1990 BAR EXAMINATION

Question No. 1:
The articles of incorporation to be registered in the SEC contained the following provisions
—

a) “First Article. The name of the corporation shall be Toho Marketing Company.”
b) “Third Article. The principal office of the corporation shall be located in Region III, in such
municipality therein as its Board of Directors may designate.”
c) “Seventh Article. The capital stock of the corporation is One Million Pesos (P1,000.00),
Philippine Currency.”

What are your comments and suggested changes to the proposed articles?

Answer:
a) On the First Article, I would suggest that the corporate name indicate the fact of
incorporation by using either “Toho Marketing Corporation” or “Toho Marketing Company,
Incorporated”.

b) The Third Article should indicate the City or the Municipality and the Province in the
Philippines, and not merely the region or as its Board of Directors may later designate, to be
its place of principal office.

c) 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.

Question No. 2:
At least 2/3 of the stockholders of Solar Corporation, meeting upon the recommendation of
the Board of Directors, 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.

Answer:
I will not accept the case. Section 43 of the Corporation Code states that no stock dividend
shall be issued without the approval of the stockholders representing not less than 2/3 f the
outstanding capital stock at a regular or special meeting duly called for that purpose. Conformably
with Section 50 of the Corporation Code, a written notice of the holding of the regular meeting sent
to the shareholders will suffice. The notice itself specifies the said subject matter.

Question No. 3:
Luis was the holder of an accident insurance policy effective November 1, 1988 to October
31, 1989. At a boxing contest held on January 1, 1989 and sponsored by his employer, he slipped
and was hit on the face 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 “intracranial
hemorrhage.”

Can his father who is a beneficiary under said insurance policy successfully claim indemnity
from the insurance company? Explain your answer.

Answer:
Yes, the father who is a beneficiary under the accident insurance can successfully claim
indemnity for the death of the insured. Clearly, the proximate cause of the death was the boxing
contest. Death is sustained in a boxing contest is an accident.

Question No. 4:
Acme Trading Company, Inc. (Acme), 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”).

a) May Acme invest in the said department store corporation? Explain your answer.
b) May Acme invest in the realty corporation? Discuss with reasons.
c) May the President of Acme, a foreigner, sit in the Board of Directors of the said department
store corporation? Discuss with reasons.
d) May the Treasurer of Acme, another foreigner, occupy the same position in the said
department store corporation? May he be the treasurer of the said realty corporation?
Explain your answers?

Answer:
a) Acme may not invest in the department store corporation since the Retail Trade Act allows,
in the case of corporations, only 100% Filipino-owned companies to engage in retail trade.

b) Acme may invest in the realty corporation, on the assumption that the balance of 60% of
ownership of the latter corporation, is Filipino-owned since the law merely required 60%
Filipino holding in land corporate ownership.

c) The Anti-Dummy Law allows board representation to the extent of actual and permissible
foreign investments in corporations. Accordingly, the President of Acme may not sit in the
Board of Directors of the department store corporation but can do so in the realty
corporation.

d) 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.

Question No. 5:
Jose loaned Mario some money and, to evidence his indebtedness, Mario executed and
delivered to Jose a promissory note payable to his order.
 Jose endorsed the note to Pablo. Bert fraudulently obtained the note from Pablo and
endorsed it to Julian by forging Pablo’s signature. Julian then endorsed the note to Camilo.

a) May Camilo enforce the said promissory note against Mario and Jose?
b) May Camilo go against Pablo?
c) May Camilo enforce said note against Julian?
d) Against whom can Julian have the right of recourse?
e) May Pablo recover from either Mario or Jose?

Explain your answers.

Answer:
a) 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 is inoperative. Accordingly,
the parties after the forgery are not juridically related to parties after the forgery to allow
such enforcement.

b) Camilo may not go against Pablo, the latter not having indorsed the instrument.

c) 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.

d) Julian, in turn, may enforce the instrument against Bert who, by his forgery, has rendered
himself primarily liable.

e) Pablo preserves his right to recover from either Marion 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.

Question No. 6:
Che-che invented a device that can convert rainwater to automobile fuel. She asked 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 a patent, 80% of the shares of stock thereof to
be subscribed by Che-hhe and 5% by Macon. The corporation was formed and the patent
application was filed. However, Che-che died 3 months later of a heart attack.

Franco, the estranged husband of Che-che, contested the application of the corporation of
the corporation and filed his own patent application of the corporation and filed his own patent
application as the sole surviving heir of Che-che. Decide the issue with reasons.

Answer:
The estranged husband of Che-che 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 Che-che, if not disqualified to inherit, merely would succeed to the interest of
Che-che.
Question No. 7:
a) Manosa, a newspaper columnist, while making a deposit in a bank, overheard a pretty bank
teller informing a co-employee that Gigi, a well-known public official, has just a few hundred
pesos in her bank account and that her next check will in all probability bounce. Manosa wrote
this information in his newspaper column. Thus, Gigi filed a complaint with the Office of the City
Fiscal of Manila for unlawfully disclosing information about her bank account. Will the said suit
prosper? Explain your answer.

b) Supposing that Gigi is charged with unlawfully acquiring wealth under RA No. 1379 and that the
fiscal issued a subpoena duces tecum for the records of the issuance on the ground that the
same violates the law on secrecy of bank deposits? Explain your answer.

Answer:
a) 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 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 the law.

b) Among the instances excepted from the coverage of the Secrecy of Bank Deposits Act are anti-
graft cases. Hence, Gigi may not validly oppose the issuance of a subpoena duces tecum for the
bank records on her.

Question No. 8:
One day jerry haw, doing business under the name Starlight Enterprises, 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:

a) 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.

b) Should he sell profit participation certificates to his 10 brothers and sisters in order to raise
cash for his business? Explain your answer.

Answer:
a) I would counsel Jerry Haw 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.

b) Instead of selling profit participation certificates, I would urge Jerry Haw to enter into a
partnership or to incorporate in order to raise cash for his business.

Question No. 9:
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 Supreme Court 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 your answer.

Answer:
I will counsel Jimmy to desist from challenging the decision. The action of 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.

Question No. 10:

Zone, who lives in Bulacan, bought a 1988 model Toyota Corolla sedan on July 1, 1989 from
Anadelaida, who lives in Quezon City, for P300,000, paying P150,000 as down payment 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.

10 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 Deed of Quezon
City.

In September 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.

a) 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
meritotios? Explain your answer.

b) 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?

Answer:
a) Jimbo’s argument is not meritorious. Zone became the owner of the property upon delivery;
registration is not essential to 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.

b) 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
situated as well as the LTO where the vehicle is registered.

Question No. 11:

 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
jeeney in Van’s 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 cost.

The Sheriff levied on the jeepney belonging to Johnny but registered in the name of Van.
Johnny filed a third-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 jeepeny? Discuss the reasons.

Answer:
Yes, the Sheriff may proceed with the auction sale of Jjohnny’s jeepney. In contemplation of
law as regards the public and third persons, the vehicle is considered the property of the registered
operator.

Question No. 12:

a) Suppose that Fortune owns a house valued at P600,000 and insured the same against fire
with 3 insurance companies as follows:

X ------------------- P400,000.00
Y ------------------- P200,000.00
Z ------------------- P600,000.00

In the absence of any stipulation in the policies from which insurance company or
companies may Fortune recover in case of fire should destroy his house completely?

b) If each of the fire insurance policies obtained by Fortune in problem (a) is a valued policy
and the value of his house was fixed in each of the policies at P1 M, how much would
Fortune recover from X if he has already obtained full payment on the insurance policies
issued by Y and Z?

c) If each of the policies obtained by Fortune in problem (a) above is an open policy and it was
immediately determined after the fire that the value of Fortune’s house was P2.4 M, how
much may he collect from X, Y and Z?

d) In problem (a), what is the extent of the liability of the insurance companies among
themselves?

e) 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?

Explain your answer.

Answer:
a) Fortune may recover from the insurers in such order as he may select up to their concurrent
liability.

b) One Answer (assuming that the real value is P1 M):

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.

Another Answer (assuming that the real value is P600,000):

Having obtained full payment on the insurance policies issued by Y and Z, Fortune may no
longer recover from X Insurance Company.

c) In an open policy, the insured may recover his total loss up to the amount of the insurance
coverage. Thus, the extent of recovery would be P400,000 from X; P200,000 from Y; and
P600,000 from Z.

d) In the problem (a), the insurance companies among themselves would be liable, viz:

X— 4/12 of P600,000 = P200,000

Y— 2/12 of P600,000 = P100,000
Z— 6/12 of P600,000 = P300,000

e) No, he can only be indemnified for his loss, not profit thereby; hence, he must return P200,000
of the P800,000 he was able to collect.

Question No. 13:

In 1988, the FDA 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
professional and the pharmaceutical industry, and that it is used as 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 be your advice?

Answer:
The application for registration by Turbo Corporation may be contested. The Trademark
Law would not allow the registration of a trademark which, when applied to or used in connection
with his products, is merely descriptive or deceptively misdescriptive of them. Confusion can result
from the result from the use of “Axilon” as the generic product itself.

Question No. 14:

Mercy subscribed to 1,000 shares of stock of Rosario Corporation. She paid 25% of said
subscription. During the stockholders’ meeting, ca mercy vote all her subscribed shares? Explain
your answer.

Answer:
 Yes, Mercy can vote all her subscribed shares. Section 72 of the Corporation Code state that
holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.

Question No. 15:

To accommodate Carmen, drawer (sic- should be 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 accommodation party only. When the promissory note
was not paid, and Raffy discovered that Carmen had no funds, he sued Jorge. He pleads in defense
the fact the 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 instrument.

Is Jorge liable? Discuss with reasons.

Answer:
Yes, Jorge is liable. Section 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.

1991 BAR EXAMINATION

Question No. 1:
The law (RA No. 6832) creating a Commission to Conduct a Thorough Fact-Finding
Investigation of the Failed Coup D’Etat of December 1989, Recommended 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 grant authority to
examine any bank deposits, trust or investment funds, or banking transactions in the name of
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 not the above provision violate the Law on Secrecy of Bank Deposits (RA No. 1405)?

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 depositary 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-impairment clause. RA No, 6832, creating a commission to conduct an investigation of the
failed 1989 coup d’etat and to recommend measures to prevent similar attempts to seize power is
a valid exercise of police power.

Question No. 2:
A. To secure the payment of his loan of P200,000, A executed in favor of the Angeles Banking
Corp., in 1 document, a real estate mortgage over 3 lots registered in his name and a chattel
mortgage over his 3 cars and 1 Isuzu cargo truck.

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 P99,000 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?

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 be an
action for collection of any deficiency. In Caltex vs. Intermediate Appellate Court (G.R. 74730, 25
August 1989). 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 exception such as those stated in
Article 1484 of the Civil Code, by a foreclosure on the mortgages. While the factual settings in
the case of Suria vs. Intermediate Appellate Court (30 June 1987) are not similar to the facts
given in the problem, the Supreme Court 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.

B. 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) care.

Is the mortgage valid?

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, 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.

Question No. 3:
A. During the annual stockholders meeting, Riza, a stockholder proposed to the body that a part of
the corporation’s undeserved earned surplus be capitalized and stock dividends be distributed
to the stockholders, arguing that as owners of the company, the stockholders, by majority vote,
can do anything. As chairman of the meeting, how would you rule on the motion to declare stock
dividends?

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 board of directors and thereafter
to be concurred in by a 2/3 vote of the stockholders. There is no prohibition, however, against
the stockholders’ resolving to recommend to the board of directors that it consider a declaration
of stock dividends for concurrence thereafter by the stockholders.

B. ABC Management, Inc. presented to DEF Mining Corp. 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?

Answer:
I would not approve of 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. 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. As an alternative, I
would suggest that the managing corporation should instead be given a net profit participation and,
if 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.
C. Assuming that the minority block of the XYZ Corporation is able to elect only 1 director and
therefore, the majority stockholders can always muster a 2/3 vote, would you allow the
majority stockholders to remove the one director representing the minority?

Answer:
No. I would 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 this right
may not, without just cause, be exercised so as to deprive the minority of representation in the
board of directors.

D. 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
Board of Directors 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 Board. A stockholder of ABC questioned the bonus. Does he have grounds to
object?

Answer:
Yes, the stockholder has 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 directors, in the preceding year, cannot exceed 10% of the company’s net income
before income tax.

Question No. 4:
A. ABC Piggery, Inc. is engaged in raising and selling hogs in the local market. Mr. De Dios, one of its
directors, while travelling 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 skins exported were not sourced from ABC.
His fellow directors in ABC complained that he should have given his business to ABC. How
would you decide this matter?

Answer:
I would decide in favor of Mr. De Dios. ABC, Inc., 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
pig skins. There is thus no conflict of interest situation under the law.

B. 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, Mr. 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 and the
plaintiff sought to enforce this judgment. The sheriff, however, could not locate any property in
the name of Mr. Pablo and therefore returned the writ of execution unsatisfied. What remedy, if
any, is available to the plaintiff?

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 existence of a lawsuit that
could subject Mr. Pablo to a substantial amount of damages. It would thus be difficult for Mr.
Pablo to convincingly assert that the incorporation of the family corporation was intended
merely as a case of “estate tax planning”.

Question No. 5:
On June 1, 1990, A obtained a loan of P100,000 from B, payable not later than December 20,
1990. B required A to issue him a check for that amount to be dated December 20, 1990. Since he
does not have any checking account, A, with the knowledge of B, requested his friend, C, President
of the Saad Banking Corp. (SAAD), to accommodate him. C agreed, he signed a check for the
aforesaid amount, dated December 20, 1990, drawn against SAAD’s account with the ABC
Commercial Banking Corp. 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.

a) Is the SAAD liable on the checks as an accommodation party?

Answer:
No. SAAD is not liable on the checks as an accommodation party. The act of the corporation
in accommodating a friend of the President, is ultra vires. While it may be legally possible for a
corporation, whose business is to provide financial accommodation 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.

b) If it is not, who then, under the above facts, is/are the accommodation party?

Answer:
Considering that both the President and the 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.

Question No. 6:
A. Mr. Pablo sought to borrow P200,000 from Mr. Carlos. The latter agreed to loan the amount in
the form of a post-dated check which was crossed (i.e., two parallel lines diagonally drawn on
the top left portion of the check). Before the due date of the check, Mr. Pablo discounted it with
Mr. Noble. On due date, Mr. Noble deposited the check with his bank. The check was dishonored.
Mr. Noble sued Mr. Pablo. The court dismissed Mr. Noble’s complaint. Was the court’s decision
correct?

