wash
sale or simulated sale.
Securities Regulation Code; Purpose (1998)
What is the principal purpose of laws and
regulations governing securities in the
Philippines? (2%)
SUGGESTED ANSWER:
The principal purpose of laws and
regulations governing securities in the
Philippines is to protect the public against
the nefarious practices of unscrupulous
brokers and salesmen in selling securities.
Securities; Definition (1996)
Define securities
SUGGESTED ANSWER:
Stocks, bonds notes, convertible
debentures, warrants or other documents
that represent a share in a company or a
debt owned by a company or government
entity. Evidences of obligations to pay
money or of rights to participate in
earnings and distribution of corporate
assets. Instruments giving to their legal
Version 1990-2003 Arranged by SULAW Class 2005
holders rights to money or other property;
they are therefore instruments which have
intrinsic value and are recognized and used
as such in the regular channels of
commerce.
(Note: Sec 2a of the Revised Securities
Act does not really define the term
‘securities.’)
Securities; Selling of Securities; Meaning (2002)
2002 (18) Equity Online Corporation (EOL),
a New York corporation, has a securities
brokerage service on the Internet after
obtaining all requisite U.S. licenses and
permits to do so. EOL’s website
(www.eonline..com), which is hosted by a
server in Florida, enables Internet users to
trade on-line in securities listed in the
various stock exchanges in the U.S. EOL
buys and sells U.S. listed securities for the
accounts of its clients all over the world,
who convey their buy and sell instructions
to EOL through the Internet. EOL has no
offices, employees or representatives
outside the U.S. The website has icons for
many countries, including an icon “For
Filipino Traders” containing the day’s
prices of U.S. listed securities expressed in
U.S. dollars and their Philippine peso
equivalent. Grace Gonzales, a resident of
Makati, is a regular customer of the
website and has been purchasing and
selling securities through EOL with the use
of her American Express credit card. Grace
has never traveled outside the Philippines.
After a series of erroneous stock picks, she
had incurred a net indebtedness of
US$30,000. with EOL, at which time she
cancelled her American Express credit
card. After a
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) The person intends to acquire equity
number of demand letters sent to Grace, all shares of a public company that
of them unanswered, EOL, through a would result in ownership of more
Makati law firm, filed a complaint for than 50% of the said shares.
collection against Grace with the Regional
Trial Court of Makati. Grace, through her
lawyer, filed a motion to dismiss on the Transportation Law
ground that EOL (a) was doing business in
the Philippines without a license and was Boundary System (2005)
therefore barred from bringing suit and (b)
Baldo is a driver of Yellow Cab Company
violated the Securities Regulation Code by
under the boundary system. While cruising
selling or offering to sell securities within
along the South Expressway, Baldo’s cab
the Philippines without registering the
figured in a collision, killing his
securities with the Philippine SEC and thus
came to court “with unclean hands.” EOL
opposed the motion to dismiss, contending
that it had never established a physical
presence in the Philippines, and that all of
the activities related to plaintiffs trading in
U.S. securities all transpired outside the
Philippines. If you are the judge, decide the
motion to dismiss by ruling on the
respective contentions of the parties on the
basis of the facts presented above. (10%)
SUGGESTED ANSWER:
The grounds of the motion to dismiss are
both untenable. EOL is not doing business
in the Philippines, and it did not violate the
Securites Act, because it was not selling
securities in the country.

The contention of EOL is correct, because

it never did any business in the Philippines.
All its transactions in question were
consummated outside the Philippines.

Tender Offer (2002)

2002 (6)
A. What is a tender offer?
B. In what instances is a tender offer
required to be made?
SUGGESTED ANSWER:
A. Tender offer is a publicly announced
intention of a person acting alone or in
concert with other persons to acquire
equity securities of a public company. It
may also be defined as a method of taking
over a company by asking stockholders to
sell their shares at a price higher than the
current market price and on a particular
date.

B. Instances where tender offer is required

to be made:
The person intends to acquire 15% or
more of the equity share of a public
company pursuant to an agreement
made between or among the person
and one or more sellers.
The person intends to acquire 30% or
more of the equity shares of a public
company within a period of 12
months.
 Page 93 of 103
passenger, Pietro. The heirs of Pietro sued
Yellow Cab Company for damages, but the
latter refused to pay the heirs, insisting
that it is not liable because Baldo is not its
employee. Resolve with reasons. (2%)
SUGGESTED ANSWER:
Yellow Cab Company shall be liable with
Baldo, on a solidary basis, for the death of
passenger Pietro. Baldo is an employee of
Yellow Cab under the boundary system. As
such, the death of passenger Pietro is
breach of contract of carriage, making both
the common carrier Yellow Cab and its
employee, Baldo, solidarily liable.
(Hernandez v. Dolor, G.R, No. 160286, July 30,
2004)
Carriage; Breach of Contract; Presumption
of Negligence (1990)
Peter so hailed a taxicab owned and
operated by Jimmy Cheng and driven by
Hermie Cortez. Peter asked Cortez to take
him to his office in Malate. On the way to
Malate, the taxicab collided with a
passenger jeepney, as a result of which
Peter was injured, i.e., he fractured his left
leg.
Peter sued Jimmy for damages, based upon
a contract of carriage, and Peter won.
Jimmy wanted to challenge the decision
before the SC on the ground that the trial
court erred in not making an express
finding as to whether or not Jimmy was
responsible for the collision and, hence,
civilly liable to Peter. He went to see you
for advice. What will you tell him? Explain.
SUGGESTED ANSWER:
I will counsel Jimmy to desist from
challenging the decision. The action of
Version 1990-2003 Arranged by SULAW Class 2005
Peter being based on culpa contractual, the
carrier’s negligence is presumed upon the
breach of contract. The burden of proof
instead would lie on Jimmy to establish that
despite an exercise of utmost diligence the
collision could not have been avoided.
Carriage; Breach of Contract; Presumption
of Negligence (1997)
In a court case involving claims for
damages arising from death and injury of
bus passengers, counsel for the bus
operator files a demurrer to evidence
arguing that the complaint should be
dismissed because the plaintiffs did not
submit any evidence that the operator or its
employees were negligent. If you were the
judge, would you dismiss the complaint?
SUGGESTED ANSWER:
No. In the carriage of passengers, the
failure of the common carrier to bring the
passengers safely to their destination
immediately raises the presumption that
such failure is attributable to the carrier’s
fault or negligence. In the case at bar, the
fact of death and injury of the bus
passengers raises the presumption of fault
or negligence on the part of the carrier. The
carrier must rebut such presumption.
Otherwise, the conclusion can be properly
made that the carrier failed to exercise
extraordinary diligence as required by law.
Carriage; Fortuitous Event (1995)
M. Dizon Trucking entered into a hauling
contract with Fairgoods Co whereby the
former bound itself to haul the latter’s 2000
sacks of Soya bean meal from Manila
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) Discuss whether or not the following
Port Area to Calamba, Laguna. To carry out stipulations in a contract of carriage of a
faithfully its obligation Dizon common carrier are valid:
subcontracted with Enrico Reyes the a stipulation limiting the sum that may be
delivery of 400 sacks of the Soya bean recovered by the shipper or owner to
meal. Aside from the driver, three male 90% of the value of the goods in case of
employees of Reyes rode on the truck with loss due to theft.
the cargo. While the truck was on its way a stipulation that in the event of loss,
to Laguna two strangers suddenly stopped destruction or deterioration of goods on
the truck and hijacked the cargo. account of the defective condition of
Investigation by the police disclosed that the vehicle used in the contract of
one of the hijackers was armed with a carriage, the carrier’s liability is limited
bladed weapon while the other was to the value of the goods appearing in
unarmed. For failure to deliver the 400 the bill of lading unless
sacks, Fairgoods sued Dizon for damages. the shipper or owner declares a higher
Dizon in turn set up a 3rd party complaint value (5%)
SUGGESTED ANSWER:
against Reyes which the latter registered
on the ground that the loss was due to
force majeure.
Did the hijacking constitute force majeure
to exculpate Reyes from any liability to
Dizon? Discuss fully.
SUGGESTED ANSWER:
No. The hijacking in this case cannot be
considered force majeure. Only one of the
two hijackers was armed with a bladed
weapon. As against the 4 male employees
of Reyes, 2 hijackers, with only one of them
being armed with a bladed weapon, cannot
be considered force majeure. The hijackers
did not act with grave or irresistible threat,
violence or force.

Carriage; Liability; Lost Baggage or Acts of

Passengers (1997)
1997 (15) Antonio, a paying passenger,
boarded a bus bound for Batangas City. He
chose a seat at the front row, near the bus
driver, and told the bus driver that he had
valuable items in his hand carried bag
which he then placed beside the driver’s
seat. Not having slept for 24 hours, he
requested the driver to keep an eye on the
bag should he doze off during the trip.
While Antonio was asleep, another
passenger took the bag away and alighted
at Calamba, Laguna. Could the common
carrier be held liable by Antonio for the
loss?
SUGGESTED ANSWER:
Yes. Ordinarily, the common carrier is not
liable for acts of other passengers. But the
common carrier cannot relieve itself from
liability if the common carrier’s employees
could have prevented the act or omission
by exercising due diligence. In this case,
the passenger asked the driver to keep an
eye on the bag which was placed beside
the driver’s seat. If the driver exercised
due diligence, he could have prevented the
loss of the bag.

Carriage; Prohibited & Valid Stipulations (2002)

 Page 94 of 103
The stipulation is considered unreasonable,
unjust and contrary to public policy
under Article 1745 of the Civil Code.
The stipulation limiting the carrier’s
liability to the value of the goods
appearing in the bill of lading unless
the shipper or owner declares a higher
value, is expressly recognized in Article
1749 of the Civil Code.
Carriage; Valuation of Damaged Cargo (1993)
A shipped thirteen pieces of luggage
through LG Airlines from Teheran to
Manila as evidenced by LG Air Waybill
which disclosed that the actual gross
weight of the luggage was 180 kg. Z did
not declare an inventory of the contents or
the value of the 13 pieces of luggage. After
the said pieces of luggage arrived in
Manila, the consignee was able to claim
from the cargo broker only 12 pieces, with
a total weight of 174 kg. X advised the
airline of the loss of one of the 13 pieces of
luggage and of the contents thereof. Efforts
of the airline to trace the missing luggage
were fruitless. Since the airline failed to
comply with the demand of X to produce
the missing luggage, X filed an action for
breach of contract with damages against
LG Airlines. In its answer, LG Airlines
alleged that the Warsaw Convention which
limits the liability of the carrier, if any, with
respect to cargo to a sum of $20 per kilo or
$9.07 per pound, unless a higher value is
declared in advance and additional charges
are paid by the passenger and the
conditions of the contract as set forth in
the air waybill, expressly subject the
Version 1990-2003 Arranged by SULAW Class 2005
contract of the carriage of cargo to the
Warsaw Convention. May the allegation of
LG Airlines be sustained? Explain.
SUGGESTED ANSWER:
Yes. Unless the contents of a cargo are
declared or the contents of a lost luggage
are proved by the satisfactory evidence
other than the self-serving declaration of
one party, the contract should be enforced
as it is the only reasonable basis to arrive
at a just award. The passenger or shipper
is bound by the terms of the passenger
ticket or the waybill. (Panama v Rapadas 209
s 67)
Common Carrier (1996)
Define a common carrier?
SUGGESTED ANSWER:
A common carrier is a person, corporation,
firm or association engaged in the business
of carrying or transporting passengers or
goods or both, by land, water or air for
compensation, offering its services to the
public (Art 1732, Civil Code)
Common Carrier; Breach of Contract; Damages (2003)
Vivian Martin was booked by PAL, which
acted as a ticketing agent of Far East
Airlines, for a round trip flight on the
latter’s aircraft, from Manila-Hongkong-
Manila. The ticket was cut by an employee
of PAL. The ticket showed that Vivian was
scheduled to leave Manila at 5:30 p.m. on
05 January 2002 aboard Far East’s Flight
F007. Vivian arrived at the Ninoy Aquino
International Airport an hour before the
time scheduled in her ticket, but was told
that Far East’s Flight F007 had left at
12:10 p.m. It
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) assured X that the suitcases would come in
turned out that the ticket was inadvertently the next flight but they never did.
cut and wrongly worded. PAL employees X claimed P2,000 for the loss of both
manning the airport’s ground services suitcases, but the airline was willing to pay
nevertheless scheduled her to fly two hours only P500 because the airline ticket
later aboard their plane. She agreed and stipulated that unless a higher value was
arrived in Hongkong safely. The aircraft declared, any claim for loss cannot exceed
used by Far East Airlines developed engine P250 for each piece of luggage. X reasoned
trouble, and did not make it to Hongkong out that he did not sign the stipulation and
but returned to Manila. Vivian sued both in fact had not even read it.
airlines, PAL and Far East, for damages
because of her having unable to take the
Far East flight. Could either or both
airlines be held liable to Vivian? Why? (6%)
SUGGESTED ANSWER:
(per dondee) No, there was breach of
contract and that she was accommodated
well with the assistance of PAL employees
to take the flight without undue delay.

Common Carrier; Defenses (2002)

Why is the defense of due diligence in the
selection and supervision of an employee
not available to a common carrier? (2%)
SUGGESTED ANSWER:
The defense of due diligence in the
selection and supervision of an employee is
not available to a common carrier because
the degree of diligence required of a
common carrier is not the diligence of a
good father of a family but extraordinary
diligence, i.e., diligence of the greatest skill
and utmost foresight.

Common Carrier; Defenses; Fortuitous Events (1994)

Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at the
bus by an unidentified bystander as the bus
was speeding through the National
Highway. The bus owner’s personnel lost
no time in bringing Marites to the
provincial hospital where she was confined
and treated.
Marites wants to sue the bus company for
damages and seeks your advice whether
she can legally hold the bus company
liable. What will you advise her?
SUGGESTED ANSWER:
Marites can not legally hold the bus
company liable. There is no showing that
any such incident previously happened so
as to impose an obligation on part of the
personnel of the bus company to warn the
passengers and to take the necessary
precaution. Such hurling of a stone
constitutes fortuitous event in this case.
The bus company is not an insurer. (Pilapil
v CA 180 s 346)

Common Carrier; Defenses; Limitation of Liability

(1998) X took a plane from Manila bound for
Davao via Cebu where there was a change
of planes. X arrived in Davao safely but to
his dismay, his two suitcases were left
behind in Cebu. The airline company
 Page 95 of 103
X did not declare a greater value despite
the fact that the clerk had called his
attention to the stipulation in the ticket.
Decide the case (5%)
SUGGESTED ANSWER:
Even if he did not sign the ticket, X is
bound by the stipulation that any claim for
loss cannot exceed P250 for each luggage.
He did not declare a higher value. X is
entitled to P500 for the two luggages lost.
Common Carrier; Defenses; Limitation of Liability
(2001) Suppose A was riding on an airplane
of a common carrier when the accident
happened and A suffered serious injuries.
In an action by A against the common
carrier, the latter claimed that
there was a stipulation in the ticket issued
to A absolutely exempting the carrier from
liability from the passenger’s death or
injuries ad notices were posted by the
common carrier dispensing with the
extraordinary diligence of the carrier, and
A was given a discount on his plane fare
thereby reducing the liability of the
common carrier with respect to A in
particular.
a) Are those valid defenses? (1%)
b) What are the defenses available to any
common carrier to limit or exempt it from
liability? (4%)
SUGGESTED ANSWER:
No. These are not valid defenses because
they are contrary to law as they are in
violation of the extraordinary diligence
required of common carriers. (Article
1757, 1758 New Civil Code)
Version 1990-2003 Arranged by SULAW Class 2005
The defenses available to any common
carrier to limit or exempt it from liability
are:
observance of extraordinary diligence,
or the proximate cause of the incident is
a fortuitous event or force majeure,
act or omission of the shipper or owner
of the goods,
the character of the goods or defects in
the packing or in the containers, and
order or act of competent public
authority, without the common
carrier being guilty of even simple
negligence (Article 1734, NCC).
Common Carrier; Duration of Liability (1996)
A bus of GL Transit on its way to Davao
stopped to enable a passenger to alight. At
that moment, Santiago, who had been
waiting for a ride, boarded the bus.
However, the bus driver failed to notice
Santiago who was still standing on the bus
platform, and stepped on the accelerator.
Because of the sudden motion, Santiago
slipped and fell down suffering serious
injuries.
May Santiago hold GL Transit liable for
breach of contract of carriage? Explain.
SUGGESTED ANSWER:
Santiago may hold GL Transit liable for
breach of contract of carriage. It was the
duty of the driver, when he stopped the
bus, to do no act that would have the effect
of increasing the peril to a passenger such
as Santiago while he was attempting to
board the same. When a bus is not in
motion there is no necessity for a
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
person who wants to ride the same to
signal his intention to board. A public
utility bus, once it stops, is in effect making
a continuous offer to bus riders. It is the
duty of common carriers of passengers to
stop their conveyances for a reasonable
length of time in order to afford passengers
an opportunity to board and enter, and they
are liable for injuries suffered by boarding
passengers resulting from the sudden
starting up or jerking of their conveyances
while they are doing so. Santiago, by
stepping and standing on the platform of
the bus, is already considered a passenger
and is entitled to all the rights and
protection pertaining to a contract of
carriage. (Dangwa Trans Co v CA 95582
Oct 7,91 202s574)
person or entity, for some business purpose
and with general or limited clientele, offers
the service of carrying or transporting
passengers or goods or both for
compensation.
Common Carriers; Defenses (1996)
AM Trucking, a small company, operates
two trucks for hire on selective basis. It
caters only to a few customers, and its
trucks do not make regular or scheduled
trips. It does not even have a certificate of
public convenience.

Common Carrier; Duty to Examine Baggages;

Railway and Airline (1992)
Marino was a passenger on a train.
Another passenger, Juancho, had taken a
gallon of gasoline placed in a plastic bag
into the same coach where Marino was
riding. The gasoline ignited and exploded
causing injury to Marino who filed a civil
suit for damages against the railway
company claiming that Juancho should
have been subjected to inspection by its
conductor.
The railway company disclaimed liability
resulting from the explosion contending
that it was unaware of the contents of the
plastic bag and invoking the right of
Juancho to privacy.
Should the railway company be held liable
for damages?
If it were an airline company involved,
would your
answer be the same? Explain briefly.
SUGGESTED ANSWER:
No. The railway company is not liable for
damages. In overland transportation, the
common carrier is not bound nor
empowered to make an examination on the
contents of packages or bags, particularly
those handcarried by passengers.

If it were an airline company, the common

carrier should be made liable. In case of air
carriers, it is not lawful to carry flammable
materials in passenger aircrafts, and
airline companies may open and
investigate suspicious packages and
cargoes (RA 6235)

Common Carrier; Test (1996)

What is the test for determining whether or
not one is a common carrier?
SUGGESTED ANSWER:
The test for determining whether or not
one is a common carrier is whether the
 Page 96 of 103
On one occasion, Reynaldo contracted AM
to transport for a fee, 100 sacks of rice
from Manila to Tarlac. However, AM failed
to deliver the cargo, because its truck was
hijacked when the driver stopped in
Bulacan to visit his girlfriend.
May Reynaldo hold AM liable as a
common carrier?
May AM set up the hijacking as a
defense to
defeat Reynaldo’s claim?
SUGGESTED ANSWER:
Reynaldo may hold AM Trucking liable as a
common carrier. The facts that AM
Trucking operates only two trucks for hire
on a selective basis, caters only to a few
customers, does not make regular or
scheduled trips, and does not have a
certificate of public convenience are of no
moment as
• the law does not distinguish between one
whose principal business activity is the
carrying of persons or goods or both
and anyone who does such carrying
only as an ancillary activity,
the law avoids making any distinction
between a person or enterprise offering
transportation service on a regular or
scheduled basis and one offering such
service on an occasional, episodic or
unscheduled basis, and
the law refrains from making a distinction
between a carrier offering its services
to the general public and one who
offers services or solicits business only
Version 1990-2003 Arranged by SULAW Class 2005
from a narrow segment of the general
population
(Pedro de Guzman v CA L-47822 Dec 22,88
168s612)
SUGGESTED ANSWER:
AM Trucking may not set up the hijacking
as a defense to defeat Reynaldo’s claim as
the facts given do not indicate that the
same was attended by the use of grave or
irresistible threat, violence, or force. It
would appear that the truck was left
unattended by its driver and was taken
while he was visiting his girlfriend. (Pedro
de Guzman v CA L-47822 Dec 22,88 168 scra
612).
Common Carriers; Liability for Loss (1991)
Alejandor Camaling of Alegria, Cebu, is
engaged in buying copra, charcoal,
firewood, and used bottles and in reselling
them in Cebu City. He uses 2 big Isuzu
trucks for the purpose; however, he has no
certificate of public convenience or
franchise to do business as a common
carrier. On the return trips to Alegria, he
loads his trucks with various merchandise
of other merchants in Alegria and the
neighboring municipalities of Badian and
Ginatilan. He charges them freight rates
much lower than the regular rates. In one
of the return trips, which left Cebu City at
8:30 p.m. 1 cargo truck was loaded with
several boxes of sardines, valued at
P100th, belonging to one of his customers,
Pedro Rabor. While passing the zigzag road
between Carcar and Barili, Cebu, which is
midway between Cebu City and Alegria,
the truck was hijacked by 3 armed men
who took all the boxes of
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) license, for a fee or percentage of their
sardines and kidnapped the driver and his earnings (Lim v. Court of Appeals and Gonzalez,
G.R, No. 125817, January 16, 2002, citing
helper, releasing them in Cebu City only 2 Baliwag Trannit v. Court of Appeals, G.R. No.
days later. 57493, January 7, 1987) The law enjoining the
kabit system aims to identify the person
Pedro Rabor sought to recover from
responsible for an accident in order to
Alejandro the value of the sardines. The
protect the riding public. The policy has no
latter contends that he is not liable
force when the public at large is neither
therefore because he is not a common deceived nor involved.
carrier under the Civil Code and, even
granting for the sake of argument that he The law does not penalize the parties to a
is, he is not liable for the occurrence of the kabit agreement. But the kabit system is
loss as it was due to a cause beyond his
contrary to public
control.
If you were the judge, would you sustain
the contention of Alejandro?
SUGGESTED ANSWER:
If I were the Judge, I would hold Alejandro
as having engaged as a common carrier. A
person who offers his services to carry
passengers or goods for a fee is a common
carrier regardless of whether he has a
certificate of public convenience or not,
whether it is his main business or
incidental to such business, whether it is
scheduled or unscheduled service, and
whether he offers his services to the
general public or to a limited few (De
Guzman v CA GR 47822 27Dec1988)

I will however, sustain the contention of

Alejandro that he is not liable for the loss
of the goods. A common carrier is not an
insurer of the cargo. If it can be established
that the loss, despite the exercise of
extraordinary diligence, could not have
been avoided, liability does not ensue
against the carrier. The hijacking by 3
armed men of the truck used by Alejandro
is one of such cases (De Guzman v CA GR
47822 27Dec1988).

Common vs. Private Carrier; Defenses (2002)

Name two (2) characteristics which
differentiate a common carrier from a
private carrier. (3%).
SUGGESTED ANSWER:
Two (2) characteristics that differentiate a
common carrier from a private carrier are:
A common carrier offers its service to the
public; a private carrier does not.

A common carrier is required to observe

extraordinary diligence; a private
carrier is not so required.

Kabit System (2005)

Discuss the “kabit system” in land
transportation and its legal consequences.
(2%)
SUGGESTED ANSWER:
The kabit system is an arrangement where
a person granted a certificate of public
convenience allows other persons to
operate their motor vehicles under his
 Page 97 of 103
policy and therefore void and inexistent.
(Art. 1409[1], Civil Code)
Kabit System; Agent of the Registered Owner (2005)
Procopio purchased an Isuzu passenger
jeepney from Enteng, a holder of a
certificate of public convenience for the
operation of public utility vehicle plying the
Calamba-Los Baños route. While Procopio
continued offering the jeepney for public
transport services, he did not have the
registration of the vehicle transferred in
his name. Neither did he secure for himself
a certificate of public convenience for its
operation. Thus, per the records of the
Land Transportation Franchising and
Regulatory Board, Enteng remained its
registered owner and operator. One day,
while the jeepney was traveling
southbound, it collided with a ten-wheeler
truck owned by Emmanuel. The driver of
the truck admitted responsibility for the
accident, explaining that the truck lost its
brakes.
Procopio sued Emmanuel for damages, but
the latter moved to dismiss the case on the
ground that Procopio is not the real party
in interest since he is not the registered
owner of the jeepney.
Resolve the motion with reasons. (3%)
SUGGESTED ANSWER:
The motion to dismiss should be denied
because Procopio, as the real owner of the
jeepney, is the real party in interest.
Procopio falls under the Kabit system.
However, the legal restriction as regards
the Kabit system does not apply in this case
Version 1990-2003 Arranged by SULAW Class 2005
because the public at large is not deceived
nor involved. (Lim v. Court of Appeals, G.R.
No. 125817, January 16, 2002, citing
Baliwag Transit v. Court of Appeals, G.R.
No. 57493, January 7, 1987)
In any event, Procoprio is deemed to be
"the agent" of the registered owner. (First
Malayan Leasing v. Court of Appeals, G.R.
No. 91378, June 9,1992; and "F" Transit
Co., Inc. v. NLRC, G.R. Nos, 88195-96,
January 27, 1994)
Maritime Commerce; Bareboat (2003)
For the transportation of its cargo from the
Port of Manila to the Port of Kobe, Japan,
Osawa & Co., chartered “bareboat” M/V
Ilog of Karagatan Corporation. M/V Ilog
met a sea accident resulting in the loss of
the cargo and the death of some of the
seamen manning the vessel. Who should
bear the loss of the cargo and the death of
the seamen? Why? (4%)
SUGGESTED ANSWER:
(per Dondee) Osawa and Co. shall bear the
loss because under a demise or bareboat
charter, the charterer (Osawa
Co.) mans the vessel with his own people
and becomes, in effect, the owner for the
voyage or service stipulated, subject to
liability for damages caused by negligence.
Prior Operator Rule (2003)
Bayan Bus Lines had been operating
satisfactorily a bus service over the route
Manila to Tarlac and vice versa via the
McArthur Highway. With the upgrading of
the new North Expressway, Bayan Bus
Lines service became
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) and third persons, the vehicle is considered
seemingly inadequate despite its efforts of the property of the registered operator
improving the same. Pasok Transportation, (Santos v Sibug 104 S 520)
Inc., now applies for the issuance to it by
Trans-Shipment; Bill of Lading; binding contract (1993)
the Land Transportation Franchising and
JRT Inc entered into a contract with C Co of
Regulatory Board of a certificate of public
Japan to export anahaw fans valued at
convenience for the same Manila-Tarlac-
$23,000. As payment thereof, a letter of
Manila route. Could Bayan Bus Lines, Inc.,
credit was issued to JRT by the buyer. The
invoke the “prior operator” rules against
letter of credit required the issuance of an on-
Pasok Transportation, Inc.? Why? (6%)
SUGGESTED ANSWER:
board bill of lading and prohibited the
(per Dondee) No, Bayan Bus Lines, Inc., transshipment. The President of JRT then
cannot invoke the “prior operator” rules contracted a shipping agent to ship the
against Pasok Transportation, Inc. because anahaw fans through O Containers Lines,
such “Prior or Old Operator Rule” under specifying the requirements of the letter of
the Public Service Act only applies as a credit. However, the bill of lading issued by
policy of the law of the Public Service the shipping lines bore the notation
Commission to issue a certificate of public
Version 1990-2003 Arranged by SULAW Class 2005
convenience to a second operator when
prior operator is rendering sufficient,
adequate and satisfactory service, and who
in all things and respects is complying with
the rule and regulation of the Commission.
In the facts of the case at bar, Bayan Bus
Lines service became seemingly
inadequate despite its efforts of improving
the same. Hence, in the interest of
providing efficient public transport
services, the use of the 'prior operator' and
the 'priority of filing' rules shall is
untenable n this case.

Registered Owner; Conclusive Presumption (1990)

Johnny owns a Sarao jeepney. He asked his
neighbor Van if he could operate the said
jeepney under Van’s certificate of public
convenience. Van agreed and, accordingly,
Johnny registered his jeepney under Van
name.
On June 10, 1990, one of the passenger
jeepneys operated by Van bumped Tomas.
Tomas was injured and in due time, he filed
a complaint for damages against Van and
his driver for the injuries he suffered. The
court rendered judgment in favor of Tomas
and ordered Van and his driver, jointly and
severally, to pay Tomas actual and moral
damages, attorney’s fees, and costs.

The Sheriff levied on the jeepney belonging

to Johnny but registered in the name of
Van. Johnny filed a 3rd party claim with the
Sheriff alleging ownership of the jeepney
levied upon and stating that the jeepney
was registered in the name of Van merely
to enable Johnny to make use of Van’s
certificate of public convenience.
May the Sheriff proceed with the public
auction of Johnny’s jeepney. Discuss with
reasons.
SUGGESTED ANSWER:
Yes, the Sheriff may proceed with the
auction sale of Johnny’s jeepney. In
contemplation of law as regards the public
 Page 98 of 103
“received for shipment” and contained an Is lack of intent to defraud a bar to the
entry indicating transshipment in prosecution of these acts or omissions?
Hongkong. The President of JRT personally (2.5%)
received and signed the bill of lading and SUGGESTED ANSWER:
despite the entries, he delivered the No. The Trust Receipts Law is violated
corresponding check in payment of the whenever the entrustee fails to: (1) turn
freight. over the proceeds of the sale of the goods,
The shipment was delivered at the port of or (2) return the goods covered by the trust
discharge but the buyer refused to accept receipts if the goods are not sold. The mere
failure to account or return gives rise to
the anahaw fans because there was no on-
the crime which is malum prohibitum.
board bill of lading, and there was
There is no requirement to prove intent to
transshipment since the goods were
defraud (Ching v. Secretary of Justice, G.R. No.
transferred in Hongkong from MV Pacific, 164317, February 6, 2006; Colinares v. Court of
the feeder vessel, to MV Oriental, a mother Appeals, G.R. No. 90828, September 5, 2000;
vessel. JRT argued that the same cannot be Ong v. Court of Appeals, G.R. No. 119858, April
considered transshipment because both 29, 2003).
vessels belong to the same shipping
company. Version 1990-2006 Updated by Dondee
Was there transshipment? Explain
JRT further argued that assuming that
there was transshipment, it cannot be
deemed to have agreed thereto even if it
signed the bill of lading containing such
entry because it was made known to the
shipping lines from the start that
transshipment was prohibited under the
letter of credit and that, therefore, it had
no intention to allow transshipment of the
subject cargo. Is the argument tenable?
Reason.
SUGGESTED ANSWER:
Yes. Transshipment is the act of taking
cargo out of one ship and loading it in
another. It is immaterial whether or not the
same person, firm, or entity owns the two
vessels. (Magellan v CA 201 s 102)

No. JRT is bound by the terms of the bill of

lading when it accepted the bill of lading
with full knowledge of its contents which
included transshipment in Hongkong.
Acceptance under such circumstances
makes the bill of lading a binding contract.
(Magellan v Ca 201 s 102)

Trust Receipts Law

Trust Receipts Law; Acts & Omissions; Covered (2006)
What acts or omissions are penalized
under the Trust Receipts Law? (2.5%)
SUGGESTED ANSWER:
The Trust Receipts Law (P.D. No. 115)
declares the fail-ure to turn over goods or
proceeds realized from sale thereof, as a
criminal offense under Art. 315(l)(b) of
Revised Penal Code. The law is violated
whenever the entrustee or person to whom
trust receipts were issued fails to: (a)
return the goods covered by the trust
receipts; or (b) return the proceeds of the
sale of said goods
(Metropolitan Bank v. Tonda, G.R. No. 134436,
August 16, 2000).
Mercantile Law Bar Examination Q & A (1990-2006) No. Violation of a trust receipt is criminal
as it is punished as estafa under Art 315 of
Trust Receipts Law; Liability for estafa (1991) the RPC. There is a public policy involved
Mr. Noble, as the President of ABC Trading which is to assure the entruster the
Inc executed a trust receipt in favor of BPI reimbursement of the amount advanced or
Bank to secure the importation by his the balance thereof for the goods subject of
company of certain goods. After release the trust receipt. The execution of the trust
and sale of the imported goods, the receipt or the use thereof promotes the
proceeds from the sale were not turned smooth flow of commerce as it helps the
over to BPI. Would BPI be justified in filing importer or buyer of the goods covered
a case for estafa against Noble? thereby.
SUGGESTED ANSWER:
BPI would be justified in filing a case for
estafa under PD 115 against Noble. The
fact that the trust receipt was issued in
favor of a bank, instead of a seller, to
secure the importation of the goods did not
preclude the application of the Trust
Receipt Law. (PD 115) Under the law, any
officer or employee of a corporation
responsible for the violation of a trust
receipt is subject to the penal liability
thereunder (Sia v People 166s655)
ALTERNATIVE ANSWER:
The filing of a case for estafa under the
penal provisions of the RPC would not be
justified. It has been held in Sia v People
(161 s 655) that corporate officers and
directors are not criminally liable for a
violation of said Code. 2 conditions are
required before a corporate officer may be
criminally liable for an offense committed
by the corporation; viz:
There must be a specific provision of
law mandating a corporation to act
or not to act; and

There must be an explicit statement in

the law itself that, in case of such
violation by a corporation, the
officers and directors thereof are to
be personally and criminally liable
therefore.

These conditions are not met in the penal

provisions of the RPC on trust receipts.

Trust Receipts Law; Liability for Estafa (1997)

A buys goods from a foreign supplier using
his credit line with a bank to pay for the
goods. Upon arrival of the goods at the
pier, the bank requires A to sign a trust
receipt before A is allowed to take delivery
of the goods. The trust receipt contains the
usual language. A disposes of the goods
and receives payment but does not pay the
bank. The bank files a criminal action
against A for violation of the Trust Receipts
Law. A asserts that the trust receipt is only
to secure his debt and that a criminal
action cannot lie against him because that
would be violative of his constitutional
right against “imprisonment for
nonpayment of a debt.” Is he correct?
SUGGESTED ANSWER:
 Page 99 of 103
Trusts Receipt Law (2003)
PB & Co., Inc., a manufacturer of steel and
steel products, imported certain raw
materials for use by it in the manufacture
of its products. The importation was
effected through a trust receipt
arrangement with AB Banking corporation.
When it applied for the issuance by AB
Banking Corporation of a letter of credit,
PB & Co., Inc., did not make any
representation to the bank that it would be
selling what it had imported. It failed to
pay the bank. When demand was made
upon it to account for the importation, to
return the articles, or to turn-over the
proceeds of the sale thereof to the bank,
PB & Co., Inc., also failed. The bank sued
PB & Co.’s President who was the
signatory of the trust receipt for estafa.
The President put up the defense that he
could not be made liable because there was
no deceit resulting in the violation of the
trust receipt. He also submitted that there
was no violation of the trust receipt
because the raw materials were not sold
but used by the corporation in the
manufacture of its products. Would those
defenses be sustainable? Why? (6%)
SUGGESTED ANSWER:
No, the defenses are not sustainable. The
lack of deceit should not be sustained
because the mere failure to account for the
importation, or return the articles
constitutes the abuse of confidence in the
crime of estafa. The fact that the goods
Version 1990-2003 Arranged by SULAW Class 2005
aren’t sold but are used in the manufacture
of its products is immaterial because a
violation of the trust receipts law happened
when it failed to account for the goods or
return them to the Bank upon demand.
Usury Law
Usury Law (199)
Borrower obtained a loan from a money
lending enterprise for which he issued a
promissory note undertaking to pay at the
end of a period of 30 days the principal
plus interest at the rate 5.5% per month
plus 2% per annum as service charge.
On maturity of the loan, borrower failed to
pay the principal debt as well as the
stipulated interest and service charge.
Hence, he was sued.
How would you dispose of the issues
raised by the borrower?
That the stipulated interest rate is
excessive and unconscionable? (3%)
Is the interest rate usurious? (3%)
Recommendation: Since the subject matter
of these two (2) questions is not included
within the scope of the Bar Questions in
Mercantile Law, it is suggested that
whatever answer is given by the examinee,
or the lack of answer should be given full
credit. If the examinee gives a good answer,
he should be given additional credit.
SUGGESTED ANSWER:
a. The rate of interest of 5.5% per month is
excessive and unconscionable.
Version 1990-2006 Updated by Dondee
 SUGGESTED ANSWER:
Mercantile Law Bar Examination Q & A (1990-2006)
The warehouseman is bound to deliver the
b. The interest cannot be considered
goods upon demand made either by the
usurious. The Usury Law has been
holder of the receipt for the goods or by
suspended in its application, and the
the depositor if the demand is accompanied
interest rates are made “floating.”
by
an offer to satisfy the warehouseman’s lien,
Warehouse Receipts Law an offer to surrender the receipt, if
negotiable, with such indorsements as
would be necessary for the negotiation
Bill of Lading (1998) thereof,
What do you understand by a “bill of
lading?” (2%)
Explain the two-fold character of a “bill of
lading.” (3%)
SUGGESTED ANSWER:
A bill of lading may be defined as a written
acknowledgement of the receipt of goods
and an agreement to transport and to
deliver them at a specified place to a
person named therein or on his order.

A bill of lading has a two-fold character,

namely, a) it is a receipt of the goods to be
transported; and b) it constitutes a contract
of carriage of the goods.

Delivery of Goods; Requisites (1998)

Luzon Warehousing Co received from
Pedro 200 cavans of rice for deposit in its
warehouse for which a negotiable receipt
was issued. While the goods were stored in
said warehouse, Cicero obtained a
judgment against Pedro for the recover of a
sum of money. The sheriff proceeded to
levy upon the goods on a writ of execution
and directed the warehouseman to deliver
the goods. Is the warehouseman under
obligation to comply with the sheriffs
order? (5%)
SUGGESTED ANSWER:
No. There was a valid negotiable receipt as
there was a valid delivery of 200 cavans of
rice for deposit. In such case, the
warehouseman (LWC) is not obliged to
deliver the 200 cavans of rice deposited to
any person, except to the one who can
comply with sec 8 of the Warehouse
Receipts Law, namely:
surrender the receipt of which he is a
holder;
willing to sign a receipt for the delivery
of the goods; and
pays the warehouseman’s liens that is,
his fees and advances, if any.

The sheriff cannot comply with these

requisites especially the first, as he is not
the holder of the receipt.

Delivery of the Goods (1991)

When is a warehouseman bound to deliver
the goods, upon a demand made either by
the holder of a receipt for the goods or by
the depositor?
 Page 100 of 103
and readiness and willingness to sign when
the goods are delivered if so requested
by the warehouseman (Sec 8 by the court.
Warehouse Receipts Law).
Garnishment or Attachment of Goods (1999)
A Warehouse Company received for
safekeeping 1000 bags of rice from a
merchant. To evidence the transaction, the
Warehouse Company issued a receipt
expressly providing that the goods be
delivered to the order of said merchant.
A month after, a creditor obtained judgment
against the said merchant for a sum of money.
The sheriff proceeded to levy on the rice and
directed the Warehouse Company to deliver
to him the deposited rice.
a. What advice will you give the Warehouse
Company? Explain (2%)
b. Assuming that a week prior to the levy,
the receipt was sold to a rice mill on the
basis of which it filed a claim with the
sheriff. Would the rice mill have better
rights to the rice than the creditor? Explain
your answer. (2%)
SUGGESTED ANSWER:
a. The 1000 bags of rice were delivered to
the Warehouse Company by a merchant,
and a negotiable receipt was issued
therefor. The rice cannot thereafter, while
in the possession of the Warehouse
Company, be attached by garnishment or
otherwise, or be levied upon under an
execution unless the receipt be first
surrendered to the warehouseman, or its
negotiation enjoined. The Warehouse
Version 1990-2003 Arranged by SULAW Class 2005
Company cannot be compelled to deliver
the actual possession of the rice until the
receipt is surrendered to it or impounded
b. Yes. The rice mill, as a holder for value
of the receipt, has a better right to the rice
than the creditor. It is the rice mill that can
surrender the receipt which is in its
possession and can comply with the other
requirements which will oblige the
warehouseman to deliver the rice, namely,
to sign a receipt for the delivery of the rice,
and to pay the warehouseman’s liens and
fees and other charges.
Negotiable Documents of Title (1992)
For a cargo of machinery shipped from
abroad to a sugar central in Dumaguete,
Negros Oriental, the Bill of Lading (B/L)
stipulated “to shipper’s order,” with notice
of arrival to be addressed to the Central.
The cargo arrived at its destination and
was released to the Central without
surrender of the B/L on the basis of the
latter’s undertaking to hold the carrier free
and harmless from any liability.
Subsequently, a Bank to whom the central
was indebted, claimed the cargo and
presented the original of the B/L stating
that the Central had failed to settle its
obligations with the Bank.
Was there misdelivery by the carrier to the
sugar central considering the non-
surrender of the B/L? Why?
SUGGESTED ANSWER:
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006)
There was no misdelivery by the carrier
since the cargo was considered consigned
to the Sugar central per the “Shipper’s
Order” (Eastern Shipping Lines v CA 190 s
512)
ALTERNATIVE ANSWER:
There was misdelivery. The B/L was a
negotiable document of title because it was
to the “Shipper’s Order.” Hence, the
common carrier should have delivered the
cargo to the Central only upon surrender of
the B/L. The non-surrender of the B/L will
make it liable to holders in due course.
the bailee to hold the goods in his name."
(Art. 1513, Civil Code; Section 41,
Warehouse Receipts Law) Since EJ is the
holder of the warehouse receipt, he has the
better right to the goods. SN Warehouse is
obliged to hold the goods in his name.
If SN Warehouse Corporation is uncertain
as to who is entitled to the property,
what is the proper
recourse of the corporation? Explain.
SUGGESTED ANSWER:

Ownership of Goods Stored (1992)

To guarantee the payment of a loan
obtained from a bank, Raul pledged 500
bales of tobacco deposited in a warehouse
to said bank and endorsed in blank the
warehouse receipt. Before Raul could pay
for the loan, the tobacco disappeared from
the warehouse.
Who should bear the loss – the pledgor or
the bank?
Why?
SUGGESTED ANSWER:
The pledgor should bear the loss. In the
pledge of a warehouse receipt the
ownership of the goods remain with
depositor or his transferee. Any contract or
real security, among them a pledge, does
not amount to or result in an assumption of
risk of loss by the creditor. The Warehouse
Receipts Law did not deviate from this rule.

Right to the Goods (2005)

Jojo deposited several cartons of goods
with SN Warehouse Corporation. The
corresponding warehouse receipt was
issued to the order of Jojo. He endorsed the
warehouse receipt to EJ who paid the value
of the goods deposited. Before EJ could
withdraw the goods, Melchor informed SN
Warehouse Corporation that the goods
belonged to him and were taken by Jojo
without his consent. Melchor wants to get
the goods, but EJ also wants to withdraw
the same. (5%)
Who has a better right to the goods? Why?
SUGGESTED ANSWER:
EJ has a better right to the goods, being
covered by a negotiable document of title,
namely the warehouse receipts issued to
the "order of Jojo." Under the Sales
provisions of the Civil Code on negotiable
documents of title, and under the
provisions of the Warehouse Receipts Law,
when goods deposited with the bailee are
covered by a negotiable document of title,
the endorsement and delivery of the
document transfers ownership of the goods
to the transferee. By operation of law, the
transferee obtains the direct obligation of
 Page 101 of 103
Validity of stipulations excusing warehouseman
SN Warehouse can file an INTERPLEADER
from negligence (2000)
to compel EJ and Melchor to litigate
against each other for the ownership of the S stored hardware materials in the bonded
goods. Sec. 17 of the Warehouse Receipts warehouse of W, a licensed warehouseman
under the General Bonded Warehouse Law
Law states, "If more than one person
(Act 3893 as amended). W issued the
claims the title or possession of the goods,
corresponding warehouse receipt in the
the warehouse may, either as a defense to
form he ordinarily uses for such purpose in
an action brought against him for non-
the course of his business. All the essential
delivery of the goods or as an original suit,
terms required under Section 2 of the
whichever is appropriate, require all
Warehouse Receipts Law (Act 2137 as
known claimants to interplead."
amended) are embodied in the form. In
Unpaid Seller; Negotiation of the Receipt (1993) addition, the receipt issued to S contains a
stipulation that W would not be responsible
A purchased from S 150 cavans of palay on
for the loss of all or any portion of the
credit. A deposited the palay in W’s
hardware materials covered by the receipt
warehouse. W issued to A a negotiable
even if such loss is caused by the
warehouse receipt in the name of A.
negligence of W or his representatives or
Thereafter, A negotiated the receipt to B
employees. S endorsed and negotiated the
who purchased the said receipt for value
warehouse receipt to B, who demanded
and in good faith.
delivery of the goods. W could not deliver
Who has a better right to the deposit, S,
because the goods were nowhere to be
the unpaid vendor or b, the purchaser of
found in his warehouse. He claims he is not
the receipt for value and in good faith?
liable because of the free-from-liability
Why?
clause stipulated in the receipt. Do you
When can the warehouseman be obliged to agree with W’s contention? Explain. (5%)
deliver the palay to A? SUGGESTED ANSWER:
SUGGESTED ANSWER:
No. I do not agree with the contention of W.
B has a better right than S. The right of the
The stipulation that W would not be
unpaid seller, S, to the goods was defeated
responsible for the loss of all or any portion
by the act of A in endorsing the receipt to
of the hardware materials covered by the
B.
receipt even if such loss is caused by the
The warehouseman can be obliged to negligence of W or his representative or
deliver the palay to A if B negotiates back employees is void. The law requires that a
the receipt to A. In that case, A becomes a warehouseman should exercise due
diligence in the care and custody of the
holder again of the receipt, and A can
things deposited in his warehouse.
comply with Sec 8 of the Warehouse
Receipts Law.

Version 1990-2003 Arranged by SULAW Class 2005 Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) (4) delay in the delivery of quality
judgments. The judicial department should
discharge its functions with transparency,
Miscellaneous accountability and dignity.
(NOTA BENE: It is
respectfully
Energy Regulatory Commission: Jurisdiction & suggested that all Bar
Power (2004) Candidates
CG, acustomer, sued MERALCO in the MM receive a 2.5% bonus for
Regional Trial Court to disclose the basis of the above
question regardless of
the computation of the purchased power
the answer)
adjustment (PPA). The trial court ruled it
had no jurisdiction over the case because,
as contended by the defendant, the
customer not only demanded a breakdown
of MERALCO's bill with respect to PPA but
questioned as well the imposition of the
PPA, a matter to be decided by the Board of
Energy, the regulatory agency which
should also have jurisdiction over the
instant suit. Is the trial court's ruling
correct or not? Reason briefly. (5%)
SUGGESTED ANSWER:
The trial court's ruling is correct. As held in
Manila Electric Company v. Court of
Appeals, 271SCRA 417 (1997), the Board of
Energy had the power to regulate and fix
power rates to be charged by franchised
electric utilities like MERALCO. In fact
pursuant to Executive Order No. 478 (April
17, 1998), this power has been transferred
to the Energy Regulatory Board (now the
Energy Regulatory Commission). Under
Section 43(u) of the Electric Power
Industry Reform Act of 2001, the Energy
Regulatory Commission has original and
exclusive jurisdiction over all cases
contesting power rates.

Four ACID Problems of Philippine Judiciary (2006)

In several policy addresses extensively
covered by media since his appointment on
December 21, 2005, Chief Justice Artemio
V. Panganiban vowed to leave a judiciary
characterized by "four Ins" and to focus in
solving the "four ACID" problems that
corrode the administration of justice in our
country.
Explain this "four Ins" and "four ACID"
problems.
SUGGESTED ANSWER:
Upon assuming his office, Chief Justice
Panganiban vowed to lead a judiciary
characterized by the "four Ins:" Integrity,
Independence, Industry and Intelligence;
one that is morally courageous to resist
influence, interference, indifference and
insolence. He envisions a judiciary that is
impervious to the plague of undue
influence brought about by kinship,
relationship, friendship and fellowship. He
calls on the judiciary to battle the "Four
ACID" problems corroding our justice
system: (1) limited access to justice by the
poor; (2) corruption; (3) incompetence; and
 Page 102 of 103
The Chief Justice also said that the
judiciary must "safeguard the liberty" and
"nurture the prosperity" of our people.
Explain this philosophy. Cite Decisions of
the Supreme Court implementing each of
these twin beacons of the Chief Justice.
(2.5%)
SUGGESTED ANSWER:
The Chief Justice's philosophy
"Safeguarding Liberty, Nurturing
Prosperity" embodies the Supreme Court's
approach in decision- making in the
exercise of its constitutional power of
judicial review which provides: In cases
involving liberty, the scales of justice
should weight heavily against government
and in favor of the poor, the oppressed, the
marginalized, the dispossessed and the
weak; and that laws and action that restrict
fundamental rights come to the court "with
a heavy presumption against their
constitutional validity. On the other hand,
as a general rule, the Supreme Court must
adopt a deferential or respectful attitude
towards actions taken by the governmental
agencies that have primary responsibility
for the economic development of the
country; and only when an act has been
clearly made or executed with grave abuse
of discretion does the Court get involved in
policy issues.
Decisions implementing the "safeguarding
of liberty" in-clude those involving the
constitutionality of Presidential
Proclamation No. 1017 (David v. Arroyo,
G.R. No. 171390, May 3, 2006); the validity
of Calibrated Pre-emptive Response (CPR)
and B.P. Big. 880 or the Public Assembly
Act (Bayan v. Ermita, G.R. No. 169848,
Version 1990-2003 Arranged by SULAW Class 2005
April 25, 2006); and the legality of
Executive Order No. 464 and the
President's exercise of Execu-tive Privilege
(Senate of the Philippines v. Ermita, G.R.
No. 169777, April 20, 2006).
On the other hand, cases that relate to
"nurturing the prosperity" of the people
include the question the constitutionality of
the Mining Law (La Bugal-B'Laan v. Ramos,
G.R. No. 127882, Dec. 1, 2004) and the
WTO Agreement (Tanada v. Angara, G.R.
118295, May 2,1997).
Government Deregulation vs. Privatization of an
Industry (2004)
What is the difference between government
deregulation and the privatization of an
industry? Explain briefly. (2%)
SUGGESTED ANSWER:
Government deregulation is the relaxation
or removal of regulatory constraints on
firms or individuals, with a view to
promoting competition and market-
oriented approaches toward pricing,
output, entry, and other related economic
decisions.
Privatization of an industry refers to the
transfer of ownership and control by the
government of assets, firms and operations
in an industry to private investors.
Political Law; WTO (1999)
Government plans to impose an additional
duty on imported sugar on top of the
current tariff rate. The intent is to ensure
that the landed cost of sugar shall not be
lower than P800 per bag. This is the price
at which locally produced sugar would be
sold in order to enable sugar producers to
realize reasonable profits. Without
Version 1990-2006 Updated by Dondee
Mercantile Law Bar Examination Q & A (1990-2006) system of LVM is similar to ours, would
this additional duty, the current low price Mrs. BC's contention be tenable or not?
of sugar in the world market will surely Reason briefly. (5%)
SUGGESTED ANSWER:
pull the domestic price to levels lower than
the cost to producer domestic sugar – a Mrs. BC's contention is not tenable. First,
situation that could spell the demise of the the UDHR does not purport to limit the
Phil sugar industry. right of states (like LVM) to regulate
domestic trade. Second, the WTO
Discuss the validity of this proposal to
Agreement involves international trade
impose an additional levy on imported
between states or governments, not
sugar (3%)
domestic trade in timber or other
Would the proposal be consistent with the
commodities. Third, nationality is an
tenets of the World Trade Organization
accepted norm for making classifications
(WTO)? (3%)
that do not run counter to the
Recommendation: Since the subject
matter of these two (2) questions is not
included within the scope of the Bar
Questions in Mercantile Law, it is
suggested that whatever answer is
given by the examinee, or the lack of
answer should be given full credit. If the
examinee gives a good answer, he
should be given additional credit.

SUGGESTED ANSWER:
The proposal to impose an additional duty
on imported sugar on top of the current
tariff rate is valid, not being prohibited by
the Constitution. It would enable producers
to realize reasonable profits, and would
allow the sugar industry of the country to
survive.

No. The proposal would not be consistent

with the tenets of the WTO which call for
the liberalization of trade. However, such
proposal may be acceptable within the
allowable period under the WTO for
adjustment of the local industry

Power of the State: Regulating of Domestic Trade

(2004) In its exercise of police power and
business regulation, the legislature of LVM
State passed a law prohibiting aliens from
engaging in domestic timber trade.
Violators including dummies would, after
proper trial, be fined and imprisoned or
deported. Mrs. BC, a citizen of LVM but
married to ZC, an alien merchant of PNG,
filed suit to invalidate the law or exempt
from its coverage their timber business.

She contended that the law is, inter alia,

gravely oppressive and discriminatory. It
violated the Universal Declaration of
Human Rights (UDHR) passed in 1948 by
the United Nations, of which LVM is a
member, she said, as well as the reciprocity
provisions of the World Trade Organization
(WTO) Agreement of 1994, of which PNG
and LVM are parties. Aside from denying
them equal protection, according to BC,
the law will also deprive her family their
livelihood without due process nor just
compensation. Assuming that the legal
 Page 103 of 103
equal protection of law clause of the
Constitution. Fourth, there is no
impairment of due process here because
violators of the law will be punished only
after "proper trial." Fifth, the issue of "just
compensation" does not arise, because the
property of Mrs. BC is not being
expropriated. On the contrary, as a citizen
of LVM, Mrs. BC is freely allowed to
engage in domestic timber trade in LVM.
Tariff and Customs Code: Violation of Customs
Laws (2004)
The Collector of Customs ordered the
seizure and forfeiture of new electronic
appliances shipped by TON Corp. from
Hongkong for violation of customs laws
because they were falsely declared as used
office equipment and then undervalued for
purposes of customs duties. TON filed a
Version 1990-2003 Arranged by SULAW Class 2005
complaint before the MM Regional Trial
Court for replevin, alleging that the
Customs officials erred in the classification
and valuation of its shipment, as well as in
the issuance of the warrant of seizure. The
Collector moved to dismiss the suit for lack
of jurisdiction on the part of the trial court.
Should the Collector's motion be granted or
denied? Reason briefly. (5%)
SUGGESTED ANSWER:
The Collector's motion should be granted.
Under Section 602(g) of the Tariff and
Customs Code, the Bureau of Customs has
exclusive original jurisdiction over seizure
and forfeiture cases under the tariff and
customs laws.
NOTE: (This question is outside the
coverage of the Bar Examinations. It is
therefore recommended that whatever
answer made by the candidate should
be given full credit.)
Version 1990-2006 Updated by Dondee
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

A Compilation of the

Questions and Suggested Answers

In the

PHILIPPINE BAR EXAMINATIONS 2007-2013

In

MERCANTILE
LAW
Compiled and Arranged By:

Salise, Hector Christopher “Jay-Arh” Jr. M.

(University of San Jose-Recoletos School of Law)

ANSWERS TO BAR EXAMINATION QUESTIONS by the UP

LAW COMPLEX (2007, 2009, 2010) &

PHILIPPINE ASSOCIATION OF LAW SCHOOLS (2008)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 1 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

FOREWORD

This work is a compilation of the ANSWERS TO BAR

EXAMINATION QUESTIONS by the UP LAW COMPLEX ,
Philippine Association of Law Schools from 2007-2010 and
local law students and lawyers’ forum sites from 2011-2013
and not an original creation or formulation of the author.

The author was inspired by the work of Silliman University’s

College of Law and its students of producing a very good
material to everyone involved in the legal field particularly the
students and the reviewees for free. Hence, this work is a
freeware.

Everyone is free to distribute and mass produce copies of this

work, however, the author accepts no liability for the content of
this reviewer, or for the consequences of the usage, abuse, or
any actions taken by the user on the basis of the information
given.

The answers (views or opinions) presented in this reviewer are

solely those of the authors in the given references and do not
necessarily represent those of the author of this work.

The Author.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 2 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

TABLE OF CONTENTS
(Titles are based on Silliman’s Compilation [Arranged by Topic])

General Principles

Presumption: Habitually Engaging in Commerce (2009)………………………………….............9

Banking Law

Banks; Bank Deposits vs. Deposit Substitutes (2010)..........................................................................9

Banks; Deposit: Safety Deposit Box, Relationship from Banks (2010).......................................10

Banks; Money Laundering: Predicate Crimes (2007)..........................................................................10

Banks; Mortgage; Redemption (2007)........................................................................................................11

Banks; Insolvency; Actions of the Monetary Board (2009)..............................................................12

Banks; Insolvency; Claims (2010)..............................................................................................................13

Banks; Receivership (2007)............................................................................................................................ 13

Banks; Receivership; Prohibited Transaction (2009).........................................................................14

Banks; Secrecy of Bank Deposit; AMLC (2013).....................................................................................14

Banks; Secrecy of Bank Deposits (2009).................................................................................................. 15

Banks; Single Borrower’s Limit; Collateral Security (2008)............................................................16

Banks; Types of Banks (2010).......................................................................................................................16

Truth in Lending Act (2009).........................................................................................................................17

Bulk Sales Law

Bulk Sales Law; Covered Transactions (2010)........................................................................................18

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 3 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Bulk Sales Law; Covered Transactions (2009).......................................................................................19

Bulk Sales Law; Covered Transactions (2007)........................................................................................19

Bulk Sales Law; Validity (2009)....................................................................................................................20

Corporation Law

BOD; Conflict of Interest; Ratification (2008)......................................................................................20

BOD; Qualifications (2012)............................................................................................................................21

Corporation; Dissolution (2012).................................................................................................................. 23

Corporation; Formation; Enactment of a Law (2008).........................................................................24

Corporation; Sole Proprietorship (2010).................................................................................................. 24

Derivative Suit; Expiration of Term (2013)........................................................................................... 26

Derivative Suit; Jurisdiction (2009).......................................................................................................... 26

Dividends; Declaration of Dividends (2009)........................................................................................... 27

Dividends; Declaration of Dividends (2009)........................................................................................... 28

Dividends; Declaration of Dividends (2008)........................................................................................... 28

Liabilities; BOD; Corporate Acts (2012)....................................................................................................29

Piercing the Corporate Veil (2008).............................................................................................................31

Stock and Transfer Book (2009)...................................................................................................................32

Stockholders; Appraisal Right (2007)........................................................................................................32

Stockholders; Contractual Relationship; Quorum (2009)................................................................ 33

Stockholders; Preferred Shares (2013).....................................................................................................34

Trust Fund Doctrine (2007)...........................................................................................................................35

Ultra Vires Acts (2009)......................................................................................................................................35

Credit Transaction

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 4 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Chattel Mortgage; Foreclosure (2009)...................................................................................................... 36

Chattel Mortgage; Foreclosure (2008)...................................................................................................... 37

Mortgage; Extrajudicial Foreclosure; Blanket Mortgage & Damage Clause (2012)................38

Mortgage; Foreclosure (2012)........................................................................................................................39

Mortgage; Foreclosure (2010)........................................................................................................................40

Insolvency & Corporate Recovery

Insolvency; Preferred Claims (2007).......................................................................................................... 41

Rehabilitation; Proceeding; Rehabilitation & Insolvency (2012)..................................................42

Rehabilitation; Stay Order (2012)...............................................................................................................44

Insurance Law

Beneficiary; Death of Insured Due to Beneficiary (2008)................................................................45

Concealment; Material Concealment (2013)..........................................................................................45

Insurable Interest; Building Destroyed by Fire (2010)......................................................................46

Insurance; Double Insurance, Validity (2012).......................................................................................47

Insurance; Perfection of Insurance Contracts (2009)........................................................................ 47

Insurance; Property Insurance; Assignments (2009)..........................................................................48

Insurance; Property Insurance; Late Payment of Premiums (2010)............................................49

Insurance; Property Insurance; Payment of Premiums by Check (2007).................................50

Insurance; Property Insurance; Payment of Premiums even after Loss (2013).....................51

Insurer: Effects: Several Insurers (2008).................................................................................................51

Intellectual Property

Agreements: Technology Transfer Agreements; Requisites & Prohibitions (2010)..............52

Article of Commerce; As Trademark, Patent & Copyright (2010)................................................53

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 5 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Copyright (2013)................................................................................................................................................54

Copyright; Commissioned Artist (2008)..................................................................................................54

Copyright; Commissioned Work (2008)....................................................................................................56

Copyright; Infringement (2007)...................................................................................................................57

Denicola Test (2009)..........................................................................................................................................57

Infringement; Claims (2010)..........................................................................................................................58

Infringement; Trademark, Copyright (2009)..........................................................................................59

Patent: Non-Patentable; Method of Diagnosis & Treatment (2010).............................................60

Trademark; Unfair Competition (2010)....................................................................................................61

Letters of Credit

Independence Principle (2010).....................................................................................................................61

Letter of Credit (2012)..................................................................................................................................... 62

Letter of Credit; Liabilities of a Confirming and Notifying Bank (2008).................................. 63

Maritime Commerce

Averages: Types (2010)....................................................................................................................................64

Barratry (2010).................................................................................................................................................... 64

Carriage of Goods; Deviation; Liability (2009)......................................................................................65

Carriage of Goods; Implied Warranty; Liability (2010)......................................................................65

Carriage of Goods; Indemnity; Jettisoned Goods (2010)..................................................................66

COGSA; Prescription of Claims/Action (2010)......................................................................................67

Liability; Loss; Fortuitous Event (2008).................................................................................................. 67

Negotiable Instruments Law

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 6 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com JayArhSals

Checks: Forged Checks; Liability of Drawee Bank (2008)................................................ 68

Checks; Liability; Drawer and Drawee Bank (2010)......................................................... 69

Checks; Notice of Dishonor (2009)................................................................................. 70

Forgery; Liabilities; Drawee Bank (2009)........................................................................ 71

Negotiability (2013) ...................................................................................................... 71

Negotiability (2012) ...................................................................................................... 72

Negotiable Instruments; Illicit/Illegal Consideration (2007)........................................... 73

Negotiable Instruments; Illicit/Illegal Consideration; Lawful Dishonor (2009)................ 74

Negotiable Instruments: Incomplete, Delivered; Doctrine: Comparative Negligence

(2008)............................................................................................................................ 74

Negotiable Instruments: Subject to a Term (2009)......................................................... 75

Parties; Holder in Due Course (2012) ............................................................................ 75

Parties; Instances a Subsequent Party is Liable (2008)................................................... 76

Securities Regulation

Howey Test (2009)......................................................................................................... 77

Insider Trading (2013) .................................................................................................. 77

Insider Trading (2008) .................................................................................................. 78

Investment Contract; Procedure (2010) ........................................................................ 79

Margin Trading Rule (2009) .......................................................................................... 80

Securities; Exempt Securities (2009) ............................................................................ 80

Securities; Selling of Securities (2009) .......................................................................... 81

Tender Offer (2010) ...................................................................................................... 82

Transportation Law

Carriage; Breach of Contract (2008) .............................................................................. 83

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 7 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Carriage; Breach of Contract; Cause of Action; Defenses (2009).................................................83

Carriage; Breach of Contract; Presumption of Negligence (2013)................................................85

Maritime Protest (2007)...................................................................................................................................86

Trust Receipts Law

Trust Receipt (2007)..........................................................................................................................................87

Trust Receipt; Security for a Loan (2008).............................................................................................. 88

Trust Receipts Law; Liability for Estafa (2013).....................................................................................88

Trust Receipts Law; Violation Committed by a Corporation (2012)...........................................89

Warehouse Receipts Law

Warehouse Receipt: Surrendering of Possession; Lien (2009).......................................................90

Negotiable Instrument; Delivery of Goods (2007)...............................................................................90

MULTIPLE CHOICE QUESTIONS

2013 Mercantile Law Exam MCQ (October 20, 2013) ….…………………………………….…....92

2012 Mercantile Law Exam MCQ (October 21, 2012) ….………………………………………..102

2011 Mercantile Law Exam MCQ (November 20, 2011).……………………………….………..144

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 8 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

General Principles establishment which has for its object

some commercial operation. “ Text
Presumption: Habitually Engaging in messages may qualify to be equivalent to
Commerce (2009) electronic documents.

