1986 BAR EXAMINATION

Question No. 1:
Distinguish between a corporation that is going public and a corporation that is
going private. What provisions would you expect to find in the articles of incorporation
of a corporation that organizes itself under the narrow concept of going private?
Answer:
A corporation is deemed to be going public when it decides to list its shares in the
stock exchanges. The term can also be used to convey the fact that a corporation would
initially go into a public offering of its shares or to otherwise invite equity investments
from the public. A corporation is said to be going private when it would restrict equity
investment in the corporation within the organization itself or its existing subject structure.
In another context, the term can likewise be understood as a corporation whose articles of
incorporation would have the features of a close or closely-held corporation.
It might be pointed out that the above terms do not have technical meanings either
in law or in business finance. Accordingly, a laymans understanding thereof, such as for
instance, the disposition of ownership by the government of government-owned or
controlled corporations to the private sector would be acceptable in describing a
corporation going private.
Question No. 2:
As payment for goods received, Masikap gave to Humimok on November 3, his
check drawn on the Eternal Bank of Manila. On November 11, Kahusayan went to Eternal
Bank to encash the check. He could not cash the check because on November 10, Central
Bank had forbidden Eternal Bank to do business in the Philippines on grounds of
insolvency. Masikap, Humimok, and Kahusayan all reside in Manila.
(a) Can Kahusayan hold Masikap liable on the uncashed check? Explain briefly.
(b) Can Kahusayan hold Humimok liable on the check? Explain briefly.
(c) Can Kahusayan still collect from Humimok for the dental work done on the
latter? Explain briefly.
(d) Assume that Eternal Bank was not closed by Central Bank but simply refused
to honor and encash the check. Can Kahusayan hold Masikap liable? Explain briefly.
Answer:

(a) Kahusayan can hold Masikap secondarily liable on the uncashed check. A
drawer of a negotiable instrument assumes secondary liability under the NIL, which is to
say that an immediate right of recourse ensues in favor of the holder once the instrument is
dishonored.
(b) The liability of Humimok would depend on how he negotiated the check to
Kahusayan. If it was negotiated by delivery (as when it is payable to cash), Humimok
would not be secondarily liable; if, however, Humimok indorsed the check as a general
endorser then Kahusayan could hold Humimok secondarily liable.
A qualified
indorsement by Humimok would, upon the other hand, preclude Dr. Kahusayan from
holding the former secondarily liable.
(c) Kahusayan can still collect from Humimok what may be due for the dental work
done, since payment by means of a check will only produce the effect of payment once the
instrument is encashed or, by the fault of the holder, it is impaired.
(d) The secondary liability of Masikap to Kahusayan, as expressed in letter (a)
above, is not dependent on the ability or capability of the drawee to honor the instrument.
Accordingly, Kahusayan can still hold Masikap liable.
Question No. 3:
The President of Matibay Bank obtained a P100,000.00 clean loan from the
Tagumpay Banking Corporation. In turn and at about the same time, the President of the
Tagumpay Banking Corporation secured a P50,000.00 clean loan from the Matibay Bank,
with the latters President expediting the loan for his friend and colleague.
Are thee any legal consequences as far as the borrowers are concerned? If there are
any, what are the bases and the reasons for these consequences?
Answer:
The prohibition on bank officers and directors against the borrowing or securing of
loans is confined to financial accommodations given by a bank in which they are directors
or officers. It may thus be said under the problem that neither of the two bank presidents
committed an infraction of that prohibition. There mere fact that the President of Matibay
Bank helped his friend and colleague in expediting the loan should not be considered as
having produced an adverse legal consequence.
Note: It is suggested, however, that an answer to the contrary, premised on an
examinees appreciation that undue influence, in fact, had been exercised or that an indirect
circumvention had been intended, should be given a full credit.
Question No. 4:

