Training & Convention Division

University of the Philippines Law Center

SUGGESTED ANSWERS
to the
2018 BAR EXAMINATIONS IN
MERCANTILE LAW

Yeti Export Corporation {YEC), thru its President, negotiated for Yahoo
Bank of Manila {YBM) to issue a letter of credit to course the importation of
electronic parts from China to be sold and distributed to various electronic
manufacturing companies in Manila. YBM issued the letter of credit and forwarded
it to its correspondent bank, Yunan Bank (YB) of Beijing, to notify the Chinese
exporters to submit the bill of lading in the name of YBM covering the goods to be
exported to Manila and to pay the Chinese exporters the purchase price upon
verification of the authenticity of the shipping documents.

The electronic parts arrived in the Port of Manila, and YBM released them to
the custody of YEC as an entrustee under a trust receipt. When YEC unpacked the
imported parts in its warehouse, it found that they were not only of inferior quality
but also did not fit the descriptions contained in the bill of lading. YEC refused to
pay YBM the amount owed under the trust receipt. YBM thereafter commenced the
following:

(a) Civil suit to hold YB liable for failure to ensure that the electronic
parts loaded for exportation in China corresponded with those
described in the bill of lading. Is there any merit in the case against
YB? (2.5%)

SUGGESTED ANSWER:

(a) There is no merit in the case against YB. YB only acted as an

advising bank whose only obligation after determining the
apparent authenticity of the letter of credit is to transmit a copy
thereof to the beneficiary of the letter of credit. It has no obligation
to ensure that the goods loaded for exportation corresponded with
those described in the bill of lading (Bank of America v. Court of
Appeals, G..R No. 105395, Dec. 10, 1993). YB cannot be considered
a confirming bank, because to be one it must have assumed a
direct obligation to the seller as if it has issued the letter of credit

1
 (Marphil Export Corporation v. Allied Banking Corporation, (G.R.
No. 187922, September 21, 2016). YB not a negotiating bank
either, because it did not buy the draft of the beneficiary of the
letter of credit. Even if, however, YB acted as a confirming or
negotiating bank, such kind of correspondent bank has no similar
obligation to ensure that the goods shipped match with those
described in the bill of lading.

(b) Criminal suit against YEC and its President for estafa, and sought the
payment of the amount covered in the trust receipt. The defense of the
YEC President is that he cannot be held liable for a transaction of the
corporation, of which he only acted as an officer, and that it is YEC as
the principal that should be held liable under the trust receipt, which
was entered into in the name of YEC and pursuant to YEC's corporate
purposes. He cited as his legal ground the "Doctrine of Separate
Juridical Personality." Is the President's contention meritorious?
(2.5%)

SUGGESTED ANSWER:

(b) The President of YEC cannot invoke as a defense the doctrine of

separate juridical personality to avoid criminal liability. The law
specifically makes the director, officer or any person responsible
for the violation of the Trust Receipt agreement criminally liable
precisely for the reason that a Corporation, being a juridical
entity, cannot be the subject of the penalty of imprisonment.
Nevertheless, following the same doctrine of separate legal
personality, he cannot be civilly liable there being no showing that
he bound himself with YEC to pay the loan. Only YEC is liable to
pay the loan covered by the letter of credit/trust receipt [Ching v.
Secretary of Justice, (G. R. No. 164317, February 6, 2006 and
Section 13 of PD 115)].

2
 II.

Yolanda executed and signed a promissory note with all the requisites for
negotiability being present, except for the amount which was left blank. She kept
the promissory note in her desk and decided to place the amount at a later date. The
indicated payee, Yohann, managed to obtain the promissory note from Yolanda's
desk and filled out the amount for the sum of PhP 10 million, which was the
amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann
later endorsed and delivered the check to Yvette, under circumstances that would
constitute the latter to be a holder in due course.
(a) May Yvette hold Yolanda liable on the note? (2.5%)

SUGGESTED ANSWER:

(a) Yvette cannot hold Yolanda liable on the note. This is a case of
incomplete and undelivered instrument, insofar as Yolanda is
concerned. Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, including
a holder in due course as against Yolanda, whose signature was
placed thereon before delivery (Section 15 of the Negotiable
Instruments Law [NIL]).

(b) Would your answer be the same if the promissory note was actually
completed by Yolanda (including the amount of PhP 10 million), but
stolen from her desk by Yohann? Can Yvette enforce the note against
Yolanda? (2.5%)

SUGGESTED ANSWER:

(b) The answer will not be the same. Now that the instrument is
complete but undelivered and in the hands of Yvette, a holder in
due course, a valid and intentional delivery to make all parties
prior to Yvette liable is conclusively presumed under Section 16 of
the NIL, therefore, Yvette can hold Yolanda , a prior party, liable.
A complete but undelivered instrument is only a personal defense
not available againt a holder in due course.

3
 III

On November 23, 2017, Yas Ysmael loaned the amount of PhP 5 million to
Yarn & Thread Corporation (YTC), through its President, Ylmas
Yektas (Yektas), which loan was evidenced by a Promissory Note
(PN), which reads as follows:

Date: _______________

Within one year from date hereof, I promise to pay to the order of YAS
YSMAEL, the sum of PhP5,000,000 with interest at 120% per
annum.

YARN & THREAD Corporation

By:

(Sgd.)
Ylmas Yektas

Yektas was the controlling stockholder of YTC at the time the PN was
issued. As security for the payment of the PN, Yektas issued and
delivered to Yas Ysmael a postdated personal check covering the face
value of the PN drawn from his account with Yellow Bell Bank and
Trust Company (YBTC). The proceeds of the loan under the PN were
used by YTC as working capital.