No.V. Cecilio is planning to put up a Banking Law

grocery store in the subdivision where he
and his family reside. To promote this Banks; Bank Deposits vs. Deposit
proposed business venture, he told his wife Substitutes (2010)
and three children to send out promotional
No.II. (C) Differentiate ―bank deposits‖ from
text messages to all the residents in the
―deposit substitutes.‖ (2%)
subdivision. Cecilio’s family members did
SUGGESTED ANSWER:
as instructed, and succeeded in reaching,
Bank deposits are funds obtained by a
through text messages, more than 80% of
bank from the public which are relent by
the residents in the subdivision.
such bank to its own borrowers. Deposit
substitutes are alternative forms of
Is Cecilio habitually engaged in commerce
obtaining funds from the public, other
even if the grocery store has yet to be
than deposits, through the issuance,
established? Explain your answer. (3%)
endorsement, or acceptance of debt
instruments for the own account of the
SUGGESTED ANSWER:
borrower, for the purpose of relending or
Yes. Even if the grocery store has yet to
purchasing of receivables and other
be established, Cecilio already habitually
obligations. These instruments may
engaged in commerce, when per his
include, but need not be limited to,
instruction the members of his family
banker’s acceptances, promissory notes,
contacted more than 80% the residents
participations, certificates of assignment
of the subdivision where they reside.
and similar instruments with recourse,
According to Article 3 of the Code of
and repurchase agreements (Section 95,
Commerce, “legal presumption of
Rep. Act No. 7653, “The New Central
habitually engaging in commerce shall
Bank Act”).
exist from the moment the person who
intends to engage therein announces
Why are banks required to maintain
through circulars, newspapers, handbills,
reserves against their deposits and deposit
posters exhibited to the public, or in any
substitutes? State one of three purposes for
other manner whatsoever an
these reserves. (2%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 9 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: ALTERNATIVE ANSWER:

Any one of the following 4 purposes for
requiring banks to maintain reserves
against their deposits
substitutes will suffice:
One of the purposes of the requirement
to maintain bank reserves is to control
the volume of money created by the
credit operations of the banking system
(Section 94 of the New Central Bank
Act);
It is to enable the banks to answer any
withdrawal;
To help Government to finance its
operation;
To help the Government control money
supply.
The legal relationship of the bank and its
safety deposit box client is that of lessor
and deposit and lessee.
Is a stipulation in the contract for the use
of a safety deposit box relieving the bank of
liability in connection with the use thereof
valid? (2%).
SUGGESTED ANSWER:
The stipulation relieving the bank of
liability in connection with the use of
the safety deposit box is void as it is
against law and public policy (CA Agro-
Industrial Development Corp. v. Court of
Appeals, supra).

Banks; Deposit: Safety Deposit Box,

Banks; Money Laundering: Predicate
Relationship from Banks (2010)
Crimes (2007)
No.II. (A) How do you characterize the legal
No.X. Name at least five predicate crimes to
relationship between a commercial bank
money laundering. (5%)
and its safety deposit box client? (20%)
SUGGESTED ANWERS: SUGGESTED ANSWER:
The Relationship between a commercial
Any five of the following are predicate
bank and its safety deposit box client is
that of a bailee and a bailor, the crimes to money laundering:

bailment being for hire and mutual Kidnapping for ransom under Article 267
benefit (Sia v. Court of Appeals, 222 of Act No.3815, otherwise known as the
SCRA 24 (1993); CA Agro-Industrial
Revised Penal Code, as amended;
Development Corp. v. Court of Appeals,
219 SCRA 426(1993)). Sections 3,4,5,7,8 and 9 of Article Two

of Republic Act No. 6425, as

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 10 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

amended, otherwise known as the Violations under Republic Act No. 8792,

Dangerous Drugs Act of 1972; otherwise known as the Electronic

Commerce Act of 2000
Section 3 paragraphs B,C,E,G,H and I of
Republic Act No. 3019, as amended; Hijacking and other violations under
otherwise known as the Anti-graft and Republic Act No 6235;destructive arson
Corrupt Practices Act; and murder, as defined under the
Revised Penal Code, as amended,
Plunder under Republic Act No. 7080, as including those perpetrated by terrorist
amended; against non-combatant persons and
Robbery and extortion under Articles similar targets;
294,295,296,299,300,301 and 302 of the
Revised Penal Code, as amended; Fraudulent practices and other
violations under Republic Act No. 8799,
Jueteng and Masiao punished as illegal otherwise known as the securities
gambling under Presidential Decree No. Regulation Code of 2000
1602;
Felonies or offenses of a similar nature
those are punishable under the penal
Piracy on the high seas under the
laws of other countries. (Sec 3, Anti-
Revised Penal Code, as amended and
Money Laundering Act of 2001).
Presidential Decree No. 532;

Qualified theft under Article 310 of the

Revised Penal Code, as amended; (9)
Swindling under Article 315 of the Banks; Mortgage; Redemption (2007)
Revised Penal Code, as amended.
No.IX. On December 4, 2003, RED
Swindling under 315 of the Revised Corporation executed a real estate mortgage

Penal code, as amended; in favor of BLUE Bank. RED Corporation

defaulted in the payment of its loan.
Smuggling under Republic Act Nos. Consequently, on June 4, 2004, BLUE
455 and 1937 Bank extra judicially foreclosed the
property. Being the highest bidder in the
auction sale conducted, the Bank was

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 11 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

issued a Certificate of Sale which was (SED) of the Monetary Board prepared a
registered on August 4, 2004. detailed report (SED Report) specifying the
facts and the chronology of events relative
Does RED Corporation still have the right
to the problems that beset MPBC rural
to redeem the property as of September 14,
bank branches. The report concluded that
2007? Reason briefly. (5%)
the bank branches were unable to pay their
SUGGESTED ANSWER: liabilities as they fell due, and could not
possibly continue in business without
No, RED Corporation has lost its right to
incurring substantial losses to its
redeem the property. Juridical persons
depositors and creditors.
whose property is sold pursuant to an
extrajudicial foreclosure, shall have the May the Monetary Board order the closure
right to redeem the property until of the MPBC rural banks relying only on the
registration of the certificate of sale with SED Report, without need of an
the Register of Deeds, which shall in no examination? Explain. (3%)
case be more than three months after SUGGESTED ANSWER:
foreclosure, whichever is earlier (Section Yes. Upon receipt of the report of the
47, General Banking Law). SED, the Monetary Board is authorized
to take any of the actions enumerated
under Sec. 30, Republic Act No. 7653,
Banks; Insolvency; Actions of the otherwise known as the New Central
Monetary Board (2009) Bank Act, leading to the receivership
and liquidation of a bank or quasi-bank.
No.VIII. Maharlikang Pilipino Banking
There is no requirement that an
Corporation (MPBC) operates several
examination be first conducted before a
branches of Maharlikang Pilipino Rural
banking institution may be placed under
Bank in Eastern Visayas. Almost all the
receivership ( Rural Bank of Buhi v.
branch managers are close relatives of the
Court of Appeals, 162 SCRA 288 (1988)).
members of the Board of Directors of the
corporation. Many undeserving relatives of
If MPBC hires you as lawyer because the
the branch managers were granted loans.
Monetary Board has forbidden it from
In time, the branches could not settle their
carrying on its business due to its
obligations to depositors and creditors.
imminent insolvency, what action will you
institute to question the Monetary Board’s
Receiving reports of these irregularities, the
order? Explain. (3%)]
Supervising and Examining Department
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 12 of 173
Mercantile Law Q&As (2007-2013)
SUGGESTED ANSWER:
The order of the Monetary Board may be
questioned on a petition for certiorari on
the ground that the action taken was in
excess of jurisdiction or with grave abuse
of discretion amounting to
excess of jurisdiction. The petition of
certiorari may only be filed by the
stockholders of record representing the
majority of the capital stock within ten
days from receipt by the
directors of MPBC of the order directing
receivership, liquidation
conservatorship (Sec. 30, par. (2), R.A.
No. 7653).
Banks; Insolvency; Claims (2010)
No.XIV. When OCCIDENTAL Bank folded
up due to insolvency, Manuel had the
following separate deposits in his name:
P200,000 in savings deposit; P250,000 in
time deposit; P50,000 in current account;
P1 million in a trust account and P3 million
in money market placement. Under the
Philippine Deposit Insurance Corporation
Act, how much could Manuel recover?
Explain. (2%)
SUGGESTED ANSWER:
Manuel can recover P500,
because this is the total of his savings
deposit, time deposit and
account (Section 4(g) of Republic Act No.
3591, as amended). The trust account
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
and the money market placements are
not included in the insured deposits
(section 4(f) of Republic Act No. 3591, as
amended).
lack or
Banks; Receivership (2007)
No.VIII. Due to growing financial
difficulties, Z Bank was unable to finish
board of construction of its 21-storey building on a
prime lot located in Makati City. Inevitably,
or the Bangko Sentral ordered the closure of Z
Bank and consequently placed it under
receivership. In a bid to save the bank’s
property investment, the President of Z
Bank entered into a financing agreement
with a group of investors for the completion
of the construction of the 21-storey building
in exchange for a ten-year lease and the
exclusive option to purchase the building.
(10%)
Is the act of the President valid? Why or
why not?
SUGGESTED ANSWER:
No, the bank president’s act is not valid.
He had no authority to enter into the
financing agreement. Z Bank was ordered
closed and placed under receivership.
000.00,
Control over the properties of Z Bank
passed to the receiver. The appointment
current
of a receiver operates to suspend the
authority of the bank and its officers
over the bank’s assets and properties,
Page 13 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com JayArhSals

such authority being reposed in the False. During the receivership, the
receiver (Abacus Real Estate assets and properties of the corporation
Development Center, Inc. v. Manila are being gathered for conversion into
Banking Corporation, 455 SCRA 97 cash in preparation for distribution to
(2005)). creditors. Granting new loans and
accepting new deposits would constitute
Will a suit to enforce the exclusive right of
doing business for the bank in the
the investors to purchase the property
ordinary course of business which is
prosper? Reason briefly.
contrary to the purpose and nature of a
SUGGESTED ANSWER: receivership proceeding.

No, the exclusive options granted to the

investors, having been entered into by
Banks; Secrecy of Bank Deposit; AMLC
one without authority to do so, is
(2013)
unenforceable. The bank, therefore,
cannot be compelled to sell the property. No.III. From his first term in 2007,
Under Section 30 of Republic Act No. Congressman Abner has been endorsing his
7653, New Central Bank Act, the pork barrel allocations to Twin Rivers in
properties of Z Bank should be exchange for a commission of 40% of the
administered for the benefit of its face value of the allocation. Twin Rivers is a
creditors. The property in question can non-governmental organization whose
be disposed of only for the purpose of supporting papers, after audit, were found
paying the debts of Z Bank (Sec. 30, by the Commission on Audit to be fictitious.
Republic Act No. 7653, and New Central Other than to prepare and submit falsifies
Bank Act). papers to support the encashment of the
pork barrel checks, Twin Rivers does not
appear to have done anything on the
endorsed projects and Congressman Abner
likewise does not appear to have bothered
Banks; Receivership; Prohibited
to monitor the progress of the project he
Transaction (2009) endorsed. The congressmen converted most

No.I. (E) A bank under receivership can still of the commissions he generated into US

grant new loans and accept new deposits. dollars, and deposited these in a foreign

SUGGESTED ANSWER: currency account with Banco de Plata

(BDP).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 14 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Anti-Money Laundering Council (Anti-

Based on amply-supported tips given by a Money Laundering Act; Republic v.
congressman from another political party, Cabrini Green Ross, 489 SCRA 644,
the Anti-Money Laundering Council sent B 2006).
DP an order: (1) to confirm Cong. Abner’s
deposits with the bank and to provide
details of these deposits; and (2) to hold all
withdrawals and other transactions
Banks; Secrecy of Bank Deposits (2009)
involving the congressman’s bank
accounts.
No.I. (B) If the Ombudsman is convinced
As counsel for BDP, would you advise the
that there is a violation of law after
bank to comply with the order? (8%)
investigating a complaint alleging illicit
SUGGESTED ANSWER:
bank deposits of public officer, the
I shall advise Banco de Plata not to
Ombudsman may order the bank
comply with the order of the Anti-Money
concerned to allow in camera inspection of
Laundering Council. It cannot inquire
bank records and documents.
into the deposits of Congressman Abner,
regardless of currency, without a bank SUGGESTED ANSWER:
inquiry order from a competent court, False. The Bank Secretary Law prohibits
because crimes involved are not the inspection of a bank account unless
kidnapping for ransom, violations of the the permission of the account holder is
Comprehensive Dangerous Drugs Act, obtained, or upon lawful order of the
hijacking and other violations of court or when the deposit is the subject
Republic Act No. 6235, destructive of litigation. Investigation by the
arson, murder, and terrorism and Ombudsman is not considered as a
conspiracy to commit terrorism (Section
pending litigation to allow the
11 of Anti-Money Laundering Act).
examination of the bank records and
documents (Marquez v. Desierto, 359
The Anti-Money Laundering Council
SCRA 772 (2001)).
cannot order Banco de Plata to hold all
withdrawals and other transactions
involving the accounts of Congressman
Abner. It is the Court of Appeals which
has the power to issue a freeze order
over the accounts upon petition of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 15 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Banks; Single Borrower’s Limit; not release any part of the collateral by
Collateral Security (2008) the amount of reduction.

No.XIX. Industry Bank, which has a net

The collateral is a single commercial lot
worth of P1 Billion, extended a loan to
in the Fort, covered by a single title and
Celestial Properties Inc. amounting to P270
beings essentially indivisible in
Million. The loan was secured by a
character, the mortgage cannot be
mortgage over a vast commercial lot in the
“partially released.” Besides, since a real
Fort Bonifacio Global City, appraised at
estate mortgage cannot be “partially
P350 Million. After audit, the Banko Sentral
released.” Besides, since a real estate
ng Pilipinas gave notice that the loan to
mortgage is merely a collateral contract,
Celestial Properties exceeded the single
it can be enforced only to the amount of
borrower’s limit of 25% of the bank’s net
the loan; and the moment the loan
worth under a recent BSP Circular. In light
exposure is reduced, then automatically,
of other previous similar violations of the
reduction of the collateral coverage of
credit limit requirement, the BSP advised
the real estate mortgage follows.
Industry Bank to reduce the amount of the
loan to Celestial Properties under pain of
severe sanctions. When Industry Bank
informed Celestial Properties that it
intended to reduce the loan by P50 Million, Banks; Types of Banks (2010)
Celestial Properties countered that the
bank should first release a part of the No.I. Briefly describe the ff. types of banks;

collateral worth P50 Million. Industry Bank (2% each)

rejected the counter-proposal, and referred

the matter to you as counsel. How would Universal bank
SUGGESTED ANSWER:
you advise Industry Bank to proceed, with
its best interests in mind? (5%) A universal bank is a commercial bank
with 2 additional powers, namely: (1) the
SUGGESTED ANSWER:
power of an investment house and (2)
With a net worth of P1.0 Billion, the the power to invest in non-allied
maximum loan exposure of the bank to enterprises (Section 23, Rep. Act No.
Celestial Properties can reach up to 8791, “The General Banking Law of
P250.0 Million. The bank should proceed 2000”).
with to reduce the loan of Celestial
properties by P20.0 Million, but should Commercial bank

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 16 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: enterprises and individuals (Section 3

A commercial bank is a bank that can: (a), Rep. Act No. 7906 “Thrift Banks Act
accept drafts; (2) issue letters of credit; of 1995”).
(3) discount and negotiate promissory
notes, drafts, bills of exchange, and Rural bank
other evidence of debt; (4) accept or SUGGESTED ANSWER:
create demand deposits; (5) receive other A rural bank is one established to
types of deposits, as well as deposit provide credit facilities to farmers and
substitutes; (6) buy and sell foreign merchants or their cooperatives and, in
exchange, as well as gold or silver general to the people of the rural
bullion; (7) acquire marketable bonds and communities (Section 3, Rep. Act No.
other debts securities; and (8) extend 7353, “The Rural Banks Act of 1992”).
credit, subject to such rules promulgated
by the Monetary Board Cooperative bank
(Section 29, Rep. Act No. 8791, “The SUGGESTED ANSWER:
General Banking Law of 2000”). A cooperative bank is organized under
the Cooperative Code to provide
Thrift bank financial and credit services to
SUGGESTED ANSWER: cooperatives. It may perform any or all
A thrift bank is one established as a the services offered by a rural bank,
savings and mortgage bank, a stock including the operation of a Foreign
savings and loan association, or a private Currency Deposit Unit subject to certain
development bank, for the purpose of: (1) conditions (Section 100, Rep. Act
accumulating the savings of depositors No.6938, “The Cooperative Code of the
and investing them in outlets Philippines”).
determined by the Monetary Board as
necessary in the furtherance of national
economic objectives; (2) providing short- Truth in Lending Act (2009)
term working capital, medium and long-
No.XI. (A) A loan agreement which provides
term financing, to business engaged in
that the debtor shall pay interest at the rate
agriculture, services, industry and
determined by the bank’s branch manager
housing; and (3) providing diversified
violates the disclosure requirement of the
financial and allied services for its
Truth in Lending Act.
chosen market and constituencies
SUGGESTED ANSWER:
specially for small and medium

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 17 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

True. This contrary to the duty of the Manila outlet constitutes only one-third
creditor to disclose in detail the of its total business and, therefore, it
interests, charges and other figures would not conducted by Venezia.
indicating in detail the cost of the credit Moreover, the requirements of the Bulk
granted to the debtor (United Coconut Sales Law reflected in Sections 3,4,5,
Planters Bank v. Beluso, 530 SCRA 567 and 9, by the express language of said
(2007)). provisions, apply only to the first type of
bulk sales, i.e., to any sale, transfer,
mortgage or assignment of a stock of
goods, wares, merchandise, provisions or
Bulk Sales Law
materials otherwise than in the ordinary
Bulk Sales Law; Covered Transactions course of trade and the regular

(2010) prosecution of business of the vendor,

No.V. Venezia is a famous international
fashion chain with outlets in
Ortigas, and Manila. It has complied with
the minimum capitalization required under
the Retail Trade Nationalization Act and
carries on retail business worth more than
S3 million for each of its outlets. As its
Manila outlet is not doing very well, it
decides to sell all of its business there
consisting of remaining inventory, furniture
and fixtures and other assets
competitor.
Venezia’s Manila outlet constitutes one-
third of its total business. Should it comply
with the requirements of the Bulk Sales
Law? Why or why not? (2%)
SUGGESTED ANSWER:
Venezia need not comply with the
requirements of the Bulk Sales Law as its
mortgagor, transferor, or assignor, and
not to the second type (as in the sale
Makati,
described in the problem) or the third
type (i.e., sale, etc. of all or substantially
all of the fixtures and equipment used in
and about the business). As the Bulk
Sales Law is penal in nature, it should be
interpreted strictly against the State
(People v. Wong Szu Tung, CA G.R. No.
9776-R, March 26, 1954;50 O.G. 4867;
Section 2 of the Bulk Sales Law).
to its
If instead of selling its Manila outlet,
Venezia merely mortgages its assets there,
would it need to comply with the
requirements of the Bulk Sales Law? (2%)
SUGGESTED ANSWERS:
For the same reasons stated in the
answer to A above, Venezia need not
comply with the requirements of the
Bulk Sales Law. The second type of bulk

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 18 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

sales also includes the mortgage of all or The receiver seeks your advice on whether
substantially all of the business of the the Bulk Sales law will apply to either, or
mortgagor (Section 2, Bulk Sales Law). both, options. What will your advice be?
Explain (4%)
What are the legal consequences of a failure SUGGESTED ANSWER:
to comply with the requirements of the I will advice the receiver that the Bulk
Bulk Sales law? (2%) Sales law does not apply to both options.
Sect. 8 of the Bulk Sales Law expressly
SUGGESTED ANSWER: provides that it will not apply executors,
Failure to comply with the requirements administrators, receivers, and assignees
of the Bulk Sales Law renders the Sale, in insolvency, or public officers, acting
transfer, mortgage, or assignment under judicial process. In this case, the
fraudulent and void (Section 4, Bulk receiver is acting under judicial process.
Sales Law), and makes any person found
guilty of violating any provision of the
Bulk Sales Law punishable by 5 years, or
a fine in an amount not exceeding P5,
Bulk Sales Law; Covered Transactions
000, or both such imprisonment and fine
(2007)
in the discretion of the court (Section
11, Bulk Sales Law). No.XII. Seeking to Streamline its operations
and to ball out its losing ventures, the
stockholders of X corporation unanimously
Bulk Sales Law; Covered Transactions adopted a proposal to sell substantially all
(2009) of the machineries and equipment used in
and about its manufacturing business and
No.XIV. XXX Corporation (XXX) and its
to sink the proceeds of the sale for the
sister company, YYY Corporation (YYY), are
expansion of its cargo transport services.
both under judicial receivership. The
(5%)
receiver has the option to sell or
substantially all of the properties of YYY to Would the transaction be covered by the
XX, or simply merges the two Corporations. provisions of eh Bulk Sales Law?
Under either option, the requirements
SUGGESTED ANSWER:
under the Corporation Code have to be
complied with. No. the transaction is not covered by the
provisions of the Bulk sales law, Bulk

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 19 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

sales law applies only to retail Bulk Sales Law; Validity (2009)
merchants, traders and dealers. It does
No.I. (C) Even if the seller and the buyer in
not apply to manufacturers. X
a sale in bulk violate the Bulk Sales Law,
Corporation is engaged in the
the sale would still be valid.
manufacturing business (Development
SUGGESTED ANSWER:
bank of the Phil. V. Judge of the
False. When the Bulk Sales Law is
Regional Trial Court of manial86 O.G.
violated, the sale is null and void. When
1137 (1987)).
the provisions of the said law have not
ALTERNATIVE ANSWER: been complied with, the sale is
considered as being “fraudulent and
YES, the transaction is covered by the
void” and even when coupled with
Bulk Sales Law because it involves the
delivery, the title over the goods does
sale of substantially all the equipment
not transfer to the buyer. However, the
used in the business of X corporation
civil liabilities arising from the
(Sec. 2 Bulk sales law)
transaction remain enforceable between
the parties thereto.

How would X Corporation effect a valid

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

should give the affidavit to the buyer remaining stock equally between them.

who , in turn, should furnish a copy to Paolo also owns a security agency, a

each creditor and notify the creditors of janitorial company and a catering business.

the proposed bulk sale to enable them to In behalf of the office building company,

protect their interest. Paolo engaged his companies to render

their services to the office building. Are the
service contracts valid? Explain. (4%)
SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 20 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

The contracts of Paolo, who owns 15% of full disclosure of the adverse interest of
the Outstanding Capital Stock of the Paolo to Pedro.
office building company is concerned if
they were not approved by the Board of
Directors and Paolo was not designated BOD; Qualifications (2012)
to execute them on behalf of said
company. No.VI. X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino
On the other hand, if the contracts were
residing in Quezon City, Philippines. Z is a
duly approved by the Board of Directors
resident alien residing in Makati City. GGG
of the office building company with
Corporation is a domestic corporation -
Paolo duly designated as company
40% owned by foreigners and 60% owned
representative, they would nevertheless
by Filipinos, with T as authorized
be voided at the option of the company.
representative. CCC Corporation is a
Under Sec. 32 of the Corporation Code.
foreign corporation registered with the
“A contract of the corporation with one
Philippine Securities and Exchange
or more of its directors or trustees or
Commission. KKK Corporation is a
officers is voidable at the option of such
domestic corporation (100%) Filipino
corporation, unless all the following
owned. S is a Filipino, 16 years of age, arid
conditions are present,” (a) if Paolo as a
the daughter of Y.
director in the board meeting in which
the contracts were approved was not Who can be incorporators? Who can be
necessary to constitute a quorum for subscribers? (2%)
such meeting; (b) Paolo’s vote at such
meeting was not necessary for the SUGGESTED ANSWER:
approval of the contracts; (c) Each of the
contract are fair and reasonable under X,Y,Z and T could all be incorporators

the circumstances. and subscribers. Note, however, that

Sec.10 of the Corporation Code requires
If condition (a) or (b) is absent, Sec, 32 that there must be at least five but not

requires that the contracts must be more than fifteen incorporators (who

ratified by the shareholders representing must all be natural persons) and that a

at least two-thirds (2/3) of outstanding majority of the incorporators must be

capital stock, provided that there was residents of the Philippines. S, being a
minor, could neither be an incorporator
nor a subscriber. GGG Corporation, CCC

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 21 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Corporation, and KKK Corporation, CCC requirement under the law governing the
Corporation, and KKK Corporation could business of the corporation) but not GGG
not be incorporators as they are not Corporation, CCC Corporation, and KKK
natural persons. However, they could be Corporation as they are not natural
subscribers. persons. However, the aforementioned
corporations could have their respective
What are the differences between an representatives nominated and possibly
incorporator and a subscriber, if there are elected as directors by the stockholders.
any? (2%) Each director must own at least one
share of the capital stock of the
SUGGESTED ANSWER:
corporation (Sec.23, Corporation Code).

Some of the differences are as follows:

Who are qualified to act as Treasurer of the
first, all the incorporators are required
company? (2%)
to sign and acknowledge the Articles of
Incorporation while the subscribers, as SUGGESTED ANSWER:
such, are not subject to the same
requirement; second, the incorporators The Corporation Code does not impose
could be either natural or juridical any nationality or residency requirement
persons; and third, the number of in respect of the Treasurer. Any such
incorporators cannot exceed fifteen requirement or any other reasonable

while the number of subscribers could be requirement may be adopted by the

more than fifteen (subject to corporation and reflected in its by-laws,

compliance, in the appropriate cases, or required by the law(s) governing the

with the requirements of the Securities business of the corporation or a law of

Regulation Code). general application (e.g., the Anti-

Dummy Law which applies to all
Who are qualified to become members of nationalized businesses). Accordingly,
the board of directors of the corporation? anybody with the qualifications required
(2%) under the by-laws of the corporation or
under the law(s) governing the business
SUGGESTED ANSWER:
of the corporation, could be elected
Treasurer by the Board of Directors.
X,Y,Z and T could be directors (subject
Note, however, that the Treasurer could
to the residency requirement mentioned
not be the President at the same time
in (a) above and any nationality
(Sec. 25, Corporation Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 22 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Who can be appointed Corporate Secretary? Corporation automatically dissolve or

(2%) terminate the corporate existence of AAA
Corporation? Explain your answer. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWERS:
The Secretary is required to be both a
resident and a citizen of the Philippines No, the sale of all the assets and

(Sec. 10, Corporation Code). liabilities of AAA Corporation to BBB

Banking Corporation will not result in
[Note: The problem does not state what kind the automatic dissolution of termination
of business the corporation would engaged of the existence of the former. A
in. Neither does it state whether X,Y,Z and T decision to dissolve AAA Corporation or
are all of legal age and otherwise have the to terminate its corporate existence
capacity to enter into contracts. Accordingly, would require a separate approval by a
the suggested answer set out below assume majority of the Board of Directors of AAA
that the corporation would not be engaging Corporation and its stockholders holding
in a nationalized activity and that X,Y,Z and at least two thirds of the total
T are all of legal age and otherwise have the outstanding capital stock, as well as the
capacity to enter into contracts.] separate approval by the Monetary
Board.

Corporation; Dissolution (2012) What are the legal requirements in order

that a corporation may be dissolved? (5%)
No.X. AAA Corporation is a bank. The
operations of AAA Corporation as a bank SUGGESTED ANSWERS:

was not doing well. So, to avert any bank

A corporation may be dissolved
run, AAA Corporation, with the approval of
voluntarily under Section 118 (where no
the Monetary Board, sold all its assets and
creditors are affected) or under Section
liabilities to BBB Banking Corporation
119 (where creditors are affected), or by
which includes all deposit accounts. In
shortening of the corporate term under
effect then, BBB Corporation will service all
Section 120, or involuntarily by the SEC
deposits of all depositors of AAA
under Section 122, all of the Corporation
Corporation.
Code. Dissolution under Section 118,119
Will the sale of all assets and liabilities of and 120 require the same corporate
AAA Corporation to BBB Banking approvals stated in (a) above.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 23 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Note that the SEC also has the authority May the composition of the board of
under Section 6 of PD 902-A to revoke directors of the National Power Corporation
the certificate of registration of a (NPC) be validly reduced to three (3)?
corporation upon any of the grounds Explain your answer fully. (2%)
provided by law, including the SUGGESTED ANSWER:

aforementioned Section 6-A

The NPC Board may be reduced to only
three (3) members, but this would have
to be affected by legislative amendment
of its charter. The National Power
Corporation; Formation; Enactment of a Corporation (NPC is a chartered

Law (2008) government corporation, not governed

by the general provisions of the
No.XI. (A) Since February 8, 1935, the Corporation Code which requires that
legislature has not passed even a single law
Boards of Directors of private
creating a private corporation. What
corporations shall not have less than 5
provision of the Constitution precludes the
members. The provisions of the
passage of such a law? (3%)
Corporation Code are applicable to
SUGGESTED ANSWER:
government corporations only in a

Under Sec. 16, Art. XII of the 1987 suppletory manner.

Constitution, Congress cannot, except

by general law, provide for the
formation, organization, or regulation of
private corporations. It is only
Corporation; Sole Proprietorship (2010)
government owned or controlled
corporations that may be created or No.IX. Your client Dianne approaches you
established through special charters. for legal advice on putting up a medium-
Consequently, it has been held that a sized restaurant business that will
private corporation created pursuant to specialize in a novel type of cuisine. As
a special law is a nullity, and such Dianne feels that the business is a little
special law is void for being in violation risky, she wonders whether she should use
of the Constitution (NDC v. Phil. a corporation as the business vehicle, or
Veterans Bank, G.R. Nos. 84132-33, 10 just run it as a single proprietorship. She
December 1990). already has an existing corporation that is
producing meat products profitably and is

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 24 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

also considering the alternative of simply capital than if she were to form a
setting up the restaurant as a branch office separate corporation. However, all the
of the existing corporation. assets of the existing corporation will be
liable for the debts and losses of the
Briefly explain to your client what you see restaurant business.
as the legal advantages and disadvantages
of using a separate corporation, a single If you advise your client to use a
proprietorship, or a branch of an existing corporation, what officer positions must the
corporation for the proposed restaurant corporation at least have?(2%)
business. (3%) SUGGESTED ANSWER:
SUGGESTED ANSWER: The corporation must have at least five
If Dianne will set up a separate directors (Section 14 of the Corporation
corporation, her liability for its Code). It Must also have a president, a
obligations and losses will be limited to treasure, and secretary (Section 25 of
the amount of her subscription in the the Corporation Code).
absence of showing that there is a
ground to disregard its separate juridical What particular qualifications, if any, are
personality. If she were to operate a these officers legally required to possess
single proprietorship, her liability for its under the Corporation Code? (2%)
debts and losses will be unlimited. SUGGESTED ANSWER:
Every director must own at least one
The formation and the operation of a share of the capital stock of the
corporation require a great deal of paper corporation, which must be recorded in
work and record-keeping. This is not the his name on the books of the
situation in the case of a single corporation, and a majority of the
proprietorship. directors must be residents of the
Philippines (Section 25 of the
If Dianne will form a separate Corporation Code).
corporation, it can raise more funds for
the business than if she were to set up a The president must also be a director.
single proprietorship. The secretary must be a resident and
citizen of the Philippines (Section 25 of
If she were to set up the restaurant as a the Corporation Code).
branch office an existing corporation,
the corporation will have more funds as

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 25 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Derivative Suit; Expiration of Term SUGGESTED ANSWER:

(2013) The remaining directors cannot elect

new directors to fill in the two
No.VIII. In the November 2010 stockholders
vacancies. The board of directors may fill
meeting of Greenville Corporation, eight (8)
up vacancy only if the ground is not due
directors were elected to the board. The
to expiration of term, removal or
directors assumed their posts in January
increase in the number of board seats. In
2011. Since no stockholders meeting was
this case, the term of the two directors
held in November 2011, the eight directors
expired after one year. They hold-over
served in a holdover capacity and thus
period is not part of their term. The
continued discharging their powers.
vacancies should be filled up by election
by the stockholders (Valle Verde Country
In June 2012, two (2) of Greenville
Club, Inc. v. Africa, 598 SCRA 202,
Corporation’s directors - Director A and
2009).
Director B – resigned from the board.
Relying on Section 29 of the Corporation
The derivative suit was improper. In a
Code, the remaining six (6) directors elected
derivative suit, the corporation, not the
two (2) new directors to fill in the vacancy
individual stockholder, must be the
caused by the resignation of Directors A
aggrieved party and that the stockholder
and B.
is suing on behalf of the corporation.
What stockholder X is asserting is his
Stockholder X questioned the election of the
individual right as a stockholder to elect
new directors, initially, through a letter-
the two directors. The case partakes
complaint addressed to the board, and later
more of an election contest under the
(when his letter-complaint went unheeded),
rules on intra-corporate controversy
through a derivative suit filed with the
(Legaspi Towers 300, Inc. v. Muer, 673
court. He claimed that he vacancy in the
SCRA 453, 2012).
board should be filled up by the vote of the
stockholders of Greenville Corporation.
Greenville Corporation’s directors defended
the legality of their action, claiming as well
that Stockholder X’s derivative suit was Derivative Suit; Jurisdiction (2009)
improper.
No.II. Atlantis Realty Corporation (ARC), a
local firm engaged in real estate
Rule on the issues raised. (8%)
development, plans to sell one of its prime

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 26 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

assets—a three-hectare land valued at why and where would such a suit be filed?
about P100-million. For this purpose, the If not, why not? (2%)
board of directors of ARC unanimously SUGGESTED ANSWER:
passed a resolution approving the sale of Yes, such suit would constitute an entra-
the property for P75-million to Shangrila corporate dispute as it is a suit initiated
Real Estate Ventures (SREV) a rival realty by a stockholder against other
firm. The resolution also called for a special stockholders who are officers and
stockholders meeting at which the proposed directors of the same corporation (P.D.
sale would be up for ratification. No. 902-A, Sec. 5(b)). Such suit should be
filed in the Regional Trial Court
Atty. Edric, a stockholder who owns only designated by the Supreme Court as a
one (1) share in ARC, wants to stop the corporate or commercial court.
sale. He then commences a derivative suit
for and in behalf of the corporation, to Will the suit prosper? Why or why not? (3%)
enjoin the board of directors and the SUGGESTED ANSWER:
stockholders from approving the sale. No. The suit will not prosper. There is no
requisite demand on the officers and
Can Atty. Edric, who owns only one share directors concerned. There is, therefore,
in the company, initiate a derivative suit? no exhaustion of administrative
Why or why not? (2%) remedies.
SUGGESTED ANSWER
Yes, Atty. Edric can initiate a derivative
suit, otherwise known as the minority
stockholders’ suit. It is allowed by law to
enable the minority stockholder/s to Dividends; Declaration of Dividends

protect the interest of the corporation (2009)

against illegal or disadvantageous act/s
No.I. (D) Dividends on shares of stocks can
of its officers or directors, the people
only be declared out of unrestricted
who are supposed to protect the
retained earnings of the corporation.
corporation (Pascual v. Del Zaz Orozco,
SUGGESTED ANSWER:
19 Phil. 82 (1991)). True. Dividends on shares of stock of a
corporation, whether cash dividend or
If such a suit is commenced, would it
stock dividend, can be validly declared
constitute an intra-corporate dispute? If so,
only out of unrestricted retained

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 27 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

earnings (Sec. 43, Corporation Code). It No. the suit will not prosper. Paterno
cannot be declared out of the capital. cannot compel XYZ Corporation to pay
Otherwise, such declaration of dividend dividends, which have to be declared by

will violate the trust fund doctrine. the Board of Directors and the latter
cannot do so, unless there are sufficient
unrestricted retained earnings.
Otherwise, the corporation will be forced
to use its capital to make said payments
Dividends; Declaration of Dividends
in violation of the trust fund doctrine.
(2009) Likewise, redemption of shares cannot

No.XVI. On September 15, 2007, XYZ be compelled. While the certificate allws

Corporation issued to Paterno eight such redemption, the option and

hundred preferred shares with the ff. terms: discretion to do so are clearly vested in
the corporation (Republic Planters Bank
―The Preferred Shares shall have v. Agana, 269 SCRA 1 [1997]).
the
rights, preferences, qualifications, and
limitations, to wit:

The right to receive a quarterly

dividend of One per Centum cumulative and
Dividends; Declaration of Dividends
participating;
(2008)
These shares may be redeemed, by
drawing of lots, at any time after two years No.XIV. Ace Cruz subscribed to 100,000
from date of issue, at the option of the shares of stock of JP Development
Corporation; xxx Corporation, which ahs a par value of P1
per share. He paid P25,000 and promised
Today, Paterno sues XYZ Corporation for to pay the balance before December 31,
specific performance, for the payment of 2008. JP Development Corporation declared
dividends on, and to compel the redemption a cash dividend on October 15, 2008,
of , the preferred shares, under the terms payable on December 1, 2008
and conditions provided in the stock
certificates. Will the suit prosper? Explain. For how many shares is Ace Cruz entitled
(3%) to be paid cash dividends? Expalin. (2%)
SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 28 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: On December 1, 2008, can Ace Cruz

compel JP Development Corporation to
Ace Cruz is entitled to be paid each cash
issue to him the stock certificate
dividends to the entire 100,1000 shares
corresponding to the P25,000 paid by him?
subscribed, and not only to the paid-up
(2%)
portion thereof. The legal character of
SUGGESTED ANSWER:
being a “stockholder,” and therefore the
entitlement to all the rights of a No, Ace Cruz cannot compel JP
stockholder, are determined from the Development Corporation to issue him
time of “subscription” and not from the stock certificate for the P 25,000.00.
payment of the subscription. No Certificate of Stock can be issued to a
subscriber until the full amount of his
Under Sec. 43 of the Corporation Code, subscription together with interest and
“a stock corporation may declare expense, if any is due, has been paid. A
dividends out of the unrestricted Subscription is one, entire and
retained earnings which shall be payable indivisible whole contract which cannot
in cash, in property, or in stock to all be divided into portions. The
stock-holders on the basis of outstanding stockholder is not entitled to a
stock held by them” on not on the basis Certificate of Stock until he has
on what stocks have been paid. remitted the full amount of his
subscription (Sec. 64, Corporation Code;
ALTERNATIVE ANSWER: SEC Opinion [January 6, 1989]).
Under Sec. 71, only when a stockholder
has been declared delinquent do his
rights as stockholder become suspended. Liabilities; BOD; Corporate Acts (2012)
It means therefore that a stockholder
who has not paid the full subscription, No.IX. A, B, C, D, E are all duly elected
provided he is not declared delinquent members of the Board of Directors of XYZ
has complete exercise of all of his rights, Corporation. F, the general manager,
including the right to receive dividends. entered into a supply contract with an
But any cash dividends due on American firm. The contract was duly
delinquent stock shall first be applied to approved by the Board of Directors.
the unpaid balance of the subscription However, with the knowledge and consent
(Sec. 43, Corporation Code). of F, no deliveries were made to the
American firm. As a result of the non-

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 29 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

delivery of the promised supplies, the consented to the non-delivery of the

American firm incurred damages. The promised supplies contrary to the
American firm would like to file a suit for contract that was duly approved by the
damages. Can the American firm sue: Board of Directors. The problem does
indicate any circumstance that would
The members of the Board of Directors excuse or favorably explain the action of
individually, because they approved the F.
transaction? (2%)
Explain the rules on liabilities of a
SUGGESTED ANSWERS: corporation for the act of its corporate
officers and the liabilities of the corporate
No. In approving the transaction, the
officers and Board of Directors of a
directors were not acting their personal
corporation acting in behalf of the
capacities but rather in behalf of XYZ
corporation. (4%)
Corporation exercising the powers of the
corporation and conduction its business SUGGESTED ANSWERS:
(Sec. 23, Corporation Code). The problem
contains no facts that would indicate A corporation would be liable for the acts
that the directors acted otherwise. of its Board of Directors and officers if
the said acts were performed by them in
(B) The corporation? (2%) accordance with powers granted to them
under the Corporation Code, the articles
SUGGESTED ANSWERS:
of incorporation and by-laws of the
corporation, the laws and regulations
Yes. The Board approved the supply
governing the business of, or otherwise
contract and the General Manager
applicable to, the corporation, and, in
entered into the contract, both of them
the case of officers, the resolutions
acting on behalf of the XYZ Corporation.
approved by the Board of Directors.
F, the general manager, personally, because
As the directors have a personality
the non-delivery was with his knowledge
separate from that of the corporation,
and consent? (2%)
they would be personally liable only if

SUGGESTED ANSWERS: they acted wilfully and knowingly vote

for or assent to a patently unlawful act
Yes, F could be sued in his personal of the corporation, or when they are
capacity because he knowingly guilty of gross negligence or bad faith in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 30 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

directing the affairs of the corporation, SUGGESTED ANSWER:

or when they acquire any personal or
I would sue Nelson, as the person who
pecuniary interest in conflict with their
owned and controlled Sonnel
duty as directors, which acts result in
Contruction Company, under the
damages to the corporation, its
doctrine of “piercing the veil of
stockholders or other persons, when
corporate fiction.” Although a
they agree to hold themselves personally
corporation has a juridical personality
and solidarily liable with the
separate and distinct from that of its
corporation, or when they are made, by a
stockholders, when the corporation is
specific provision of law, to personally
used merely as an alter ego or controlled
answer for the corporate action. (Sec. 31,
for the benefit of a stockholder, or when
Corporation Code).
it is necessary to render justice, then
the courts have the right to pierce the
veil of corporate fiction to hold the
controlling stockholder-officer
Piercing the Corporate Veil (2008) personally liable for the corporate tort or
wrong committed.
No.X. Nelson owned and controlled Sonnel
Construction Company. Acting for the
The contractor should also be held liable,
company, Nelson contracted the
since being an independent contractor it
construction of a building. Without first
is liable for the fault or negligence of its
installing a protective net atop the
people.
sidewalks adjoining the construction site,
the company proceeded with the
If you were the counsel for Sonnel
construction work. One day a heavy piece
Construction, how would you defend your
of lumber fell from the building. It smashed
client? What would be your theory? (2%)
a taxicab which at that time had gone
SUGGESTED ANSWER:
offroad and onto the sidewalk in order to
I would use the theory that the company
avoid traffic. The taxicab passenger died as
cannot be held liable for damages
a result.
because there was no fraud or negligence
Assume that the company had no more
by its officers in undertaking the project
account and property in its name. As
for the construction of the building or
counsel for the heirs of the victim, whom
the selection of a construction company.
will you sue for damages, and what theory
Since a contractor is not an agent of
will you adopt? (3%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 31 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Sonnel Construction, the latter cannot Stock and Transfer Book (2009)
be held liable for the contractor’s
No.XVIII. (C) What is a stock and transfer
negligence. I would also argue that
book? (1%)
piercing the veil of corporate fiction is a
SUGGESTED ANSWER:
remedy of last resort and cannot be
A Stock and transfer book is a book
availed of without clear evidence
which records all stocks in the name of
showing fraud or disrespect of the
the stockholders alphabetically arranged;
separate juridical personality of the
the installments paid or unpaid on all
corporation. Mere control of equity has
stocks for which subscription has been
not been considered as sufficient basis
made and the date of payment of any
for piercing the veil.
installment, a statement of every
alienation, sale or transfer of stock
Could the heirs hold the taxicab owner and made, the date thereof, and by and to
driver liable? Explain. (2%) whom made; and such other entries as
SUGGESTED ANSWER: the by-laws may prescribe (Section 74,
Corporation Code).
Yes, the taxicab company can be liable
for damages because it failed to comply
with its obligation as a common carrier
to use extraordinary diligence in
transporting the passenger, and because Stockholders; Appraisal Right (2007)
at the time of death of the passenger,
No.VII. In a stockholders meeting, S
the cab driver was violating a traffic
dissented from the corporate act converting
regulation. Under Art. 2185 of Civil
preferred voting shares to non-voting
Code, it is presumed that a person
shares. Thereafter, S submitted his
driving a motor vehicle has been
certificates of stock for notation that his
negligent if at time of mishap he was
shares are dissenting. The next day, S
violating a traffic regulation, such as
transferred his shares are dissenting. The
when he was driving on the wrong side of
next day, S transferred his shares to T to
the road (Mallari, Sr. v. CA, G.R. No.
whom new certificates were issued. Now, T
128607, 31 January 2000).
demands from the corporation the payment
of the value of his shares. (10%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 32 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

What is the meaning of a stockholder’s

appraisal right?
Stockholders; Contractual Relationship;

Quorum (2009)
SUGGESTED ANSWER:
Appraisal right is the right of No.XVIII. Triple a Corporation (Triple A) was
stockholder, who dissents from a incorporated in 1960, with 500 founders’
fundamental or extraordinary corporate shares and 78 common shares as its initial
action, to demand payment of the fair capital stock subscription. However, Triple
value of his shares. It is the right of a A registered its stock and transfer book
stockholder to withdraw from the only in 1978, and recorded merely 33
corporation and demand payment of the common shares as the corporation’s issued
fair value of his shares after dissenting and outstanding shares.
form certain corporate acts involving
fundamental changes in the corporate In 1982, Juancho, the sole heir of one of
structure (Section 81, Corporation Code). the original incorporators filed a petition
with the Securities and Exchange
Can T exercise the right of appraisal? Commission (SEC) for the registration of his
Reason briefly? property rights over 120 founder’s shares
SUGGESTED ANSWER: and 12 common shares. The petition was
No, T cannot exercise the right of supported by a copy of the Articles of
appraisal in this case. When S Incorporation indicating the incorporator’s
transferred his shares to T and T was initial capital stock subscription. Will the
issued new stock certificates, the petition be granted? Why or why not? (3%)
appraisal right of S ceased, and T SUGGESTED ANSWER:
acquired all the rights of a regular Yes. The articles of Incorporation define
stockholder. The transfer of shares from the charter of the corporation and the
S to T constitutes an abandonment of contractual relationship between the
the appraisal right of S. All the T State and the Corporation, the State and
acquired from the issuance of new stock the stockholders, and between the
certificated was the rights of a regular corporation and the stockholders. Its
stockholders (Section 86, Corporation contents are thus binding upon both the
Code). corporation and the stockholders,
conferring on Juancho a clear right to
have his stockholding recorded (Lanuza

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 33 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

v. Court of Appeals, 454 SCRA 54 with equal par values of P100.00/share.

(2005)). Currently, the issued and outstanding
capital stock of BelPhil consists only of
On May 6, 1992, a special stockholders’ common shares shared between Bayani
meeting was held. At this meeting, what Cruz, a Filipino with 60% of the issued
would have constituted a quorum? Explain. common shares, and Bernard Fleet, a
(3%) Canadian, with 40%.
SUGGESTED ANSWER:
A quorum consists of the majority of the To secure additional working fund, BelPhil
totality of the shares which gave been issued preferred shares to Bernard Fleet
subscribed and issued. Thus the quorum equivalent to the currently outstanding
for such meeting would be 289 shares or common shares. A suit was filed
a majority of the 576 shares issued and questioning the corporate action on the
outstanding as indicated in the article of ground that the foreign equity holdings in
incorporation. This includes the 33 the company would now exceed the 40%
common shares reflected in the stock foreign equity limit allowed under the
and transfer book, there being no Constitution the for public utilities.
mention or showing of any transaction
effected from the time of Triple A’s Rule on the legality of Bernard Fleet’s
incorporation in 1960up to the said current holdings. (8%)
meeting (Section 52 in Relation to SUGGESTED ANSWER:
Section 137 of corporation Code; Lanuza The holding of Bernard Fleet equivalent
v. court of Appeals, 454 SCRA 54 (2005)). to the outstanding common shares is
illegal. His holdings of preferred shares
should not exceed 40%. Since the
constitutional requirement of 60%
Filipino ownership of the capital of
Stockholders; Preferred Shares (2013)
public utilities applies not only to voting

No.X. Bell Philippines, Inc. (BelPhil) is a control but also to beneficial ownership

public utility company, duly incorporated of the corporation, it should also apply

and registered with the Securities and to the preferred shares. Preferred shares

Exchange Commission. Its authorized are also entitled to vote in certain

capital stock consists of voting common corporated matters. (Gamboa v. Teves,

shares and non-voting preferred shares, 682 SCRA 397, 2012) The state shall
develop a self-reliant and independent

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 34 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

national economy effectively controlled directors; and (c) the corporate officers?
by Filipinos. (Articles II, Sec. 19, 1987 (3%)
Constitution) The effective control here
should be mirrored across the board on the corporation;
all kinds of shares. SUGGESTED ANSWER:
Under Section 45 of the Corporation
Code, no corporation shall possess or
exercise any corporate power except
those conferred by the Code or by its
Trust Fund Doctrine (2007)
articles of incorporation and except such

No.VI. Discuss the trust fund doctrine. (5%) as are necessary or incidental to the

SUGGESTED ANSWER: exercise of the powers so conferred.

The trust fund doctrine means that the When a corporation does an act or

capital stock, properties and other engages in an activity which is outside

assets of a corporation are regarded as of its express, implied or incidental

equity in trust for the payment of powers set out in its articles of

corporate creditors. Stated simply, the incorporation, the act is deemed to be

trust fund doctrine states that all funds ultra vires.

received by the corporation in payment

of the shares of stock shall be held in the board of directors;
SUGGESTED ANSWER:
trust for the corporate creditors and
When the Board engages in an activity or
other stockholders of the corporation.
Under such doctrine, no fund shall be enters into a contract without the

used to buy back the issued shares of ratificatory vote of the stockholders in

stock except only in instances those instances where the Corporation

specifically allowed by the Corporation Code so Requires such ratificatory vote,

Code (Boman Environmental such as when the corporation is made to

invest in another corporation or engage
Development Corporation v. Court of
in a business which is not in pursuit of
Appeals, 167 SCRA 540 [1988]).
its primary purpose, the board resolution
not ratified by stockholders owning or
representing at least two-thirds of the
Ultra Vires Acts (2009)
outstanding capital stock would make
When is there an ultra vires act on the part the transaction void, as being ultra
of (a) the corporation; (b) the board of vires.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 35 of 173
Mercantile Law Q&As (2007-2013)
the corporate officers
SUGGESTED ANSWER:
When a corporate officer enters into a
contract on behalf of the corporation
without having been so expressly or
impliedly authorized by the Board of
Directors, even when the act or contract
falls within the corporation’s express,
implied or incidental power, then the
unauthorized act of the corporate officer
is deemed to be ultra vires.
Credit Transaction
Chattel Mortgage; Foreclosure (2009)
No.III. Armando, a resident of Manila,
borrowed P3-million from
offering as security his 500 shares of stock
worth P1.5-million in Xerxes Corporation,
and his 2007BMW sedan, valued at P2-
million. The mortgage on the shares of
stock was registered in the Office of the
Register of Deeds of Makati City where
Xerxes Corporation has its principal office.
The mortgage on the car was registered in
the Office of the Register of Deeds of
Manila. Armando executed a single Affidavit
of Good Faith, covering both mortgages.
Armando defaulted on the payment of his
obligation; thus, Bernardo foreclosed on the
two chattel mortgages. Armando filed suit
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
to nullify the foreclosure and the
mortgages, raising the following issues:
The execution of only one Affidavit of Good
Faith for both mortgages invalidated the
two mortgages; (2%) and
SUGGESTED ANSWER:
The execution of only one Affidavit of
Good Faith for both mortgages is not a
ground to nullify the said mortgages and
the foreclosure thereof. Said mortgages
are valid as between immediate parties
(Lilius v. Manila Railroad Company, 62
Phil. 56 (1935)), although they cannot
bind third parties (Philippine Refining v.
Jarque, 61 Phil. 229 (1935)).
The mortgage on the shares of stocks
should have been registered in the office of
Bernardo,
the Register of Deeds of Manila where he
resides, as well as in the stock and transfer
book of Xerxes Corporation. (3%)
Rule on the foregoing issues with reasons.
SUGGESTED ANSWER:
The mortgage on the shares of stock
should be registered in the chattel
mortgage registry in the Register of
Deeds of Makati City where the
corporation has its principal office and
also in the Register of Deeds of Manila
where the mortgagor resides (Chua Guan
v. Samahang Magsasaka, Inc., 62 Phil.
472 (1935)). Registration of chattel
Page 36 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
mortgage in the stock and transfer book
is not required to make the chattel
mortgage valid. Registration of dealings
in the stock and transfer book under
Section 63 of the Corporation Code
applies only to sale or disposition of
shares, and has no application
mortgages and other forms
encumbrances (Monserrat v. Ceron, 58
Phil. 469 (1933)).
Assume that Bernardo extrajudicially
foreclosed on the mortgages, and both the
car and the shares of stocks were sold at
public auction. If the proceeds from such
public sale should be 1-million short of
Armando’s total obligation, can Bernardo
recover the deficiency? Why or why not?
(2%)
SUGGESTED ANSWER:
Yes. Bernardo can recover
deficiency. Chattels are given as mere
security, and not as payment or pledge
(CuH ada v. Drilon, 432 SCRA 618
(2004)).
Chattel Mortgage; Foreclosure (2008)
No.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
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
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
to but the car was bidded for P6,000 only. Al
of 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:
Bob has the legal right to file a collection
suit for a sum of money in lieu of
foreclosing on the chattel mortgage. It
has been ruled that a c chattel mortgage
is a security arrangement to support a
primary contract (Serra v. Rodriguez,
the
G.R. no. L-25546, 22 April 1974). Since
the chattel mortgage is only a collateral
contract prerogative to choose which of
the remedies available to pursue.
However, the filing of the collection suit
constitutes a waiver of the chattel
mortgage (Land Settlement and Dev.
Corp. v. Carlos, 22 SCRA 202, 1968). And
even if the collection suit included the
recovery of the P6,000 deficiency on the
first loan, the same is valid because
unlike in a pledge the lender has the
legal right to recover the deficiency
Page 37 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

incurred on the foreclosure of a chattel Yes. X executed a real estate mortgage

mortgage (PAMECA Wood Treatment v. containing a “blanket mortgage clause.”
CA, G.R. No. 106435, 14 July 1999). Mortgages given to secure future
advancements are valid and legal
contracts, and the amounts named as
consideration in said contracts do not
limit the amount for which the mortgage
Mortgage; Extrajudicial
may stand as security if from the four
Foreclosure; Blanket Mortgage & corners of the instrument the intent to
Damage Clause (2012) secure future and other indebtedness
can be gathered. (Prudential Bank v.
No.VIII. X obtained a Php10Million loan
Alviar, G.R. No. 150197, 28 July 2005)
from BBB Banking Corporation. The loan is
secured by Real Estate Mortgage on his What is the meaning of a "dragnet clause"
vacation house in Tagaytay City. The in a Deed of Real Estate Mortgage? Under
original Deed of Real Estate Mortgage for
what circumstances will the "dragnet
the Php10Million was duly registered. The
clause" be applicable? ( 5%)
Deed of Real Estate Mortgage also provides
that "The mortgagor also agrees that this SUGGESTED ANSWERS:
mortgage will secure the payment of
additional loans or credit accommodations Generally, a dragnet clause is a clause in

that may be granted by the mortgagee ... " a deed of real estate mortgage stating

Subsequently, because he needed more that the mortgage secures all the loans

funds, he obtained another Php5Million and advances that the mortgagor may at

loan. On due dates of both loans, X failed to any time owe to the mortgagee. The
pay the Php5Million but fully paid the word “dragnet” is a reference to a net
Php10Million. BBB Banking Corporation drawn through a river or across ground

instituted extrajudicial foreclosure to trap fish or game. It is also known in

proceedings. American jurisprudence as a “blanket

mortgage clause” or an “anaconda
Will the extrajudicial foreclosure prosper clause.” A mortgage with a dragnet
considering that the additional Php5Million clause enables the parties to provide
was not covered by the registration? (5%) continuous dealings, the nature or
extent of which may not be known or
SUGGESTED ANSWERS:
anticipated at the time, and they avoid
the expense and inconvenience of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 38 of 173
Mercantile Law Q&As (2007-2013)
executing a new security on each new
transaction. It operates as a convenience
and accommodation to the borrower as it
makes available additional funds to him
without his having to execute additional
security documents, thereby
time, travel, cost of extra legal services,
recording fees, etc. (Prudential Bank v.
Alviar, id.)
The “dragnet clause” may not apply to
other loans extended by the mortgagee
to the mortgagor for which
securities were given. In the case of
Prudential Bank v. Alviar, the Supreme
Court adopted the “reliance
security test” to the effect that “when
the mortgagor takes another loan [from
the mortgage] for which another security
was given, it could not be inferred that
such loan was made in reliance solely on
the original security with the “dragnet
clause,” but, rather, on the new security
given.” This means that the existence of
the new security must be respected and
the foreclosure of the old security should
only be for the other
separately collateralized and for any
amount not covered by the new security
for the new loan.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Mortgage; Foreclosure (2012)
No.VII. X obtained a loan for Php50Million
from SSS Bank. The collateral is his
vacation house in Baguio City under a real
saving estate mortgage. X needed more funds for
his business so he again borrowed another
Php10Million, this time from BBB Bank,
another bank, using the same collateral.
The loan secured from SSS Bank fell due
and X defaulted.
other If SSS Bank forecloses the real estate
mortgage, what rights, if any, are left with
888 Bank as mo1igagee also? (2%)
on the
SUGGESTED ANSWER:
Bank, as junior mortgagee, would have a
right to redeem the foreclosed property,
together with X, his successors in
interest, any judicial or judgement
creditor of X, or any other person or
entity having a lien on the vacation
house subsequent to the real estate
mortgage in favour of SSS Bank (i.e.,
other junior mortgagees, if any)(Sec. 6,
loans not Act 3135)
If the value of the Baguio property is less
than the amount of loan, what would be the
recourse of SSS Bank? BBB Bank? (2%)
SUGGESTED ANSWER:
Page 39 of 173
Mercantile Law Q&As (2007-2013)
In case of a deficiency, SSS bank could
file suit to claim for the deficiency. BBB
Bank could file an ordinary action to
collect its loan from X. if it does so, it
would be deemed to have waived its
mortgage lien. If the judgement in the
action to collect is favorable to BBB
Bank, and it becomes
executory , BBB Bank could enforce the
said judgement by execution. It could
even levy execution execution on the
same mortgaged property, but it would
not have priority over the latter. (Caltex
Philippines v. IAC, et al., G.R. No. 74730,
August 25,1989)
If the value of the property is more that the
amount of the loan, who will benefit from
the excess value of the property? (2%)
SUGGESTED ANSWER:
If the value of the property is more that
the amount of the loan, the excess could
benefit and be claimed by BBB Bank, any
judicial or judgement creditor of X, any
other junior mortgagee, and X.
If X defaulted with its loan in favor of BBB
Bank but fully paid his loan with SSS
Bank, can BBB Bank foreclose the real
mortgage executed in its favor? (2%)
SUGGESTED ANSWER:
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
If X defaulted in respect of his loan from
Bank but fully paid his loan from SSS
Bank, BBB Bank could now foreclose the
mortgaged property as it would be the
only remaining mortgagee of the same.
Does X have any legal remedy after the
final and foreclosure in the event that later on he has
the money to pay for the loan? (1%)
SUGGESTED ANSWER:
Yes, X could redeem the property within
one (1) year from the date of registration
of the sheriff’s certificate of foreclosure
sale.
If SSS Bank and BBB Bank abandon their
rights under the real estate mortgage, is
there any legal recourse available to them?
(1%)
SUGGESTED ANSWER:
Bank and BBB Bank could each file an
ordinary action to collect its loan from
X.
Mortgage; Foreclosure (2010)
No.III. Ozamis Paper Corporation secured
loans from ABC Universal Bank in the
aggregate principal amount of P100 million,
evidenced by several promissory notes, and
Page 40 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

secured by a continuing guaranty of its and SA v. American Realty Corporation,

principal stockholder Menandro Marquez; a 321 SCRA 659(1999)).
pledge of Marquez’s shares in the
corporation valued at P45 million; and a Can the bank foreclose on the pledged
real estate mortgage over certain parcels of shares of Marquez and recover the
land owned by Marquez. deficiency from the corporation? Explain.
(2%)
The corporation defaulted and the bank SUGGESTED ANSWER:
extra-judicially foreclosed on the real estate If the bank forecloses the pledge, it
mortgage. The bank which was the sole cannot recover the deficiency because
bidder for P75 million, won the award. the foreclosure extinguishes the
principal obligation, whether or not the
Can the bank sue Marquez for the proceeds from the foreclosure are equal
Deficiency of P25 million? Explain. (2%) to the amount of the principal obligation
SUGGESTED ANSWER: (Art. 2115, Civil Code).
Yes, the bank can sue Marquez for the
deficiency of P25million. In extrajudicial
foreclosure of a real estate mortgage, if
Insolvency & Corporate
the proceeds of the sale are insufficient
to pay the debt, the mortgagee has the
Recovery
right to sue for the deficiency (Suico
Insolvency; Preferred Claims (2007)
Rattan and Buri Interiors, Inc. v. Court
of Appeals, 490 SCRA 560 (2006)). No.XIII. (A) What are the preferred claims
that shall be satisfied first from the assets
If the bank opts to file an action for of an insolvent corporation? (10%)
collection against the corporation, can it
SUGGESTED ANSWER:
afterwards institute a real action to
foreclose the mortgage? Explain (2%) Under the Insolvency law necessary
SUGGESTED ANSWER:
funeral expenses of the debtor is the
No, the bank can no longer file an action
most preferred claim. However, this is an
to foreclose the real estate mortgage.
insolvent corporation, thus, claims shall
When it filed a collection case, it was
be paid in the ff. order:
deemed to have abandoned the real
Debts due for personal services rendered
estate mortgage (Bank of America, NT
the insolvent by employees,

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 41 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

laborers, or domestic servants Philippine Islands (Section 50,

immediately preceding the Insolvency Law).
commencement of proceeding in
insolvency; How shall the remaining non-preferred
creditors share in the estate of the insolvent
Compensation due the laborers or their corporation above?
dependents under the provisions of act SUGGESTED ANSWER:
numbered thirty-four hundred and The remaining non-preferred creditors,
twenty-eight, known as the workmen’s whose debts are duly proved and allowed,
Compensation Act, as amended by Act shall be entitled to share pro-rata in the
Numbered Thirty-eight hundred and assets, without priority or preference
twelve, and under the provisions of Act whatsoever (Section 49, Insolvency Law;
Numbered Eighteen hundred and Article 2251, Civil Code).
seventy-four, known as the Employees’
Liability Act, and of other laws providing
for payment of indemnity for damages in
cases of labor accidents;
Rehabilitation; Proceeding;

Rehabilitation & Insolvency (2012)

Legal expenses, and expenses incurred in
No.XVIII. (A) Can be distressed corporation
the administration of the insolvent’s
file a petition for corporation rehabilitation
estate for the common interest of the
after the dismissal of its earlier petition for
creditors, when properly authorized and
insolvency? Why? (2%)
approved by the court;
SUGGESTED ANSWER:

Debts, taxes, and assessments due the Yes, when a distressed corporation’s
Insular Government; petition for insolvency has been
dismissed, it can only mean that it still
Debts, taxes, and assessments due to possesses more than enough assets to
any province or provinces of the cover all its liabilities, and consequently,
Philippine Islands; it can still be “rehabilitated” (PAL v.
Zamora, G.R. No. 166996, 06 February
Debts, taxes, and assessments due to
2007, and Sec. 5[d], Securities
any municipality or municipalities of the Regulation Act).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 42 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Although in Ching v. LBP, G.R. No.