Pabaya paid for a fire insurance policy on his multi-storey building. At the time he
applied for the insurance, he told the representative of the insurance company that he
planned to assign a security guard on every floor of the building right away. Except for the
ground floor, no security guards were assigned. Eleven months after the policy was issued,
the building was gutted by fire which started on the third floor. Unknown to Pabaya, the
insurance company had incorporated his planned undertaking in the policy.
Can Pabaya recover on the fire insurance policy? Explain.
Answer:
Pabaya can recover under the insurance policy. The statement of Pabaya that he
planned to assign a security guard on every floor of the insured building, whether
incorporated in the policy or not, did not amount to firm commitment so as to constitute an
express warranty or representation. The facts indicate that it was a simply a planned, not
obligatory or promissory, undertaking.
Note: It is suggested, however, that if an examinee construed the planned
undertaking in the policy as a commitment or as a warranty, his answer stating that the
insured cannot recover should also deserve a full credit.
Question No. 5:
Sumabod issued a promissory note payable to the order of Panloob as consideration
for the textiles purchased from the latter. The promissory note recites that the amount of
P100,000.00 is payable in five monthly installments of P20,000.00 each, beginning on
December 1, 1986 and every first day of the month thereafter until fully paid, provided that
the holder may declare the entire amount due and demandable in the event the maker fails
to pay on time any installment in full, or whenever the holder for valid reasons finds his
claim insecure. Panloob indorsed and delivered the note for value to Humabol who acted
in good faith.
Panloobs factory burns down and he is unable to deliver the textiles. Sumabod did
not pay as promised.
Can Humabol as an innocent purchaser for value hold Sumabod liable on the
promisory note? Explain.
Answer:
Humabol can hold Sumabod liable on the promisory note. The statement in the
instrument providing for installment payments and an acceleration clause did not adversely
effect the negotiability of the instrument. Humabod, being a holder in due course, may
hold the maker liable under the note. Personal defenses that Sumabod may raise against an
immediate party may not be raised against a holder in due course.

Question No. 6:
Mayari obtained a comprehensive insurance policy on his car. The policy carried
the standard authorized driver clause which states that the insurance company is not
liable for any loss, accident or damage sustained while the car is being driven by someone
other than a duly authorized driver. One day, Mayari allowed his friend, Kaibigan, to drive
the car. Kaibigan figured in a mishap and the car was a total loss.
Kaibigan had been driving for the past five years but it appears that his drivers
license was irregularly issued because he cannot read or write; neither did he take any of
the prescribed drivers tests. After the initial license was issued, he merely asked his wife
to go to the LTC office to get a renewal of his license. Mayari did not know about the
irregularity in the drivers license of Kaibigan.
Can Mayari recover on the insurance policy? Explain.
Answer:
Mayari cannot recover under the policy. The standard authorized driver clause
requires that the driver at the time of the accident must be duly authorized and licensed to
drive. An irregular license is not a license at all.
Note: It is suggested, however, that an answer that would allow recovery
predicated on the fact that a drivers license, although irregularly issued is a standing
license until revoked, should be given credit.
Question No. 7:
Primero, Segundo, Tercero, Pedro and Juan are the five original members of the
Board of Directors of a stock corporation. The only interest of Primero is that fifty percent
of the corporations stocks were pledged to him. Pedro and Juan died in a vehicular
accident.
Primero, Segundo and Tercero held an emergency board meeting to fill up the two
vacancies in the board. Primero and Tercero were able to push through the selection of
Cuatro and Cinco as new directors over the strong objections of Segundo who, as
corporation president, wanted two other persons as board members.
Subsequently, the composition of the Board was validly increased to six. At
another board meeting, the four members of Primeros group voted for Seis as the new
sixth director. Segundo voted for another person. When the six-member board convened,
it decided by a five-to-one vote to replace President Segundo with Tercero as the new
President.
Were the elections of Cuatro, Cinco and Seis as directors valid? Was the election of
Tercero as new President valid? Explain.

Answer:
The elections of Cuatro, Cinco and Seis as directors were not valid. Primero was
not validly elected as a director since he was not a stockholder. Upon the death of Pedro
and Juan, only two remained as duly elected directors, namely: Segundo and Tercero. The
agreement between these two remaining directors obviously could not have permitted the
due election of other to fill the vacancies.
When the number of directors is increased, the new positions can only be filled by
the stockholders in an election duly conducted.
Prescinding from all the for all the foregoing, Tercero was not duly elected as the
new President of the corporation.
Note: The problem was rather complex. It is thus suggested that a liberal
correction be given to this number and valid statements made by an examinee in the course
of his discussion should be given proper weight.
Question No. 8:
Pasahero, a paying passenger, boarded a Victory Liner bus bound for Olongapo.
He whose a seat at the front near the bus driver. Pasahero told the bus driver that he had
valuable items in his bag which was placed near his feet. Since he had not slept 24 hours,
he requested the driver to keep an eye on the bag should he doze off during the trip.
(a) While Pasahero was asleep, another passenger took the bag away and alighted
at Guagua, Pampanga. Is Victory Liner liable to Pasahero? Explain.
(b) Supposing the two armed men staged a hold-up while the bus was speeding
along the North Expressway. One of them pointed a gun at Pasahero and stole not only his
bag but his wallet as well. Is Victory Liner liable to Pasahero? Explain.
(c) There have been incidents of unknown persons throwing stones at passing
vehicles from the overpasses in the North Expressway. While the bus was traversing the
superhighway, a stone hurled from the Sto. Domingo overpass smashed the front
windshield and hit Pasahero in the face. Pasahero lost an eye and suffered other injuries.
Can Pasahero hold the bus company liable for damages? Explain.
Answer:
(a) The responsibility of common carriers in the case of loss or damage to handcarried baggage is governed by the rule on necessary deposits. The common carrier is thus
liable for the loss of the personal property caused by its employees or by strangers.