Answer:
 The court’s decision was incorrect. Mr. Pablo and Mr. Carlos, being immediate parties to the
instrument, are governed by the rules of privity. Given the factual circumstances of the problem,
Mr. Pablo has no valid excuse from denying liability. Mr. Pablo undoubtedly had benefited in the
transaction. To hold otherwise would also contravene the basic rules of unjust enrichment. Even
in negotiable instruments, the Civil Code and other laws of general application can still apply
suppletorily.

B. Mr. Lim issued a check drawn against BPI Bank in favor of Mr. Yu as payment for certain shares
of stock which he purchased. On the same day that he issued the check to Mr. Yu, Mr. Lim
ordered BPI to stop payment. Per standard banking practice, Mr. Lim was made to sign a waiver
of BPI’s liability in the event that it should pay Mr. Yu through oversight or inadvertence. Despite
the stop order by Mr. Lim, BPPI nevertheless paid Mr. Yu upon presentation of the check. Mr. Lim
sued BPI for paying his order. Decide the case.

Answer:
In the event that Mr. Lim, in fact, had sufficient legal reasons to issue the stop payment order,
he may sue BPI for paying against his order. The waiver executed by 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 had 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 the stop payment order.

Question No. 7:
A. Atty. Roberto took out a life insurance policy from Dana Insurance Corp. (DIC) on September 1,
1989. On August 31, 1990, Roberto died. DIC refused to pay his beneficiaries because it
discovered that Roberto 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.

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.

B. The policy of insurance upon his life, with a face value of P100,000, was assigned by Jose, a
married man with 2 legitimate children, to his nephew, Y as security for a loan of P50,000. 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.

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. The failure of the notice of
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.

Question No. 8:
Sheryl insured her newly acquired car, a NISSAN Maxima against any loss or damage for
P50,000 and against third party liability for P20,000 with the XYZ Insurance Corp. (XYZ). 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 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 the repair was
P40,000. 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?

Answer:
No. the insurer is not correct in denying the claim since the proviso “that the person driving
is permitted in accordance with the licensing, etc.” qualifies only a person driving the vehicle, other
than the insured, at the time of the accident.

Question No. 9:
A piece of machinery was shipped to Mr. Pablo on the basis of C&F, Manila. Mr. Pablo insured
said machinery with the Talaga Merchants Insurance Corp. (TAMIC) for loss or damage during the
voyage. The vessel sank en route to Manila. Mr. Pablo then filed a claim with TAMIC which was
denied for the reason that prior to delivery, Mr. Pablo had no insurable interest. Decide the case.

Answer:
Mr. Pablo had an existing insurable interest on the piece of machinery he bought. The
purchase of goods under a perfected contract of sale already vested equitable interest on the
property in favor of the buyer even while it is pending delivery.

Question No. 10:

Mr. Noble, as the President of ABC Trading, Inc., executed a trust receipt in favor of BPI Bank
to secure the importation by his company of certain goods. After release and sale of the imported
goods, the proceeds from the sale were not turned over to BPI. Would BPI be justified in filing a case
for estafa against Noble?

Answer:
BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that
the trust receipt 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 Receipts 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 personal
liability thereunder.
Question No. 11:
A. ABC Manufacturing, Inc., a company wholly owned by foreign nationals, manufactures
typewriters which ABC distributes to the general public in 2 ways:

a) ABC consigns its typewriters to independent dealers who in turn sell them to the public;
and,
b) 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?

Answer:
a) 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.

b) 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 itself.

B. Is the 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 should be violating the Retail Trade Act.

Answer:
It is possible that the examinee would have responded on the basis of the basis of the Anti-
Dummy Law exclusively in which case the engagement by the common-law wife may, by
presumption, be considered as having violated the law.

Question No. 12:

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’s SONY without the consent of SONY. SONY sued Best Manufacturing for infringement.
Decide the case.

Answer:
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 be said to be similar to such products as TV, stereo and radio sets or cameras or betamax
products of SONY.

Question No. 13:

 In a collision between M/T Manila, a tanker, and M/V Don Claro, an inter-island vessel, M/V
Don Claro sank and many of its passengers drowned and died. All its cargoes were lost. The collision
occurred at nighttime but the sea was calm, the weather fair and visibility was good. Prior to the
collision and while still 4 nautical miles apart, M/V Don Claro already sighted M/T Manila on its
radar screen. M/T Manila had no radar equipment. As for speed, M/V Don Claro was twice as fast as
M/T Manila.

At the time of the collision, M/T Manila failed to follow Rule 19 of the International Rules of
the Road which required 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. M/T Manila
signaled that it would turn to port side and steered accordingly, thus resulting in the collision. M/T
Don Claro’s captain was off-duty and was having a drink at the ship’s bar at the time of the collision.

a) Who would you hold liable for the collision?

Answer:
I could 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 2 vessels but not
on the claims made by passengers or shippers.

b) If M/V 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?

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.

Question No. 14:

A. Is the issuance of an order, declaring a petitioner in a Voluntary Insolvency proceeding
insolvent, mandatory upon the court?

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.

B. What are the effects of a judgment in insolvency in Voluntary Insolvency cases?

Answer:
The adjudication or declaration of insolvency by the court, after hearing or default, shall
have the following effects:

1. Forbid the payment to the debtor of any debt due to him and the delivery to him of any
property belonging to him;
2. Forbid the transfer of any property by him; and
 3. Stay of all civil proceedings against the insolvent but foreclosure may be allowed.

Question No. 15:

A. The Saad Development Corp. enters into a voyage charter with the XYZ Shipping Corp. over the
latter’s vessel, the M/V Lady Love. Before the Saad Development Corp. could load it, XYZ
Shipping Corp. sold M/V Lady Love to Oslob Maritime Corp., which decided to load it for its own
account.

a) May YZ Shipping Corp. validly ask for the rescission of the charter party? If so, can Saad
Development Corp. recover damages? To what extent?

Answer:
XYZ Shipping Corporation 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 Development Corp. may recover damages to the extent of its losses.

b) If Oslob Maritime Corp. did not load it for its own account, is it bound by the charter party?

Answer:
Oslob Maritime Corp. did not load M/V Lady Love for its own account, it would be bound by
the charter party, but XYZ Shipping would have to indemnify Oslob Maritime if it was not
informed of the Charter Party at the time of sale.

B. The term “owner pro hac vice of the vessel.” In what kind of charter party does this obtain?

Answer:
The term “owner pro hac vice of the vessel”, is generally understood to be the charterer of a
vessel in the case of bareboat or demise charter.

Question No. 16:

Alejandro 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 8:30pm, 1 cargo truck
was loaded with several boxes of sardines, valued at P100,000, 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 trucks was hijacked by 3 armed men who took all the boxes of
sardines and kidnapped the driver and his helper, releasing them in Cebu City only 2 days later.

Pedro Rabor sought to recover from Alejandro the value of the sardines. The latter contends
that he is not liable therefor because he is not a common carrier under the Civil Code and, even
granting for the sake of argument that he is, he is not liable for the occurrence of the loss as it was
due to a cause beyond his control.

If you were the Judge, would you sustain the contention of Alejandro?
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.

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.

Question No. 17:

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?

Answer:
The warehouseman is bound to deliver the goods upon demand made either by the holder
of the receipt for the goods or by the depositor if the demand is accompanied by (a) an officer to
satisfy the warehouseman’s lien, (b) an offer to surrender the receipt, if negotiable, with such
indorsements as would be necessary for the negotiation thereof, and (c) readiness and willingness
to sign when the goods are delivered if so requested by the warehouseman.

Question No. 18:

Dana Gianina purchase 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 No. 3765). Nevertheless, the conditional deed of sale which the parties executed
mentioned that the total amount indicated therein included such finance charges.

a) Has there been substantial compliance of the aforesaid Act?

Answer:
No. 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 cost. 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.

b) If your answer to the foregoing question is in the negative, what is the effect of the violation on
the contract?

Answer:
A violation of the Truth in Lending Act will not adversely affect the validity of the contract
itself.

c) In the event of a violation of the Act, what remedies may be availed of by Dana?
 Answer:
The violation of the Truth in Lending Act 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.

Question No. 19:

On December 6, 1988, A, an incorporator and the General Manager of the PAJE Multi-Farms
Corp., resigned as General Manager and sold the corporation his shares of stocks in the corporation
for P300,000, the book value thereof, payable as follows: (a) P100,000 as downpayment; (b)
P100,000 on or before September 30, 1989. A promissory note, with an acceleration clause, was
executed by the corporation for the unpaid balance.

The corporation failed to pay the first installment on due date. A then sued PAJE Mulit-
Farms Corp. on the promissory note in the RTC.

a) Does said court have jurisdiction over the case?

Answer:
The RTC has no jurisdiction over the case. In Boman Environmental Development
Corporation v. Court of Appeals (G.R. No. 77860, November 22, 1988), the Supreme Court
observed that a corporation may only buy its own shares of stock if it has enough surplus profits
therefor. On an issue involving the trust fund doctrine, the SEC would be in better position than
ordinary courts to make an assessment and judgment on the matter.

b) 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?

Answer:
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 intracorporate matter exclusively lies with the SEC to
take cognizance.

1992 BAR EXAMINATION

Question No. 1:
Perla brought a motor car payable in installments from Automotive Company for P250,000.
She made a down payment of P50,000 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 promise to pay Automotive Company or order at its office in Legaspi
City, the sum of P200,000.00 with interest at twelve (12%) per cent 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

Pay to the order of Reliable Finance Corp.

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
open to all defenses available to the assignor and, therefore, Reliable Finance Corporation is not a
holder in due course.

a) Is the promissory note a mere assignment of credit or a negotiable instrument? Why?

Answer:
The promissory note in the problem is a negotiable instrument, being in compliance with
the provisions of Section 1 of the 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.

b) Is Reliable Finance Corporation a holder in due course? Explain briefly.

Answer:
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.

Question No. 2:
A Cooperative purchased from “Y” Corporation on installments a rice mill and made a down
payment therefor. As security for the payment of the balance, the Cooperative executed a chattel
mortgage in favor of Y Corporation. Y Corporation, in turn, assigned its rights to the chattel
mortgage to Z, Inc., a 5% foreign-owned company doing business in the Philippines. The
cooperative thereafter made installment payment to Z, Inc.

Because the Cooperative was unable to meet its obligations in full, Z, Inc. filed against it a
court suit for collection. The Cooperative resisted contending that Z, Inc. was illegally engaged in the
retail trade business for having sold a consumer good as opposed to a producer item. The
Cooperative also alleged that Z, Inc had violated the Anti-Dummy Law.

Is Z, Inc. guilty of violating the Retail Trade Law and the Anti-Dummy Law? Why?
Answer:
Z, Inc. 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 does not fall under that category. Neither does it appear that Z, Inc,
is habitually engaged in selling to the general public that commodity. Since there is no violation of
the Retail Trade Law, there would likewise be no violation of the Anti-Dummy Law.

Question No. 3:
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 lighter.

Is the insurance company liable under its policy? Why?

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 be
claimed since the ¾ rule is to be computed on the total 1,000 pieces of Mindoro garden stones
covered by the single policy coverage.

Question No. 4:
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.

a) Should the railway company be held liable for damages?

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 hand carried by passengers.

b) If it were an airline company involved, would your answer be the same? Explain your answer
briefly.

Answer:
 No. If it were an airline company, the common carrier should be made liable. In the 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.

Question No. 5:
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?

Answer:
There was no misdelivery to the carrier since the cargo was consigned to the sugar central
per the “Shipper’s Order”.

Question No. 6:
Antonio was granted a Certificate of Public Convenience (CPC) in 1986 to operate a ferry
between Mindoro and Batangas using the motor vessel “MV Lotus”. He stopped 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? Give your reasons.

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 CPC 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.

Question No. 7:
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 the said former President
filed suit for collection of the balance before the SEC.
a) Under what condition is a stock corporation empowered to acquire its own shares?

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.

b) Is the arrangement between the corporation and its President covered by the trust fund
doctrine? Explain your answers briefly.

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.

Question No. 8:
A distressed company executed a voting trust agreement for a period of 3 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 3-year period prescribed in the Voting Trust Agreement having expired, the company
demanded the turnover 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.

Answer:
No. 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 the foreclosure of the mortgaged properties would be alien to the
Voting Trust Agreement and its effects.

Question No. 9:
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 COGSA after the carrier had rejected its
demand. The carrier pleaded in its Answer the affirmative defense of prescription under the
provisions of the same Act inasmuch as the suit was brought by the consignee after 1 year from
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 1-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.

a) Has the action, in fact, prescribed? Why?

Answer:
The action taken by the local consignee has, in fact, prescribed. The period of 1 year under
the COGSA is not interrupted by a written extrajudicial demand. The provision of Article 1155 of the
Civil Code merely apply to the prescriptive periods provided for in said Code and not the special
laws except when otherwise provided.

b) If the consignee’s action were predicated on misdelivery or conversion of the goods, would your
answer be the same? Explain briefly.

Answer:
If the consignee’s action were predicated on misdelivery or conversion of the goods, the
provisions of the COGSA would be inapplicable. In these case, the Civil Code prescriptive periods,
including Art. 1155 of the Civil Code, will apply.

Question No. 10:

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 was poised to: (1) restrain 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?

Answer:
No. the RTC has no authority to restrain the monetary board of the Central Bank from
statutory authority to undertake receivership and ultimate liquidation of a bank. Any opposition to
such an action could be made to the court itself where assistance is sought.

The action of the RTC where the proceeding is pending appeal have to be made in the Court
of Appeals.

Question No. 11:

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
and succeeded in encashing the check on the same day. Placido’s account was thereby debited in the
same amount.
 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.

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 on his desk.

Question No. 12:

Socorro received $10,000 from a foreign bank although she was entitled only to $1,000. In
an apparent plan to conceal the erroneously sent amount, she opened a dollar account with her
local bank, deposited the $10,000 and issued 4 checks 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 the 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?

Answer:
No. 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.