Under Sec. 6(d) of P.D. 902-A, a petition 73123, 02 September 1991, it was held
for corporate rehabilitation is allowed that when a petitioning corporate debtor
only “in cases where the has been denied rehabilitation, the SEC
corporation**possesses sufficient may declare a corporation insolvent as
property to cover all its debts but an incident and in continuation of its
foresees the impossibility of meeting already acquired jurisdiction over
them when they respectively fall due or petitioner, such a procedure does not
in cases where the corporation** has no seem warranted under the Interim Rules
sufficient assets to cover liabilities, but of Procedure for Corporate
is under the management of a Rehabilitation.
rehabilitation receiver or management
committee created pursuant to this Sec. 27, Rule 4 of the Interim Rules

Decree.” state that, “the court shall upon motion,

motu porprio or upon the
Under Sec. 1, Rule 4, Interim Rule of recommendation of the Rehabilitation
Procedure for Corporate Rehabilitation. Receiver, terminate the proceedings,
A petitioner corporate debtor must be without proceeding to
one who is “Any debtor who foresees the insolvency/dissolution.” In other words,
impossibility of meeting its debts when a different petition for insolvency
they respectively fall due,” which means proceedings fall with the general
that it is not insolvent, but merely jurisdiction of RTC, whereas petition for
illiquid, which under Section 2 provides corporate rehabilitation fall within the
the minimum that the debtor is original and exclusive jurisdiction of
“rehabilitable” thus: “the manner by RTC special Commercial Courts.
which the debtor may be rehabilitated
and how such rehabilitation may benefit Explain the key phrase ―equality is
the general body of creditors, employees equity‖ in corporate rehabilitation proceedings.

and stock holders. (2%)

SUGGESTED ANSWER:
Can the corporation file a petition for
The principle of “equality in equity”
rehabilitation first, and after it is dismissed
means that when a corporation is placed
file a petition foR insolvency? Why? (2%)
under the control of a court-appointed
SUGGESTED ANSWER:
rehabilitation receiver, then “all the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 43 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

creditors should stand on equal footing. Can XYC Company still be able to draw on
Not anyone of them should be given any their irrevocable Standby Letter of Credit
preference by paying one or some of when due? Explain your answer. (5%)
them ahead of the others. This is
SUGGESTED ANSWER:
precisely the reason for the suspension
of all pending claims against the Yes, As an exception to a Stay or
corporation under receivership” Suspension Order included in a

(Sobrejuanite v. ASB Dev. Corp., G.R. No. Commencement Order issued pursuant

165675, 30 September 2005: Ruby to Section 16(q) of the FRIA, Section

Industrial v. Lim, G.R. Nos. 124185-87, 18(c) if the said law provides that a Stay

20 January 1998). or Suspension Order shall not apply “to

the enforcement of claims against
sureties and other persons solidarily
liable with the debtor, and third party or
accommodation mortgagors as well as
Rehabilitation; Stay Order (2012) issuers of letters of credit x xx.”
Similarly, assuming that it has not been
No.I. ABC Company filed a Petition for
superseded by the FRIA, Section 7(b) of
Rehabilitation with the Court. An Order
the Supreme Court Rules of Procedure
was issued by the Court, (1) staying
on Corporate Rehabilitation (2008)
enforcement of all claims, whether money
provides that a stay order shall not cover
or otherwise against ABC Company, its
claims against letters of credit and
guarantors and sureties not solidarily liable
similar security arrangements issued by
with the company; and (2) prohibiting ABC
a third party to secure the payment of
Company from making payments of its
the debtor’s obligations. This was the
liabilities, outstanding as of the date of the
basis of the decision in the case of
filing of the Petition. XYC Company is a
Metropolitan Waterworks and Sewerage
holder of an irrevocable Standby Letter of
System v. Hon. Reynaldo B. Daway, et al.
Credit which was previously procured by
(G.R. No. 160732, June 21,2004).
ABC Company in favor of XYC Company to
secure performance of certain obligations.
In the light of the Order issued by the
Court.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 44 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Insurance Law Concealment; Material Concealment

(2013)
Beneficiary; Death of Insured Due to
No.II. Benny applied for life insurance for
Beneficiary (2008)
Php 1.5 Million. The insurance company
No.VI. On January 1, 2000, Antonio Rivera approved his application and issued an
secured a life insurance from SOS insurance policy effective Nov, 6, 2008.
Insurance Corp. for P1 Million with Gemma Benny named his children as his
Rivera, his adopted daughter, as the beneficiaries. On April 6, 2010, Benny died
beneficiary. Antonio Rivera died on March of hepatoma, a liver ailment.
4, 2005 and in the police investigation, it
was ascertained that Gemma Rivera The insurance company denied the
participated as an accessory in the killing of children’s claim for the proceeds of the
Antonio Rivera. Can SOS Insurance Corp. insurance policy on the ground that Benny
avoid liability by setting up as a defense the failed to disclose in his application two
participation of Gemma Rivera in the killing previous consultations with his doctors for
of Antonio Rivera? Discuss with reasons. diabetes and hypertension, and that he had
(4%) been diagnosed to be suffering from
hepatoma. The insurance company also
SUGGESTED ANSWER:
rescinded the policy and refunded the
Under Sec. 12 of the Insurance Code. premiums paid.
The interest of a beneficiary shall be Was the insurance company correct? (8%)
forfeited when the beneficiary is the SUGGESTED ANSWER
principal, accomplice, or accessory in The insurance company correctly
willfully bringing about the death of the rescinded the policy because of
insured. In which event, the nearest concealment (Section 27 of Insurance
relative of the insured shall receive the Code). Benny did not disclose that he
proceeds of said insurance, if not was suffering from diabetes,
otherwise disqualified. Thus, the hypertension, and hepatoma. The
insurance company must still pay out concealment is material, because these
the proceed of the life insurance policy are serious ailments (Florendo v. Philam
to the nearest qualified relative of the Plans, Inc., 666 SCRA 618, 2012). Benny
insured. died less than two years from the date of
the issuance of the policy (Section 48 of
Insurance Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 45 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Insurable Interest; Building Destroyed by Globe & Rutgers Fire Insurance

Fire (2010) Company, 57 Phil. 576 (1932)). Second,

fire insurance policies contain a
No.X. To secure a loan of P10 million, Mario
warranty that the insured will not store
mortgaged his building to Armando. In
hazardous materials within the insured
accordance with the loan arrangements,
premises. Mario breached this warranty
Mario had the building insured with First
when he stored inflammable materials in
Insurance Company for P10 million,
the building. (Young v. Midland Textile
designating Armando as the beneficiary.
Insurance Company, 30 Phil. 617
Armando also took an insurance of the
(1915)).These two factors exonerate First
building upon his own interest with Second
Insurance Company from liability to
Insurance Company for P5 million.
Armando as mortgagee even though it
The building was totally destroyed by fire, a
was Mario who committed them (Section
peril insured against under both insurance
8 of the Insurance Code).
policies. It was subsequent determined that
the fire had been intentionally started by
What happens to the P10 million debt of
Mario and that in violation of the loan
Mario to Armando? Explain. (3%)
agreement, he had been storing
SUGGESTED ANSWER:
inflammable materials in the building.
Since Armando would have collected P5
million from Second Insurance
How much, if any, can Armando recover
Company, this amount should be
from either or both insurance companies?
considered as partial payment of the
(2%)
loan. Armando can only collect the
SUGGESTED ANSWER:
balance of P5 million (Panlileo v. Cosio,
Armando can receive P5 million from
supra). Second Insurance Company can
Second Insurance Company. As
recover from Mario the amount of P5
mortgagee, he had an insurable interest
million it paid, because it became
in the building (Panlileo v. Cosio, 97
subrogated to the rights of Armando
Phil. 919 (1955)). Armando cannot
(Panlileo v. Cosio, supra).
collect anything from First Insurance
Company. First Insurance Company is
not liable for the loss of the building.
First, it was due to a willful act of Mario,
who committed arson (Section 87 of the
Insurance Code; East Furnitures, Inc. v.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 46 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Insurance; Double Insurance, Validity SUGGESTED ANSWER:

(2012)
Yes. If X obtained an open policy then
No.V X borrowed from CCC Bank. She she could claim an amount
mortgaged her house and lot in favor of the corresponding to the extent of the
bank. X insured her house. The bank also damage based on the value of the house
got the house insured. determined as of the date the damage
occurred, but not to exceed the face
Is this double insurance? Explain your value of the insurance policy; however, if
answer. (3%) she obtained a valued policy then she
could claim an amount corresponding to
SUGGESTED ANSWER:
the extent of the damage based on the

No, there is no double insurance. Double agreed upon valuation of the house.

insurance exists where the same person

As for CCC Bank, it could claim an
is insured by several insurers separately
amount corresponding to the extent of
with respect to the same subject and
the damage but not to exceed the
interest. (Sec. 93, Insurance Code)
amount of the loan it extended to X or

Is this legally valid? Explain your answer. so much thereof as may remain unpaid.

(3%)

SUGGESTED ANSWER:

Yes, X and CCC Bank can both insure the Insurance; Perfection of Insurance

house as they have different insurable Contracts (2009)

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 47 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Quirico then requested ALAC for the

issuance of a cover note while he was trying The cover note is a receipt whereby the
to raise funds to pay the insurance company agrees to insure the insured for
premium. ALAC granted the request. Ten 60 days pending the issuance of a
days after he received the cover note, regular policy. No separate premium is
Quirico had a heart seizure and had to be to be paid on a cover note. It is not a
hospitalized. He then filed a claim on the separate policy but is integrated in the
policy. regular policy to be subsequently issued.

Can ALAC validly deny the claim on the

ground that the insurance coverage, as
publicly offered, was available only to
Insurance; Property Insurance;
persons 50 to 75 years of age? Why or why
not? (2%) Assignments (2009)

No.XIII. Ciriaco leased a commercial

SUGGESTED ANSWER:
apartment from Supreme Building
No. By approving the application of
Corporation (SBC). One of the provisions of
Quirino who disclosed that he was
the one-year lease contract states:
already 80 years old, ALAC waived the
age requirement. ALAC is now stopped ―18.xxx The LESSEE shall not insure against
from raising such defense of age of the fire the chattels, merchandise, textiles,
insured. goods and effects placed at any stall or
store or space in the leased premises
Did ALAC’s issuance of a cover note result in without first obtaining the written consent
the perfection of an insurance contract of the LESSOR. If the LESSEE obtains fire
between Quirico and ALAC? Explain. (3%) insurance coverage without the consent of
the LESSOR, the insurance policy is
deemed assigned and transferred
SUGGESTED ANSWER:
to the LESSOR for the latter’s benefit.‖
The issuance of a cover note by ALAC
resulted in the perfection of the contract
Notwithstanding the stipulation in the
of insurance. In that case, it is only
contract, without the consent of SBC,
because there is delay in the issuance of Ciriaco insured the merchandise inside the
the policy that the cover notes was leased premises against loss by fire in the
issued.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 48 of 173
Mercantile Law Q&As (2007-2013)
amount of P500, 000 with First United
Insurance Corporation (FUIC).
A day before the lease contract expired, fire
broke out inside the leased premises,
damaging Ciriaco’s merchandise.
learned of the insurance earlier procured by
Ciriaco, SBC demanded from FUIC that the
proceeds of the insurance policy be paid
directly to it, as provided in the lease
contract.
Who is legally entitled to receive the
insurance proceeds? Explain. (4%)
SUGGESTED ANSWER:
Ciriaco is entitled to receive
proceeds of the insurance policy. The
stipulation that the policy is deemed
assigned and transferred to SBC is void,
because SBC has no insurable interest in
the merchandise of Ciriaco (Cha v. Court
of Appeals, 277 SCRA 690 (1997))
Insurance; Property Insurance;
Payment of Premiums (2010)
No.XI. Enrique obtained from
Insurance Company a comprehensive motor
vehicle insurance to cover his top of the line
Aston martin. The policy was issued on
March 31, 2010 and, on even date, Enrique
paid the premium with a personal check
postdated April 6, 2010.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
On April 5, 2010, the car was involved in an
accident that resulted in its total loss.
On April 10, 2010, the drawee bank
Having returned Enrique’s check with the notation
―Insurance funds.‖ Upon notification,
Enrique immediately deposited additional
funds with the bank and asked the insurer
to redeposit the check.
Enrique thereupon claimed indemnity from
the insurer. Is the insurer liable under the
insurance coverage? Why or why not? (3%)
SUGGESTED ANSWER:
the The insurer is not liable under the
insurance policy. Under Article 1249 of
the Civil Code, the delivery of a check
produces the effect of payment only
when it is encashed. The loss occurred
on April 5, 2010. When the check was
deposited, it was returned on April 10,
2010, for insufficiency of funds. The
check was honored only after Enrique
deposited additional funds with the
bank. Hence, it did not produce the
Late
effect of payment (Vitug, Commercial
Laws and Jurisprudence, Vol. I, p.250).
Seguro
ALTERNATIVE ANSWER:
Yes. The insurer is liable. The insurance
policy was issued. In effect, there was a
grant of credit for the payment of the
premium. The insurer can deduct the
Page 49 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

amount of the check from the proceeds
of the insurance.
Insurance; Property Insurance; Payment
of Premiums by Check (2007)
No.IV. Alfredo took out a policy to insure
this commercial building fire. The broker
for the insurance company agreed to give a
Would your answer in (a) be the same if it
was found that the proximate cause of the
fire was an explosion and that fire was but
the immediate cause of loss and there is no
excepted peril under the policy?
SUGGESTED ANSWER:
Yes, recovery under the insurance
contract is allowed if the cause of the
loss was either the proximate or the
immediate cause as long as an excepted
peril, if any was not the proximate cause

15-day credit within which pay the of the loss (Section 86, Insurance Code

insurance premium. Upon delivery of the of the Philippines).

policy on May 15, 2006, Alfredo issued a

If the fire was found to have been caused by
postdated check payable on May 30, 2006.
On May 28, 2006, a fire broke out and Alfredo’s own negligence, can he still

destroyed the building owned by Alfredo. recover on the policy?

(10%)
Reason briefly in (a), (b) and (c).

May Alfredo recover on the insurance

SUGGESTED ANSWER:
policy?
Yes, mere negligence on the part of the

SUGGESTED ANSWER: insured will not prevent recovery under

Yes, Alfredo may recover on the policy. the insurance policy. The law merely

It is valid to stipulate that the insured prevents recovery when the cause of loss

will be granted credit term for payment is the willful act of the insured, alone or

of premium. Payment by means of a in connivance with others (Section 87,

check which was accepted by the Insurance Code of The Philippines).

insurer, bearing a date prior to the loss,

would be sufficient. The subsequent
effects of encashment retroact to the
date of the check (UCPB General
Insurance Co., Inc. v. Masagana
Telamart, Inc., 356 SCRA 307 [2001]).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 50 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Insurance; Property Insurance; Payment St. Peter Manufacturing Company is

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

insurance, no coverage existed at the time

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 51 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

companies is “double insurance,” insurance Corp. is liable to the extent of

recognized under Sec. 93 of the its coverage but may recover one-half of
Insurance Code. However, in American the total indemnity from the co-insurers
Home Assurance Co. v, Chua, G.R. No. in the proportion of 60% (Southern
130421, 28 June 1999, the court Insurance) – 40% (Northern Insurance).
referred to the common inclusion of the
“other insurance clause” in fire
insurance policies, requiring disclosure Intellectual Property
of co-insurance of the same property
with other insurers. Agreements: Technology Transfer
Agreements; Requisites & Prohibitions
The Building was totally razed by fire. If the (2010)
owner decides to claim from Eastern
No.VI. (A) What contractual stipulations are
Insurance Corp. only P50 Million, will the
claim prosper? Explain. (2%) required in all technology transfer

SUGGESTED ANSWER: agreements? (2%)

Insured can recover from Eastern SUGGESTED ANSWER:

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 52 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

of the Arbitration Law of the Philippines

or the Arbitration Rules of the United
Article of Commerce; As Trademark,
Nations Commission on International
Patent & Copyright (2010)
Trade Law or the Rules of Arbitration of
the International Chamber of Commerce No.VI. (C) Can an article of commerce serve
(ICC) shall apply and the venue of as a trademark and at the same time enjoy
arbitration shall be the Philippines or patent and copyright protection? Explain
any neutral country; and give an example. (2%)
SUGGESTED ANSWER:
The Philippine taxes on all payments A stamped or marked container of goods
relating to the technology transfer can be registered as trademark
agreement shall be borne by the licensor (subsections 113.1 of the Intellectual
(Sec. 88, Intellectual Property Code). Property Code). An original ornamental
design or model for articles of
Enumerate three stipulations that are manufacturer can be copyrighted
prohibited in technology transfer (Subsection 172.1 of the Intellectual
agreements. (3%) Property Code). An ornamental design
SUGGESTED ANSWER: cannot be patented, because aesthetic
The following stipulations are prohibited creations cannot be patented (Section 22
in technology transfer agreements: of the Intellectual Property Code).
However, it can be registered as an
Those that contain restrictions regarding industrial design (Subsections 113.1 and
the volume and structure of production; 172.1 of the Intellectual Code). Thus, a
container of goods which has an original
Those that prohibit the use of
ornamental design can be registered as
competitive technologies in a non- trademark, can be copyrighted, and can
exclusive agreement; and be registered as an industrial design.

ALTERNATIVE ANSWER:
Those that establish a full or partial
It is entirely possible for an article of
purchase option in favor of the licensor
commerce to bear a registered
(Subsections 87.3, 87.4 and 87.5 of the
trademark, be protected by a patent and
Intellectual Property Code).
have most, or some part of it
copyrighted. A book is a good example.
The name of the publisher or the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 53 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

colophon used in the book may be Intellectual Property Code) His rights
registered trademarks, the ink used in existed from the moment of its creation
producing the book may be covered by a (Section 172 of the Intellectual Property
patent, and the text and design of the Code; Unilever Philippines (PRC) v. Court
book may be covered by copyrighted. of Appeals, 498 SCRA 334, 2006). The
registration of the painting by Bernie
with the National Library did not confer
Copyright (2013) copyright upon him. The registration is
merely for the purpose of completing the
No.IV. Ruby is a fine arts student in a
records of the National Library. (Section
university. He stays in a boarding house
191 of the Intellectual Property Code).
with Bernie as his roommate. During his
free time, Rudy would paint and leave his
finished works lying around the boarding
house. One day, Rudy saw one of his works
– an abstract painting entitled Manila Traffic Copyright; Commissioned Artist (2008)
Jam – on display at the university cafeteria.
No.XVI. In 1999, Mocha warn, an American
The cafeteria operator said he purchased the
musician, had a bit rap single called Warm
painting from Bernie who represented
Warm Honey which he himself composed
himself as its painter and owner
and performed. The single was produced by
a California record company, Galactic
Rudy and the cafeteria operator immediately
Records. Many notice that some passages
confronted Bernie. While admitting that he
from Warm Warm Honey sounded eerily
did not do the painting,. Bernie claimed
similar to parts of Under Hassle, a 1978 hit
ownership of its copyright since he had
song by the British rock and Majesty. A
already registered it in his name with the
copyright infringement suit was filed in the
National Library as provided in the
United States against Mocha Warm by
Intellectual Property Code.
Majesty. It was later settled out of court,
with Majesty receiving attribution as co-
Who owns the copyright to the painting?
author of Warm Warm Honey as well as a
Explain (8%).
share in the royalties.
SUGGESTED ANSWER.
Rudy owns the copyright to the painting
By 2002, Moeha Warm was nearing
because he was the one who actually
bankruptcy and he sold his economic rights
created it. (Section 178.1 of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 54 of 173
Mercantile Law Q&As (2007-2013)
over Warm Warm Honey to
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 a
salsa beat, and interspersed as well a
recital of poetic stanza by John Blake, 1
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 publicly identified
as the author of the remixed song is all the
CD covers and publicity releases of Planet
Films.
Who are the parties or entities entitled to be
credited as author of the remixed Warm
Warm Honey? Reason out your answers.
(3%)
SUGGESTED ANSWER:
The parties entitled to be credited as
authors of the remixed Warm Warm
Honey are Mocha Warm, Majesty, DJ
Chef Jean and John Blake, for the
segments that was the product of their
respective intellectual efforts.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Galactic In the case of Mocha Warm and Majesty,
who are the attributed co-authors, and in
spite of the sale of the economic right to
Galactic Records, they retain their moral
rights to the copyrighted rap, which
include the right to demand attribution
to them of the authorship (Sec. 193,
IPC).
Which respect to DJ Chef Jean, in spite
of his death, and although he was
commissioned by Planet Films for the
remix, the rule is that the person who so
commissioned work shall have
ownership of the work, but copyright
thereto shall remain with creator, unless
there is a written stipulation to the
contrary.
Even if no copyright exist in favor of
poet John Blake, intellectual integrity
requires that the authors of creative
work should properly be credited.
Who are the particular parties or entities
who exercise copyright over the remixed
Warm Warm Honey? Explain. (3%)
SUGGESTED ANSWER:
The parties who exercise copyright or
economic rights over the remixed Warm
Warm Honey would be Galactic Records
and Planet Films. In the case of Galactic
Records, it bought the economic rights
of Mocha Warm. In the case of Planet
Page 55 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Films, it commissioned the remixed Eloise may publish the columns without

work. securing authorization from New Media

Enterprises. Under Sec. 172 of the
Intellectual Property Code, original
intellectual creations in the literary and
artistic domain are protected from the
Copyright; Commissioned Work (2008)
moment of their creation and shall
include those in periodicals and
No.XV. Eloise, an accomplished writer, was
hired by Petong to write a bimonthly newspapers. Under Sec. 178, copyright

newspaper column for Diario de Manila, a ownership shall belong to the author. In

newly-established newspaper of which case of commissioned work, the person

Petong was the editor-in-chief. Eloise was to who so commissioned work shall have

be paid P1,000 for each column that was ownership of work, but copyright shall

published. In the course of two months, remain with creator, unless there is a

Eloise submitted three columns which, written stipulation to the contrary.

after some slight editing, were printed in

Assume that New Media Enterprises plans to
the newspaper. However, Diario de Manila
publish Eloise’s columns in its own anthology
proved unprofitable and closed only after
entitled, ―The Best of Diario de Manila‖ Eloise
two months. Due to the minimal amounts
wants to prevent the publication of her
involved, Eloise chose not to pursue any
columns in that anthology since she was
claim for payment from the newspaper,
never paid by the newspaper. Name one
which was owned by New Media
irrefutable legal argument Eloise could cite
Enterprises.
to enjoin New Media Enterprises from
including her columns in its anthology.
Three years later, Eloise was planning to
(2%)
publish an anthology of her works, and
SUGGESTED ANSWER:
wanted to include the three columns that
appeared in the Diario de Manila in her Under the IPC, the copyright or
anthology She asks for you legal advice: economic rights to the columns she
authored pertains only to Eloise. She can
Does Eloise have to secure authorization invoke the right to either “authorize or
from New Media Enterprises to be able to
prevent” reproduction of the work,
publish her Diario de Manila columns in
including the public distribution of the
her own anthology? Explain fully. (4%)
original and each copy of the work “by
SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 56 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

sale or other forms of transfer of protecting electronic documents. What

ownership,” Since this would be the are involved here are text messages, not
effect of including her column in the letter in their ordinary sense. Hence, the
anthology. protection under the copyright law does
not extend to text messages (Section
172, Intellectual Property Code).
Copyright; Infringement (2007)
The messages that Diana and Piolo
No.III. Diana and Piolo are famous exchanged through the use of messaging
personalities in showbusiness who kept
service do not constitute literary and
their love affair secret. They use a special
artistic works under Section 172 of the
instant messaging service which allows
Intellectual Property Code. They are not
them to see one another’s typing on their
letter under Section 172(d).
own screen as each letter key is pressed.
When Greg, the controller of the service For copyright to subsist in a “message”,
facility, found out their identities, he kept a
it must qualify as a “work” (Section 172
copy of all the messages Diana and Piolo
Intellectual Property Code). Whether the
sent each other and published them. Is
messages are entitled or not to copyright
Greg liable for copyright infringement?
protection would have to be resolved in
Reason briefly. (5%)
the light of the provision of the
SUGGESTED ANSWER:
Intellectual Property Code.
Yes, Greg is liable for copyright
infringement. Letter are among the Note: Since the law on this matter is not
works which are protected from the clear, it is suggested that either of the above
moment of their creation (Section 172,
of the above suggested answers should be
intellectual Property Code; Columbia
given full credit.
Pictures, Inc. v Court of Appeals, 261
SCRA 144 [1996]). The publication of the
letters without the consent of their
writers constitutes infringement of
copyright. Denicola Test (2009)

No.I. (A) The Denicola Test in intellectual

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 57 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

aspects of the work cannot be conceptually

separable from the utilitarian aspects; thus, Monaliza filed a complaint against
the article cannot be copyrighted. Valentino damages based on, among other
SUGGESTED ANSWER: grounds, violation of her intellectual
True. Applying the Denicola Test in property rights. Does she have any cause of
Brandir International, Inc. v.Cascade action? Explain. (2%)
Pacific Lumber Co. (834 F. 2d 1142, SUGGESTED ANSWER:
1988 Copr.L.Dec. P26), the United States Monaliza cannot sue Valentino for
Court of Appeals for the Second Circuit violation of her intellectual property
held that if there is any aesthetic rights, because she was not the one who
element which can be separated from the took the pictures (Subsection 178.1 of
utilitarian elements, then the aesthetic the Intellectual Property Code). She may

element may be copyrighted. sue Valentino instead for violation of her

(Note: It is suggested that the candidate
be given full credit for whatever answer
or lack of it. Further, it is suggested that
terms or any matter originating from
foreign laws or jurisprudence should not
be asked.)
right to privacy. He surreptitiously took
photographs of her and then sold the
photographs to a magazine and uploaded
them to his personal blog in the Internet
(Tolentino, Commentaries and
Jurisprudence on the Civil Code of the
Philippines, Vol. I, 1987 ed., p. 169).

Valentino’s friend Francesco stole the

Infringement; Claims (2010) photographs and duplicated them and sold
them to a magazine publication. Valentino
No.XV. While vacationing in Boracay, sued Francisco for infringement and
Valentino surreptitiously took photographs damages. Does Valentino have any cause of
of his girlfriend Monaliza in her skimpy action? Explain. (2%)
bikini. Two weeks later, her photographs SUGGESTED ANSWER:
appeared in the Internet and in a national Valentino cannot sue Francesco for
celebrity magazine. infringement, because he has already
sold the photographs to a magazine
Monaliza found out that Valentino had sold
(Angeles vs. Premier Productions, Inc., 6
the photographs to the magazine, adding
CAR (2s) 159).
insult to injury, uploaded them to his
personal blog on the Internet. ALTERNATIVE ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 58 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, as the author of the photographs, Lacoste International, the French firm that
Valentino has exclusive economic rights manufactures lacoste apparel and owns the
thereto, which include the rights to Lacoste trademark, decided to cash in on
reproduce, to distribute, to perform, to the universal popularity of the boxing icon.
display, and to prepare derivative works It reprinted the photographs, with the
based upon the copyrighted work. He permission of the newspaper publishers,
sold only the photographs to the and went on a world-wide blitz of print
magazine; however, he still retained commercials in which Sonny is shown
some economic rights thereto. Thus, he wearing a Lacoste shirt alongside the
has a cause of action against phrase ―Sonny Bachao just loves Lacoste.‖
infringement against Francesco.
When Sonny sees the Lacoste
Does Monaliza have any cause of action advertisements, he hires you as lawyer and
against Francesco? Explain. (2%) asks you to sue Lacoste International
SUGGESTED ANSWER: before a Philippine court:
Monaliza can also sue Francesco for

violation of her right to privacy. For trademark Infringement in the

Philippines because Lacoste International
used his image without his permission:
(2%)
SUGGESTED ANSWER:
Infringement; Trademark, Copyright
Sonny Bachao cannot sue for
(2009) infringement of trademark. The

No.XV. After disposing of his last opponent photographs showing him wearing a

in only two rounds in Las Vegas, the Lacoste shirt were not registered as a

renowned Filipino boxer Sonny Bachao trademark (Pearl & Dean (Phil.), Inc. v.

arrived at the Ninoy Aquino International Shoemart, Inc., 409 SCRA 231 (2003)).
Airport met by thousands of hero-
worshipping fans and hundreds of media For copyright infringement because of the

photographers. The following day, a colored unauthorized use of the published

photograph of Sonny wearing a black polo photographs; (2%)and

shirt embroidered with the 2-inch Lacoste SUGGESTED ANSWER:

Crocodile logo appearedon the front page of Sonny Bachao cannot sue for

every Philippine newspaper. infringement of copyright for the

unauthorized use of the photographs

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 59 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
showing him wearing a Lacoste shirt.
The copyright to the photographs belong
to the newspapers which published them
inasmuch as the photographs were the
result of the performance of the regular
duties of the photographers (Subsection
173.3 (b), Intellectual Property Code
(IPC)).Moreover, the newspaper
publishers authorized the reproduction
of the photographs (Section
Intellectual Property Code).
For injunction in order to stop Lacoste
International from featuring him in their
commercials. (2%)
Will these actions prosper? Explain.
SUGGESTED ANSWER:
The complaint for injunction to stop
Lacoste International from featuring him
in its advertisements will prosper. This
is a violation of subsection 123, 4(c) of
the IPC and Art.169 in relation to
Art.170 of the IPC.
Can Lacoste International validly invoke the
defense that it is not a Philippine company
and, therefore, Philippine courts have no
jurisdiction? Explain. (2%)
SUGGESTED ANSWER:
No. Philippine courts have jurisdiction
over it, if it is doing business in the
Philippines. Moreover, under Section
133 of the Corporation Code, while a
foreign corporation doing business in the
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
Philippines without license to do
business, cannot sue or intervene in any
action, it may be sued or proceeded
against before our courts or
administrative tribunal (De Joya v.
Marquez, 481 SCRA 376 (2006)).
177,
Patent: Non-Patentable; Method of
Diagnosis & Treatment (2010)
No.XIX. Dr. Nobel discovered a new method
of treating Alzheimer’s involving a special
method of diagnosing the disease, treating
it with a new medicine that has been
discovered after long experimentation and
field testing, and novel mental isometric
exercises. He comes to you for advice on
how he can have his discoveries protected.
Can he legally protect his new method of
diagnosis, the new medicine, and the new
method of treatment? If no, why? If yes,
how? (4%)
SUGGESTED ANSWER:
Dr. Nobel can be protected by a patent
for the new medicine as it falls within
the scope of Sec. 21 of the Intellectual
Property Code (Rep. Act No. 8293, as
amended). But no protection can be
legally extended to him for the method
of diagnosis and method of treatment
which are expressly non-patentable (Sec.
22, Intellectual Property Code).
Page 60 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Intellectual Property Code (Section 122

of the Intellectual Property Code).

Trademark; Unfair Competition (2010)

No.XVIII. For years, Y has been engaged in Suppose the shoes are covered by a

the parallel importation of famous brands, Philippine patent issued to the owner, what

including shoes carrying the foreign brand would your answer be? Explain. (2%)

MAGIC. Exclusive distributor X demands SUGGESTED ANSWER:

that Y cease importation because of his A patent for a product confers upon its

appointment as exclusive distributor of owner the exclusive right of importing

MAGIC shoes in the Philippines. the product (Subsection 71.1 of the

Intellectual Property Code). The

Y counters that the trademark MAGIC is importation of a patented product

not registered with the Intellectual Property without the authorization of the owner

Office as a trademark and therefore no one of the patent constitutes infringement of

has the right to prevent its parallel the patent (Subsection 76.1 of the

importation. Intellectual Property Code). X can

prevent the parallel importation of such

Who is correct? Why? (2%) shoes by Y without its authorization.

SUGGESTED ANSWER:
X is correct. His rights under his
exclusive distributorship agreement are
property rights entitled to protection. Letters of Credit
The importation and sale by Y of MAGIC
shoes constitute unfair competition (Yu Independence Principle (2010)
v. Court of Appeals, 217 SCRA 328
No.XVII. The Supreme Court has held that
(1993)). Registration of the trademark is
fraud is an exception to the ―independence
not necessary in case of an action for
principle‖ governing letters of credit.
unfair competition (Del Monte
Explain this principle and give an example
Corporation v. Court of Appeals, 181
of how fraud can be an exception. (3%)
SCRA 410 (1990)).
SUGGESTED ANSWER:
The “independence principle” posits that
ALTERNATIVE ANSWER:
the obligations of the parties to a letter
Y is correct. The rights in a trademark
of credit are independent of the
are acquired through registration made
obligations of the parties to the
validly in accordance with the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 61 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
underlying transaction. Thus,
beneficiary of the letter of credit, which
is able to comply with the documentary
requirements under the letter of credit,
must be paid by the issuing
confirming bank, notwithstanding the
existence of a dispute between
parties to the underlying transaction,
say a contract of sale of goods where the
buyer is not satisfied with the quality of
the goods delivered by the seller. The
Supreme Court in Transfield Philippines,
Inc. v. Luzon Hydro Corporation, 443
SCRA 307 (2004) for the first time
declared that fraud is an exception to
the independence principle.
instance, if the beneficiary fraudulently
presents to the issuing or confirming
bank documents that contain material
facts that, to his knowledge, are untrue,
then payment under the letter of credit
may be prevented through a court
injunction.
Letter of Credit (2012)
No.I. ABC Company filed a Petition for
Rehabilitation with the Court. An Order
was issued by the Court, (1) staying
enforcement of all claims, whether money
or otherwise against ABC Company, its
guarantors and sureties not solidarily liable
with the company; and (2) prohibiting ABC
Company from making payments of its
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
the liabilities, outstanding as of the date of the
filing of the Petition. XYC Company is a
holder of an irrevocable Standby Letter of
Credit which was previously procured by
or ABC Company in favor of XYC Company to
secure performance of certain obligations.
the In the light of the Order issued by the
Court.
Explain the nature of Letters of Credit as a
financial devise. (5%)
SUGGESTED ANSWER:
A letter of credit is a financial device
developed by merchants as a convenient
For and relatively safe mode of dealing with
sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who
refuses to part with his goods before he
is paid, and a buyer, who wants to have
control of the goods before paying. To
break the impasse, the buyer may be
required to contract a bank to issue a
letter of credit in favor of the seller so
that, by virtue of the letter of credit, the
issuing bank can authorize the seller to
draw drafts and engage to pay them
upon their presentment simultaneously
with the tender of documents required
by the letter of credit. The buyer and the
seller agree on what documents are to be
presented for payment, but ordinarily
they are documents of title evidencing
or attesting to the shipment of the goods
to the buyer. Once the credit is
Page 62 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

established, the seller ships the goods to Letter of Credit; Liabilities of a

the buyer and in the process secures the
required shipping documents
documents of title. To get paid, the
seller executes a draft and present it
together with the required documents to
the issuing bank. The issuing
redeems draft and pays cast to the seller
if it finds that the documents submitted
by the seller conform with what the
letter of credit requires. The bank then
obtains possession of the documents
upon paying the seller. The transaction
is completed when the buyer reimburses
the issuing bank and acquires
documents entitling him to the goods.
Under this arrangement, the seller gets
paid only if he delivers the documents of
title over the goods, while the buyer
acquires the said documents and control
over the goods only after reimbursing
the bank. (Bank of America NT & SA v.
CA, et al., G.R. No. 105395, December
10,1993) However, letters of credit are
also used in non-sale settings where they
serve to reduce the risk
performance. Generally, letters of credit
in non-sale settings have come to be
known as standby letters
(Transfield Philippines, Inc. v. Luzon
Hydro Corporation, et al.,
146717, November 22,2004)
Confirming and Notifying Bank (2008)
or
No.I. X Corporation entered into a contract
with PT Construction Corp. for the latter to
construct and build a sugar mill with six (6)
months. They agreed that in case of delay,
bank
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)
the
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.
of non- Can Atlantic Bank refuse payment due to
the unresolved controversy? Explain. (3%)
SUGGESTED ANSWER:
of credit. No, Atlantic Bank cannot refuse payment
to the unresolved controversy between
G.R. No. the two companies. The Bank is
solidarily liable to pay based on the
terms and conditions of the Letter of
Credit. In FEATI Bank v. Court of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 63 of 173
Mercantile Law Q&As (2007-2013)
Appeals, G.R. No.94209, 30 April 1991,
the Court held that an irrevocable letter
of credit is independent of the contract
between the buyer-applicant and the
seller-beneficiary.
Can X Corporation claim directly from PT
Construction Corp.? Explain. (3%)
SUGGESTED ANSWER:
Yes, X Corporation can claim directly
from PT Construction
irrevocable letter of credit was merely a
security arrangement that
replace the main contract between the
two companies. In FEATI Bank c. CA,
G.R. No. 94209, 30 April 1991, opening a
letter of credit does not
specific appropriation of money in favor
of the beneficiary. It only signifies that
the beneficiary may draw funds up to the
designated amount. It does not mean
that a particular sum of money has been
specifically reserved of held in trust.
Maritime Commerce
Averages: Types (2010)
No.XVI. (B) What are the types of averages
in marine commerce (3%)
SUGGESTED ANSWER:
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
The types of average are particular and
general (Article 808 of the Code of
Commerce). Particular averages include
all expenses and damages caused to the
vessel or to the cargo which did not
inure to the common benefit and profit
of all the persons interested in the vessel
and the cargo (Article 809 of the Code of
Commerce). General averages include all
damages and expenses which are
deliberately caused to save the vessel,
Corp. The
its cargo, or both at the same time, from
a real and known risk (Article 811 of the
did not
Code of Commerce).
involve a
Barratry (2010)
No.XIII. (B) What is ―barratry‖ in marine
insurance? (2%)
SUGGESTED ANSWER:
Barratry is any willfull misconduct in the
part of the master or crew in pursuance
of some unlawful or fraudulent purpose
without the consent of the owner and to
the prejudice of the interest of the
owner (Roque v. Intermediate Appellate
Court, supra).
Page 64 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Carriage of Goods; Deviation; Liability entitles him to compensation or

(2009) indemnification from the shipowner and

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

Against whom does Romualdo have a cause

When the vessel was about ten nautical
of action for indemnity of his lost TV sets?
miles away from Manila, the ship captain
Explain. (3%)
heard on the radio that a typhoon which, as
announced by PAG-ASA, was on its way out
SUGGESTED ANSWER;
of the country, had suddenly veered back
Romualdo has a cause of action for his
into Philippine territory, the captain
lost TV sets against the shipowner and
realized that MV Dona Juana would
the owners of the cargoes saved by the
traverse the storm’s path, but decided to
jettison. The jettison of the TV sets
proceed with the voyage. True enough, the
resulted in a general average loss,
vessel sailed into the storm. The captain
entitling Romualdo to indemnity for the
ordered the jettison of the 10, 000 television
lost TV sets.
sets, along with some other cargo, in order
to lighten the vessel and make it easier to
steer the vessel out of the path of the
typhoon. Eventually, the vessel, with its
crew intact, arrived safely in Cebu. Carriage of Goods; Implied Warranty;

Liability (2010)
Will you characterize the jettison of
Romualdo’s TV sets as an average? If so, No.XIII. Paulo, the owner of an ocean-going

what kind of an average, and why? If not, vessel, offered to transport the logs of

why not? (3%) Constantino from Manila to Nagoya.

SUGGESTED ANSWER: Constantino accepted the offer, not

The jettison of Romualdo’s TV sets knowing that the vessel was manned by an
irresponsible crew with deep-seated
resulted in a general average loss, which
resentments against Paolo, their employer.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 65 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

(Roque v. Intermediate Appellate Court,

Constantino insured the cargo of logs 139 SCRA 596 [1985]).
against both perils of the sea and barratry.
The logs were improperly loaded on one
side, thereby causing the vessel to tilt on
one side. On the way to Nagoya, the crew Carriage of Goods; Indemnity; Jettisoned
unbolted the sea valves of the vessel Goods (2010)
causing water to flood the ship hold. The
No.XVI. An importer of Christmas toys
vessel sank.
loaded 100 boxes of Santa Claus talking
dolls aboard a ship in Korea bound for
Constantino tried to collect from the
Manila. With the intention of smuggling
insurance company which denied liability,
one-half of his cargo, he took a bill of lading
given the unworthiness of both the vessel
for only 50 boxes. On the voyage to Manila,
and its crew.
50 boxes were jettisoned to save the more

Constantino countered that he was not the precious cargo.

owner of the vessel and he could therefore

Is the importer entitled to receive any
not be responsible for conditions about
indemnity for average? Explain. (2%)
which he was innocent.
SUGGESTED ANSWER:
The importer is not entitled to receive
Is the insurance company liable? Why or
any indemnity for average. In order that
why not? (3%)
SUGGESTED ANSWER: the goods jettisoned may be included in

The insurance company is not liable, the general average and the owner be

because there is an implied warranty in entitled to indemnity, it is necessary

every marine insurance that the ship is that their existence on board be proven

seaworthy whoever is insuring the cargo, by means of the bill of lading (Article

whether it be the ship-owner or not. 816 of the Code of Commerce).

There was a breach of warranty, because

the logs were improperly loaded and the
crew was irresponsible. It is the
obligation of the owner of the cargo to
look for a reliable common carrier which
keeps its vessel in seaworthy condition

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 66 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
COGSA; Prescription of Claims/Action
(2010)
No.XII. AA entered into a contract with BB
for the latter to transport ladies wear from
Manila to France with transshipment via
Taiwan. Somehow the goods were not
loaded in Taiwan on time, hence, these
arrived in France ―off-season.‖ AA was only
paid for one half the value by the buyer.
claimed damages from BB. BB invoked
prescription as a defense under
Carriage of Goods by Sea Act Considering
the ―loss of value‖ of the ladies wear as
claimed by AA, is BB’s defense tenable?
Explain. (3%)
SUGGESTED ANSWER:
The defense of BB is not tenable. The
one-year prescriptive period in
Carriage of Goods Sea Act applies only in
case the goods were not delivered or
were delivered in a damaged
deteriorated condition. It does not apply
to damages as a result of delay in the
delivery of the goods. The prescription of
the action is governed by Article 1144 of
the Civil Code, which provides for a
prescriptive period of ten years in case
of actions based on a written contract
(Mitsui O.S.K. Lines Ltd. v. Court of
Appeals, 287 SCRA 366 (1998)).
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
Liability; Loss; Fortuitous Event (2008)
No.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 (Emprie) 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.
the
Assume that the vessel was seaworthy.
Before departing, the vessel was advised by
theJapanese 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.
the To avoid the typhoon, the vessel changed
its course. However, it was still at the fringe
of the typhoon when it was repeatedly hit
or by huge waves, were saved three (3) who
perished. Is CSC liable to empire? What
principle of maritime law is applicable?
Explain. (3%)
SUGGESTED ANSWER:
The common carrier incurs no liability
for the loss of the cargo during a
fortuitous event, because the following
circumstances were present: (1) the
typhoon was the cause of the cargo loss;
the carrier did not contribute to the loss;
and (3) the carrier exercised
extraordinary diligence in order to
Page 67 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

minimize the attendant damage before,
during and after the typhoon
Fortune Express v. CA, Caorong. G.R. No.
119756, 18 March 1999; Yobido v. CA,
G.R. No. 113003, 17 October 1997;
Gathalian v. Delim, G.R. No. L-56487, 21
October 1991).
Under Art. 587 of Code of Commerce, in
case of maritime transactions,
liability of the owner of the vessel is
limited to the vessel itself. Since the
vessel of CSC was seaworthy at the time
it sank, the CSC is not liable to Empire
under the maritime principle that the
obligations of the owner of a vessel are
hypothecary in nature.
Assume the vessel was not seaworthy as in
fact its hull had leaked, causing flooding in
the vessel. Will you answer be the same?
Explain. (2%)
SUGGESTED ANSWER:
the full extent of the claims of the cargo
(See owners (Aboitiz Shipping v. New India
Assurance Company, G.R. No. 156978,
02 May 2006).
Assume the facts in question (b). Can the
heirs of the three (3) crew members who
perished recover from CSC? Explain fully.
(3%)
the SUGGESTED ANSWER:
Yes, because the crew members died
while performing their assigned duties,
aggravated by the failure of the ship
owner to ensure that the vessel is
seaworthy. Workmen’s compensation has
been classified by jurisprudence as an
exception to the hypothecary nature of
maritime commerce, Abueg v. San Diego,
77 Phil. 730 (1948), especially in this
case where the vessel was not seaworthy
at the time it sank.

When the vessel is not seaworthy, it is

an exception to the hypothecary
principle in maritime commerce. To
Negotiable Instruments Law
limit its liability to the amount of the
Checks: Forged Checks; Liability of
insurance proceeds, the carrier has the
Drawee Bank (2008)
burden of proving that the
No.V. Pancho drew a check to Bong and
unseaworthiness of its vessel was not
Gerard jointly, Bong indorsed the check
due to its fault or negligence. The failure
and also forged Gerard’s indorsement . The
to discharge such a heavy burden
payor bank paid the check and charged
precludes application of the limited
Pancho’s account for the amount of the
liability rule and the carrier is liable to

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 68 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

check. Gerard received nothing from the Checks; Liability; Drawer and Drawee
payment. Bank (2010)
No.VIII. Marlon deposited with LYRIC Bank
Pancho asked the payor bank to recredit
a money market placement of P1 million for
his account. Should the bank comply?
tern of 31 days. On Maturity date, one
Explain fully. (3%)
claiming to be Marlon called up the LYRIC
SUGGESTED ANSWER:
Bank account officer and instructed him to
Yes, Sec. 41 of the NIL provides that all give the manager’s check representing the
payees or indorsees who are not partners proceeds of the money market placement to
must indorse jointly, unless the one Marlon’s girlfriend Ingrid.
indorsing has authority to endorse for
the others. Since the signature of Gerard The check, which bore the forged signature
was forged, then the endorsement by of Marlon, was deposited in Ingrid’s
Bong was wholly inoperative. The Bank account with YAMAHA Bank. YAMAHA
is under strict liability to pay to the Bank stamped a guaranty on the check
order of payee. Payment under a forged reading: ―All prior endorsements and/or lack of
endorsement is not to the drawer’s endorsement guaranteed.‖
order, and consequently, the drawee
bank must bear the loss as against the Upon presentment of the check, LYRIC
drawer (Associated Bank v. CA, G.R. Nos. Bank funds the check. Days later, Marlon
107382 and 107612, 31 January 1996). goes to LYRIC Bank to collect his money
market placement and discovers the
Based on the facts, was Pancho as drawer
foregoing transactions.
discharged on the instrument? Why? (2%)
SUGGESTED ANSWER:
Marlon thereupon sues LYRIC Bank which
No. The payee Gerard can recover as he in turn files a third-party complaint against

still retains his claim on the debt of YAMAHA Bank. Discuss the respective

Pancho. rights and liabilities of the banks. (5%)

SUGGESTED ANSWER:
Since the money market placement of
Marlon is in the nature of a loan to Lyric
Bank, and since he did not authorize the
release of the money market placement
to Ingrid, the obligation of Lyric Bank to

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 69 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

him has not been paid. Lyric Bank still the ASSIGNOR unconditionally and
has the obligation to pay him. irrevocably agrees to pay the same,
assuming the liability to pay by way of
Since Yamaha Bank indorsed the check penalty, three percent of the total amount
bearing the forged indorsement of unpaid, for the period of delay until the
Marlon and guaranteed all indorsements, same is fully paid.”
including the forged indorsement, when
it presented the check to Lyric Bank, it When the checks became due, BFC
should be held liable to it. deposited them for collection, but the
drawee banks dishonored all the checks for
However, since the issuance of the check one of the ff. reasons: ―account closed,‖
was attended with the negligence of ―payment stopped,‖ ―account under
Lyric Bank, it should share the loss with garnishment, ―or ―insufficiency of funds.‖
Yamaha Bank on a fifty percent basis BFC wrote Gaudencio notifying him of the
(Allied Banking Corporation v. Lim Sio dishonored checks, and demanding
Wan, 549 SCRA 504 (2008)). payment of the loan. Because Gaudencio
did not pay, BFC filed a collection suit.

In his defense, Gaudencio contended that

Checks; Notice of Dishonor (2009) BFC did not give timely notice of dishonor
No.XII. Gaudencio, a store owner, obtained (of the checks); and (b) considering that the
a P1-million loan from Bathala Financing checks were duly indorsed, BfC should
Corporation (BFC). As security, Gaudencio proceed against the drawers and the
executed a ―Deed of Assignment of indorsers of the checks.
Receivables.‖ Assigning fifteen checks
received from various customers who Are Gaudencio’s defenses tenable? Explain.
bought merchandise from his store. The (5%)
checks were duly indorsed by Gaudencio’s
customers. SUGGESTED ANSWER:
No. Gaudencio’s defenses are untenable.
The Deed of Assignment contains the ff. The cause of action of BFC was really on
stipulation: the contract of loan, with the checks
merely serving as collateral to secure the
―If, for any reason, the receivables or any payment of the loan. By virtue of the
part thereof cannot be paid by the obligors, Deed of Assignment which he signed,

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 70 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Gaudencio undertook to pay for the the east the following morning to welcome
receivables if for any reason they cannot the day.
be paid by the obligors (Velasquez v. (Sgd.) Antonio Reyes
Solidbank Corporation, 550 SCRA 119
(2008)). Explain each requirement of negotiability
present or absent in the instrument. (8%)
SUGGESTED ANSWER:
The instrument contains a promise to
Forgery; Liabilities; Drawee Bank (2009) pay and was signed by the maker,
No.XI. (E) ―A bank is bound to know its Antonio Reyes (Section 1(a) of Negotiable
depositor’s signature‖ is an inflexible rule in Instruments Law).
determining the liability of a bank in forgery
cases. The promise to pay is unconditional
SUGGESTED ANSWER: insofar as the reference to the setting of
False. In cases of forgery, the forger may the sun in the west in the evening and
not necessarily be a depositor of the its rising in the east in the morning are
bank, especially in the case of a drawee concerned. These are certain to happen
bank. Yet in many cases of forgery, it is (Section 4(c) of Negotiable Instruments
the drawee that is held liable for the Law). The promise to pay is conditional,
loss. because the money will be taken from a
particular fund, BPI Account No. 1234
(Section 3 of Negotiable Instruments
Law).
Negotiability (2013)
No.I. Antonio issued the following The Instrument contains a promise to
instrument: pay a sum certain in money,
August 10, 2013 P100,000.00 (Section (b) of Negotiable
Makati City Instruments Law).
P1OO,OOO,OO
Sixty days after date, I promise to pay The money is payable at a determinable
Bobby or his designated representative the future time, sixty days after August 10,
sum of ONE HUNDRED THOUSAND PESOS 2013 (Section 4(a) of Negotiable
(P100,000.00) from my BPI Acct. No. 1234 Instruments Law).
if, by this due date, the sun still sets in the
west to usher in the evening and rises in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 71 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

The instrument is not payable to order there are no 90-day treasury bills
or to bearer (Section 1(d) of Negotiable (although there are 91-day, 182-day, and

Instruments Law). 364-days bills); second the promise does

not specify whether the so-called
“interest rate” is that established at the

Negotiability (2012) primary market (where new T-bills are

No.IV. Indicate and explain whether the
promissory note is negotiable or non-
negotiable.
I promise to pay A or bearer Php100,000.00
from my inheritance which I will get after
the death of my father. (2%)
SUGGESTED ANSWER:
Not negotiable. There
unconditional promise to pay a sum
certain in money (Sec. 1 [b], NIL) as the
promise is to pay the amount out of a
sold for the first time by the Bureau of
Treasury) or at the secondary market
(where T-bills can be bought and sold
after they have been issued in the
primary market).; and third, T-bills are
conventionally quoted in terms of their
discount rate, rather than their interest
rate. They do not pay any interest
directly; instead, they are sold at a
discount of their face value and this
“earn” by selling at face value upon
is no
maturity. (See, among other,
www.treasury.gov.ph/govsec/aboutsec.h
tml)

particular fund, i.e., the inheritance

I promise to pay A or bearer the sum of
from the father of the promisor(Sec. 3,
Php100,000 if A passes the 2012 bar
NIL).
exams. (2%)

I promise to pay A or bearer Php100,000

SUGGESTED ANSWER:
plus the interest rate of ninety (90) – day
treasury bills. (2%) Not negotiable. The promise to pay is
subject to a condition, i.e., that A will
SUGGESTED ANSWER:
pass the 2012 bar exams (Sec.1[b],NIL).

Not negotiable. There is no

I promise to pay A or bearer the sum of
unconditional promise to pay a sum
Php100.000 on or before December 30,
certain in money. The promise to pay
2012. (2%)
“the interest rate of ninety (90)-day
treasury bills” is vague because, first, SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 72 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Negotiable. It conforms fully with the constitute a defect of title (Section 55,
requirements of negotiability under Negotiable Instruments Law).
Section 1, NIL.
Does S have a cause of action against R in
I promise to pay A or bearer the sum of case of dishonor by the drawee bank?
Php100,000. (2%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
No, s does not have a cause of action
against R in case of dishonor of the
Negotiable. It conforms fully with the
check by the drawee bank. S is not a
requirements of negotiability under
holder in due course, thus, R can raise
Section 1,NIL. It is payable on demand
the defense that the check was issued
because the note does not express a time
for an illegal consideration (Section 58,
for its payment(Sec.7[b], NIL).
Negotiable Instruments Law).

It S negotiated the check to T, who accepted

it in good faith and for value, may R be held
Negotiable Instruments; Illicit/Illegal secondarily liable by T?