Note: It is suggested, however, that an answer opposed to the above, but predicated
on Pasaheros contributory negligence, should be given credit.
(b) The use of arms (in the staging of the holdup is force majeure under the rule on
necessary deposits. Accordingly, Pasahero may not hold Victory Liner liable.
(c) Pasahero can hold the bus company liable because of its failure to exercise
utmost diligence. Since incidents of stone-throwing had earlier been known, it behooved
upon the common carrier to warn its passengers against seating themselves close to the
windshield or to provide other precautionary measures for its passengers.
Note: It is suggested, however, that if an examinee did not consider the
circumstances, a failure in the exercise of utmost diligence (the matter being factual), he
should be given credit for that contrary appreciation, after all, what is primordial is his
knowledge of the legal principle or rule involved.
Question No. 9:
The vessel M/V Sweet Perceptions, commanded by Kapitan, its captain, was
unloading goods at a private wharf in Naval, Leyte, when the ship bumped the wharf of the
pier causing it to collapse into the sea. It turned out that Kapitan failed to drop the vessels
bow anchors and to fasten the vessel properly to the pier. The vessel was pushed by the
combined action of the currents in the Biliran Island Strait and the usual southwest
monsoon winds of the season. As a result, Pantalan, the owner of the wharf, lost not only
the wharf but also the goods that had just been unloaded on the pier pending their delivery
to him. Pantalan sued both the owner of the M/V Sweet Perceptions and Kapitan for the
loss of the cargoes and the destruction of the wharf of the pier. The vessels owner, who is
in Manila, states that he exercised due diligence in the selection and supervision of
Kapitan.
Can the vessels owner and Kapitan be held liable for the loss of the wharf and the
cargoes? Explain.
Answer:
The vessels owner is not liable for the loss of or damage to the wharf but he can be
held liable for the loss of the cargo. The cause of action on the loss of or damage to the
wharf is one of culpa acquiliana where due diligence in the section and supervision of
employees is a valid defense against liability. The defense, however, is not available for
the loss of the cargo since the cause of action one of culpa contractual (the goods had not
yet been delivered to the consignee).
Question No. 10:
Mamuhunan was invited by his friends to invest in Adelantado Corporation, a
newly organized firm engaged in money market and financing operations. Because of his

heavy investments, Mamuhunan became the firms President and, as such, purchased a big
number of computers, typewriters and other equipment from Taktak Corporation on
installment basis. Adelantado Corporation paid the down payment and Taktak Corporation
issued the corresponding receipt. To his chagrin, Mamuhunan discovered that the articles
of incorporation had not been filed by his friends at that late date so her hurriedly attended
to the matter. No sooner had the certificate of incorporation been issued by the Securities
and Exchange Commission three months later when Adelantado Corporation became
bankrupt.
Upon being sued by Taktak Corporation in his personal capacity, Mamuhunan
raised among his defenses the doctrines of de facto corporation and corporation by
estoppel.
Can the two defenses be validly raised by Mamuhunan? Explain.
Answer:
Neither the doctrine of de facto corporation nor the doctrine of corporation by
estoppel is applicable or of relevance. An attack against a de facto corporation may be
raised only by the State. In the case of a corporation by estoppel, rights or defenses are
established in favor of persons with whom the corporation deals but not in favor of those
who represent themselves as such corporation where none exists. Mamuhunan, instead,
may raise the defense that personal liability on the part of officers and directors of a
corporation is incurred only in cases of patently illegal acts committed or consented to by
them, bad faith or gross negligence on their part and in conflict of interest situations, not
one of which is involved in the problems.
Note: The factual setting could mislead an examinee into believing that the above
doctrines are pertinent to the problem. An answer, therefore, that discusses the two
doctrines sufficiently should be given full credit since it could appear to be the thrust of the
question.
Question No. 11:
Without going into unnecessary details, discuss the legal consequences of a
creditors failure to comply with the Truth In Lending Act, including the effect on the
validity or enforceability of the contract or transaction involved.
Answer:
The failure of a creditor to comply with the Truth in Lending Act would result in
the debtor being allowed to recover the interest payment from the creditor but the validity
of the contract or transaction itself is not adversely affected.
Note: It is suggested that an answer to the effect that the creditor can be held
civilly or criminally liable should be sufficient.