A year later, Yas Ysmael inserted the date of “ November 23, 2017” on the
date section of the PN, and made a formal demand upon YTC, through
Yektas, to pay the note, but which was refused on the ground that
Yektas was no longer the President and controlling shareholder of
YTC. By this time, all the shares of YTC had already been sold to a
new group of investors. Yas Ysmael deposited the personal check
issued by Yektas which bounced. He then filed a collection suit
against YTC and Yektas including the accrued interest.

The defendants raised the following defenses in the collection suit. Rule on
the merits of each defense. (2% each)

(a) A PN issued with a blank date is one that is not payable on demand or
on a fixed or determinable future time, and therefore the insertion of
the date constituted material alteration that nullified it, so that no cause
of action arose.

4
SUGGESTED ANSWER:

(a) The defense is not meritororious. Where the instrument is not

dated, it will be considered to be dated as of the time it was issued

(Section 17 of NIL (c)). Section 14 of NIL also concedes to the

payee the prima facie authority to fill-in the blanks in a negotiable
instrument. Such prima facie stands in the absence of evidence to
the contrary.

(b) Yektas cannot be made liable on the PN since he signed in his capacity
as President of YTC, which fact was known to Ysmael although not
indicated on the PN.

SUGGESTED ANSWER:

(b) The defense is not meritorious. Where the instrument contains, or

a person adds to his signature words indicating that he signs for or
on behalf of a principal or in a representative capacity, he must
disclose his principal and must indicate that he is acting on benalf
of his principal (Section 20 of NIL).

ALTERNATIVE ANSWER:
(b) The defense is meritorious. Since the matter of signing the note by
Yektas on behalf of YTC is known to Ysmael, then, Yektas has no
personal liability as it may be inferred from the note that he is
acting only in a representative capacity.

(c) Yektas signed the PN merely as an accommodation to YTC. As he

received no consideration for the PN, it is void for lack of
consideration.

SUGGESTED ANSWER:
(c) The defense is not meritorius. An accommodation party signs a
negotiable instrument as a maker, drawer, endorser, acceptor
without receiving value therefor and only for the purpose of
lending his name in another, he is liable to a holder for value

5
 notwithstanding that such holder, at the time of taking the
instrument, knew him only to be an accommodation party
(Section 29 of NIL).

(d) YTC, now owned by new owners, cannot be held liable on the PN
since it was entered into by its former owner and President, which act
the new Board of Directors did not ratify.

SUGGESTED ANSWER:
(d) The defense is not meritorius. In stock sales, where shareholder
sell a block of stock to new or existing shareholders, the
transaction takes place at the shareholder level only. Because the
corporation has a legal personality separate and distinct from that
of its shareholders, a change in the composition of shareholders
will not affect its existence or extinguish its separate legal
personality (SME Bank v. Samson, (G.R. No. 186641, October 8,
2013)).

(e) The PN is void for being in violation of the Usury Law seeking interest
at an unconscionable rate of 120% p.a.

SUGGESTED ANSWER:
(e) The defense is not meritorius. The Usury law is currently
suspended in view of CB Circular 905 series of 1982, which lifted
the ceiling on interest rate for loans. If the interest rate is deemed
to be unconscionable by the courtdespite the absence of the Usury
Law, the legal rate of interest shall be deemed to apply; thus, the
PN remains valid.

ALTERNATIVE ANSWER:

(e) The PN remains valid, because the obligation to pay the principal
amount of the loan is distinct from the obligation to pay the
interest on the loan.

6
 IV
Ysidro, a paying passenger, was on board Bus No. 904 owned and operated
by Yatco Transportation Company (“Yatco”). He boarded the bus at Munoz, Nueva
Ecija with Manila as his final destination. He was seated on the first row, window
seat on the left side of the bus. As the bus was negotiating the national highway in
front of the public market of Gerona, Tarlac, the bus came to a full stop because of
the traffic. The driver of the bus took this opportunity to check on the tires of the
bus and to relieve himself. As he was alighting from the bus to do these, an
unidentified man standing along the highway hurled a huge rock at the left side of
the bus and hit Ysidro between his eyes. He lost consciousness and immediately the
driver, with the conductor, drove the bus to bring him to the nearest hospital. He
expired before the bus could reach the hospital.

Ysidro’s wife and children brought a civil action to collect damages from
Yatco, alleging that, as a common carrier, it was required to exercise extraordinary
diligence in ensuring the safety of its passengers. They contended that in case of
injuries and/or death on the part of any of its passengers, the common carrier is
presumed to be at fault. In its defense, Yatco alleged that it is not an absolute
insurer of its passengers and that Ysidro’s death was not due to any defect in the
means of transport or method of transporting passengers, or the negligent acts of its
employees. Since the accident was due to the fault of a stranger over whom the
common carrier had no control, or of which it did not have any prior knowledge to
be able to prevent it, the cause of Ysidro’s death should be considered a fortuitous
event and not the liability of the common carrier.

(a) Is a common carrier presumed to be at fault whenever there is death or

injury to its passengers, regardless of the cause of death or injury?
(2.5%)

SUGGESTED ANSWER:

(a) Yes, by express provision of law, in case of death or injuries to

passengers, common carriers are presumed to have been at fault
or to have acted negligently, unless they prove that they exercised
extraordinary diligence (Art. 1756 of the Civil Code).