Consideration (2007)
Reason Briefly in (a), (b) and (c).
No.I. R issued a check for P1m which he
used to pay S for killing his political enemy. SUGGESTED ANSWER:
(10%) Yes, R may be held secondarily liable by
T who took the check in good faith and
Can be the check be considered a
for value. T is a holder in due course. R
negotiable instrument? cannot raise the defense of illegality of
the considerarion, because T took the
SUGGESTED ANSWER:
check fre from the defect of title of S
Yes, the check can be considered a
(Section 57, Negotiable Instrumets Law).
negotiable instrument even if it was
issued to pay S to kill his political
enemy. The validity of the consideration
is not one of the requisites of a
negotiable instruments (Section 1,
Negotiable Instruments Law.) it merely

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 73 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Negotiable Instruments; Illicit/Illegal No. the illicit cause or consideration

Consideration; Lawful Dishonor (2009) does not adversely affect the

negotiability of the bill, especially in the
No.VI. Lorenzo drew a bill of exchange in
hands of a holder in due course. Under
the amount of P100, 000.00 payable to
Sec. 1 of the Negotiable Instruments law,
Barbara or order, with his wife, Diana, as
the bill of exchange is a negotiable
drawee. At the time the bill was drawn.
instrument. Every negotiable instrument
Diana was unaware that Barbara is
is deemed prima facie to have been
Lorenzo’s paramour.
issued for valuable consideration, and
every person whose signature appears
Barbara then negotiated the bill to her
thereon is deemed to have become a
sister, Elena, who paid for it for value, and
party thereto for value (Sec. 24,
who did not know who Lorenzo was. On
Negotiable Instruments Law).
due date, Elena presented the bill to Diana
for payment, but the latter promptly
dishonored the instrument because, by
then, Diana had already learned of her
husband’s dalliance. Negotiable Instruments: Incomplete,
Delivered; Doctrine: Comparative
Was the bill lawfully dishonored by Diana? Negligence (2008)
Explain. (3%)
No.IV. AB Corporation drew a check for

SUGGESTED ANSWER: payment to XY Bank. The check was given

to an officer of AB Corporation who was

No, the bill was not lawfully dishonored instructed deliver it to XY Bank. Instead ,
the officer intending to defraud the
by Diana. Elena, to whom the instrument
Corporation, filled up the check by making
was negotiated, was a holder in due
himself as the payee and delivered it to XY
course inasmuch as she paid value
Bank for deposit to his personal account.
therefore in good faith.
XY Bank debited AB Corporation’s account.
AB Corporation came to know of the
Does the illicit cause or consideration
officer’s fraudulent act after he absconded.
adversely affect the negotiability of the bill?
AB Corporation asked XY Bank to recredit
Explain. (3%)
its amount. XY Bank refused.

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 74 of 173
Mercantile Law Q&As (2007-2013)
If you were the judge, what issues would
you consider relevant to resolve the case?
Explain. (3%)
SUGGESTED ANSWER:
The filling up by the officer of his name
as payee does not constitute forgery, and
contemplates a mechanically incomplete
but delivered instrument. Under Sec. 14
of the NIL, in order to enforce an
incomplete but delivered
against a prior party, it must be filled-up
strictly in accordance with the authority
given. The doctrine of
negligence provides that AB Corp. is
deemed negligent for having issued the
check with a blank payee section that
facilitated the fraud; it should be AB
Corp. that must bear the loss, and not
XY Bank.
How would you decide the case? Explain.
(2%)
SUGGESTED ANSWER:
I would fin AB Corp. liable for its
negligence in delivering an incomplete
instrument to XY Bank (Sec. 14, NIL).
Negotiable Instruments: Subject to a
Term (2009)
No.XI. (D) A document, dated July 15, 2009
that reads: ―Pay to X or order the sum of
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
5,000.00 five days after his pet dog, Sparky,
dies. Signed Y.‖ is a negotiable instrument.
SUGGESTED ANSWER:
True. The document is subject to a term
and not a condition. The dying of the
dog is a day which is certain to come.
Therefore, the order to pay is
unconditional, in compliance with
Section 1 of the Negotiable Instruments
Law (NIL).
instrument
(Note: This answers presumes that there
is a drawee)
comparative
Parties; Holder in Due Course (2012)
No.III. X borrowed money from Y in the
amount of Php1Million and as payment,
issued a check. Y then indorsed the check
to his sister Z for no consideration. When Z
deposited the check to her account, the
check was dishonored for insufficiency of
funds.
Is Z a holder in due course? Explain your
answer. (5%)
SUGGESTED ANSWER:
Z is not a holder in due course. She did
not give any valuable consideration for
the check. To be a holder in due course,
the holder must have taken the check in
Page 75 of 173
Mercantile Law Q&As (2007-2013)
good faith and for value (Sec. 52[c],
Negotiable Instruments Law).
Who is liable on the check. The drawer or
the indorser? Explain your answer. (5%)
SUGGESTED ANSWER:
X, the drawer, will be liable. As the
drawer, X engaged that
presentment the check would be paid
according to its tenor and that if it is
dishonored and he is given notice of
dishonor, he will pay the amount to the
holder (Sec. 61, NIL). No
dishonor need be given to X if he is
aware that he has insufficient funds in
his account. Under Section 114(d) of the
Negotiable Instruments Law, notice of
dishonor is not required to be given to
the drawer where he has no right to
expect that the drawee will honor the
instrument. Z cannot hold
endorser, liable as the latter can raise
the defense that there was no valuable
consideration for the endorsement of the
check(Sec. 58, NIL).
Parties; Instances a Subsequent Party is
Liable (2008)
No.III. (A) As a rule under the Negotiable
Instruments Law, a subsequent party may
hold a prior party liable but not vice versa.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Give two (2) instances where a prior party
may hold a subsequent party liable. (2%)
SUGGESTED ANSWER:
In the following cases, a prior party may
hold a subsequent party liable: (1) where
an instrument is negotiated back to a
prior party, and he reissues and further
on due negotiates the same, he is entitled to en
force payment against a subsequent
party who qualifies as an intervening
party to whom the prior party is not
personally liable; and (2) in the case of
notice of an accommodation party arrangement,
where the accommodation party may
recover from the party accommodated,
even when the latter is a subsequent
party (Sec. 29, NIL).
How does the ―shelter principle‖ embodied in
the Negotiable Instruments Law operate to
give the rights of a holder-in-dine course to
Y, the
a holder who does not have the status of a
holder-in-due course? Briefly explain. (2%)
SUGGESTED ANSWER:
The “shelter principle” provides that a
holder who is not himself a holder in due
course but is not a party to any fraud or
illegality affecting the instrument, and
who derives his title from a holder in due
course, acquires the rights of a holder in
due course (Sec. 58, NIL).
Page 76 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Securities Regulation While working with Atty. Buenexito on

another file, he accidentally gave you the
Howey Test (2009) Coco Products file containing the
company’s planned corporate financial
No.XI. (C) The Howey Test states that there
rehabilitation. While you knew you had the
is an investment contract when a person
wrong file, your curiosity prevailed and you
invests money in a common enterprise and
browsed through the file before returning it.
is led to expect profits primarily from the
Thus, you learned that a petition for
efforts of others.
financial rehabilitation is imminent, as the
SUGGESTED ANSWER:
company could no longer meet its
The Howey Test requires a transaction,
obligations as they fell due.
contract, or scheme whereby a person
makes an investment of money in a
Soon After, you mother is rushed to the
common enterprise with the expectation
hospital for an emergency operation, and
of profits to be derived solely, not
you have to raise money for her hospital
primarily from the efforts of others
bills. An immediate option for you is to sell
(Power Homes Unlimited Corp. v. SEC,
your Coco Products shares. The sale would
546 SCRA 567 (2008)).
be very timely because the price of the
company’s stocks are still high.

Would you sell the shares to raise the

Insider Trading (2013) needed funds for your mother’s

hospitalization? Take into account legal
No.V. You are a member of the legal staff of (5%) and ethical (3%) considerations. (8%)
a law firm doing corporate and securities SUGGESTED ANSWER
work for Coco Products Inc., a company The sale of the shares does not
with unique products derived from constitute insider trading. Although
coconuts and whose shares are traded in Atty. Buenexito, as corporate secretary
the Philippine Stock Exchange. A partner in of Coco Products, Inc., was an insider, it
the law firm, Atty. Buenexito, to whom you did not obtain the information regarding
report, is the Corporate Secretary of Coco the planned corporate rehabilitation by a
Products. You have long been investing in communication from him. He just
Coco Products stocks even before you accidentally gave the wrong file (Section
become a lawyer. 3.8 of Securities Regulation Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 77 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

It would be unethical to sell the shares. What provision of the Securities Regulation
Rule 1.01 of the Code of Professional Code (SRC) did they violate, if any ?
Responsibility provide, “A lawyer shall Explain. (4%)
not engage in unlawful, dishonest, SUGGESTED ANSWER:

immoral or deceitful conduct.”

The directors and key officers of the
company violated the prohibition against
A lawyer should not only refrain from
insider trading under Sec. 27 of the
performing unlawful acts. He should also
Securities Regulation Code, which
desist from engaging in unfair deceitful
declares it unlawful for an “insider”
conduct to conceal from the buyer of the
(which includes directors and officers of
shares the planned corporate
a publicly listed company) to sell or buy
rehabilitation.
its securities, if they know of a fact of
special significance with respect to the
company or the security, that is not
Insider Trading (2008)
generally available to the public, before

No.XIII. Grand Gas Corporation, a publicly such material information made public

listed company, discovered after extensive through disclosure proceedings. The

drilling a rich deposit of natural gas along directors and key officers are liable to

the coast of Antique. For five (5%) months, disgorge the profits earned and to pay
the company did not disclose the discovery damages.
so that it could quietly and cheaply acquire
neighboring land and secure mining rights Assuming that the employees of the

to the land. Between the discovery and its establishment handling the printing work of

disclosure of the information to the Grand Gas Corporation saw the exploration

Securities and Exchange Commission, all reports which were mistakenly sent to their

the directors and key officers of the establishment together with other materials

company bought shares in the company at to be printed. They too bought shares in the

very low prices. After the disclosure, the company at low prices and later sold them

price of the shares went up. The directors at huge profits. Will they be liable for

and officers sold their shares at huge violation of the SRC? Why? (3%)

profits, SUGGESTED ANSWER:

The employees are liable for violation of

the prohibition against insider trading.
They fall within the definition of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 78 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

“insider”. Subsection 3.8 of the under the Securities Regulation Code.

Securities Regulation Code defines an An “investment contract” is a contract,
insider as “a person whose relationship transaction or scheme (1) involving an
or former relationship to Issuer gives or investment of money, (2) in a common
gave him access to a fact of special enterprise, (3) with expectation of
significance about Issuer or the security profits, (4) primarily from the efforts of
that is not generally available.” others (Power Homes Unlimited
Corporation v. Securities and Exchange
Commission, 546 SCRA 567 (2008)).

What procedure must be followed under the

Investment Contract; Procedure (2010)
Securities Regulation Code to authorize the

No.IV. Andante Really, a marketing company sale or offer for sale or distribution of an

that promotes and facilitates sales of real investment contract? (2%)

property through leverage marketing, solicits

SUGGESTED ANSWER:
investors who are required to be a Business
Before the investment contract is sold or
Center Owner (BCO) by paying an enrollment
offered for sale or distribution to the
fee of S250. The BCO is then entitled to
public in the Philippines, it should be
recruit two other investors who pay S250
each. The BCO receives S90 from the S250
registered with the Securities and

paid by each of his recruits and is credited a Exchange Commission in accordance

certain amount for payments made by with Section 8 of the Securities

investors through the initial efforts of his Regulation Code (Power Homes

Business Center. Once the accumulated Unlimited Corporation v. Securities and

amount reaches S5, 000, the same is used as Exchange Commission, 546 SCRA 567

down payment for the real property chosen by (2008)).

the BCO.
What are the legal consequences of failure

Does this multi-level marketing scheme to follow this procedure? (2%)

constitute an ―investment contract‖ under the SUGGESTED ANSWER:

Securities Regulation Code? Define an The failure to follow the procedure has

―investment contract.‖ (2%) criminal consequences (i.e., upon

SUGGESTED ANSWER: conviction, a fine 50,000 to 5 million

Yes. The multi-level marketing pesos and / or imprisonment of 7 to 21

constitutes an “investment contract” years). It carries also civil liabilities in

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 79 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

that the purchaser can recover from the market price (Section 48, Securities
seller (i) the consideration paid with Regulation Code).
interest thereon, less the amount of any
income received on the purchased The purpose of the Margin Trading Rule
securities, upon the tender of such is to prevent excessive use of credit for
securities, or (ii) damages if the the purchase of securities. It is a counter
purchaser no longer owns such securities to a broker’s desire to generate more
(Sections 57 and 73, Securities sales by encouraging clients to but
Regulation Code). Furthermore, the securities on credit (Carolina Industries,
Securities and Exchange Commission Inc. vs. CMS STock Brokerage, Inc. 97
(SEC) may issue a cease and desist order SCRA 734 [1980]).
(Subsection 64.1, Securities Regulation
Code).

Securities; Exempt Securities (2009)

No.X. What are the so-called exempt

Margin Trading Rule (2009)
securities under the Securities Regulation
No.XX. Under the Securities Regulation Code? (2%)
Code, what is the margin Trading Rule?
(2%) SUGGESTED ANSWER:
SUGGESTED ANSWER: Under Section 9 of the Securities
Under the Margin Trading Rule, no Regulation Code, the so-called exempt
registered broker or dealer, or member of securities are:
an exchange shall extend credit on any
security an amount greater than Those issued or guaranteed by the
whichever is higher of: government of the Philippines or any of
its political subdivisions or agencies;
65 percent of the current market price

of the security, or Those issued or guaranteed by the

100 percent of the lowest market price
of the security during the preceding 36
calendar months, but not more than 75
percent of the current
government of any foreign country with
which the Philippines has diplomatic
relation, or any other state on the basis
of reciprocity, although the SEC may

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 80 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

require compliance with the form and authorized to sell securities, including
content of disclosures; timeshares.

Those issued by the receiver or by the
trustee in a bankruptcy duly approved by
the proper adjudicatory board;
Those involving the sale or transfer
which is bylaw, under the regulation of
the OIC, HLURB, BIR; and
Those issued by banks, except its own
shares.
On March 30, 1998, Leon and Carina wrote
PPR rescinding their purchase agreement
and demanding the refund of the amount
they paid because the Palacio Del Boracay
timeshare was sold to them by PPR without
the requisite license or authority from the
SEC. PPR contended that the grant of the
SEC authority had the effect of ratifying the
purchase agreement (with Leon and Carina)
of Oct.6, 1996.

(Note: It is suggested that any two of the Is the contention of PPR correct? Explain
above exempt securities should be (3%)
considered as enough answer to the SUGGESTED ANSWER:
question.) The contention of PPR is not correct. It
is settled that no securities shall be sold
or offered for sale or distribution in the
Philippines without a registration duly
filed and approved by the Commission.
Securities; Selling of Securities (2009)
Corporate registration is one of the

No.XVII. Philippine Palaces Realty (PPR) requirements under Sec. 8of batas

had been representing itself as a registered pambansa Blg. 178 (timeshare Realty

broker of securities, duly authorized by the Corporation v. Lao, 544 SCRA 254

Securities and Exchange Commission (2008)).

(SEC). On October6, 1996, PPR sold to

spouses Leon and Carina one timeshare of
Palacio del Boracay for US S7, 500.00.
However, its Registration Statement became
ALTERNATIVE ANSWER:
No. Such contention is not correct. Sale
or offer to sell securities which are not

effective only on Feb.11, 1998 after the SEC exempt securities or which do not arise

issued a resolution declaring that PPR was out of exempt transactions, and,
therefore, requiring registration, is
unlawful as such act is violative of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 81 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Securities Regulation Cod. Subsequent any scheme that dilutes the share value
grant of authority by the SEC does not of their investments. It gives them the

retroact to past sales or offers to sell. chance to exit the company under the
same terms offered to the majority
stockholders.

Tender Offer (2010) Under the Securities Regulations Code

and its implementing rules, a mandatory
No.VII. Union Mines, Inc. has total assets of
tender offer is required (i) when at least
P60 Million with 210 stockholders holding
35% of the outstanding shares of a
at least 100 shared each.
public company is to be acquired in one
The company has two principal
transaction or a series of transaction
stockholders, ABC which owns 60% of the
during 12-month period, or (ii) even if
shares of stock, and XYZ; which owns 17%.
any acquisition is less than 35%
ABC in turns is owned to the extent of
threshold but the result thereof is the
21.13% by Acme, Inc.; 29.69% by Golden
ownership of more than 51% of the total
Boy Inc.; 9% by XYZ; and the rest by
outstanding shares of a public company.
individual stockholders.
The mandatory offer rule also applies to
None of the parties is a publicly-listed
share acquisition meeting the threshold,
company.
which is done at the level of the holding
XYZ now proposes to buy Acme’s and
or Parent Corporation controlling a
Golden Boy’s shares in ABC, which would
public company (Cemco Holding, Inc. v.
give it, direct control of ABC and indirect
National Life Insurance Company of the
control of Union Mines.
Philippines, Inc. 529 SCRA 355 [2007]).
Is the proposal acquisition by XYZ subject
to the mandatory tender offer rule? Why or In this case, Union Mines is clearly a
why not? What is tender offer and when is
public company, since it has total assets
it mandatory? (5%)
of P60 million pesos with 210
SUGGESTED ANSWER
stockholders holding at least 100 shares
Yes, the proposed acquisition is subject
each. A public company is defined as a
to mandatory tender offer rule. A tender
corporation listed on the stock
offer is publicly announced intention by
exchange, or a corporation with assets
a person (acting alone or in concert with
exceeding 50 million pesos and with 200
other persons) to acquire shares of a
or more stockholders at least 200 of
public company. A tender offer is meant
them holding not less than 100 shares of
to protect minority stockholders against
such corporation.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 82 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

train and that it was not guilty of

XYZ’s acquisition of shares of Acme, Inc. negligence. Decide. (5%)
and Golden Boy, Inc., taken separately, SUGGESTED ANSWER:
does not reach 35% threshold. If taken
CRI is liable for death of Ricardo Santos
collectively, the two acquisitions total
because it failed to exercise
only 50%. However, when the
extraordinary diligence (LRTA v. Navidad
acquisitions are added to XYZ’s existing
G.R. No. 145804, 06 February 2003). The
shares in Union Mines, they meet the
contract of carriage began when the
more- than -51% thresholds for
passenger purchased his ticket and
mandatory tender offer.
proceeded to the designated loading
facilities to board the train (Dangwa
Transp. Co., Inc. v. Court of Appeals,
G.R. No. 95582, 07 October 1991), CRI is

Transportation Law also liable for all persons in its employ

(Caltex Philippines, Inc. v. Sulpicio
Carriage; Breach of Contract Lines, Inc., G.R. No. 131166, 30
September 1999).
No.VIII. City Railways, Inc. (CRI) provides
train service, for a fee, to commuters from
Manila to Calamba, Laguna. Commuter are
required to purchase tickets and then
proceed to designated loading and Carriage; Breach of Contract; Cause of
unloading facilities to board the train. Action; Defenses (2009)
Ricardo Santos purchased a ticket for
No.XIX. One of the passenger buses owned
Calamba and entered the station. While
by Continental Transit Corporation (CTC),
waiting, he had an altercation with the
plying its usual route figured in a collision
security guard of CRI leading to a fistfight.
with another bus owned by Universal
Ricardo Santos fell on the railway just as a
Transport, Inc. (UTI). Among those injured
train was entering the station. Ricardo
inside the CTC bus were: Romeo, a stow
Santos was run over by the train. He died.
away: Samuel, a pickpocket then in the act
of robbing his seatmate when the collision
In the action for damages filed by the heirs
occurred; Teresita, the bus driver’s mistress
of Ricardo Santos, CRI interposed lack of
who usually accompanied the driver on his
cause of action, contending that the mishap
occurred before Ricardo Santos boarded the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 83 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

trips for free; and Uriel, holder of a free Do Romeo, Samuel, Teresita, and Uriel have
riding pass he won in a raffle held by CTC. a cause of action for damages against UTI?
Will a suit for breach of contract of carriage Explain. (3%)
filed by Romeo, Samuel, Teresita, and Uriel SUGGESTED ANSWER:
against CTC prosper? Explain. (3%) Romeo, Samuel, Teresita and Uriel may
sue UtI on the basis of quasi-delict since
SUGGESTED ANSWER: they have no pre-existing contractual
Romeo cannot sue for breach of contract relationship with UTI. They may allege
of carriage. A stowaway like Romeo, Who that the collision was due to the
secures passage by fraud, is not a negligence of driver of UTI and UTI was
passenger (Vda. De nueca v. Manial negligent in the selection and
Railroad Company, 13 C.A. R. 49(1968)). supervision of its driver (Articles 2176
and 2180, New Civil Code).
Samuel and Teresita cannot sue for
breach of contract of carriage. The What, if any, are the valid defenses that
Elements in the definition of a passenger CTC and UTI can raise in the respective
are: an undertaking of a person to travel actions against them? Explain. (3%)
in the conveyance provided by the SUGGESTED ANSWER:
carrier and an acceptance by the carrier With respect to Romeo, Samuel and
of the person as a passenger. (14 Am Jur Teresita, since there was no pre-existing
2d, Carriers, So. 714,p. 164). Samuel did contractual relationship between them
not board the bus to be transported but and CTC, CTC can raise the defense that
to commit robbery. Teresita did not it exercised the due diligence of a good
board the bus to be transported but to father of a family in the selection and
accompany the driver while he was supervision of its driver (Article 2180,
performing his work. New Civil Code).
Uriel can sue for breach of contract. He
was a passenger although he was being It can raise the same defense against
transported gratuitously, because he won Uriel if there is a stipulation that

a free riding pass in a raffle held by CTC exempts it from liability for simple

(Article 1753, New Civil Code). negligence, but not for willful acts or
gross negligence (Article 1758, New Civil
Code).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 84 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

CTC can also raise against
plaintiffs the defense that the collision
was due exclusively to the negligence of
the driver of UTI, and this constitutes a
fortuitous event, because there was no
concurrent negligence on the part of its
own driver (Ampang
Transportation Company, G.R. No. L-
5044, April 30, 1953).
CTC can also raise against Samuel the
defense that he was engaged
seriously illegal act at the time of the
collision, which can render him liable for
damages on the basis of quasi-delict
(Dobbs, the Law of Torts, pp.524-525).
Since UTI had no pre-existing
contractual relationship with any of the
plaintiffs, it can raise the defense that it
exercised due diligence in the selection
and supervision of its driver that the
collision was due exclusively to the
negligence of the driver of CTC, and that
Samuel was committing a serious illegal
act at the time of the collision.
all the de Oro airport; the pilot miscalculated the
plane’s approach and undershot the
runway. Of the 150 people on board, ten
(10) passengers died at the crash scene.
Of the ten who died, one was a passenger
v.Guinoo who managed to leave the plane but was
run over by an ambulance coming to the
rescue. Another was an airline employee
who hitched a free ride to Cagayan de Oro
and who was not in the passenger manifest.
in a
It appears from the Civil Aeronautics
Authority investigation that the co-pilot
who had control of the plane’s landing had
less than the required flying and landing
time experience, and should not have been
in control of the plane at the time. He was
allowed to fly as a co-pilot because of the
scarcity of pilots – Philippine pilots have
been recruited by foreign airlines under
vastly improved flying terms and wages so
that newer and less trained pilots are being
locally deployed. The main pilot, on the
other hand, had a very high level of blood
alcohol at the time of the crash.

You are part of the team that the victims

hired to handle the case for them as a
group. In your case conference, the
Carriage; Breach of Contract;
following questions came up:
Presumption of Negligence (2013)

Explain the causes of action legally possible

No.IX. Fil-Asia Flight 916 was on a
under the given facts against the airline
scheduled passenger flight from Manila
and the Pilots; whom will you
when it crashed as it landed at the Cagayan

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 85 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

specifically implead in these causes of over. This is in accordance with Articles

action? (5%) 2176 and 2180 of the Civil Code. There
could also be a criminal prosecution for
SUGGESTED ANSWER: reckless imprudence resulting in
A complaint for breach of contract of homicide against the ambulance driver
carriage can be filed against Fil-Asia for and the consequent civil liability.
failure to exercise extraordinary
diligence in transporting the passengers Since the airline employee was being
safety from their point of embarkation to transported gratuitously, Fil-Asia Air was
their destination (Article 1755, Civil not required to exercise extraordinary
Code). diligence for his safety and only ordinary
care. (Lara v. Valencia, 104 Phil. 65,
complaint based on a quasi-delict can be 1958).
filed against the pilots because of their
fault and negligence (Article 2176, Civil
Code). Fil-Asia Air can be included for
negligence in the selection and
Maritime Protest (2007)
supervision of the pilots (Article 2180,
Civil Code). No.XI. Two vessels figured in a collision
along the Straits of Guimaras resulting in
third cause of action may be a criminal
considerable loss of cargo. The damaged
prosecution for reckless imprudence
vessels were safely conducted to the Port of
resulting in homicide against two pilots.
Iloilo Passenger A failed to file a maritime
The airline will be subsidiarily liable for protest. B, a non-passenger but a shipper
the civil liability only after the pilots are who suffered damage to his cargo, likewise
convicted and found to be insolvent. did not file a maritime protest at all. (10%)

How will you handle the cases of the (A) What is a maritime protest?
passenger run over the ambulance and the
SUGGESTED ANSWER:
airline employee allowed to hitch a free ride
to Cagayan de Oro? (3%) A maritime protest is a sworn statement
SUGGESTED ANSWER: made with 24 hours after a collision in
It is the driver of the ambulance and his which the circumstances thereof are
employer who should be held liable for declared or made known before a
damages, because a passenger was run competent authority at the point of

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 86 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

accident or the first port of arrival if in Trust Receipts Law

the Philippines or the Philippine consul
in a foreign country (Article 835, Code of Trust Receipt (2007)
Commerce; Goro v. William Lines, Inc., 3
No.V. C contracted D to renovate his
CAR 1(1963)).
commercial building. D ordered
construction materials from E and received
Can A and B successfully maintain an
delivery thereof. The following day, C went
action to recover losses and damages
to F Bank to apply for loan to pay for the
arising from the collision? Reason briefly
construction materials. As security for the
SUGGESTED ANSWER: loan, C was made to execute a trust receipt.
One year later, after C failed to pay the
B, the shipper, can successfully maintain
balance of the loan, F Bank charged him
an action to recover losses and damages
with violation of the Trust Receipts Law.
arising from the collision
(5%)
notwithstanding his failure to file a
maritime protest since the filing thereof
What is a Trust Receipt?
is required only on the part of A, who
SUGGESTED ANSWER:
being a passenger of the vessel at the
A Trust Receipt is a written or printed
time of the collision, was expected to
document signed by the entrustee in
know the circumstances of the collision.
favor of the entruster containing terms
A’s failure to file a maritime protest will
and conditions substantially complying
therefore prevent him from successfully
with the provision of the Trust Receipts
maintaining an action to recover his
Law, whereby the bank as entruster
losses and damages (Art. 836, Code of
releases the goods to the possession of
Commerce)
the entrustee but retains ownership
ALTERNATIVE ANSWER: thereof while the entrustee may sell the
goods and apply the proceeds for the full
A can maintain an action to recover
payment of his liability to the bank
damages if he was not in a condition to
(Section 3(j), Trust Receipts Law).
make known his wishes. B can maintain
an action to recover damages since he Will the case against C prosper? Reason
was not on board the vessel (Article 836, briefly.
Code of Commerce). SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 87 of 173
Mercantile Law Q&As (2007-2013)
No, the case against C will not prosper,
Since C received the Construction
material from E Before the trust receipt
transaction was a simple loan, with the
trust receipt merely as a collateral or
security for the loan.
inconsistent with a trust
transaction where the title to the goods
remains with the bank and the goods are
released to the entrustee before the loan
is granted (Consolidated Bank and Trust
Corporation v. Court of Appeals, 356
SCRA 671 [2001].
Trust Receipt; Security for a Loan (2008)
No.II. Tom Cruz obtained a loan of P1
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:
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
No, Tom Cruz’s obligation to pay the
loan covered by the trust receipts to XYZ
Bank remains, A “Trust receipt” is
merely a collateral agreement which
serves as security for a loan, with the
This is Bank appearing as the owner of the
receipt goods. The Bank cannot dispose of the
goods in any manner it chooses, because
it is not the true owner thereof (Rosario
Textile Miss v. Home Bankers, G.R. No.
137232, 29 June 2005, citing Sia v.
People, G.R. No. 30896, 28 April 1983,
Abad v. CA, G.R. No. 42735, 22 January
1990, and PNB v. Pineda, G.R. No.
46658, 13 May 1991). The loss of the
goods covered by the trust receipts
cannot extinguish the principal
obligation of the borrower to pay the
bank (Landl & Company [Phil.] v.
Metropolitan Bank, G.R. 159622, 30 July
2004).
Trust Receipts Law; Liability for Estafa
(2013)
No.VI. Delano Cruz is in default in the
payment of his existing loan from BDP
Bank. To extend and restructure this loan,
Delano agreed to execute a trust receipt in
the bank’s favor covering the iron pellets
Delano agreed to execute a trust receipt in
the bank’s favor covering the iron pellets
Delano imported from China one year
Page 88 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

earlier. Delano subsequently succeeded in consequence acquired ownership to the

selling the iron pellets to a smelting plant, goods, the transaction does not involve a
but the proceeds went to the payment of trust receipt but a simple loan even
the separation benefits of his employees though the parties denominated the
who were laid off as he reduced his transaction as one of trust receipt
operations. (Colinares vs. Court of Appels, 339 SCRA
609, 2000; Consolidated Bank and Trust
When the extend loan period expired Corporation v. CA, SCRA 671, 2001).
without any significant payment from
Delano (not even to the extent of the
proceeds of the sale of the iron pellets), BDP
Bank consulted you on how to proceed
Trust Receipts Law; Violation
against Delano. The bank is contemplating
the filing of estafa pursuant to the Committed by a Corporation (2012)

provisions of Pres. Decree No. 115 (Trust

No.II. CCC Car, Inc. obtained a loan from
Receipts Law) to force Delano to tum in at
Bank, which fund was used to import ten
least the proceeds of the sale of the iron
(10) units of Mercedes Benz S class
pellets.
vehicles. Upon arrival of the vehicles and
before release of said vehicles to CCC Car,
Would you, as bank counsel and as an
Inc., X and Y, the President and Treasurer,
officer of the court, advise the bank to
respectively, of CCC Car, Inc. signed the
proceed with its contemplated action? (8%)
Trust Receipt to cover the value of the ten
(10) units of Mercedes Benz S class vehicles
SUGGESTED ANSWER:
after which, the vehicles were all delivered
to the Car display room of CCC Car, Inc.
I will not advise BDP Bank to file a
Sale of the vehicles were slow, and it took a
criminal case for estafa against Delano.
month to dispose of the ten (10) units. CCC
Delano received the iron pellets he
Car, Inc. wanted to be in business and to
imported one year before the trust
save on various documentations required
receipt was executed. As held by the
by the bank, decided that instead of turning
Supreme Court, where the execution of a
over the proceeds of the sales, CCC Car,
trust of a trust receipt agreement was
Inc. used the proceeds to buy another ten
made after the goods covered by it had
(10) units of BMW 3 series.
been purchased by and delivered to the
entrustee and the latter as a

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 89 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Is the action of CCC Car, Inc. legally [Note:The problem does not state that BBB
justified? Explain your answer. (5%) bank issued a letter of credit upon
application of CCC Car, Inc, to enable the
SUGGESTED ANSWER:
latter to pay for its importation. In the
No. It is the obligation of CCC Car, Inc., suggested answers above, we assume this
as entrustee, to receive the proceeds of to be the case because the trust receipt,
the sale of the Mercedes Benz S class being an accessory contract, cannot validly
vehicles intrust for BBB Bank, as exist without a principal contract, i.e., the
entruster, and turn over the same to application for the letter of credit.]
Bank to the extent of the amount owing
to the latter or as appears in the trust
receipt (Sec. 9(2), Trust Receipt Law).
Warehouse Receipts Law
Will the corporate officers of CCC Car, Inc.
Warehouse Receipt: Surrendering of
be held liable under the circumstances?
Possession; Lien (2009)
Explain your answer. (5%)
No.XI. (B) Under the Warehouse loses his
SUGGESTED ANSWER:
lien upon the goods when he surrenders
possession thereof.
Yes, particularly the President and the
SUGGESTED ANSWER:
Treasurer of CCC Car, Inc. who both
True. A lien is dependent on possession.
signed the trust receipts in the problem.
When a warehouseman surrenders
Section 13 of the Trust Receipt Law(PD
possession, he thereby loses his lien on
provides that if the violation or offense
the goods over which hi no longer has
is committed by a corporation,
possession (Sec.29 (a), Warehouse
partnership, association, or other
Receipts Law).
juridical entity, the penalty provided for
in the law shall be imposed upon the
directors, officers, employees or other
Negotiable Instrument; Delivery of Goods
officials or persons therein responsible
(2007)
for the offense, without prejudice to the
civil liabilities arising from the criminal No.II. Alex deposited goods for which Billy,
offense. a warehousemen, issued a negotiable
warehouse receipt wherein the good were
deliverable to Alex or order. Alex negotiated
the receipt TC Caloy. Thereafter, Dario a

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 90 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

creditor, secured judgment against Alex

and served notice of levy over the goods on
the warehouseman.

To whom should the warehousemen deliver

the goods upon demand?(5%)

SUGGESTED ANSWER:

The warehouseman should deliver the

goods upon demand to Caloy who is a
holder of the receipt in good faith and
for value. The goods cannot be levied
upon by the creditor of Alex after it was
negotiated to Caloy (Section 25,
Negotiable Instruments Law).

Would your answer be the same if the

warehouseman issued a non-negotiable
warehouse receipt? Reason briefly. (5%)
SUGGESTED ANSWER:

No, my answer would not be the same if

the warehousemen issued a non-
negotiable warehouse receipt. In such
case. The warehouseman should deliver
the goods to Datio, if the notice of levy
was served on the warehouseman prior
to the notification of the warehouseman
by Alex or Caloy of the transfer of the
non-negotiable receipt. In such case, the
title of Caloy would be defeated by the
notice of levy by Dario (Section 42,
Warehouse Receipts Law).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 91 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

MULTIPLE CHOICE equivalent to a lawful pledge of the shares

of stock.
QUESTIONS (MCQ)
SUGGESTED ANSWER:
2013 Mercantile Law Exam
Yes, because the execution of the Deed

MCQ (October 20, 2013) of Assignment of Shares of Stock is

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

Yes, since the endorsement and delivery of

No, because shares of stock are intangible
personal properties whose possession
cannot be delivered and, hence, cannot be
the subject of a pledge.
No, because the pledge of shares of stock
requires double registration
Register of the principal place of business of
the corporation and of the residence of the
pledgor.
Yes, because endorsement and delivery of
the certificates of stock is equivalent to the
transfer of possession of the covered shares
to the pledgee.
Yes, because the execution of the Deed of
Assignment of Shares of Stock is
the certificates of stock executed by Claude
constitute the legal authority to cancel the
shares in his name and to place them in
Conrad’s name.
Yes, since the execution of the Deed of
with the Assignment by Claude would constitute the
legal authority to cancel the shares in his
name and place them in Conrad’s name.
No, because corporate officers can only take
direct instructions from the registered
owners on the proper disposition of shares
registered in their names.
No, because the corporation has a primary
lien on the shares covering the unpaid
subscription.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 92 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: The ―Filipino First Policy‖

None of the answer is correct. The The ―Foreign Investment Positive Lists‖
pledge must be foreclosed. (Article 2112, concept
Civil Code) Conrad cannot just The ―Foreign Investment Negative Lists‖
appropriate the shares of stock (Article concept

2088, Civil Code). The ―Control Test‖ concept

All of the above.
NOTE: (D) could have been the correct
answer if the facts stated that there are SUGGESTED ANSWER:
unpaid subscriptions because under The “Foreign Investment Negative Lists”
Section 63 of the Corporation Code, the concept
corporation may refuse the transfer if it (Section 7 of Foreign Investments Act)

holds unpaid claim on the subscribed

shares (See China Banking Corp. v. CA II.(2) The delegation asked: aside from

and Valle Verde Country Club, G.R. No. Filipino citizens, what entities would fall

117604, March 26, 1997). under the definition of ―Philippine National‖

under FIA ’91?
A foreign delegation of businessmen and
investment bankers called on your law firm You replied that the definition of
to discuss the possibilities of investing in “Philippine national” under FIA ’91
various projects in the Philippines, and covers .(1%)
wanted your thoughts on certain issues
regarding foreign investment in the domestic partnerships wholly composed of
Philippines. Filipino citizens
domestic corporations 60% of whose capital
II.(1) The delegation has been told about stock, outstanding and entitled to vote, are
the Foreign Investment Act of 1991, as owned and held by Filipino citizens
amended (FIA ’91), and they asked what foreign corporations considered as doing
exactly is the law’s essential thrust regarding business in the Philippines under the
foreign investment in Philippine business Corporation Code, 100% of whose capital
and industries. stock, outstanding and entitled to vote, are
wholly-owned by Filipino citizens
You replied that FIA ’91 essentially
reflects . (1%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 93 of 173
 Mercantile Law Q&As (2007-2013)
All of the above, because the law considers
the juridical personality, whether domestic
or foreign, as a mere medium; the test of
nationally is on the individual who control
the medium
None of the above, because the term
Philippine national can only
individuals and not juridical entities.
SUGGESTED ANSWER:
All of the above, because the law
considers the juridical personality,
whether domestic or foreign, as a mere
medium: the test of nationality is on the
individuals who control the medium
(Section 3(a) of Foreign Investments Act)
II.(3) The delegation heard that foreigners
can invest up to 100% of the equity in
―export oriented enterprises‖ and you were
asked exactly what the term covers.
You replies that an ―export oriented
enterprise ”under FIA ’91 is an enterprise
that .(1%)
only engages in the export of goods and
services, and does not sell goods or services
to the domestic market
exports consistently at least 40% of its
goods or services, and sells at least 60% of
the rest to the domestic market
exports consistently at least 60% of the
goods or services produced, and sell at least
40% of the rest to the domestic market.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Exports consistently at least 60% of its
goods or services produced, and can sell
goods or services to the domestic market
None of the above.
SUGGESTED ANSWER:
cover (E) None of the above.
(Section 3(e) of Foreign Investments Act)
II.(4) As a last question and by way of a
concrete example, a delegation member
finally inquired – which of the following
corporations or businesses in the
Philippines may it invest and up to what
extent? (1%)
A lifestyle magazine publication
corporation, up to 40% equity
An advertising corporation, up to 100%
equity
A commercial bank, up to 60% equity
A jeepney manufacturing corporation, up to
100% equity
A real estate development corporation, up
to 60% equity
SUGGESTED ANSWER:
(D) A Jeepney manufacturing
corporation, up to 100% equity (Section
7 of Foreign Investment Act)
Dennis subscribed to 10,000 shares of XYZ
Corporation with a par value of P100 per
share. However, he paid only 25% of the
Page 94 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

subscription or P250,000.00 No call has ABC Corp. may redeem the shares at the
been made on the unpaid subscription. end of 10 years without need for
unrestricted earnings provided that, after
How many shares in Dennis entitled to the redemption, there are sufficient assets
vote at the annual meeting of the to cover its debts.
stockholders of XYZ? (1%) All of the above are incorrect.

10,000 shares SUGGESTED ANSWER:

2,500 shares ABC Corp. may redeem the shares at the
100 shares end of 10 years without need for
0 shares unrestricted earnings provided that,
None of the above. after the redemption, there are sufficient
assets to cover its debts.
SUGGESTED ANSWER: (Section 8 of Corporation Code; Republic
(A) 10,000 Shares Planters Bank v. Agana, 269 SCRA 1,
(Section 24 and 71 of Corporation Code) 1997)

IV. ABC Corp, issued redeemable shares,
Under the terms of the issuance, the shares
shall be redeemed at the end of 10 years
from date of issuance, at par value plus a
premium of 10%
Choose the correct statement relating to
these redeemable shares. (1%)
ABC Corp. would need
retained earnings to be able to redeem the
shares.
Corporations are not allowed to issue
redeemable shares; thus, the issuance by
ABC Corp. is ultra vires.
Holders of redeemable shares enjoy a
V. Arnold, representing himself as an agent
of Brian for the sale of Brian’s car,
approached Dennis who appeared
interested in buying the car. At Arnold’s
prodding, Dennis issued a crossed check
would only be shown to Brian as evidence
of Dennis’ good faith and interest in buying
the car. Instead, Arnold used the check to
pay for the medical expenses of his wife in
unrestricted Brian’s clinic after Brian, a doctor, treated
her.
Is Brian a holder in due course (HIDC)?
(1%)
Yes, Brian is a HIDC because he was the

preference over creditors. payee of the check and he received it for

services rendered.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 95 of 173
Mercantile Law Q&As (2007-2013)
Yes, Brian is a HIDC because he did not
need to go behind the check that was
payable to him.
No, Brian is not a HIDC because Dennis
issued the check only as evidence of good
faith and interest in buying the car.
No, Brian is not a HIDC because Brian
should have been placed on notice: the
check was crossed in his favor and Arnold
was not the drawer.
No, Brian is not a HIDC because the
requisite consideration to Dennis was not
present.
SUGGESTED ANSWER:
No, Brian is not a HIDC because Brian
should have been placed on notice: the
check was crossed in his favor and
Arnold was not the drawer.
(Vicente R. de Ocampo & Company v.
Gatchalian, 3 SCRA 566, 1961)
VI. Gawsengsit Corp. is a corporation
incorporated in Singapore. It invested in
Bumblebee Corp., a Philippine corporation,
by acquiring 30% of its shares. As a result,
Gawsengsit Corp. nominated 30% of the
directors of Bumblebee Corp., all of whom
are Singaporeans and
Gawsengsit Corp.
Choose the correct statement relating to
Gawsengsit Corp. (1%)
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Gawsengsit Corp. is doing business in the
Philippines and requires a license from the
Securities and Exchange Commission
(SEC).
Gawsengsit Corp. is not doing business in
the Philippines by its mere investment in a
Philippine corporation and does not need a
license from the SEC
Gawsengsit Corp. has to appoint a resident
agent in the Philippines.
Gawsengsit Corp. cannot elect directors in
Bumblebee Corp.
All the above choices are incorrect.
SUGGESTED ANSWER:
Gawsengsit Corp. is not doing business
in the Philippines by its mere
investment in a Philippines corporation
and does not need a license from the
SEC.
(Section 3(d) of Foreign Investment Act)
VII. The BIR assessed ABC Corp. for
deficiency income tax for taxable year 2010
in the amount of P26,731,208.00, inclusive
of surcharge and penalties.
The BIR Can . (1%)
officers of Run after the directors and officers of ABC
Corp. to collect the deficiency tax and their
liability will be solidary.
Run after the stockholders of ABC Corp.
and their liability will be joint
Run after the stockholders of ABC Corp.
and their liability will be solidary
Page 96 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Run after the unpaid subscriptions still due (Rosario Textile Mills Corporation v.
to ABC Corp., if any Home Bankers Savings and Trust
None of the above choices is correct. Company, 462 SCRA 88, 2005)

SUGGESTED ANSWER: IX. A Bank may acquire real property

Run after the unpaid subscriptions still (1%)
due to ABC Corp., if any By purchase at a public sale of properties
(Halley v. Printwell, 648 SCRA 116, levied to satisfy tax delinquencies
2011). By purchase from a real estate corporation
in the ordinary course of the bank’s
VIII. Anton imported perfumes from business
Taiwan and these were released to him Through dacion en pago in satisfaction of a
by the bank under a trust receipt. While debt in favor of the bank
the perfumes were in Anton’s warehouse, In exchange for the purchase of shares of
thieves broke in and stole all of them. stocks of the bank
All of the above.
Who will shoulder the lossof the stolen None of the above.
perfumes? (1%)
SUGGESTED ANSWER:
The loss of the perfumes will be borne by By purchase from a real estate
the bank in whose behalf the perfumes corporation in the ordinary course of the
were held in trust. bank’s business; or
Anton will bear the loss. Through dacion en pago in satisfaction
The exporter can hold both the bank and of a debt in favor of the bank; or
Anton liable for the loss. in exchange for the purchase of shares of
The exporter form whom Anton bought the stocks of the bank.
perfumes will bear the loss. (Section 36 (7) and 62 (2) of the
No one bears the loss for an unforeseen Corporation Code)
event. (Section 52 of the General Banking Law)

SUGGESTED ANSWER: Under the Anti-Money Laundering Act, a

(B) Anton will bear the loss. depositor’s bank account may be frozen.
(Section 10 of the Trust Receipts Law) (1%)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 97 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

. (1%)

person already convicted of money

laundering
By the Regional Trial Court, upon ex parte
By the bank when the account is the
motion by the AMLC, in a criminal
subject of a suspicious or covered
prosecution for money laundering pending
transaction report
before it.
By the Anti-Money Laundering Council
(AMLC) when the account belongs to a
By the Court of Appeals motu proprio in an
appeal from a judgment of conviction of a
criminal charge for money laundering.
Auto Mo, Ayos Ko is a . (1%)
In none of the above.

De jure corporation
SUGGESTED ANSWER:
De facto corporation
(E) In none of the above.
Corporation by estoppels
(Section 10 of the Anti-Money
General partnership
Laundering Act)
None of the above.

XI. Unknown to the other four proponents,

SUGGESTED ANSWER:
Enrico (who had been given the task of
NOTE: The last sentence of the given
attending to the Articles of Incorporation of
problem is unclear as to whether the
the proposed corporation, Auto Mo, Ayos
term “latter” refers to Enrico or to the
Ko) misappropriated the filing fees and
incorporators. As such, it is necessary to
never filed the Articles of Incorporation with
qualify the answer depending on the
the Securities and Exchange Commission
meaning given to the term “latter”
(SEC). Instead, he prepared and presented
(C) Corporation by estoppels
to the proposed incorporators a falsified
SEC certificate approving the Articles.
If the term “latter” refers to the
Relying on the falsifies SEC certificate, the
incorporators, the correct answer is C
latter began assuming and discharging
(Section 20 and 21 of the Corporation
corporate powers.
Code).

(E) None of the above.

If the term “latter” refers to Enrico, the
correct answer is E (Sections 20 and 21
of the Corporation Code).

XII. Preferred shares cannot vote on the proposal

To include other corporate officers in the

corporation’s by-laws
To issue corporate bonds
To shorten the corporate term

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 98 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

All of the above Is the policy valid and binding? (1%)

None of the above.
Yes, the policy is valid and binding because
SUGGESTED ANSWER: Aurelia has an insurable interest on the life
(E) None of the above. of Kaddafy Benjelani.
No, the policy is not valid and binding
Under letter (A), to include other because Kaddafy Benjelani has been
corporate officers in the corporation’s officially declared a public enemy.
by-laws. This will require the Yes, the policy is valid and binding because
amendment of the by-laws, and as such, it has been in force for more than two
preferred shares shall be allowed to years.
vote. No, the policy is not valid and binding since
Under letter (B), to issue corporate bonds the spouses’ estrangement removed Aurelia’s
– Such corporate bonds are construed as insurable interest in Benjelani’s life.
bonded indebtedness, then preferred
shares shall be allowed to vote. None of the above.
Under letter (C), to shorten the corporate
term, - Under Section 6 of the SUGGESTED ANSWER”

Corporation Code, preferred shares shall Yes the policy is valid and binding

be allowed to vote. because Aurelia has an insurable interest

XIII. In 2010, the Philippine National Police
declared Kaddafy Benjelani ―Public Enemy No.
1‖ because of his terrorist activities in
the country that have resulted in the death
of thousands of Filipino. A ransom of P15
million was placed on Kaddafy Benjelani’s head.
Worried about the future of their family,
Kaddafy Benjelani’s estranged wife, Aurelia,
secured in December 2010 a life insurance
policy on his life and designated herself as
the beneficiary.
on the life of Kaddafy Benjelani.
The policy is valid. Aurelia had insurable
interest in the life of Kaddafy Benjelani,
because he is her husband even if they
are estranged (Section 10 (a) of the
Insurance Code). Kaddafy Benjelani is
not a public enemy, because he is not a
national of an enemy country (Filipinas
Compañia de Sejunos v. Christern,
Huefeld & Company, Inc., 89 Phil. 54,
1951).

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 99 of 173
Mercantile Law Q&As (2007-2013)
XIV. Muebles Classico, Inc. (MC), a Manila-
based furniture shop, purchased hardwood
lumber from Surigao Timber, Inc. (STI), a
Mindanao-based logging company. MC was
pay STI the amount of P5.0 million for 50
tons of lumber. To pay STI, MC opened a
letter of credit with Baco de Plata (BDP).
BDP duly informed STI of the opening of a
letter of credit in its favor.
In The meantime, MC- which had been
undergoing financial reverses = filed a
petition for corporate rehabilitation. The
rehabilitation court issued a Stay Order to
stay the enforcement of all claims against
MC.
After shipping the lumber, STI went to BDP,
presented the shipping documents, and
demanded payment of the letter of credit
opened in its favor. MC, on the other hand,
informed the bank of the Stay Order and
instructed it to deny payment to STI
because of the Stay Order.
BDP comes to you for advice. Your best
advice is to . (1%)
(A) Grant STI’s claim,
―Independence Principle,‖ the bank deals only
with the documents and not the underlying
circumstances; hence, the presentation of
the letter of credit is sufficient.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
Deny STI’s claim. The Stay Order covers all
claims against the debtor and binds all its
creditors. The letter of credit is a claim
against the debtor that is covered by the
Stay Order.
Grant STI’s claim. The letter of credit is not a
claim against the debtor under
rehabilitation, but against the bank which
has assumed a solidary obligation.
Deny STI’s claim. If the bank disregards the
Stay Order, it may be subject to contempt
by the rehabilitation court. STI should file
its claim with the rehabilitation court.
File an action for interpleader to resolve the
parties’ competing claims
SUGGESTED ANSWER:
Grant SIT’s claim. The letter of credit is
not a claim against the debtor under
rehabilitation. But against the bank
which has assumed a solidary obligation.
(Metropolitan Waterworks and Sewerage
System v. Daway, 432 SCRA 559, 2004)
XV. Akiro of Tokyo, Japan sent various
goods to his friend Juan in Cebu City,
Philippines , through one of the vessels of
Under the Worthsell Shippers, Inc., an American
corporation. En route to Cebu City, the
vessel had two stops, first in Hong Kong,
and second, in Manila.
XV.(1) While traveling from Tokyo to Hong
Kong, the goods were damaged.
Page 100 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER:
What law will govern? (1%) Yes, provided he files the complaint
within 1 year from delivery.
Japanese law (Section 3 (6) of Carriage of Goods by Sea
Hong Kong law Act; Belgian Overseas Chartering
Chinese law &Shipping N.V. v. Philippine First
Philippine law Insurance Company, Inc., 383 SCRA 23,
American law 2002)

SUGGESTED ANSWER:
Philippine law (Article
1753, Civil Code)
(Eastern Shipping Lines, Inc. v.
Intermediate Appellate Court, G.R. No. L-
69044, May 29, 1987).

XV.(2) Assuming Philippine law to be

applicable and Juan fails to file a claim
with the carrier, may he still commence
an action to recover damages with the
court? (1%)

No, the failure to file a claim with the

carrier is a condition precedent for
recovery.
Yes, provided he files the complaint with
10 years from delivery.
Yes, provided he files the complaint with
10 years from discovery of the damage.
Yes, provided he files the complaint within
1 year from delivery.
Yes, provided he files the complaint with 1
year from discovery of the damage.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 101 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

2012 Mercantile Law Exam serves to reduce the risk of non-

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

SUGGESTED ANSWER: the bank a xerox copy of the Bill of

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 102 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

strictly corn plied with or 4. AAA Carmakers opened an

else funds will not be irrevocable Letter of Credit with BBB
released. Banking Corporation with CCC Cars
Yes, because an irrevocable Corporation as beneficiary. The,
letter of credit means that irrevocable Letter of Credit was
the issuing bank undertakes opened to pay for the importation of
to release the fund anytime ten (1 0) units of Mercedes Benz S
when claimed by the class. Upon arrival of the cars, AAA
beneficiary, regardless of the Carmakers found out that the cars
kind of document presented. were all not in running condition
Yes, because the issuing bank and some parts were missing. As a
can always justify to CCC consequence, AAA Carmakers
Corporation that xerox instructed BBB Banking
copies are considered as Corporation not to allow drawdown
faithful reproduction of the on the Letter of Credit. Is this legally
original copies. possible?
Yes, because the issuing bank a. No, because under the
really has no discretion to "Independence Principle",

determine whether the conditions for the

documents presented by the drawdown on the Letters of

beneficiary are sufficient or Credit are based only on

not. documents, like shipping

documents, and not with
SUGGESTED ANSWER: the condition of the goods
subject of the importation.
a. No, because the rule of strict
Yes, because the acceptance by
compliance in commercial
the importer of the goods
transactions involving letters of
subject of importation is
credit, requiring documents set as
material for the drawdown of
conditions for the release of the
the Letter of Credit.
FUND ,has to be strictly corn
Yes, because under the
plied with or else funds will not be "Independence Principle", the
released. seller or the beneficiary is
always assured of prompt
payment if there is no breach

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 103 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

in the contract between the b. Assign the warehouse receipt

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

a. No, because under the SUGGESTED ANSWER:

"Independence Principle",
conditions for the drawdown on a. No, because under the
the Letters of Credit are based "Independence Principle",
only on documents, like shipping conditions for the drawdown on
documents, and not with the the Letters of Credit are based
condition of the goods subject of only on documents, like shipping
the importation. documents, and not with the
condition of the goods subject of
the importation.

For a fee, X deposited 1,000 sacks of

corn in the warehouse owned by Y.
Y is in the business of warehousing. 6. The warehouseman, by issuing the
Y issued a warehouse receipt as warehouse receipt, acknowledges
proof of the possession of the 1,000 that the goods are in his possession,
sacks of corn. The warehouse but he can refuse to deliver the
receipt states as follows: "Deliver to goods to the holder of the
X or bearer 1,000 sacks of corn." X warehouse receipt covering the
wanted to use the warehouse receipt goods if -
as payment of his debt in favor of Z. a. the warehouse receipt
How can the ownership of the goods covering the goods is not
covered by the warehouse receipt be presented.
transferred? b. the lien of the
a. Negotiate the warehouse warehouseman is not
receipt by just delivering satisfied.
the warehouse receipt to Z.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 104 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

the said holder presents a was asked to sign a Trust Receipt

materially altered warehouse covering the goods. When the goods
receipt. were sold, X did not deliver the
All of the above. proceeds to BBB Banking
Corporation, arguing that he will
need the fund for the subsequent
importation. Is there sufficient basis
SUGGESTED ANSWER:
to sue for criminal action?
Yes, because X's failure to turn
d. All of the above.
over the proceeds to the
bank is a violation of the
Trust Receipt Law.
7. The legal remedy of the No, because the trust receipt
warehouseman in case of conflicting was signed only after the
claims is to --- delivery of the goods. When
a. file an action for the trust receipt was signed,
interpleader. the ownership of the goods
give the goods to the first one was already with X.
who first presented the Yes, because violation of Trust
warehouse receipt. Receipt Law is mala
use his discretion as to who he prohibita, intention is
believes has the prior right. irrelevant.
keep the goods and appropriate No, because X has a valid reason
them to himself. not to deliver the proceeds to
BBB Banking Corporation.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
a. file an action for interpleader.
Yes, because X's failure to turn over
BBB Banking Corporation issued a the proceeds to the BANK is a
Letter of Credit in the amount of violation of the Trust Receipt
P5Million, for the purchase of five (5)
Law.
tons of corn by X. Upon arrival of
the goods, the goods were delivered
to the warehouse of X. Thereafter he

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 105 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

c. Yes, because violation of Trust payment under the Trust

Receipt Law is mala prohibita, Receipts Law.
intention is irrelevant. c. X can be held criminally
liable under the Trust
Recommendation in respect of MCQ #8: Receipts Law regardless of
the purpose or intention
It is recommended that examinees be
for the use of the proceeds.
given full credit for whatever answer they
X cannot be held criminally
gave as there are two possible correct
liable because the underlying
answers of equal value: (a) and (c).
obligation is one of simple
loan.

SUGGESTED ANSWER:
X secured a loan from BBB Bank to pay
for the importation of some dried
c. X can be held criminally liable
fruits. Upon arrival of the goods
under the Trust Receipts Law
consisting of dried fruits imported
regardless of the purpose or
by X but before delivery to him, a
intention for the use of the
trust receipt was executed by X to
proceeds.
cover the transfer of the dried fruits
to his possession. The dried fruits
were so saleable but instead of
turning over the proceeds of the X is the President of AAA Products
sale, X used the funds to pay for the Corporation. X signs all the Trust
medical expenses of his mother who Receipts documents for certain
was sick of cancer of the bone. importations of the company. In the
Which statement is most accurate? event of failure to deliver the
X cannot be held criminally proceeds of the sale of the goods to
liable because although he the bank, which statement is most
did not pay the bank he used accurate?
the proceeds for a good The criminal liability will not
reason. attach to X as President
Fraud or deceit is a necessary because of separate juridical
element to hold X criminally personality.
liable for non - For violation of Trust Receipts
Law, the law

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 106 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

specifically provides for who bears the risk of the

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

the trust receipt for and in

the person to whom goods are
behalf of the corporation.
delivered for sale and who
The officer of the corporation will
bears the risk of the loss;
be held liable provided it is
clear that the officer
concerned participated in the
decision not to pay. Which phrase best completes the
statement - In accordance with the
SUGGESTED ANSWER:
Trust Receipt Law, purchasers of
the goods from the Entrustee will:
b. For violation of Trust
Receipts Law, the law
get the goods only as a
specifically provides for
collateral;
the imposition of penalty
not get good title to the goods;
upon directors I officers of
only get security interest over
the corporation. the goods;
get good title to the goods.

SUGGESTED ANSWER:
Who is the Entrustee in a Trust Receipt
arrangement? get good title to the goods.

the owner of the goods;

the one who holds the goods
and receives the proceeds X acted as an accommodation party in
from the sale of the goods; signing as a maker of a promissory
the person to whom goods are note. Which phrase best
delivered for sale and

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 107 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

completes the sentence - This b. The promissory note is

means that X is liable on the non-negotiable because the
instrument to any holder for value: option as to which form of
payment is with the
for as long as the holder does maker.
not know that X is only an The promissory note is an
accommodation party.
invalid instrument because
even though the holder knew
there is more than one form
all along that X is only an
of payment.
accommodation party.
The promissory note can be
for as long as X did not receive
negotiated by way of delivery.
any consideration for acting
as accommodation party. SUGGESTED ANSWER:
provided X received
consideration for acting as b. The promissory note is non-

accommodation party. negotiable because the option as

to which form of payment is with
SUGGESTED ANSWER: the maker.

b. even though the holder X issued a promissory note which states

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 108 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, the promissory note is a. Z can encash the check even

negotiable because the Hong though Y did not indorse the check.
Kong dollar is a known
foreign currency in the A stale check is a check -
that cannot anymore be
Philippines.
paid although the
SUGGESTED ANSWER: underlying obligation still
exists.
b. Yes. The promissory note is that cannot anymore be paid
negotiable even though the and the underlying
amount is stated in foreign obligation under the check is
currency. also extinguished.
that can still be negotiated or
X delivered a check issued by him and
indorsed so that whoever is
payable to the order of CASH to Y in
the holder can
payment for certain obligations
which has not been presented for
incurred by X in favor of Y. Y then
payment within a period of
delivered the check to Z in payment
thirty (30) days.
for certain obligations. Which
statement is most accurate? SUGGESTED ANSWER:
Z can encash the check even
though Y did not indorse a. that cannot anymore be paid
the check. although the underlying obligation still
Z cannot encash the check for exists.
lacking in proper
endorsement. In payment for his debt in favor of X, Y

Y is the only one liable because gave X a Manager's Check in the

he was the one who delivered amount of Php100,000 dated May

the check to Z. 30, 2012. Which phrase best

The negotiation is not valid completes the statement - A

because the check is an Manager's Check:

instrument payable to order. is a check issued by a manager

of a bank for his own
SUGGESTED ANSWER: account.
is a check issued by a manager
of a bank in the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 109 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

name of the bank against a. negotiation can be made by

the bank itself for the delivery only.
account of the bank.
c. is like any ordinary check As payment for a debt, X issued a

that needs to be presented promissory note in favor of Y but the

for payment also. promissory note on its face was

d. is better than a cashier's marked non-negotiable. Then Y

check in terms of use and instead of indorsing the promissory

effect. note, assigned the same in favor of Z

to whom he owed some debt also.
Which statement is most accurate?
Z cannot claim payment from X
SUGGESTED ANSWER: on the basis of the
promissory note because it is
b. Is a check issued by a manager
marked non-negotiable.
of a bank in the name of the bank
Z can claim payment from X
against the bank itself for the
even though it is marked
account of the bank.
non-negotiable.
Z can claim payment from Y
Which phrase best completes the
because under the
statement -- A check which is
Negotiable Instrument Law,
payable to bearer is a bearer
negotiation and assignment
instrument and:
is one and the same.
negotiation can be made by
Z can claim payment from Y only
delivery only;
because he was the endorser
negotiation must be by written
of the promissory note.
indorsement;
negotiation must be by specific
SUGGESTED ANSWER:
indorsement;
negotiation must be by b. Z can claim payment from X
indorsement and delivery. even though it is marked non-negotiable.

