Question & Answer in Mercantile Law

Culled from the Recent & Significant Decisions of the Supreme Court
2009 Bar Examinations

Atty. Mark P. Piad

(LLB, A.B. Pol. Sci.)
Associate, ALOBBA PORRAS & ASSOCIATES

-o0o-

1. X delivered stocks of vegetable oil to Y sometime on March 1993. As

payment therefor, Y issued a personal check in the amount of Php 348,
805.50. However, when the check was encashed, it was dishonored by the
drawee bank. Y then assured X that he would replace the bounced check
with a cashier’s check from the Bank of the Philippine Islands (BPI).
Thereafter, BPI cashier’s check no. 14428 in the amount of Php 348, 805.50
was issued, drawn against the account of Y. The following day, X returned
to drawee bank to encash the check but it was dishonored, the bank then
informed X that Y’s account was closed on that date.

X then filed a complaint for collection of sum of money against BPI.

In it’s answer, BPI claimed that it issued the check by mistake in good faith;
that its dishonor was due to lack of consideration; and that X’s remedy was
to sue Y who purchased the check.

a. Is X a holder in due course despite BPI’s contention that there was

lack of consideration?
b. Is BPI liable to X for the amount of the cashier’s check?
c. What is the nature of a cashier’s check?

SUGGESTED ANSWER:

a. YES. X is a holder in due course.

Sec. 52. (NIL)—a holder in due course is a holder who has taken the
instrument under the following conditions:

a. That it is complete and regular upon it’s face;

b. That he became the holder of it before it was overdue and
without notice that it had been previously dishonored;
c. That he took it in good faith and for value;
d. 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.

Value in general terms may be some right, interest, profit

or benefit to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc., on the other
side. Here, there is no dispute that X received Y’s cashier’s check
as payment for the former’s vegetable oil. The fact that it was Y
who purchased the cashier’s check from BPI will not affect X’s
status as a holder for value since the check was delivered to him
as payment for the vegetable oil he sold to Y. (Bank of the
 Philippine Islands vs. Gregorio C. Roxas, G.R. No. 157833, October
15, 2007 [Sandoval-Gutierrez, J.]).

b. YES. BPI is liable for the amount of the cashier’s check.

A cashier’s check is really the bank’s own check and may be treated
as a promissory note with the bank as a maker. The check becomes
the primary obligation of the bank which issues it and constitutes a
written promise to pay upon demand. (BPI vs. Roxas)

c. It is a well known and accepted practice in the business sector that a

cashier’s check is deemed as cash. This is because the mere issuance
of a cashier’s check is considered acceptance thereof. (BPI vs. Roxas).

2. Can a foreign corporation not doing business in the Philippines file an

administrative complaint for alleged violation of intellectual property
rights?

SUGGESTED ANSWER:

YES. A foreign corporation has the legal capacity to sue for the
protection of its trademarks, albeit it is not doing business in the Philippines.
Sec. 160 in relation to Sec. 3 of R.A. 8293, provides:

SEC. 160. “Any foreign national or juridical person who meets the
requirements of Sec. 3 of this Act and does not engage in business in the
Philippines may bring a civil or administrative action hereunder for
opposition, cancellation, infringement, unfair competition, or false designation
of origin and false description, whether or not it is licensed to do business in
the Philippines under existing laws.”

SEC. 3. “Any person who is domiciled or has a real and effective

industrial establishment in a country which is a party to any convention,
treaty or agreement relating to intellectual property rights or the repression of
unfair competition, to which the Philippines is also a party, or extends
reciprocal rights to nationals of the Philippines by law, shall be entitled to
benefits to the extent necessary to give effect to any provision of such
convention, treaty or reciprocal law, in addition to the rights to which any
owner of an intellectual property right is otherwise entitled by this Act.”
(Sehwani, Incorporated and/or Benita’s Frites, Inc., vs. In-N-Out Burger, Inc., G.R.
No. 171053, October 15, 2007 [Ynares-Santiago, J.]).

xxx

Stated differently, in the case of Philip Morris, Inc. vs. Fortune Tobacco
Corporation, 493 SCRA 333 [2006]), to wit:

“Foreign corporations may not successfully sue on the basis alone of

their respective certificates of registration of trademarks, for as a condition to
availment of the rights and privileges vis-à-vis their trademarks in this
country, they ought to show proof that, on top of Philippine registration, their
 country grants substantially similar rights and privileges to Filipino citizens
pursuant to Section 21-A of R.A. 166 (now Sec. 3, R.A. 8293).