Question No. 13:

X & Co., obtained a loan from a local bank in the amount of P500,000, mortgaging as security
therefore its real property. Subsequently, the company applied with the same bank for a Letter of
Credit (L/C) for $200,000 in favor of a foreign bank to cover the importation of machinery. To
guarantee payment of the obligation under the L/C, the company and its President and Treasurer
executed a Surety Agreement in the local bank’s favor.

The machinery arrived and was received 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, and (2) foreclosure of the mortgage? Why?

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 goods in payment of a due obligation.

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 yet been effected.

Question No. 14:

To guarantee the payment of a loan obtained from a bank, Raoul pledged 500 bales of
tobacco deposited in a warehouse to said bank and endorsed in blank the warehouse receipt. Before
Raoul could pay for the loan, the tobacco disappeared from the warehouse.

Who should bear the loss—the pledgor or the bank? Why?

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.

Question No. 15:

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?

Answer:
I would not exempt the alleged violator from liability for the following reasons:

1. A patent once issued by the Patent Office raises a presumption that the article is patentable;
it can, however be shown otherwise. A mere statement or allegation is not enough to
destroy that presumption.
2. An intention to infringe is not necessary nor an element in a case for infringement of a
patent.

3. There is no need of exact duplication of the patentee’s existing patent such as when the
improvement made by another is merely minor. To be independently patentable, an
improvement of an existing patented invention must be a major improvement.

1993 BAR EXAMINATION

Question No. 1:
Discuss the negotiability or non-negotiability of the following notes:

1. Manila, September 1, 1993

P2,500.00
I promise to pay Pedro San Juan or order the sum of P2,500.00

(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 thereafter.

(Sgd.) LITO VILLA

Answer:
1. 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.

2. The promissory note is not 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.

Question No. 2:
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.
1. Can Devi enforce the note against Larry and if she can, for how much? Explain.
2. Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity,
can the latter enforce the note against Larry?

Answer:
1. 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.
2. Yes. Baby is not a holder in due course because she had knowledge of the breach 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.

Question no. 3:
Juan Sy purchased from “A” Appliance center 1 generator set on installment with the 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, he executed a promissory note for said amount with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.

1. What is the liability of Ben Lopez as an accommodation party? Explain.

2. What is the liability of Juan Sy?

Answer:
1. Ben, 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 can ask for reimbursement from Juan, the accommodated party.
2. Juan is liable to the extent of P5,000 in the hands of a holder in due course. If Ben paid the
promissory note, Juan has the obligation to reimburse Ben for the amount paid. If Juan pays
directly to the holder of the promissory note, or he pays Ben for the reimbursement of the
payment by the latter to the holder, the instrument is discharged.

Question No. 4:
On October 10, 1981, B borrowed from C the sum of P1.5 M. To hedge against the
depreciation of the Philippine Peso, it was stipulated in the promissory note executed by B in favor
of C that the loan shall be paid in US dollars at the exchange rate prevailing on the date the
obligation was incurred, plus interest at 12% per annum.

1. Is the stipulation valid? Explain.

2. Assuming that the stipulation is invalid, does the obligation to pay subsist? How should it be
discharged?

Answer:
1. No. The obligation was incurred in the Philippines. Hence, the Uniform Currency Law, which
requires payment in the Philippine currency, applies.

2. Yes. It should be discharged in Philippine pesos at the rate of exchange prevailing at the time of
payment.

Question No. 5:
 In the annual meeting of the “XYZ” Corporation, the stockholders unanimously adopted a
resolution proposed by the Board of Directors 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.

1. What steps should you take so that the sale may be valid?
2. What are 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?

Answer:
1. The 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.

2. If the sale and transfer is made (1) by vendor, mortgagor, transferor or assignor who produces
and delivers a written waiver of the provisions of the Bulk Sales Law from his creditors as
shown by verified statement; and (2) by a vendor, mortgagor, receiver, assignee in insolvency, or
public officer acting under judicial process, the sale or transfer is not covered by the Bulk Sales
Law.

Question No. 6:
1. “A” invested P500,00 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?

2. 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.

Answer:
1. “A” allows or permits the use or exploitation or enjoyment of a right, privilege or business, the
exercise of enjoyment of which is expressly reserved by the Constitution or the laws to citizens
of the Philippines, by the foreigner not possessing the requisites prescribed by the Constitution
or the laws of the Philippines. The prosecutor should prove the above elements of the crime and
also the facts that “A” does not have the means and resources to invest P500,000 in the security
agency.

2. 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.

Question No. 7:
A foreign firm is engaged in the business of manufacturing and selling rubber products to
dealers who in turn sell them to others. It also sells directly to agricultural enterprises, automotive
assembly plants, public utilities which buy them in large bulk, and to its officers and employees.

1. Is there a violation of the Retail Trade Law? Explain.

 2. May said firm operate a canteen inside the premises of its plant exclusive for its officials and
employees without violating the Retail Trade Act? Explain.

Answer:
1. 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.

2. 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.

Question No. 8:
BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27
per cubic meter FOB. After inspecting the logs, CD issued a purchase order.

On the arrangements made upon instruction of the consignee, H&T Corporation of Los
Angeles, California, the SP Bank of Los Angeles issued an irrevocable letter of credit available at
sight in favor of BV for the total purchase price of the logs. The letter of credit provided 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 to 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 the certification, FE Bank refused to
advance payment on the letter of credit.

1. May FE Bank be held liable under the letter of credit? Explain.

2. Under the facts stated above, the seller, BV, argued that FE Bank, by accepting the obligation
to notify him that the irrevocable letter of credit. Consequently, FE Bank is liable under the
letter of credit. Is the argument tenable? Explain.

Answer:
1. No. The letter of credit provide as a condition a certification from AC. Without such certification,
there is no obligation on the part of FE Bank to advance payment of the letter of credit.

2. 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.

Question no. 9:
Ferdie is a patent owner of a certain invention. He discovered that his invention is being
infringed by Johann.

1. What are the remedies available to Ferdie against Johann?

 2. If you were the lawyer of Johann in the infringement suit, what are the defenses that your
client can assert?

Answer:
1. The following are the remedies available to Ferdie against Johann:

a. Seize and destroy

b. Injunction
c. 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.
d. Attorney’s fees and costs.

2. These are the defenses that can be asserted in an infringement suit:

a. Patent is invalid
b. Patent is not new or patentable
c. Specification of the invention does not comply with Sec.14
d. 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.

Question No. 10:

S Insurance Company issued a Personal Accident Policy to Bob Tan with a face value of
P500,000.

In the evening of September 5, 1992, after his birthday party, Tan was in a happy mood but
not drunk. He was playing with his handgun, 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.

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 deliberated 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.

Answer:
No. these 2 contentions of the insurance company 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 handgun means that the insured did not willfully expose himself to needless
peril. At most, the insured is only guilty of negligence.

Question No. 11:

 HL insured his brand new car with P Insurance Company for comprehensive coverage
wherein the insurance company undertook to indemnify him against loss or damage to the car (a)
by accidental collision xxx (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 the said car when it was carnapped was
in possession of an expired driver’s license, a violation of the “authorized driver” clause of the
insurance company.

1. May the insurance company be held liable to indemnify HL for the loss of the insured
vehicle? Explain.
2. Supposing that the car was brought by HL on installment basis and there were installments
due and payable before 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 loss of the car but no longer liable for the
other installments not yet due at the time of the loss of the car.

Decide.

Answer:
1. 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.

2. The promissory note is not affected by whatever befalls the subject matter of the accessory
contract. The unpaid balance on the promissory note should be paid and not only the
installments due and payable before the loss of the car.

Question No. 12:

The City of Manila passed an ordinance banning provincial buses from the city. The
ordinance was challenged as invalid under the Public Service Acct by X who has 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 so under Section 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 Section 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.

1. May the reliance of X on Section 16(m) of the Public Service Act be sustained? Explain.
2. Was X correct in his contention that under Section 17 (j) of the public Service Act it is only
the Commission which can require compliance with the provision of the ordinance? Explain.

Answer:
1. No. The power vested in the public Service Commission under Section 16(m) is subordinate to
the authority of the City of Manila under Section 18(hh) of its revised charter, to superintend,
regulate or control the streets of the City of Manila.
2. No. The powers conferred by law upon the Public Service Commission were not designed or
supersede the regulatory power of local governments over motor traffic in the streets subject to
their control.

Question No. 13:

1. Robert is a holder of a certificate of public convenience to operate a taxicab service in Manila
and suburbs. One evening, one of his taxicab units was boarded by 3 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 Section 19(a) 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?

2. Pepay, a holder of a certificate of public convenience, failed to register 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 has the money and financial ability to buy new trucks
or repair the destroyed one. Are the reasons given by Pepay sufficient grounds to excuse her
from completing her units? Explain.

Answer:
1. a) 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.

b) Under Section 19(a) 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.

2. 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 authorized representatives.

Question No. 14:

JRT, Inc. entered into a contract with C. Co. of Japan to export anahaw fans valued at $23,000.
As payment thereof, a letter of credit was issued to JR, Inc. by the buyer. The letter of credit required
was issued to JR, Inc. by the buyer. The letter of credit required the issuance of an on-board bill of
lading and prohibited the transhipment. The President of JRT, inc. then contracted a shipping agent
to ship the anahaw fans through O Containers Lines, specifying the requirements of the letter of
credit. However, the bill of lading issued by the shipping lines bore the notation “received for
shipment” and contained an entry indicating transshipment in Hongkong. The President of JRT, Inc,
personally received and signed the bill of lading and despite the entries, he delivered the
corresponding check in payment of the freight.

The shipment was delivered at the port of discharge but he buyer refused to accept the
anahaw fans because there was no on-board bill of lading, and there was transshipment since the
goods were transferred in Hongkong from MV Pacific, the feeder vessel, to MV Oriental, a mother
vessel. The same cannot be considered transshipment because both vessels belong to the same
shipping company.

1. Was there transshipment? Explain.

2. JRT, Inc. further argued that assuming there was transshipment, it cannot be deemed to have
agreed thereto even if it signed the bill of lading containing such entry because it has 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.

Answer:
1. 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 2 vessels.

2. 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 binding contract.

Question No. 15:

A shipped 13 pieces of luggage through LG Airlines from Teheran to Manila as evidences by
LG Air Waybill which disclosed that the actual gross weight of the luggage was 180Kg. 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 174Kg. X adviced the airlines of the loss of one of the 13 pieces of luggage and
of the contents thereof. Efforts of the airlines to trace the missing luggage were fruitless. Since the
airlines 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 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 charger are paid by the passenger and the conditions of the contract as
set forth in the air waybill. Expressly subject the contract of the carriage of cargo to the Warsaw
Convention. May the allegation of LG Airlines be sustained? Explain.

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.

Question No. 16:

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 January 5, 1991, PREC issued free of
charge 10,000 shares to X, a lawyer who assisted in a court case involving PREC.

1. 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?
 2. 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?
3. Can not the shares issued to X be considered as watered stock?

Answer:
1. 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.

2. No. In a derivative suit, the action is instituted/ brought in the name of a corporation and the
reliefs are prayed for therein for the 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.

3. 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.

Question No. 17:

The AB Memorial Foundation, Inc. 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 provide for a board of trustees composed of the 5
incorporators, which is authorized to admit new members. The Articles of Incorporation also allow
the Foundation to receive donations from members. As of January 30, 1993, 60 members had been
admitted by the board of trustees.

1. Can the Foundation use the funds donated to it by its members for the purchase of food and
medicine for distribution to the victims of the Pinatubo eruption?
2. Can the Foundation operate a specialty restaurant that caters to the general public in order
to augment its funds?
3. One of the original trustees died and the other 2 resigned because they immigrated to the
United States. How will the vacancies in the board of trustees be filled?

Answer:
1. Yes, Sec. 36 (9) of the Corporation Code provides that as long as the amount of donation is
reasonable.

2. 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.

Question No. 18:

A purchased from S 150 cavans of palay on credit. A deposited the palay in W’s warehouse.
W issued to A a negotiable warehouse receipt in the name of A. thereafter, A negotiated the receipt
to B who purchased the said receipt for value and in good faith.

1. Who has a better right to the deposit, S, the unpaid vendor, or B, the purchaser of the receipt
for value and in good faith? Why?
 2. When can the warehouseman be obliged to deliver the palay to A?

Answer:
1. B has a better right than S. the right of the unpaid seller, S, to the goods was defeated by the act
of A in endorsing the receipt to B.

2. The warehouseman can be obliged to deliver the palay to A if B negotiates back the receipt to A.
in that case, A becomes a holder again of the receipt, and A can comply with Sec. 8 of the
Warehouse Receipts Law.

Question No. 19:

Under the Articles of Incorporation of Manila Industrial Corporation, its principal place of
business shall be in Pasig, Metro Manila. The principal corporate offices are at the Ortigas Center,
Pasig, Metro Manila while its factory processing leather products is in Manila. The corporation holds
its annual stockholder’s meeting at the Manila Hotel in Manila and, its board of directors’ meeting at
a hotel in Makati, Metro Manila. The by-laws are silent as to the place of meetings of the
stockholders and the directors.

1. Who shall preside at the meeting of the directors?

2. Can Ting, a stockholder, who did not attend the stockholder’ annual meeting in Manila,
question the validity of the corporate resolutions passed at such meeting?
3. Can the same stockholder question the validity of the resolutions adopted by the board of
directors at the meeting held in Makati?

Answer:
1. 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.

2. 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, Metro Manila, the holding of the annual stockholders’
meeting in Manila is proper.

3. No. The law allows the Board of Directors to hold its meeting anywhere in the Philippines.
The holding of the board meeting in Makati was proper and the validity of the resolution
adopted by the Board in that meeting cannot be question.

Question No. 20:

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 Company for P350,000. Subsequently, she again got an insurance
contract with RSI for P1 M and then from EIC for P200,000. A fire of unknown origin gutted the
store of the partnership. Julie filed her claims with the 3 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 coverage and that she was not informed about the
requirement that such other or additional insurance should be stated in the policy.
1. Is the contention of Julie tenable? Explain.
2. May she recover on her fire insurance policies? Explain.

Answer:
1. No. An insured is required to disclose the other insurances covering the subject matter of
the insurance being applied for.
2. No, because she is guilty of violation of a warranty/ condition.
 1994 BAR EXAMINATION

Question No.1:
1. What is your understanding of a “no fault indemnity” clause found in an insurance policy?
2. Distinguish co-insurance from re-insurance.
3. In letters of credit in banking transactions, distinguish the liability of a confirming bank from a
notifying bank.