(b) What kind of diligence is required of common carriers like Yatco for
the protection of its passengers? (2.5%)

SUGGESTED ANSWER:

(b) A common carrier is bound to carry the passengers safely as far as

human care and foresight can provide, using the utmost diligence
of a very cautious person with a due regard for all the
circumstances or simply put, with extraordinary diligence (Art.
1755 of the Civil Code).

7
 (c) Will your answer be the same as your answer in (b) above, if the
assailant was another paying passenger who boarded the bus and
deliberately stabbed Ysidro to death? (2.5%)

SUGGESTED ANSWER:

(c) My answer will be different. A common carrier is responsible for

death or injuries caused by wilfull acts of other passengers or
strangers, only if the common carrier’s employees through the
exercise of the diligence of a good father of a family could have
prevented the act (Art 1763 of the Civil Code; GV. Florida
Transport v. Heirs of Romeo Battung, Jr, (G.R. No. 208802,
October 14, 2015).

Yellow Fin Tuna Corporation (Yellow Fin), a domestic corporation, applied

for a credit facility in the amount of PhP 50 million with Yengzi Financial
Corporation (YFC). The application was approved and the Credit Agreement was
signed and took effect. Ysko and Yuan, Yellow Fin Chairman and President,
respectively, executed a Continuing Suretyship Agreement in favor of YFC wherein
they guaranteed the due and full payment and performance of Yellow Fin’s
guarantee obligations under the credit facility. YFC soon discovered material
inconsistencies in the financial statements given by Yellow Fin, drawing YFC to
conclude that Yellow Fin committed misrepresentation. Under the Credit
Agreement, any misrepresentation by Yellow Fin or its sureties will constitute an
event of default. YFC thus called an event of default and filed a complaint for sum
of money against Yellow Fin, Ysko, and Yuan. Immediately thereafter, Yellow Fin
filed a petition for rehabilitation. The court suspended the proceedings in YFC’s
complaint until the rehabilitation court disposed of the petition for rehabilitation.
YFC posits that the suspension of the proceedings should only be with respect to
Yellow Fin but not with respect to Ysko and Yuan. Is YFC correct? (2.5%)

SUGGESTED ANSWER:

YFC is correct. Actions or proceedings against the surety of the insolvent

debtor that filed a petition for rehabilitation are not subject to the stay order;
consequently, the suit may continue against him (Section 18 (c) of FRIA).

8
 VI.

Shortly after Yin and Yang were wed, they each took out separate life
insurance policies on their lives, and mutually designated one another as sole
beneficiary. Both life insurance policies provided for a double indemnity clause,
the cost for which was added to the premium rate. During the last 10 years of their
marriage, the spouses had faithfully paid for the annual premiums over the life
policies from both their salaries. Unfortunately, Yin fell in love with his
officemate, Yessel, and they carried on an affair. After two years, their relationship
bore them a daughter named Yinsel. Without the knowledge of Yang, Yin changed
the designation of the beneficiary to an "irrevocable designation" of Yinsel and
Yessel jointly. When Yang learned of the affair, she was so despondent that, having
chanced upon Yin and Yessel on a date, she rammed them down with the car she
was driving, resulting in Yin's death and Yessel's complete loss of mobilization.
Yang was sued for parricide, and while the case was pending, she filed a claim on
the proceeds of the life insurance of Yin as irrevocable beneficiary, or at least his
legal heir, and opposed the claims on behalf of Yessel and her daughter Yinsel.
Yang claimed that her designation as beneficiary in Yin's life insurance policy was
irrevocable, in the nature of one "coupled with interest," since it was made in
accordance with their mutual agreement to designate one another as sole beneficiary
in their respective life policies. She also claimed that the beneficiary designation of
Yessel and the illegitimate minor child Yinsel was void being the product of an
illicit relationship, and therefore without "insurable interest."

(a) Is Yang correct in saying that her designation as beneficiary was

irrevocable? (2.5%)

SUGGESTED ANSWER:

(a) Yang is not correct. The insured shall have the right to change the
beneficiary he designated in the policy, unless he has expressly
waived this right in the policy. There is nothing in the life
insurance policy taken by Yang which indicated that the
designation of Yin is irrevocable. As such, it is deemed to be
revocable.

(b) Do Yessel and Yinsel have “insurance interest” on the life of Yin?
(2.5%)

SUGGESTED ANSWER:
(b) Yessel has no insurable interest on the life of Yin, because she can
not be lawfully designated as beneficiary. Persons who are
proscribed to become donees under the rules on donation cannot
be designated as beneficiary in life insurance. These include

9
 persons in illicit relations as in the case of Yin and Yessel. Yinsel,
however, has insurable interest on the life of Yin. There is no
proscription in naming an illegitimate child as a beneficiary (Heirs
of Loreta Maramag v. Maramag, (G.R. No. 181132, June 5, 2009)).

VII

Pictures Inc., a movie production company based in California, USA, entered

into a contract with Yehey Movies Inc., a Filipino movie production and
distribution company which is registered in the Philippines under the Securities
Regulation Code (SRC) and listed in the Philippine Stock Exchange Inc. (PSE), for
the exclusive distribution in the Philippines of movies produced in the USA by
Yelp Pictures Inc. Yehey Movies is currently owned 85% by Yavic Yamson, and
the balance, by the public in the Philippines. For purposes of entering into the
contract, suing for breach of such contract, and prosecuting unauthorized showing
of movies produced by Yelp Pictures, it appointed Atty. Yson, a local lawyer, as its
attorney-in-fact.