3. What are pre-need plans?

SUGGESTED ANSWER:

Are contracts which provide for the performance of future services of

the payment of future monetary considerations at the time of actual need, for
which planholders pay in cash or installment at stated prices, with or without
interest or insurance coverage and includes life, pension, education, interment,
and other plans which the Commission may from time to time approve. (Sec.
3.9. R.A. 8799)

4. What is the so-called “Must-Carry Rule”?

SUGGESTED ANSWER:

The “Must-Carry Rule” favors both broadcasting organizations and the

public. It prevents cable television companies from excluding broadcasting
organization especially in those places not reached by signal. Also, the rule
prevents cable television companies from depriving viewers in far-flung areas
the enjoyment of programs available to city viewers.

This mandatory coverage provision under Section 6.2 of said

Memorandum Circular, requires all cable television system operators,
operating in a community within the Grade “A” or “B” contours to “must-
carry” the television signals of the authorized television broadcast stations, x x
x as the circular was issued to give consumers and the public a wider access to
more sources of news, information, entertainment and other
programs/contents.

The carriage of ABS-CBN’s signals by virtue of the must-carry rule in

Memorandum Circular No. 04-08-88 is under the direction and control of the
government though the NTC which is vested with exclusive jurisdiction to
supervise, regulate and control telecommunications and broadcast
services/facilities in the Philippines. The imposition of the must-carry rule is
within the NTC’s power to promulgate rules and regulations, as public safety
and interest may require, to encourage a larger and more effective use of
communications, radio and television broadcasting facilities, and to maintain
effective competition among private entities in these activities whenever the
Commission finds it reasonably feasible. (ABS-CBN Broadcasting Corporation vs.
Philippine Multi-Media System, Inc., G.R. Nos. 175769-70, January 19, 2009
[Ynares-Santiago, J.]).

5. What is the relationship between the banking institution and its depositor?
What is the standard of diligence required of the bank?

SUGGESTED ANSWER:
 The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan. Article 1980 of the Civil Code
expressly provides that “x x x savings x x x deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loan.” There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor
is the contract that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary
nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”), which
took effect on 13 June 2000, declares that the State recognizes the “fiduciary
nature of banking that requires high standards of integrity and performance.”
This new provision in the general banking law, introduced in 2000, is a
statutory affirmation of Supreme Court decisions, starting with the 1990 case
of Simex International vs. Court of Appeals, holding that “the bank is under
obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.”
This fiduciary relationship means that the bank’s obligation to observe
“high standards of integrity and performance” is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and
absent such stipulation then the diligence of a good father of a family. Section
2 of RA 8791 prescribes the statutory diligence required from banks – that
banks must observe “high standards of integrity and performance” in
servicing their depositors. (Central Bank of the Philippines vs. Citytrust Banking
Corporation, G.R. No. 141835, February 4, 2009 [Carpio-Morales, J.]).

6. Geronimo, the president of Gateway Corporation executed a deed of

suretyship for Gateway in favor of Asianbank Corporation. Gateway
defaulted in the payment of its obligations, thereafter Asianbank filed with
the RTC Makati a complaint for sum of money against the Corporation and
Geronimo. Court ruled in favor of Plaintiff bank, thus defendants appealed
to the CA. Pending appeal, the Corporation filed a petition for voluntary
insolvency with RTC Imus, Cavite and was subsequently declared by said
Court insolvent. Gateway and Geronimo thus prayed that the assailed
decision of the Makati RTC be set aside, as the insolvency court acquired
jurisdiction over the properties of Gateway by virtue of Section 60 of Act
1956, without prejudice to Asianbank pursing its claim in the insolvency
proceedings.

Is the contention of Gateway Corporation and Geronimo tenable?

SUGGESTED ANSWER:

The contention, as formulated, is in a qualified sense meritorious.

Upon the filing of the petition for insolvency, pending civil actions
against the property of the petitioner are not ipso facto stayed, but the insolvent
 may apply with the court in which the actions are pending for a stay of the
actions against the insolvent’s property. If the court grants such application,
pending civil actions against the petitioner’s property shall be stayed;
otherwise, they shall continue. Once an order of insolvency nevertheless
issues, all civil proceedings against the petitioners property are, by statutory
command, automatically stayed. (See, Sec. 18 in relation to Sec. 60, Insolvency
Law)

Applying the aforequoted provisions, it can rightfully be said that the

issuance of the insolvency order had the effect of automatically staying the
civil action for sum of money filed by Asianbank against Gateway.

However, Geronimo’s contention is untenable.

A surety undertakes directly for the payment and is so responsible at

once if the principal debtor makes default. A creditor’s right to proceed
against the surety exists independently of his right to proceed against the
principal. Since, generally, it is not necessary for the creditor to proceed
against a principal in order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same as that of the principal, then
as soon as the principal is in default, the surety is likewise in default, and may
be sued immediately and before any proceedings are had against the
principal. (Gateway Electronics Corporation and Geronimo B. Delos Reyes, Jr. vs.
Asianbank Corporation, G.R. No. 172041, December 18, 2008 [Velasco, Jr., J.];
Palmares vs. Court of Appeals).