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 110 of 173
Mercantile Law Q&As (2007-2013)
Negotiable instruments are used as
substitutes for money, which means
- drawer
that they can be considered legal
tender.
that when negotiated,
can be used to
indebtedness.
that at all times the delivery of
the instrument is equivalent
to delivery of the cash.
that at all times negotiation of
the instruments
proper indorsement.
SUGGESTED ANSWER:
b. That when negotiated, they can
be used to pay indebtedness.
The signature of X was forged as drawer
of a check. The check was deposited
in the account of Y and when
deposited was accepted by AAA
Bank, the drawee
Subsequently, AAA Bank found out
that the signature of X was actually
forged. Which statement is most
accurate?
The drawee bank can recover
from Y, because the check
was deposited
account.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
The drawee bank can recover
from X, because he is the
even though his
signature was forged.
The drawee bank is estopped
they from denying the
pay genuineness of the
signature of the X, the
drawer of the check.
The drawee bank can recover
from Y because as endorser
he warrants the genuineness
requires of the signature.
SUGGESTED ANSWER:
c. The drawee bank is estopped
from denying the genuineness of
the signature of the X, the drawer
of the check.
A issued a check in the amount of
Php20,000 payable to B. B endorsed
the check but only to the extent of
Php1 0,000. Which statement is
most accurate?
bank. The partial indorsement is not
a valid indorsement,
although will result in the
assignment of that part.
The partial indorsement will
invalidate the whole
instrument.
in his The endorsee will be considered
as a holder in due course.
Page 111 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

d. The partial indorsement is SUGGESTED ANSWER:

valid indorsement up to the
a. a bill of exhchange
extent of the Php10,000.

SUGGESTED ANSWER: A check was issued to Tiger Woods. But

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

the promissory note can just assumed name.

be delivered and the maker

will still be liable.

Y, as President of and in behalf of AAA

SUGGESTED ANSWER:
Corporation, as a way to

d. the note can still be assigned accommodate X, one of its

stockholders, endorsed the check
and the marker made liable
issued by X. Which statement is
A check is - most acurate?
a bill of exchange; It is an ultra vires act.
the same as a promissory note; It is a valid indorsement.
is drawn by a maker; The corporation will be held
a non-negotiable instrument. liable to any holder in due
course.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 112 of 173
Mercantile Law Q&As (2007-2013)
d. It is an invalid indorsement.
SUGGESTED ANSWER:
it is an ultra vires act.
it is a valid indorsement.
Recommendation in respect of MCQ #27:
It is recommended that examinees be given
full credit for whatever answer they gave as
there are two possible correct answers of
equal value: (a) which is supported by the
case of Jose v. CA, et al., G.R. No. 80599,
September 15,1989, and (b)
supported by Section 22 of the Negotiable
Instrument Law.
In a negotiable instrument, when the
sum is expressed both in numbers
and in words and
discrepancy between the words and
the numbers -
the sum expressed in words
will prevail over the one
expressed in numbers.
the sum expressed in numbers
will prevail over
expressed in words.
the instrument becomes void
because of the discrepancy.
this will render the instrument
invalid.
SUGGESTED ANSWER:
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
a. the sum expressed in words will
prevail over the one expressed in
numbers.
A promissory note which is undated is
presumed to be -
dated as of the date of issue;
dated as of the date of the first
indorsement;
promissory note is invalid
because there is no date;
dated on due date.
SUGGESTED ANSWER:
which is
a. dated as of the date of issue
An insurance contract is an aleatory
contract, which means that -
the insurer will pay the insured
there is equivalent to the amount of
the premium paid.
the obligation of the insurer is
to pay depending upon the
happening of an uncertain
future event.
the insured pays a fixed
the one premium for the duration of
the policy period and the
amount of the premiums
paid to the insurer is not
necessarily the same amount
as what the insured will get
upon the happening of an
uncertain future event.
Page 113 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

the obligation of the insurer is to b. are to be constructed liberally

pay depending upon the in favour of the insured and strictly
happening of an event that is against the insurer who drafted the
certain to happen. insurance policy,

SUGGESTED ANSWER: X is the common law wife of Y. Y loves X

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

invalidate the contract. life insurance policy on the life of Y will

be entitled to the proceeds of the life
SUGGESTED ANSWER: insurance.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 114 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

X, in January 30, 2009, or two (2) years
before reaching the
insured his life for Php20Million.
For reason unknown to his family,
he took his own life two (2) days
after his 65th birthday. The policy
contains no excepted risk. Which
d. The life insurance is valid
age of 65, provided the disposition of
the proceeds will be subject
to the approval of the legal
guardian of the minor.
SUGGESTED ANSWER:

statement is most accurate?

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

a. the insurer will be liable. the insurer cannot

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 115 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

insurance· policy two (2) b. existing at the time of

years after death. perfection and at the time of loss for
property
SUGGESTED ANSWER:
A house and lot is covered by a real
b. the two (2) years after date of estate mortgage (REM) in favor of
issuance or reinstatement of the life ZZZ Bank. The bank required that
insurance policy the insurer cannot the house be insured. The owner of
anymore prove that the policy is void the policy failed to endorse nor
abignitio or rescindable by reason of assign the policy to the bank.
fraudulent concealment or However, the Deed of Real Estate
misrepresentation of the insured. Mortgage has· an express provision
which says that the insurance policy
For both the Life Insurance and
is also endorsed with the signing of
Property Insurance, the insurable
the REM. Will this be sufficient?
interest is required to be -
No, insurance policy must be
existing at the time of perfection
expressly endorsed to the
of the contract and at the
bank so that the bank will
time of loss.
have a right in the
existing at the time of
proceeds of such insurance
perfection and at the time
in the event of loss.
of loss for property
The express provision contained
insurance but only at the
in the Deed of Real Estate
time of perfection for life
Mortgage to the effect that
insurance.
the policy is also endorsed is
existing at the time of perfection
sufficient.
for property insurance but
Endorsement of Insurance Policy
for life insurance both at the
in any form is not legally
time of perfection and at the
allowed.
time of loss.
Endorsement of the Insurance
existing at the time of perfection
Policy must be in a formal
only.
document to be valid.

SUGGESTED ANSWER:
SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 116 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

a. No, insurance policy must be X insured the building she owns with
expressly endorsed to the bank so that two (2) insurance companies for the
the bank will have a right in the same amount. In case of damage, -
proceeds of such insurance in the event X can not claim from any of the
of loss. two (2) insurers because with
the double insurance, the
X is a passenger of a jeepney for hire insurance coverage becomes
being driven by Y. The jeepney automatically void.
collided with another passenger the two (2) insurers will be
jeepney being driven by Z who was solidarily liable to the extent
driving recklessly. As a result of the of the loss.
collision, X suffered injuries. Both the two (2) insurers will be
passenger jeepneys are covered by proportionately liable.
Comprehensive Motor Vehicular X can choose who he wants to
Insurance Coverage. If X wants to claim against.
claim under the "no fault indemnity
clause", his claim will lie - SUGGESTED ANSWER:
against the insurer of the
jeepney being driven by Z d. X can choose who he wants to

who was the one at fault. claim against.

the claim shall lie against the
When X insured his building, X
insurer of the passenger
indicated in the application that it is
jeepney driven by Y
a residential building, but actually
because X was his
the building was being used as a
passenger.
warehouse for some hazardous
X has a choice against whom he
materials. What is the effect on the
wants to make his claim.
insurance policy, i f any?
None of the above.
The insurance policy can be
SUGGESTED ANSWER: cancelled because of the
change in the use.
b. the claim shall lie against the The insurance policy will
insurer of the passenger jeepney driven automatically be changed.
by Y because X was his passenger. The insurance policy need not be
changed.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 117 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

The insurance policy is fixed over the house and lot was
regardless of the change in already transferred.
the use. Y will be the one entitled to the
proceeds because he now
Recommendation in respect of MCQ #40:
owns the partially burnt
house and lot.
It is recommended that examinees be given
full credit for whatever answer they gave as SUGGESTED ANSWER:
the question is unclear. What is clear is that
there was misrepresentation on the part of X b. X is still entitled to the
when he indication in his application that proceeds of the insurance policy because
the building is residential when it was what is material is that at the time of
actually being used as a warehouse. The the loss, X is the owner of the house and
problem does not indicate that the change in lot.
the use of the house was carried out by X
and that it was done without the permission X, while driving his Toyota Altis, tried to

of the insurer. cross the railway tract of Philippine

(xxx line 2 unread text
X owned a house and lot. X insured the approached BlumentrittAvenida
house. The house got burned. Then Ext., applied its horn as a warning
he sold the partially burnt house to all the vehicles that might be
and the lot to Y. Which statement is crossing the railway tract, but there
most accurate? was really nobody manning the
X is not anymore entitled to the crossing. X was listening to his lpod
proceeds of the insurance touch, hence, he did not hear the
policy because he already sound of the horn of the train and
sold the partially burnt so his car was hit by the train. As a
house and lot. result of the accident, X suffered
X is still entitled to the some injuries and his car was totally
proceeds of the insurance destroyed as a result of the impact.
policy because what is Is PNR liable?
material is that at the time PNR is not liable because X
of the loss, X is the owner should have known that he
of the house and lot. was crossing a place
No one is entitled to the designated as crossing for
proceeds because ownership
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 118 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

train, and therefore should instantly. Is AAA Bus Company

have been more careful. liable?
b. PNR is liable because a. The bus company is not
Railroad companies owe to liable for as long as the bus
the public a duty of company can show that
exercising a reasonable when they hired X, they did
degree of care to avoid injury the right selection process.
to person and property at The bus company cannot be
railroad crossings which held liable because what X
means a flagman or a did is not part of his
watchman should have been responsrbility.
posted to warn the public at The bus company is liable
all times. because common carriers
PNR is not liable because it blew are liable for the
its horn when it was about to negligence or willful act of
cross the railway along its employees even though
BlumentrittAvenida Ext. they acted beyond the
PNR is not liable because X was scope of their
negligent, for listening to his responsibility.
lpod touch while driving. The bus company is not liable
because there is no way that
SUGGESTED ANSWER:
the bus company can
anticipate the act of X.
a. PNR is not liable because X
should have known that he was crossing SUGGESTED ANSWER:
a place designated as crossing for train,
and therefore should have been more c. The bus company is liable

careful. because common carriers are liable for

the negligence or wilful act of its
The AAA Bus Company picks up employees even though they acted
passengers along EDSA. X, the
beyond the scope of their responsibility.
conductor, while on board the bus,
drew his gun and randomly shot the X is a trader of school supplies in
passengers inside. As a result, Y, a Calapan, Oriental Mindoro. To bring
passenger, was shot and died the school supplies to Calapan, it
has to be transported by a vessel.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 119 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Because there were so many When X reached Los Angeles one (1)
passengers, the two (2) boxes of of the two (2) checked in luggage
school supplies were loaded but the could not be found. Which
shipping company was not able to statement is most accurate?
issue the Bill of Lading. So, on PAL is liable for the loss of the
board, the Ship Captain issued checked- in luggage under
instead a "shipping receipt" to X the provisions of the
indicating the two (2) boxes of Warsaw Convention on Air
school supplies being part of the Transport.
cargo of the vessel. Which phrase PAL is liable for the loss only if
therefore, is the most accurate? the baggage check expressly
the owner of the vessel is not states that the airline shall
liable because no bill of be liable in case of loss.
lading was issued to X PAL cannot be held liable
hence, no contract of because that is the risk that
carriage was perfected. a passenger takes when she
it is possible to have a checks- in her baggage.
contract of carriage of PAL can only be held liable if it
cargo even without a bill of can be proven that PAL was
lading, and the "shipping negligent.
receipt" would be
sufficient. SUGGESTED ANSWER:

c. the only acceptable

a. PAL is liable for the loss of the
document of title is a Bill of
checked-in-luggage under the provisions
Lading.
of the Warsaw Convention on Air
d. None of the above.
Transport.
SUGGESTED ANSWER:
X owns a passenger jeepney covered by

b. it is possible to have a contract Certificate of Public Convenience.

of carriage of cargo even wiht He allowed Y to use its Certificate of

Convenience for a consideration. Y
X took Philippine Airlines Flight PR 102 therefore was operating the
to Los Angeles, USA. She had two (2) passenger jeepney under the same
luggage checked-in and was issued Certificate of Public Convenience
two (2) baggage checks.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 120 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

(Kabit System) under the name of X. amount of Php1 ,000 daily under
The passenger jeepney met an the boundary system. This means
accident. Who will be liable? that anything above Php1 ,000
Y, the one actually operating the would be the earnings of Y. Y,
jeepney, will be liable to the driving recklessly, hit an old lady
injured party. crossing the street. Which statement
X will be the one liable to the is most accurate?
injured party despite the a. X as the owner is exempt
fact that it is Y who is from liability because he was
actually operating the not the one driving.
jeepney, because while the b. X as the owner is exempt
Kabit System is tolerated, from liability because
the public should not be precisely the arrangement is
inconvenienced by the one under the "boundary
arrangement. system".
X will not be held liable if he can X will not be exempt from
prove that he is not the liability because he
owner anymore. remains to be the
Public Policy dictates that the registered owner and the
real owner, even not the boundary system will not
registered one, will be held allow the circumvention of
liable. the law to avoid liability.
Y is the only one liable because
SUGGESTED ANSWER:
he drove recklessly.

b. X will be the one liable to the SUGGESTED ANSWER:

injured party despite the fact that it is Y
who is actually operating the jeepney, c. X will not be exempt from
because while the Kabit System is liability because he remains to be the
tolerated, the public should not be registered owner and the boundary
inconvenienced by the arrangement. system will not allow the circumvention
of the law to avoid liability.
X owns a fleet of taxicabs. He operates
it through what is known as The Articles of Incorporation of AAA
boundary system. Y drives one of Corporation was approved by the
such taxicabs and pays X a fixed SecuritiesandExchange

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 121 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Commission (SEC). After the receipt he signed all the loan

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

SUGGESTED ANSWER: b. X, as President, cannot be

personally held liable for the obligation
a. A de jure corporation of the corporation even though he signed
all the loan documents, because the loan
X, the President of ZZZ Corporation,
was authorized by the Board.
was authorized by the Board of
Directors of ZZZ Corporation to X owns 99% of the capital stock of SSS
obtain a loan from YYY Bank and to Corporation. X also owns 99% of
sign documents in behalf of the TTT Corporation. SSS Corporation
corporation. X personally negotiated obtained a loan from VW Bank. On
for the loan and got tile loan at very due date, SSS Corporation
low interest rates. Upon maturity of defaulted. TTT Corporation is
the loan, ZZZ Corporation was financiallyhealthy. Which statement
unable to pay. Which statement is is most accurate?
most accurate? X being a controlling owner of
Because X was personally acting SSS Corporation can
in behalf of the Corporation, automatically be held
he can be held personally personally liable for the loan
liable. of SSS Corporation.
X, as President, cannot be TTT Corporation, owned 99% by
personally held liable for X, can automatically be held
the obligation of the liable.
corporation even though
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 122 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

c. SSS Corporation and TTT SUGGESTED ANSWER:

Corporation, although both
are owned by X, are two (2) Banks

distinct corporations with

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

SUGGESTED ANSWER: piece of land located in Bacolod City

for use as a school. Which
c. SSS Corporation and TTT statement is most accurate?
corporation, although both are owned by The Register of Deeds of Bacolod
X, are two (2) distinct corporation with City can refuse to register
the separate juridical personalities and transfer the title because
hence, the TTT Corporation cannot the present head of the

automatically be held liable for the loan corporation sole is not a

of SSS corporation. Filipino.

The nationality of a corporation
A corporation generally can issue both sole depends upon the
par value stock and no par value nationality of the head at any
stock. These are all fixed in the given time.
Articles of Incorporation of the Acorporationsole,
corporation. Which of the following regardless of the
corporations may not be allowed to nationality of the head,
issue no par value shares? can acquire real property
Insurance companies; either by sale or donation.
Banks; A corporation sole is not legally
Trust companies; allowed to own real property.
All of the above.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 123 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: Was the Corporate Secretary

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

SUGGESTED ANSWER: percentage of what has been

paid.
c. Any number in multiples of five The Corporate Secretary cannot
(5), for as long as it is not less than five refuse because it is his legal
and no more than fifteen (15) duty to issue a
stock certificate
X subscribed 10,000 shares in the corresponding to the number
capital stocks of AAA Corporation. of shares actually subscribed
He paid 50% of the 10,000 shares. X regardless of the actual
asked the Corporate Secretary to payment.
issue him the corresponding stock
certificate representing the 50% of SUGGESTED ANSWER:

what he already paid. The Corporate

Secretary of the corporation refused.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 124 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

a. The Corporate Secretary is merger anytime after the

correct because the Corporation Code approval of the SEC.
provides that no certificate of stock
shall be issued to a subscriber until the SUGGESTED ANSWER:

shares as subscribed have been fully

b. The effective date of the
paid.
merger is always the date of the approval

55. XXX Corporation and YYY of the Articles of Merger by the SEC.

Corporation have agreed to be

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 125 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

SUGGESTED ANSWER: b. Classification of shares may be

allowed for as long as it is clearly stated
a. It only requires the approval of as such in the Articles of Incorporation
the Board of Directors of BBB of the Corporation.
Corporation.
ABC Corporation declared stock
57. The capital stock of ABC dividends to its stockholders. The
Corporation is divided into common stock dividends were approved by
shares and preferred shares. the Board of Directors of ABC
Preferred shares are preferred as to Corporation. In the subsequent year
dividends and common shares are however, the Board again approved
those shares which have the regular the redemption of all stock
and ordinary attributes of a share of dividends and to pay the
a corporation. Which statement is shareholdings in cash. Which
most accurate? statement is most accurate?
a. This kind of classification The redemption of the stock
may not be allowed or else it dividends can be validly
will violate the Doctrine of approved by the Board
Equality of shares. without any conditions.
b. Classifications of shares The redemption of stock
may be allowed for as long dividends may only be
as it is clearly stated as allowed if there are sufficient
such in the Articles of earnings and should not be
Incorporation of the violative of the trust fund
Corporation. doctrine.
c. Classifications of shares is The redemption of the shares
mainly for business purpose may be taken from the
to attract investors. existing property and other
Classifications of shares may be assets of the corporation.
allowed with the approval of None of the above.
the stockholders and the
Board of Directors. Recommendation in respect of MCQ #58:

SUGGESTED ANSWER: It is recommended that examinees be given

full credit for whatever answer they give as
the question is vague. It does not state that

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 126 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

stockholders representing at least two-thirds SUGGESTED ANSWER:

of the outstanding capital stock approved
b. Despite the change in
the declaration of stock dividends.
shareholder, there is actually no change
X sold all his shares in AAA Hotel in the juridical entity and therefore
Corporation to Y. X owns 99% of existing employees cannot automatically
AAA Hotel Corporation. As the new be considered separated.
owner, Y wanted a reorganization of
the hotel which is to include South China Airlines is a foreign airline

primarily the separation of all company. South China Airlines

existing employees and the hiring of tickets are sold in the Philippines

new employees. Which statement is though Philippine Airlines as their

most accurate? general agent. South China Airlines

With the change in ownership, is not registered to do business as

in effect there is a new such with the Philippine Securities

juridical entity and therefore and Exchange Commission. Which

all employees are considered statement is most accurate?

separated. Although unlicensed to do

Despite the change in business in the Philippines,
shareholder, there is South China Airlines can sue
actually no change in the before the Philippine Courts
juridicalentityand and can also be sued.
thereforeexisting South China Airlines can sue
employeescannot but cannot be sued.
automatically be South China Airlines cannot sue

considered separated. and cannot be sued also.

Y, as the new shareholder, has South China Airlines can be

the right to retain only those sued in Philippine Courts

employees who in his but cannot sue.

judgment are qualified.
SUGGESTED ANSWER:
For as long as the existing
employees are given their
d. South China Airlines can be
separation pay, they can be
sued in Philippine Courts but cannot
terminated.
sue.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 127 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

So that ABC Corporation could venture shares equivalent to their

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

Recommendation in respect of MCQ #62:

SUGGESTED ANSWER:

It is recommended that examinees be given

a. The existing shareholders
full credit for whatever answer they gave as
can subscribe to the new

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 128 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

the question is vague. It does not state that extended. What will happen to the
the increase of the authorized capital stock corporation?
also requires the approval of the SEC. a. The corporation is
dissolved ipso facto.
X is a minority stockholder of CCC There is a need to pass a board
Corporation. Y is a member of the resolution to formally
Board of Directors of CCC dissolve the corporation.
Corporation and at the same time The Board of Directors must
he is the President. X believes that Y pass a resolution for the
is mismanaging CCC Corporation
corporation to formally go
hence, as a stockholder and in
into liquidation.
behalf of the other stockholders, he
The stockholders must pass a
wanted to sue Y. Which statement is
resolution to dissolve the
most accurate?
corporation.
X can institute a derivative suit
in behalf of himself as a SUGGESTED ANSWER:
stockholder.
A derivative suit must be a. The corporation is dissolved

instituted in behalf of the ipso facto.

corporation.
The term of one (1) year of the Board of
Derivative suit is an exclusive
Directors of AAA Corporation
remedy that X can institute.
expired last February 15, 2012. No
Derivative suit is not the remedy
new election of the Board of
in this situation.
Directors was called, hence, the
SUGGESTED ANSWER: existing members of Board continue
as Directors in hold over capacity.
b. A derivative suit must be Which statement is most accurate?
instituted in behalf of the corporation This is allowed provided there
is a valid and justifiable
The term GGG Corporation in
reason for not calling for
accordance with its Articles of
an election of the new
Incorporation ended last January
members of the Board.
30, 2012. The term was not

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 129 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

This is not allowed because the of its license to do

term of the directors must business.
only be for one (1) year. There is no more effect in the
The positions of the members of license because anyway at
the Board of the time of registration, a
Directorswillbe resident agent was
automatically declared appointed.
vacant. This can be a ground for
Acting as members of the Board suspension only.
of Directors in a hold over This will result in automatic
capacity must be ratified by revocation of its license to do
the stockholders. business in the Philippines.

SUGGESTED ANSWER: SUGGESTED ANSWER:

a. This is allowed provided there a. This can be a ground for

is a valid and justifiable reason for not revocation or suspension of its license to
calling for an election of the new do business.
members of the Board.
The By-laws of ABC Corporation is
AAA Corporation is a foreign silent as to when a stockholder can
corporation that wants to operate a be qualified to attend the meeting of
representative office here in the the stockholders. The Corporate
Philippines. As required by the Secretary sent out the notice of the
Corporation Code, there is a need to stockholders meeting two (2) days
appoint a Resident Agent as a before the meeting and at that time
condition precedent to the issuance X was not yet a stockholder. On the
of a license to transact business in day of the meeting, however, X
the Philippines. After two (2) years, became a shareholder which was
AAA Corporation removed its duly recorded in the stock and
Resident Agent and did not appoint transfer book. Which statement is
anyone anymore. Which statement most accurate?
is the most accurate? X is a stockholder of ABC
This can be a ground for Corporation as of the time
revocation or suspension of meeting of the
stockholders for the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 130 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

purpose of electing the b. bought shares of XYC

members of the board. Corporation, a sister
b. X is not qualified to elect company of ABC Corporation
members of the board when he learned that XYC
because at the time the Corporation was about to
notice of the meeting was also list its share in the
sent, she was not yet a Philippine Stock Exchange.
stockholder. c. bought shares of ZZZ
Qualifications as to who are Corporation when he learned
considered as stockholders that ABC Corporation would
on record for purposes of acquire ZZZ Corporation.
being able to elect members All of the above.
of the board are to be
determined by the By-laws SUGGESTED ANSWER:

alone.
All of the above.
None of the above.

The purpose of the "Tender Offer" Rule

SUGGESTED ANSWER:
is to -

a. X is a stockholder of ABC ensure an even playing field for

Corporation as of the time of meeting of all shareholders of a

the stockholders for the purpose of company in terms of

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 131 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

the opportunity for a better b. the Philippine Stock

price. Exchange;
All of the above. c. the Securities and
Exchange Commission;
SUGGESTED ANSWER: d. the Securities and Exchange
All of the above. Commission and the
Philippine Stock Exchange.
Section 38 of The Securities Regulation
Code defines an independent
SUGGESTED ANSWER:
director as a person who must not
have a relation with the corporation c. The Securities and Exchange
which would interfere with his Commission
exercise of independent judgment in
carrying out the responsibilities of a The government agency granted with
director. To ensure independence the power of supervision and
therefore, he must be - examination over banks and non-
nominated and elected by the bank financial institutions
entire shareholders; performing quasi-banking functions,
nominated and elected by the to ensure that the conduct of its
minority shareholders; business is on a sound financial
nominated and elected by the basis that will provide continued
majority shareholders; solvency and liquidity is -
appointed by the Board. The Philippine Deposit
Insurance Corporation;
SUGGESTED ANSWER: The Bangko Sentral ng
Pilipinas;
c. Nominated and elected by the
The Anti-Money Laundering
majority shareholders; Council;
The Securities and Exchange
"Securities" issued to the public are
Commission.
required by law to be registered with
-
SUGGESTED ANSWER:
the Bangko Sentral ng Pilipinas;
b. The Bangko Sentral ng Pilipinas

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 132 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

X maintains a savings deposit in the XYZ Corporation is a quasi-

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

from the savings account

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

ABC Bank can set-off the loan 11.

from the savings account being

SUGGESTED ANSWER:
maintained by X with ABC bank.

c. 21
XYZ Corporation is engaged in lending
funds to small vendors in various
All senior officers of ABC Bank are
public markets. To fund the lending,
entitled to obtain a housing loan. X
XYZ Corporation raised funds
is an Executive Vice President for
through borrowings from friends
Operations of ABC Bank. She
and investors. Which statement is
obtained a housing loan with the
most accurate?
a. XYZ Corporation is a bank.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 133 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

ABC Bank. Which statement is most owned by ABC Holding Company.

accurate? Which statement is most acurate?
a. The housing loan of X Buying back the shares by XYZ
requires a guarantor from Bank is absolutely not
somebody who is not allowed.
connected with the bank. Buying back the shares may be
b. The housing loan of X allowed provided it is with
requires the approval of the the approval of the
Board of Directors of the Monetary Board and
bank. disposed of within six (6)
The housing loan of X, being a months.
benefit for employees, does Buying back the shares may be
not require (a) but will allowed provided such
require (b). shares 'will be disposed of
The housing loan of X, being a within ten (1 0) years.
benefit for employees, will Buying back the shares may be
not require done anytime provided the
(a) and (b). Board of Directors will
approve the same.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
d. The housing loan of X, being a
benefit for employees, will not require (a) b. Buying back the shares may be

and (b). allowed provided it is with the approval

of the Monetary Board and disposed of
ABC Holdings Company, a Hong Kong within six (6) months.
company, owns 10% of XYZ Bank.
Because of the peace and order X is being charged for violation of Anti-
situation in the Philippines, ABC Graft and Corrupt Practices because
Holding Company wanted to sell its he is suspected of having
shareholdings in XYZ Bank. accumulated unexplained wealth. X
Unfortunately, nobody is interested maintains deposit accounts with
to buy a 1 0% shareholdings in a ABC Bank. The Ombudsman filed
bank. The board of directors of XYZ criminal cases against X before the
Bank thought that it would be a Sandiganbayan. Can the Court
good idea to buy back the shares issue subpoenas against ABC Bank

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 134 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

to produce all documents pertaining big amounts. Which statement is

to all the deposit accounts of X? most accurate?
a. Yes, because there is a. The same rules under
already a pending case and Secrecy of Bank Deposit
provided the subpoena Act will apply.
must be specific as to b. An approval from the
which account. Monetary Board is necessary
b. Yes, it is enough that the to open the account.
specific bank is identified. Because the deposit is in US
No, because the issuance of the Dollars, it is covered by the
subpoena has no real legal Foreign Currency Deposit
basis. Act which allows disclosure
Even without a subpoena, only upon the written
information about the permission of the depositor.
deposit accounts of X can be Approval from the Court is
submitted to the necessary to order disclosure
Sandiganbayan because it of the account.
will be used in a pending
case. SUGGESTED ANSWER:

SUGGESTED ANSWER: a. The same rules under Secrecy

of Bank deposit Act will apply.
a. Yes, because there is already a
pending case and provided the subpoena X is a depositor of AAA Bank. She has

must be specific as to which account.
X, a private individual, maintains a
dollar deposit with ABC Bank. X is
suspected to be the leader of a
Kidnap for Ransom Gang and he is
suspected of depositing all ransom
money in said deposit
which are all in US Dollars. The
police want to open said account to
know if there are really deposits in
three (3) deposit accounts all under
her name. One, in checking
account, one in saving account and
another one in time deposit account.
Each account has a balance of
Php250,000. AAA Bank became
insolvent. Philippine Deposit
account Insurance Corporation closed the
Bank. X therefore is unable to
withdraw from all of the accounts.
She then filed her claims with the
Philippine Deposit Insurance

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 135 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Corporation. Which statement is a. In an examination to determine

most accurate? gross estate of a decedent.
a. X can claim a total of
Php500,000 for all the X works as a research computer

three (3) accounts. engineer with the Institute of

X can only claim from one (1) Computer Technology, a government

account of Php250,000. agency. When not busy with his

X can claim a total of work, but during office hours, he

Php750,000 from all the developed a software program for

three (3) accounts. law firms that will allow efficient

X cannot claim anything from monitoring of the cases, which

any of the deposit accounts. software program is not at all

related to his work. Assuming the
SUGGESTED ANSWER: program is patentable, who has the
right over the patent?
a. X can claim a total of Php X;
500,000 for all the three (3) accounts. Institute of Computer
Technology;
The Bank Secrecy Law (RA 1405)
Neither X nor the Institute of
prohibits disclosing any information
Computer Technology can
about deposit records of an
claim patent right over the
individual without court order
invention;
except -
X and the employer of X will
in an examination to
jointly have the rights over
determine gross estate of a
the patent.
decedent.
in an investigation for violation SUGGESTED ANSWER:
of Anti-Graft and Corrupt
Practices. a. X
in an investigation by the
Ombudsman. The "test of dominancy" in the Law on

in an impeachment proceeding. Trademarks, is a way to determine

whether there exists an
SUGGESTED ANSWER: infringement of a trademark by -

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 136 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

determining if the use of the b. X can sue Y for

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 137 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

any agent of the owner of the a. obligations both past and

Patent right. future;
obligations existing at the
SUGGESTED ANSWER: time the mortgage is
constituted;
b. the Director of Legal Affairs of
future obligations only;
the Intellectual Property Office;
past obligations only.

The Fair Use Doctrine allows others to

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

SUGGESTED ANSWER: SUGGESTED ANSWER:

b. effect of the use upon the c. properties described in the

potential market of the work. deed except in case of stock in trade
being a substitute;
Which phrase best completes the
statement - A chattel mortgage can Which phrase best completes the
be constituted to secure: statement - The Deed of Chattel
mortgage, if not registered with the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 138 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Register of Deeds where debtor c. in the Stock and Transfer

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

affect third party;

d. With the Register of Deeds
c. to be valid between the
where the debtor resides and the
mortgagor and the
mortgagee, it must be principal office of the corporation.

coupled with the delivery of

Which phrase best completes the
the subject matter of the
statement - The affidavit of good
chattel mortgage;
faith in a Deed of Chattel Mortgage
is as if a non-existent chattel
is:
mortgage.
an oath where the parties
swear that the mortgage is
SUGGESTED ANSWER:
made for the purpose of

b. is binding between the securing the obligations

mortgagor and the mortgagee but will specified and that the
obligation is just and valid;
not affect third party.
an affidavit, the absence of
Which phrase best completes the which will vitiate the
statement - To bind third parties, a mortgage between the
chattel mortgage of shares of stock parties;
must be registered: necessary only if the chattel
with the Register of Deeds where being mortgaged are growing
the debtor resides; crops;
with the Register of Deeds where a certification from the
the principal office of the mortgagor that he is the
corporation is; mortgagor of the chattel.

SUGGESTED ANSWER:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 139 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

a. an oath where then parties SUGGESTED ANSWER:

swear that the mortgage is made for the
purpose of securing the obligations b. the one (1) year period will not

specified and that the obligation is just be interrupted by the filing of the action.

and valid.
What is the effect if the. proceeds in an

X defaulted in his loan with Y. Y extra-judicial foreclosure sale is not

instituted extra-judicial foreclosure sufficient to pay for the obligation?

of the property subject of a real the mortgagee can claim for

estate mortgage that secured the deficiency judgment from

loan. X has one year within which to the debtor.

redeem the property. After the the mortgagee can claim for

foreclosure, X filed an action deficiency judgment from the

questioning the validity of the extra- mortgagor even though it is a

judicial foreclosure sale. Which third party mortgage.

statement is most accurate? the mortgagee has no more

The one (1) year period within recourse or claim against the

which to redeem will be debtor.

interrupted by the filing of the mortgagee cannot claim for

an action questioning the deficiency judgment from the

validity of the foreclosure. debtor because its an

The one (1) year period will extrajudicial foreclosure.

not be interrupted by the

SUGGESTED ANSWER:
filing of the action.
The one (1) year period will be
a. The mortgage can claim for
extended for another year
deficiency judgement from the debtor.
because of the filing of an
action questioning the X mortgaged her residential house and
validity of the foreclosure lot in favor of ABC Bank. X
sale. defaulted in her loan and so the
If the action which questions the bank foreclosed the real estate
validity of the foreclosure mortgage on the residential house. Y
prospers, the period will be then bought the residential house
interrupted. and lot before the expiration of the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 140 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

redemption period. Can Y now take foreclose if collection is not

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

entitled to the possession of

the house.
No, because there is a need to
talk to X to leave the house.
c. the creditor can foreclose the
mortgage and demand collection for any
deficiency.

No, because Y was not the one

XYZ Corporation bought ten (1 0) units
who foreclosed the mortgage
of Honda Civic from CCC
on the property.
Corporation. ABC Bank granted a
loan to XYC Corporation which
SUGGESTED ANSWER:
executed a financing agreement
a. No, because it is still covered which provided for the principal
by the redemption period and the amount, the installment payments,

purchaser is not yet entitled as a matter the interest rates and the due dates.

of right to take possession of the On due dates of the installment

property. payments, XYZ Corporation was

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 141 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

amount of the monthly investments with any bank,

installments but also the when the inquiry or
details of the finance examination is made in the
charges as required by the course of the SSP's periodic
Truth in Lending Act. special examination of said
c. No, because the Finance bank to ensure compliance
Agreement is a valid with the Anti-Money
document to establish the Laundering Act (AMLA);
existence of the obligation. b. Upon Philippine Deposit
Yes, because legally, finance Insurance Corporation
charges are never allowed in (PDIC) and SSP inquiry into
any banking transaction. and examination of deposit
accounts in case there is a
SUGGESTED ANSWER: finding of unsafe or unsound
banking practice;
Yes, because ABC Bank is
c. Upon inquiry in cases of
required to provide XYZ
impeachment;
Corporation not only the
d. Upon inquiry by the
amount of the monthly
Commissioner of Internal
installments but also the
Revenue in the event a
details of the finance
taxpayer files an application
charges as required by the
to compromise his tax
Truth in Lending Act.
liabilities on the ground of
financial incapacity.

SUGGESTED ANSWER:
Which of the following is an exception to
the secrecy of bank deposits which
c. Upon inquiry in cases of
are in Philippine Pesos, but NOT an
impeachment.
exception to the secrecy of foreign
currency deposits? The Anti-Money Laundering Law is a
law that seeks to prevent money
Upon BangkoSentralngPilipinas
laundering activities by providing for
(SSP) inquiry into or
more transparency in the Philippine
examination of deposits or
Financial System, hence the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 142 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

following institutions are covered by The main feature of the Foreign

the law, except: Investment Act of 1991 is to introduce
a. bank and any financial the concept of "Negative Lists". Under
institutions; the said law, what is a "Negative List"?
pawnshops;
casino operators; It is a list of business

All of the above. activities or enterprises in

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

a. It is a list of business activities or

SUGGESTED ANSWER:
enterprises in the Philippines that
d. all of the above foreigners are disqualified to engage in.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 143 of 173
Mercantile Law Q&As (2007-2013)
2011 Mercantile Law Exam
MCQ (November 20, 2011)
P rode a Sentinel Liner bus going to Baguio
from Manila. At a stop-over in Tarlac, the
bus driver, the conductor,
passengers disembarked for
decided, however, to remain in the bus, the
door of which was not locked. At this point,
V, a vendor, sneaked into the bus and
offered P some refreshments. When P
rudely declined, V attacked him, resulting
in P suffering from bruises and contusions.
Does he have cause to sue Sentinel Liner?
Yes, since the carrier's crew did
nothing to protect a passenger
who remained in the bus during
the stop-over.
No, since the carrier's crew could
not have foreseen the attack.
Yes, since the bus is liable for
anything that goes wrong in the
course of a trip.
No, since the attack on P took place
when the bus was at a stop-over.
A cargo ship of X Shipping, Co. ran
aground off the coast of Cebu during a
storm and lost all its cargo amounting to
Php50 Million. The ship itself suffered
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
damages estimated at Php80 Million. The
cargo owners filed a suit against X Shipping
but it invoked the doctrine of limited
liability since its vessel suffered an Php80
Million damage, more than the collective
value of all lost cargo. Is X Shipping
and the
correct?
lunch. P
Yes, since under that doctrine, the
value of the lost cargo and the
damage to the ship can be set-off.
No, since each cargo owner has a
separate and individual claim for
damages.
Yes, since the extent of the ship’s
damage was greater than that of the
value of the lost cargo.
No, since X Shipping neither
incurred a total loss nor
abandoned its ship.
A writes a promissory note in favor of his
creditor, B. It says: "Subject to my option, I
promise to pay B Php1 Million or his order
or give Php1 Million worth of cement or to
authorize him to sell my house worth Php1
Million. Signed, A." Is the note negotiable?
No, because the exercise of the
option to pay lies with A, the
maker and debtor.
Page 144 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
No, because it authorizes the sale of
collateral securities in case the note
is not paid at maturity.
Yes, because the note is really
payable to B or his order, the other
provisions being merely optional.
Yes, because an election to require
something to be done in lieu of
payment of money does not affect
negotiability.
ABC Corp. increased its capital stocks from
Php10 Million to Php15 Million and, in the
process, issued 1,000 new shares divided
into Common Shares "B" and Common
Shares "C." T, a stockholder owning 500
shares, insists on buying the newly issued
shares through a right of pre-emption. The
company claims, however, that its By-laws
deny T any right of pre-emption. Is the
corporation correct?
No, since the By-Laws cannot
deny a shareholder his right of
pre-emption.
Yes, but the denial of his pre-
emptive right extends only to 500
shares.
Yes, since the denial of the right
under the By-laws is binding on T.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
No, since pre-emptive rights are
governed by the articles of
incorporation.
M makes a promissory note that states: "I,
M, promise to pay Php5,000.00 to B or
bearer. Signed, M." M negotiated the note
by delivery to B, B to N, and N to O. B had
known that M was bankrupt when M
issued the note. Who would be liable to O?
M and N since they may be assumed
to know of M's bankruptcy
N, being O's immediate negotiator
of a bearer note
B, M, and N, being indorsers by
delivery of a bearer note
B, having known of M's bankruptcy
S delivered 10 boxes of cellphones to Trek
Bus Liner, for transport from Manila to
Ilocos Sur on the following day, for which S
paid the freightage. Meanwhile, the boxes
were stored in the bus liner’s bodega. That
night, however, a robber broke into the
bodega and stole S’s boxes. S sues Trek
Bus Liner for contractual breach but the
latter argues that S has no cause of action
based on such breach since the loss
occurred while the goods awaited transport.
Who is correct?
Page 145 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

The bus liner since the goods were serving as an arm for receiving its
not lost while being transported. outside orders for pizzas.

S since the goods were Yes, it is not shown that one

unconditionally placed with T for company completely dominates
transportation. the finances, policies, and
business practices of the other.
S since the freightage for the goods
had been paid. Yes, since the two companies
perform two distinct businesses.
The bus liner since the loss was due
to a fortuitous event. A negotiable instrument can be indorsed by
way of a restrictive indorsement, which
X Corp. operates a call center that received prohibits further negotiation and
orders for pizzas on behalf of Y Corp. which constitutes the indorsee as agent of the
operates a chain of pizza restaurants. The indorser. As agent, the indorsee has the
two companies have the same set of right, among others, to
corporate officers. After 2 years, X Corp.
dismissed its call agents for no apparent demand payment of the instrument
reason. The agents filed a collective suit for only.
illegal dismissal against both X Corp. and Y
Corp. based on the doctrine of piercing the notify the drawer of the payment of

veil of corporate fiction. The latter set up the instrument.

the defense that the agents are in the

receive payment of the
employ of X Corp. which is a separate
instrument.
juridical entity. Is this defense appropriate?

instruct that payment be made to

No, since the doctrine would apply,
the drawee.
the two companies having the same
set of corporate officers.
Under the Negotiable Instruments Law, a
signature by procuration operates as a
No, the real employer is Y Corp., the
notice that the agent has but a limited
pizza company, with X Corp.
authority to sign. Thus, a person who takes
a bill that is drawn, accepted, or indorsed
by procuration is duty-bound to inquire
into the extent of the agent's authority by:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 146 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
examining the agent’s special power
of attorney.
examining the bill to determine
the extent of such authority.
asking the agent about the extent of
such authority.
asking the principal about the
extent of such authority.
Under the Negotiable Instruments Law, if
the holder has a lien on the instrument
which arises either from a contract or by
implication of law, he would be a holder for
value to the extent of
his successor's interest.
his predecessor's interest.
the lien in his favor.
the amount indicated on the
instrument's face.
The liability of a common carrier for the
goods it transports begins from the time of
conditional receipt.
constructive receipt.
actual receipt.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
either actual or constructive
receipt.
On X’s failure to pay his loan to ABC
Bank, the latter foreclosed the Real Estate
Mortgage he executed in its favor. The
auction sale was set for Dec. 1, 2010 with
the notices of sale published as the law
required. The sale was, however, cancelled
when Dec. 1, 2010 was declared a holiday
and re-scheduled to Jan. 10, 2011 without
republication of notice. The auction sale
then proceeded on the new date. Under the
circumstances, the auction sale is
rescissible.
unenforceable.
void.
voidable.
X executed a promissory note with a face
value of Php50,000.00, payable to the order
of Y. Y indorsed the note to Z, to whom Y
owed Php30,000.00. If X has no defense at
all against Y, for how much may Z collect
from X?
Php20,000.00, as he is a holder for
value to the extent of the difference
between Y's debt and the value of
the note.
Php30,000.00, as he is a holder for
value to the extent of his lien.
Page 147 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Php50,000.00, but with the P sold to M 10 grams of shabu worth

obligation to hold Php20,000.00 Php5,000.00. As he had no money at the
for Y's benefit. time of the sale, M wrote a promissory note
promising to pay P or his order Php5,000. P
None, as Z's remedy is to run after then indorsed the note to X (who did not
his debtor, Y. know about the shabu), and X to Y. Unable
to collect from P, Y then sued X on the note.
Under the Anti-Money Laundering Law, a
X set up the defense of illegality of
covered institution is required to maintain a
consideration. Is he correct?
system of verifying the true identity of their
clients as well as persons purporting to act No, since X, being a subsequent
on behalf of indorser, warrants that the note is
valid and subsisting.
those doing business with such
clients. No, since X, a general indorser,
warrants that the note is valid
unknown principals.
and subsisting.

the covered institution.

Yes, since a void contract does not
give rise to any right.
such clients.

Yes, since the note was born of an

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

par value. implied duty to transport the

passenger safely.

(D) market value.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 148 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

rule that the carrier has an express in every case even if the majority of
duty to transport the passenger the members decide otherwise
safely during the elections.

Doctrine of Respondeat Superior. The rule is that the valuation of the shares
of a stockholder who exercises his appraisal
rule in culpa aquiliana. rights is determined as of the day prior to
the date on which the vote was taken. This
A holder in due course holds the
is true -
instrument free from any defect of title of
prior parties and free from defenses regardless of any depreciation or
available to prior parties among themselves. appreciation in the share's fair
An example of such a defense is - value.

fraud in inducement. regardless of any appreciation in the

share's fair value.
duress amounting to forgery.

regardless of any depreciation in the

fraud in esse contractus.
share's fair value.

alteration.
only if there is no appreciation or
depreciation in the share's fair
In elections for the Board of Trustees of
value.
non-stock corporations, members may cast
as many votes as there are trustees to be
T Shipping, Co. insured all of its vessels
elected but may not cast more than one
with R Insurance, Co. The insurance
vote for one candidate. This is true -
policies stated that the insurer shall answer
for all damages due to perils of the sea. One
unless set aside by the members in
of the insured's ship, the MV Dona Priscilla,
plenary session.
ran aground in the Panama Canal when its

in every case even if the Board of engine pipes leaked and the oil seeped into

Trustees resolves otherwise. the cargo compartment. The leakage was

caused by the extensive mileage that the
unless otherwise provided in the ship had accumulated. May the insurer be
Articles of Incorporation or in the made to answer for the damage to the cargo
By-laws. and the ship?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 149 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, because the insurance policy Yes, since X and Y are Z’s
covered any or all damage arising employees.
from perils of the sea.
X, Co., a partnership, is composed of A
Yes, since there appears to have (capitalist partner), B (capitalist partner)
been no fault on the part of the and C (industrial partner). If you were
shipowner and shipcaptain. partner A, who between B and C would you
have an insurable interest on, such that
No, since the proximate cause of the you may then insure him?
damage was the breach of warranty
of seaworthiness of the ship. No one, as there is merely a
partnership contract among A, B
No, since the proximate cause of
and C.
the damage was due to ordinary
usage of the ship, and thus not Both B and C, as they are your
due to a peril of the sea. partners.

X has been a long-time household helper of Only C, as he is an industrial

Z. X's husband, Y, has also been Z's long- partner.
time driver. May Z insure the lives of both X
and Y with Z as beneficiary? Only B, as he is a capitalist partner.

Yes, since X and Y render services to X is the holder of an instrument payable to

Z. him (X) or his order, with Y as maker. X

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

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 150 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, because X, as a qualified divulge it. The reason for this is that the
indorser, warrants that the note test of concealment of material fact is
is genuine. determined

No, because X made a qualified at the time of the issuance of the

indorsement. policy.

No, because a qualified indorsement at any time before the payment of

does not include the warranty of premium.
genuineness.
at the time of the payment of the
A bill of exchange has T for its drawee, U as premium.
drawer, and F as holder. When F went to T
for presentment, F learned that T is only 15 at any time before the policy

years old. F wants to recover from U but the becomes effective.

latter insists that a notice of dishonor must

T, the captain of MV Don Alan, while asleep
first be made, the instrument being a bill of
in his cabin, dreamt of an Intensity 8
exchange. Is he correct?
earthquake along the path of his ship. On

Yes, since a notice of dishonor is waking up, he immediately ordered the ship

essential to charging the drawer. to return to port. True enough, the

earthquake and tsunami struck three days
No, since T can waive the later and his ship was saved. Was the
requirement of notice of dishonor. deviation proper?

No, since F can treat U as maker Yes, because the deviation was
due to the minority of T, the made in good faith and on a
drawee. reasonable ground for believing that
it was necessary to avoid a peril.
Yes, since in a bill of exchange,
notice of dishonor is at all times No, because no reasonable ground

required. for avoiding a peril existed at the

time of the deviation.
An insured, who gains knowledge of a
material fact already after the effectivity of No, because T relied merely on his
the insurance policy, is not obliged to supposed gift of prophecy.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 151 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, because the deviation took Yes, because it is an original

place based on a reasonable belief of creation.
the captain.
Yes, because it entailed the
X, drawee of a bill of exchange, wrote the application of X's intellect.
words: "Accepted, with promise to make
payment within two days. Signed, X." The No, because it did not entail any

drawer questioned the acceptance as application of X's intellect.

invalid. Is the acceptance valid?

D, debtor of C, wrote a promissory note

Yes, because the acceptance is in payable to the order of C. C's brother, M,

reality a clear assent to the order misrepresenting himself as C’s agent,

of the drawer to pay. obtained the note from D, then negotiated it

to N after forging C's signature. N indorsed
Yes, because the form of the it to E, who indorsed it to F, a holder in due
acceptance is really immaterial. course. May F recover from E?

No, because the acceptance must be No, since the forgery of C's signature
a clear assent to the order of the results in the discharge of E.
drawer to pay.
Yes, since only the forged
No, because the document must not signature is inoperative and E is
express that the drawee will perform bound as indorser.
his promise within two days.
No, since the signature of C, the
X came up with a new way of presenting a payee, was forged.
telephone directory in a mobile phone,
which he dubbed as the "iTel" and which Yes, since the signature of C is

uses lesser time for locating names and immaterial, he being the payee.

telephone numbers. May X have his "iTel"

A material alteration of an instrument
copyrighted in his name?
without the assent of all parties liable
No, because it is a mere system or thereon results in its avoidance, EXCEPT

method. against a

prior indorsee.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 152 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

subsequent acceptor. No, since the promise to just pay a

sum of money is unclear.
subsequent indorser.
No, since it contains a promise to
prior acceptor. do an act in addition to the
payment of money.
X constituted a chattel mortgage on a car
(valued at Php1 Million pesos) to secure a A bank can be placed under receivership
P500,000.00 loan. For the mortgage to be when, if allowed to continue in business, its
valid, X should have depositors or creditors would incur

the right to mortgage the car to the probable losses

extent of half its value.
inevitable losses
ownership of the car.
possible losses
unqualified free disposal of his

car. a slight chance of losses

registered the car in his name. EFG Foundation, Inc., a non-profit

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

Yes, since it is payable to bearer. 6

Yes, since it contains an 9

unconditional promise to pay a sum
certain in money. 12

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 153 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

3 law firm’s letterhead and its computer in

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

The law office since T was an

check.
employee and he wrote it on the
firm’s letterhead.
D draws a bill of exchange that states: "One
month from date, pay to B or his order
The publisher to whom the letter
Php100,000.00. Signed, D." The drawee
was sent.
named in the bill is E. B negotiated the bill to
M, M to N, N to O, and O to P. Due to non- E received goods from T for display and sale
acceptance and after proceedings for dishonor in E's store. E was to turn over to T the
were made, P asked O to pay, which O did. proceeds of any sale and return the ones
From whom may O recover? unsold. To document their agreement, E
executed a trust receipt in T’s favor
B, being the payee
covering the goods. When E failed to turn
over the proceeds from his sale of the goods
N, as indorser to O
or return the ones unsold despite demand,

E, being the drawee he was charged in court for estafa. E moved

to dismiss on the ground that his liability is
D, being the drawer only civil. Is he correct?

T, an associate attorney in XYZ Law Office, No, since he committed fraud when
wrote a newspaper publisher a letter he promised to pay for the goods
disputing a columnist’s claim about an and did not.
incident in the attorney’s family. T used the

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 154 of 173
Mercantile Law Q&As (2007-2013)
No, since his breach of the trust
receipt agreement subjects him to
both civil and criminal liability
for estafa.
Yes, since E cannot be charged with
estafa over goods covered a trust
receipt.
Yes, since it was
consignment sale and the buyer
could not pay.
The authorized alteration of a warehouse
receipt which does not change its tenor
renders the warehouseman liable according
to the terms of the receipt
in its original tenor if the alteration
is material.
in its original tenor.
as altered if there is fraud.
as altered.
Any agreement binding upon the holder to
extend the time of payment or to postpone
the holder's right to enforce the instrument
results in the discharge of the party
secondarily liable unless made with the
latter's consent. This agreement refers to
one which the holder made with the
principal debtor.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
principal creditor.
secondary creditor.
secondary debtor.
Upon execution of a trust receipt over
goods, the party who is obliged to release
such goods and who retains security
merely a interest on those goods, is called the
holder.
shipper.
entrustee.
entrustor.
X, warehouseman, sent a text message to Y,
to whom X had issued a warehouse receipt
for Y's 500 sacks of corn, notifying him of
the due date and time to settle the storage
fees. The message stated also that if Y does
not settle the warehouse charges within 10
days, he will advertise the goods for sale at
a public auction. When Y ignored the
demand, X sold 100 sacks of corn at a
public auction. For X’s failure to comply
with the statutory requirement of written
notice to satisfy his lien, the sale of the 100
sacks of corn is
voidable.
rescissible.
Page 155 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

unenforceable. A bill of exchange has D as drawer, E as

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

perfected upon acceptance by the fictitious drawer is void and

insurer of X's application. inexistent.

No, since there is no privity of Due to his debt to C, D wrote a promissory

contract between the insurer and note which is payable to the order of C. C's

X’s heirs. brother, M, misrepresenting himself as

agent of C, obtained the note from D. M
No, since X had no knowledge of then negotiated the note to N after forging
the insurer's acceptance of his the signature of C. May N enforce the note
application before he died. against D?

Yes, since under the Manifestation Yes, since D is the principal debtor.
Theory, the insurance contract was
No, since the signature of C was
perfected upon acceptance of the
insurer of X's application. forged.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 156 of 173
Mercantile Law Q&As (2007-2013)
No, since it is C who can enforce it,
the note being payable to the order
of C.
Yes, since D, as maker, is primarily
liable on the note.
T Corp. has a corporate term of 20 years
under its Articles of Incorporation or from
June 1, 1980 to June 1, 2000. On June 1,
1991 it amended its Articles
Incorporation to extend its life by 15 years
from June 1, 1980 to June 1, 2015. The
SEC approved this amendment. On June 1,
2011, however, T Corp decided to shorten
its term by 1 year or until June 1, 2014.
Both the 1991 and 2011 amendments were
approved by majority vote of its Board of
Directors and ratified in a special meeting
by its stockholders representing at least
2/3 of its outstanding capital stock. The
SEC, however, disapproved the
amendment on the ground that it cannot be
made earlier than 5 years prior to the
expiration date of the corporate term, which
is June 1, 2014. Is this SEC disapproval
correct?
No, since the 5-year
amendment of corporate
applies only to extension, not to
shortening, of term.
Yes, any amendment
corporate term cannot be made
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
earlier than 5 years prior to the
corporation’s expiration date.
No, since a corporation can in fact
have a corporate life of 50 years.
Yes, the amendment to shorten
corporate term cannot be made
earlier than 5 years prior to the
corporation’s expiration date.
of
B, while drunk, accepted a passenger in his
taxicab. B then drove the taxi recklessly,
and inevitably, it crashed into an electric
post, resulting in serious physical injuries
to the passengers. The latter then filed a
suit for tort against B's operator, A, but A
raised the defense of having exercised
extraordinary diligence in the safety of the
passenger. Is his defense tenable?
Yes, as a common carrier can rebut
2011
the presumption of negligence by
raising such a defense.
No, as in tort actions, the proper
defense is due diligence in the
selection and supervision of the
employee by the employer.
rule on
term
No, as B, the common carrier's
employee, was obviously negligent
due to his intoxication.
affecting
Page 157 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, as a common carrier can invoke Php1 Million since he warrants that
extraordinary diligence in the safety the note is genuine and in all
of passengers in tort cases. respects what it purports to be.

(49)X is a director in T Corp. who was Php12 Million since he warrants his
elected to a 1-year term on Feb. 1, 2010. solvency and that he has a good title
On April 11, 2010, X resigned and was to the note.
replaced by R, who assumed as director on
Php12 Million since he warrants
May 17, 2010. On Nov. 21, 2010, R died. S
was then elected in his place. Until which that the note is genuine and in all

time should S serve as director? respects what it purports to be.

April 11, 2011. X Corp., whose business purpose is to

manufacture and sell vehicles, invested its
Feb. 1, 2011. funds in Y Corp., an investment firm,
through a resolution of its Board of
May 17, 2011. Directors. The investment grew
tremendously on account of Y Corp.'s
Nov. 21, 2011.
excellent business judgment. But a
minority stockholder in X Corp. assails the
M, the maker, issued a promissory note to
investment as ultra vires. Is he right and, if
P, the payee which states: "I, M, promise to
so, what is the status of the investment?
pay P or order the amount of Php1 Million.
Signed, M." P negotiated the note by
Yes, it is an ultra vires act of the
indorsement to N, then N to O also by
corporation itself but voidable only,
indorsement, and O to Q, again by
subject to stockholders’ ratification.
indorsement. But before O indorsed the
note to Q, O's wife wrote the figure "2" on Yes, it is an ultra vires act of its
the note after "Php1" without O's Board of Directors and thus void.
knowledge, making it appear that the note
is for Php12 Million. For how much is O Yes, it is an ultra vires act of its
liable to Q? Board of Directors but voidable
only, subject to stockholders’
Php1 Million since it is the original ratification.
tenor of the note.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 158 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, it is an ultra vires act of the Yes, since both companies use water
corporation itself and, consequently, in conducting their business.
void.
No, since the companies are not
Notice of dishonor is not required to be engaged in the same line of
made in all cases. One instance where such business.
notice is not necessary is when the indorser
is the one to whom the instrument is No, since the root word "Eagle" is a

suppose to be presented for payment. The generic name not subject to

rationale here is that the indorser registration.

already knows of the dishonor and For a constructive total loss to exist in

it makes no sense to notify him of marine insurance, it is required that the

it. person insured relinquish his interest in

the thing insured. This relinquishment
is bound to make the acceptance in must be
all cases.
actual.
has no reason to expect the
dishonor of the instrument. constructive first and if it fails, then
actual.
must be made to account for all his
actions. either actual or constructive.

"Eagleson Refillers, Co.," a firm that sells constructive.

water to the public, opposes the trade name

The Corporation Code sanctions a contract
application of "Eagleson Laundry, Co.," on
between two or more corporations which
the ground that such trade name tends to
have interlocking directors, provided there
deceive trade circles or confuse the public
is no fraud that attends it and it is fair and
with respect to the water firm’s registered
reasonable under the circumstances. The
trade name. Will the opposition prosper?
interest of an interlocking director in one
Yes, since such use is likely to corporation may be either substantial or

deceive or confuse the public. nominal. It is nominal if his interest:

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 159 of 173
Mercantile Law Q&As (2007-2013)
does not exceed 25% of the
outstanding capital stock.
exceeds 25% of the outstanding
capital stock.
exceeds 20% of the outstanding
capital stock.
does not exceed 20% of the
outstanding capital stock.
X, an amateur astronomer, stumbled upon
what appeared to be a massive volcanic
eruption in Jupiter while peering at the
planet through his telescope. The following
week, X, without notes, presented a lecture
on his findings before the Association of
Astronomers of the Philippines. To his
dismay, he later read an article in a science
journal written by Y, a professional
astronomer, repeating exactly
discovered without any attribution to him.
Has Y infringed on X's copyright, if any?
No, since X did not reduce his
lecture in writing or other material
form.
Yes, since the lecture is considered
X’s original work.
No, since no protection extends
to any discovery, even if
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
expressed, explained, illustrated,
or embodied in a work.
Yes, since Y’s article failed to make
any attribution to X.
In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding
the fair value of his shares, a three-member
group shall by majority vote resolve the
issue with finality. May the wife of the
withdrawing stockholder be named to the
threemember group?
No, the wife of the withdrawing
shareholder is not a disinterested
person.
Yes, since she could best protect her
husband's shareholdings.
what X
Yes, since the rules do not
discriminate against wives.
No, since the stockholder himself
should sit in the three-member
group.
Apart from economic rights, the author of a
copyright also has moral rights which he
may transfer by way of assignment. The
term of these moral rights shall last
during the author's lifetime and
for 50 years after his death.
Page 160 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

forever. The insured’s formal assignment of

his right to indemnification to the
50 years from the time the author insurer.
created his work.
The insured’s endorsement of its
during the author's lifetime. claim to the insurer.

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

The qualified indorser. No, since the correct remedy for X is

a civil action for damages.
Where the insurer was made to pay the
No, since Y is a prior user in good
insured for a loss covered by the insurance
contract, such insurer can run after the faith.

third person who caused the loss through

Yes, since X is the first to register
subrogation. What is the basis for
his device for patent registration.
conferring the right of subrogation to the
insurer? Yes, since Y unwittingly used X’s
patented invention.
Their express stipulation in the
contract of insurance. P, a sales girl in a flower shop at the Ayala
Station of the Metro Rail Transit (MRT)
The equitable assignment that
bought two tokens or tickets, one for her
results from the insurer’s
ride to work and another for her ride
payment of the insured.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 161 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

home. She got to her flower shop where she without acceptance but the bill is
usually worked from 8 a.m. to 5 p.m. At paid by the drawer.
about 3 p.m., while P was attending to her
duties at the flower shop, two crews of the without acceptance but the bill is

MRT got into a fight near the flower shop, paid by the drawee.
causing injuries to P in the process. Can P
with acceptance but the bill is paid
sue the MRT for contractual breach as she
by the drawer.
was within the MRT premises where she
would shortly take her ride home?
If an insurance policy prohibits additional
insurance on the property insured without
No, since the incident took place,
the insurer's consent, such provision being
not in an MRT train coach, but at
valid and reasonable, a violation by the
the MRT station.
insured
No, since P had no intention to
reduces the value of the policy.
board an MRT train coach when
the incident occured. avoids the policy.