Answer:
1. Under the “no fault indemnity” clause any claim for the 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 P15,000, provided they are under oath,
the following proofs shall be sufficient:

a) Police report of the accident; and

b) Death certificate and evidence sufficient to establish the proper payee; or
c) Medical report and evidence of medical or hospital disbursement in respect of which refund
is claimed.

Claim may be made against one motor vehicle only.

2. 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 reinsurance is an insurance
against liability which the original insurer may incur in favor of the original insured.

3. In case anything wrong happens to the letter of credit, a confirming bank incurs liability for the
amount of the letter of credit, while a notifying bank does not incur any liability.

Question No. 2:
1. 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”.
2. In Securities Law, what is a “shortswing” transaction.
3. In “insider trading”, what is a “fact of special significance”?

Answer:
1. 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.

2. A “shortswing” is a transaction where a person buys securities and sells or disposes of the same
within a period of 6 months.
3. In “insider trading”, a “fact of special significance” is, in addition to being 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.

Question No. 3:
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:

1. What are the effects of crossing a check?

2. Whether as second indorser and holder of the crossed check, is it a holder in due course?
3. Whether Po’s defense of lack of consideration as against Jose is also available as against
Excel?

Answer:
1. The effects of crossing a check are:

a) The check is for deposit only in the account of the payee.

b) The check may be indorsed only once in favor of a person who has an account with the bank.
c) 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.

2. 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, prevented Excel from
becoming a holder in due course, as such failure or refusal constituted bad faith.

3. Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press
can set up against Jose.

Question No. 4:
Gemma drew a check on Septmeber 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.

1. What is meant by “unreasonable time” as applied to presentment?

2. Is Gemma liable to the holder?

Answer:
1. 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.
2. No. Aside from the check being already stale, Gemma is also discharged from liability under the
check, being a drawer and a person whose liability is secondary, 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 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.

Question No. 5:
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.

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.

1. Is Celeste barred under the Flag Law from taking part in bidding to supply the government?
2. Did Celeste and Matilde violate the Anti-Dummy Law?
3. Did Celeste and Matilde violate the Retail Trade Nationalization Law? Explain.

Answer:
1. 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.
2. 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.
3. 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 engage in retail trade. Besides, Matilde’s sale of the asbestos
products to Celeste, being wholesale, the transaction is not covered by the Retail Trade Law.

Question No, 6:
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 decoration, 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:
1. Whether the intended sale is “bulk sale”.
2. How can it protect itself from future claims of creditors of Stanrus.

Answer:
1. Yes. The sale involves all fixtures and equipment, not in the ordinary course of trade and the
regular prosecution of business of Stanrus, Inc.

2. 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.

Question No. 7:
In a civil suit, the Court ordered Benjie to pay Nat P500,000. To execute the judgment, the
sheriff levied upon Benjie’s registered property (a parcel of land and the building thereon), and sold
the same at public auction to Nat, the highest bidder. The latter, on March 18, 1992, registered with
the Register of Deeds the certificate of sale issued to him by the sheriff. Meanwhile, on January 27,
1993, Benjie insured with Garapal Insurance for P1 M the same building that was sold at public
auction to Nat. Benjie failed to redeem the property by March 18, 1993.

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.

1. Is Garapal Insurance legally justified in refusing payment to Benjie?

2. Is Nat entitled to collect on the insurance policy?

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.

2. No. While at the time of the loss he has 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.

Question No. 8:
Raul’s truck bumped the car owned by Luz. The car was insured by Cala Insurance. For the
damage caused, Cala paid Luz P5,000 in amicable settlement. Luz executed a release claim,
subrogating Cala to all her rights against Raul. When Cala demanded reimbursement from Raul, the
latter refused saying that he had already paid 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. Since Cala paid P5,000 only, Luz contends that she was entitled to go
after Raul to claim the additional P4,500.

1. Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?

2. May Cala recover what it has paid Luz?

Answer:
1. No. Luz executed a release in favor of Raul.
2. 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.

Question No. 9:
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.

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 2 years and prior to the
commencement of the action.

Is the contention of the beneficiaries tenable?

Answer:
No. The incontestability clause does not apply. The insured died within less than 2 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.

Question No. 10:

Mariter, 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 Mariter to the provincial hospital where she was confined and
treated.

Mariter wants to sue the bus company for damages and seeks your advice whether she can
legally hold the bus company liable?

Answer:
Mariter cannot legally hold the bus company liable. There is no showing that any such
incident previously happened so as to impose an obligation on the 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.
Question No. 11:
Toni, a copra dealer, loaded 1,000 sacks of copra on board the vessel M/V 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”

1. What do you understand of the “rule” invoked by Ichi?

2. Are there exceptions to the “limited liability rule”

Answer:
1. By “limited liability rule” is meant that the liability of a ship owner 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.

2. 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.

Question No. 12:

Angelene is a customer of Meralco Electric Company (MECO). Because of the abrupt rise of
the 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 5:00pm 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 when there is a bona fide and just dispute as to the amount due as her electric
consumption rate.

Is Angelene’s contention valid?

Answer:
No. Angelene’s only legal recourse in this case was to pay the electric bill under protest. Her
failure to do so justified Meralco to cut the electric service.

Question No. 13:

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?
Answer:
No. a private corporation may be created only under the Corporation Code. Only public
corporation may be created under a 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.

Question No. 14:

Victor was employed in MAIA Corporation. He subscribed to P1,500 shares of the
corporation at P100 per share or a total of P150,000. He made an initial down payment of P37,500.
He was appointed President and General Manager. Because of his disagreement with the Board of
Directors, 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. There was no call or notice for
the payment of the unpaid subscription. Victor questioned the set-off.

1. May MAIA set-off unpaid subscription with Victor’s claim for salaries?
2. Would your answer be the same if indeed there had been a call for the unpaid subscription?

Answer:
1. No. MAIA cannot set-off the unpaid subscription with Victor’s claim for salaries. The unpaid
subscription is not yet due as there is no call.

2. 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.

Question No. 15:

Because of disagreement with the Board of Directors and a threat by the Board to expel
her for misconduct and inefficiency, Carissa offered in writing to resign as President and Member of
the Board of Directors, and to sell to the company all her shares therein for P300,000. Her offer to
resign was “effective as soon as my shares are fully paid”. At its meeting, the Board of Directors
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 Board Resolution
in a letter agreement to which she affixed her consent. The Company’s new President signed the
promissory note. After paying 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?

Answer:
a) No. the Labor Arbiter has no jurisdiction. This is not a labor case, involving employer-employee
relationship.
b) No. The RTC has no jurisdiction over this case which involves intra-corporate controversy.

c) Yes. The SEC has jurisdiction over this case. The case is between a stockholder and a corporation
of which he is a stockholder, and the dispute arose out of such relationship. Moreover, the
question whether or not the transaction falls under the right of appraisal so as to make the
withdrawal legal, properly falls under the SEC jurisdiction.

Question No. 16:

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 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 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 the said
shares.” It is silent as to pricing.

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 in the By-Laws.

Question No. 17:

Miguel, a special customs agent is charged before the Ombudman 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.

Miguel moved to quash the subpoenas arguing that they violate the Law on Secrecy of Bank
Deposits. In addition, he contends that the subpoenas are in the nature of “fishing expedition” or
“general warrants” and are constitutionally impermissible with respect to private individuals who
are not under investigation.

Is Miguel’s contention tenable?

Answer:
No. Miguel’s contention is not tenable. The inquiry into illegally acquired property extends
to cases where such property is concealed by being held by or recorded in the 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 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.

Question No. 18:

The Victoria Hotel chain reproduces videotapes, distributes the copies thereof to its hotels
and makes them available to hotel guests for viewing in the hotel guest rooms. It charges a separate
normal fee for the use of the videotape player.

1. Can the Victoria Hotel be enjoined for infringing copyrights and held liable for damages?
2. Would it make any difference if Victoria Hotel does not charge any fee for the use of the
videotape?

Answer:
1. 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.
2. No. The use if the videotapes is for business and not merely for home consumption.

Question No. 19:

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 xxx to a vessel of which GIGI is the absolute owner.” The chattel mortgage was
registered with the Philippine Coast Guard pursuant to PD No. 1521. Gigi defaulted and had a total
accountability of P3 M. But JOJO could not foreclose the mortgage on the vessel because it sank
during a typhoon.

Meanwhile, Lutang Corporation which rendered salvage for refloating the vessel sued Gigi.

Whose lien should be given preference, that of JOJ or of Lutang?

Answer:
Lutang Corporation’s lien should be given preference. The lien of JOJO by virtue of a loan on
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.

Question No. 20:

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 Philippine
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?
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 include
briefs and underwear which are different products protected by Laberge’s trademark.

JG can register the trademark “PRUTE” to cover its briefs and underwear.

1995 BAR EXAMINATION

Question No. 1:
1. What requirements must be met before a certificate of public convenience may be granted
under the Public Service Act?

2. What is the prescriptive period for actions involving lost or damaged cargo under the Carriage
of Goods by Sea Act?

3. 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 or special significance with respect to the issuer or the security that is
not generally available, without disclosing such fact to the other party.

a. What does the term “insider” mean as used in the Revised Securities Act?
b. When is a fact considered to be “of special significance” under the same Act?
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?

Answer:
1. The following are the requirements for the granting of a certificate of public convenience, to wit:

a) 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 or
paid-up capital of which must belong to citizens of the Philippines.
b) The applicant must prove public necessity.
c) The applicant must prove that the operation of the public service proposed and the
authorization to do business will promote the public interest in a proper and suitable
manner.
d) The applicant must be financially capable of undertaking the proposed service and
meeting the responsibilities incident to its operation.

2. One (1) year after delivery of the goods or the date when the goods should have been delivered.

3. a) “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 facts is
such an insider.

b) 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 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.

c) The person may be liable to (1) a fine of not less than P5,000 nor more than P500,000, 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 offender 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.

Question No. 2:
Ronald Sham doing business under the name of SHAMRON Macineries (SHAMRON) sold to
Turtle Mercantile (TURTLE) a diesel farm tractor. In payment, TURTLE’s President and Manager
Dick Seldon issued a check for P50,000 in favor of SHAMRON. A week after, TURTLE sold the tractor
to Briccio Industries (BRICCIO) for P60,000. BRICCIO discovered that the engine of the tractor was
reconditioned so he refused to pay TURTLE. As a result, Dick Seldon ordered “stop payment” of the
check issued to SHAMRON.

SHAMRON sued TURTLE and Dick Seldon. SHAMRON obtained a favorable judgment holding
co-defendants TURTLE and Seldon jointly and severally liable.

Comment on the decision of the trial court. Discuss fully.

Answer:
The trial court erred in holding Dick, President and General Manager of Turtle, jointly and
severally liable with TUTRTLE.

In issuing the check issued to SHAMRON and, thereafter, 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.

Question No. 3:
Chito Santos is a director of both Platinum Corporation (PLATINUM) and KWIK Silver
Corporation (KWIK). He owns 1% of the outstanding capital stock of PLATINUM and 40% 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.

1. In order that the contract will not be voidable, what conditions will have to be complied with?
Explain.
2. If these conditions are not met, how may this contract be ratified? Explain.

Answer:
1. At the meeting of the Board of Directors of PLATINUM to approve the contract, Chito Santos
would have to make sure that:

a) His presence as director at the meeting is not necessary to constitute a quorum for such
meeting;
b) His vote is not necessary for the approval of the contract; and
c) The contract is fair and reasonable under the circumstances.
 At the meeting of the Board of Directors of KWIK to approve the contract, Chito would have to
make sure that:

a) There is no fraud involved; and

b) The contract is fair and reasonable under the circumstances.

2. If the conditions relating to 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.

Question No. 4:
Stikki Cement Corporation (STIKKI) 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 used in the
manufacture of cement.

1. What corporate approvals or votes are needed for the proposed investments? Explain.
2. Describe the procedure in securing these approvals.

Answer:
1. Unless the power plant and the concrete road project are reasonably necessary to the
manufacture of cement by STIKKI (and they do not appear to be so), then the approval of the
said projects by a majority of the Board of Directors 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 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 Board of Directors would
be necessary.

2. a) The procedure in securing the approval of the Board of Directors is as follows:

i) A notice of meeting of the Board should be sent to all the directors. The notice
should state the purpose of the meeting.
ii) At the meeting, each of the project should be approved by a majority of the Board
(not merely a majority of those present at the meeting).

b) The procedure in securing the approval of the stockholders is as follows:

i) 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.
ii) At the meeting, each of the projects should be approved by the stockholders
representing at least 2/3 of the outstanding capital stock.

Question No. 5:
 Robert, Rey and Ben executed a joint venture agreement to form a close corporation under
the Corporation Code the outstanding capital stock of which the 3 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
which to invest the funds of the corporation. Robert wants the deadlock broken.

1. What are the remedies available to Robert under the Corporation Code to break the deadlock?
Explain.
2. 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.

Answer:
1. Robert can petition the SEC to arbitrate the dispute, with such powers as provided in the
Corporation Code.
2. The SEC can appoint a rehabilitation receiver or a management committee.

Question No. 6:
On October 12, 1993, Chelsea Straights (CHELSEA), a corporation engaged in the
manufacture of cigarettes, ordered from Moises Lim 2,000 bales of tobacco. CHELSEA issued to
Moises Lim 2 crossed checks postdated March 15, 1994 and April 15, 1994 in full payment therefor.
On January 19, 1994 Moises Lim sold to Dragon Investment House (DRAGON) at a discount the 2
checks drawn by CHELSEA in his favor.

Moises Lim failed to deliver the bales of tobacco as agrees despite CHELSEA’s demand.
Consequently, on March 1, 1994 CHELSEA issued a “stop payment” order on the 2 checks issued to
Moises Lim. 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.

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 by Moises Lim. 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 2,000
bales of tobacco.

Question No. 7:
Alex issued a negotiable promissory note (PN) payable to Benito or order in payment of
certain goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later Alex
found the goods to be defective. While in 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.

1. What are the rights of Felix, if any, against Alex. Bento, Celso and Edgar? Explain.
2. Does Celso have nay right against Alex, Benito and Felix? Explain.

Answer:
1. 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.