7. When the payee of the check is not intended to be the true recipient of its
proceeds, is it payable to order or bearer?

SUGGESTED ANSWER:

As a rule, when the payee is “fictitious” or not intended to be the true

recipient of the proceeds, the check is considered as a BEARER instrument.

8. What is the FICTITIOUS-PAYEE RULE? Who is liable under it? Is there any
exception?

SUGGESTED ANSWER:

When a person making the check so payable did not intent for the
specified payee to have any part in the transaction, the payee is considered as
fictitious payee. (Mueller & Martin vs. Liberty Insurance Bank). Fictitious-payee
rule extends protection even to non-bank transferee of the checks.

The rule protects the depositary bank and assigns the loss to the drawer
of the check who was in a better position to prevent the loss in the first place.
(Getty Petroleum Corp. vs. American Express Travel Related Services Company, Inc.)

However, there is a ‘commercial bad faith’ exception to the fictitious-

payee rule. A showing of commercial bad faith on the part of the drawee
bank, or any transferee of the check for that matter, will work to strip it of its
 defense. The exception will cause it to bear the loss. Commercial bad faith is
present if the transferee of the checks acts dishonestly, and is a party to the
fraudulent scheme. (Philippine National Bank vs. Erlando T. Rodriguez, et al, G.R.
No. 170325, September 26, 2008 [Reyes, R.T., J.])

9. If a bank pays out on a forged check, is it liable to reimburse the drawer

from whose account the funds were paid out?

SUGGESTED ANSWER:

NO.

General rule remains that the drawee who has paid upon the forged
signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was
forged, and the need arises to weigh the comparative negligence between the
drawer and the drawee to determine who should bear the burden of loss. x x x

The general rule is to the effect that a forged signature is “wholly

inoperative”, and payment made ‘through or under such signature’ is ineffectual
or does not discharge the instrument. If payment is made, the drawee cannot
charge it to the drawer’s account. The traditional justification for the result is
that the drawee is in a superior position to detect a forgery because he has the
maker’s signature and is expected to know and compare it. The rule has a
healthy cautionary effect on banks by encouraging care in the comparison of
the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the
cost among its customers who use checks makes the drawee an ideal party to
spread the risk to insurance. (Samsung Construction Company Philippines, Inc.
vs. Far East Bank and Trust Company, G.R. No. 129015, August 13, 2004 [Tinga,
J.]).

10. If a bank refuses to pay a check, can the payee-holder thereof sue the bank?

SUGGESTED ANSWER:

No.

If a bank refuses to pay a check (notwithstanding sufficiency of funds),

the payee-holder cannot sue the bank—the payee-holder should instead sue
the drawer who might in turn sue the bank. (Villanueva vs. Nite, 496 SCRA 459
[2006]).

11. What are the requisites before a Management Committee can be created and
a Receiver are appointed by the Regional Trial Court?

SUGGESTED ANSWER:

(a.) He Must show that the corporate property is in danger of being

wasted and destroyed;
 (b.) That the business of the corporation is being diverted from the
purpose for which it has been organized;
(c.) That there is a serious paralyzation of operations all to his
detriment.

In the absence of a strong showing of an imminent danger of

disposition, loss, wastage, or destruction of assets or other properties of a
corporation and paralysis of its business operations, the mere apprehension of
future misconduct based upon prior mismanagement will not authorize the
appointment of a Management Committee/Receiver. (Sy Chim vs. Siy Hi &
Sons, Inc., 480 SCRA 465 [2006]).

12. What is the Concession Theory? Does it have any legal basis in Philippine
Law?

SUGGESTED ANSWER:

It is a principle in the creation of corporations, under which a

corporation is an artificial creature without any existence until it has received
the imprimatur of the State acting according to law, through SEC. The life of
the Corporation is a concession made by the State.

Section 19 of Batas Pambansa Bilang 68, otherwise known as the

Corporation Code of the Philippines provides for the Commencement of
corporate existence, that—“A private corporation formed or organized under
this Code commences to have corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange Corporation issues
a certificate of incorporation under its official seal x x x”.

13. Distinguish between the Trust Fund Doctrine from the Trust Fund Theory.

SUGGESTED ANSWER:

Trust Fund Theory (Sec. 65, Corporation Code)—this doctrine holds

that a subscriber or stockholder shall be considered a Trustee for his UNPAID
SUBSCRIPTION to the Corporation and to corporate creditors until fully paid.

Trust Fund Doctrine (Sec. 122, Corporation Code)—Stockholders who

receive corporate assets are deemed Trustees for such property or assets received
by them under the instances as provided in the Corporation Code.