Question No. 12:

On December 9, 1985, Matatag Corporation revalued its assets. On the basis of the
reappraisal, the Board of Directors also declared cash dividends for all stockholders. On
December 16, 1985, Matatag Corporation amassed substantial profits in a highly lucrative
transaction. Some minority stockholders, however, did not want to complicate their
income tax problems for 1985 and refused to accept the cash dividends. They also filed
suit to compel the other stockholders to return to Matatag Corporation the money received
as dividends. Not one of the stockholders who formed the majority joined in the suit since
they were happy with the money they received.
(a) Will the action prosper? Explain.
(b) As one of its defenses in court, the Board of Directors raised the business
judgment rule. What is the business judgment rule and does it have any relevance to this
case? Explain.
Answer:
(a) Two alternative answer are suggested:
i. The action will prosper. A cash dividend based on re-appraisal value is
improper. Dividends may only be declared from surplus profit from operations.
ii. The action will not prosper. The fact that, shortly after the declaration of
cash dividends, the corporation had earned substantial profits (assuming that
the amount thereof would be sufficient to cover the dividend declaration)
during the same month would be sufficient to cure the defect. A violation of
the trust fund doctrine, which is the rationale of the legal requirement on
dividend declaration, is not void per se and it is, therefore, susceptible to
curative events in ultimate results.
(b) The business judgment rule would allow the board of directors to exercise
absolute but sound discretion on matters they are authorized to consider and act upon. In
the declaration of dividends, the rule has relevance for its lies upon the Boards discretion
when to declare dividends, as well as the class and extent thereof.
Question No. 13:
The widow of a former President commissioned Matalino to write a biography of
her late husband for a fee. Upon completion of the work, the widow paid Matalino the
agreed price. The biography was copyrighted. The widow, however, changed her mind
upon reading the book and decided not to have it published.

(a) Can the Presidents widow sell the property without the consent of Matalino?
Explain.
(b)
Matalino?

Can the Presidents widow transfer the copyright without the consent of

Answer:
(a) The Presidents widow can sell the property without the consent of Matalino.
The widow was the owner of the work that was done by Matalino pursuant to their
agreement.
(b) Since the copyright is likewise owned by the widow, the transfer thereof may
be effected even without the consent of Matalino. Of course, Matalino, as the creator,
retains certain moral rights but consent on transfer is not among such rights.
Question No. 14:
Romeo had P100,000.00 in his current account at the Matatag Banking
Corporation. Romeo learned that his enemy had hired a contract killer to liquidate him.
Fearful for his life, he mailed to his fiancee, Juliet a check for his P100,000.00 in the bank.
The check was payable to Juliet or order and was accompanied by a letter stating that he
was giving her his money out of his great love for her and because something would
happen to him anytime now.
(a) Juliet presented the check for payment but the bank refused to honor it. Does
Juliet have any right of action against the bank? Explain.
(b) The hit contract was called off by Romeos enemy. Meanwhile, Juliet broke off
her engagement to Romeo because of the humiliation she suffered at the bank. Does
Romeo have a right of action against the bank? Explain.
Answer:
(a) Two alternative answers are suggested:
i. Juliet has no cause of action against the bank. Under the Negotiable
Instrument Law, a drawee has no liability to the holder under an instrument until
and after it has been accepted by such drawee.
ii. Juliet has a right of action against the bank. While a drawee bank has
the right to dishonor the check until it has been accepted by it, the right must not be
exercised arbitrarily or whimsically. When the bank, without justification
whatsoever, dishonors the check, it could be liable under Article 19 of the Civil
Code.