Yes, since she already had a ticket

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

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

No, since the payee's signature has

with acceptance but the bill is paid
been forged.
by the drawee.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 162 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

No, since Y’s remedy is to run after Yes, but solidarily with Y.
the forger, X.
Yes, since X’s is deemed to warrant
Yes, since forgery is only a personal that his land would cover the whole
defense. obligation.

Yes, since ABC Bank is bound to No, since it is the buyer at the
know the signature of Y, its auction sale who should answer for
client. the deficiency.

The rule is that no stock dividend shall be No, because X is not Z’s debtor.
issued without the approval of stockholders
May a publicly listed universal bank own
representing at least 2/3 of the outstanding
100% of the voting stocks in another
capital stock at a regular or special meeting
universal bank and in a commercial bank?
called for the purpose. As to other forms of
dividends:
Yes, if with the permission of the

a mere majority of the entire Board Bangko Sentral ng Pilipinas.

of Directors applies.
No, since it has no power to invest

a mere majority of the quorum of in equities.

the Board of Directors applies.

Yes, as there is no prohibition on
it.
a mere majority of the votes of
stockholders representing the
No, since under the law, the 100%
outstanding capital stock applies.
ownership on voting stocks must

the same rule of 2/3 votes applies. be in either bank only.

X, at Y’s request, executed a Real Estate Perils of the ship, under marine insurance

Mortgage (REM) on his (X’s) land to secure law, refer to loss which in the ordinary

Y's loan from Z. Z successfully foreclosed course of events results from

the REM when Y defaulted on the loan but

natural and inevitable actions of
half of Y's obligation remained unpaid. May
the sea.
Z sue X to enforce his right to the
deficiency?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 163 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

natural and ordinary actions of the results in the discharge of the latter. With
sea. respect to an indorser, the holder's right to
cancel his signature is:
unnatural and inevitable actions of
the sea. without limitation.

unnatural and ordinary actions of not limited to the case where the
the sea. indorsement is necessary to his title.

Under the Intellectual Property Code, limited to the case where the
lectures, sermons, addresses or indorsement is not necessary to
dissertations prepared for oral delivery, his title.
whether or not reduced in writing or other
material forms, are regarded as limited to the case where the
indorsement is necessary to his title.
non-original works.
X, in the hospital for kidney dysfunction,
original works. was about to be discharged when he met
his friend Y. X told Y the reason for his
derivative works. hospitalization. A month later, X applied for
an insurance covering serious illnesses
not subject to protection.
from ABC Insurance, Co., where Y was
working as Corporate Secretary. Since X
Can a drawee who accepts a materially
had already told Y about his
altered check recover from the holder and
hospitalization, he no longer answered a
the drawer?
question regarding it in the application

No, he cannot recover from either form. Would this constitute concealment?

of them.
Yes, since the previous

Yes from both of them. hospitalization would influence

the insurer in deciding whether to
Yes but only from the drawer. grant X's application.

Yes but only from the holder. No, since Y may be regarded as
ABC’s agent and he already knew of
The rule is that the intentional cancellation X’s previous hospitalization.
of a person secondarily liable
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 164 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, it would constitute concealment Yes, since as an indorser who is

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

40% The Board of Directors of XYZ Corp.

unanimously passed a Resolution
0% approving the taking of steps that in reality
amounted to willful tax evasion. On
60%
discovering this, the government filed tax
evasion charges against all the company’s
70%
members of the board of directors. The

X executed a promissory note in favor of Y directors invoked the defense that they

by way of accommodation. It says: "Pay to Y have no personal liability, being mere

or order the amount of Php50,000.00. directors of a fictional being. Are they

Signed, X." Y then indorsed the note to Z, correct?

and Z to T. When T sought collection from

No, since as a rule only natural
Y, the latter countered as indorser that
persons like the members of the
there should have been a presentment first
board of directors can commit
to the maker who dishonors it. Is Y correct?
corporate crimes.
No, since Y is the real debtor and
Yes, since it is the corporation that
thus, there is no need for
did not pay the tax and it has a
presentment for payment and
personality distinct from its
dishonor by the maker.
directors.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 165 of 173
Mercantile Law Q&As (2007-2013)
JayArhSals
Yes, since the directors officially and
collectively performed acts that are
imputable only to the corporation.
No, since the law makes directors
of the corporation solidarily liable
for gross negligence and bad faith
in the discharge of their duties.
T is the registered trademark owner of
"CROCOS" which he uses on his ready-to-
wear clothes. Banking on the popularity of
T's trade mark, B came up with his own
"CROCOS" mark, which he then used for
his "CROCOS" burgers. T now sues B for
trademark infringement but B argues that
his product is a burger, hence, there is no
infringement. Is B correct?
No, since the owner of a well-
known mark registered in the
Philippines has rights
extends even to dissimilar kinds
of goods.
Yes, since the right of the owner of a
well-known mark registered in the
Philippines does not extend to goods
which are not of the same kind.
Yes, as B was in bad faith in coming
up with his own "CROCOS" mark.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
No, since unlike T, he did not
register his own "CROCOS" mark for
his product.
A, the proprietor of a fleet of ten taxicabs,
decides to adopt, as his business name, "A
Transport Co., Inc." May this be allowed?
No, it would be deceptive since he
is a proprietor, not a corporation.
No, since "A" is a generic name, not
suitable for registration.
Yes, since his line of business is
public transportation.
Yes, since such name would give his
business a corporate identity.
T delivers two refrigerators to the
warehouse of W who then issues a
that
negotiable receipt undertaking the delivery
of the refrigerators to "T or bearer." T
entrusted the receipt to B for safekeeping
only. B negotiated it, however, to F who
bought it in good faith and for value. Who is
entitled to the delivery of the refrigerators?
T, since he is the real owner of the
refrigerators.
F, since he is a purchaser in good
faith and for value.
Page 166 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

B, since T entrusted the receipt to
him.
W, since he has as a warehouseman
a lien on the goods.
The Articles of Incorporation must be
accompanied by a Treasurer's Affidavit
certifying under oath, among others, that
the total subscription paid is:
not less than P25,000.00.
not more than P5,000.00.
not less than P5,000.00.
No, because the voting in the Board
should have been by majority of a
quorum.
Yes since the votes of 2/3 of the
stockholders and majority of the
Board were secured.
A group of Malaysians wanted to invest in
the Philippines’ insurance business.
After negotiations, they agreed to organize
"FIMA Insurance Corp." with a group of
Filipino businessmen. FIMA would have a
PhP50 Million paid up capital, PhP40
Million of which would come from the
Filipino group. All corporate officers would

not more than P25,000.00. be Filipinos and 8 out of its 10-member

Board of Directors would be Filipinos. Can
In a special meeting called for the purpose, FIMA operate an insurance business in the
2/3 of the stockholders representing the Philippines?
outstanding capital stock in X. Co.
No, since an insurance company
authorized the company's Board of
Directors to amend its By-laws. By majority must have at least PhP75 Million

vote, the Board then approved the paid-up capital.

amendment. Is this amendment valid?

Yes, since there is substantial

No since the stockholders cannot compliance with our nationalization

delegate their right to amend the laws respecting paid-up capital and

By-laws to the Board. Filipino dominated Board of

Directors.
Yes since the majority votes in the
Board was sufficient to amend the Yes, since FIMA’s paid up capital

By-laws. more than meets the country’s

nationalization laws.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 167 of 173
Mercantile Law Q&As (2007-2013)
No, since an insurance company
should be 100% owned by Filipinos.
Under the Public Service
administrative agency has the power to
approve provisionally the rates of public
utilities without a hearing in case of urgent
public needs. The exercise of this power is
supervisory.
absolute.
discretionary.
mandatory.
X, creditor of Y, obtained a judgment in his
favor in connection with Y's unpaid loan to
him. The court's sheriff then levied on the
goods that Y stored in T's warehouse, for
which the latter issued a warehouse
receipt. A month before the levy, however, Z
bought the warehouse receipt for value.
Who has a better right over the goods?
T, being the warehouseman with a
lien on the goods
Z, being a purchaser for value of
the warehouse receipt
X, being Y’s judgment creditor
Y, being the owner of the goods
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
hectorchristopher@yahoo.com
JayArhSals
A promissory note states, on its face: "I, X,
promise to pay Y the amount of Php
5,000.00 five days after completion of the
Act, an on-going construction of my house. Signed,
X." Is the note negotiable?
Yes, since it is payable at a fixed
period after the occurrence of a
specified event.
No, since it is payable at a fixed
period after the occurrence of an
event which may not happen.
Yes, since it is payable at a fixed
period or determinable future time.
No, since it should be payable at a
fixed period before the occurrence of
a specified event.
P sold to M a pair of gecko (tuko) for
Php50,000.00. M then issued a promissory
note to P promising to pay the money
within 90 days. Unknown to P and M, a law
was passed a month before the sale that
prohibits and declares void any agreement
to sell gecko in the country. If X acquired
the note in good faith and for value, may he
enforce payment on it?
No, since the law declared void
the contract on which the
promissory note was founded.
Page 168 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

No, since it was not X who bought
the gecko.
Yes, since he is a holder in due
course of a note which is distinct
from the sale of gecko.
Yes, since he is a holder in due
course and P and M were not aware
of the law that prohibited the sale of
gecko.
P authorized A to sign a bill of exchange in
his (P’s) name. The bill reads:
"Pay to B or order the sum of Php1 million.
Signed, A (for and in behalf of P)." The bill
was drawn on P. B indorsed the bill to C, C
to D, and D to E. May E treat the bill as a
promissory note?
No, because the instrument
payable to order and has been
indorsed several times.
Yes, because the drawer
his creditor, Y, to whom he owed Php1
million. Y now wants to collect and satisfy
X's debt through the Php1 million on the
check. May he validly do so?
Yes, since the indorsement to Y is
for Php1 Million.
No, since Z is not a party to the loan
between X and Y.
No, since X is merely an agent of
Z, his only right being to collect.
Yes, since X owed Y Php1 Million.
X Shipping, Co., insured its vessel MV Don
Teodoro for Php100 Million with ABC
Insurance, Co. through T, an agent of X
Shipping. During a voyage, the vessel
accidentally caught fire and suffered
is
damages estimated at Php80 Million. T
personally informed ABC Insurance that X
Shipping was abandoning the ship. Later,
and ABC insurance denied X Shipping’s claim

drawee are one and the same for loss on the ground that a notice of

person. abandonment through its agent was

improper. Is ABC Insurance right?
No, because the instrument is a bill
of exchange. Yes, since X Shipping should have
ratified its agent’s action.
Yes, because A was only an agent of
No, since T, as agent of X
P.
Shipping who procured the
Z wrote out an instrument that states: "Pay
to X the amount of Php1 Million for
collection only. Signed, Z." X indorsed it to
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 169 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

insurance, can also give notice of is sufficient that he was declared

abandonment for his principal. no longer a member of the board.

Yes, since only the agent of X Yes, since the provisions of the
Shipping relayed the fact of Corporation Code applies as well to
abandonment. government-owned and controlled
corporations.
No, since in the first place, the
damage was more than ¾ of the No, since the board has the power to
ship's value. oust him even without the new law.

A law was passed disqualifying former 002-38-0001 G, a grocery goods supplier,

members of Congress from sitting in the sold 100 sacks of rice to H who promised to
Board of Directors of government-owned or pay once he has sold all the rice. H
controlled corporations. Because of this, meantime delivered the goods to W, a
the Board of Directors of ABC Corp., a warehouseman, who issued a warehouse
government-owned and controlled receipt. Without the knowledge of G and W,
corporation, disqualified C, a former H negotiated the receipt to P who acquired
Congressman, from continuing to sit as one it in good faith and for value. P then
of its members. C objected, however, claimed the goods from W, who released
insisting that under the Corporation Code them. After the rice was loaded on a ship
members of the board of directors of bound for Manila, G invokes his right to
corporations may only be removed by vote stop the goods in transit due to his unpaid
of stockholders holding 2/3 of its lien. Who has a better right to the rice?
outstanding capital stock in a regular or
P, since he has superior rights as
special meeting called for that purpose. Is C
correct? a purchaser for value and in good
faith.
Yes, since the new law cannot be
applied to members of the board of P, regardless of whether or not he is

directors already elected prior to its a purchaser for value and in good

passage. faith.

No, since the disqualification G, since as an unpaid seller, he has

takes effect by operation of law, it the right of stoppage in transitu.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 170 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

W, since it appears that the A bill of exchange states on its face: "One
warehouse charges have not been (1) month after sight, pay to the order of
paid. Mr. R the amount of Php50,000.00,
chargeable to the account of Mr. S. Signed,
In a signature by procuration, the principal Mr. T." Mr. S, the drawee, accepted the bill
is bound only in case the agent acted upon presentment by writing on it the
within the actual limits of his authority. words "I shall pay Php30,000.00 three (3)
The signature of the agent in such a case months after sight." May he accept under
operates as notice that he has such terms, which varies the command in
the bill of exchange?
a qualified authority to sign.
Yes, since a drawee accepts
a limited authority to sign.
according to the tenor of his
acceptance.
a special authority to sign.

No, since, once he accepts, a drawee

full authority to sign.
is liable according to the tenor of the

In return for the 20 years of faithful service bill.

of X as a househelper to Y, the latter

Yes, provided the drawer and payee
promised to pay Php100,000.00 to X’s heirs
agree to the acceptance.
if he (X) dies in an accident by fire. X
agreed. Is this an insurance contract?
No, since he is bound as drawee to
accept the bill according to its tenor.
Yes, since all the elements of an
insurance contract are present. May the indorsee of a promissory note
indorsed to him "for deposit" file a suit
Yes, since X’ services may be
against the indorser?
regarded as the consideration.

Yes, as long as the indorser

No, since Y actually made a
received value for the restrictive
conditional donation in X’s favor.
indorsement.

No, since it is in fact an innominate

contract between X and Y.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 171 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

Yes, as long as the indorser received Yes, because there was breach of
value for the conditional implied warranty.
indorsement.
No, because there was no intent to
Yes, whether or not the indorser breach an implied warranty.
received value for the conditional
indorsement. Yes, because it relates to a material
representation.
Yes, whether or not the indorser
received value for the restrictive No, because there was only

indorsement. representation of intention.

X issued a check in favor of his creditor, Y. The Articles of Incorporation of ABC

It reads: " Pay to Y the amount of Seven Transport Co., a public utility, provides for

Thousand Hundred Pesos (Php700,000.00). ten (10) members in its Board of Directors.

Signed, X". What amount should be What is the prescribed minimum number of

construed as true in such a case? Filipino citizens in its Board?

Php700,000.00. 10

Php700.00. 6

Php7,000.00. 7

Php700,100.00. 5

Shipowner X, in applying for a marine P authorized A to sign a negotiable

insurance policy from ABC, Co., stated that
his vessel usually sails middle of August
and with normally 100 tons of cargo. It
turned out later that the vessel departed on
the first week of September and with only
10 tons of cargo. Will this avoid the policy
that was issued?
instrument in his (P’s) name. It reads: "Pay
to B or order the sum of Php1 million.
Signed, A (for and in behalf of P)." The
instrument shows that it was drawn on P.
B then indorsed to C, C to D, and D to E. E
then treated it as a bill of exchange. Is
presentment for acceptance necessary in
this case?

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 172 of 173
Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.com
JayArhSals

No, since the drawer and drawee References:

are the same person.

¾ Answers to Bar Examination
No, since the bill is non-negotiable, Questions by the UP LAW COMPLEX
the drawer and drawee being the (2007, 2009, 2010)
same person.
UP LAW REVIEW
Yes, since the bill is payable to
order, presentment is required for
PHILIPPINE ASSOCIATION OF LAW
acceptance.
SCHOOLS (2008)

Yes, in order to hold all persons

lawphil.net
liable on the bill.

The corporate term of a stock corporation is

that which is stated in its Articles of
Incorporation. It may be extended or
shortened by an amendment of the Articles
when approved by majority of its Board of
Directors and:

approved and ratified by at least 2/3

of all stockholders.

approved by at least 2/3 of the

stockholders representing the
outstanding capital stock.

ratified by at least 2/3 of all

stockholders.

ratified by at least 2/3 of the

stockholders representing the
outstanding capital stock.

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 173 of 173
2014 BAR EXAMINATIONS Page !1of !25
COMMERCIAL LAW

I.

Carlo and Bianca met in the La Boracay festivities. Immediately, they fell in love with each
other and got married soon after. They have been cohabiting blissfully as husband and wife,
but they did not have any offspring. As the years passed by, Carlo decided to take out an
insurance on Bianca’slife for P1,000,000.00 with him (Carlo) as sole beneficiary, given that
he did not have a steady source of income and he always depended on Bianca both
emotionally and financially. During the term of the insurance, Bianca died of what appeared
to bea mysterious cause so that Carlo immediately requested for an autopsy tobe
conducted. It was established that Bianca died of a natural cause. More than that, it was also
established that Bianca was a transgender all along – a fact unknown to Carlo. Can Carlo
claim the insurance benefit? (5%)

SUGGESTED ANSWERS

Yes, Carlo can claim the insurance benefit. He had insurable interest on Bianca’s life under Section 10 (b)
of the Insurance Code as the problem states that Carlo “always depended on Bianca both emotionally
and financially”. The insurable interest upon the life of another under the aforesaid provision need not be
based on kinship or legal obligation to give support (see Alvendia, The Law of Insurance in the Philippines,
1968 ed., p. 42; Martin, Commentaries and Jurisprudence on the Philippine Commercial Laws, vol. 2,
1986 ed., p. 21). The fact that their marriage may be void is irrelevant.
2014 BAR EXAMINATIONS Page !2of !25
COMMERCIAL LAW

II.

Bong bought 300 bags of rice from Ben for P300,000.00. As payment, Bong indorsed to
Bena Bank of the Philippine Islands (BPI) check issued by Baby in the amount of P300,000.00.
Upon presentment for payment, the BPI check was dishonored because Baby’s account from
which it was drawn has been closed. To replace the dishonored check, Bong indorsed a crossed
Development Bank of the Philippines (DBP) check issued also by Baby for P300,000.00. Again,
the check was dishonored because of insufficient funds. Ben sued Bong and Baby on the
dishonored BPI check. Bong interposed the defense that the
BPI check was discharged by novation when Ben accepted the crossed DBP check as
replacement for the BPI check. Bong cited Section 119 of the Negotiable Instruments Law
which provides that a negotiable instrument is discharged "by any other act which will
discharge a simple contractfor the payment of money." Is Bong correct? (4%)

SUGGESTED ANSWERS

Bong is not correct. His claim that the BPI check was discharged by novation when Ben
accepted the crossed DBP check as replacement for the BPI check is unmeritorious.

Ben’s acceptance of the DBP check, which replaced the dishonored BPI check, did not
result in novation as there was no express agreement to establish that Bong was already
discharged from the liability to pay Ben the amount of P300,000.00 as payment for the 300
bags of rice. Novation is never presumed. There must be an express intention to novate. In
fact, when the DBP check was delivered to Ben, the same was also indorsed by Bong which
shows Bong’s recognition of the existing obligation to Ben to pay P214,000.00 subject of the
replaced BPI check.

Moreover, Ben’s acceptance of the DBP check did not result in any incompatibility, since the two
checks – BPI and DBP checks – were precisely for the purpose of paying the amount of
P214,000.00,
i.e. the credit obtained from the purchase of the 300 bags of rice from Ben. Indeed, there was no
substantial change in the object or principal condition of the obligation of Bong as the indorser of the
check to pay the amount of P214,000.00. It would appear that Ben accepted the DBP check to give Bong
the chance to pay his obligation. (Salazar vs J.Y. Brothers Marketing Corporation, (2010))
2014 BAR EXAMINATIONS Page !3of !25
COMMERCIAL LAW

III.

Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a petition for
voluntary rehabilitation must be approved by: (1%)

a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock

a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least two-thirds of the outstanding capital stock

two-thirds vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock

two-thirds vote of the Board of Directors and authorized by the vote of the
stockholders representing at least two-thirds of the outstanding capital stock

RECOMMENDATION:

This MCQ is outside the coverage of the 2014 Mercantile Law Bar Examination as the 2014
Syllabus for Mercantile Law prepared by the SC did not include the FRIA. It is
recommended that all examinees be given full credit whether they gave any answer or not.

a majority vote of the Board of Directors and authorized by the vote of the stockholders representing at
least a majority of the outstanding capital stock
2014 BAR EXAMINATIONS Page !4of !25
COMMERCIAL LAW

IV.

DC is a unit owner of Medici Condominium located in Pasig City. On September 7, 2011,

Medici Condominium Corp. (Medici) demanded from DC payment for alleged unpaid
association dues and assessments amounting toP195,000.00. DC disputed the claim, saying
that he paid all dues as shown by the fact that he was previously elected as Director and
President of Medici. Medici, on the other hand, claimed that DC’s obligation was a carry-over
of his obligations to the condominium developer, Medici Construction Corporation.
Consequently, DCwas prevented from exercising his right to vote and be voted for during the
2011 election of Medici’s Board of Directors. This prompted DC to file a
complaint for damages before the Special Commercial Court of Pasig City. Medici filed a
motion to dismiss on the ground that the court has no jurisdiction over the intra-corporate
dispute which the Housing and Land Use Regulatory Board (HLURB) has exclusive
jurisdiction over. Is Medici correct? (4%)

SUGGESTED ANSWER

Medici is correct. Using the relationship test and the nature of the controversy test, it is
indubitable that the controversy involves intra-corporate issues. The facts of the problem
indicate that there was
a dispute as to the liability of DC for condominium dues, as well as the right to DC to “to
vote and be voted for during the 2011 election of Medici’s Board of Directors”. Accordingly,
jurisdiction is with the Special Commercial Court of Pasig City, not with the Housing and
Land Use Regulatory Board (Medical Plaza Makati Condominium Corp. vs Cullen, (2013)

V.

A corporation organized under the Corporation Code commences to have corporate

existence and juridical personality and is deemed incorporated: (1%)

from the date the application for incorporation is filed with the Securities and
Exchange Commission (SEC)

from the date the SEC issues a certificate of incorporation under its official seal

thirty (30) days after the date the application for incorporation is filed with the
SEC

thirty (30) days after the datethe SEC issues a certificate of incorporation under its
official seal

SUGGESTED ANSWER
from the date the SEC issues a certificate of incorporation under its official seal. (Sec 19, Corporation
Code)
2014 BAR EXAMINATIONS Page !5of !25
COMMERCIAL LAW

VI.

On May 26, 2014, Jess insured with Jack Insurance (Jack) his 2014 Toyota Corolla sedan under
a comprehensive motor vehicle insurance policy for one year. On July 1, 2014, Jess’ car was
unlawfully taken. Hence, he immediately reported the theft to the Traffic Management Command
(TMC) of the Philippine National Police (PNP), which made Jess accomplish a complaint sheet as
part of its procedure. In the complaint sheet, Jess alleged that a certain Ric Silat(Silat) took
possession of the subject vehicle to add accessories and improvements thereon. However, Silat
failed to return the subject vehicle within the agreed 3-day period. As a result, Jess notified Jack
of his claim for reimbursement of the value of the lost vehicle under the insurance policy. Jack
refused to pay claiming that there is no theft as Jess gave Silat lawful possession of the car. Is
Jack correct? (4%)

SUGGESTED ANSWER

Jack Insurance is not correct. Ric Silat was merely given physical possession of the car. He did not have
juridical possession over the same. It is also apparent that the taking by Silat of the car of Jess is without
the consent or authority of the latter. Thus, the act of Silat in depriving Jess of his car, soon after the
transfer of physical possession of the same to him, constitutes theft under the insurance policy that is
compesable. (Paramount Insurance vs Spouse Remondeulaz (2012)
2014 BAR EXAMINATIONS Page !6of !25
COMMERCIAL LAW

VII.

Jinggy went to Kluwer University(KU) in Germany for his doctorate degree (Ph.D.). He
completed his degree with the highest honors in the shortest time. When he came back, he decided to
set-up his own graduate school in his hometown in Zamboanga. After seeking free legal advice from
his high-flying lawyer-friends, he learned that the Philippines follows the territoriality principle in
trademark law, i.e., trademark rights are acquired through valid registration in accordance with the law.
Forth with, Jinggy named his school the Kluwer Graduate School of Business of Mindanao and
immediately secured registration with the Bureau of
Trademarks. KU did not like the unauthorized use of its name by its top alumnus no less. KU
sought your help. What advice can you give KU? (4%)

SUGGESTED ANSWER

I can advise KU to file a petition to cancel the registration of the name “Kluwer” Graduate
School of Business of Mindanao” (“KGSBM”) with the Bureau of Trademarks.

The petition could be anchored on the following facts: Kluwer University is the owner of the
name “Kluwer.” Jinggy registered the trademark in bad faith. He came to know of the
trademark because he went to Kluwer University in Germany for his doctorate degree. KU is
the owner of the name “Kluwer” and has the sole right to register the same. Foreign marks
that are not registered are still accorded protection against infringement and/or unfair
competition under the Paris Convention for the Protection of Industrial Property. Both the
Philippines and Germany are signatories to the Paris Convention. Under the said
Convention, the trademark of a national or signatory to the Paris Convention is entitled to its
protection in other countries that are also signatories to the Convention without need of
registering the trademark.

The petition could also be based on the fact, if it were proven by KU that “Kluwer” is a well-
known mark and entitled to protection as KU and KGSBM belong to the same class of
services, i.e. Class 41 (education and entertainment). KU must also prove that a competent
authority of the Philippines has designated “Kluwer” to be well known internationally and in
the Philippines.

Finally, the petition could also be based on the fact, if it were proven by KU, that “Kluwer” is a trade name
that KU has adopted and used before its use and registration by Jinggy. (Ecole de Cuisine Manille (Cordon
Bleu of the Philippines), Inc. vs Renaud Cointreau & Cie and Le Cordon Bleu Int’s (2013)
2014 BAR EXAMINATIONS Page !7of !25
COMMERCIAL LAW

VIII.

As a rule, an insurance contract is consensual and voluntary. The exception is in the case of:
(1%)

(A) Inland Marine Insurance

(B) Industrial Life Insurance

(C) Motor Vehicle Liability Insurance

(D) Life Insurance

SUGGESTED ANSWER

(C) Motor Vehicle Liability Insurance

Note: The correct term to use in (C) is compulsory motor vehicle liability insurance” (Chapter VI,
Insurance Code) rather than “motor vehicle liability insurance.”
2014 BAR EXAMINATIONS Page !8of !25
COMMERCIAL LAW

IX.

On February 21, 2013, Barrack entered into a contract of insurance with Matino Insurance
Company (Matino) involving a motor vehicle. The policy obligates Matino to pay Barrack the
amount of Six Hundred Thousand Pesos (P600,000.00) in case of loss or damage to said
vehicle during the period covered, which is from February 26, 2013 to February 26, 2014.

On April 16, 2013, at about 9:00 a.m., Barrack instructed his driver, JJ, to bring the motor
vehicle to a near by auto shop for tune-up. However, JJno longer returned and despite
diligent efforts to locate the said vehicle, the efforts proved futile. Resultantly, Barrack
promptly notified Matino of the said loss and demanded payment of the insurance proceeds
of P600,000.00.

In a letter dated July 5, 2013. Matino denied the claim, reasoning as stated in the contract
that "the company shall not be liable for any malicious damage caused by the insured, any
member of his family or by a person in the insured’s service. Is Matino correct in denying the
claim? (4%)

SUGGESTED ANSWER

Matino Insurance is not correct in denying the claim. The loss of the motor vehicle is not
excluded under the insurance policy as the loss was due to theft, not malicious damage.
The malicious damage” clause under the policy is not applicable but rather the “theft”
clause. Thus, the provision under the policy that “the company shall not be liable for any
malicious damage caused by the insured, any member of his family or by a person in the
insured’s service” is not applicable. (Alpha Insurance and Surety Co vs Castor (2003)

X.

A person is said to have an insurable interest in the subject matter insured where he has a
relation or connection with, or concern in it that he will derive pecuniary benefit or advantage
from its preservation. Which among the following subject matters is not considered
insurable? (1%)

(A) A partner in a firm on its future profits

(B) A general creditor on debtor’s property

(C) A judgment creditor on debtor’s property

(D) A mortgage creditor on debtor’s mortgaged property

SUGGESTED ANSWER

(B) A general creditor on debtor’s property

2014 BAR EXAMINATIONS Page !9of !25
COMMERCIAL LAW

XI.

PA Assurance (PA) was incorporated in 1980 to engage in the sale of pre-need educational plans.
It sold open-ended educational plans which guaranteed the payment of tuition and other fees to
planholders irrespective of the cost at the time of availment. Italso engaged in the sale of fixed
value plans which guaranteed the payment of a pre-determined amount to planholders. In 1982,
PAwas among the country’s top corporations. However, it subsequently suffered financial
difficulties.

On September 8, 2005, PA filed a Petition for Corporate Rehabilitation before the Regional
Trial Court (RTC) of Makati City. On October 17, 2005, ten (10) plan holders filed an
Opposition and Motion to Exclude Planholders from Stay Order on the ground that
planholders are not creditors as they (planholders) have a trust relationship with PA. Are the
planholders correct? (4%)
SUGGESTED ANSWER

RECOMMENDATION:

XII.

To constitute a quorum for the transaction of corporate business, only a majority of the
number of Board of Directors is required: (1%)

(A) as fixed by the corporate by-laws

(B) as fixed in the articles of incorporation

(C) actually serving in the board

actually serving in the board but constituting a quorum

SUGGESTED ANSWER

(B) as fixed in the articles of incorporation

2014 BAR EXAMINATIONS Page !10 of !25
COMMERCIAL LAW

XIII.

Pursuant to its By-Laws, Soei Corporation’s Board of Directors created an Executive Committee
to manage the affairs of the corporation in between board meetings. The Board
of Directors appointed the following members of the Executive Committee: the President,
Sarah L; the Vice President, Jane L; and, a third member from the board, Juan Riles. On
December 1, 2013, the Executive Committee, with Sarah L and Jane L present, met and
decided on the following matters:

Purchase of a delivery van for use in the corporation’s retail business;

2. Declaration and approval of the 13th month bonus;

Purchase of an office condominium unit at the Fort; and

4. Declaration of P10.00 per share cash dividend.

Are the actions of the Executive Committee valid? (4%)

SUGGESTED ANSWER

All the actions taken by the Executive Committee in the problem are not valid. The Executive
Committee was not properly created and, therefore, its acts are invalid. Section 35 of the
Corporation Code requires that at least three members of an Executive Committee be directors
of the corporation. In the problem, only Member Sarah L (who is a director as she is the
President) and Member Juan Riles (who is clearly identified in the problem as a director) are
directors of Soci Corporation. Member Jane L is no identified as a director. As the Executive
Committee in the problem was not properly created it could not act at all as the minimum
quorum would be three. As stated earlier, the Executive Committee lacks one qualified
member.

If the Executive Committee were properly organized and a quorum were present, all the actions taken by
the Executive Committee in the problem, except the declaration of P 10.00 per share cash dividend,
would have been valid. The distribution of cash dividends to the shareholders may not be delegated by
the Board of Directors to the Executive Committee pursuant to Section 35 of the Corporation Code.
2014 BAR EXAMINATIONS Page !11 of !25
COMMERCIAL LAW

XIV.

On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a
face value ofP5,000,000.00 from RN Insurance Company (RN), with his wife Tina
Marcial(Tina) as sole beneficiary. On the same day, Danny issued an undated check to RN
for the full amount of the premium. On October 1, 2013, RN issued the policy covering
Danny’s life insurance. On October 5, 2013, Dannymet a tragic accident and died. Tina
claimed the insurance benefit, but RN was quick to deny the claim because at the time of
Danny’s death, the check was not yet encashed and therefore the premium remained
unpaid.

Is RN correct? Will your answer be the same if the check is dated October 15, 2013? (4%)

SUGGESTED ANSWERS

To the first question

RN Insurance is not correct. The facts of the case show that Danny procured insurance on
his life on September 25, 2013, with his wife Tina as beneficiary, and that on the same day,
i.e. September 25, 2013, he issued an undated check to RN for the full amount of the
premium. Since the undated check was issued to RN on September 25, 2013, it will be
considered dated as of the same day, i.e. September 25, 2013 pursuant to Section 17(c) of
the Negotiable Instruments Law. The facts also show that RN Insurance issued the policy
on Danny’s life on October 1, 2013 and that Danny died in an accident on October 5, 2013.

RN Insurance denied that claim of Tina because at the time of Danny’s death, the check
was not yet encashed and, therefore, the premium remained unpaid. Presumably, RN
Insurance is relying on the second paragraph of Article 1249 of the Civil Code which states
that the “delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.”

Whose fault was it that the check was not encashed? Certainly not Danny or Tina. RN
Insurance had the check as early as September 25, 2013 and could have encashed the
check before the death of Danny on October 5, 2013. The problem did not indicate that
there was any problem with the check, e.g. that it was not adequately funded. RN Insurance
was at fault and Tina should not be denied the proceeds of the policy.

(See the case of Malayan Insurance Co., Inc. vs Arnaldo (1987), where the Court held that the insurer
could no longer claim forfeiture of the insured’s right because it held the check used to pay the premium
on a fire insurance policy for an unreasonable time; see also the comments of Justice Jose C. Vitug (ret.)
in his book, Commercial Laws and Jurisprudence, 2006 Vol 1., p. 250, that “payment x x x by means of a
check or note, accepted by the insurer, bearing a date prior to the loss, assuming
2014 BAR EXAMINATIONS Page !12 of !25
COMMERCIAL LAW

an availability of funds thereof, would be sufficient even if it remains uncashed at the time of
the loss. The subsequent effects of encashment (or impairment by the fault of the creditor)
or of legal compensation under Articles 1278-1279, in relation to Article 1249 of the Civil
Code, would retroact to the date of the mercantile instrument and its acceptance by the
creditor.”

To the second question

My answer would not be the same if the check were dated October 15, 2013. This answer
assumes that Danny was the one who dated the check and, therefore what he issued was a
postdated check. The payment of a promissory note or a postdated check at a stated
maturity subsequent to the loss, assuming that there was no estoppel (e.g. written
acknowledgment of the receipt of premium), is insufficient to put the insurance into effect.
(Vitug, Commercial Laws and Jurisprudence, 2006, Vol 1 p 250)

If it were RN Insurance who dated the check October 15, 2013, then my answer would be
the same as my answer to the first question.

XV.

A, B, C, D, and Ewere members of the 2003-2004 Board of Directors of FLP Corporation. At

the election for the 2004-2005 Board of Directors, not one of them was elected. They filed in
court a derivative suit on behalf of FLP Corporation against the newly-elected members of
the Board of Directors. They questioned the validity of the election as it was allegedly marred
by lack of quorum, and prayed for the nullification of the said election. The
2004-2005 Board of Directorsmoved to dismiss the complaint because the derivative suit is
not proper. Decide. (4%)

SUGGESTED ANSWER

The position taken by the 2004-2005 Board of Directors is correct. The derivative suit is not
proper. The members of the 03-04 BOD of FLP Corporation are the injured parties, not FLP
Corporation, as their rights to vote and to be voted upon were directly affected by the
election of the new set of directors (Legaspi Towers 300, Inc. et. al. vs Muer, et al (2012)

XVI.

In intellectual property cases, fraudulent intent is not an element of the cause of action
except in cases involving: (1%)

(A) trademark infringement

(B) copyright infringement

(C) patent infringement

(D) unfair competition

SUGGESTED ANSWER

(D) unfair competition

2014 BAR EXAMINATIONS Page !13 of !25
COMMERCIAL LAW

XVII.

On December 1, 2010, Kore A Corporationshipped from South Korea to LT Corporation in

Manila some 300,000 sheets of high-grade special steel. The shipment was insured against
all risks by NA Insurance(NA). The carrying vessel arrived at the Portof Manila on January
10, 2011. When the shipment was discharged, it was noted that 25,000 sheets were
damaged and in bad order. The entire shipment was turned over to the custody of ATI, the
arrastre operator, on January 21, 2011 for storage and safekeeping, pending its withdrawal
by the consignee’s authorized customs broker, RVM.

On January 26 and 29, 2011, the subject shipment was withdrawn by RVM from the custody of
ATI. On January 29, 2011, prior to the withdrawal of the last batch of the shipment, a joint
inspection of the cargo was conducted per the Request for Bad Order Survey (RBO) dated
January 28, 2011. The examination report showed that 30,000 sheets of steel were damaged
and in bad order.

NA Insurance paid LT Corporationthe amount of P30,000,000.00 for the 30,000 sheets that were
damaged, as shown in the Subrogation Receipt dated January 13, 2013. Thereafter, NA
Insurance demanded reparation against ATI for the goods damaged in its custody, in the amount
of P5,000,00.00. ATI refused to pay claiming that the claim was already barred by
the statute of limitations. ATI alleged that the Carriage of Goods by Sea Act (COGSA) applies
in this case since the goods were shipped from a foreign port to the Philippines. NA
Insurance claims that the COGSA does not apply, since ATIis not a shipper or carrier. Who is
correct? (5%)

SUGGESTED ANSWER

NA Insurance is correct. The COGSA applies only to carriers or ships. A “carrier”, under
Section 1(a) of the COGSA, “includes the owner or the charterer who enters into a contract
of carriage with a shipper”, while a “ship” is defined under Section 1(d) as “any vessel used
for the COGSA.” The COGSA does not apply to ATI as it is neither a “carrier” nor a “ship”,
much less a “shipper”. It is simply an arrastre operator. Moreover, the COGSA does not
mention that an arrastre operator may invoke the prescriptive period of one year; hence, it does not
cover the arrastre operator. (Insurance Co. of North America vs Asian Terminals, Inc., (2012)
2014 BAR EXAMINATIONS Page !14 of !25
COMMERCIAL LAW

XVIII.

Skechers Corporation sued Inter-Pacific for trademark infringement, claiming that Inter-
Pacificused Skechers’ registered "S" logo mark on Inter-Pacific’s shoe products without its
consent. Skechers has registered the trademark "SKECHERS" and the trademark "S" (with
an oval design) with the Intellectual Property Office (IPO).

In its complaint, Skechers points out the following similarities: the color scheme of the blue,
white and gray utilized by Skechers. Even the design and "wave-like" pattern of the mid-sole
and outer sole of Inter Pacific’s shoes are very similar to Skechers’ shoes, if not exact
patterns thereof. On the side of Inter-Pacific’s shoes, near the upper part, appears the
stylized "S" placed in the exact location as that of the stylized "S" the Skechers shoes. On
top of the "tongue" of both shoes, appears the stylized "S" in practically the same location
and size.

In its defense, Inter-Pacific claims that under the Holistic Test, the following dissimilarities are
present: the mark "S" found in Strong shoes is not enclosed in an "oval design"; the word
"Strong" is conspicuously placed at the backside and insoles; the hang tags labels attached to
the shoes bear
the word "Strong" for Inter-Pacific and "Skechers U.S.A." for Skechers; and, Strong shoes
are modestly priced compared to the costs of Skechers shoes.

Under the foregoing circumstances, which is the proper test to be applied – Holistic or
Dominancy Test? Decide. (4%)

SUGGESTED ANSWER

Considering the facts given and the arguments of the parties, the dominancy test is the
proper test to apply. Thus, the appropriation and use of the letter “S” by Inter-Pacific on its
rubber shoes constitutes an infringement of the trademark of Skechers.

The essential element of infringement under the Intellectual Property Code is that the infringing
mark is likely to cause confusion. In determining similarity and likelihood of confusion,
jurisprudence has developed tests – Dominancy Test and Holistic Test. The Dominancy Test
focuses on the similarity of the prevalent or dominant features of the competing trademarks that
might cause confusion, mistake, and deception in the mind of the purchasing public. Duplication
or imitation is not necessary; neither is it required that the mark sought to be registered suggest
an effort to imitate. Given more consideration are the aural and visual impressions created by
the marks on the buyers of goods, giving little weight to factors like prices, quality, sales outlets,
and market segments.

In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining
confusing similarity. The discerning eye of the observer must focus not only on the
predominant words, but also on the other features appearing on both labels so that the
observer may draw conclusion on whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted two (w) types
of confusion, viz: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser
would be induced to purchase one product in the belief that he was purchasing the other; and (2)
confusion of business (source or origin confusion), where, although the goods of the parties are different,
the product, the mark of which registration is applied for by one party, is such as might reasonably be
assumed to originate with the
2014 BAR EXAMINATIONS Page !15 of !25
COMMERCIAL LAW
registrant of an earlier product, and the public would then be deceived either into that belief
or into the belief that there is some connection between the two parties, though inexistent.

Applying the Dominancy Test to the problem, we find that the use of the stylized “S” by Inter-
Pacific in its Strong rubber shoes infringes on the mark already registred by Skechers with the
IPO. While it is undisputed that stylized “S” of Skechers is within an oval design, the dominant
feature of the trademark is the stylized “S”, as it is precisely the stylized “S” which catches the
eye of the purchaser. Thus, even if Inter-Pacific did not use an oval design, the mere fact that it
used the same stylized “S”, the same being the dominant feature of the trademark of Skechers,
already constitutes infringement under the Dominancy Test. (Skechers, USA Inc. vs Inter Pacific
Industrial Trading Corp., et al (2006)

XIX.

Guetze and his wife have three (3) children: Neymar, 25, who is now based in Rio de
Janeiro, Brazil; Muelter, 23, who has migrated to Munich, Germany; and James, 21, who
resides in Bogota, Colombia. Neymar and Muelter have since renounced their Philippine
citizenship in favor of their country of residence. Nearing 70 years old, Guetze decided to
incorporate his business in Binondo, Manila. He asked his wife and three (3) children to
act
as incorporators with one (1) share of stock each, while he owned 999,996 shares of the
1,000,000 shares of the capital stock. (6%)

Assuming all other requirements are met, should the Securities and Exchange
Commission (SEC) accept or reject the Articles of Incorporation? Why?

Being the control freak and micro-manager that he is, Guetze asked you – his astute
legal adviser – if he can serve as Chairman of the Board of Directors, as
President, and as General Manager of the corporation, all at the same time. Please advise Guetze.

Assuming the corporation has beenproperly registered, may the Articles of

Incorporation now beamended to reduce the number of directors to two (2) – Guetze
and his wife– to reflect the real owners of the shares of stock?

SUGGESTED ANSWERS

The SEC should reject the Articles of Incorporation. Only two of the incorporators are
resident of the Philippines. Section 10 of the Corporation Code requires that a
majority of the incorporators be residents of the Philippines.
Guetze can serve as Chairman of the Board of Directors, and President and General
Manager of the corporation, all at the same time. This is allowed by, and is not
covered by the prohibition in, Section 25 of the Corporation Code.
The AOI may not be amended to reduce that number of directors to two. Under Section 14 of the
Corporation Code, the number of directors shall not be less than five.
2014 BAR EXAMINATIONS Page !16 of !25
COMMERCIAL LAW

XX.

On May 13, 1996, PAM, Inc. obtained a P15,000,000.00 fire insurance policy from Ilocano
Insurance covering its machineries and equipment effective for one (1) yearor until May 14,
1997. The policy expressly stated that the insured properties were located at "Sanyo
Precision Phils. Building, Phase III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite." Before
its expiration, the policy was renewed on "as is" basis for another year or until May 13,
1998. The subject properties were later transferred to Pace Factory also in PEZA. On October
12, 1997, during the effectivity of the renewed policy, a fire broke out at the Pace
Factory which totally burned the insured properties.

The policy forbade the removal of the insured properties unless sanctioned by Ilocano.
Condition 9(c) of the policy provides that "the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence of any loss or damage, obtains
the sanction of the company signified by endorsement upon the policy x x x (c) if the property
insured is removed to any building or place other than in that which is herein stated
to be insured." PAM claims that it has substantially complied with notifying Ilocano through its
sister company, the RBC, which, in fact, referred PAM to Ilocano for the insurance
coverage. Is Ilocano liable under the policy? (4%)

SUGGESTED ANSWERS

Ilocano Insurance is not liable under the policy. By the clear and express condition in the
renewal policy, the removal of the insured property to any building or place required the
consent of Ilocano. Any transfer effected by PAM, Inc. without Ilocano’s consent (as is the
case here) would free the latter from any liability. (Malayan Insurance Company vs PAPCO
(2013)

XXI.

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Ilocos Bankers
Life Insurance Corporation (Ilocos Life) designating Creencia Aban(Aban), her niece, as her
beneficiary. Ilocos Life issued Policy No. 747, with a face value of P100,000.00, in Sotero’s
favor on August 30, 1993, after the requisite medical examination and payment of the
premium.

On April 10, 1996, Sotero died. Aban filed a claim for the insurance proceeds on July 9,
1996. Ilocos Life conducted an investigation into the claim and came out withthe following
findings:

Soterodid not personally apply for insurance coverage, as she was illiterate.

2. Soterowas sickly since 1990.

Soterodid not have the financial capability to pay the premium on the policy.

4. Soterodid not sign the application for insurance.

Aban was the one who filed the insurance application and designated herself as the beneficiary.
2014 BAR EXAMINATIONS Page !17 of !25
COMMERCIAL LAW
For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16, 1997,
but refunded the premium paid on the policy. (6%)

May Sotero validly designate her niece as beneficiary?

May the incontestability period set in even in cases of fraud as alleged in this
case?

Is Aban entitled to claim the proceeds under the policy?

SUGGESTED ANSWERS

Yes, Sotero may validly designate her niece as beneficiary. The same is not
prohibited under the Insurance Code or any other law pertinent to the problem.
Yes, the incontestability period applies even in cases of fraud as claimed in this
problem. Note that the findings are those of the insurer and these were made in an
investigation conducted unilaterally by the insurer more than 3 years after the policy
was taken out by Sotero. These findings may very well be dismissed as self-serving
considering the incontestability clause set out in Sec. 48 of the Insurance Code.

Sec. 48 regulates both the actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire whether the policy was obtained by
fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming
individuals that their attempts at insurance fraud would be timely uncovered – thus
deterring them from venturing into such nefarious enterprise. At the same time,
legitimate policy holders are absolutely protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds occasioned by allegations of fraud,
concealment, or misrepresentation by insurers, claims which may no longer be set
up after the two-year period expires as ordained under the law.

Thus, the self-regulating feature of Sec. 48 lies in the fact that both the insurer and
the insured are given the assurance that any dishonest scheme to obtain life
insurance would be exposed, and attempts at unduly denying a claim would be
struck down. Life insurance policies that pass the statutory two-year period are
essentially treated as legitimate and beyond question, and the individuals who wield
them are made secure by the thought that they will be paid promptly upon claim. In
this manner, Sec. 48 contributes to the stability of the insurance industry.

Sec. 48 prevents a situation where the insurer knowingly continues to accept annual
premium payments on life insurance, only to later on deny a claim on the policy on
specious claims of fraudulent concealment and misrepresentation, such as what
obtains in the instant case. Thus, instead of conducting at the first instance an
investigation into the circumstances surrounding the issuance of the insurance
policy which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, Ilocos Life appears to have turned a blind eye and
opted instead to continue collecting collected the premiums and devoted the same
to its own profit. It cannot now deny the claim when it is called to account. Sec. 48
must be applied to it with full force and effect.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court,
hoping that the inevitable may be put off for years – or even decades – by the pendency of these
unnecessary court cases. In the meantime, they benefit from
2014 BAR EXAMINATIONS Page !18 of !25
COMMERCIAL LAW
collecting the interest and/or returns on both the premiums previously paid by the
insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in
the country, and is imbued with public interest. An insurance contract is a contract of
adhesion that must be construed liberally in favor of the insured and strictly against
the insurer in order to safeguard the former’s interest (Manila Bankers Life
Insurance Corp vs Aban (2013)

Yes, Aban is entitled to claim the proceeds under the policy as beneficiary for the
same reasons adduced in (B) above.

XXII.

Paul George Pua (Pua) filed a complaint for a sum of money against the spouses Benito
and Caroline James (Spouses James). In the complaint, Pua prayed that the defendants pay
Pua the amount of P8,500,000.00, covered by a check. Pua asserts that defendants
owed him a sum of money way back in 1988 for which the Spouses James gave him several
checks. These checks, however, had all been dishonored and Pua has not been paid the
amount of the loan plus the agreed interest. In 1996, the Spouses James approached Pua to
get the computation of their liability including the 2% compounded interest. After bargaining
to lower the amount of their liability, the Spouses James gave Puaa postdated check bearing
the discounted amount of P8,500,000.00. Like the 1988 checks, the drawee bank likewise
dishonored this check. To prove his allegations, Pua submitted the original copies of the 17
checks issued by Caroline in 1988 and the check issued in 1996, Manila trust Check No.
750. The Spouses James, on the other hand, completely denied the existence of the debt
asserting that they had never approached Pua to borrow money in 1988 or in 1996. They
assert, instead, that Pua is simply acting at the instance of his sister, Lilian, to file a false
charge against them using a check left to fund a gambling business previously operated by
Lilian and Caroline. Decide. (5%)

SUGGESTED ANSWER

I will decide in favor of Pua and against the Spouses James.

A check is evidence of indebtedness and proof of an obligation. It can be used in lieu of and for the same
purpose as a promissory note. In other words, a check functions more than a promissory note since it not
only contains an undertaking to pay an amount of money but is an order addressed to a bank and
partakes of a representation that the drawer has funds on deposit against which the check is drawn,
sufficient to ensure payment upon its presentation to the bank. A check, the entries of which are in
writing, could prove a loan transaction. Thus, under the NIL, every negotiable instrument is deemed
prima facie to have been issued for a valuable consideration, and every person whose signature appears
thereon to have become a party for value. (Pua vs Spouse Benito Tiong (2013)
2014 BAR EXAMINATIONS Page 19! of 25!
COMMERCIAL LAW

XXIII.

What vote is needed to consider every decision to be a valid corporate act? (1%)

(A) a majority of the directors present at the meeting

(B) two-thirds of the directors present at the meeting

a majority of the directors present at the meeting at which there is a quorum

two-thirds of the directors present at the meeting at which there is a quorum

a majority of the directors present at the meeting at which there is a quorum (Sec 25, Corporation
Code)
2014 BAR EXAMINATIONS Page !20 of !25
COMMERCIAL LAW

XXIV.

A criminal complaint for violation of B.P. 22 was filed by Foton Motors (Foton), an entity engaged
in the business of car dealership, against Pura Felipe (Pura) with the Office of the City Prosecutor
of Quezon City. The Office found probable cause to indict Pura and filed an information before the
Metropolitan Trial Court (MeTC) of Quezon City, for her issuance of a postdated check in the
amount of P1,020,000.00 which was subsequently dishonored upon presentment due to "Stop
Payment."

Pura issued the check because her son, Freddie, attracted by a huge discount of
P220,000.00, purchased a Foton Blizzard 4x2 from Foton. The term of the transaction was
Cash-on-Delivery and no downpayment was required. The car was delivered on May 14,
1997, but Freddie failed to pay upon delivery. Despite non-payment, Freddie took
possession of the vehicle.

Pura was eventually acquitted of the charge of violating B.P. 22 but was found civilly liable for the
amount of the check plus legal interest. Pura appealed the decision as regards the civil liability,
claiming that there was no privity of contract between Foton and Pura. No civil liability could be
adjudged against her because of her acquittal from the criminal charge. It was Freddie who was
civilly liable to Foton, Pura claimed. Pura added that she could not be an accommodation party
either because she only came in after Freddie failed to pay the purchase price, or six (6)
months after the execution of the contract between Foton and Freddie. Her liability was
limited to her act of issuing a worthless check, but by her acquittal in the criminal charge,
there was no more basis for her to be held civilly liable to Foton. Pura’s act of issuing the
subject check did not, by itself, assume the obligation of Freddie to Foton or automatically
make her a party to the contract. Is Pura liable? (5%)

SUGGESTED ANSWER

Pura is liable to Foton Motors because it sold a car to her son and was a holder for value of
the check issued in its favor by Pura. Any person criminally liable for felony is also civilly
liable. Thus , her acquittal in the criminal charge does not carry with it extinction of her civil
liability unless the extinction proceeds from a declaration in a final judgment that the fact
from which the civil might arise did not exist. (People vs Maniego (1987)

More specifically, Pura is liable as an accommodation party. Under Sec. 29 of the NIL, an
accommodation party is one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew him to be only an
accommodation party.

Pura’s liability existed although Pura issued the check after the delivery of the car. Under Sec. 25 of the
NIL, and antecedent or pre-existing debt constitutes value and is deemed such whether the instrument is
payable on demand or at a future time.
2014 BAR EXAMINATIONS Page !21 of !25
COMMERCIAL LAW

XXV.

In an action for collection of a sum of money, the Regional Trial Court (RTC) of Makati City
issued a decision finding D-Securities, Inc. liable to Rehouse Corporation for
P10,000,000.00. Subsequently, the writ of execution was issued but returned unsatisfied
because D-Securities had no more assets to satisfy the judgment. Rehouse moved for an
Alias Writ of Execution against Fairfield Bank (FB), the parent company of D-Securities. FB
opposed the motion on the grounds that it is a separate entity and that it was never made a
party to the case. The RTC granted the motion and issued the Alias Writ of Execution. In its
Resolution, the RTC relied on the following facts: 499,995 out of the 500,000 outstanding
shares of stocks of D-Securities are owned by FB; FB had actual knowledge of the subject
matter of litigation as the lawyers who represented D-Securities are also the lawyers of FB.
As an alter ego, there is no need for a finding of fraud or illegality before the doctrine of
piercing the veil of corporate fiction can be applied. The RTC ratiocinated that being one and
the same entity in the eyes of the law, the service of summons upon D-Securities has
bestowed jurisdiction over both the parent and wholly-owned subsidiary. Is the RTC correct?
(4%)
SUGGESTED ANSWER

The RTC is not correct. As FB is a separate entity and was never made a party to the case,
the judgment sought to be enforced against D-Securities cannot be made against its parent
company, FB.

Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements:
control of the corporation by the stockholder or parent corporation, (2) fraud or fundamental
unfairness imposed on the plaintiff, and (3) harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of all these elements in the
problem prevents the piercing of the corporate veil.

The absence of any one of these elements prevents piercing the corporate veil. In applying
the alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to that operation. Hence, all
three elements should concur for the doctrine to be applicable.

Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality. Neither is the existence of interlocking directors, corporate officers
and shareholders enough justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations/

To justify treating the sole stockholder or holding company as responsible, it is not enough
that the subsidiary is so organized and controlled as to make it “merely an instrumentality,
conduit or adjunct” of its stockholders. It must further appear that to recognize their separate
entities would aid in the consummation of a wrong.

Control, by itself, does not mean that the controlled corporation is a mere instrumentality or a business
conduit of the mother company. Even control over the financial operational concerns of a subsidiary
company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of
fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify
piercing the veil. Such fraudulent intent is lacking in this case (Pacific Rehouse Corporation vs CA (2014)
2014 BAR EXAMINATIONS Page !22 of !25
COMMERCIAL LAW

XXVI.

DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB) secured by
a real estate mortgage over a 63,380-square-meter land situated in Cabanatuan City. Due to
the Asian Economic Crisis, DMP experienced liquidity problems disenabling it from paying its
loan on time. For that reason, NB sought the extra judicial foreclosure of the said mortgage
by filing a petition for sale on June 30, 2003. On September 4, 2003, the mortgaged property
was sold at public auction, which was eventually awarded to NBas the highest bidder. That
same day, the Sheriff executed a Certificate of Sale in favor of NB.

On October 21, 2003, DMP filed a Petition for Rehabilitation before the Regional Trial Court
(RTC).
Pursuant to this, a Stay Order was issued by the RTC on October 27, 2003.

On the other hand, NB caused the recording of the Sheriff’s Certificate of Sale on December
3, 2003 with the Register of Deeds of Cabanatuan City. NB executed an Affidavit of
Consolidation of Ownership and had the same annotated on the title of DMP. Consequently,
the Register of Deeds cancelled DMP’s title and issued a new title in the name of NB on
December 10, 2003.

NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance of Writ of Possession
before the RTC of Cabanatuan City. After hearing, the RTC issued on September 6, 2004 an
Order directing the Issuance of the Writ of Possession, which was issued on October 4,
2004.

DMP claims that all subsequent actions pertaining to the Cabanatuan property should have
been held in abeyance after the Stay Order was issued by the rehabilitation court. Is DMP
correct? (4%)
SUGGESTED ANSWER

DMP is not correct. Since the foreclosure of DMP’s mortgage and the issuance of the certificate of sale in
NB’s favor were done prior to the appointment of a Rehabilitation Receiver and the Stay Order, all the
actions taken with respect to the foreclosed mortgage property which were subsequent to the issuance
of the Stay Order were not affected by the Stay Order. Thus, after the redemption period expired without
DMP redeeming the foreclosed property, NB becomes the absolute owner of the property and it was
within its right to ask for the consolidation of title and the issuance of new title in its name as a
consequence of ownership; thus, it is entitled to the possession and enjoyment of the property
(Equitable PCI Bank vs DNG Realty and Development Corp. (2010)
2014 BAR EXAMINATIONS Page !23 of !25
COMMERCIAL LAW

XXVII.

ELP Insurance, Inc. issued Marine Policy No. 888 in favor of FCL Corp. to insure the
shipment of 132 bundles of electric copper cathodes against all risks. Subsequently, the
cargoes were shipped on board the vessel "M/V Menchu" from Leyte to Pier 10, North
Harbor, Manila.

Upon arrival, FCL Corp. engaged the services of CGM, Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent delivery to its warehouses/plants in Valenzuela City.
The goods were loaded on board twelve (12) trucks owned by CGM, Inc., driven by its employed
drivers and accompanied by its employed truck helpers. Of the twelve (12) trucks en routeto
Valenzuela City, only eleven (11) reached the destination. One (1) truck, loaded with eleven (11)
bundles of copper cathodes, failed to deliver its cargo.

Because of this incident, FCL Corp. filed with ELP Insurance, Inc. a claim for insurance
indemnity in the amount of P1,500,000.00. After the requisite investigation and adjustment,
ELP Insurance, Inc. paid FCL Corp. the amount of P1,350,000.00 as insurance indemnity.

ELP Insurance, Inc., thereafter, filed a complaint for damages against CGM, Inc. before the
Regional Trial Court (RTC), seeking reimbursement of the amount it had paid to FCL Corp.
for the loss of the subject cargo. CGM, Inc. denied the claim on the basis that it is not privy to
the contract entered into by and between FCL Corp. and ELP Insurance, Inc., and hence, it
is not liable therefor. If you are the judge, how will you decide the case? (4%)

SUGGESTED ANSWER

I will decide the case in favor of ELP Insurance. Even if CGM, Inc. is not privy to the
contract between FCL Corp. and ELP Insurance, it is still liable for the loss of the subject
cargo. Art. 2207 of the Civil Code states if the plaintiff’s property has been insured and he
has received indemnity from the insurance company for injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer or the person who has violated the contract,
which in this case is CGM. Since ELP Insurance is subrogated to the rights of FCL
Corporation to the extent of the amount it paid to the latter under the marine insurance
contract, it has the right to seek reimbursement from CGM, Inc, for breach of contract and/or
tort (Loadmasters Customs Services, Inc. vs Glodel Brokerage Corporation and R & B
Insurance Corp (2011)
2014 BAR EXAMINATIONS Page !24 of !25
COMMERCIAL LAW

XXVIII.

Which of the following instruments is negotiable if all the other requirements of negotiability
are met? (1%)

A promissory note with promise to pay out of the U.S. Dollar account of the
maker in XYZ Bank

A promissory note which designates the U.S. Dollar currency in which payment is
to be made

A promissory note which contains in addition a promise to paint the portrait of the
bearer

A promissory note made payable to the order of Jose Cruz or Josefa Cruz

SUGGESTED ANSWER
A promissory note which designates the U.S. Dollar currency in which payment is to be
made or
(D) A promissory note made payable to the order of Jose Cruz or Josefa Cruz
2014 BAR EXAMINATIONS Page !25 of !25
COMMERCIAL LAW

XXIX.

KKis from Bangkok, Thailand. She studies medicine in the Pontifical University of Santo
Tomas (UST). She learned that the same foreign books prescribed in UST are 40-50%
cheaper in Bangkok. So she ordered 50 copies of each book for herself and her
classmates and sold the books at 20% less than the price in the Philippines. XX, the
exclusive licensed
publisher of the books in the Philippines, sued KK for copyright infringement. Decide. (4%)

SUGGESTED ANSWER

is liable for infringement of copyright. XX, as exclusive licensed publisher, is entitled, within
the scope of the license, to all the rights and remedies that the licensor has with respect
to the copyright (Sec. 180, of IPC)

The importation by KK of 50 copies of each foreign book prescribed in UST and selling them
locally at 20% less than their respective prices in the Philippines is subject to the doctrine of
fair use set out in Sec. 185.1 of the IPC. The factors to be considered in determining
whether the us made of a work is fair use shall include:

The purpose and character of the use, including whether such use is of a
commercial nature or is for non-profit educational; purposes;
The nature of the copyrighted work;
The amount and substantiality of the portion used in relation to the copyrighted work as
a whole; and
The effect of the use upon the potential market for or value of the copyrighted work.