14. What is the extent of the power and function of a Rehabilitation Receiver?

SUGGESTED ANSWER:

The rehabilitation receiver shall not take over the management and
control of the debtor but shall closely oversee and monitor the operations of
the debtor during the pendency of the proceedings. x x x
 He shall be considered as an officer of the court. And shall be primarily
tasked to study the best way to rehabilitate the debtor and to ensure that the
value of the debtor’s property is reasonably maintained pending the
determination of whether or not the debtor should be rehabilitated, as well as
implement the rehabilitation plan after its approval. (Section 12, A.M. No. 00-8-
10-SC, Rules of Procedure on Corporate Rehabilitation)

15. What is the effect of placing a bank under receivership?

SUGGESTED ANSWER:

When a bank is placed under receivership, it would only not be able to

do new business, that is, to grant new loans or accept new deposits but the
receiver is in fact obliged to collect debts owing to the bank, which debts form
part of the assets of the bank. (Aguilar vs. Manila Banking Corporation, 502
SCRA 354 [2006]).

16. What is the nature and characteristic of a NOW account? Is it Negotiable

within the ambit of the Negotiable Instruments Law?

SUGGESTED ANSWER:

Negotiable Orders of Withdrawals (NOW Accounts) is defined as

savings accounts from which funds may be withdrawn by means of negotiable
orders of withdrawal. They shall be kept and maintained separately from the
regular savings deposits subject to withdrawal through the presentation of
withdrawal slips and passbooks. Only natural persons shall be eligible to
maintain NOW Accounts. The authority to offer NOW Accounts shall be
granted only to thrift banks that meet the requirements laid down by the
Central Bank Regulations.

They are not negotiable within the provisions of the Negotiable

Instruments Law because of certain limits and restrictions, to wit:

(a.) The order of withdrawal shall be payable only to a specific

person, natural or juridical, and not to bearer nor to the order of
a specified person;
(b.) Only the payee can encash this order of withdrawal with drawee
bank, or deposit it in his account with the drawee bank or with
any other bank.

17. When may a corporation invest its funds in another corporation or business
or for any other purposes? (1996 Bar)

SUGGESTED ANSWER: (UP LAW CENTER)

A corporation my invest its funds in another corporation or business or

for any other purpose other than the primary purpose for which it was
organized when the said investment is approved by a majority of the BOD
and such approval is ratified by the stockholders representing at least 2/3 of
 the outstanding capital stock. Written notice of the proposed investment and
the date, time and place of the stockholders’ meeting at which such proposal
will be taken up must be sent to each stockholder. (Sec. 42, Corporation Code)

18. What is meant by “Serious Situation Test”?

SUGGESTED ANSWER:

It merely provides that receivers may be appointed whenever: (1)

necessary in order to preserve the rights of the parties-litigants; and/or (2)
protect the interest of the investing public and creditors. The situations
contemplated in there instances are serious in nature. There must exist a clear and
imminent danger of losing the corporate assets if a receiver is not appointed. Absent
such danger, such as where there are sufficient assets to sustain the
rehabilitation plan and both investors and creditors are amply protected, the
need for appointing a receiver does not exist. Simply put, the purpose of the
law in directing the appointment of receivers is to protect the interests of the
corporate investors and creditors. (Pryce Corporation vs. Court of Appeals and
China Banking Corporation, G.R. No. 172302, February 4, 2008 [Sandoval-Gutierrez,
J.], citing Rizal Banking Corporation vs. Intermediate Appellate Court)

19. What is the nature of a health care agreement? What is the effect of limited
liability to health care agreements?

SUGGESTED ANSWER:

A health care agreement is in the nature of a non-life insurance. It is an

established rule in insurance contracts that when their terms contain
limitations on liability, they should be construed strictly against the insurer.
These are contracts of adhesion the terms of which must be interpreted and
enforced stringently against the insurer which prepared the contract. This
doctrine is equally applicable to health care agreements. (Blue Cross Health
Care, Inc. vs. Noemi and Danilo Olivares, G.R. No. 169737, February 12, 2008
[Corona, J.], citing Philamcare Health Systems, Inc. vs. CA)

20. REP Inc. is a corporation organized and existing under Philippine laws with
its main office in the City of Mandaluyong. Sometime in 2004, REP Inc.
filed a Petition for the Declaration of a State of Suspension of Payments
with Approval of Proposed Rehabilitation Plan with RTC Malolos, Bulacan.
Thereafter, court issued a Stay Order suspending the enforcement of all
claims whether for money or otherwise judicial or extrajudicial against REP
Inc. Creditors opposed the petition and subsequently the Stay Order was
lifted.