(b) Romeo has a right of action against the bank. The juridical relation between
the drawer and drawee is not governed solely by the Negotiable Instruments Law. The
relationship between the bank and the drawer is governed primarily by their own
agreement and by the applicable provisions of the Civil Code under which a possible
breach of obligation is likely under the factual setting in the problem.
Question No. 15:
Jacob, the owner of a barge, offered to transport the logs of Esau from palawan to
Manila. Esau accepted the offer not knowing that the barge was manned by an
irresponsible crew with deep-seated resentments against Jacob, their employer.
Esau insured his cargo of logs against both perils of the sea and barratry.
The logs were improperly loaded on one side, thereby causing the barge to tilt and
to navigate on an uneven keel. When the strong winds and high waves, normal for that
season, started to pound the barge, the crew took advantage of the situation and unbolted
the sea valves of the barge, causing sea water to come in. The barge sank.
When Esau tried to collect from the insurance firm, the latter stated that it could not
be held responsible considering the unworthiness of both the barge and its crew. Esau
countered that he was not the owner of the barge and he could not be held responsible for
conditions about which he was innocent.
Is the insurance company liable? Decide with reasons.
Answer:
In marine insurance, the implied warranty of seaworthiness of the vessel applies
also to the insurance of the cargo. In an insurance against perils of the sea, it is the
responsibility of the insured rather than the insurer to see to it that the vessel is seaworthy.
The responsibility, however, shifts to the insurer where the covered risks include perils of
the ship. Accordingly, the insurance company in the problem can be held liable.
Note: It is suggested, however, that an answer that relieves the insurance company
from liability should not be entirely rejected. It is possible that an examinee may have
depended much on legal provisions that appear to give a rather comprehensive scope of the
implied warranty against unseaworthiness of the vessel. It is not unlikely that he may not
have also given much significance to the term barratry. Some leniency, therefore, is
suggested.
Question No. 16:
Mr. Mangasiwa applied for a certificate of public convenience to operate five
jeepneys from the Batasang Pambansa area to Cubao, Quezon City. The application was
opposed by Hallelujah Transit and Kingdom Bus Co., which were already serving the area.

They invoked the prior or old operator rule in their opposition. Mangasiwa, in turn,
invoked the prior applicant rule.
Discuss the prior or old operator rule and the limitations or provisos on its
application. In case of conflict between the prior or old operator rule and the prior
applicant rule, which rule shall prevail? Explain.
Answer:
The prior or old operator rule allows an existing franchised operator to invoke
preferential right to render the public service within the authorized territory as long as he
does so satisfactorily and economically. In case of conflict between the prior or old
operator rule and the prior applicant rule, the former will apply as long as again the
operator is able to render satisfactory and economically service.
Question No. 17:
Benedicto executed a chattel mortgage on a Mercedes Benz car in favor of Silverio.
The mortgage was duly registered on August 15. Upon the failure of Benedicto to pay the
obligation secured by the chattel mortgage. Silverio filed, on October 3, an action for
replevin to take possession of the mortgaged car. It turned out that as early as August 20,
Leopoldo had already filed an action to recover a sum of money against Benedicto. Even
before the replevin case of Silverio could be set for trial, Leopoldo caused a levy to be
made on the Mercedes Benz to satisfy the money judgment which a court had awarded on
October 10 against Benedicto in favor of Leopoldo.
Whose claim to the Mercedes Benz car will prevail, Leopoldos or Silverios?
Explain.
Answer:
Silverios claim will prevail. His mortgage was duly registered on August 15 or
days before Leopoldo filed his action and months before the judgment levy by him was
made. The time when Silverio sought to enforce the lien is not material; the date of
registration of the chattel mortgage is enough to bind, or make it effective as against, third
persons.
Question No. 18:
Maingat deposited her personal computer (PC) machine in the warehouse of
Bodeguero, who issued a negotiable receipt undertaking the delivery of the computer to
Mayaman or bearer.
Mayaman entrusted the receipt to Secretario, his secretary, who, in turn, delivered
the receipt to Bumibili, a purchaser for value and in good faith. Secretario needed the
money to pay his gambling debts.

(a) Who has a better title to the computer, Mayaman or Bumibili? Explain.
(b) Would the answer be the same, if by the terms of Bodegueros receipt, the
computer is deliverable to the order of Mayaman? Explain.
Answer:
(a) Bumibili has a better title to the computer than Mayaman. A bearer negotiable
document of title can pass ownership thereof by means of mere delivery to one who
acquires the document for value and in good faith.
(b) Mayaman would have had a better right than Bumibili had the document of
title been so worded as to make the article deliverable to the order of Mayaman. Without
an indorsement of Mayaman, Bodegueros receipt could not have been negotiated to
Bumibili, sufficient for the latter to acquire title there over as against Mayaman, who was
unlawfully deprived of it.