Simultaneously with the execution of the film distribution agreement, Yehey

Movies also granted Yelp Pictures an option to acquire up to 40% of the total
outstanding capital stock in Yehey Movies post-exercise of the option, at the option
price of PhP .01 per number of shares covered by the option, exercisable within a
period of one year from the date of the grant, at the exercise price of PhP 100 per
share. Once exercised, Yelp Pictures was granted the right to nominate two (2)
directors to the Board of Yehey Movies, and Yavic Yamson agreed to vote all his
shares for the election of directors to be nominated by Yelp Pictures.

(a) May the acts of entering into the film distribution contract, the
subsequent execution and performance of the terms of the contract in
the Philippines, and the appointment of Atty. Yson, be considered as
act of “doing business” in the Philippines that will require Yelp
Pictures to register as a foreign corporation and obtain a license to do
business in the Philippines? (2.5%)

SUGGESTED ANSWER:

(a) A foreign Corporation which owns the Copyright to foreign films

and exclusive distribution rights in the Philippines and appointed
an attorney in-fact to file criminal cases on behalf of the
corporation is not doing business in the Philippines, because the
contract was executed abroad and the hiring of the attorney-in-
fact is merely for the protection of its property rights [Columbia
Pictures vs Court of Appeals (261 SCRA 144 (1996)].

10
 (b) Will your answer in (a) be the same if Yelp Picture exercises the
option, becomes a substantial shareholder, and is able to elect two (2)
directors in the Board of Directors of Yehey Movies? (2.5%)

SUGGESTED ANSWER:

(b) It will be the same. Mere passive investment in equity and voting
the equity shares of the corporation to elect its director in the
board of a domestic corporation is not tantamount to doing
business.

(c) Must the option granted to Yelp Pictures be registered under the SRC?
(2.5%)

SUGGESTED ANSWER:
(c)

(c) While options are securities, the option was granted only to Yelp
Pictures and not to the public. As a consequence, the option need
not be registered with the SEC.

VIII

Yenkell Cement Corporation (YCC) is a public corporation whose shares are

listed at the PSE. It is 60% owned by Yenkell Holdings Corporation (YHC) and
20% by Yengco Exploration Inc. (YEI). The remaining 20% is held by the public.

YHC is a private non-listed corporation which, in turn, is 60% owned by

Yatlas Mines Inc. (YMI), and 40% by Yacnotan Consolidated Inc. (YCI). On
August 8, 2008, the Board of Directors of YEI passed a resolution approving the
acquisition of 50% and 25% of the shares held by YMI and YCI, respectively, in
the authorized capital stock of YHC.

Yolly, one of the staff members in the office of the Corporate Secretary of
YEI was immediately asked to type the resolution and file the disclosure with the
PSE and the Securities and Exchange Commission (SEC). Before doing that, she
secretly called her brother who works with a stock brokerage company, to purchase,
in the name of Yolly’s husband, 5,000 shares in YCC. After the acquisition was
disclosed to the SEC and the PSE, the market price of YCC increased by 50%.

(a) In acquiring 75% of the total capital stock of YHC, should YEI be
required to do a mandatory tender offer? (2.5%)

SUGGESTED ANSWER:

(a) In acquiring 75% of the total capital stock of YCC, YEI should be
required to do a mandatory tender offer. By acquiring the

11
 combined 75% shareholdings of YMI and YCIin YCC, YEI
effectively owns 45% of YCC. Add that to the 20% it directly owns
in YCC, YEI now owns and controls 65% of YCC. Once a person
singly or in concert with others acquires more than 50% of the
voting stock of a public company, the mandatory tender offer rule
applies. The tender offer rule covers not only direct acquisition
but also indirect acquisition or any type of acquisition. Whatever
may be the method by which control of a public company is
obtained either through the direct purchase of its stocks or
through indirect means, mandatory tender offer rule applies
(Cemco Holdings v. National Life Insurance Company, [529 SCRA
(2007).

(b) Can Yolly be held liable for insider trading? (2.5%)

SUGGESTED ANSWER:
(b) Yolly cannot be held liable for insider trading. Insider trading is
the buying and selling of securities by an insider while in the
possession of a material non-public information. While Yolly is an
insider, because she has access to material non-public information
by reason of her relationship with the Issuer, she did not, however,
buy or sell securities. She is liable, however, for having
communicated material non-public information about the issuer to
any broker who by virtue of such communication becomes an
insider considering that Yolly, the insider communicating the
information knows or has reason to believe that the broker will
likely buy or sell a security of the issuer while in possession of such
information (Section 27.3 of the SRC). The law makes no
distinction that the insider is buying for himself or for the account
of another, as such, it is immaterial that the broker purchased
securities for the account of Yolly’s husband. The information
about the MTO is also material as it will likely affect the decision
of a reasonable person to buy or sell the securities.

12
 IX

Yangchou lnc.'s (YI) Articles of Incorporation (AOI) provides for two (2)
types of shares of stock: common and preferred shares. Its AOI further provides that
"the preferred shares shall have a guaranteed annual dividend of 3% of the par
value." Its By-Laws also specifically provides that "preferred shareholdings shall be
cumulative and participating." No other terms of preference are provided for
preferred shares in either the AOI or By-Laws of YI.

For the first five years of operations, the company was operating at a loss. At
the end of the sixth year, YI realized a net profit of PhP 100 million, and
unrestricted retained earnings of PhP 30 million. The YI Board of Directors
declared and paid out dividends of 1 % on common shares, and 5% on preferred
shares, which amounted to a total of PhP 30 million.