Since REP Inc. did not appeal, AT Bank, one of it’s creditors initiated
foreclosure proceedings against REP Inc’s. properties. In anticipation of the
foreclosure, REP filed a complaint for Annulment of Documents and
Damages with Prayer for a Temporary Restraining Order and Injunction.
Court granted the TRO enjoining AT Bank from proceeding with the extra-
judicial foreclosure of mortgage on its properties. AT Bank filed a Petition
 for Certiorari with the Court of Appeals alleging grave abuse of discretion
on the part of the RTC issuing the TRO. CA ruled in favor of AT Bank and
annulled the order of the RTC, stating that the Stay Order could not be any
clearer, that it was lifted by the trial court because of REP Inc.’s insolvency,
misrepresentations, and infeasible rehabilitation plan. The appellate court
further observed that the Order granting TRO in the Civil Case interfered
with and set aside the earlier Order of the RTC in the rehabilitation case,
and such intervention thwarted the foreclosure of REP Inc.’s assets.

REP Inc. through a Petition for Certiorari with the Supreme Court raised the
issue that the CA gravely erred when it ordered the annulment of orders of
the RTC, granting the issuance of a Writ of Preliminary Injunction and the
TRO, on the ground that the Civil Case is entirely separate and distinct and
involves a totally separate and distinct cause of action as against a petition
for declaration of state of suspension of payments.

How would you rule on the matter?

SUGGESTED ANSWER:

There is no interference by one co-equal court with another when the

case filed in one involves corporate rehabilitation and suspension of
extrajudicial foreclosure in the other.

The rehabilitation case is distinct and dissimilar from the annulment of

foreclosure case, in that the first case is a special proceeding while the second
is a civil action. However, for a civil action to prosper it must be grounded on
a cause of action, and a petition for rehabilitation need not state a cause of
action, hence, REP Inc’s. contention that the two cases have distinct causes of
action is incorrect.

The rehabilitation case is a special proceeding which is summary and

non-adversarial in nature. The annulment of foreclosure case is an ordinary
civil action governed by the regular rules of procedure under the 1997 Rules of
Civil Procedure.

The purpose of the rehabilitation case is the suspension of payments

because it “foresees the impossibility of meeting its debts when they
respectively fall due”, and the approval of its proposed rehabilitation plan.
The objective of the annulment of foreclosure case are, among others, to annul
the unilateral increase in the interest rate and to cancel the auction of the
mortgaged properties.

Indeed, the two cases are different with respect to their nature,
purpose, and the reliefs sought such that the injunctive writ issued in the
annulment of foreclosure case did not interfere with the rehabilitation case.
(Rombe Eximtrade (Phils.), et al vs. Asiatrust Development Bank, G.R. No. 164479,
February 13, 2008, [Velasco, J.]).

21. What is the nature of a writ of possession in a foreclosure sale?

SUGGESTED ANSWER:
 As to the nature of a petition for a writ of possession, it is well to state
that the proceeding in a petition for a writ of possession is ex parte and
summary in nature. x x x It is not strictly speaking a judicial process as
contemplated in Article 433 of the Civil Code. It is a judicial proceeding for the
enforcement of one's right of possession as purchaser in a foreclosure sale. . It
is not an ordinary suit filed in court, by which one party "sues another for the
enforcement of a wrong or protection of a right, or the prevention or redress of
a wrong." (Spouses Lam vs. Metropolitan Bank and Trust Company, G.R. No.
178881, February 18, 2008, [Nachura, J.]).

22. What is an Investment Contract? What is the test to determine it? Is it

required to be registered with the Securities and Exchange Commission
prior to its sale or offer for sale or distribution to the public?

SUGGESTED ANSWER:

It is a “contract, transaction or scheme (collectively ‘contract’) whereby

a person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others.” (R.A. 8799)

The HOWEY TEST is the test established to determine whether a

transaction falls within the scope of an investment contract. It requires that a
person:

a. Makes an investment of money;

b. In a common enterprise;
c. With the expectation of profits;
d. To be derived primarily from the efforts of others.

xxx

“We therefore rule that the business operation or the scheme of

petitioner constitutes an investment contract that is a security under R.A. No.
8799. Thus, it must be registered with public respondent SEC before its sale or
offer for sale or distribution to the public. As petitioner failed to register the
same, its offering to the public was rightfully enjoined by public respondent
SEC. The CDO was proper even without a finding of fraud. As an investment
contract that is security under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded on the
premise that the capital markets depend on the investing public’s level of
confidence in the system. “

(Power Homes Unlimited Corporation vs. Securities and Exchange

Commission, G.R. No. 164182, February 26, 2008, [Puno, C.J.], citing US cases of
SEC vs. W.J.Howey Co., and SEC vs. Glenn W. Turner Enterprises, Inc., et al)

23. Can Phividec Industrial Authority (PIA) temporarily operate as a seaport

cargo-handler upon agreement with the Philippine Ports Authority (PPA)
sans a franchise or a license from Congress or PPA?
 SUGGESTED ANSWER:

Yes.