2. Celso has the right to collect from Alex and Benito. Celso is a party subsequent to the two.
However, Celso has no right to claim against Felix who is a party subsequent to Celso.

Question No. 8:
Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value of
P500,000. 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”. 6 months later, Henry 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 gun at his temple and pulled the trigger. The gun fires and Henry
slumped dead on the floor.

Henry’s wife, Beverly, as the designated beneficiary, sought to collect under the policy. Sun-
Moon rejected her claim on the ground that the death of Henry was not accidental. Beverly sued the
insurer.

Decide. Discuss fully.

Answer:
Beverly can recover the proceeds of the policy from the insurer. The death of the insured
was not due to suicide or willful exposure to needless peril which are the excepted risks. The
insured’s act was purely on 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.

Question No. 9:
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.

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.

Question No. 10:

1. Distinguish between suspension of payments and insolvency.
2. Distinguish between voluntary insolvency and involuntary insolvency.

Answer:

1. In suspension of payments, the debtor is not insolvent. He only needs time within which to
convert his asset/s into cash with which to pay his obligations when they fall due. In the case of
insolvency, the debtor is insolvent, that is, his assets are less than his liabilities

2. 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.

Question No. 11:

Michael withdrew authority funds of the partnership in the amounts of P500,000 and used
US$50,000 for services he claims he rendered for the benefit of the partnership. He deposited the
P500,000 in his personal peso current account with Prosperity Bank and the US$50,000 in his
personal foreign currency savings account with Eastern Bank.

The partnership instituted an action in court against Michael, Prosperity Bank and Eastern
Bank 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 Bank to produce the records of
Michaels’s peso current account, and Eastern Bank to produce the records of his foreign currency
savings account.

Can the court compel Prosperity Bank and Eastern Bank to disclose the bank deposits of
Michael? Discuss fully.

Answer:
Yes, as far as the peso account is concerned. Section 2 of RA No. 1405 allows the disclosure
of bank deposits in case where the money deposited is the subject matter of the 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.

Question No. 12:

Global KL Malaysia (GLOBAL), a 100% Malaysian-owned corporation, desires to build a
hotel beach resort in Samal Island, Davao City, to take advantage of the increased traffic of tourists
and boost the tourism industry of the Philippines.

1. Assuming that GLOBAL has US$100 Million 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.
2. May GLOBAL be allowed to manage the hotel beach resort? Explain.
3. May GLOBAL be allowed to operate restaurants within the hotel beach resort? Explain.

Answer:
1. GLOBAL can secure a lease on the land. As a corporation with a Malaysian nationality, GLOBAL
cannot own the land.
2. Yes, GLOBAL can manage the hotel beach resort. There is no law prohibiting it from managing a
resort.
3. GLOBAL may be allowed to operate restaurants within the beach resort. This is part of the
operation of the resort.

Question No. 13:

1. Two vessels coming from 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.
2. If it cannot be determined which of the vessels was at fault resulting in the collision, which party
should bear the damage caused to the vessels and the cargoes? Explain.
3. Which party should bear the damage to the vessels and the cargoes if the cause of the collision
was a fortuitous event? Explain.

Answer:
1. Each vessel must bear its own damage. Both of them are at fault.
2. Each of them should bear their respective damages. Since it cannot be determined as to which
vessel is at fault. This is under the doctrine of “inscrutable fault”.
3. No party shall be held liable since the cause of the collision is fortuitous event. The carrier is not
an insurer.

Question No. 14:

M. Dizon Trucking (DIZON) entered into a hauling contract with Fairgoods Corporation
(FAIRGOODS) whereby the former bound itself to haul the latter’s 2,000 sacks of soya bean meal
from Manila Port Area to Calamba, Laguna. To carry out faithfully its obligation DIZON
subcontracted with Enrico Reyes the delivery of 400 sacks of the soya bean meal. Aside from the
driver, three male employees of Reyes rode on the truck with the cargo. While the truck was on its
way to Laguna two strangers suddenly stopped the trucks and hijacked the cargo. Investigation by
the police disclosed that one of the hijackers was armed with a bladed weapon while the other was
unarmed. For failure to deliver the 400 sacks, FIARGOODS sued Dizon for damages. DIZON in turn
set up a third-party complaint against Reyes which the latter resisted 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.

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 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.

Question No. 15:

1. What intellectual property rights are protected by copyright?
2. Solid Investment House (SOLID) commissioned Mon Blanco and his son Steve, both noted artist,
to paint a mural for the Main Lobby of the new building of SOLID for a contract price of P2 M.

a) Who owns the mural? Explain.

b) Who owns the copyright of the mural? Explain.

Answer:
1. Section 5 of PD 49 provides that Copyright shall consist the exclusive right:

a) To print, reprint, publish, copy, distribute, multiply, sell and make photographs, photo
engravings, and pictorial illustrations of the works;
b) 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 if it be a model or design;
c) 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;
d) To make any other use or disposition of the work consistent with the laws of the land.

2. a) 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 P2 M.

b) Unless there is a stipulation to the contrary in the contract, the copyright shall belong in joint
ownership to SOLID and Mon Blanco and his son Steve.

Question No. 16:

Mario Guzman issued to Honesto Santos a check for P50,000 as payment for a second-hand
car. Without the knowledge of Mario, Honesto changed the amount to P150,000 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 P150,000 from the account of Mario. Honesto withdrew the
amount of P150,000 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 liabilities of the parties concerned.

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.

1996 BAR EXAMINATION

1. a) What are the requisites of a negotiable instrument?

b) When is notice of dishonor not required to be given to the drawer?
c) What constitutes a holder in course?
 d) What are the effects of crossing a check?

Answer:
a) The requisites of a negotiable instrument are as follows:

1. It must be in writing and signed by the maker or drawer;

2. It must contain an unconditional promise or order to pay a sum certain in money;
3. It must be payable to order or to bearer; and
4. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

b) Notice of dishonor not required to be given to the drawer in any of the following cases:

1. Where the drawer and the drawee are the same person;
2. When the drawee is a fictitious person or a person not having capacity to contract;
3. When the drawer is the person to whom the instrument is presented for payment;
4. Where the drawer has no right to expect or require that the drawee or acceptor will
honor the instrument;
5. Where the drawer has countermanded payment

c) A holder in due course is one who has taken the instrument under the following conditions:

1. That it is complete and regular upon its face;

2. That he became a holder of it before it was overdue and without notice that t had been
previously dishonored, if such was the fact;
3. That he took it in good faith and for value;
4. 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.

d) The effects of crossing a check are as follows:

1. The check may not be encashed but only deposited in a banks;

2. The check may be negotiated only once to one who has an account with a bank;
3. 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 if he has received the
check pursuant to that purpose, otherwise he is not a holder in due course.

2. a) On March 1, 1996, Pentium Company ordered a computer from CD Bytes, and issued a
crossed check in the amount of P30,000 post-dated March 31, 1996. Upon receipt of the check,
CD Bytes discounted the check with Fund House.

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.

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.

b) Eva issued to Imelda a check in the amount of P50,000 post-dated September 30, 1995, as
security for a diamond ring to be sold on commission. On September 15, 1995, Imelda
negotiated the check to MT Investment which paid the amount of P40,000 to her.

Eva failed to sell the ring, so she returned it to Imelda on September 19, 1995. Unable to retrieve
her check, Eva withdrew her funds from the drawee bank. Thus, when MT Investment presented
the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her,
Eva raised the defense of absence of consideration, the check having been issued merely as
security for the ring that she could not sell.

Does Eva have a valid defense? Explain.

Answer:

No, Eva does not have a valid defense. First, MT Investment is a holder in due course
and, as such, holds the post dated 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 only if the latter was a 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 Law and
none of those grounds are available to Eva. The latter may not unilaterally discharge herself
from her liability by mere expediency of withdrawing her funds from the drawee bank.

3. a) Nora applied for loan of P100,000 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.

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.
 b) William issued to Albert a check for P100,000 drawn on XM Bank. Albert alerted 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 payment through the Clearing House, XM Bank honored it. Thereafter,
Albert withdrew the P210,000, and closed his account.

When the check was returned to him after a month, William discovered the alteration. XM Bank
recredited P210,000 to William’s current account, and sought reimbursement from ND Bank.
ND Bank refused, claiming that XM Bank failed to return the altered check to it within the 24-
hour clearing period.

Who, as between, XM Bank and ND Bank, should bear the loss? Explain.

Answer:
ND Bank should bear the loss if XM Bank returned the altered check to ND Bank
within 24 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 William
immediately advised XM Bank of such fact and that the latter promptly notified ND Bank
thereafter. CB Circular No. 9, as amended, on which the decisions of the Supreme Court, in
the Hongkong & Shanghai Banking Corporation v. People’s Bank & Trust Co. and Republic
Bank v. CA, et al. were based was expressly cancelled and superseded by the CB Circular No.
317, dated December 23, 1970. The latter was in turn amended by CB Circular No. 580,
dated September 19, 1977. As to the altered checks, the new rules provide that the drawee
bank can still return them even after 4:00pm 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.

4. a) Juan procured a “non-medical” life insurance from Good Life Insurance. He designed 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 the part of Juan.

Will Petra’s suit prosper? Explain.

Answer:
No. Petra’s suit will not prosper (assuming that the policy of life insurance has been
in force for a period of less than 2 years from the date of its issue). The matters which Juan
failed to disclose was material and relevant to the approval and issuance of the insurance
policy. They would have affected Good Life’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 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.

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 rescindable by reason of the fraudulent
concealment or misrepresentation of Juan.

b) RC Corporation purchased 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.

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 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 imported.

5. a) 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 1 year after the rejection of the
claim.

After his building burned down, Robin filed his claim for fire loss with EFG. On February 28,
1994, EFG denied Robin’s claim. On April 3, 1994, Robin sought reconsideration of the denial,
but EFG reiterated its position. On March 20,1995, Robin commenced judicial action against
EFG.

Should Robin’s action be given due course? Explain.

Answer:
No, Robin’s action should not be given due course. His filing of the request for
reconsideration did not suspend the running of the prescriptive period of 1 year stipulated
in the insurance policy. Thus, when Robin commenced judicial action against EFG on March
20, 1995, his ability to do so had already prescribed. The 1 year period is counted from
February 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 destruction has not yet disappeared.

b) 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.

1. Is the contention of the insurer correct? Explain.

2. May the insurer be held liable with Cesar?

Answer:
1. 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.

2. 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 stated in the insurance policy, the principles underlying solidary
obligations would be violated.

6. a) What are the rights of a stockholder?

Answer:
The rights of a stockholder are as follows:

1. The right to vote, including the right to appoint a proxy;

2. The right to share in the profits of the corporation, including the right to declare stock
dividends;
3. The right to proportionate share of the assets of the corporation upon liquidation;
4. The right of appraisal;
5. The preemptive right to shares;
6. The right to inspect corporate books and records;
7. The right to elect directors;
8. Such other rights as may contractually be granted to the stockholders by the corporation
or by special law.

b) When may a corporate director, trustee or officer be held personally liable with the
corporation?

Answer:
 A corporate director, trustee or officer be held personally liable with the corporation
under the following circumstances:

1. When he assents to a patently unlawful act of the corporation;

2. When he acts in bad faith or with gross negligence in directing the affairs of the
corporation, or in conflict with the interest of the corporation, its stockholders or other
persons;
3. 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;
4. When he agrees to hold himself personally and solidarily liable with the corporation; or
5. When he is made, by specific provision of law, to personally answer for the corporate
action.

a) When may a corporation invest its funds in another corporation or business or for any other
purposes?

Answer:
A corporation may invest its funds in another corporation or business or for any
purpose other than the primary purpose for which it was organized when the said
investment is approved by a majority of the Board of Directors and such approval is ratified
by the stockholders representing at least 2/3 of the outstanding capital. 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.

b) May a corporation enter into a joint venture?

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 2 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.

7. a) Leonardo is the Chairman and President, while Raphael is a Director of NT Corporation. On

one occasion, NT Corporation, represented by Leonardo, and A Enterprises, a single
proprietorship owned by Raphael, entered into a dealership agreement whereby NT
Corporation appointed A Enterprises as exclusive distributor of its products in Northern Luzon.

Is the dealership agreement valid? Explain.

Answer:
The dealership agreement is voidable at the option of NT inasmuch as the facts do
not indicate that the same was approved by the Board of Directors of NT Corporation before
it was signed or, assuming such approval, that it was approved under the following
conditions:
 1. That the presence of Raphael, the owner of A Enterprises, in the meeting of the Board of
Directors at which the agreement was approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of Raphael was not necessary for the approval of the agreement;
3. That the agreement is fair and reasonable under the circumstances.

b) Arnold has in his name 1,000 shares of the capital stock of ABC Corporation as evidenced by
a stock certificate. Arnold delivered the stock 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.

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 to Steven or that the procedure for the effective
transfer of shares of stock set out in the by-laws of ABC Corporation, 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.

8. a) PR Corporation 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.

Answer:
Jaime’s contention is not correct. Jaime may own shares of stock in PR Corporation
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 a 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
stock do not represent specific corporate property.

b) Rodman, the President of TF Corporation 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 P50,000. A few days later, the Corporate Secretary of TF informed
Gregorio of the decision of the Board of Directors not to ratify the letter-offer. However, since
Gregorio had already paid the down payment, TF delivered the 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.

Answer:
No, there is no binding contract for the 5,000 bags of fertilizers. First, the facts do
not indicate that Rodman, the President of TF Corporation, was authorized by the Board of
Directors to enter into the said contract or that he was empowered to do so under some
provision of the by-laws of TF. The facts do not also indicate that Rodman has been clothed
with the apparent power to execute the contract or agreements similar to it. Second, TF has
specifically informed Gregorio that it has not ratified the contract for the sale of 5,000 bags
of fertilizer and that the delivery to Gregorio of 500 bags, which Gregorio accepted, is an
entirely new transaction.

9. a) E Corporation sold its assets to M, Inc. after complying with the requirements of the Bulk
Sales Law. Subsequently, one of the creditors of E Corporation tried to collect the amount due it,
but found out that E Corporation had no more assets left. The creditor then sued M, Inc. on the
theory that M, Inc. is a mere alter ego of E Corporation.

Will the suit prosper? Explain.