However, the preferred shareholders made a formal demand that they be

given an additional 3% dividend for each of the five (5) years based on the
preferred shares features of "cumulative and participating," and an additional 1 %
given to the common shareholders, which could all be accommodated within the
remaining balance of the net profits.

Should Vi's Board heed the demand of its preferred shareholders? (2.5%)

SUGGESTED ANSWER:

YI’s Board should not heed the demand of its preferred shareholders.
While the preferred shares are cumulative and participating, the holders
thereof are entitled to dividends only if the unrestricted retained earnings are
sufficient to pay such dividends. Dividends are declared based on unrestricted
retained earnings and not on the amount of net profit Republic Planters Bank
v. Agana, (G.R. No. 51765, March 3, 1997; Section 43 of the Corporation Code).

ALTERNATIVE ANSWER:

The dividends paid to the holders of the common shares should be

recalled and added to the dividends due to the holder of the preferred shares.
Holders of common shares are entitled to receive dividends only after the
dividends due to the holder of preferred shares shall have been fully paid.

Ybarra is the registered shareholder of 500 shares in Yakal Inc., of which

only 50% has been paid up, but for which the corporation had erroneously issued a
covering certificate of stock for the entire 500 shares. Ybarra sells the entire 500

13
shares for cash pursuant to a notarized Deed of Sale in favor of Ynchon, and which
certificate was duly endorsed and delivered. When Ynchon presented the Deed of
Sale and the endorsed certificate of stock, as well as proof of payment to the Bureau
of Internal Revenue (BIR) of the tax due on the sale of shares, the Corporate
Secretary of Yakal Inc. refused to register the sale on the ground of lack of written
authority from Ybarra to cancel the certificate and have the shares registered in the
name of Ynchon.

(a) Does Ynchon have a cause of action to file a petition for mandamus to
compel the corporation to register the 500 shares in his name in the
corporation books? (2.5%)

SUGGESTED ANSWER:

(a) Yes, Ynchon has a cause of action to file the petition for
mandamus to compel the corporation to register the 500 shares in
the corporation’s books. In Andaya v. Rural Bank of Cabadbaran,
(G.R. No. 188769, August 3, 2016), the Supreme Court abandoning
its previous ruling in (Ponce v. Alsons Cement) ruled that the
transferees of shares of stock are real parties in interest having a
cause of action for mandamus to compel registration of the
transfer and the corresponding issuance of stock certificates even
without the written authority from the seller to cancel the
certificate and register the shares in the books of the corporation.

(b) Who is liable to pay the remaining unpaid 50% balance - Ybarra or
Ynchon? (2.5%)

SUGGESTED ANSWER:

(b) Ynchon should be the one to pay the remaining balance but
without prejudice to his right to recover from Ybarra. The effect
of the sale of the shares was to extinguish the obligation of the
seller to the Corporation to pay whatever is the balance in the
contract of subscription. The sale of shares to the buyer with the
consent of the corporation effectively resulted in novation
(Interport Resources Corporation v. Securities Specialist Inc., G.R.
No. 154069, June 6, 2016).

14
 XI

Yenetic Corporation wants to increase its Authorized Capital Stock (which is

currently fully subscribed and issued) to be able to increase its working capital to
undertake business expansions.

The Board of Directors consults with you as legal counsel on the proper
answers to the following issues: (2.5% each)

(a) Can Yenetic's AOI be formally amended to remove the right of

appraisal on all dissenting stockholders in all matters under the law
which requires a ratification vote of the stockholders?

SUGGESTED ANSWER:

(a) Yenetic’s AOI cannot be amended to remove the appraisal right

of the stockholders on matters requiring their approval in cases
where the law grants them such appraisal right, like :
i) In case any amendment to the articles of incorporation has
the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any
class, or of extending or shortening the term of corporate
existence;
ii) In case of sale, lease, exchange, transfer , mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets;
iii) In case of merger (Section 81 of the Corporation Code);
iv) In case of investment of funds in the secondary purpose of the
corporation or another business (Section 42).
Appraisal right is a statutory right. It cannot be denied
to the stockholders in cases where the law allows such right.
For all the other matters under the Corporation Code which
require ratificatory approval of the shareholders, the AOI
may be formally amended to remove appraisal right, because
the right does not exist anyway in those cases.

(b) If the increase in Authorized Capital Stock is formally submitted to the

stockholders in a meeting duly called for the purpose, what is the vote

15
 necessary for the stockholders’ ratification, and would the dissenting
stockholders have a right to exercise their right of appraisal?

SUGGESTED ANSWER:

(b) Any provision or matter stated in the AOI may be amended by a

majority vote of the board of directors and the vote or written
assent of the stockholders representing at least 2/3 of the
outstanding capital stock. Stockholders cannot exercise any
appraisal right in case of amendment to the articles of
incorporation to increase capital stock, because this is not one of
the cases allowed by law where appraisal right may be exercised
(Articles 81 and 42 of the Corporation Code).

(c) Once the increase in the Authorized Capital Stock of Yenetic has been
legally effected with the SEC, can the new shares from the unissued
shares be offered to a new limited group of investors without having to
offer them to the shareholders of record since no pre-emptive right is
provided for in the AOI and By-laws of Yenetic?

SUGGESTED ANSWER:

(c) The new shares from the unissued shares cannot be validly offered to a
new limited group of investors without having to offer to shareholders
of record, as pre-emptive rights are not explicitly denied in the AOI.
Section 39 of the Corporation Code provides that 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. There need not be an explicit grant of pre-
emptive rights in the AOI for it to exercised.