PPA was created for the purpose of, among others, promoting the
growth of regional port bodies. In furtherance of this objective, PPA is
empowered, after consultation with relevant government agencies, to make
port regulations particularly to make rules or regulation for the planning,
development, construction, maintenance, control, supervision and
management of any port or port district in the country. With this mandate,
the decision to bid out cargo-handling services is within the province and
discretion of PPA which necessarily required prior study and evaluation. This
task is left to the judgment of PPA and cannot be set aside absent grave abuse
of discretion on its part. As long as the standards are set in determining the
contractor and such standards are reasonable and related to the purpose for
which they are used, courts should not inquire into the wisdom of PPA’s
choice. x x x

[F]ranchises from Congress are not required before each and every
public utility may operate because the law has granted certain administrative
agencies the power to grant licenses for or to authorize the operation of certain
public utilities. (Oroport Cargoholding Services, Inc. vs. Phivdec Industrial
Authority, G.R. No. 166785, July 28, 2008, [Quisumbing, J.])

24. What are the remedies available to a financially distressed corporation?

Explain.

SUGGESTED ANSWER:

Under the Rules of Procedure on Corporate Recovery, there are two

distinct remedies, namely:

1. Suspension of Payments, under Section 3-1, Rule III;

2. Rehabilitation Proceedings, under Section 4-1, Rule IV.

A debtor or petitioning corporation may have sufficient assets to pay

for all its obligations but foresees the impossibility of paying them when they
respectively fall due, necessitating a suspension of payments for at least one
year.

Despite declaration of solvency, the petitioning corporation may still be

found to be subsequently unable to pay its obligations for a period longer than
one year and be considered by SEC as technically insolvent.

If during the pendency of the proceedings, the petitioner has become or

is shown to be insolvent, whether actually or technically, the SEC may, instead
of terminating the proceedings for suspension of payments, treat the petition
as one for rehabilitation of the debtor.

Hence, the Rules of Procedure on Corporate Recovery does not

preclude a solvent corporation or debtor from filing a petition for
 rehabilitation instead of just a petition for suspension of payments because
such temporary inability to pay its obligations out of its assets may extend
beyond the period of one year, or a solvent corporation may become actually
insolvent in the interim.

The requirements and procedures in a petition for suspension of

payments and petition for rehabilitation are indeed entirely different and
distinct from one another; nonetheless, the petitioning corporation which
seeks temporary relief and assistance in the payment of its obligations falling
due, but may still have sufficient assets to cover the same, may already file at
the first instance a petition for rehabilitation. (Court of Appeals ruling in
Union Bank of the Philippines vs. ASB Development Corporation, G.R. No. 172895,
July 30, 2008, [Chico-Nazario, J.])

25. Company X procured an “open-policy” marine insurance from Y Insurance,

a foreign corporation. The insurance was for a transshipment of certain
wooden work tools and workbenches purchased for consignee Z. The
cargo, packed inside one container van was shipped from Hamburg,
Germany en route to Manila, Philippines. The ship arrived and docked
where cargo was received by Aboitiz Shipping Corporation, thereafter it
issued a bill of lading containing a notation ‘grounded outside warehouse’.
It was then shipped to Cebu City and was released to Z. Two days after its
release, Aboitiz received a call from Z informing it that the cargo sustained
water damage. Z then informed the Philippine office of Y Insurance for
insurance claims. Y Insurance got an official weather report from PAGASA,
it would appear that heavy rains caused water damage to the shipment,
noticeably the shipment was placed outside the warehouse of Aboitiz based
on the bill of lading containing an notation “grounded outside the
warehouse”. Aboitiz refused to settle the claim, Y Insurance paid the
amount of Php 280, 176.92 to consignee Z, and a subrogation receipt was
thereafter signed.

Case for collection of actual damages with interest and attorney’s fees was
filed with RTC. Aboitiz disavowed any liability and asserted that the claim
had no factual and legal bases, and that complaint had no cause of action,
plaintiff Y Insurance had no personality to sue, cause of action was barred,
suit was premature there being no claim made upon Aboitiz. RTC rendered
decision against Y Insurance and case was elevated to CA, which reversed
RTC decision. Case was then elevated to SC.

a. Is Respondent Y Insurance the real party-in-interest that possesses

the right of subrogation to claim reimbursement from Aboitiz?

b. Is this right to subrogation an absolute right?

SUGGESTED ANSWER:

a. YES.