Answer:
The suit will not prosper. The sale by E Corporation 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 Corporation 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 stockholder. There is, therefore, no merger or consolidation
that took place. E Corporation continues to exist and remains liable to the creditor.

b) Richard owns 90% of the shares of the capital stock of GOM Corporation. On one occasion,
GOM Corporation, represented by Richard as President and General Manager, executed a
contract to sell a subdivision lot in favor of Tomas. For failure of GOM Corporation to develop
the subdivision, Tomas filed an action for rescission and damages against GOM Corporation and
Richard.

Will the action prosper? Explain.

Answer:
The action may prosper against GOM Corporation but definitely not against Richard.
Richard has a legal personality separate and distinct from that of GOM Corporation. If he
signed the contract to sell, he did so as the President and General Manager of GOM
Corporation and not in his personal capacity. Mere ownership by Richard of 90% of the
capital stock of GOM Corporation 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.

10. a) Define securities.

 Answer:
Stocks, bonds, notes, convertible debentures, warrants or other documents that
represent a share in a company or debt owed by a company or government entity. Evidences
of obligations to pay money or rights to participate in earnings and distribution of corporate
assets. Instruments giving to their legal 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.

b) What is the original and exclusive jurisdiction of the SEC?

Answer:
The SEC has original and exclusive jurisdiction over case involving:

1. Devices or schemes amounting to fraud and misrepresentation;

2. Controversies arising out of intra-corporate or partnership relations;
3. Controversies in the election or appointment of directors, officers, etc.;
4. Petitions to be declared in the state of suspension of payment.

11. a) In 1970, Magno joined AMD Corporation 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 Board of Directors considered him resigned from the company
due to loss of confidence.

Aggrieved, Magno filed a complaint in the SEC, questioning the validity of hi termination, and
seeking reinstatement to his former position, with back wages, 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 dismiss, arguing that the SEC has no jurisdiction over cases of
illegal dismissal, and has no power to award damages.

Should the motion to dismiss be granted? Explain.

Answer:
The motion to dismiss should be denied. The dismissal of Magno is a corporate act
as it resulted in his non-reelection to his position, and his non-acceptance of such dismissal
is an intra-corporate controversy. The fact that Magno sought payment of his back wages
and other benefits, as well as moral and exemplary damages and attorney’s fees in his
complaint for illegal dismissal, does not operate to prevent the SEC from exercising its
jurisdiction under PD 902-A. While the affirmative reliefs and monetary claims sought by
Magno may, at first glance, mislead one into placing the case under the jurisdiction of the
Labor Arbiter, a closer examination reveals that they are actually part of the perquisites of
his elective position, hence, intimately linked with his relations with the corporation.

b) Jennifer and Gabriel owned the controlling stocks in MFF Corporation and CLO, Inc., both
family corporations. Due to serious disagreements, Jennifer assigned all her shares in MFF
Corporation to Gabriel, while Gabriel assigned all his shares in CLO, Inc. to Jennifer.
Subsequently, Jennifer and CLO, Inc., filed a complaint against Gabriel and MFF Corporation in
 the SEC, seeking to recover the corporate records and funds of CLO, Inc., which Gabriel allegedly
refused to turn over, and which remained in the offices of MFF Corporation.

Is there an intra-corporate controversy in this case? Explain.

Answer:
Yes, there is an intra-corporate controversy in this case. The fact that, when the
complaint against Gabriel and MFF Corporation was filed with the SEC, Jennifer and CLO,
Inc. were no longer stockholders of MFF Corporation did not divest the SEC of its
jurisdiction over the case inasmuch as Jennifer was a former stockholder of MFF
Corporation and the controversy arose out of this relation.

12. a) With a capital of P92,000, Maria operates a stall in the public market. She manufactures soap
that she sells to the general public. Her common law husband, Ma Lee, who has a pending
petition for naturalization, occasionally finances the purchase of goods for resale, and assist in
the management of business.

Is there a violation of the Retail trade Law? Explain.

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 P5,000 then she is considered under Sec.4 (a) 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 Section 1 of the Retail Trade Law that only
Philippine nationals shall engage , directly or indirectly, in the retail business is inapplicable.
For this reason, the participation of Ma Lee in the management of the business would not be
a violation of the Retail Trade Law in relation to the Anti-Dummy Law.

b) EL, Inc., a domestic corporation with the foreign equity, manufactures electric generators,
and sells them to the following customers: (a) government offices which use the generators
during brownouts to render public service, (b) agricultural enterprises which utilize the
generators as back up in the processing of goods, (c) factories, and (d) its own employees.

Is EL engaged in retail trade? Explain.

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 (e.g. the government offices) and/or to produce or
manufacture goods which are in turn sold by them (e.g., the agricultural enterprises and
factories).
13. a) Define a common carrier?

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.

b) What is the test for determining whether or not one is a common carrier?

Answer:
The test for determining whether or not one is a common carrier is whether the
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.

14. a) AM Trucking, a small company, operates 2 trucks for hire on selective basis. It caters to only a
few customers, and its trucks do not make regular or scheduled trips. It does not even have a
certificate of public convenience.

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.

1. May Reynaldo hold AM liable as a common carrier? Explain.

2. May AM set up the hijacking as a defense to defeat Reynaldo’s claim?

Answer:
1. Reynaldo may hold AM liable as a common carrier. The facts that AM operates only 2
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 (i) does not distinguish between one whose principal business
activity is the carrying of persons or goods or both and one who does such carrying only
as an ancillary activity, (ii) 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 (iii) refrains
from the general public and one who offers services or solicits business only from a
narrow segment of the general population.

2. AM 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.

b) 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.

Answer:
Santiago may hold GL 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 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.

15. a) What is the distinction between infringement and unfair competition?

Answer:
The distinction between infringement (presumably of trademark) and unfair
competition are as follows:
1. Infringement of a trademark is the unauthorized use of a trademark, whereas unfair
competition is the passing off of one’s goods as those of another;
2. Fraudulent intent is unnecessary in infringement of trademark, whereas fraudulent
intent is essential in unfair competition;
3. 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.

b) What is the “test of dominancy”?

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; nor is it necessary that the infringing
label should suggest an effort to imitate. Similarity in size, form and color, while relevant, is
not conclusive.

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

In 1992, PK Company 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 Corporation? Explain.

 Answer:
PK may be held liable for unfairly competing against N Corporation. By
copying the design, shape and color of N’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 the trademark “Javorski” was registered
ahead of the trademark “Jordann”. Priority in registration is not material in an action
for infringement of trademark. The basis of an action for unfair competition is
confusing and misleading similarly in general appearance, not similarity of
trademarks.

16. Finding a 24-month payment plan attractive, Anjo purchased a Tamaraw FX from Toyota
Quezon City. He paid a down payment of P100,000, and obtained financing for the balance from
IOU Company. He executed a chattel mortgages over the vehicle in favor of IOU. When Anjo
defaulted, IOU foreclosed the chattel mortgage, and sought to recover the deficiency.

May IOU still recover the deficiency? Explain.

Answer:
IOU may no longer recover the deficiency. Under Article 1484 of the Civil Code, in a contract
of sale of personal property the price of which is payable in installments, the vendor may,
among several options, foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee’s failure to pay cover 2 or more 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 to foreclose the chattel mortgage under the circumstances is
premised on Anjo’s failure to pay 2 or more installment. The foreclosure would not have been
valid if it were not so.

17. ON June 16, 1995, Vicente obtained a writ of preliminary attachment against Carlito. The levy
on Carlito’s property occurred on June 25, 1995. On July 29, 1995, another creditor filed a
petition for involuntary insolvency against Carlito. The insolvency court gave due course to the
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.

Answer:
The judgment obtained by Vicente can be enforced independently of the insolvency
proceedings. Under Section 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 court shall
vacate and set aside any judgment entered in any action commenced within 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.

1997 BAR EXAMINATION

1. The Civil Code adopts the theory of cognition, while the Code of Commerce generally recognizes
the theory of manifestation, in the perfection of contracts. How do these two theories differ?

Answer:
 Under the theory of cognition, the acceptance is considered to effectively bind the offeror
only from the time it came to his knowledge. Under the theory of manifestation, the contract is
perfected at the moment when the acceptance is declared or made by the offeree.

2. The sole proprietor of a medium-size grocery shop, engaged in both wholesale and retail
transactions, sells the entire business “lock, stock 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, what
must be done by the parties so as to comply with the law?

Answer:
Yes. This is a sale of all the stock of goods, fixtures and entire business, not in the ordinary
course of business or trade of the vendor. Before receiving from the vendee any part of the
purchase price, the vendor must deliver to such vendee a written statement, duly sworn, of the
names and addresses of all creditors to whom said vendor may be indebted, together with the
amount of indebtedness due or owing, on the account of the goods, fixtures or business subject
matter of the bulk sale.

3. Juan was a stockholder of X Corporation. He owned a total of 500 shares evidenced by

Certificate of Stock No. 1001. He sold the shares to Pedro. After getting paid, Juan indorsede 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 not be located. The formalities prescribed by law for the
replacement of the “lost” certificate, Certificate 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 Pedro and Jose.
The Board of Directors of X Corporation invited you to enlighten them on these questions; viz:

a) If a suit were to be initiated in order to resolve the controversy between Pedro and Jose,
should the matter be submitted to SEC or to the regular courts?
b) Between Pedro and Jose, whom should the corporation so recognize as the rightful
stockholder?

How would you respond to the above queries?

Answer:
a) The matter should be submitted to the regular court. The controversy between Pedro and
Jose is not an intra-corporate controversy.

b) 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.

4. A, B and C are shareholders of XYZ Company. A has an unpaid subscription of P100,000, B’s
shares are fully paid up, while C owns only nominal but fully paid up shares and is a director
and officer. XYZ Company 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
Company, would you advice legal action against A, B and C?

Answer:

a) An action can be brought against A for P100,000 which is the amount of his unpaid
subscription. Since the corporation is insolvent, the limit of a stockholder’s liability to the
creditor is only up to the extent of his unpaid subscription.

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.

c) An action can be filed against C, not as a 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 damages sustained by the corporation, stockholders or other persons resulting
from gross negligence or bad faith in directing the affairs of the corporation.

5. The Board of Directors of a corporation, by a vote of ten in favor and 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., September 19, 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
September 23, 1997, he was informed by the Board of Directors that, unless due payment is
meanwhile received, he

a) Could no longer serve as a director of the corporation forthwith;

b) Would not be entitled to the cash and stock dividends which were declared and payable on
September 24, 1997; and
c) Could not vote in the stockholders meeting scheduled to take place on September 26, 1997.

Was the action of the Board of Directors on each of the foregoing matters valid?

Answer:
a) No. the period 30 days within which the stockholder can pay the unpaid subscription had
not yet expired.

b) 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.

c) No. the period of 30 days within which the stockholder can pay the unpaid subscription had
not yet expired.

6. The corporation, once dissolved, thereafter continues to be a body corporate for 3 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), the
corporate liquidation is not yet over, how, if at all, can a final settlement of the corporate affairs
be made?

Answer:
The liquidation can continue with the winding up. The members of the Board of Directors
can continue with the winding of the corporate affairs until final liquidation. They can act as
trustees or receivers for this purpose.

7. An employee of a large manufacturing firm earns a salary which is just a bit more than what he
need 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.

a) State which of the four accounts are deemed insured by the PDIC?
b) State which of the above accounts are covered by the Law on Secrecy of Bank Deposits.

Answer:
a) The P10,000 savings account and the P20,000 checking account are deemed insured by the
PDIC.

b) The P10,000 savings account and the P20,000 checking account are covered by the Law on
Secrecy of Bank Deposits.

8. Give the basic requirements to be complied with by the Central Bank before the Monetary Board
can declare a bank insolvent, order it closed and forbid it from doing further business in the
Philippines.

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 Central Bank, to wit:

a) There must be an examination by the head of the Department of Supervision or his

examiners or agents into the condition of the bank.
b) 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.
c) The head of said Department shall inform in writing the Monetary Board of such facts.
d) 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.
e) 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.

9. 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?

Answer:
Yes. A can be held liable to C, assuming that the latter gave notice of dishonor to A. this 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.

10. Can a bill of exchange or a promissory note qualify as a negotiable instrument if—

a) It is not dated; or
b) The day and month, but not the year of its maturity, is given; or
c) It is payable to “cash”; or
d) It names two alternatives drawees.

Answer:
a) Yes. Date is not a material particular required by Sec. 1, NIL, for the negotiability of an
instrument.
b) No. The time for payment is not determinable in this case. The year is not stated
c) Yes. Sec. 9(d), NIL, makes the instrument payable to bearer because the name of the payee
does not purport to be the name of any person.
d) A bill may not be addressed to two or more drawees in the alternative or in succession, to be
negotiable. To do so makes the order conditional.

11. 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.

a) If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument
against the drawer?
b) 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?

Answer:
a) 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.

b) 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 signature was forged by E cannot be held liable by F.
12. 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 non-payment of a debt.” Is he correct?

Answer:
No. Violation of a trust receipt is criminal as it is punished as estafa under Art. 315 of the
RPC. There is a public policy involved which is to assure the entruster with the reimbursement
of the amount advanced or the balance thereof for the goods subject of the trust receipt. The
execution of the trust receipt or the use thereof promotes the smooth flow of commerce as it
helps the importer or buyer of the goods covered thereby.

13. 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
September 7, 1991, the assured is killed in a plane crash. The insurance company denies the
claim for insurance proceeds and returns the premium paid.

Is the decision of the insurance company justified?

Answer:
Assuming that the incontestability clause does not apply because the policy has not been in
force for 2 years from 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 the
heart ailment, is material to the determination by the insurance company whether or not to
accept the application for insurance and to require the medical examination of the insured.

However, of the incontestability clause applies t the insurance policy covering the life of the
insured had been in force for 2 years from the issuance thereof, the insurance company would
not be justified in denying the claim for the proceeds of the insurance and in returning the
premium paid. In that case, the insurer cannot prove the policy void ab initio or rescindable by
reason of fraudulent concealment or misrepresentation of the insured.

14. a) 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?

b) 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?

Answer:
a) No. in property insurance, the beneficiary must have insurable interest in the property
insured. B does not have insurable interest in the house insured.
 b) Yes. In life insurance, it is 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.

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, h 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?

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.

16. 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
dismisses 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?

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.