XII

Yashtag Holdings, lnc.'s (Yashtag Holdings) AOI states that its primary
purpose is "to invest in real and personal properties of every kind or otherwise
acquire and deal with stocks, bonds, and other securities or evidence of
indebtedness of any other corporation, and to hold or to own, use, sell, deal in, and
dispose of, any such stock." It further states that it has an authorized capital stock of
PhP 1 million, all of which have been fully subscribed and paid up.

Yashtag Holdings' President, Mr. Yokada, convinced Yeh, Yah, and Yo to

lend/invest money with Yashtag, which money will be invested in a sister company,
Yashtag Realty, Inc. (Yashtag Realty), a corporation that develops premium real
estate projects in the Philippines. For the amount loaned/invested, Yashtag

16
Holdings issued two (2) postdated checks to each lender/investor, one representing
the principal amount, and the other covering the guaranteed interest that ranged
between 18-32% p.a. On the maturity dates of the checks, the individual
lender/investor can review the loans/investment, and may either collect only the
interest or roll over the same with the principal amounts. Eventually, the bursting of
the real estate bubble brought about a serious financial crisis around the world,
including the Philippines. Yashtag Realty collapsed and with it Yashtag Holdings
defaulted in the payment of its loans/investments, as well as the dishonor of the tens
of thousands of postdated checks issued to its various lenders/investors.

Yeh, Yah, and Yo filed several charges against Yashtag Holdings and its
President, making them solidarily liable for the investments they failed to recover.
Yeh, Yah, and Yo proved that Yashtag Holdings, acting through Mr. Yokada, was
able to get a total of PhP 800 million of loans/investments from the public under the
scheme, and from which Mr. Yokada, as the controlling stockholder, was able to
withdraw a total amount of PhP 300 million for his personal account and entered
into the books of Yashtag Holdings as "Advances to Stockholders." Mr. Yokada
pleads as a defense that he cannot be made personally liable on the claim of the
group under the doctrines of "Separate Juridical Personality" and "Limited
Liability."

(a) What are the doctrines of "Separate Juridical Personality" and "Limited
Liability"? (2.5%)

SUGGESTED ANSWER:

(a) The doctrine of separate juridical personality is a principle of law

which ordains that the corporation has a separate legal personality
from the stockholders, directors and officers composing it. The
limited liability rule, on the other hand, means that the liability of
a stockholder who is not a director, officer or agent of the
corporation, is limited to his subscription to the capital stock of the
corporation.

ALTERNATIVE ANSWER:

[NOTE: The following answer should also be given credit because the
question may be construed as to whether this defense is pertinent
under the second question].
(a) The limited liability rule, also known as the real or the
hyphotecary nature of maritime law, simply means that that the
liability of the shipowner or ship agent arising from the
transportation of goods and passengers is limited to their interest

17
 in the vessel which is hyphotecated for such obligations or which
stands as a guaranty for their settlement. This rule may be best
explained by the doctrine, “no vessel, no liability” [Aboitiz Shipping
Corporation v. General Accident Fire and Life Assurance
Corporation, 217 SCRA 359, (1993)].

(b) Decide on the merits of Mr. Yokada’s defense against being made
liable for Yashtag Holdings’ obligations. (2.5%)

SUGGESTED ANSWER:
(b) Yokada cannot validaly invoke the doctrine of separate juridical
personality and limited liability. Yokada acted in bad faith in
withrawing 300M for his personal account. Having acted in bad
faith, he becomes solidarily liable with the corporation;
furthermore, having issued securities to the public without prior
approval of the SEC is also another basis to hold him solidarily
liable with the issuer corporation.

ALTERNATIVE ANSWER:

NOTE: (b) It is respectfully suggested that an examinee who answers that the
limited liability rule is a maritime law concept and has no bearing to
the issue, should also be given credit.

XIII

YBC Bank extended a loan of PhP 50 million to Mr. Yamato secured by a

real estate mortgage (REM) on a large tract of land. The covering Transfer
Certificate of Title (TCT) of the property mortgaged did not indicate any
encumbrance or lien on it, and the bank was able to obtain a certified true copy of
the TCT from the Register of Deeds showing that the owner's copy submitted to the
bank was a genuine title. The Loan Agreement provided an escalation clause which
stated that, at the anniversary date of the loan, YBC Bank was granted the option to
increase the interest rate whenever there would be an increase in the Bangko Sentral
ng Pilipinas' prevailing rates. Three years later, Mr. Yamato received a formal
notice from YBC Bank raising the interest rate of the loan based on the escalation
clause provided for in the Loan Agreement. Mr. Yamato refused to pay based on
the increased interest rate that was effected without his consent. YBC Bank insists
on the binding effect of the escalation clause appearing on their Loan Agreement.

18
 Mr. Yamato subsequently defaulted on the loan and vanished. Thus, YBC
Bank extrajudicially foreclosed on the REM, and was the highest bidder at the
public auction sale. It was only then that the bank determined that there were
actually two separate TCTs issued for the property and one of which was in the
name of Mr. Yamsuan who occupied the property after having bought it earlier
from Mr. Yamato.

(a) Can YBC Bank unilaterally increase the interest rates on the loan?
(2.5%)

SUGGESTED ANSWER:

(a) YBC Bank cannot unilaterally increase the interest rates on the
loan. A stipulation allowing the bank to increase the interest rate
unilaterally is a solely-potestative condition which violates the
principle of mutuality of contracts and as such is null and void
[PNB v. Padilla SCRA 259 SCRA 174 (1991)].