A foreign corporation not licensed to do business in the Philippines is

not absolutely incapacitated from filing a suit in local courts. Only when that
foreign corporation is “transacting” or “doing business” in the country will a
license be necessary before it can institute suits. It may, however, bring suits
 on isolated business transactions, which is not prohibited under Philippine
law. Thus, this Court has held that a foreign insurance company may sue in
the Philippine courts upon the marine insurance policies issues by it abroad to
cover international-bound cargoes shipped by a Philippine carrier, even if it
has no license to do business in this country. It is the act of engaging in
business without the prescribed license, and not the lack of license per se,
which bars a foreign corporation from access to our courts.

Thus, the payment by the insurer to the assured operates as an

equitable assignment of all remedies the assured may have against the third
party who caused the damage. Subrogation is not dependent upon, nor does
it grow out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance by the insurer. (Aboitiz Shipping
Corporation vs. Insurance Company of North America, G.R. No. 168402, August6,
2008, [Reyes, R.T.,J.])

b. NO.

This Right of Subrogation has its limitations, to wit:

a. Both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading;

b. The insurer can be subrogated only to the rights as the insured may
have against the wrongdoer.

26. What are the tests to determine whether a dispute constitutes an intra-
corporate controversy? How would jurisdiction be determined?

SUGGESTED ANSWER:

a. Relationship Test; and

b. Nature of the Controversy Test.

Jurisdiction should be determined by considering not only the status or

relationship of the parties, but also of the nature of the question under
controversy. This two-tier test was adopted in the case of Speed Distribution,
Inc. vs. Court of Appeals:

“To determine whether a case involves an intra-corporate controversy,

and is to be heard and decided by the branches of the RTC specifically
designated by the Court to try and decide such cases, two elements must
concur:

(a) the status or relationship of the parties (relationship test);

and
(b) the nature of the question that is subject of the controversy
(nature of the controversy test).

The first element requires that the controversy must arise out of intra-
corporate partnership relations between any or all of the parties and the
corporation, partnership, or association of which they are stockholders,
 members, or associates, respectively; and between such corporation,
partnership, or association and the State insofar as it concerns their
individual franchises.

The Second element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation. If the
nature of the controversy involves matters that are purely civil in
character, necessarily, the case does not involve an intra-corporate
controversy.

(Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])

27. What is meant by the Relationship Test?

SUGGESTED ANSWER:

Initially, the main consideration in determining whether a dispute

constitutes an intra-corporate controversy was limited to a consideration of
the intra-corporate relationship (also known as the Relationship Test) existing
between or among parties. The types of relationships embraced under Section
5(b), as declared in the case of Union Glass & Container Corp. vs. SEC, were as
follows:

a. Between the corporation, partnership, or association and the public;

b. Between the corporation, partnership, or association and its
stockholders, partners, members or officers;
c. Between the corporation, partnership, or association and the State as far
as its franchise, permit or license to operate is concerned; and
d. Among the stockholder, partners, or associates themselves.

(Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])

28. What is meant by the Nature of the Controversy Test?

SUGGESTED ANSWER:

Under the nature of the controversy test, the incidents of that

relationship must also be considered for the purpose of ascertaining whether
the controversy itself is intra-corporate. The controversy must not only be
rooted in the existence of an intra-corporate relationship, but must pertain to
the enforcement of the parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation. If the relationship and its incidents are merely incidental to the
controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists. (Reyes vs. Zenith Insurance
Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])

29. What effect does the civil code provision on succession have in the
corporation with respect to the shares of stock registered under the name of
the decedent? Is there any exception?
SUGGESTED ANSWER:

Article 777 of the Civil Code declares that he successional rights are
transferred from the moment of death of the decedent. Accordingly, upon the
decedent’s death, the heirs acquired legal right to his estate (which includes
his shareholdings with the corporation), and they are, prior to the estate’s
partition, deemed to be co-owners thereof. This status as co-owners, however,
does not immediately and necessarily make them stockholders of the
corporation. Unless and until there is compliance with Section 63 of the
Corporation Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63 provides:

“x x x No transfer, however, shall be valid, except as between the

parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates, and the number of shares transferred.
x x x”

Simply stated, the transfer of title by means of succession, though

effective and valid between the parties involves (i.e., between the decedent’s
estate and his heirs), does not bind the corporation and third parties. The
transfer must be registered in the books of the corporation to make the
transferee-heirs a stockholder entitled to recognition as such by both the
corporation and by third parties.

It is noted, that in relation with the above statement, that in Abejo vs.
Dela Cruz and TCL Sales Corporation vs. Court of Appeals, it did not require the
registration of the transfer before considering the transferee a stockholder of
the corporation. A marked difference, however, exists between these cases
and the present one.