17. Explain these two doctrines in Maritime accidents—

a) The Doctrine of Inscrutable Fault; and

b) The Doctrine of Limited Liability

Answer:
b) Under the “doctrine of inscrutable fault”, where fault is established but it cannot be
determined which of the 2 vessels were at fault, both shall be deemed to have been at fault.

c) 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.
18. 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?

Answer:
No. An intention to pirate is not an element of infringement. Hence, an honest intention is no
defense to an action for infringement.

19. Ritz bought a new car on installments which provided for an acceleration clause in the event of
default. To secure payment of the unpaid installment, as and when due, he constituted 2 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 installment. After Ritz defaulted on 3 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. Would the seller-mortgagee
be legally justified in foreclosing on this second chattel mortgage?

Answer:
No. the 2 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.

20. An insolvent debtor, after a 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 that survive.

Answer:
The 5 obligations of the insolvent debtor that survive are as follows:

1. Taxes and assessments due the government, national or local;

2. Obligations arising from embezzlement or fraud;
3. Obligation of any person liable with the insolvent debtor for the same debt, either as a
solidary co-debtor, surety, guarantor, partner, indorser or otherwise;
4. Alimony or claim for support; and
5. Debts not payable against the estate (such after-incurred obligations) of, or not included in
the schedule submitted by, the insolvent debtor.

1998 BAR EXAMINATION

1. a) What do you understand by a “bill of lading”?

b) Explain the two-fold character of a “bill of lading.”

Answer:
 a) A bill of lading may be defined as written acknowledgment 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.
b) A bill of lading has two-fold character, namely, (a) it is a receipt of goods to be transported;
and (b) it constitutes a contract of carriage of the goods.

2. 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 assured X that the suitcases would come in the next flight but they never did.

X claimed P2,000 for the loss of both suitcases, but the airline was willing to pay only P500
because the airline ticket stipulated that unless a higher value was declared, any claim for the
loss cannot exceed P250 for each piece of luggage. X however reasoned out that he did not sign
the stipulation and in fact had not even read it.

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.

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.

3. A severe typhoon was raging when the vessel SS Masdaam collided with the M/V Princess. It is
conceded that the typhoon was the major cause of collision, although there was a very strong
possibility that it could have been avoided if the captain of the SS Masdaam was not drunk and
the captain of the M/V Princess was not asleep at the time of the collisions.

Who should bear the damages to the vessels and their cargoes?

Answer:
The shipowners of the SS Masdaam and M/V Princess shall each bear their respective loss of
vessels.
For the losses and damages suffered by their cargoes, both shipowner are solidarily liable.

4. The Batong Bakal Corporation filed with the Board of Energy an application for a Certificate of
Public Convenience for 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?

Answer:
No. A certificate of public convenience may be granted to Batong Bakal Corporation, though
not possessing a legislative franchise, if it meets all the other requirements. There is nothing in
the law nor the Constitution, which indicates that a legislative franchise is necessary or required
 for an entity to operate as supplier of electric power and light to its factory and its employees
living within the compound.

5. a) How do you treat a negotiable instrument that is so ambiguous that there is doubt whether it
is a bill or a note?

b) 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?

Answer:
a) Where a negotiable instrument is so ambiguous that there is doubt whether it is a bill or
note, the holder may treat is either as a bill of exchange or a promissory note at his election.

b) 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 bearer, 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.

6. X draws a check against his current account with the Ortigas branch of Bonifacio Bank in favor
of B. Although X does not have sufficient fund, the bank honors the check when it is presented to
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.

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.

7. For the purpose of lending his name without receiving value therefor, 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.

a) May Y recover from Pedro if the latter interposes the absence of consideration?
b) Supposing under the same facts, Pedro pays the said P20,000, may he recover the same
amount from X?

Answer:
a) 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.
 b) If Pedro pays the said P20,000 to Y, Pedro can recover the amount from X. X is the
accommodated party or the party ultimately liable for the instrument. Pedro is only an
accommodation party. Otherwise, it would be unjust enrichment on the part of X if he is not
to pay Pedro.

8. 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 Napoleon proceed against Richard
Clinton for the note?

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 latter became a holder thereof. As such
holder, Napoleon can proceed against Richard Clinton.

9. a) What are the responsibilities and primary objectives of the Bangko Sentral ng Pilipinas?
b) What is the principal purpose of laws and regulations governing securities in the Philippines?

Answer:
a) The Bangko Sentral ng Pilipinas shall provide policy directions in the areas of money,
banking and credit. It shall have supervision over the operations of banks and exercise such
regulatory powers as provided in the Central Bank Act and other pertinent laws over the
operations of finance companies and non-bank financial institutions performing quasi-
banking functions, such as quasi-banks and institutions performing similar functions. The
primary objective of the BSP is to maintain price stability conducive to a balanced and
sustainable growth of the economy. It shall also promote and maintain monetary stability
and convertibility of the Peso.

b) The principal purpose of laws and regulations governing securities in the Philippines is to
protect the public against nefarious practices of unscrupulous brokers and salesmen in
selling securities.

10. 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 de la Cruz is married to Cynthia with whom he has
three legitimate children. He, however, designated Purita, his common-law-wife, as the
revocable beneficiary. Juan de la Cruz referred to Purita in his application and policy as the legal
wife.
 3 years later, Juan de la Cruz died. Purita filed her claim for the proceeds of the policy as the
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?

Answer:
The proceeds of the insurance policy shall be awarded to the estate of Juan. 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 relation, Purita
cannot be a donee of the deceased. Hence, she cannot also be his beneficiary.

11. a) 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?

b) May a person have photocopies of some pages of the book of Professor Rosario made without
violating the copyright law?

Answer:
a) Yes. Juan is liable for infringement of copyright. It is not necessary that Juan is aware that
the story of Manoling was protected by copyright. The work of Manoling is protected from
the time of its creation.

b) 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.

12. 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?

Answer:
Yes. The life insurance policy in question was issued on January 2, 1990. More than 2 years
had elapsed when Renato, the insured, died on March 1, 1992. The incontestability clause
applies.
13. 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?

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.
14. Luzon Warehouse Corporation received from Pedro 200 cavans of rice for deposit in its
warehouse for which a negotiable warehouse receipt was issued. While the goods were stored
in the said warehouse, Cicero obtained a judgment against Pedro for the recovery 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
sheriff’s order?

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 one who can comply with Section 8 of the Warehouse
Receipts law, namely: (1) surrender the receipt of which he is a holder; (2) willing to sign a
receipt for the delivery of the goods; and (3) 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.

15. a) Distinguish insolvency from suspension of payment.

b) Horacio opened a coffee shop using money borrowed from financial institutions. After 3
months, Horacio left for the USA with the intent of defrauding his creditors. While his liabilities
are P1.2 M, his assets, however are worth P1.5. M. May Horacio be declared insolvent?

Answer:
a) In insolvency, the liabilities of the debtor are more than his assets, while in 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.

b) No. Horacio may not be declared insolvent. His assets worth P1.5 M are more than his
liabilities worth P1.2 M.

16. In a complaint filed against XYZ Corporation, Luzon Trading Corporation allege 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 Corporation claimed to have suffered moral damages due to
besmirched reputation or goodwill as a result of Luzon Trading Corporation’s complaint.

a) May Luzon recover moral damages based on the allegations in the complaint?
b) May XYZ Corporation recover moral damages?

Answer:
 a) 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.

b) Yes. When a juridical person has a good reputation that is debased, resulting in social
humiliation, moral damages may be awarded. Moreover, goodwill can be considered an asset
of the corporation.

17. a) What is the nationality of a corporation organized and incorporated under the laws of a
foreign country, but owned 100% by Filipinos?

b) when is a foreign corporation deemed to be “doing business in the Philippines?”

Answer:
a) 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.

b) 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 by a foreign corporation to a domestic corporation for
every purchase shows an intention to continue transacting with the latter

18. The stockholders of People Power, Inc. (PPI) approved two resolutions in a special
stockholders’ meeting:

a) Resolution increasing the authorized capital stock of PPI; and

b) Resolution authorizing the Board of Directors 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.

a) Are the resolutions binding on the corporation and its stockholders including Jimmy
Morato, the dissenting stockholder?
b) What remedies, if any, are available to Morato?

Answer:
a) No. the resolutions are not binding on the corporation and its stockholders including Jimmy.
While these resolutions were approved by the stockholders, the directors’ approval, which is
required by law in such case, does not exist.
 b) Jimmy can petition the SEC to declare the 2 resolutions, as well as any and all actions taken
by the Board of Directors thereunder, null and void.

19. The Board of Directors of X Corporation, 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 Board of Directors.

Y, a stockholder holding sufficient shares to assure him of a seat in the Board, 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?

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 Board of Directors. 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 antagonistic to the other corporation, is
valid.

20. An insurance company is deluded into releasing a check to A for P35 M to pay for T-bills which
A claims to e en route on board an armoured truck from a government bank. The check is
delivered to A who deposits it to his account with XYZ Bank before the insurance company
realized 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 subpoenas
invoking secrecy of bank deposits under RA 1405, as amended. Can the Bank justifiably invoke
RA 1405 and (a) not respond to the writ and (b) quash for examination?

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 deposits except “in cases where the money deposited or
invested is the subject matter of litigation” nor will it matter whether the money was “swindled”.
1999 BAR EXAMINATION

1. 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 this additional duty, the current low price of
 sugar in the world, the current low price of sugar in the world market will surely pull the
domestic price—a situation that could spell the demise of the Philippine sugar industry.

a) Discuss the validity of this proposal to impose an additional levy on imported sugar.
b) Would the proposal be consistent with the tenets of the World Trade Organization (WTO)

Answer:
a) 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.

b) 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.

2. 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.

a) What tools are available to the stockholders to replenish capital?

b) Assuming that the corporation continues to operate even with depleted capital, would the
stockholders or the managers be solidarily liable for the obligations incurred by the
corporation? Explain.

Answer:
a) In the face of the refusal of the creditor-banks to grant more loans, the following are tools
available to the stockholders to replenish capital, to wit: (1) additional subscription to
shares of stock of the corporation by stockholders or by investors; (2) advances by the
stockholders to the corporation; (3) payment of unpaid subscription by the stockholders.

b) 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 and 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.

3. Debtor purchased a parcel of land from a realty company payable in 5 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.

5 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 bank 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.

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.

b) Who has a better claim to the house, the surety company or the lending investor? Explain.
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.

Answer:
a) 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 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.

b) 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 rights of third parties such as the lending investor despite registration of the
chattel mortgage.

c) No. The chattel mortgage over the house which was foreclosed did not affect the rights of
third parties like the lending investor. Since 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.

4. A businessman in the grocery business obtained from First Insurance an insurance policy for P5
M to fully cover his stocks-in-trade from the risk of fire.
 3 months later, 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 P5 M representing the full value of his goods.

First Insurance denied the claim because it discovered that at the time of the loss, the stock-in-
trade were mortgaged to a creditor who likewise obtained from Second Insurance Company fore
insurance coverage for the stocks at their full value of P5 M.

a) May the businessman and the creditor obtain separate insurance coverage over the same
stocks-in-trade? Explain.
b) First Insurance refused to pay claiming that double insurance is contrary to law. Is this
contention tenable?
c) Suppose you are the Judge, how much would you allow the businessman and the creditor to
recover from their respective insurers. Explain.

Answer:
a) 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.
b) 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. 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.

c) As judge, I would allow the businessman to recover his total loss of P5 M pesos 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.

5. Debtor Corporation and its principal stockholders filed with the SEC a petition for rehabilitation
and declaration of a state of suspension of payments under P.D. 902-A. The objective was for SEC
to take control of the corporation and all its assets and liabilities, earnings and 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.

a) Discuss the validity of the SEC order of suspension?

b) Discuss the effects of the SEC order of suspension on the judicial foreclosure proceedings
initiated by First Bank.
c) Would the order of suspension have any legal effect on the foreclosure proceedings initiated
by Second Bank? Explain.
d) Would the order of suspension have any effect on the suit filed by Third Bank? Explain.
e) What are the legal consequences of a rehabilitation receivership?
f) What measures may the receiver take to preserve the assets of Debtor Corporation?

Answer:
a) The SEC order of suspension of payment is valid with respect to the debtor corporation, but
not with respect to the principal stockholder. The SEC has jurisdiction to declare suspension
of payments with respect to corporations, partnership or associations, but not with respect
to individuals.

b) The SEC order of suspension of payment suspended the judicial proceedings initiated by
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.

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 owed 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.

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.

e) Under PD 902-A, the appointment of a rehabilitation receiver will suspend all actions for
claims against the corporation and the corporation will be placed under rehabilitation in
accordance with a rehabilitation plan approved by the Commission.

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.

6. On December 1, 1996, Borrower executed a chattel mortgage in favor of the bank to secure a
loan of P3 M. in due time the loan was paid.

On December 1, 1997, Borrower obtained another loan of P2 M 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 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 the 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.

a) Decide the case and ratiocinate.

b) Supposed the chattel mortgage was not registered, would its validity and effectiveness be
impaired? Explain.

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, it is not secured
by the mortgage.

b) Yes. The chattel mortgage is not valid as against any person, except the mortgagor, his
executors and administrators.

7. ABC Corporation has an authorized capital stock of P1 M 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.

a) Would Mr. X, a stockholder holding 4,000 shares, have pre-emptive rights to the remaining
10,000 shares?
b) Would Mr. X have pre-emptive rights to the 50,000 preferred shares?
c) Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will
the shares be offered?
d) 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?
 Explain your answers.

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 preemptive right to
subscribe to all issues or disposition of shares of any class, in proportion to their respective
shareholdings. The ruling in Benito v. Datu and Tan v. SEC to the effect that preemptive right
applies only to issuance of shares in connection with an increase in capital is no longer a
valid rule under the Corporation Code. The facts in those cases happened during the regime
of the old Corporation Law.

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.

c) The shares will be offered to existing stockholders, who are entitled to pre-emptive right, at
a price fixed by the Board of Directors, which shall not be less than the par value of such
shares.

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.

8. 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 your answer.
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.

Answer:
a) The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a
negotiable receipt was issued therefore. The rice cannot thereafter, while in 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 Company cannot be compelled to deliver the actual possession of
the rice until the receipt is surrendered to it or impounded by the court.

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 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 lien and
fees and other charges.
9. Borrower obtained a loan against the security of a mortgage on a parcel of land. While the
mortgage was subsisting, borrower leased for 50 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 1 year, title was consolidated in the name of the
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.