Applying the above-listed factors to the problem, KK’s importation of the books and their
sale locally clearly show the unfairness of her use of the books, particularly the adverse
effect of her price discounting on the business of XX.

---oo0ooo---
 !"#$ &'( )*'+,-'.,/-0
!"#$%&'()" )%+

(,
%, &-./01 2-3 - 42145/06 -447809 :/92 ;-/< = >?8-<1 @-05, A01 .-BC 321 D739
21< 42145E775 -0. 921 F/0.1< :-3 -ED1 97 F7<61 21< 3/60-98<1 -0. 104-32
921 F7<61. 42145, +/DD &-./01 E1 -ED1 97 <147G1< 921 -H7809 .1E/91.
F<7H 21< 42145/06 -447809 F<7H ;-/< = >?8-<1 @-05I J839/FB B78< -03:1<,
KLMN

1234 -56782 39:;<6 =2 5=<2 >: ?2@:A2? >92 5B:;8> 62=7>26 C?:B 92?
@92@D78E 5@@:;8> C?:B F57? 586 0G;5?2 &58DH .92 &58D 73 3;II:326 >: D8:J >92
37E85>;?2 :C 7>3 @<728>3H .92 &58D J53 >9;3 82E<7E28> 78 8:> 62>2@>78E >92
C:?E2?K :C -56782L3 37E85>;?2 586 I5K78E >92 @92@DH M862? >92 @7?
@;B3>58@234 >92?2 J53 8: 82E<7E28@2 :8 >92 I5?> :C -56782 J97@9 J:;<6 I?
2@<;62 92? C?:B 78A:D78E C:?E2?KH O2/D/PP/01 &-9/70-D @-05 G3 Q8/HP7C
RST >$#% STU

@, (3 - H-0-61<V3 42145 -3 677. -3 4-32I +2B 7< :2B 079I KUMN

1234 >92 0;I?2B2 N:;?> 92<6 78 A5?7:;3 62@737:83 >95> 5 B585E2?L3 @92@D 73 E::6 53
@539H ' B585E2?L3 @92@D 73 5 @92@D 6?5J8 =K >92 =58D 5E5783> 7>32<CH ,> 73
622B26 I?2O5@@2I>26 =K >92 =58D C?:B >92 B:B28> :C 733;58@2H .92 @92@D
=2@:B23 >92 I?7B5?K :=<7E5>7:8 :C >92 =58D J97@9 733;23 7> 586 @:83>7>;>23 7>3 J?
7>>28 I?:B732 >: I5KH &K 733;78E 7>4 >92 =58D 78 2CC2@> @:BB7>3 7>3 >:>5< ?23:;?
@234 78>2E?7>K 586 9:8:? =29786 >92 @92@DH K '-0 G3
$78<9 7F %PP1-D3C ULW >$#% LRXY (091<0-9/70-D $7<P7<-91 @-05 G3
Z8147C LSR >$#% SR[Y !19<7E-05 -0. '<839 $7HP-0B G3 $2/75C Z# &7, R\U[SUC
&7G1HE1< U[C UXR]

%D91<0-9/G1 -03:1<

+585E2?L3 @92@D 73 8:> <2E5< >2862? =2@5;32 ;862? '?>7@<2 #!PQ :C >92
N7A7< N:624 @92@D3 6: 8:> I?:6;@2 >92 2CC2@> :C I5KB28> ;8>7< 28@53926 :?
>9?:;E9 >92 C5;<> :C >92 @?267>:?4 >927? A5<;2 953 =228 7BI57?26H +:?2:A2?4
;862? >92 N28>?5< &58D '@>4
>92 62=>:? @58 8:> @:BI2< >92 @?267>:? >:
 5@@2I> @92@D3 78 I5KB28> :C 5 62=> J92>92? I;=<7@ :? I?7A5>2 R '?
>7@<2 S" :C (' TS$U V

$, +210 4-0 B78 9<1-9 - E/DD 7F 1^42-061 -3 - P<7H/337<B 0791I KLMN

=7<< :C 2W@958E2 B5K =2 >?25>26 53 5 I?:B733:?K 8:>2 78 >92

C:<<:J78E 783>58@23H

#H .92 6?5J22 73 5 C7@>7>7:;3 I2?3:8 :? 5 I2?3:8 8:> 95A78E >92 @5I5@7>K >:
@:8>?5@>X
!H .92 6?5J2? 586 >92 6?5J22 5?2 :82 586 >92 35B2 I2?3:8H
UHY92?2 >92 783>?;B28> 73 3: 5B=7E;:;3 >95> >92?2 73 5 6:;=> 53 >:
J92>92? >92 783>?;B28> 73 5 =7<< :? 5 8:>24 >92 9:<62? B5K >?25> 7>
27>92? 53 5 =7<< :? 8:>24 5> >92 :I>7:8 :C >92 9:<62?H R 02@>7:83 #U"
586 #T :C >92 -2E:>75=<2 ,83>?;B28>3 Z5J

((,
%, &7G1991 1091<1. /097 - 4709<-49 F7< 921 P8<42-31 7F 41<9-/0 7FF/41
38PPD/13, '21 677.3 :1<1 32/PP1., +2/D1 /0 9<-03/9C 921 677.3 :1<1 /
038<1. EB &7G1991, _713 321 2-G1 -0 /038<-ED1 /091<139 7G1< 921
677.3 1G10 E1F7<1 .1D/G1<B 7F 921 3-H1 97 21<I "^PD-/0, KUMN

1234 -:A2>>2 953 58 783;?5=<2 78>2?23> 78 >92 E::63H .92 @:8>?

5@> :C 35<2 J53 5<?256K I2?C2@>26 586 -:A2>>2 5@G;7?26 78>2?23>
>92?2:8 5<>9:;E9 >92 E::63 95A2 K2> >: =2 62<7A2?26H

@, +/DD -0 /038<-041 P7D/4B E1 E/0./06 1G10 /F 921 P<1H/8H /3 80P-/.I +2-9

/F /9 :1<1 P-<9/-DDB P-/.I KLMN

'3 5 E282?5< ?;<24 >92 783;?58@2 I:<7@K 73 8:> A5<76 586 =78678E ;8<233
>92 I?2B7;B >92?2:C 953 =228 I576H .973 73 >92 @539 586 @5??K ?;<2 ;862?
>92 ,83;?58@2 N:62H [?2B7;B 73 >92 @:83762?5>7:8 C:? >92 ;862?>5D78E :C
>92 783;?2? >: 7862B87CK >92 783;?26 5E5783> 5 3I2@7C726 I2?7<H .92?2
5?2 2W@2I>7:834 9:J2A2?4 :82 :C >92B 73 J928 >92?2 73 58 5E?22B28>
5<<:J78E >92 783;?26 >: I5K >92 I?2B7;B 78 783>5<<B28>3 586 I5?>75<
I5KB28> 953 =228 B562 5> >92 >7B2 :C >92 <:33H K !-5-9/ '834-0B $70.7H/0/8H
$7<P7<-9/70 G3 $78<9 7F %PP1-D3C URS >$#% ][L
 (((,
%, _/34833 921 92<11`F7D. 42-<-491< 7F - E/DD 7F D-./06, KLMN

=7<< :C <5678E 73 @:83762?26 5 ?2@27I> C:? >92 E::63 397II26 >: >92
@:BB:8 @5??72?H

,> 5<3: 32?A23 53 >92 @:8>?5@> =K J97@9 >9?22 I5?>7234 85B2<K4

>92 397II2?4 >92 @5??72? 586 >92 @:837E822 ;862?>5D2 3I2@7C7@ ?
23I:837=7<7>723 586 533;B26 3>7I;<5>26 :=<7E5>7:83H

.97?64 7> 73 >92 2A7628@2 :C >92 2W73>28@2 :C >92 @:8>?5@> :C @5??75E2

I?:A7678E C:? >92 >2?B3 586 @:867>7:83 >92?2:C K a106 b8- O-P1< O<7.8493
G3 $78<9 7F %PP1-D3C UT[ >$#% US\,

@, +2-9 /3 - cJ-370 4D-831d /0 - 42-<91< P-<9BI KUMN

.92 \53:8 @<5;32 62?7A23 7>3 85B2 C?:B .92 \53:8 !!$ M0 U! R #Q#! V
62@7626 =K >92 M0 0;I?2B2 N:;?> ;862? >92 ]5?>2? '@>H &K >92 \53:8
@<5;324 5 397I:J82? R I?:A7626 92 956 2W2?@7326 6;2 67<7E28@2 >:
B5D2 >92 397I 325J:?>9K 586 I?:I2?<K B588264 2G;7II26 586 3;II<726V
@:;<6 @<57B 5 E282?5< 5A2?5E2 @:8>?7=;>7:8 C?:B @5?E:4 2A28 J92?2
>92 65B5E2 J53 @5;326 =K C5;<>K 85A7E5>7:8 :C >92 A2332<4 I?:A7626
>95> >92 =7<< :C <5678E 2W@<;626 <75=7<7>K C:? 3;@9 C5;<>3H

-&H .973 73 8:> 5 C5B7<75? I?78@7I<2 78 [97<7II782 B5?7>7B2 @:BB2?@2

586 >92 G;23>7:8 73 8:> @:8373>28> J7>9 >92 8:?B :C 53D78E G;23>7:83
>: >23> >92 D8:J<26E2 :C 28>?K <2A2< <5JK2?3H ,> 73 ?23I2@>C;<<K
3;=B7>>26 >95> >92 G;23>7:8 39:;<6 =2 E7A28 :;>?7E9> @?267> 78
C5A:? :C >92 2W5B78223 ?2E5?6<233 :C >927? 583J2?H

%<1 47HH70 4-<</1<3 D/-ED1 F7< /0e8</13 97 P-331061<3 1G10 /F 921B 2-G1
7E31<G1. 7<./0-<B ./D/61041 -0. 4-<1I "^PD-/0, KUMN

1234 @:BB:8 @5??72?3 5?2 <75=<2 >: 78^;?723 >: I53328E2?3 2A28 7C >92 @5??72?3
:=32?A26 :?6785?K 67<7E28@2 586 @5?2 =2@5;32 >92 :=<7E5>7:8 7BI:326 ;I:8 >92B =K
<5J 73 >: 2W2?@732 2W>?5O:?6785?K 67<7E28@2H N:BB:8 @5??72?3 5?2
=:;86 >: @5??K >92 I53328E2?3 35C2<K 53 C5? 53 9;B58 @5?2 586 C:?237E9>
@58 I?:A7624 ;378E >92 ;>B:3> 67<7E28@2 :C A2?K @5;>7:;3 I2?3:83 J7>9 5
6;2 ?2E5?6 C:? 5<< >92 @7?@;B3>58@23 K %<9/4D1 R\SS 7F 921 $/G/D $7.1 N

,_H

%, !-/01 _10C (04, 7P101. -0 /<<1G74-ED1 D1991< 7F 4<1./9 :/92 ;-/< f @-05C
/0 4700149/70 :/92 !-/01 _10C (04,V3 /HP7<9-9/70 7F 3P-<1 P-<93 F7< /93
91^9/D1 H/DD3, '21 /HP7<91. P-<93 :1<1 <1D1-31. 97 !-/01 _10C (04, -F91< /
9 1^14891. - 9<839 <141/P9 /0 F-G7< 7F ;-/< @-05, +210 !-/01 _10C (04, :-3
80-ED1 97 P-B /93 7ED/6-9/70 80.1< 921 9<839 <141/P9C ;-/< @-05
381. !-/01 _10C (04, F7< 139-F- 80.1< 921 '<839 #141/P93 )-:, '21 478<9C 27:
./3H/331. 921 38/9, +-3 921 ./3H/33-D e839/F/1.I +2B 7< :2B 079I KLMN

.92 673B7335< :C >92 @:BI<578> C:? 23>5C5 73 ^;3>7C726H M862? ?2@28>

^;?73I?;628@24 >92 0;I?2B2 N:;?> 92<6 >95> >?5835@>7:83 ?2C2??26 >: 78 ?
2<5>7:8 >: >?;3> ?2@27I>3 B578<K 78A:<A26 35<23 586 7C >92 28>?;3>2?
D82J 2A28 =2C:?2 >92 2W2@;>7:8 :C >92 5<<2E26 >?;3> ?2@27I> 5E?22B28>
>95> >92 E::63 3;=^2@> :C >92 >?;3> ?2@27I> J2?2 82A2? 78>28626 =K >92
28>?;3>22 C:? ?235<2 :? C:? >92 B58;C5@>;?2 :C 7>2B3 >: =2 3:<64 >92 5E?
22B28> 73 8:> 5 >?;3> ?2@27I> >?5835@>7:8 =;> 5 37BI<2 <:584
8:>J7>93>58678E >92 <5=2<H ,8 >973 @5324 >92 :=^2@> :C >92 >?;3> ?
2@27I>4 3I5?2 I5?>3 C:? >2W>7<2 B7<<3 4 J2?2 C:? >92 ;32 :C >92 28>?;3>22
586 82A2? 78>28626 C:? 35<2H '3 3;@94 >92 >?5835@>7:8 73 5 37BI<2 <:58H
&6 G3 O17PD1 7F 921 O2/D/PP/013C Z# &7, R\LWXSC %P</D ULC UXRXY )-0.
@-05 G3 O1<1gC Z# &7, R[[TT]C J801 RLC UXRU -0. b8< '/06 h-06 G3 O17PD1 7F
921 O2/D/PP/013C Z# &/7, RWSRR\C %86839 R]C UXRL

@, +/DD 921 P</04/PD1 7F <13 P1</9 .7H/07 -PPDB /0 9<839 <141/P9 9<-
03-49/70 I

-:H .973 73 =2@5;32 >92 <:33 :C >92 E::634 6:@;B28>3 :? 783>?;B28>3

J97@9 5?2 >92 3;=^2@> :C 5 >?;3> ?2@27I> I28678E >927? 673I:37>7:84
7??23I2@>7A2 :C J92>92? :? 8:> 7> J53 6;2 >: >92 C5;<> :? 82E<7E28@2
:C >92 28>?;3>224 395<< 8:> 2W>78E;739 >92 28>?;3>22L3 :=<7E5>7:8
>: >92 28>?;3>2? C:? >92 A5<;2 >92?2:CH
 '<3:4 J97<2 >92 28>?;3>2? 73 B562 >: 5II25? 53 :J82? :C >92 E::63 @:A2?26
=K >92 >?;3> ?2@27I>4 3;@9 :J82?397I 73 :8<K 5 <2E5< C7@>7:8 >:
28958@2 >92 28>?;3>2?L3 32@;?7>K 78>2?23> :A2? >92 E::63H >149/70
RX 7F O_ RRSY #73-</7 '1^9/D1 !/DD3 $7<P G3, b7H1 @-051<3 >-G/063 -0.
'<839 $7HP-0BC ][U >$#% TT
_H
'H % 39-0.EB D1991< 7F 4<1./9 :-3 /3381. EB %@$ @-05 97 3148<1 921 7ED/6-
9/70 7F i $7HP-0B 97 h $7HP-0B, j0.1< 921 39-0.EB D1991< 7F 4<1./9C /F
921<1 /3 F-/D8<1 70 921 P-<9 7F i $7HP-0B 97 P1<F7<H /93 7ED/6-9/70C
9210 h $7HP-0B :/DD 38EH/9 97 %@$ @-05 - 41<9/F/4-91 7F .1F-8D9 K/0
921 F7<H P<134</E1. 80.1< 921 39-0.EB D1991< 7F 4<1./9N -0. %@$ @-
05 :/DD 2-G1 97 P-B h $7HP-0B 921 .1F-8D91. -H7809,

>8E31?8109DBC h $7HP-0B 38EH/991. 97 %@$ @-05 - 41<9/F/4-91 7F .1F-

8D9 079:/9239-0./06 921 F-49 92-9 i $7HP-0B :-3 079 /0 .1F-8D9, $-0 %@$
@-05 <1F831 97 2707< 921 41<9/F/4-91 7F .1F-8D9I "^PD-/0, KLMN

-:H M862? >92 6:@>?782 :C 7862I28628@2 78 5 <2>>2? :C @?267>4 >92 :=<7E5>7:8 :C

>92 733;78E =58D >: I5K >92 =282C7@75?K 73 673>78@> 586 7862I28628> C?:B >92 B578
586 :?7E785>78E @:8>?5@> ;862?<K78E >92 <2>>2? :C @?267>H 0;@9 :=<7E5>7:8 >: I5K
6:23 8:> 62I286 :8 >92 C;<C7<<B28> :? 8:8OC;<C7<<B28> :C >92 :?7E785>78E @:8>?
5@>H ,> 5?7323 ;I:8 >2862? :C >92 3>7I;<5>26 6:@;B28>3 ;862? >92 <2>>2? :C @?267>H ,
8 >92 I?2328> @5324 >92 >2862? :C >92 @2?>7C7@5>2 :C 62C5;<> 28>7><23 1 >:
I5KB28> ;862? >92 3>586=K <2>>2? :C @?267> 8:>J7>93>58678E >92 C5@> >95> *
N:BI58K J53 8:> 78 62C5;<>H .973 73 J7>9:;> I?2^;67@2 >: >92 ?7E9> :C * N:BI58K >:
I?:@226 5E5783> 1 N:BI58K ;862? >92 <5J :8 @:8>?5@>3 586 65B5E23H (038D-< @-05 7F
%3/- -0. %H1</4- G3
(091<H1./-91 %PP1D-91 $78<9 R[\ >$#% ]SX,

%D91<0-9/G1 -03:1< ,

M862? >92 C?5;6 2W@2I>7:8 I?78@7I<24 >92 =282C7@75?K B5K =2 28^:7826 C?:B
@:<<2@>78E :8 >92 <2>>2? :C @?267> 78 @532 :C C?5;6;<28> 5=;32 :C @?267>H .92
733;58@2 :C 5 @2?>7C7@5>2 :C 62C5;<> 623I7>2 >92 C5@> >95> * @:BI58K 73 8:> 78
62C5;<> @:83>7>;>23 C?5;6;<28> 5=;32 :C @?267>H '<-03F/1D. O2/D/PP/013 G3
)8g70 bB.<7 $7<P7<-9/70C ]]L >$#% LX\,
&H(3 921 j0/F7<H $8397H3 -0. O<-49/41 F7< _748H109-<B $<1./93 7F 921
(091<0-9/70-D $2-HE1< 7F $7HH1<41 -PPD/4-ED1 97 47HH1<4/-D D1991<3
7F 4<1./9 /3381. EB - .7H139/4 E-05 1G10 /F 079 1^P<133DB H109/701. /0
3842 D1991<3 7F 4<1./9I +2-9 /3 921 E-3/3 F7< B78< -03:1<I KLMN

1234 >92 0;I?2B2 N:;?> 92<6 >95> >92 :=32?A58@2 :C >92 M87C:?B N;3>:B3 586 [?
5@>7@2 78 >92 [97<7II7823 73 ^;3>7C726 =K '?>7@<2 ! :C >92 N:62 :C N:BB2?@2
J97@9 28;8@75>23 >95> 78 >92 5=328@2 :C 58K I5?>7@;<5? I?:A737:8 78 >92
N:62 :C N:BB2?@24 @:BB2?@75< >?5835@>7:8 395<< =2 E:A2?826 =K ;35E2 586
@;3>:B3 E282?5<<K :=32?A26H @-05 7F 921 O2/D/PP/01 (3D-0.3 G3
_1 #10B ;-E</4 (0.839</13C (04, LS >$#% USL

_,H
%, _"; $7<P7<-9/70 2-3 <19-/01. 38<PD83 P<7F/93 /0 1^4133 7F RXXM 7F /93
P-/.` /0 4-P/9-D 39745, b7:1G1<C /9 /3 80-ED1 97 .14D-<1 ./G/.10.3C E14-831 /9
2-.
1091<1. /097 - D7-0 -6<11H109 :/92 - 41<9-/0 4<1./97< :21<1/0 921
.14D-<-9/70 7F ./G/.10.3 /3 079 -DD7:1. :/92789 921 4703109 7F 3842
4<1./97<, (F _"; $7<P7<-9/70 4-0079 7E9-/0 92/3 4703109C :/DD /9 E1
e839/F/1. /0 079 .14D-</06 ./G/.10.3 97 /93 3974527D.1<3I "^PD-/0, KLMN

123H 0>:@D @:?I:?5>7:83 5?2 I?:97=7>26 C?:B ?2>57878E 3;?I<;3 I?:C7>3 78

2W@233 :C #""` :C >927? I576O78 @5I7>5< 3>:@D 2W@2I> 5B:8E :>92?34
J928 >92 @:?I:?5>7:8 73 I?:97=7>26 ;862? 58K <:58 5E?22B28> J7>9 58K
C7858@75< 783>7>;>7:8 :? @?267>:?X J92>92? <:@5< :? C:?27E84 C?:B
62@<5?78E 67A762863 J7>9:;> >92 @:8328> :C >92 @?267>:? 586 3;@9
@:8328> 953 8:> =228 32@;?26H R 02@>7:8 PU :C >92 N:?I:?5>7:8 N:62 V

@, +2-9 /3 c:-91<1. 39745d -0. :2-9 /3 921 D16-D 47031?81041 7F 921 /338-
041 7F 3842 39745I KLMN

Y5>2?26 3>:@D3 5?2 3>:@D3 733;26 C:? 5 @:83762?5>7:8 <233 >958 7>3 I5? :? 733;26
A5<;2 :? C:? 5 @:83762?5>7:8 78 58K C:?B :>92? >958 @5394 A5<;26 78 2W@233 :C 7>3
C57? A5<;2H '8K 67?2@>:? :? :CC7@2? :C 5 @:?I:?5>7:8 @:8328>78E >: >92 733;58@2 :C
J5>2?26 3>:@D3 :? J9:4 95A78E D8:J<26E2 >92?2:C4 6:23 8:> C:?>9J7>9 2WI?233 973
:=^2@>7:8 78 J?7>78E 586 C7<2 >92 35B2 J7>9 >92 @:?I:?5>2 32@?2>5?K 395<< =2
3:<765?7<K <75=<2 J7>9 >92 3>:@D9:<62? @:8@2?826 >: >92 @:?I:?5>7:8 586 7>3 @?
267>:?3 C:? >92 67CC2?28@2 =2>J228 >92 C57?
 A5<;2 ?2@27A26 5> >92 >7B2 :C 733;58@2 :C >92 3>:@D 586 >92 I5? :? 733;26
A5<;2 :C >92 35B2H >149/70 [S 7F 921 $7<P7<-9/70 $7.1

k((,
%, % F7<1/60 47HP-0B 2-3 E110 1^P7<9/06 677.3 97 - O2/D/PP/01 47HP-0B F7<
31G1<-D B1-<3 07:, +210 921 O2/D/PP/01 47HP-0B F-/D1. 97 P-B 921 D-9139
1^P7<9-9/70C 921 F7<1/60 47HP-0B 381. 97 47DD149 /0 921 O2/D/PP/013, '21
O2/D/PP/01 47HP-0B /091<P731. 921 .1F1031 92-9 921 F7<1/60 47HP-0B :-3
.7/06 E83/0133 /0 921 O2/D/PP/013 :/92789 - D/41031Y 21041C 478D. 079 381
E1F7<1 - O2/D/PP/01 478<9, (3 92/3 .1F1031 910-ED1I "^PD-/0 B78< -03:1<,
KLMN

.92 62C2832 73 8:> >285=<2H .92 B2?2 5@> :C 2WI:?>78E C?:B :82L3 :J8 @:;8>?
K4 J7>9:;> 6:78E 58K 3I2@7C7@ @:BB2?@75< 5@> J7>978 >92 >2??7>:?K :C
>92 7BI:?>78E @:;8>?K @58 8:> =2 622B26 53 6:78E =;378233 78 >92 7BI:?>78E
@:;8>?KH .9;34 >92 C:?27E8 @:BI58K B5K 3;2 78 >92 [97<7II7823 623I7>2
<5@D :C <7@2832 >: 6: =;378233 78 >92 [97<7II7823H K @, k-0 l8/.10
@<73 )9., k3 Z'k) !-08F-498</06 (0.839</13 SUL >$#% ULL

@, _1F/01m
R, _749</01 7F -PP-<109 -8927</9B KUMN

&K >92 6:@>?782 :C 5II5?28> 5;>9:?7>K4 >92 @:?I:?5>7:8 J7<< =2

23>:II26 C?:B 628K78E >92 5E28>L3 5;>9:?7>K 7C 7> D8:J78E<K I2?
B7>3 :82 :C 7>3 :CC7@2?3 :? 58K :>92? 5E28> >: 5@> J7>978 >92
3@:I2 :C 58 5II5?28> 5;>9:?7>K 586 7> 9:<63 97B :;> >: >92 I;=<7@ 53
I:3323378E >92 I:J2? >: 6: >9:32 5@>3H %.G-041 O-P1< $7<P7<-9/70 G3
%<H-'<-.1<3 $7<P7<-9/70C Z# &7, R\[TW\C _141HE1< RRC UXRL

U, '<839 F80. .749</01 KUMN

&K >92 >?;3> C;86 6:@>?782 3;=3@?7I>7:83 >: >92 @5I7>5< 3>:@D :C 5
@:?I:?5>7:8 @:83>7>;>2 5 C;86 >: J97@9 >92 @?267>:?3 95A2 >92 ?7E9>
>: <::D C:? 35>73C5@>7:8 :C >927? @<57B3H .92 3@:I2 :C >92 6:@>?782
28@:BI53323 8:> :8<K >92 @5I7>5< 3>:@D =;> 5<3: :>92? I?:I2?>K 586
5332>3 E282?5<<K ?2E5?626 78 2G;7>K 53 5 >?;3> C;86 C:? >92 I5KB28>
 :C @:?I:?5>2 62=>3 b-DD1B G3 O</09:1DDC Z# &7, RS\S]WC !-B
LXC UXRRY A06 G3 '/8C ]XR >$#% R

_,,,H
%, @-H F/D1. -0 -49/70 97 10e7/0 >& $7HP-0BV3 @7-<. 7F _/<1497<3 F<7H
31DD/06 - P-<41D 7F D-0. <16/391<1. /0 921 47<P7<-9/70V3 0-H1C 97
47HP1D 921 47<P7<-9/70 97 <14760/g1 @-H -3 - 3974527D.1< :/92 SX 32-
<13C 97 -DD7: 2/H 97 /03P149 921 47<P7<-91 E7753C -0. 97 4D-/H .-H-613
-6-/039 921 47<P7<-9/70 -0. /93 7FF/41<3, >8E31?8109DBC 921 47<P7<-9/70
-0. 921 /0./G/.8-D .1F10.-093 H7G1. 97 ./3H/33 921 47HPD-/09 3/041 921
47<P7<-9/70V3 41<9/F/4-91 7F <16/39<-9/70 :-3 <1G751. EB 921 >"$
.8</06 921 P10.104B 7F @-<0V3 4-31 70 921 6<780. 7F 070`47HPD/-
041 :/92 <1P7<97</-D <1?8/<1H1093,

'21 3P14/-D 47HH1<4/-D 478<9 6<-091. 921 H79/70 -0. <1-3701. 92-9 70DB
-0 -49/70 F7< D/?8/.-9/70 7F -33193 4-0 E1 H-/09-/01. :210 - 47<P7<-9/70 2-
3 E110 ./337DG1. -0. @-H 4-0079 3115 <1D/1F3 :2/42 /0 1FF149 D1-. 97
921 4709/08-9/70 7F 921 47<P7<-9/70V3 E83/0133, '21 478<9 -D37 <8D1.
92-9 /9 D739 e8</3./49/70 7G1< 921 /09<-`47<P7<-91 4709<7G1<3B
8P70 921 ./337D89/70 7F 921 47<P7<-9/70,

-N +-3 921 478<9 47<<149I KLMN

.92 @:;?> 73 8:> @:??2@>H '8 5@>7:8 >: =2 ?2@:E87a26 53 5 3>:@D9:<62?

586 >: 783I2@> @:?I:?5>2 6:@;B28>3 73 58 78>?5O@:?I:?5>2 673I;>2
J97@9 6:23 8:> @:83>7>;>2 5 @:8>78;5>7:8 :C =;378233H .92
6733:<;>7:8 :C >92 @:?I:?5>7:8 37BI<K I?:97=7>3 7> C?:B @:8>78;78E 7>3
=;378233H +:?2:A2?4 ;862? 02@>7:8 #P$ :C >92 N:?I:?5>7:8 N:624 8: ?
7E9> :? ?2B26K 78 C5A:? :C :? 5E5783> 58K @:?I:?5>7:84 7>3
3>:@D9:<62?34 B2B=2?34 67?2@>:?3 586 :CC7@2?3 395<< =2 ?
2B:A26 :? 7BI57?26 =K >92 3;=32G;28> 6733:<;>7:8 :C >92 @:?I:?5>7:8H

.92 6733:<;>7:8 6:23 8:> 5;>:B5>7@5<<K @:8A2?> >92 I5?>723 78>: 3>?
58E2?3 :? @958E2 >927? 78>?5 @:?I:?5>2 ?2<5>7:8397IH-27>92? 6:23 7>
>2?B785>2 2W73>78E @5;323 :C 5@>7:8 J97@9 5?:32 =2@5;32 :C >92
 @:?I:?5>2 >723 :C >92 I5?>723H .92 @5;32 :C 5@>7:8 78A:<A78E 58
78>?5O @:?I:?5>2 @:8>?:A2?3K ?2B5783 586 B;3> =2 C7<26 53 58
78>?5O @:?I:?5>2 673I;>2 623I7>2 >92 3;=32G;28> 6733:<;>7:8 :C >92
@:?I:?5>7:8H %68/<<1 G3 ;Q@ n\C (04, Z# 07, R\X\\XC J-08-<B WC UXRL

EN ;78< B1-<3 D-91<C >& $7HP-0B F/D13 -0 -49/70 -6-/039 @-H 97

<147G1< 47<P7<-91 -33193 -DD161.DB 21D. EB 921 D-991< F7<
D/?8/.-9/70, +/DD 92/3 -49/70 P<73P1<I KLMN

.92 5@>7:8 @588:> I?:3I2? =2@5;32 >92 @:?I:?5>7:8 953 8: B:?2

<2E5< @5I5@7>K >: 3;2 5C>2? >9?22 K25?3 C?:B 7>3
6733:<;>7:8H %D-E-06 _1G1D7PH109 $7<P7<-9/70 G3 %D-E-06
b/DD3 k/DD-61 %3374/-9/70C Z# 07, RT\]S[C J801 UC UXR]

,*H
%, %ED1 $7<P7<-9/70 37D. 3148</9/13 97 UR 070`?8-D/F/1. E8B1<3 .8</06 -
RS` H7092 P1</7.C :/92789 <16/391</06 921 3148</9/13 :/92 921
>148</9/13 -0. "^42-061 $7HH/33/70, _/. %ED1 $7<P7<-9/70 G/7D-91 921
>148</9/13 #168D-9/70 $7.1I "^PD-/0, KUMN

123 =2@5;32 ;862? >92 0(N 32@;?7>723 395<< 8:> =2 3:<6 :? :CC2?26 >: =2 3:<6
>: >92 I;=<7@ J7>978 >92 [97<7II7823 ;8<233 >92 32@;?7>723 5?2 ?
2E73>2?26 J7>9 586 5II?:A26 =K >92 02@;?7>723 586 )W@958E2
N:BB7337:8H [;=<7@ B2583 !" :? B:?2 78A28>:?3H .92 C5@> >95> >92
32@;?7>723 J2?2 3:<6 6;?78E 5 #$ B:8>9 I2?7:6 73 7BB5>2?75<H

]:J2A2?4 >92 35<2 :C 32@;?7>723 >: <233 >958 !" 78A23>:?3 7C 6:82 6;?
78E 5 #! B:8>9 I2?7:6 73 58 2W2BI> >?5835@>7:8 ;862? >92 02@;?7>723
(2E;<5>7:8 N:62H

@, >148</9/13 /3381. EB 921 O2/D/PP/01 67G1<0H109 -<1 c1^1HP9

3148</9/13d -0.C 921<1F7<1C 011. 079 E1 <16/391<1. :/92 921 >148</9/13
-0. "^42-061 $7HH/33/70 P</7< 97 921/< 3-D1 7< 7FF1</06 97 921
P8ED/4 /0 921 O2/D/PP/013, +2-9 /3 921 <-9/70-D1 E12/0. 92/3 1^1HP9/70I
KUMN
 .92 ?5>7:85<2 C:? >92 2W2BI>7:8 73 >95> >92 I;=<7@ 73 5BI<K I?:>2@>26
2A28 J7>9:;> >92 ?2E73>?5>7:8 :C >92 32@;?7>723 >: =2 733;26 =K >92
E:A2?8B28> 378@2 >92 E:A2?8B28> 73 I?23;B26 >: =2 5<J5K3 3:<A28>H

$, +2B /3 921 >148</9/13 #168D-9/70 $7.1 4-DD1. - c9<892 /0 3148</9/13 D-:dI

KUMN

.92 02@;?7>723 (2E;<5>7:8 N:62 73 @5<<26 5 b >?;>9 78 32@;?7>723 <5J b =2@5;32 7> ?
2G;7?23 >92 733;2? >: B5D2 C;<< 586 C57? 673@<:3;?2 :C 78C:?B5>7:8 5=:;> 32@;?7>723
=278E 3:<6 :? :CC2?26 >: =2 3:<6 J7>978 >92 [97<7II7823 586 I285<7a23 B587I;<5>7A2 586
C?5;6;<28> 5@>34 62A7@23 586 3@92B23H

*H
!<, -0. !<3, #1B13 /0G1391. 921/< 2-<.`1-<01. 3-G/063 /0 3148</9/13 /3381.
EB )"%_ @-05, %F91< ./347G1</06 92-9 921 3148</9/13 37D. 97 921H :1<1 079
<16/391<1. :/92 921 >"$ /0 G/7D-9/70 7F 921 >148</9/13 #168D-9/70 $7.1C 921
3P78313 #1B13 F/D1. - 47HPD-/09 F7< 08DD/9B 7F 4709<-49 -0. F7< <147G1<B
7F - 38H 7F H701B :/92 921 #'$, )"%_ @-05 H7G1. 97 ./3H/33 921 4-31 70 921
6<780. 92-9 /9 /3 921 >"$ 92-9 2-3 P</H-<B e8</3./49/70 7G1< -49/703 /
0G7DG/06 G/7D-9/703 7F 921 >148</9/13 #168D-9/70 $7.1, (F B78 :1<1 921
e8.61C 27: :78D. B78 <8D1 70 921 H79/70 97 ./3H/33I KLMN

.92 B:>7:8 39:;<6 =2 628726H N7A7< 3;7>3 C5<<78E ;862? >92 0(N R <7D2
<75=7<7>K C:? 32<<78E ;8?2E73>2?26 32@;?7>723 V 5?2 ;862? >92 2W@<;37A2 :?
7E785< ^;?7367@>7:8 :C >92 (.N 586 928@24 8226 8:> =2 C7?3> C7<26 =2C:?2 >92
0)N ;8<7D2 @?7B785< @53234 J92?278 >92 <5>>2? =:6K 2W2?@7323 I?7B5?K ^;?
7367@>7:8H O8- G3 $/9/E-05C Z# 07, RTXX[]C >1P91HE1< R[C UXRL

*,H
%, +2B /3 921 @-0657 >109<-D 06 O/D/P/0-3 4703/.1<1. - D10.1< 7F D-39 <137<9I
KUMN

,> 73 @:83762?26 >92 <2862? :C <53> ?23:?> =2@5;32 7> <2863 >: =58D3 586
37B7<5? 783>7>;>7:83 ;862? C7858@75< 673>?233 J928 >92K 95A2 8: :>92? B2583
>: ?5732 C;863H

@, _/39/068/32 - 47031<G-97< F<7H - <141/G1< 7F - E-05, KUMN

 @:832?A5>:? 73 5II:78>26 7C 5 =58D :? G;537O=58D 73 78 5 3>5>2 :C @:8>78;78E
785=7<7>K :? ;8J7<<78E8233 >: B578>578 5 @:867>7:8 :C <7G;767>K 622B26
562G;5>2 >: I?:>2@> >92 78>2?23> :C @?267>:?3 586 62I:37>:?3H .92 @:832?A5>:?
395<< >5D2 @95?E2 :C >92 5332>3 586 <75=7<7>723 :C >92 =58D 586 2W2?@732
B585E2B28> 586 2W2?@732 :>92? I:J2?3 >: ?23>:?2 >92 =58DL3 A75=7<7>KH .92
@:832?A5>:?397I 395<< 8:> 2W@226 :82 K25?H

?2@27A2? 73 5II:78>26 E282?5<<K 7C >92 ?25<7a5=<2 A5<;2 :C >92 =58DL3

5332>3 53 62>2?B7826 =K &0[ 73 <233 >958 7>3 <75=7<7>723H .92 ?2@27A2?
395<< >5D2 @95?E2 :C >92 5332>3 586 <75=7<7>723 :C >92 783>7>;>7:8 586
56B7873>2? >92 35B2 C:? >92 =282C7> :C 7>3 @?267>:?3H .92 ?2@27A2? 395<<
62>2?B782 J7>978 Q" 65K3 J92>92? >92 =58D @58 =2 ?295=7<7>5>264 :>92?J7324
92 395<< ?2@:BB286 >92 @<:3;?2 :C >92 783>7>;>7:8H

$, +2-9 /3 /03/.1< 9<-./06I KUMN

,83762? >?5678E 73 >92 =;K78E :? 32<<78E =K 32@;?7>723 =K 58 783762?

J97<2 78 >92 I:332337:8 :C 5 B5>2?75< 8:8OI;=<7@ 78C:?B5>7:8H

*,,H
%, #-BH70. /0G1391. 2/3 H701B /0 3148</9/13 /3381. EB 921 O2/D/PP/01
67G1<0H109C 92<7862 2/3 E-05, >8E31?8109DBC 921 @8<1-8 7F (091<0-D
#1G1081 -351. 2/3 E-05 97 ./34D731 2/3 /0G139H1093, b/3 E-05 <1F831. 921
<1?8139 F7< ./34D738<1 70 921 6<780. 92-9 921 /0G139H1093 -<1 470F/.109/-
D 80.1< 921 >14<14B 7F @-05 _1P73/93 )-: K#1P8ED/4 %49 &7, R]XSC -3
-H10.1.N, (3 921 E-05V3 <1F83-D e839/F/1.I _1F10. B78< -03:1<, KUMN

,> 73 ^;3>7C726H M862? (' #P"$4 78A23>B28> 78 =:863 733;26 =K >92

[97<7II782 E:A2?8B28> 5?2 5<3: 5=3:<;>2<K @:8C7628>75< 586 B5K 8:>
=2 2W5B78264 78G;7?26 :? <::D26 78>: =K 58K I2?3:84 E:A2?8B28>
:CC7@75<4 =;?25; :? :CC7@2 35A2 C:? >92 2W@2I>7:83 I?:A7626 =K
<5JH -:82 :C >92 2W@2I>7:83 5II<K 78 >92 I?2328> @532HH

@, ;/<39 @-05 <141/G1. -0 7<.1< 7F 6-<0/32H109 7G1< - 4D/109V3 P137 -0. .7DD-<
.1P73/93 /0 ;/<39 @-05, >278D. ;/<39 @-05 47HPDB :/92 92-9 7<.1<I "^PD-/0,
KLMN
 F7?3> &58D 39:;<6 @:BI<K J7>9 >92 :?62? :C E5?8739B28> :A2? 5 @<728>L3 I23:
62I:37>3 =2@5;32 >92?2 73 8:>978E 78 (' #P"$ >95> I<5@23 =58D 62I:37>3 =2K:86
>92 ?25@9 :C ^;6EB28> @?267>:?H '86 >92 673@<:3;?2 :C 78C:?B5>7:8 :8 =58D
62I:37>3 I;?3;58> >: >92 J?7> :C E5?8739B28> 73 :8<K 78@7628>5< >: >92
2W2@;>7:8 I?:@233H O$(@ G3 $78<9 7F %PP1-D3 RWL >$#% ]SU,

.92 6:<<5? 62I:37>34 9:J2A2?4 5?2 2W2BI> C?:B E5?8739B28> :? @:;?

> :?62? ;862? >92 F:?27E8 N;??28@K '@> R (' SP!S VH .9;34 >92 =58D
39:;<6 8:> @:BI<K J7>9 >973 I5?> :C >92 E5?8739B28>H

*,,,H
%, % 47HH1<4/-D E-05 :-093 97 -4?8/<1 32-<13 /0 - 41H109 H-08F-498</06
47HP-0B, _7 B78 92/05 /9 4-0 .7 92-9I +2B 7< :2B 079I KUMN

@:BB2?@75< =58D @58 8:> 5@G;7?2 395?23 78 5 @2B28> B58;C5@>;?

78E @:BI58K =2@5;32 5 @:BB2?@75< =58D @58 :8<K 78A23> 78 >92
2G;7>K :C 5<<726 ;862?>5D78E34 B25878E4 ;862?>5D78E3 ?2<5>26 >:
=58D78EH R 02@>7:8 U" :C (' cTQ# V

@, % 478<9 F780. 921 /091<139 42-<61. EB - E-05 -3 1^4133/G1 -0.

8047034/70-ED1 -0. 39<845 .7:0 921 4709<-498-D 39/P8D-9/70 70 /
091<139, (F B78 :1<1 921 e8.61C :2-9 :78D. B78 /HP731 -3 921 -PPD/4-
ED1 /091<139 <-91I >9-91 B78< D16-D E-3/3, KUMN

, J7<< 7BI:32 <2E5< ?5>2 :C 78>2?23> J97@9 73 @;??28><K 32> 5> S` I2? 588;B

$, +2-9 /3 921 3/06D1 E7<<7:1<V3 D/H/9I KUMN

M862? >92 378E<2 =:??:J2?L3 <7B7>4 >92 >:>5< 5B:;8> :C <:5834 @?267>
5@@:BB:65>7:83 586 E;5?58>22 >95> >92 =58D B5K 2W>286 >: 58K I2?3:8
395<< 8:> 2W@226 !$` :C >92 =58DL3 82> J:?>9H Y97<2 >92 <5J 32>3 >92
@27<78E 5> !"` :C >92 =58DL3 82>J:?>94 7> 5<3: 2BI:J2?3 >92 &0[ >: B:67CK >92
@27<78EH .92 @;??28> 0&Z 53 32> =K &0[ 73 !$` :C >92 &58DL3 82> J:?>9H

*,_H
%, _/FF1<109/-91 9<-.1H-<5C 47PB</629 -0. P-9109 F<7H 1-42 7921<, K[MN

#H '3 >: 62C787>7:8 d

5H .?562B5?D 73 58K A737=<2 37E8 @5I5=<2 :C 673>78E;73978E E::63

=HN:IK?7E9> 73 58 78@:?I:?25< ?7E9> E?58>26 =K 3>5>;>2 >: >92
5;>9:? :? @?25>:? :C :?7E785< <7>2?5?K 586 5?>73>7@ J:?D3
J92?2=K 92 73 78A23>26 C:? 5 <7B7>26 I2?7:6 :C >7B2 J7>9 >92 ?
7E9> @5??K :;>4 5;>9:?7a2 586 I?2A28> >92 ?2I?:6;@>7:84 673>?
7=;>7:84 >?583C:?B5>7:84 ?28>5<4 I;=<7@ I2?C:?B58@2 586
:>92? C:?B3 :C @:BB;87@5>7:8 :C 973 J:?D >: >92 I;=<7@H
@H[5>28> 73 58K >2@987@5< 3:<;>7:8 :C 58K I?:=<2B 78 58K C72<6 :C 9;B58
5@>7A7>K J97@9 73 82J4 ?2G;7?23 58 78A28>7A2 3>2I 586 786;3>?75<<K
5II<7@5=<2H
!H '3 >: :=^2@>

5H .92 :=^2@> :C >?562B5?D 5?2 E::63

=H .92 :=^2@> :C @:IK?7E9> 5?2 :?7E785< <7>2?5?K 586 5?
>73>7@ J:?D3 @H .92 :=^2@> :C I5>28> 73 78A28>7:8
UH '3 >: >2?B

5H .92 >2?B :C >?562B5?D 73 >28 K25?3

=H .92 >2?B :C @:IK?7E9> 73 E282?5<<K $" K25?3
@H .92 >2?B :C I5>28> 73 !" K25?3 C?:B
5II<7@5>7:8 PH '3 >: 9:J 5@G;7?26

5H .?562B5?D 73 5@G;7?26 >9?:;E9 ?2E73>?5>7:8 586 ;32

=H N:IK?7E9> 73 5@G;7?26 C?:B >92 B:B28> :C @?25>7:8
@H [5>28> 73 5@G;7?26 >9?:;E9 5II<7@5>7:8 J7>9 >92 ,[/

@, +2-9 /3 921 .749</01 7F 1?8/G-D1093I KUMN

M862? >92 6:@>?782 :C 2G;7A5<28>34 78C?78E2B28> :C I5>28> :@@;?3 J928 5

62A7@2 5II?:I?75>23 5 I?7:? 78A28>7:8 =K 78@:?I:?5>78E 7>3 788:A5>7A2
@:8@2I> 586 5<=27> J7>9 3:B2 B:67C7@5>7:83 586 @958E2 I2?C:?B3 >92 35B2
C;8@>7:8 78 3;=3>58>75<<K >92 35B2 J5K >: 5@972A2 >92 35B2 ?23;<>H Z7./013
G3 $78<9 7F %PP1-D3C UU[ >$#% LLT
 $, (0 :2-9 :-B3 :78D. - 4-31 F7< /0F</061H109 7F 9<-.1H-<5 E1 ./FF1<109
F<7H - 4-31 F7< 80F-/< 47HP19/9/70I KLMN

#H,8 78C?78E2B28> :C >?562B5?D4 I?7:? ?2E73>?5>7:8 :C >92 >?

562B5?D 73 5 I?2?2G;737>2 >: >92 5@>7:8 J92?253 78 ;8C57?
@:BI2>7>7:8 >?562B5?D ?2E73>?5>7:8 73 8:> 82@2335?K
!H .?562B5?D 78C?78E2B28> 73 >92 ;85;>9:?7a26 ;32 :C >92 ?2E73>2?26
>?562B5?D J97<2 ;8C57? @:BI2>7>7:8 73 >92 I53378E :CC :82L3
E::63 53 >9:32 :C 58:>92?
UH,8 78C?78E2B28> :C >?562B5?D4 C?5;6;<28> 78>28> 73 ;882@2335?K
J92?253 78 ;8C57? @:BI2>7>7:8 C?5;6;<28> 78>28> 73 23328>75< R
e2<B:8>2 N:?I:?5>7:8 A3 N:;?> :C 'II25<34 #c# 0N(' P#" V

*_H
$b"&C (04,C - '-/:-0131 47HP-0BC /3 - H-08F-498<1< 7F 9/<13 :/92 921 H-<5 )/629 h1-<,
;<7H UXXW 97 UXR]C $D-<5 "091<P</313C - O2/D/PP/01` <16/391<1. 47<P7<-
9/70C /HP7<91. 9/<13 F<7H $b"&C (04, 80.1< 31G1<-D 3-D13 4709<-493 -0. 37D.
921H 21<1 /0 921 O2/D/PP/013, (0 UXRSC $b"&C (04, F/D1. - 9<-.1H-<5 -PPD/4-
9/70 :/92 921 (091DD1498-D O<7P1<9B AFF/41 K(OAN F7< 921 H-<5 )/629 h1-< 97 E1
831. F7< 9/<13, '21 (OA /3381. $b"&C (04, - 41<9/F/4-91 7F <16/39<-9/70 K$A#N F7<
3-/. H-<5, $D-<5 "091<P</313 378629 921 4-041DD-9/70 7F 921 $A# -0. 4D-/H1. /9 2-. -
E1991< </629 97 <16/391< 921 H-<5 )/629 h1-<, $b"&C (04, -331<91. 92-9 /9 :-3 921
7:01< 7F 921 H-<5 -0. $D-<5 "091<P</313 :-3 - H1<1 ./39</E897<, $D-<5 "091<P</313
-<681. 92-9 921<1 :-3 07 1G/.1041 70 <147<. 92-9 921 9/<13 /9 /HP7<91. F<7H $b"&C
(04, E7<1 921 H-<5 )/629 h1-< -0. $D-<5 "091<P</313 :-3 -ED1 97 P<7G1 92-9 /9 :-3
921 F/<39 97 831 921 H-<5 21<1 /0 921 O2/D/PP/013, _14/.1 921 4-31, K]MN

Y97<2 (' c!QU ?2B:A26 >92 I?2A7:;3 ?2G;7?2B28> :C I?::C :C 5@>;5< ;32 I?7:? >: >92
C7<78E :C 58 5II<7@5>7:8 C:? ?2E73>?5>7:8 :C 5 B5?D4 I?::C :C I?7:? 586 @:8>78;:;3 ;32
73 82@2335?K >: 23>5=<739 :J82?397I :C >?562B5?DH 0;@9 :J82?397I :C >92 >?562B5?D
@:8C2?3 >92 ?7E9> >: ?2E73>2? >92 >?562B5?DH 078@2 N928 :J83 >92 >?562B5?D 53
2A7628@26 =K 7>3 5@>;5< 586 @:8>78;:;3 ;32 I?7:? >: >92 N<5?D )8>2?I?73234 >928 7>
73 >92 :82 28>7><26 >: >92 ?2E73>?5>7:8 :C >92 >?562B5?DH .92 C5@> >95> N<5?D J53
>92 C7?3> :82 >: ;32 >92 B5?D 92?2 78 >92 [97<7II7823 J7<< 8:> B5>>2?H N928L3 I?7:?
5@>;5< ;32 :C >92 >?562B5?D 2A28 78 58:>92? @:;8>?K =5?3 N<5?D C?:B 5II<K78E C:?
>92 ?2E73>?5>7:8 :C >92 35B2 >?562B5?DH
'<3:4 5 B2?2 673>?7=;>:? 6:23 8:> :J8 >92 >?562B5?D >: >92 E::63 92 673>?7=;>23
586 973 ?7E9> :A2? >92 >?562B5?D @58 8:> I?2A57< :A2? >92 :J82?H ",h (0.839</-
D >-D13 G3, >2/10 _-< "D149</4/9B -0. !-42/01<BC Z# 07, RT]TSXC A497E1< UXC
UXRXY "47D1 .1 $8/3/01 !-0/DD1 G3 #10-8. $7/09<1-8C Z# RTSTLXC J801 SC UXRL

*_,H
%, A0 921 -09/`H701B D-80.1</06 D-:3m
R, +2-9 /3 921 ./39/049/70 E19:110 - c47G1<1. 9<-03-49/70 <1P7<9d -0. -
c383P/4/783 9<-03-49/70 <1P7<9dI KUMN

@:A2?26 >?5835@>7:8 ?2I:?> 78A:<A23 >?5835@>7:8f3 78 @539 :?

:>92? 2G;7A5<28> B:82>5?K 783>?;B28> 78A:<A78E 5 >:>5< 5B:;8> 78
2W@233 :C $""D J7>978 :82 =58D78E 65K J97<2 3;3I7@7:8 >?
5835@>7:8 ?2I:?> 78A:<A23 >?5835@>7:83 J7>9 @:A2?26
783>7>;>7:83 ?2E5?6<233 :C >92 5B:;8>3 78A:<A26 B562 ;862? 58K :C
>92 3;3I7@7:;3 @7?@;B3>58@23 28;B2?5>26 =K <5JH

U, _713 921 %09/`!701B )-80.1</06 $7804/D 2-G1 921 -8927</9B 97 F<11g1

.1P73/93I "^PD-/0, KUMN

-:H .92 5;>9:?7>K >: C?22a2 62I:37>3 73 <:6E26 J7>9 586 =5326 ;I:8
>92 :?62? :C >92 N:;?> :C 'II25<3H R 02@>7:8 #" :C (' Q#S" 53 5B28626 V

&H /8 C:?27E8 78A23>B28>3d

R, % F7<1/60 47HP-0B 2-3 - ./39</E897< /0 921 O2/D/PP/013, '21 D-991<
-493 /0 2/3 7:0 0-H1 -0. -447809, +/DD 92/3 ./39</E897<32/P E1
4703/.1<1. -3 .7/06 E83/0133 EB 921 F7<1/60 47HP-0B /0 921
O2/D/PP/013I KLMN

.92 5II:78>B28> :C 5 673>?7=;>:? 78 >92 [97<7II7823 73 8:> 3;CC7@728> >: @:83>7>;>2

6:78E =;378233 ;8<233 7> 73 ;862? >92 C;<< @:8>?:< :C >92 C:?27E8 @:?I:?5>7:8H ,C
>92 673>?7=;>:? 73 58 7862I28628> 28>7>K 6:78E =;378233 C:? 7>3 :J8 85B2 586
5@@:;8>4 >92 <5>>2? @58 8:> =2 @:83762?26 53 6:78E
 =;378233H >911D $-31 G3 _13/60 (091<0-9/70-D >1D149/70C Z# &7
R\RWWSC %P</D RTC UXRU

U, %@$ $7<P7<-9/70 :-3 7<6-0/g1. /0 !-D-B3/- E89 2-3 - E<-042 /0 921

O2/D/PP/013, (9 /3 109/<1DB 7:01. EB ;/D/P/07 4/9/g103, $-0 B78
4703/.1< %@$ $7<P7<-9/70 - O2/D/PP/01 0-9/70-DI KUMN

123 7> 73 5 @:83762?26 5 [97<7II782 85>7:85< 53 <:8E 53 7> 73 ?

2E73>2?26 53 6:78E =;378233 78 >92 [97<7II7823 ;862? >92 N:?I:?5>7:8
N:62 R 02@>7:8 # :C (' T"P!4 53 5B28626 =K 02@>7:8 # :C (' c#TQ V

O :::/::: O
 2016 BAR EXAMINATIONS
MERCANTILE LAW

I
What does "doing business in the Philippines" under the Foreign Investments Act of
1991 mean? (5%)

Under the Foreign Investments Act of 1991 of Section 3(d) “doing business” shall include
soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totaling one hundred
eighty [180] days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase
“doing business” shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to represent
its interests in such corporation; nor appointing a representative or distributor domiciled
in the Philippines which transacts business in its own name and for its own account;

II
Jason is the proud owner of a newly-built house worth PS million. As a protection against any
possible loss or damage to his house, Jason applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on October 11, 2016 and paid the premium in cash. It took
the company a week to approve Jason's application.

On October 18, 2016, Shure mailed the approved policy to Jason which the latter received five
days later. However, Jason's house had been razed by fire which transpired a day before his
receipt of the approved policy. Jason filed a written claim with Shure under the insurance policy.
Shure prays for the denial of the claim on the ground that the theory of cognition applies to
contracts of insurance.

Decide Jason's claim with reasons. (5%)

Answer (1):
Jason cannot recover on the insurance policy since he had no knowledge of the insurer's
acceptance of his application before his house (insured property) was razed by fire.

An insurance contract is a consensual contract and is therefore perfected the moment

there is a meeting of minds with respect to the object and the cause or consideration.
What is being followed in insurance contracts is what is known as the “cognition
theory”. In Enriquez vs. Sun Life Assurance Co., the contract for a life annuity in was not
perfected because it has not been proved satisfactorily that the acceptance of the
application ever came to the knowledge of the applicant.

1 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
In the case at bar, the policy was received by Jason only a day after the occurrence of the
insured risk. There was no perfected contract of fire insurance yet. Thus, Jason's claim
under said policy should be denied.

Answer (2):

Jason written claim with Shure under the insurance policy will prosper,

Fire insurance policy was paid in cash to Shure Insurance Corporation on October 11,
2016 and the contract was perfected on October 18, 2016 with receipt of the approved
policy.

Section 77. “An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of a life
or an industrial life policy whenever the grace period provision applies.”

Article 78 of the Insurance Code “An acknowledgment in a policy or contract of

insurance of the receipt of premium is conclusive evidence of its payment, so far as to
make the policy binding, notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid“

What is being followed in insurance contracts is what is known as the “cognition theory”
Thus, “an acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge”.(Enriquez vs. Sun Life Assurance Co. of Canada,
41 Phil. 269

Essential elements of the general rule pertaining to the mailing and delivery of mail
matter as announced by the American courts, namely, when a letter or other mail matter
is addressed and mailed with postage prepaid there is a rebuttable presumption of fact
that it was received by the addressee as soon as it could have been transmitted to him in
the ordinary course of the mails. But if any one of these elemental facts fails to appear, it
is fatal to the presumption. For instance, a letter will not be presumed to have been
received by the addressee unless it is shown that it was deposited in the post-office,
properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq.,
notes.)

Cognition theory applies only to life and health insurance and not to property and
liability insurance.

2 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
 III

ABC Appliances Corporation (ABC) is a domestic corporation engaged in the production and
sale of televisions and other appliances. YYY Engineers, a Taiwanese company, is the
manufacturer of televisions and other appliances from whom ABC actually purchases
appliances. From 2000, when ABC started doing business with YYY, it has been using the mark
"TTubes" in the Philippines for the television units that were bought from YYY. In 2015, YYY filed
a trademark application for "TTubes." Later, ABC also filed its application. Both claim the right
over the trademark "TTubes" for television products. YYY relies on the principle of "first to file"
while ABC invokes the "doctrine of prior use."

Does the fact that YYY filed its application ahead of ABC mean that YYY has the prior right
over the trademark? Explain briefly. (2.5o/o)

Does the prior registration also mean a conclusive assumption that YYY Engineers is in fact
the owner of the trademark "TTubes?"
Briefly explain your answer. (2.5%)

No.

RA 8293 espouses the first-to-file rule as stated under Sec. 123.1(d) which states: Section
Registrability. - 123.1. A mark cannot be registered if it: x x x x (d) Is identical with a
registered mark belonging to a different proprietor or a mark with an earlier filing or
priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods
or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause
confusion. Under this provision, the registration of a mark is prevented with the filing of
an earlier application for registration. This must not, however, be interpreted to mean that
ownership should be based upon an earlier filing date. While RA 8293 removed the
previous requirement of proof of actual use prior to the filing of an application for
registration of a mark, proof of prior and continuous use is necessary to establish
ownership of a mark. Such ownership constitutes sufficient evidence to oppose the
registration of a mark.

Once application has commenced, it is imperative that actual use of the mark in
commerce takes. Otherwise, such mark is open to cancellation proceedings from any
third party who may be minded to do so or motu propio by the Director of Trademarks.

b. NO.

As aptly stated by the Court in Shangri-la International Hotel Management, Ltd. v.

Developers Group of Companies, Inc.:[37] G.R. No. 159938 , March 31, 2006. Registration,
without more, does not confer upon the registrant an absolute right to the registered
mark. The certificate of registration is merely a prima facie proof that the registrant is the
owner of the registered mark or trade name. Evidence of prior and continuous use of the
mark or trade name by another can overcome the presumptive ownership of the
registrant and may very well entitle the former to be declared owner in an appropriate
case. x x x x Ownership of a mark or trade name may be acquired not necessarily by
3 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
registration but by adoption and use in trade or commerce. As between actual use of a
mark without registration, and registration of the mark without actual use thereof, the
former prevails over the latter. For a rule widely accepted and firmly entrenched, because
it has come down through the years, is that actual use in commerce or business is a pre-
requisite to the acquisition of the right of ownership. x x x x By itself, registration is not a
mode of acquiring ownership. When the applicant is not the owner of the trademark
being applied for, he has no right to apply for registration of the same. Registration
merely creates a prima facie presumption of the validity of the registration, of the
registrants ownership of the trademark and of the exclusive right to the use thereof.
Such presumption, just like the presumptive regularity in the performance of official
functions, is rebuttable and must give way to evidence to the contrary.

IV

X's "MINI-ME" burgers are bestsellers in the country. Its "MINI-ME" logo, which bears the color
blue, is a registered mark and has been so since the year 2010. Y, a competitor of X, has her
own burger which she named "ME-TOO" and her logo thereon is printed in bluish-green. When
X sued Y for trademark infringement, the trial court ruled in favor of the plaintiff by applying the
Holistic Test. The court held that Y infringed on X's mark since the dissimilarities between the
two marks are too trifling and frivolous such that Y's "ME-TOO," when compared to X's "MINI-
ME," will likely cause confusion among consumers.

Is the application of the Holistic Test correct? ( 5%)

Yes, Holistic Test is correct.