(b) Is YBC Bank a mortgagee buyer in good faith? Is it preferred over Mr.
Yamsuan? (2.5%)

SUGGESTED ANSWER:

(b) YBC Bank is not a mortgagee-buyer in good faith. As a bank, it

should have exercised due diligence to determine who the actual
and true owner of the real property is prior to the grant of the
loan; also, Yamsuan, being the first buyer, has a prior right to the
property.

XIV

On June 21, 2008, Yate took out a life insurance policy on her life in the
amount of PhP 10 million and named her husband Vandy and daughter as joint
irrevocable beneficiaries. Before the policy was issued and the premiums were paid,
Yate underwent a medical checkup with a physician accredited by the insurer, and
the only result found was that she was suffering from high blood pressure. Yate was
previously diagnosed by a private physician of having breast cancer which she did
not disclose to the insurer in her application, nor to the insurer's accredited
physician because by then, she was told that she was already cancer-free after
undergoing surgery which removed both her breasts. She was later diagnosed with
psychotic tendency that graduated into extreme despondency. She was found dead
hanging in her closet 36 months after the issuance of the policy. The police
authorities declared it to be a case of suicide. The policy did not include suicide as
an excepted risk.

19
 (a) Can the insurer raise the issue of failure to disclose that she had cancer
as a cause for denying the claim of the beneficiaries? (2.5%)

SUGGESTED ANSWER:

(a) The insurer cannot raise the issue of concealment, because only
material facts known to the insured at the time of the issuance of
the policy should be disclosed to the insurer (Section 28 of the
Insurance Code). Yate’s previous cancer diagnosis is no longer a
material fact at the time she procured the policy.

(b)
Are the beneficiaries entitled to receive the proceeds of the life
insurance notwithstanding the fact that the cause of death was suicide?
(2.5%)
SUGGESTED ANSWER:

(b) Yes, the beneficiaries are entitled to received the proceeds. The
rule is that the insurer in life insurance is liable in case of suicide
only when it is committed after the policy has been in force for a
period of two years from the date of issue or last reinstatement.
The rule, however, admits of an exception so that when suicide is
committed in the state of insanity, it shall be compensable
regardless of the date of commission (Section 183 of the Insurance
Code). In the facts given, Yate was diagnosed with psychotic
tendency that graduated into extreme despondency; thus, even
though Yate committed suicide 36 months from issuance of the
policy, the insurer is liable.

XV

A distinctive-tasting pastillas is well-known throughout the country as having

been developed within a close-knit women's group in Barangay San Ysmael which
is located along a very busy national highway. Its popularity has encouraged the
setting up of several shops selling similar delicacies, with the most famous product
being the pastillas of "Barangay San Ysmael." Eventually, the pastillas of Aling
Voling under the brand name "Ysmaellas" began to attract national distinction.
Aling Voling therefore registered it as a copyright with the National Library. Her
neighbor, Aling Yasmin, realizing the commercial value of the brand, started using
the term "Ysmaellas" for her pastillas but used different colors. Aling Yasmin
registered the brand name "Ysmaellas" with the Intellectual Property Office (IPO).

20
 (a) Can Aling Voling successfully obtain court relief to prohibit Aling
Yasmin from using the brand name "Ysmaellas" in her products on the
basis of her (Aling Yoling's) copyright? What is the difference between
registration as a copyright and registration as a trade or brand name?
(2.5%)

SUGGESTED ANSWER:

(a) Aling Yoling cannot successfully obtain court relief to prohibit

Aling Yasmin from using the brand name “ Ysmaellas “ in her
product on the basis of Aling Yoling’s copyright. The brand name
“ Ysmaellas “ is proper subject of trademark, not copyright. They
can not be interchanged. The copyright on a trade name or mark
does not guarantee her the right to the exclusive use of the same
for the reason that it is not a proper subject of said intellectual
right (Kho v. Court of Appeals, (G.R. No. 115758, March 19, 2002);
Juan v. Juan, (G.R. No. 221372, August 23, 2017)).
The registration of a copyright is only a proof of the
recording of the copyright but not a condition precedent for the
copyright to subsist and for copyright infringement suit to
prosper; whereas, registration of a trademark is an indispensable
requisite for any trademark infringement suit.

(b) Can Aling Yasmin seek injunctive relief against Aling Yoling from
using the brand name “Ysmaellas,” the latter relying on the doctrine of
“prior use” as evidenced by her prior copyright registration? (2.5%)

SUGGESTED ANSWER:

(b) Aling Yasmien can seek injunctive relief against Aling Yoling from
using the brand name “ Ysmaellas “ because of the doctrine of
prior use. It is ownership of the trademark that confers the right to
register. Registration does not confer ownership. Since Aling
Yasmin was the first one to use the brand or trade name in
commerce, then she is considered the owner thereof [EY Industrial
Sales v. Shen Dar 634 SCRA 363(2010)].

21
 (c) Can Aling Yoling seek the cancellation of Aling Yasmin’s trademark
registration of the brand name “Ysmaellas” on the ground of “Well
Known Brand” clearly evidenced by her (Aling Yoling’s) prior
copyright registration, actual use of the brand, and several magazine
coverages? (2.5%)

SUGGESTED ANSWER:

(c) NO, Aling Yoling can not seek the cancellation of Aling Yasmin’s
trademark registration of the brand name “ Ysmaellas on the
ground of well-known brand, because the well- known mark rule
only applies to a mark which is well-known internationally and in
the Philippines [Section 123 ( E ) of the Intellectual Property Code].
She, however, can seek the cancellation of the trademark for being
the prior user even though the mark is not well-known.