LDC countered that it had built on the mortgaged property with the prior knowledge of
mortgagee which had received formal notice of the lease.

a) How would you resolve the dispute between the mortgagee and LDC?
b) Is the mortgagee entitled to the lease rentals due from LDC under the lease agreement?

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. 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
mortgaged 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 Article 1678 of the Civil Code. 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.

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.

10. A check for P50,000 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.

Drawee bank refused to honor the check on ground that the serial number thereof had been
altered.
 XYZ Marketing sued drawee bank.

a) Is it proper for the drawee bank to dishonor the check for the reason that it had been
altered? Explain.
b) In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the
drawee bank as there was no privity between them. Drawee theorized that there was no
basis to make it liable for the check. Is this contention correct? Explain.

Answer:
a) No. The serial number is not a material particular of the check. Its alteration does not
constitute material 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.

11. 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.

a) What would happen to the absorbed corporation? Must the absorbed corporation
undertake dissolution and the winding up procedures? Explain your answer.
b) Pending the approval of the merger by the SEC, may the surviving corporation already
institute suits to collect all receivables due to the absorbed corporation from its customers?
Explain your answer.
c) 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 were 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.

Answer:
a) No. There is no need for the absorbed corporation to undertake dissolution and winding up
procedure. As a result of the merger, the absorbed corporation is automatically dissolved
and its assets and liabilities are acquired and assumed by the surviving corporation.

b) No. The merger does not become effective until and unless approved by the SEC. before the
approval by the SEC of the merger, the surviving corporation has no legal personality with
respect to receivables due to the absorbed corporation.

c) 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 Section 80 of the Corporation Code
 which does not make any distinction as to the assets and liabilities of the absorbed
corporation that the surviving corporation would inherit.

12. Various buyers of lots in a subdivision brought actions to compel either or both the developer
and the bank to release 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.

a) May the bank dispossess prior purchasers of individual lots or, alternatively, require them to
pay again for the paid lots? Discuss.
b) What are the rights of the bank vis-aà -vis those buyers with remaining unpaid installments?
Discuss.

Answer:
a) No. The bank may not dispossess the prior purchasers of the individual lots, much less
require them to pay for the paid 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.

13. 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 principle 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?

a) That the stipulated interest rate is excessive and unconscionable?

Answer:
The rate of interest of 5.5% per month is excessive and unconscionable.

a) The interest cannot be considered usurious. The Usury Law has been suspended in its
application, and the interest rates are made “floating”.
14. 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-owner and the captain
as the typhoon came earlier and overtook the vessel. The vessel sank and a number of
passengers disappeared with it.

Relatives of the missing passengers claimed damages against the shipowner. The shipowner set
up the defense that under the doctrine of limited liability, his liability was co-extensive with his
interest in the vessel. As the vessel was totally lost, his liability had also been extinguished.

a) How will you advice the claimants? Discuss the doctrine of limited liability in maritime law.
b) Assuming that the vessel was insured. May the claimants go after the insurance proceeds?

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.

2000 BAR EXAMINATION

1. a) What is a joint account?

b) Distinguish joint account from partnership.
 Answer:
a) 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.

b) The following are the distinctions between joint account and partnership:
1. A partnership has a firm name while a joint account has none and is conducted in the
name of the ostensible partner.
2. 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.
3. While a partnership has a common fund, a joint account has none.
4. While in a partnership, all general partners have the right of management, in a joint
account, the ostensible partner manages its business operations.
5. While liquidation 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.

2. 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).
Is the opposition of GP and the bank valid? Explain.

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.

3. 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 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.

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 manufactures 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.

4. S stored hardware materials in the bonded warehouse of W, a licensed warehousemen under

the General Bonded Warehouse Law (Act 3893 as amended). W issued the corresponding
warehouse receipt in the form he ordinarily uses for such purpose in the course of his business.
All the essential terms required under Section 2 of the Warehouse Receipts Law (Act 2137 as
amended) are embodied in the form. In addition, the receipt issued to S contains a stipulation
that W would not be responsible for the loss of all or any portion of the hardware materials
covered by the receipt even if such loss is caused by the negligence of W or his representatives
or employees. S endorsed and negotiated the warehouse receipt to B, who demanded delivery of
the goods. W could not deliver because the goods were nowhere to be found in his warehouse.
He claims he is not liable because of the free-from-liability clause stipulated in the receipt. Do
you agree with W’s contention? Explain.

Answer:
No. I do not agree with the contention of W. the stipulation that W would not be responsible
for the loss of all or any portion of the hardware materials covered by the receipt even if such
loss is caused by the negligence of W or his representative or employees is void. The law
requires that a warehouseman should exercise due diligence in the care and custody of the
things deposited in his warehouse.

5. a) MP bought a used cellphone from JR. JR preferred cash but MP is a friend so JR accepted MP’s
promissory note for P10,000. JR thought of converting the note into cash by endorsing it to his
brother KR. The promissory note is a piece of paper with the following hand-printed notation:
“MP WILL PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 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? Explain.

b) TH is an indorsee of a promissory note that simply states: “PAY TO JUAN TAN OR ODER 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 he rendered to SH, who in
turn received the note from Juan Tan as payment for a prepaid cellphone 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
NIL and therefore does not enjoy the rights and protection under the statute. TH asks for your
 advice specifically in connection with the note being undated and not mentioning a place of
payment and any consideration. What would your advice be?

Answer:
KR is right. The promissory note is not negotiable. It is not issued to order or bearer. There
is no word of negotiability contained therein. It is not issued in accordance with Section 1 of the
NIL.

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.

6. a) PN makes a promissory note for P5,000, 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 NIL. Who is
correct and why?

b) Can the payee in a promissory note be a “holder in due course” within the NIL? Explain your
answer.

Answer:
a) 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.

b) A payee in a promissory note cannot be a “holder in due course” within the meaning of the
NIL, because a payee is an immediate party in relation to the maker. The payee is subject to
whatever defenses, real or personal, available to the maker of the promissory note.

7. PN is the holder of a negotiable promissory note within the meaning of the NIL. 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 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.

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 cost of collection.

8. a) 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 Philippines? Explain.

b) BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the
PDIC is only 1/10 of BD’s deposit, he would like some protection for the excess by taking out an
insurance against all risk or contingencies of loss arising from any unsound or unsafe banking
practices including unforeseen adverse effects of the continuing crisis involving the banking and
financial sector in the Asian region. Does BD have an insurable interest within the meaning the
Insurance Code of the Philippines?

Answer:
a) 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 Philippines. 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.

b) 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, BD
will be damnified. He will suffer pecuniary loss of P400,000, that is, his bank deposit of half
a million pesos minus P100,000 which is the maximum amount recoverable from the PDIC.

9. a) Name at least 3 instances when an insured is entitled to a return of the premium paid.

b) What warranties are implied in marine insurance?

Answer:
a) Three instances when an insured is entitled to a return of premium paid are:

1. To the whole premium, if no part of his interest in the thing insured be exposed to any of
the perils insured against.
2. 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.
3. 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.

b) The following warranties are implied in marine insurance:

1. That the ship is seaworthy to make the voyage and/or to take in certain cargoes;
2. That the ship shall not deviate from the voyage insured;
 3. That the ship shall carry the necessary documents to show nationality or neutrality and
that it will not carry document which will cast reasonable suspicion thereon;
4. That the ship shall not carry contraband, especially if it is making voyage through
belligerent waters.

10. IS, is an elderly bachelor with no known relatives, obtained life insurance coverage for
P250,000 from Starbrite Insurance Corporation, an entity licensed to engage in the insurable
business under the Insurance Code of the Philippines. He also insured his residential house for
twice that amount with the same corporation. He immediately assigned all his rights to the
insurance proceeds to BX, a friend-companion living with him. 3 years later, IS died in a fire that
gutted his insured house 2 days after he had sold it. There is no evidence of suicide or arson or
involvement of BX in these events. BX demanded payment of the insurance proceeds from the 2
policies, the premiums for which IS had been faithfully paying during all the time he was alive.
Starbrite, refused payment, contending that BX had no insurable interest and therefore was not
entitled to receive the proceeds from IS’ insurance coverage on his life and also on his property.
Is Starbrite’s contention valid? Explain.

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’ 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.

11. a) X Company procured a group accident insurance policy for its construction employees
variously assigned to its provincial infrastructure projects. 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 an 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 a settlement check to the order of the 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
Company. Will the suit prosper? Explain.

b) X was riding a suburban utility vehicle (SUV) covered by a comprehensive motor vehicle
liability insurance (CMVLI) underwritten by FastPay Insurance Company when it collided with a
speeding bus owned by RM Travel, Inc. the collision resulted in serious injuries to X; Y, a
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 a CMVLI policy
issued by Dragon Insurance Corporation, X, Y and Z jointly sued RM Travel and Dragon
Insurance for indemnity under the Insurance Code of the Philippines. The lower court applied
 the “no-fault” indemnity policy of the statute, dismissed the suit against RM Travel, and ordered
Dragon insurance to pay indemnity to all three plaintiffs. Do you agree with the court’s
judgment? Explain.

Answer:
a) Yes. The suit will prosper. Y insurance Company is liable. X Company, through its executive,
PJ, acted as agent of Y Insurance Company. The latter is thus bound by the misconduct of its
agent. It is the usual practice in the group insurance business that the employer-policy
holder is the agent of the issuer.

b) 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 Insurance 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.

12. X has a Tamaraw FX among other cars. Every other day during the workweek, he goes to his
office in Quezon City using his Tamaraw FX and picks up friends as passengers at designated
points along the way. His passengers pay him a flat fee for the ride, usually P20 per person, one
way. Although a lawyer, he never bothered to obtain a license to engage in this type of income-
generating activity. He believes that he is not a common carrier within the purview of the law.
Do you agree with him? Explain.

Answer:
No. I do not agree with X. A common carrier holds himself out to the public as engaged in
the business of transporting persons or property from place to place, for compensation, offering
his services to the public generally. The fact that X has a limited clientele does not exclude him
from the definition of a common carrier. The law does not make any distinction between one
whose principal business activity is the carrying of persons or goods or both, and the one who
does such carrying only as an ancillary activity or in the local idiom, as a “sideline”

13. a) 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.

b) MV SuperFast, a passenger-cargo vessel owned by SF Shipping Company plying the inter-

island routes, was on its way to Zamboanga City from the Manila port when it accidentally, and
without fault or negligence of anyone on the ship, hit a huge floating object. The accident caused
damage to the vessel and loss of an accompanying crated cargo of passenger PR. In order to
lighten the vessel and save 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 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.

Answer:
a) No. the assertion of X Shipping Company is not valid. The total destruction of the vessel does
not affect the liability of the shipowner for repairs on the vessel completed before its loss.

b) 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 cost of repairs on the

vessel from the shippers.

14. a) MV Mariposa, one of five passenger ships owned by the Marina Navigation Company, 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 PAGASA
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 Navigation Company 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?

b) RC imported computer motherboards from the USA and had them shipped to Manila aboard
an ocean-going cargo ship owned by BC Shipping Company. When the cargo arrived at the
Manila seaport and 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
COGSA. What would your advise be?

Answer:
a) Yes. The contentions of Marina Navigation Company are meritorious. The captain of MV
Mariposa is guilty of negligence in ignoring the typhoon bulletins issued by PAGASA and in
overloading the vessel. But only the captain of the vessel MV Mariposa is guilty of
negligence. The shipowner is not. Therefore, the shipowner can invoke the doctrine of
limited liability.
 b) 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 1
year from the date of the delivery of the cargo to him.

15. WWW 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 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.

Answer:
The reorganized business activity of WWW Communications Inc. would not be considered a
public utility requiring a franchise or certificate or any other form of authorization from the
government. It owns the facilities, but does not operate the same.

16. Nine individuals formed a private corporation pursuant to the provisions of the Corporation
Code of the Philippines. 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 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.

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 property of any stockholder even how substantial
the equity share that stockholder owns.

17. Marulas Creative Technology Inc., an e-business enterprise engaged in the manufacture of
computer multimedia 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 payment; but
after 3 years, X put a stop to it and asked Marulas president and general manager, Y, who is a
stockholder, to pay 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?

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.

But the suit against Y will not prosper. Y, as president and general manager, and also
stockholder of Marulas Creative Technology, Inc., has a legal personality separate and distinct
from that of the corporation and not that of its officers and stockholders who are not liable for
corporate liabilities.

18. a) 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
Philippines. What would your legal advice be?

b) The SEC approved the amendment of the articles of incorporation of GHQ Corporation
shortening its corporate life to only 25 years in accordance with Section 120 of the Corporation
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 5 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?

Answer:
a) 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
Corporation, is valid. The corporation is empowered to adopt a code of by-laws for its
government not inconsistent with the Corporation Code. Such disqualifying provision is not
inconsistent with the Corporation Code.

b) The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence
of GHQ Corporation. The Corporation is not actually dissolved upon the expiration of its
corporate term. There is still the period for liquidation or winding up.

19. a) The Monetary Board of the Bangko Sentral closed Urban Bank after it encountered crippling
financial difficulties that resulted in a bank run. X, one of the members of the Board of Directors
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 the
preparation and issuance of a manager’s check payable to himself in the sum of P5 M 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 for which he should be punished. Do you agree that there has been no
violation of the statute?

b) After many years of shopping in the Metro Manila area, housewife HW has developed the
sound habit of making cash purchases 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 P100. HW was paying P70 in
25-centavo coins and P25 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.

Answer:
a) No. I do not agree that there is no violation of the statute. X violated Section 85 when he
caused the preparation and issuance of a manager’s check payable to himself in the sum of
P5 M. This is paying out or permitting to be paid out funds of the bank after the latter
became insolvent. This act is penalize by fine of not less than P1,000 nor more than P10,000
and by imprisonment for not less than 2 nor more than 10 years.

b) No. The salesgirl’s understanding that coins are not legal tender is not correct. Coins are
legal tender in amounts not exceeding P50 for denominations from 25-centavos and above,
and in amounts not exceeding P20 for denominations 10-centavos and less.

20. Embassy Appliance 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. 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 without more, proceeds to arrange the delivery and installation of your new
home theatre 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 charges for your purchase. Did Embassy Appliance comply with the provisions of
the Truth in Lending Act?

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.