The Holistic Test entails a consideration of the entirety of the marks as applied to the
products, including labels and packaging, in determining confusing similarity. The
scrutinizing eye of the observer must focus not only on the predominant words but also
on the other features appearing in both labels so that a conclusion may be drawn as to
whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has
noted two (2) types of confusion, viz: (1) confusion of goods (product confusion), where
the ordinarily prudent purchaser would be induced to purchase one product in the belief
that he was purchasing the other; and (2) confusion of business (source or origin
confusion), where, although the goods of the parties are different, the product, the mark
of which registration is applied for by one party, is such as might reasonably be assumed
to originate with the registrant of an earlier product, and the public would then be
deceived either into that belief or into the belief that there is some connection between
the two parties, though in existent.
4 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
Answer:

No. The application by the court of the holistic test is not correct. In determining
likelihood of confusion, jurisprudence has developed two tests, the dominancy test and
the holistic test.

The dominancy test focuses on the similarity of the prevalent features of the competing
trademarks that might cause confusion. Under this test, courts give greater weight to the
similarity of the appearance of the product arising from the adoption of the dominant
features of the registered mark, disregarding minor differences. Courts will consider
more the aural and visual impressions created by the marks in the public mind, giving
little weight to factors like prices, quality, sales outlets and market segments. In contrast,
the holistic test requires the court to consider the entirety of the marks as applied to the
products, including the labels and packaging, in determining confusing similarity. In the
case of Co Tiong Sa v. Director of Patents,the Court ruled: xxx It has been consistently
held that the question of infringement of a trademark is to be determined by the test of
dominancy. Similarity in size, form and color, while relevant, is not conclusive. If the
competing trademark contains the main or essential or dominant features of another, and
confusion and deception is likely to result, infringement takes place. Duplication or
imitation is not necessary; nor is it necessary that the infringing label should suggest an
effort to imitate. (G. Heilman Brewing Co. vs. Independent Brewing Co., 191 F., 489, 495,
citing Eagle White Lead Co. vs. Pflugh (CC) 180 Fed. 579). The question at issue in cases
of infringement of trademarks is whether the use of the marks involved would be likely to
cause confusion or mistakes in the mind of the public or deceive purchasers. (Auburn
Rubber Corporation vs. Honover Rubber Co., 107 F. 2d 588; xxx) (Emphasis supplied

MS Brewery Corporation (MS) is a manufacturer and distributor of the popular beer "MS Lite." It
faces stiff competition from BA Brewery Corporation (BA) whose sales of its own beer product,
"BA Lighter," has soared to new heights. Meanwhile, sales of the "MS Lite" decreased
considerably. The distribution and marketing personnel of MS later discovered that BA has
stored thousands of empty bottles of "MS Lite" manufactured by MS in one of its warehouses.
MS filed a suit for unfair competition against BA before the Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS and the increased sales of BA, the RTC ruled
that BA resorted to acts of unfair competition to the detriment of MS. Is the RTC correct?
Explain. (5%)

5 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
NO. in the case of G.R. No. 154491 November 14, 2008

COCA-COLA BOTTLERS, PHILS., INC. (CCBPI), Naga Plant, petitioner,

vs.
QUINTIN J. GOMEZ, a.k.a. "KIT" GOMEZ and DANILO E. GALICIA, a.k.a. "DANNY
GALICIA",respondents.

We do not agree with the petitioner's expansive interpretation of Section 168.3 (c).

"Unfair competition," previously defined in Philippine jurisprudence in relation with R.A. No. 166
and Articles 188 and 189 of the Revised Penal Code, is now covered by Section 168 of the IP
Code as this Code has expressly repealed R.A. No. 165 and R.A. No. 166, and Articles 188 and
189 of the Revised Penal Code.

Articles 168.1 and 168.2, as quoted above, provide the concept and general rule on the
definition of unfair competition. The law does not thereby cover every unfair act committed in
the course of business; it covers only acts characterized by " deception or any other
means contrary to good faith" in the passing off of goods and services as those of
another who has established goodwill in relation with these goods or services, or any
other act calculated to produce the same result.

From jurisprudence, unfair competition has been defined as the passing off (or palming
off) or attempting to pass off upon the public the goods or business of one person as the
goods or business of another with the end and probable effect of deceiving the public. It
formulated the "true test" of unfair competition: whether the acts of defendant are such as are
calculated to deceive the ordinary buyer making his purchases under the ordinary conditions
which prevail in the particular trade to which the controversy relates. 13 One of the essential
requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must
be shown before the right to recover can exist. 14 The advent of the IP Code has not significantly
changed these rulings as they are fully in accord with what Section 168 of the Code in its
entirety provides. Deception, passing off and fraud upon the public are still the key
elements that must be present for unfair competition to exist.

We hold that it is not. Hoarding as defined by the petitioner is not even an act within the
contemplation of the IP Code

NO. The RTC is not correct. Unfair competition has been defined as the passing off (or
palming off) or attempting to pass off upon the public the goods or business of one
person as the goods or business of another with the end and probable effect of
deceiving the public. It formulated the true test of unfair competition: whether the acts of
defendant are such as are calculated to deceive the ordinary buyer making his purchases
under the ordinary conditions which prevail in the particular trade to which the
controversy relates. One of the essential requisites in an action to restrain unfair
competition is proof of fraud; the intent to deceive must be shown before the right to
recover can exist. The advent of the IP Code has not significantly changed these rulings
as they are fully in accord with what Section 168 of the Code in its entirety provides.

6 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Deception, passing off and fraud upon the public are still the key elements that must be
present for unfair competition to exist. Hoarding - as defined and charged by MS does
not fall within the coverage of the IP. It does not relate to any patent, trademark, trade
name or service mark that BA have invaded, intruded into or used without proper
authority from the MS. Nor BA alleged to be fraudulently passing off their products or
services as those of the MS. The BA was not also alleged to be undertaking any
representation or misrepresentation that would confuse or tend to confuse the goods of
MS with those of BA, or vice versa. What in fact MS alleges is an act foreign to the Code,
to the concepts it embodies and to the acts it regulates; as alleged, hoarding inflicts
unfairness by seeking to limit the oppositions sales by depriving it of the bottles it can
use for these sales.

VI

Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It modified
the design of the bulkhead of the deck of the ship to accommodate more passengers. The ship
sunk with its passengers in Tablas Strait due to heavy rains brought by the monsoon. The heirs
of the passengers sued Nautica for its liability as a common carrier based on the reconfiguration
of the bulkhead which may have compromised the stability of the ship. Nautica raised the
defense that the monsoon is a fortuitous event and, at most, its liability is prescribed by the
Limited Liability Rule. Decide with reasons. ( 5%)

Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death
of passengers arising from the negligence of the captain in cases of collisions or
shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a
total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in
the provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the
prevailing conditions of the maritime trade and sea voyages during the medieval ages,
attended by innumerable hazards and perils. To offset against these adverse conditions
and to encourage ship building and maritime commerce, it was deemed necessary to
confine the liability of the owner or agent arising from the operation of a ship to the
vessel, equipment, and freight, or insurance, if any, so that if the ship owner or agent
abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs.
San Diego, 77 Phil. 730 [1946])

7 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Without the principle of limited liability, a ship owner and investor in maritime commerce
would run the risk of being ruined by the bad faith or negligence of his captain , and the
apprehension of this would be fatal to the interest of navigation.” Yangco vs. Lasema,
supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the
liability of the agents to the actual value of the vessel and the freight money, and (2) the
right to retain the cargo and the embargo and detention of the vessel even in cases
where the ordinary civil law would not allow more than a personal action against the
debtor or person liable. It will be observed that these rights are correlative, and naturally
so, because if the agent can exempt himself from liability by abandoning the vessel and
freight money, thus avoiding the possibility of risking his whole fortune in the business,
it is also just that his maritime creditor may for any reason attach the vessel itself to
secure his claim without waiting for a settlement of his rights by a final judgment, even to
the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen’s compensation
claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show
that the loss of the cargo was due to the fault of the private respondent as shipowners,
or to their concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the “real
and hypothecary nature” of liability under maritime law, these provisions would not have
any effect on the principle of limited liability for ship owners or ship agents. As was
expounded by this Court:

In arriving at this conclusion, the fact is not ignored that the ill fated, Nautica, as a vessel
engaged in interisland trade, is a common carrier, and that the relationship between the
petitioner and the passengers who died in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of contract of carriage, the exclusively ‘real
and hypothecary nature of maritime law operates to limit such liability to the value of the
vessel, or to the insurance thereon, if any. In the instant case it does not appear that the
vessel was insured. (Yangco vs. Laserila, et al., supra).

8 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Moreover, Article 1766 of the Civil Code provides:

Art. 1766. In all matters not regulated by this Code, the rights and obligations of common
carriers shall be governed by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof,
the Code of Commerce and other special laws are applied. Since the Civil Code contains
no provisions regulating liability of ship owners or agents in the event of total loss or
destruction of the vessel, it is the provisions of the Code of Commerce, more particularly
Article 587, that govern in this case.

Article 587 of the Code of Commerce provides:

Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third
persons which may arise from the conduct of the captain in the care of the goods which
he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel
with all the equipment and the freight it may have earned during the voyage.”

In sum, it will have to be held that since the ship agent’s or ship owner’s liability is
merely co-extensive with his interest in the vessel such that a total loss thereof results in
its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on
limited liability being present, the liability of private respondents for the loss of the cargo
of copra must be deemed to have been extinguished. There is no showing that the vessel
was insured in this case.

Answer (2)
Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death of
passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest in the vessel such that a total loss thereof results
in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in the
provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing
conditions of the maritime trade and sea voyages during the medieval ages, attended by
innumerable hazards and perils. To offset against these adverse conditions and to encourage ship
building and maritime commerce, it was deemed necessary to confine the liability of the owner
or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if
9 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
any, so that if the ship owner or agent abandoned the ship, equipment, and freight, his
liability was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946])

Without the principle of limited liability, a ship owner and investor in maritime commerce would
run the risk of being ruined by the bad faith or negligence of his captain, and the apprehension of
this would be fatal to the interest of navigation.” Yangco vs. Lasema, supra).

As evidence of this real nature of the maritime law we have (1) the limitation of the liability of
the agents to the actual value of the vessel and the freight money, and (2) the right to retain the
cargo and the embargo and detention of the vessel even in cases where the ordinary civil law
would not allow more than a personal action against the debtor or person liable. It will be
observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility
of risking his whole fortune in the business, it is also just that his maritime creditor may for any
reason attach the vessel itself to secure his claim without waiting for a settlement of his rights
by a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6
Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen’s compensation
claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show
that the loss of the cargo was due to the fault of the private respondent as shipowners, or
to their concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the “real and
hypothecary nature” of liability under maritime law, these provisions would not have any
effect on the principle of limited liability for ship owners or ship agents. As was expounded by
this Court:

In arriving at this conclusion, the fact is not ignored that the illfated, Nautica, as a vessel
engaged in interisland trade, is a common carrier, and that the relationship between the petitioner
and the passengers who died in the mishap rests on a contract of carriage. But assuming that
petitioner is liable for a breach of contract of carriage, the exclusively ‘real and hypothecary
nature of maritime law operates to limit such liability to the value of the vessel, or to the
insurance thereon, if any. In the instant case it does not appear that the vessel was insured.
(Yangco vs. Laserila, et al., supra).

Moreover, Article 1766 of the Civil Code provides:

10 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Art. 1766. In all matters not regulated by this Code, the rights and obligations of common
carriers shall be governed by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the
Code of Commerce and other special laws are applied. Since the Civil Code contains no
provisions regulating liability of ship owners or agents in the event of total loss or destruction of
the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that
govern in this case.

Article 587 of the Code of Commerce provides:

Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third persons
which may arise from the conduct of the captain in the care of the goods which he loaded on
the vessel; but he may exempt himself therefrom by abandoning the vessel with all the
equipment and the freight it may have earned during the voyage.”

In sum, it will have to be held that since the ship agent’s or ship owner’s liability is merely co-
extensive with his interest in the vessel such that a total loss thereof results in its extinction
(Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being
present, the liability of private respondents for the loss of the cargo of copra must be deemed to
have been extinguished. There is no showing that the vessel was insured in this case.

VII

A railroad track of the Philippine National Railway (PNR) is located near a busy intersection of
Puyat Avenue and Osmefia Highway. One afternoon, the intersection was heavily congested,
as usual. Juan, the driver of a public utility jeepney (PUJ), drove onto the railroad tracks but
could go no farther because of the heavy traffic at the intersection. After the jeepney stopped
right on the railroad track, it was hit and overturned by a PNR train, resulting in the death of
Kim, a passenger of the PUJ, and injuries to Juan and his other passengers. Juan, the injured
passengers and Kim's family sued the PNR for damages for its negligence.
It was established that the steel pole barrier before the track was broken, and that the PNR had
the last clear chance of avoiding the accident. On the other hand, the PNR raised the defense
that the track is for the exclusive use of the train and that motorists are aware that it is
negligence per se to stop their vehicles on the tracks.

Decide the case and explain. (5%)

I will rule in favor of PNR.

The doctrine of last clear chance states that where both parties are negligent but the
negligent act of one is appreciably later than that of the other, or where it is impossible
to determine whose fault or negligence caused the loss, the one who had the last clear
11 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29] Stated
differently, the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the defendant, who had the
last fair chance to prevent the impending harm by the exercise of due diligence.

We do not apply the doctrine of last clear chance to the present case. It cannot be
expected for a train to avoid the jeepney since it can only go one way trailing the
railings. Moreover, the rail road is exclusive the PNR and the jeepney should not have
stopped right in the rail road. The jeepney failed to observe extraordinary diligence.

Alternative Answer:

G.R. No. 70547 January 22, 1993

PHILIPPINE NATIONAL RAILWAYS and HONORIO CABARDO, petitioners, vs.

INTERMEDIATE APPELLATE COURT, and BALIWAG TRANSIT, INC., respondents.

absence of a crossing bar, signal light, flagman or switchman to warn the public of an
approaching train constitutes negligence per the pronouncement of this Court in
Lilius vs. Manila Railroad Company (59 Phil 758 [1934]).

VIII

In 2015, Total Bank (Total) proposed to sell to Royal Bank (Royal) its banking business for P 10
billion consisting of specified assets and liabilities. The parties reached an eventual agreement,
which they termed as "Purchase and Assumption (P & A) Agreement," in which Royal would
acquire Total's specified assets and liabilities, excluding contingent claims, with the further
stipulation that it should be approved by the Bangko Sentral ng Pilipinas (BSP). BSP imposed
the condition that Total should place in escrow Pl billion to cover for contingent claims against it.
Total complied. After securing the approval of the BSP, the two banks signed the agreement.
BSP thereafter issued a circular advising all bank and non-bank intermediaries that effective
January 1, 2016, "the banking activities of Total Bank and Royal Bank have been consolidated
and the latter has carried out their operations since then."

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

What is meant by a de facto merger? Discuss. (2.5%)

NO.
Merger is a re-organization of two or more corporations that results in their consolidating
into a single corporation, which is one of the constituent corporations, one disappearing

12 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
or dissolving and the other surviving. To put it another way, merger is the absorption of
one or more corporations by another existing corporation, which retains its identity and
takes over the rights, privileges, franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s). The absorbing corporation continues its
existence while the life or lives of the other corporation(s) is or are terminated.

The Corporation Code requires the following steps for merger or consolidation: (1) The
board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of
incorporation of a corporation. (2) Submission of plan to stockholders or members of
each corporation for approval. A meeting must be called and at least two (2) weeks’
notice must be sent to all stockholders or members, personally or by registered mail. A
summary of the plan must be attached to the notice. Vote of two-thirds of the members
or of stockholders representing two thirds of the outstanding capital stock will be
needed. Appraisal rights, when proper, must be respected. (3) Execution of the formal
agreement, referred to as the articles of merger o[r] consolidation, by the corporate
officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of
the surviving corporation. (4) Submission of said articles of merger or consolidation to
the SEC for approval. (5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before. (6) Issuance of certificate of merger
or consolidation. Indubitably, it is clear that no merger took place between Total Bank
and Royal Bank as the requirements and procedures for a merger were absent. A merger
does not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to take
effect. Section 79 of the Corporation Code further provides that the merger shall be
effective only upon the issuance by the Securities and Exchange Commission (SEC) of a
certificate of merger. Here, Total Bank and Royal Bank remained separate corporations
with distinct corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerce’s
assumption of identified recorded liabilities of TRB including booked contingent
accounts. There was no merger or consolidation but a mere "sale of assets with
assumption of liabilities".

[b] What is meant by a de facto merger? Discuss. (2.5%)

In Bank of Commerce v Radio Philippines Network, citing the book Philippine Corporate
Law by Dean Cesar Villanueva, explained that under the Corporation Code, "a de facto
merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring
corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation." No de facto
merger took place in the present case simply because the Royal Bank owners did not get
in exchange for the bank’s assets and liabilities an equivalent value in Total Bank’s
shares of stock. Total Bank and Royal Bank agreed with BSP approval to exclude from
the sale the TRB’s contingent judicial liabilities. The BSP Circular is not an indication of a
de facto merger because what was "consolidated" per the above letter was the banking
activities and transactions of Total Bank and Royal Bank, not their corporate existence.
The BSP did not remotely suggest a merger of the two corporations. What controls the
13 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap
2017
relationship between those corporations cannot be the BSP letter circular, which had
been issued without their participation, but the terms of their P & A Agreement that
the BSP approved through its Monetary Board and the requirements of law.

IX

X insured his life for P20 million. X, plays golf and regularly exercises every day, hence is
considered in good health. He did not know, however, that his frequent headache is really
caused by his being hypertensive. In his application form for a life insurance for himself, he did
not put a check to the question if he is suffering from hypertension, believing that because of his
active lifestyle, being hypertensive is a remote possibility. While playing golf one day, X
collapsed at the fairway and was declared dead on arrival at the hospital. His death certificate
stated that X suffered a massive heart attack.

Will the beneficiary of X be entitled to the proceeds of the life insurance under the
circumstances, despite the non-disclosure that he is hypertensive at the time of application?
(2.5%)

If X died in an accident instead of a heart attack, would the fact of X's failure to disclose that he
is hypertensive be considered as material information? (2.5%)

Yes. The beneficiary of X shall be entitled to the proceeds of the insurance.

Section 28 of the Insurance Code provides that each party to a contract of insurance
must communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other
has not the means of ascertaining. The fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind the contract.

Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense

and the duty to establish such defense by satisfactory and convincing evidence rests
upon the insurer. In the case at bar, the insurer failed to clearly and satisfactorily
establish its defense, and is therefore liable to pay the proceeds of the insurance.
There was no fraudulent intent on the part of the insured. (GREAT PACIFIC LIFE
ASSURANCE CORP., vs. COURT OF APPEALS AND MEDARDA V. LEUTERIO)

b. Yes. It is a material information.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of

insurance to communicate to the other, in good faith, all facts within his knowledge
which are material to the contract and as to which he makes no warranty, and which the
other has no means of ascertaining. Said Section provides: A neglect to communicate
that which a party knows and ought to communicate, is called concealment.

Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health. The information which the insured failed to 14
Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT Quantum Leap
2017
disclose were material and relevant to the approval and issuance of the insurance policy.
The matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of
the information withheld does not depend on the state of mind of the insured. Neither
does it depend on the actual or physical events which ensue. Anent the finding that the
facts concealed had no bearing to the cause of death of the insured, it is well settled that
the insured need not die of the disease he had failed to disclose to the insurer. It is
sufficient that his non-disclosure misled the insurer in forming his estimates of the risks
of the proposed insurance policy or in making inquiries (Henson v. The Philippine
American Life Insurance Co., 56 O.G. No. 48 [1960]).
(SUNLIFE ASSURANCE COMPANY OF CANADA vs. The Hon. COURT OF APPEALS
and Spouses ROLANDO and BERNARDA BACANI)

After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as drawee.
The bill reads: "October 1, 2016. Pay to the order of B the sum of Pl million. To: C (drawee).
Signed, A." A then delivered the bill to B who, however, lost it. It turned out that it was stolen by
D, B's brother. D lost no time in forging B's signature and negotiated it to E who acquired it for
value and in good faith.

May E recover on the bill from C, the drawee? Explain. (5%)

Yes. E may recover on the bill from C, the drawee; Provided, that C accepts the
instrument presented by E. Section 62 of the Negotiable Instruments Law, provides that
the acceptor, by accepting the instrument, engages that he will pay it according to the to
the tenor of his acceptance and admits: a) the existence of the drawer, the genuineness
of his signature, and his capacity and authority to draw the instrument; and b) the
existence of the payee and his then capacity to indorse. Upon C’s acceptance of the
instrument, he shall automatically be primarily liable to the holder of the instrument even
if the drawer’s signature is really forged, because at the time of making his acceptance,
he warrants that the drawer’s signature is genuine.

Can the cut-off principle apply?

XI
Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of Directors (Board) that
if the arrearages are not paid within thirty (30) days, it will extra-judicially foreclose the
mortgage. The Board decided to offer to the members 200 proprietary membership shares,
which are treasury shares, at the price of Pl 75,000.00 per share even when the current market
value is P200,000.00.

15 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of trust for selling the shares at P25,000.00, lower
than its market value, and asked for the nullification of the sales and the removal of the board
members. Peter claims the Club incurred a loss of PS million. The Board presented the defense
that in its honest belief any delay in the payment of the arrearages will be prejudicial to the Club
as the mortgage on its assets will be foreclosed and the sale at a lower price is the best solution
to the problem. Decide the suit and explain. (5%)

The suit shall be ruled against Peter. Under the Business Judgment Rule embodied in
Sec. 23 of the Corporation Code, it provides that unless otherwise provided in the Code,
all corporate powers and prerogatives are vested directly in the Board of Directors.
Directors cannot be held liable for mistakes or errors in the exercise of their business
judgment if they acted in good faith, with due care & prudence. Contracts intra vires
entered into by the board of directors are binding upon the corporation & courts will not
interfere. Furthermore, in order for a derivative suit to prosper, it must be shown with
particularity that the Stockholder had exhausted the intra corporate remedies available.

In this case, the sale of the shares by the Board of Directors is not shown to have
been made in bad faith nor was it in breach of trust of the stockholders. The said act is
within the sound business judgment of the Board. Moreover, it was not shown that Peter
had exhausted all intra-corporate remedies which is required in a derivative suit.

Hence, the derivative suit shall be ruled against Pete for failure to show that the
act was made in bad faith and for his failure to exhaust all intra-corporate remedies.

Treasury shares does not have fix value. It is for the board of directors to fix the value of
the shares.

XII

X owns I 0,000 shares in Z Telecoms Corp. As he is in immediate need of money, he offered

to sell all his shares to his friend, Y, at a bargain price. Upon receipt of the purchase price from
Y, X proceeded to indorse in blank the certificates of shares and delivered these to Y. The
latter then went to the corporate secretary of Z Telecoms Corp. and requested the transfer of
the shares in his name.

The corporate secretary refused since X merely indorsed the certificates in blank to Y. According
to the corporate secretary, the certificates should have been specifically indorsed to the purchaser,
Y. Was the corporate secretary justified in declining Y's request? Discuss. ( 5%)

Sec. 63 of the Corporation Code provides xxx Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer
xxx. Sec. 34 of the negotiable instruments law further provides that an indorsement in

16 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
blank specifies no indorsee, and an indorsement so indorsed is payable to bearer, and
may be negotiated by delivery.

In this case, X indorsed in blank the certificate of stock and delivered the same to Y.
Hence, there was a valid transfer of stocks to Y, and the corporate secretary is not
justified in declining Y’s request.

Considered as street certificate considered as quasi-negotiable.

XIII

C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not public)
firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed company. The
other principal stockholder in H Corp. is C Corp. which owns 18% of its shares. Meanwhile, the
majority stocks in U Corp. are owned by B Corp. and V Corp. at 22% and 30%, respectively. B
Corp. and V Corp. later sold their respective shares in U Corp. to C Corp., thereby resulting in
the increase of C Corp. 's interest in U Corp., whether direct or indirect, to more than 50%.

[a] Explain the Tender Offer Rule under the Securities Regulation Code. (2.5%)

Does the Tender Offer Rule apply in this case where there has been an indirect acquisition of
the shareholdings in H Corp. by C Corp.? Discuss. (2.5%)

Tender offer is a publicly announced intention by a person acting alone or in concert with
other persons to acquire equity securities of a corporation which is listed on an
exchange, (public corp.) or a corporation with assets exceeding P50, 000,000.00 and with
200 or more stockholders, at least 200 of them holding not less than 100 shares of such
company.

Tender offer is in place to protect minority shareholders against any scheme that dilutes
the share value of their investments. It gives the minority shareholders the chance to exit
the company under reasonable terms, giving them the opportunity to sell their shares at
the same price as those of the majority shareholders.

Yes. The Supreme Court held that the coverage of the mandatory tender offer rule covers
not only direct acquisition but also indirect acquisition or any type of acquisition.

For the purpose of protecting the minority stockholders of a listed corporation,

mandatory tender offer applies whatever may be the method by which control of a public
company is obtained, either through the direct purchase of its stocks or through an
indirect means such as in this case.

It needs computation.

CEMCO HOLDINGS, INC., v. NATIONAL LIFE INSURANCE COMPANY OF

THE PHILIPPINES, INC., G.R. No. 171815

17 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
 XIV

X, a government official, has a number of bank accounts in T Bank containing millions of

pesos. He also opened several trust accounts in the same bank which specifically covered the
placement and/or investment of funds. X was later charged with graft and corruption before the
Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor filed a motion praying for a
court order authorizing it to look into the savings and trust accounts of X in T Bank. X opposed
the motion arguing that the trust accounts are not "deposits" under the Law on Secrecy of Bank
Deposits (Rep. Act No. 1405). Is the contention of X correct? Explain. (5%)

No. The contention of X is not correct.

In the case of Ejercito vs. Sandiganbayan, the Supreme Court held that The contention
that trust accounts are not covered by the term "deposits," as used in R.A. 1405, by the
mere fact that they do not entail a creditor-debtor relationship between the trustor and
the bank, does not lie. An examination of the law shows that the term "deposits" used
therein is to be understood broadly and not limited only to accounts which give rise to a
creditor-debtor relationship between the depositor and the bank. Section 2 of RA 1405 in
fact even more clearly shows that the term "deposits" was intended to be understood
broadly:

SECTION 2. All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the Philippines,
its political subdivisions and its instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined, inquired or looked into by any
person, government official, bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited
or invested is the subject matter of the litigation. The phrase "of whatever nature"
proscribes any restrictive interpretation of "deposits." Moreover, it is clear from the
immediately quoted provision that, generally, the law applies not only to money which is
deposited but also to those which are invested. This further shows that the law was not
intended to apply only to "deposits" in the strict sense of the word. Otherwise, there
would have been no need to add the phrase "or invested." Clearly in the case at bar, R.A.
1405 is broad enough to cover Trust Accounts.

xv

ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and other
gadgets of value. In order to expand its business and attract investors, it offered to any person
who invests at least Pl 00,000.00 a "Promissory Note" where it obligated itself to pay the holder
a 50% return on investment within one month. Due to the attractive offer, many individuals
invested in the company but not one of them was able to realize any profit after one month. Has
ABC Corp. violated any law with its scheme? Explain. ( 5%)

18 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Yes, ABC Corp. violated Securities Regulation Code or R.A. No. 8799. Its business
constitutes investment contracts which should be registered with Securities and
Exchange Commission before its sale or offer for sale or distribution to the public.

The Court held in the case of Power Homes Unlimited Corp. v. SEC that any investment
contract covered by the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent practices. R.A. No. 8799
defines an investment contract as a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others.

In the case at bar, a person will invest at least P100,000.00 with ABC Corp. with the
expectation of profit or return of investment of 50% within a month. Hence, ABC Corp. is
engaged in the sale or offer for sale or distribution of investment contracts.

XVI

Henry is a board director in XYZ Corporation. For being the "fiscalizer" in the Board, the
majority of the board directors want him removed and his shares sold at auction, so he can no
longer participate even in the stockholders' meetings. Henry approaches you for advice on
whether he can be removed as board director and stockholder even without cause. What is
your advice? Explain "amotion" and the procedure in removing a director. (5%)

Amotion is the ousting of an o(cer from his or her post in the corporation prior to the end of the
term for which the o(cer was appointed or elected, without taking away the person's right to be a
member of the corporation.

The procedure of removal of directors are: 1. it must take place either at a regular
meeting or special meeting of the stockholders or members called for the purpose; 2.
there must be previous notice to the stockholders or members of the intention to
remove;3. the removal must be by a vote of the stockholders representing two-thirds of
Outstanding capital stock or two-thirds of its members and; 4. the director may be
removed with or without cause unless he was elected by the minority, in which case, it is
required that there is cause of removal

Removal of shareholders?

XVII

PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount ofPl0 million for the
purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by P J against
such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing,
China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in favor of ABC to
cover for the value of the ecodoors for its release to PJ. The terms of the Trust Receipt is that
any proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the

19 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from
Scrap Metal another I 00 pieces of ecodoors but using another bank to issue a new Letter of
Credit fully covered by such proceeds. PJ refused to pay the proceeds of the sale of the first set
of ecodoors to ABC, claiming that the ecodoors that were delivered were defective. It then
instructed ABC not to negotiate the Letter of Credit that was issued in favor of Scrap Metal.

Explain what is a "Letter of Credit" as a financial device and a "Trust Receipt" as a security to
the Letter of Credit. (2.5%)

As counsel of ABC, you are asked for advice on whether or not to grant the instruction of PJ.
What will be your advice? (2.5%)

In commercial transactions, a letter of credit is a financial device developed by

merchants as a convenient and relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying.[30] The use of credits in commercial transactions serves
to reduce the risk of nonpayment of the purchase price under the contract for the
sale of goods.

A letter of credit-trust receipt arrangement is endowed with its own distinctive

features and characteristics. Under that set-up, a bank extends a loan covered by
the letter of credit, with the trust receipt as security for the loan. In other words,
the transaction involves a loan feature represented by the letter of credit, and a
security feature which is in the covering trust receipt. x x x. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a security
interest in the goods. It secures an indebtedness and there can be no such thing
as security interest that secures no obligation.

As counsel for ABC, I will tell them not to follow the instructions of ABC Company
because a trust receipt transaction is independent from the contract of sale.
The so-called "independence principle" assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually accomplished or
not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or
for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence
of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever.

The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under the

20 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
 underlying agreement. In both cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would constitute fraudulent abuse of
the credit.

XVIII

B Bank, a large universal bank, regularly extends revolving credit lines to business
establishments under what it terms as socially responsible banking and private business
partnership relations. All loans that are extended to clients have a common "Escalation Clause,"
to wit: "B Bank hereby reserves its right to make successive increases in interest rates in
accordance with the bank's adopted policies as approved by the Monetary Board; Provided that
each successive increase shall be with the written assent of the depositor."

X, a regular client of the bank, contends that the "Escalation Clause" is unfair,
unconscionable and contrary to law, morals, public policy and customs. Rule on the issue and
explain. (2.5%)

Escalation clauses are generally valid and do not contravene public policy. They are
common in credit agreements as means of maintaining fiscal stability and retaining the
value of money on long-term contracts. To prevent any one-sidedness that these clauses
may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge
Navarro, that there should be a corresponding de-escalation clause that would authorize
a reduction in the interest rates corresponding to downward changes made by law or by
the Monetary Board.

Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the right to
make reasonable increases in interest rates in accordance with bank policies as approved by
the Monetary Board; Provided, there shall be corresponding reasonable decreases in
interest rates as approved by the Monetary Board." Would this be valid?
Explain. (2.5%)

Basic is the rule that there can be no contract in its true sense without the mutual assent
of the parties. If this consent is absent on the part of one who contracts, the act has no
more efficacy than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially when
it affects an important aspect of the agreement. In the case of loan contracts, the interest
rate is undeniably always a vital component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon, otherwise, it produces no binding
effect.

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled
right to unilaterally adjust interest rates. The adjustment should have still been subjected
to the mutual agreement of the contracting parties. In light of the absence of consent on
the part of respondents to the modifications in the interest rates, the adjusted rates

21 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan
agreement. (PSB vs Spouses Castillo)

In short, it should have the consent of the contracting parties--- the bank and the client.

De escalation clause
Prevailing market rate
Consistent with the nature of the contract

XIX

In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its opposition to
the applications for Mineral Production Sharing Agreements (MPSA) of 0 Corp., P Corp., and Q
Corp. which were pending before the Panel of Arbitrators (POA) of the Department of
Environment and Natural Resources (DENR). The three corporations wanted to undertake
exploration and mining activities in the province of Isabela. The oppositor alleged that at least
60% of the capital shareholdings of the applicants are owned by B Corp., a 100% Chinese
corporation, in violation of Sec. 2, Art. XII of the Constitution. The applicants countered that
they are qualified corporations as defined under the Philippine Mining Act of 1995 and the
Foreign Investments Act of 1991 since B Corp. holds only 40% of the capital stocks in each of
them and not 60% as alleged by R Corp.

The Summary of Significant Accounting Policies statement of B Corp. reveals that the joint venture
agreements of B Corp. with Sigma Corp. and Delta Corp. involve the 0 Corp., P Corp., and Q Corp.
The ownership of the layered corporations and joint venture agreements show that B Corp.
practically exercises control over the 0, P and Q corporations. 0, P and Q corporations contend that
the control test should be applied and its MPSA applications granted. On the other hand, R Corp.
argues that the "grandfather rule" should be applied. Decide with reasons. (5%)
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No.
020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of
the Constitution and other laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is

owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation
or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned
by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
22 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
citizens shall be considered as of Philippine nationality,” pertains to the control test or
the liberal rule. On the other hand, the second part of the DOJ Opinion which provides,
“if the percentage of the Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be counted as
Philippine nationality,” pertains to the stricter, more stringent grandfather rule.

In ending, the “control test” is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt, based
on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the “grandfather rule.”

XX

Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the
Bureau of Internal Revenue (BIR) for the company's taxes for the third quarter of 1997. The
check was deposited with Bank B, the collecting bank with which the BIR has an account. The
check was subsequently cleared and the amount of P500,000.00 was deducted from the
company's balance. Thereafter, Company X was notified by the BIR of its non-payment of its
unpaid taxes despite the P500,000.00 debit from its account. This prompted the company to
seek assistance from the proper authorities to investigate on the matter.

The results of the investigation disclosed that unknown then to Company X, its chief
accountant Bonifacio Santos is part of a syndicate that devised a scheme to syphon its funds. It
was discovered that though deposited, the check was never paid to the BIR but was passed on
by Santos to Winston Reyes, Bank B's branch manager and Santos' co-conspirator. Instead of
bringing the check to the clearing house, Reyes replaced Check No. 12345 with a worthless
check bearing the same amount, and tampered documents to cover his tracks. No amount was
then credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the
amount therein credited into the accounts of fictitious persons, to be later withdrawn by Santos
and Reyes.

Company X then sued Bank B for the amount of P500,000.00 representing the amount
deducted from its account. Bank B interposed the defense that Company X was guilty of
contributory negligence since its confidential employee Santos was an integral part of the
scheme to divert the proceeds of Check No. 12345. Is Company X entitled to
reimbursement from Bank B, the collecting bank? Explain. ( 5%)

On this point, jurisprudence regarding the imputed negligence of employer in a master-

servant relationship is instructive. Since a master may be held for his servants
wrongful act, the law imputes to the master the act of the servant, and if that act is
negligent or wrongful and proximately results in injury to a third person, the negligence
or wrongful conduct is the negligence or wrongful conduct of the master, for which he
is liable. The 23 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT
Quantum Leap 2017
general rule is that if the master is injured by the negligence of a third person and by the
concurring contributory negligence of his own servant or agent, the latters negligence
is imputed to his superior and will defeat the superiors action against the third person,
assuming, of course that the contributory negligence was the proximate cause of the
injury of which complaint is made.

As defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury, and without which the
result would not have occurred.

It appears that although the employee initiated the transactions attributable to an

organized syndicate, their actions were not the proximate cause of encashing the checks
payable to the BIR. The degree of the company’s negligence, if any, could not be
characterized as the proximate cause of the injury to the parties.

As to the preparation of Checks, it was established that these checks were made payable
to the BIR. Both were crossed checks. These checks were apparently turned around by
company employees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-
payors confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the bank, does
not entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer. This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential employees who hold
them in their possession.

Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that
the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank to ascertain that the check be deposited in payees account only.
Therefore, it is the collecting bank which is bound to scrutinize the check and to know
its depositors before it could make the clearing indorsement all prior indorsements
and/or lack of indorsement guaranteed. (PCIB vs CA)

24 Suggested Answers to the 2016 Commercial Law Bar Questions—CAVEAT

Quantum Leap 2017
Suggested answers to the Merc Bar by Fiscal Rocille Aquino Tambasacan. If you were
able to get the last minute materials, the reference question/page is indicated, including
the powerpoint slide number.
I.

Absolute Timber Co. (ATC) has been engaged in the logging business in Isabela.
To secure one of its shipments of logs to be transported by Andok Shipping Co.,
ATC purchased a marine policy with an all-risk provision. Because of a strong
typhoon then hitting Northern Luzon, the vessel sank and the shipment of logs
was totally lost. ATC filed its claim, but the insurer denied the claim on several
grounds, namely: (1) the vessel had not been seaworthy; (2) the
vessel’s crew had lacked sufficient training; (3)
the improper loading of the logs on only one side of the vessel had led to the
tilting of the ship to that side during the stormy voyage; and (4) the extremely bad
weather had been a fortuitous event.
ATC now seeks your legal advice to know if its claim was sustainable. What is
your advice? Explain your answer. (3%)
Suggested Answer:

The insurance claim is sustainable. An all risk insurance policy covers all causes of
conceivable loss or damage, except as otherwise excluded in the policy or due to fraud
or intentional misconduct on the part of the insured. Since there was no stipulation as to
what losses are excluded from the coverage, the insured can recover.
The newly restored Ford Mustang muscle car was just released from the car
restoration shop to its owner, Seth, an avid sportsman. Given his passion for
sailing, he needed to go to a round-the-world voyage with his crew on his brand-
new 180-meter yacht. Hearing about his coming voyage, Sean, his bosom friend,
asked Seth if he could borrow the car for his next roadshow. Sean, who had been
in the business of holding motor shows and promotions, proposed to display the
restored car of Seth in major cities of the country. Seth agreed and lent the Ford
Mustang to Sean. Seth further expressly allowed Sean to use the car even for his
own purposes on special occasions during his absence from the country. Seth
and Sean then went together to Bayad Agad Insurance Co. (BAIC) to get separate
policies for the car in their respective names.
BAIC consults you as its lawyer on whether separate policies could be issued to
Seth and Sean in respect of the same car.
a. What is insurable interest? (2%)

Suggested Answer:

There is insurable interest in property when he derives a benefit from its existence or
would suffer a loss from its destruction.
b. Do Seth and Sean have separate insurable interests? Explain briefly your
answer. (3%)
Suggested Answer:

Only Seth has insurable interest in it. Insurable interest in property consists of either an
existing interest, (2) an inchoate interest founded on an existing interest, or (3) an
expectancy coupled with an existing interest in that out of which the expectancy arises.
Seth, being the owner, has an existing interest. Sean has no interest in the car as he
does not own it, even if he is being benefited by its existence.
II.

Morgan, a lawyer, received a lot of diving and other water sports equipment as
payment of his professional fees by Dennis, his client in a child custody case.
Dennis owned a diving and water sports dealership in Anilao, Batangas. Morgan
decided to name Dennis as entrustee because he did not have any experience in
selling such specialized sports equipment. They executed a trust receipt
agreement, with Morgan as entruster and Dennis as entrustee.
Before the sports equipment could be sold, a strong typhoon hit Batangas. Anilao
and other parts of Batangas experienced power outage. Taking advantage of the
total darkness, unidentified thieves destroyed the padlocks of the establishment
of Dennis, and carted off the equipment inside.
Morgan demanded that Dennis pay the value of the stolen equipment, but the
latter refused on the ground that he also had suffered from the effects of the
typhoon, and insisted that the cause of the loss was fortuitous event or force
majeure.
Is the justification of Dennis warranted? Explain your answer. (4%)

Suggested Answer:

No. The risk of loss in a trust receipt agreement shall be borne by the entrustee, Dennis.
Loss of goods, irrespective of whether or not it was due to the fault or negligence of the
entrustee, shall not extinguish his obligation to the entruster.
Safe Warehouse, Inc. (Safe) issued on various dates negotiable warehouse
receipts to Peter, Paul, and Mary covering certain goods deposited by the latter
with the former. Peter, Paul, and Mary then negotiated and endorsed the
warehouse receipts to Cyrus, Magnus, and Charles upon payment by the latter of
valuable consideration for the warehouse receipts. Cyrus, Magnus, and Charles
were not aware of, nor were they parties to any irregularity or infirmity affecting
the title or the face of the warehouse receipts.
On due dates of the warehouse receipts, Cyrus, Magnus, and Charles demanded
that Safe surrender the goods to them. Safe refused because its warehouseman’s
claim must first be paid. Cyrus, Magnus, and Charles refused to pay, and insisted
that such claim was the liability of Peter, Paul, and Mary.
a. What is a warehouseman’s claim? (3%)

Suggested Answer:

It refers to the warehouseman’s lien, or lien on goods deposited or on the proceeds

thereof in his hands, for all lawful charges for storage and preservation of the goods;
also for all lawful claims for money advanced, interest, insurance, transportation, labor,
weighing, coopering and other charges and expenses in relation to such goods; also for
all reasonable charges and expenses for notice, and advertisements of sale.
b. Is Safe’s refusal to surrender the goods to Cyrus, Magnus, and Charles legally
justified? Explain your answer. (3%)
Suggested Answer:

Yes. A warehouseman loses his lien upon goods by surrendering possession thereof.
 III.

Data Realty, Inc. (DRI) was engaged in realty development. The family of Matteo
owned 100% of the capital stock of DRI. Matteo was also the President and
Chairman of the Board of Directors. Other members of Matteo’s family held the
major positions in DRI. Because of a nasty takeover fight with D&E Realty Co.,
Inc. (D&E), another realty developer, for the control of a smaller realty company
with vast landholdings, DRI and D&E engaged in an expensive litigation that
eventually led to a money judgment being rendered in favor of D&E.
Meantime, DRI, facing inability to pay its liabilities as they fall due but still holding
substantial assets, filed a petition for voluntary rehabilitation. Trying to beat the
consequences of rehabilitation proceedings, D&E moved in the trial court for the
issuance of a writ of execution. The trial court also happened to be the
rehabilitation court. The writ of execution was issued. Serving the writ of
execution, Merto, the court sheriff who had just passed his Credit Transactions
subject in law school, garnished Matteo’s bank accounts, and levied his real
properties, including his house and lot in Makati.
Are the garnishment and levy of Matteo’s assets lawful and proper? Explain your
answer. (4%)
Suggested Answer:

Yes, considering there is no issuance yet of any Commencement Order which

necessarily includes a Stay or Suspension Order which results to, among others,
suspension of all actions to enforce any judgment, attachment or other provisional
remedies against the debtor.
Sid used to be the majority stockholder and President of Excellent Corporation
(Excellent). When Meridian Co., Inc. (Meridian), a local conglomerate, took over
control and ownership of Excellent, it brought along its team of officers. Sid thus
became a minority stockholder and a minority member of the Board of Directors.
Excellent, being the leading beverage manufacturer in the country, became the
monopoly when Meridian’s own beverage business was merged with Excellent’s,
thereby making Excellent virtually the only beverage
manufacturer in the country. Left out and ignored by the management, Sid
became a fiscalizer of sorts, questioning during the Board meetings the direction
being pursued by Excellent’s officers.

Ultimately, Sid demanded the inspection of the books and other corporate
records of Excellent. The management refused to comply, saying that his right as
a minority stockholder has been much reduced.
State under what conditions may Sid properly assert his right to inspect the
books and other corporate records of Excellent. Explain your answer. (3%)
Suggested Answer:

The following are the valid purposes to justify a demand for inspection:

To ascertain the financial condition of the company or the propriety of dividends;

the value of the shares of stock for sale or investment;

whether there has been mismanagement;

in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit
proxies or influence voting;
to obtain information in aid of litigation with the corporation or its officers as to corporate
transactions.
If the right is to be denied on Sid, the burden of proof is upon the corporation to show
that the purpose of the shareholder is improper, by way of defense.
IV.

Procopio, a Director and the CEO of Parisian Hotel Co., Inc. (Parisian), was
charged along with other company officials with several counts of estafa in
connection with the non-remittance of SSS premiums the company had collected
from its employees. During the pendency of the cases, Parisian filed a petition for
rehabilitation. The court, finding the petition to be sufficient in form and
substance, issued a commencement order together with a stay or suspension
order.
Citing the commencement order, Procopio and the other officers facing the
criminal charges moved to suspend the proceedings in the estafa cases.
a. What is a commencement order, and what is the effect of its issuance? Explain
your answer. (4%)
Suggested Answer:

The rehabilitation proceedings formally commences upon issuance of a commencement

order. Generally, the same: (1) suspends all actions or proceedings, in court or
otherwise, for the enforcement of claims against the debtor; (2) suspend all actions to
enforce any judgment, attachment or other provisional remedies against the debtor; (3)
prohibit the debtor from selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and (4) prohibit the
debtor from making any payment of its liabilities outstanding as of the commencement
date except as may be provided herein . Source: Section 16, FRIA, powerpoint slide no.
10 in FRIA, Last Minute/Pre-Week Lecture

b. Suppose you are the trial judge, will you grant the motion to suspend of
Procopio, et al.? Explain your answer. (4%)
Suggested Answer:

No. Any criminal action against the individual debtor or owner, partner, director or officer
of a debtor shall not be affected by any proceeding commenced under this Act.
V.

Under the Nell Doctrine, so called because it was first pronounced by the
Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the
general rule is that where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and liabilities of
the transferor.
State the exceptions to the Nell Doctrine. (4%)

Suggested Answer:
Nell Doctrine states the general rule that the transfer of all the assets of a corporation to
another shall not render the latter liable to the liabilities of the transferor except:

Where the purchaser expressly or impliedly agrees to assume such debts;

Where the transaction amounts to a consolidation or merger of the corporations;

Where the purchasing corporation is merely a continuation of the selling corporation

(business enterprise transfer); and
Where the transaction is entered into fraudulently in order to escape liability for such
debts.
Santorini Corporation (Santorini) was in dire straits. In order to firm up its
financial standing, it agreed to entertain the merger and takeover offer of
Proficient Corporation (Proficient), the leading company in their line of business.
Erica, the major stockholder of Santorini, strongly opposed the merger and
takeover. The matter of the merger and takeover by Proficient was included in the
agenda of the next meeting of Santorini’s Board of Directors. However, owing to
Erica’s serious illness that required her to seek urgent medical treatment and
care in Singapore, she failed to attend the meeting and was consequently unable
to cast her vote. The Board of Directors approved the merger and takeover. At the
time of the meeting, Santorini had been in the red for a number of years owing to
its recurring business losses and reverses.
Erica seeks your legal advice regarding her right as a stockholder opposed to the
corporate action. Explain your answer. (4%)
Suggested Answer:

Considering that it is a case of merger, Erica can oppose the same being a stockholder,
as action or approval by 2/3 of the outstanding capital stock is required. Under the facts
presented, only the Board of Directors had approved the merger.
Samito is the President and a Director of Lucky Bank (Lucky), a commercial bank
holding its main office in Makati. His brother, Othello, owned a big fishing
business based in Malabon. Othello applied for a loan of P50 million with Lucky.
Othello followed the ordinary banking procedures in all the stages of the
processing of his application. When required, he made the necessary
arrangements to guarantee the loan. Thus, in addition to the real estate mortgage,
Othello executed a joint and solidary suretyship, issued postdated checks, and
submitted all other requirements prescribed by Lucky.
When the loan application was about to be approved and the proceeds released,
BG Company, a keen competitor of Othello in the fishing industry, wrote to the
Board of Directors and the management of Lucky questioning the loan on the
ground of conflict of interest due to Samito and Othello being brothers, citing the
legal restriction against bank exposure of directors, officers, stockholders or
their related interests. (DOSRI).
What are the three restrictions imposed by law on DOSRI transactions? (4%)

Suggested Answer:

These are: (1) ratio of networth to total risk assets. When a loan is secured by realty, the
loan should not be more than 75% of appraised value of realty + 60% of appraised
value of improvements. If the loan is secured by chattel mortgage and intangibles, the
loan should not bemore than 75%; (2) SBL (Single Borrower’s Limit rule) – a single
borrower cannot obtain more than 25% of bank networth, but the amount can be
increased by additional 10% if secured by trust receipts, warehouse receipts or shipping
documents and (3) DOSRI cannot borrow nor become guarantor for loans except if
there is written approval of majority of all directors, excluding DOSRI concerned, except
if it is a fringe benefit plan approved by BSP.
b. Is BG Company’s opposition based on conflict of interest and violation of the
restrictions on DOSRI transactions legally and factually correct? Explain your
answer. (4%)
Suggested Answer:

It depends whether or not there was compliance with the aforementioned requirements.
The problem only indicated that Othello followed the normal banking procedures in the
processing of his loan, but there were no amounts indicated as reference, save for the
P50M loan, as basis for compliance with the loan ceilings.
VI.

Hortencio owned a modest grocery business in Laguna. Because of the economic

downturn, he incurred huge financial liabilities. he remained afloat only because
of the properties inherited from his parents who had both come from landed
families in Laguna. His main creditor was Puresilver Company (Puresilver), the
principal supplier of the merchandise sold in his store. To secure his credit with
Puresilver, he executed a real estate mortgage with a dragnet clause involving his
family’s assets worth several millions of pesos.
Nonetheless, Hortencio, while generally in the black, now faces a situation where
he is unable to pay his liabilities as they fall due in the ordinary course of
business. What will you advise him to do to resolve his dire financial condition?
Explain your answer. (5%)
Suggested Answer:

He can file a petition for rehabilitation. Corporate rehabilitation contemplates a

continuance of business life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency, the purpose
being to enable the debtor to gain a new lease on life and allow its creditors to be paid
their claims out of its earnings. Though Hortencio is a natural person and not a
corporation, rehabilitation is possible considering that FRIA covers an insolvent debtor,
whether a natural or juridical one.
Wyatt, an internet entrepreneur, engaged in a sideline business of creating
computer programs for selected clients on a per project basis and for servicing
basic computer problems of his friends and family members. His main job was
being an IT consultant at Futurex Co., a local computer company. Because of his
ill-advised investments in the stock market and the fraud perpetrated against him
by his trusted confidante, Wyatt was already drowning in debt, that is, he had far
more liabilities than his entire assets.
What legal recourse remained available to Wyatt? Explain your answer. (5%)

Suggested Answer:

He can apply for voluntary liquidation. It applies when the individual debtor has
properties are not sufficient to cover his liabilities, and owing debts exceeding
P500,000. Suspension of payments is not feasible considering it applies only if he
possesses sufficient property to cover all his debts but foresees the impossibility of
meeting them when they respectively fall due. Here, Wyatt has more liabilities than
assets thus voluntary liquidation is the only remedy available to him.
VII.

Virtucio was a composer of Ilocano songs who has been quite popular in the
Ilocos Region. Pascuala is a professor of music in a local university with special
focus on indigenous music. When she heard the musical works of Virtucio, she
purchased a CD of his works. She copied the CD and sent the second copy to her
Music class with instructions for the class to listen to the CD and analyze the
works of Virtucio.
Did Pascuala thereby infringe Virtucio’s copyright? Explain your answer. (4%)

Suggested Answer:

No, there is no violation. The fair use of a copyrighted work for criticism, comment, news
reporting, teaching including limited number of copies for classroom use, scholarship,
research, and similar purposes is not an infringement of copyright.
Super Biology Corporation (Super Biology) invented and patented a miracle
medicine for the cure of AIDS. Being the sole manufacturer, Super Biology sold
the medicine at an exorbitant price. Because of the sudden prevalence of AIDS
cases in Metro Manila and other urban areas, the Department of Health (DOH)
asked Super Biology for a license to produce and sell the AIDS medicine to the
public at a substantially lower price. Super Biology, citing the huge costs and
expenses incurred for research and development, refused.
Assuming you are asked your opinion as the legal consultant of DOH, discuss
how you will resolve the matter. (4%)
Suggested Answer:

A government agency or third person authorized by the government may exploit the
invention even without agreement of the patent owner where, among others; (1)The
public interest, in particular, national security, nutrition, health or the development of
other sectors, as determined by the appropriate agency of the government, so requires;
or (2) In the case of drugs and medicines, there is a national emergency or other
circumstance of extreme urgency requiring the use of the invention. Here, the
prevalence of AIDS could fall under national emergency.
VIII.

Flora, a frequent traveller, found a purse concealed between the cushions of a

large sofa inside the VIP lounge in NAIA while she was waiting for her flight to be
called. Inside the purse was a very valuable diamond-studded necklace. She
decided not to turn over the purse to the airport management, and instead to
keep it. On her return from her travels, she had a dependable jeweller appraise
the necklace, and the latter told her that the necklace was easily worth at least P5
million in the open market. To test the appraisal, she pawned the necklace for P2
million. She then deposited the entire amount in her checking account with Metro
Bank. Promptly, Metro Bank reported the transaction to the Anti-Money
Laundering Council (AMLC).
Given that her appropriation was theft, may Flora be successfully prosecuted for
money laundering? Explain briefly your answer. (4%)
Suggested Answer:
No, she cannot be prosecuted for money laundering. Under AMLA, the predicate crime
or unlawful activity referred to is qualified theft, not plain theft.
Prosperous Bank is a domestic bank with head office in Makati. It handles the
banking requirements of thousands of clients.
The AMLC initiated a discreet investigation of the financial transactions of
Lorenzo, a suspected drug trafficker based in Naga City. The intelligence group of
the AMLC, in coordination with the counterpart group from the PDEA and the NBI,
gathered ample evidence establishing Lorenzo’s unlawful drug activities. The
AMLC had probable cause that his deposits and investments in various banks,
including Prosperous Bank, were related to money laundering.
Accordingly, the AMLC now transmits to Prosperous Bank a formal demand to
allow its agent to examine the banking transactions of Lorenzo, but Prosperous
Bank refuses the demand.
Is Prosperous Bank’s refusal justified? Explain your answer. (4%)

Suggested Answer:

No, the bank cannot refuse. The AMLC may inquire into or examine any particular
deposit or investment with any banking institution when it has been established that
there is probable cause that the deposits or investments are related to an unlawful
activity. No court order is required if the predicate crime is violation of the Dangerous
Drugs Act.
IX.

Alfred issued a check for P1,000 to Benjamin, his friend, as payment for an
electronic gadget. The check was drawn against Alfred’s account with Good
Bank. Benjamin then indorsed the check specially in favor of Cesar. However,
Cesar misplaced the check. Dexter, a dormmate of Cesar, found the check, altered
its amount to P91,000 and forged Cesar’s indorsement by way of a blank
indorsement in favor of Felix, a known jeweler. Felix then caused the deposit of
the check in his account with Solar Bank. As collecting bank, Solar Bank stamped
“all previous indorsements guaranteed” on the check. Seeing such stamp of the
collecting bank, Good Bank paid the amount of P91,000 on the check.
May Good Bank claim reimbursement from Alfred? Explain your answer. (4%)

Suggested Answer:

The figure being a material alteration, the instrument can be enforced according to its
original tenor, which is P1,000 only, on Alfred. However, considering that there was an
indorsement by Solar Bank, Good Bank, in case of dishonor of the check by Alfred, can
collect from Solar Bank the sum of P91,000. Solar Bank acted as an indorser and thus
warrants, among others, the genuineness of the instrument.
In 2006, Donald, an American temporarily residing in Cebu City, issued to
Rhodora a check for $50,000 drawn against Wells Fargo Bank with offices in San
Francisco, California. Rhodora negotiated the check and delivered it to Yaasmin,
a Filipina socialite who frequently travelled locally and internationally. Because of
her frequent travels, Yaasmin misplaced the check. It was only 11 years later on,
in 2017, when she found the check inside a diary kept in her vault in her
Hollywood, California house.
Discuss and explain the rights of Yaasmin on the check. (4%)
Suggested Answer:

The check is considered a stale one already, and Yaasmin cannot expect payment on it.
A stale check is one which has not been presented for payment within a reasonable
time after its issue. It is valueless and, therefore, should not be paid. Under the
negotiable instruments law, a check must be presented for payment within a reasonable
time after its issue. In banking parlance, that is 6 months from issue date. Failure of a
payee to encash a check for more than ten years undoubtedly resulted in the check
becoming stale.
X.

Wisconsin Transportation Co., Inc. (WTC) owned and operated an inter-island

deluxe bus service plying the Manila-Batangas-Mindoro route. Three friends,
namely: Aurelio, Jerome, and Florencio rode on the same WTC bus from Manila
bound for Mindoro. Aurelio purchased a ticket for himself. Jerome, being a
boyhood friend of the bus driver, was allowed a free ride by agreeing to sit during
the trip on a stool placed in the aisle. Florencio, already penniless after spending
all of his money on beer the night before, just stole a ride in the bus by hiding in
the on-board toilet of the bus.
During the trip, the bus collided with another bus coming from the opposite
direction. The three friends all suffered serious physical injuries.
What are WTC’s liabilities, if any, in favor of Aurelio, Jerome, and Florencio?
Explain your answer. (4%)
Suggested Answer:

In so far as Aurelio is concerned, WTC is liable for his injuries considering common
carriers like WTC are presumed to have been at fault, unless it was proven that it
observed extraordinary diligence. However, in so far as Jerome is concerned where
there was gratuitous carriage, if there was a stipulation limiting WTC’s liability for
negligence, that is valid but not for gross negligence. Thus, if there was no stipulation,
then the carrier’s liability is the same as that of Aurelio’s, the paying passenger.
However, for a stowaway like Florencio, he assumes all the risk attendant to the trip.
The carrier then is not liable.
XI.

TRUE or FALSE – Explain briefly your answer.

a. A conviction under the Trust Receipts Law shall bar a prosecution for estafa
under the Revised Penal Code. (2%)
Suggested Answer:

FALSE. Violation of the Trust Receipts Law constitutes estafa.

The term capital in relation to public utilities under Sec. 11, Art. XII of the 1987
Constitution refers to the total outstanding capital stock comprising both
common and non-voting preferred shares. (2%)
Suggested Answer:

FALSE. It only refers to those with voting shares. The restrictive application proposed
might result to deprivation of capital if there were no Filipino takers.
Forgery is a real defense but may only be raised against a holder not in due
course. (2%)
Suggested Answer:

FALSE. Being a real defense, it can be raised even against a holder in due course.

News reports are not copyrightable. (2%)

Suggested Answer:

FALSE. News reports are copyrightable. It falls under the category of audiovisual works
and cinematographic works and works produced by a process analogous to
cinematography. News of the day however is not copyrightable.
The law on life insurance prohibits double insurance. (2%)

Suggested Answer:

FALSE. The danger of overinsuring, which is present in double insurance, is not present
in life insurance. Insurable interest in life is unlimited. Thus, the same is allowed.
XII.

Onassis Shipping, Inc. (Onassis) operated passenger vessels and cargo trucks,
and offered its services to the general public. In line with its vision and mission to
protect the environment, Go-Green Asia (Go -Green), an NGO affiliated with
Greenpeace, entered into a contract with Onassis whereby Go-Green would
operate with its own crew the M/V Dolphin, an ocean -going passenger vessel of
Onassis.
While on its way to Palawan carrying Go-Green’s invited guests who were
international and local observers desirous of checking certain environmental
concerns in the area, the M/V Dolphin encountered high waves and strong winds
caused by a typhoon in the West Philippine Sea. The rough seas led to serious
physical injuries to some of the guests.
Discuss the liabilities of Onassis and Go-Green to the passengers of the M/V
Dolphin. Explain briefly your answer. (3%)
Suggested Answer:

Considering that Go-Green was the one who operated the vessel with its own crew,
what was taken then by the parties was a bareboat or demise charter. In a charter by
demise or bareboat charter, the whole vessel is let to the charterer with a transfer to him
of its entire command and possession and consequent control over its navigation,
including the master and the crew, who are his servants. The charterer mans the vessel
with his own people and becomes, in effect, the owner for the voyage or service
stipulated and hence liable for damages or loss sustained by the goods transported.
The concept of owner pro hac vice applies making Go-Green solidarily liable for the
injuries.

***END OF EXAMINATION***
 November 24, 2017

THE BOARD OF DIRECTORS

SCEMPC
Supreme Court
Manila

Gentlemen/Mesademes:

The undersigned would like to request for early processing of the Special Loan
(EEA 2018). The proceeds of which will be used for the tuition fee of my two children in
college and for other personal expenses.

Thank you for your usual and kind consideration.

Very truly yours,

CARMELITA B. JUANZON
Court Stenographer III
RTC-Branch 220, Quezon City