XVI

Yosha was able to put together a mechanical water pump in his garage
consisting of suction systems capable of drawing water from the earth using less
human effort than what was then required by existing models. The water pump
system provides for a new system which has the elements of novelty and inventive
steps. Yosha, while preparing to have his invention registered with the IPO, had
several models of his new system fabricated and sold in his province.

Is Yosha’s invention no longer patentable by virtue of the fact that he had

sold several models to the public before the formal application for
registration of patent was filed with the IPO? (2.5%)

SUGGESTED ANSWER:

(a) Yosha’s invention is still patentable despite the fact he had sold
several models to the public before the formal application for
registration of the patent was filed with the IPO. It is true that an
invention shall not be considered new if it forms part of a prior art
and that prior art shall consist of everything which has been made
available to the public anywhere in the world, before the filing
date or the priority date of the application claiming the
invention.This, however, presupposes that the one who has made
available the patentable invention to the public is a person other
than the applicant for patent.

22
 (b) If Yosha is able to properly register his patent with the IPO, can he
revent anyone who has possession of the earlier models from using
them? (2.5%)

SUGGESTED ANSWER:

(b) Yosha can no longer prevent anyone who has possession of the
earlier models from using them even if Yosha is able to properly
register the patent with the IPO. One of the limitations of patent
rights is the use of the patented product which has been put on the
market in the Philippines by the owner of the product insofar as
such use is performed after the product has been so put on the said
market [Section 172 of the Intellectual Property Code].

XVII

Yvan was a slot machine operator supervisor in a casino operated by the

Philippine Amusement and Gaming Corporation (PAGCOR). On the basis of an
intelligence report, he was found, in connivance with some slot machine customers,
to have padded the credit meter readings of slot machines in the casino where he
was employed. After being served with notice and opportunity to contest the
findings, he was found guilty of the charges and ordered dismissed by PAGCOR.
After receiving his copy of the order for dismissal, he claimed to have sent to the
Board of PAGCOR his motion for reconsideration through facsimile transmission.
After a considerable time, when his motion for reconsideration was unacted upon,
he filed an action with the Civil Service Commission (CSC) for illegal dismissal.
PAGCOR claimed that his action has prescribed because it was filed more than 15
days after his dismissal became final. Yvan claimed that there was no final
decision yet because the Board of PAGCOR has not yet acted on his motion for
reconsideration. He presented a copy of his facsimile transmission addressed to the
Board of PAGCOR seeking reconsideration of his dismissal, and the fact that there
has been no action taken. He claimed that based on the Electronic Commerce Act of
2000, his facsimile transmission should be considered like any genuine and
authentic paper pleading. PAGCOR denied having received it and was able to prove
that the telephone number of PAGCOR used in the facsimile transmission was
wrong. CSC denied his complaint on account of prescription. He appealed CSC's
dismissal in court.

(a) Was CSC correct in dismissing the case? (2.5%)

SUGGESTED ANSWER:

(a) CSC is correct in dismissing the case. The E-commerce law does
not cover or allow e-filing or facsimile transmission as a mode of

23
 filing of pleadings in administrative cases [Torres v. PAGCOR,
(G.R. No. 193531, December 6, 2011)].

(b) Can Yvan’s bank be ordered by the court to disclose if there were
unreasonable increases in his bank deposit when the alleged acts were
committed? (2.5%)
SUGGESTED ANSWER:

(b) No, Yvan’s bank cannot be ordered by the court to disclose if there
were unreasonable increases in his bank deposit when the alleged
acts were committed. The inquiry into bank deposits allowable
under RA 1405 must be premised on the fact that the money
deposited in the account is itself the subject of the action;
otherwise, the inquiry will amount to an impermissible
encroachment into one’s right to privacy (BSB Group v. Go, G.R.
No. 168644, February 16, 2010)].

XVIII

Through various acts of graft and bribery, Mayor Ycasiano accumulated a

large amount of wealth which he converted into U.S. dollars and deposited in a
Foreign Currency Deposit Unit (FCDU) account with the Yuen Bank (YB). On a tip
given by the secretary of the mayor, the Anti-Money Laundering Council (AMLC)
sent an order to YB to confirm the amount of U.S. dollars that Mayor Ycasiano had
in his FCDU account. YB claims that, under the Foreign Currency Deposit Act
(R.A. No. 6426, as amended), a written permission from the depositor is the only
instance allowed for the examination of FCDU accounts. YB alleges that AMLC on
its own cannot order a banking institution to reveal matters relating to bank
accounts.

(a) Is the legal position of YB, in requiring written permission from the
depositor, correct? (2.5%)

SUGGESTED ANSWER:

(a) Yes, the legal position of YB in requring written permission from

the depositor is correct. The AMLC cannot order the bank to
inquire into the bank account of any depositor on mere suspicion
of acts of graft and bribery without his written consent or a bank
inquiry order issued by the competent court.

24
 (b) Does AMLC have the power to order a banking institution to reveal
matters relating to bank accounts? (2.5%)

SUGGESTED ANSWER:

(b) The AMLC has no power to order a banking institution to reveal

matters relating to bank accounts without a bank inquiry order
issued by the competent court about the existence of probable
cause that the deposits, funds or investments of the person relate to
unlawful activities under the Anti-Money Laundering law. A bank
inquiry order, however, is not necessary, however, and as such, the
AMLA may order the disclosure of information about bank
accounts if the predicate crime/s is/are: a) hijacking, b)
kidnapping, c) violation of the terrorism financing act, d) murder,
e) arson and, f) violation of the Dangerous Drugs law (Section 11 of
AMLA).

- Nothing follows -

25