In Abjeo and TCL Sales, the transferee held definite and uncontested
titles to a specific number of shares of the corporation; after the transferee
has established prima facie ownership over the shares of stocks in question,
registration became a mere formality in confirming their status as
stockholders. In the present case, each of the decedent’s heirs holds only an
undivided interest in the shares. This interest, at this point, is still inchoate
and subject to the outcome of a settlement proceeding; the right of the heirs to
specific, distributive shares of inheritance will not be determined until all the
debts of the estate of the decedent are paid. In short, the heirs are only
entitled to what remains after payment of the decedent’s debts; whether there
will be residue remains to be seen. Justice Jurado aptly puts it as follows:

“No succession shall be declared unless and until a liquidation of the

assets and debts left by the decedent shall have been made and all his
creditors are fully paid. Until a final liquidation is made and all the debts are
paid, the right of the heirs to inherit remains inchoate. This is so because
under our rules of procedure, liquidation is necessary in order to determine
whether or not the decedent has left any liquid assets which may be
transmitted to the heirs.”
 An heir must, therefore, hurdle two obstacles before he can be
considered a stockholder of the corporation with respect to the shareholdings
originally belonging to the decedent. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be
determined only in a settlement of the decedent’s estate. Second, he must
register the transfer of the share allotted to him to make it binding against the
corporation. He cannot demand that this be done unless and until he has
established his specific allotment (and prima facie ownership) of the shares.
Without the settlement of the decedent’s estate, there can be no definite
partition and distribution of the estate to the heirs. Without the partition and
distribution, there can be no registration of the transfer. And without the
registration, we cannot consider the transferee-heir a stockholder who may
invoke the existence of an intra-corporate relationship as premise for an intra-
corporate controversy within the jurisdiction of a special commercial court.
(Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])

30. Sometime on June 1998, Samuel Tagoe, a foreigner, purchased from a

Jewelry Store several pieces of jewelry valued at Php 258, 000.00. In
payment of the same, he offered a Foreign Draft issued in favor of United
Overseas Bank (Malaysia)-UOB, addressed to Land Bank of the Philippines
(LBP), payable to the Jewelry Store for Php 380, 000.00. Subsequently said
draft was cleared and the collecting bank, Far East Bank was credited with
the amount. Three (3) weeks thereafter, LBP informed Far East that the
amount in the Foreign Draft had been materially altered from Php 300.00 to
Php 380, 000.00 and it was returning the same. Far East Bank then refunded
the amount and debited the same from the account of the Jewelry Store,
however, there is a deficiency of Php 211, 946.64, thus Far East Bank
demanded for the payment thereof, and when the same went futile, they
filed a case for sum of money against the Jewelry Store. RTC ruled in favor
of Far East Bank, however, on appeal, the CA reversed the ruling that Far
East Bank could not charge the Jewelry Store on its secondary liability as an
indorser. Bank appealed the ruling to the SC.

Is the petition for review on certiorari under rule 45, meritorious?

SUGGESTED ANSWER:

No.

Act No. 203, or the Negotiable Instruments Law (NIL), explicitly

provides that the acceptor, by accepting the instrument, engages that he will
pay it according to the tenor of his acceptance. This provision applies with equal
force in case the drawee pays a bill without having previously accepted it. His
actual payment of the amount in the check implies not only his assent to the
order of the drawer and a recognition of his corresponding obligation to pay
the aforementioned sum, but also, his clear compliance with that obligation.
Actual payment by the drawee is greater than his acceptance, which is merely
a promise in writing to pay. The payment of a check includes its acceptance.

Unmistakable herein is the fact that the drawee bank cleared and paid
the subject foreign draft and forwarded the amount thereof to the collecting
bank. The latter then credited to the Jewelry Store’s account the payment it
received. Following the plain language of the law, the drawee, by said
payment, recognized and complied with its obligation to pay in accordance
with the tenor of his acceptance. The tenor of his acceptance is determined by the
terms of the bill as it is when the drawee accepts. Stated simply, LBP was
liable on its payment of the check according to the tenor of the check at the
time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the

payment it erroneously made to a due course holder. We note at his point that
Gold Palace (Jewelry Store) was not a participant in the alteration of the draft,
was not negligent, and was a holder in due course—it received the draft
complete and regular on its face, before it became overdue and without notice
of any dishonor, in good faith and for value, and absent any knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it.
Having relied on the drawee bank’s clearance and payment of the draft and
not being negligent, respondent Store is amply protected by the said Section
62. Commercial policy favors the protection of anyone who, in due course,
changes his position on the faith of the drawee bank’s clearance and payment
of a check or draft. (Far East Bank & Trust Company vs. Gold Palace Jewelry
Company, G.R. No. 168274, August 20, 2008 [Nachura, J.])